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, 1999 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 14, 1999 was 8,299,252. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) ASSETS MARCH 31, DECEMBER 31, 1999 1998 -------------- ----------------- Cash and cash equivalents................................... $ 20,022 $ 13,677 Portfolio Assets, net....................................... 56,399 69,717 Loans receivable, net....................................... 84,215 46,187 Mortgage loans held for sale................................ 1,028,934 1,207,679 Residual interests in securitizations....................... 64,585 65,242 Equity investments in and advances to Acquisition Partnerships.............................................. 40,261 41,466 Mortgage servicing rights, net.............................. 47,436 91,440 Receivable for servicing advances and accrued interest...... 112,203 58,977 Deferred tax benefit, net................................... 32,113 32,162 Other assets, net........................................... 24,900 37,430 ---------- ---------- Total Assets...................................... $1,511,068 $1,663,977 ========== ========== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Notes payable............................................. $1,286,616 $1,462,231 Other liabilities......................................... 63,671 38,472 ---------- ---------- Total Liabilities................................. 1,350,287 1,500,703 Commitments and contingencies............................... -- -- Redeemable preferred stock: Adjusting rate preferred stock, including dividends of $642 (redemption value of $21 per share; 2,000,000 shares authorized; 1,222,701 shares issued and outstanding)........................................... 26,319 26,319 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: 8,299,252 and 8,287,959 shares, respectively)........................ 83 83 Paid in capital........................................... 78,568 78,456 Retained earnings......................................... 55,917 58,061 Accumulated other comprehensive income (loss)............. (106) 355 ---------- ---------- Total Shareholders' Equity........................ 134,462 136,955 ---------- ---------- Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity............................ $1,511,068 $1,663,977 ========== ========== See accompanying notes to consolidated financial statements. 2 3 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 -------- -------- Revenues: Gain on sale of mortgage and other loans.................. $26,641 $20,269 Net mortgage warehouse income............................. 5,756 1,722 Gain (loss) on sale of mortgage servicing rights.......... (2,395) -- Servicing fees: Mortgage............................................... 6,143 4,694 Other.................................................. 2,076 1,113 Gain on resolution of Portfolio Assets.................... 1,369 3,097 Equity in earnings of Acquisition Partnerships............ 2,643 3,214 Interest income........................................... 5,217 3,799 Other income.............................................. 2,193 4,118 ------- ------- Total revenues.................................... 49,643 42,026 Expenses: Interest on notes payable................................. 5,590 3,418 Salaries and benefits..................................... 25,793 16,017 Amortization of mortgage servicing rights................. 4,723 3,176 Provision for loan losses and impairment on residual interests.............................................. 23 2,352 Provision (credit) for valuation of mortgage servicing rights................................................. (2,695) -- Occupancy, data processing, communication and other....... 17,219 12,123 ------- ------- Total expenses.................................... 50,653 37,086 Earnings (loss) before minority interest, accounting change and income taxes.......................................... (1,010) 4,940 Benefit (provision) for income taxes........................ (21) 641 ------- ------- Earnings (loss) before minority interest and accounting change.................................................... (1,031) 5,581 Minority interest........................................... 364 215 Cumulative effect of accounting change...................... (835) -- ------- ------- Net earnings (loss)............................... (1,502) 5,796 Preferred dividends......................................... (642) (1,515) ------- ------- Net earnings (loss) to common shareholders........ $(2,144) $ 4,281 ======= ======= Earnings (loss) before accounting change per common share -- basic............................................ $ (0.16) $ 0.66 Earnings (loss) before accounting change per common share -- diluted.......................................... $ (0.16) $ 0.64 Cumulative effect of accounting change -- basic............. $ (0.10) $ -- Cumulative effect of accounting change -- diluted........... $ (0.10) $ -- Net earnings (loss) per common share -- basic............... $ (0.26) $ 0.66 Net earnings (loss) per common share -- diluted............. $ (0.26) $ 0.64 Weighted average common shares outstanding -- basic......... 8,288 6,531 Weighted average common shares outstanding -- diluted....... 8,288 6,678 See accompanying notes to consolidated financial statements. 3 4 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) (UNAUDITED) ACCUMULATED NUMBER OF OTHER TOTAL COMMON COMMON PAID IN RETAINED COMPREHENSIVE SHAREHOLDERS' SHARES STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY --------- ------ ------- -------- ------------- ------------- BALANCES, JANUARY 1, 1998........ 6,526,510 $65 $29,509 $ 83,140 $ 44 $112,758 Exercise of warrants, options and employee stock purchase plan... 519,299 5 12,675 -- -- 12,680 Issuance of common stock to acquire the minority interest of subsidiary.................. 41,000 1 2,149 -- -- 2,150 Issuance of common stock in public offering................ 1,201,150 12 34,123 -- -- 34,135 Comprehensive loss: Net loss for 1998.............. -- -- -- (20,192) -- (20,192) Foreign currency items........... -- -- -- -- 311 311 -------- Total comprehensive loss......... (19,881) -------- Preferred dividends.............. -- -- -- (5,186) -- (5,186) Other............................ -- -- -- 299 -- 299 --------- --- ------- -------- ----- -------- BALANCES, DECEMBER 31, 1998...... 8,287,959 83 78,456 58,061 355 136,955 Exercise of employee stock purchase plan.................. 11,293 -- 112 -- -- 112 Comprehensive loss: Net loss for the first quarter of 1999..................... -- -- -- (1,502) -- (1,502) Foreign currency items........... -- -- -- -- (461) (461) -------- Total comprehensive loss......... (1,963) -------- Preferred dividends.............. -- -- -- (642) -- (642) --------- --- ------- -------- ----- -------- BALANCES, MARCH 31, 1999......... 8,299,252 $83 $78,568 $ 55,917 $(106) $134,462 ========= === ======= ======== ===== ======== See accompanying notes to consolidated financial statements. 4 5 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) THREE MONTHS ENDED MARCH 31, ----------------------------- 1999 1998 ------------- ------------- Cash flows from operating activities: Net earnings (loss)....................................... $ (1,502) $ 5,796 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities, net of effect of acquisitions: Proceeds from resolution of Portfolio Assets........... 5,035 16,976 Gain on resolution of Portfolio Assets................. (1,369) (3,097) Purchase of Portfolio Assets and loans receivable, net................................................... (1,566) (7,532) Origination of automobile receivables, net of purchase discount.............................................. (46,123) (29,000) Loss on sale of mortgage servicing rights.............. 2,395 -- Decrease (increase) in mortgage loans held for sale.... 178,745 (515,105) Decrease (increase) in construction loans receivable... 4,355 (2,815) Originated mortgage servicing rights................... (41,225) (21,845) Purchases of mortgage servicing rights................. -- (46) Proceeds from sale of mortgage servicing rights........ 80,807 -- Provision (credit) for loan losses, residual interests and valuation of mortgage servicing rights............ (2,672) 2,352 Equity in earnings of Acquisition Partnerships......... (2,643) (3,214) Proceeds from performing Portfolio Assets and loans receivable, net....................................... 15,242 45,712 (Increase) decrease in net deferred tax asset.......... 49 (1,768) Depreciation and amortization.......................... 6,461 4,070 Increase in other assets............................... (32,134) (4,649) Increase (decrease) in other liabilities............... 