##### 



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, 2004 or  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(State or Other Jurisdiction of
Incorporation or Organization)
    
    76-0243729(I.R.S. Employer
Identification No.)6400 Imperial Drive,
Waco, TX(Address of Principal Executive Offices)
    
    76712(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 May 6, 2004 was 11,224,937.




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TABLE OF CONTENTS  PART IItem 1. Financial StatementsFIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSFIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOMEFIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSWAMCO PARTNERSHIPSCombined Financial StatementsWAMCO PARTNERSHIPSCOMBINED BALANCE SHEETSWAMCO PARTNERSHIPSCOMBINED STATEMENTS OF OPERATIONSWAMCO PARTNERSHIPSCOMBINED STATEMENTS OF CHANGES IN PARTNERS CAPITALWAMCO PARTNERSHIPSCOMBINED STATEMENTS OF CASH FLOWSWAMCO PARTNERSHIPSNOTES TO COMBINED FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART IIOTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESINDEX TO EXHIBITS5th Amend. to Term Loan & Revolving Credit Agmt.Separation Agreement - G. Stephen FillipConsultant Agreement - G. Stephen FillipCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO pursuant to Section 906Certification of CFO pursuant to Section 906 
 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 31,2004
    
    2003(Unaudited)ASSETSCash and cash equivalents
    
    $
    2,753
    
    
    $
    2,745Portfolio Assets, net
    
    
    6,998
    
    
    
    4,525Loans receivable from Acquisition Partnerships held for investment
    
    
    15,849
    
    
    
    17,313Equity investments
    
    
    75,106
    
    
    
    73,146Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Service fees receivable from affiliates
    
    
    1,320
    
    
    
    1,390Other assets, net
    
    
    9,056
    
    
    
    6,769Net assets of discontinued operations
    
    
    5,882
    
    
    
    6,150Total Assets
    
    $
    137,065
    
    
    $
    132,139LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable to affiliates
    
    $
    82,994
    
    
    $
    88,628Notes payable other
    
    
    4,912
    
    
    
    2,432Preferred stock subject to mandatory redemption, including
accumulated dividends in arrears of $1,260 and $1,193 at March
31, 2004 and December 31, 2003, respectively, (par value $.01;
redemption value of $21 per share; 2,000,000 shares authorized;
126,291 shares issued and outstanding
    
    
    3,912
    
    
    
    3,846Minority interest
    
    
    4,958
    
    
    
    3,972Other liabilities
    
    
    7,391
    
    
    
    4,292Total Liabilities
    
    
    104,167
    
    
    
    103,170Commitments and contingencies (note 10)
Stockholders equity:Optional preferred stock (par value $.01 per share; 98,000,000
shares authorized; no shares issued or outstanding)
    
    
    
    
    
    
    Common stock (par value $.01 per share; 100,000,000 shares
authorized; shares issued and outstanding: 11,224,937 and
11,193,687, respectively)
    
    
    112
    
    
    
    112Paid in capital
    
    
    99,260
    
    
    
    99,168Accumulated deficit
    
    
    (69,074
    )
    
    
    (73,923
    )Accumulated other comprehensive income
    
    
    2,600
    
    
    
    3,612Total Stockholders Equity
    
    
    32,898
    
    
    
    28,969Total Liabilities and Stockholders Equity
    
    $
    137,065
    
    
    $
    132,139
 See accompanying notes to consolidated financial statements. 2




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except
per share data)
(Unaudited)
 Three Months EndedMarch 31,2004
    
    2003Revenues:Servicing fees from affiliates
    
    $
    3,032
    
    
    $
    3,507Gain on resolution of Portfolio Assets
    
    
    75
    
    
    
    695Equity in earnings of investments
    
    
    9,212
    
    
    
    2,091Interest income from affiliates
    
    
    444
    
    
    
    915Interest income  other
    
    
    85
    
    
    
    188Other income
    
    
    1,338
    
    
    
    362Total revenues
    
    
    14,186
    
    
    
    7,758Expenses:Interest and fees on notes payable to affiliates
    
    
    2,529
    
    
    
    1,891Interest and fees on notes payable  other
    
    
    69
    
    
    
    62Interest on shares subject to mandatory redemption
    
    
    66
    
    
    
    Salaries and benefits
    
    
    4,077
    
    
    
    3,496Provision for loan and impairment losses
    
    
    
    
    
    
    34Occupancy, data processing, communication and other
    
    
    1,452
    
    
    
    1,994Total expenses
    
    
    8,193
    
    
    
    7,477Earnings from continuing operations before income taxes and minority interest
    
    
    5,993
    
    
    
    281Provision for income taxes
    
    
    (112
    )
    
    
    (121
    )Earnings from continuing operations before minority interest
    
    
    5,881
    
    
    
    160Minority interest
    
    
    (1,032
    )
    
    
    (179
    )Earnings (loss) from continuing operations
    
    
    4,849
    
    
    
    (19
    )Loss from discontinued operations
    
    
    
    
    
    
    Net earnings (loss)
    
    
    4,849
    
    
    
    (19
    )Accumulated preferred dividends in arrears
    
    
    
    
    
    
    (66
    )Net earnings (loss) to common stockholders
    
    $
    4,849
    
    
    $
    (85
    )Basic earnings (loss) per common share are as follows:Earnings (loss) from continuing operations
    
    $
    .43
    
    
    $
    (0.01
    )Discontinued operations
    
    
    
    
    
    
    Net earnings (loss) to common stockholders
    
    $
    .43
    
    
    $
    (0.01
    )Weighted average common shares outstanding
    
    
    11,198
    
    
    
    11,202Diluted earnings (loss) per common share are as follows:Earnings (loss) from continuing operations
    
    $
    .41
    
    
    $
    (0.01
    )Discontinued operations
    
    
    
    
    
    
    Net earnings (loss) to common stockholders
    
    $
    .41
    
    
    $
    (0.01
    )Weighted average common shares outstanding
    
    
    11,792
    
    
    
    11,202
 See accompanying notes to consolidated financial statements. 3




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (Dollars in
thousands)
(Unaudited)
 AccumulatedNumber of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    TotalCommon
    
    Common
    
    Paid in
    
    Accumulated
    
    Comprehensive
    
    Stockholders'Shares
    
    Stock
    
    Capital
    
    Deficit
    
    Income
    
    EquityBalances, December 31, 2002
    
    
    11,195,076
    
    
    $
    112
    
    
    $
    98,934
    
    
    $
    (82,977
    )
    
    $
    2,683
    
    
    $
    18,752Issuance of common stock in exchange for
redeemable preferred stock
    
    
    8,200
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75Issuance of shares through employee stock
purchase plan
    
    
    1,395
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Exercise of common stock options
    
    
    6,250
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Refund of unconverted common stock
    
    
    (17,234
    )
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    144Comprehensive income:Net earnings for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,187
    
    
    
    
    
    
    
    9,187Foreign currency items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,157
    
    
    
    2,157Unrealized net loss on securitization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,228
    )
    
    
    (1,228
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,116Preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )
    
    
    
    
    
    
    (133
    )Balances, December 31, 2003
    
    
    11,193,687
    
    
    
    112
    
    
    
    99,168
    
    
    
    (73,923
    )
    
    
    3,612
    
    
    
    28,969Exercise of common stock options
    
    
    31,250
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    92Comprehensive income:Net earnings for the first three months of 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,849
    
    
    
    
    
    
    
    4,849Foreign currency items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,034
    )
    
    
    (1,034
    )Unrealized net gain on securitization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    22Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,837Balances, March 31, 2004
    
    
    11,224,937
    
    
    $
    112
    
    
    $
    99,260
    
    
    $
    (69,074
    )
    
    $
    2,600
    
    
    $
    32,898
 See accompanying notes to consolidated financial statements. 4




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
(Unaudited)
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net earnings (loss)
    
    $
    4,849
    
    
    $
    (19
    )Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:Proceeds from resolution of Portfolio Assets
    
    
    249
    
    
    
    3,003Gain on resolution of Portfolio Assets
    
    
    (75
    )
    
    
    (695
    )Purchase of Portfolio Assets and loans receivable, net
    
    
    (2,717
    )
    
    
    Provision for loan and impairment losses
    
    
    
    
    
    
    34Equity in earnings of investments
    
    
    (9,212
    )
    
    
    (2,091
    )Proceeds from performing Portfolio Assets and loans receivable, net
    
    
    1,909
    
    
    
    971Capitalized interest and costs on Portfolio Assets and loans receivable
    
    
    (48
    )
    
    
    (84
    )Depreciation and amortization
    
    
    205
    
    
    
    192(Increase) decrease in service fees receivable from affiliate
    
    
    70
    
    
    
    (289
    )(Increase) decrease in other assets
    
    
    (175
    )
    
    
    31Change in estimated notes payable to affiliates
    
    
    (759
    )
    
    
    Increase in other liabilities
    
    
    1,263
    
    
    
    157Net cash provided by (used in) operating activities
    
    
    (4,441
    )
    
    
    1,210Cash flows from investing activities:Property and equipment, net
    
    
    (106
    )
    
    
    (441
    )Contributions to Acquisition Partnerships and Servicing Entities
    
    
    (397
    )
    
    
    (75
    )Distributions from Acquisition Partnerships and Servicing Entities
    
    
    6,987
    
    
    
    4,892Net cash provided by investing activities
    
    
    6,484
    
    
    
    4,376Cash flows from financing activities:Borrowings under notes payable to affiliates
    
    
    1,395
    
    
    
    500Borrowing under notes payable  other
    
    
    2,664
    
    
    
    Payments of notes payable to affiliates
    
    
    (6,270
    )
    
    
    (6,493
    )Payments of notes payable  other
    
    
    (184
    )
    
    
    (609
    )Payments for tender of redeemable preferred stock
    
    
    
    
    
    
    (50
    )Proceeds from issuance of common stock
    
    
    92
    
    
    
    1Net cash used in financing activities
    
    
    (2,303
    )
    
    
    (6,651
    )Net cash used in continuing operations
    
    
    (260
    )
    
    
    (1,065
    )Net cash provided by (used in) discontinued operations
    
    
    268
    
    
    
    (184
    )Net increase (decrease) in cash and cash equivalents
    
    $
    8
    
    
    $
    (1,249
    )Cash and cash equivalents, beginning of period
    
    
    2,745
    
    
    
    4,118Cash and cash equivalents, end of period
    
    $
    2,753
    
    
    $
    2,869Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    1,391
    
    
    $
    1,607Income taxes
    
    
    79
    
    
    
    222Non-cash financing activities:Dividends accumulated and not paid on preferred stock
    
    
    66
    
    
    
    66Balance of redeemable preferred stock and associated dividends
relinquished in recapitalization transaction
    
    
    
    
    
    
    74
 See accompanying notes to consolidated financial statements. 5




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004
(Dollars in thousands, except per share data)
 (1) Basis of Presentation, Earnings (Loss) per Common Share and Stock-Based
Compensation FirstCity Financial Corporation (the Company or FirstCity) is a
financial services company with offices throughout the United States and
Mexico, with a presence in France. At December 31, 2003, the Company was
engaged in two principal reportable segments: (i) portfolio asset acquisition
and resolution and (ii) consumer lending through the Companys minority
investment in Drive Financial Services LP (Drive). The unaudited consolidated financial statements of FirstCity Financial
Corporation (FirstCity or the Company) 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, 2004, and its results of operations and cash flows for
the three-month periods ended March 31, 2004 and 2003. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates include the
estimation of future collections on purchased portfolio assets used in the
calculation of net gain on resolution of portfolio assets, interest rate
environments, valuation of the deferred tax asset, and prepayment speeds and
collectibility of loans held in inventory, in securitization trusts and held
for investment. Actual results could differ materially from those estimates. Basic net earnings (loss) per common share calculations are based upon the
weighted average number of common shares outstanding. Earnings (losses)
included in the earnings (loss) per common share calculation are reduced by
minority interest and increased for preferred stock dividends. Potentially
dilutive common share equivalents include warrants and stock options in the
diluted loss per common share calculations. The effects of any common stock equivalents are antidilutive for the first
quarter of 2003 due to the net loss for the period; therefore, diluted loss per
common share is reported the same as basic loss per common share for that
period. At March 31, 2004, the Company has three stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees,and related Interpretations. No stock-based employee compensation
cost is reflected in the consolidated statements of operations, as all options
granted under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. As required by FASB
Statement No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure,the following table represents the effect on net earnings (loss)
and earnings (loss) per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation,to stock-based employee compensation. Three MonthsEndedMarch 31,2004
    
    2003Net earnings (loss) to common stockholders, as reported
    
    $
    4,849
    
    
    $
    (85
    )Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (21
    )
    
    
    (49
    )Pro forma net earnings (loss) to common stockholders
    
    $
    4,828
    
    
    $
    (134
    )Net earnings (loss) per common share:Basic  as reported
    
    $
    0.43
    
    
    $
    (0.01
    )Basic  pro forma
    
    $
    0.43
    
    
    $
    (0.01
    )Diluted  as reported
    
    $
    0.41
    
    
    $
    (0.01
    )Diluted  pro forma
    
    $
    0.41
    
    
    $
    (0.01
    )
 6




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (2)
    
    Restructure, Liquidity and Capital Resources Generally, the Company requires liquidity to fund its operations, working
capital, payment of debt, equity for acquisition of Portfolio Assets,
investments in and advances to entities formed to acquire Portfolios
(Acquisition Partnerships), retirement of and interest on preferred stock,
and other investments by FirstCity. The potential sources of liquidity are
funds generated from operations, equity distributions from the Acquisition
Partnerships, interest and principal payments on subordinated intercompany debt
and dividends from the Companys subsidiaries, borrowings from revolving lines
of credit and other credit facilities, proceeds from equity market
transactions, securitization and other structured finance transactions and
other special purpose short-term borrowings. In December 2002, FirstCity completed a recapitalization in which holders
of redeemable preferred stock, par value $.01 per share, (New Preferred
Stock) exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares
of common stock and $10.5 million in cash. As a result, common equity was
increased by $18.9 million. During the first quarter of 2003, 4,400 shares of
New Preferred Stock were redeemed for 8,200 shares of common stock and $50,000
in cash. FirstCity also recorded a $4 million gain in December 2002 from the
release of its guaranty of Drives indebtedness to BoS(USA) Inc. (BoS(USA)).
BoS(USA)s warrant to purchase 1,975,000 shares of non-voting common stock was
cancelled. FirstCity also acquired the minority interest in FirstCity Holdings
Corporation held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes,
each of whom were Senior Vice Presidents of FirstCity, by issuing 400,000
shares of common stock of the Company and a note payable, 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 of 4.56%
based on the Companys cost of funds on that date. During the first quarter of
2004, the Company reduced the estimated carrying value of these loans based on
an imputed interest rate of 6.94% and revised cash flow projections. FirstCity
recorded the change in estimate of $.8 million to other income. At March 31,
2004, these notes had a combined balance of $.5 million and mature in December
2011. The Company evaluates the contingent amount of these outstanding notes
on a quarterly basis and will make adjustments to the estimated liability as
changes in estimated cash flows supporting these notes change. As a part of the recapitalization, BoS(USA) provided a non-recourse loan
in the amount of $16 million to FirstCity, which was used to pay the cash
portion of the exchange offer to the holders of the New Preferred Stock, to pay
expenses of the exchange offer and recapitalization, and to reduce FirstCitys
debt to the Bank of Scotland (together with BoS(USA), the Senior Lenders).
The $16 million loan is secured by a 20% interest in Drive (64.51% of
FirstCitys remaining 31% interest in Drive) and other assets of Consumer
Lending Corporation (Consumer Corp.) as are necessary and only to the extent
to allow the Senior Lenders to realize the security interest in the 20%
interest in Drive. In connection with the $16 million loan, the Company agreed
to pay a contingent fee to BoS (USA) Inc. equal to 20% of all amounts received
by the Company upon any sale of the Companys 20% interest in Drive or any
receipt of distributions from Drive related to the 20% ownership interest, once
such payments exceed $16 million in the aggregate. During the first quarter of
2004, the Company recorded $.8 million of additional interest expense related
to the contingent fee. The Company currently estimates that additional
interest expense will be recognized in the amount of $160,000 per quarter
through December 2007. This additional interest expense currently has no
impact on the Companys cash flow. The payment of the interest and any gain or
income resulting from any sale or distribution will not be recognized until a
sale occurs or distribution is received. The Company has no present plans to
sell any interest in Drive and does not anticipate that any distributions will
be made from Drive in the near future that would result in an obligation to pay
a contingent fee. In connection with the recapitalization, the Senior Lenders refinanced the
remainder of the Companys debt facilities ($40 million outstanding at March
31, 2004). The Senior Lenders also provided new financing to FirstCity, with a
total commitment of up to $59 million, consisting of (a) a $5 million revolving
credit loan and (b) an acquisition term loan in an amount up to $54 million.
The aggregate amount of outstanding loans under the total commitment by the
Senior Lenders for the refinancing and the new financing at any time may not
exceed $77 million. Effective as of March 31, 2004, the Company and the Senior
Lenders amended the acquisition term loan facility providing for a total amount
of term loans to be made up to $54 million in the aggregate to (i) make it into
a revolving loan facility providing for a maximum principal balance of loans
outstanding at any time of $45 million, (ii) allow loans to be made in Euros up
to a maximum amount in Euros that is equivalent to $22.5 million U.S. dollars,
(iii) allow loans to be made for acquisition of Portfolio Assets originated
outside the United States of up to $22.5 million, (iv) provide for an interest
rate of Libor plus 3.75%, (v) provide for the commitment commission to increase
from 0.25% to 0.375%, (vi) provide for distribution of 35% of collections from
Asset Portfolios to the Company, provided that the aggregate outstanding
principal balances of all loans under the facility does not exceed 65% of the
total equity interests in Acquisition Partnerships pledged to secure the
acquisition facility, and (vii) provide for other modifications that would
facilitate the use of the acquisition facility in the United States and other
countries. The amended facility continues to provide that the aggregate amount
of all outstanding loans under the loan facilities refinanced with the 7




