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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 Form 10-Q (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2004 or [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 033-19694 FirstCity Financial Corporation (Exact name of Registrant as Specified in Its Charter)
 Delaware(State or Other Jurisdiction of
Incorporation or Organization)
    
    76-0243729(I.R.S. Employer
Identification No.)6400 Imperial Drive,Waco, TX
    
    76712(Address of Principal Executive Offices)
    
    (Zip Code)
 (254) 751-1750
(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   [X]   No
   [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   [  ]   No
   [X] The number of shares of common stock, par value $.01 per share,
outstanding at August 13, 2004 was 11,235,687.




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Financial StatementsCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESINDEX TO EXHIBITSCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO pursuant to Section 906Certification of CFO pursuant to Section 906    Table of Contents  
 PART I FINANCIAL INFORMATION 
 Item 1.Financial Statements FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCash and cash equivalents
    
    $
    3,823
    
    
    $
    2,745Portfolio Assets, net
    
    
    11,238
    
    
    
    4,525Loans receivable from Acquisition Partnerships held for investment
    
    
    20,333
    
    
    
    17,313Equity investments
    
    
    85,359
    
    
    
    73,146Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Service fees receivable from affiliates
    
    
    1,033
    
    
    
    1,390Other assets, net
    
    
    13,528
    
    
    
    6,769Net assets of discontinued operations
    
    
    5,527
    
    
    
    6,150Total Assets
    
    $
    160,942
    
    
    $
    132,139LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable to affiliates
    
    $
    97,856
    
    
    $
    88,628Notes payable other
    
    
    4,664
    
    
    
    2,432Preferred stock subject to mandatory redemption, including
accumulated dividends in arrears of $1,326 and $1,193 at June
30, 2004 and December 31, 2003, respectively, (par value $.01;
redemption value of $21 per share; 2,000,000 shares authorized;
126,291 shares issued and outstanding)
    
    
    3,978
    
    
    
    3,846Minority interest
    
    
    6,516
    
    
    
    3,972Other liabilities
    
    
    12,013
    
    
    
    4,292Total Liabilities
    
    
    125,027
    
    
    
    103,170Commitments and contingencies (note 10)Stockholders equity:Optional preferred stock (par value $.01 per share; 98,000,000
shares authorized; no shares issued or outstanding)
    
    
    
    
    
    
    Common stock (par value $.01 per share; 100,000,000 shares
authorized; shares issued and outstanding: 11,235,687 and
11,193,687, respectively)
    
    
    112
    
    
    
    112Paid in capital
    
    
    99,288
    
    
    
    99,168Accumulated deficit
    
    
    (65,775
    )
    
    
    (73,923
    )Accumulated other comprehensive income
    
    
    2,290
    
    
    
    3,612Total Stockholders Equity
    
    
    35,915
    
    
    
    28,969Total Liabilities and Stockholders Equity
    
    $
    160,942
    
    
    $
    132,139
 See accompanying notes to consolidated financial statements. 2




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Servicing fees from affiliates
    
    $
    3,716
    
    
    $
    4,086
    
    
    $
    6,748
    
    
    $
    7,593Gain on resolution of Portfolio Assets
    
    
    162
    
    
    
    272
    
    
    
    237
    

    
    
    967Equity in earnings of investments
    
    
    7,757
    
    
    
    6,933
    
    
    
    16,969
    
    
    
    9,024Interest income from affiliates
    
    
    617
    
    
    
    911
    
    
    
    1,061
    
    
    
    1,826Interest income  other
    
    
    51
    
    
    
    157
    
    
    
    136
    
    
    
    345Other income
    
    
    444
    
    
    
    254
    
    
    
    1,782
    
    
    
    616Total revenues
    
    
    12,747
    
    
    
    12,613
    
    
    
    26,933
    
    
    
    20,371Expenses:Interest and fees on notes payable to affiliates
    
    
    2,268
    
    
    
    1,804
    
    
    
    4,797
    
    
    
    3,695Interest and fees on notes payable  other
    
    
    102
    
    
    
    52
    
    
    
    171
    
    
    
    114Interest on shares subject to mandatory redemption
    
    
    67
    
    
    
    
    
    
    
    133
    
    
    
    Salaries and benefits
    
    
    3,477
    
    
    
    4,098
    
    
    
    7,554
    
    
    
    7,594Provision for (recovery of) loan and impairment losses
    
    
    22
    
    
    
    (56
    )
    
    
    22
    
    
    
    (22
    )Occupancy, data processing, communication and other
    
    
    1,785
    
    
    
    1,736
    
    
    
    3,237
    
    
    
    3,730Total expenses
    
    
    7,721
    
    
    
    7,634
    
    
    
    15,914
    
    
    
    15,111Earnings from continuing operations before income taxes and
minority interest
    
    
    5,026
    
    
    
    4,979
    
    
    
    11,019
    
    
    
    5,260Provision for income taxes
    
    
    (471
    )
    
    
    (133
    )
    
    
    (583
    )
    
    
    (254
    )Earnings from continuing operations before minority interest
    
    
    4,555
    
    
    
    4,846
    
    
    
    10,436
    
    
    
    5,006Minority interest
    
    
    (1,006
    )
    
    
    (609
    )
    
    
    (2,038
    )
    
    
    (788
    )Earnings from continuing operations
    
    
    3,549
    
    
    
    4,237
    
    
    
    8,398
    
    
    
    4,218Loss from discontinued operations
    
    
    (250
    )
    
    
    (420
    )
    
    
    (250
    )
    
    
    (420
    )Net earnings
    
    
    3,299
    
    
    
    3,817
    
    
    
    8,148
    
    
    
    3,798Accumulated preferred dividends in arrears
    
    
    
    
    
    
    (67
    )
    
    
    
    
    
    
    (133
    )Net earnings to common stockholders
    
    $
    3,299
    
    
    $
    3,750
    
    
    $
    8,148
    
    
    $
    3,665Basic earnings per common share are as follows:Earnings from continuing operations
    
    $
    0.31
    
    
    $
    0.37
    
    
    $
    0.75
    
    
    $
    0.37Discontinued operations
    
    
    (0.02
    )
    
    
    (0.04
    )
    
    
    (0.02
    )
    
    
    (0.04
    )Net earnings to common stockholders
    
    $
    0.29
    
    
    $
    0.33
    
    
    $
    0.73
    
    
    $
    0.33Weighted average common shares outstanding
    
    
    11,235
    
    
    
    11,204
    
    
    
    11,216
    
    
    
    11,203Diluted earnings per common share are as follows:Earnings from continuing operations
    
    $
    0.30
    
    
    $
    0.37
    
    
    $
    0.71
    
    
    $
    0.37Discontinued operations
    
    
    (0.02
    )
    
    
    (0.04
    )
    
    
    (0.02
    )
    
    
    (0.04
    )Net earnings to common stockholders
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    0.69
    
    
    $
    0.33Weighted average common shares outstanding
    
    
    11,820
    
    
    
    11,204
    
    
    
    11,806
    
    
    
    11,203
 See accompanying notes to consolidated financial statements. 3




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited) AccumulatedNumber of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    TotalCommon
    
    Common
    
    Paid in
    
    Accumulated
    
    Comprehensive
    
    StockholdersShares
    
    Stock
    
    Capital
    
    Deficit
    
    Income
    
    EquityBalances, December 31, 2002
    
    
    11,195,076
    
    
    $
    112
    
    
    $
    98,934
    
    
    $
    (82,977
    )
    
    $
    2,683
    
    
    $
    18,752Issuance of common stock in exchange for
redeemable preferred stock
    
    
    8,200
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75Issuance of shares through employee stock
purchase plan
    
    
    1,395
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Exercise of common stock options
    
    
    6,250
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Refund of unconverted common stock
    
    
    (17,234
    )
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    144Comprehensive income:Net earnings for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,187
    
    
    
    
    
    
    
    9,187Foreign currency items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,157
    
    
    
    2,157Unrealized net loss on securitization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,228
    )
    
    
    (1,228
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,116Preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )
    
    
    
    
    
    
    (133
    )Balances, December 31, 2003
    
    
    11,193,687
    
    
    
    112
    
    
    
    99,168
    
    
    
    (73,923
    )
    
    
    3,612
    
    
    
    28,969Exercise of common stock options
    
    
    42,000
    
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    120Comprehensive income:Net earnings for the first six months of 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,148
    
    
    
    
    
    
    
    8,148Foreign currency items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,323
    )
    
    
    (1,323
    )Unrealized net gain on securitization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,826Balances, June 30, 2004
    
    
    11,235,687
    
    
    $
    112
    
    
    $
    99,288
    
    
    $
    (65,775
    )
    
    $
    2,290
    
    
    $
    35,915
 See accompanying notes to consolidated financial statements. 4




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    8,148
    
    
    $
    3,798Adjustments to reconcile net earnings to net cash used in operating activities:Loss from discontinued operations
    
    
    250
    
    
    
    420Proceeds from resolution of Portfolio Assets
    
    
    706
    
    
    
    4,496Gain on resolution of Portfolio Assets
    
    
    (237
    )
    
    
    (967
    )Purchase of Portfolio Assets and loans receivable, net
    
    
    (13,372
    )
    
    
    (5,172
    )Provision for (recovery of) loan and impairment losses
    
    
    22
    
    
    
    (22
    )Equity in earnings of investments
    
    
    (16,969
    )
    
    
    (9,024
    )Proceeds from performing Portfolio Assets and loans receivable, net
    
    
    3,186
    
    
    
    1,799Capitalized interest and costs on Portfolio Assets and loans receivable
    
    
    (92
    )
    
    
    (126
    )Depreciation and amortization
    
    
    409
    
    
    
    393(Increase) decrease in service fees receivable from affiliate
    
    
    357
    
    
    
    (396
    )Increase in other assets
    
    
    (2,217
    )
    
    
    (927
    )Change in estimated notes payable to affiliates
    
    
    (759
    )
    
    
    Increase in other liabilities
    
    
    4,334
    
    
    
    1,082Net cash used in operating activities
    
    
    (16,234
    )
    
    
    (4,646
    )Cash flows from investing activities:Purchase of minority interest by consolidated subsidiary
    
    
    
    
    
    
    (1,399
    )Property and equipment, net
    
    
    (124
    )
    
    
    (625
    )Contributions to Acquisition Partnerships and Servicing Entities
    
    
    (8,552
    )
    
    
    (7,275
    )Distributions from Acquisition Partnerships and Servicing Entities
    
    
    13,248
    
    
    
    12,778Net cash provided by investing activities
    
    
    4,572
    
    
    
    3,479Cash flows from financing activities:Borrowings under notes payable to affiliates
    
    
    29,152
    
    
    
    13,459Borrowing under notes payable  other
    
    
    2,664
    
    
    
    2,720Payments of notes payable to affiliates
    
    
    (19,136
    )
    
    
    (13,587
    )Payments of notes payable  other
    
    
    (432
    )
    
    
    (1,148
    )Payments for tender of redeemable preferred stock
    
    
    
    
    
    
    (50
    )Proceeds from issuance of common stock
    
    
    120
    
    
    
    2Net cash provided by financing activities
    
    
    12,368
    
    
    
    1,396Net cash used in continuing operations
    
    
    706
    
    
    
    229Net cash provided by (used in) discontinued operations
    
    
    372
    
    
    
    (352
    )Net increase (decrease) in cash and cash equivalents
    
    $
    1,078
    
    
    
    (123
    )Cash and cash equivalents, beginning of period
    
    
    2,745
    
    
    
    4,118Cash and cash equivalents, end of period
    
    $
    3,823
    
    
    $
    3,995Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    2,864
    
    
    $
    3,198Income taxes
    
    
    242
    
    
    
    254Non-cash financing activities:Dividends accumulated and not paid on preferred stock
    
    
    133
    
    
    
    133Balance of redeemable preferred stock and associated dividends relinquished
in recapitalization transaction
    
    
    
    
    
    
    75
 See accompanying notes to consolidated financial statements. 5




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Dollars in thousands, except per share data)  (1)
    
    Basis of Presentation, Earnings per Common Share and Stock-Based Compensation FirstCity Financial Corporation (the Company or FirstCity) is a
financial services company with offices throughout the United States and
Mexico, with a presence in France and South America. At June 30, 2004, the
Company was engaged in two principal reportable segments: (i) portfolio asset
acquisition and resolution and (ii) consumer lending through the Companys
minority investment in Drive Financial Services LP (Drive). The portfolio
asset acquisition and resolution business involves acquiring portfolios of
assets or single assets (collectively referred to as Portfolio Assets) at a
discount to face value and servicing and resolving such portfolios in an effort
to maximize the present value of the ultimate cash recoveries. Drive is a
specialized consumer finance company engaged in the purchase, securitization
and servicing of retail installment contracts originated by automobile dealers. The unaudited consolidated financial statements of FirstCity Financial
reflect, in the opinion of management, all adjustments, consisting only of
normal and recurring adjustments, necessary to present fairly FirstCitys
consolidated financial position at June 30, 2004, its results of operations for
the three-and six month periods ended June 30, 2004 and 2003 and cash flows for
the six-month periods ended June 30, 2004 and 2003. 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, in securitization trusts and held
for investment. Actual results could differ materially from those estimates. Basic net earnings per common share calculations are based upon the
weighted average number of common shares outstanding. Earnings included in the
earnings per common share calculation are reduced by minority interest and
increased for preferred stock dividends. Potentially dilutive common share
equivalents include warrants and stock options in the diluted loss per common
share calculations. At June 30, 2004, the Company has three stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees,and related Interpretations. No stock-based employee compensation
cost is reflected in the consolidated statements of operations, as all options
granted under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. As required by FASB
Statement No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure,the following table represents the effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation. Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net earnings to common stockholders, as reported
    
    $
    3,299
    
    
    $
    3,750
    
    
    $
    8,148
    
    
    $
    3,665Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (109
    )
    
    
    (34
    )
    
    
    (130
    )
    
    
    (67
    )Pro forma net earnings to common stockholders
    
    $
    3,190
    
    
    $
    3,716
    
    
    $
    8,018
    
    
    $
    3,598Net earnings per common share:Basic  as reported
    
    $
    0.29
    
    
    $
    0.33
    
    
    $
    0.73
    
    
    $
    0.33Basic  pro forma
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    0.71
    
    
    $
    0.32Diluted  as reported
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    0.69
    
    
    $
    0.33Diluted  pro forma
    
    $
    0.27
    
    
    $
    0.33
    
    
    $
    0.68
    
    
    $
    0.32
 6




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)  (2)
    
