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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 Form 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 o
    
    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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ The number of shares of common stock, par value $.01 per share, outstanding at April 30, 2005
was 11,267,187.




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TABLE OF CONTENTS  PART IItem 1. 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 IndexCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 1350Certification of CFO Pursuant to Section 1350    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) March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCash and cash equivalents
    
    $
    9,067
    
    
    $
    9,724Portfolio Assets, net
    
    
    31,609
    
    
    
    37,952Loans receivable from Acquisition Partnerships held for investment
    
    
    21,501
    
    
    
    21,255Equity investments
    
    
    57,825
    
    
    
    57,815Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Service fees receivable from affiliates
    
    
    1,247
    
    
    
    1,631Other assets, net
    
    
    6,801
    
    
    
    8,562Discontinued mortgage assets
    
    
    1,377
    
    
    
    1,817Total Assets
    
    $
    149,528
    
    
    $
    158,857LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable to affiliates
    
    $
    560
    
    
    $
    491Notes payable other
    
    
    48,223
    
    
    
    50,812Minority interest
    
    
    1,286
    
    
    
    1,292Liabilities from discontinued consumer operations
    
    
    989
    
    
    
    9,033Liabilities from discontinued mortgage operations
    
    
    40
    
    
    
    50Other liabilities
    
    
    4,255
    
    
    
    4,756Total Liabilities
    
    
    55,353
    
    
    
    66,434Commitments and contingencies (note 12)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: 11,263,187 and 11,260,687, respectively)
    
    
    113
    
    
    
    113Paid in capital
    
    
    99,372
    
    
    
    99,364Accumulated deficit
    
    
    (7,740
    )
    
    
    (10,289
    )Accumulated other comprehensive income
    
    
    2,430
    
    
    
    3,235Total Stockholders Equity
    
    
    94,175
    
    
    
    92,423Total Liabilities and Stockholders Equity
    
    $
    149,528
    
    
    $
    158,857
 See accompanying notes to consolidated financial statements. 2




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Revenues:Servicing fees from affiliates
    
    $
    3,172
    
    
    $
    3,032Gain on resolution of Portfolio Assets
    
    
    1,862
    
    
    
    75Equity in earnings of investments
    
    
    3,401
    
    
    
    4,175Interest income from affiliates
    
    
    451
    
    
    
    444Interest income  other
    
    
    486
    
    
    
    85Other income
    
    
    349
    
    
    
    1,338Total revenues
    
    
    9,721
    
    
    
    9,149Expenses:Interest and fees on notes payable to affiliates
    
    
    8
    
    
    
    25Interest and fees on notes payable  other
    
    
    872
    
    
    
    1,688Interest on shares subject to mandatory redemption
    
    
    
    
    
    
    66Salaries and benefits
    
    
    4,158
    
    
    
    4,077Provision for loan and impairment losses
    
    
    85
    
    
    
    Occupancy, data processing, communication and other
    
    
    1,913
    
    
    
    1,449Total expenses
    
    
    7,036
    
    
    
    7,305Earnings from continuing operations before income taxes and
minority interest
    
    
    2,685
    
    
    
    1,844Income taxes
    
    
    (139
    )
    
    
    (84
    )Earnings from continuing operations before minority interest
    
    
    2,546
    
    
    
    1,760Minority interest
    
    
    3
    
    
    
    (26
    )Earnings from continuing operations
    
    
    2,549
    
    
    
    1,734Discontinued operationsEarnings from discontinued operations
    
    
    
    
    
    
    3,143Income taxes
    
    
    
    
    
    
    (28
    )Net earnings from discontinued operations
    
    
    
    
    
    
    3,115Net earnings
    
    $
    2,549
    
    
    $
    4,849Basic earnings per common share are as follows:Earnings from continuing operations
    
    $
    0.23
    
    
    $
    0.15Discontinued operations
    
    $
    
    
    
    $
    0.28Net earnings to common stockholders
    
    $
    0.23
    
    
    $
    0.43Weighted average common shares outstanding
    
    
    11,262
    
    
    
    11,198Diluted earnings per common share are as follows:Earnings from continuing operations
    
    $
    0.21
    
    
    $
    0.15Discontinued operations
    
    $
    
    
    
    $
    0.26Net earnings to common stockholders
    
    $
    0.21
    
    
    $
    0.41Weighted average common shares outstanding
    
    
    12,007
    
    
    
    11,792
 See accompanying notes to consolidated financial statements. 3




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED 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, 2003
    
    
    11,193,687
    
    
    $
    112
    
    
    $
    99,168
    
    
    $
    (73,923
    )
    
    $
    3,612
    
    
    $
    28,969Exercise of common stock options
    
    
    67,000
    
    
    
    1
    
    
    
    196
    
    
    
    
    
    
    
    
    
    
    
    197Comprehensive income:Net earnings for 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,634
    
    
    
    
    
    
    
    63,634Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (377
    )
    
    
    (377
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,257Balances, December 31, 2004
    
    
    11,260,687
    
    
    
    113
    
    
    
    99,364
    
    
    
    (10,289
    )
    
    
    3,235
    
    
    
    92,423Exercise of common stock options
    
    
    2,500
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Comprehensive income:Net earnings for the first three months of 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,549
    
    
    
    
    
    
    
    2,549Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (805
    )
    
    
    (805
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,744Balances, March 31, 2005
    
    
    11,263,187
    
    
    $
    113
    
    
    $
    99,372
    
    
    $
    (7,740
    )
    
    $
    2,430
    
    
    $
    94,175
 See accompanying notes to consolidated financial statements. 4




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net earnings
    
    $
    2,549
    
    
    $
    4,849Adjustments to reconcile net earnings to net cash used in operating activities:Net earnings from discontinued operations
    
    
    
    
    
    
    (3,115
    )Proceeds from resolution of Portfolio Assets
    
    
    6,741
    
    
    
    249Gain on resolution of Portfolio Assets
    
    
    (1,862
    )
    
    
    (75
    )Purchase of Portfolio Assets and loans receivable, net
    
    
    (532
    )
    
    
    (2,717
    )Provision for loan and impairment losses
    
    
    85
    
    
    
    Equity in earnings of investments
    
    
    (3,401
    )
    
    
    (4,175
    )Proceeds from performing Portfolio Assets and loans receivable, net
    
    
    1,389
    
    
    
    1,909Capitalized interest and costs on Portfolio Assets and loans receivable
    
    
    (96
    )
    
    
    (48
    )Depreciation and amortization
    
    
    214
    
    
    
    205Decrease in service fees receivable from affiliate
    
    
    384
    
    
    
    70Decrease (increase) in other assets
    
    
    1,801
    
    
    
    (175
    )Change in debt imputed value
    
    
    73
    
    
    
    (759
    )Decrease in other liabilities
    
    
    (1,184
    )
    
    
    (659
    )Net cash provided by (used in) operating activities
    
    
    6,161
    
    
    
    (4,441
    )Cash flows from investing activities:Property and equipment, net
    
    
    (39
    )
    
    
    (106
    )Contributions to Acquisition Partnerships and Servicing Entities
    
    
    (3,690
    )
    
    
    (397
    )Distributions from Acquisition Partnerships and Servicing Entities
    
    
    6,533
    
    
    
    6,987Net cash provided by investing activities
    
    
    2,804
    
    
    
    6,484Cash flows from financing activities:Borrowing under notes payable  other
    
    
    15,332
    
    
    
    4,059Payments of notes payable to affiliates
    
    
    (4
    )
    
    
    Payments of notes payable  other
    
    
    (17,344
    )
    
    
    (6,454
    )Proceeds from issuance of common stock
    
    
    8
    
    
    
    92Net cash used in financing activities
    
    
    (2,008
    )
    
    
    (2,303
    )Net cash provided by (used in) continuing operations
    
    
    6,957
    
    
    
    (260
    )Net cash provided by (used in) discontinued operations
    
    
    (7,614
    )
    
    
    268Net increase (decrease) in cash and cash equivalents
    
    
    (657
    )
    
    
    8Cash and cash equivalents, beginning of period
    
    
    9,724
    
    
    
    2,745Cash and cash equivalents, end of period
    
    $
    9,067
    
    
    $
    2,753Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    575
    
    
    $
    1,391Income taxes
    
    
    146
    
    
    
    79Non-cash financing activities:Dividends accumulated and not paid on preferred stock
    
    
    
    
    
    
    66
 See accompanying notes to consolidated financial statements. 5




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Dollars in thousands, except per share data) (1) Basis of Presentation 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 March 31, 2005, 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 March 31, 2005, its results of
operations for the three month periods ended March 31, 2005 and 2004 and cash flows for the three
month periods ended March 31, 2005 and 2004. Certain disclosures have been condensed or omitted
from these financial statements. Accordingly, these financial statements should be read with the
consolidated financial statements included in the Companys 2004 Annual Report on Form 10-K.
Certain amounts in the consolidated financial statements for prior years have been reclassified to
conform with current consolidated financial statement presentation. 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. (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 with
other investors to acquire Portfolios (Acquisition Partnerships) 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. FirstCity has a $96 million revolving acquisition facility with Bank of Scotland that matures
in November 2008. This facility is used to finance the 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 and in Acquisition
Partnerships pledged to secure the acquisition facility. 6