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Senior Lenders in December 2002 ($40 million outstanding at March 31,
2004) and the amended acquisition facility and the related $5 million revolving
loan are limited to $77 million. BoS(USA) has a warrant to purchase 425,000 shares of the Companys voting
Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants
in connection with this existing warrant for 425,000 shares under certain
specific situations to retain its ability to acquire approximately 4.86% of the
Companys voting Common Stock. The warrant will expire on August 31, 2010, if
it is not exercised prior to that date. In the third quarter of 1999, dividends on the Companys New Preferred
Stock were suspended. At March 31, 2004, accumulated dividends in arrears on
New Preferred Stock totaled $1.3 million, or $9.98 per share. Since the Company
failed to pay quarterly dividends for six consecutive quarters, the holders of
New Preferred Stock are entitled to exercise their right to elect two directors
to the Companys Board until cumulative dividends have been paid in full. To
exercise this right, the holders of the New Preferred Stock must follow certain
prescribed actions set forth in the Certificate of Designations of the
Companys New Preferred Stock. To date, the holders of the New Preferred Stock
have not exercised this right. Dividends on outstanding shares of New Preferred
Stock of FirstCity will be restricted until the Tranche II term loan is paid in
full. Given the continued high debt levels of the Company, and managements
priority of assuring adequate levels of liquidity, the Company does not
anticipate that dividends on New Preferred Stock will be paid prior to
September 30, 2005, the date fixed for redemption of the New Preferred Stock. The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a
subsidiary of Cargill. This facility is being used exclusively to provide
equity in new Portfolio acquisitions in partnerships with Cargill and its
affiliates and matures in March 2005. At March 31, 2004, approximately $23
million was outstanding under this facility. In September 2003, FirstCity entered into a Portfolio acquisition facility
line of credit with Greenwich Capital Financial Products, Inc., which provides
borrowings up to $30 million. The facility obligation was zero at March 31,
2004 and matures September 2004. Management believes that the BoS(USA) loan facilities along with the
liquidity from the Cargill Facility, the related fees generated from the
servicing of assets and equity distributions from existing Acquisition
Partnerships and wholly owned portfolios will allow the Company to meet its
obligations as they come due during the next twelve months. (3) New Accounting Pronouncements In November 2003, the FASB issued Staff Position, No. 150-3, Effective
Date, Disclosures, and Transition for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(Staff Position 150-3). Staff Position 150-3 defers the application of
various provisions of SFAS 150 for specified mandatorily redeemable
noncontrolling interests in consolidated limited-life entities. FirstCity has
minority interests in various limited-life partnerships with a carrying value
of $.8 million at March 31, 2004. The estimated amount that would be paid to
the minority interest holder if the instruments were to be settled at March 31,
2004 is $.8 million. In December 2003, the Accounting Standards Executive Committee issued
Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer(SOP 03-3). SOP 03-3 addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investors initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. SOP 03-3 limits the yield that may be accreted on a loan
portfolio to the excess of undiscounted expected cash flows over the initial
investment in the loan portfolio. FirstCity will be required to account for all
loans acquired after 2004 in accordance with SOP 03-3. For loans acquired prior
to January 1, 2005, FirstCity will adopt the provisions of SOP 03-3 on a
prospective basis. In December 2003, the FASB issued a revision to Interpretation No. 46,
Consolidation of Variable Interest Entities(FIN 46R), which was originally
issued in January 2003. FIN 46R provides guidance on the consolidation of
certain entities when control exists through other than voting (or similar)
interests and was effective immediately with respect to entities created after
January 31, 2003. For certain special purpose entities created prior to
February 1, 2003, FIN 46R became effective for financial statements issued
after December 15, 2003. For all other entities created prior to February 1,
2003 FIN 46R became effective January 1, 2004. FIN 46R requires consolidation by the majority holder of expected residual
gains and losses of the activities of a variable interest entity (VIE).
FirstCity holds significant variable interests in certain domestic Acquisition
Partnerships and all of the French and 8




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##### 



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Mexico partnerships, which would be characterized as VIEs. However,
FirstCity is not deemed to be the primary beneficiary of any of these entities.
At March 31, 2004, FirstCitys maximum exposure to loss as a result of its
involvement with the VIEs is $32 million. (4) Discontinued Operations The net assets related to the resolution of activity from the Companys
investment in discontinued operations was $5,882 at March 31, 2004. No
provisions were recorded during the first quarter of 2004 and 2003. The net
assets from discontinued operations consist of the following: March 31,
    
    December 31,2004
    
    2003Estimated future gross cash receipts on residual interests in securitizations
    
    $
    6,150
    
    
    $
    6,399Accrual for loss on operations and disposal of discontinued operations, net
    
    
    (268
    )
    
    
    (249
    )Net assets of discontinued operations
    
    $
    5,882
    
    
    $
    6,150
 The only assets remaining from discontinued operations are the investment
securities resulting from the retention of residual interests in securitization
transactions. Although the liquidation or run-off of these investment
securities will last longer than one year, the Company is contractually
obligated to service the securitized assets. The Company has considered the
estimated future gross cash receipts for such investment securities in the
computation of the value of such investment securities. The cash flows are
collected over a period of time and are valued using prepayment assumptions of
33% for fixed rate loans and 23% to 25% for variable rate loans. Overall loss
rates are estimated from 3% to 13% of collateral. (5) Portfolio Assets Portfolio Assets are summarized as follows: March 31,
    
    December 31,2004
    
    2003Non-performing Portfolio Assets
    
    $
    30,344
    
    
    $
    27,071Performing Portfolio Assets
    
    
    2,636
    
    
    
    2,682Real estate Portfolios
    
    
    283
    
    
    
    283Total Portfolio Assets
    
    
    33,263
    
    
    
    30,036Adjusted purchase discount required to reflect Portfolio Assets at carrying value
    
    
    (26,265
    )
    
    
    (25,511
    )Portfolio Assets, net
    
    $
    6,998
    
    
    $
    4,525
 Portfolio Assets are pledged to secure non-recourse notes payable. (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 31,2004
    
    2003Mexico
    
    $
    12,723
    
    
    $
    13,351France
    
    
    1,689
    
    
    
    2,604Domestic
    
    
    1,399
    
    
    
    1,358Chile
    
    
    38
    
    
    
    $
    15,849
    
    
    $
    17,313
 There were no provisions recorded on these loans during the first three
months of 2004 and 2003. The loans receivable from Acquisition Partnerships are
secured by the assets/loans acquired by the partnerships with purchase money
loans provided by affiliates of the investors to the partnerships to purchase
the asset pools held in those entities. These loans are evaluated for
impairment by analyzing the expected future cash flows from the underlying
assets within each pool to determine that the cash flows were sufficient to
repay these notes. The Company applies the asset valuation methodology
consistently in all venues and uses the same proprietary asset management
system to evaluate impairment on all asset pools. The results of this
evaluation indicated that cash flows from the pools will be sufficient to repay
the loans and no allowances for impairment were necessary. 9




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##### 



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Equity method earnings (losses) which were recorded to increase (reduce)
the loans and interest receivable from the Mexican partnerships were $.1
million and $(1.9) million during the first three months of 2004 and 2003,
respectively, in compliance with EITF 98-13, Accounting by an Equity Method
Investor for Investee Losses When the Investor Has Loans to and Investments in
Other Securities of the Investee. (7) Equity Investments The Company has investments in Acquisition Partnerships and their general
partners and investments in servicing entities that are accounted for under the
equity method. The condensed combined financial position and results of
operations of the Acquisition Partnerships (excluding servicing entities),
which include the domestic and foreign Acquisition Partnerships and their
general partners, are summarized below: Condensed Combined Balance Sheets March 31,
    
    December 31,2004
    
    2003Assets
    
    $
    484,959
    
    
    $
    525,493Liabilities
    
    $
    406,323
    
    
    $
    441,677Net equity
    
    
    78,636
    
    
    
    83,816$
    484,959
    
    
    $
    525,493Equity investment in Acquisition Partnerships
    
    $
    49,787
    
    
    $
    53,098Equity investment in servicing entities
    
    
    4,587
    
    
    
    4,381$
    54,374
    
    
    $
    57,479
 Condensed Combined Summary of Operations Three Months EndedMarch 31,2004
    
    2003Proceeds from resolution of Portfolio Assets
    
    $
    62,335
    
    
    $
    57,582Gain on resolution of Portfolio Assets
    
    
    20,569
    
    
    
    20,989Interest income on performing Portfolio Assets
    
    
    2,899
    
    
    
    2,145Net earnings (loss)
    
    
    16,044
    
    
    
    (21,038
    )Equity in earnings of Acquisition Partnerships
    
    $
    3,845
    
    
    $
    1,014Equity in earnings of servicing entities
    
    
    330
    
    
    
    216$
    4,175
    
    
    $
    1,230
 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 31,2004
    
    2003Assets:Domestic:WAMCO Partnerships
    
    $
    189,821
    
    
    $
    205,134MinnTex Investment Partners LP
    
    
    1,446
    
    
    
    1,530Other
    
    
    10,153
    
    
    
    10,164Mexico
    
    
    177,656
    
    
    
    186,431France
    
    
    105,883
    
    
    
    122,234$
    484,959
    
    
    $
    525,493
 10




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##### 



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) March 31,
    
    December 31,2004
    
    2003Equity (deficit):Domestic:WAMCO Partnerships
    
    $
    82,242
    
    
    $
    84,589MinnTex Investment Partners LP
    
    
    1,334
    
    
    
    1,418Other
    
    
    6,130
    
    
    
    6,218Mexico
    
    
    (83,462
    )
    
    
    (86,412
    )France
    
    
    72,392
    
    
    
    78,003$
    78,636
    
    
    $
    83,816Equity investment in Acquisition Partnerships:Domestic:WAMCO Partnerships
    
    $
    32,902
    
    
    $
    33,413MinnTex Investment Partners LP
    
    
    440
    
    
    
    514Other
    
    
    3,024
    
    
    
    3,037Mexico
    
    
    944
    
    
    
    1,021France
    
    
    12,477
    
    
    
    15,113$
    49,787
    
    
    $
    53,098
 Revenues and earnings (loss) of the Acquisition Partnerships and equity in
earnings of the Acquisition Partnerships are summarized by geographic region
below. Three Months EndedMarch 31,2004
    
    2003Revenues:Domestic:WAMCO Partnerships
    
    $
    6,435
    
    
    $
    6,352MinnTex Investment Partners LP
    
    
    2,530
    
    
    
    3,255Other
    
    
    43
    
    
    
    10Mexico
    
    
    4,238
    
    
    
    7,006France
    
    
    10,466
    
    
    
    7,026$
    23,712
    
    
    $
    23,649Net earnings (loss):Domestic:WAMCO Partnerships
    
    $
    2,569
    
    
    $
    3,367MinnTex Investment Partners LP
    
    
    2,253
    
    
    
    2,859Other
    
    
    (182
    )
    
    
    (136
    )Mexico
    
    
    3,700
    
    
    
    (31,518
    )France
    
    
    7,704
    
    
    
    4,390$
    16,044
    
    
    $
    (21,038
    )Equity in earnings (loss) of Acquisition
Partnerships:Domestic:WAMCO Partnerships
    
    $
    1,267
    
    
    $
    1,434MinnTex Investment Partners LP
    
    
    743
    
    
    
    944Other
    
    
    (61
    )
    
    
    (30
    )Mexico
    
    
    112
    
    
    
    (2,061
    )France
    
    
    1,784
    
    
    
    727$
    3,845
    
    
    $
    1,014
 FirstCity also has an investment in Drive that is accounted for under the
equity method. The condensed consolidated financial position and results of
operations of Drive are summarized below: 11




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##### 



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Condensed Consolidated Balance Sheets March 31,
    
    December 31,2004
    
    2003Cash
    
    $
    31,825
    
    
    $
    19,013Restricted cash
    
    
    60,931
    
    
    
    47,623Retail installment contracts, net
    
    
    770,042
    
    
    
    623,389Residual interests in securitizations
    
    
    30,087
    
    
    
    29,094Other assets
    
    
    22,243
    
    
    
    19,711Total assets
    
    $
    915,128
    
    
    $
    738,830Notes payable
    
    $
    836,342
    
    
    $
    683,758Other liabilities
    
    
    25,272
    
    
    
    14,631Total liabilities
    
    
    861,614
    
    
    
    698,389Net equity
    
    
    53,514
    
    
    
    40,441$
    915,128
    
    
    $
    738,830Equity investment in Drive
    
    $
    20,732
    
    
    $
    15,667Minority interest
    
    
    (4,143
    )
    
    
    (3,131
    )Net investment in Drive
    
    $
    16,589
    
    
    $
    12,536
 Condensed Consolidated Summary Of Operations Three Months Ended March 31,2004
    
    2003Finance and other interest income
    
    $
    60,443
    
    
    $
    39,303Interest expense
    
    
    9,208
    
    
    
    6,193Net interest margin
    
    
    51,235
    
    
    
    33,110Provision for credit losses on retail installment contracts
    
    
    24,500
    
    
    
    14,164Impairment of residual interests in securitizations, including servicing asset
    
    
    
    
    
    
    1,217Net interest margin after provision for credit losses and impairments
    
    
    26,735
    
    
    
    17,729Other revenues:Servicing income
    
    
    7,185
    
    
    
    5,592Other income
    
    
    941
    
    
    
    554Total other revenues
    
    
    8,126
    
    
    
    6,146Costs and expenses:Salaries and benefits
    
    
    9,716
    
    
    
    12,480Servicing expense
    
    
    8,656
    
    
    
    6,434Occupancy, data processing, communication, and other
    
    
    3,488
    
    
    
    2,471Total costs and expenses
    
    
    21,860
    
    
    
    21,385Net income
    
    $
    13,001
    
    
    $
    2,490Equity in earnings of Drive
    
    $
    5,037
    
    
    $
    861Minority interest
    
    
    (1,007
    )
    
    
    (172
    )Net equity in earnings of Drive
    
    $
    4,030
    
    
    $
    689
 (8) Segment Reporting The Company is engaged in two reportable segments: (i) Portfolio Asset
acquisition and resolution; and (ii) consumer lending. These segments have been
segregated based on products and services offered. The Portfolio Asset
acquisition and resolution business involves acquiring Portfolio Assets at a
discount to face value and servicing and resolving such Portfolios in an effort
to maximize the present value of the ultimate cash recoveries. The consumer
lending business is conducted through the Companys equity investment in Drive.
Drive is a specialized consumer finance company engaged in the purchase,
securitization and servicing of retail installment 12




