<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   FORM 10-K
(MARK ONE)
[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR

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

             FOR THE TRANSITION PERIOD FROM           TO

                        COMMISSION FILE NUMBER 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 28, 2001 was
8,368,344. 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
$9,149,188.

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                                                              FORM 10-K
                                                              ---------
<S>                                                           <C>
Notice of Annual Meeting and Proxy Statement for the 2001
  Annual Meeting of Shareholders............................     III
</TABLE>

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                        FIRSTCITY FINANCIAL CORPORATION

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>        <C>                                                           <C>
PART I
Item 1     Business....................................................     1
Item 2     Properties..................................................     9
Item 3     Legal Proceedings...........................................     9
Item 4     Submission of Matters to a Vote of Security Holders.........    10
PART II
Item 5     Market for Registrant's Common Equity and Related
             Stockholder Matters.......................................    10
Item 6     Selected Financial Data.....................................    11
Item 7     Management's Discussion and Analysis of Financial Condition
             and Results of Operations.................................    12
Item 7A    Quantitative and Qualitative Disclosures About Market
             Risk......................................................    38
Item 8     Financial Statements and Supplementary Data.................    40
Item 9     Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure..................................    78
PART III
Item 10    Directors and Executive Officers of the Registrant..........    78
Item 11    Executive Compensation......................................    78
Item 12    Security Ownership of Certain Beneficial Owners and
             Management................................................    78
Item 13    Certain Relationships and Related Transactions..............    78
PART IV
Item 14    Exhibits, Financial Statement Schedules and Reports on Form
             8-K.......................................................    79
</TABLE>

                                        i
<PAGE>   3

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

     The Company 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 $5.6 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 9 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 purchased assets pools. Key elements of the Company's overall
business strategy include:

     - Increasing the Company's investments in purchased asset pools 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 assets in certain
       international markets, either separately or in partnership with others,
       including Cargill.

                                        1
<PAGE>   4

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

     - Retaining a minority interest investment in the consumer lending business
       line.

     - 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 $4.8
billion in Face Value of distressed 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 with management. 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
IFA Incorporated ("IFA

                                        2
<PAGE>   5

Parent"), 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 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,
which are generally acquired at a discount to Face Value. Purchases may be in
the form of pools of assets or single assets. Performing assets are those as to
which debt service payments are being made in accordance with the original or
restructured terms of such assets. Nonperforming assets are those as to which
debt service payments are not being made in accordance 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 $5.6 billion in Face Value of assets.

     Revenues from the Portfolio Asset acquisition and resolution business
attributable to foreign and domestic operations for the years ended December 31,
2000, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Domestic................................................  $14,616   $20,468   $24,241
Foreign.................................................    6,700     5,029     5,041
                                                          -------   -------   -------
                                                          $21,316   $25,497   $29,282
                                                          =======   =======   =======
</TABLE>

 Portfolio Asset Acquisition and Resolution Business

    SOURCES OF ASSETS ACQUIRED

     In the early 1990s large quantities of nonperforming assets were available
for acquisition from the RTC and the FDIC. Since 1993, 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.

                                        3
<PAGE>   6

    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.

     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 markets 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, 2000, Commercial Corp.
has acquired, with Cargill and a local French partner, ten Portfolios in France,
consisting of approximately 22,000 assets, for an aggregate purchase price of
approximately $245 million. Such assets had a Face Value of approximately $945
million. Commercial Corp.'s share of the equity interest in the Portfolios
acquired in France ranges from 10% to 33% and Commercial Corp. has made a total
equity investment in these Portfolios of approximately $21 million. Commercial
Corp. owns a 10% interest in MCS et Associates ("MCS"), a French asset servicing
company and is, in conjunction with MCS and Cargill, actively pursuing
opportunities to purchase additional pools of distressed 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, which facilitates its participation in acquisition of in Mexico.
Through December 31, 2000 Commercial Corp. and its various partners have
acquired five Portfolios in Mexico consisting of an aggregate of approximately
39,000 assets with a Face Value of approximately $1.6 billion for a total
purchase price of approximately $333 million. Commercial Corp.'s share of the
equity interest in the Portfolios acquired in Mexico ranges from 3% to 20%, and
Commercial Corp. has made a total investment therein of approximately $16
million.

                                        4
<PAGE>   7

     The following table presents, for the years ended December 31, 2000, 1999
and 1998,respectively, selected data for the Portfolio Assets acquired by
Commercial Corp.

                                PORTFOLIO ASSETS

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      --------------------------------
                                                         2000        1999       1998
                                                      ----------   --------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                   <C>          <C>        <C>
Face Value..........................................  $1,578,932   $516,518   $537,356
Total purchase price................................     394,927    210,799    139,691
Total equity invested(1)............................     341,736     63,260     65,073
Commercial Corp. equity invested....................  $   22,140   $ 11,203   $ 28,478
Total number of Portfolio Assets....................      47,320      5,769      4,966
</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.

     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, which, to the extent permitted by the
seller, will include site visits to, and environmental reviews of the property
securing the loan or the asset proposed to be purchased. Commercial Corp. will
also analyze relevant local economic and market conditions based on information
obtained from its prior experience in the market or from other sources, such as
local appraisers, real estate principals, realtors and brokers.

     The evaluation further includes an analysis of an asset's projected cash
flow and sources of repayment, including the availability of third party
guarantees. Commercial Corp. values loans (and other assets included

                                        5
<PAGE>   8

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 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.

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

     Commercial Corp. services all of the Portfolio Assets owned for its own
account, all of the Portfolio Assets owned by the Acquisition Partnerships and,
to a very limited extent, Portfolio Assets owned by third parties. In connection
with the Acquisition Partnerships in the United States, Commercial Corp.
generally earns a servicing fee of between 1% and 8% of gross cash collections
generated rather than a management fee based on the Face Value of the asset
being serviced. The rate of servicing fee charged is 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). 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 whereby 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 an 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

                                        6
<PAGE>   9

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, Commercial Corp. and the investor each own 50% of the
general partner and a 49.5% limited partnership interest in the 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 or transfer assets from the Portfolios to
special purpose entities to affect structured financings or securitization
transactions. Such long-term debt generally accrues interest at a lower rate
than the senior acquisition debt, has collateral terms similar to the senior
acquisition debt, and permits distributions of excess cash flow generated by the
Acquisition Partnership to the equity partners so long as the partnership is in
compliance with applicable financial covenants.

     In foreign markets, Commercial Corp. takes great care in the establishment
of ownership structures. Prior to investment, Commercial Corp., in conjunction
with its co-investors, performs significant 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.

  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
                                        7
<PAGE>   10

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, 2002.

  Business Strategy

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

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

GOVERNMENT REGULATION

     Some 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.

COMPETITION

     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.
                                        8
<PAGE>   11

     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 win the Portfolio at an
economically unattractive price).

EMPLOYEES

     The Company had 140 employees as of December 31, 2000. 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.

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 IFA Parent, a wholly owned subsidiary of the Bank of Scotland.
See "Background" under Item 1 and "Overview -- Sale of 49% of Automobile Finance
Operation and Debt Restructure" under Item 7 for additional information related
to formation and structure of Drive. As a result of the sale, the majority of
Consumer Corp.'s operations that have historically been consolidated are now
accounted for under the equity method.

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

     Drive employs an underwriting process and purchase discount methodology
that is designed to result in a purchase discount equaling or exceeding expected
losses for all loans acquired by Drive. The carrying value of loans is evaluated
by Drive on a monthly basis for impairment. A valuation allowance is established
for any impairment identified with provisions to augment the allowance charged
to earnings in the period identified. Loans are generally acquired by Drive at a
discount from the face value of the loan with the acquisition discount
established as an allowance to losses at the acquisition date of the loan.

     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 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, IFA Parent 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 $4,000,000.00 of the $60 million loan by
IFA Parent. 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. IFA Parent also provided a warehouse line to
Drive through a $100 million Receivables Financing Agreement (the "Receivables
Financing Agreement"). The

                                        9
<PAGE>   12

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, IFA Parent 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 IFA Parent which provides
for working capital loans in the maximum aggregate principal amount of $40
million to be made available to Drive. An initial draw under this facility was
made in the amount of $20 million, which amount was applied to a payment on the
$60 million term facility provided by IFA Parent.

     On April 6, 2001, Drive terminated its prior warehouse facility with
Enterprise Funding Corporation and entered into a $100 million commercial paper
conduit warehouse facility with Enterprise Funding Corporation (the "Enterprise
Facility") which will provide financing for Drive through April 5, 2002. IFA
Parent was requested, as a condition to the effectiveness of the Enterprise
Facility, to enter into agreements (the "Sponsor Agreements") which require IFA
Parent, under certain circumstances to: (i) purchase nonconforming contracts in
the event that the seller, the servicer, or the related originator fails to
repurchase any contract which is required to be repurchased, (ii) pay certain
premiums and other expenses, (iii) indemnify Enterprise Funding Corporation, the
collateral agent, and the insurance provider from certain types of losses, and
(iv) to make certain secondary servicer advances. IFA Parent required the
Company to indemnify IFA Parent for 31% (the amount of the direct and indirect
ownership of Consumer Corp. in Drive) of any losses resulting under the terms of
the Sponsor Agreements.

     During the fourth quarter of 2000, Drive completed a securitization of $100
million of face value of automobile receivables. In connection with that
securitization, IFA Parent 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. IFA Parent required the Company to
provide an indemnity to IFA Parent for 31% (the ownership interest held directly
and indirectly by Consumer Corp. in Drive) of any and all losses suffered by IFA
Parent under those agreements. The Company believes that additional funding
provided by IFA Parent and Enterprise 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.

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 2001. All leases of the other offices of the
Company and subsidiaries expire prior to 2006.

ITEM 3. LEGAL PROCEEDINGS.

     The Company and Harbor Financial Group, Inc. (formerly known as FirstCity
Financial Mortgage Corporation) 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 damages resulting from alleged
violations by the defendants of the Bank Holding Company Act and from civil
conspiracy engaged in by the defendants, and injunctive relief, arising from an
engagement letter entered into between the Company and Chase Securities, Inc.
relating to the sale assets or securities of Harbor Financial Group, Inc.,
Harbor Financial Mortgage Corporation and their subsidiaries (collectively
"Harbor"). The Company alleged that Chase Bank of Texas, N.A. conditioned its
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 actual damages sought by the Company were in excess of $200 million.
The Company also sought recovery of three times its damages pursuant to the Bank
Holding Company Act and recovery of its 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
                                        10
<PAGE>   13

engagement letter would be pursued in the State of New York. The Company has
requested leave of the Supreme Court for the State of New York to amend its
answer in that proceeding to include these claims as a counterclaim to the suit
brought by Chase Securities, Inc. and an action against Chase Bank of Texas,
N.A.

     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 and other just and
proper relief. The Company denies that it has any liability to Chase Securities,
Inc. and intends to vigorously defend the suit. The Company has asserted as a
defense to this action the violations of the Bank Holding Company Act asserted
in the litigation pending before the Federal District Court for the Western
District of Texas. The Company has sought leave to amend its answer in the suit
to include a counterclaim against Chase Securities, Inc. and an action against
Chase Bank of Texas, N.A. under the Bank Holding Company Act as is asserted in
the Texas suit.

     On October 14, 1999, Mortgage Corp. filed voluntary petitions under Chapter
11 of the United States Bankruptcy Code before the United States Bankruptcy
Court for the Northern District of Texas, Dallas Division. In a motion filed in
those proceedings requesting the appointment of a Chapter 11 Trustee, the
debtors stated that they were reviewing pre-petition transfers to the Company to
determine if those transfers are avoidable. On December 14, 1999, the bankruptcy
proceedings were converted to liquidations under Chapter 7 of the United States
Bankruptcy Code. The Chapter 7 Trustee has not initiated an action against the
Company to assert an avoidance action to recover any preferential transfers. The
Company believes that it has valid defenses to any allegations that might be
made to avoid any pre-petition transfers in connection with the Mortgage Corp.
bankruptcy proceedings.

     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, 2000.

                                    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 (the "Common Stock"),
and adjusting rate 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 March 31, 2001 was approximately 514.

                                        11
<PAGE>   14

High and low stock prices and dividends for the Common Stock and adjusting rate
preferred stock in 2000 and 1999 are displayed in the following table:

<TABLE>
<CAPTION>
                                                 2000                   1999
                                            --------------   ---------------------------
                                             MARKET PRICE     MARKET PRICE       CASH
                                            --------------   ---------------   DIVIDENDS
QUARTER ENDED                                HIGH     LOW     HIGH     LOW       PAID
-------------                               ------   -----   ------   ------   ---------
<S>                                         <C>      <C>     <C>      <C>      <C>
Common Stock:
  March 31................................  $ 3.89   $2.13   $16.75   $ 8.88        --
  June 30.................................    2.38    1.58    11.44     5.06        --
  September 30............................    2.88    1.50     6.63     0.75        --
  December 31.............................    2.19    1.25     2.75     1.13        --
Adjusting Rate Preferred Stock(1):
  March 31................................  $11.00   $7.00   $20.75   $17.38    $0.525
  June 30.................................    9.25    4.38    18.25    15.00     0.525
  September 30............................   11.88    8.25    15.75     5.00     0.525
  December 31.............................   11.00    9.06     9.63     6.00        --
</TABLE>

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

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

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

     There have been no sales of unregistered securities.

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.

                                        12
<PAGE>   15

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

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

<TABLE>
<CAPTION>
                                               2000       1999        1998       1997       1996
                                             --------   ---------   --------   --------   --------
<S>                                          <C>        <C>         <C>        <C>        <C>
Revenues...................................  $ 52,176   $  58,928   $ 51,544   $ 63,896   $ 61,469
Expenses...................................    56,288      58,197     51,719     49,482     42,077
Earnings (loss) from continuing
  operations...............................   (11,733)     (5,819)       785     27,623     35,405
Earnings (loss) from discontinued
  operations...............................    (5,000)   (102,337)   (20,977)     8,005      3,724
Net earnings (loss)........................   (15,900)   (108,156)   (20,192)    35,628     39,129
Redeemable preferred dividends.............     2,568       2,568      5,186      6,203      7,709
Net earnings (loss) to common
  shareholders(1)..........................   (18,468)   (110,724)   (25,378)    29,425     31,420
Net earnings (loss) from continuing
  operations per common share --
  Basic(1).................................     (1.71)      (0.92)     (0.58)      3.28       4.26
  Diluted(1)...............................     (1.71)      (0.92)     (0.58)      3.25       4.22
Dividends per common share.................        --          --         --         --         --
At year end:
  Total assets.............................   140,991     230,622    336,643    317,146    237,802
  Total notes payable......................    93,764     169,792    165,922    152,216     91,924
  Preferred stock..........................    29,533      26,965     26,323     41,908     53,617
Total common equity........................     8,478      26,587    136,955    112,758     84,802
</TABLE>

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

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

     As a result of the significant period to period fluctuations in the
revenues and earnings or losses 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 Consumer Corp.,
period to period comparisons of the Company's results of continuing operations
may not be meaningful.

     The Company reported a loss for the quarter ended December 31, 2000 of $.5
million. After accrued dividends on the Company's preferred stock, the net loss
to common shareholders was $1.2 million or $.14 per

                                        13
<PAGE>   16

share on a diluted basis. Components of the quarterly loss for the fourth
quarter compared to the third quarter are as follows:

<TABLE>
<CAPTION>
                                                              FOURTH      THIRD
                                                              QUARTER    QUARTER
                                                               2000       2000
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Portfolio Asset Acquisition and Resolution..................  $   254    $ 1,086
Consumer....................................................    1,663      6,763
Corporate interest..........................................   (1,526)    (2,905)
Corporate overhead..........................................     (902)    (2,059)
Accrued preferred dividends.................................     (642)      (642)
Extraordinary gain (early extinguishment of debt)...........       --        833
                                                              -------    -------
  Net income (loss) to common shareholders..................  $(1,153)   $ 3,076
                                                              =======    =======
</TABLE>

     For the year 2000, the Company reported a net loss to common shareholders
of $18.5 million or $2.21 per share on a diluted basis. Components of the annual
net loss for 2000 compared to 1999 are as follows:

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    ---------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Portfolio Asset Acquisition and Resolution..................  $  3,354    $   9,743
Consumer....................................................    10,362        5,635
Corporate interest..........................................   (12,175)      (9,716)
Corporate overhead..........................................   (13,274)     (11,481)
Accrued preferred dividends.................................    (2,568)      (2,568)
Loss from discontinued operations...........................    (5,000)    (102,337)
Extraordinary gain (early extinguishment of debt)...........       833           --
                                                              --------    ---------
  Net loss to common shareholders...........................  $(18,468)   $(110,724)
                                                              ========    =========
</TABLE>

  Sale of 49% of Automobile Finance Operation and Corporate Debt Restructure

     In the third quarter of 2000, the Company completed a major transaction
that generated significant cash to allow the Company to return to its emphasis
in the Portfolio Asset acquisition and resolution business. The Company sold a
49% equity interest in its automobile finance operation to certain subsidiaries
of IFA Parent, a wholly owned subsidiary of Bank of Scotland. 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
reduction and restructure, which resulted in reduced interest rates and fees,
increased liquidity, and an extended maturity. Additionally, this transaction
brought the Company into compliance under its lending covenants and cured
defaults that may have existed prior to the restructure.

