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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 September 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
    
    76-0243729(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    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 November 9, 2004 was 11,260,687.




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TABLE OF CONTENTS  PART IItem 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 IIItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEXHIBIT INDEXRevolving Credit AgreementCertification 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)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCash and cash equivalents
    
    $
    5,265
    
    
    $
    2,745Portfolio Assets, net
    
    
    33,631
    
    
    
    4,525Loans receivable from Acquisition Partnerships held for investment
    
    
    19,445
    
    
    
    17,313Equity investments
    
    
    55,868
    
    
    
    57,479Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Service fees receivable from affiliates
    
    
    886
    
    
    
    1,390Other assets, net
    
    
    7,596
    
    
    
    6,769Net assets of discontinued mortgage operations
    
    
    4,388
    
    
    
    6,150Consumer assets held for sale
    
    
    36,773
    
    
    
    15,667Total Assets
    
    $
    183,953
    
    
    $
    132,139LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable to affiliates
    
    $
    101,641
    
    
    $
    72,628Notes payable other
    
    
    4,211
    
    
    
    2,432Preferred stock subject to mandatory redemption, including accumulated dividends in arrears of zero
and $1,193 at September 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)
    
    
    2,652
    
    
    
    3,846Minority interest
    
    
    1,305
    
    
    
    841Liabilities from discontinued consumer operations
    
    
    30,096
    
    
    
    19,132Other liabilities
    
    
    5,327
    
    
    
    4,291Total Liabilities
    
    
    145,232
    
    
    
    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
    
    
    99,289
    
    
    
    99,168Accumulated deficit
    
    
    (62,867
    )
    
    
    (73,923
    )Accumulated other comprehensive income
    
    
    2,187
    
    
    
    3,612Total Stockholders Equity
    
    
    38,721
    
    
    
    28,969Total Liabilities and Stockholders Equity
    
    $
    183,953
    
    
    $
    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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Servicing fees from affiliates
    
    $
    3,328
    
    
    $
    3,574
    
    
    $
    10,076
    
    
    $
    11,167Gain on resolution of Portfolio Assets
    
    
    601
    
    
    
    112
    
    
    
    838
    
    
    
    1,079Equity in earnings of investments
    
    
    3,656
    
    
    
    3,162
    
    
    
    10,470
    
    
    
    8,609Interest income from affiliates
    
    
    674
    
    
    
    501
    
    
    
    1,735
    
    
    
    2,327Interest income  other
    
    
    229
    
    
    
    98
    
    
    
    365
    
    
    
    443Other income
    
    
    454
    
    
    
    545
    
    
    
    2,236
    
    
    
    1,161Total revenues
    
    
    8,942
    
    
    
    7,992
    
    
    
    25,720
    
    
    
    24,786Expenses:Interest and fees on notes payable to affiliates
    
    
    1,979
    
    
    
    1,770
    
    
    
    5,359
    
    
    
    5,277Interest and fees on notes payable  other
    
    
    107
    
    
    
    20
    
    
    
    278
    
    
    
    134Interest on shares subject to mandatory redemption
    
    
    66
    
    
    
    66
    
    
    
    199
    
    
    
    66Salaries and benefits
    
    
    3,673
    
    
    
    3,823
    
    
    
    11,227
    
    
    
    11,417Provision for loan and impairment losses
    
    
    1
    
    
    
    23
    
    
    
    23
    
    
    
    1Occupancy, data processing, communication and other
    
    
    2,141
    
    
    
    2,168
    
    
    
    5,374
    
    
    
    5,886Total expenses
    
    
    7,967
    
    
    
    7,870
    
    
    
    22,460
    
    
    
    22,781Earnings from continuing operations before income taxes and
minority interest
    
    
    975
    
    
    
    122
    
    
    
    3,260
    
    
    
    2,005Benefit (provision) for income taxes
    
    
    11
    
    
    
    195
    
    
    
    (145
    )
    
    
    (24
    )Earnings from continuing operations before minority interest
    
    
    986
    
    
    
    317
    
    
    
    3,115
    
    
    
    1,981Minority interest
    
    
    (34
    )
    
    
    32
    
    
    
    (43
    )
    
    
    (41
    )Earnings from continuing operations
    
    
    952
    
    
    
    349
    
    
    
    3,072
    
    
    
    1,940Discontinued operationsEarnings from discontinued operations
    
    
    2,211
    
    
    
    1,515
    
    
    
    8,666
    
    
    
    3,757Income taxes
    
    
    (255
    )
    
    
    (24
    )
    
    
    (682
    )
    
    
    (59
    )Net earnings from discontinued operations
    
    
    1,956
    
    
    
    1,491
    
    
    
    7,984
    
    
    
    3,698Net earnings
    
    
    2,908
    
    
    
    1,840
    
    
    
    11,056
    
    
    
    5,638Accumulated preferred dividends in arrears
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )Net earnings to common stockholders
    
    $
    2,908
    
    
    $
    1,840
    
    
    $
    11,056
    
    
    $
    5,505Basic earnings per common share are as follows:Earnings from continuing operations
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.28
    
    
    $
    0.16Discontinued operations
    
    $
    0.17
    
    
    $
    0.13
    
    
    $
    0.71
    
    
    $
    0.33Net earnings to common stockholders
    
    $
    0.26
    
    
    $
    0.16
    
    
    $
    0.99
    
    
    $
    0.49Weighted average common shares outstanding
    
    
    11,236
    
    
    
    11,204
    
    
    
    11,223
    
    
    
    11,203Diluted earnings per common share are as follows:Earnings from continuing operations
    
    $
    0.08
    
    
    $
    0.03
    
    
    $
    0.26
    
    
    $
    0.16Discontinued operations
    
    $
    0.17
    
    
    $
    0.13
    
    
    $
    0.68
    
    
    $
    0.33Net earnings to common stockholders
    
    $
    0.25
    
    
    $
    0.16
    
    
    $
    0.94
    
    
    $
    0.49Weighted average common shares outstanding
    
    
    11,837
    
    
    
    11,371
    
    
    
    11,816
    
    
    
    11,259
 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
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    121Comprehensive income:Net earnings for the first nine months of 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,056
    
    
    
    
    
    
    
    11,056Foreign currency items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,425
    )
    
    
    (1,425
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,631Balances, September 30, 2004
    
    
    11,235,687
    
    
    $
    112
    
    
    $
    99,289
    
    
    $
    (62,867
    )
    
    $
    2,187
    
    
    $
    38,721
 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) Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    11,056
    
    
    $
    5,638Adjustments to reconcile net earnings to net cash used in operating activities:Net earnings from discontinued operations
    
    
    (7,984
    )
    
    
    (3,698
    )Proceeds from resolution of Portfolio Assets
    
    
    3,346
    
    
    
    6,314Gain on resolution of Portfolio Assets
    
    
    (838
    )
    
    
    (1,079
    )Purchase of Portfolio Assets and loans receivable, net
    
    
    (38,237
    )
    
    
    (5,174
    )Provision for loan and impairment losses
    
    
    23
    
    
    
    1Equity in earnings of investments
    
    
    (10,470
    )
    
    
    (8,609
    )Proceeds from performing Portfolio Assets and loans receivable, net
    
    
    5,849
    
    
    
    3,471Capitalized interest and costs on Portfolio Assets and loans receivable
    
    
    (138
    )
    
    
    (172
    )Depreciation and amortization
    
    
    612
    
    
    
    658(Increase) decrease in service fees receivable from affiliate
    
    
    504
    
    
    
    (290
    )Increase in other assets
    
    
    (81
    )
    
    
    (2,270
    )Change in
notes payable related to purchase of minority interest
    
    
    (759
    )
    
    
    Increase in other liabilities
    
    
    (3,232
    )
    
    
    (357
    )Net cash used in operating activities
    
    
    (40,349
    )
    
    
    (5,567
    )Cash flows from investing activities:Purchase of minority interest by consolidated subsidiary
    
    
    
    
    
    
    (1,399
    )Property and equipment, net
    
    
    (168
    )
    
    
    (774
    )Contributions to Acquisition Partnerships and Servicing Entities
    
    
    (9,732
    )
    
    
    (11,367
    )Distributions from Acquisition Partnerships and Servicing Entities
    
    
    22,074
    
    
    
    20,564Net cash provided by investing activities
    
    
    12,174
    
    
    
    7,024Cash flows from financing activities:Borrowings under notes payable to affiliates
    
    
    57,693
    
    
    
    18,090Borrowing under notes payable  other
    
    
    3,074
    
    
    
    3,241Payments of notes payable to affiliates
    
    
    (28,068
    )
    
    
    (22,018
    )Payments of notes payable  other
    
    
    (1,295
    )
    
    
    (2,930
    )Refund on unconverted Common Stock
    
    
    
    
    
    
    144Payment of dividends on preferred stock
    
    
    (1,392
    )
    
    
    Payments for tender of redeemable preferred stock
    
    
    
    
    
    
    (50
    )Proceeds from issuance of common stock
    
    
    121
    
    
    
    3Net cash provided by (used in) financing activities
    
    
    30,133
    
    
    
    (3,520
    )Net cash provided by (used) in continuing operations
    
    
    1,958
    
    
    
    (2,063
    )Net cash provided by discontinued operations
    
    
    562
    
    
    
    998Net increase (decrease) in cash and cash equivalents
    
    
    2,520
    
    
    
    (1,065
    )Cash and cash equivalents, beginning of period
    
    
    2,745
    
    
    
    4,118Cash and cash equivalents, end of period
    
    $
    5,265
    
    
    $
    3,053Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    5,073
    
    
    $
    4,785Income taxes
    
    
    779
    
    
    
    314Non-cash financing activities:Dividends accumulated and not paid on preferred stock
    
    
    
    
    
    
    133
 See accompanying notes to consolidated financial statements. 5




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2004, the
Company was engaged in one principal reportable segment  portfolio asset
acquisition and resolution. The portfolio asset acquisition and resolution
business involves acquiring portfolios of loans, real estate and
other assets or single assets (collectively
referred to as Portfolios or 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. On September 21, 2004, FirstCity and certain of its
subsidiaries entered into a Securities Purchase Agreement relating to the sale
of a 31% beneficial ownership interest in Drive Financial Services LP (Drive)
and its general partner, Drive GP LLC, to IFA Drive GP Holdings LLC (IFA-GP),
IFA Drive LP Holdings LLC (IFA-LP) and Drive Management LP (MG-LP). As a
result of the execution of the sale agreement, the consumer lending segment
conducted through Drive was no longer considered a principal reportable segment
and is treated as a discontinued operation. The unaudited consolidated financial statements of FirstCity 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 September 30, 2004, its results of operations for the
three and nine month periods ended September 30, 2004 and 2003 and cash flows
for the nine month periods ended September 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 earnings per
common share calculations. At September 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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net earnings to common stockholders, as reported
    