17,503 10,183 ----------- ----------- Net cash provided by (used in) operating activities...................................... 181,358 (503,982) ----------- ----------- Cash flows from investing activities, net of effect of acquisitions: Property and equipment, net............................... (2,443) (1,529) Contributions to Acquisition Partnerships................. (831) (7,597) Distributions from Acquisition Partnerships............... 3,732 8,053 ----------- ----------- Net cash provided by (used in) investing activities...................................... 458 (1,073) ----------- ----------- Cash flows from financing activities, net of effect of acquisitions: Borrowings under notes payable............................ 3,005,933 2,445,245 Payments of notes payable................................. (3,180,874) (1,928,127) Proceeds from issuance of common stock.................... 112 153 Preferred dividends paid.................................. (642) (1,515) ----------- ----------- Net cash provided by (used in) financing activities...................................... (175,471) 515,756 ----------- ----------- Net increase in cash........................................ $ 6,345 $ 10,701 Cash, beginning of period................................... 13,677 31,605 ----------- ----------- Cash, end of period......................................... $ 20,022 $ 42,306 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest............................................... $ 21,975 $ 16,818 Income taxes........................................... $ 77 $ 94 Non-cash investing activities: Investment securities received as a result of sales of loans through securitizations.......................... $ -- $ 14,234 See accompanying notes to consolidated financial statements. 5 6 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (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, 1999, the results of operations and the cash flows for the three month periods ended March 31, 1999 and 1998. 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, prepayment speeds of loans in servicing portfolios and in securitization trusts, collectibility on 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 resulting from 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 loss of $.8 million for the first quarter of 1999 and has been reflected as a cumulative effect of a change in accounting principle. (2) PORTFOLIO ASSETS Portfolio Assets are summarized as follows: MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ Non-performing Portfolio Assets........................... $ 86,958 $93,716 Performing Portfolio Assets............................... 22,137 24,759 Real estate Portfolios.................................... 11,325 12,561 -------- ------- Total Portfolio Assets.......................... 120,420 131,036 Discount required to reflect Portfolio Assets at carrying value................................................... (64,021) (61,319) -------- ------- Portfolio Assets, net........................... $ 56,399 $69,717 ======== ======= Portfolio Assets are pledged to secure non-recourse notes payable. (3) LOANS RECEIVABLE Loans receivable are summarized as follows: MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ Construction loans receivable............................ $ 20,235 $24,590 Residential mortgage and other loans held for investment.......................................... 8,072 11,016 Automobile and consumer finance receivables.............. 69,059 16,475 Allowance for loan losses................................ (13,151) (5,894) -------- ------- Loans receivable, net.......................... $ 84,215 $46,187 ======== ======= 6 7 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, ------------------- 1999 1998 -------- -------- Balances, beginning of period............................... $ 5,894 $ 9,282 Provision for loan losses................................. 23 2,352 Discounts acquired........................................ 7,621 4,474 Allocation of reserves to sold loans...................... -- (2,802) Charge off activity: Principal balances charged off......................... (1,081) (4,589) Recoveries............................................. 694 926 ------- ------- Net charge offs................................... (387) (3,663) ------- ------- Balances, end of period..................................... $13,151 $ 9,643 ======= ======= (4) MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale include loans collateralized by first lien mortgages on one-to-four family residences as follows: MARCH 31, DECEMBER 31, 1999 1998 ---------- ------------ Residential mortgage loans.................................. $1,014,413 $1,190,585 Unamortized premiums and discounts, net..................... 14,521 17,094 ---------- ---------- $1,028,934 $1,207,679 ========== ========== (5) RESIDUAL INTERESTS IN SECURITIZATIONS The Company has residual interests in securitizations consisting of rated securities, retained interests and related interest only strips (collectively referred to as residual interests) which are all 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, 1999 1998 --------- ------------ Rated securities............................................ $ 1,766 $ 2,073 Residual interests.......................................... 64,824 66,473 Accrued interest............................................ 2,445 1,146 Allowance for losses........................................ (4,450) (4,450) ------- ------- $64,585 $65,242 ======= ======= 7 8 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The activity related to residual interests for 1999 and 1998 is as follows: THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 ------- ------- Balance, beginning of period................................ $65,242 $ 6,935 Cost allocated from securitizations......................... -- 14,234 Interest accreted........................................... 2,063 270 Increase in other securities, net........................... -- 200 Cash received from trusts................................... (2,720) (301) ------- ------- Balance, end of period...................................... $64,585 $21,338 ======= ======= (6) INVESTMENTS IN ACQUISITION PARTNERSHIPS The Company has investments in Acquisition Partnerships and their general partners that are accounted for on the equity method. The condensed combined financial position and results of operations of the Acquisition Partnerships, which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized below: CONDENSED COMBINED BALANCE SHEETS MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ Assets...................................................... $267,604 $295,114 ======== ======== Liabilities................................................. $178,453 $190,590 Net equity.................................................. 89,151 104,524 -------- -------- $267,604 $295,114 ======== ======== Company's equity in Acquisition Partnerships................ $ 40,261 $ 41,466 ======== ======== CONDENSED COMBINED SUMMARY OF EARNINGS THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 -------- -------- Proceeds from resolution of Portfolio Assets................ $29,645 $57,558 Gross margin................................................ 10,731 18,533 Interest income on performing Portfolio Assets.............. 3,336 2,453 Net earnings................................................ $ 6,383 $ 9,123 ======= ======= Company's equity in earnings of Acquisition Partnerships........................................... $ 2,643 $ 3,214 ======= ======= (7) SEGMENT REPORTING The Company is engaged in three reportable segments; i) residential and commercial mortgage banking; ii) portfolio asset acquisition and resolution; and iii) 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 8 9 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the segments and a reconciliation to net earnings (loss) for the quarters ended March 31, 1999 and 1998, respectively. FIRST FIRST QUARTER QUARTER 1999 1998 ------- ------- MORTGAGE BANKING: Revenues: Net mortgage warehouse income.......................... $ 5,756 $ 1,722 Gain on sale of mortgage loans......................... 26,641 20,269 Servicing fees......................................... 6,143 4,694 Other.................................................. 346 2,004 ------- ------- Total............................................. 38,886 28,689 Expenses: Salaries and benefits.................................. 21,897 12,935 Amortization of mortgage servicing rights.............. 4,723 3,176 Provision (credit) for valuation of mortgage servicing rights................................................ (2,695) -- Interest on notes payables............................. 2,049 501 Occupancy, data processing, communication and other.... 12,222 8,104 ------- ------- Total............................................. 