     The new entity formed to facilitate the transaction is Drive. Drive assumed
the entire operations of the former automobile finance platform of the Company
created and developed by the Company and the Auto Finance Management Group in
September of 1997. The platform will continue to be headquartered in Dallas,
Texas. IFA Parent, through its wholly-owned subsidiaries IFA-GP and IFA-LP,
purchased 49% of this newly formed entity for $15 million, and Bank of Scotland
provided $60 million to Drive and its subsidiary, Drive ABS LP, in term
financing which was used to repay indebtedness owed to The Company 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, Scott A. Foith, Thomas G.
Dundon, R. Tyler Whann, Bradley C. Reeves,

                                        14
<PAGE>   17

Stephen H. Trent and Blake P. Bozman (the "Auto Finance Management Group"). Bank
of Scotland also provided a new $100 million warehouse line of credit to Drive
(subsequently increased to $150 million). This new warehouse line is in addition
to the current $100 million warehouse line of Drive with an affiliate of Bank of
America. The Company believes that additional funding along with improved
capital markets execution should provide the needed liquidity to allow this
business model to mature with planned, controlled growth. The Company provided a
guaranty limited to a maximum amount of up to $4 million of the $60 million term
loan by IFA Parent, resulting in a $4 million deferral of the $12.1 million
gain. The Company, Consumer Corp. and Funding LP secured the Company's guaranty
with a security interest in their respective ownership interests in Consumer
Corp., Funding LP and Drive. 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 Drive transaction, the indebtedness of the Company owed
to its senior lenders under its Senior Facility, to IFA Parent under its
Subordinated Debt facility and certain other creditors was reduced from
approximately $113 million to approximately $44.3 million. The Company also
retired approximately $6.4 million of debt owed to other lenders. In the
restructure, 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 Company's debt of $44.3 million remaining after the Drive transaction
was restructured into a new facility provided solely by Bank of Scotland and IFA
Parent, which provides for an aggregate maximum loan amount of $53 million
comprised of a $10 million Revolving Line of Credit, a $31 million Term Loan A
and a $12 million Term Loan B, with reduced interest rates and fees and a
maturity date of December 31, 2003. 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. The new
facility 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.

     In connection with the restructuring of the loan facility, the Company and
IFA Parent amended IFA Parent's option to acquire a warrant for 1,975,000 shares
of non-voting Common Stock, which was granted to IFA Parent in December 1999 in
connection with the $25 million subordinated debt facility. The option, as
amended, allows IFA to acquire a warrant to acquire 1,975,000 shares of the
Company's non-voting Common Stock; the option can be exercised after August 31,
2001 if Term Loan B remains outstanding, but not prior to that date. The strike
price of $2.3125 remains the same. In the event that prior to August 31, 2001
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.

     IFA Parent also retains its warrant to purchase 425,000 shares of the
Company's voting Common Stock at $2.3125 per share, which was issued in
connection with the debt restructure in December 1999. In the event that Term
Loan B is terminated prior to August 31, 2001 through a transaction involving
the issuance of warrants, IFA 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 common stock.

  Dividends on Preferred Stock

     Currently, the Company has approximately 1.2 million preferred shares
outstanding with accrued and unpaid dividends of approximately $3.9 million.
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.

     The Company stated previously that it intended to seek stockholder approval
prior to the end of fiscal year 2000 for the replacement of Term Loan B with a
private placement of subordinated debt provided by

                                        15
<PAGE>   18

certain insiders and other interested investors. At that time it was
contemplated that warrants for common stock would be issued in connection with
the private placement. The Company, however, is limited in its ability to issue
common shares and warrants due to change of control issues related to its
substantial net operating loss carryforwards. While the private placement
originally contemplated would allow for the payment of future dividends on the
preferred stock, management believes that a more strategic utilization of its
limited authorized shares and would better serve the long-term interests of the
Company's stockholders. The Company currently does not plan to pursue the
private placement at this time. Management will continue to evaluate
alternatives to repay Term Loan B prior to August 31, 2001 to terminate the
option to obtain warrants to acquire the 1,975,000 shares of the Company's
common stock. This would allow the Company to utilize these shares in a
transaction that the Company believes would maximize long-term stockholder
value.

ANALYSIS OF REVENUES AND EXPENSES

     The Company reported a net loss to common stockholders for 2000 of $18.5
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,
                                                      -------------------------------------
                                                         2000         1999          1998
                                                      ----------   -----------   ----------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>          <C>           <C>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
  Revenues:
     Servicing fees.................................   $  7,555     $   3,850     $  3,062
     Gain on resolution of Portfolio Assets.........      3,120         4,054        9,208
     Equity in earnings of investments..............      7,369        11,318       12,827
     Interest income................................      2,143         2,610        2,452
     Other..........................................      1,129         3,665        1,733
                                                       --------     ---------     --------
          Total.....................................     21,316        25,497       29,282
  Expenses:
     Interest and fees on notes payable.............      3,266         4,308        6,244
     Salaries and benefits..........................      5,531         5,542        4,619
     Provision for loan and impairment losses.......      1,971            --           --
     Occupancy, data processing and other...........      7,083         5,818        6,078
                                                       --------     ---------     --------
          Total.....................................     17,851        15,668       16,941
                                                       --------     ---------     --------
  Operating contribution before direct taxes........   $  3,465     $   9,829     $ 12,341
                                                       ========     =========     ========
  Operating contribution, net of direct taxes.......   $  3,354     $   9,743     $ 12,284
                                                       ========     =========     ========
</TABLE>

                                        16
<PAGE>   19

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                      -------------------------------------
                                                         2000         1999          1998
                                                      ----------   -----------   ----------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>          <C>           <C>
CONSUMER LENDING:
  Revenues:
     Servicing fees.................................   $  3,887     $   5,086     $  2,705
     Equity in earnings of investments..............      2,223            --           --
     Interest income................................     12,882        17,787       10,035
     Gain on sale of automobile loans...............      2,836        10,280        7,214
     Gain on sale of interest in subsidiary.........      8,091            --           --
     Other..........................................         71           171          106
                                                       --------     ---------     --------
          Total.....................................     29,990        33,324       20,060
  Expenses:
     Interest and fees on notes payable.............      3,217         4,730        3,549
     Salaries and benefits..........................      7,277         8,053        5,602
     Provision for loan and impairment losses.......      2,420         4,302        9,201
     Occupancy, data processing and other...........      6,706        10,539        5,466
                                                       --------     ---------     --------
          Total.....................................     19,620        27,624       23,818
                                                       --------     ---------     --------
  Operating contribution (loss) before direct
     taxes..........................................   $ 10,370     $   5,700     $ (3,758)
                                                       ========     =========     ========
  Operating contribution (loss), net of direct
     taxes..........................................   $ 10,362     $   5,635     $ (3,758)
                                                       ========     =========     ========
  Total operating contribution, net of direct
     taxes..........................................   $ 13,716     $  15,378     $  8,526
                                                       ========     =========     ========
CORPORATE OVERHEAD:
  Other revenue.....................................   $    870     $     107     $  2,202
  Corporate interest expense........................    (12,175)       (9,716)      (4,797)
  Salaries and benefits, occupancy, professional and
     other expenses.................................     (7,144)       (6,688)      (6,335)
  Deferred tax valuation benefit (allowance)........     (7,000)       (4,900)       1,189
                                                       --------     ---------     --------
  Earnings (loss) from continuing operations........    (11,733)       (5,819)         785
  Loss from discontinued operations.................     (5,000)     (102,337)     (20,977)
  Extraordinary gain................................        833            --           --
                                                       --------     ---------     --------
  Net loss..........................................    (15,900)     (108,156)     (20,192)
  Preferred dividends...............................     (2,568)       (2,568)      (5,186)
                                                       --------     ---------     --------
  Net loss to common shareholders...................   $(18,468)    $(110,724)    $(25,378)
                                                       ========     =========     ========
SHARE DATA:
  Basic and diluted earnings (loss) per common share
     are as follows:
     Loss from continuing operations before
       accounting change per common share...........   $  (1.71)    $   (0.92)    $  (0.58)
     Discontinued operations per common share.......      (0.60)       (12.32)       (2.77)
     Cumulative effect of accounting change.........         --         (0.09)          --
     Extraordinary gain.............................       0.10            --           --
     Net loss per common share......................   $  (2.21)    $  (13.33)    $  (3.35)
     Weighted average common shares outstanding.....      8,351         8,307        7,584
</TABLE>

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

     Acquisitions for the fourth quarter of 2000 were comprised of four
portfolios, two of which were in France for $41 million, one in Mexico for $49
million and one in the United States at a cost of $10 million for a total
purchase price of $100 million. The Company invested approximately $9.4 million
in these portfolios for the quarter ended December 31, 2000, resulting in
aggregate invested capital for the year 2000 of $22.1 million,

                                        17
<PAGE>   20

which approximates the Company's target of $22.5 million for the year. Not
included in year 2000 acquisitions was a $66.3 million domestic portfolio
purchased in January 2001, in which FirstCity invested $4.1 million in equity.
This portfolio was originally contemplated to close prior to year-end.

     Aggregate acquisitions by the Company are as follows:

<TABLE>
<CAPTION>
                                                                          FIRSTCITY
                                                              PURCHASE    INVESTED
                                                               PRICE       EQUITY
                                                              --------    ---------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
1st Quarter.................................................  $ 13,629     $ 1,836
2nd Quarter.................................................   154,398       4,941
3rd Quarter.................................................   126,914       6,012
4th Quarter.................................................    99,986       9,351
                                                              --------     -------
          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>

     In 2000 the Company completed its largest acquisition year in its history
the purchase of $395 million of Portfolio Assets directly and through
Acquisition Partnerships. While the Company was limited as to the amount of
equity it could invest in these Portfolios due to lack of capital and limited
availability under its funding facilities (the equity line available to
Commercial Corp. was increased from $17 million to $30 million in January 2001),
in certain markets the Company was able to obtain servicing contracts which
provide for incentive fees to be paid to the Company once a target return
threshold to the investors has been achieved. Current estimates indicate that
these contracts should generate significant additional fee revenue over the next
three to five years.

     The Company believes that prospects for investment in distressed assets in
2001 continue to be positive. The recent increase in non-performing assets in
the domestic banking sector has resulted in a significant increase in the
availability of product. Additionally, the Company continues to see increasing
availability of distressed assets in France and Mexico.

     During January 2001 the Company increased its line of credit with a related
party to $30 million from $17 million, which will provide liquidity for
additional equity investments. To complement these equity investments the
Company will continue to utilize its established acquisition and servicing
franchise to attract new capital and generate incentive based servicing fees.

     Revenues at Commercial Corp. consist primarily of gain on disposition of
assets, interest income on performing assets and equity in earnings of
affiliated Acquisition Partnerships. In addition, Commercial Corp. derives
servicing fees from Acquisition Partnerships for the servicing activities
performed related to the assets held in the Acquisition Partnerships.

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

                                        18
<PAGE>   21

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,
                                                        -----------------------------
                                                         2000       1999       1998
                                                        -------    -------    -------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                     <C>        <C>        <C>
GAIN ON RESOLUTION OF PORTFOLIO ASSETS:
  Average investment:
     Nonperforming Portfolios.........................  $21,446    $29,822    $41,873
     Performing Portfolios............................   12,416     15,618     14,629
     Real estate Portfolios...........................    5,534      9,154     15,919
  Gain on resolution of Portfolio Assets:
     Nonperforming Portfolios.........................  $ 2,325    $ 3,047    $ 6,112
     Performing Portfolios............................      185         --        299
     Real estate Portfolios...........................      610      1,007      2,797
                                                        -------    -------    -------
          Total.......................................  $ 3,120    $ 4,054    $ 9,208
  Interest income on performing Portfolios............  $ 2,120    $ 2,397    $ 2,140
  Gross profit percentage on resolution of Portfolio
     Assets:
     Nonperforming Portfolios.........................     22.4%      19.8%      23.6%
     Performing Portfolios............................     24.6%        --        8.0%
     Real estate Portfolios...........................     18.6%      23.7%      20.9%
     Weighted average gross profit percentage.........     21.7%      20.7%      21.4%
  Interest yield on performing Portfolios.............     17.1%      15.4%      14.6%
SERVICING FEE REVENUES:...............................  $ 7,555    $ 3,850    $ 3,062
PERSONNEL:
Personnel expenses....................................  $ 5,531    $ 5,542    $ 4,619
  Number of personnel (at period end):
     Production.......................................       23         12         12
     Servicing........................................       82         60         64
INTEREST EXPENSE:
  Average debt........................................  $32,878    $49,078    $71,091
  Interest expense....................................    3,266      4,308      6,244
  Average cost........................................      9.9%       8.8%       8.8%
</TABLE>

  Nonperforming Portfolio Assets

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

     All nonperforming Portfolio Assets are purchased at substantial discounts
from their Face Value. Net gain on the resolution of nonperforming Portfolio
Assets is recognized to the extent that proceeds collected on the Portfolio
exceed a pro rata portion of allocated costs of the resolved Portfolio Assets.
Proceeds from the resolution of Portfolio Assets that are nonperforming are
recognized as cash is realized from the collection,

                                        19
<PAGE>   22

disposition and other resolution activities associated with the Portfolio
Assets. No interest income or any other yield component of revenue is recognized
separately on nonperforming Portfolio Assets.

  Performing Portfolio Assets

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

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

  Real Estate Portfolios

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

  Equity in Earnings of Acquisition Partnerships

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

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

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                            ACQUISITION PARTNERSHIPS

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
REVENUES:
  Gain on resolution of Portfolio Assets................  $75,788   $51,035   $57,628
  Gross profit percentage on resolution of Portfolio
     Assets.............................................     46.4%     40.9%     33.9%
  Interest income.......................................  $18,049   $16,409   $ 9,714
  Other income..........................................    2,195     1,914     3,127
</TABLE>

                                        20
<PAGE>   23

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
INTEREST EXPENSE(1):
  Interest expense......................................   38,289    15,626    13,081
  Average debt..........................................  292,707   159,827   159,145
  Average cost..........................................     13.1%      9.8%      8.2%
OTHER EXPENSES:
  Servicing fees........................................  $ 8,034   $ 6,391   $ 5,360
  Legal.................................................      251     2,178     2,557
  Property protection...................................    5,390     3,109     5,898
  Other.................................................    7,302     5,599     9,867
                                                          -------   -------   -------
          Total other expenses..........................   20,977    17,277    23,682
                                                          -------   -------   -------
          Net earnings..................................  $36,766   $36,455   $33,706
                                                          =======   =======   =======
Equity in earnings of Acquisition Partnerships..........  $ 7,203   $11,444   $12,827
Equity in earnings (loss) of Servicing Entities.........      166      (126)       --
                                                          -------   -------   -------
                                                          $ 7,369   $11,318   $12,827
                                                          =======   =======   =======
</TABLE>

---------------
(1) Interest expense for 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 9.4% and 9.2% for
    2000 and 1999, respectively.

  Servicing Fee Revenues

     Commercial Corp. derives fee income for its servicing activities performed
on behalf of the Acquisition Partnerships. In connection with the Acquisition
Partnerships in the United States, Commercial Corp. generally earns a servicing
fee of between 1% and 8% of gross cash collections generated by the Acquisition
Partnerships, rather than a periodic management fee based on the Face Value of
the assets being serviced. The rate of servicing fee charged is a function of
the average Face Value of the assets within each Portfolio being serviced (the
larger the average Face Value of the assets in a Portfolio, the lower the fee
percentage within the prescribed range). For the Mexican Acquisition
Partnerships, Commercial Corp. earns a servicing fee based on costs of servicing
plus a profit margin. Commercial Corp. also receives incentive fees once the
Mexican Acquisition Partnerships reach a targeted return on the initial
investment.

CONSUMER LENDING

     During the fourth quarter of 2000, Drive completed a securitization of $100
million of face value of automobile receivables. FirstCity's portion of the
quarterly earnings from this entity was $1.8 million. Earnings from this entity
correlate closely with the timing, size and execution of securitizations of
originated automobile receivables. Therefore, earnings from this entity on a
quarterly basis will fluctuate. Management is encouraged with the results to
date.

     Historically, the primary components of revenue derived by Consumer Corp.
have been interest income and gain on sale of loans. The primary expenses of
Consumer Corp. have been salaries and benefits, provision for loan losses and
impairment of residual interests and interest expense. As noted above, the
Company sold a 49% equity interest in the automobile finance operation
(conducted through Drive) effective August 1, 2000. The Company recognized a
gain of $8.1 million on the sale of equity interest. 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

                                        21
<PAGE>   24

comparisons of Consumer Corp.'s results of operations may not be meaningful. The
following chart presents selected information regarding the revenues and
expenses of Consumer Corp.'s consumer lending business.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                                CONSUMER LENDING

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
INTEREST INCOME:
  Average loans and investments:
     Auto...............................................  $35,710   $56,540   $35,880
     Investments........................................   33,757    41,864    26,720
  Interest income:
     Auto...............................................    8,364    11,811     7,542
     Investments........................................    4,077     5,487     2,181
     Other..............................................      441       489       312
  Average yield:
     Auto...............................................     23.4%     20.9%     21.0%
     Investments........................................     12.1%     13.1%      8.2%
SERVICING FEE REVENUES..................................  $ 3,887   $ 5,086   $ 2,705
PERSONNEL:
  Personnel expenses....................................  $ 7,277   $ 8,053   $ 5,602
  Number of personnel (at period end)(1):
     Production.........................................       --       142        93
     Servicing..........................................       --       206       110
INTEREST EXPENSE:
  Average debt..........................................  $34,531   $53,948   $36,302
  Interest expense......................................    3,217     4,730     3,549
  Average cost..........................................      9.3%      8.8%      9.8%
</TABLE>

---------------
(1) As a result of the Drive transaction, effective August 2000, Drive employs
    the personnel associated with the automobile finance operation.

  Interest Income

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

  Gain on Sale of Loans

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

                                        22
<PAGE>   25

     During the second quarter 2000, Consumer Corp. completed one securitization
transaction, FAR 2000-1, with an approximate aggregate loss assumption of 11.3%.
Consumer Corp. completed two securitization transactions in 1999, FAR 1999-1 and
FAR 1999-2. Approximate aggregate loss assumptions were 10.7% and 11.0%,
respectively, of the outstanding principal balance of underlying loans. In its
securitization transactions completed in 1998, NAF 1998-1, FAR 1998-2 and FAR
1998-3, Consumer Corp. assumed that losses would approximate an aggregate of
19.8%, 15.4% and 11.2%, respectively, of the outstanding principal balance of
the underlying loans. Consumer Corp. calculated the present value of future cash
flows from the securitizations using discount rates ranging from 7.3% (on one
rated security) to 15% per year and prepayment speeds ranging from 10% to 15%.

