1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-26500 FIRSTCITY FINANCIAL CORPORATION (Exact name of Registrant as Specified in Its Charter) DELAWARE 76-0243729 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 6400 IMPERIAL DRIVE, WACO, TX 76712 (Address of Principal Executive Offices) (Zip Code) (254) 751-1750 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] The number of shares of common stock, par value $.01 per share, outstanding at May 19, 2000 was 8,347,677. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ASSETS Cash and cash equivalents................................... $ 12,977 $ 11,263 Portfolio Assets, net....................................... 35,505 39,437 Loans receivable, net....................................... 42,286 30,144 Residual interests in securitizations....................... 58,271 55,661 Equity investments in Acquisition Partnerships and Servicing Entities.................................................. 32,648 31,104 Deferred tax benefit, net................................... 27,101 27,101 Other assets, net........................................... 19,148 15,786 Net assets of discontinued operations....................... 21,258 20,126 -------- -------- Total Assets...................................... $249,194 $230,622 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Notes payable............................................. $184,313 $169,792 Other liabilities......................................... 11,598 7,278 -------- -------- Total Liabilities................................. 195,911 177,070 Commitments and contingencies............................... -- -- Redeemable preferred stock: Adjusting rate preferred stock, including accumulated dividends in arrears of $1,926 and $1,284, respectively (par value $.01; redemption value of $21 per share; 2,000,000 shares authorized; 1,222,901 shares issued and outstanding)....................................... 27,607 26,965 Shareholders' equity: Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)........................................... -- -- Common stock (par value $.01 per share; 100,000,000 shares authorized; issued and outstanding: 8,347,677 and 8,333,300 shares, respectively)........................ 83 83 Paid in capital........................................... 79,596 79,562 Accumulated deficit....................................... (53,434) (52,663) Accumulated other comprehensive loss...................... (569) (395) -------- -------- Total Shareholders' Equity........................ 25,676 26,587 -------- -------- Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity............................ $249,194 $230,622 ======== ======== See accompanying notes to consolidated financial statements. 1 3 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------- 2000 1999 -------- -------- Revenues: Gain on sales of automobile loans......................... $ 2,836 $ -- Servicing fees............................................ 3,296 2,113 Gain on resolution of Portfolio Assets.................... 1,081 1,302 Equity in earnings of Acquisition Partnerships and Servicing Entities..................................... 2,613 2,644 Interest income........................................... 5,005 4,349 Other income.............................................. 845 569 ------- ------- Total revenues.................................... 15,676 10,977 Expenses: Interest and fees on notes payable........................ 5,509 4,357 Salaries and benefits..................................... 4,670 3,897 Provision for loan losses and impairment of residual interests.............................................. 1,105 23 Occupancy, data processing, communication and other....... 4,262 4,009 ------- ------- Total expenses.................................... 15,546 12,286 Earnings (loss) from continuing operations before income taxes, minority interest and accounting change......... 130 (1,309) Provision for income taxes.................................. (19) (22) ------- ------- Earnings (loss) from continuing operations before minority interest and accounting change......................... 111 (1,331) Minority interest........................................... (240) 69 Cumulative effect of accounting change...................... -- (765) ------- ------- Loss from continuing operations........................... (129) (2,027) Earnings from discontinued operations, net of income taxes..................................................... -- 525 ------- ------- Net loss.................................................. (129) (1,502) Preferred dividends(1)...................................... (642) (642) ------- ------- Net loss to common shareholders................... $ (771) $(2,144) ======= ======= Basic and diluted earnings (loss) per common share are as follows: Loss from continuing operations before accounting change per common share....................................... $ (0.09) $ (0.23) Discontinued operations per common share.................... -- $ 0.06 Cumulative effect of accounting change...................... -- $ (0.09) Net loss per common share................................... $ (0.09) $ (0.26) Weighted average common shares outstanding.................. 8,333 8,288 - --------------- (1) Includes accumulated dividends in arrears in 2000. See accompanying notes to consolidated financial statements. 2 4 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) (UNAUDITED) ACCUMULATED RETAINED OTHER NUMBER OF EARNINGS COMPREHENSIVE TOTAL COMMON COMMON PAID IN (ACCUMULATED INCOME SHAREHOLDERS' SHARES STOCK CAPITAL DEFICIT) (LOSS) EQUITY --------- ------ ------- ------------ ------------- ------------- BALANCES, DECEMBER 31, 1998................... 8,287,959 $ 83 $78,456 $ 58,061 $ 355 $ 136,955 Purchase of shares through employee stock purchase plan.......... 45,341 -- 231 -- -- 231 Issuance of common stock warrant................ -- -- 875 -- -- 875 Comprehensive loss: Net loss for 1999...... -- -- -- (108,156) -- (108,156) Foreign currency items............... -- -- -- -- (750) (750) --------- Total comprehensive loss................... (108,906) --------- Preferred dividends...... -- -- -- (2,568) -- (2,568) --------- ------ ------- --------- ----- --------- BALANCES, DECEMBER 31, 1999................... 8,333,300 83 79,562 (52,663) (395) 26,587 Purchase of shares through employee stock purchase plan.......... 14,377 -- 34 -- -- 34 Comprehensive loss: Net loss for the first quarter of 2000..... -- -- -- (129) -- (129) Foreign currency items............... -- -- -- -- (174) (174) --------- Total comprehensive loss................... (303) --------- Preferred dividends...... -- -- -- (642) -- (642) --------- ------ ------- --------- ----- --------- BALANCES, MARCH 31, 2000................... 8,347,677 $ 83 $79,596 $ (53,434) $(569) $ 25,676 ========= ====== ======= ========= ===== ========= See accompanying notes to consolidated financial statements. 3 5 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------- 2000 1999 -------- -------- Cash flows from operating activities: Net loss.................................................. $ (129) $ (1,502) Adjustments to reconcile net loss to net cash used in operating activities: Earnings from discontinued operations.................. -- (525) Proceeds from resolution of Portfolio Assets........... 4,286 5,035 Gain on resolution of Portfolio Assets................. (1,081) (1,302) Purchase of Portfolio Assets and loans receivable, net................................................... (334) (172) Origination of automobile receivables, net of purchase discount.............................................. (51,660) (46,123) Provision for loan losses and impairment of residual interests............................................. 1,105 23 Equity in earnings of Acquisition Partnerships and Servicing Entities.................................... (2,613) (2,644) Proceeds from performing Portfolio Assets and loans receivable, net....................................... 40,379 12,289 Decrease in net deferred tax asset..................... -- 49 Depreciation and amortization.......................... 693 1,133 (Increase) decrease in other assets.................... (7,674) 4,030 Increase in other liabilities.......................... 4,135 85 -------- -------- Net cash used in operating activities............. (12,893) (29,624) Cash flows from investing activities: Property and equipment, net............................... 481 (1,211) Contributions to Acquisition Partnerships and Servicing Entities............................................... (1,659) (831) Distributions from Acquisition Partnerships and Servicing Entities............................................... 2,418 3,732 -------- -------- Net cash provided by investing activities......... 1,240 1,690 -------- -------- Cash flows from financing activities: Borrowings under notes payable............................ 55,894 67,289 Payments of notes payable................................. (41,428) (33,543) Proceeds from issuance of common stock.................... 34 112 Preferred dividends paid.................................. -- (642) -------- -------- Net cash provided by financing activities......... 14,500 33,216 -------- -------- Net cash provided by continuing operations........ 2,847 5,282 Net cash provided by (used by) discontinued operations....................................... (1,133) 357 -------- -------- Net increase in cash and cash equivalents................... 1,714 5,639 Cash and cash equivalents, beginning of period.............. 11,263 5,955 -------- -------- Cash and cash equivalents, end of period.................... $ 12,977 $ 11,594 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest............................................... $ 4,638 $ 2,740 Income taxes........................................... $ 18 $ 21 Non-cash investing activities: Residual interests received as a result of sales of loans through securitizations......................... $ 5,713 $ -- Non-cash financing activities: Dividends accumulated and not paid on preferred stock................................................. $ 642 $ 642 See accompanying notes to consolidated financial statements. 4 6 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) BASIS OF PRESENTATION 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 financial position at March 31, 2000, the results of operations and the cash flows for the three-month periods ended March 31, 2000 and 1999. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimation of future collections on purchased portfolio assets used in the calculation of net gain on resolution of portfolio assets, interest rate environments, valuation of the deferred tax asset, and prepayment speeds and collectibility of loans held in inventory, securitization trusts and for investment. Actual results could differ materially from those estimates. Certain amounts in the financial statements for prior periods have been reclassified to conform with current financial statement presentation. An accounting change due to the adoption of SOP 98-5, which requires previously capitalized start-up costs including organization costs to be written off and future costs related to start-up entities be charged to expense as incurred, resulted in a write-off of $.8 million in previously capitalized organization costs during the first quarter of 1999 and has been reflected as a cumulative effect of a change in accounting principle. (2) DISCONTINUED OPERATIONS Effective during the third quarter of 1999, management of the Company adopted formal plans to discontinue the operations of Harbor Financial Group, Inc. (formerly known as FirstCity Financial Mortgage Corp.) and its subsidiaries (collectively referred to as "Mortgage Corp."), and FC Capital Corp. ("Capital Corp."). These entities comprise the operations that were previously reported as the Company's residential and commercial mortgage banking business. As formal termination plans were adopted and operations at each entity are expected to cease in the near future (within 12 months), the results of operations for the first quarter 1999 have been reflected as discontinued operations in the accompanying consolidated statement of operations for the three months ended March 31, 1999. Additionally, a net asset related to the resolution of activity from the discontinued operations has been reflected in the accompanying consolidated balance sheets. The following is a summary of activity related to each of the entity's operations: Mortgage Corp. -- During the third quarter of 1999, Mortgage Corp. incurred significant losses from operations and the liquidation of certain assets. Ultimately, on October 14, 1999, Mortgage Corp. filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. On December 14, 1999 the bankruptcy proceedings were converted to liquidations under Chapter 7 of the United States Bankruptcy Code. In the filings, the stated assets of Mortgage Corp. were approximately $95 million and the stated liabilities were approximately $98 million. Additionally, it is anticipated that the liquidation of any remaining assets will yield proceeds which are less than the stated amount of the assets as listed in the filings. The Company does not guarantee any of the debt of Mortgage Corp. nor is there any recourse to the Company on any of Mortgage Corp.'s liabilities. Furthermore, management of the Company was not involved in the daily operations of Mortgage Corp. during a significant portion of the third quarter of 1999 and no longer has access to financial records of Mortgage Corp. Based on the above, Mortgage Corp. was deemed insolvent and the Company wrote off its entire investment in and advances to (collectively referred to as the Net Investment) Mortgage Corp. 5 7 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Capital Corp. -- Management of the Company made the decision to completely exit all mortgage banking activities due to the significant negative impact realized from Mortgage Corp. The Company ceased acquiring mortgage loans under Capital Corp.'s platform during the fourth quarter of 1999. At March 31, 2000, Capital Corp. had loans totaling $126 million remaining in its inventory. A sale of substantially all of the remaining inventory closed subsequent to quarter end, and the remainder of the wind-down of operations is expected to be completed by the end of the second quarter of 2000. It is projected that the only assets remaining from Capital Corp.'s operations will be the investment securities resulting from the retention of residual interests in securitization transactions completed by Capital Corp. The Company has considered the estimated future income from such investment securities in the computation of the loss from discontinued operations. The net assets from discontinued operations consist of the following: MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ Investment securities, net of valuation allowance........... $26,135 $28,602 Accrual for loss on operations and disposal of discontinued operations................................................ (4,877) (8,476) ------- ------- Net assets of discontinued operations............. $21,258 $20,126 ======= ======= A summary of discontinued operations for the three months ended March 31, 1999 is as follows: THREE MONTHS ENDED MARCH 31, 1999 ------------------ Revenues: Net mortgage warehouse income............................. $ 5,957 Gain on sale of mortgage loans............................ 26,641 Loss on sale of mortgage servicing rights................. (2,395) Servicing fees............................................ 6,143 Other..................................................... 2,683 ------- Total............................................. 39,029 ------- Expenses: Salaries and benefits..................................... 21,896 Amortization of mortgage servicing rights................. 4,723 Credit for valuation of mortgage servicing rights......... (2,344) Provision for loan losses and residual interests.......... 50 Interest on notes payable................................. 2,202 Occupancy, data processing, communication and other....... 11,977 ------- Total............................................. 38,504 ------- Operating contribution, before and net of direct taxes...... $ 525 ======= During the third quarter of 1999, the Company wrote-off its investment of $50,558 in Mortgage Corp. and wrote down its net investment in Capital Corp. by $12,674. (3) LIQUIDITY AND CAPITAL RESOURCES Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to the Acquisition Partnerships, investments in expanding businesses to support their growth, retirement of and dividends on preferred stock, and other investments by the Company. The potential sources of liquidity are funds generated from operations, equity 6 8 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt and dividends from the Company's subsidiaries, short-term borrowings from revolving lines of credit, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings. In December 1999, the Company renewed and restructured its senior lending facility (the "Senior Facility"). The Senior Facility was renewed at a maximum available amount of $88 million and provides for a facility fee of $1.65 million if the loan is paid in full before September 30, 2000, or $2.5 million if paid thereafter. Defaults at Mortgage Corp. do not constitute defaults under the Senior Facility. Additionally, the Company issued $25 million in senior subordinated notes maturing December 2003 At March 31, 2000, the Company was not in compliance with certain financial and other covenants in the Senior Facility. The Company is working with its lenders to obtain formal approval or waivers relating to these matters and funding under the Senior Facility continues uninterrupted. The Senior Facility also requires the consent of the lenders prior to payment of any common and preferred dividends. The Company continually evaluates its liquidity position giving priority to assuring adequate funding levels for its two operating entities. Secondarily, management will determine when and if it is appropriate to pay the dividends on the Company's outstanding preferred stock. Currently, there are approximately 1.2 million preferred shares outstanding with accrued dividends of approximately $1.9 million. The Company also issued an option to the holder of the senior subordinated notes allowing it to acquire an additional warrant for 1,975,000 shares of the non-voting common stock in the Company (currently no such stock is authorized), which can be exercised after one year if the notes or any portion thereof remains outstanding, but not prior thereto. The strike price on these warrants is $2.3125. In the event that the notes are paid prior to the expiration of such one-year period through a transaction involving the issuance of warrants, the note holder is entitled to retain sufficient warrants to allow the note holder to acquire approximately 4.86% of the Company's common stock. The Company is in the process of taking the necessary actions to authorize the issuance of the non-voting common stock covered by the option. During the first quarter of 2000, the Company completed an automobile finance receivable securitization containing loans of approximately $41 million. The ability of the Company to continue securitizations is dependant on numerous factors including, but not limited to, conditions in the securities market in general and conditions in the asset-backed securitization market. The Company does not anticipate a down-turn in market conditions that would have a significant adverse impact on the Company's ability to securitize its loans. Additionally, in the first quarter of 2000, the credit enhancement provider for the automobile warehouse facility has reestablished funding to a maximum available funding amount of $70 million. The Company continues to work with the credit enhancement provider on its automobile securitizations to maintain extensions of the waivers and consents of trigger events occurring from the Company's failure to meet certain financial covenants. The Company has received an extension on its automobile finance warehouse line through June 28, 2000, and is currently in discussions with various warehouse lenders regarding the potential to structure alternative or additional funding. Alternatives currently being explored include a whole loan sale arrangement, and an uninsured warehouse line. During January 2000, the Company increased its existing residual financing from $4 million at December 31, 1999 to $7 million. Residual interests securing this borrowing had a carrying value of $36.4 million at March 31, 2000. Subsequent to quarter end, additional borrowings after payment reductions brought the outstanding balance to $5.5 million. Although there is no guarantee, the Company anticipates additional borrowings against such residuals will be available in the future. Subsequent to quarter end, the Company obtained a secured, $17 million equity acquisition facility for the investment in future Acquisition Partnerships. This, along with equity distributions (totaling approxi- 7 9 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) mately $2.4 million for the first quarter of 2000) from existing Acquisition Partnerships, is expected to be adequate to meet the funding needs of Commercial Corp. Although the above transactions enhanced the Company's immediate liquidity concerns, management has identified the following actions that it believes are essential to allow the Company to meet all of its financing needs and cover its obligations during the remainder of 2000: - continue to obtain warehouse financing for consumer lending operations and identify alternative sources for such funding; - identify alternative or additional sources of financing on residual interests obtained from securitization transactions; - continue to securitize automobile finance receivables, either with or without credit enhancement; - obtain additional financing required by Commercial Corp. for investment in additional Portfolio Assets; - realize positive cash flows from existing equity investments in Portfolio Assets; and - sell asset and loan portfolios or portions of operating businesses. Based on the above, management of the Company expects that it will be able to meet its obligations as they come due during 2000. (4) PORTFOLIO ASSETS Portfolio Assets are summarized as follows: MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ Non-performing Portfolio Assets............................. $ 67,871 $ 72,396 Performing Portfolio Assets................................. 