    Restructure, Liquidity and Capital Resources The Company requires liquidity to fund its operations, working capital,
payment of debt, equity for acquisition of Portfolio Assets, investments in and
advances to entities formed to acquire Portfolios (Acquisition Partnerships),
retirement of and dividends on preferred stock, and other investments by
FirstCity. The potential sources of liquidity are funds generated from
operations, equity distributions from the Acquisition Partnerships, interest
and principal payments on subordinated intercompany debt, dividends from the
Companys subsidiaries, borrowings from revolving lines of credit and other
credit facilities, proceeds from equity market transactions, securitization and
other structured finance transactions and other special purpose short-term
borrowings. In December 2002, FirstCity completed a recapitalization in which holders
of redeemable preferred stock, par value $.01 per share, (New Preferred
Stock) exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares
of common stock and $10.5 million in cash. As a result, common equity was
increased by $18.9 million. During the first quarter of 2003, 4,400 shares of
New Preferred Stock were redeemed for 8,200 shares of common stock and $50,000
in cash. FirstCity also recorded a $4 million gain in December 2002 from the
release of its guaranty of Drives indebtedness to BoS(USA) Inc. (BoS(USA)).
BoS(USA)s warrant to purchase 1,975,000 shares of non-voting Common Stock was
cancelled. FirstCity also acquired the minority interest in FirstCity Holdings
Corporation held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes,
each of whom were Senior Vice Presidents of FirstCity, by issuing 400,000
shares of common stock of the Company and notes payable, to be periodically
redeemed by the Company for an aggregate of up to $3.2 million out of incentive
servicing fees related to certain Portfolios in Mexico. FirstCity valued the
loans at the inception date using an imputed interest rate of 4.56% based on
the Companys cost of funds on that date. During the first quarter of 2004,
the Company reduced the estimated carrying value of these loans based on an
imputed interest rate of 6.94% and revised cash flow projections. FirstCity
recorded the change in estimate of $.8 million to other income. At June 30,
2004, these notes had a combined balance of $.5 million and mature in December
2011. The Company evaluates the contingent amount of these outstanding notes
on a quarterly basis and will make adjustments to the estimated liability as
changes in estimated cash flows supporting these notes change. As
a part of the recapitalization, Bank of Scotland provided a non-recourse loan
in the amount of $16 million to FirstCity, which was used to pay the cash
portion of the exchange offer to the holders of the New Preferred Stock, to pay
expenses of the exchange offer and recapitalization, and to reduce FirstCitys
debt to the Bank of Scotland (together with BoS(USA), the Senior Lenders).
The $16 million loan is secured by a 20% interest in Drive (64.51% of
FirstCitys remaining 31% interest in Drive) and other assets of FirstCity
Consumer Lending Corporation (Consumer Corp.) as are necessary and only to
the extent to allow the Senior Lenders to realize the security interest in the
20% interest in Drive. In connection with the $16 million loan, the Company
agreed to pay a contingent fee to Bank of Scotland equal to 20% of all amounts received
by the Company upon any sale of the Companys 20% interest in Drive or any
receipt of distributions from Drive related to the 20% ownership interest, once
such payments exceed $16 million in the aggregate. See note 10 for further
discussion and accounting treatment of this contingent fee. In connection with the recapitalization, the Senior Lenders refinanced the
remainder of the Companys debt facilities ($37 million outstanding at June 30,
2004). The Senior Lenders provided additional financing to FirstCity,
increasing the total commitment under the acquisition facility to $59 million,
consisting of (a) a $5 million revolving credit loan and (b) an acquisition
term loan in an amount up to $54 million. The aggregate amount of outstanding
loans under the total commitment by the Senior Lenders for the refinancing and
the new financing at any time may not exceed $77 million. Effective as of
March 31, 2004, the Company and the Senior Lenders amended the acquisition term
loan facility providing for a total amount of term loans to be made up to $54
million in the aggregate to (i) make it into a revolving loan facility
providing for a maximum principal balance of loans outstanding at any time of
$45 million, (ii) allow loans to be made in Euros up to a maximum amount in
Euros that is equivalent to $22.5 million U.S. dollars, (iii) allow loans to be
made for acquisition of Portfolio Assets originated outside the United States
of up to $22.5 million, (iv) provide for an interest rate of Libor plus 3.50%,
(v) provide for the non-utilization fee to increase from 0.25% to 0.375% of the
unused balance of the revolving acquisition facility, (vi) provide for
distribution of 35% of collections from Asset Portfolios to the Company,
provided that the aggregate outstanding principal balances of all loans under
the facility does not exceed 65% of the net present value of FirstCitys
interest in Portfolio Assets in Acquisition Partnerships pledged to secure the
acquisition facility, and (vii) provide for other modifications that would
facilitate the use of the acquisition facility in the United States and other
countries. The amended facility continues to provide that the aggregate amount
of all outstanding loans under the loan facilities refinanced with the Senior
Lenders in December 2002 and the amended acquisition facility and the related
$5 million revolving loan are limited to $77 million. BoS(USA) has a warrant to purchase 425,000 shares of the Companys voting
Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants
in connection with this existing warrant for 425,000 shares under certain
specific situations to retain its 7




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) ability to acquire approximately 4.86% of the Companys voting Common
Stock. The warrant will expire on August 31, 2010, if it is not exercised
prior to that date. In the third quarter of 1999, dividends on the Companys New Preferred
Stock were suspended. At June 30, 2004, accumulated dividends in arrears on New
Preferred Stock totaled $1.3 million, or $10.50 per share. The accumulated
dividends in arrears were paid on July 29, 2004 to the holders of record as of
July 22, 2004. The dividend covered the period from July 1, 1999 through June
30, 2004. Because the dividend was in excess of 25% of the value of the New
Preferred Stock, the ex dividend date for the security was July 30, 2004, the
day after the payable date. The Company halted payment of dividends on New
Preferred Stock as of July 1, 1999, due to liquidity constraints resulting from
financial difficulties the Company experienced at the time. Since then, the
Companys bank lending agreements have prohibited the payment of any dividends
on New Preferred Stock. Giving consideration to its successful recapitalization
in December of 2002, and resulting improvement in its balance sheet, liquidity
and earnings, the Company recently sought and received a waiver of the
restrictions on dividend payments from its lender. There are currently 126,291 shares of New Preferred Stock outstanding.
The issue, which matures in September 2005, has a $21.00 per share liquidation
preference and $2.10 per share annual dividend rate. The Company expects to
make quarterly dividend payments of $.525 per share beginning in October of
2004, until the shares are retired. The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a
subsidiary of Cargill (the Cargill Facility). This facility is being used
exclusively to provide equity in new Portfolio acquisitions in partnerships
with Cargill and its affiliates and matures in March 2005. At June 30, 2004,
approximately $24.9 million was outstanding under this facility. In September 2003, FirstCity entered into a Portfolio acquisition facility
line of credit with Greenwich Capital Financial Products, Inc., which provides
borrowings up to $30 million. The facility obligation was zero at June 30, 2004
and matures September 2004. Management believes that the loan facilities provided by the Senior
Lenders along with the liquidity from the Cargill Facility, the related fees
generated from the servicing of assets and equity distributions from existing
Acquisition Partnerships and wholly owned portfolios will allow the Company to
meet its obligations as they come due during the next twelve months.  (3)
    
    New Accounting Pronouncements In November 2003, the FASB issued Staff Position, No. 150-3, Effective
Date, Disclosures, and Transition for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(Staff Position 150-3). Staff Position 150-3 defers the application of
various provisions of SFAS 150 for specified mandatorily redeemable
noncontrolling interests in consolidated limited-life entities. FirstCity has
minority interests in various limited-life partnerships with a carrying value
of $1.4 million at June 30, 2004. The estimated amount that would be paid to
the minority interest holder if the instruments were to be settled at June 30,
2004 is $.9 million. In December 2003, the Accounting Standards Executive Committee issued
Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer(SOP 03-3). SOP 03-3 addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investors initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. SOP 03-3 limits the yield that may be accreted on a loan
portfolio to the excess of undiscounted expected cash flows over the initial
investment in the loan portfolio. FirstCity will be required to account for all
loans acquired after 2004 in accordance with SOP 03-3. For loans acquired prior
to January 1, 2005, FirstCity will adopt the provisions of SOP 03-3 on a
prospective basis. In December 2003, the FASB issued a revision to Interpretation No. 46,
Consolidation of Variable Interest Entities(FIN 46R), which was originally
issued in January 2003. FIN 46R provides guidance on the consolidation of
certain entities when control exists through other than voting (or similar)
interests and was effective immediately with respect to entities created after
January 31, 2003. For certain special purpose entities created prior to
February 1, 2003, FIN 46R became effective for financial statements issued
after December 15, 2003. For all other entities created prior to February 1,
2003, FIN 46R became effective January 1, 2004. FIN 46R requires consolidation by the majority holder of expected residual
gains and losses of the activities of a variable interest entity (VIE).
FirstCity holds significant variable interests in certain Acquisition
Partnerships, which would be characterized as 8




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) VIEs. However, FirstCity is not deemed to be the primary beneficiary of
any of these entities based on the criteria set forth in FIN46R. At June 30,
2004, FirstCitys maximum exposure to loss as a result of its involvement with
the VIEs is $34 million.  (4)
    
    Discontinued Operations The Company recorded a provision of $.3 million in the first six months of
2004 and $.4 million in the first six months of 2003 for additional losses from
discontinued operations. The provisions primarily relate to reductions in
anticipated future cash flows from securitization trusts due to increased
prepayment speeds and losses. The net assets from discontinued operations
consist of the following: June 30,
    
    December 31,2004
    
    2003Estimated future gross cash receipts on residual interests in securitizations
    
    $
    5,777
    
    
    $
    6,399Accrual for loss on operations and disposal of discontinued operations, net
    
    
    (250
    )
    
    
    (249
    )Net assets of discontinued operations
    
    $
    5,527
    
    
    $
    6,150
 The only assets remaining from discontinued operations are the investment
securities resulting from the retention of residual interests in securitization
transactions. Although the liquidation or run-off of these investment
securities will last longer than one year, the Company is contractually
obligated to service the securitized assets. The Company has considered the
estimated future gross cash receipts for such investment securities in the
computation of the value of such investment securities. The cash flows are
collected over a period of time and are valued using prepayment assumptions of
29% to 32% for fixed rate loans and 23% to 25% for variable rate loans. Overall
loss rates are estimated from 2% to 13% of collateral.  (5)
    
    Portfolio Assets Portfolio Assets are summarized as follows: June 30,
    
    December 31,2004
    
    2003Non-performing Portfolio Assets
    
    $
    39,176
    
    
    $
    27,071Performing Portfolio Assets
    
    
    2,318
    
    
    
    2,682Real estate Portfolios
    
    
    283
    
    
    
    283Total Portfolio Assets
    
    
    41,777
    
    
    
    30,036Adjusted purchase discount required to reflect Portfolio Assets at carrying value
    
    
    (30,539
    )
    
    
    (25,511
    )Portfolio Assets, net
    
    $
    11,238
    
    
    $
    4,525
 Portfolio Assets are pledged to secure notes payable that are non-recourse
to FirstCity or any affiliate other than the entity that incurred the debt.  (6)
    
    Loans Receivable from Acquisition Partnerships Held for Investment Loans receivable from Acquisition Partnerships held for investment consist
primarily of loans from certain partnerships located in Mexico and are
summarized as follows: June 30,
    
    December 31,2004
    
    2003Latin America
    
    $
    17,721
    
    
    $
    13,351Europe
    
    
    1,169
    
    
    
    2,604Domestic
    
    
    1,443
    
    
    
    1,358$
    20,333
    
    
    $
    17,313
 There were no provisions recorded on these loans during the second quarter
of 2004 and 2003. The loans receivable from Acquisition Partnerships are
secured by the assets/loans acquired by the partnerships with purchase money
loans provided by affiliates of the investors to the partnerships to purchase
the asset pools held in those entities. These loans are evaluated for
impairment by analyzing the expected future cash flows from the underlying
assets within each pool to determine that the cash flows were sufficient to
repay these notes. The Company applies the asset valuation methodology
consistently in all venues and uses the same proprietary asset management
system to evaluate impairment on all asset pools. The results of this
evaluation indicated that cash flows from the pools will be sufficient to repay
the loans and no allowances for impairment were necessary. 9




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Equity method losses which were recorded to reduce the loans and interest
receivable from the Mexican partnerships were $.5 million and $1.6 million
during the first six months of 2004 and 2003, respectively, in compliance with
EITF 98-13, Accounting by an Equity Method Investor for Investee Losses When
the Investor Has Loans to and Investments in Other Securities of the Investee.  (7)
    
    Equity Investments The Company has investments in Acquisition Partnerships and their general
partners and investments in servicing entities that are accounted for under the
equity method. 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 June 30,
    
    December 31,2004
    
    2003Assets
    
    $
    507,185
    
    
    $
    525,493Liabilities
    
    $
    433,814
    
    
    $
    441,677Net equity
    
    
    73,371
    
    
    
    83,816$
    507,185
    
    
    $
    525,493Equity investment in Acquisition Partnerships
    
    $
    55,088
    
    
    $
    53,098Equity investment in servicing entities
    
    
    4,447
    
    
    
    4,381$
    59,535
    
    
    $
    57,479
 Condensed Combined Summary of Operations Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Proceeds from resolution of Portfolio Assets
    
    $
    63,297
    
    
    $
    60,610
    
    
    $
    125,632
    
    
    $
    118,193Gain on resolution of Portfolio Assets
    
    
    22,140
    
    
    
    22,245
    
    
    
    42,709
    
    
    
    43,234Interest income on performing Portfolio Assets
    
    
    2,265
    
    
    
    1,983
    
    
    
    5,165
    
    
    
    4,128Net earnings (loss)
    
    
    811
    
    
    
    17,080
    
    
    
    16,855
    
    
    
    (3,958
    )Equity in earnings of Acquisition Partnerships
    
    $
    2,492
    
    
    $
    4,114
    
    
    $
    6,337
    
    
    $
    5,128Equity in earnings of servicing entities
    
    
    147
    
    
    
    103
    
    
    
    477
    
    
    
    319$
    2,639
    
    
    $
    4,217
    
    
    $
    6,814
    
    
    $
    5,447
 The assets and equity of the Acquisition Partnerships and equity
investments in the Acquisition Partnerships are summarized by geographic region
below. The WAMCO Partnerships represent limited partnerships and limited
liability companies in which the Company has a common ownership with Cargill.
MinnTex Investment Partners LP is considered to be a significant subsidiary of
FirstCity. June 30,
    
    December 31,2004
    
    2003Assets:Domestic:WAMCO Partnerships
    
    $
    199,228
    
    
    $
    205,134MinnTex Investment Partners LP
    
    
    1,162
    
    
    
    1,530Other
    
    
    10,199
    
    
    
    10,164Latin America
    
    
    201,986
    
    
    
    186,431Europe
    
    
    94,610
    
    
    