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##### 



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) contracts originated by automobile dealers. The following is a summary of
results of operations for each of the segments and reconciliation to earnings
(loss) from continuing operations for the three months ended March 31, 2004 and
2003. Three Months EndedMarch 31,2004
    
    2003Portfolio Asset Acquisition and Resolution:Revenues:Servicing fees
    
    $
    3,032
    
    
    $
    3,507Gain on resolution of Portfolio Assets
    
    
    75
    
    
    
    695Equity in earnings of investments
    
    
    4,175
    
    
    
    1,230Interest income
    
    
    529
    
    
    
    1,102Other
    
    
    1,131
    
    
    
    302Total
    
    
    8,942
    
    
    
    6,836Expenses:Interest and fees on notes payable
    
    
    779
    
    
    
    686Salaries and benefits
    
    
    3,041
    
    
    
    2,842Provision for loan and impairment losses
    
    
    
    
    
    
    34Occupancy, data processing, communication and other
    
    
    999
    
    
    
    1,381Minority interest
    
    
    26
    
    
    
    7Total
    
    
    4,845
    
    
    
    4,950Operating contribution before direct taxes
    
    $
    4,097
    
    
    $
    1,886Operating contributiong, net of direct taxes
    
    $
    4,043
    
    
    $
    1,777Consumer Lending:Revenues:Equity in earnings of investment
    
    $
    5,037
    
    
    $
    861Other
    
    
    3
    
    
    
    Total
    
    
    5,040
    
    
    
    861Expenses:Interest and fees on notes payable
    
    
    885
    
    
    
    95Occupancy, data processing, communication and other
    
    
    3
    
    
    
    5Minority interest
    
    
    1,006
    
    
    
    172Total
    
    
    1,894
    
    
    
    272Operating contribution before direct taxes
    
    $
    3,146
    
    
    $
    589Operating contribution, net of direct taxes
    
    $
    3,118
    
    
    $
    576Total operating contribution, net of direct taxes
    
    $
    7,161
    
    
    $
    2,353Corporate Overhead:Corporate interest expense
    
    
    1,000
    
    
    
    1,172Salaries and benefits, occupancy, professional and
other income and expenses, net
    
    
    1,312
    
    
    
    1,200Earnings (loss) from continuing operations
    
    $
    4,849
    
    
    $
    (19
    )
 All of the revenues from the consumer lending segment are attributable to
domestic operations. Revenues from the Portfolio Asset acquisition and
resolution segment are attributable to domestic and foreign operations as
follows: Three MonthsEndedMarch 31,2004
    
    2003Domestic
    
    $
    4,143
    
    
    $
    4,407Mexico
    
    
    2,588
    
    
    
    1,425France
    
    
    2,202
    
    
    
    1,004Other foreign
    
    
    9
    
    
    
    Total
    
    $
    8,942
    
    
    $
    6,836
 13




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##### 



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Total assets for each of the segments and a reconciliation to total assets
is as follows: March 31,
    
    December 31,2004
    
    2003Cash
    
    $
    2,753
    
    
    $
    2,745Portfolio acquisition and resolution assets
Domestic
    
    
    44,776
    
    
    
    42,872Mexico
    
    
    13,699
    
    
    
    14,468France
    
    
    19,598
    
    
    
    23,088Other foreign
    
    
    49
    
    
    
    Consumer assets
    
    
    20,732
    
    
    
    15,685Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Other assets, net
    
    
    9,475
    
    
    
    7,041Net assets of discontinued operations
    
    
    5,882
    
    
    
    6,150Total assets
    
    $
    137,065
    
    
    $
    132,139
 (9) Income Taxes Federal income taxes are provided at a 35% rate. The Company has
substantial net operating loss carryforwards for federal income tax purposes
(NOLs), which can be used to offset the tax liability associated with the
Companys pre-tax earnings until the earlier of the expiration or utilization
of such NOLs. The Company accounts for the benefit of the NOLs by recording the
benefit as an asset and then establishing a valuation allowance to value the
net deferred tax asset at a level, which more likely than not, will be
realized. Realization is determined based on managements expectation of
generating sufficient taxable income in a look forward period over the next
four years. The ultimate realization of the resulting net deferred tax asset is
dependent upon generating sufficient taxable income from its continuing
operations prior to expiration of the NOLs. Although realization is not
assured, management believes it is more likely than not that all of the
recorded deferred tax asset, net of the allowance, will be realized. The amount
of the deferred tax asset considered realizable, however, could be adjusted in
the future if estimates of future taxable income during the carryforward period
change. The ability of the Company to realize the deferred tax asset is
periodically reviewed and the valuation allowance is adjusted accordingly. (10) Commitments and Contingencies Periodically, FirstCity, its subsidiaries, its affiliates and the
Acquisition Partnerships are parties to or otherwise involved in legal
proceedings arising in the normal course of business. FirstCity does not
believe that there is any proceeding threatened or pending against it, its
subsidiaries, its affiliates or the Acquisition Partnerships which, if
determined adversely, would have a material adverse effect on the consolidated
financial position, results of operations or liquidity of FirstCity, its
subsidiaries, its affiliates or the Acquisition Partnerships. In connection with the transactions contemplated by the Securities
Purchase Agreement, effective August 1, 2000, Consumer Corp. and FirstCity
Funding LP (Funding LP) contributed all of the assets utilized in the
operations of the automobile finance operation to Drive pursuant to the terms
of a Contribution and Assumption Agreement by and between Consumer Corp. and
Drive, and a Contribution and Assumption Agreement by and between Funding LP
and Drive (collectively, the Contribution Agreements). Drive assumed
substantially all of the liabilities of the automobile finance operation as set
forth in the Contribution Agreements. In addition, in the Securities Purchase Agreement, the Company, Consumer
Corp., Funding LP and Funding GP made various representations and warranties
concerning (i) their respective organizations, (ii) the automobile finance
operation conducted by Consumer Corp. and Funding LP, and (iii) the assets
transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer
Corp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and
IFA-LP from damages resulting from a breach of any representation or warranty
contained in the Securities Purchase Agreement or otherwise made by the
Company, Consumer Corp. or Funding LP in connection with the transaction. The
indemnity obligation under the Securities Purchase Agreement survives for a
period of seven (7) years from August 25, 2000 (the Closing Date) with
respect to tax-related representations and warranties and for thirty months
from the Closing Date with respect to all other representations and warranties.
Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to
make any payments as a result of the indemnity provided under the Securities
Purchase Agreement until the aggregate amount payable exceeds $.25 million, and
then only for the amount in excess of $.25 million in the aggregate; however
certain representations and warranties are not subject to this $.25 million
threshold. Pursuant to 14




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##### 



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) the terms of the Contribution Agreements, Consumer Corp. and Funding LP
have agreed to indemnify Drive from any damages resulting in a material adverse
effect on Drive resulting from breaches of representations or warranties,
failure to perform, pay or discharge liabilities other than the assumed
liabilities, or claims, lawsuits or proceedings resulting from the transactions
contemplated by the Contribution Agreements. Pursuant to the terms of the
Contribution Agreements, Drive has agreed to indemnify Consumer Corp. and
Funding LP for any breach of any representation or warranty by Drive, the
failure of Drive to discharge any assumed liability, or any claims arising out
of any failure by Drive to properly service receivables after August 1, 2000.
Liability for indemnification pursuant to the terms of the Contribution
Agreements will not arise until the total of all losses with respect to such
matters exceeds $.25 million and then only for the amount by which such losses
exceed $.25 million; however this limitation will not apply to any breach of
which the party had knowledge at the time of the Closing Date or any
intentional breach by a party of any covenant or obligation under the
Contribution Agreements. The Company has agreed to indemnify BoS(USA) for up to 31% of losses,
which might arise as a result of agreements BoS(USA) executed as a sponsor in
connection with the securitizations completed by Drive. The Company also agreed
to provide support in connection with securitizations by Consumer Corp. and
Drive prior to the acquisition by BoS(USA) of the interest in Drive in August
2000. Management of the Company currently does not believe it is likely that
FirstCity will be required to make payments on these indemnification
agreements. FirstCity is obligated to pay BoS(USA) an arrangement fee related to the
$16 million loan equal to 20% of all proceeds and other amounts paid to
FirstCity from any sale or other disposition (regardless of when such sale or
other disposition occurs) of, and of all dividends and other distributions paid
to FirstCity by Drive or its general partner (regardless of when such dividend
or other distribution occurs) on, its 20% interest in Drive, in each case in
excess of $16 million in the aggregate. As of March 31, 2004 the Company has
accrued $.8 million of additional interest expense related to this contingent
fee. The Company currently estimates that additional interest expense will be
recognized in the amount of $160,000 per quarter through December 2007. This
additional interest expense currently has no impact on the Companys cash flow.
The payment of the interest and any gain or income resulting from any sale or
distribution will not be recognized until a sale occurs or distribution is
received. The Company has no present plans to sell any interest in Drive and
does not anticipate that any distributions will be made from Drive in the near
future that would result in an obligation to pay a contingent fee. 15




---



##### 



WAMCO PARTNERSHIPS Combined Financial Statements March 31, 2004
(Unaudited)
 16




---



##### 



WAMCO PARTNERSHIPS COMBINED BALANCE SHEETS March 31,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)ASSETSCash
    
    $
    13,335
    
    
    $
    15,044Portfolio Assets, net
    
    
    155,003
    
    
    
    168,681Investments in partnerships
    
    
    2,361
    
    
    
    2,350Deferred profit sharing
    
    
    17,933
    
    
    
    18,273Other assets, net
    
    
    1,189
    
    
    
    786$
    189,821
    
    
    $
    205,134LIABILITIES AND PARTNERS CAPITALNotes payable (including $24,712 and $71,224 affiliates in 2004 and 2003, respectively)
    
    $
    83,644
    
    
    $
    95,946Deferred compensation
    
    
    21,422
    
    
    
    21,466Other liabilities (including $1,512 and $1,603 to affiliates in 2004 and 2003, respectively)
    
    
    2,513
    
    
    
    3,133Total liabilities
    
    
    107,579
    
    
    
    120,545Commitments
and contingencies (note 9)Partners capital
    
    
    82,242
    
    
    
    84,589$
    189,821
    
    
    $
    205,134
 See accompanying notes to combined financial statements. 17




---



##### 



WAMCO PARTNERSHIPS COMBINED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003(Dollars in thousands)Proceeds from resolution of Portfolio Assets
    
    $
    20,413
    
    
    $
    15,889Cost of Portfolio Assets resolved
    
    
    15,575
    
    
    
    11,469Gain on resolution of Portfolio Assets
    
    
    4,838
    
    
    
    4,420Interest income on performing Portfolio Assets.
    
    
    1,587
    
    
    
    1,523Interest and fees on notes payable  affiliates
    
    
    (614
    )
    
    
    (955
    )Interest and fees on notes payable  other
    
    
    (629
    )
    
    
    (404
    )Provision for loan losses
    
    
    (587
    )
    
    
    (444
    )Servicing fees  affiliate
    
    
    (855
    )
    
    
    (657
    )General, administrative and operating expenses.
    
    
    (1,180
    )
    
    
    (525
    )Other income, net
    
    
    9
    
    
    
    409Net earnings
    
    $
    2,569
    
    
    $
    3,367
 See accompanying notes to combined financial statements. 18




---



##### 



WAMCO PARTNERSHIPS COMBINED STATEMENTS OF CHANGES IN PARTNERS CAPITAL (Unaudited)
 Class BClass A Equity
    
    EquityGeneral
    
    Limited
    
    Limited
    
    General
    
    LimitedPartners
    
    Partners
    
    Partners
    
    Partners
    
    Partners
    
    Total(Dollars in thousands)Balance at December 31, 2002
    
    $
    123
    
    
    $
    6,010
    
    
    $
    1,063
    
    
    $
    939
    
    
    $
    71,924
    
    
    $
    80,059Contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    332
    
    
    
    29,850
    
    
    
    30,182Distributions
    
    
    (98
    )
    
    
    (4,788
    )
    
    
    (322
    )
    
    
    (546
    )
    
    
    (38,987
    )
    
    
    (44,741
    )Comprehensive income:Net earnings
    
    
    41
    
    
    
    1,989
    
    
    
    55
    
    
    
    280
    
    
    
    18,163
    
    
    
    20,528Unrealized net loss on securitization
    
    
    (21
    )
    
    
    (1,018
    )
    
    
    (5
    )
    
    
    (17
    )
    
    
    (378
    )
    
    
    (1,439
    )Total comprehensive income
    
    
    20
    
    
    
    971
    
    
    
    50
    
    
    
    263
    
    
    
    17,785
    
    
    
    19,089Balance at December 31, 2003
    
    
    45
    
    
    
    2,193
    
    
    
    791
    
    
    
    988
    
    
    
    80,572
    
    
    
    84,589Contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    788
    
    
    
    793Distributions
    
    
    (4
    )
    
    
    (190
    )
    
    
    (18
    )
    
    
    (70
    )
    
    
    (5,427
    )
    
    
    (5,709
    )Comprehensive income:Net earnings
    
    
    5
    
    
    
    267
    
    
    
    12
    
    
    
    32
    
    
    
    2,253
    
    
    
    2,569Total comprehensive income
    
    
    5
    
    
    
    267
    
    
    
    12
    
    
    
    32
    
    
    
    2,253
    
    
    
    2,569Balance at March 31, 2004
    
    $
    46
    
    
    $
    2,270
    
    
    $
    785
    
    
    $
    955
    
    
    $
    78,186
    
    
    $
    82,242
 See accompanying notes to combined financial statements. 19




---



##### 



WAMCO PARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003(Dollars in thousands)Cash flows from operating activities:Net earnings
    
    $
    2,569
    
    
    $
    3,367Adjustments to reconcile net earnings to net cash provided by operating activities:Amortization of loan origination and commitment fees
    
    
    130
    
    
    
    96Amortization of deferred profit sharing
    
    
    296
    
    
    
    Accretion of unrealized gain on trust certificates
    
    
    
    
    
    
    (81
    )Provision for loan losses
    
    
    587
    
    
    
    444Gain on resolution of Portfolio Assets
    
    
    (4,838
    )
    
    
    (4,420
    )Purchase of Portfolio Assets
    
    
    (3,908
    )
    
    
    Net receipts on Portfolio Asset lines of credit
    
    
    117
    
    
    
    Capitalized costs on Portfolio Assets
    
    
    (281
    )
    
    
    (458
    )Capitalized interest on Portfolio Assets
    
    
    (362
    )
    
    
    (184
    )Proceeds from resolution of Portfolio Assets
    
    
    20,413
    
    
    
    15,889Principal payments on Performing Portfolio Assets
    
    
    1,950
    
    
    
    2,243Decrease (increase) in deferred profit sharing
    
    
    44
    
    
    
    (1,314
    )Increase in other assets
    
    
    (533
    )
    
    
    (35
    )Increase (decrease) in deferred compensation
    
    
    (44
    )
    
    
    1,314Deferred compensation paid
    
    
    
    
    
    
    (58
    )Decrease in other liabilities
    
    
    (620
    )
    
    
    (1,254
    )Net cash provided by operating activities
    
    
    15,520
    
    
    
    15,549Cash flows from investing activities:Contribution to subsidiaries
    
    
    (11
    )
    
    
    (29
    )Change in trust certificates
    
    
    
    
    
    
    318Net cash provided by (used in) investing activities
    
    
    (11
    )
    
    
    289Cash flows from financing activities:Borrowing of debt  affiliates
    
    
    3,126
    
    
    
    118Borrowing of debt
    
    
    43,900
    
    
    
    Repayment of debt  affiliates
    
    
    (43,638
    )
    
    
    (7,394
    )Repayment of debt
    
    
    (9,690
    )
    
    
    (4,116
    )Repayment of preferred equity
    
    
    
    
    
    
    (51
    )Capital contributions
    
    
    793
    
    
    
    Capital distributions
    
    
    (5,709
    )
    
    
    (6,267
    )Net cash used in financing activities
    
    
    (17,218
    )
    
    
    (17,710
    )Net decrease in cash
    
    
    (1,709
    )
    