17,065 17,878 Real estate Portfolios...................................... 6,593 7,663 -------- -------- Total Portfolio Assets............................ 91,529 97,937 Adjusted purchase discount required to reflect Portfolio Assets at carrying value.................................. (56,024) (58,500) -------- -------- Portfolio Assets, net............................. $ 35,505 $ 39,437 ======== ======== Portfolio Assets are pledged to secure non-recourse notes payable. (5) LOANS RECEIVABLE Loans receivable are summarized as follows: MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ Automobile and consumer finance receivables................. $ 52,459 $37,718 Other loans held for investment............................. 870 883 Allowance for loan losses................................... (11,043) (8,457) -------- ------- Loans receivable, net............................. $ 42,286 $30,144 ======== ======= 8 10 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The activity in the allowance for loan losses is summarized as follows for the periods indicated: THREE MONTHS ENDED MARCH 31, ------------------- 2000 1999 -------- -------- Balances, beginning of period............................... $ 8,457 $ 5,894 Provision for loan losses................................... 630 23 Discounts acquired.......................................... 9,499 7,621 Allocation of reserves to sold loans........................ (5,605) -- Charge off activity: Principal balances charged off............................ (2,899) (1,081) Recoveries................................................ 961 694 ------- ------- Net charge offs................................... (1,938) (387) ------- ------- Balances, end of period..................................... $11,043 $13,151 ======= ======= (6) RESIDUAL INTERESTS IN SECURITIZATIONS The Company has residual interests in securitizations consisting of rated securities, retained interests, servicing interests and related interest only strips (collectively referred to as residual interests) which are attributable to loans sold through securitization transactions by the Company. Residual interests are comprised of the following as of the dates indicated: MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ Rated securities............................................ $ 1,221 $ 1,313 Residual interests.......................................... 64,913 62,167 Accrued interest............................................ 996 565 Valuation allowance......................................... (8,859) (8,384) ------- ------- $58,271 $55,661 ======= ======= The activity related to residual interests for 2000 and 1999 is as follows: THREE MONTHS ENDED MARCH 31, ------------------- 2000 1999 --------- ------- Balance, beginning of period................................ $55,661 $41,849 Cost allocated from securitizations......................... 5,713 -- Interest accreted........................................... 1,762 1,268 Cash received from trusts................................... (4,390) (2,566) Provision for permanent impairment of value................. (475) -- ------- ------- Balance, end of period...................................... $58,271 $40,551 ======= ======= 9 11 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) EQUITY INVESTMENTS IN ACQUISITION PARTNERSHIPS AND SERVICING ENTITIES The Company has investments in Acquisition Partnerships and their general partners that are accounted for on the equity method. During 1999, the Company also acquired investments in Servicing Entities that are accounted for on 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, 2000 1999 --------- ------------ Assets...................................................... $309,394 $324,954 ======== ======== Liabilities................................................. 202,618 210,967 Net equity.................................................. 106,776 113,987 -------- -------- $309,394 $324,954 ======== ======== Equity investment in Acquisition Partnerships............... $ 31,278 $ 29,639 Equity investment in Servicing Entities..................... 1,370 1,465 -------- -------- $ 32,648 $ 31,104 ======== ======== CONDENSED COMBINED SUMMARY OF EARNINGS THREE MONTHS ENDED MARCH 31, ------------------- 2000 1999 -------- -------- Proceeds from resolution of Portfolio Assets................ $29,282 $29,645 Gain on resolution of Portfolio Assets...................... 13,738 10,731 Interest income on performing Portfolio Assets.............. 5,222 3,336 Net earnings................................................ $10,051 $ 6,383 ======= ======= Equity in earnings of Acquisition Partnerships.............. $ 2,592 $ 2,644 Equity in earnings of Servicing Entities.................... 21 -- ------- ------- $ 2,613 $ 2,644 ======= ======= 10 12 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 by each. The following is a summary of results of operations for each of the segments and a reconciliation to net loss from continuing operations for the quarters ended March 31, 2000 and 1999. THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 ------- -------- PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: Gain on resolution of Portfolio Assets................. $1,081 $ 1,302 Equity in earnings of Acquisition Partnerships and Servicing Entities.................................... 2,613 2,644 Servicing fees......................................... 1,623 978 Other.................................................. 1,027 1,464 ------ ------- Total............................................. 6,344 6,388 Expenses: Salaries and benefits.................................. 1,414 1,421 Interest and fees on notes payable..................... 620 1,116 Asset level expenses, occupancy, data processing and other................................................. 1,454 1,482 ------ ------- Total............................................. 3,488 4,019 ------ ------- Operating contribution before direct taxes................ $2,856 $ 2,369 ====== ======= Operating contribution, net of direct taxes............... $2,840 $ 2,350 ====== ======= CONSUMER LENDING: Revenues: Gain on sale of automobile loans....................... $2,836 $ -- Interest income........................................ 4,583 3,405 Servicing fees......................................... 1,673 1,135 Other.................................................. 50 29 ------ ------- Total............................................. 9,142 4,569 Expenses: Salaries and benefits.................................. 2,426 1,533 Provision for loan losses and impairment of residual interests............................................. 1,105 23 Interest and fees on notes payable..................... 1,108 752 Occupancy, data processing and other................... 2,304 2,011 ------ ------- Total............................................. 6,943 4,319 ------ ------- Operating contribution before direct taxes................ $2,199 $ 250 ====== ======= Operating contribution, net of direct taxes............... $2,191 $ 250 ====== ======= Total operating contribution, net of direct taxes........................................... $5,031 $ 2,600 ====== ======= CORPORATE OVERHEAD: Corporate interest and fees expense....................... $3,781 $ 2,489 Salaries and benefits, occupancy, professional and other income and expenses, net............................... 1,379 2,138 ------ ------- Net loss from continuing operations............... $ (129) $(2,027) ====== ======= 11 13 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, 2000 1999 --------- ------------ Portfolio acquisition and resolution assets................. $ 69,079 $ 71,479 Consumer assets............................................. 100,165 85,261 Deferred tax benefit, net................................... 27,101 27,101 Other assets, net........................................... 31,591 26,655 Net assets of discontinued operations....................... 21,258 20,126 -------- -------- Total assets...................................... $249,194 $230,622 ======== ======== (9) PREFERRED STOCK AND SHAREHOLDERS' EQUITY In the third quarter of 1999, dividends on the Company's adjusting rate preferred stock were suspended. At March 31, 2000, accumulated dividends in arrears on such preferred stock totaled $1.9 million, or $1.575 per share. If the Company fails to pay quarterly dividends for any six consecutive or non-consecutive quarters, the holders of adjusting rate preferred stock are entitled to elect two directors to the Company's Board until cumulative dividends have been paid in full. The Company also issued an option to the holder of the senior subordinated notes allowing it to acquire an additional warrant for 1,975,000 shares of non-voting common stock in the Company (currently no such stock is authorized), which can be exercised after one year if the notes or any portion thereof remains outstanding, but not prior thereto. The strike price on these warrants is $2.3125. In the event that the notes are paid prior to the expiration of such one-year period through a transaction involving the issuance of warrants, the note holder is entitled to retain sufficient warrants to allow the note holder to acquire approximately 4.86% of the Company's common stock. The Company is in the process of taking the necessary actions to authorize the issuance of the non-voting common stock covered by the option. (10) INCOME TAXES Federal income taxes are provided at a 35% rate. Net operating loss carry forwards ("NOLs") are available to FirstCity and are recognized as an offset to the provision in the period during which the benefit is realized. During the first three months of 2000 and 1999, FirstCity recognized no deferred tax benefit from NOLs. Realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income prior to expiration of the net operating loss carry forwards. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset 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 carry forward period change. (11) COMMITMENTS AND CONTINGENCIES The Company and Harbor Financial Group, Inc. (formerly known as FirstCity Financial Mortgage Corporation) filed suit in the Federal District Court for the Western District of Texas, Waco Division, against Chase Bank of Texas, N.A. and Chase Securities, Inc. in September 1999 seeking damages resulting from alleged violations by the defendants of the Bank Holding Company Act and from civil conspiracy engaged in by the defendants, and injunctive relief, arising from an engagement letter entered into between the Company and Chase Securities, Inc. relating to the sale of assets or securities of Harbor Financial Group, Inc., Harbor Financial Mortgage Corporation and their subsidiaries (collectively "Harbor"). The Company alleges that Chase Bank of Texas, N.A. conditioned its extension of credit to Harbor on the retention of Chase Securities, Inc. by the Company and Harbor in violation of the Bank Holding Company Act. The Company has, in its First Amended Original Complaint filed in November 1999, sought a judicial declaration that the 12 14 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) plaintiffs are not obligated to pay any commission to Chase Securities, Inc. under the engagement letter. The actual damages sought by the Company are in excess of $200 million. The Company also seeks recovery of three times its damages pursuant to the Bank Holding Company Act and recovery of its costs of court, including reasonable attorneys fees. On October 4, 1999, Chase Securities, Inc. filed suit against the Company before the Supreme Court for the State of New York, County of New York: Commercial Part seeking recovery of $2.4 million as the balance of a transaction fee allegedly due it under the terms of the engagement letter, expenses in an amount in excess of $3,909, and other just and proper relief. The Company denies that it has any liability to Chase Securities, Inc. and intends to vigorously defend the suit. The Company has asserted as a defense to this action the violations of the Bank Holding Company Act asserted in the litigation pending before the Federal District Court for the Western District of Texas. On October 14, 1999, Mortgage Corp. filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code before the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. In a motion filed in those proceedings requesting the appointment of a Chapter 11 Trustee, the debtors stated that they were reviewing pre-petition transfers to the Company to determine if those transfers are avoidable. On December 14, 1999, the bankruptcy proceedings were converted to liquidations under Chapter 7 of the United States Bankruptcy Code. The Company believes that it has valid defenses to any allegations that might be made to avoid any pre-petition transfers in connection with the Mortgage Corp. bankruptcy proceedings. The Company is involved in various other 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 consolidated financial condition, results of operations or liquidity of the Company. The Company is a 50% owner in an entity that is obligated to advance up to $2.5 million toward the acquisition of Portfolio Assets from financial institutions in California. At March 31, 2000, advances of $2 million had been made under the obligation. 13 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company is a diversified financial services company engaged in Portfolio Asset acquisition and resolution ("Commercial Corp.") and consumer lending ("Consumer Corp."). 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 Company also seeks opportunities to originate and retain high yield commercial loans to businesses and to finance real estate projects that are unable to access traditional lending sources. The consumer lending business involves the acquisition, origination, warehousing, securitization and servicing of consumer receivables. The Company's current consumer lending operations are focused on the acquisition of sub-prime automobile receivables. FirstCity Financial Corporation reported a loss of $129,000 for the quarter ended March 31, 2000. After accrued dividends on the Company's preferred stock, the loss to common shareholders was $771,000 or $.09 per share on a diluted basis. 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, 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 of the Company's Portfolio Asset acquisition and resolution business, and the timing of securitization transactions of Consumer Corp., period to period comparisons of the Company's results of continuing operations may not be meaningful. ANALYSIS OF REVENUES AND EXPENSES The following table summarizes the revenues and expenses of each of the Company's business segments and presents the contribution that each business makes to the Company's operating margin. ANALYSIS OF REVENUES AND EXPENSES THREE MONTHS ENDED MARCH 31, --------------------- 2000 1999 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: Gain on resolution of Portfolio Assets................. $ 1,081 $ 1,302 Servicing fees......................................... 1,623 978 Equity in earnings of Acquisition Partnerships and Servicing Entities.................................... 2,613 2,644 Other.................................................. 1,027 1,464 ------- ------- Total............................................. 6,344 6,388 Expenses: Interest and fees on notes payable..................... 620 1,116 Salaries and benefits.................................. 1,414 1,421 Asset level expenses, occupancy, data processing and other................................................. 1,454 1,482 ------- ------- Total............................................. 3,488 4,019 ------- ------- Operating contribution before direct taxes................ $ 2,856 $ 2,369 ======= ======= Operating contribution, net of direct taxes............... $ 2,840 $ 2,350 ======= ======= 14 16 THREE MONTHS ENDED MARCH 31, --------------------- 2000 1999 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSUMER LENDING: Revenues: Gain on sale of automobile loans....................... $ 2,836 $ -- Servicing fees......................................... 1,673 1,135 Interest income........................................ 4,583 3,405 Other.................................................. 50 29 ------- ------- Total............................................. 9,142 4,569 Expenses: Interest and fees on notes payable..................... 1,108 752 Salaries and benefits.................................. 2,426 1,533 Provision for loan losses and impairment of residual interests............................................. 1,105 23 Occupancy, data processing and other................... 2,304 2,011 ------- ------- Total............................................. 6,943 4,319 ------- ------- Operating contribution before direct taxes................ $ 2,199 $ 250 ======= ======= Operating contribution, net of direct taxes............... $ 2,191 $ 250 ======= ======= Total operating contribution, net of direct taxes......... $ 5,031 $ 2,600 ======= ======= CORPORATE OVERHEAD: Interest and fees on notes payable........................ $ 3,781 $ 2,489 Salaries and benefits, occupancy, professional and other income and expenses, net............................... 1,379 2,138 ------- ------- Loss from continuing operations........................... (129) (2,027) Earnings from discontinued operations..................... -- 525 ------- ------- Net loss.................................................. (129) (1,502) Preferred dividends....................................... (642) (642) ------- ------- Net loss to common shareholders................... $ (771) $(2,144) ======= ======= SHARE DATA: Basic and diluted earnings (loss) per common share are as follows: Loss from continuing operations before accounting change per common share............................... $ (0.09) $ (0.23) Discontinued operations per common share............... -- 0.06 Cumulative effect of accounting change................. -- (0.09) Net loss per common share.............................. $ (0.09) $ (0.26) Weighted average common shares outstanding............. 8,333 8,288 ORIGINATION AND OTHER FINANCIAL DATA: Commercial Corp.: Aggregate purchase price of assets acquired............ $13,629 $ 9,817 Proceeds from resolution............................... 33,568 34,680 Consumer Corp.: Aggregate acquisition of automobile and other consumer receivables........................................... 61,160 53,736 PORTFOLIO ASSET ACQUISITION AND RESOLUTION The Portfolio Acquisition unit acquired three domestic portfolios during the quarter totaling $13.6 million. During the quarter, collections were $33.6 million, principally coming from Acquisition partnerships. Subsequent to quarter end the Company participated in the purchase of a portfolio in Mexico consisting of approximately 20,000 commercial and industrial loans. The acquired portfolio, the largest transaction by the 15 17 Company in its history, will be managed by the previously established servicing platform headquartered in Guadalajara, Mexico. The outlook for investment and servicing opportunities worldwide continues to be very positive, as the Company continues to expand its platform into foreign markets. Correspondingly, the European investments continue to perform well with prospects for future expansion and investment remaining strong. 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 ENDED MARCH 31, ----------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) GAIN ON RESOLUTION OF PORTFOLIO ASSETS: Average investment: Nonperforming Portfolios............................... $21,043 $32,870 Performing Portfolios.................................. 9,497 21,357 Real estate Portfolios................................. 7,198 12,175 Gain on resolution of Portfolio Assets: Nonperforming Portfolios............................... $ 722 $ 894 Real estate Portfolios................................. 359 408 ------- ------- Total............................................. $ 1,081 $ 1,302 Interest income on performing Portfolios.................. $ 394 $ 890 Gross profit percentage on resolution of Portfolio Assets: Nonperforming Portfolios............................... 25.24% 25.73% Real estate Portfolios................................. 25.20% 31.48% Weighted average gross profit percentage............... 25.22% 25.86% Interest yield on performing Portfolios (annualized)...... 16.58% 16.67% SERVICING FEE REVENUES...................................... $ 1,623 $ 978 PERSONNEL: Personnel expenses........................................ $ 1,414 $ 1,421 Number of personnel (at period end): Production............................................. 13 10 Servicing.............................................. 58 62 INTEREST EXPENSE: Average debt.............................................. $29,813 $59,970 Interest expense.......................................... 620 1,116 Average cost (annualized)................................. 8.32% 7.44% 16 18 The following chart presents selected information regarding the revenues and expenses of the Acquisition Partnerships. ANALYSIS OF SELECTED REVENUES AND EXPENSES ACQUISITION PARTNERSHIPS THREE MONTHS ENDED MARCH 31, ----------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) REVENUES: Gain on resolution of Portfolio Assets.................... $13,738 $10,731 Gross profit percentage on resolution of Portfolio Assets................................................. 46.92% 36.20% Interest income........................................... $ 5,222 $ 3,336 Other income.............................................. 428 161 INTEREST EXPENSE: Interest expense.......................................... $ 3,965 $ 3,161 Average cost (annualized)................................. 8.74% 8.15% OTHER EXPENSES: Servicing fees............................................ $ 1,857 $ 1,438 Legal..................................................... 889 557 Property protection....................................... 1,335 1,385 Other..................................................... 1,291 1,304 ------- ------- Total other expenses.............................. 5,372 4,684 ------- ------- Net earnings...................................... $10,051 $ 6,383 ======= ======= Equity in earnings of Acquisition Partnerships.............. $ 2,592 $ 2,644 Equity in earnings of Servicing Entities.................... 