  Provision for Loan Losses and Impairment of Residual Interests

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

INCOME TAXES

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

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

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.

                                        23
<PAGE>   26

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 quarter 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.

     Equity in earnings of Investments. Proceeds from the resolution of
Portfolio Assets for the Acquisition Partnerships increased 31% to $163 million
in 2000 from $125 million in 1999 while the gross profit percentage increased to
46.4% in 2000 from 40.9% in 1999. The net result was an overall increase in the
net income of the Acquisition Partnerships of 1% to $36.8 million in 2000 from
$36.5 million in 1999. However, Commercial Corp.'s equity earnings from
Acquisition Partnerships declined 37% to $7.2 million in 2000 from $11.4 million
in 1999 due to smaller 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 69% to $1.1 million in 2000
compared to $3.7 million in 1999 due to $2.2 million of gains in 1999 from sales
of investments in Acquisition Partnerships in Japan and France.

     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.

                                        24
<PAGE>   27

     The provision for loan and impairment losses totaled $2.0 million and can
be attributed to the write-down in estimated future collections of one of the
Portfolio Asset pools.

     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 24% 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. FirstCity'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.

     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.

1999 COMPARED TO 1998

     The Company reported a net loss of $108.2 million in 1999 (including a
deferred tax provision of $4.9 million) compared to a loss of $20.2 million in
1998 (including a $1.2 million deferred tax benefit from NOLs). Net loss to
common shareholders was $110.7 million in 1999 compared to a loss of $25.4
million in 1998. On a per share basis, net loss attributable to common
shareholders was $13.33 in 1999 compared to $3.35 in 1998. The primary factor
contributing to the loss for 1999 was losses from discontinued mortgage
operations of $102.3 million or $12.31 per share for 1999 as compared to losses
of $21.0 million or $2.77 per share in 1998. Additionally, an accounting change
related to SOP 98-5 resulted in a loss of $.8 million in 1999 or $0.09 per
share.
                                        25
<PAGE>   28

  Portfolio Asset Acquisition and Resolution

     Commercial Corp.'s year-end investment in Portfolio Assets decreased to
$39.4 million in 1999 from $68.4 million in 1998. Commercial Corp., through its
investment in Acquisition Partnerships invested $11.2 million in equity in
Portfolio Assets in 1999 compared to $28.5 million in 1998. Such investments
represented Commercial Corp.'s share of Portfolio Assets acquired totaling $211
million and $140 million for 1999 and 1998, respectively.

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

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

     Equity in earnings of Acquisition Partnerships and Servicing
Entities. Proceeds from the resolution of Portfolio Assets for the Acquisition
Partnerships decreased by 27% to $125 million in 1999 from $170 million in 1998
while the gross profit percentage increased to 40.9% in 1999 from 33.9% in 1998.
Interest income rose $6.7 million in 1999. Other expenses of the Acquisition
Partnerships decreased by $6.4 million in 1999 generally reflecting costs
associated with the resolution of Portfolio Assets in Europe, which generated
proceeds of $62.2 million. The net result was an overall increase in the net
income of the Acquisition Partnerships of 8.2% to $36.5 million in 1999 from
$33.7 million in 1998. However, Commercial Corp.'s equity earnings from
Acquisition Partnerships decreased by 11% to $11.4 million in 1999 from $12.8
million in 1998 due primarily to lower equity interests in Portfolios purchased
through Acquisition Partnerships during 1999 and at the end of 1998. Equity in
earnings of Servicing Entities was not significant.

     Interest income. Interest income was consistent year to year.

     Other revenues. Other revenues increased by 111% to $3.7 million in 1999
from $1.7 million in 1998 due to $2.2 million of gains recognized in 1999 from
sales of investments in Acquisition Partnerships in Japan and France.

     Operating expenses. Operating expenses declined by 8% to $15.7 million in
1999 from $16.9 million in 1998 primarily as a result of reduced interest
expense and lower asset level expenses.

     Interest and fees on notes payable declined $1.9 million or 31% due to
lower debt levels.

     Salaries and benefits increased $0.9 million or 20% due to higher number of
employees required to support the growth in the acquisition and servicing of
loan portfolios in Mexico.

     Occupancy, data processing and other expenses decreased by 4% to $5.8
million in 1999 from $6.1 million in 1998 as a result of lower investments in
Portfolio Assets and the consolidation of servicing offices in 1999.

 Consumer Lending

     Service fees. Servicing fees increased $2.4 million or 88% due to increased
service fee revenue from securitization trusts.

     Interest income. Interest income increased by 77% to $17.8 million in 1999
from $10.0 million in 1998, reflecting increased levels of loan origination
activity and an increase in the average balance of aggregate loans and
investments held by Consumer Corp. during 1999.

     Gain on sale of automobile loans. In 1999, Consumer Corp. realized a gain
of $10.3 million on the sale of automobile loans as compared to $7.2 million in
1998, primarily due to higher purchase discounts associated with the underlying
loans sold into the 1999 securitizations.
                                        26
<PAGE>   29

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

     Interest and fees on notes payable increased by 33% to $4.7 million in 1999
from $3.5 million in 1998 as a result of a higher volume of debt.

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

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

     Occupancy, data processing and other expenses increased by 93% to $10.5
million in 1999 from $5.5 million in 1998 as a result of increased levels of
operating activity.

  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.

     Other revenue. During the first nine months of 1998 the Company recognized
deferred premium income of $2.1 million related to the redemption of Special
Preferred Stock.

     Corporate interest expense. Company level interest expense increased by
103% to $9.7 million in 1999 from $4.8 million in 1998 as a result of higher
volumes of debt associated with the equity required to purchase Portfolio
Assets, equity interests in Acquisition Partnerships and capital support to
operating subsidiaries.

     Corporate overhead. Other overhead expenses were flat, including a
write-off of $.8 million of organization costs in accordance with SOP 98-5.

     Income taxes.  The Company recorded a deferred tax provision of $4.9
million to increase the valuation allowance on the deferred tax asset (based on
an evaluation of the realization of income from the discontinued mortgage
banking operations) in 1999 as compared to a benefit of $1.2 million in 1998.

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 a result of the Drive transaction, the indebtedness of the Company owed
to its senior lenders under its Senior Facility, to IFA Parent under its
Subordinate Debt facility and certain other creditors was reduced from
approximately $113 million to approximately $44.3 million. The Company also
retired approximately $6.4 million of debt owed to other lenders. In the
restructure, 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 Company's debt of $44.3 million remaining after the Drive transaction
was restructured into a new facility provided solely by Bank of Scotland and IFA
Parent, which provides for an aggregate maximum loan amount of $53 million
comprised of a $10 million Revolving Line of Credit, a $31 million Term Loan A
and a $12 million Term Loan B with reduced interest rates and fees and a
maturity date of December 31, 2003. The

                                        27
<PAGE>   30

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. The new facility 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.

     Currently, the Company has approximately 1.2 million preferred shares
outstanding with accrued and unpaid dividends of approximately $3.9 million.
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.

     The Company stated previously that it intended to seek stockholder approval
prior to the end of fiscal year 2000 for the replacement of Term Loan B with a
private placement of subordinated debt provided by certain insiders and other
interested investors. At that time it was contemplated that warrants for common
stock would be issued in connection with the private placement. The Company,
however, is limited in its ability to issue common shares and warrants due to
change of control issues related to its substantial net operating loss
carryforwards. While the private placement originally contemplated would allow
for the payment of future dividends on the preferred stock, management believes
that a more strategic utilization of its limited authorized shares would better
serve the long-term interests of the Company's stockholders. The Company
currently does not plan to pursue the private placement at this time. Management
will continue to evaluate alternatives to repay Term Loan B prior to August 31,
2001 to terminate the option to obtain warrants to acquire the 1,975,000 shares
of the Company's common stock. This would allow the Company to utilize these
shares in a transaction that the Company believes would maximize long-term
stockholder value.

     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, except
as described below. The Company and Funding LP are parties to an Insurance
Agreement and Letter Agreement related to the FCAR LLC Retail Automobile
Installment Loan Agreement Financing Facility provided by Enterprise Funding
Corporation (the "Enterprise Facility"). These agreements require the Company
and Funding LP, as servicer and seller, to (i) purchase nonconforming contracts
in the event that the seller, the servicer, or the related originator fails to
repurchase any contract which is required to be repurchased, (ii) pay certain
premiums and other expenses, and (iii) indemnify Enterprise Funding Corporation,
the collateral agent, and the insurance provider. Additionally, the Company,
pursuant to the terms of the Letter Agreement, has agreed to make certain
secondary servicer advances. The Enterprise Facility was terminated on April 6,
2001 in connection with a $100 million warehouse facility provided by Enterprise
Funding Corporation. The Company has indemnified IFA Parent for losses which
might arise as a result of agreements it executed as a sponsor in connection
with the $100 million warehouse facility.

     Excluding the term acquisition facilities of the unconsolidated Acquisition
Partnerships and the term and warehouse facilities of Drive, as of December 31,
2000, the Company and its subsidiaries had credit facilities providing for
borrowings in an aggregate principal amount of $113 million and outstanding
borrowings of $94 million. The Company has also provided a guaranty limited to a
maximum amount of up to $4 million of a $60 million term loan from IFA Parent to
Drive. The following table summarizes the material terms of the credit

                                        28
<PAGE>   31

facilities to which the Company, its major operating subsidiaries and the
Acquisition Partnerships were parties to as of March 31, 2000 and the
outstanding borrowings under such facilities as of December 31, 2000.

                               CREDIT FACILITIES

<TABLE>
<CAPTION>
                             FUNDED AND
                              UNFUNDED     OUTSTANDING
                             COMMITMENT     BORROWINGS
                            AMOUNT AS OF      AS OF
                             MARCH 31,     DECEMBER 31,
                                2001           2000       INTEREST RATE  OTHER TERMS AND CONDITIONS
                            ------------   ------------   -------------  --------------------------
                               (DOLLARS IN MILLIONS)
<S>                         <C>            <C>            <C>            <C>
FIRSTCITY
Company Senior Facility...                                               Secured by the assets of
                                                                         the Company, matures
                                                                         December 31, 2003
Revolving Line of
  Credit..................      $ 10           $  5       LIBOR + 2.5%
Term Loan A...............        31             31       LIBOR + 2.5%
Term Loan B...............        12             12       Prime
Term credit facility......         8              8       LIBOR + 5.0%   Secured by ownership
                                                                         interests in certain
                                                                         acquisition partnerships
                                                                         matures February 2002
COMMERCIAL CORP.
Acquisition facilities....         8              8       LIBOR + 4.0%   Secured by existing
                                                                         Portfolio Assets, matures
                                                                         June 15, 2001
Term facilities...........        14             14       Fixed at       Secured by Portfolio
                                                          7.00% to       Assets, matures June 5,
                                                          7.66%          2002 and November 7, 2002
Equity investment
  facility................        30             16
                            ---------      ---------      LIBOR + 4.5%   Acquisition facility for
                                                                         the investment in future
                                                                         acquisition partnerships,
                                                                         matures March 2002
          Total...........      $113           $ 94
                            ---------      ---------
                            ---------      ---------
Unconsolidated Acquisition
  Partnerships term
  Facilities(1)...........      $145           $145
                            ---------      ---------
                            ---------      ---------      Fixed at 10%,  Secured by Portfolio
                                                          LIBOR + 2.25%  Assets, various Maturities
                                                          to 5% and
                                                          Prime + 1% to
                                                          7%
                                $150           $ 72
Unconsolidated Drive
  Warehouse Facility......                                LIBOR + 1%     Secured by warehouse
                                                                         inventory, Commitment
                                                                         Termination Date is
                                                                         February 15, 2002; Final
                                                                         Scheduled Payment Date
                                                                         matures 72 months after
                                                                         Commitment Termination
                                                                         Date
</TABLE>

                                        29
<PAGE>   32

<TABLE>
<CAPTION>
                             FUNDED AND
                              UNFUNDED     OUTSTANDING
                             COMMITMENT     BORROWINGS
                            AMOUNT AS OF      AS OF
                             MARCH 31,     DECEMBER 31,
                                2001           2000       INTEREST RATE  OTHER TERMS AND CONDITIONS
                            ------------   ------------   -------------  --------------------------
                               (DOLLARS IN MILLIONS)
<S>                         <C>            <C>            <C>            <C>
Warehouse Facility........       100             17       Rate based on  Secured by warehouse
                                                          commercial     inventory, matures April
                                                          paper rates    2002
                                                          combined with
                                                          certain
                                                          facility fees
Term Facility.............        53             53
                            ---------      ---------      LIBOR          Secured by residual
                                                                         interests, matures August
                                                                         18, 2003
                                $303           $142
                                ====           ====
</TABLE>

---------------
(1) In addition to the term acquisition facilities of the unconsolidated
    Acquisition Partnerships, the Mexican Acquisition Partnerships also have
    term debt of approximately $264 million outstanding as of December 31, 2000
    owed to affiliates of the investor groups. Of this amount, the Company has
    recorded approximately $13 million as Loans Receivable on the Consolidated
    Balance Sheets.

FOURTH QUARTER

     Net loss for the fourth quarter of 2000 was $.5 million. After deducting
preferred dividends, net loss to common equity was $1.2 million, or $0.14 per
basic and diluted share. Net earnings for the fourth quarter of 1999 were $1.2
million. After deducting preferred dividends, net earnings attributable to
common equity were $.5 million in 1999, or $0.06 per basic and diluted share.
The following table presents a summary of operations for the fourth quarters of
2000 and 1999.

                  CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  FOURTH QUARTER
                                                              -----------------------
                                                                 2000         1999
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
Revenues....................................................   $ 7,924      $18,466
Expenses....................................................     8,025       17,061
Earnings (loss) from continuing operations..................      (511)       1,154
Earnings from discontinued operations.......................        --           --
                                                               -------      -------
Net earnings (loss).........................................      (511)       1,154
                                                               -------      -------
Preferred dividends.........................................       642          642
                                                               -------      -------
Net earnings (loss) to common shareholders..................   $(1,153)     $   512
                                                               =======      =======
Net earnings (loss) from continuing operations per common
  share -- basic and diluted................................   $ (0.14)     $  0.06
</TABLE>

EFFECT OF NEW ACCOUNTING STANDARDS

     Statements of Financial Accounting Standards No. 133 and No. 138 (SFAS 133
and 138), Accounting for Derivative Instruments and Hedging Activities, requires
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
earnings unless specific hedge accounting criteria are met. The Company adopted
SFAS 133 and 138 on January 1, 2001, and there was no impact on the consolidated
financial statements.

                                        30
<PAGE>   33

     In September 2000, the Financial Accounting Standards Board issued
Statement of 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. In connection with discontinued operations, the Company
has investment securities resulting from the retention of residual interests in
securitization transactions. See note 3 of the consolidated financial statements
for required disclosures.

                                  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.
Potential liability of the Company could arise in regard to the bankruptcy
filing of Mortgage Corp. The risk that the value of Capital Corp.'s retained
interests in the securitizations could be adversely affected by the level and
fluctuation of interest rates, delinquency rates and property values, resulting
in a lower realizable value. 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 such credit facilities that are approaching
maturity and the Company expects that it will be necessary to extend the
maturities of other such credit facilities in the near future. There can be no
assurance that such negotiations will be successful. If such negotiations do not
result in the extension of the maturities of such credit facilities and the
Company or its subsidiaries cannot find alternative funding sources on
satisfactory terms, or at all, the Company's consolidated financial condition,
results of operations and business prospects would be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

     Each of the Company and its major operating subsidiaries has its own source
of debt financing. In certain circumstances, a default by the Company or any of
its major operating subsidiaries in respect of indebtedness owed to a third
party constitutes a default under the Company'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

                                        31
<PAGE>   34

such arrangements would be available. In the event the Company's major operating
subsidiaries are compelled to accept cross-guarantees, or cross-default or
cross-acceleration provisions in connection with their respective credit
facilities, financial difficulties experienced by one of the Company's
subsidiaries could adversely impact the Company's other subsidiaries.

     Dependence on Warehouse Financing.  As is customary in the consumer lending
businesses, 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 the Company. The inability of the Company 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

     Significance of Securitization.  The Company continues to believe that its
ability to securitize sub-prime automobile loans and other loans, including
Portfolio Assets) 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 the Company's ability to originate, purchase and
sell loans on a favorable or timely basis. Any such impairment could have a
material adverse effect upon the Company's consolidated condition, results of
operations and business prospects. Proceeds from the securitization of
originated and acquired loans are required to be used to repay borrowings under
warehouse credit facilities, which makes such facilities available to finance
the origination and purchase of additional loan assets. There can be no
assurance that, as the Company's volume of loans originated or purchased
increases and other new products available for securitization increases, the
Company will be able to securitize its loan production efficiently. An inability
to efficiently securitize its loan production could have a material adverse
effect on the Company's consolidated condition, results of operations and
business prospects.

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

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

     Retained Risks of Securitized Loans.  The Company makes various
representations with respect to the loans that it securitizes. With respect to
acquired loans, the Company's representations rely in part on similar
representations made by the originators of such loans when the Company purchased
them. In the event of a breach of its representations, the Company may be
required to repurchase or replace the related loan using its own funds. While
the Company may have a claim against the originator in the event of a breach of
any of these representations made by the originators, the Company's ability to
recover on any such claim will be

                                        32
<PAGE>   35

dependent on the financial condition of the originator. There can be no
assurance that the Company will not experience a material loss associated with
any of these contingencies.