    
    (1,872
    )Cash at beginning of period
    
    
    15,044
    
    
    
    13,035Cash at end of period
    
    $
    13,335
    
    
    $
    11,163
 Supplemental disclosure of cash flow information: Cash paid for interest was $1,941 and $1,189 for the three months ended
March 31, 2004 and 2003, respectively. Unrealized net loss on trust certificates recorded in partners capital
was zero and $331 for the three months ended March 31, 2004 and 2003,
respectively. See accompanying notes to combined financial statements. 20




---



##### 



WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS March 31, 2004
(Dollars in thousands)
(Unaudited)
 (1) Basis of Presentation The unaudited combined financial statements of the WAMCO Partnerships
reflect, in the opinion of management, all adjustments, consisting only of
normal and recurring adjustments, necessary to present fairly the combined
financial position at March 31, 2004, and the results of operations and cash
flows for the three-month periods ended March 31, 2004 and 2003. (2) Organization and Partnership Agreements The combined financial statements represents domestic Texas limited
partnerships and limited liability companies (Acquisition Partnerships or
Partnerships) and include the accounts of WAMCO III, Ltd. (WAMCO III);
WAMCO IX, Ltd. (WAMCO IX); WAMCO XXIV, Ltd. (WAMCO XXIV); WAMCO XXV, Ltd.
(WAMCO XXV); WAMCO XXVI, Ltd.; WAMCO XXVII, Ltd.; WAMCO XXVIII, Ltd. (WAMCO
XXVIII); WAMCO XXIX, Ltd.; WAMCO XXX, Ltd. (WAMCO XXX); WAMCO 31, Ltd.
(WAMCO 31); WAMCO 32, Ltd. (WAMCO 32); WAMCO 33, Ltd. (WAMCO 33); SOWAMCO
XXIX, Ltd. (SOWAMCO XXIX); Calibat Fund, LLC; First B Realty, Ltd.; First
Paradee, Ltd.; FirstStreet Investments LLC (FirstStreet); FC Properties, Ltd.
(FC Properties); and Community Development Investment, LLC. FirstCity
Financial Corporation or its subsidiaries, FirstCity Commercial Corporation and
FirstCity Holdings Corporation (together FirstCity), share limited
partnership interests and participate as general partners in common with
Cargill Financial Services, Inc. in all of the Partnerships. FC Properties,
WAMCO XXVII and WAMCO XXX are considered to be significant subsidiaries of
FirstCity. The Partnerships were formed to acquire, hold and dispose of Portfolio
Assets acquired from the Federal Deposit Insurance Corporation, Resolution
Trust Corporation and other nongovernmental agency sellers, pursuant to certain
purchase agreements or assignments of such purchase agreements. In accordance
with the purchase agreements, the Partnerships may retain certain rights of
return regarding the assets related to representations and warranties as set
forth in and according to the terms and conditions of the purchase agreements. Generally, the partnership loan agreements of the Partnerships provide for
certain preferences as to the distribution of cash flows. Proceeds from
disposition of and payments received on the Portfolio Assets are allocated
based on the partnership and other agreements which ordinarily provide for the
payment of interest and mandatory principal installments on outstanding debt
before payment of intercompany servicing fees and return of capital and
restricted distributions to partners. The partnership agreement for WAMCO III provides for Class A and Class B
Equity partners. The Class A Equity partners are WAMCO III of Texas, Inc.,
FirstCity Commercial Corporation and CFSC Capital Corp. II, and the Class B
Equity partner is CFSC Capital Corp. II. The Class B Equity limited partner is
allocated 20 percent net income or loss, excluding equity earnings in
FirstStreet, recognized by the partnership prior to allocation of net income or
loss to the Class A Equity partners. Net earnings in FirstStreet are allocated
to the Class A Equity partners in proportion to their respective ownership
percentages. Net income or loss is credited or charged to the Class A Equity
partners capital accounts in proportion to their respective capital account
balances after the 20% allocation to the Class B Equity limited partner.
Distributions are allocated using the same methodology as net income or loss.
The Class B Equity limited partner is not required to make capital
contributions. During September 2003, WAMCO XXIX, Ltd. was merged with and into WAMCO
XXVII, Ltd. with WAMCO XXVII, Ltd. being the surviving entity. Also during
September 2003, Community Development Investment, LLC. was merged with and into
WAMCO XXIV, Ltd. with WAMCO XXIV, Ltd. being the surviving entity. 21




---



##### 



WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS  (Continued) (3) Combining Financial Statements FC Properties, WAMCO XXVIII and WAMCO XXX are considered to be significant
subsidiaries of FirstCity. The following tables summarize the combining balance
sheets and changes in partners capital of the WAMCO Partnerships as of March
31, 2004 and December 31, 2003, the related combining statements of operations
and combining cash flows for the three months ended March 31, 2004 and 2003. Combining Balance Sheets
March 31, 2004 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    Combined(Dollars in thousands)ASSETSCash
    
    $
    1,440
    
    
    $
    1,305
    
    
    $
    2,076
    
    
    $
    8,514
    
    
    $
    13,335Portfolio Assets, net
    
    
    13,120
    
    
    
    15,834
    
    
    
    15,799
    
    
    
    110,250
    
    
    
    155,003Investments in partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,361
    
    
    
    2,361Deferred profit sharing
    
    
    17,933
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,933Other assets, net
    
    
    21
    
    
    
    54
    
    
    
    152
    
    
    
    962
    
    
    
    1,189$
    32,514
    
    
    $
    17,193
    
    
    $
    18,027
    
    
    $
    122,087
    
    
    $
    189,821LIABILITIES AND PARTNERS CAPITALNotes payable
    
    $
    
    
    
    $
    5,907
    
    
    $
    9,210
    
    
    $
    68,527
    
    
    $
    83,644Deferred compensation
    
    
    21,422
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,422Other liabilities
    
    
    217
    
    
    
    795
    
    
    
    170
    
    
    
    1,331
    
    
    
    2,513Total liabilities
    
    
    21,639
    
    
    
    6,702
    
    
    
    9,380
    
    
    
    69,858
    
    
    
    107,579Partners capital
    
    
    10,875
    
    
    
    10,491
    
    
    
    8,647
    
    
    
    52,229
    
    
    
    82,242$
    32,514
    
    
    $
    17,193
    
    
    $
    18,027
    
    
    $
    122,087
    
    
    $
    189,821Notes payable owed to affiliates included
in above balances
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    24,712
    
    
    $
    24,712Other liabilities owed to affiliates
included in above balances
    
    
    21
    
    
    
    577
    
    
    
    134
    
    
    
    780
    
    
    
    1,512
 Combining Balance Sheets
December 31, 2003 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    Combined(Dollars in thousands)ASSETSCash
    
    $
    1,526
    
    
    $
    539
    
    
    $
    3,897
    
    
    $
    9,082
    
    
    $
    15,044Portfolio Assets, net
    
    
    13,340
    
    
    
    17,780
    
    
    
    19,086
    
    
    
    118,475
    
    
    
    168,681Investments in partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,350
    
    
    
    2,350Deferred profit sharing
    
    
    18,273
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,273Other assets, net
    
    
    5
    
    
    
    101
    
    
    
    187
    
    
    
    493
    
    
    
    786$
    33,144
    
    
    $
    18,420
    
    
    $
    23,170
    
    
    $
    130,400
    
    
    $
    205,134LIABILITIES AND PARTNERS CAPITALNotes payable
    
    $
    
    
    
    $
    6,829
    
    
    $
    13,393
    
    
    $
    75,724
    
    
    $
    95,946Deferred compensation
    
    
    21,466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,466Other liabilities
    
    
    533
    
    
    
    987
    
    
    
    209
    
    
    
    1,384
    
    
    
    3,133Total liabilities
    
    
    22,019
    
    
    
    7,816
    
    
    
    13,602
    
    
    
    77,108
    
    
    
    120,545Partners capital
    
    
    11,125
    
    
    
    10,604
    
    
    
    9,568
    
    
    
    53,292
    
    
    
    84,589$
    33,144
    
    
    $
    18,420
    
    
    $
    23,170
    
    
    $
    130,400
    
    
    $
    205,134Notes payable owed to affiliates included
in above balances
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    71,224
    
    
    $
    71,224Other liabilities owed to affiliates
included in above balances
    
    
    1
    
    
    
    572
    
    
    
    163
    
    
    
    867
    
    
    
    1,603
 22




---



##### 



WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS  (Continued) COMBINING STATEMENTS OF OPERATIONS Three Months Ended March 31, 2004
 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    Combined(Dollars in thousands)Proceeds from resolution of Portfolio Assets
    
    $
    687
    
    
    $
    2,052
    
    
    $
    4,350
    
    
    $
    13,324
    
    
    $
    20,413Cost of Portfolio Assets resolved
    
    
    251
    
    
    
    1,513
    
    
    
    3,370
    
    
    
    10,441
    
    
    
    15,575Gain on resolution of Portfolio Assets
    
    
    436
    
    
    
    539
    
    
    
    980
    
    
    
    2,883
    
    
    
    4,838Interest income on performing Portfolio Assets
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    1,527
    
    
    
    1,587Interest and fees expense  affiliate
    
    
    
    
    
    
    (114
    )
    
    
    
    
    
    
    (500
    )
    
    
    (614
    )Interest and fees expense  other
    
    
    
    
    
    
    (104
    )
    
    
    (133
    )
    
    
    (392
    )
    
    
    (629
    )Provision for loan and impairment losses
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    (552
    )
    
    
    (587
    )Service fees  affiliate
    
    
    (21
    )
    
    
    (92
    )
    
    
    (152
    )
    
    
    (590
    )
    
    
    (855
    )General, administrative and operating expenses
    
    
    (666
    )
    
    
    (38
    )
    
    
    (109
    )
    
    
    (367
    )
    
    
    (1,180
    )Other income, net
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    5
    
    
    
    9Net earnings
    
    $
    (250
    )
    
    $
    217
    
    
    $
    588
    
    
    $
    2,014
    
    
    $
    2,569
 COMBINING STATEMENTS OF OPERATIONS Three Months Ended March 31, 2003
 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    Combined(Dollars in thousands)Proceeds from resolution of Portfolio Assets
    
    $
    232
    
    
    $
    2,981
    
    
    $
    10,633
    
    
    $
    2,043
    
    
    $
    15,889Cost of Portfolio Assets resolved
    
    
    39
    
    
    
    2,141
    
    
    
    7,813
    
    
    
    1,476
    
    
    
    11,469Gain on resolution of Portfolio Assets
    
    
    193
    
    
    
    840
    
    
    
    2,820
    
    
    
    567
    
    
    
    4,420Interest income on performing Portfolio Assets
    
    
    
    
    
    
    410
    
    
    
    
    
    
    
    1,113
    
    
    
    1,523Interest and fees expense  affiliate
    
    
    
    
    
    
    (162
    )
    
    
    (476
    )
    
    
    (317
    )
    
    
    (955
    )Interest and fees expense  other
    
    
    
    
    
    
    (221
    )
    
    
    
    
    
    
    (183
    )
    
    
    (404
    )Provision for loan and impairment losses
    
    
    
    
    
    
    (112
    )
    
    
    
    
    
    
    (332
    )
    
    
    (444
    )Service fees  affiliate
    
    
    (7
    )
    
    
    (152
    )
    
    
    (352
    )
    
    
    (146
    )
    
    
    (657
    )General, administrative and operating expenses
    
    
    (146
    )
    
    
    (73
    )
    
    
    (130
    )
    
    
    (176
    )
    
    
    (525
    )Other income, net
    
    
    
    
    
    
    2
    
    
    
    3
    
    
    
    404
    
    
    
    409Net earnings
    
    $
    40
    
    
    $
    532
    
    
    $
    1,865
    
    
    $
    930
    
    
    $
    3,367
 COMBINING STATEMENTS OF CHANGES IN PARTNERS CAPITAL
Year Ended December 31, 2003 and Three Months Ended March 31, 2004 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    Combined(Dollars in thousands)Balance at December 31, 2002
    
    $
    12,096
    
    
    $
    14,944
    
    
    $
    12,151
    
    
    $
    40,868
    
    
    $
    80,059Contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,182
    
    
    
    30,182Distributions
    
    
    (4,880
    )
    
    
    (7,291
    )
    
    
    (7,925
    )
    
    
    (24,645
    )
    
    
    (44,741
    )Net earnings
    
    
    3,909
    
    
    
    2,951
    
    
    
    5,342
    
    
    
    8,326
    
    
    
    20,528Unrealized net gain on
Securitization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,439
    )
    
    
    (1,439
    )Total comprehensive income.
    
    
    3,909
    
    
    
    2,951
    
    
    
    5,342
    
    
    
    6,887
    
    
    
    19,089Balance at December 31, 2003
    
    
    11,125
    
    
    
    10,604
    
    
    
    9,568
    
    
    
    53,292
    
    
    
    84,589Contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    793
    
    
    
    793Distributions
    
    
    
    
    
    
    (330
    )
    
    
    (1,509
    )
    
    
    (3,870
    )
    
    
    (5,709
    )Net earnings
    
    
    (250
    )
    
    
    217
    
    
    
    588
    
    
    
    2,014
    
    
    
    2,569Unrealized net gain on
Securitization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive income.
    
    
    (250
    )
    
    
    217
    
    
    
    588
    
    
    
    2,014
    
    
    
    2,569Balance at March 31, 2004
    
    $
    10,875
    
    
    $
    10,491
    
    
    $
    8,647
    
    
    $
    52,229
    
    
    $
    82,242
 23




---



##### 



WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS  (Continued) COMBINING STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2004
 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    Combined(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net earnings (loss)
    
    $
    (250
    )
    
    $
    217
    
    
    $
    588
    
    
    $
    2,014
    
    
    $
    2,569Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:Amortization of loan origination and
commitment fees
    
    
    
    
    
    
    44
    
    
    
    35
    
    
    
    51
    
    
    
    130Amortization of deferred profit sharing.
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    296Provision for loan losses
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    552
    
    
    
    587Gain on resolution of Portfolio Assets
    
    
    (436
    )
    
    
    (539
    )
    
    
    (980
    )
    
    
    (2,883
    )
    
    
    (4,838
    )Purchase of Portfolio Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,908
    )
    
    
    (3,908
    )Net receipts on Portfolio Asset lines
of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    117Capitalized costs on Portfolio Assets
    
    
    (31
    )
    
    
    
    
    
    
    (83
    )
    
    
    (167
    )
    
    
    (281
    )Capitalized interest on Portfolio Assets
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (360
    )
    
    
    (362
    )Proceeds from resolution of Portfolio
Assets
    
    
    687
    
    
    
    2,052
    
    
    
    4,350
    
    
    
    13,324
    
    
    
    20,413Principal payments on Performing
Portfolio Assets
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    1,550
    
    
    
    1,950Increase in deferred profit sharing
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44(Increase) decrease in other assets
    
    
    (16
    )
    
    
    3
    
    
    
    
    
    
    
    (520
    )
    
    
    (533
    )Increase in deferred compensation
    
    
    (44
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44
    )Decrease in other liabilities
    
    
    (336
    )
    
    
    (192
    )
    
    
    (39
    )
    
    
    (53
    )
    
    
    (620
    )Net cash provided by (used in)
operating activities
    
    
    (86
    )
    
    
    2,018
    
    
    
    3,871
    
    
    
    9,717
    
    
    
    15,520Cash flows from investing activities:Contribution to subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Cash flows from financing activities:Borrowing of debt  affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,126
    
    
    
    3,126Borrowing of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,900
    
    
    
    43,900Repayment of debt  affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,638
    )
    
    
    (49,638
    )Repayment of debt
    
    
    
    
    
    
    (922
    )
    
    
    (4,183
    )
    
    
    (4,585
    )
    
    
    (9,690
    )Capital contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    793
    
    
    
    793Capital distributions
    
    
    
    
    
    
    (330
    )
    
    
    (1,509
    )
    
    
    (3,870
    )
    
    
    (5,709
    )Net cash used in financing activities
    
    
    
    
    
    
    (1,252
    )
    
    
    (5,692
    )
    
    
    (10,274
    )
    
    
    (17,218
    )Net increase (decrease) in cash
    
    
    (86
    )
    
    
    766
    
    
    
    (1,821
    )
    