21 -- ------- ------- $ 2,613 $ 2,644 ======= ======= CONSUMER LENDING During the quarter FirstCity Funding, the Company's automobile finance business unit, completed a securitization of $41 million of face value of automobile receivables resulting in a gain of $2.8 million. The transaction was structured with $35.7 million in senior bonds, with the balance held by the Company in a residual interest. Production increased to $61 million in purchased auto receivables during the quarter because of improved liquidity and funding. The loans purchased during the quarter were purchased at an average discount to face value of 15.58% and carry a weighted average coupon of 19.9%. Delinquencies at quarter-end were 3.00% of the total serviced portfolio. At the end of the period the Company's consolidated balance sheet reflected $58.3 million of auto finance residuals. Additionally, during the quarter, the warehouse provider in conjunction with the credit enhancement provider increased warehouse capacity from $50 million to $70 million. 17 19 The following chart presents selected information regarding the revenues and expenses of Consumer Corp.'s consumer lending business. ANALYSIS OF SELECTED REVENUES AND EXPENSES CONSUMER LENDING THREE MONTHS ENDED MARCH 31, ----------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) INTEREST INCOME: Average loans and investments: Auto................................................... $47,767 $32,639 Investments............................................ 54,433 39,930 Interest income: Auto................................................... 2,688 1,998 Investments............................................ 1,762 1,269 Average yield (annualized): Auto................................................... 22.51% 24.48% Investments............................................ 12.95% 12.71% SERVICING FEE REVENUES...................................... $ 1,673 $ 1,135 PERSONNEL: Personnel expenses........................................ $ 2,426 $ 1,533 Number of personnel (at period end): Production............................................. 134 133 Servicing.............................................. 222 123 INTEREST EXPENSE: Average debt.............................................. $40,126 $33,101 Interest expense.......................................... 1,108 752 Average cost (annualized)................................. 11.05% 9.09% PROVISION FOR INCOME TAXES The Company has substantial federal net operating loss carryforwards ("NOLs"), which can be used to offset the tax liability associated with the Company's pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing an allowance to value the net deferred tax asset at a value commensurate with the Company's expectation of being able to utilize the recognized benefit in the foreseeable future. Such estimates are reevaluated on a quarterly basis with the adjustment to the allowance recorded as an adjustment to the income tax expense generated by the quarterly operating results. Significant events that change the Company's view of its currently estimated ability to utilize the tax benefits result in substantial changes to the estimated allowance required to value the deferred tax benefits recognized in the Company's periodic financial statements. Such events could occur in the future, and would impact the quarterly recognition of the Company's estimate of the required valuation allowance associated with its NOLs. 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 2000 COMPARED TO FIRST QUARTER 1999 The Company reported a net loss from continuing operations of $0.1 million in 2000 compared to a net loss of $2.0 million in 1999. Earnings from discontinued operations totaled $0.5 million in 1999. Net loss to 18 20 common shareholders was $0.8 million in 2000 compared to $2.1 million in 1999. On a per share basis, basic and diluted net loss attributable to common shareholders was $.09 in 2000 compared to $.26 in 1999. An accounting change related to SOP 98-5 resulted in a loss of $.8 million in the first quarter of 1999 or $0.09 per share. Portfolio Asset Acquisition and Resolution Commercial Corp. purchased $13.6 million of Portfolio Assets during 2000 through the Acquisition Partnerships compared to $9.8 million in acquisitions in 1999. Commercial Corp.'s quarter end investment in Portfolio Assets decreased to $35.5 million in 2000 from $39.4 million in 1999. Commercial Corp. invested $1.8 million in equity in Portfolio Assets in 2000 compared to $2.5 million in 1999. Gain on resolution of Portfolio Assets. Proceeds from the resolution of Portfolio Assets decreased by 15% to $4.3 million in 2000 from $5.0 million in 1999. The net gain on resolution of Portfolio Assets decreased by 17% to $1.1 million in 2000 from $1.3 million in 1999 as the result of lower collections. The gross profit percentage on the resolution of Portfolio Assets in 2000 was 25.2% as compared to 25.9% in 1999. Equity in earnings of Acquisition Partnerships and Servicing Entities. Proceeds from the resolution of Portfolio Assets for the Acquisition Partnerships decreased by 1% to $29.3 million in 2000 from $29.6 million in 1999 while the gross profit percentage increased to 46.9% in 2000 from 36.2% in 1999. The net result was an overall increase in the net income of the Acquisition Partnerships of 57% to $10.1 million in 2000 from $6.4 million in 1999. However, Commercial Corp.'s equity earnings from Acquisition Partnerships were relatively level from period to period due to smaller equity investments in recent partnership acquisitions. Servicing fee revenues. Servicing fees increased by 66% to $1.6 million in 2000 from $1.0 million in 1999 primarily as a result of significant collections from acquisition partnerships formed during 1999 . Other revenues. Other revenues decreased by 30% to $1.0 million in 2000 compared to $1.5 million in 1999 principally as a result of lower interest income on performing portfolios. Operating expenses. Operating expenses declined by 13% to $3.5 million in 2000 from $4.0 million in 1999 primarily as a result of reduced interest expense. Salaries and benefits were relatively level from period to period. Interest on notes payable declined $.5 million or 44% due to lower debt levels. Asset level expenses, occupancy, data processing and other expenses were relatively level from period to period. Consumer Lending Gain on sale of automobile loans. A gain of $2.8 million resulted from the securitization of automobile loans totaling $41 million. Interest income. Interest income on consumer loans increased by 35% to $4.6 million in 2000 from $3.4 million in 1999, reflecting increased levels of loan origination activity and an increase in the average balance of aggregate loans and investments held by Consumer Corp. during 2000. Service fees. Service fee income increased $.5 million or 47% as a result of average non-portfolio servicing increasing from $147 million to $224 million. Operating expenses. Operating expenses increased by 61% to $6.9 million in 2000 from $4.3 million in 1999 primarily as a result of a significant increase in the provision for loan losses and impairment of residual interests and increased operating activity. Provision for loan losses on automobile receivables and impairment of residual interests increased by $1.1 million from 1999. 19 21 Salaries and benefits increased by $.9 million or 58% and other expenses increased $.3 million or 15% as a result of the increased levels of operating activity. Interest expense increased by 47% to $1.1 million in 2000 from $0.8 million in 1999 as a result of higher levels of debt. Other Items Affecting Net Earnings The following items affect the Company's overall results of operations and are not directly related to any one of the Company's businesses discussed above. Corporate overhead. Company level interest expense increased by 52% to $3.8 million in 2000 from $2.5 million in 1999 as a result of higher volumes of debt associated with the equity required to purchase Portfolio Assets, equity interests in Acquisition Partnerships and capital support to operating subsidiaries. Salary and benefits decreased 12% to $.8 million in 2000. Income taxes. Federal income taxes are provided at a 35% rate applied to taxable income 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 benefit from NOLs in 2000 and 1999. LIQUIDITY AND CAPITAL RESOURCES Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to the Acquisition Partnerships, investments in expanding businesses to support their growth, retirement of and dividends on preferred stock, and other investments by the Company. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt and dividends from the Company's subsidiaries, short-term borrowings from revolving lines of credit, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings. In December 1999, the Company renewed and restructured its senior lending facility (the "Senior Facility"). The Senior Facility was renewed at a maximum available amount of $88 million and provides for a facility fee of $1.65 million if the loan is paid in full before September 30, 2000, or $2.5 million if paid thereafter. Defaults at Mortgage Corp. do not constitute defaults under the Senior Facility. Additionally, the Company issued $25 million in senior subordinated notes maturing December 2003. At March 31, 2000, the Company was not in compliance with certain financial and other covenants in its Senior Facility. The Company is working with its lenders to obtain formal approval or waivers relating to these matters and funding under the Senior Facility continues uninterrupted. The Senior Facility also requires the consent of the lenders prior to payment of any common and preferred dividends. The Company continually evaluates its liquidity position giving priority to assuring adequate funding levels for its two operating entities. Secondarily, management will determine when and if it is appropriate to pay the dividends on the Company's outstanding preferred stock. Currently, there are approximately 1.2 million preferred shares outstanding with accrued dividends of approximately $1.9 million. The Company also issued an option to the holder of the senior subordinated notes allowing it to acquire an additional warrant for 1,975,000 shares of the non-voting common stock in the Company (currently no such stock is authorized), which can be exercised after one year if the notes or any portion thereof remains outstanding, but not prior thereto. The strike price on these warrants is $2.3125. In the event that the notes are paid prior to the expiration of such one-year period through a transaction involving the issuance of warrants, the note holder is entitled to retain sufficient warrants to allow the note holder to acquire approximately 4.86% of the Company's common stock. The Company is in the process of taking the necessary actions to authorize the issuance of the non-voting common stock covered by the option. 