    $
    2,908
    
    
    $
    1,840
    
    
    $
    11,056
    
    
    $
    5,505Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (118
    )
    
    
    (54
    )
    
    
    (248
    )
    
    
    (152
    )Pro forma net earnings to common stockholders
    
    $
    2,790
    
    
    $
    1,786
    
    
    $
    10,808
    
    
    $
    5,353Net earnings per common share:Basic  as reported
    
    $
    0.26
    
    
    $
    0.16
    
    
    $
    0.99
    
    
    $
    0.49Basic  pro forma
    
    $
    0.25
    
    
    $
    0.16
    
    
    $
    0.96
    
    
    $
    0.48Diluted  as reported
    
    $
    0.25
    
    
    $
    0.16
    
    
    $
    0.94
    
    
    $
    0.49Diluted  pro forma
    
    $
    0.24
    
    
    $
    0.16
    
    
    $
    0.91
    
    
    $
    0.48
 6




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) (2) 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. 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. At
September 30, 2004, FirstCity had $95 million total debt outstanding
with Bank of Scotland and BoS(USA) Inc. (the Senior Lenders). This debt was
comprised of $53 million in term loans, $4 million under a $5 million revolving
credit loan and a $38 million under a $45 million revolving portfolio
acquisition loan facility. As discussed in note 4, on November 1, 2004,
FirstCity completed the sale of the Companys 31% beneficial ownership interest
in Drive and its general partner, Drive GP LLC, which resulted in net proceeds
of $86.8 million. A portion of the proceeds was used to pay off the $53
million in term loans and the $4 million revolving credit loan. On
November 12, 2004, FirstCity and Bank of Scotland restructured the $5
million revolving credit loan and the $45 million revolving portfolio
acquisition facility into a $96 million revolving acquisition facility that
matures in November 2008. This new facility will be used to finance the senior
debt and equity portion of distressed asset pool purchases and to provide for
the issuance of Letters of Credit and working capital loans. The $96 million
facility (i) allows loans to be made in Euros up to a maximum amount in Euros
that is equivalent to $35 million U.S. dollars, (ii) allows loans to be made
for acquisition of Portfolio Assets in Latin America of up
to $35 million, (iii) provides for an interest rate of Libor plus 2.50% to
2.75%, (iv) provides for a commitment fee of 0.20% of the unused balance of
the revolving acquisition facility, and (v) provides that the aggregate
borrowings under the facility does not exceed 60% of the net present value of
FirstCitys interest in Portfolio Assets in Acquisition Partnerships pledged to
secure the acquisition facility. BoS
(USA) Inc. (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. 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 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 September 30,
2004, approximately $23.2 million was outstanding under this facility. On
November 12, 2004, the outstanding balance on the Cargill Facility was paid
down to zero out of a portion on the proceeds received on the sale of Drive. 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 $1.3 million at September 30, 2004. The estimated amount that would be paid
to the minority interest holder if the instruments were to be settled at
September 30, 2004 is $.7 million. 7




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) 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 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 September 30, 2004, FirstCitys maximum
exposure to loss as a result of its involvement with the VIEs is $33 million. (4) Discontinued Operations Discontinued operations are comprised of two components previously
reported as the Companys residential and commercial mortgage banking business
(Mortgage) and the consumer lending business conducted through the Companys
minority interest investment in Drive (Consumer). Earnings from discontinued
operations is summarized as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Mortgage
    
    $
    (950
    )
    
    $
    
    
    
    $
    (1,200
    )
    
    $
    (420
    )Consumer
    
    
    2,906
    
    
    
    1,491
    
    
    
    9,184
    
    
    
    4,118Net earnings from discontinued operations
    
    $
    1,956
    
    
    $
    1,491
    
    
    $
    7,984
    
    
    $
    3,698
 Mortgage The Company recorded a provision of $1.2 million in the first nine months
of 2004 and $.4 million in the first nine months of 2003 for additional losses
from discontinued mortgage operations. The provisions primarily relate to
reductions in anticipated future cash flows from securitization trusts due to
increased prepayment speeds and losses, and a higher projected interest cost of
the underlying bonds. The net assets from discontinued mortgage operations
consist of the following: September 30,
    
    December 31,2004
    
    2003Estimated future gross cash receipts on residual interests in securitizations
    
    $
    4,605
    
    
    $
    6,399Accrual for loss on operations and disposal of discontinued operations, net
    
    
    (217
    )
    
    
    (249
    )Net assets of discontinued mortgage operations
    
    $
    4,388
    
    
    $
    6,150
 The
only assets remaining from discontinued mortgage 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
32% to 50% for fixed rate loans and 35% to 36% for variable rate loans. Overall
loss rates are estimated from 3% to 13% of collateral. 8




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Consumer On September 21, 2004, FirstCity and certain of its subsidiaries entered
into a definitive agreement to sell a 31% beneficial ownership interest in
Drive and its general partner, Drive GP LLC, to IFA-GP, IFA-LP and MG-LP for a
total purchase price of $108.5 million in cash, resulting in distributions and
payments to FirstCity in the aggregate amount of $86.8 million in cash, from
various sources. The sale was completed on November 1, 2004, and net cash
proceeds from these transactions were primarily used to pay off debt. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the consolidated financial statements have been
reclassified for all periods presented to reflect the operations, assets and
liabilities of the consumer business segment as discontinued operations. The
assets and liabilities of such operations have been classified as Consumer
assets held for sale and Liabilities from discontinued consumer operations,
respectively on the September 30, 2004 and December 31, 2003 balance sheets and
consist of the following: September 30,
    
    December 31,2004
    
    2003Equity investment in Drive
    
    $
    30,502
    
    
    $
    15,667Other assets
    
    
    6,271
    
    
    
    Total consumer assets held for sale
    
    $
    36,773
    
    
    $
    15,667Notes payable  affiliate
    
    $
    16,000
    
    
    $
    16,000Minority interest
    
    
    6,095
    
    
    
    3,131Other liabilities
    
    
    8,001
    
    
    
    1Total liabilities from discontinued consumer operations
    
    $
    30,096
    
    
    $
    19,132
 The net earnings from discontinued consumer operations were classified on
the consolidated statements of operations for the three and nine months ended
September 30, 2004 and 2003 as Earnings from discontinued operations.
Summarized results of discontinued consumer operations are as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Equity in earnings
    
    $
    4,680
    
    
    $
    2,025
    
    
    $
    14,835
    
    
    $
    5,602Interest and fees on notes payable to affiliate
    
    
    (584
    )
    
    
    (85
    )
    
    
    (2,001
    )
    
    
    (273
    )Other expenses
    
    
    
    
    
    
    (21
    )
    
    
    (4
    )
    
    
    (33
    )Income taxes
    
    
    (255
    )
    
    
    (24
    )
    
    
    (682
    )
    
    
    (59
    )Minority interest
    
    
    (935
    )
    
    
    (404
    )
    
    
    (2,964
    )
    
    
    (1,119
    )Earnings from discontinued consumer operations
    
    $
    2,906
    
    
    $
    1,491
    
    
    $
    9,184
    
    
    $
    4,118
 The
pro forma consolidated balance sheet as of September 30, 2004 and
the statements of operations for the three and nine months ended September 30, 2004
and 2003 and the year ended December 31, 2003 illustrating the effects of the
Drive sale as if it has occurred as of the beginning of the periods are as
follows: 9




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Pro Forma Condensed Consolidated Balance Sheet at September 30, 2004
(Dollars in thousands)
(Unaudited) Pro Forma AdjustmentsHistorical
    
    (A)
    
    (B)
    
    Other
    
    
    
    
    
    Pro FormaAssetsCash and cash equivalents
    
    $
    5,265
    
    
    $
    86,800
    
    
    $
    (85,148
    )
    
    $
    (177
    )
    
    
    (C
    )
    
    $
    6,740Portfolio Assets, net
    
    
    33,631
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,631Loans receivable from Acquisition Partnerships held for investment
    
    
    19,445
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,445Equity investments
    
    
    55,868
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,868Deferred tax asset, net
    
    
    20,101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,101Service fees receivable from affiliates
    
    
    886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    886Other assets, net
    
    
    7,596
    
    
    
    
    
    
    
    (553
    )
    
    
    (27
    )
    
    
    (C
    )
    
    
    7,016Drive assets held for sale
    
    
    36,773
    
    
    
    (30,502
    )
    
    
    
    
    
    
    (6,271
    )
    
    
    (D
    )
    
    
    Net assets of discontinued operations
    
    
    4,388
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,388Total Assets
    
    $
    183,953
    
    
    $
    56,298
    
    
    $
    (85,701
    )
    
    $
    (6,475
    )
    
    
    
    
    
    $
    148,075Liabilities and Stockholders EquityNotes payable to affiliates
    
    $
    105,852
    
    
    $
    
    
    
    $
    (67,798
    )
    
    $
    
    
    
    
    
    
    
    $
    38,054Preferred stock subject to mandatory redemption
    
    
    2,652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,652Minority interest
    
    
    1,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,305Liabilities from discontinued operations
    
    
    30,096
    
    
    
    (6,095
    )
    
    
    (16,001
    )
    
    
    
    
    
    
    
    
    
    
    8,000Other liabilities
    
    
    5,327
    
    
    
    
    
    
    
    (386
    )
    
    
    
    
    
    
    
    
    
    
    4,941Total Liabilities
    
    
    145,232
    
    
    
    (6,095
    )
    
    
    (84,185
    )
    
    
    
    
    
    
    
    
    
    
    54,952Total Stockholders Equity
    
    
    38,721
    
    
    
    62,393
    
    
    
    (1,516
    )
    
    
    (204
    )
    
    
    (C
    )
    
    
    93,123(6,271
    )
    
    
    (D
    )Total Liabilities and Stockholders Equity
    
    $
    183,953
    
    
    $
    56,298
    
    
    $
    (85,701
    )
    
    $
    (6,475
    )
    
    
    
    
    
    $
    148,075
  (A)
    
    Record proceeds of sale of FirstCitys 31% interest in Drive.(B)
    
    Record $83.8 million pay down of debt and interest, payment of $1.3 million of debt fees to Bank of Scotland and write-off $1.3 million of unamortized loan fees relating to the
paid off debt (net of $.7 million of new loan fees capitalized).(C)
    
    Record $204 thousand estimated closing costs less $27 thousand fees prepaid.(D)
    
    Record write-off remaining $6.3 million unamortized loan discount relating to $8.0 million accrued participation liability owed to Bank of Scotland. 10




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Pro Forma Condensed Consolidated Statements of Operations
(Dollars in thousands except per share data)
(Unaudited) Three Months Ended
    