    
    (568
    )
    
    
    (1,709
    )Cash at beginning of period
    
    
    1,526
    
    
    
    539
    
    
    
    3,897
    
    
    
    9,082
    
    
    
    15,044Cash at end of period
    
    $
    1,440
    
    
    $
    1,305
    
    
    $
    2,076
    
    
    $
    8,514
    
    
    $
    13,335Supplemental disclosure of cash flow
information  Approximate cash paid for
interest
    
    $
    
    
    
    $
    195
    
    
    $
    109
    
    
    $
    1,637
    
    
    $
    1,941
 24




---



##### 



WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS  (Continued) COMBINING STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2003
 FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    Combined(Dollars in
thousands)(Unaudited)Cash flows from operating activities:Net earnings
    
    $
    40
    
    
    $
    532
    
    
    $
    1,865
    
    
    $
    930
    
    
    $
    3,367Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:Amortization of loan origination and
commitment fees
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    52
    
    
    
    96Amortization of deferred profit sharing.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accretion of unrealized gain on trust
Certificates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    (81
    )Provision for loan losses
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    332
    
    
    
    444Gain on resolution of Portfolio Assets
    
    
    (193
    )
    
    
    (840
    )
    
    
    (2,820
    )
    
    
    (567
    )
    
    
    (4,420
    )Purchase of Portfolio Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net receipts on Portfolio Asset lines
of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capitalized costs on Portfolio Assets
    
    
    (135
    )
    
    
    (9
    )
    
    
    (12
    )
    
    
    (302
    )
    
    
    (458
    )Capitalized interest on Portfolio Assets
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (178
    )
    
    
    (184
    )Proceeds from resolution of Portfolio
Assets
    
    
    232
    
    
    
    2,981
    
    
    
    10,633
    
    
    
    2,043
    
    
    
    15,889Principal payments on Performing
Portfolio Assets
    
    
    
    
    
    
    1,219
    
    
    
    
    
    
    
    1,024
    
    
    
    2,243Increase in deferred profit sharing
    
    
    (1,314
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,314
    )(Increase) decrease in other assets
    
    
    (21
    )
    
    
    13
    
    
    
    (110
    )
    
    
    83
    
    
    
    (35
    )Increase in deferred compensation
    
    
    1,314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,314Deferred compensation and profit
sharing paid
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )Decrease in other liabilities
    
    
    (431
    )
    
    
    (118
    )
    
    
    (240
    )
    
    
    (465
    )
    
    
    (1,254
    )Net cash provided by (used in)
operating Activities
    
    
    (566
    )
    
    
    3,928
    
    
    
    9,316
    
    
    
    2,871
    
    
    
    15,549Cash flows from investing activities:Contribution to subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (29
    )Change in trust certificates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318
    
    
    
    318Net cash provided by investing
activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    289
    
    
    
    289Cash flows from financing activities:Borrowing of debt  affiliate
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    118Repayment of debt  affiliate
    
    
    
    
    
    
    
    
    
    
    (6,798
    )
    
    
    (596
    )
    
    
    (7,394
    )Repayment of debt
    
    
    
    
    
    
    (2,199
    )
    
    
    
    
    
    
    (1,917
    )
    
    
    (4,116
    )Repayment of preferred equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    (51
    )Capital contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital distributions
    
    
    (88
    )
    
    
    (1,525
    )
    
    
    (728
    )
    
    
    (3,926
    )
    
    
    (6,267
    )Net cash used in financing activities
    
    
    (88
    )
    
    
    (3,724
    )
    
    
    (7,408
    )
    
    
    (6,490
    )
    
    
    (17,710
    )Net increase (decrease) in cash
    
    
    (654
    )
    
    
    204
    
    
    
    1,908
    
    
    
    (3,330
    )
    
    
    (1,872
    )Cash at beginning of period
    
    
    1,484
    
    
    
    2,440
    
    
    
    3,621
    
    
    
    5,490
    
    
    
    13,035Cash at end of period
    
    $
    830
    
    
    $
    2,644
    
    
    $
    5,529
    
    
    $
    2,160
    
    
    $
    11,163Supplemental disclosure of cash flow
information  Approximate cash paid for
interest
    
    $
    
    
    
    $
    359
    
    
    $
    375
    
    
    $
    455
    
    
    $
    1,189
 25




---



##### 



WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS  (Continued) (4) Portfolio Assets Portfolio Assets are summarized as follows: March 31, 2004FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedNon-performing Portfolio Assets
    
    $
    
    
    
    $
    35,148
    
    
    $
    44,932
    
    
    $
    130,330
    
    
    $
    210,410Performing Portfolio Assets
    
    
    
    
    
    
    9,656
    
    
    
    
    
    
    
    66,119
    
    
    
    75,775Real estate Portfolios
    
    
    13,120
    
    
    
    
    
    
    
    
    
    
    
    4,063
    
    
    
    17,183Total Portfolio Assets
    
    
    13,120
    
    
    
    44,804
    
    
    
    44,932
    
    
    
    200,512
    
    
    
    303,368Discount required to reflect Portfolio
Assets at carrying value
    
    
    
    
    
    
    (28,970
    )
    
    
    (29,133
    )
    
    
    (90,262
    )
    
    
    (148,365
    )Portfolio Assets, net
    
    $
    13,120
    
    
    $
    15,834
    
    
    $
    15,799
    
    
    $
    110,250
    
    
    $
    155,003
 December 31, 2003FC
    
    WAMCO
    
    WAMCO
    
    OtherProperties
    
    XXVIII
    
    XXX
    
    Partnerships
    
    CombinedNon-performing Portfolio Assets
    
    $
    
    
    
    $
    37,230
    
    
    $
    50,542
    
    
    $
    134,034
    
    
    $
    221,806Performing Portfolio Assets
    
    
    
    
    
    
    10,209
    
    
    
    
    
    
    
    71,573
    
    
    
    81,782Real estate Portfolios
    
    
    13,340
    
    
    
    
    
    
    
    
    
    
    
    4,214
    
    
    
    17,554Total Portfolio Assets
    
    
    13,340
    
    
    
    47,439
    
    
    
    50,542
    
    
    
    209,821
    
    
    
    321,142Discount required to reflect Portfolio
Assets at carrying value
    
    
    
    
    
    
    (29,659
    )
    
    
    (31,456
    )
    
    
    (91,346
    )
    
    
    (152,461
    )Portfolio Assets, net
    
    $
    13,340
    
    
    $
    17,780
    
    
    $
    19,086
    
    
    $
    118,475
    
    
    $
    168,681
 Portfolio Assets are pledged to secure non-recourse notes payable. (5) Interest Related to Residual Interest in Trust Certificates There were no residual certificates held by the Partnerships to which the
Partnerships receive all the economic benefits and risks at March 31, 2004 and
December 31, 2003. The Partnerships recognized interest income on certificates
held utilizing a yield of 21.29% for the three months ended March 31, 2003.
During September 2003 the Partnerships purchased the underlying assets from the
trust. At the time of this purchase, these assets were included in the
Performing Portfolio Assets at their remaining historical cost of $5,902 and
the remaining balance for the adjustment to market value of $905 was reversed
against its corresponding balance of unrealized net gain on securitizations in
the Partnerships equity. (6) Deferred Profit Sharing and Deferred Compensation In connection with the formation of FC Properties, an agreement was
entered into which provided for potential payments to the project manager based
on a percentage of actual sales proceeds. An equal amount of deferred profit
participation and deferred compensation is recorded based on estimates of the
projected sales with the deferred profit participation being amortized into
expense in proportion to actual sales realized. No profit participation was
paid until the limited partners recognized a 20% return on their investment.
This return threshold was met in 2001. At March 31, 2004 and December 31, 2003,
the estimated liability for this profit participation was $21,422 and $21,466,
respectively, and was included in deferred compensation in the accompanying
combined balance sheets. Additionally, amortization of $296 and $0 was
recognized during the three months ended March 31, 2004 and 2003, respectively,
and has been included in general, administrative and operating expenses in the
accompanying combined statements of operations. The achievement of the 20% return on investment resulted in payments of $0
and $58 in deferred profit sharing and commissions during the three months
ended March 31, 2004 and 2003, respectively. (7) Transactions with Affiliates Under the terms of the various servicing agreements between the
Partnerships and FirstCity, FirstCity receives a servicing fee based on
proceeds from resolution of the Portfolio Assets for processing transactions on
the Portfolio Assets and for conducting settlement, collection and other
resolution activities. Included in the accompanying combined statements of
operations is $855 and $657 in servicing fees incurred by the Partnerships
during the three months ended March 31, 2004 and 2003, respectively. 26




---



##### 



WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS  (Continued) During January 2004, WAMCO 32, Ltd. purchased a pool of loans from WAMCO
31, Ltd. The purchase price was $3.1 million, which was the pools net
carrying value less deferred service fees payable associated with the pool. During September 2003, WAMCO XXIX, Ltd. was merged with and into WAMCO
XXVII, Ltd. with WAMCO XXVII, Ltd being the surviving entity. Also during
September 2003, Community Development Investment, LLC was merged with and into
WAMCO XXIV, Ltd. with WAMCO XXIV, Ltd being the surviving entity. (8) Preferred Equity In 1999, CFSC Capital Corp. XXX contributed $3,556 as preferred equity in
Community Development Investment, LLC. This preferred equity was converted to a
note payable on August 30, 2003. The balance converted was $4,160. The note
agreement has terms similar to the preferred equity and a maturity date of
August 30, 2006. On July 1, 2003, the Partnerships adopted SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS establishes standards for how an issuer measures certain
financial instruments with characteristics of both liabilities and equity and
classifies them in its balance sheets. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) when that financial instrument embodies an obligation of
the issuer. At December 31, 2003, SFAS No. 150 had no impact on the combined
financial statements since the preferred equity was converted to a note
payable. (9) Commitments and Contingencies WAMCO 31 owned a pool of loans that includes two lines of credit with a
combined outstanding balance of $2.3 million at December 31, 2003. On January
1, 2004, WAMCO 32 purchased this pool from WAMCO 31 at cost and assumed the
related lines of credit. The maximum commitment associated with these lines
was $4.4 million at March 31, 2004. After reserves and borrowing base
requirements, the total availability was $.3 million at March 31, 2004. The Partnerships are involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such
matters will not have a material adverse impact on the combined financial
position, results of operations or liquidity of the Partnerships. 27




---



##### 



Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations. Overview FirstCity is a financial services company engaged in the acquisition and
resolution of portfolios of assets or single assets (collectively referred to
as Portfolio Assets). The Portfolio Asset acquisition and resolution
business involves acquiring Portfolio Assets at a discount to face value and
servicing and resolving such portfolios in an effort to maximize the present
value of the ultimate cash recoveries. FirstCity also has an equity investment
in Drive Financial Services LP (Drive), which is engaged in the acquisition,
origination, warehousing, securitization and servicing of sub-prime automobile
receivables. During the first quarter of 2004 the Company recorded earnings to common
shareholders on a diluted basis of $4.8 million or $.41 per common share, a
significant increase over the first quarter of 2003. The positive earnings were
a result of a strong contribution from the Portfolio Asset Acquisition and
Resolution segment of $4.0 million compared with $1.8 million for the same
period in 2003 and $3.1 million in earnings contribution from the Consumer
segment and its related investment in Drive, an increase of $2.5 million over
the first quarter of 2003. The increased earnings contribution from the Portfolio Asset Acquisition
business of $2.3 million is primarily related to increases in revenues from
investments in France and Mexico when compared to 2003. The increase in France
is the result of increased equity earnings from Acquisition Partnerships which
reflect strong collections from 2003 acquisitions. The Companys positive
equity earnings from investments in Mexico are a result of Mexican Peso
exchange gains of $.5 million during the quarter when compared to a $1.6
million Mexican Peso exchange loss in the first quarter of 2003. The Company was able to invest $3 million in portfolios acquisitions of
$6.7 million during the quarter of which $6.5 million was purchased in the U.S.
The Company also invested approximately $.2 million in South America during the
quarter and continues to investigate other opportunities to invest in South
America. The Companys 31% investment in Drive generated $4.0 million for the
quarter and net of interest and other expenses resulted in a contribution of
$3.1 million from the Consumer segment of the business. Drive had a record
origination quarter of $244 million as a result of seasonal trends and a
strengthening economy. Although the Companys primary revenues are generated by the Portfolio
Asset Acquisition and resolution business and the Companys investment in
Drive, other items such as interest expense and the effects of discontinued
operations may also have a significant impact on net income. During the first
quarter 2004 corporate interest and overhead was down slightly when compared to
the first quarter 2003 and there were no provisions from discontinued
operations. The Company did receive cash flow from the residual interests of
$.2 million during the first quarter 2004. Overall the Companys continues to reflect positive growth trends in
acquisitions and originations and the resulting increased earnings
contribution. 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, and the type of securitization transactions of Drive,
period to period comparisons of the Companys results of continuing operations
may not be meaningful. The Company reported net earnings for the quarter ended March 31, 2004 of
$4.8 million or $.41 per share on a diluted basis. Components of the results
for the three months ended March 31, 2004 and 2003, respectively, are detailed
below (dollars in thousands): 28




---



##### 



Three Months EndedMarch 31,2004
    
    2003Portfolio Asset Acquisition and Resolution.
    
    $
    4,043
    
    
    $
    1,777Consumer
    
    
    3,118
    
    
    
    576Corporate interest
    
    
    (1,000
    )
    
    
    (1,172
    )Corporate overhead
    
    
    (1,312
    )
    
    
    (1,200
    )Earnings (loss) from continuing operations
    
    
    4,849
    
    
    
    (19
    )Accrued preferred dividends
    
    
    
    
    
    
    (66
    )Loss from discontinued operations
    
    
    
    
    
    
    Net earnings (loss) to common stockholders
    
    $
    4,849
    
    
    $
    (85
    )Diluted earnings (loss) per common share
    
    $
    0.41
    
    
    $
    (0.01
    )
 Results of Operations The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of the Company (including the Notes
thereto) included elsewhere in this Quarterly Report on Form 10-Q. First Quarter 2004 Compared to First Quarter 2003 The Company reported net earnings of $4.8 million in the first quarter of
2004 compared to a loss of $85,000 in the first quarter of 2003. On a per share
basis, diluted net earnings to common stockholders were $.41 in the first
quarter of 2004 compared to a loss of $.01 in the first quarter of 2003. Portfolio Asset Acquisition and Resolution The operating contribution from the Portfolio Asset acquisition and
resolution segment was $4.0 million in the first quarter of 2004 compared to
$1.8 million in the first quarter of 2003. FirstCity purchased $6.7 million of
Portfolio Assets during the first quarter of 2004 ($4.0 million through
Acquisition Partnerships), compared to zero purchases in the first quarter of
2003. The quarter end investment in wholly owned Portfolio Assets decreased to
$7.0 million from $7.5 million at March 31, 2004 and 2003, respectively. Servicing fee revenues.Servicing fee revenues decreased by 14% to $3.0
million in the first quarter of 2004 from $3.5 million in the first quarter of
2003. Service fees from the Mexican partnerships decreased $.5 million or 19%
as a result of efforts to reduce operating costs in Mexico. For the Mexican
Acquisition Partnerships, FirstCity earns a servicing fee based on costs of
servicing plus a profit margin. Service fees from domestic Partnerships were
flat from period to period. Gain on resolution of Portfolio Assets.The net gain on resolution of
Portfolio Assets decreased from $.7 million in the first quarter of 2003 to
$75,000 in the first quarter of 2004. The weighted average gross profit
percentage on the resolution of Portfolio Assets in the first quarter of 2004
was 30% as compared to 23% in the first quarter of 2003. This change was
primarily due to one Portfolio generating proceeds of $2.2 million and a net
gain of $.4 million or 18% during 2003. Equity in earnings of investments.Equity in earnings of Acquisition
Partnerships increased 279% to $3.8 million in the first quarter of 2004
compared to $1.0 million in the first quarter of 2003. The Acquisition
Partnerships reflected net earnings of $16.0 million in the first quarter of
2004 compared to a net loss of $21.0 million in the first quarter of 2003.
Following is a discussion of equity earnings by geographic region.  
    