38,196 24,716 ------- ------- Operating contribution before direct taxes................ $ 690 $ 3,973 ======= ======= Operating contribution, net of direct taxes................. $ 1,706 $ 3,884 ======= ======= PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: Gain on resolution of Portfolio Assets................. $ 1,369 $ 3,097 Equity in earnings of Acquisition Partnerships......... 2,643 3,214 Servicing fees......................................... 1,003 729 Other.................................................. 1,221 1,998 ------- ------- Total............................................. 6,236 9,038 Expenses: Salaries and benefits.................................. 1,420 1,167 Interest on notes payable.............................. 1,050 1,476 Asset level expenses, occupancy, data processing and other................................................. 1,549 2,212 ------- ------- Total............................................. 4,019 4,855 ------- ------- Operating contribution before direct taxes................ $ 2,217 $ 4,183 ======= ======= Operating contribution, net of direct taxes............... $ 1,487 $ 4,169 ======= ======= CONSUMER LENDING: Revenues: Interest income........................................ $ 3,405 $ 2,566 Servicing fees and other............................... 1,087 390 ------- ------- Total............................................. 4,492 2,956 9 10 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FIRST FIRST QUARTER QUARTER 1999 1998 ------- ------- Expenses: Salaries and benefits.................................. 1,533 1,112 Provision for loan losses and residual interests....... 23 2,352 Interest on notes payable.............................. 668 880 Occupancy, data processing and other................... 2,041 1,107 ------- ------- Total............................................. 4,265 5,451 ------- ------- Operating income (loss) before direct taxes............... $ 227 $(2,495) ======= ======= Operating income (loss), net of direct taxes.............. $ 278 $(2,495) ======= ======= Total operating contribution, net of direct taxes.......................................... $ 3,471 $ 5,558 ======= ======= CORPORATE OVERHEAD: Salaries and benefits, occupancy, professional and other income and expenses, net............................... $(4,973) $ (512) Deferred tax benefit from NOLs............................ -- 750 ------- ------- Net earnings (loss)....................................... $(1,502) $ 5,796 ======= ======= Total assets for each of the segments and a reconciliation to total assets is as follows: MARCH 31, DECEMBER 31, 1999 1998 ---------- ------------ Mortgage assets............................................. $1,237,524 $1,413,799 Portfolio acquisition and resolution assets................. 99,422 114,596 Consumer assets............................................. 96,594 52,029 Deferred tax benefit........................................ 32,113 32,162 Other assets................................................ 45,415 51,391 ---------- ---------- Total assets...................................... $1,511,068 $1,663,977 ========== ========== (8) PREFERRED STOCK AND SHAREHOLDERS' EQUITY In May 1998, the Company closed the public offering of 1,542,150 shares of FirstCity common stock, of which 341,000 shares were sold by selling shareholders. Net proceeds (after expenses) of $34.1 million were used to retire debt. On May 11, 1998, the Company notified holders of its outstanding warrants to purchase shares of common stock that it was exercising its option to repurchase such warrants for $1.00 each. In June 1998, as a result of such notification, warrants representing 471,380 shares of common stock were exercised for an aggregate warrant purchase price of $11.8 million. On July 17, 1998 the Company filed a shelf registration statement with the Securities and Exchange Commission which allows the Company to issue up to $250 million in debt and equity securities from time to time in the future. The registration statement became effective July 28, 1998. As of March 31, 1999, there have been no securities issued under this registration statement. At March 31, 1999, accrued dividends on adjusting rate preferred stock totaled $.6 million, or 10 11 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $.525 per share, and were paid on April 15, 1999. A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows: THREE MONTHS ENDED MARCH 31, ------------------ 1999 1998 -------- ------- Net earnings (loss) to common shareholders.................. $(2,144) $4,281 ======= ====== Weighted average common shares outstanding -- basic......... 8,288 6,531 Effect of dilutive securities: Assumed exercise of stock options......................... -- 73 Assumed exercise of warrants.............................. -- 74 ------- ------ Weighted average common shares outstanding -- diluted....... 8,288 6,678 ======= ====== Earnings (loss) before accounting change per common share -- basic............................................ $ (0.16) $ 0.66 Earnings (loss) before accounting change per common share -- diluted.......................................... $ (0.16) $ 0.64 Cumulative effect of accounting change -- basic............. $ (0.10) $ -- Cumulative effect of accounting change -- diluted........... $ (0.10) $ -- Net earnings (loss) per common share -- basic............... $ (0.26) $ 0.66 Net earnings (loss) per common share -- diluted............. $ (0.26) $ 0.64 Weighted average common shares outstanding -- basic......... 8,288 6,531 Weighted average common shares outstanding -- diluted....... 8,288 6,678 (9) 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 1999, FirstCity recognized no deferred tax benefit from NOLs (compared to $.8 million in the first three months of 1998). 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. (10) COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings in the ordinary course of business. In the opinion of management, the resolution of such matters will not have a material adverse impact on the 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, 1999, advances of $.7 million had been made under the obligation. 11 12 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 residential and commercial mortgage banking ("Mortgage Corp."), Portfolio Asset acquisition and resolution ("Commercial Corp.") and consumer lending ("Consumer Corp."). The mortgage banking business involves the origination, acquisition and servicing of residential and commercial mortgage loans and the subsequent warehousing, sale or securitization of such loans through various public and private secondary markets. 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 posted a net loss for the quarter ended March 31, 1999 of $1.5 million. After dividends on the Company's preferred stock, the loss was $2.1 million, or $.26 per share on a fully diluted basis. The loss for the quarter resulted primarily from the following: - No securitizations of automobile or home equity assets - Slow collections in the portfolio asset acquisition group, as is historically typical in the first quarter - Minimal profit contribution from mortgage operations - Change in accounting principle In addition, the anticipated liquidation of certain unprofitable assets and future costs associated with the restructuring of the mortgage subsidiary is expected to generate a loss for the second quarter of 1999. Subsequent to March 31, 1999, Mortgage Corp. sold its $55 million portfolio of GNMA buyback loans for a loss of $1.5 million which will be recognized during the quarter ending June 30, 1999. This sale represents the last of the GNMA portfolio held by Mortgage Corp. and is included in mortgage loans held for sale in the accompanying consolidated balance sheet. 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 strategic changes in Mortgage Corp., period to period comparisons of the Company's results of operations may not be meaningful. 12 13 ANALYSIS OF REVENUES AND EXPENSES The following table summarizes the revenues and expenses of each of the Company's business lines and presents the contribution that each business makes to the Company's operating margin. ANALYSIS OF REVENUES AND EXPENSES (IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST FIRST QUARTER QUARTER 1999 1998 ---------- ---------- MORTGAGE BANKING: Revenues: Net mortgage warehouse income.......................... $ 5,756 $ 1,722 Gain on sale of mortgage loans......................... 26,641 20,269 Servicing fees......................................... 6,143 4,694 Other.................................................. 346 2,004 ---------- ---------- Total............................................. 38,886 28,689 Expenses: Salaries and benefits.................................. 