    Three Months EndedSeptember 30, 2004
    
    September 30, 2003Pro Forma
    
    
    
    
    
    
    
    
    
    Pro FormaAdjustments
    
    
    
    
    
    
    
    
    
    AdjustmentsHistorical
    
    (A)
    
    Pro Forma
    
    Historical
    
    (A)
    
    Pro FormaRevenues:Servicing fees
    
    $
    3,328
    
    
    $
    
    
    
    $
    3,328
    
    
    $
    3,574
    
    
    $
    
    
    
    $
    3,574Gain on resolution of Portfolio Assets
    
    
    601
    
    
    
    
    
    
    
    601
    
    
    
    112
    
    
    
    
    
    
    
    112Equity in earnings of investments
    
    
    3,656
    
    
    
    
    
    
    
    3,656
    
    
    
    3,162
    
    
    
    
    
    
    
    3,162Interest income
    
    
    903
    
    
    
    
    
    
    
    903
    
    
    
    599
    
    
    
    
    
    
    
    599Other
    
    
    454
    
    
    
    
    
    
    
    454
    
    
    
    545
    
    
    
    
    
    
    
    545Total revenues
    
    
    8,942
    
    
    
    
    
    
    
    8,942
    
    
    
    7,992
    
    
    
    
    
    
    
    7,992Expenses:Interest and fees on notes payable
    
    
    2,152
    
    
    
    (1,516
    )
    
    
    636
    
    
    
    1,856
    
    
    
    (1,493
    )
    
    
    363Salaries and benefits
    
    
    3,673
    
    
    
    
    
    
    
    3,673
    
    
    
    3,823
    
    
    
    
    
    
    
    3,823Provision for loan and impairment losses
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    23
    
    
    
    
    
    
    
    23Occupancy, data processing, communication and
other
    
    
    2,141
    
    
    
    
    
    
    
    2,141
    
    
    
    2,168
    
    
    
    
    
    
    
    2,168Income taxes
    
    
    (11
    )
    
    
    
    
    
    
    (11
    )
    
    
    (195
    )
    
    
    
    
    
    
    (195
    )Minority interest
    
    
    34
    
    
    
    
    
    
    
    34
    
    
    
    (32
    )
    
    
    
    
    
    
    (32
    )Total expenses
    
    
    7,990
    
    
    
    (1,516
    )
    
    
    6,474
    
    
    
    7,643
    
    
    
    (1,493
    )
    
    
    6,150Earnings from continuing operations
    
    $
    952
    
    
    $
    1,516
    
    
    $
    2,468
    
    
    $
    349
    
    
    $
    1,493
    
    
    $
    1,842Earnings from continuing operations per common
shareBasic
    
    $
    0.09
    
    
    
    
    
    
    $
    0.22
    
    
    $
    0.03
    
    
    
    
    
    
    $
    0.16Diluted
    
    $
    0.08
    
    
    
    
    
    
    $
    0.21
    
    
    $
    0.03
    
    
    
    
    
    
    $
    0.16Weighted average common shares outstandingBasic
    
    
    11,236
    
    
    
    
    
    
    
    11,236
    
    
    
    11,204
    
    
    
    
    
    
    
    11,204Diluted
    
    
    11,837
    
    
    
    
    
    
    
    11,837
    
    
    
    11,371
    
    
    
    
    
    
    
    11,371
  (A)
    
    To eliminate additional interest and fees on notes payable that would not have been incurred if the transaction had been completed at
the beginning of the period: 2004 interest savings from paydown of $67.8 million x average rate of 7.74% ÷ 4 = $1.3 million and
amortization of loan fees of $.2 million; 2003 interest savings from paydown of $67.8 million x average rate of 7.50% ÷ 4 = $1.3
million and amortization of loan fees of $.2 million. 11




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Pro Forma Condensed Consolidated Statements of Operations
(Dollars in thousands except per share data)
(Unaudited) Nine Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2003Pro Forma
    
    
    
    
    
    
    
    
    
    Pro FormaAdjustments
    
    
    
    
    
    
    
    
    
    AdjustmentsHistorical
    
    (A)
    
    Pro Forma
    
    Historical
    
    (A)
    
    Pro FormaRevenues:Servicing fees
    
    $
    10,076
    
    
    $
    
    
    
    $
    10,076
    
    
    $
    11,167
    
    
    $
    
    
    
    $
    11,167Gain on resolution of Portfolio Assets
    
    
    838
    
    
    
    
    
    
    
    838
    
    
    
    1,079
    
    
    
    
    
    
    
    1,079Equity in earnings of investments
    
    
    10,470
    
    
    
    
    
    
    
    10,470
    
    
    
    8,609
    
    
    
    
    
    
    
    8,609Interest income
    
    
    2,100
    
    
    
    
    
    
    
    2,100
    
    
    
    2,770
    
    
    
    
    
    
    
    2,770Other
    
    
    2,236
    
    
    
    
    
    
    
    2,236
    
    
    
    1,161
    
    
    
    
    
    
    
    1,161Total revenues
    
    
    25,720
    
    
    
    
    
    
    
    25,720
    
    
    
    24,786
    
    
    
    
    
    
    
    24,786Expenses:Interest and fees on notes payable
    
    
    5,836
    
    
    
    (4,476
    )
    
    
    1,360
    
    
    
    5,477
    
    
    
    (4,494
    )
    
    
    983Salaries and benefits
    
    
    11,227
    
    
    
    
    
    
    
    11,227
    
    
    
    11,417
    
    
    
    
    
    
    
    11,417Provision for loan and impairment losses
    
    
    23
    
    
    
    
    
    
    
    23
    
    
    
    1
    
    
    
    
    
    
    
    1Occupancy, data processing, communication and
other
    
    
    5,374
    
    
    
    
    
    
    
    5,374
    
    
    
    5,886
    
    
    
    
    
    
    
    5,886Income taxes
    
    
    145
    
    
    
    
    
    
    
    145
    
    
    
    24
    
    
    
    
    
    
    
    24Minority interest
    
    
    43
    
    
    
    
    
    
    
    43
    
    
    
    41
    
    
    
    
    
    
    
    41Total expenses
    
    
    22,648
    
    
    
    (4,476
    )
    
    
    18,172
    
    
    
    22,846
    
    
    
    (4,494
    )
    
    
    18,352Earnings from continuing operations
    
    $
    3,072
    
    
    $
    4,476
    
    
    $
    7,548
    
    
    $
    1,940
    
    
    $
    4,494
    
    
    $
    6,434Earnings from continuing operations per common share (B)Basic
    
    $
    0.28
    
    
    
    
    
    
    $
    0.67
    
    
    $
    0.16
    
    
    
    
    
    
    $
    0.56Diluted
    
    $
    0.26
    
    
    
    
    
    
    $
    0.64
    
    
    $
    0.16
    
    
    
    
    
    
    $
    0.56Weighted average common shares outstandingBasic
    
    
    11,223
    
    
    
    
    
    
    
    11,223
    
    
    
    11,203
    
    
    
    
    
    
    
    11,203Diluted
    
    
    11,816
    
    
    
    
    
    
    
    11,816
    
    
    
    11,259
    
    
    
    
    
    
    
    11,259
  (A)
    
    To eliminate additional interest and fees on notes payable that would not have been incurred if the transaction had been completed at the
beginning of the period: 2004 interest savings from paydown of $67.8 million x average rate of 7.62% x .75 = $3.9 million and amortization of
loan fees of $.6 million; 2003 interest savings from paydown of $67.8 million x average rate of 7.60% x .75 = $3.9 million and amortization of
loan fees of $.6 million.(B)
    
    Earnings from continuing operations per common share for the nine months ended September 30, 2003 include the effects of $133 thousand
accumulated preferred dividends. 12




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Pro Forma Condensed Consolidated Statements of Operations
For the Year Ended December 31, 2003
(Dollars in thousands except per share data)
(Unaudited) Pro FormaAdjustmentsHistorical
    
    (A)
    
    Pro FormaRevenues:Servicing fees
    
    $
    15,051
    
    
    $
    
    
    
    $
    15,051Gain on resolution of Portfolio Assets
    
    
    1,380
    
    
    
    
    
    
    
    1,380Equity in earnings of investments
    
    
    21,411
    
    
    
    (7,237
    )
    
    
    14,174Interest income
    
    
    3,327
    
    
    
    
    
    
    
    3,327Other
    
    
    1,560
    
    
    
    
    
    
    
    1,560Total revenues
    
    
    42,729
    
    
    
    (7,237
    )
    
    
    35,492Expenses:Interest and fees on notes payable
    
    
    7,855
    
    
    
    (6,353
    )
    
    
    1,502Salaries and benefits
    
    
    15,875
    
    
    
    
    
    
    
    15,875Provision for loan and impairment losses
    
    
    98
    
    
    
    
    
    
    
    98Occupancy, data processing, communication and
other
    
    
    7,518
    
    
    
    (27
    )
    
    
    7,491Income taxes
    
    
    240
    
    
    
    (55
    )
    
    
    185Minority interest
    
    
    1,436
    
    
    
    (1,446
    )
    
    
    (10
    )Total expenses
    
    
    33,022
    
    
    
    (7,881
    )
    
    
    25,141Earnings from continuing operations
    
    $
    9,707
    
    
    $
    644
    
    
    $
    10,351Earnings from continuing operations per common share (B)Basic
    
    $
    0.86
    
    
    
    
    
    
    $
    0.91Diluted
    
    $
    0.85
    
    
    
    
    
    
    $
    0.90Weighted average common shares outstandingBasic
    
    
    11,200
    
    
    
    
    
    
    
    11,200Diluted
    
    
    11,349
    
    
    
    
    
    
    
    11,349
  (A)
    
    To eliminate the results of operations from the
discontinued consumer business segment that would not have been incurred if the transaction had been completed at the beginning
of the period. The elimination of $6.4 million of additional interest and fees on notes
payable includes interest savings from paydown of $83.8 million x average rate of 6.66% =
$5.6 million and amortization of loan fees of $.8 million.(B)
    
    Earnings from continuing operations per common share include the effects of $133 thousand
accumulated preferred dividends in arrears. (5) Portfolio Assets Portfolio Assets are summarized as follows: September 30,
    
    December 31,2004
    
    2003Non-performing Portfolio Assets
    
    $
    56,219
    
    
    $
    27,071Performing Portfolio Assets
    
    
    24,148
    
    
    
    2,682Real estate Portfolios
    
    
    283
    
    
    
    283Total Portfolio Assets
    
    
    80,650
    
    
    
    30,036Adjusted purchase discount required to
reflect Portfolio Assets at carrying value
    
    
    (47,019
    )
    