20 22 During the first quarter of 2000, the Company completed an automobile finance receivable securitization containing loans of approximately $41 million. The ability of the Company to continue securitizations is dependant on numerous factors including, but not limited to, conditions in the securities market in general and conditions in the asset-backed securitization market. The Company does not anticipate a down-turn in market conditions that would have a significant adverse impact on the Company's ability to securitize its loans. Additionally, in the first quarter of 2000, the credit enhancement provider for the automobile warehouse facility has reestablished funding to a maximum available funding amount of $70 million. The Company continues to work with the credit enhancement provider on its automobile securitizations to maintain extensions of the waivers and consents of trigger events occurring from the Company's failure to meet certain financial covenants. The Company has received an extension on its automobile finance warehouse line through June 28, 2000, and is currently in discussions with various warehouse lenders regarding the potential to structure alternative or additional funding. Alternatives currently being explored include a whole loan sale arrangement, and an uninsured warehouse line. During January 2000, the Company increased its existing residual financing from $4 million at December 31, 1999 to $7 million. Residual interests securing this borrowing had a carrying value of $36.4 million at March 31, 2000. Subsequent to quarter end, additional borrowings after payment reductions brought the outstanding balance to $5.5 million. Although there is no guarantee, the Company anticipates additional borrowings against such residuals will be available in the future. Subsequent to quarter end, the Company obtained a secured, $17 million equity acquisition facility for the investment in future Acquisition Partnerships. This, along with equity distributions (totaling approximately $2.4 million for the first quarter of 2000) from existing Acquisition Partnerships, is expected to be adequate to meet the funding needs of Commercial Corp. Although the above transactions enhanced the Company's immediate liquidity concerns, management has identified the following areas that it believes are essential to allow the Company to meet all of its financing needs and cover its obligations during the remainder of 2000: - continue to obtain warehouse financing for consumer lending operations and identify alternative sources for such funding; - identify alternative or additional sources of financing on residual interests obtained from securitization transactions; - continue to securitize automobile finance receivables, either with or without credit enhancement; - obtain additional financing required by Commercial Corp. for investment in additional Portfolio Assets; and - realize positive cash flows from existing equity investments in Portfolio Assets - sell asset and loan portfolios or portions of operating businesses. Based on the above, management of the Company expects that it will be able to meet its obligations as they come due during 2000. The Company and each of its major operating subsidiaries have entered into one or more credit facilities to finance its respective operations. Each of the operating subsidiary credit facilities is nonrecourse to the Company, except as to the following agreements. The Company has guaranteed obligations of FC Capital Corp. to Lehman Commercial Paper, Inc., limited to an amount of up to $1 million plus interest accruing after demand and collection costs under the guaranty, which arise out of or are related to a certain Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of March 31, 1998 between Lehman and Client, including the September 29, 1999 and December 8, 1999 letter agreements. The Company and FirstCity Funding L.P. are parties to an Insurance Agreement and Letter Agreement related to the FCAR LLC Retail Automobile Installment Loan Agreement Financing Facility 21 23 provided by Enterprise Funding Corporation. These agreements require the Company and FirstCity Funding L.P., as servicer and seller, to (i) purchase nonconforming contracts in the event that the seller, the servicer, or the related originator fails to repurchase any contract which is required to be repurchased, (ii) pay certain premiums and other expenses, and (iii) indemnify Enterprise Funding Corporation, the collateral agent, and the insurance provider for losses related to breaches of certain representations and warranties. Additionally, the Company, pursuant to the terms of the Letter Agreement, agrees to make certain secondary servicer advances. Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships, as of March 31, 2000, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $245 million and outstanding borrowings of $184 million. 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 19, 2000 and the outstanding borrowings under such facilities as of March 31, 2000. CREDIT FACILITIES FUNDED AND UNFUNDED COMMITMENT AMOUNT AS OF OUTSTANDING MAY 19, BORROWINGS AS OF 2000 MARCH 31, 2000 INTEREST RATE OTHER TERMS AND CONDITIONS ------------ ---------------- ------------- -------------------------- (DOLLARS IN MILLIONS) FIRSTCITY Company Senior Facility............... $ 88 $ 83 Libor + 4% Secured by the assets of the Company, expires June 30, 2001 Company senior subordinated term debt................... 25 25 Prime + 3.75% Secured by the assets of the Company, expires December 20, 2003 Term credit facilities... 10 10 LIBOR + 5.0% Secured by stock of an Fixed at 7.25% acquisition partnership and certain residual interests, expires June 15, 2000 and January 3, 2001 COMMERCIAL CORP. Term facility............ 5 5 LIBOR + 4.0% Term facility secured by existing Portfolio Assets, expires June 15, 2000 Term acquisition facilities............. 22 22 Fixed at 7.00% to Acquisition facilities for 7.66% existing Portfolio Assets. Secured by Portfolio Assets. Expires June 5, 2002 and November 7, 2002 Equity acquisition facility............... 17 -- LIBOR + 4.5% Acquisition facility for the investment in future acquisition Partnerships. Expires March 31, 2001 22 24 FUNDED AND UNFUNDED COMMITMENT AMOUNT AS OF OUTSTANDING MAY 19, BORROWINGS AS OF 2000 MARCH 31, 2000 INTEREST RATE OTHER TERMS AND CONDITIONS ------------ ---------------- ------------- -------------------------- (DOLLARS IN MILLIONS) CONSUMER CORP. Warehouse facility....... 70 33 Rate based on Commercial paper conduit Commercial paper warehouse facility secured rates combined with by automobile receivables, certain facility expires June 28, 2000 fees Term facility............ 6 4 Prime + 1% Term facility secured by residual interests in automobile securitized loans, expires August 15, 2000. Term fixed asset facilities............. 2 2 -------- ---------- Fixed at 9.33% to Secured by certain fixed 9.50% assets, expires July 31, 2002 and 2003 $ 245 $ 184 Total.......... ======== ========== Unconsolidated Acquisition Partnerships Term acquisition facilities............. $ 179 $ 179 -------- ---------- Fixed at 8.5% Senior and subordinated to 13%, loans secured by Portfolio LIBOR + 2% Assets, various maturities to 4% and Prime + 1% 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 fact, 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", "anticipate", "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, general economic conditions; interest rate risk; prepayment speeds; delinquency and default rates; credit loss rates; changes (legislative and otherwise) in the asset securitization industry; demand for the Company's services; residential and commercial real estate values; the impact of certain covenants in loan agreements of the Company; the degree to which the Company is leveraged; its needs for financing; the continued availability of the Company's credit facilities; capital markets conditions, including the markets for asset-backed securities; the performance of the Company's subsidiaries and affiliates; changes in foreign political, social and economic conditions; regulatory initiatives and compliance with governmental regulations; the ability to attract and retain qualified personnel; the factors identified under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations; risk factors, and other risks identified in the Company's Securities and Exchange Commission filings. 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 23 25 and operational performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Report speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's earnings are materially impacted by net gains on sales of loans and net interest margins. The level of gains from loan sales the Company achieves is dependent on demand for the products originated. Net interest margins are dependent on the Company to maintain the spread or interest differential between the interest it charges the customer for loans and the interest the Company is charged for the financing of those loans. The following describes each component of interest bearing assets held by the Company and how each could be effected by changes in interest rates. 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 bench-mark 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. The sub-prime loans the Company sells generally are included in asset backed securities the investor or purchaser issues. These securities are priced at spreads over the LIBOR or an equivalent term treasury security. These spreads are determined by demand for the security. Demand is affected by the perception of credit quality and prepayment risk associated with the loans the Company originates and sells. 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 the Company for the products. The Company does not hedge these price risks. The Company's residual interests in securitizations represent the present value of the excess cash flows the Company expects to receive over the life of the underlying sub-prime automobile loans. The sub-prime automobile residual interests are affected less by prepayment speeds due to the shorter term of the underlying assets and the fact that the loans are fixed rate, generally at the highest rate allowable by law. Additionally the Company has various sources of financing which have been previously described in the Liquidity and Capital Resources section of Item 2. In summary, the Company would be negatively impacted by rising interest rates and declining prices for its sub-prime loans. Rising interest rates would negatively impact the value of residual interests in securitizations and costs of borrowings. Declining prices for the Company's sub-prime loans would adversely effect the levels of gains achieved upon the sale of those loans. There have been no material changes in the quantitative and qualitative risks of the Company since December 31, 1999. 