21,897 12,935 Amortization of mortgage servicing rights.............. 4,723 3,176 Provision (credit) for valuation of mortgage servicing rights............................................... (2,695) -- Interest on notes payables............................. 2,049 501 Occupancy, data processing, communication and other.... 12,222 8,104 ---------- ---------- Total............................................. 38,196 24,716 ---------- ---------- Operating contribution before direct taxes................ $ 690 $ 3,973 ========== ========== Operating contribution, net of direct taxes............... $ 1,706 $ 3,884 ========== ========== PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: Gain on resolution of Portfolio Assets................. $ 1,369 $ 3,097 Equity in earnings of Acquisition Partnerships......... 2,643 3,214 Servicing fees......................................... 1,003 729 Other.................................................. 1,221 1,998 ---------- ---------- Total............................................. 6,236 9,038 Expenses: Salaries and benefits.................................. 1,420 1,167 Interest on notes payable.............................. 1,050 1,476 Asset level expenses, occupancy, data processing and other................................................ 1,549 2,212 ---------- ---------- Total............................................. 4,019 4,855 ---------- ---------- Operating contribution before direct taxes................ $ 2,217 $ 4,183 ========== ========== Operating contribution, net of direct taxes............... $ 1,487 $ 4,169 ========== ========== CONSUMER LENDING: Revenues: Interest income........................................ $ 3,405 $ 2,566 Servicing fees and other............................... 1,087 390 ---------- ---------- Total............................................. 4,492 2,956 Expenses: Salaries and benefits.................................. 1,533 1,112 Provision for loan losses and residual interests....... 23 2,352 Interest on notes payable.............................. 668 880 Occupancy, data processing and other................... 2,041 1,107 ---------- ---------- Total............................................. 4,265 5,451 ---------- ---------- 13 14 FIRST FIRST QUARTER QUARTER 1999 1998 ---------- ---------- Operating income (loss) before direct taxes............... $ 227 $ (2,495) ========== ========== Operating income (loss), net of direct taxes.............. $ 278 $ (2,495) ========== ========== Total operating contribution, net of direct taxes........................................... $ 3,471 $ 5,558 ========== ========== CORPORATE OVERHEAD: Salaries and benefits, occupancy, professional and other income and expenses, net............................... $ (4,973) $ (512) Deferred tax benefit from NOLs............................ -- 750 ---------- ---------- Net earnings (loss)....................................... (1,502) 5,796 Preferred dividends....................................... (642) (1,515) ---------- ---------- Net earnings (loss) to common shareholders........ $ (2,144) $ 4,281 ========== ========== SHARE DATA: Earnings (loss) before accounting change per common share -- basic......................................... $ (0.16) $ 0.66 Earnings (loss) before accounting change per common share -- diluted....................................... $ (0.16) $ 0.64 Cumulative effect of accounting change -- basic........... $ (0.10) $ -- Cumulative effect of accounting change -- diluted......... $ (0.10) $ -- Net earnings (loss) per common share -- basic............. $ (0.26) $ 0.66 Net earnings (loss) per common share -- diluted........... $ (0.26) $ 0.64 Weighted average common shares outstanding -- basic....... 8,288 6,531 Weighted average common shares outstanding -- diluted..... 8,288 6,678 ORIGINATION AND OTHER FINANCIAL DATA: Mortgage Corp.: Origination of residential mortgage loans: Conventional......................................... $1,431,796 $1,360,865 Agency............................................... 597,238 331,228 Home equity.......................................... 62,344 58,261 Other................................................ 30,428 19,913 ---------- ---------- Total............................................. $2,121,806 $1,770,267 ========== ========== Origination of commercial mortgage loans: Correspondent........................................ $ 122,628 $ 113,265 Construction......................................... 18,062 15,596 ---------- ---------- Total............................................. $ 140,690 $ 128,861 ========== ========== Capital Corp.: Acquisition of Home Equity Loans....................... $ 99,741 $ 36,416 Commercial Corp.: Aggregate purchase price of assets acquired............ $ 9,817 $ 51,971 Proceeds from resolution............................... 34,680 74,534 Consumer Corp.: Aggregate acquisition of automobile and other consumer receivables.......................................... $ 53,736 $ 33,810 MORTGAGE BANKING During the first quarter of 1999, Harbor, the Company's mortgage subsidiary, continued to see strong originations totaling $2.4 billion. However, mortgage operations were only marginally profitable during the quarter as a result of the costs associated with the previously announced strategy to reduce the investment in mortgage servicing rights. 14 15 The transition to a production-only platform mitigates interest rate risk and reduces capital requirements associated with owning servicing assets. During this transition period, profits are negatively impacted by reduced servicing revenues during the two to three month period that Harbor subservices the loans for the buyers of the servicing, the third party costs associated with the actual sale and transfer of the servicing, and the additional internal costs related to sorting and shipping of servicing files to the buyers of the servicing. During the quarter, the mortgage subsidiary completed two bulk sales of mortgage servicing. These sales, combined with the flow sales of current production, reduced the size of the owned residential mortgage servicing portfolio from $5.5 billion at December 31, 1998 to $2.3 billion at March 31, 1999, and reduced the Company's investment in residential mortgage servicing rights from $88 million at December 31, 1998 to $44 million at March 31, 1999. The combined proceeds to the Company from these bulk sales aggregated $40 million (comprised of $32 million of cash and $8 million of accounts receivable), allowing Harbor to reduce debt by $22 million and to reduce the capital commitment to Harbor by $5 million. The Company has taken and continues to take steps to reduce overhead at the mortgage subsidiary. During the second quarter of 1999, the mortgage subsidiary expects to complete a plan to restructure its balance sheet, organization, and cost structure. Members of senior management of FirstCity and Harbor, working with outside consultants, are currently evaluating the cost and profitability of each operating unit within Harbor. Management expects the resulting changes to positively impact the future cost and profitability structure of the mortgage subsidiary. Harbor is expected to report a one-time charge during the second quarter when the plan for restructuring and reorganizing the mortgage subsidiary is finalized. As previously disclosed in FirstCity's 1998 Annual Report, the mortgage subsidiary's warehouse funding facility of $490 million matured on March 31, 1999. The Company has extended the existing facility, with expectation of finalizing the renewal by May 31, 1999. The renewed facility is expected to include new sub-limits for working capital and servicing sale accounts receivable financing to facilitate the mortgage subsidiary's production-only platform strategy. Capital Corp., FirstCity's home equity mortgage conduit, acquired $100 million of home equity loans during the quarter. At quarter end, the Company held $140 million of home equity loans in inventory and $24.5 million in home equity residual interests in securitizations. Driven by capital and liquidity priorities, FirstCity closely monitors its capital commitment to this business line, and will continue the selective origination of product, while at the same time effecting a strategic realignment of the platform. 15 16 The following table presents selected information regarding the revenues and expenses of the Company's mortgage banking business. ANALYSIS OF SELECTED REVENUES AND EXPENSES MORTGAGE BANKING (DOLLARS IN THOUSANDS) FIRST QUARTER FIRST QUARTER 1999 1998 ------------- ------------- WAREHOUSE INVENTORY: Average inventory balance................................. $1,056,300 $ 229,533 Net mortgage warehouse income: Dollar amount.......................................... 5,756 1,722 Percentage of average inventory balance................ 