    
    (25,511
    )Portfolio Assets, net
    
    $
    33,631
    
    
    $
    4,525
 13




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) 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: September 30,
    
    December 31,2004
    
    2003Latin America
    
    $
    17,812
    
    
    $
    13,351Europe
    
    
    144
    
    
    
    2,604Domestic
    
    
    1,489
    
    
    
    1,358$
    19,445
    
    
    $
    17,313
 There were no provisions recorded on these loans during the third 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. Equity method losses which were recorded to reduce the loans and interest
receivable from the Mexican partnerships were $.4 million and $1.8 million
during the first nine 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: 14




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Condensed Combined Balance Sheets September 30,
    
    December 31,2004
    
    2003Assets
    
    $
    456,707
    
    
    $
    525,493Liabilities
    
    $
    388,482
    
    
    $
    441,677Net equity
    
    
    68,225
    
    
    
    83,816$
    456,707
    
    
    $
    525,493Equity investment in Acquisition Partnerships
    
    $
    51,179
    
    
    $
    53,098Equity investment in servicing entities
    
    
    4,689
    
    
    
    4,381$
    55,868
    
    
    $
    57,479
 Condensed Combined Summary of Operations Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Proceeds from resolution of Portfolio Assets
    
    $
    72,738
    
    
    $
    69,506
    
    
    $
    198,370
    
    
    $
    187,699Gain on resolution of Portfolio Assets
    
    
    21,842
    
    
    
    29,169
    
    
    
    64,551
    
    
    
    72,403Interest income on performing Portfolio Assets
    
    
    2,365
    
    
    
    1,756
    
    
    
    7,530
    
    
    
    5,884Net earnings (loss)
    
    $
    11,849
    
    
    $
    (7,880
    )
    
    $
    28,704
    
    
    $
    (11,838
    )Equity in earnings of Acquisition Partnerships
    
    $
    3,507
    
    
    $
    3,007
    
    
    $
    9,844
    
    
    $
    8,135Equity in earnings of servicing entities
    
    
    149
    
    
    
    155
    
    
    
    626
    
    
    
    474$
    3,656
    
    
    $
    3,162
    
    
    $
    10,470
    
    
    $
    8,609
 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. September 30,
    
    December 31,2004
    
    2003Assets:Domestic:WAMCO Partnerships
    
    $
    171,665
    
    
    $
    205,134MinnTex Investment Partners LP
    
    
    1,002
    
    
    
    1,530Other
    
    
    10,319
    
    
    
    10,164Latin America
    
    
    186,295
    
    
    
    186,431Europe
    
    
    87,426
    
    
    
    122,234$
    456,707
    
    
    $
    525,493
 15




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) September 30,
    
    December 31,2004
    
    2003Equity (deficit):Domestic:WAMCO Partnerships
    
    $
    79,388
    
    
    $
    84,589MinnTex Investment Partners LP
    
    
    909
    
    
    
    1,418Other
    
    
    6,075
    
    
    
    6,218Latin America
    
    
    (87,380
    )
    
    
    (86,412
    )Europe
    
    
    69,233
    
    
    
    78,003$
    68,225
    
    
    $
    83,816Equity investment in Acquisition Partnerships:Domestic:WAMCO Partnerships
    
    $
    33,734
    
    
    $
    33,413MinnTex Investment Partners LP
    
    
    300
    
    
    
    514Other
    
    
    2,959
    
    
    
    3,037Latin America
    
    
    1,257
    
    
    
    1,021Europe
    
    
    12,929
    
    
    
    15,113$
    51,179
    
    
    $
    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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Domestic:WAMCO Partnerships
    
    $
    7,743
    
    
    $
    8,102
    
    
    $
    22,592
    
    
    $
    26,143MinnTex Investment Partners LP
    
    
    2,110
    
    
    
    3,200
    
    
    
    6,914
    
    
    
    9,908Other
    
    
    22
    
    
    
    59
    
    
    
    70
    
    
    
    97Latin America
    
    
    7,473
    
    
    
    7,113
    
    
    
    18,284
    
    
    
    19,251Europe
    
    
    8,821
    
    
    
    12,979
    
    
    
    26,699
    
    
    
    24,425$
    26,169
    
    
    $
    31,453
    
    
    $
    74,559
    
    
    $
    79,824Net earnings (loss):Domestic:WAMCO Partnerships
    
    $
    3,822
    
    
    $
    4,776
    
    
    $
    10,841
    
    
    $
    15,032MinnTex Investment Partners LP
    
    
    1,885
    
    
    
    2,841
    
    
    
    6,169
    
    
    
    8,751Other
    
    
    (165
    )
    
    
    (184
    )
    
    
    (549
    )
    
    
    (414
    )Latin America
    
    
    562
    
    
    
    (24,391
    )
    
    
    (5,167
    )
    
    
    (51,126
    )Europe
    
    
    5,745
    
    
    
    9,078
    
    
    
    17,410
    
    
    
    15,919$
    11,849
    
    
    $
    (7,880
    )
    
    $
    28,704
    
    
    $
    (11,838
    )Equity in earnings (loss) of AcquisitionPartnerships:Domestic:WAMCO Partnerships
    
    $
    1,852
    
    
    $
    1,599
    
    
    $
    5,099
    
    
    $
    5,284MinnTex Investment Partners LP
    
    
    622
    
    
    
    937
    
    
    
    2,036
    
    
    
    2,888Other
    
    
    (54
    )
    
    
    (56
    )
    
    
    (172
    )
    
    
    (81
    )Latin America
    
    
    (70
    )
    
    
    (1,104
    )
    
    
    (849
    )
    
    
    (2,774
    )Europe
    
    
    1,157
    
    
    
    1,631
    
    
    
    3,730
    
    
    
    2,818$
    3,507
    
    
    $
    3,007
    
    
    $
    9,844
    
    
    $
    8,135
 16




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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 nine month periods ended September 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 September 30, 2004 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    536
    
    
    $
    693
    
    
    $
    2,401
    
    
    $
    22,301
    
    
    $
    25,931Cost of Portfolio Assets resolved
    
    
    198
    
    
    
    468
    
    
    
    1,780
    
    
    
    17,840
    
    
    
    20,286Gain on resolution of Portfolio Assets
    
    
    338
    
    
    
    225
    
    
    
    621
    
    
    
    4,461
    
    
    
    5,645Interest income on performing Portfolio Assets
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    1,463
    
    
    
    1,497Interest and fees expense  affiliate
    
    
    
    
    
    
    (107
    )
    
    
    
    
    
    
    (525
    )
    
    
    (632
    )Interest and fees expense  other
    
    
    
    
    
    
    (23
    )
    
    
    (103
    )
    
    
    (419
    )
    
    
    (545
    )Provision for loan and impairment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (667
    )
    
    
    (667
    )Service fees  affiliate
    
    
    (16
    )
    
    
    (46
    )
    
    
    (86
    )
    
    
    (909
    )
    
    
    (1,057
    )General, administrative and operating expenses
    
    
    (490
    )
    
    
    (58
    )
    
    
    (112
    )
    
    
    (360
    )
    
    
    (1,020
    )Other income, net
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    597
    
    
    
    601Net earnings (loss)
    
    $
    (167
    )
    
    $
    26
    
    
    $
    322
    
    
    $
    3,641
    
    
    $
    3,822Three
Months Ended September 30, 2003FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    2,682
    
    
    $
    1,998
    
    
    $
    5,163
    
    
    $
    7,720
    
    
    $
    17,563Cost of Portfolio Assets resolved
    
    
    461
    
    
    
    1,553
    
    
    
    3,908
    
    
    
    5,078
    
    
    
    11,000Gain on resolution of Portfolio Assets
    
    
    2,221
    
    
    
    445
    
    
    
    1,255
    
    
    
    2,642
    
    
    
    6,563Interest income on performing Portfolio Assets
    
    
    
    
    
    
    262
    
    
    
    
    
    
    
    1,000
    
    
    
    1,262Interest and fees expense  affiliate
    
    
    
    
    
    
    (169
    )
    
    
    (1
    )
    
    
    (419
    )
    
    
    (589
    )Interest and fees expense  other
    
    
    
    
    
    
    (145
    )
    
    
    (167
    )
    
    
    (82
    )
    
    
    (394
    )Provision for loan and impairment losses
    
    
    (1
    )
    
    
    (32
    )
    
    
    
    
    
    
    (345
    )
    
    
    (378
    )Service fees  affiliate
    
    
    (80
    )
    
    
    (99
    )
    
    
    (178
    )
    
    
    (405
    )
    
    
    (762
    )General, administrative and operating expenses
    
    
    (432
    )
    
    
    (288
    )
    
    
    (232
    )
    
    
    (251
    )
    
    
    (1,203
    )Other income, net
    
    
    
    
    
    
    2
    
    
    
    3
    
    
    
    272
    
    
    
    277Net earnings (loss)
    
    $
    1,708
    
    
    $
    (24
    )
    
    $
    680
    
    
    $
    2,412
    
    
    $
    4,776
 17




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Nine Months Ended September 30, 2004 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    3,479
    
    
    $
    7,265
    
    
    $
    8,854
    
    
    $
    51,794
    
    
    $
    71,392Cost of Portfolio Assets resolved
    
    
    1,146
    
    
    
    5,658
    
    
    
    6,703
    
    
    
    40,469
    
    
    
    53,976Gain on resolution of Portfolio Assets
    
    
    2,333
    
    
    
    1,607
    
    
    
    2,151
    
    
    
    11,325
    
    
    
    17,416Interest income on performing Portfolio Assets
    
    
    
    
    
    
    187
    
    
    
    
    
    
    
    4,371
    
    
    
    4,558Interest and fees expense  affiliate
    
    
    
    
    
    
    (335
    )
    
    
    
    
    
    
    (1,415
    )
    
    
    (1,750
    )Interest and fees expense  other
    
    
    
    
    
    
    (208
    )
    
    
    (347
    )
    
    
    (1,272
    )
    
    
    (1,827
    )Provision for loan and impairment losses
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    (1,248
    )
    
    
    (1,318
    )Service fees  affiliate
    
    
    (104
    )
    
    
    (309
    )
    
    
    (318
    )
    
    
    (2,199
    )
    
    
    (2,930
    )General, administrative and operating expenses
    
    
    (2,478
    )
    
    
    (14
    )
    
    
    (320
    )
    
    
    (1,114
    )
    
    
    (3,926
    )Other income, net
    
    
    3
    
    
    
    3
    
    
    
    5
    
    
    
    607
    
    
    
    618Net earnings (loss)
    
    $
    (246
    )
    
    $
    861
    
    
    $
    1,171
    
    
    $
    9,055
    
    
    $
    10,841
 Nine Months Ended September 30, 2003 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    8,654
    