    122,234$
    507,185
    
    
    $
    525,493
 10




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) June 30,
    
    December 31,2004
    
    2003Equity (deficit):Domestic:WAMCO Partnerships
    
    $
    87,999
    
    
    $
    84,589MinnTex Investment Partners LP
    
    
    1,064
    
    
    
    1,418Other
    
    
    6,080
    
    
    
    6,218Latin America
    
    
    (89,896
    )
    
    
    (86,412
    )Europe
    
    
    68,124
    
    
    
    78,003$
    73,371
    
    
    $
    83,816Equity investment in Acquisition Partnerships:Domestic:WAMCO Partnerships
    
    $
    37,281
    
    
    $
    33,413MinnTex Investment Partners LP
    
    
    351
    
    
    
    514Other
    
    
    3,024
    
    
    
    3,037Latin America
    
    
    995
    
    
    
    1,021Europe
    
    
    13,437
    
    
    
    15,113$
    55,088
    
    
    $
    53,098
 Revenues and earnings (loss) of the Acquisition Partnerships and equity in
earnings of the Acquisition Partnerships are summarized by geographic region
below. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Domestic:WAMCO Partnerships
    
    $
    8,415
    
    
    $
    11,689
    
    
    $
    14,849
    
    
    $
    18,041MinnTex Investment Partners LP
    
    
    2,274
    
    
    
    3,452
    
    
    
    4,804
    
    
    
    6,708Other
    
    
    4
    
    
    
    30
    
    
    
    48
    
    
    
    39Latin America
    
    
    6,574
    
    
    
    5,131
    
    
    
    10,812
    
    
    
    12,137Europe
    
    
    7,411
    
    
    
    4,420
    
    
    
    17,877
    
    
    
    11,446$
    24,678
    
    
    $
    24,722
    
    
    $
    48,390
    
    
    $
    48,371Net earnings (loss):Domestic:WAMCO Partnerships
    
    $
    4,450
    
    
    $
    6,889
    
    
    $
    7,019
    
    
    $
    10,256MinnTex Investment Partners LP
    
    
    2,031
    
    
    
    3,051
    
    
    
    4,284
    
    
    
    5,911Other
    
    
    (202
    )
    
    
    (94
    )
    
    
    (384
    )
    
    
    (231
    )Latin America
    
    
    (9,429
    )
    
    
    4,782
    
    
    
    (5,729
    )
    
    
    (26,735
    )Europe
    
    
    3,961
    
    
    
    2,452
    
    
    
    11,665
    
    
    
    6,841$
    811
    
    
    $
    17,080
    
    
    $
    16,855
    
    
    $
    (3,958
    )Equity in earnings (loss) of Acquisition
Partnerships:Domestic:WAMCO Partnerships
    
    $
    1,980
    
    
    $
    2,251
    
    
    $
    3,247
    
    
    $
    3,685MinnTex Investment Partners LP
    
    
    671
    
    
    
    1,007
    
    
    
    1,414
    
    
    
    1,950Other
    
    
    (57
    )
    
    
    6
    
    
    
    (118
    )
    
    
    (24
    )Latin America
    
    
    (891
    )
    
    
    390
    
    
    
    (779
    )
    
    
    (1,670
    )Europe
    
    
    789
    
    
    
    460
    
    
    
    2,573
    
    
    
    1,187$
    2,492
    
    
    $
    4,114
    
    
    $
    6,337
    
    
    $
    5,128
 11




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Combining statements of operations for the WAMCO Partnerships for the
three and six month periods ended June 30, 2004 and 2003 follow. FC Properties,
Ltd. (FC Properties), WAMCO XXVIII, Ltd. (WAMCO XXVIII) and WAMCO XXX, Ltd.
(WAMCO XXX) are considered to be significant subsidiaries of FirstCity. Three Months Ended June 30, 2004 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    2,256
    
    
    $
    4,520
    
    
    $
    2,103
    
    
    $
    16,169
    
    
    $
    25,048Cost of Portfolio Assets resolved
    
    
    697
    
    
    
    3,677
    
    
    
    1,553
    
    
    
    12,188
    
    
    
    18,115Gain on resolution of Portfolio Assets
    
    
    1,559
    
    
    
    843
    
    
    
    550
    
    
    
    3,981
    
    
    
    6,933Interest income on performing Portfolio Assets
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    1,381
    
    
    
    1,474Interest and fees expense  affiliate
    
    
    
    
    
    
    (114
    )
    
    
    
    
    
    
    (390
    )
    
    
    (504
    )Interest and fees expense  other
    
    
    
    
    
    
    (81
    )
    
    
    (111
    )
    
    
    (461
    )
    
    
    (653
    )Provision for loan and impairment losses
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    (29
    )
    
    
    (64
    )Service fees  affiliate
    
    
    (67
    )
    
    
    (171
    )
    
    
    (80
    )
    
    
    (700
    )
    
    
    (1,018
    )General, administrative and operating expenses
    
    
    (1,322
    )
    
    
    82
    
    
    
    (99
    )
    
    
    (387
    )
    
    
    (1,726
    )Other income, net
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    5
    
    
    
    8Net earnings
    
    $
    171
    
    
    $
    618
    
    
    $
    261
    
    
    $
    3,400
    
    
    $
    4,450
 Three Months Ended June 30, 2003 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    5,740
    
    
    $
    6,276
    
    
    $
    10,923
    
    
    $
    7,657
    
    
    $
    30,596Cost of Portfolio Assets resolved
    
    
    1,454
    
    
    
    4,773
    
    
    
    8,300
    
    
    
    6,195
    
    
    
    20,722Gain on resolution of Portfolio Assets
    
    
    4,286
    
    
    
    1,503
    
    
    
    2,623
    
    
    
    1,462
    
    
    
    9,874Interest income on performing Portfolio Assets
    
    
    
    
    
    
    368
    
    
    
    
    
    
    
    1,041
    
    
    
    1,409Interest and fees expense  affiliate
    
    
    
    
    
    
    (164
    )
    
    
    (119
    )
    
    
    (282
    )
    
    
    (565
    )Interest and fees expense  other
    
    
    
    
    
    
    (189
    )
    
    
    (225
    )
    
    
    (149
    )
    
    
    (563
    )Provision for loan and impairment losses
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (20
    )
    
    
    (82
    )Service fees  affiliate
    
    
    (172
    )
    
    
    (230
    )
    
    
    (359
    )
    
    
    (401
    )
    
    
    (1,162
    )General, administrative and operating expenses
    
    
    (1,955
    )
    
    
    (129
    )
    
    
    (178
    )
    
    
    (166
    )
    
    
    (2,428
    )Other income, net
    
    
    
    
    
    
    3
    
    
    
    4
    
    
    
    399
    
    
    
    406Net earnings
    
    $
    2,159
    
    
    $
    1,100
    
    
    $
    1,746
    
    
    $
    1,884
    
    
    $
    6,889
 Six Months Ended June 30, 2004 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    2,943
    
    
    $
    6,572
    
    
    $
    6,453
    
    
    $
    29,493
    
    
    $
    45,461Cost of Portfolio Assets resolved
    
    
    948
    
    
    
    5,190
    
    
    
    4,923
    
    
    
    22,629
    
    
    
    33,690Gain on resolution of Portfolio Assets
    
    
    1,995
    
    
    
    1,382
    
    
    
    1,530
    
    
    
    6,864
    
    
    
    11,771Interest income on performing Portfolio Assets
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    2,908
    
    
    
    3,061Interest and fees expense  affiliate
    
    
    
    
    
    
    (228
    )
    
    
    
    
    
    
    (890
    )
    
    
    (1,118
    )Interest and fees expense  other
    
    
    
    
    
    
    (185
    )
    
    
    (244
    )
    
    
    (853
    )
    
    
    (1,282
    )Provision for loan and impairment losses
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    (581
    )
    
    
    (651
    )Service fees  affiliate
    
    
    (88
    )
    
    
    (263
    )
    
    
    (232
    )
    
    
    (1,290
    )
    
    
    (1,873
    )General, administrative and operating expenses
    
    
    (1,988
    )
    
    
    44
    
    
    
    (208
    )
    
    
    (754
    )
    
    
    (2,906
    )Other income, net
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    10
    
    
    
    17Net earnings
    
    $
    (79
    )
    
    $
    835
    
    
    $
    849
    
    
    $
    5,414
    
    
    $
    7,019
 Six Months Ended June 30, 2003 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    5,972
    
    
    $
    9,257
    
    
    $
    21,556
    
    
    $
    9,700
    
    
    $
    46,485Cost of Portfolio Assets resolved
    
    
    1,493
    
    
    
    6,914
    
    
    
    16,116
    
    
    
    7,671
    
    
    
    32,191Gain on resolution of Portfolio Assets
    
    
    4,479
    
    
    
    2,343
    
    
    
    5,443
    
    
    
    2,029
    
    
    
    14,294Interest income on performing Portfolio Assets
    
    
    
    
    
    
    778
    
    
    
    
    
    
    
    2,154
    
    
    
    2,932Interest and fees expense  affiliates
    
    
    
    
    
    
    (326
    )
    
    
    (595
    )
    
    
    (599
    )
    
    
    (1,520
    )Interest and fees expense  other
    
    
    
    
    
    
    (410
    )
    
    
    (225
    )
    
    
    (332
    )
    
    
    (967
    )Provision for loan losses
    
    
    
    
    
    
    (174
    )
    
    
    
    
    
    
    (352
    )
    
    
    (526
    )Service fees  affiliate
    
    
    (179
    )
    
    
    (382
    )
    
    
    (711
    )
    
    
    (547
    )
    
    
    (1,819
    )General, administrative and operating expenses
    
    
    (2,101
    )
    
    
    (202
    )
    
    
    (308
    )
    
    
    (342
    )
    
    
    (2,953
    )Other income, net
    
    
    
    
    
    
    5
    
    
    
    7
    
    
    
    803
    
    
    
    815Net earnings
    
    $
    2,199
    
    
    $
    1,632
    
    
    $
    3,611
    
    
    $
    2,814
    
    
    $
    10,256
 12




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Statements of operations for MinnTex Investment Partners LP for the three
and six month periods ending June 30, 2004 and 2003 follow: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Proceeds from resolution of Portfolio Assets
    
    $
    2,368
    
    
    $
    3,928
    
    
    $
    5,052
    
    
    $
    7,817Cost of Portfolio Assets resolved
    
    
    95
    
    
    
    477
    
    
    
    250
    
    
    
    1,112Gain on resolution of Portfolio Assets
    
    
    2,273
    
    
    
    3,451
    
    
    
    4,802
    
    
    
    6,705Service fees  affiliate
    
    
    (237
    )
    
    
    (393
    )
    
    
    (505
    )
    
    
    (782
    )General, administrative and operating expenses
    
    
    (6
    )
    
    
    (8
    )
    
    
    (15
    )
    
    
    (15
    )Other income
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    3Net earnings
    
    $
    2,031
    
    
    $
    3,051
    
    
    $
    4,284
    
    
    $
    5,911
 FirstCity also has an investment in Drive that 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 June 30,
    
    December 31,2004
    
    2003Cash
    
    $
    32,568
    
    
    $
    19,013Restricted cash
    
    
    134,517
    
    
    
    47,623Retail installment contracts, net
    
    
    861,461
    
    
    
    623,389Residual interests in securitizations
    
    
    19,637
    
    
    
    29,094Other assets
    
    
    25,853
    
    
    
    19,711Total assets
    
    $
    1,074,036
    
    
    $
    738,830Notes payable
    
    $
    986,861
    
    
    $
    683,758Other liabilities
    
    
    20,518
    
    
    
    14,631Total liabilities
    
    
    1,007,379
    
    
    
    698,389Net equity
    
    
    66,657
    
    
    
    40,441$
    1,074,036
    
    
    $
    738,830Equity investment in Drive
    
    $
    25,824
    
    
    $
    15,667Minority interest
    
    
    (5,160
    )
    
    
    (3,131
    )Net investment in Drive
    
    $
    20,664
    
    
    $
    12,536
 Condensed Consolidated Summary of Operations Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Finance and other interest income
    
    $
    71,138
    
    
    $
    46,182
    
    
    $
    131,581
    
    
    $
    85,485Interest expense
    
    
    9,903
    
    
    
    8,104
    
    
    
    19,111
    
    
    
    14,297Net interest margin
    
    
    61,235
    
    
    
    38,078
    
    
    
    112,470
    
    
    
    71,188Provision for credit losses on
retail installment contracts
    
    
    32,295
    
    
    
    15,864
    
    
    
    56,795
    
    
    
    30,028Impairment of residual interests
in securitizations, including
servicing asset
    
    
    
    
    
    
    1,240
    
    
    
    
    
    
    
    2,457Net interest margin
after provision for
credit losses and
impairments
    
    
    28,940
    
    
    
    20,974
    
    
    
    55,675
    
    
    
    38,703Other revenues:Servicing income
    
    
    6,672
    
    
    
    5,837
    
    
    
    13,857
    
    
    
    11,429Other income
    
    
    1,036
    
    
    
    572
    
    
    
    1,977
    
    
    
    1,126Total other revenues
    
    
    7,708
    
    
    
    6,409
    
    
    
    15,834
    
    
    
    12,555
 13




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Costs and expenses:Salaries and benefits
    
    
    8,302
    
    
    
    10,605
    
    
    
    18,018
    
    
    
    23,086Servicing expense
    
    
    8,872
    
    
    
    7,019
    
    
    
    17,528
    
    
    
    13,453Occupancy, data processing,
communication, and other
    
    
    6,262
    
    
    
    2,748
    
    
    
    9,750
    
    
    
    5,218Total costs and expenses
    
    
    23,436
    
    
    
    20,372
    
    
    
    45,296
    
    
    
    41,757Net income
    
    $
    13,212
    
    
    $
    7,011
    
    
    $
    26,213
    
    
    $
    9,501Equity in earnings of Drive
    
    $
    5,118
    
    
    $
    2,716
    
    
    $
    10,155
    
    
    $
    3,577Minority interest
    
    
    (1,023
    )
    
    
    (543
    )
    
    
    (2,029
    )
    
    
    (715
    )Net equity in earnings of Drive.
    