    Domestic- Equity in earnings of domestic Acquisition Partnerships
decreased 17% to $1.9 million in the first quarter of 2004 from $2.3
million in 2003 primarily due to reduced equity earnings from MinnTex
Investment Partners LP.
    
    Mexico- Equity in earnings of Mexican Acquisition Partnerships were
$112,000 in the first quarter of 2004 compared to equity in losses of
$2.1 million in 2003. These partnerships reflected net earnings of $3.7
million in the first quarter of 2004 compared to a $31.5 million loss in
2003. Approximately $23 million of the losses in 2003 were due to
foreign exchange losses recognized by the partnerships as the Mexican
peso fell to historical lows during the first quarter of 2003
(FirstCitys portion of these losses was $1.5 million in 2003). In the
first quarter of 2004, the partnerships recorded $6.5 million of foreign
exchange gains. In addition, $2.1 million of interest expense was
recorded in the first quarter of 2004 compared to $12 million in 2003. 29




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##### 



This interest is owed to affiliates of the investors in these partnerships,
of which FirstCity recorded $.4 million and $.9 million, respectively, as
interest income.  
    
    France- Equity in earnings of Acquisition Partnerships located in
France increased 145% to $1.8 million in the first quarter of 2004 from
$.7 million in 2003. This increase is principally due to the addition of
three French Partnerships during 2003, which accounted for $1.2 million
in equity in earnings in 2004. During the first quarter of 2003,
FirstCity also recorded $.3 million in foreign currency transactions
gains (included in other expenses) relating to investments in France. Interest income.Interest income decreased 52% from $1.1 million in the
first quarter of 2003 to $.5 million in the first quarter of 2004. This
decrease is primarily due to the Acquisition Partnerships and their lenders
amending three loan agreements with Acquisition Partnerships located in Mexico
in 2003 to provide for no interest to be payable with respect to periods after
the effective date of the amendments. This change had no impact on the
consolidated net earnings, as the effect is offset through equity earnings in
these Partnerships. Also, the average balances in Portfolio Assets and loans
receivable decreased from $24.9 million in the first quarter of 2003 to $21.8
million in the first quarter of 2004. Expenses.Operating expenses were $4.8 million in the first quarter of
2004 compared to $5.0 million in 2003. Interest and fees on notes payable increased 14% from $.7 million in the
first quarter of 2003 to $.8 million in 2004. The average debt for the quarter
increased from $26.8 million in the first quarter of 2003 to $31.5 million in
the first quarter of 2004. The average cost of borrowing decreased from 10.24%
in the first quarter of 2003 to 9.90% in the first quarter of 2004. Salaries and benefits increased $.2 million, or 7% to $3.0 million in the
first quarter of 2004 from $2.8 million in 2003. Total personnel within the
Portfolio Asset acquisition and resolution segment were 223 and 219 at March 31
2004 and 2003, respectively. The provision for loan and impairment losses was minimal from period to
period. Impairment on performing Portfolio Assets is measured based on the present
value of the expected future cash flows in the aggregate discounted at the
loans risk adjusted rates, which approximates the effective interest rates, or
the fair value of the collateral, less estimated selling costs, if any loans
are collateral dependent and foreclosure is probable. Impairment on
nonperforming Portfolios is evaluated by analyzing the expected future cash
flows from the underlying assets within each Portfolio. The expected future
cash flows are reviewed monthly and adjusted as deemed necessary. Changes in
various factors including, but not limited to, economic conditions,
deterioration of collateral values, deterioration in the borrowers financial
condition and other conditions described in the risk factors discussed later in
this document, could have a negative impact on the estimated future cash flows
of the Portfolio. Significant decreases in estimated future cash flows can
reduce a Portfolios present value to below the Companys carrying value of
that Portfolio, causing impairment. For real estate Portfolios, the evaluation of impairment is determined
quarterly based on the review of the estimated future cash receipts less
estimated costs to sell, which represents the net realizable value of the real
estate Portfolio. A valuation allowance is established for any impairment
identified through provisions charged to operations in the period the
impairment is identified. There were no provisions recorded on loans receivable from Acquisition
Partnerships during the first quarter of 2004 and 2003. The loans receivable
from Acquisition Partnerships are secured by the assets/loans acquired by the
partnerships with purchase money loans provided by affiliates of the investors
in the partnerships to purchase the asset pools held in those entities. These
loans are evaluated for impairment by analyzing the expected future cash flows
from the underlying assets within each pool to determine that the cash flows
were sufficient to repay these notes. The Company applies the asset valuation
methodology consistently in all venues and uses the same proprietary asset
management system to evaluate impairment on all asset pools. The results of
this evaluation indicated that cash flows from the pools will be sufficient to
repay the loans and no allowances for impairment were necessary. Occupancy, data processing, communication and other expenses declined 38%
from $1.4 million in the first quarter of 2003 to $1.0 million in 2004
primarily due to increased foreign currency gains recorded in 2004. Minority interest expense was minimal from period to period. 30




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##### 



Consumer Lending FirstCitys consumer lending segment consists of the Companys net
investment in Drive. The operating contribution for the first quarter of 2004
was $3.1 million compared to $.6 million during the first quarter of 2003. Equity in earnings of investment.FirstCity recorded equity in earnings
of Drive of $5.0 million in the first quarter of 2004 compared to $.9 million
in 2003. Drive recorded net income of $13.0 million in the first quarter of
2004 compared to $2.5 million in the first quarter of 2003. Drives inventory
of retail installments contracts has grown from $443 million at March 31, 2003
to $770 million at March 31, 2004. Consequently, net interest margin after
provision for credit losses and impairments at Drive rose from $17.7 million to
$26.7 million during the first quarter of 2003 and 2004, respectively. Interest and fees on notes payable.Interest and fees on notes payable
increased from $95,000 in the first quarter of 2003 to $.9 million in 2004.
During the first quarter of 2004, FirstCity recorded $.8 million of additional
interest expense related to the contingent fee arrangement with the Bank of
Scotland. See note 10 of the consolidated financial statements for further
discussion of this contingent fee. Other Items Affecting Operations The following items affect the Companys overall results of operations and
are not directly related to any one of the Companys businesses discussed
above. Corporate interest and overhead.Company level interest expense decreased
by 15% to $1.0 million in the first quarter of 2004 from $1.2 million in the
first quarter of 2003. Average debt declined to $41.4 million in the first
quarter of 2004 from $50.5 million in 2003. Also, beginning with the third
quarter of 2003, dividends on the New Preferred Stock are included in Corporate
interest expense. Other corporate overhead expenses increased 9% to $1.3
million in the first quarter of 2004 from $1.2 million in 2003 primarily due to
increased salaries and benefits. Income taxes.Provision for income taxes was $.1 million in the first
quarter of 2004 and 2003 and related primarily to state income taxes and
federal alternative minimum taxes. Federal income taxes are provided at a 35%
rate applied to taxable income or loss and are offset by NOLs that the Company
believes are available. The tax benefit of the NOLs is recorded in the period
during which the benefit is realized. The Company recorded no deferred tax
provision in the first quarters of 2004 and 2003. Discontinued Operations.The Company recorded no provision for additional
losses from discontinued operations during the first quarter of 2004 and 2003.
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. Portfolio Asset Acquisition and Resolution Aggregate acquisitions by the Company are as follows (dollars in
thousands): Purchase
    
    FirstCityPrice
    
    InvestmentFirst quarter 2004
    
    $
    6,699
    
    
    $
    3,097Total 2003
    
    
    129,192
    
    
    
    22,944Total 2002
    
    
    171,769
    
    
    
    16,717Total 2001
    
    
    224,927
    
    
    
    24,319Total 2000
    
    
    394,927
    
    
    
    22,140Total 1999
    
    
    210,799
    
    
    
    11,203
 31




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##### 



The following table presents selected information regarding the revenues
and expenses of the Companys Portfolio Asset acquisition and resolution
business: Analysis of Selected Revenues and Expenses
Portfolio Asset Acquisition and Resolution Three Months EndedMarch 31,2004
    
    2003Income from Portfolio Assets and Loans Receivable:Average investment in Portfolio Assets and loans
receivable:Domestic
    
    $
    6,490
    
    
    $
    9,558Mexico
    
    
    13,133
    
    
    
    15,354France
    
    
    2,155
    
    
    
    Other foreign
    
    
    34
    
    
    
    Total
    
    $
    21,812
    
    
    $
    24,912Income from Portfolio Assets and loans receivable:Domestic
    
    $
    196
    
    
    $
    913Mexico
    
    
    376
    
    
    
    878France
    
    
    26
    
    
    
    Other foreign
    
    
    
    
    
    
    Total
    
    $
    598
    
    
    $
    1,791Average return (annualized):Domestic
    
    
    12.1
    %
    
    
    38.2
    %Mexico
    
    
    11.5
    %
    
    
    22.9
    %France
    
    
    4.8
    %
    
    
    Other foreign
    
    
    
    
    
    
    Total
    
    
    11.0
    %
    
    
    28.8
    %Servicing fee revenues:Domestic partnerships:$ Collected
    
    $
    26,353
    
    
    $
    24,051Servicing fee revenue
    
    
    1,038
    
    
    
    1,041Average servicing fee %
    
    
    3.9
    %
    
    
    4.3
    %Mexico partnerships:$ Collected
    
    $
    14,846
    
    
    $
    16,512Servicing fee revenue
    
    
    1,956
    
    
    
    2,395Average servicing fee %
    
    
    13.2
    %
    
    
    14.5
    %Incentive service fees
    
    $
    38
    
    
    $
    71Total Service Fees:$ Collected
    
    $
    41,199
    
    
    $
    40,563Servicing fee revenue
    
    
    3,032
    
    
    
    3,507Average servicing fee %
    
    
    7.4
    %
    
    
    8.6
    %Personnel:Personnel expenses
    
    $
    3,041
    
    
    $
    2,842Number of personnel (at period end):Domestic
    
    
    61
    
    
    
    76Mexico
    
    
    162
    
    
    
    143Interest expense:Average debt
    
    $
    31,483
    
    
    $
    26,788Interest expense
    
    
    779
    
    
    
    686Average cost (annualized)
    
    
    9.90
    %
    
    
    10.24
    %
 32




---



##### 



The following table presents selected information regarding the revenues
and expenses of the Acquisition Partnerships: Analysis of Selected Revenues and Expenses
Acquisition Partnerships Three Months EndedMarch 31,2004
    
    2003Revenues:Gain on resolution of Portfolio Assets
    
    $
    20,569
    
    
    $
    20,989Gross profit percentage on resolution of Portfolio Assets
    
    
    33.0
    %
    
    
    36.5
    %Interest income
    
    $
    2,899
    
    
    $
    2,145Other income
    
    
    244
    
    
    
    515Interest expense(1):Interest expense
    
    $
    3,744
    
    
    $
    14,486Average cost (annualized)
    
    
    4.2
    %
    
    
    14.2
    %Other expenses:Service fees
    
    
    3,933
    
    
    
    4,474Other operating costs
    
    
    6,372
    
    
    
    3,641Foreign currency loss (gain)
    
    
    (6,538
    )
    
    
    22,988Income taxes
    
    
    157
    
    
    
    (902
    )Total other expenses
    
    
    3,924
    
    
    
    30,201Net earnings (loss)
    
    $
    16,044
    
    
    $
    (21,038
    )Equity in earnings of Acquisition Partnerships
    
    $
    3,845
    
    
    $
    1,014Equity in earnings of Servicing Entities
    
    
    330
    
    
    
    216$
    4,175
    
    
    $
    1,230
   (1)
    
    Interest expense includes interest on loans to the Acquisition
Partnerships located in Mexico from affiliates of the investor groups. The
rates on all but three of these loans range from 18% to 20%. The average
cost on debt excluding the Mexican Acquisition Partnerships was 5.2% and
5.6% for the three months ended March 31, 2004 and 2003, respectively. As
noted above, beginning in 2003, the Acquisition Partnerships and their
lenders amended three loan agreements from Mexican Acquisition
Partnerships to provide for no interest to be payable with respect to
periods after the effective date of the amendment. This change had no
impact on the consolidated net earnings as the effect is offset through
equity earnings in these Partnerships. Consumer Lending FirstCity owns a 31% interest in Drive Financial Services L.P., a sub
prime auto lending company. Drive originated $244 million of receivables during
the first quarter of 2004 compared to $126 million in 2003. Defaults and losses
were 20.77% and 10.98%, respectively, at March 31, 2004 compared to 21.03% and
10.83%, respectively, at March 31, 2003. These statistics reflect the weakness
in the economy in prior periods and the resulting impact on used car prices,
although recent indicators reflect an upward trend in used car prices.
Delinquencies were 11.52% at March 31, 2004, up from 4.66% for the same period
last year as a result of a change in collections strategies, which in some
instances will allow Drive to provide borrowers additional time to cure
delinquencies rather than pursue immediate repossession. Net income from Drive continues to be positive as originations and the
volume of portfolio assets grow over time. Based on information provided by
Drive, the Company expects that this positive trend will continue. 33




---



##### 



The following table details this trend (dollars in thousands): Income (Loss)Loan
    
    Total
    
    Before Provisions
    
    Provisions
    
    Net Income
    
    FirstCity'sOriginations
    
    Inventory
    
    Assets
    
    on Residual Assets
    
    on Residual Assets
    
    (Loss)
    
    31% Share20041st Quarter
    
    $
    244,121
    
    
    $
    770,042
    
    
    $
    915,128
    
    
    $
    13,001
    
    
    $
    
    
    
    $
    13,001
    
    
    $
    4,03120034th Quarter
    
    
    102,228
    
    
    
    623,389
    
    
    
    738,829
    
    
    
    6,308
    ***
    
    
    (2,087
    )
    
    
    4,221
    
    
    
    1,3083rd Quarter
    
    
    128,688
    
    
    
    577,974
    
    
    
    700,760
    
    
    
    9,132
    
    
    
    (3,904
    )
    
    
    5,228
    
    
    
    1,6212nd Quarter
    
    
    127,706
    
    
    
    511,212
    
    
    
    619,269
    
    
    
    8,251
    
    
    
    (1,240
    )
    
    
    7,011
    
    
    
    2,1731st Quarter
    
    
    126,118
    
    
    
    443,099
    
    
    
    551,412
    
    
    
    3,707
    
    
    
    (1,217
    )
    
    
    2,490
    
    
    
    689
   ***
    
    Net of $3.7 million of additional provisions related to loans receivable. Note: As of March 31, 2004 Drive holds on its balance sheet residual interests
with a book value of $30.1 million compared with $56.6 million as of March 31,
2003. The following table presents selected information regarding consumer
lending: Analysis of Selected Data
Consumer Lending Three Months EndedMarch 31,2004
    
    2003Retail installment contracts acquired
    
    $
    244,121
    
    
    $
    126,118Origination characteristics:Face value to wholesale value
    
    
    102.40
    %
    
    
    98.86
    %Weighted average coupon
    
    
    21.10
    %
    
    
    20.91
    %Purchase discount (% of face value)
    
    
    17.34
    %
    
    
    17.08
    %Servicing portfolioOwned
    
    $
    437,193
    
    
    $
    163,473Securitized
    
    
    561,298
    
    
    
    559,983Total
    
    $
    998,491
    
    
    $
    723,456Owned  number of contracts
    
    
    34,767
    
    
    
    14,570Securitized  number of contracts
    
    
    48,452
    
    
    
    52,233Total number of contracts
    
    
    83,219
    
    
    
    66,803Defaults (% of original loan balance at time
of default)
    
    
    20.77
    %
    
    
    21.03
    %Net losses on defaults after recovery
    
    
    10.98
    %
    
    
    10.83
    %Delinquencies (% of total serviced portfolio)
    
    
    11.52
    %
    
    
    4.66
    %
 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 entities formed to acquire Portfolios
(Acquisition Partnerships), retirement of and interest on preferred stock,
and other investments by FirstCity. The potential sources of liquidity are
funds generated from operations, 34