    
    $
    11,255
    
    
    $
    26,719
    
    
    $
    17,420
    
    
    $
    64,048Cost of Portfolio Assets resolved
    
    
    1,954
    
    
    
    8,467
    
    
    
    20,021
    
    
    
    12,749
    
    
    
    43,191Gain on resolution of Portfolio Assets
    
    
    6,700
    
    
    
    2,788
    
    
    
    6,698
    
    
    
    4,671
    
    
    
    20,857Interest income on performing Portfolio Assets
    
    
    
    
    
    
    1,040
    
    
    
    
    
    
    
    3,154
    
    
    
    4,194Interest and fees expense  affiliates
    
    
    
    
    
    
    (495
    )
    
    
    (596
    )
    
    
    (1,018
    )
    
    
    (2,109
    )Interest and fees expense  other
    
    
    
    
    
    
    (555
    )
    
    
    (392
    )
    
    
    (414
    )
    
    
    (1,361
    )Provision for loan losses
    
    
    (1
    )
    
    
    (206
    )
    
    
    
    
    
    
    (697
    )
    
    
    (904
    )Service fees  affiliate
    
    
    (259
    )
    
    
    (481
    )
    
    
    (889
    )
    
    
    (952
    )
    
    
    (2,581
    )General, administrative and operating expenses
    
    
    (2,533
    )
    
    
    (490
    )
    
    
    (540
    )
    
    
    (593
    )
    
    
    (4,156
    )Other income, net
    
    
    
    
    
    
    7
    
    
    
    10
    
    
    
    1,075
    
    
    
    1,092Net earnings
    
    $
    3,907
    
    
    $
    1,608
    
    
    $
    4,291
    
    
    $
    5,226
    
    
    $
    15,032
 Statements of operations for MinnTex Investment Partners LP for the three
and nine month periods ended September 30, 2004 and 2003 follow: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Proceeds from resolution of Portfolio Assets
    
    $
    2,182
    
    
    $
    3,523
    
    
    $
    7,234
    
    
    $
    11,340Cost of Portfolio Assets resolved
    
    
    73
    
    
    
    324
    
    
    
    323
    
    
    
    1,437Gain on resolution of Portfolio Assets
    
    
    2,109
    
    
    
    3,199
    
    
    
    6,911
    
    
    
    9,903Service fees  affiliate
    
    
    (218
    )
    
    
    (352
    )
    
    
    (723
    )
    
    
    (1,134
    )General, administrative and operating expenses
    
    
    (7
    )
    
    
    (7
    )
    
    
    (22
    )
    
    
    (22
    )Other income
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    4Net earnings
    
    $
    1,885
    
    
    $
    2,841
    
    
    $
    6,169
    
    
    $
    8,751
 (8) Segment Reporting The Company is engaged in
one reportable segment - Portfolio Asset
acquisition and resolution. 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 following is a summary of results
of operations for the Portfolio Asset acquisition and resolution segments and
reconciliation to earnings from continuing operations for the three months and
the nine months ended September 30, 2004 and 2003. 18




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Portfolio Asset Acquisition and Resolution:Revenues:Servicing fees
    
    $
    3,328
    
    
    $
    3,574
    
    
    $
    10,076
    
    
    $
    11,167Gain on resolution of Portfolio Assets
    
    
    601
    
    
    
    112
    
    
    
    838
    
    
    
    1,079Equity in earnings of investments
    
    
    3,656
    
    
    
    3,162
    
    
    
    10,470
    
    
    
    8,609Interest income
    
    
    902
    
    
    
    598
    
    
    
    2,098
    
    
    
    2,767Other
    
    
    328
    
    
    
    405
    
    
    
    1,767
    
    
    
    888Total
    
    
    8,815
    
    
    
    7,851
    
    
    
    25,249
    
    
    
    24,510Expenses:Interest and fees on notes payable
    
    
    1,174
    
    
    
    587
    
    
    
    2,832
    
    
    
    1,848Salaries and benefits
    
    
    2,851
    
    
    
    2,972
    
    
    
    8,830
    
    
    
    9,117Provision for loan and impairment losses
    
    
    1
    
    
    
    23
    
    
    
    23
    
    
    
    1Occupancy, data processing, communication and other
    
    
    1,110
    
    
    
    1,492
    
    
    
    3,335
    
    
    
    4,062Minority interest
    
    
    34
    
    
    
    (32
    )
    
    
    43
    
    
    
    41Total
    
    
    5,170
    
    
    
    5,042
    
    
    
    15,063
    
    
    
    15,069Operating contribution before direct taxes
    
    $
    3,645
    
    
    $
    2,809
    
    
    $
    10,186
    
    
    $
    9,441Operating contribution, net of direct taxes
    
    $
    3,638
    
    
    $
    3,005
    
    
    $
    10,127
    
    
    $
    9,418Corporate Overhead:Corporate interest expense
    
    
    978
    
    
    
    1,269
    
    
    
    3,004
    
    
    
    3,629Salaries and benefits, occupancy, professional and other
income and expenses, net
    
    
    1,708
    
    
    
    1,387
    
    
    
    4,051
    
    
    
    3,849Earnings from continuing operations
    
    $
    952
    
    
    $
    349
    
    
    $
    3,072
    
    
    $
    1,940
 Revenues from the Portfolio Asset acquisition and resolution segment are
attributable to domestic and foreign operations as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Domestic
    
    $
    4,686
    
    
    $
    4,109
    
    
    $
    13,035
    
    
    $
    13,903Latin America
    
    
    2,751
    
    
    
    1,869
    
    
    
    7,613
    
    
    
    7,089Europe
    
    
    1,378
    
    
    
    1,873
    
    
    
    4,601
    
    
    
    3,518Total
    
    $
    8,815
    
    
    $
    7,851
    
    
    $
    25,249
    
    
    $
    24,510
 Total assets for each of the segments and a reconciliation to total assets is
as follows: September 30,
    
    December 31,2004
    
    2003Cash
    
    $
    5,265
    
    
    $
    2,745Portfolio acquisition and resolution assetsDomestic
    
    
    72,210
    
    
    
    42,872Latin America
    
    
    19,198
    
    
    
    14,468Europe
    
    
    18,490
    
    
    
    23,088Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Other non-earning assets, net
    
    
    7,528
    
    
    
    7,048Net assets of discontinued operations
    
    
    4,388
    
    
    
    6,150Consumer assets held for sale
    
    
    36,773
    
    
    
    15,667Total assets
    
    $
    183,953
    
    
    $
    132,139
 19




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) (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. In August 2000, Consumer Corp. and Funding LP contributed all of the assets utilized in the
operations of the automobile finance operation to Drive pursuant to the terms
of a Contribution and Assumption Agreement by and between Consumer Corp. and
Drive, and a Contribution and Assumption Agreement by and between Funding LP
and Drive (collectively, the Contribution Agreements). Drive assumed
substantially all of the liabilities of the automobile finance operation as set
forth in the Contribution Agreements. In addition, pursuant to the
terms of a Securities Purchase Agreement dated as of August 18,
2000 (the 2000 Securities Purchase Agreement), by and
among FirstCity, Consumer Corp., FirstCity Funding LP (Funding
LP), and FirstCity Funding GP Corp. (Funding GP),
IFA-GP and IFA-LP; FirstCity, Consumer Corp., Funding LP and Funding GP made various
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 2000 Securities Purchase Agreement or
otherwise made by the Company, Consumer Corp. or Funding LP in connection with
the transaction. The indemnity obligation under the 2000 Securities Purchase
Agreement survives for a period of seven (7) years from August 25, 2000 (the
2000 Closing Date) with respect to tax-related representations and warranties and
for thirty months from the 2000 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 2000 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. On September 21, 2004, FirstCity, Consumer Corp., Funding LP and Funding
GP entered into the a Securities Purchase Agreement to sell a 31% beneficial
ownership interest in Drive and its general partner, Drive GP LLC, to IFA GP,
IFA LP and MG-LP (the 2004 Securities Purchase Agreement). In the 2004
Securities Purchase Agreement, FirstCity, Consumer Corp., Funding LP and
Funding GP made various representations and warranties concerning (i) their
respective organizations, (ii) their power and authority to enter into the 2004
Securities Purchase Agreement and the transactions contemplated therein, (iii)
the ownership of the limited partnership interests in Drive by Funding LP, (iv)
the ownership of membership interests in Drive-GP by Consumer Corp., and (iv)
the capital structure of Funding LP. FirstCity, Consumer Corp., Funding LP and
Funding GP also agreed to indemnify BoS (USA), IFA-GP, IFA-LP and MG-LP from
damages resulting from a breach of any representation or warranty contained in
the 2004 Securities Purchase Agreement or otherwise made by FirstCity, Consumer
Corp. or Funding LP in connection with the transaction. The indemnity
obligations under the 2004 Securities Purchase Agreement survive for a maximum
period of five (5) years from November 1, 2004. Neither FirstCity, Consumer
Corp., Funding LP, or Funding GP is required to make any payments as a result
of the indemnity provided under the 2004 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. The Company has recently discovered that it may have offered and sold
unregistered plan interests to its employees through its FirstCity Financial
Corporation Employees Profit Sharing and Retirement Plan. Such sales may
have violated Section 5 of the Securities Act of 1933 (the Act), in which
case the Company could be liable for rescission to such employees under
Section 12(a)(1) during the one year period following the sales. The Company
is currently evaluating the legal issues involved with the foregoing to
determine whether any securities laws have been violated, and, if so, how it
will comply with such laws. 20




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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. During the third quarter of 2004, the Company recorded earnings to common
stockholders on a diluted basis of $2.9 million or $.25 per common share. The
operating contribution from the Portfolio Asset acquisition and resolution
segment was $3.6 million compared with $3.0 million for the same period in
2003. The Company was able to invest $27.4 million in portfolio acquisitions
of $36 million during the quarter of which $27 million was purchased in the
U.S. and $9 million in Mexico. This quarters investment activity represents
the largest quarter in portfolio acquisition investments in the Companys
history. In the third quarter of 2004, FirstCity announced its intention to sell
its 31% beneficial ownership interest in Drive. This sale was completed on
November 1, 2004 and will have an estimated positive impact to the Companys
fourth quarter earnings of $54.4 million. The $86.8 million proceeds from the
sale were primarily used to retire debt. Following the sale, FirstCity
and Bank of Scotland restructured the existing $50 million revolving credit
facility into a $96 million revolving acquisition facility that matures in
November 2008. The effects of the sale of the ownership interest in Drive will be
reflected in the fourth quarter 2004 results. However, because Drive represents
the consumer lending segment, which FirstCity is exiting, the Drive earnings
for the third quarter were classified as earnings from discontinued
operations. It should be noted that the estimated impact of $54.4 million
realized from the sale and the anticipated reduced interest costs, are not
reflected in the third quarter. Therefore, earnings from continuing operations
as reflected in the third quarter financials are not a clear indicator of what
earnings will be going forward. The completion of the sale of Drive gives
FirstCity a strong equity base and new liquidity with which to grow the
Portfolio Asset acquisition and resolution business. The pro forma impact of
this sale on historical financial statements is represented in footnote 4 of
the consolidated financial statements. Although the Companys primary revenues are generated by the Portfolio
Asset acquisition and resolution, other items such as interest expense and the
effects of discontinued mortgage operations could have an impact on net income.
During the third quarter 2004, corporate interest and overhead was up slightly
when compared to the third quarter 2003 and provisions from discontinued
mortgage operations were $950,000 in the third quarter 2004 compared to zero in
2003. The Company received $193,000 and $1.4 million in cash flow from the
residual interests during the third 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 nine months ended
September 30, 2004 and 2003, respectively, are detailed below (dollars in
thousands except per share data): 21