    $
    4,095
    
    
    $
    2,173
    
    
    $
    8,126
    
    
    $
    2,862
  (8)
    
    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. The Portfolio Asset
acquisition and resolution business involves acquiring Portfolio Assets at a
discount to face value and servicing and resolving such Portfolios in an effort
to maximize the present value of the ultimate cash recoveries. The consumer
lending business is conducted through the Companys equity investment in Drive.
Drive is a specialized consumer finance company engaged in the purchase,
securitization and servicing of retail installment contracts originated by
automobile dealers. The following is a summary of results of operations for
each of the segments and reconciliation to earnings (loss) from continuing
operations for the three months and the six months ended June 30, 2004 and
2003. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Portfolio Asset Acquisition and Resolution:Revenues:Servicing fees
    
    $
    3,716
    
    
    $
    4,086
    
    
    $
    6,748
    
    
    $
    7,593Gain on resolution of Portfolio Assets
    
    
    162
    
    
    
    272
    
    
    
    237
    
    
    
    967Equity in earnings of investments
    
    
    2,639
    
    
    
    4,217
    
    
    
    6,814
    
    
    
    5,447Interest income
    
    
    667
    
    
    
    1,067
    
    
    
    1,196
    
    
    
    2,169Other
    
    
    286
    
    
    
    181
    
    
    
    1,417
    
    
    
    483Total
    
    
    7,470
    
    
    
    9,823
    
    
    
    16,412
    
    
    
    16,659Expenses:Interest and fees on notes payable
    
    
    879
    
    
    
    575
    
    
    
    1,658
    
    
    
    1,261Salaries and benefits
    
    
    2,938
    
    
    
    3,303
    
    
    
    5,979
    
    
    
    6,145Provision for loan and impairment losses
    
    
    22
    
    
    
    (56
    )
    
    
    22
    
    
    
    (22
    )Occupancy, data processing, communication and other
    
    
    1,226
    
    
    
    1,189
    
    
    
    2,225
    
    
    
    2,570Minority interest
    
    
    (17
    )
    
    
    66
    
    
    
    9
    
    
    
    73Total
    
    
    5,048
    
    
    
    5,077
    
    
    
    9,893
    
    
    
    10,027Operating contribution before direct taxes
    
    $
    2,422
    
    
    $
    4,746
    
    
    $
    6,519
    
    
    $
    6,632Operating contribution, net of direct taxes
    
    $
    2,424
    
    
    $
    4,636
    
    
    $
    6,467
    
    
    $
    6,413Consumer Lending:Revenues:Equity in earnings of investment
    
    $
    5,118
    
    
    $
    2,716
    
    
    $
    10,155
    
    
    $
    3,577Other
    
    
    19
    
    
    
    
    
    
    
    22
    
    
    
    Total
    
    
    5,137
    
    
    
    2,716
    
    
    
    10,177
    
    
    
    3,577Expenses:Interest and fees on notes payable
    
    
    532
    
    
    
    93
    
    
    
    1,417
    
    
    
    188Occupancy, data processing, communication and other
    
    
    1
    
    
    
    6
    
    
    
    4
    
    
    
    12Minority interest
    
    
    1,023
    
    
    
    543
    
    
    
    2,029
    
    
    
    715Total
    
    
    1,556
    
    
    
    642
    
    
    
    3,450
    
    
    
    915Operating contribution before direct taxes
    
    $
    3,581
    
    
    $
    2,074
    
    
    $
    6,727
    
    
    $
    2,662Operating contribution, net of direct taxes
    
    $
    3,182
    
    
    $
    2,052
    
    
    $
    6,300
    
    
    $
    2,627Total operating contribution, net of direct taxes
    
    $
    5,606
    
    
    $
    6,688
    
    
    $
    12,767
    
    
    $
    9,040
 14




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Three Months Ended
    

    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Corporate Overhead:Corporate interest expense
    
    $
    1,026
    
    
    $
    1,188
    
    
    $
    2,026
    
    
    $
    2,360Salaries and benefits, occupancy, professional and
other income and expenses, net
    
    
    1,031
    
    
    
    1,263
    
    
    
    2,343
    
    
    
    2,462Earnings from continuing operations
    
    $
    3,549
    
    
    $
    4,237
    
    
    $
    8,398
    
    
    $
    4,218
 All of the revenues from the consumer lending segment are attributable to
domestic operations. Revenues from the Portfolio Asset acquisition and
resolution segment are attributable to domestic and foreign operations as
follows: Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Domestic
    
    $
    4,185
    
    
    $
    5,387
    
    
    $
    8,328
    
    
    $
    9,794Latin America
    
    
    2,265
    
    
    
    3,795
    
    
    
    4,862
    
    
    
    5,220Europe
    
    
    1,020
    
    
    
    641
    
    
    
    3,222
    
    
    
    1,645Total
    
    $
    7,470
    
    
    $
    9,823
    
    
    $
    16,412
    
    
    $
    16,659
 Total assets for each of the segments and a reconciliation to total assets is
as follows: June 30,
    
    December 31,2004
    
    2003Cash
    
    $
    3,823
    
    
    $
    2,745Portfolio acquisition and resolution assetsDomestic
    
    
    53,355
    
    
    
    42,872Latin America
    
    
    18,788
    
    
    
    14,468Europe
    
    
    19,828
    
    
    
    23,088Consumer assets
    
    
    25,824
    
    
    
    15,685Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Other non-earning assets, net
    
    
    13,696
    
    
    
    7,030Net assets of discontinued operations
    
    
    5,527
    
    
    
    6,150Total assets
    
    $
    160,942
    
    
    $
    132,139
  (9)
    
    Income Taxes Federal income taxes are provided at a 35% rate. The Company has
substantial net operating loss carryforwards for federal income tax purposes
(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 a valuation allowance to value the
net deferred tax asset at a level, which more likely than not, will be
realized. Realization is determined based on managements expectation of
generating sufficient taxable income in a look forward period over the next
four years. The ultimate realization of the resulting net deferred tax asset is
dependent upon generating sufficient taxable income from its continuing
operations prior to expiration of the NOLs. 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. (10) Commitments and Contingencies Periodically, FirstCity, its subsidiaries, its affiliates and the
Acquisition Partnerships are parties to or otherwise involved in legal
proceedings arising in the normal course of business. FirstCity does not
believe that there is any proceeding threatened or pending against it, its
subsidiaries, its affiliates or the Acquisition Partnerships which, if
determined adversely, would have a material adverse effect on the consolidated
financial position, results of operations or liquidity of FirstCity, its
subsidiaries, its affiliates or the Acquisition Partnerships. 15




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) In connection with the transactions contemplated by the Securities
Purchase Agreement, effective August 1, 2000, Consumer Corp. and FirstCity
Funding LP (Funding LP) contributed all of the assets utilized in the
operations of the automobile finance operation to Drive pursuant to the terms
of a Contribution and Assumption Agreement by and between Consumer Corp. and
Drive, and a Contribution and Assumption Agreement by and between Funding LP
and Drive (collectively, the Contribution Agreements). Drive assumed
substantially all of the liabilities of the automobile finance operation as set
forth in the Contribution Agreements. In addition, in the Securities Purchase Agreement, the Company, Consumer
Corp., Funding LP and Funding GP made various representations and warranties
concerning (i) their respective organizations, (ii) the automobile finance
operation conducted by Consumer Corp. and Funding LP, and (iii) the assets
transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer
Corp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and
IFA-LP from damages resulting from a breach of any representation or warranty
contained in the Securities Purchase Agreement or otherwise made by the
Company, Consumer Corp. or Funding LP in connection with the transaction. The
indemnity obligation under the Securities Purchase Agreement survives for a
period of seven (7) years from August 25, 2000 (the Closing Date) with
respect to tax-related representations and warranties and for thirty months
from the Closing Date with respect to all other representations and warranties.
Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to
make any payments as a result of the indemnity provided under the Securities
Purchase Agreement until the aggregate amount payable exceeds $.25 million, and
then only for the amount in excess of $.25 million in the aggregate; however
certain representations and warranties are not subject to this $.25 million
threshold. Pursuant to the terms of the Contribution Agreements, Consumer Corp.
and Funding LP have agreed to indemnify Drive from any damages resulting in a
material adverse effect on Drive resulting from breaches of representations or
warranties, failure to perform, pay or discharge liabilities other than the
assumed liabilities, or claims, lawsuits or proceedings resulting from the
transactions contemplated by the Contribution Agreements. Pursuant to the terms
of the Contribution Agreements, Drive has agreed to indemnify Consumer Corp.
and Funding LP for any breach of any representation or warranty by Drive, the
failure of Drive to discharge any assumed liability, or any claims arising out
of any failure by Drive to properly service receivables after August 1, 2000.
Liability for indemnification pursuant to the terms of the Contribution
Agreements will not arise until the total of all losses with respect to such
matters exceeds $.25 million and then only for the amount by which such losses
exceed $.25 million; however this limitation will not apply to any breach of
which the party had knowledge at the time of the Closing Date or any
intentional breach by a party of any covenant or obligation under the
Contribution Agreements. The Company has agreed to indemnify BoS(USA) for up to 31% of losses,
which might arise as a result of agreements BoS(USA) executed as a sponsor in
connection with the securitizations completed by Drive. The Company also agreed
to provide support in connection with securitizations by Consumer Corp. and
Drive prior to the acquisition by BoS(USA) of the interest in Drive in August
2000. Management of the Company currently does not believe it is likely that
FirstCity will be required to make payments on these indemnification
agreements. FirstCity
is obligated to pay Bank of Scotland an arrangement fee related to the
$16 million loan equal to 20% of all proceeds and other amounts paid to
FirstCity from any sale or other disposition (regardless of when such sale or
other disposition occurs) of, and of all dividends and other distributions paid
to FirstCity by Drive or its general partner (regardless of when such dividend
or other distribution occurs) on a 20% interest in Drive, in each case in
excess of $16 million in the aggregate. An equal amount of loan discount
(included in other assets) and participation liability (included in other
liabilities) is recorded based on the estimated amount of this contingent fee.
The loan discount is amortized into interest expense over the remaining term of
the loan. At June 30, 2004, the estimated liability for this contingent fee
was $7.5 million. Additionally, amortization of $1.2 million was recognized
during the first six months of 2004. The Company currently estimates that
additional interest expense will be recognized in the amount of $.4 million per
quarter through December 2007. This additional interest expense currently has
no impact on the Companys cash flow. The interest will not be paid and any
gain or income resulting from any sale or distribution will not be recognized
until a sale occurs or distributions are received that exceed $16 million in
the aggregate. 16




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##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations. Overview FirstCity is a financial services company engaged in the acquisition and
resolution of portfolios of assets or single assets (collectively referred to
as Portfolio Assets). The Portfolio Asset acquisition and resolution
business involves acquiring Portfolio Assets at a discount to face value and
servicing and resolving such portfolios in an effort to maximize the present
value of the ultimate cash recoveries. FirstCity also has an equity investment
in Drive Financial Services LP (Drive). Drive is a specialized consumer
finance company engaged in the purchase, securitization and servicing of retail
installment contracts originated by automobile dealers. During the second quarter of 2004 the Company recorded earnings to common
stockholders on a diluted basis of $3.3 million or $.28 per common share. The
operating contribution from the Portfolio Asset Acquisition and Resolution
segment was $2.4 million compared with $4.6 million for the same period in
2003. The Consumer segment and its related investment in Drive generated $3.2
million in earnings contribution during the second quarter of 2004, an increase
of $1.5 million over the second quarter of 2003. The decreased earnings contribution from the Portfolio Asset Acquisition
business of $2.2 million is primarily related to Mexican Peso exchange losses
of $.7 million during the quarter when compared to gains of $1.1 million in the
second quarter of 2003. Also, during the second quarter of 2003, FirstCity and
several Acquisition Partnerships completed a loan sale, which resulted in $1.0
million of additional revenues to the Company. The Company was able to invest $18.7 million in portfolio acquisitions of
$86 million during the quarter of which $35 million was purchased in the U.S.,
$41 million in Mexico and $10 million in France. The Companys 31% investment in Drive generated $4.1 million for the
quarter. After interest and other expenses, the net contribution was $3.2
million from the Consumer segment of the business. Although the Companys primary revenues are generated by the Portfolio
Asset Acquisition and resolution business and the Companys investment in
Drive, other items such as interest expense and the effects of discontinued
operations could have an impact on net income. During the second quarter 2004
corporate interest and overhead was down slightly when compared to the second
quarter 2003 and provisions from discontinued operations were $250,000 in the
second quarter 2004 compared to $420,000 in 2003. The Company received $123,000
and zero in cash flow from the residual interests during the second quarter of
2004 and 2003, respectively. 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 and losses of the Companys Portfolio Asset acquisition
and resolution business, period to period comparisons of the Companys results
of continuing operations may not be meaningful. Components of the results for the three months and six months ended June
30, 2004 and 2003, respectively, are detailed below (dollars in thousands
except per share data): 17




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Portfolio Asset Acquisition and Resolution
    
    $
    2,424
    
    
    $
    4,636
    
    
    $
    6,467
    
    
    $
    6,413Consumer
    
    
    3,182
    
    
    
    2,052
    
    
    
    6,300
    
    
    
    2,627Corporate interest
    
    
    (1,026
    )
    
    
    (1,188
    )
    
    
    (2,026
    )
    
    
    (2,360
    )Corporate overhead
    
    
    (1,031
    )
    
    
    (1,263
    )
    
    
    (2,343
    )
    
    
    (2,462
    )Earnings from continuing operations
    
    
    3,549
    
    
    
    4,237
    
    
    
    8,398
    
    
    
    4,218Accrued preferred dividends
    
    
    
    
    
    
    (67
    )
    
    
    
    
    
    
    (133
    )Loss from discontinued operations
    
    
    (250
    )
    
    
    (420
    )
    
    
    (250
    )
    
    
    (420
    )Net earnings to common stockholders
    
    $
    3,299
    
    
    $
    3,750
    
    
    $
    8,148
    
    
    $
    3,665Diluted earnings per common share
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    0.69
    
    
    $
    0.33
 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 Quarterly Report on Form 10-Q. Second Quarter 2004 Compared to Second Quarter 2003 The Company reported net earnings of $3.3 million in the second quarter of
2004 compared to earnings of $3.8 million in the second quarter of 2003. On a
per share basis, diluted net earnings to common stockholders were $.28 in the
second quarter of 2004 compared to earnings of $.33 in the second quarter of
2003. Portfolio Asset Acquisition and Resolution The operating contribution from the Portfolio Asset acquisition and
resolution segment was $2.4 million in the second quarter of 2004 compared to
$4.6 million in the second quarter of 2003. FirstCity purchased $85.8 million
of Portfolio Assets during the second quarter of 2004 ($81.0 million through
Acquisition Partnerships), compared to $32.2 million in the second quarter of
2003. The quarter end investment in wholly owned Portfolio Assets increased to
$11.2 million from $5.9 million at June 30, 2004 and 2003, respectively, as a
result of recent acquisitions. Servicing fee revenues.Servicing fee revenues decreased by 9% to $3.7
million in the second quarter of 2004 from $4.1 million in the second quarter
of 2003. Service fees from domestic Partnerships decreased $.3 million. In
June 2003, FirstCity and several Acquisition Partnerships completed a loan sale
of performing and non-performing Portfolio Assets with a carrying value of $8.3
million for proceeds of $10.0 million, resulting in $.3 million of additional
service fees. Gain on resolution of Portfolio Assets.The net gain on resolution of
Portfolio Assets decreased from $.3 million in the second quarter of 2003 to
$.2 million in the second quarter of 2004 as a result of higher collections
received on one non-performing Portfolio in 2003. Equity in earnings of investments.Equity in earnings of Acquisition
Partnerships decreased 39% to $2.5 million in the second quarter of 2004
compared to $4.1 million in the second quarter of 2003. Following is a
discussion of equity earnings by geographic region. See note 7 for summary of
revenues and earnings of the Acquisition Partnerships and equity in earnings of
the Acquisition Partnerships.  
    