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) At March 31, 2005, the Company had $14.7 million in Euro-denominated debt for the purpose of
hedging a portion of the net equity investments in Europe. In general, the type of risk hedged
relates to the foreign currency exposure of net investments in Europe caused by movements in Euro
exchange rates. The Company entered into the hedging relationship such that changes in the net
investments being hedged are expected to be offset by corresponding changes in the values of the
Euro-denominated debt. Effectiveness of the hedging relationship is measured and designated at the
beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the
carrying value of the designated net equity investments. The net foreign currency translation loss
included in accumulated other comprehensive income relating to the Euro-denominated debt was $528
and zero for the first three months of 2005 and 2004, respectively. 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. Management believes that the Bank of Scotland loan 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 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. SOP 03-3 became effective January 1,
2005. FirstCity accounts for all loans acquired after 2004 in accordance with SOP 03-3. For loans
acquired prior to January 1, 2005, FirstCity adopted the provisions of SOP 03-3, as they apply to
decreases in cash flows expected to be collected, on a prospective basis. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment(SFAS 123R).SFAS 123R supersedes APB Opinion No. 25, which
requires recognition of an expense when goods or services are provided. SFAS 123R requires the
determination of the fair value of the share-based compensation at the grant date and the
recognition of the related expense over the period in which the share-based compensation vests.
SFAS 123R permits a prospective or two modified versions of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods by the original SFAS No. 123. The Company will utilize the
prospective method. In April 2005, the SEC amended the compliance date of SFAS 123R to allow
companies to implement SFAS 123R at the beginning of their next fiscal year. Therefore, on January
1, 2006, the Company will begin recognizing an expense for unvested share-based compensation that
has been issued or will be issued after that date. Based on current unvested stock options
outstanding, the Company anticipates approximately $.9 million in unvested compensation cost at
January 1, 2006 to be expensed prospectively. In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004, which provides guidance under SFAS No. 109, Accounting for Income Taxes,
with respect to recording the potential impact of the repatriation provisions of the American Jobs
Creation Act of 2004 (the Jobs Act) on enterprises income tax expense and deferred tax
liability. The Jobs Act was enacted on October 22, 2004. The Jobs Act creates a temporary incentive
for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends
received deduction for certain dividends from controlled foreign corporations. FSP No. 109-2 states
that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate
the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying SFAS No. 109. Management does not expect FSP No. 109-2 to have an impact on
the Company as any taxes on repatriated foreign earnings are offset by the Companys NOLs. 7




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) (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 are summarized as follows: Three Months EndedMarch 31,2005
    
    
    2004Mortgage
    
    $
    
    
    
    $
    Consumer
    
    
    
    
    
    
    3,115Net earnings from discontinued operations
    
    $
    
    
    
    $
    3,115
 Mortgage The only assets remaining from discontinued mortgage operations are the investment securities
resulting from the retention of residual interests in securitization transactions. These securities
are in run-off, and the Company is contractually obligated to service these assets. The
securities are recorded at the lower of their carrying value or fair value less cost to sell. The
cash flows are collected over a period of time and are valued using prepayment assumptions of 32%
to 35% for fixed rate loans and 33% for variable rate loans. Overall loss rates are estimated from
5% to 14% of collateral. The Company recorded no provisions in the first three months of 2005 and
2004 for losses from discontinued mortgage operations. 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.
There were no consumer assets held for sale as of March 31, 2005 and December 31, 2004. The
liabilities of such operations have been classified as Liabilities from discontinued consumer
operations, respectively on the March 31, 2005 and December 31, 2004 balance sheets and consisted
primarily of accrued state taxes at March 31, 2005. The liability at December 31, 2004 related to
accrued state taxes and an $8.0 million participation liability owed to Bank of Scotland, which was
paid in the first quarter of 2005. The net earnings from discontinued consumer operations are classified on the consolidated
statements of operations as Earnings from discontinued operations. Summarized results of
discontinued consumer operations are as follows: Three Months EndedMarch 31,2005
    
    
    2004Equity in earnings
    
    $
    
    
    
    $
    5,037Interest and fees on notes payable to affiliate
    
    
    
    
    
    
    (885
    )Other expenses
    
    
    
    
    
    
    (3
    )Income taxes
    
    
    
    
    
    
    (28
    )Minority interest
    
    
    
    
    
    
    (1,006
    )Earnings from discontinued consumer operations
    
    $
    
    
    
    $
    3,115
 8




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) (5) Portfolio Assets Portfolio Assets are summarized as follows: March 31,
    
    
    December 31,2005
    
    
    2004Loan PortfoliosNon-performing Portfolio Assets
    
    $
    15,634
    
    
    $
    19,993Performing Portfolio Assets
    
    
    14,140
    
    
    
    16,039Outstanding balance
    
    
    29,774
    
    
    
    36,032Allowance for loan losses
    
    
    (85
    )
    
    
    Carrying amount of loans, net of allowance
    
    
    29,689
    
    
    
    36,032Real estate Portfolios
    
    
    1,920
    
    
    
    1,920Portfolio Assets, net
    
    $
    31,609
    
    
    $
    37,952
 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. FirstCity primarily acquires loans in groups or portfolios that have experienced deterioration
of credit quality between origination and the Companys acquisition of the loans. The amount paid
for a loan reflects FirstCitys determination that it is probable the Company will be unable to
collect all amounts due according to the loans contractual terms. FirstCity acquired no
wholly-owned loan portfolios during the first quarter of 2005, but did acquire four portfolios
through Acquisition Partnerships during the quarter. On January 1, 2005, FirstCity adopted the provisions of Statement of Position No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer(SOP 03-3). The adoption
of SOP 03-3 did not have a material impact on the Companys consolidated results of operations.
For loan portfolios acquired prior to January 1, 2005, FirstCity designated these loans as
non-performing Portfolio Assets or performing Portfolio Assets. Such designation was made at the
acquisition of the pool and does not change even though the actual performance of the loans may
change. FirstCity accounts for all loans acquired after 2004 in accordance with SOP 03-3. Pursuant
to SOP 03-3, the following is a description of each classification and the related accounting
policy accorded to each Portfolio type: Loans Acquired Prior to 2005 Non-Performing Portfolio Assets Non-performing Portfolio Assets consist primarily of distressed loans and loan related assets,
such as foreclosed upon collateral. Prior to January 1, 2005, Portfolio Assets were designated as
non-performing if a majority of all of the loans in the Portfolio were significantly under
performing in accordance with the contractual terms of the underlying loan agreements at date of
acquisition. Net gain on resolution of non-performing Portfolio Assets is recognized as income to
the extent that proceeds collected exceed a pro rata portion of allocated cost from the pool. Cost
allocation is based on a proration of actual proceeds divided by total estimated proceeds of the
pool. No interest income is recognized separately on non-performing Portfolio Assets. All proceeds,
of whatever type, are included in proceeds from resolution of Portfolio Assets in determining the
gain on resolution of such assets. Once a non-performing Portfolio Asset becomes impaired, all
future proceeds are allocated to reduce the carrying value of the Portfolio. Accounting for
non-performing Portfolios is on a pool basis as opposed to an individual asset-by-asset basis. Performing Portfolio Assets Performing Portfolio Assets consist primarily of Portfolios of consumer and commercial loans
acquired at a discount from the aggregate amount of the borrowers obligation. Prior to January 1,
2005, performing Portfolio Assets were accounted for using the interest method  acquisition
discounts for the Portfolio as a whole are accreted as an adjustment to yield over the estimated
life of the Portfolio. Performing Portfolio Assets are carried at the unpaid principal balance of
the underlying loans, net of acquisition discounts and allowance for loan losses. Significant
increases in expected future cash flows may be recognized prospectively through an upward
adjustment of the internal rate of return (IRR) over a portfolios remaining life. Any increase
to the IRR then becomes the new benchmark for impairment testing. Income on performing Portfolio Assets is accrued monthly
based on each loan pools effective 9