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Portfolio Asset Acquisition and Resolution
    
    $
    3,638
    
    
    $
    3,005
    
    
    $
    10,127
    
    
    $
    9,418Corporate interest
    
    
    (978
    )
    
    
    (1,269
    )
    
    
    (3,004
    )
    
    
    (3,629
    )Corporate overhead
    
    
    (1,708
    )
    
    
    (1,387
    )
    
    
    (4,051
    )
    
    
    (3,849
    )Earnings from continuing operations
    
    
    952
    
    
    
    349
    
    
    
    3,072
    
    
    
    1,940Accrued preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )Earnings from discontinued operations
    
    
    1,956
    
    
    
    1,491
    
    
    
    7,984
    
    
    
    3,698Net earnings to common stockholders
    
    $
    2,908
    
    
    $
    1,840
    
    
    $
    11,056
    
    
    $
    5,505Diluted earnings per common share
    
    $
    0.25
    
    
    $
    0.16
    
    
    $
    0.94
    
    
    $
    0.49
 Results of Operations The following discussion and analysis should be read in conjuntion with
the Consolidated Financial Statements of the Company (including the Notes
thereto) included elsewhere in this Quarterly Report on Form 10-Q. Third Quarter 2004 Compared to Third Quarter 2003 The Company reported net earnings of $2.9 million in the third quarter of
2004 compared to earnings of $1.8 million in the third quarter of 2003. On a
per share basis, diluted net earnings to common stockholders were $.25 in the
third quarter of 2004 compared to earnings of $.16 in the third quarter of
2003. Portfolio Asset Acquisition and Resolution The operating contribution from the Portfolio Asset acquisition and
resolution segment was $3.6 million in the third quarter of 2004 compared to
$3.0 million in the third quarter of 2003. FirstCity invested
$27.4 in Portfolio acquisitions during the third quarter of 2004
through wholly-owned subsidiaries and Acquisition Partnerships,
compared to $3.9 million in the third quarter of
2003. The quarter end investment in wholly-owned Portfolio Assets increased to
$33.6 million from $4.1 million at September 30, 2004 and 2003, respectively,
as a result of recent acquisitions. Servicing fee revenues.Servicing fee revenues decreased by 7% to $3.3
million in the third quarter of 2004 from $3.6 million in the third quarter of
2003 primarily due to decreased service fees from the Mexican partnerships
related to a reduction in operating costs for Mexico. For the Mexican
Acquisition Partnerships, FirstCity earns a servicing fee based on cost of
servicing plus a profit margin. Gain on resolution of Portfolio Assets.The net gain on resolution of
Portfolio Assets increased from $.1 million in the third quarter of 2003 to $.6
million in the third quarter of 2004 primarily due to three Portfolios
generating proceeds of $2.3 million and a net gain of $.5 million during the
third quarter of 2004. Equity in earnings of investments.Equity in earnings of Acquisition
Partnerships increased 17% to $3.5 million in the third quarter of 2004
compared to $3.0 million in the third 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
was flat from period to period.
    
    Latin America- Equity in losses of Latin American Acquisition
Partnerships were $70,000 in the third quarter of 2004 compared to
equity in losses of $1.1 million in 2003. These partnerships reflected
net earnings of $562,000 in the third quarter of 2004 compared to a net
loss of $24.4 million in 2003. Approximately $14 million of the earnings
in 2003 were due to foreign exchange gains recognized by the
partnerships. In the third quarter of 2004, the partnerships recorded
$2.0 million of foreign exchange losses. In addition, $3.5 million of
interest expense was recorded in the third quarter of 2004 compared to
$12 million in 2003. This interest is owed to the investors of these
partnerships, of which FirstCity recorded $.6 million and $.4 22




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##### Table of Contents



million, respectively, as interest income. Excluding effects of foreign
currency transactions and interest expense, these partnerships reflected
adjusted net earnings of $2.0 million in the third quarter of 2004 compared
to $2.1 million in 2003.
    
    Europe- Equity in earnings of Acquisition Partnerships located in
France decreased 29% to $1.2 million in the third quarter of 2004 from
$1.6 million in 2003. This decrease is principally due to lower proceeds
received on resolution of Portfolio Assets. During the third quarter of
2004, FirstCity also recorded $.3 million in foreign currency
transactions gains (included in other expenses) relating to investments
in France. Interest income.Interest income increased 53% from $.6 million in the
third quarter of 2003 to $.9 million in the third quarter of 2004. This
increase is primarily due to the purchase of one large performing Portfolio
Asset pool and the addition of loans receivable from two new Acquisition
Partnerships in 2003. Other income.Other income decreased 19% to $.3 million in the third
quarter of 2004 from $.4 million in the third quarter of 2003 primarily as a
result of reimbursements of due diligence expenses being lower this period,
which will vary from period to period. Expenses.Operating expenses were flat period to period. Interest and fees on notes payable increased 100% from $.6 million in the
third quarter of 2003 to $1.2 million in 2004. The average debt for the
quarter increased from $27.1 million in the third quarter of 2003 to $54.3
million in the third quarter of 2004 as a result of acquisitions. The average
cost of borrowing remained at 8.7% from period to period. Salaries and benefits decreased $.1 million or 4% to $2.9 million in the
third quarter of 2004 from $3.0 million in 2003. Total personnel within the
Portfolio Asset acquisition and resolution segment were 199 and 236 at
September 30, 2004 and 2003, respectively. The provision for loan and impairment losses was minimal in the third
quarter of 2004 and 2003. 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 third 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 decreased to
$1.1 million in the third quarter of 2004 compared to $1.5 million in 2003,
primarily as a result of reduced operating costs in Mexico. Minority interest was minimal from period to period. Other Items Affecting Operations 23




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##### Table of Contents



The following items affect the Companys overall results of operations and
are not directly related to the Portfolio Asset acquisition and resolution
business discussed above. Corporate interest and overhead.Company level interest expense decreased
by 23% to $1.0 million in the third quarter of 2004 from $1.3 million in the
third quarter of 2003. Average debt declined to $40.1 million in the third
quarter of 2004 from $46.5 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 increased 23% to $1.7
million in the third quarter of 2004 from $1.4 million in 2003 primarily due to
increased accounting fees related to new regulatory compliance work. Income taxes.Benefit for income taxes was $11,000 and $195,000 in the
third quarters of 2004 and 2003, respectively, and related primarily to state
income 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
third quarters of 2004 and 2003. Discontinued Operations.The Company recorded a provision of $1.0 million
in the third quarter of 2004 for additional losses from discontinued mortgage
operations. No provision was required in the third quarter of 2003. The
additional provision in 2004 primarily relates 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. Also, the
estimated bond interest rates have been increased to account for the current
market trends for a rise in interest rates. 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. As discussed above, On November 1, 2004, FirstCity and certain of its
subsidiaries completed the sale of a 31% beneficial ownership interest in Drive
and its general partner, Drive GP LLC, to IFA-GP, IFA-LP and MG-LP for a total
purchase price of $108.5 million in cash, which resulted in distributions and
payments to FirstCity in the aggregate amount of $86.8 million in cash, from
various sources. Pursuant to SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the consolidated financial statements have been
reclassified for all periods presented to reflect the operations, assets and
liabilities of the consumer business segment as discontinued consumer
operations. Earnings from discontinued consumer operations were $2.9 million
in the third quarter of 2004 compared to $1.5 million in 2003. The increase
primarily relates to equity earnings in Drive, net of minority interest, of
$3.7 million and $1.6 million in the third quarter of 2004 and 2003,
respectively. FirstCity also recorded $482,000 in amortization of deferred
debt discount fees and $255,000 estimated federal income taxes during the third
quarter of 2004. First Nine Months of 2004 Compared to First Nine Months of 2003 The Company reported earnings from continuing operations of $3.1 million
in the first nine months of 2004. Net earnings to common stockholders were
$11.1 million in the first nine months of 2004 compared to $5.5 million in the
first nine months of 2003. On a per share basis, diluted net earnings to common
stockholders were $.94 in the first nine months of 2004 compared to $.49 in the
first nine months of 2003. Portfolio Asset Acquisition and Resolution The operating contribution in the first nine months of 2004 was $10.1
million compared to $9.4 million for the same period last year. FirstCity
purchased $128.2 million of Portfolio Assets during the first nine months of
2004 ($95.9 through Acquisition Partnerships), compared to $72 million in
acquisitions in the first nine months of 2003. FirstCitys investment in these
acquisitions was $49 million and $15.3 million in the first nine months of 2004
and 2003, respectively. FirstCitys quarter end investment in wholly-owned
Portfolio Assets increased to $33.6 million from $4.1 million at September 30,
2004 and 2003, respectively. Servicing fee revenues.Servicing fee revenues decreased 10% from $11.2
million in the first nine months of 2003 to $10.1 million in 2004. Service
fees from the Mexican partnerships decreased $.8 million or 11% 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 $3.7 million in the first nine months of 2003 to $3.5 million in
2004. 24




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##### Table of Contents



Gain on resolution of Portfolio Assets.The net gain on resolution of
Portfolio Assets decreased from $1.1 million in the first nine months of 2003
to $.8 million in the first nine 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 21% to $9.8 million in the first nine months of 2004
compared to $8.1 million in the first nine 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 14% to $7.0 million in the first nine months of 2004 from $8.1
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 nine months of 2004 compared to $2.8
million in 2003. These partnerships reflected a loss of $5.2 million in
the first nine months of 2004 compared to $51.1 million in 2003. The
partnerships recorded foreign exchange gains of $37,000 in the first
nine months of 2004 compared to losses of $20.4 million in 2003.
Interest expense of $8.2 million and $37.0 million were recorded during
the first nine months of 2004 and 2003, respectively. This interest is
owed to the investors of these partnerships, of which FirstCity recorded
$1.5 million and $2.1 million, respectively, as interest income.
Excluding effects of foreign currency transactions and interest expense,
these partnerships reflected adjusted net earnings of $3.1 million in
the first nine months of 2004 compared to $6.3 million in 2003.
    