     Performance Assumptions.  Securitization gains realized on the sale of
loans will be an important part of Drive's future net income. Such gains will be
dependent largely upon the estimated present values of the subordinated
interests expected to be derived from the transactions and retained by the
Company. Also, the timing and size of the securitizations could have a material
effect on the net income of the Company. Management makes a number of
assumptions in determining the estimated present values for the subordinated
interests. These assumptions include, but are not limited to, prepayment speeds,
default rates and subsequent losses on the underlying loans, and the discount
rates used to present value the future cash flows. All of the assumptions are
subjective. Varying the assumptions can have a material effect on the present
value determination in one securitization as compared to any other. Subsequent
events will cause the actual occurrences of prepayments, losses and interest
rates to be different from the assumptions used for such factors at the time of
the recognition of the sale of the loans. The effect of the subsequently
occurring events could cause a re-evaluation of the carrying values of the
previously estimated values of the subordinated interests and excess spreads and
such adjustment could be material.

     Because the subordinated interests to be retained by 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

     Consumer Corp.'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. The Company is
subject to various risks associated with these borrowers, including, but not
limited to, the risk that the borrowers will not satisfy their debt service
obligations and that the realizable value of the assets securing their loans
will not be sufficient to repay the borrowers' debt. While the Company believes
that the underwriting criteria and collection methods it employs enable it to
identify and control the higher risks inherent in loans made to such borrowers,
and that the interest rates charged compensate the Company for the

                                        33
<PAGE>   36

risks inherent in such loans, no assurance can be given that such criteria or
methods, or such interest rates, will afford adequate protection against, or
compensation for, higher than anticipated delinquencies, foreclosures or losses.
The actual rate of delinquencies, foreclosures or losses could be significantly
accelerated by an economic downturn or recession. Consequently, the Company's
consolidated financial condition, results of operations (primarily Consumer
Corp.'s 31% equity earnings in Drive) and business prospects could be materially
adversely affected. Drive has established an allowance for loan losses through
periodic earnings charges and purchase discounts on acquired receivables to
cover anticipated loan losses on the loans currently in its portfolio. No
assurance can be given, however, that loan losses in excess of the allowance
will not occur in the future or that additional provisions will not be required
to provide for adequate allowances in the future.

AVAILABILITY OF PORTFOLIO ASSETS

     The Portfolio Asset acquisition and resolution business is affected by
long-term cycles in the general economy. In addition, the volume of domestic
Portfolio Assets available for purchase by investors such as the Company has
generally declined since 1993 as large pools of distressed assets acquired by
governmental agencies in the 1980s and early 1990s have been resolved or sold.
The Company cannot predict its future annual acquisition volume of Portfolio
Assets. Moreover, future Portfolio Asset purchases will depend on the
availability of Portfolios offered for sale, the availability of capital and the
Company's ability to submit successful bids to purchase Portfolio Assets. The
acquisition of Portfolio Assets has become highly competitive in the United
States. This may require the Company to acquire Portfolio Assets at higher
prices thereby lowering profit margins on the resolution of such Portfolios. 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 $137 million in tax operating losses. Accordingly, as of December 31,
2000, the Company believes that it has approximately $733 million of NOLs
available to offset future taxable income. Out of the total $733 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 2020; 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.

                                        34
<PAGE>   37

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 2020.
A valuation allowance is provided to reduce the deferred tax assets to a level,
which, more likely than not, will be realized. The ultimate realization of the
resulting net deferred tax asset is dependent upon generating sufficient taxable
income prior to expiration of the net operating loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the recorded deferred tax asset, net of the allowance, will be realized.
The amount of the deferred tax asset considered realizable, however, could be
adjusted in the future if estimates of future taxable income during the
carryforward period change. The change in valuation allowance represents a
change in the estimate of the future taxable income during the carryforward
period since the prior year-end and utilization of net operating loss
carryforwards since the Merger. The ability of the Company to realize the
deferred tax asset is periodically reviewed and the valuation allowance is
adjusted accordingly.

ASSUMPTIONS UNDERLYING PORTFOLIO ASSET PERFORMANCE

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

GENERAL ECONOMIC CONDITIONS

     Periods of economic slowdown or recession, or declining demand for
commercial real estate, automobile loans or other commercial or consumer loans
may adversely affect the Company's business. Economic downturns may reduce the
number of loan originations by the Company's consumer 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. Significant increases in
automobiles for sale during recessionary economic periods may depress the prices
at which such collateral may be sold or delay the timing of such sales. There
can be no assurance that there will be adequate markets for the sale of
repossessed automobiles. Any material deterioration of such markets could reduce
recoveries from the sale of collateral.

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

RISK OF DECLINING VALUE OF COLLATERAL

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

                                        35
<PAGE>   38

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 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

                                        36
<PAGE>   39

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.

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

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

RELATIONSHIP WITH AND DEPENDENCE UPON CARGILL

     The Company's relationship with Cargill is significant 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.

DEPENDENCE ON KEY PERSONNEL

     The Company is dependent on the efforts of its senior executive officers,
particularly James R. Hawkins (Chairman) and James T. Sartain (President and
Chief Executive Officer effective January 16, 2000). 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.

                                        37
<PAGE>   40

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

INFLUENCE OF CERTAIN SHAREHOLDERS

     The directors and executive officers of the Company collectively
beneficially own 18.6% 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 11.2% of the Common Stock. James T. Sartain,
President and Chief Executive Officer (effective January 16, 2001) of the
Company, is the beneficial owner of 4.4% 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,
and may limit the Company's ability to sell common stock to certain existing
holders of common stock at an advantageous time or at a time when capital may be
required but unavailable from any other source.

ANTI-TAKEOVER CONSIDERATIONS

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

PERIOD TO PERIOD VARIANCES

     The 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. Consequently, the Company's
period-to-period revenue and net income have historically varied, and are likely
to continue to vary, correspondingly. Such variances, alone or with other
factors, such as conditions in the economy or the financial services industries
or other developments

                                        38
<PAGE>   41

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 consists of investment loans made to Acquisition
Partnerships and bear interest based on both fixed and variable rates. Rising
interest rates would negatively affect the ability and speed of payment on 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 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
                                        39
<PAGE>   42

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 following table is a summary of the interest earning assets and
interest bearing liabilities, as of December 31, 2000, segregated by asset type
as described in the previous paragraphs, with expected maturity or sales dates
as indicated (dollars in thousands):

<TABLE>
<CAPTION>
                                WEIGHTED                                          GREATER
                                AVERAGE      0-3       3-6      6-9      9-12      THAN
                                  RATE     MONTHS    MONTHS    MONTHS   MONTHS   12 MONTHS    TOTAL
                                --------   -------   -------   ------   ------   ---------   -------
<S>                             <C>        <C>       <C>       <C>      <C>      <C>         <C>
INTEREST BEARING ASSETS
Portfolio assets(1)...........     N/A     $11,119   $ 3,401   $1,463   $1,593    $12,442    $30,018
Loans receivable(2)...........   19.37%      1,729       837    1,202    1,326      9,445     14,539
Equity investments(3)
  Acquisition Partnerships....     N/A       2,095     7,185    1,618    3,720     19,244     33,862
  Drive.......................     N/A          --        --       --       --      3,738      3,738
                                           -------   -------   ------   ------    -------    -------
                                           $14,943   $11,423   $4,283   $6,639    $44,869    $82,157
                                           =======   =======   ======   ======    =======    =======
INTEREST BEARING LIABILITIES
Notes payable secured by
  Portfolio Assets, loans
  receivable and equity in
  Acquisition
  Partnerships(4).............   10.27%    $    --   $ 1,642   $   --   $   --    $43,422    $45,064
Unsecured notes...............    7.10%         --        60       --       --        862        922
Company credit facility.......    9.22%         --        --       --       --     47,778     47,778
                                           -------   -------   ------   ------    -------    -------
                                           $    --   $ 1,702   $   --   $   --    $92,062    $93,764
                                           =======   =======   ======   ======    =======    =======
</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.

                                        40
<PAGE>   43

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 2000         1999
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
Cash and cash equivalents...................................   $  8,043     $ 11,263
Portfolio Assets, net.......................................     30,018       39,437
Loans receivable, net.......................................     14,539       30,144
Residual interests in securitizations.......................         --       55,661
Equity investments..........................................     39,022       31,104
Deferred tax benefit, net...................................     20,101       27,101
Other assets, net...........................................      8,824       15,786
Net assets of discontinued operations.......................     20,444       20,126
                                                               --------     --------
          Total Assets......................................   $140,991     $230,622
                                                               ========     ========

          LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY

Liabilities:
  Notes payable.............................................   $ 93,764     $169,792
  Other liabilities.........................................      9,216        7,278
                                                               --------     --------
          Total Liabilities.................................    102,980      177,070
Commitments and contingencies (notes 2, 3, 8, 10, 11, 13 and
  15).......................................................         --           --
Redeemable preferred stock:
  Adjusting rate preferred stock, including accumulated
     dividends in arrears of $3,852 and $1,284, respectively
     (par value $.01, redemption value of $21 per share;
     2,000,000 shares authorized; 1,222,901 shares issued
     and outstanding).......................................     29,533       26,965
Shareholders' equity:
  Optional preferred stock (par value $.01 per share;
     98,000,000 shares authorized; no shares issued or
     outstanding)...........................................         --           --
  Common stock (par value $.01 per share; 100,000,000 shares
     authorized; issued and outstanding: 8,368,344 and
     8,333,300 shares, respectively)........................         84           83
  Paid in capital...........................................     79,634       79,562
  Accumulated deficit.......................................    (71,131)     (52,663)
  Accumulated other comprehensive loss......................       (109)        (395)
                                                               --------     --------
          Total Shareholders' Equity........................      8,478       26,587
                                                               --------     --------
          Total Liabilities, Redeemable Preferred Stock and
           Shareholders' Equity.............................   $140,991     $230,622
                                                               ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        41
<PAGE>   44

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 2000          1999           1998
                                                              ----------    -----------    ----------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>           <C>            <C>
Revenues:
  Servicing fees............................................   $ 11,442      $   8,936      $  5,767
  Gain on resolution of Portfolio Assets....................      3,120          4,054         9,208
  Equity in earnings of investments.........................      9,592         11,318        12,827
  Interest income...........................................     15,094         20,502        12,590
  Gain on sale of automobile loans..........................      2,836         10,280         7,214
  Gain on sale of interest in subsidiary....................      8,091             --            --
  Other income..............................................      2,001          3,838         3,938
                                                               --------      ---------      --------
         Total revenues.....................................     52,176         58,928        51,544
Expenses:
  Interest and fees on notes payable........................     18,658         18,754        14,590
  Salaries and benefits.....................................     16,329         17,199        13,755
  Provision for loan and impairment losses..................      4,391          4,302         9,201
  Occupancy, data processing, communication and other.......     16,910         17,942        14,173
                                                               --------      ---------      --------
         Total expenses.....................................     56,288         58,197        51,719
                                                               --------      ---------      --------
Earnings (loss) from continuing operations before income
  taxes, minority interest and accounting change............     (4,112)           731          (175)
Benefit (provision) for income taxes........................     (7,414)        (5,051)        1,132
                                                               --------      ---------      --------
Earnings (loss) from continuing operations before minority
  interest and accounting change............................    (11,526)        (4,320)          957
Minority interest...........................................       (207)          (734)         (172)
Cumulative effect of accounting change......................         --           (765)           --
                                                               --------      ---------      --------
Earnings (loss) from continuing operations..................    (11,733)        (5,819)          785
Loss from discontinued operations, net of provision for
  income taxes of $89 in 1998...............................     (5,000)      (102,337)      (20,977)
Extraordinary gain, net of income taxes of $0...............        833             --            --
                                                               --------      ---------      --------
Net loss....................................................    (15,900)      (108,156)      (20,192)
Preferred dividends (Includes accumulated dividends in
  arrears after June 30, 1999)..............................     (2,568)        (2,568)       (5,186)
                                                               --------      ---------      --------
         Net loss to common shareholders....................   $(18,468)     $(110,724)     $(25,378)
                                                               ========      =========      ========
Basic and diluted loss per common share are as follows:
  Loss from continuing operations before accounting change
    per common share........................................   $  (1.71)     $   (0.92)     $  (0.58)
  Discontinued operations per common share..................      (0.60)        (12.32)        (2.77)
  Cumulative effect of accounting change....................         --          (0.09)           --
  Extraordinary gain........................................       0.10             --            --
  Net loss per common share.................................   $  (2.21)     $  (13.33)     $  (3.35)
  Weighted average common shares outstanding................      8,351          8,307         7,584
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        42
<PAGE>   45

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

          See accompanying notes to consolidated financial statements.

                                        43
<PAGE>   46

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
  Net loss..................................................  $ (15,900)  $(108,156)  $ (20,192)
  Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
    Loss from discontinued operations.......................      5,000     102,337      20,977
    Proceeds from resolution of Portfolio Assets............     14,398      19,610      42,976
    Gain on resolution of Portfolio Assets..................     (3,120)     (4,054)     (9,208)
    Purchase of Portfolio Assets and loans receivable,
      net...................................................    (26,161)       (307)    (26,420)
    Origination of automobile receivables, net of purchase
      discount..............................................   (106,311)   (166,476)   (119,096)
    Provision for loan and impairment losses................      4,391       4,302       9,201
    Equity in earnings of investments.......................     (9,592)    (11,318)    (12,827)
    Proceeds from performing Portfolio Assets and loans
      receivable, net.......................................     54,172     150,043     144,627
    (Increase) decrease in net deferred tax asset...........      7,000       5,061      (1,637)
    Depreciation and amortization...........................      1,994       2,912       2,058
    (Increase) decrease in other assets.....................       (974)        895     (10,246)
    Deferred gain from sale of interest in subsidiary.......     (4,000)         --          --
    Gain on sale of interest in subsidiary..................     (8,091)         --          --
    Increase in other liabilities...........................      2,296       1,198      12,742
                                                              ---------   ---------   ---------
         Net cash provided by (used in) operating
           activities.......................................    (84,898)     (3,953)     32,955
                                                              ---------   ---------   ---------
Cash flows from investing activities:
  Proceeds from sale of interest in subsidiary..............     15,000          --          --
  Proceeds on notes receivable from sale of interest in
    subsidiary..............................................     60,000          --          --
  Property and equipment, net...............................        210      (5,321)     (1,840)
  Contributions to Acquisition Partnerships and Servicing
    Entities................................................     (6,715)    (15,500)    (22,534)
  Distributions from Acquisition Partnerships and Servicing
    Entities................................................     10,313      36,045      28,050
                                                              ---------   ---------   ---------
         Net cash provided by investing activities..........     78,808      15,224       3,676
                                                              ---------   ---------   ---------
Cash flows from financing activities:
  Borrowings under notes payable............................    148,310     237,702     340,680
  Payments of notes payable.................................   (140,195)   (235,598)   (329,232)
  Purchase or redemption of special preferred stock.........         --          --     (14,716)
  Proceeds from issuance of common stock....................         73         231      46,815
  Preferred dividends paid..................................         --      (1,926)     (6,059)
                                                              ---------   ---------   ---------
         Net cash provided by financing activities..........      8,188         409      37,488
                                                              ---------   ---------   ---------
  Net cash provided by continuing operations................  $   2,098   $  11,680   $  74,119
  Net cash used by discontinued operations..................     (5,318)     (6,372)    (95,489)
                                                              ---------   ---------   ---------
Net increase (decrease) in cash and cash equivalents........  $  (3,220)  $   5,308   $ (21,370)
Cash and cash equivalents, beginning of year................     11,263       5,955      27,325
                                                              ---------   ---------   ---------
Cash and cash equivalents, end of year......................  $   8,043   $  11,263   $   5,955
                                                              =========   =========   =========
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Interest................................................  $  15,932   $  16,097   $  12,399
                                                              =========   =========   =========
    Income taxes............................................  $     637   $     235   $     627
                                                              =========   =========   =========
  Non-cash investing activities:
    Residual interests received as a result of sales of
      loans through securitizations.........................  $   5,713   $  27,306   $  44,309
                                                              =========   =========   =========
  Non-cash financing activities:
    Dividends accumulated and not paid on preferred stock...  $   2,568   $   1,284   $     642
    Issuance of common stock warrant........................         --         875          --
                                                              ---------   ---------   ---------
                                                              $   2,568   $   2,159   $     642
                                                              =========   =========   =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        44
<PAGE>   47

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2000, 1999 AND 1998
                             (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, 2000, the
Company was engaged in two principal reportable segments: (i) portfolio asset
acquisition and resolution and (ii) consumer lending. Refer to Note 9 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 principal 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 IFA Incorporated ("IFA Parent"), 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 nonhomogeneous
assets, 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 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

                                        45
<PAGE>   48
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

domestic and foreign partnerships and other entities ("Acquisition
Partnerships") in which a partially owned affiliate of the Company is the
general partner and the Company and other investors are limited partners.

     The Company 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 percent
to 50 percent owned affiliates are accounted for on the equity method.
Investments in less than 20 percent owned affiliates are also accounted for on
the equity method if the investments are considered to be corporate joint
ventures. All significant intercompany transactions and balances have been
eliminated in consolidation.

(d) CASH EQUIVALENTS

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

(e) PORTFOLIO ASSETS

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

  Non-Performing Portfolio Assets

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

     All non-performing Portfolio Assets are purchased at substantial discounts
from their outstanding legal principal amount, the total of the aggregate of
expected future sales prices and the total payments to be received from
obligors. Subsequent to acquisition, the amortized cost of non-performing
Portfolio Assets is evaluated for impairment on a quarterly basis. A valuation
allowance is established for any impairment identified through provisions
charged to earnings in the period the impairment is identified. No valuation
allowance was required as of December 31, 2000, 1999 or 1998.

     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.

                                        46
<PAGE>   49
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Performing Portfolio Assets

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

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

     The Company accounts for performing Portfolio Assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
which requires creditors to evaluate the collectibility of both contractual
interest and principal of loans when assessing the need for a loss accrual.