    Domestic Equity in earnings of domestic Acquisition Partnerships
decreased 20% to $2.6 million in the second quarter of 2004 from $3.3
million in 2003 primarily due to a bulk loan sale in 2003, which
generated an additional $.7 million in equity earnings.  
    
    Latin America Equity in losses of Mexican Acquisition Partnerships
were $.9 million in the second quarter of 2004 compared to equity in
earnings of $.4 million in 2003. These partnerships reflected net losses
of $9.4 million in the second quarter of 2004 compared to earnings of
$4.8 million in 2003. Approximately $17 million of the earnings in 2003
were due to foreign exchange gains recognized by the partnerships. In
the second quarter of 2004, the partnerships recorded $8.5 million of
foreign exchange losses. In addition, $2.7 million of interest expense
was recorded in the second quarter of 2004 compared to 18




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##### Table of Contents



$12 million in 2003. This interest is owed to affiliates of the investors
in these partnerships, of which FirstCity recorded $.5 million and $.9
million, respectively, as interest income.  
    
    Europe Equity in earnings of Acquisition Partnerships located in
France increased 72% to $.8 million in the second quarter of 2004 from
$.5 million in 2003. This increase is principally due to the addition of
three French Partnerships during 2003, which accounted for $.3 million
in equity in earnings in 2004. During the second quarter of 2004,
FirstCity also recorded $.2 million in foreign currency transactions
gains (included in other expenses) relating to investments in France. Interest income.Interest income decreased 37% from $1.1 million in the
second quarter of 2003 to $.7 million in the second quarter of 2004. This
decrease is primarily due to the Acquisition Partnerships and their lenders
amending three loan agreements with Acquisition Partnerships located in Mexico
in the third quarter of 2003 to provide for no interest to be payable with
respect to periods after the effective date of the amendments. This change had
no impact on the consolidated net earnings, as the effect is offset through
equity earnings in these Partnerships. Other income.Other income increased 58% to $.3 million in the second
quarter of 2004 from $.2 million in the second quarter of 2003 primarily as a
result of reimbursements of due diligence expenses, which will vary from period
to period. Expenses.Operating expenses were $5.0 million in the second quarter of
2004 compared to $5.1 million in 2003. Interest and fees on notes payable increased 53% from $.6 million in the
second quarter of 2003 to $.9 million in 2004. The average debt for the
quarter increased from $25.3 million in the second quarter of 2003 to $39.7
million in the second quarter of 2004. The average cost of borrowing decreased
from 9.1% in the second quarter of 2003 to 8.9% in the second quarter of 2004. Salaries and benefits decreased $.4 million or 11% to $2.9 million in the
second quarter of 2004 from $3.3 million in 2003. Total personnel within the
Portfolio Asset acquisition and resolution segment were 204 and 236 at June 30,
2004 and 2003, respectively. The provision for loan and impairment losses was minimal in the second
quarter of 2004. The Company recorded a net credit of $56,000 to provision for
loan and impairment losses in the second quarter of 2003 due to a $61,000
recovery on one real estate Portfolio. Impairment on performing Portfolio Assets is measured based on the present
value of the expected future cash flows in the aggregate discounted at the
loans risk adjusted rates, which approximates the effective interest rates, or
the fair value of the collateral, less estimated selling costs, if any loans
are collateral dependent and foreclosure is probable. Impairment on
nonperforming Portfolios is evaluated by analyzing the expected future cash
flows from the underlying assets within each Portfolio. The expected future
cash flows are reviewed monthly and adjusted as deemed necessary. Changes in
various factors including, but not limited to, economic conditions,
deterioration of collateral values, deterioration in the borrowers financial
condition and other conditions described in the risk factors discussed later in
this document, could have a negative impact on the estimated future cash flows
of the Portfolio. Significant decreases in estimated future cash flows can
reduce a Portfolios present value to below the Companys carrying value of
that Portfolio, causing impairment. For real estate Portfolios, the evaluation of impairment is determined
quarterly based on the review of the estimated future cash receipts less
estimated costs to sell, which represents the net realizable value of the real
estate Portfolio. A valuation allowance is established for any impairment
identified through provisions charged to operations in the period the
impairment is identified. There were no provisions recorded on loans receivable from Acquisition
Partnerships during the second quarter of 2004 and 2003. The loans receivable
from Acquisition Partnerships are secured by the assets/loans acquired by the
partnerships with purchase money loans provided by affiliates of the investors
in the partnerships to purchase the asset pools held in those entities. These
loans are evaluated for impairment by analyzing the expected future cash flows
from the underlying assets within each pool to determine that the cash flows
were sufficient to repay these notes. The Company applies the asset valuation
methodology consistently in all venues and uses the same proprietary asset
management system to evaluate impairment on all asset pools. The results of
this evaluation indicated that cash flows from the pools will be sufficient to
repay the loans and no allowances for impairment were necessary. Occupancy, data processing, communication and other expenses was flat from
period to period. Minority interest expense was minimal from period to period. 19




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##### Table of Contents



Consumer Lending FirstCitys consumer lending segment consists of the Companys net
investment in Drive. The operating contribution for the second quarter of 2004
was $3.2 million compared to $2.1 million during the second quarter of 2003. Equity in earnings of investment.FirstCity recorded equity in earnings
of Drive, net of minority interest, of $4.1 million in the second quarter of
2004 compared to $2.2 million in 2003. Drive recorded net income of $13.2
million in the second quarter of 2004 compared to $7 million in the second
quarter of 2003. Drives inventory of retail installment contracts has grown
from $511 million at June 30, 2003 to $861 million at June 30, 2004.
Consequently, net interest margin after provision for credit losses and
impairments at Drive rose from $21.0 million to $29 million during the second
quarter of 2003 and 2004, respectively. Interest and fees on notes payable.Interest and fees on notes payable
increased from $93,000 in the second quarter of 2003 to $.5 million in 2004.
During the second quarter of 2004, FirstCity recorded $.4 million of additional
interest expense related to the contingent fee arrangement with the Bank of
Scotland. See note 10 of the consolidated financial statements for further
discussion of this contingent fee. 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 interest and overhead.Company level interest expense decreased
by 14% to $1.0 million in the second quarter of 2004 from $1.2 million in the
second quarter of 2003. Average debt declined to $41.0 million in the second
quarter of 2004 from $47.2 million in 2003. Also, beginning with the third
quarter of 2003, dividends on the New Preferred Stock are included in corporate
interest expense. Other corporate overhead expenses decreased 18% to $1.0
million in the second quarter of 2004 from $1.3 million in 2003 primarily due
to decreased salaries and benefits. Income taxes.Provision for income taxes was $.5 million in the second
quarter of 2004 and related primarily to federal alternative minimum taxes.
Federal income taxes are provided at a 35% rate applied to taxable income or
loss and are offset by NOLs that are available to the Company. The tax benefit
of the NOLs is recorded in the period during which the benefit is realized. The
Company recorded no deferred tax provision in the second quarters of 2004 and
2003. Discontinued Operations.The Company recorded a provision of $.3 million
in the second quarter of 2004 for additional losses from discontinued
operations compared to $.4 million in 2003. The additional provisions primarily
relate to a decrease in the estimated future gross cash receipts on residual
interests in securitizations. These securities are in run-off, and the
Company is contractually obligated to service these assets. The assumptions
used in the valuation model consider both industry as well as the Companys
historical experience. The decrease in the estimated future gross cash receipts
is partially a result of the actual losses exceeding the losses projected by
the valuation model. In addition, prepayment assumptions have increased to take
into consideration the lower market rates and higher than predicted actual
prepayments over the past quarter. As the securities run off, assumptions are
reviewed in light of historical evidence in revising the prospective results of
the model. These revised assumptions could potentially result in either an
increase or decrease in the estimated cash receipts. An additional provision is
booked based on the output of the valuation model if deemed necessary. First Six Months of 2004 Compared to First Six Months of 2003 The Company reported earnings from continuing operations of $8.4 million
in the first six months of 2004. Net earnings to common stockholders were $8.1
million in the first six months of 2004 compared to $3.7 million in the first
six months of 2003. On a per share basis, diluted net earnings to common
stockholders were $.69 in the first six months of 2004 compared to $.33 in the
first six months of 2003. Portfolio Asset Acquisition and Resolution The operating contribution in the first six months of 2004 was $6.5
million compared to $6.4 million for the same period last year. FirstCity
purchased $92.5 million of Portfolio Assets during the first six months of 2004
($85.0 through Acquisition Partnerships), compared to $32.2 million in
acquisitions in the first six months of 2003. FirstCitys investment in these
acquisitions was $21.8 20




---



##### Table of Contents



million and $11.4 million in the first six months of
2004 and 2003, respectively. FirstCitys quarter end investment in
wholly-owned Portfolio Assets increased to $11.2 million from $5.9 million at
June 30, 2004 and 2003, respectively. Servicing fee revenues.Servicing fee revenues decreased 11% from $7.6
million in the first six months of 2003 to $6.7 million in 2004. Service fees
from the Mexican partnerships decreased $.5 million or 10% as a result of
efforts to reduce operating costs in Mexico. For the Mexican Acquisition
Partnerships, FirstCity earns a servicing fee based on costs of servicing plus
a profit margin. Service fees from the domestic Acquisition Partnerships
decreased from $2.6 million in the first six months of 2003 to $2.3 million in
2004. In June 2003, FirstCity and several Acquisition Partnerships completed a
loan sale of performing and non-performing Portfolio Assets with a carrying
value of $8.3 million for proceeds of $10.0 million, resulting in $.3 million
of service fees. Gain on resolution of Portfolio Assets.The net gain on resolution of
Portfolio Assets decreased from $1.0 million in the first six months of 2003 to
$.2 million in the first six months of 2004 primarily due to one non-performing
Portfolio generating proceeds of $2.7 million and a net gain of $.5 million
during 2003. Equity in earnings of investments.Equity in earnings of Acquisition
Partnerships increased 23.6% to $6.3 million in the first six months of 2004
compared to $5.1 million in the first six months of 2003. Following is a
discussion of equity earnings by geographic region. See note 7 for summary of
revenues and earnings of the Acquisition Partnerships and equity in earnings of
the Acquisition Partnerships.  
    
    Domestic Equity in earnings of domestic Acquisition Partnerships
decreased 19% to $4.5 million in the first six months of 2004 from $5.6
million in 2003 primarily as a result of a loan sale completed during
the second quarter of 2003, which resulted in $.7 million of additional
equity earnings to the Company.  
    
    Latin America Equity in loss of Mexican Acquisition Partnerships
was $.8 million in the first six months of 2004 compared to $1.7 million
in 2003. These partnerships reflected a loss of $5.7 million in the
first six months of 2004 compared to $26.7 million in 2003. The
partnerships recorded foreign exchange losses of $2.0 million in the
first six months of 2004 compared to $6.1 million in 2003. Interest
expense of $4.8 million and $24.8 million were recorded during the first
six months of 2004 and 2003, respectively. This interest is owed to the
investors of these partnerships, of which FirstCity recorded $.9 million
and $1.7 million, respectively, as interest income. Excluding effects of
foreign currency transactions and interest expense, these partnerships
reflected adjusted net earnings of $1.1 million in the first six months
of 2004 compared to $4.2 million in 2003.  
    
    Europe Equity in earnings of Acquisition Partnerships located in
France increased to $2.6 million in the first six months of 2004
compared to $1.2 million in 2003. This increase is principally due to
the addition of three French Partnerships, which accounted for $1.4
million in equity earnings in 2004. During the first six months of
2004, FirstCity also recorded $.6 million in foreign currency
transaction gains (included in other expenses) relating to investments
in France. Interest income.Interest income decreased 45% from $2.2 million in the
first six months of 2003 to $1.2 million in the first six months of 2004. This
decrease is primarily due to the Acquisition Partnerships and their lenders
amending three loan agreements with Acquisition Partnerships located in Mexico
in the third quarter of 2003 to provide for no interest to be payable with
respect to periods after the effective date of the amendments. This change had
no impact on the consolidated net earnings, as the effect is offset through
equity earnings in these Partnerships. Other income.Other income was $1.4 million in the first six months of
2004 compared to $.5 million in 2003. In the first Quarter of 2004, FirstCity
reduced the estimated carrying value of loans payable to certain members of
management by $.8 million. See further discussion related to these loans in
note 2 of the consolidated financial statements. Expenses.Operating expenses were $9.9 million in the first six months of
2004 compared to $10.0 million in 2003. Interest and fees on notes payable increased 31% to $1.7 million in the
first six months of 2004 from $1.3 million in 2003. The average debt for the
period increased to $35.0 million in the first six months of 2004 from $26.3
million in the first six months of 2003. Salaries and benefits decreased $.2 million, or 3%. Total personnel within
the Portfolio Asset acquisition and resolution segment were 204 and 236 at June
30, 2004 and 2003, respectively. 21