    Europe- Equity in earnings of Acquisition Partnerships located in
France increased to $3.7 million in the first nine months of 2004
compared to $2.8 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 nine months of
2004, FirstCity also recorded $.9 million in foreign currency
transaction gains (included in other expenses) relating to investments
in France. Interest income.Interest income decreased 24% from $2.8 million in the
first nine months of 2003 to $2.1 million in the first nine 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 $1.8 million in the first nine months of
2004 compared to $.9 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 $15 million in the first nine months of
2004 compared to $15 million in 2003. Interest and fees on notes payable increased 53% to $2.8 million in the
first nine months of 2004 from $1.8 million in 2003. The average debt for the
period increased to $41.5 million in the first nine months of 2004 from $26.4
million in the first nine months of 2003. Salaries and benefits decreased $.3 million, or 3%. Total personnel within
the Portfolio Asset acquisition and resolution segment were 199 and 236 at
September 30, 2004 and 2003, respectively. The provision for loan and impairment losses was minimal in the first nine
months of 2004. The Company recorded a net credit of $22,000 to provision for
loan and impairment losses in the first nine months of 2003 due to a $61,000
recovery on one real estate Portfolio. Occupancy, data processing, communication and other expenses declined 18%
from $4.1 million in the first nine months of 2003 to $3.3 million in 2004
primarily due to increased foreign currency gains, which are included
in other expenses, recorded in 2004. Minority interest expense increased was minimal from period to period. 25




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##### Table of Contents



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 17% to $3.0 million in the first nine months of 2004 from $3.6 million in
the first nine months of 2003. Average debt declined to $41.0 million in the
first nine months of 2004 from $46.7 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 increased 5% to
$4.1 million in the first nine months of 2004 from $3.8 million in 2003. Income taxes.Provision for income taxes was $145,000 in the first nine
months of 2004 and related primarily to federal alternative minimum taxes.
Provision for income taxes was $24,000 in the first nine 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 nine months of 2004 and 2003. Discontinued Operations.The Company recorded a provision of $1.2 million
in the first nine months of 2004 for additional losses from discontinued
mortgage 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. Also, the estimated bond interest rates
have been increased to account for the current market trends for a rise in
interest rates. 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. Earnings from discontinued consumer operations were $9.2 million in the
first nine months of 2004 compared to $4.1 million in 2003. The increase
primarily relates to equity earnings in Drive, net of minority interest, of
$11.9 million and $4.5 million in the first nine months of 2004 and 2003,
respectively. FirstCity also recorded $1.7 million in amortization of deferred
debt discount fees and $682,000 estimated federal income taxes during the first
nine months of 2004. 26




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##### Table of Contents



Financial Condition Major changes in FirstCitys financial position resulted from the
following. Consolidated assets of $184.0 million at September 30, 2004, were $51.8
million higher than that at December 31, 2003. During 2004, FirstCity invested
$49.0 million in Portfolio Asset acquisitions through wholly-owned subsidiaries
and Acquisition Partnerships. These purchases are the primary reason for the
increase in Portfolio Assets ($29.1 million) and Loans receivable ($2.1
million). Consumer assets held for sale and liabilities from discontinued operations
relate to FirstCitys 31% beneficial ownership interest in Drive, which was
sold on November 1, 2004. The net assets from discontinued consumer operations
increased $10.1 million primarily due to equity earnings, net of minority
interest, of $11.9 million. In addition, FirstCity recorded a $6.3 million
deferred debt discount, net of $1.7 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 September
30, 2004, the estimated liability for this contingent fee was $8.0 million and
was included in liabilities from discontinued operations in the consolidated
balance sheets. Consolidated liabilities of $145.2 million at September 30, 2004, were
$42.1 million higher than that at December 31, 2003. Total notes payable
increased by $30.8 million primarily as a result of borrowings for FirstCitys
investment in portfolio purchases. Other liabilities increased $1.0 million
primarily due to the closing costs of a loan portfolio purchased on September
30, 2004. Portfolio Asset Acquisition and Resolution Aggregate acquisitions by the Company are as follows (dollars in
thousands): Purchase
    
    FirstCityPrice
    
    InvestmentFirst nine months of 2004
    
    $
    128,176
    
    
    $
    48,982Total 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: 27




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##### Table of Contents



Analysis of Selected Revenues and Expenses
Portfolio Asset Acquisition and Resolution Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Income from Portfolio Assets and Loans Receivable:Average investment in Portfolio Assets and loans receivable:Domestic
    
    $
    22,160
    
    
    $
    6,014
    
    
    $
    13,552
    
    
    $
    7,921Latin America
    
    
    18,090
    
    
    
    15,226
    
    
    
    16,163
    
    
    
    15,153Europe
    
    
    609
    
    
    
    3,486
    
    
    
    1,391
    
    
    
    1,394Total
    
    $
    40,859
    
    
    $
    24,726
    
    
    $
    31,106
    
    
    $
    24,468Income from Portfolio Assets and loans receivable:Domestic
    
    $
    863
    
    
    $
    241
    
    
    $
    1,309
    
    
    $
    1,616Latin America
    
    
    600
    
    
    
    414
    
    
    
    1,513
    
    
    
    2,147Europe
    
    
    6
    
    
    
    47
    
    
    
    49
    
    
    
    64Total
    
    $
    1,469
    
    
    $
    702
    
    
    $
    2,871
    
    
    $
    3,827Average return (annualized):Domestic
    
    
    15.6
    %
    
    
    16.0
    %
    
    
    12.9
    %
    
    
    27.2
    %Latin America
    
    
    13.3
    %
    
    
    10.9
    %
    
    
    12.5
    %
    
    
    18.9
    %Europe
    
    
    3.9
    %
    
    
    5.4
    %
    
    
    4.7
    %
    
    
    6.1
    %Total
    
    
    14.4
    %
    
    
    11.4
    %
    
    
    12.3
    %
    
    
    20.9
    %Servicing fee revenues:Domestic partnerships:$ Collected
    
    $
    32,282
    
    
    $
    24,171
    
    
    $
    89,720
    
    
    $
    88,865Servicing fee revenue
    
    
    1,192
    
    
    
    1,121
    
    
    
    3,453
    
    
    
    3,703Average servicing fee %
    
    
    3.7
    %
    
    
    4.6
    %
    
    
    3.8
    %
    
    
    4.2
    %Latin American partnerships:$ Collected
    
    $
    26,352
    
    
    $
    16,331
    
    
    $
    61,447
    
    
    $
    46,356Servicing fee revenue
    
    
    2,017
    
    
    
    2,348
    
    
    
    6,373
    
    
    
    7,227Average servicing fee %
    
    
    7.7
    %
    
    
    14.4
    %
    
    
    10.4
    %
    
    
    15.6
    %Incentive service fees
    
    $
    119
    
    
    $
    105
    
    
    $
    250
    
    
    $
    237Total Service Fees:$ Collected
    
    $
    58,634
    
    
    $
    40,502
    
    
    $
    151,167
    
    
    $
    135,221Servicing fee revenue
    
    
    3,328
    
    
    
    3,574
    
    
    
    10,076
    
    
    
    11,167Average servicing fee %
    
    
    5.7
    %
    
    
    8.8
    %
    
    
    6.7
    %
    
    
    8.3
    %Personnel:Personnel expenses
    
    $
    2,851
    
    
    $
    2,972
    
    
    $
    8,830
    
    
    $
    9,117Number of personnel (at period end):Domestic
    
    
    62
    
    
    
    58Mexico
    
    
    137
    
    
    
    178Total
    
    
    199
    
    
    
    236Interest expense:Average debt
    
    $
    54,254
    
    
    $
    27,076
    
    
    $
    41,516
    
    
    $
    26,354Interest expense
    
    
    1,174
    
    
    
    587
    
    
    
    2,832
    
    
    
    1,848Average cost (annualized)
    
    
    8.7
    %
    
    
    8.7
    %
    
    
    9.1
    %
    
    
    9.4
    %
 28




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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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Gain on resolution of Portfolio Assets
    
    $
    21,842
    
    
    $
    29,169
    
    
    $
    64,551
    
    
    $
    72,403Gross profit percentage on resolution of Portfolio Assets
    
    
    30.03
    %
    
    
    41.97
    %
    
    
    32.54
    %
    
    
    38.57
    %Interest income
    
    $
    2,365
    
    
    $
    1,756
    
    
    $
    7,530
    
    
    $
    5,884Other income
    
    
    1,963
    
    
    
    528
    
    
    
    2,479
    
    
    
    1,537Interest expense (1):Interest expense
    
    $
    4,916
    
    
    $
    13,648
    
    
    $
    13,119
    
    
    $
    42,197Average cost (annualized)
    
    
    5.64
    %
    
    
    15.22
    %
    
    
    5.00
    %
    
    
    14.74
    %Other expenses:Service fees
    
    
    4,207
    
    
    
    4,719
    
    
    
    13,005
    
    
    
    14,160Other operating costs
    
    
    7,241
    
    
    
    6,838
    
    
    
    19,599
    
    
    
    15,820Foreign currency loss (gain)
    
    
    (2,046
    )
    
    
    14,350
    
    
    
    (37
    )
    
    
    20,440Income taxes
    
    
    3
    
    
    
    (222
    )
    
    
    170
    
    
    
    (955
    )Total other expenses (income)
    
    
    9,405
    
    
    
    25,685
    
    
    
    32,737
    
    
    
    49,465Net earnings (loss)
    
    $
    11,849
    
    
    $
    (7,880
    )
    
    $
    28,704
    
    
    $
    (11,838
    )Equity in earnings of Acquisition Partnerships
    
    $
    3,507
    
    
    $
    3,007
    
    
    $
    9,844
    
    
    $
    8,135Equity in earnings of Servicing Entities
    
    
    149
    
    
    
    155
    
    
    
    626
    
    
    
    474$
    3,656
    
    
    $
    3,162
    
    
    $
    10,470
    
    
    $
    8,609
   (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 5.6% and
5.1% for the three months ended September 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.
 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 preferred stock, and other investments by
FirstCity. The potential sources of liquidity are funds generated from
operations, equity 29