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) IRR. Cash flows greater than the interest accrual will reduce
the carrying value of the pool. Likewise, cash flows that are less than the accrual will accrete
the carrying balance. The IRR is estimated and periodically recalculated based on the timing and
amount of anticipated cash flows using the Companys proprietary collection model. Gains are
recognized on the performing Portfolio Assets when sufficient funds are received to fully satisfy
the obligation on loans included in the pool, either from funds from the borrower or sale of the
loan. The gain recognized represents the difference between the proceeds received and the allocated
carrying value of the individual loan in the pool. Impairment of Loans Acquired Prior to 2005 Managements best estimate of IRR as of January 1, 2005 is the basis for subsequent impairment
testing. If it is probable that all cash flows estimated at acquisition plus any changes to
expected cash flows arising from changes in estimates after acquisition would not be collected, the
carrying value of a pool would be written down to maintain the then current IRR. A pool can become fully amortized (zero carrying balance on the balance sheet) while still
generating cash collections. In this case, all cash collections are recognized as revenue when
received. Additionally, the Company uses the cost recovery method when timing and amount of
collections on a particular pool of accounts cannot be reasonably predicted. Under the cost
recovery method, no revenue is recognized until the Company has fully collected the cost of the
portfolio, or until such time that the Company considers the collections to be probable and
estimable and begins to recognize income based on the interest method as described above. Loans Acquired After 2004 At acquisition, FirstCity reviews each loan to determine whether there is evidence of
deterioration of credit quality since origination and if it is probable that FirstCity will be
unable to collect all amounts due according to the loans contractual terms. If both conditions
exist, FirstCity determines whether each such loan is to be accounted for individually or whether
such loans will be assembled into pools of loans based on common risk characteristics (loan type,
collateral type, geographical location, performance status and borrower relationship). FirstCity considers expected prepayments, and estimates the amount and timing of undiscounted
expected principal, interest, and other cash flows (expected at acquisition) for each loan and
subsequently aggregated pool of loans. FirstCity determines the excess of the loans or pools
scheduled contractual principal and contractual interest payments over all cash flows expected at
acquisition as an amount that should not be accreted (nonaccretable difference). The excess of the
loans cash flows expected to be collected at acquisition over the initial investment in the loan
or pool is accreted into interest income over the remaining life of the loan or pool (accretable
yield). Over the life of the loan or pool, FirstCity continues to estimate cash flows expected to be
collected. FirstCity evaluates at the balance sheet date whether the present value of its loans
determined using the effective interest rates has decreased and if so, recognizes a loss. The
present value of any subsequent increase in the loans or pools actual cash flows or cash flows
expected to be collected is used first to reverse any existing valuation allowance for that loan or
pool. Any remaining increases in cash flows expected to be collected will be used to recalculate
the amount of accretable yield recognized on a prospective basis over the pools remaining life. FirstCity establishes valuation allowances for all acquired loans subject to SOP 03-3 to
reflect only those losses incurred after acquisitionthat is, the present value of cash flows
expected at acquisition that are not expected to be collected. Valuation allowances are established
only subsequent to acquisition of the loans. Prior to January 1, 2005, impairment charges would be
taken to the income statement with a corresponding write-off of the receivable balance.
Consequently, no allowance for loan loss was recorded prior to January 1, 2005. For the three
months ended March 31, 2005, FirstCity established an allowance for loan losses by a charge to the
income statement of $85. Real Estate Portfolios Real estate Portfolios consist of real estate acquired from a variety of sellers. Such
Portfolios are carried at the lower of cost or fair value less estimated costs to sell. Costs
relating to the development and improvement of real estate for its intended use are capitalized,
whereas those relating to holding assets are charged to expense. Income or loss is recognized upon
the disposal of the real estate. Rental income, net of expenses, on real estate Portfolios is
recognized when received. Accounting for the Portfolios is on an individual asset-by-asset basis as opposed to a pool basis. Subsequent to acquisition, the amortized cost
of a real estate Portfolio is evaluated for 10




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) impairment on a quarterly basis. The evaluation of
impairment is determined based on the review of the estimated future cash receipts, which
represents the net realizable value of the real estate Portfolio. A valuation allowance is
established for any impairment identified through provisions charged to operations in the period
the impairment is identified. The Company recorded no allowance for impairment charges during the
three months ended March 31, 2005 and 2004. (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: March 31,
    
    
    December 31,2005
    
    
    2004Latin America
    
    $
    19,394
    
    
    $
    19,170Europe
    
    
    518
    
    
    
    548Domestic
    
    
    1,589
    
    
    
    1,537$
    21,501
    
    
    $
    21,255
 There were no provisions recorded on these loans during the first quarter of 2005 and
2004. 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 (earnings) which were recorded to reduce (increase) the loans and
interest receivable from the Mexican partnerships were $.2 million and $(.1) million during the
first three months of 2005 and 2004, 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. During the first
quarter of 2005, FirstCity invested $2.0 million to increase its ownership percentage in a French
servicing company from 10% to 12% and in a French Acquisition Partnership from 33% to 43%. The
condensed combined financial position and results of operations of the Acquisition Partnerships
(excluding servicing entities), which include the domestic and foreign Acquisition Partnerships and
their general partners, are summarized below: Condensed Combined Balance Sheets March 31,
    
    
    December 31,2005
    
    
    2004Assets
    
    $
    460,370
    
    
    $
    479,776Liabilities
    
    $
    400,991
    
    
    $
    410,469Net equity
    
    
    59,379
    
    
    
    69,307$
    460,370
    
    
    $
    479,776Equity investment in Acquisition Partnerships
    
    $
    50,992
    
    
    $
    52,410Equity investment in servicing entities
    
    
    6,833
    
    
    
    5,405$
    57,825
    
    
    $
    57,815
 11




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Condensed Combined Summary of Operations Three Months EndedMarch 31,2005
    
    
    2004Proceeds from resolution of Portfolio Assets
    
    $
    45,619
    
    
    $
    62,335Gain on resolution of Portfolio Assets
    
    
    20,164
    
    
    
    20,569Interest income on performing Portfolio
Assets
    
    
    2,106
    
    
    
    2,899Net earnings
    
    $
    9,032
    
    
    $
    16,044Equity in earnings of Acquisition
Partnerships
    
    $
    3,048
    
    
    $
    3,845Equity in earnings of servicing entities
    
    
    353
    
    
    
    330$
    3,401
    
    
    $
    4,175
 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. March 31,
    
    
    December 31,2005
    
    
    2004Assets:Domestic:WAMCO Partnerships
    
    $
    163,286
    
    
    $
    172,464MinnTex Investment Partners LP
    
    
    734
    
    
    
    840Other
    
    
    10,309
    
    
    
    10,406Latin America
    
    
    207,982
    
    
    
    207,455Europe
    
    
    78,059
    
    
    
    88,611$
    460,370
    
    
    $
    479,776Equity (deficit):Domestic:WAMCO Partnerships
    
    $
    76,882
    
    
    $
    81,233MinnTex Investment Partners LP
    
    
    667
    
    
    
    763Other
    
    
    6,017
    
    
    
    6,012Latin America
    
    
    (86,415
    )
    
    
    (85,789
    )Europe
    
    
    62,228
    
    
    
    67,088$
    59,379
    
    
    $
    69,307Equity investment in Acquisition Partnerships:Domestic:WAMCO Partnerships
    
    $
    33,548
    
    
    $
    34,521MinnTex Investment Partners LP
    
    
    220
    
    
    
    252Other
    
    
    2,906
    
    
    
    2,916Latin America
    
    
    1,399
    
    
    
    1,538Europe
    
    
    12,919
    
    
    
    13,183$
    50,992
    
    
    $
    52,410
 12




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Revenues and earnings (loss) of the Acquisition Partnerships and equity in earnings
(loss) of the Acquisition Partnerships are summarized by geographic region below. Three Months EndedMarch 31,2005
    
    
    2004Revenues:Domestic:WAMCO Partnerships
    
    $
    8,942
    
    
    $
    6,435MinnTex Investment Partners LP
    
    
    1,605
    
    
    
    2,530Other
    
    
    34
    
    
    
    43Latin America
    
    
    5,399
    
    
    
    4,238Europe
    
    
    6,523
    
    
    
    10,466$
    22,503
    
    
    $
    23,712Net earnings (loss):Domestic:WAMCO Partnerships
    
    $
    4,205
    
    
    $
    2,569MinnTex Investment Partners LP
    
    
    1,433
    
    
    
    2,253Other
    
    
    (107
    )
    
    
    (182
    )Latin America
    
    
    (123
    )
    
    
    3,700Europe
    
    
    3,624
    
    
    
    7,704$
    9,032
    
    
    $
    16,044Equity in earnings (loss) of AcquisitionPartnerships:Domestic:WAMCO Partnerships
    
    $
    1,857
    
    
    $
    1,267MinnTex Investment Partners LP
    
    
    473
    
    
    
    743Other
    
    
    (17
    )
    
    
    (61
    )Latin America
    
    
    (174
    )
    
    
    112Europe
    
    
    909
    
    
    
    1,784$
    3,048
    
    
    $
    3,845
 13




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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 follow. WAMCO XXVIII, WAMCO
XXX, WAMCO 31 and WAMCO 33 are considered to be significant subsidiaries of FirstCity. Three Months Ended March 31, 2005 WAMCO
    
    
    WAMCO
    
    
    WAMCO
    
    
    WAMCO
    
    
    OtherXXVIII
    
    
    XXX
    
    
    31
    
    
    33
    
    
    Partnerships
    
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    804
    
    
    $
    1,006
    
    
    $
    5,590
    
    
    $
    7,050
    
    
    $
    8,080
    
    
    $
    22,530Cost of Portfolio Assets resolved
    
    
    606
    
    
    
    745
    
    
    
    4,792
    
    
    
    5,286
    
    
    