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##### Table of Contents



The provision for loan and impairment losses was minimal in the first six
months of 2004. The Company recorded a net credit of $22,000 to provision for
loan and impairment losses in the first six months of 2003 due to a $61,000
recovery on one real estate Portfolio. Occupancy, data processing, communication and other expenses declined 13%
from $2.6 million in the first six months of 2003 to $2.2 million in 2004
primarily due to increased foreign currency gains recorded in 2004. Minority interest expense increased was minimal from period to period. Consumer Lending FirstCitys consumer lending segment consists of the Companys net
investment in Drive. The operating contribution for the first six months of
2004 was $6.3 million compared to $2.6 million during the first six months of
2003. Equity in earnings of investment.FirstCity recorded equity in earnings
of Drive, net of minority interest, of $8.1 million in the first six months of
2004 compared to $2.9 million in 2003. Drive recorded net income of $26.2
million in the first six months of 2004 compared to $9.5 million in the first
six months of 2003. Drives inventory of retail installment contracts has
grown from $511 million at June 30, 2003 to $861 million at June 30, 2004.
Consequently, net interest margin after provision for credit losses and
impairments at Drive rose from $38.7 million to $56.7 million during the first
six months of 2003 and 2004, respectively. Interest and fees on notes payable.Interest and fees on notes payable
increased from $.2 in the first six months of 2003 to $1.4 million in 2004.
During the first six months of 2004, FirstCity recorded $1.2 million of
additional interest expense related to the contingent fee arrangement with the
Bank of Scotland. See note 10 of the consolidated financial statements for
further discussion of this contingent fee. 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 interest and overhead.Company level interest expense decreased
by 14% to $2.0 million in the first six months of 2004 from $2.4 million in the
first six months of 2003. Average debt declined to $41.0 million in the first
six months of 2004 from $46.9 million in 2003. Also, beginning with the third
quarter of 2003, dividends on the New Preferred Stock are included in corporate
interest expense. Other corporate overhead expenses were flat from period to
period. Income taxes.Provision for income taxes was $.6 million in the first six
months of 2004 and related primarily to federal alternative minimum taxes.
Provision for income taxes was $.3 million in the first six months of 2003 and
primarily related to state income taxes on FirstCitys servicing operations in
Minnesota, which began in April 2002. Federal income taxes are provided at a
35% rate applied to taxable income or loss and are offset by NOLs that the
Company believes are available. The tax benefit of the NOLs is recorded in the
period during which the benefit is realized. The Company recorded no deferred
tax provision in the first six months of 2004 and 2003. Discontinued Operations.The Company recorded a provision of $250,000 in
the first six months of 2004 for additional losses from discontinued operations
compared to $420,000 in 2003. The additional provisions primarily relate to a
decrease in the estimated future gross cash receipts on residual interests in
securitizations. These securities are in run-off, and the Company is
contractually obligated to service these assets. The assumptions used in the
valuation model consider both industry as well as the Companys historical
experience. The decrease in the estimated future gross cash receipts is
partially a result of the actual losses exceeding the losses projected by the
valuation model. In addition, prepayment assumptions have increased to take
into consideration the lower market rates and higher than predicted actual
prepayments over the past quarter. As the securities run off, assumptions are
reviewed in light of historical evidence in revising the prospective results of
the model. These revised assumptions could potentially result in either an
increase or decrease in the estimated cash receipts. An additional provision is
booked based on the output of the valuation model if deemed necessary. 22




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##### Table of Contents



Financial Condition Major changes in FirstCitys financial position resulted from the
following. Consolidated assets of $160.9 million at June 30, 2004, were $28.8 million
higher than that at December 31, 2003. During 2004, FirstCity invested $21.8
million in Portfolio Asset acquisitions through wholly-owned subsidiaries and
Acquisition Partnerships. These purchases are the primary reason for the
increase in Portfolio Assets ($6.7 million), Loans receivable ($3.0 million)
and equity investments ($12.2 million). Other assets increased $6.8 million primarily due to a $6.3 million
deferred debt discount, net of $1.2 million amortization. In connection with a
$16 million loan from Bank of Scotland secured by a 20% interest in Drive, FirstCity
agreed to pay a contingent fee to Bank of Scotland equal to 20% of all amounts received
by FirstCity upon any sale of the Companys 20% interest in Drive or any
receipt of distributions from Drive, once such payments exceed $16 million in
the aggregate. An equal amount of estimated deferred debt discount and
participation liability is recorded with the deferred debt discount being
amortized into expense over the term of the loan. At June 30, 2004, the
estimated liability for this contingent fee was $7.5 million and was included
in other liabilities in the consolidated balance sheets. Consolidated liabilities of $125.0 million at June 30, 2004, were $21.9
million higher than that at December 31, 2003. Total notes payable increased
by $11.5 million primarily as a result of borrowings for FirstCitys investment
in portfolio purchases. Other liabilities increased $7.7 million primarily due
to the $7.5 million contingent fee discussed above, and minority interest
increased $2.5 million, relating primarily to earnings on Drive. Portfolio Asset Acquisition and Resolution Aggregate acquisitions by the Company are as follows (dollars in
thousands): Purchase
    
    FirstCityPrice
    
    InvestmentFirst six months of 2004
    
    $
    92,520
    
    
    $
    21,832Total 2003
    
    
    129,192
    
    
    
    22,944Total 2002
    
    
    171,769
    
    
    
    16,717Total 2001
    
    
    224,927
    
    
    
    24,319Total 2000
    
    
    394,927
    
    
    
    22,140Total 1999
    
    
    210,799
    
    
    
    11,203
 The following table presents selected information regarding the revenues and
expenses of the Companys Portfolio Asset acquisition and resolution business: 23




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##### Table of Contents



Analysis of Selected Revenues and Expenses
Portfolio Asset Acquisition and Resolution Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Income from Portfolio Assets and Loans Receivable:Average investment in Portfolio Assets and loans
receivable:Domestic
    
    $
    10,500
    
    
    $
    8,262
    
    
    $
    8,509
    
    
    $
    8,553Latin America
    
    
    16,770
    
    
    
    14,816
    
    
    
    15,284
    
    
    
    14,877Europe
    
    
    1,426
    
    
    
    1,001
    
    
    
    1,805
    
    
    
    715Total
    
    $
    28,696
    
    
    $
    24,079
    
    
    $
    25,598
    
    
    $
    24,145Income from Portfolio Assets and loans receivable:Domestic
    
    $
    250
    
    
    $
    462
    
    
    $
    446
    
    
    $
    1,375Latin America
    
    
    537
    
    
    
    855
    
    
    
    913
    
    
    
    1,733Europe
    
    
    17
    
    
    
    17
    
    
    
    43
    
    
    
    17Total
    
    $
    804
    
    
    $
    1,334
    
    
    $
    1,402
    
    
    $
    3,125Average return (annualized):Domestic
    
    
    9.5
    %
    
    
    22.4
    %
    
    
    10.5
    %
    
    
    32.2
    %Latin America
    
    
    12.8
    %
    
    
    23.1
    %
    
    
    11.9
    %
    
    
    23.3
    %Europe
    
    
    4.8
    %
    
    
    6.8
    %
    
    
    4.8
    %
    
    
    4.8
    %Total
    
    
    11.2
    %
    
    
    22.2
    %
    
    
    11.0
    %
    
    
    25.9
    %Servicing fee revenues:Domestic partnerships:$ Collected
    
    $
    31,085
    
    
    $
    40,644
    
    
    $
    57,438
    
    
    $
    64,694Servicing fee revenue
    
    
    1,223
    
    
    
    1,541
    
    
    
    2,261
    
    
    
    2,582Average servicing fee %
    
    
    3.9
    %
    
    
    3.8
    %
    
    
    3.9
    %
    
    
    4.0
    %Latin American partnerships:$ Collected
    
    $
    20,249
    
    
    $
    13,513
    
    
    $
    35,095
    
    
    $
    30,025Servicing fee revenue
    
    
    2,400
    
    
    
    2,484
    
    
    
    4,356
    
    
    
    4,879Average servicing fee %
    
    
    11.9
    %
    
    
    18.4
    %
    
    
    12.4
    %
    
    
    16.2
    %Incentive service fees
    
    $
    93
    
    
    $
    61
    
    
    $
    131
    
    
    $
    132Total Service Fees:$ Collected
    
    $
    51,334
    
    
    $
    54,157
    
    
    $
    92,533
    
    
    $
    94,719Servicing fee revenue
    
    
    3,716
    
    
    
    4,086
    
    
    
    6,748
    
    
    
    7,593Average servicing fee %
    
    
    7.2
    %
    
    
    7.5
    %
    
    
    7.3
    %
    
    
    8.0
    %Personnel:Personnel expenses
    
    $
    2,938
    
    
    $
    3,303
    
    
    $
    5,979
    
    
    $
    6,145Number of personnel (at period end):Domestic
    
    
    60
    
    
    
    70Mexico
    
    
    144
    
    
    
    166Total
    
    
    204
    
    
    
    236Interest expense:Average debt
    
    $
    39,705
    
    
    $
    25,311
    
    
    $
    35,007
    
    
    $
    26,263Interest expense
    
    
    879
    
    
    
    575
    
    
    
    1,658
    
    
    
    1,261Average cost (annualized)
    
    
    8.9
    %
    
    
    9.1
    %
    
    
    9.5
    %
    
    
    9.6
    %
 24




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##### Table of Contents



The following table presents selected information regarding the revenues
and expenses of the Acquisition Partnerships: Analysis of Selected Revenues and Expenses
Acquisition Partnerships Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Gain on resolution of Portfolio Assets
    
    $
    22,140
    
    
    $
    22,245
    
    
    $
    42,709
    
    
    $
    43,234Gross profit percentage on resolution of Portfolio Assets
    
    
    35.0
    %
    
    
    36.7
    %
    
    
    34.0
    %
    
    
    36.6
    %Interest income
    
    $
    2,266
    
    
    $
    1,983
    
    
    $
    5,165
    
    
    $
    4,128Other income
    
    
    272
    
    
    
    494
    
    
    
    516
    
    
    
    1,009Interest expense(1):Interest expense
    
    $
    4,460
    
    
    $
    14,063
    
    
    $
    8,203
    
    
    $
    28,549Average cost (annualized)
    
    
    5.1
    %
    
    
    15.0
    %
    
    
    4.7
    %
    
    
    14.6
    %Other expenses:Service fees
    
    
    4,865
    
    
    
    4,966
    
    
    
    8,798
    
    
    
    9,441Other operating costs
    
    
    5,986
    
    
    
    5,343
    
    
    
    12,358
    
    
    
    8,982Foreign currency loss (gain)
    
    
    8,547
    
    
    
    (16,898
    )
    
    
    2,009
    
    
    
    6,090Income taxes
    
    
    9
    
    
    
    168
    
    
    
    167
    
    
    
    (733
    )Total other expenses (income)
    
    
    19,407
    
    
    
    (6,421
    )
    
    
    23,332
    
    
    
    23,780Net earnings (loss)
    
    $
    811
    
    
    $
    17,080
    
    
    $
    16,855
    
    
    $
    (3,958
    )Equity in earnings of Acquisition Partnerships
    
    $
    2,492
    
    
    $
    4,114
    
    
    $
    6,337
    
    
    $
    5,128Equity in earnings of Servicing Entities
    
    
    147
    
    
    
    103
    
    
    
    477
    
    
    
    319$
    2,639
    
    
    $
    4,217
    
    
    $
    6,814
    
    
    $
    5,447
   (1)
    
    Interest expense includes interest on loans to the Acquisition
Partnerships located in Mexico from affiliates of the investor groups. The
rates on all but three of these loans range from 15% to 20%. The average
cost on debt excluding the Mexican Acquisition Partnerships was 6.3% and
5.6% for the three months ended June 30, 2004 and 2003, respectively. As
noted above, in the third quarter of 2003, the Acquisition Partnerships
and their lenders amended three loan agreements from Mexican Acquisition
Partnerships to provide for no interest to be payable with respect to
periods after the effective date of the amendment. This change had no
impact on the consolidated net earnings as the effect is offset through
equity earnings in these Partnerships. Consumer Lending FirstCity owns a 31% interest in Drive Financial Services L.P., a sub
prime auto lending company. Drive originated $177.5 million of receivables
during the second quarter of 2004 compared to $127.7 million in 2003. Defaults
and losses were 20.00% and 10.65%, respectively, at June 30, 2004 compared to
21.46% and 11.07 %, respectively, at June 30, 2003. These statistics reflect
the weakness in the economy in prior periods and the resulting impact on used
car prices, although recent indicators reflect an upward trend in used car
prices. Delinquencies were 17.28% at June 30, 2004, up from 6.00% for the same
period last year as a result of a change in collections strategies, which in
some instances will allow Drive to provide borrowers additional time to cure
delinquencies rather than pursue immediate repossession. Net income from Drive continues to be positive as originations and the
volume of portfolio assets grow over time. Based on information provided by
Drive, the Company expects that this positive trend will continue. 25




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##### Table of Contents



The following table details this trend (dollars in thousands): Income (Loss)Loan
    
    Total
    
    Before Provisions
    
    Provisions
    
    Net Income
    
    FirstCitysOriginations
    
    Inventory
    
    Assets
    
    on Residual Assets
    
    on Residual Assets
    
    (Loss)
    
    31% Share20042nd Quarter
    
    $
    177,549
    
    
    $
    861,461
    
    
    $
    1,074,036
    
    
    $
    13,211
    
    
    $
    
    
    
    $
    13,211
    
    
    $
    4,0951st Quarter
    
    
    244,121
    
    
    
    770,042
    
    
    
    915,128
    
    
    
    13,001
    
    
    
    
    
    
    
    13,001
    
    
    
    4,03120034th Quarter
    
    
    102,228
    
    
    
    623,389
    
    
    
    738,829
    
    
    
    6,308
    ***
    
    
    (2,087
    )
    
    
    4,221
    
    
    
    1,3083rd Quarter
    
    
    128,688
    
    
    
    577,974
    
    
    
    700,760
    
    
    
    9,132
    
    
    
    (3,904
    )
    
    
    5,228
    
    
    
    1,6212nd Quarter
    
    
    127,706
    
    
    
    511,212
    
    
    
    619,269
    
    
    
    8,251
    
    
    
    (1,240
    )
    
    
    7,011
    
    
    
    2,1731st Quarter
    
    
    126,118
    
    
    
    443,099
    
    
    
    551,412
    
    
    
    3,707
    
    
    
    (1,217
    )
    
    
    2,490
    
    
    
    689
   *** Net of $3.7 million of additional provisions related to loans receivable.
Note: As of June 30, 2004 Drive holds on its balance sheet residual interests
with a book value of $19.6 million compared with $45.3 million as of June
30, 2003. The following table presents selected information regarding consumer
lending: Analysis of Selected Data
Consumer Lending Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Retail installment contracts acquired
    
    $
    177,549
    
    
    $
    127,706
    
    
    $
    421,670
    
    
    $
    253,825Origination characteristics:Face value to wholesale value
    
    
    99.47
    %
    
    
    98.71
    %
    
    
    101.14
    %
    
    
    98.79
    %Weighted average coupon
    
    
    21.18
    %
    
    
    21.04
    %
    
    
    21.13
    %
    
    
    20.97
    %Purchase discount (% of face value)
    
    
    16.56
    %
    
    
    17.50
    %
    
    
    17.01
    %
    
    
    17.29
    %Servicing portfolioOwned
    
    $
    192,809
    
    
    $
    277,031Securitized
    
    
    902,008
    
    
    
    491,858Total
    
    $
    1,094,817
    
    
    $
    768,889Owned  number of contracts
    
    
    16,917
    
    
    
    23,464Securitized  number of contracts
    
    
    84,561
    
    
    
    47,818Total number of contracts
    
    
    101,478
    
    
    
    71,282Defaults (% of original loan balance at time
of default)
    
    
    20.00
    %
    
    
    21.46
    %Net losses on defaults after recovery
    
    
    10.65
    %
    
    
    11.07
    %Delinquencies (% of total serviced portfolio)
    