0.54% 0.75% GAIN ON SALE OF MORTGAGE LOANS: Gain on sale of mortgage loans as a percentage of loans sold: Residential............................................ 1.06% 1.46% Home Equity............................................ 2.08% 4.54% SERVICING REVENUES: Average servicing portfolios: Residential............................................ $5,466,733 $4,553,543 Commercial............................................. 1,387,053 1,470,923 Sub-serviced........................................... 4,926,673 813,040 Servicing fees: Residential............................................ $ 5,531 $ 4,284 Commercial............................................. 261 238 Sub-serviced........................................... 351 172 ---------- ---------- Total............................................. $ 6,143 $ 4,694 Annualized servicing fee percentage: Residential............................................ 0.40% 0.38% Commercial............................................. 0.08% 0.06% Sub-serviced........................................... 0.03% 0.08% Gain (loss) on sale of servicing rights................... (2,395) -- Amortization of servicing rights: Servicing rights amortization.......................... $ 4,723 $ 3,176 Servicing rights amortization as a percentage of average residential servicing portfolio (annualized)......................................... 0.35% 0.28% PERSONNEL: Personnel expenses........................................ $ 21,897 $ 12,935 Number of personnel (at period end): Production............................................. 435 442 Servicing.............................................. 274 119 Other.................................................. 765 602 ---------- ---------- Total............................................. 1,474 1,163 ========== ========== PORTFOLIO ASSET ACQUISITION AND RESOLUTION The portfolio asset acquisition and resolution business acquired assets of $10 million during the first quarter of 1999 comprised of a $8 million portfolio in Japan and a $2 million portfolio in France. Collections during the quarter totaled $35 million. Collections and returns achieved on assets acquired in France and Mexico continue to exceed expectations. 16 17 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 (DOLLARS IN THOUSANDS) FIRST QUARTER FIRST QUARTER 1999 1998 ------------- ------------- GAIN ON RESOLUTION OF PORTFOLIO ASSETS: Average investment: Nonperforming Portfolios............................... $32,870 $49,619 Performing Portfolios.................................. 21,357 14,212 Real estate Portfolios................................. 12,175 18,307 Gain on resolution of Portfolio Assets: Nonperforming Portfolios............................... $ 961 $ 2,263 Performing Portfolios.................................. -- 299 Real estate Portfolios................................. 408 535 ------- ------- Total............................................. $ 1,369 $ 3,097 ======= ======= Interest income on performing Portfolios.................. $ 890 $ 1,070 Gross profit percentage on resolution of Portfolio Assets: Nonperforming Portfolios............................... 25.73% 22.40% Performing Portfolios.................................. -- 7.99% Real estate Portfolios................................. 31.48% 17.08% Weighted average gross profit percentage............... 27.19% 18.24% Interest yield on performing Portfolios (annualized)... 16.67% 30.12% SERVICING FEE REVENUES: Acquisition partnerships.................................. $ 948 $ 660 Affiliates................................................ 55 69 ------- ------- Total............................................. $ 1,003 $ 729 ======= ======= PERSONNEL: Personnel expenses........................................ $ 1,420 $ 1,167 Number of personnel (at period end): Production............................................. 10 10 Servicing.............................................. 62 64 ------- ------- Total............................................. 72 74 ======= ======= INTEREST EXPENSE: Average debt.............................................. $59,970 $76,547 Interest expense.......................................... 1,045 1,466 Average yield (annualized)................................ 6.97% 7.66% 17 18 The following chart presents selected information regarding the revenues and expenses of the Acquisition Partnerships. ANALYSIS OF SELECTED REVENUES AND EXPENSES ACQUISITION PARTNERSHIPS (DOLLARS IN THOUSANDS) FIRST QUARTER FIRST QUARTER 1999 1998 ------------- ------------- GAIN ON RESOLUTION OF PORTFOLIO ASSETS: Gain on resolution of Portfolio Assets.................... $10,731 $18,533 Gross profit percentage on resolution of Portfolio Assets................................................. 36.20% 32.20% Interest income........................................... 3,336 2,453 Other interest income..................................... 161 170 INTEREST EXPENSE: Interest expense.......................................... $ 3,161 $ 3,941 Average yield (annualized)................................ 8.15% 7.17% OTHER EXPENSES: Servicing fees............................................ $ 1,438 $ 1,421 Legal..................................................... 557 408 Property protection....................................... 1,385 1,036 Other..................................................... 1,304 5,227 ------- ------- Total other expenses.............................. 4,684 8,092 ------- ------- Net earnings.............................................. $ 6,383 $ 9,123 ======= ======= CONSUMER LENDING FirstCity Funding, the Company's auto finance unit, experienced a strong production quarter, purchasing auto receivables with an unpaid principal balance of $52 million during the quarter, up 62% over the fourth quarter 1998. Loans were purchased at an average discount to face value of 14.7% and carried a weighted average coupon in excess of 19%. The defaults to date on assets acquired through March 31, 1999 have totaled 7.8% of the total loans acquired. Actual losses on these defaults have totaled 3.0% of the original loan balances at the time of default. Delinquencies at quarter-end were 3.2% of the total serviced portfolio of FirstCity Funding acquired loans. At the end of the period, the Company's consolidated balance sheet reflected $40.1 million of auto finance residual interests in securitizations. FirstCity Funding originated $28 million of these residual interests with the remainder originated by NAF, the discontinued consumer platform. Additionally, during the quarter, the Company finalized the placement of a $100 million commercial paper conduit warehouse facility arranged through NationsBanc Montgomery Securities, LLC. The facility increases FirstCity Funding's warehouse capacity and lowers the cost of funds for carrying its auto loan receivables. Subsequent to quarter end, the Company completed a securitization of $56 million of auto receivables. 18 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 (DOLLARS IN THOUSANDS) FIRST QUARTER FIRST QUARTER 1999 1998 ------------- ------------- INTEREST INCOME: Average loans and investments: Auto................................................... $32,206 $48,130 Investments............................................ 38,728 13,819 Interest income: Auto................................................... $ 1,998 $ 2,249 Investments............................................ 1,269 298 Average yield (annualized): Auto................................................... 24.82% 18.69% Investments............................................ 13.11% 8.63% SERVICING FEE REVENUES: Affiliates................................................ $ 1,073 $ 384 PERSONNEL: Personnel expenses........................................ $ 1,533 $ 1,112 Number of personnel (at period end): Production............................................. 133 56 Servicing.............................................. 123 79 ------- ------- Total............................................. 256 135 ======= ======= INTEREST EXPENSE: Average debt.............................................. $33,101 $40,791 Interest expense.......................................... 668 880 Average yield (annualized)................................ 8.07% 8.63% BENEFIT (PROVISION) FOR INCOME TAXES The Company has substantial federal 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 next three to four year period. 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 earnings. 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. 