    3,409
    
    
    
    14,838Gain on resolution of Portfolio Assets
    
    
    198
    
    
    
    261
    
    
    
    798
    
    
    
    1,764
    
    
    
    4,671
    
    
    
    7,692Interest income on performing Portfolio Assets
    
    
    18
    
    
    
    
    
    
    
    263
    
    
    
    448
    
    
    
    487
    
    
    
    1,216Interest and fees expense  affiliate
    
    
    (41
    )
    
    
    
    
    
    
    
    
    
    
    (526
    )
    
    
    (155
    )
    
    
    (722
    )Interest and fees expense  other
    
    
    (6
    )
    
    
    (92
    )
    
    
    (321
    )
    
    
    
    
    
    
    (39
    )
    
    
    (458
    )Provision for loan and impairment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    (42
    )
    
    
    (92
    )Service fees  affiliate
    
    
    (45
    )
    
    
    (46
    )
    
    
    (202
    )
    
    
    (250
    )
    
    
    (464
    )
    
    
    (1,007
    )General, administrative and operating expenses
    
    
    3
    
    
    
    (85
    )
    
    
    (91
    )
    
    
    (119
    )
    
    
    (2,166
    )
    
    
    (2,458
    )Other income, net
    
    
    4
    
    
    
    2
    
    
    
    6
    
    
    
    
    
    
    
    22
    
    
    
    34Net earnings
    
    $
    131
    
    
    $
    40
    
    
    $
    453
    
    
    $
    1,267
    
    
    $
    2,314
    
    
    $
    4,205
 Three Months Ended March 31, 2004 WAMCO
    
    
    WAMCO
    
    
    WAMCO
    
    
    WAMCO
    
    
    OtherXXVIII
    
    
    XXX
    
    
    31
    
    
    33
    
    
    Partnerships
    
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    2,052
    
    
    $
    4,350
    
    
    $
    6,260
    
    
    $
    2,881
    
    
    $
    4,870
    
    
    $
    20,413Cost of Portfolio Assets resolved
    
    
    1,513
    
    
    
    3,370
    
    
    
    5,480
    
    
    
    2,312
    
    
    
    2,900
    
    
    
    15,575Gain on resolution of Portfolio Assets
    
    
    539
    
    
    
    980
    
    
    
    780
    
    
    
    569
    
    
    
    1,970
    
    
    
    4,838Interest income on performing Portfolio Assets
    
    
    60
    
    
    
    
    
    
    
    504
    
    
    
    
    
    
    
    1,023
    
    
    
    1,587Interest and fees expense  affiliate
    
    
    (114
    )
    
    
    
    
    
    
    (133
    )
    
    
    (153
    )
    
    
    (214
    )
    
    
    (614
    )Interest and fees expense  other
    
    
    (104
    )
    
    
    (133
    )
    
    
    (338
    )
    
    
    
    
    
    
    (54
    )
    
    
    (629
    )Provision for loan and impairment losses
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (552
    )
    
    
    (587
    )Service fees  affiliate
    
    
    (92
    )
    
    
    (152
    )
    
    
    (228
    )
    
    
    (96
    )
    
    
    (287
    )
    
    
    (855
    )General, administrative and operating expenses
    
    
    (38
    )
    
    
    (109
    )
    
    
    (145
    )
    
    
    (35
    )
    
    
    (853
    )
    
    
    (1,180
    )Other income, net
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    9Net earnings
    
    $
    217
    
    
    $
    588
    
    
    $
    443
    
    
    $
    285
    
    
    $
    1,036
    
    
    $
    2,569
 Statements of operations for MinnTex Investment Partners LP for the three month periods
ended March 31, 2005 and 2004 follow: Three Months EndedMarch 31,2005
    
    
    2004Proceeds from resolution of Portfolio Assets
    
    $
    1,639
    
    
    $
    2,684Cost of Portfolio Assets resolved
    
    
    36
    
    
    
    155Gain on resolution of Portfolio Assets
    
    
    1,603
    
    
    
    2,529Service fees  affiliate
    
    
    (164
    )
    
    
    (268
    )General, administrative and operating expenses
    
    
    (8
    )
    
    
    (9
    )Other income
    
    
    2
    
    
    
    1Net earnings
    
    $
    1,433
    
    
    $
    2,253
 FirstCity adopted FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities(FIN 46R) on 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 VIEs. However, FirstCity is not deemed to be the primary beneficiary of any of
these entities based on the criteria set forth in FIN46R. At March 31, 2005, FirstCitys maximum
exposure to loss as a result of its involvement with the VIEs is $23.3 million. 14




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) (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 segment and reconciliation to earnings from
continuing operations for the three months ended March 31, 2005 and 2004. Three Months EndedMarch 31,2005
    
    
    2004Portfolio Asset Acquisition and Resolution:Revenues:Servicing fees
    
    $
    3,172
    
    
    $
    3,032Gain on resolution of Portfolio Assets
    
    
    1,862
    
    
    
    75Equity in earnings of investments
    
    
    3,401
    
    
    
    4,175Interest income
    
    
    933
    
    
    
    529Other
    
    
    240
    
    
    
    1,134Total
    
    
    9,608
    
    
    
    8,945Expenses:Interest and fees on notes payable
    
    
    807
    
    
    
    779Salaries and benefits
    
    
    3,269
    
    
    
    3,041Provision for loan and impairment losses
    
    
    85
    
    
    
    Occupancy, data processing, communication and other
    
    
    1,148
    
    
    
    999Minority interest
    
    
    (3
    )
    
    
    26Total
    
    
    5,306
    
    
    
    4,845Operating contribution before direct taxes
    
    $
    4,302
    
    
    $
    4,100Operating contribution, net of direct taxes
    
    $
    4,188
    
    
    $
    4,046Corporate Overhead:Corporate interest expense
    
    
    73
    
    
    
    1,000Salaries and benefits, occupancy, professional and other
income and expenses, net
    
    
    1,566
    
    
    
    1,312Earnings from continuing operations
    
    $
    2,549
    
    
    $
    1,734
 Revenues from the Portfolio Asset acquisition and resolution segment are attributable to
domestic and foreign operations as follows: Three Months EndedMarch 31,2005
    
    
    2004Domestic
    
    $
    5,962
    
    
    $
    4,146Latin America
    
    
    2,397
    
    
    
    2,597Europe
    
    
    1,249
    
    
    
    2,202Total
    
    $
    9,608
    
    
    $
    8,945
 15




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Total earning assets of the segments and reconciliation to total assets is as follows: March 31,
    
    
    December 31,2005
    
    
    2004Cash
    
    $
    9,067
    
    
    $
    9,724Portfolio acquisition and resolution assets:Domestic
    
    
    69,887
    
    
    
    77,280Latin America
    
    
    21,105
    
    
    
    20,876Europe
    
    
    20,119
    
    
    
    19,859Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Other non-earning assets, net
    
    
    7,872
    
    
    
    9,200Discontinued mortgage assets
    
    
    1,377
    
    
    
    1,817Total assets
    
    $
    149,528
    
    
    $
    158,857
 (9) Earnings per Common Share Basic net earnings per common share calculations are based upon the weighted average number of
common shares outstanding. Potentially dilutive common share equivalents include warrants and
employee stock options in the diluted earnings per common share calculations. Basic and diluted
earnings from continuing operations per share were determined as follows: Three Months EndedMarch 31,2005
    
    
    2004Earnings from continuing operations
    
    $
    2,549
    
    
    $
    1,734Weighted average outstanding shares of common stock
    
    
    11,262
    
    
    
    11,198Dilutive effect of:Warrants
    
    
    342
    
    
    
    293Employee stock options
    
    
    403
    
    
    
    301Weighted average outstanding shares of common
stock and common stock equivalents
    
    
    12,007
    
    
    
    11,792Earnings from continuing operations per share:Basic
    
    $
    0.23
    
    
    $
    0.15Diluted
    
    $
    0.21
    
    
    $
    0.15
 (10) Stock-Based Compensation At March 31, 2005, 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. 16




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) Three Months EndedMarch 31,2005
    
    
    2004Net earnings to common stockholders, as reported
    
    $
    2,549
    
    
    $
    4,849Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (93
    )
    
    
    (21
    )Pro forma net earnings to common stockholders
    
    $
    2,456
    
    
    $
    4,828Net earnings per common share:Basic  as reported
    
    $
    0.23
    
    
    $
    0.43Basic  pro forma
    
    $
    0.22
    
    
    $
    0.43Diluted  as reported
    
    $
    0.21
    
    
    $
    0.41Diluted  pro forma
    
    $
    0.20
    
    
    $
    0.41
 (11) 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. (12) 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 17