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

  Real Estate Portfolios

     Real estate Portfolios consist of real estate assets acquired from a
variety of sellers. Such Portfolios are carried at the lower of cost or fair
value less estimated costs to sell. Costs relating to the development and
improvement of real estate are capitalized, whereas those relating to holding
assets are charged to expense. Income or loss is recognized upon the disposal of
the real estate. Rental income, net of expenses, on real estate Portfolios is
recognized when received. 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. The Company recorded an allowance
for impairment of a real estate Portfolio of $2.0 million in 2000. No valuation
allowance was required in 1999 and 1998.

(f) LOANS RECEIVABLE

     At December 31, 2000, loans receivable consist of loans made to Acquisition
Partnerships at both variable and fixed rates, the repayment of which is
generally dependent upon future cash flows and distributions made from those
Acquisition Partnerships. In prior years, the majority of the balance was
comprised of automobile and consumer finance receivables. Automobile and
consumer finance receivables consisted of sub-prime automobile finance
receivables and student loan receivables, which were originated and acquired
from third party dealers and other originators, purchased at a non-refundable
discount from the contractual principal amount. This discount was allocated
between discount available for loan losses and discount available for accretion
to interest income. Discounts allocated to discounts available for accretion
were deferred and accreted to income using the interest method. To date all
acquired discounts have been allocated as discounts available for loan losses.
To the extent the discount is considered insufficient to absorb anticipated
losses on the loans receivable, additions to the allowance are made through a
periodic provision for loan losses (see Note 5). The evaluation of the allowance
considers loan portfolio performance, historical losses, delinquency statistics,
collateral valuations and current economic conditions. Such evaluation is made
on an individual loan basis using static pool analyses.

     Interest is accrued when earned in accordance with the contractual terms of
the loans. The accrual of interest is discontinued once a loan becomes past due
90 days or more.
                                        47
<PAGE>   50
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(g) RESIDUAL INTERESTS IN SECURITIZATIONS

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

(h) PROPERTY AND EQUIPMENT

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

(i) INTANGIBLES

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

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

(j) 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 $763 in 2000. No related income was recognized in
1999 and 1998.

(k) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income established standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 also
requires the accumulated balance of other comprehensive income to be displayed
separately in the equity section of the consolidated balance sheet. The
Company's other comprehensive income consists of foreign currency transactions
only and had an accumulated balance of $(109), $(395) and $355 at December 31,
2000, 1999 and 1998, respectively.

                                        48
<PAGE>   51
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(l) FOREIGN CURRENCY TRANSLATIONS

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

(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.

(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 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 2000, 1999
and 1998 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.

(p) EFFECT OF NEW ACCOUNTING STANDARDS

     Statements of Financial Accounting Standards No. 133 and No. 138 (SFAS 133
and 138), Accounting for Derivative Instruments and Hedging Activities,requires
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
earnings unless specific hedge accounting criteria are met. The Company adopted
SFAS 133 and 138 on January 1, 2001, and there was no impact on the consolidated
financial statements.

                                        49
<PAGE>   52
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In September 2000, the Financial Accounting Standards Board issued
Statement of 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. In connection with discontinued operations, the Company
has investment securities resulting from the retention of residual interests in
securitization transactions. See note 3 for required disclosures.

(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"). IFA, through wholly owned subsidiaries formed for the
purpose of the acquisition, purchased 49% of this newly formed entity for $15
million and IFA 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, 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 IFA. 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. IFA provided a new
$100 million warehouse line of credit to Drive. This new warehouse line is in
addition to the current $100 million warehouse line of Drive with Enterprise
Funding Corporation, an affiliate of Bank of America.
                                        50
<PAGE>   53
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, the Bank of Scotland, as agent, The Governor and Company of the
Bank of Scotland and IFA Parent (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.

     In connection with the restructuring of the loan facility, the Company and
IFA Parent amended IFA Parent's option to acquire a warrant for 1,975,000 shares
of non-voting Common Stock, which was granted to IFA Parent in December 1999 in
connection with the $25 million subordinated debt facility. The option, as
amended, allows IFA Parent to acquire a warrant for 1,975,000 shares of the
Company's non-voting Common Stock; the option can be exercised after August 31,
2001 if Term Loan B remains outstanding, but not prior to that date. The strike
price of $2.3125 remains the same. In the event that prior to August 31, 2001
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.

     IFA Parent also retains its warrant to purchase 425,000 shares of the
Company's voting Common Stock at $2.3125 per share, which was issued in
connection with the debt restructure in December 2000. In the event that Term
Loan B is terminated prior to August 31, 2001 through a transaction involving
the issuance of warrants, IFA Parent 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 common stock.

     Dividends on outstanding preferred stock of FirstCity will be restricted
until Term Loan B is paid in full. The Company stated previously that it
intended to seek stockholder approval prior to the end of fiscal year 2000 for
the replacement of Term Loan B with a private placement of subordinated debt
provided by certain insiders and other interested investors. At that time it was
contemplated that warrants for common stock would be issued in connection with
the private placement. The Company, however, is limited in its ability to issue
common shares and warrants due to change of control issues related to its
substantial net operating loss carryforwards. While the private placement
originally contemplated would allow for the payment of future dividends on the
preferred stock, management believes that a more strategic utilization of the
shares available would better serve the long-term interests of the Company's
stockholders. The Company currently does not plan to pursue the private
placement at this time. Management will continue to evaluate alternatives to
repay Term Loan B prior to August 31, 2001 to terminate the option to obtain
warrants for 1,975,000 shares of the Company's non-voting common stock. This
would allow the Company to utilize these shares in a transaction that the
Company believes would maximize long-term stockholder value.

                                        51
<PAGE>   54
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During the second quarter of 2000, the Portfolio Asset acquisition and
resolution group of the Company entered into a $17 million loan facility with a
related party. This facility is being used exclusively to provide equity in new
portfolio acquisitions in partnerships with this related party. In January 2001,
this facility was increased to $30 million. As of December 31, 2000, the Company
has $15.6 million outstanding under this facility.

     Management believes that the IFA Parent loan facilities described above
along with the liquidity from the Cargill line, the related fees generated from
the servicing of assets and equity distributions (totaling approximately $11.6
million in 2000) 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 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. In 1998, the results of operations from discontinued operations were
composed of an operating loss of $21.0 million. Revenues from discontinued
operations were zero in 2000, $56.3 million in 1999 and $148.0 million in 1998.
The following is a summary of activity related to each of the entities'
operations.

     Mortgage Corp. -- During the third quarter of 1999, Mortgage Corp. incurred
significant losses from operations and the liquidation of certain assets.
Ultimately, on October 14, 1999, Mortgage Corp. filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Northern District of Texas. On December
14, 1999 the bankruptcy proceedings were converted to liquidations under Chapter
7 of the United States Bankruptcy Code. In the filings, the stated assets of
Mortgage Corp. were approximately $95 million and the stated liabilities were
approximately $98 million. Additionally, it is anticipated that the liquidation
of any remaining assets will yield proceeds, which are less than the stated
amount of the assets as listed in the filings. The Company does not guarantee
any of the debt of Mortgage Corp. Furthermore, management of the Company was not
involved in the daily operations of Mortgage Corp. during a significant portion
of the third quarter of 1999 and no longer had access to financial records of
Mortgage Corp.

     Based on the above, Mortgage Corp. was deemed insolvent and the Company
wrote off its entire investment in and advances to (collectively referred to as
the Net Investment) Mortgage Corp.

     Capital Corp. -- Management of the Company made the decision to completely
exit all mortgage banking activities due to the significant negative impact
realized from Mortgage Corp. The Company ceased acquiring mortgage loans under
Capital Corp.'s platform during the fourth quarter of 1999.

     The only assets remaining from Capital Corp.'s operations are the
investment securities resulting from the retention of residual interests in
securitization transactions completed by Capital Corp. The Company has
considered the estimated future gross cash receipts from such investment
securities in the computation of the loss from discontinued operations. The cash
flows are valued using prepayment assumptions of 25% for fixed

                                        52
<PAGE>   55
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

rate loans and 35% to 50% for variable rate loans. Loss rates are estimated at
2%. If the prepayment speeds were to increase by 10% and 20%, the estimated
future gross cash receipts would decrease by $1,736 and $3,416, respectively.

     The net assets from discontinued operations consist of the following:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Estimated future gross cash receipts on residual interests
  in securitizations........................................  $24,652   $28,602
Accrual for loss on operations and disposal of discontinued
  operations, net...........................................   (4,208)   (8,476)
                                                              -------   -------
          Net assets of discontinued operations.............  $20,444   $20,126
                                                              =======   =======
</TABLE>

An accrual of $5.0 million for costs to complete the plan of discontinuation was
recorded in the second quarter of 2000. No additional accrual was deemed
necessary by management during the remainder of 2000.

(4) PORTFOLIO ASSETS

     Portfolio Assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Non-performing Portfolio Assets.............................  $55,807   $82,291
Performing Portfolio Assets.................................   15,162     7,983
Real estate Portfolios......................................    3,075     7,663
                                                              -------   -------
          Total Portfolio Assets............................   74,044    97,937
Adjusted purchase discount required to reflect Portfolio
  Assets at carrying value..................................  (44,026)  (58,500)
                                                              -------   -------
          Portfolio Assets, net.............................  $30,018   $39,437
                                                              =======   =======
</TABLE>

     The Company recorded an allowance for impairment on a real estate Portfolio
of approximately $2.0 million in 2000. Portfolio Assets are pledged to secure
non-recourse notes payable.

(5) LOANS RECEIVABLE

     A significant portion of the automobile loans was transferred to Drive in
connection with the sale of the 49% equity interest in the Company's automobile
finance operation. The Company also has other loans held for investment, which
are comprised of loans from certain Acquisition Partnerships. Loans receivable
are summarized as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Automobile and consumer finance receivables.................  $   332   $37,718
Other loans held for investment.............................   14,207       883
Allowance for loan losses...................................       --    (8,457)
                                                              -------   -------
          Loans receivable, net.............................  $14,539   $30,144
                                                              =======   =======
</TABLE>

                                        53
<PAGE>   56
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2000       1999       1998
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Balances, beginning of year..........................  $  8,457   $  5,894   $  9,282
Provision for loan losses............................       822        368      4,751
Discounts acquired...................................    18,989     26,484     18,334
Allocation of reserves to sold loans.................    (5,606)   (22,036)   (17,133)
Charge off activity:
  Principal balances charged off.....................    (9,041)    (4,362)   (12,958)
  Recoveries.........................................     1,902      2,109      3,618
                                                       --------   --------   --------
     Net charge offs.................................    (7,139)    (2,253)    (9,340)
Adjustment from sale of interest in Drive............   (15,523)        --         --
                                                       --------   --------   --------
Balances, end of year................................  $     --   $  8,457   $  5,894
                                                       ========   ========   ========
</TABLE>

     The provision for loan losses during 1998 was predominantly for automobile
finance receivables generated by the Company's original automobile platform,
referred to as NAF, which was discontinued in January 1998.

(6) RESIDUAL INTERESTS IN SECURITIZATIONS

     The Company had residual interests in securitizations (which were
transferred to Drive in connection with the Company's sale of the 49% equity
interest in its automobile finance operations) consisting of rated securities,
retained interests, servicing interests and related interest only strips
(collectively referred to as residual interests), which were attributable to
loans sold through securitization transactions by the Company. No residual
interests were held by the Company at December 31, 2000. Residual interests were
comprised of the following at December 31, 1999:

<TABLE>
<S>                                                           <C>
Rated securities............................................  $ 1,313
Residual interests..........................................   62,167
Accrued interest............................................      565
Valuation allowance.........................................   (8,384)
                                                              -------
                                                              $55,661
                                                              =======
</TABLE>

     The activity related to residual interests is as follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                          2000       1999      1998
                                                        --------   --------   -------
<S>                                                     <C>        <C>        <C>
Balance, beginning of year............................  $ 55,661   $ 41,849   $ 6,935
Residual interests received from securitizations......     5,713     27,306    44,309
Cost allocated from securitizations...................     1,694         --        --
Interest accreted.....................................     4,077      5,487     2,181
Cash received from trusts.............................   (16,919)   (15,047)   (7,126)
Provision for permanent impairment of value...........    (1,598)    (3,934)   (4,450)
Adjustment from sale of interest in Drive.............   (48,628)        --        --
                                                        --------   --------   -------
Balance, end of year..................................  $     --   $ 55,661   $41,849
                                                        ========   ========   =======
</TABLE>

                                        54
<PAGE>   57
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) 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. Activity relating to the servicing entities was not
significant during 2000 and 1999. The condensed combined financial position and
results of operations of the Acquisition Partnerships (excluding servicing
entities), which include the domestic and foreign Acquisition Partnerships and
their general partners, are summarized below:

                       CONDENSED COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Assets......................................................  $603,353   $324,954
                                                              ========   ========
Liabilities.................................................   471,336    210,967
Net equity..................................................   132,017    113,987
                                                              --------   --------
                                                              $603,353   $324,954
                                                              ========   ========
Equity investment in Acquisition Partnerships...............  $ 33,862   $ 29,639
Equity investment in Servicing Entities.....................     1,422      1,465
                                                              --------   --------
                                                              $ 35,284   $ 31,104
                                                              ========   ========
</TABLE>

                     CONDENSED COMBINED SUMMARY OF EARNINGS

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2000       1999       1998
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Proceeds from resolution of Portfolio Assets.........  $163,386   $124,912   $170,187
Gain on resolution of Portfolio Assets...............    75,788     51,035     57,628
Interest income on performing Portfolio Assets.......    18,049     16,409      9,714
Net earnings.........................................  $ 36,766   $ 36,455   $ 33,706
                                                       ========   ========   ========
Equity in earnings of Acquisition Partnerships.......  $  7,203   $ 11,444   $ 12,827
Equity in earnings (loss) of Servicing Entities......       166       (126)        --
                                                       --------   --------   --------
                                                       $  7,369   $ 11,318   $ 12,827
                                                       ========   ========   ========
</TABLE>

     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 IFA Parent. As a result of the sale, the net operations of Drive
have been recorded (since August 1, 2000) as equity investments. The Company's

                                        55
<PAGE>   58
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

investment in Drive is accounted for under the equity method. The condensed
consolidated financial position and results of operations of Drive are
summarized below:

                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  2000
                                                              ------------
<S>                                                           <C>
Assets......................................................    $164,208
                                                                ========
Liabilities.................................................     154,561
Net equity..................................................       9,647
                                                                --------
                                                                $164,208
                                                                ========
Equity investment in Drive..................................    $  3,738
  Minority interest.........................................        (748)
                                                                --------
     Net investment in Drive................................    $  2,990
                                                                ========
</TABLE>

                   CONDENSED CONSOLIDATED SUMMARY OF EARNINGS

<TABLE>
<CAPTION>
                                                               AUGUST 1, 2000
                                                                   THROUGH
                                                              DECEMBER 31, 2000
                                                              -----------------
<S>                                                           <C>
Revenues....................................................       $20,268
Expenses....................................................        14,529
                                                                   -------
Net earnings................................................       $ 5,739
                                                                   -------
Equity in earnings of Drive.................................       $ 2,223
  Minority interest.........................................          (444)
                                                                   -------
     Net equity in earnings of Drive........................       $ 1,779
                                                                   =======
</TABLE>

(8) NOTES PAYABLE

     Notes payable consisted of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               2000       1999
                                                              -------   --------
<S>                                                           <C>       <C>
Collateralized loans, secured by Portfolio Assets:
  Fixed rate (7.66% at December 31, 2000), due 2002.........  $13,251   $ 21,873
  LIBOR (6.64% at December 31, 2000) plus 4% to 5%, due at
     various dates through 2002.............................   16,190     16,442
Senior Credit Facility, secured and with recourse to the
  Company...................................................   47,778     77,000
Acquisition Facility, secured by certain equity interests of
  the Company: LIBOR (6.64% at December 31, 2000) plus
  4.50%, due 2002...........................................   15,623         --
Collateralized loans, secured by automobile finance
  receivables...............................................       --     20,092
Collateralized loan, secured by residual interests in
  securitizations...........................................       --      4,257
Senior subordinated notes...................................       --     24,125
Other borrowings, secured by fixed assets...................       --      2,604
                                                              -------   --------
  Notes payable, secured....................................   92,842    166,393
  Notes payable to others at various fixed rates between
     7.00% and 9.56%, due at various dates through 2002.....      922      3,399
                                                              -------   --------
                                                              $93,764   $169,792
                                                              =======   ========
</TABLE>

                                        56
<PAGE>   59
                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, 2000 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, 2000, the Company was in compliance with the aforementioned
covenants. The aggregate maturities of notes payable for the three years ending
December 31, 2003 are as follows: $1,702 in 2001, $44,940 in 2002 and $47,122 in
2003.

(9) SEGMENT REPORTING

     The Company is engaged in two reportable segments i) portfolio asset
acquisition and resolution and ii) consumer lending. These segments have been
segregated based on products and services offered by each. 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 for 2000, 1999 and 1998.