19 20 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 1999 Compared to First Quarter 1998 The Company reported a net loss of $1.5 million in 1999 compared to earnings of $5.8 million in 1998 (including a $0.8 million deferred tax benefit from NOLs). Net loss to common shareholders was $2.1 million in 1999 compared to earnings of $4.3 million in 1998. On a per share basis, basic net loss attributable to common shareholders was $.26 in 1999 compared to earnings of $.66 in 1998. Diluted net loss per common share was $.26 in 1999 compared to earnings of $.64 in 1998. An accounting change related to SOP 98-5 resulted in a loss of $.8 million in the first quarter of 1999 or $0.10 per share. MORTGAGE BANKING Gain on sale of mortgage loans. Gain on sale of mortgage loans increased by 31% to $26.6 million in 1999 from $20.3 million in 1998. This increase was the result of growth in the levels of residential mortgage loan origination generated principally by the Broker Retail network of Mortgage Corp. and, to a lesser extent, the Direct Retail network of Mortgage Corp., and the resulting sales of such loans to government agencies and other investors. This is evidenced by the sale of approximately $2.5 billion of mortgage loans in first quarter 1999 (compared to $1.3 billion in the first quarter 1998). Net mortgage warehouse income. Net mortgage warehouse income increased by 234% to $5.8 million in 1999 from $1.7 million in 1998. This is the result of a significant increase in the average balance of loans held in inventory during the quarter, although partially offset by a lower spread earned between the interest rate on the underlying mortgages and the interest cost of the warehouse credit facility. Servicing fee revenues. Servicing fee revenues increased by 31% to $6.1 million in 1999 from $4.7 million in 1998 as a result of an increase in the size of the servicing portfolio. Other revenues. Other revenues decreased by 83% to $.3 million in 1999 from $2.0 million in 1998 because of a $2.4 million loss on sale of mortgage servicing rights. Operating expenses. Operating expenses of Mortgage Corp. increased by 55% to $38.2 million in 1999 from $24.7 million in 1998. The expansion of the Broker Retail and Direct Retail operation contributed to the period to period increases. Salaries and benefits increased by $9.0 million or 69% in 1999 reflecting the additional staff required to support the increase in origination volumes derived principally from the Broker Retail network and, to a lesser extent, the Direct Retail network, and the increase in the size and number of loans in the residential and commercial servicing portfolios in 1999. Amortization of mortgage servicing rights increased by $1.5 million or 49% in 1999 as a result of the substantially larger investment in mortgage servicing rights at the beginning of 1999. Interest on notes payable (the portion not associated with Mortgage Corp.'s warehouse credit facility) increased due to higher working capital borrowings during 1999. A credit of $2.7 million for valuation of mortgaging servicing rights was recorded in the first quarter of 1999. Occupancy expense increased by $1.1 million in 1999 as the result of the opening or acquisition of several new offices in 1998 in the Broker Retail and Direct Retail networks. Increases in data processing, communication and other expenses in 1999 resulted from the substantial increases in production and servicing volumes. 20 21 PORTFOLIO ASSET ACQUISITION AND RESOLUTION Commercial Corp. purchased $9.8 million of Portfolio Assets during 1999 for its own account and through the Acquisition Partnerships compared to $52.0 million in acquisitions in 1998. Commercial Corp.'s quarter end investment in Portfolio Assets decreased to $56.4 million in 1999 from $69.7 million in 1998. Commercial Corp. invested $2.5 million in equity in Portfolio Assets in 1999 compared to $8.7 million in 1998. Net gain on resolution of Portfolio Assets. Proceeds from the resolution of Portfolio Assets decreased by 70% to $5.0 million in 1999 from $17.0 million in 1998. The net gain on resolution of Portfolio Assets decreased by 56% to $1.4 million in 1999 from $3.1 million in 1998 as the result of lower collections. The gross profit percentage on the resolution of Portfolio Assets in 1999 was 27.2% as compared to 18.2% in 1998. Equity in earnings of Acquisition Partnerships. Proceeds from the resolution of Portfolio Assets for the Acquisition Partnerships decreased by 48% to $29.6 million in 1999 from $57.6 million in 1998 while the gross profit percentage increased to 36.2% in 1999 from 32.2% in 1998. Other expenses of the Acquisition Partnerships decreased by $3.4 million in 1999 generally reflecting costs associated with the resolution of Portfolio Assets in Europe which generated proceeds of $13.8 million. The net result was an overall decrease in the net income of the Acquisition Partnerships of 30% to $6.4 million in 1999 from $9.1 million in 1998. As a result, Commercial Corp.'s equity earnings from Acquisition Partnerships decreased by 18% to $2.6 million in 1999 from $3.2 million in 1998. Servicing fee revenues. Servicing fees increased by 38% to $1.0 million in 1999 from $0.7 million in 1998 primarily as a result of collections from the acquisition partnership in Mexico formed at year-end 1998. Other revenues. Other revenues decreased by 39% to $1.2 million in 1999 compared to $2.0 million in 1998 principally as a result of fewer acquisitions during the quarter (which would generate lower due diligence recovery income). Operating expenses. Operating expenses declined by 17% to $4.0 million in 1999 from $4.9 million in 1998 primarily as a result of reduced interest expense and lower asset level expenses. Salaries and benefits increased by $0.3 million or 22% in 1999 as a result of increased cost of personnel related to supporting the Company's foreign operations. Interest on notes payable declined $.4 million or 29% due to overall lower cost of funds and lower debt levels. Asset level expenses, occupancy, data processing and other expenses decreased by 30% to $1.5 million in 1999 from $2.2 million in 1998 as a result of lower investments in Portfolio Assets and the consolidation of servicing offices in 1999. CONSUMER LENDING Interest and other income. Interest income on consumer loans increased by 33% to $3.4 million in 1999 from $2.6 million in 1998, reflecting increased levels of loan origination activity and an increase in the average balance of aggregate loans and investments held by Consumer Corp. during 1999. Other income increased $.7 million or 179% due to increased service fee revenue from securitization trusts. Interest expense. Interest expense decreased by 24% to $0.7 million in 1999 from $0.9 million in 1998 as a result of a reduced level of debt due to the sale and securitization of automobile loans at the end of 1998. Operating expenses. Operating expenses decreased by 22% to $4.3 million in 1999 from $5.5 million in 1998 primarily as a result of a significant decrease in the provision for loan losses, but was partially offset by increased operating activity. Provision for loan losses on automobile receivables decreased by $2.3 million from 1998 as a result of lower levels of outstanding unpaid principal balance of loans originated under the discontinued NAF platform ($0.4 million in 1999 compared to $23.4 million in 1998). 21 22 Salaries and benefits increased by $0.4 million or 38% and other expenses increased $.9 million or 84% as a result of the increased levels of operating activity. 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 225% to $1.8 million in 1999 from $0.6 million in 1998 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 increased 17% to $.9 million in 1999, loan fees and professional fees account for the majority of the $1 million increase in other overhead expenses, which increased due to higher borrowings and other costs associated with outsourcing projects related to the Company's year 2000 initiative and other operational reviews, as well as a write-off of $.5 million of organization costs in accordance with SOP 98-5. Additionally, during the first quarter of 1998 the Company recognized $1.3 million of deferred premium income related to the redemption of Special Preferred Stock. 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 1999 as compared to a benefit of $0.8 million in 1998. 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 the future, the Company anticipates being able to raise capital through a variety of sources including, but not limited to, public debt or equity offerings (subject to limitations related to the preservation of the Company's NOLs), thus enhancing the investment and growth opportunities of the Company. The Company believes that these and other sources of liquidity, including refinancing and expanding the Company's revolving credit facility to the extent necessary, securitizations, and funding from senior lenders for Acquisition Partnership investments and direct portfolio and business acquisitions, should prove adequate to continue to fund the Company's contemplated activities and meet its liquidity needs. 