24 26 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and Harbor Financial Group, Inc. (formerly known as FirstCity Financial Mortgage Corporation) filed suit in the Federal District Court for the Western District of Texas, Waco Division, against Chase Bank of Texas, N.A. and Chase Securities, Inc. in September 1999 seeking damages resulting from alleged violations by the defendants of the Bank Holding Company Act and from civil conspiracy engaged in by the defendants, and injunctive relief, arising from an engagement letter entered into between the Company and Chase Securities, Inc. relating to the sale of assets or securities of Harbor Financial Group, Inc., Harbor Financial Mortgage Corporation and their subsidiaries (collectively "Harbor"). The Company alleges that Chase Bank of Texas, N.A. conditioned its extension of credit to Harbor on the retention of Chase Securities, Inc. by the Company and Harbor in violation of the Bank Holding Company Act. The Company has, in its First Amended Original Complaint filed in November 1999, sought a judicial declaration that the plaintiffs are not obligated to pay any commission to Chase Securities, Inc. under the engagement letter. The actual damages sought by the Company are in excess of $200 million. The Company also seeks recovery of three times its damages pursuant to the Bank Holding Company Act and recovery of its costs of court, including reasonable attorneys fees. On October 4, 1999, Chase Securities, Inc. filed suit against the Company before the Supreme Court for the State of New York, County of New York: Commercial Part seeking recovery of $2.4 million as the balance of a transaction fee allegedly due it under the terms of the engagement letter, expenses in an amount in excess of $3,909, and other just and proper relief. The Company denies that it has any liability to Chase Securities, Inc. and intends to vigorously defend the suit. The Company has asserted as a defense to this action the violations of the Bank Holding Company Act asserted in the litigation pending before the Federal District Court for the Western District of Texas. On October 14, 1999, Mortgage Corp. filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code before the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. In a motion filed in those proceedings requesting the appointment of a Chapter 11 Trustee, the debtors stated that they were reviewing pre-petition transfers to the Company to determine if those transfers are avoidable. On December 14, 1999, the bankruptcy proceedings were converted to liquidations under Chapter 7 of the United States Bankruptcy Code. The Company believes that it has valid defenses to any allegations that might be made to avoid any pre-petition transfers in connection with the Mortgage Corp. bankruptcy proceedings. The Company is involved in various other 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 consolidated financial condition, results of operations or liquidity of the Company. ITEM 3. DEFAULTS UPON SENIOR SECURITIES In the third quarter of 1999, dividends on the Company's adjusting rate preferred stock were suspended. At March 31, 2000, accumulated dividends in arrears on such preferred stock totaled $1.9 million, or $1.575 per share. 25 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.2 -- Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.1 -- Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.2 -- Warrant Agreement, dated July 3, 1995, by and between the Company and American Stock Transfer & Trust Company, as Warrant Agent (incorporated herein by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.3 -- Registration Rights Agreement, dated July 1, 1997, among the Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial Mortgage Company Employees Pension Plan, Lindsey Capital Corporation, Ed Smith and Thomas E. Smith. (incorporated herein by reference to Exhibit 4.3 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.4 -- Stock Purchase Agreement, dated March 24, 1998, between the Company and Texas Commerce Shareholders Company. (incorporated herein by reference to Exhibit 4.4 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.5 -- Registration Rights Agreement, dated March 24, 1998, between the Company and Texas Commerce Shareholders Company. (incorporated herein by reference to Exhibit 4.5 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 24, 1998). 10.1 -- Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995 (incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 10.2 -- Investment Management Agreement, dated July 3, 1995, between the Company and FirstCity Liquidating Trust (incorporated herein by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995. 26 28 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.3 -- Lock-Box Agreement, dated July 11, 1995, among the Company, NationsBank of Texas, N.A., as lock-box agent, FirstCity Liquidating Trust, FCLT Loans, L.P., and the other Trust-Owned Affiliates signatory thereto, and each of NationsBank of Texas, N.A. and Fleet National Bank, as co-lenders (incorporated herein by reference to Exhibit 10.3 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.4 -- Custodial Agreement, dated July 11, 1995, among Fleet National Bank, as custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and the Company (incorporated herein by reference to Exhibit 10.4 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.5 -- Tier 3 Custodial Agreement, dated July 11, 1995, among the Company, as custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and the Company, as servicer (incorporated herein by reference to Exhibit 10.5 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.6 -- 12/97 Amended and Restated Facilities Agreement, dated effective as of December 3, 1997, among Harbor Financial Mortgage Corporation, New America Financial, Inc., Texas Commerce Bank National Association and the other warehouse lenders party thereto. (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.7 -- Modification Agreement, dated January 26, 1998, to the Amended and Restated Facilities Agreement, dated as of December 3, 1997, among Harbor Financial Mortgage Corporation, New America Financial, Inc. and Chase Bank of Texas, National Association (formerly known as Texas Commerce Bank National Association). (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.8 -- $50,000,000 3/98 Chase Texas Temporary Additional Warehouse Note, dated March 17, 1998, by Harbor Financial Mortgage Corporation and New America Financial, Inc., in favor of Chase Bank of Texas, National Association. (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.9 -- Employment Agreement, dated as of July 1, 1997, by and between Harbor Financial Mortgage Corporation and Richard J. Gillen. (incorporated herein by reference to Exhibit 10.9 of the Company's 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.10 -- Employment Agreement, dated as of September 8, 1997, by and between FirstCity Funding Corporation and Thomas R. Brower, with similar agreements between FC Capital Corp. and each of James H. Aronoff and Christopher J. Morrissey. (incorporated herein by reference to Exhibit 0.10 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.11 -- Shareholder Agreement, dated as of September 8, 1997, among FirstCity Funding Corporation, FirstCity Consumer Lending Corporation, Thomas R. Brower, Scot A. Foith, Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves, Stephen H. Trent and Blake P. Bozman. (incorporated herein by reference to Exhibit 10.11 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 27 29 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.12 -- Revolving Credit Loan Agreement, dated as of March 20, 1998, by and between FC Properties, Ltd. and Nomura Asset Capital Corporation. (incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.13 -- Revolving Credit Loan Agreement, dated as of February 27, 1998, by and between FH Partners, L.P. and Nomura Asset Capital Corporation. (incorporated herein by reference to Exhibit 10.13 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.14 -- Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.15 -- 60,000,000 French Franc Revolving Promissory Note, dated September 25, 1997, by J-Hawk International Corporation in favor of the Bank of Scotland. (incorporated herein by reference to Exhibit 10.15 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.16 -- Loan Agreement, dated as of September 25, 1997, by and between Bank of Scotland and J-Hawk International Corporation. (incorporated herein reference to Exhibit 10.16 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.17 -- Guaranty Agreement, dated as of September 25, 1997, by J-Hawk (incorporated herein by reference to Exhibit 10.17 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.18 -- Guaranty Agreement, dated as of September 25, 1997, by FirstCity Financial Corporation in favor of Bank of Scotland. (incorporated herein by reference to Exhibit 10.18 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.19 -- Warehouse Credit Agreement, dated as of May 17, 1996, among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust and National Auto Funding Corporation. (incorporated herein by reference to Exhibit 10.19 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.20 -- Funding Commitment, dated as of May 17, 1996 by and between ContiTrade Services L.L.C. and The Company. (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.21 -- Revolving Credit Agreement, dated as of December 29, 1995, by and between the Company and Cargill Financial Services Corporation, as amended by the Eighth Amendment to Revolving Credit Agreement dated February 1998. (incorporated herein by reference to Exhibit 10.21 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.22 -- Master Repurchase Agreement Governing Purchased and Sales of Mortgage Loans, dated as of July 1998, between Lehman Commercial Paper Inc. and FHB Funding Corp. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 18, 1998). 28 30 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.23 -- Warehouse Credit Agreement, dated as of April 30, 1998 among ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation, FirstCity Auto Receivables L.L.C. and FirstCity Financial Corporation. (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.24 -- Servicing Agreement, dated as of April 30, 1998 among FirstCity Auto Receivables L.L.C., FirstCity Servicing Corporation of California, FirstCity Consumer Lending Corporation and ContiTrade Services L.L.C. (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.25 -- Security and Collateral Agreement, dated as of April 30, 1998 among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C. and Chase Bank of Texas, National Association. (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.26 -- Loan Agreement, dated as of July 24, 1998, between FirstCity Commercial Corporation and CFSC Capital Corp. XXX (incorporated herein by reference Exhibit 10.5 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.27 -- Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.28 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.29 -- Employment Agreement, dated October 1, 1998, by and between FirstCity Financial Mortgage Corporation, and Buddy L. Terrell (incorporated herein by reference to Exhibit 10.29 of the Company's Form 10-Q dated May 17, 1999, filed with the Commission on May 17, 1999). 10.30 -- Security Agreement, dated as of April 30, 1998 among Enterprise Funding Corporation, FCAR Receivables L.L.C., MBIA Insurance Corporation, FirstCity Funding Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a Loan Servicing enterprise (incorporated herein by reference to Exhibit 10.30 of the Company's Form 10-Q dated May 17, 1999, filed with the Commission on May 17, 1999). 