                                        57
<PAGE>   60
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                                2000      1999      1998
                                                              --------   -------   -------
<S>                                                           <C>        <C>       <C>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
  Revenues:
     Servicing fees.........................................  $  7,555   $ 3,850   $ 3,062
     Gain on resolution of Portfolio Assets.................     3,120     4,054     9,208
     Equity in earnings of investments......................     7,369    11,318    12,827
     Interest income........................................     2,143     2,610     2,452
     Other..................................................     1,129     3,665     1,733
                                                              --------   -------   -------
          Total.............................................    21,316    25,497    29,282
  Expenses:
     Interest and fees on notes payable.....................     3,266     4,308     6,244
     Salaries and benefits..................................     5,531     5,542     4,619
     Provision for loan and impairment losses...............     1,971        --        --
     Occupancy, data processing and other...................     7,083     5,818     6,078
                                                              --------   -------   -------
          Total.............................................    17,851    15,668    16,941
                                                              --------   -------   -------
  Operating contribution before direct taxes................  $  3,465   $ 9,829   $12,341
                                                              ========   =======   =======
  Operating contribution, net of direct taxes...............  $  3,354   $ 9,743   $12,284
                                                              ========   =======   =======
CONSUMER LENDING:
  Revenues:
     Servicing fees.........................................  $  3,887   $ 5,086   $ 2,705
     Equity in earnings of investments......................     2,223        --        --
     Gain on sale of automobile loans.......................     2,836    10,280     7,214
     Interest income........................................    12,882    17,787    10,035
     Gain on sale of interest in subsidiary.................     8,091        --        --
     Other..................................................        71       171       106
                                                              --------   -------   -------
          Total.............................................    29,990    33,324    20,060
  Expenses:
     Interest and fees on notes payable.....................     3,217     4,730     3,549
     Salaries and benefits..................................     7,277     8,053     5,602
     Provision for loan and impairment losses...............     2,420     4,302     9,201
     Occupancy, data processing and other...................     6,706    10,539     5,466
                                                              --------   -------   -------
          Total.............................................    19,620    27,624    23,818
                                                              --------   -------   -------
  Operating contribution (loss) before direct taxes.........  $ 10,370   $ 5,700   $(3,758)
                                                              ========   =======   =======
  Operating contribution (loss), net of direct taxes........  $ 10,362   $ 5,635   $(3,758)
                                                              ========   =======   =======
          Total operating income, net of direct taxes.......  $ 13,716   $15,378   $ 8,526
                                                              ========   =======   =======
CORPORATE OVERHEAD:
     Other revenue..........................................  $    870   $   107   $ 2,202
  Corporate interest expense................................   (12,175)   (9,716)   (4,797)
  Salaries and benefits, occupancy, professional and other
     expenses...............................................    (7,144)   (6,688)   (6,335)
  Deferred tax valuation benefit (allowance)................    (7,000)   (4,900)    1,189
                                                              --------   -------   -------
  Earnings (loss) from continuing operations................  $(11,733)  $(5,819)  $   785
                                                              ========   =======   =======
</TABLE>

                                        58
<PAGE>   61
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Revenues from the Portfolio Asset acquisition and resolution business
attributable to foreign and domestic operations for the years ended December 31,
2000, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                           ---------------------------
                                                            2000      1999      1998
                                                           -------   -------   -------
<S>                                                        <C>       <C>       <C>
Domestic.................................................  $14,616   $20,468   $24,241
Foreign..................................................    6,700     5,029     5,041
                                                           -------   -------   -------
                                                           $21,316   $25,497   $29,282
</TABLE>

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

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Portfolio acquisition and resolution assets.................  $ 79,567   $ 71,479
Consumer assets.............................................     4,069     85,261
Deferred tax benefit, net...................................    20,101     27,101
Other assets, net...........................................    16,810     26,655
Net assets of discontinued operations.......................    20,444     20,126
                                                              --------   --------
          Total assets......................................  $140,991   $230,622
                                                              ========   ========
</TABLE>

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

     In May 1998, the Company completed the public offering of 1,542,150 shares
of FirstCity common stock, of which 341,000 shares were sold by selling
shareholders. Net proceeds (after expenses) of $34.1 million were used to retire
debt. On May 11, 1998, the Company notified holders of its outstanding 1995
warrants to purchase shares of common stock that it was exercising its option to
repurchase such warrants for $1.00 each. In June 1998, as a result of such
notification, warrants representing 471,380 shares of common stock were
exercised for an aggregate warrant purchase price of $11.8 million. On July 17,
1998 the Company filed a shelf registration statement with the Securities and
Exchange Commission, which allows the Company to issue up to $250 million in
debt and equity securities from time to time in the future. The registration
statement became effective July 28, 1998. As of December 31, 2000, 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 shareholders' 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 IFA. IFA 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 August 31, 2001. The option can be exercised after August 31,
2001 if Term Loan B remains outstanding, but not prior to such date. In the
event that prior to August 31, 2001 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 August 31, 2001 through a transaction
involving the issuance of warrants, IFA is entitled to additional

                                        59
<PAGE>   62
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 shareholders. In order to
preserve certain tax benefits available to the Company, transactions involving
shareholders holding or proposing to acquire more than 4.75% of outstanding
common shares are prohibited unless the prior approval of the Board of Directors
is obtained.

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

     In June 1997, the Company initiated an offer to exchange one share of
special preferred stock for one share of the newly designated adjusting rate
preferred stock. The adjusting rate preferred stock has a redemption value of
$21.00 per share and cumulative quarterly cash dividends at the annual rate of
$3.15 per share through September 30, 1998, adjusting to $2.10 per share through
the redemption date of September 30, 2005. The Company may redeem the adjusting
rate preferred stock after September 30, 2003 for $21 per share plus accrued
dividends. The adjusting rate preferred stock carries no voting rights except in
the event of non-payment of dividends. Pursuant to the exchange offer, 1,073,704
shares in 1997 and 149,197 shares in 1998 of special preferred stock were
exchanged for a like number of shares of adjusting rate preferred stock.
Dividends of $1.9 million and $3.4 million, respectively, or $1.575 and $3.15
per share, respectively, were paid in 1999 and 1998. In the third quarter of
1999, dividends on the Company's adjusting rate preferred stock were suspended.
At December 31, 2000, accumulated dividends in arrears on such preferred stock
totaled $3.9 million, or $3.15 per share. Since the Company failed to pay
quarterly dividends for six consecutive quarters, the holders of adjusting rate
preferred stock are entitled to elect two directors to the Company's Board until
cumulative dividends have been paid in full.

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

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

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

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

                                        60
<PAGE>   63
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                      2000        1999         1998
                                                    --------    ---------    --------
<S>                                                 <C>         <C>          <C>
Net loss to common shareholders:
  As reported.....................................  $(18,468)   $(110,724)   $(25,378)
  Pro forma.......................................   (19,130)    (111,502)    (26,659)
Net loss per common share -- diluted:
  As reported.....................................  $  (2.21)   $  (13.33)   $  (3.35)
  Pro forma.......................................     (2.29)      (13.42)      (3.52)
</TABLE>

     Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
                                     2000                 1999                 1998
                              ------------------   ------------------   ------------------
                                        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......................  236,650    $22.96    284,950    $23.06    314,300    $22.64
Granted.....................  183,000      2.00         --        --     15,000     29.69
Exercised...................       --        --         --        --    (12,350)    22.04
Cancelled...................  (22,500)    22.00         --        --         --        --
Forfeited...................  (49,400)    23.60    (48,300)    23.54    (32,000)    22.50
                              -------    ------    -------    ------    -------    ------
Outstanding at end of
  year......................  347,750    $12.03    236,650    $22.96    284,950    $23.06
                              =======    ======    =======    ======    =======    ======
</TABLE>

     At December 31, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.00 to $30.75 and 7.78
years, respectively. In addition, 146,938 options were exercisable with a
weighted-average exercise price of $22.62.

     The Company has an employee stock purchase plan, which allows employees to
acquire approximately 150,000 shares of common stock of the Company at 85% of
the fair value at the end of each quarterly plan period. The value of the shares
purchased under the plan is limited to the lesser of 10% of compensation or
$25,000 per year. Under the plan, 35,044 shares were issued in 2000, 45,341
shares were issued in 1999, and 35,220 shares were issued in 1998. At December
31, 2000, approximately 30,000 shares of common stock are available for issuance
pursuant to the plan.

     No effect was given to dilutive securities in the 2000, 1999 and 1998 loss
per share calculations as such had an anti-dilutive effect. However, during
2000, an average of 234,629 options were outstanding that could have a
potentially dilutive per share calculation effect in the future.

(11) INCOME TAXES

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

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            2000      1999      1998
                                                           -------   -------   ------
<S>                                                        <C>       <C>       <C>
Federal and state current benefit (expense)..............  $  (414)  $    10   $ (505)
Federal deferred benefit (expense).......................   (7,000)   (5,061)   1,637
                                                           -------   -------   ------
          Total..........................................  $(7,414)  $(5,051)  $1,132
                                                           =======   =======   ======
</TABLE>

     Income taxes attributed to discontinued operations consist of deferred
expense of $89 in 1998.

                                        61
<PAGE>   64
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                            2000      1999      1998
                                                           -------   -------   ------
<S>                                                        <C>       <C>       <C>
Computed expected tax benefit (expense)..................  $ 1,439   $  (256)  $   61
(Increase) reduction in income taxes resulting from:
  Change in valuation allowance..........................   (8,439)   (4,253)   1,777
  Alternative minimum tax and state income tax...........     (414)       --     (505)
  Other..................................................       --      (542)    (201)
                                                           -------   -------   ------
                                                           $(7,414), $(5,051)  $1,132
                                                           =======   =======   ======
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2000 and 1999 are as
follows:

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              ---------   ---------
<S>                                                           <C>         <C>
Deferred tax assets:
  Investments in Acquisition Partnerships, principally due
     to differences in basis for tax and financial reporting
     purposes...............................................  $   1,902   $     676
  Intangibles, principally due to differences in
     amortization...........................................        269         325
  Book loss reserve greater than tax loss reserve...........         --       2,960
  Tax basis in fixed assets greater (less) than book........       (581)      2,118
  Other.....................................................      2,133          --
  Federal net operating loss carryforwards..................    203,428     199,633
                                                              ---------   ---------
          Total gross deferred tax assets...................    207,151     205,712
  Valuation allowance.......................................   (187,050)   (178,611)
                                                              ---------   ---------
          Net deferred tax assets...........................  $  20,101   $  27,101
                                                              =========   =========
</TABLE>

     The Company has net operating loss carryforwards for federal income tax
purposes of approximately $581.2 million from continuing operations and $152.1
million from discontinued operations at December 31, 2000, available to offset
future federal taxable income, if any, through the year 2020. A valuation
allowance is provided to reduce the deferred tax assets to a level, which, more
likely than not, will be realized. During 2000, 1999 and 1998, the Company
adjusted the previously established valuation allowance to recognize a deferred
tax benefit (expense) of $(8.4) million, $(4.3) million and $1.8 million,
respectively. The ultimate realization of the resulting net deferred tax asset
is dependent upon generating sufficient taxable income from its continuing
operations remaining prior to expiration of the net operating loss
carryforwards. The expense recognized in 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.

(12) 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

                                        62
<PAGE>   65
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

maximum. The Company's contributions to the 401(k) plan were $263 in 2000, $238
in 1999, and $192 in 1998.

(13) LEASES

     The Company leases its current headquarters from a related party under a
noncancellable operating lease. The lease calls for monthly payments of $7.5
thousand through its expiration in December 2001 and includes an option to renew
for two additional five-year periods. Rental expense for 2000, 1999 and 1998
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 2000, 1999 and 1998 was $1.7 million, $2.1 million and
$1.1 million, respectively. As of December 31, 2000, the future minimum lease
payments under all noncancellable operating leases are: $217 in 2001, $96 in
2002, $53 in 2003, $41 in 2004 and $35 in 2005.

(14) OTHER RELATED PARTY TRANSACTIONS

     The Company has contracted with the Acquisition Partnerships and related
parties as a third party loan servicer. Servicing fees totaling $11.4 million,
$8.9 million and $5.8 million for 2000, 1999 and 1998, respectively, and due
diligence fees (included in other income) were derived from such affiliates.

(15) COMMITMENTS AND CONTINGENCIES

     The Company and Harbor Financial Group, Inc. (formerly known as FirstCity
Financial Mortgage Corporation) 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 damages resulting from alleged
violations by the defendants of the Bank Holding Company Act and from civil
conspiracy engaged in by the defendants, and injunctive relief, arising from an
engagement letter entered into between the Company and Chase Securities, Inc.
relating to the sale assets or securities of Harbor Financial Group, Inc.,
Harbor Financial Mortgage Corporation and their subsidiaries (collectively
"Harbor"). The Company alleged that Chase Bank of Texas, N.A. conditioned its
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 actual damages sought by the Company were in excess of $200 million.
The Company also sought recovery of three times its damages pursuant to the Bank
Holding Company Act and recovery of its 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
requested leave of the Supreme Court for the State of New York to amend its
answer in that proceeding to include these claims as a counterclaim to the suit
brought by Chase Securities, Inc. and an action against Chase Bank of Texas,
N.A.

     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 and other just and
proper relief. The Company denies that it has any liability to Chase Securities,
Inc. and intends to vigorously defend the suit. The Company has asserted as a
defense to this action the violations of the Bank Holding Company Act asserted
in the litigation pending before the Federal District Court for the Western
District of Texas. The Company has sought leave to amend its answer in the suit
to include a counterclaim against Chase Securities, Inc. and an action against
Chase Bank of Texas, N.A. under the Bank Holding Company Act as is asserted in
the Texas suit.

                                        63
<PAGE>   66
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On October 14, 1999, Mortgage Corp. filed voluntary petitions under Chapter
11 of the United States Bankruptcy Code before the United States Bankruptcy
Court for the Northern District of Texas, Dallas Division. In a motion filed in
those proceedings requesting the appointment of a Chapter 11 Trustee, the
debtors stated that they were reviewing pre-petition transfers to the Company to
determine if those transfers are avoidable. On December 14, 1999, the bankruptcy
proceedings were converted to liquidations under Chapter 7 of the United States
Bankruptcy Code. The Chapter 7 Trustee has not initiated an action against the
Company to assert an avoidance action to recover any preferential transfers. The
Company believes that it has valid defenses to any allegations that might be
made to avoid any pre-petition transfers in connection with the Mortgage Corp.
bankruptcy proceedings.

     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, 2000, advances of $2.4 million had
been made under the obligation.

     In connection with the transactions contemplated by the Securities Purchase
Agreement, 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 dated as of August 18, 2000, by
and between Consumer Corp. and Drive, and a Contribution and Assumption
Agreement dated as of August 18, 2000, 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 IFA, 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 (30) months from the Closing Date
with respect to all other representations and warranties. None of 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

                                        64
<PAGE>   67
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

(16) SUBSEQUENT EVENTS

     During January 2001 FirstCity increased its line of credit with a related
party to $30 million from $17 million, which will provide liquidity for
additional equity investments.

(17) FINANCIAL INSTRUMENTS

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

(a) CASH AND CASH EQUIVALENTS

     The carrying amount of cash and cash equivalents approximated fair value at
December 31, 2000 and 1999.

(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 $44.6
million and $69.6 million, respectively, at December 31, 2000 and 1999. The
estimated fair value of the Portfolio Assets and loans receivable was
approximately $47.2 million and $71.8 million, respectively, at December 31,
2000 and 1999.

(c) 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, 2000 and 1999 approximate the market terms for similar credit instruments.
Accordingly, the carrying amount of notes payable is believed to approximate
fair value.

(d) REDEEMABLE PREFERRED STOCK

     Redeemable preferred stock is carried at redemption value plus accrued but
unpaid dividends. Carrying values were $29,533 and $26,965 at December 31, 2000
and 1999, respectively. Fair market values based on quoted market rates were
$11,618 and $11,770 at December 31, 2000 and 1999, respectively.

                                        65
<PAGE>   68

                          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, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2000.
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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United Sates of America.

     As discussed in note 1 to the consolidated financial statements, 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 6, 2001

                                        66
<PAGE>   69

                        FIRSTCITY FINANCIAL CORPORATION

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

<TABLE>
<CAPTION>
                                                   2000                                     1999
                                  --------------------------------------   ---------------------------------------
                                   FIRST     SECOND     THIRD    FOURTH     FIRST     SECOND     THIRD     FOURTH
                                  QUARTER   QUARTER    QUARTER   QUARTER   QUARTER   QUARTER    QUARTER    QUARTER
                                  -------   --------   -------   -------   -------   --------   --------   -------
<S>                               <C>       <C>        <C>       <C>       <C>       <C>        <C>        <C>
Revenues........................  $15,676   $ 12,390   $16,186  $ 7,924    $10,977   $ 16,396   $ 13,089   $18,466
Expenses........................   15,546     19,493    13,224    8,025     12,286     14,460     14,390    17,061
Earnings (loss) from continuing
  operations before accounting
  change(1).....................     (129)   (13,978)    2,885     (511)    (1,262)    (3,753)    (1,193)    1,154
Accounting change...............       --         --        --       --       (765)        --         --        --
Extraordinary gain..............       --         --       833       --         --         --         --        --
Earnings (loss) from
  discontinued operations(2)....       --     (5,000)       --       --        525    (40,128)   (62,734)       --
Net earnings (loss).............     (129)   (18,978)    3,718     (511)    (1,502)   (43,881)   (63,927)    1,154
Preferred dividends.............      642        642       642      642        642        642        642       642
Net earnings (loss) to common
  shareholders..................  $  (771)  $(19,620)  $ 3,076  $(1,153)   $(2,144)  $(44,523)  $(64,569)  $   512
Net earnings (loss) from
  continuing operations before
  accounting change per common
  share -- Basic and diluted....  $ (0.09)  $  (1.75)  $  0.27  $ (0.14)   $ (0.23)  $  (0.52)  $  (0.22)  $  0.06
</TABLE>

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

(1) During the second quarter of 2000, the Company reflected significant losses
    from continuing operations. These losses were primarily 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.

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

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

        The loss in the third quarter 1999 is primarily due to the write-off of
    the Company's investment in Mortgage Corp of $50.5 million and the write
    down of the Company's net investment in Capital Corp by $12.7 million.