    
    17.28
    %
    
    
    6.00
    %
 Provision for Income Taxes The Company has substantial 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
a valuation allowance to value the net deferred tax asset at a level, which
more likely than not, will be realized. Realization is determined based on
managements expectation of generating sufficient taxable income in a look
forward period over the next four years. The ultimate realization of the
resulting net deferred tax asset is dependent upon generating sufficient
taxable income from its continuing operations prior to expiration of the NOLs.
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. Liquidity and Capital Resources The Company requires liquidity to fund its operations, working capital,
payment of debt, equity for acquisition of Portfolio Assets, investments in and
advances to entities formed to acquire Portfolios (Acquisition Partnerships),
retirement of and dividends on 26




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##### Table of Contents



preferred stock, and other investments by FirstCity. The potential sources
of liquidity are funds generated from operations, equity distributions from the
Acquisition Partnerships, interest and principal payments on subordinated
intercompany debt, dividends from the Companys subsidiaries, borrowings from
revolving lines of credit and other credit facilities, proceeds from equity
market transactions, securitization and other structured finance transactions
and other special purpose short-term borrowings. In December 2002, FirstCity completed a recapitalization in which holders
of New Preferred Stock exchanged 1,092,210 shares of New Preferred Stock for
2,417,388 shares of common stock and $10.5 million in cash. As a result, common
equity was increased by $18.9 million. During the first quarter of 2003, 4,400
shares of New Preferred Stock were redeemed for 8,200 shares of Common Stock
and $50,000 in cash. FirstCity also recorded a $4 million gain in December 2002
from the release of its guaranty of Drives indebtedness to BoS(USA) Inc.
(BoS(USA)). BoS(USA)s warrant to purchase 1,975,000 shares of non-voting
common stock was cancelled. FirstCity also acquired the minority interest in
FirstCity Holdings Corporation held by Terry R. DeWitt, G. Stephen Fillip and
James C. Holmes, each of whom were Senior Vice Presidents of FirstCity, by
issuing 400,000 shares of common stock of the Company and notes payable, to be
periodically redeemed by the Company for an aggregate of up to $3.2 million out
of incentive servicing fees related to certain Portfolios in Mexico. FirstCity
valued the loans at the inception date using an imputed interest rate of 4.56%
based on the Companys cost of funds on that date. During the first quarter of
2004, the Company reduced the estimated carrying value of these loans based on
an imputed interest rate of 6.94% and revised cash flow projections. FirstCity
recorded the change in estimate of $.8 million to other income. At June 30,
2004, these notes had a combined balance of $.5 million and mature in December
2011. The Company evaluates the contingent amount of these outstanding notes
on a quarterly basis and will make adjustments to the estimated liability as
changes in estimated cash flows supporting these notes change. As a part of the recapitalization, BoS(USA) provided a non-recourse loan
in the amount of $16 million to FirstCity, which was used to pay the cash
portion of the exchange offer to the holders of the New Preferred Stock, to pay
expenses of the exchange offer and recapitalization, and to reduce FirstCitys
debt to the Bank of Scotland (together with BoS(USA), the Senior Lenders).
The $16 million loan is secured by a 20% interest in Drive (64.51% of
FirstCitys remaining 31% interest in Drive) and other assets of Consumer Corp.
as are necessary and only to the extent to allow the Senior Lenders to realize
the security interest in the 20% interest in Drive. In connection with the $16
million loan, the Company agreed to pay a contingent fee to BoS (USA) Inc.
equal to 20% of all amounts received by the Company upon any sale of the
Companys 20% interest in Drive or any receipt of distributions from Drive
related to the 20% ownership interest, once such payments exceed $16 million in
the aggregate. At June 30, 2004, the estimated liability for this contingent
fee was $7.5 million. Additionally, amortization of $1.2 million was
recognized during the first six months of 2004. The Company currently
estimates that additional interest expense will be recognized in the amount of
$.4 million per quarter through December 2007. This additional interest
expense currently has no impact on the Companys cash flow. The payment of the
interest and any gain or income resulting from any sale or distribution will
not be recognized until a sale occurs or distribution is received. In connection with the recapitalization, the Senior Lenders refinanced the
remainder of the Companys debt facilities ($37 million outstanding at June 30,
2004). The Senior Lenders provided additional financing to FirstCity,
increasing the total commitment under the acquisition facility to $59 million,
consisting of (a) a $5 million revolving credit loan and (b) an acquisition
term loan in an amount up to $54 million. The aggregate amount of outstanding
loans under the total commitment by the Senior Lenders for the refinancing and
the new financing at any time may not exceed $77 million. Effective as of
March 31, 2004, the Company and the Senior Lenders amended the acquisition term
loan facility providing for a total amount of term loans to be made up to $54
million in the aggregate to (i) make it into a revolving loan facility
providing for a maximum principal balance of loans outstanding at any time of
$45 million, (ii) allow loans to be made in Euros up to a maximum amount in
Euros that is equivalent to $22.5 million U.S. dollars, (iii) allow loans to be
made for acquisition of Portfolio Assets originated outside the United States
of up to $22.5 million, (iv) provide for an interest rate of Libor plus 3.50%,
(v) provide for the non-utilization fee to increase from 0.25% to 0.375% of the
unused balance of the revolving acquisition facility, (vi) provide for
distribution of 35% of collections from Asset Portfolios to the Company,
provided that the aggregate outstanding principal balances of all loans under
the facility does not exceed 65% of the net present value of FirstCitys
interest in Portfolio Assets in Acquisition Partnerships pledged to secure the
acquisition facility, and (vii) provide for other modifications that would
facilitate the use of the acquisition facility in the United States and other
countries. The amended facility continues to provide that the aggregate amount
of all outstanding loans under the loan facilities refinanced with the Senior
Lenders in December 2002 and the amended acquisition facility and the related
$5 million revolving loan are limited to $77 million. BoS(USA) has a warrant to purchase 425,000 shares of the Companys voting
Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants
in connection with this existing warrant for 425,000 shares under certain
specific situations to retain its ability to acquire approximately 4.86% of the
Companys voting Common Stock. The warrant will expire on August 31, 2010, if
it is not exercised prior to that date. 27




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##### Table of Contents



In the third quarter of 1999, dividends on the Companys New Preferred
Stock were suspended. At June 30, 2004, accumulated dividends in arrears on New
Preferred Stock totaled $1.3 million, or $10.50 per share. The accumulated
dividends in arrears were paid on July 29, 2004 to the holders of record as of
July 22, 2004. The dividend covered the period from July 1, 1999 through June
30, 2004. Because the dividend was in excess of 25% of the value of the New
Preferred Stock, the ex dividend date for the security was July 30, 2004, the
day after the payable date. The Company halted payment of dividends on New
Preferred Stock as of July 1, 1999, due to liquidity constraints resulting from
financial difficulties the Company experienced at the time. Since then, the
Companys bank lending agreements have prohibited the payment of any dividends
on New Preferred Stock. Giving consideration to its successful recapitalization
in December of 2002, and resulting improvement in its balance sheet, liquidity
and earnings, the Company recently sought and received a waiver of the
restrictions on dividend payments from its lender. There are currently 126,291 shares of New Preferred Stock outstanding.
The issue, which matures in September 2005, has a $21.00 per share liquidation
preference and $2.10 per share annual dividend rate. The Company expects to
make quarterly dividend payments of $.525 per share beginning in October of
2004, until the shares are retired. The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a
subsidiary of Cargill. This facility is being used exclusively to provide
equity in new Portfolio acquisitions in partnerships with Cargill and its
affiliates and matures in March 2005. At June 30, 2004, approximately $24.9
million was outstanding under this facility. In September 2003, FirstCity entered into a Portfolio acquisition facility
line of credit with Greenwich Capital Financial Products, Inc., which provides
borrowings up to $30 million. The facility obligation was zero at June 30, 2004
and matures September 2004. Drive has a warehouse line of credit with BoS(USA), which provides
borrowings up to $300 million. Drives obligation under this arrangement at
June 30, 2004 was $120.7 million. The debt is secured by Drives retail
installment contracts and has been extended to February 2005. Drive also has a warehouse line of credit agreement with Variable Funding
Capital Corporation, a subsidiary of Wachovia National Bank (formerly First
Union National Bank), which provides borrowings up to $100 million. Drives
obligation under the arrangement at June 30, 2004 was zero. The debt will be
secured by Drives retail installment contracts and terminates September 2004. The Company and each of its major operating subsidiaries have entered into
one or more credit facilities to finance their respective operations. Each of
the operating subsidiary credit facilities is nonrecourse to the Company. The
Company has agreed to indemnify BoS(USA) for up to 31% of losses, which might
arise as a result of agreements BoS(USA) executed as a sponsor in connection
with the securitizations completed by Drive. The Company also agreed to provide
support in connection with securitizations by Consumer Corp. and Drive prior to
the acquisition by BoS(USA) of the interest in Drive in August 2000.
Management of the Company currently does not believe it is likely that
FirstCity will be required to make payments on these indemnification
agreements. Excluding the term acquisition facilities of the unconsolidated
Acquisition Partnerships and the term and warehouse facilities of Drive, as of
June 30, 2004, the Company and its subsidiaries had credit facilities providing
for borrowings in an aggregate principal amount of $165 million and outstanding
borrowings of $103 million. Management believes that the loan facilities provided by the Senior
Lenders, along with the liquidity from the Cargill Facility, the related fees
generated from the servicing of assets, equity distributions from existing
Acquisition Partnerships and wholly owned portfolios, as well as sales of
interests in equity investments, will allow the Company to meet its obligations
as they come due during the next twelve months. The following table summarizes the material terms of the credit facilities
to which the Company, its major operating subsidiaries and the Acquisition
Partnerships were parties to as of August 5, 2004 and the outstanding
borrowings under such facilities as of June 30, 2004. 28




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##### Table of Contents



Credit Facilities Funded andUnfunded
    
    OutstandingCommitment
    
    BorrowingsAmount as of
    
    as ofAugust 5,
    
    June 30,2004
    
    2004
    
    Interest Rate
    
    Other Terms and Conditions(Dollars in millions)CorporateCompany Senior Facility:Bank of Scotland revolving line of credit
    
    $
    5
    
    
    $
    3
    
    
    LIBOR + 2.75%
    
    Secured by the assets ofthe Company, maturesDecember 2004BoS(USA) Tranche I (Term)
    
    
    25
    
    
    
    25
    
    
    Prime + 2.5%
    
    Secured by the assets ofthe Company, maturesDecember 2006BoS(USA) Tranche II (Term)
    
    
    12
    
    
    
    12
    
    
    Fixed at 8.77%
    
    Secured by the assets ofthe Company, maturesDecember 2007Portfolio Asset Acquisition and
ResolutionBank of Scotland portfolio acquisition facility
    
    
    37
    
    
    
    17
    
    
    LIBOR + 3.5%
    
    Secured by the assets ofthe Company, maturesNovember 2006Cargill equity investment facility
    
    
    35
    
    
    
    25
    
    
    Greater of 8.5% or
    
    Acquisition facility forLIBOR + 4.5%
    
    the investment in futureAcquisition partnerships,matures March 2005Greenwhich Capital portfolio
acquisition facility
    
    
    30
    
    
    
    
    
    
    LIBOR + 4.0%
    
    Secured by Portfolio Assets purchased with the facility, matures September 2004Central National Bank term facility
    
    
    5
    
    
    
    5
    
    
    Bank prime + 0.50%
    
    Secured by existingPortfolio Assets, matures December 2004Unsecured loans payable tosenior management
    
    
    
    
    
    
    
    
    
    Rate based Corporateaverage cost of funds
    
    Matures December 2011ConsumerBank of Scotland term loan
    
    
    16
    
    
    
    16
    
    
    LIBOR + 1.0%
    
    Secured by 20% equityinterest in Drive, maturesDecember 2007,non-recourseTotal
    
    $
    165
    
    
    $
    103Unconsolidated Acquisition
Partnerships Term Facilities(1)
    
    $
    116
    
    
    $
    116
    
    
    Various rates
    
    Secured by PortfolioAssets, various maturities($11 million due in 2004),non-recourse
 29




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##### Table of Contents



Credit Facilities Funded andUnfunded
    
    OutstandingCommitment
    
    BorrowingsAmount as of
    
    as ofAugust 5,
    
    June 30,2004
    
    2004
    
    Interest Rate
    
    Other Terms and Conditions(Dollars in millions)Unconsolidated DriveBoS(USA) warehouse facility
    
    $
    300
    
    
    $
    121
    
    
    Prime minus .75%
    
    Secured by warehouseinventory, matures February2005Variable Funding Corp.
warehouse facility
    
    
    100
    
    
    
    
    
    
    Rate based on
    
    Secured by warehouseCommercial paper
    
    inventory, maturesrates combined with
    
    September 2004certain facilityfeesBonds payable
    
    
    812
    
    
    
    812
    
    
    Fixed at 1.47 % to 4.14%
    
    Secured by retailinstallment Contracts,various maturities throughOctober 2010Subordinate capital facility
    
    
    65
    
    
    
    54
    
    
    Fixed at 16%
    
    Secured by all assets ofDrive, matures February2006$
    1,277
    
    
    $
    987
   (1)
    
    In addition to the term acquisition facilities of the unconsolidated
Acquisition Partnerships, the Mexican Acquisition Partnerships also have
term debt of approximately $251 million outstanding as of June 30, 2004
owed to affiliates of the investor groups. Of this amount, the Company has
recorded approximately $17.7 million as Loans Receivable on the
Consolidated Balance Sheets. Forward-Looking Statements Certain statements contained in this Quarterly Report on Form 10-Q or
incorporated by reference from time to time, including, but not limited to,
statements relating to the Companys strategic objectives and future
performance, which are not historical facts, may be deemed to be
forward-looking statements under the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, without limitation, any statement
that may project, indicate or imply future results, performance or
achievements, and may contain the words expect, intend, plan, estimate,
believe, will be, will continue, will likely result, and similar
expressions. Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. There are many important factors that could cause the Companys
actual results to differ materially from those indicated in the forward-looking
statements. Such factors include, but are not limited to, the performance of
the Companys subsidiaries and affiliates; the availability of Portfolio
Assets; assumptions underlying Portfolio asset performance; risks associated
with foreign operations; currency exchange rate fluctuations; interest rate
risk; the degree to which the Company is leveraged; the Companys continued
need for financing; availability of the Companys credit facilities; the impact
of certain covenants in loan agreements of the Company and its subsidiaries;
risks of declining value of loans, collateral or assets; the ability of the
Company to utilize NOLs; uncertainties of any litigation that might arise from
discontinued operations; general economic conditions; foreign social and
economic conditions; changes (legislative and otherwise) in the asset
securitization industry; fluctuations in residential and commercial real estate
values; capital market conditions, including the markets for asset-backed
securities; factors more fully discussed and identified in the Companys Annual
Report on Form 10-K, filed March 30, 2004 (including those discussed under
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations), as well as in other Securities and Exchange Commission
filings of the Company. Many of these factors are beyond the Companys control.
In addition, it should be noted that past financial and operational performance
of the Company is not necessarily indicative of future financial and
operational performance. Given these risks and uncertainties, investors should
not place undue reliance on forward-looking statements. The forward-looking
statements in this Form 10-Q speak only as of the date of this Form 10-Q. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement to reflect any change
in the Companys expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based. 30