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 and the other operating subsidiaries, except as discussed below. 22 23 Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships, as of March 31, 1999, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $2.1 billion and outstanding borrowings of $1.3 billion. 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 as of May 11, 1999 and the outstanding borrowings under such facilities as of March 31, 1999. CREDIT FACILITIES OUTSTANDING BORROWINGS PRINCIPAL AS OF AMOUNT MARCH 31, 1999 INTEREST RATE OTHER TERMS AND CONDITIONS --------- -------------- ------------- -------------------------- (DOLLARS IN MILLIONS) FIRSTCITY Company Credit Facility..... $ 89 $ 80 Prime + 1.0% Secured by the assets of the Company, to Prime + 4% expires June 30, 1999 or LIBOR + 2.625% Term fixed asset facility... .7 .7 Prime + 1.0% Secured by certain fixed assets, expires January 1, 2001 Term credit facility........ 10 10 LIBOR + 5.0% Secured by stock of an acquisition partnership and certain residual interests, expires February 20, 2000 MORTGAGE CORP. Warehouse facilities........ 538 488 LIBOR + 1.375% Revolving line to warehouse residential to 2.5% mortgage loans, expires May 31, 1999 Supplemental warehouse facilities................ 134 94 LIBOR + 1.75% Revolving line to warehouse residential to 2.75% mortgage loans and related receivables, expires May 31, 1999 Gestation facilities........ 886 365 Fed Funds + Open facilities to fund committed loans 0.8% to 1.05% to FNMA and others and LIBOR + 0.5% to 0.8% CAPITAL CORP. Warehouse facility.......... 200 135 LIBOR + 1.50% Acquisition facility to acquire Home to 3.00% Equity Loans, expires March 31, 2000 Repurchase agreement........ 7 7 LIBOR + 4.00% Repurchase agreement secured by residual interests in Home Equity securitized loans, expires June 30, 1999 COMMERCIAL CORP. Portfolio acquisition facility.................... 100 52 LIBOR + 2.25% Acquisition facility to acquire Portfolio Assets, repaid April 1999 (includes $41 million advanced to unconsolidated Acquisition Partnerships) Term facility............... 62 -- LIBOR + 4.0% Term facility secured by existing Portfolio Assets, expires April 30, 2000 (includes $51 million advanced to unconsolidated Acquisition Partnerships). 23 24 OUTSTANDING BORROWINGS PRINCIPAL AS OF AMOUNT MARCH 31, 1999 INTEREST RATE OTHER TERMS AND CONDITIONS --------- -------------- ------------- -------------------------- (DOLLARS IN MILLIONS) French and Japanese acquisition facility...... 15 10 French franc Acquisition facility to fund equity LIBOR + 3.5% investments in French and Japanese Japanese yen Portfolio Assets, expires March 31, LIBOR + 3.5% 2000. Guaranteed by Commercial Corp. and the Company. Term acquisition 33 33 Fixed at 7.00% Acquisition facilities for existing facilities................ to 7.66% Portfolio Assets. Secured by Portfolio Assets. Expires February 25, 2003 and June 5, 2002 CONSUMER CORP. Warehouse facility.......... 70 44 LIBOR + 3% Revolving line secured by automobile receivables, paid off April 1999 Warehouse facility.......... 100 -- Rate equal to Commercial paper conduit warehouse the mixed rate facility secured by automobile of LIBOR and receivables, expires March 30, 2000 commercial paper rates Repurchase Agreement........ 7 7 LIBOR + 3% Repurchase agreement secured by residual interest in automobile securitized loans, expires June 30, 1999 Term facility............... 4 4 Prime + 1% Term facility secured by residual interests in automobile securitized loans, expires March 15, 2000 UNCONSOLIDATED ACQUISITION PARTNERSHIPS Term acquisition 93 93 Fixed at 4.5% Senior and subordinated loans secured facilities................ to 10.17%, by Portfolio Assets, various maturities LIBOR + 2.25% to 6.5% and Prime + 1.0% RELIANCE ON SYSTEMS; YEAR 2000 ISSUES The Year 2000 Issue consists of shortcomings of many electronic data processing systems that make them unable to process year-date data accurately beyond the year 1999. The primary shortcoming arises because computer programmers have abbreviated dates by eliminating the first two digits of the year under the assumption that these digits would always be 19. Another shortcoming is caused by the routine used by some computers for calculating leap year does not detect that the year 2000 is a leap year. This inability to process dates could potentially result in a system failure or miscalculation causing disruptions in the Company's operations or performance. The potential problems posed by this issue affect the Company's internal business-critical systems ("internal systems") upon which the Company depends. This includes information technology systems and applications ("IT"), as well as non-IT systems and equipment with embedded technology, such as fax machines and telephone systems. Examples of internal IT systems includes accounting systems such as general ledger, loan servicing systems, cash management systems and loan origination systems. In addition to the internal systems, the Company may be at risk from Year 2000 failures caused by or occurring to third parties. Some third parties have significant direct business relationships with the Company. These parties 24 25 include borrowers, lenders, investors who buy the Company's loan products and outside system vendors such as Alltel, Inc., the primary data processing provider for the servicing of Mortgage Corp's loans. The Company's Year 2000 Initiative The Company, with the assistance of a consulting firm that specializes in Year 2000 readiness, is conducting an enterprise-wide Year 2000 initiative that encompasses both the internal systems and exposure to third parties. For the Company's internal systems, the initiative is being approached in three phases comprised of assessment, remediation and testing. While there is considerable overlap in the timing of the three phases, the assessment phase is the first step in the initiative. In this phase, the objective is to identify the components (i.e., hardware and software) of all internal systems and to assess the readiness of each component. This information is then used to prepare a comprehensive plan for remediation and testing. The information gathered during this phase is also used to develop a more precise estimate of the costs of remediation and testing. Third party exposures are addressed by obtaining written representations of Year 2000 readiness from the third parties and through cooperative testing between the Company and certain of its significant third parties. The third party initiative includes contingency planning which is based on the responses to requests for representations of readiness and the results of cooperative testing. Contingency plans also involve a comprehensive risk assessment in order to maintain focus on critical business relationships. A contingency plan could include replacement of a third party with a comparable firm believed to be compliant. The Company is in the process of completing the assessment phase for all of its internal systems. Remediation and testing have already begun and complete Year 2000 readiness for internal systems is scheduled to be achieved by July 1999. The Company does not anticipate any material difficulties in achieving Year 2000 readiness within this time frame. The Company has not yet developed a most reasonably likely worst case scenario with respect to Year 2000 issues, but instead has focused its efforts on reducing uncertainties through the review described above. The Company has not developed Year 2000 Contingency plans other than as described above, and does not expect to do so unless merited by the result of its continuing review. With respect to third party exposure, the process of obtaining written representation from third parties is still ongoing. Therefore, the Company has not completed its contingency plan. Based on responses received and testing to date, it is not anticipated that the Company will be materially affected by any third party Year 2000 readiness issue. The Company expects to have a comprehensive contingency plan in place by the third quarter of 1999. In general, any significant third party service providers that have not completed their Year 2000 initiative by the third quarter of 1999 and certified their readiness to the Company will be replaced with comparable firms that are believed to be compliant. Contingency planning with respect to third parties will continue throughout the remainder of 1999. In addition to the being included in the Company's initiative described above, Mortgage Corp. is currently participating in the Year 2000 Inter-Industry Test sponsored by the Mortgage Bankers Association ("MBA Test"). Other participants in the MBA Test are from a cross section of the top industry participants including originators, servicers, mortgage