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued) 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. Management of the Company
believes that FirstCity will not have to pay any amounts related to these agreements. On September 21, 2004, FirstCity, Consumer Corp., Funding LP and Funding GP entered into 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. Management of the Company believes that FirstCity
will not have to pay any amounts relating to these representations and warranties. FirstCity has minority interests in various limited-life partnerships with a carrying value of
$1.3 million at March 31, 2005. The estimated amount that would be paid to the minority interest
holder if the instruments were to be settled at March 31, 2005 is $1.7 million. The Company has unsecured notes payable to Terry R. DeWitt, G. Stephen Fillip and James C.
Holmes, each of whom were Senior Vice Presidents of FirstCity, in connection with the acquisition
of the minority interest in FirstCity Holdings. The notes are to be periodically redeemed by the
Company for an aggregate of up to $3.2 million out of certain cash collections from servicing
income from Portfolios in Mexico. FirstCity valued the loans at the inception date using an imputed
interest rate based on the Companys cost of funds. At March 31, 2005, these notes had an imputed
balance of $560 and mature in December 2011. 18




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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 first quarter of 2005, the Company recorded earnings to common stockholders on a
diluted basis of $2.5 million or $.21 per common share. The operating contribution from the
Portfolio Asset acquisition and resolution segment was $4.2 million compared with $4.0 million for
the same period in 2004. The Company was able to invest $2.2 million in portfolio acquisitions of
$14.9 million during the quarter of which $1.5 million was purchased in the U.S. and $.7 million in
Mexico. During the quarter, FirstCity also invested $2.0 million to increase its ownership
percentage in a French servicing company from 10% to 12% and in an Acquisition Partnership from 33%
to 43%. Management of the Company is very optimistic regarding the portfolio acquisition business. Our
pipeline is as strong as it has ever been. FirstCity is currently evaluating eighteen different
transactions representing over $5 Billion in face value of assets. These prospects, coupled with
strong liquidity, position the Company to perform very well in 2005. 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 ended March 31, 2005 and 2004, respectively,
are detailed below (dollars in thousands except per share data): Three Months EndedMarch 31,2005
    
    
    2004Portfolio Asset Acquisition and Resolution
    
    $
    4,188
    
    
    $
    4,046Corporate interest
    
    
    (73
    )
    
    
    (1,000
    )Corporate overhead
    
    
    (1,566
    )
    
    
    (1,312
    )Earnings from continuing operations
    
    
    2,549
    
    
    
    1,734Earnings from discontinued operations
    
    
    
    
    
    
    3,115Net earnings to common stockholders
    
    $
    2,549
    
    
    $
    4,849Diluted earnings per common share
    
    $
    0.21
    
    
    $
    0.41
 Results of Operations The following discussion and analysis is based on the segment reporting information presented
in note 8 of the Consolidated Financial Statements of the Company and should be read in conjunction
with the Consolidated Financial Statements (including the Notes thereto) included elsewhere in this
Quarterly Report on Form 10-Q. First Quarter 2005 Compared to First Quarter 2004 The Company reported net earnings of $2.5 million in the first quarter of 2005 compared to
earnings of $4.8 million in the first quarter of 2004. On a per share basis, diluted net earnings
to common stockholders were $.21 in the first quarter of 2005 compared to earnings of $.41 in the
first quarter of 2004. 19




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##### Table of Contents



Portfolio Asset Acquisition and Resolution The operating contribution from the Portfolio Asset acquisition and resolution segment was
$4.2 million in the first quarter of 2005 compared to $4.0 million in the first quarter of 2004.
FirstCity invested $2.2 million in Portfolio acquisitions during the first quarter of 2005 through
Acquisition Partnerships, compared to $3.1 million in the first quarter of 2004. The quarter-end
investment in wholly-owned Portfolio Assets increased to $31.6 million at March 31, 2005, from $7.0
million at March 31, 2004, as a result of wholly-owned acquisitions of approximately $36 million
since the first quarter of 2004. Servicing fee revenues.Servicing fee revenues increased by 5% to $3.2 million in the first
quarter of 2005 from $3.0 million in the first quarter of 2004 primarily due to increased
collections in domestic Acquisition Partnerships and higher service fee rates on certain
portfolios. Gain on resolution of Portfolio Assets.The net gain on resolution of Portfolio Assets
increased from $75,000 in the first quarter of 2004 to $1.9 million in the first quarter of 2005
primarily due to the purchase of several wholly-owned Portfolios in the third and fourth quarters
of 2004. Equity in earnings of investments.Equity in earnings of investments decreased 19% to $3.4
million in the first quarter of 2005 compared to $4.2 million in the first quarter of 2004. Equity
earnings in Acquisition Partnerships decreased $.8 million or 21% and equity in earnings of
servicing entities was flat from quarter to quarter. Following is a discussion of equity earnings
from Acquisition Partnerships by geographic region.  
    Domestic Equity in earnings of domestic Acquisition Partnerships increased from $1.9
million in the first quarter of 2004 to $2.3 million in 2005 primarily as a result of higher
earnings in Acquisition Partnerships established in 2004 and partially offset by declines in
earnings from older partnerships as the Portfolios liquidate.
    Latin America Equity in losses of Acquisition Partnerships located in Latin America
(primarily Mexico) was $174,000 in the first quarter of 2005 compared to earnings of
$112,000 in 2004. These partnerships reflected net losses of $123,000 in the first quarter
of 2005 compared to earnings of $3.7 million in 2004. The partnerships recorded $4.0
million of foreign exchange gains in the first quarter of 2005 compared to $6.5 million in
2004 (of which $308,000 and $456,000 are included in equity earnings). Interest expense of
$3.1 million and $2.1 million were recorded in the first quarter of 2005 and 2004,
respectively. This interest is owed to affiliates of the investors of these partnerships, of
which FirstCity recorded $.4 million as interest income in the first quarter of 2005 and
2004.
    Europe Equity in earnings of Acquisition Partnerships located in France decreased 49%
to $.9 million in the first quarter of 2005 from $1.8 million in 2004. This decrease is
principally due to reduced collections received by the partnerships for Portfolio Assets.
FirstCity also recorded $230,000 and $309,000 in foreign currency transactions gains
(included in other expenses) relating to investments in France in the first quarter of 2005
and 2004, respectively. Interest income.Interest income increased 76% from $.5 million in the first quarter of 2004
to $.9 million in the first quarter of 2005 and is primarily due to the purchase of one large
performing Portfolio Asset pool in the third quarter of 2004. Other income.Other income decreased from $1.1 million in the first quarter of 2004 to $.2
million in the first quarter of 2005. In the first quarter of 2004, FirstCity reduced the
estimated carrying value of loans payable to certain members of management by $.8 million, which
was reflected in other income. Expenses.Operating expenses were $5.3 million in the first quarter of 2005 compared to $4.8
million in 2004. Interest and fees on notes payable were $.8 million in each of the first quarters of 2004 and
2005. The average debt for the quarter increased from $31.5 million in the first quarter of 2004
to $47.0 million in the first quarter of 2005 as a result of acquisitions. However, the average
cost of borrowing declined from 9.9% in 2004 to 6.9% in 2005, which reflects the lower rates
achieved from the debt restructure in the fourth quarter of 2004. Salaries and benefits increased $.2 million or 7% to $3.3 million in the first quarter of 2005
from $3.0 million in the first quarter of 2004. The total number of personnel within the Portfolio
Asset acquisition and resolution segment was 194 and 223 at March 31, 2005 and 2004, respectively.
The increase in salaries and benefits is primarily due to an increase in contract labor utilized in
Mexico. 20




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##### Table of Contents



The provision for loan and impairment losses was $85,000 in the first quarter of 2005 and zero
in the first quarter of 2004. See note 5 to the Consolidated Financial Statements for a discussion
regarding the Companys adoption on January 1, 2005 of AICPA Statement of Position No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer(SOP 03-3). Occupancy, data processing, communication and other expenses increased to $1.1 million in the
first quarter of 2005 compared to $1.0 million in the first quarter of 2004, primarily as a result
of higher foreign exchanges gains of $242,000 recorded in 2005 compared to $315,000 in 2004. Minority interest was minimal from period to period. Other Items Affecting Operations 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 to $73,000 in the
first quarter of 2005 from $1.0 million in the first quarter of 2004 as a result of the payoff of
corporate debt in November 2004 from proceeds received on the sale of the Companys 31%
beneficial interest in Drive. Other corporate overhead expenses increased 19% to $1.6 million in
the first quarter of 2005 from $1.3 million in 2004 primarily due to increased accounting fees
related to new regulatory compliance work. Income taxes.Provision for income taxes was $139,000 and $84,000 in the first quarters of
2005 and 2004, 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 first quarters of 2005 and 2004. Discontinued Operations.The Company recorded no provision for additional losses from
discontinued mortgage operations during the first quarter of 2005 and 2004. The only assets
remaining from discontinued operations are the investment securities resulting from the retention
of residual interests in securitization transactions. 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. 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 $3.1 million in the first quarter of 2004
and zero in 2005 as a result of the sale of FirstCitys interest in Drive in November 2004. Financial Condition Major changes in FirstCitys financial position resulted from the following. Consolidated assets of $149.5 million at March 31, 2005, were $9.3 million lower than that at
December 31, 2004, primarily as a result of normal liquidation of Portfolio Assets. During the
first quarter of 2005, FirstCity invested $2.2 million in Portfolio Asset acquisitions through
Acquisition Partnerships and none through wholly-owned subsidiaries. During the quarter, FirstCity
also sold its investment in certain bonds receivable, with a carrying value of approximately
$681,000, for a net gain of $64,000. During the quarter, FirstCity also invested $2.0 million to
increase its ownership percentage in a French servicing company from 10% to 12% and in an
Acquisition Partnership located in France from 33% to 43%. Consolidated liabilities of $55.4 million at March 31, 2005, were $11.1 million lower than
that at December 31, 2004, primarily due to an $8.0 million participation liability owed to Bank of
Scotland upon the sale of Drive, which was paid in the first quarter of 2005. Total notes payable
decreased by $2.5 million, primarily with proceeds received from Portfolio Assets and Acquisition
Partnerships. 21