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##### 



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 and other
credit facilities, proceeds from equity market transactions, securitization and
other structured finance transactions and other special purpose short-term
borrowings. In December 2002, FirstCity completed a recapitalization in which holders
of redeemable preferred stock, par value $.01 per share, (New Preferred
Stock) exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares
of common stock and $10.5 million in cash. As a result, common equity was
increased by $18.9 million. During the first quarter of 2003, 4,400 shares of
New Preferred Stock were redeemed for 8,200 shares of common stock and $50,000
in cash. FirstCity also recorded a $4 million gain in December 2002 from the
release of its guaranty of Drives indebtedness to BoS(USA) Inc. (BoS(USA)).
BoS(USA)s warrant to purchase 1,975,000 shares of non-voting common stock was
cancelled. FirstCity also acquired the minority interest in FirstCity Holdings
Corporation held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes,
each of whom were Senior Vice Presidents of FirstCity, by issuing 400,000
shares of common stock of the Company and a note payable, 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 of 4.56%
based on the Companys cost of funds on that date. During the first quarter of
2004, the Company reduced the estimated carrying value of these loans based on
an imputed interest rate of 6.94% and revised cash flow projections. FirstCity
recorded the change in estimate of $.8 million to other income. At March 31,
2004, these notes had a combined balance of $.5 million and mature in December
2011. As a part of the recapitalization, BoS(USA) provided a non-recourse loan
in the amount of $16 million to FirstCity, which was used to pay the cash
portion of the exchange offer to the holders of the New Preferred Stock, to pay
expenses of the exchange offer and recapitalization, and to reduce FirstCitys
debt to the Bank of Scotland (together with BoS(USA), the Senior Lenders).
The $16 million loan is secured by a 20% interest in Drive (64.51% of
FirstCitys remaining 31% interest in Drive) and other assets of Consumer
Lending Corporation (Consumer Corp.) as are necessary and only to the extent
to allow the Senior Lenders to realize the security interest in the 20%
interest in Drive. In connection with the $16 million loan, the Company agreed
to pay a contingent fee to BoS (USA) Inc. equal to 20% of all amounts received
by the Company upon any sale of the Companys 20% interest in Drive or any
receipt of distributions from Drive related to the 20% ownership interest, once
such payments exceed $16 million in the aggregate. During the first quarter of
2004, the Company recorded $.8 million of additional interest expense related
to the contingent fee. The Company currently estimates that additional
interest expense will be recognized in the amount of $160,000 per quarter
through December 2007. This additional interest expense currently has no
impact on the Companys cash flow. The payment of the interest and any gain or
income resulting from any sale or distribution will not be recognized until a
sale occurs or distribution is received. The Company has no present plans to
sell any interest in Drive and does not anticipate that any distributions will
be made from Drive in the near future that would result in an obligation to pay
a contingent fee. In connection with the recapitalization, the Senior Lenders refinanced the
remainder of the Companys debt facilities ($40 million outstanding at March
31, 2004). The Senior Lenders also provided new financing to FirstCity, with a
total commitment of up to $59 million, consisting of (a) a $5 million revolving
credit loan and (b) an acquisition term loan in an amount up to $54 million.
The aggregate amount of outstanding loans under the total commitment by the
Senior Lenders for the refinancing and the new financing at any time may not
exceed $77 million. Effective as of March 31, 2004, the Company and the Senior
Lenders amended the acquisition term loan facility providing for a total amount
of term loans to be made up to $54 million in the aggregate to (i) make it into
a revolving loan facility providing for a maximum principal balance of loans
outstanding at any time of $45 million, (ii) allow loans to be made in Euros up
to a maximum amount in Euros that is equivalent to $22.5 million U.S. dollars,
(iii) allow loans to be made for acquisition of Portfolio Assets originated
outside the United States of up to $22.5 million, (iv) provide for an interest
rate of Libor plus 3.75%, (v) provide for the commitment commission to increase
from 0.25% to 0.375%, (vi) provide for distribution of 35% of collections from
Asset Portfolios to the Company, provided that the aggregate outstanding
principal balances of all loans under the facility does not exceed 65% of the
total equity interests in Acquisition Partnerships pledged to secure the
acquisition facility, and (vii) provide for other modifications that would
facilitate the use of the acquisition facility in the United States and other
countries. The amended facility continues to provide that the aggregate amount
of all outstanding loans under the loan facilities refinanced with the Senior
Lenders in December 2002 ($40 million outstanding at March 31, 2004) and the
amended acquisition facility and the related $5 million revolving loan are
limited to $77 million. BoS(USA) has a warrant to purchase 425,000 shares of the Companys voting
Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants
in connection with this existing warrant for 425,000 shares under certain
specific situations to retain its ability to acquire approximately 4.86% of the
Companys voting Common Stock. The warrant will expire on August 31, 2010, if
it is not exercised prior to that date. 35




---



##### 



In the third quarter of 1999, dividends on the Companys New Preferred
Stock were suspended. At March 31, 2004, accumulated dividends in arrears on
New Preferred Stock totaled $1.3 million, or $9.98 per share. Since the Company
failed to pay quarterly dividends for six consecutive quarters, the holders of
New Preferred Stock are entitled to exercise their right to elect two directors
to the Companys Board until cumulative dividends have been paid in full. To
exercise this right, the holders of the New Preferred Stock must follow certain
prescribed actions set forth in the Certificate of Designations of the
Companys New Preferred Stock. To date, the holders of the New Preferred Stock
have not exercised this right. Dividends on outstanding shares of New Preferred
Stock of FirstCity will be restricted until the Tranche II term loan is paid in
full. Given the continued high debt levels of the Company, and managements
priority of assuring adequate levels of liquidity, the Company does not
anticipate that dividends on New Preferred Stock will be paid prior to
September 30, 2005, the date fixed for redemption of the New Preferred Stock. The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a
subsidiary of Cargill. This facility is being used exclusively to provide
equity in new Portfolio acquisitions in partnerships with Cargill and its
affiliates and matures in March 2005. At March 31, 2004, approximately $23
million was outstanding under this facility. In September 2003, FirstCity entered into a Portfolio acquisition facility
line of credit with Greenwich Capital Financial Products, Inc., which provides
borrowings up to $30 million. The facility obligation was zero at March 31,
2004 and matures September 2004. Drive has a warehouse line of credit with BoS(USA), which provides
borrowings up to $300 million. Drives obligation under this arrangement at
March 31, 2003 was $197 million. The debt is secured by Drives retail
installment contracts and has been extended to February 2005. Drive also has a warehouse line of credit agreement with Variable Funding
Capital Corporation, a subsidiary of First Union National Bank, which provides
borrowings up to $100 million. During the first quarter of 2004, this facility
was amended to increase the borrowing limit to $250 million until the sooner of
May 31, 2004 or the close of a secured financing transaction. After that
event, the limit returns to $100 million. Drives obligation under the
arrangement at March 31, 2004 was $172 million. The debt is secured by Drives
retail installment contracts and terminates September 2004. The Company and each of its major operating subsidiaries have entered into
one or more credit facilities to finance their respective operations. Each of
the operating subsidiary credit facilities is nonrecourse to the Company. The
Company has agreed to indemnify BoS(USA) for up to 31% of losses, which might
arise as a result of agreements BoS(USA) executed as a sponsor in connection
with the securitizations completed by Drive. The Company also agreed to provide
support in connection with securitizations by Consumer Corp. and Drive prior to
the acquisition by BoS(USA) of the interest in Drive in August 2000.
Management of the Company currently does not believe it is likely that
FirstCity will be required to make payments on these indemnification
agreements. Excluding the term acquisition facilities of the unconsolidated
Acquisition Partnerships and the term and warehouse facilities of Drive, as of
March 31, 2004, the Company and its subsidiaries had credit facilities
providing for borrowings in an aggregate principal amount of $163 million and
outstanding borrowings of $88 million. Management believes that the BoS(USA) loan facilities, along with the
liquidity from the Cargill Facility, the related fees generated from the
servicing of assets, equity distributions from existing Acquisition
Partnerships and wholly owned portfolios, as well as sales of interests in
equity investments, will allow the Company to meet its obligations as they come
due during the next twelve months. The following table summarizes the material terms of the credit facilities
to which the Company, its major operating subsidiaries and the Acquisition
Partnerships were parties to as of May 11, 2004 and the outstanding borrowings
under such facilities as of March 31, 2004. 36




---



##### 



Credit Facilities Funded andUnfunded
    
    OutstandingCommitment
    
    BorrowingsAmount as of
    
    as ofMay 11,
    
    March 31,2004
    
    2004
    
    Interest Rate
    
    Other Terms and Conditions(Dollars in millions)FirstCityCompany Senior Facility:Revolving Line of Credit
    
    $
    5
    
    
    $
    2
    
    
    LIBOR + 2.75%
    
    Secured by the assets of
the Company, matures
December 2004Portfolio Acquisition Loan (Term)
    
    
    32
    
    
    
    2
    
    
    LIBOR + 3.75%
    
    Secured by the assets of
the Company, matures
November 2006Tranche I (Term)
    
    
    28
    
    
    
    28
    
    
    Prime + 2.5%
    
    Secured by the assets of
the Company, matures
December 2006Tranche II (Term)
    
    
    12
    
    
    
    12
    
    
    Fixed at 8.77%
    
    Secured by the assets of
the Company, matures
December 2007Commercial Corp.Term facility
    
    
    5
    
    
    
    5
    
    
    Bank prime + 0.50%
    
    Secured by existing
Portfolio Assets, matures
December 2004Equity investment facility
    
    
    35
    
    
    
    23
    
    
    Greater of 8.5% or
LIBOR + 4.5%
    
    Acquisition facility for
the investment in future
Acquisition partnerships,
matures March 2005Portfolio acquisition facility
    
    
    30
    
    
    
    
    
    
    LIBOR + 4.0%
    
    Secured by Portfolio Assets
purchased with The
facility, matures September
2004Unsecured loans payable to
senior management
    
    
    
    
    
    
    
    
    
    Fixed at 4.5% to
7.0%
    
    Matures December 2011Other unsecured loans
    
    
    
    
    
    
    
    
    
    Fixed at 5.4% to
6.5%
    
    Matures 2004Consumer Corp.Term loan
    
    
    16
    
    
    
    16
    
    
    LIBOR + 1.0%
    
    Secured by 20% equity
interest in Drive, matures
December 2007,
non-recourseTotal
    
    $
    163
    
    
    $
    88Unconsolidated Acquisition
Partnerships Term Facilities(1)
    
    $
    118
    
    
    $
    118
    
    
    Various rates
    
    Secured by Portfolio
Assets, various maturities
($11 million due in 2004),
non-recourse
 37




---



##### 



Credit Facilities Funded andUnfunded
    
    OutstandingCommitment
    
    BorrowingsAmount as of
    
    as ofMay 11,
    
    March 31,2004
    
    2004
    
    Interest Rate
    
    Other Terms and Conditions(Dollars in millions)Unconsolidated DriveWarehouse Facility
    
    $
    300
    
    
    $
    198
    
    
    Prime minus .75%
    
    Secured by warehouse
inventory, matures February
2005Warehouse Facility
    
    
    250
    
    
    
    172
    
    
    Rate based on
Commercial paper
rates combined with
Certain facility
fees
    
    Secured by warehouse
inventory, matures
September 2004Bonds payable
    
    
    412
    
    
    
    412
    
    
    Fixed at 1.09% To
4.09%
    
    Secured by retail
installment Contracts,
various maturities through
October 2009Subordinate capital Facility
    
    
    65
    
    
    
    54
    
    
    Fixed at 16%
    
    Secured by all assets of
Drive, matures February
2006$
    1,027
    
    
    $
    836
   (1)
    
    In addition to the term acquisition facilities of the unconsolidated
Acquisition Partnerships, the Mexican Acquisition Partnerships also have
term debt of approximately $223 million outstanding as of March 31, 2004
owed to affiliates of the investor groups. Of this amount, the Company has
recorded approximately $14 million as Loans Receivable on the Consolidated
Balance Sheets. Forward-Looking Statements Certain statements contained in this Quarterly Report on Form 10-Q or
incorporated by reference from time to time, including, but not limited to,
statements relating to the Companys strategic objectives and future
performance, which are not historical facts, may be deemed to be
forward-looking statements under the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, without limitation, any statement
that may project, indicate or imply future results, performance or
achievements, and may contain the words expect, intend, plan, estimate,
believe, will be, will continue, will likely result, and similar
expressions. Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. There are many important factors that could cause the Companys
actual results to differ materially from those indicated in the forward-looking
statements. Such factors include, but are not limited to, the performance of
the Companys subsidiaries and affiliates; the availability of Portfolio
Assets; assumptions underlying Portfolio asset performance; risks associated
with foreign operations; currency exchange rate fluctuations; interest rate
risk; the degree to which the Company is leveraged; the Companys continued
need for financing; availability of the Companys credit facilities; the impact
of certain covenants in loan agreements of the Company and its subsidiaries;
risks of declining value of loans, collateral or assets; the ability of the
Company to utilize NOLs; uncertainties of any litigation that might arise from
discontinued operations; general economic conditions; foreign social and
economic conditions; changes (legislative and otherwise) in the asset
securitization industry; fluctuations in residential and commercial real estate
values; capital market conditions, including the markets for asset-backed
securities; factors more fully discussed and identified in the Companys Annual
Report on Form 10-K, filed March 30, 2004 (including those discussed under
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations), as well as in other Securities and Exchange Commission
filings of the Company. Many of these factors are beyond the Companys control.
In addition, it should be noted that past financial and operational performance
of the Company is not necessarily indicative of future financial and
operational performance. Given these risks and uncertainties, investors should
not place undue reliance on forward-looking statements. The forward-looking
statements in this Form 10-Q speak only as of the date of this Form 10-Q. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement to reflect any change
in the Companys expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based. 38




---



##### 



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 located in Mexico and bear interest at predominately fixed rates.
The collectibility of these loans is directly related to the underlying
Portfolio Assets of those Acquisition Partnerships, which are non-performing in
nature. Therefore, changes in benchmark rates would have minimal effect on the
collectibility of these loans. The Companys equity investment in Drive is materially impacted by net
interest margins and the ability to securitize the loans Drive originates.
During 2002, Drive elected not to use gain on sale treatment when assets were
securitized. Instead, Drive pursued a strategy to grow the balance sheet and
record interest income from loans and interest expense on the related debt as
incurred to build an earnings stream over time. Demand from potential investors
in Drives securitizations is affected by the perception of credit quality and
prepayment risk associated with the loans Drive originates and securitizes. The
timing and size and interest rates of the bonds issued as a part of the
securitizations could also have a material effect on the net income of Drive.
Interest rates offered to customers also affect prices paid for loans. These
rates are determined by review of competitors rate offerings to the public and
current prices being paid to Drive for the products. Drive does not hedge these
price risks. Drives residual interests in securitizations represent the present value
of the excess cash flows Drive expects to receive over the life of the
underlying sub-prime automobile loans. The sub-prime automobile residual
interests are affected less by prepayment speeds due to the shorter term of the
underlying assets and the fact that the loans are fixed rate, generally at the
highest rate allowable by law. In summary, the Company would be negatively impacted by rising interest
rates and declining prices of its sub-prime loans. Rising interest rates would
negatively impact the value of residual interests in securitizations currently
held and costs of borrowings under the warehouse lines and new secured
financings. Declining prices of the Companys sub-prime loans would adversely
affect the levels of gains achieved in the event Drive elects to sell those
loans. The Company has not entered into any instruments to minimize this market
risk of adverse changes in interest rates or declining prices. There have been
no material changes in the quantitative and qualitative risks of the Company
since December 31, 2003. The Company currently has investments in Mexico and France. In France, 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, 2004, one
U.S. dollar equaled .82 Euros. A sharp change of the Euro relative to the U.S.
dollar could materially adversely affect the financial position and results of
operations of the Company. A 5% and 10% incremental depreciation of the Euro
would result in an estimated decline in the valuation of the Companys equity
investments in France of approximately $.7 million and $1.3 million,
respectively. These amounts are estimates of the financial impact of a
depreciation of the Euro relative to the U.S. dollar. Consequently, these
amounts are not necessarily indicative of the actual effect of such changes
with respect to the Companys consolidated financial position or results of
operations. As discussed above, on March 31, 2004, the Company amended its
acquisition term loan facility with the Senior Lenders to allow loans to be
made in Euros up to a maximum amount in Euros that is equivalent to $22.5
million U.S. dollars. Management of the Company feels that this amended loan
agreement will help reduce the risk of adverse effects of currency changes on
Euro-denominated investments. 39