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##### Table of Contents



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. At September 30, 2004, FirstCity had $95 million total debt outstanding
with the Senior Lenders. This debt was comprised of $53 million in term loans,
$4 million under a $5 million revolving credit loan and a $38 million under a
$45 million revolving portfolio acquisition loan facility. As discussed in
note 4, on November 1, 2004, FirstCity completed the sale of the Companys 31%
beneficial ownership interest in Drive and its general partner, Drive GP LLC,
which resulted in net proceeds of $86.8 million. A portion of the proceeds
were used to pay off the $53 million in term loans and the $4 million revolving
credit loan. On
November 12, 2004, FirstCity and Bank of Scotland restructured the $5
million revolving credit loan and the $45 million revolving portfolio
acquisition facility into a $96 million revolving acquisition facility that
matures in November 2008. This new facility will be used to finance the senior
debt and equity portion of distressed asset pool purchases and to provide for
the issuance of Letters of Credit and working capital loans. The $96 million
facility (i) allows loans to be made in Euros up to a maximum amount in Euros
that is equivalent to $35 million U.S. dollars, (ii) allows loans to be made
for acquisition of Portfolio Assets originated in Latin America of up
to
$35 million, (iii) provides for an interest rate of Libor plus 2.50% to
2.75%, (iv) provides for a commitment fee of 0.20% of the unused balance of the
revolving acquisition facility, and (v) provides that the aggregate borrowings
under the facility does not exceed 60% of the net present value of FirstCitys
interest in Portfolio Assets in Acquisition Partnerships pledged to secure the
acquisition facility. 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. 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 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 September 30,
2004, approximately $23.2 million was outstanding under this facility. On
November 12, 2004, the outstanding balance on the Cargill Facility was paid
down to zero out of a portion on the proceeds received on the sale of Drive. 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 had 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 obligations to
indemnify BoS (USA) were terminated in connection with the sale of
the 31% beneficial ownership interest in Drive on November 1,
2004. The Company also provided
support in connection with securitizations by Consumer Corp. and Drive prior to
the acquisition by BoS(USA) of the interest in Drive in
August 2000. The securitizations by Consumer Corp. have been
terminated. 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, as of September 30, 2004, the Company and its
subsidiaries had outstanding borrowings of $122 million. With the proceeds
from the sale of FirstCitys interest in Drive, the Company paid off
approximately $80 million of the outstanding debt as of November 12, 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, 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 November 15, 2004 and the outstanding
borrowings under such facilities as of September 30, 2004. 30




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##### Table of Contents



Credit Facilities Funded andUnfunded
    
    OutstandingCommitment
    
    BorrowingsAmount as of
    
    as ofNovember 15,
    
    September 30,2004
    
    2004
    
    Interest Rate
    
    Other Terms and Conditions(Dollars in millions)CorporateCompany Senior Facility:Bank of Scotland revolving line of credit
    
    Paid off
    
    $
    4
    
    
    LIBOR + 2.75%
    
    Secured by the assets ofthe Company, maturesDecember 2004BoS(USA) Tranche I (Term)
    
    Paid off
    
    
    25
    
    
    Prime + 2.5%
    
    Secured by the assets ofthe Company, maturesDecember 2006BoS(USA) Tranche II (Term)
    
    Paid off
    
    
    12
    
    
    Fixed at 8.77%
    
    Secured by the assets ofthe Company, maturesDecember 2007Portfolio Asset Acquisition and
ResolutionBank of Scotland $96 million portfolio acquisition facility
    
    96
    
    
    
    
    
    LIBOR + 2.5% - 2.75%
    
    Acquisition facility for 
the investment in futureAcquisition partnerships,matures November 2008Bank of Scotland $45 million portfolio
    
    Refinanced
    
    
    38
    
    
    LIBOR + 3.5%
    
    Secured by the assets ofacquisition
facility
    
    
    
    
    
    
    
    
    
    the Company, maturesNovember 2006Cargill equity investment facility(2)
    
    35
    
    
    23
    
    
    Greater of 8.5% or
    
    Acquisition facility forLIBOR + 4.5%
    
    the investment in futureAcquisition partnerships,matures March 2005Central National Bank term facility
    
    4
    
    
    4
    
    
    Bank prime + 0.50%
    
    Secured by existing
Portfolio Assets, maturesDecember 2004Unsecured loans payable to
    
    
    
    
    
    
    
    Rate based Corporate
    
    Matures December 2011senior management
    
    
    
    
    
    
    
    average cost of fundsConsumerBank of Scotland term loan
    
    Paid off
    
    
    16
    
    
    LIBOR + 1.0%
    
    Secured by 20% equityinterest in Drive, maturesDecember 2007, non-recourseTotal
    
    $135
    
    $
    122Unconsolidated Acquisition
Partnerships Term Facilities(1)
    
    $90
    
    $
    90
    
    
    Various rates
    
    Secured by Portfolio
Assets, various maturities
non-recourse
 31




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##### Table of Contents



FirstCity Financial
Corporation Employees Profit Sharing and Retirement Plan Issues The Company has recently discovered that it may have offered and sold
unregistered plan interests to its employees through its FirstCity Financial
Corporation Employees Profit Sharing and Retirement Plan. Such sales may
have violated Section 5 of the Securities Act of 1933 (the Act), in which
case the Company could be liable for rescission to such employees under
Section 12(a)(1) during the one year period following the sales. The Company
is currently evaluating the legal issues involved with the foregoing to
determine whether any securities laws have been violated, and, if so, how it
will comply with such laws. 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, for the year ended December 31, 2003 (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. 
 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 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 September 30, 2004, one U.S. dollar equaled $0.81 Euros. A sharp change
of the Euro relative to the U.S. dollar could materially adversely affect the
consolidated financial position and results of operations of the Company. A 32




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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
$.6 million and $1.2 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, the refinanced revolving
acquisition facility with Bank of Scotland for $96 million allows loans to be
made in Euros up to a maximum amount in Euros that is equivalent to $35 million
U.S. dollars. 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. 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 September 30, 2004, one U.S. dollar
equaled 11.4 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 $.9 million and $1.7 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 September 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
September 30, 2004. 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds. None 
 Item 3.Defaults Upon Senior Securities. None 
 Item 4.Submission of Matters to a Vote of Security Holders. The Company held its annual meeting of stockholders (the Annual Meeting)
on August 5, 2004. The following items for business were considered at the
Annual Meeting. (a) Election of Directors The following were elected as directors to serve as members of the
Companys Board of Directors until the Companys 2004 annual meeting of
stockholders. The number of votes cast for each nominee was as follows: 33




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##### Table of Contents



VotesNominee
    
    Votes For
    
    Against
    
    AbstainedJames R. Hawkins
    
    
    10,087,170
    
    
    
    36,139
    
    
    
    C. Ivan Wilson
    
    
    10,026,370
    
    
    
    96,939
    
    
    
    James T. Sartain
    
    
    10,030,647
    
    
    
    97,662
    
    
    
    Richard E. Bean
    
    
    10,051,923
    
    
    
    71,386
    
    
    
    Dane Fulmer
    
    
    10,049,562
    
    
    
    73,747
    
    
    
    Robert E. Garrison II
    
    
    10,051,948
    
    
    
    71,361
    
    
    
    Jeffery D. Leu
    
    
    10,021,578
    
    
    
    101,731
    
    
    
    
 (b) Ratification of Appointment of Auditors A proposal to ratify the Board of Directors appointment of KPMG LLP as
the Companys independent auditors for 2004 was approved by the stockholders.
The number of votes for the proposal: 10,106,111; votes against:
13,799; abstentions: 3,399. 
 Item 5.Other Information. None 
 Item 6.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
    
    -
    
    Securities Purchase Agreement, dated as of August 18, 2000,
 34




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibitby 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).10.2
    
    -
    
    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).10.3
    
    -
    
    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).10.4
    
    -
    
    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).10.5
    
    -
    
    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).10.6
    
    -
    
    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).10.7
    
    -
    
    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).10.8
    
    -
    
    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).10.9
    
    -
    
    Securities Purchase Agreement dated as of September 21, 2004 by
and among FirstCity Financial Corporation and certain affiliates
of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP
Holdings LLC, Drive Management LP and certain affiliates of
those persons. (incorporated herein by reference to Exhibit 10.1
of the Companys Form 8-K dated September 27, 2004)10.10
    
    -
    
    Letter agreements dated as of November 1, 2004, between
FirstCity, Consumer Corp. and BoS-UK relating to extension of
time for and waiver related to payment of any fee under Fee
Letter. (incorporated herein by reference to Exhibit 10.1 of the
Companys Form 8-K dated November 5, 2004)10.11
    
    -
    
    Letter agreement dated November 1, 2004 between Bank of
Scotland, acting through its New York branch, and FirstCity
providing for deposit of funds in cash collateral account.
(incorporated herein by reference to Exhibit 10.2 of the
Companys Form 8-K dated November 5, 2004)10.12*
    
    -
    
    Revolving Credit Agreement, dated November 12, 2004, among
FirstCity Financial Corporation as Borrower and the Lenders
named
 35




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibittherein, as Lenders, and Bank of Scotland, as Agent31.1*
    
    -
    
    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 September 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 September 30, 2004.
   *
    
    Filed herewith. 36




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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: November 15, 2004
 37




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##### Table of Contents



EXHIBIT INDEX 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
    
    -
    
    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).10.2
    
    -
    
    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).10.3
    
    -
    
    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).10.4
    
    -
    
    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).10.5
    
    -
    
    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




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibitof Scotland as Agent (incorporated herein by reference to
Exhibit 10.17 of the Companys Form 10-K dated April 15,
2003).10.6
    
    -
    
    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).10.7
    
    -
    
    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).10.8
    
    -
    
    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).10.9
    
    -
    
    Securities Purchase Agreement dated as of September 21, 2004 by
and among FirstCity Financial Corporation and certain affiliates
of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP
Holdings LLC, Drive Management LP and certain affiliates of
those persons. (incorporated herein by reference to Exhibit 10.1
of the Companys Form 8-K dated September 27, 2004)10.10
    
    -
    
    Letter agreements dated as of November 1, 2004, between
FirstCity, Consumer Corp. and BoS-UK relating to extension of
time for and waiver related to payment of any fee under Fee
Letter. (incorporated herein by reference to Exhibit 10.1 of the
Companys Form 8-K dated November 5, 2004)10.11
    
    -
    
    Letter agreement dated November 1, 2004 between Bank of
Scotland, acting through its New York branch, and FirstCity
providing for deposit of funds in cash collateral account.
(incorporated herein by reference to Exhibit 10.2 of the
Companys Form 8-K dated November 5, 2004)10.12*
    
    -
    
    Revolving Credit Agreement, dated November 12, 2004, among
FirstCity Financial Corporation as Borrower and the Lenders
named therein, as Lenders, and Bank of Scotland, as Agent31.1*
    
    -
    
    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 September 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 September 30, 2004.