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##### Table of Contents



Portfolio Asset Acquisition and Resolution Aggregate acquisitions by the Company are as follows (in thousands): Purchase
    
    
    FirstCityPrice
    
    
    InvestmentFirst three months of 2005
    
    $
    14,871
    
    
    $
    2,213Total 2004
    
    
    174,139
    
    
    
    59,762Total 2003
    
    
    129,192
    
    
    
    22,944Total 2002
    
    
    171,769
    
    
    
    16,717Total 2001
    
    
    224,927
    
    
    
    24,319Total 2000
    
    
    394,927
    
    
    
    22,140
 22




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##### Table of Contents



The following table presents selected information regarding the revenues and expenses of the
Companys Portfolio Asset acquisition and resolution business (dollars in thousands): Analysis of Selected Revenues and Expenses
Portfolio Asset Acquisition and Resolution Three Months EndedMarch 31,2005
    
    
    2004Portfolio Assets and Loans Receivable:Average investment in Portfolio Assets and loans receivable:Domestic
    
    $
    36,315
    
    
    $
    6,490Latin America
    
    
    19,096
    
    
    
    13,167Europe
    
    
    530
    
    
    
    2,155Total
    
    $
    55,941
    
    
    $
    21,812Income from Portfolio Assets and loans receivable:Domestic
    
    $
    2,393
    
    
    $
    196Latin America
    
    
    363
    
    
    
    376Europe
    
    
    8
    
    
    
    26Total
    
    $
    2,764
    
    
    $
    598Average return (annualized):Domestic
    
    
    26.4
    %
    
    
    12.1
    %Latin America
    
    
    7.6
    %
    
    
    11.4
    %Europe
    
    
    6.0
    %
    
    
    4.8
    %Total
    
    
    19.8
    %
    
    
    11.0
    %Servicing fee revenues:Domestic partnerships:$ Collected
    
    $
    27,434
    
    
    $
    26,353Servicing fee revenue
    
    
    1,141
    
    
    
    1,038Average servicing fee %
    
    
    4.2
    %
    
    
    3.9
    %Latin American partnerships:$ Collected
    
    $
    9,130
    
    
    $
    14,846Servicing fee revenue
    
    
    1,981
    
    
    
    1,956Average servicing fee %
    
    
    21.7
    %
    
    
    13.2
    %Incentive service fees
    
    $
    50
    
    
    $
    38Total Service Fees:$ Collected
    
    $
    36,564
    
    
    $
    41,199Servicing fee revenue
    
    
    3,172
    
    
    
    3,032Average servicing fee %
    
    
    8.7
    %
    
    
    7.4
    %Personnel:Personnel expenses
    
    $
    3,269
    
    
    $
    3,041Number of personnel (at period end):Domestic
    
    
    65
    
    
    
    61Mexico
    
    
    129
    
    
    
    162Total
    
    
    194
    
    
    
    223Interest expense:Average debt
    
    $
    47,035
    
    
    $
    31,483Interest expense
    
    
    807
    
    
    
    779Average cost (annualized)
    
    
    6.9
    %
    
    
    9.9
    %
 23




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##### Table of Contents



The following table presents selected information regarding the revenues and expenses of
the Acquisition Partnerships (dollars in thousands): Analysis of Selected Revenues and Expenses
Acquisition Partnerships Three Months EndedMarch 31,2005
    
    
    2004Revenues:Gain on resolution of Portfolio Assets
    
    $
    20,164
    
    
    $
    20,569Gross profit percentage on resolution of Portfolio Assets
    
    
    44.20
    %
    
    
    33.00
    %Interest income
    
    $
    2,106
    
    
    $
    2,899Other income
    
    
    233
    
    
    
    244Interest expense (1):Interest expense
    
    $
    4,404
    
    
    $
    3,744Average cost (annualized)
    
    
    5.29
    %
    
    
    4.20
    %Other expenses:Service fees
    
    $
    3,823
    
    
    $
    3,933Other operating costs
    
    
    8,730
    
    
    
    6,372Foreign currency gains
    
    
    (4,009
    )
    
    
    (6,538
    )Income taxes
    
    
    523
    
    
    
    157Total other expenses
    
    
    9,067
    
    
    
    3,924Net earnings
    
    $
    9,032
    
    
    $
    16,044Equity in earnings of Acquisition Partnerships
    
    $
    3,048
    
    
    $
    3,845Equity in earnings of Servicing Entities
    
    
    353
    
    
    
    330$
    3,401
    
    
    $
    4,175
   (1)
    
    Interest expense includes interest on loans to the Acquisition Partnerships located
primarily in Mexico from affiliates of the investor groups. Beginning in 2003, FirstCity
amended seven 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 Generally, the Company requires liquidity to fund its operations, working capital, payment of
debt, equity for acquisition of Portfolio Assets, investments in and advances to the Acquisition
Partnerships, and other investments by the Company. The potential sources of liquidity are funds
generated from operations, equity distributions from the Acquisition Partnerships, interest and
principal payments on subordinated intercompany debt and dividends from the Companys subsidiaries,
borrowings from revolving lines of credit, proceeds from equity market transactions,
securitization and other structured finance transactions and other special purpose short-term
borrowings. 24




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##### Table of Contents



FirstCity has a $96 million revolving acquisition facility with Bank of Scotland that matures
in November 2008. This facility is used to finance the equity portion of distressed asset pool
purchases and to provide for the issuance of Letters of Credit and working capital loans. This
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 and in Acquisition
Partnerships pledged to secure the acquisition facility. FirstCitys $35 million loan facility with CFSC Capital Corp. XXX, a
subsidiary of Cargill, terminated by its own terms on March 31, 2005. This
facility had been used to provide equity in new Portfolio acquisitions in
partnerships with Cargill and its affiliates. On November 12, 2004, the
outstanding balances on the Cargill facility were paid down to zero out of a
portion on the proceeds received from the sale of Drive as discussed in note 1
of the consolidated financial statements. FirstCity has not used the facility
since September 2004 and determined that the facility was no longer necessary
in light of the $96 million revolving acquisition facility provided by the Bank
of Scotland. 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. Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships, as
of March 31, 2005, the Company and its subsidiaries had credit facilities providing for borrowings
in an aggregate principal amount of $101 million and outstanding borrowings of $49 million. Management believes that the Bank of Scotland facilities, 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
April 30, 2005, and the outstanding borrowings under such facilities as of March 31, 2005. 25




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##### Table of Contents



Credit Facilities Funded andUnfunded
    
    OutstandingCommitment
    
    BorrowingsAmount as of
    
    as ofApril 30,
    
    March 31,2005
    
    2005
    
    Interest Rate
    
    Other Terms and Conditions(Dollars in millions)Bank of Scotland $96 million portfolio
acquisition and working capital facility
    
    
    96
    
    
    
    48
    
    
    LIBOR + 2.5%  2.75%
    
    Secured by equity interests
and other assets of FirstCity,
matures November 2008Unsecured loans payable to
senior management
    
    
    
    
    
    
    1
    
    
    Rate based Corporate
average cost of funds
    
    Contingent liability related to
acquisition of minority interest,
matures December 2011American Bank $5.2 million term loan
for acquisition by FC Washington
    
    
    5
    
    
    
    
    
    
    Fixed 5.625%
    
    Secured by assets of FC
Washington and guaranteed
by the Company, 3-year term loan.Total
    
    $
    101
    
    
    $
    49Unconsolidated Acquisition
Partnerships Term Facilities (1)
    
    $
    82
    
    
    $
    82
    
    
    Various rates
    
    Secured by Portfolio Assets, various maturities non-recourse
   (1)
    