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##### Table of Contents



Item 3.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s ability to maintain the spread
or interest differential between the interest it charges the customer for loans
and the interest the Company is charged for the financing of those loans. The
following describes each component of interest bearing assets held by the
Company and how each could be affected by changes in interest rates. The Company invests in Portfolio Assets both directly through consolidated
subsidiaries and indirectly through equity investments in Acquisition
Partnerships. Portfolio Assets consist of investments in pools of
non-homogenous assets that predominantly consist of loan and real estate
assets. Earnings from these assets are based on the estimated future cash flows
from such assets and recorded when those cash flows occur. The underlying loans
within these pools bear both fixed and variable rates. Due to the
non-performing nature and history of these loans, changes in prevailing
benchmark rates (such as the prime rate or LIBOR) generally have a nominal
effect on the ultimate future cash flow to be realized from the loan assets.
Furthermore, these pools of assets are held for sale, not for investment;
therefore, the disposition strategy is to liquidate these assets as quickly as
possible. Loans receivable consist of investment loans made to Acquisition
Partnerships and bear interest at predominately fixed rates. The collectibility
of these loans is directly related to the underlying Portfolio Assets of those
Acquisition Partnerships, which are non-performing in nature. Therefore,
changes in benchmark rates would have minimal effect on the collectibility of
these loans. The Companys equity investment in Drive is materially impacted by net
interest margins and the ability to securitize the loans Drive originates.
During 2002, Drive elected not to use gain on sale treatment when assets were
securitized. Instead, Drive pursued a strategy to grow the balance sheet and
record interest income from loans and interest expense on the related debt as
incurred to build an earnings stream over time. Demand from potential investors
in Drives securitizations is affected by the perception of credit quality and
prepayment risk associated with the loans Drive originates and securitizes. The
timing and size and interest rates of the bonds issued as a part 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. In summary, Drive would be negatively impacted by rising interest rates
and declining prices of its sub-prime loans. Rising interest rates would
negatively impact the value of residual interests in securitizations currently
held and costs of borrowings under the warehouse lines and new secured
financings. Declining prices of the Companys sub-prime loans would adversely
affect the levels of gains achieved in the event Drive elects to sell those
loans. The Company has not entered into any instruments to minimize this market
risk of adverse changes in interest rates or declining prices. There have been
no material changes in the quantitative and qualitative risks of the Company
since December 31, 2003. The Company currently has investments in Europe and Latin America. In
Europe, the Companys investments are in the form of equity and represent a
significant portion of the Companys total equity investments. FirstCity also
has a Euro-denominated loan receivable from a French Acquisition Partnership.
As of June 30, 2004, one U.S. dollar equaled .83 Euros. A sharp change of the
Euro relative to the U.S. dollar could materially adversely affect the
financial position and results of operations of the Company. A 5% and 10%
incremental depreciation of the Euro would result in an estimated decline in
the valuation of the Companys equity investments in France of approximately
$.7 million and $1.3 million, respectively. These amounts are estimates of the
financial impact of a depreciation of the Euro relative to the U.S. dollar.
Consequently, these amounts are not necessarily indicative of the actual effect
of such changes with respect to the Companys consolidated financial position
or results of operations. As discussed above, on March 31, 2004, the Company
amended its acquisition term loan facility with the Senior Lenders to allow
loans to be made in Euros up to a maximum amount in Euros that is equivalent to
$22.5 million U.S. dollars. In June 2004, FirstCity borrowed 7.0 million Euros
under this facility to refinance the outstanding balance of U.S. Dollar
denominated loans it had with Cargill related to the acquisition of European
portfolios. Management of the Company feels that this amended loan agreement
will help reduce the risk of adverse effects of currency changes on
Euro-denominated investments. 31




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##### Table of Contents



In Latin America, approximately 95% of the Companys investments are made
through U.S. dollar denominated loans to Acquisition Partnerships in Mexico.
The remaining investment is in the form of equity in these same Acquisition
Partnerships. The loans receivable are required to be repaid in U.S. dollars.
Although the U.S. dollar balance of these loans will not change due to a change
in the Mexican peso, the future estimated cash flows of the underlying assets
in Mexico could become less valuable as a result of a change in the exchange
rate for the Mexican peso, and thus could affect the overall total returns to
the Company on these investments. As of June 30, 2004, one U.S. dollar equaled
11.45 Mexican pesos. A 5% and 10% incremental depreciation of the peso would
result in an estimated decline in the valuation of the Companys total
investments in Mexico of approximately $1.4 million and $2.8 million,
respectively. These amounts are estimates of the financial impact of a
depreciation of the Mexican peso relative to the U.S. dollar. Consequently,
these amounts are not necessarily indicative of the actual effect of such
changes with respect to the Companys consolidated financial position or
results of operations. 
 Item 4.Controls and Procedures. An evaluation was performed under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of June 30, 2004. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective, in all material respects, to ensure
that information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required. There have been no significant changes in the Companys
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of managements evaluation. 
 PART II OTHER INFORMATION 
 Item 1.Legal Proceedings. FirstCity was not involved in any material legal proceedings as of June
30, 2004. 
 Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. None 
 Item 3.Defaults Upon Senior Securities. In the first quarter of 1999, dividends on the Companys adjusting rate
preferred stock were suspended. At June 30, 2004, accumulated dividends in
arrears on such preferred stock totaled $1.3 million, or $10.50 per share. The
accumulated dividends in arrears were paid on July 29, 2004 to the holders of
record as of July 22, 2004. The dividend covered the period from July 1, 1999
through June 30, 2004. Because the dividend was in excess of 25% of the value
of the New Preferred Stock, the ex dividend date for the security was July 30,
2004, the day after the payable date. 
 Item 4.Submission of Matters to a Vote of Security Holders. None 
 Item 5.Other Information. None 
 Item 6.Exhibits and Reports on Form 8-K. (a) Exhibits. ExhibitNumber
    
    
    
    Description of Exhibit2.1
    
    
    
    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
 32




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of ExhibitFinancial 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).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
    
    
    
    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).10.2
    
    
    
    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).10.3
    
    
    
    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).10.4
    
    
    
    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).10.5
    
    
    
    Amended and Restated Loan Agreement, dated December 20,
1999, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank
of Scotland as Agent (incorporated herein by reference to
Exhibit 10.1 of the Companys Form 8-K dated December 22,
1999, filed with the Commission on December 28, 1999).10.6
    
    
    
    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
 33




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibitreference to Exhibit 10.40 of the Companys Form 8-K dated
August 25, 2000, filed with the Commission on September 11,
2000).10.7
    
    
    
    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).10.8
    
    
    
    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).10.9
    
    
    
    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).10.10
    
    
    
    Receivables Financing Agreement, dated August 18, 2000,
among Drive BOS LP, Drive Financial Services LP, each
Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A.
(incorporated herein by reference to Exhibit 10.44 of the
Companys Form 10-K dated April 13, 2001, filed with the
Commission on April 13, 2001).10.11
    
    
    
    Amendment to Loan Agreement and extension of Promissory
Note, dated January 12, 2001, by and between FirstCity
Holdings Corporation and CSFC Capital Corp. XXX
(incorporated herein by reference to Exhibit 10.45 of the
Companys Form 10-K dated April 13, 2001, filed with the
Commission on April 13, 2001).10.12
    
    
    
    Second Amendment, dated as of February 16, 2001, to the
Receivables Financing Agreement, dated as of August 18,
2000, among Drive BOS LP, Drive Financial Services LP the
Lenders party thereto, IPA Incorporated and Wells Fargo Bank
Minnesota, NA (incorporated herein by reference to Exhibit
10.46 of the Companys Form 10-K dated April 13, 2001, filed
with the Commission on April 13, 2001).10.13
    
    
    
    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
IFA Incorporated (incorporated herein by reference to
Exhibit 10.47 of the Companys Form 10-K dated April 13,
2001, filed with the Commission on April 13, 2001).10.14
    
    
    
    Amended and Restated Amendment #4 (Option and Option
Warrant), dated as of December 31, 2001, between the Company
and BoS(USA) Inc. (incorporated herein by reference to
Exhibit 99.1 of the Companys Form 8-K dated January 18,
2002, filed with the Commission on January 18, 2002).10.15
    
    
    
    Letter Agreement, dated November 26, 2002, between FirstCity
Consumer Lending Corporation and The Governor and Company of
the Bank of Scotland, including Form of Promissory Note to
be executed by FirstCity Consumer Lending Corporation,
payable to The Governor and Company of the Bank of Scotland.
(incorporated herein by reference to Exhibit 99(d)(5) of the
Companys Form SC TO-I/A dated November 27, 2002, filed with
the Commission on November 27, 2002).10.16
    
    
    
    Amended and Restated Loan Agreement, dated December 12,
 34




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibit2002, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank
of Scotland as Agent (incorporated herein by reference to
Exhibit 10.16 of the Companys Form 10-K dated April 15,
2003).10.17
    
    
    
    Term Loan and Revolving Credit Agreement, dated December 12,
2002, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank
of Scotland as Agent (incorporated herein by reference to
Exhibit 10.17 of the Companys Form 10-K dated April 15,
2003).10.18
    
    
    
    Fifth amendment, dated March 31, 2004, to the Term Loan and
Revolving Credit Agreement, dated December 12, 2002, by and
among FirstCity Financial Corporation as Borrower and the
Lenders named therein, as Lenders and Bank of Scotland as Agent
(incorporated herein by reference to Exhibit 10.18 of the
Companys Form 10-Q dated May 14, 2004).10.19
    
    
    
    Separation Agreement and Release, dated March 31, 2004, by
and between G. Stephen Fillip, FirstCity Servicing Corporation
and FirstCity Financial Corporation (incorporated herein by
reference to Exhibit 10.19 of the Companys Form 10-Q dated May
14, 2004).10.20
    
    
    
    Consultant Agreement, dated April 1, 2004, by and between
FirstCity Servicing Corporation and G. Stephen Fillip
(incorporated herein by reference to Exhibit 10.20 of the
Companys Form 10-Q dated May 14, 2004).31.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer
of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of
the Company, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer
of the Company, pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and relating to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.32.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of
the Company, pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and relating to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.
   *
    
    Filed herewith. (b) Reports onForm 8-K. None filed. 35




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Firstcity Financial CorporationBy:
    /s/     James T. SartainJames T. SartainPresident and Chief ExecutiveOfficer and Director(Duly authorized officer of theRegistrant)By:
    /s/     J. Bryan BakerJ. Bryan BakerSenior Vice President and ChiefFinancial Officer(Duly authorized officer andprincipal financial and accountingofficer of the Registrant)Dated: August 13, 2004
 36




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##### Table of Contents



INDEX TO EXHIBITS ExhibitNumber
    
    
    
    Description of Exhibit2.1
    
    
    
    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).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
    
    
    
    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).10.2
    
    
    
    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).10.3
    
    
    
    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).10.4
    
    
    
    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).10.5
    
    
    
    Amended and Restated Loan Agreement, dated December 20,
1999, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibitof 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).10.6
    
    
    
    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).10.7
    
    
    
    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).10.8
    
    
    
    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).10.9
    
    
    
    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).10.10
    
    
    
    Receivables Financing Agreement, dated August 18, 2000,
among Drive BOS LP, Drive Financial Services LP, each
Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A.
(incorporated herein by reference to Exhibit 10.44 of the
Companys Form 10-K dated April 13, 2001, filed with the
Commission on April 13, 2001).10.11
    
    
    
    Amendment to Loan Agreement and extension of Promissory
Note, dated January 12, 2001, by and between FirstCity
Holdings Corporation and CSFC Capital Corp. XXX
(incorporated herein by reference to Exhibit 10.45 of the
Companys Form 10-K dated April 13, 2001, filed with the
Commission on April 13, 2001).10.12
    
    
    
    Second Amendment, dated as of February 16, 2001, to the
Receivables Financing Agreement, dated as of August 18,
2000, among Drive BOS LP, Drive Financial Services LP the
Lenders party thereto, IPA Incorporated and Wells Fargo Bank
Minnesota, NA (incorporated herein by reference to Exhibit
10.46 of the Companys Form 10-K dated April 13, 2001, filed
with the Commission on April 13, 2001).10.13
    
    
    
    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
IFA Incorporated (incorporated herein by reference to
Exhibit 10.47 of the Companys Form 10-K dated April 13,
2001, filed with the Commission on April 13, 2001).10.14
    
    
    
    Amended and Restated Amendment #4 (Option and Option
Warrant), dated as of December 31, 2001, between the Company
and BoS(USA) Inc. (incorporated herein by reference to
Exhibit 99.1 of the Companys Form 8-K dated January 18,
2002, filed with the Commission on January 18, 2002).10.15
    
    
    
    Letter Agreement, dated November 26, 2002, between FirstCity
Consumer Lending Corporation and The Governor and Company of
the Bank of Scotland, including Form of Promissory Note to
be executed by FirstCity Consumer Lending Corporation,
payable to The Governor and Company of the Bank of Scotland.




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibit(incorporated herein by reference to Exhibit 99(d)(5) of the
Companys Form SC TO-I/A dated November 27, 2002, filed with
the Commission on November 27, 2002).10.16
    
    
    
    Amended and Restated Loan Agreement, dated December 12,
2002, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank
of Scotland as Agent (incorporated herein by reference to
Exhibit 10.16 of the Companys Form 10-K dated April 15,
2003).10.17
    
    
    
    Term Loan and Revolving Credit Agreement, dated December 12,
2002, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank
of Scotland as Agent (incorporated herein by reference to
Exhibit 10.17 of the Companys Form 10-K dated April 15,
2003).10.18
    
    
    
    Fifth amendment, dated March 31, 2004, to the Term Loan and
Revolving Credit Agreement, dated December 12, 2002, by and
among FirstCity Financial Corporation as Borrower and the
Lenders named therein, as Lenders and Bank of Scotland as Agent
(incorporated herein by reference to Exhibit 10.18 of the
Companys Form 10-Q dated May 14, 2004).10.19
    
    
    
    Separation Agreement and Release, dated March 31, 2004, by
and between G. Stephen Fillip, FirstCity Servicing Corporation
and FirstCity Financial Corporation (incorporated herein by
reference to Exhibit 10.19 of the Companys Form 10-Q dated May
14, 2004).10.20
    
    
    
    Consultant Agreement, dated April 1, 2004, by and between
FirstCity Servicing Corporation and G. Stephen Fillip
(incorporated herein by reference to Exhibit 10.18 of the
Companys Form 10-Q dated May 14, 2004).31.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer
of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of
the Company, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer
of the Company, pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and relating to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.32.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of
the Company, pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and relating to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.