                                        67
<PAGE>   70

                                 WAMCO PARTNERSHIPS

                              COMBINED BALANCE SHEETS
                             DECEMBER 31, 2000 AND 1999
                               (DOLLARS IN THOUSANDS)

                                       ASSETS

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Cash........................................................  $  6,677    $  6,453
Portfolio Assets, net.......................................   194,942     225,622
Investments in partnerships.................................     2,254       1,681
Investments in trust certificates...........................     6,908       6,486
Deferred profit sharing.....................................    16,174       7,882
Other assets, net...........................................     1,697       6,915
                                                              --------    --------
                                                              $228,652    $255,039
                                                              ========    ========
                        LIABILITIES AND PARTNERS' CAPITAL

Notes payable (including$128,208 and $162,881 to affiliates
  in 2000 and 1999, respectively)...........................   135,833     171,908
Deferred compensation.......................................    22,356      12,857
Other liabilities (including $883 and $325 to affiliates in
  2000 and 1999, respectively)..............................     3,928       2,546
                                                              --------    --------
          Total liabilities.................................   162,117     187,311
Commitments and contingencies...............................        --          --
Preferred equity............................................     3,556       3,556
Partners' capital...........................................    62,979      64,172
                                                              --------    --------
                                                              $228,652    $255,039
                                                              ========    ========
</TABLE>

            See accompanying notes to combined financial statements.

                                        68
<PAGE>   71

                               WAMCO PARTNERSHIPS

                       COMBINED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               2000        1999        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Proceeds from resolution of Portfolio Assets...............  $ 44,328    $ 51,459    $ 71,473
Cost of Portfolio Assets resolved..........................    30,115      34,108      49,855
                                                             --------    --------    --------
Gain on resolution of Portfolio Assets.....................    14,213      17,351      21,618
Interest income on performing Portfolio Assets.............    18,049      15,599       8,341
Interest expense (including $13,078, $9,624 and $4,494 to
  affiliates in 2000, 1999 and 1998, respectively).........   (14,776)    (11,425)     (7,483)
General, administrative and operating expenses.............    (6,712)     (6,949)    (10,033)
Other income, net..........................................     1,704       1,938       1,772
                                                             --------    --------    --------
          Net earnings.....................................  $ 12,478    $ 16,514    $ 14,215
                                                             ========    ========    ========
</TABLE>

            See accompanying notes to combined financial statements.

                                        69
<PAGE>   72

                               WAMCO PARTNERSHIPS

              COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           CLASS B
                                       CLASS A EQUITY       EQUITY
                                     -------------------   --------
                                     GENERAL    LIMITED    LIMITED    GENERAL    LIMITED
                                     PARTNERS   PARTNERS   PARTNERS   PARTNERS   PARTNERS    TOTAL
                                     --------   --------   --------   --------   --------   --------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
Balance at December 31, 1997.......     272      13,320      3,346       682       37,650     55,270
  Contributions....................      10         483         --       503       34,077     35,073
  Distributions....................    (111)     (5,456)    (1,111)     (699)     (41,125)   (48,502)
  Net earnings.....................      (5)       (224)      (290)      201       14,533     14,215
                                      -----     -------    -------     -----     --------   --------
Balance at December 31, 1998.......     166       8,123      1,945       687       45,135     56,056
  Contributions....................       1          40         --       540       27,558     28,139
  Distributions....................     (48)     (2,355)      (440)     (527)     (33,167)   (36,537)
  Net earnings.....................      10         476        (81)      250       15,859     16,514
                                      -----     -------    -------     -----     --------   --------
Balance at December 31, 1999.......     129       6,284      1,424       950       55,385     64,172
  Contributions....................       6         325         --        62        5,821      6,214
  Distributions....................     (36)     (1,778)      (283)     (341)     (17,447)   (19,885)
  Net earnings.....................      18         884          6       207       11,363     12,478
                                      -----     -------    -------     -----     --------   --------
Balance at December 31, 2000.......   $ 117     $ 5,715    $ 1,147     $ 878     $ 55,122   $ 62,979
                                      =====     =======    =======     =====     ========   ========
</TABLE>

            See accompanying notes to combined financial statements.

                                        70
<PAGE>   73

                               WAMCO PARTNERSHIPS

                       COMBINED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                2000       1999        1998
                                                              --------   ---------   --------
<S>                                                           <C>        <C>         <C>
Cash flows from operating activities:
  Net earnings..............................................  $ 12,478   $  16,514   $ 14,215
  Adjustments to reconcile net earnings to net cash provided
     by (used in) operating activities:
     Amortization of loan origination and commitment fees...       376       1,334        678
     Provision for losses...................................        58          --         --
     Gain on resolution of Portfolio Assets.................   (14,213)    (17,351)   (21,618)
     Purchase of Portfolio Assets...........................   (24,172)   (107,704)   (91,713)
     Capitalized costs on Portfolio Assets..................    (3,112)     (5,304)    (2,095)
     Proceeds from resolution of Portfolio Assets...........    44,328      51,459     71,473
     Principal payments on Performing Portfolio Assets......    27,791       1,420         --
     Increase in deferred profit sharing....................    (8,292)     (3,336)    (5,307)
     (Increase) decrease in other assets....................       531        (138)       857
     Increase in deferred compensation......................     9,499       3,437       9420
     Increase (decrease) in other liabilities...............     1,894        (571)     1,574
                                                              --------   ---------   --------
          Net cash provided by (used in) operating
            activities......................................    47,166     (60,240)   (22,516)
Cash flows from investing activities:
  Contribution to subsidiaries..............................      (573)     (1,090)      (406)
  Purchase of trust certificates............................      (420)       (330)      (281)
                                                              --------   ---------   --------
          Net cash used in operating activities.............      (993)     (1,420)      (687)
Cash flows from financing activities:
  Borrowing of debt.........................................    29,673     160,903     93,308
  Repayment of debt.........................................   (61,951)   (100,057)   (56,269)
  Issuance of preferred equity..............................        --       3,556         --
  Capital contributions.....................................     6,214      28,139     35,073
  Capital distributions.....................................   (19,885)    (36,537)   (48,502)
                                                              --------   ---------   --------
          Net cash provided by (used in) financing
            activities......................................   (45,949)     56,004     23,610
                                                              --------   ---------   --------
Net increase (decrease) in cash.............................       224      (5,656)       407
Cash at beginning of year...................................     6,453      12,109     11,702
                                                              --------   ---------   --------
Cash at end of year.........................................  $  6,677   $   6,453   $ 12,109
                                                              ========   =========   ========
</TABLE>

Supplemental disclosure of cash flow information (note 6):

     Cash paid for interest was approximately $13,638, $11,104 and $6,889 for
     2000, 1999, and 1998, respectively.

            See accompanying notes to combined financial statements.

                                        71
<PAGE>   74

                               WAMCO PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS
                       DECEMBER 31, 2000, 1999, AND 1998
                             (DOLLARS IN THOUSANDS)

(1) ORGANIZATION AND PARTNERSHIP AGREEMENTS

     The combined financial statements include the accounts of WAMCO III, Ltd.;
WAMCO V, Ltd.; WAMCO IX, Ltd.; WAMCO XVII, Ltd.; WAMCO XXIV, Ltd.; WAMCO XXV,
Ltd.; WAMCO XXVI Ltd.; WAMCO XXVII Ltd.; WAMCO XVIII Ltd.; Calibat Fund, LLC;
First B Realty, L.P.; First Paradee, L.P.; First Street LLC; FC Properties; Ltd;
FCS Creamer, Ltd.; FCS Wildhorse, Ltd.; FCS Wood, Ltd.; FCS Fischer, Ltd.;
Imperial Fund I, L.P.; and VOJ Partners, L.P., all of which are Texas limited
partnerships ("Acquisition Partnerships" or "Partnerships"). FirstCity Financial
Corporation or its subsidiaries, FirstCity Commercial Corporation and FirstCity
Holdings Corporation, own limited and general partnership interests in all of
the Partnerships. During November 2000, WAMCO V, Ltd. and WAMCO XVII, Ltd. were
merged with and into WAMCO III, Ltd., with WAMCO III, Ltd. being the surviving
entity. The merger of the acquisition partnerships has no effect on the
comparability of the combined financial statements. All significant intercompany
balances have been eliminated.

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

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

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PORTFOLIO ASSETS

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

                                        72
<PAGE>   75
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

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

  Non-Performing Portfolio Assets

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

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

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

  Performing Portfolio Assets

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

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

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

  Real Estate Portfolios

     Real estate Portfolios consist of real estate assets acquired from a
variety of sellers. Such Portfolios are carried at the lower of cost or fair
value less estimated costs to sell. Costs relating to the development and
improvement of real estate are capitalized, whereas those relating to holding
assets are charged to expense. Income or loss is recognized upon the disposal of
the real estate. Rental income, net of expenses, on real estate Portfolios is
recognized when received. Accounting for the Portfolios is on an individual
asset-by-asset basis as
                                        73
<PAGE>   76
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

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

(c) INCOME TAXES

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

(d) USE OF ESTIMATES

     The preparation of financial statements in conformity with 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. Actual results could differ from those
estimates.

(3) PORTFOLIO ASSETS

     Portfolio Assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Non-performing Portfolio Assets.............................  $ 98,138   $121,055
Performing Portfolio Assets.................................   158,634    182,534
Real estate Portfolios......................................    34,136     39,491
                                                              --------   --------
          Total Portfolio Assets............................   290,908    343,080
Discount required to reflect Portfolio Assets at carrying
  value.....................................................   (95,966)  (117,458)
                                                              --------   --------
          Portfolio Assets, net.............................  $194,942   $225,622
                                                              ========   ========
</TABLE>

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

(4) DEFERRED PROFIT SHARING AND DEFERRED COMPENSATION

     In connection with the formation of FC Properties, Ltd., 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

                                        74
<PAGE>   77
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

participation will be paid until the limited partners recognize a 20% return on
their investment. Management anticipates this return threshold will be met in
2001. At December 31, 2000 and 1999, the estimated liability for this profit
participation was $21,175 and $11,767, respectively, and was included in
deferred compensation in the accompanying combined balance sheets. Additionally,
amortization of $1,118 and $761 was recognized during 2000 and 1999,
respectively, and has been included in general, administrative and operating
expense in the accompanying statements of operations.

     Other deferred compensation at December 31, 2000 and 1999 of $1,181 and
$1,090, respectively, represent commissions owed to the project manager of FC
Properties Ltd. These commissions are based on sales incurred to date and will
be paid out after the limited partners recognize a 20% return on their
investment. As noted above, management anticipates this return will be met in
2001.

(5) NOTES PAYABLE

     Notes payable at December 31, 2000 and 1999 consist of the following:

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Senior collateralized loans, secured by Portfolio Assets:
  Prime (9.5% at December 31, 2000) plus 0.5% to 7%.........  $  2,145   $  4,650
  LIBOR (6.4% at December 31, 2000) plus 2.25% to 5%........   115,233    142,951
  Fixed rate -- 6.5% to 13%.................................    16,200     22,020
Subordinated collateralized loans, secured by Portfolio
  Assets:
  Prime (9.5% at December 31, 2000) plus 1% to 7%...........     2,255      1,215
Uncollateralized intercompany loans:
  Prime (9.5% at December 31, 2000) plus 1%.................        --      1,072
                                                              --------   --------
                                                              $135,833   $171,908
                                                              ========   ========
</TABLE>

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

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

<TABLE>
<CAPTION>
                 YEAR ENDING DECEMBER 31:
<S>                                                         <C>
  2001....................................................    44,298
  2002....................................................    81,739
  2003....................................................     3,262
  2004....................................................     1,298
  2005....................................................       757
  Thereafter..............................................     4,479
                                                            --------
                                                            $135,833
                                                            ========
</TABLE>

     It is anticipated that the notes payable maturing in 2001 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, 2000, 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 proportionate to the principal
reductions on the related notes and are included in general,

                                        75
<PAGE>   78
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

administrative and operating expenses. At December 31, 2000 and 1999,
approximately $696 and $792, respectively, of origination and commitment fees
are included in other assets, net.

(6) TRANSACTIONS WITH AFFILIATES

     Under the terms of the various servicing agreements between the
Partnerships and FirstCity, FirstCity receives a servicing fee based on proceeds
from resolution of the Portfolio Assets for processing transactions on the
Portfolio Assets and for conducting settlement, collection and other resolution
activities. Included in general, administrative and operating expenses in the
accompanying combined statements of operations is approximately $2,566, $2,613,
and $2,752 in servicing fees incurred by the Partnerships in 2000, 1999 and
1998, respectively.

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

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

(a) CASH, OTHER ASSETS AND OTHER LIABILITIES

     The carrying amount of cash, other assets and other liabilities
approximates fair value at December 31, 2000 and 1999 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 $194,942 and $225,622 at December 31, 2000 and 1999,
respectively. The estimated fair value of the Portfolio Assets was approximately
$253,255 and $277,397 at December 31, 2000 and 1999, respectively.

(c) INVESTMENTS IN TRUST CERTIFICATES

     Investments in trust certificates are carried at the lower of cost or
estimated fair value. Fair value of the investments is estimated by discounting
future anticipated cash flows at a rate consistent with similar types of
investments. The carrying value of Investments in Trust Certificates was $6,908
and $6,486 at December 31, 2000 and 1999, respectively. The estimated fair value
of the Investments in Trust Certificates was approximately $8,611 and $8,335,
respectively.

                                        76
<PAGE>   79
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(d) NOTES PAYABLE

     Management believes that for similar financial instruments with comparable
credit risks, the stated interest rates at December 31, 2000 and 1999
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.

(8) PREFERRED EQUITY

     WAMCO XXIV, Ltd. invested in Community Development Investment LLC in 1999.
This investment carries Preferred Equity belonging to a third party. All net
cash flow is payable monthly first to the Preferred Return member in an amount
equal to its unreturned contribution, plus interest accrued thereon at a rate of
Libor (6.4%) plus 5%, compounded monthly, until such contribution plus accrued
interest is returned in full. The remainder, if any, is distributed to the
common member interest holder, WAMCO XXIV, Ltd. Not withstanding anything to the
contrary, all net losses, net cash use or other situations resulting in a
situation requiring additional contributions shall be allocated to, or made by,
WAMCO XXIV, Ltd.

(9) COMMITMENTS AND CONTINGENCIES

     Calibat Fund, LLC has committed to make additional investments in
partnerships up to $137 at December 31, 2000.

     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.

                                        77
<PAGE>   80

                          INDEPENDENT AUDITORS' REPORT

The Partners
WAMCO Partnerships:

     We have audited the accompanying combined balance sheets of the WAMCO
Partnerships as of December 31, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.

                                            KPMG LLP

Dallas, Texas
February 6, 2001

                                        78
<PAGE>   81

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

     Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information called for by this item with respect to the Company's
directors and executive officers is incorporated by reference from the
information contained under the headings "Election of Directors," "Executive
Officers" and "Compliance with Section 16(a) of the Exchange Act" in the
Company's definitive proxy statement pertaining to the 2001 Annual Meeting of
Stockholders.

ITEM 11. EXECUTIVE COMPENSATION.

     The information called for by this item is incorporated by reference from
the information contained under the headings "Director Compensation," "Executive
Compensation," "Summary Compensation Table," "Stock Option and Purchase Plans
and 401(k) Plan," "Other Exercises and Year-End Values," "Board Compensation
Committee Report on Executive Compensation," "Compensation Committee Interlocks
and Insider Participation," "Employment Agreements" and "Cumulative Total
Stockholder Return" in the Company's definitive proxy statement pertaining to
the 2001 Annual Meeting of Stockholders.

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

     The information called for by this item is incorporated by reference from
the information contained under the headings "Stock Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
pertaining to the 2001 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information called for by this item is incorporated by reference from
the information contained under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement pertaining to the 2001
Annual Meeting of Stockholders.

                                        79
<PAGE>   82

                                    PART IV

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

     (a) 1. Financial Statements

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

          3. Exhibits

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

                                        80
<PAGE>   83

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

                                        81
<PAGE>   84

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

                                        82
<PAGE>   85

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

                                        83
<PAGE>   86

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.30           -- Security Agreement, dated as of April 30, 1998 among
                            Enterprise Funding Corporation, FCAR Receivables L.L.C.,
                            MBIA Insurance Corporation, FirstCity Funding
                            Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a
                            Loan Servicing enterprise (incorporated herein by
                            reference to Exhibit 10.30 of the Company's Form 10-Q
                            dated May 17, 1999, filed with the commission on May 17,
                            1999).
         10.31           -- Note purchase agreement, dated March 30, 1999 among
                            Enterprise Funding Corporation, FCAR Receivables, L.L.C.
                            and NationsBank, N.A. (incorporated herein by reference
                            to Exhibit 10.31 of the Company's Form 10-Q dated May 17,
                            1999, filed with the commission on May 17, 1999).
         10.32           -- Custodian Agreement, dated March 30, 1999, among FCAR
                            Receivables L.L.C., FirstCity Funding Corporation,
                            NationsBank, N.A., Enterprise Funding Corporation and
                            Chase Bank of Texas, N.A. (incorporated herein by
                            reference to Exhibit 10.32 of the Company's Form 10-Q
                            dated May 17, 1999, filed with the commission on May 17,
                            1999).
         10.33           -- Credit agreement dated effective as of May 28, 1999 made
                            by and among Harbor Financial Mortgage, New America
                            Financial, Inc., FirstCity Financial Mortgage
                            Corporation, and Guaranty Federal Bank F.S.B. as
                            Administrative Agent and Bank One, Texas, N.A. as
                            Collateral Agent (incorporated herein by reference to
                            Exhibit 10.33 of the Company's Form 10-Q dated August 16,
                            1999, filed with the commission on August 16, 1999).
         10.34           -- Tenth Amendment to Loan Agreement, dated August 11, 1999
                            between Bank of Scotland and the Company (incorporated
                            herein by reference to Exhibit 10.34 of the Company's
                            Form 10-Q dated August 16, 1999, filed with the
                            Commission on August 16, 1999).
         10.35           -- Amended and Restated Loan Agreement, dated December 20,
                            1999, By and Among FirstCity Financial Corporation as
                            Borrower and The Lenders Named Herein, as Lenders and
                            Bank of Scotland as Agent (incorporated herein by
                            reference to Exhibit 10.1 of the Company's Form 8-K dated
                            December 22, 1999, filed with the commission on December
                            28, 1999).
         10.36           -- Subordinated Secured Senior Note Purchase Agreement,
                            dated December 20, 1999, between FirstCity Financial
                            Corporation, as Issuer and IFA Corporation, as Purchaser
                            (incorporated herein by reference to Exhibit 10.2 of the
                            Company's Form 8-K dated December 22, 1999, filed with
                            the commission on December 28, 1999).
         10.37           -- Employment Agreement, dated October 1, 1999, by and
                            between FirstCity Commercial Corporation and Terry R.
                            DeWitt. (incorporated herein by reference to Exhibit
                            10.37 of the Company's Form 10-K dated February 8, 2000,
                            filed with the commission of 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 of 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 of
                            February 8, 2000).
</TABLE>

                                        84
<PAGE>   87

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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.
         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.
         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.
         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.
         21.1            -- Subsidiaries of the Registrant.
         23.1            -- Consent of KPMG LLP.
         23.2            -- Consent of KPMG LLP.
</TABLE>

     (b) Reports on Form 8-K.