insurers, service bureaus, investors and software vendors. Mortgage Corp.'s primary data processing vendor, Alltel, Inc., and FNMA, Mortgage Corp.'s primary investor, are also participants. The objective of the test is to prove that the interaction with common mortgage industry trading partners is acceptable in a year 2000+ environment. The test covers 17 types of transactions that fall under the three primary mortgage processes: origination, secondary marketing, and servicing. The test is scheduled to conclude no later than June 30, 1999. While this test will not replace internal testing, it does provide additional assurance to Mortgage Corp. and the other participants that the readiness of their systems, many of which are directly interfaced, are subjected to independent verification. The Company has increased its estimate of the cost of its Year 2000 initiative and now believes that it will be approximately $1,500,000, a majority of which is being incurred during 1999. Of these costs, approximately $150,000 is for computer systems that must be replaced and the remainder is personnel costs (employees and external consultants). The increase is due to the cost of participation in the MBA Test and 25 26 higher than anticipated costs for outside consultants. All estimated costs have been budgeted and are expected to be funded by cash flows from operations. The cost of the initiative and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which are derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. Unanticipated failures by critical third parties, as well as the failure by the Company to execute its own remediation efforts, could have a material adverse effect on the cost of the initiative and its completion date. As a result, there can be no assurance that these forward-looking estimates will be achieved and the actual cost and third party compliance could differ materially from those plans, resulting in material financial risk. Potential Risks Currently, there is uncertainty as to the ultimate success of global remediation efforts, including the efforts of entities that provide services to large segments of society such as airlines, utilities and securities exchanges. There could be short term or longer-term disruptions in segments of the economy that could impact the Company. Due to the uncertainty with respect to how the Year 2000 issue will affect business and government, it is not possible to list all potential problems or risks to the Company. The Company believes that the most reasonably likely worst case scenarios that could have adverse effects on the Company are the failures of third parties, particularly residential mortgage loan borrowers, its lenders and the investors who purchase its mortgage and consumer loan products. The Company's residential mortgage and consumer loan borrowers could be affected by any adverse impact on the general economy that could cause a rise in delinquencies. Lenders, who provide funds used by the Company to acquire assets, might be adversely affected, disrupting the flow of funds, which could have an adverse impact on the Company's ability to make new loans. Likewise, a disruption in services by investors such as FNMA could have an adverse impact on the Company's ability to sell loans, which would result in significant reductions in operating activities. Any Year 2000 factors that might impact borrowers' abilities to repay their obligations relate to the failure of global remediation efforts over which the Company has no influence. The Company's lenders and investors, most of which operate in highly regulated industries, are among the largest such institutions in the world. These institutions are under government regulatory mandates to achieve full readiness prior to the end of 1999. The Company believes that it is unlikely that these institutions will fail to achieve readiness within a reasonable time frame; however, the Company will continue to monitor their readiness and maintain an ongoing contingency plan. 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 and commercial 26 27 mortgage-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 Company's Year 2000 issues; 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 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 statement to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's 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 are 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 and 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. Prices paid for prime loans are impacted by movements in interest rates. The Company mitigates this risk by locking in prices with its investors as the customer locks in the price with the Company, thus allowing the Company to maintain its margin. Generally, if interest rates rise significantly, home sales and refinancing will decline adversely affecting the Company's prime mortgage loan production. 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 mortgage or automobile loans. The value of the sub-prime mortgage residual interest is adversely affected by prepayment, losses and delinquencies due to the longer term of the underlying assets and the value would be negatively impacted by an increase in short-term rates, as a portion of the cash flows fluctuate monthly based upon the one-month LIBOR. The sub-prime automobile residual interests is 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. The Company's investment in mortgage servicing rights are based on a weighted average service fee rates and an assumed prepayment speeds. Changes in prevailing mortgage interest rates contribute to changes in the prepayment assumptions of servicing rights, thus causing increases to the value of the servicing rights when mortgage rates increase and decreases in value when mortgage rates decrease. 27 28 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 prime mortgage production and the value of the residual interests in the securitization and 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, 1998. 28 29 PART II OTHER INFORMATION 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) 29 30 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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 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). 30 31 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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 10.10 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). 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 ConiTrade 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). 31 32 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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). 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. 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. 10.31 -- Note purchase agreement, dated March 30, 1999 among Enterprise Funding Corporation, FCAR Receivables, LLC and NationsBank, N.A.. 10.32 -- Custodian Agreement, dated March 30, 1999, among FCAR Receivables LLC, FirstCity Funding Corporation, NationsBank, N.A., Enterprise Funding Corporation and Chase Bank of Texas, N.A.. 32 33 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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.) (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, 1999. 33 34 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 ----------------------------------- Name: James T. Sartain Title: President and Chief Operating Officer and Director (Duly authorized officer of the Registrant) By /s/ GARY H. MILLER ----------------------------------- Name: Gary H. Miller Title: Senior Vice President and Chief Financial Officer (Duly authorized officer and principal financial and accounting officer of the Registrant) Dated: May 17, 1999 34 35 INDEX TO 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). 36 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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 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 10.10 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 37 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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). 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 ConiTrade 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). 38 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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). 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. 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. 10.31 -- Note purchase agreement, dated March 30, 1999 among Enterprise Funding Corporation, FCAR Receivables, LLC and NationsBank, N.A.. 10.32 -- Custodian Agreement, dated March 30, 1999, among FCAR Receivables LLC, 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. 39 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.)