    In addition to the term acquisition facilities of the unconsolidated Acquisition
Partnerships, the Latin American Acquisition Partnerships also have term debt of
approximately $250 million outstanding as of March 31, 2005, owed to affiliates of the
investor groups. Of this amount, the Company has recorded approximately $19.4 million as
Loans Receivable on the Consolidated Balance Sheets. Critical Accounting Policies In the ordinary course of business, the Company has made a number of estimates and assumptions
relating to the reporting of results of operations and financial position in the preparation of its
consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America. Actual results could differ significantly from those estimates under
different assumptions and conditions. The Company believes that the critical accounting policies
and estimates are those related to revenue recognition, deferred tax asset, equity investments, and
discontinued operations. These policies are those that are most important to the portrayal of the
Companys consolidated financial position and results and require managements most difficult,
subjective and complex judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain. Revenue Recognition: Performing, Non-performing and Real Estate Pools. FirstCity primarily acquires loans in groups or portfolios that have experienced deterioration
of credit quality between origination and the Companys acquisition of the loans. The amount paid
for a loan reflects FirstCitys determination that it is probable the Company will be unable to
collect all amounts due according to the loans contractual terms. FirstCity acquired no
wholly-owned loan portfolios during the first quarter of 2005, but did acquire four portfolios
through Acquisition Partnerships during the quarter. 26




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##### Table of Contents



On January 1, 2005, FirstCity adopted the provisions of Statement of Position No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer(SOP 03-3). The adoption
of SOP 03-3 did not have a material impact on the Companys consolidated results of operations.
For loan portfolios acquired prior to January 1, 2005, FirstCity designated these loans as
non-performing Portfolio Assets or performing Portfolio Assets. Such designation was made at the
acquisition of the pool and does not change even though the actual performance of the loans may
change. FirstCity accounts for all loans acquired after 2004 in accordance with SOP 03-3. Pursuant
to SOP 03-3, the following is a description of each classification and the related accounting
policy accorded to each Portfolio type: Loans Acquired Prior to 2005 Non-Performing Portfolio Assets Non-performing Portfolio Assets consist primarily of distressed loans and loan related assets,
such as foreclosed upon collateral. Prior to January 1, 2005, Portfolio Assets were designated as
non-performing if a majority of all of the loans in the Portfolio were significantly under
performing in accordance with the contractual terms of the underlying loan agreements at date of
acquisition. Net gain on resolution of non-performing Portfolio Assets is recognized as income to
the extent that proceeds collected exceed a pro rata portion of allocated cost from the pool. Cost
allocation is based on a proration of actual proceeds divided by total estimated proceeds of the
pool. No interest income is recognized separately on non-performing Portfolio Assets. All proceeds,
of whatever type, are included in proceeds from resolution of Portfolio Assets in determining the
gain on resolution of such assets. Once a non-performing Portfolio Asset becomes impaired, all
future proceeds are allocated to reduce the carrying value of the Portfolio. Accounting for
non-performing Portfolios is on a pool basis as opposed to an individual asset-by-asset basis. Performing Portfolio Assets Performing Portfolio Assets consist primarily of Portfolios of consumer and commercial loans
acquired at a discount from the aggregate amount of the borrowers obligation. Prior to January 1,
2005, performing Portfolio Assets were accounted for using the interest method  acquisition
discounts for the Portfolio as a whole are accreted as an adjustment to yield over the estimated
life of the Portfolio. Performing Portfolio Assets are carried at the unpaid principal balance of
the underlying loans, net of acquisition discounts and allowance for loan losses. Significant
increases in expected future cash flows may be recognized prospectively through an upward
adjustment of the internal rate of return (IRR) over a portfolios remaining life. Any increase
to the IRR then becomes the new benchmark for impairment testing. Income on performing Portfolio
Assets is accrued monthly based on each loan pools effective IRR. Cash flows greater than the
interest accrual will reduce the carrying value of the pool. Likewise, cash flows that are less
than the accrual will accrete the carrying balance. The IRR is estimated and periodically
recalculated based on the timing and amount of anticipated cash flows using the Companys
proprietary collection model. Gains are recognized on the performing Portfolio Assets when
sufficient funds are received to fully satisfy the obligation on loans included in the pool, either
from funds from the borrower or sale of the loan. The gain recognized represents the difference
between the proceeds received and the allocated carrying value of the individual loan in the pool. Impairment of Loans Acquired Prior to 2005 Managements best estimate of IRR as of January 1, 2005 is the basis for subsequent impairment
testing. If it is probable that all cash flows estimated at acquisition plus any changes to
expected cash flows arising from changes in estimates after acquisition would not be collected, the
carrying value of a pool would be written down to maintain the then current IRR. A pool can become fully amortized (zero carrying balance on the balance sheet) while still
generating cash collections. In this case, all cash collections are recognized as revenue when
received. Additionally, the Company uses the cost recovery method when timing and amount of
collections on a particular pool of accounts cannot be reasonably predicted. Under the cost
recovery method, no revenue is recognized until the Company has fully collected the cost of the
portfolio, or until such time that the Company considers the collections to be probable and
estimable and begins to recognize income based on the interest method as described above. Loans Acquired After 2004 At acquisition, FirstCity reviews each loan to determine whether there is evidence of
deterioration of credit quality since origination and if it is probable that FirstCity will be
unable to collect all amounts due according to the loans contractual terms. If both conditions
exist, FirstCity determines whether each such loan is to be accounted for individually or whether
such loans will be 27




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##### Table of Contents



assembled into pools of loans based on common risk characteristics (loan type,
collateral type, geographical location, performance status and borrower relationship). FirstCity considers expected prepayments, and estimates the amount and timing of undiscounted
expected principal, interest, and other cash flows (expected at acquisition) for each loan and
subsequently aggregated pool of loans. FirstCity determines the excess of the loans or pools
scheduled contractual principal and contractual interest payments over all cash flows expected at
acquisition as an amount that should not be accreted (nonaccretable difference). The excess of the
loans cash flows expected to be collected at acquisition over the initial investment in the loan
or pool is accreted into interest income over the remaining life of the loan or pool (accretable
yield). Over the life of the loan or pool, FirstCity continues to estimate cash flows expected to be
collected. FirstCity evaluates at the balance sheet date whether the present value of its loans
determined using the effective interest rates has decreased and if so, recognizes a loss. The
present value of any subsequent increase in the loans or pools actual cash flows or cash flows
expected to be collected is used first to reverse any existing valuation allowance for that loan or
pool. Any remaining increases in cash flows expected to be collected will be used to recalculate
the amount of accretable yield recognized on a prospective basis over the pools remaining life. FirstCity establishes valuation allowances for all acquired loans subject to SOP 03-3 to
reflect only those losses incurred after acquisitionthat is, the present value of cash flows
expected at acquisition that are not expected to be collected. Valuation allowances are established
only subsequent to acquisition of the loans. Prior to January 1, 2005, impairment charges would be
taken to the income statement with a corresponding write-off of the receivable balance.
Consequently, no allowance for loan loss was recorded prior to January 1, 2005. For the three
months ended March 31, 2005, FirstCity established an allowance for loan losses by a charge to the
income statement of $85. Real Estate Portfolios Real estate Portfolios consist of real estate acquired from a variety of sellers. Such
Portfolios are carried at the lower of cost or fair value less estimated costs to sell. Costs
relating to the development and improvement of real estate for its intended use are capitalized,
whereas those relating to holding assets are charged to expense. Income or loss is recognized upon
the disposal of the real estate. Rental income, net of expenses, on real estate Portfolios is
recognized when received. Accounting for the Portfolios is on an individual asset-by-asset basis as
opposed to a pool basis. Subsequent to acquisition, the amortized cost of a real estate Portfolio
is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based
on the review of the estimated future cash receipts, which represents the net realizable value of
the real estate Portfolio. A valuation allowance is established for any impairment identified
through provisions charged to operations in the period the impairment is identified. The Company
recorded no allowance for impairment charges during the three months ended March 31, 2005 and 2004. 28




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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, 2004 (including those
discussed under Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations), as well as in other Securities and Exchange Commission filings of the Company. Many
of these factors are beyond the Companys control. In addition, it should be noted that past
financial and operational performance of the Company is not necessarily indicative of future
financial and operational performance. Given these risks and uncertainties, investors should not
place undue reliance on forward-looking statements. The forward-looking statements in this Form
10-Q speak only as of the date of this Form 10-Q. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking statement to
reflect any change in the Companys expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based. 
 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 (primarily Mexico and
Argentina). In Europe, the Companys investments are in the form of equity and represent a
significant portion of the Companys total equity investments. As of March 31, 2005, one U.S.
dollar equaled .77 Euros. A sharp change of the Euro relative to the U.S. dollar could materially
adversely affect the financial position and results of operations of the Company. A 5% and 10%
incremental depreciation of the Euro would result in an estimated decline in the valuation of the
Companys equity investments in Europe of approximately $.7 million and $1.3 million, respectively.
These amounts are estimates of the financial impact of a depreciation of the Euro relative to the
U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of
such changes with respect to the Companys consolidated financial position or results of
operations. As discussed above, the revolving acquisition facility with Bank of Scotland 29