---



##### 



In Mexico, approximately 95% of the Companys investments in Mexico 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, 2004, one U.S. dollar equaled
11.1 Mexican pesos. A 5% and 10% incremental depreciation of the peso would
result in an estimated decline in the valuation of the Companys total
investments in Mexico of approximately $.9 million and $1.8 million,
respectively. These amounts are estimates of the financial impact of a
depreciation of the Mexican peso relative to the U.S. dollar. Consequently,
these amounts are not necessarily indicative of the actual effect of such
changes with respect to the Companys consolidated financial position or
results of operations. Item 4. Controls and Procedures An evaluation was performed under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of March 31, 2004. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective, in all material respects, to ensure
that information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required. There have been no significant changes in the Companys
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of managements evaluation. 40




---



##### 



PART II OTHER INFORMATION Item 1. Legal Proceedings FirstCity was not involved in any material legal proceedings as of March
31, 2004. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities None Item 3. Defaults Upon Senior Securities In the first quarter of 1999, dividends on the Companys adjusting rate
preferred stock were suspended. At March 31, 2004, accumulated dividends in
arrears on such preferred stock totaled $1.3 million, or $9.98 per share. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. ExhibitNumber
    
    
    
    Description of Exhibit2.1
    
    
    
    Joint Plan of Reorganization by First City Bancorporation of
Texas, Inc., Official Committee of Equity Security Holders
and J-Hawk Corporation, with the Participation of Cargill
Financial Services Corporation, Under Chapter 11 of the
United States Bankruptcy Code, Case No. 392-39474-HCA-11
(incorporated herein by reference to Exhibit 2.1 of the
Companys Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995).2.2
    
    
    
    Agreement and Plan of Merger, dated as of July 3, 1995, by
and between First City Bancorporation of Texas, Inc. and
J-Hawk Corporation (incorporated herein by reference to
Exhibit 2.2 of the Companys Current Report on Form 8-K
dated July 3, 1995 filed with the Commission on July 18,
1995).3.1
    
    
    
    Amended and Restated Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.1 of
the Companys Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995).3.2
    
    
    
    Bylaws of the Company (incorporated herein by reference to
Exhibit 3.2 of the Companys Current Report on Form 8-K
dated July 3, 1995 filed with the Commission on July 18,
1995).4.1
    
    
    
    Certificate of Designations of the New Preferred Stock
($0.01 par value) of the Company. (incorporated herein by
reference to Exhibit 4.1 to the Companys Current Report on
Form 10-K dated March 24, 1998 filed with the Commission on
March 26, 1998).9.1
    
    
    
    Shareholder Voting Agreement, dated as of June 29, 1995,
among ATARA I Ltd., James R. Hawkins, James T. Sartain and
 41




---



##### 



ExhibitNumber
    
    
    
    Description of ExhibitCargill Financial Services Corporation. (incorporated herein
by reference to Exhibit 9.1 of the Companys Form 10-K dated
March 24, 1998 filed with the Commission on March 26, 1998).10.1
    
    
    
    Note Agreement, dated as of June 6, 1997, among Bosque Asset
Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
Investment Realty Partners, L.P. and Bankers Trust Company
of California, N.A. (incorporated herein by reference to
Exhibit 10.14 of the Companys Form 10-K dated March 24,
1998 filed with the Commission March 26, 1998).10.2
    
    
    
    Loan Agreement, dated April 8, 1998 between Bank of Scotland
and the Company (incorporated herein by reference to Exhibit
10.6 of the Companys Form 10-Q dated August 14, 1998, filed
with the Commission on August 18, 1998).10.3
    
    
    
    First Amendment to Loan Agreement, dated July 20, 1998,
between Bank of Scotland and the Company (incorporated
herein by reference to Exhibit 10.7 of the Companys Form
10-Q dated August 14, 1998, filed with the Commission on
August 18, 1998).10.4
    
    
    
    Tenth Amendment to Loan Agreement, dated August 11, 1999
between Bank of Scotland and the Company (incorporated
herein by reference to Exhibit 10.34 of the Companys Form
10-Q dated August 16, 1999, filed with the Commission on
August 16, 1999).10.5
    
    
    
    Amended and Restated Loan Agreement, dated December 20,
1999, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank
of Scotland as Agent (incorporated herein by reference to
Exhibit 10.1 of the Companys Form 8-K dated December 22,
1999, filed with the Commission on December 28, 1999).10.6
    
    
    
    Securities Purchase Agreement, dated as of August 18, 2000,
by and among the Company, Consumer Corp., Funding LP,
Funding GP, IFA-GP and IFA-LP. (incorporated herein by
reference to Exhibit 10.40 of the Companys Form 8-K dated
August 25, 2000, filed with the Commission on September 11,
2000).10.7
    
    
    
    Contribution and Assumption Agreement by and between
Consumer Corp. and Drive dated as of August 18, 2000.
(incorporated herein by reference to Exhibit 10.41 of the
Companys Form 8-K dated August 25, 2000, filed with the
Commission on September 11, 2000).10.8
    
    
    
    Contribution and Assumption Agreement by and between Funding
LP and Drive dated as of August 18, 2000. (incorporated
herein by reference to Exhibit 10.42 of the Companys Form
8-K dated August 25, 2000, filed with the Commission on
September 11, 2000).10.9
    
    
    
    Second Amendment to Amended and Restated Loan Agreement,
dated December 20, 1999, by and among the Company, as
borrower, and the Lenders, as lenders, and Bank of Scotland,
as Agent. (incorporated herein by reference to Exhibit 10.43
of the Companys Form 8-K dated August 25, 2000, filed with
the Commission on September 11, 2000).10.10
    
    
    
    Receivables Financing Agreement, dated August 18, 2000,
among Drive BOS LP, Drive Financial Services LP, each
Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A.
(incorporated herein by reference to Exhibit 10.44 of the
Companys Form 10-K dated April 13, 2001, filed with the
Commission on April 13, 2001).10.11
    
    
    
    Amendment to Loan Agreement and extension of Promissory
 42




---



##### 



ExhibitNumber
    
    
    
    Description of ExhibitNote, dated January 12, 2001, by and between FirstCity
Holdings Corporation and CFSC Capital Corp. XXX
(incorporated herein by reference to Exhibit 10.45 of the
Companys Form 10-K dated April 13, 2001, filed with the
Commission on April 13, 2001).10.12
    
    
    
    Second Amendment, dated as of February 16, 2001, to the
Receivables Financing Agreement, dated as of August 18,
2000, among Drive BOS LP, Drive Financial Services LP the
Lenders party thereto, IPA Incorporated and Wells Fargo Bank
Minnesota, NA (incorporated herein by reference to Exhibit
10.46 of the Companys Form 10-K dated April 13, 2001, filed
with the Commission on April 13, 2001).10.13
    
    
    
    Subordinate Capital Loan Agreement, dated as of February 16,
2001, among Drive Financial Services LP, DRIVE BOS LP, the
financial institutions from time to time party hereto and
IFA Incorporated (incorporated herein by reference to
Exhibit 10.47 of the Companys Form 10-K dated April 13,
2001, filed with the Commission on April 13, 2001).10.14
    
    
    
    Amended and Restated Amendment #4 (Option and Option
Warrant), dated as of December 31, 2001, between the Company
and BoS(USA) Inc. (incorporated herein by reference to
Exhibit 99.1 of the Companys Form 8-K dated January 18,
2002, filed with the Commission on January 18, 2002).10.15
    
    
    
    Letter Agreement, dated November 26, 2002, between FirstCity
Consumer Lending Corporation and The Governor and Company of
the Bank of Scotland, including Form of Promissory Note to
be executed by FirstCity Consumer Lending Corporation,
payable to The Governor and Company of the Bank of Scotland.
(incorporated herein by reference to Exhibit 99(d)(5) of the
Companys Form SC TO-I/A dated November 27, 2002, filed with
the Commission on November 27, 2002).10.16
    
    
    
    Amended and Restated Loan Agreement, dated December 12,
2002, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank
of Scotland as Agent (incorporated herein by reference to
Exhibit 10.16 of the Companys Form 10-K dated April 15,
2003).10.17
    
    
    
    Term Loan and Revolving Credit Agreement, dated December 12,
2002, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank
of Scotland as Agent (incorporated herein by reference to
Exhibit 10.17 of the Companys Form 10-K dated April 15,
2003).10.18*
    
    
    
    Fifth amendment, dated March 31, 2004, to the Term Loan and
Revolving Credit Agreement, dated December 12, 2002, by and
among FirstCity Financial Corporation as Borrower and the
Lenders named therein, as Lenders and Bank of Scotland as Agent.10.19*
    
    
    
    Separation Agreement and Release, dated March 31, 2004, by
and between G. Stephen Fillip, FirstCity Servicing Corporation
and FirstCity Financial Corporation.10.20*
    
    
    
    Consultant Agreement, dated April 1, 2004, by and between
FirstCity Servicing Corporation and G. Stephen Fillip.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.
 43




---



##### 



ExhibitNumber
    
    
    
    Description of Exhibit32.1*
    
    
    
    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, 2004.32.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of
the Company, pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and relating to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004.
   *
    
    Filed herewith. (b) Reports onForm 8-K. On January 23, 2004 the Company filed a report on Form 8-K. The report
was filed under Item 7 and 11 of Form 8-K in connection with a notice to
executive officers and directors of the Company concerning a blackout period
under the FirstCity Financial Corporation Employees Profit Sharing and
Retirement Plan. 44




---



##### 



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 Executive
Officer and Director
(Duly authorized officer of the
Registrant) By:
    /s/      J. Bryan BakerJ. Bryan BakerSenior Vice President and Chief
Financial Officer
(Duly authorized officer and
principal financial and accounting
officer of the Registrant) Dated: May 14, 2004 45




---



##### 



INDEX TO EXHIBITS ExhibitNumber
    
    
    
    Description of Exhibit2.1
    
    -
    
    Joint Plan of Reorganization by First City Bancorporation of
Texas, Inc., Official Committee of Equity Security Holders
and J-Hawk Corporation, with the Participation of Cargill
Financial Services Corporation, Under Chapter 11 of the
United States Bankruptcy Code, Case No. 392-39474-HCA-11
(incorporated herein by reference to Exhibit 2.1 of the
Companys Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995).2.2
    
    -
    
    Agreement and Plan of Merger, dated as of July 3, 1995, by
and between First City Bancorporation of Texas, Inc. and
J-Hawk Corporation (incorporated herein by reference to
Exhibit 2.2 of the Companys Current Report on Form 8-K
dated July 3, 1995 filed with the Commission on July 18,
1995).3.1
    
    -
    
    Amended and Restated Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.1 of
the Companys Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995).3.2
    
    -
    
    Bylaws of the Company (incorporated herein by reference to
Exhibit 3.2 of the Companys Current Report on Form 8-K
dated July 3, 1995 filed with the Commission on July 18,
1995).4.1
    
    -
    
    Certificate of Designations of the New Preferred Stock
($0.01 par value) of the Company. (incorporated herein by
reference to Exhibit 4.1 to the Companys Current Report on
Form 10-K dated March 24, 1998 filed with the Commission on
March 26, 1998).9.1
    
    -
    
    Shareholder Voting Agreement, dated as of June 29, 1995,
among ATARA I Ltd., James R. Hawkins, James T. Sartain and
Cargill Financial Services Corporation. (incorporated herein
by reference to Exhibit 9.1 of the Companys Form 10-K dated
March 24, 1998 filed with the Commission on March 26, 1998).10.1
    
    -
    
    Note Agreement, dated as of June 6, 1997, among Bosque Asset
Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
Investment Realty Partners, L.P. and Bankers Trust Company
of California, N.A. (incorporated herein by reference to
Exhibit 10.14 of the Companys Form 10-K dated March 24,
1998 filed with the Commission March 26, 1998).10.2
    
    -
    
    Loan Agreement, dated April 8, 1998 between Bank of Scotland
and the Company (incorporated herein by reference to Exhibit
10.6 of the Companys Form 10-Q dated August 14, 1998, filed
with the Commission on August 18, 1998).10.3
    
    -
    
    First Amendment to Loan Agreement, dated July 20, 1998,
between Bank of Scotland and the Company (incorporated
herein by reference to Exhibit 10.7 of the Companys Form
10-Q dated August 14, 1998, filed with the Commission on
August 18, 1998).10.4
    
    -
    
    Tenth Amendment to Loan Agreement, dated August 11, 1999
between Bank of Scotland and the Company (incorporated
herein by reference to Exhibit 10.34 of the Companys Form
10-Q dated August 16, 1999, filed with the Commission on
August 16, 1999).10.5
    
    -
    
    Amended and Restated Loan Agreement, dated December 20,
1999, by and among FirstCity Financial Corporation as
Borrower and the Lenders Named therein, as Lenders and Bank




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##### 



ExhibitNumber
    
    
    
    Description of Exhibitof Scotland as Agent (incorporated herein by reference to
Exhibit 10.1 of the Companys Form 8-K dated December 22,
1999, filed with the Commission on December 28, 1999).10.6
    
    -
    
    Securities Purchase Agreement, dated as of August 18, 2000,
by and among the Company, Consumer Corp., Funding LP,
Funding GP, IFA-GP and IFA-LP. (incorporated herein by
reference to Exhibit 10.40 of the Companys Form 8-K dated
August 25, 2000, filed with the Commission on September 11,
2000).10.7
    
    -
    
    Contribution and Assumption Agreement by and between
Consumer Corp. and Drive dated as of August 18, 2000.
(incorporated herein by reference to Exhibit 10.41 of the
Companys Form 8-K dated August 25, 2000, filed with the
Commission on September 11, 2000).10.8
    
    -
    
    Contribution and Assumption Agreement by and between Funding
LP and Drive dated as of August 18, 2000. (incorporated
herein by reference to Exhibit 10.42 of the Companys Form
8-K dated August 25, 2000, filed with the Commission on
September 11, 2000).10.9
    
    -
    
    Second Amendment to Amended and Restated Loan Agreement,
dated December 20, 1999, by and among the Company, as
borrower, and the Lenders, as lenders, and Bank of Scotland,
as Agent. (incorporated herein by reference to Exhibit 10.43
of the Companys Form 8-K dated August 25, 2000, filed with
the Commission on September 11, 2000).10.10
    
    -
    
    Receivables Financing Agreement, dated August 18, 2000,
among Drive BOS LP, Drive Financial Services LP, each
Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A.
(incorporated herein by reference to Exhibit 10.44 of the
Companys Form 10-K dated April 13, 2001, filed with the
Commission on April 13, 2001).10.11
    
    -
    
    Amendment to Loan Agreement and extension of Promissory
Note, dated January 12, 2001, by and between FirstCity
Holdings Corporation and CFSC Capital Corp. XXX
(incorporated herein by reference to Exhibit 10.45 of the
Companys Form 10-K dated April 13, 2001, filed with the
Commission on April 13, 2001).10.12
    
    -
    
    Second Amendment, dated as of February 16, 2001, to the
Receivables Financing Agreement, dated as of August 18,
2000, among Drive BOS LP, Drive Financial Services LP the
Lenders party thereto, IPA Incorporated and Wells Fargo Bank
Minnesota, NA (incorporated herein by reference to Exhibit
10.46 of the Companys Form 10-K dated April 13, 2001, filed
with the Commission on April 13, 2001).10.13
    
    -
    
    Subordinate Capital Loan Agreement, dated as of February 16,
2001, among Drive Financial Services LP, DRIVE BOS LP, the
financial institutions from time to time party hereto and
IFA Incorporated (incorporated herein by reference to
Exhibit 10.47 of the Companys Form 10-K dated April 13,
2001, filed with the Commission on April 13, 2001).10.14
    
    -
    
    Amended and Restated Amendment #4 (Option and Option
Warrant), dated as of December 31, 2001, between the Company
and BoS(USA) Inc. (incorporated herein by reference to
Exhibit 99.1 of the Companys Form 8-K dated January 18,
2002, filed with the Commission on January 18, 2002).10.15
    
    -
    
    Letter Agreement, dated November 26, 2002, between FirstCity
Consumer Lending Corporation and The Governor and Company of
the Bank of Scotland, including Form of Promissory Note to
be executed by FirstCity Consumer Lending Corporation,
payable to The Governor and Company of the Bank of Scotland.




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##### 



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