          No reports on Form 8-K were filed with the Commission during the
     fourth quarter of 2000.

                                        85
<PAGE>   88

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                            FIRSTCITY FINANCIAL CORPORATION

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

April 12, 2001

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

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

                /s/ JAMES R. HAWKINS                     Chairman of the Board and      April 12, 2001
-----------------------------------------------------      Director
                  James R. Hawkins

                /s/ JAMES T. SARTAIN                     President, Chief Executive     April 12, 2001
-----------------------------------------------------      Officer and Director
                  James T. Sartain                         (Principal Executive
                                                           Officer)

                 /s/ J. BRYAN BAKER                      Senior Vice President, and     April 12, 2001
-----------------------------------------------------      Chief Financial Officer
                   J. Bryan Baker                          (Principal financial
                                                           officer)

                 /s/ RICHARD E. BEAN                     Director                       April 12, 2001
-----------------------------------------------------
                   Richard E. Bean

                 /s/ C. IVAN WILSON                      Director                       April 12, 2001
-----------------------------------------------------
                   C. Ivan Wilson

               /s/ ROBERT E. GARRISON                    Director                       April 12, 2001
-----------------------------------------------------
                 Robert E. Garrison

                   /s/ DANE FULMER                       Director                       April 12, 2001
-----------------------------------------------------
                     Dane Fulmer

                 /s/ DAVE MACLENNAN                      Director                       April 12, 2001
-----------------------------------------------------
                   Dave MacLennan
</TABLE>

                                        86
<PAGE>   89

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1            -- Joint Plan of Reorganization by First City Bancorporation
                            of Texas, Inc., Official Committee of Equity Security
                            Holders and J-Hawk Corporation, with the Participation of
                            Cargill Financial Services Corporation, Under Chapter 11
                            of the United States Bankruptcy Code, Case No.
                            392-39474-HCA-11 (incorporated herein by reference to
                            Exhibit 2.1 of the Company's Current Report on Form 8-K
                            dated July 3, 1995 filed with the Commission on July 18,
                            1995).
          2.2            -- Agreement and Plan of Merger, dated as of July 3, 1995,
                            by and between First City Bancorporation of Texas, Inc.
                            and J-Hawk Corporation (incorporated herein by reference
                            to Exhibit 2.2 of the Company's Current Report on Form
                            8-K dated July 3, 1995 filed with the Commission on July
                            18, 1995).
          3.1            -- Amended and Restated Certificate of Incorporation of the
                            Company (incorporated herein by reference to Exhibit 3.1
                            of the Company's Current Report on Form 8-K dated July 3,
                            1995 filed with the Commission on July 18, 1995).
          3.2            -- Bylaws of the Company (incorporated herein by reference
                            to Exhibit 3.2 of the Company's Current Report on Form
                            8-K dated July 3, 1995 filed with the Commission on July
                            18, 1995).
          4.1            -- Certificate of Designations of the New Preferred Stock
                            ($0.01 par value) of the Company. (incorporated herein by
                            reference to Exhibit 4.1 to the Company's Current Report
                            on form 10-K dated March 24, 1998 filed with the
                            Commission on March 26, 1998).
          4.2            -- Warrant Agreement, dated July 3, 1995, by and between the
                            Company and American Stock Transfer & Trust Company, as
                            Warrant Agent (incorporated herein by reference to
                            Exhibit 4.2 of the Company's Current Report on Form 8-K
                            dated July 3, 1995 filed with the Commission on July 18,
                            1995).
          4.3            -- Registration Rights Agreement, dated July 1, 1997, among
                            the Company, Richard J. Gillen, Bernice J. Gillen, Harbor
                            Financial Mortgage Company Employees Pension Plan,
                            Lindsey Capital Corporation, Ed Smith and Thomas E.
                            Smith. (incorporated herein by reference to Exhibit 4.3
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission on March 26, 1998).
          4.4            -- Stock Purchase Agreement, dated March 24, 1998, between
                            the Company and Texas Commerce Shareholders Company.
                            (incorporated herein by reference to Exhibit 4.4 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission on March 26, 1998).
          4.5            -- Registration Rights Agreement, dated March 24, 1998,
                            between the Company and Texas Commerce Shareholders
                            Company. (incorporated herein by reference to Exhibit 4.5
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission on March 24, 1998).
          9.1            -- Shareholder Voting Agreement, dated as of June 29, 1995,
                            among ATARA I Ltd., James R. Hawkins, James T. Sartain
                            and Cargill Financial Services Corporation. (incorporated
                            herein by reference to Exhibit 9.1 of the Company's Form
                            10-K dated March 24,1998 filed with the Commission on
                            March 26, 1998).
         10.1            -- Trust Agreement of FirstCity Liquidating Trust, dated
                            July 3, 1995 (incorporated herein by reference to Exhibit
                            10.1 of the Company's Current Report on Form 8-K dated
                            July 3, 1995 filed with the Commission on July 18, 1995).
</TABLE>
<PAGE>   90

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.2            -- Investment Management Agreement, dated July 3, 1995,
                            between the Company and FirstCity Liquidating Trust
                            (incorporated herein by reference to Exhibit 10.2 of the
                            Company's Current Report on Form 8-K dated July 3, 1995
                            filed with the Commission on July 18, 1995
         10.3            -- Lock-Box Agreement, dated July 11, 1995, among the
                            Company, NationsBank of Texas, N.A., as lock-box agent,
                            FirstCity Liquidating Trust, FCLT Loans, L.P., and the
                            other Trust-Owned Affiliates signatory thereto, and each
                            of NationsBank of Texas, N.A. and Fleet National Bank, as
                            co-lenders (incorporated herein by reference to Exhibit
                            10.3 of the Company's Form 8-A/A dated August 25, 1995
                            filed with the Commission on August 25, 1995).
         10.4            -- Custodial Agreement, dated July 11, 1995, among Fleet
                            National Bank, as custodian, Fleet National Bank, as
                            agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and
                            the Company (incorporated herein by reference to Exhibit
                            10.4 of the Company's Form 8-A/A dated August 25, 1995
                            filed with the Commission on August 25, 1995).
         10.5            -- Tier 3 Custodial Agreement, dated July 11, 1995, among
                            the Company, as custodian, Fleet National Bank, as agent,
                            FCLT Loans, L.P., FirstCity Liquidating Trust, and the
                            Company, as servicer (incorporated herein by reference to
                            Exhibit 10.5 of the Company's Form 8-A/A dated August 25,
                            1995 filed with the Commission on August 25, 1995).
         10.6            -- 12/97 Amended and Restated Facilities Agreement, dated
                            effective as of December 3, 1997, among Harbor Financial
                            Mortgage Corporation, New America Financial, Inc., Texas
                            Commerce Bank National Association and the other
                            warehouse lenders party thereto. (incorporated herein by
                            reference to Exhibit 10.6 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.7            -- Modification Agreement, dated January 26, 1998, to the
                            Amended and Restated Facilities Agreement, dated as of
                            December 3, 1997, among Harbor Financial Mortgage
                            Corporation, New America Financial, Inc. and Chase Bank
                            of Texas, National Association (formerly known as Texas
                            Commerce Bank National Association). (incorporated herein
                            by reference to Exhibit 10,7 of the company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.8            -- $50,000,000 3/98 Chase Texas Temporary Additional
                            Warehouse Note, dated March 17, 1998, by Harbor Financial
                            Mortgage Corporation and New America Financial, Inc., in
                            favor of Chase Bank of Texas, National Association.
                            (incorporated herein by reference to Exhibit 10.8 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
         10.9            -- Employment Agreement, dated as of July 1, 1997, by and
                            between Harbor Financial Mortgage Corporation and Richard
                            J. Gillen. (incorporated herein by reference to Exhibit
                            10.9 of the Company's 10-K dated March 24, 1998 filed
                            with the Commission March 26, 1998).
         10.10           -- Employment Agreement, dated as of September 8, 1997, by
                            and between FirstCity Funding Corporation and Thomas R.
                            Brower, with similar agreements between FC Capital Corp.
                            and each of James H. Aronoff and Christopher J.
                            Morrissey. (incorporated herein by reference to Exhibit
                            10.10 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
</TABLE>
<PAGE>   91

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.11           -- Shareholder Agreement, dated as of September 8, 1997,
                            among FirstCity Funding Corporation, FirstCity Consumer
                            Lending Corporation, Thomas R. Brower, Scot A. Foith,
                            Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves,
                            Stephen H. Trent and Blake P. Bozman. (incorporated
                            herein by reference to Exhibit 10.11 of the Company's
                            Form 10-K dated March 24, 1998 filed with the Commission
                            March 26, 1998).
         10.12           -- Revolving Credit Loan Agreement, dated as of March 20,
                            1998, by and between FC Properties, Ltd. and Nomura Asset
                            Capital Corporation. (incorporated herein by reference to
                            Exhibit 10.12 of the Company's Form 10-K dated March 24,
                            1998 filed with the Commission March 26, 1998).
         10.13           -- Revolving Credit Loan Agreement, dated as of February 27,
                            1998, by and between FH Partners, L.P. and Nomura Asset
                            Capital Corporation. (incorporated herein by reference to
                            Exhibit 10.13 of the Company's Form 10-K dated March 24,
                            1998 filed with the Commission March 26, 1998).
         10.14           -- Note Agreement, dated as of June 6, 1997, among Bosque
                            Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
                            Investment Realty Partners, L.P. and Bankers Trust
                            Company of California, N.A. (incorporated herein by
                            reference to Exhibit 10.14 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.15           -- 60,000,000 French Franc Revolving Promissory Note, dated
                            September 25, 1997, by J-Hawk International Corporation
                            in favor of the Bank of Scotland. (incorporated herein by
                            reference to Exhibit 10.15 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.16           -- Loan Agreement, dated as of September 25, 1997, by and
                            between Bank of Scotland and J-Hawk International
                            Corporation. (incorporated herein reference to Exhibit
                            10.16 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
         10.17           -- Guaranty Agreement, dated as of September 25, 1997, by
                            J-Hawk (incorporated herein by reference to Exhibit 10.17
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission March 26, 1998).
         10.18           -- Guaranty Agreement, dated as of September 25, 1997, by
                            FirstCity Financial Corporation in favor of Bank of
                            Scotland. (incorporated herein by reference to Exhibit
                            10.18 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
         10.19           -- Warehouse Credit Agreement, dated as of May 17, 1996,
                            among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust
                            and National Auto Funding Corporation. (incorporated
                            herein by reference to Exhibit 10.19 of the Company's
                            Form 10-K dated March 24, 1998 filed with the Commission
                            March 26, 1998).
         10.20           -- Funding Commitment, dated as of May 17, 1996 by and
                            between ContiTrade Services L.L.C. and The Company.
                            (incorporated herein by reference to Exhibit 10.20 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
         10.21           -- Revolving Credit Agreement, dated as of December 29,
                            1995, by and between the Company and Cargill financial
                            Services Corporation, as amended by the Eighth Amendment
                            to Revolving Credit Agreement dated February 1998.
                            (incorporated herein by reference to Exhibit 10.21 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
</TABLE>
<PAGE>   92

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.22           -- Master Repurchase Agreement Governing Purchased and Sales
                            of Mortgage Loans, dated as of July 1998, between Lehman
                            Commercial Paper Inc. and FHB Funding Corp. (incorporated
                            herein by reference to Exhibit 10.1 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission
                            August 18, 1998).
         10.23           -- Warehouse Credit Agreement, dated as of April 30, 1998
                            among ContiTrade Services, L.L.C., FirstCity Consumer
                            Lending Corporation, FirstCity Auto Receivables L.L.C.
                            and FirstCity Financial Corporation. (incorporated herein
                            by reference to Exhibit 10.2 of the Company's Form 10-Q
                            dated August 14, 1998, filed with the Commission August
                            16, 1998).
         10.24           -- Servicing Agreement, dated as of April 30, 1998 among
                            FirstCity Auto Receivables L.L.C., FirstCity Servicing
                            Corporation of California, FirstCity Consumer Lending
                            Corporation and ContiTrade Services L.L.C. (incorporated
                            herein by reference to Exhibit 10.3 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission
                            August 16, 1998).
         10.25           -- Security and Collateral Agreement, dated as of April 30,
                            1998 among FirstCity Auto Receivables L.L.C., ContiTrade
                            Services L.L.C. and Chase Bank of Texas, National
                            Association. (incorporated herein by reference to Exhibit
                            10.4 of the Company's Form 10-Q dated August 14, 1998,
                            filed with the Commission August 16, 1998).
         10.26           -- Loan Agreement, dated as of July 24, 1998, between
                            FirstCity Commercial Corporation and CFSC Capital Corp.
                            XXX (incorporated herein by reference Exhibit 10.5 of the
                            Company's Form 10-Q dated August 14, 1998, filed with the
                            Commission on August 18, 1998).
         10.27           -- Loan Agreement, dated April 8, 1998 between Bank of
                            Scotland and the Company (incorporated herein by
                            reference to Exhibit 10.6 of the Company's Form 10-Q
                            dated August 14, 1998, filed with the Commission on
                            August 18, 1998)
         10.28           -- First Amendment to Loan Agreement, dated July 20, 1998,
                            between Bank of Scotland and the Company (incorporated
                            herein by reference to Exhibit 10.7 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission on
                            August 18, 1998).
         10.29           -- Employment Agreement, dated October 1, 1998, by and
                            between FirstCity. Financial Mortgage Corporation, and
                            Buddy L. Terrell (incorporated herein by reference to
                            Exhibit 10.29 of the Company's Form 10-Q dated May 17,
                            1999, filed with the commission on May 17, 1999).
         10.30           -- Security Agreement, dated as of April 30, 1998 among
                            Enterprise Funding Corporation, FCAR Receivables L.L.C.,
                            MBIA Insurance Corporation, FirstCity Funding
                            Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a
                            Loan Servicing enterprise (incorporated herein by
                            reference to Exhibit 10.30 of the Company's Form 10-Q
                            dated May 17, 1999, filed with the commission on May 17,
                            1999).
         10.31           -- Note purchase agreement, dated March 30, 1999 among
                            Enterprise Funding Corporation, FCAR Receivables, L.L.C.
                            and NationsBank, N.A. (incorporated herein by reference
                            to Exhibit 10.31 of the Company's Form 10-Q dated May 17,
                            1999, filed with the commission on May 17, 1999).
</TABLE>
<PAGE>   93

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.32           -- Custodian Agreement, dated March 30, 1999, among FCAR
                            Receivables L.L.C., FirstCity Funding Corporation,
                            NationsBank, N.A., Enterprise Funding Corporation and
                            Chase Bank of Texas, N.A. (incorporated herein by
                            reference to Exhibit 10.32 of the Company's Form 10-Q
                            dated May 17, 1999, filed with the commission on May 17,
                            1999).
         10.33           -- Credit agreement dated effective as of May 28, 1999 made
                            by and among Harbor Financial Mortgage, New America
                            Financial, Inc., FirstCity Financial Mortgage
                            Corporation, and Guaranty Federal Bank F.S.B. as
                            Administrative Agent and Bank One, Texas, N.A. as
                            Collateral Agent (incorporated herein by reference to
                            Exhibit 10.33 of the Company's Form 10-Q dated August 16,
                            1999, filed with the commission on August 16, 1999).
         10.34           -- Tenth Amendment to Loan Agreement, dated August 11, 1999
                            between Bank of Scotland and the Company (incorporated
                            herein by reference to Exhibit 10.34 of the Company's
                            Form 10-Q dated August 16, 1999, filed with the
                            Commission on August 16, 1999).
         10.35           -- Amended and Restated Loan Agreement, dated December 20,
                            1999, By and Among FirstCity Financial Corporation as
                            Borrower and The Lenders Named Herein, as Lenders and
                            Bank of Scotland as Agent (incorporated herein by
                            reference to Exhibit 10.1 of the Company's Form 8-K dated
                            December 22, 1999, filed with the commission on December
                            28, 1999).
         10.36           -- Subordinated Secured Senior Note Purchase Agreement,
                            dated December 20, 1999, between FirstCity Financial
                            Corporation, as Issuer and IFA Corporation, as Purchaser
                            (incorporated herein by reference to Exhibit 10.2 of the
                            Company's Form 8-K dated December 22, 1999, filed with
                            the commission on December 28, 1999).
         10.37           -- Employment Agreement, dated October 1, 1999, by and
                            between FirstCity Commercial Corporation and Terry R.
                            DeWitt. (incorporated herein by reference to Exhibit
                            10.37 of the Company's Form 10-K dated February 8, 2000,
                            filed with the commission of 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 of 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 of
                            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).
</TABLE>
<PAGE>   94

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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.
         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.
         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.
         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.
         21.1            -- Subsidiaries of the Registrant.
         23.1            -- Consent of KPMG LLP.
         23.2            -- Consent of KPMG LLP.
</TABLE>