10.31 -- Note purchase agreement, dated March 30, 1999 among Enterprise Funding Corporation, FCAR Receivables, L.L.C. and NationsBank, N.A. (incorporated herein by reference to Exhibit 10.31 of the Company's Form 10-Q dated May 17, 1999, filed with the Commission on May 17, 1999). 10.32 -- Custodian Agreement, dated March 30, 1999, among FCAR Receivables L.L.C., FirstCity Funding Corporation, NationsBank, N.A., Enterprise Funding Corporation and Chase Bank of Texas, N.A. 10.33 -- 100,000,000 dollar form of note, dated March 30, 1999 among FCAR Receivables LLC, Enterprise Funding Corporation and Nationsbank, N.A. 29 31 EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 -- Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q being submitted to the Securities and Exchange Commission. Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933, Section 18 of the Securities Act of 1934, as amended, or Section 323 of the Trust Indenture Act of 1939, as amended, or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates.) (b) Reports on Form 8-K. No report on Form 8-K was filed by the Registrant with the Securities Exchange Commission during the quarterly period ended March 31, 2000. 30 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTCITY FINANCIAL CORPORATION By: /s/ JAMES T. SARTAIN ---------------------------------- James T. Sartain President and Chief Operating Officer and Director (Duly authorized officer of the Registrant) By: /s/ GARY H. MILLER ---------------------------------- Gary H. Miller Senior Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer of the Registrant) By: /s/ JAMES B. BAKER ---------------------------------- James B. Baker Vice President and Controller (Duly authorized officer and principal accounting officer of the Registrant) Dated: May 22, 2000 31 33 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.2 -- Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.1 -- Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.2 -- Warrant Agreement, dated July 3, 1995, by and between the Company and American Stock Transfer & Trust Company, as Warrant Agent (incorporated herein by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.3 -- Registration Rights Agreement, dated July 1, 1997, among the Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial Mortgage Company Employees Pension Plan, Lindsey Capital Corporation, Ed Smith and Thomas E. Smith. (incorporated herein by reference to Exhibit 4.3 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.4 -- Stock Purchase Agreement, dated March 24, 1998, between the Company and Texas Commerce Shareholders Company. (incorporated herein by reference to Exhibit 4.4 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.5 -- Registration Rights Agreement, dated March 24, 1998, between the Company and Texas Commerce Shareholders Company. (incorporated herein by reference to Exhibit 4.5 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 24, 1998). 10.1 -- Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995 (incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 10.2 -- Investment Management Agreement, dated July 3, 1995, between the Company and FirstCity Liquidating Trust (incorporated herein by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995 34 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.3 -- Lock-Box Agreement, dated July 11, 1995, among the Company, NationsBank of Texas, N.A., as lock-box agent, FirstCity Liquidating Trust, FCLT Loans, L.P., and the other Trust-Owned Affiliates signatory thereto, and each of NationsBank of Texas, N.A. and Fleet National Bank, as co-lenders (incorporated herein by reference to Exhibit 10.3 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.4 -- Custodial Agreement, dated July 11, 1995, among Fleet National Bank, as custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and the Company (incorporated herein by reference to Exhibit 10.4 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.5 -- Tier 3 Custodial Agreement, dated July 11, 1995, among the Company, as custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and the Company, as servicer (incorporated herein by reference to Exhibit 10.5 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.6 -- 12/97 Amended and Restated Facilities Agreement, dated effective as of December 3, 1997, among Harbor Financial Mortgage Corporation, New America Financial, Inc., Texas Commerce Bank National Association and the other warehouse lenders party thereto. (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.7 -- Modification Agreement, dated January 26, 1998, to the Amended and Restated Facilities Agreement, dated as of December 3, 1997, among Harbor Financial Mortgage Corporation, New America Financial, Inc. and Chase Bank of Texas, National Association (formerly known as Texas Commerce Bank National Association). (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.8 -- $50,000,000 3/98 Chase Texas Temporary Additional Warehouse Note, dated March 17, 1998, by Harbor Financial Mortgage Corporation and New America Financial, Inc., in favor of Chase Bank of Texas, National Association. (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.9 -- Employment Agreement, dated as of July 1, 1997, by and between Harbor Financial Mortgage Corporation and Richard J. Gillen. (incorporated herein by reference to Exhibit 10.9 of the Company's 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.10 -- Employment Agreement, dated as of September 8, 1997, by and between FirstCity Funding Corporation and Thomas R. Brower, with similar agreements between FC Capital Corp. and each of James H. Aronoff and Christopher J. Morrissey. (incorporated herein by reference to Exhibit 0.10 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.11 -- Shareholder Agreement, dated as of September 8, 1997, among FirstCity Funding Corporation, FirstCity Consumer Lending Corporation, Thomas R. Brower, Scot A. Foith, Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves, Stephen H. Trent and Blake P. Bozman. (incorporated herein by reference to Exhibit 10.11 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 35 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.12 -- Revolving Credit Loan Agreement, dated as of March 20, 1998, by and between FC Properties, Ltd. and Nomura Asset Capital Corporation. (incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.13 -- Revolving Credit Loan Agreement, dated as of February 27, 1998, by and between FH Partners, L.P. and Nomura Asset Capital Corporation. (incorporated herein by reference to Exhibit 10.13 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.14 -- Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.15 -- 60,000,000 French Franc Revolving Promissory Note, dated September 25, 1997, by J-Hawk International Corporation in favor of the Bank of Scotland. (incorporated herein by reference to Exhibit 10.15 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.16 -- Loan Agreement, dated as of September 25, 1997, by and between Bank of Scotland and J-Hawk International Corporation. (incorporated herein reference to Exhibit 10.16 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.17 -- Guaranty Agreement, dated as of September 25, 1997, by J-Hawk (incorporated herein by reference to Exhibit 10.17 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.18 -- Guaranty Agreement, dated as of September 25, 1997, by FirstCity Financial Corporation in favor of Bank of Scotland. (incorporated herein by reference to Exhibit 10.18 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.19 -- Warehouse Credit Agreement, dated as of May 17, 1996, among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust and National Auto Funding Corporation. (incorporated herein by reference to Exhibit 10.19 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.20 -- Funding Commitment, dated as of May 17, 1996 by and between ContiTrade Services L.L.C. and The Company. (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.21 -- Revolving Credit Agreement, dated as of December 29, 1995, by and between the Company and Cargill Financial Services Corporation, as amended by the Eighth Amendment to Revolving Credit Agreement dated February 1998. (incorporated herein by reference to Exhibit 10.21 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.22 -- Master Repurchase Agreement Governing Purchased and Sales of Mortgage Loans, dated as of July 1998, between Lehman Commercial Paper Inc. and FHB Funding Corp. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 18, 1998). 10.23 -- Warehouse Credit Agreement, dated as of April 30, 1998 among ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation, FirstCity Auto Receivables L.L.C. and FirstCity Financial Corporation. (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 36 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.24 -- Servicing Agreement, dated as of April 30, 1998 among FirstCity Auto Receivables L.L.C., FirstCity Servicing Corporation of California, FirstCity Consumer Lending Corporation and ContiTrade Services L.L.C. (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.25 -- Security and Collateral Agreement, dated as of April 30, 1998 among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C. and Chase Bank of Texas, National Association. (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.26 -- Loan Agreement, dated as of July 24, 1998, between FirstCity Commercial Corporation and CFSC Capital Corp. XXX (incorporated herein by reference Exhibit 10.5 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.27 -- Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998) 10.28 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.29 -- Employment Agreement, dated October 1, 1998, by and between FirstCity Financial Mortgage Corporation, and Buddy L. Terrell (incorporated herein by reference to Exhibit 10.29 of the Company's Form 10-Q dated May 17, 1999, filed with the Commission on May 17, 1999). 10.30 -- Security Agreement, dated as of April 30, 1998 among Enterprise Funding Corporation, FCAR Receivables L.L.C., MBIA Insurance Corporation, FirstCity Funding Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a Loan Servicing enterprise (incorporated herein by reference to Exhibit 10.30 of the Company's Form 10-Q dated May 17, 1999, filed with the Commission on May 17, 1999). 10.31 -- Note purchase agreement, dated March 30, 1999 among Enterprise Funding Corporation, FCAR Receivables, L.L.C. and NationsBank, N.A. (incorporated herein by reference to Exhibit 10.31 of the Company's Form 10-Q dated May 17, 1999, filed with the Commission on May 17, 1999). 10.32 -- Custodian Agreement, dated March 30, 1999, among FCAR Receivables L.L.C., FirstCity Funding Corporation, NationsBank, N.A., Enterprise Funding Corporation and Chase Bank of Texas, N.A. 10.33 -- 100,000,000 dollar form of note, dated March 30, 1999 among FCAR Receivables LLC, Enterprise Funding Corporation and Nationsbank, N.A. 27.1 -- Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q being submitted to the Securities and Exchange Commission. Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933, Section 18 of the Securities Act of 1934, as amended, or Section 323 of the Trust Indenture Act of 1939, as amended, or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates.)