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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. At March 31, 2005, the Company had $14.7 million in Euro-denominated debt for
the purpose of hedging a portion of the net equity investments in Europe. Management of the Company
feels that this loan agreement will help reduce the risk of adverse effects of currency changes on
Euro-denominated investments. In Mexico, approximately 95% of the Companys investments are made through U.S. dollar
denominated loans to the Partnerships located in Mexico. The remaining investment is in the form of
equity in these same 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 March 31, 2005, one U.S. dollar
equaled 11.29 Mexican pesos. A 5% and 10% incremental depreciation of the Mexican peso would result
in an estimated decline in the valuation of the Companys total investments in Mexico of
approximately $.8 million and $1.6 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. FirstCity has investments in three Portfolios in South America  primarily in the form of
loans receivable from Argentina Acquisition Partnerships. As of March 31, 2005, one U.S. dollar
equaled 2.92 Argentine pesos. The Company estimates that a 5% and 10% incremental depreciation of
the Argentine peso would result in a decline in the valuation of the Companys total investments in
Argentina of approximately $.1 million and $.2 million, respectively. These amounts are estimates
of the financial impact of a depreciation of the Argentine 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 March 31,
2005. 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. 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. On January 19, 2005, Prudential Financial, Inc. filed a petition in interpleader seeking to
interplead 321,211 shares of Prudential common stock and any associated dividends arising from the
demutualization of Prudential Financial, Inc. in December 2000. The shares of Prudential common
stock related to group annuity contracts purchased by First-City National Bank of Houston, as
trustee of the First City Bancorporation Employee Retirement Trust (the Trust) to fund
obligations to participants in the First City Bancorporation Employee Retirement Plan (the Plan)
in connection with termination of the Plan and the Trust in 1987. FirstCity, FCLT Loans Asset Corp.
(FCLT), as assignee of the FirstCity Liquidating Trust, JP Morgan Chase Bank, National
Association (JPMCB), and First-City National Bank of Houston as trustee of the Trust were made
defendants in the suit as claimants to the Prudential common stock. An agreed order dated January
27, 2005, was entered providing that the Prudential common stock be transferred to JPMBC as record
owner and for the sale of the stock. The January 27, 2005 court order also provided that the
proceeds from the sale are to be held by JPMCB pending resolution, by agreement or court order, of
all conflicting claims to the proceeds. JPMBC has indicated that the Prudential common stock was
sold on January 28, 2005 for total proceeds of approximately $17.5 million. JPMCB also holds funds
in the amount of approximately $489,000, which were dividend payments related to the Prudential 30




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common stock. FirstCity and FCLT have filed cross claims asserting ownership of the proceeds.
JPMCB, in its capacity as successor trustee of the Trust filed an answer indicating that it was
only acting in the suit in its capacity as trustee for the Trust. JPMBC also sought to add as
additional parties to the suit a putative class of former employees of First City Bancorporation of
Texas, Inc. (now FirstCity) who were participants in the Plan. JPMCB also seeks a declaration from
the court as to whether the proceeds should be distributed to the successor of First City
Bancorporation or to the putative class. Timothy Blair answered JPMCBs third party action and
intends to seek to represent the putative class. 
 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. None 
 Item 5. Other Information. 2005 Non-Employee Director Compensation Plan Summary Effective as of January 1, 2005, the Company adopted the following compensation plan for
Non-Employee Directors. Directors of the Company who are not employees of the Company or any of
its subsidiaries will each receive an annual retainer of $14,000, payable $3,500 per quarter for
their services as directors. The Chairman of the Audit Committee receives an additional annual
retainer of $3,000, payable $750 per quarter. The Non-Employee Directors also receive $1,000 plus
expenses for each regular and special board of directors meeting attended, $500 ($750 for the
Chairman) plus expenses for each meeting of any committee of the board of directors attended, and
$500 per each telephonic meeting of the Board of Directors or any committee. Directors who are
employees of the Company do not receive directors fees. Executive Bonuses On April 23, 2004, the Board of Directors adopted an executive bonus plan for 2004 as recommended
by the Compensation Committee. The 2004 executive bonus plan provided for a bonus pool based on
the annual net profits of FirstCity and the price increase of the Common Stock exceeding certain
thresholds. The bonus plan as adopted by the Compensation Committee for 2004 was subject to the
discretion of the Compensation Committee in determining if bonuses were to be awarded, whether
performance criteria were met and whether bonuses would be paid notwithstanding that all
performance criteria had not been satisfied. The eligible participants in the 2004 executive bonus
plan were James T. Sartain, President and Chief Executive Officer, Terry R. DeWitt, Senior Vice
President, James C. Holmes, Senior Vice President, Richard J. Vander Woude, Senior Vice President
and General Counsel, J. Bryan Baker, Senior Vice President and Chief Financial Officer, and Joe S.
Greak, Senior Vice President. On January 15, 2005, the Compensation Committee approved an
executive compensation bonus pool of $1,075,000, which was $387,500 in excess of the bonus pool
determined under the terms of 2004 executive bonus plan using the highest stock price during 2004
that was maintained for at least 20 days during 2004, which was $9.28. The closing price of the
Common Stock on December 31, 2004 was $10.08. The Compensation Committee determined that the
additional amount was justified in light of the performance of the
Common Stock through the first two weeks of January 2005 and decided to use a stock price of $10.59 in
determining bonuses under the 2004 executive bonus plan, as that price more properly reflected the
performance of the Company for 2004. Bonuses under the plan were awarded to the executive officers
as follows: James T. Sartain  $400,000, Terry R. DeWitt  $165,000, James C. Holmes  $165,000,
Richard J. Vander Woude  $135,000, J. Bryan Baker  $135,000, and Joe S. Greak  $75,000. On January 15, 2005, the Compensation Committee established an executive bonus plan for the
executive officers of the Company consisting of J. Bryan Baker, Terry R. DeWitt, Joe S. Greak,
James C. Holmes, James T. Sartain and Richard J. Vander Woude. The 2005 executive bonus plan
provides for a bonus pool to be created in the event that the Company achieves a net profit target
for the bonus pool to be established. The amount of the bonus pool is based upon increases in the
price of the Common Stock over a base price of $10.59, the price used in
determining the bonuses under the 2004 executive bonus plan. The bonus plan would be established
and increased as follows: (1) a bonus pool of $200,000 for each $1.00 increase or pro rata portion
thereof will be established for the first increase of $2.00 in the price of the Common Stock, (2) the bonus pool will be increased by the amount of $250,000 for each $1.00 increase
or pro rata portion thereof for the second increase of $2.00 in the price of 31




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the Common Stock, (3) the bonus pool will be increased by the amount of $300,000 for each $1.00
increase or pro rata portion thereof for the third increase of $2.00
in the price of the Common
Stock, (4) the bonus pool will be increased by the amount of $350,000 for each
$1.00 increase or pro rata portion thereof for the fourth increase of $2.00 in the price of the
Common Stock and that the 2004 Bonus Pool would increase incrementally
thereafter. The 2005 executive bonus plan as adopted by the Compensation Committee for 2005 is
subject to the discretion of the Compensation Committee in determining if bonuses are to be
awarded, whether performance criteria are met and whether bonuses will be paid notwithstanding that
all performance criteria may not be satisfied. 
 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).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
    
    
    
    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).10.2
    
    
    
    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).10.3
    
    
    
    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).10.4
    
    
    
    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).10.5
    
    
    
    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)
 32




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibit10.6
    
    
    
    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)10.7
    
    
    
    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)10.8
    
    
    
    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 Agent (incorporated herein by
reference to Exhibit 10.12 of the Companys Form 10-Q dated November
15, 2004)10.9
    
    
    
    1995 Stock Option and Award Plan (incorporated herein by reference
to Exhibit A of the Companys Schedule 14A, Definitive Proxy
Statement, dated March 27, 1996)10.10
    
    
    
    1996 Stock Option and Award Plan (incorporated herein by reference
to Exhibit C of the Companys Schedule 14A, Definitive Proxy
Statement, dated March 27, 1996)10.11
    
    
    
    2004 Stock Option and Award Plan (incorporated herein by reference
to Appendix A of the Companys Schedule 14A, Definitive Proxy
Statement, dated October 21, 2003)31.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer of the
Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.32.2*
    
    
    
    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 March 31, 2005.
   *
    
    Filed herewith. 33




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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: May 23, 2005 34




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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).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
    
    
    
    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).10.2
    
    
    
    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).10.3
    
    
    
    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).10.4
    
    
    
    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).10.5
    
    
    
    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)10.6
    
    
    
    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)10.7
    
    
    
    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)




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibit10.8
    
    
    
    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 Agent (incorporated herein by
reference to Exhibit 10.12 of the Companys Form 10-Q dated November
15, 2004)10.9
    
    
    
    1995 Stock Option and Award Plan (incorporated herein by reference
to Exhibit A of the Companys Schedule 14A, Definitive Proxy
Statement, dated March 27, 1996)10.10
    
    
    
    1996 Stock Option and Award Plan (incorporated herein by reference
to Exhibit C of the Companys Schedule 14A, Definitive Proxy
Statement, dated March 27, 1996)10.11
    
    
    
    2004 Stock Option and Award Plan (incorporated herein by reference
to Appendix A of the Companys Schedule 14A, Definitive Proxy
Statement, dated October 21, 2003)31.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer of the
Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.32.2*
    
    
    
    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 March 31, 2005.