FIRSTCITY FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 033-19694

FirstCity Financial Corporation

(Exact name of Registrant as Specified in Its Charter)


Delaware		76-0243729
(State or Other Jurisdiction of		(I.R.S. 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

The number of shares of common stock, par value $.01 per share, outstanding at November 13, 2003 was 11,204,671.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)


			September 30,			December 31,
			2003			2002

			(Unaudited)
ASSETS
Cash and cash equivalents			$	3,053		$	4,118
Portfolio Assets, net				4,072			9,820
Loans receivable from Acquisition Partnerships held for investment				18,995			17,700
Equity investments				66,019			58,342
Deferred tax benefit, net				20,101			20,101
Service fees receivable from affiliates				2,525			2,235
Other assets, net				7,304			6,376
Net assets of discontinued operations				6,346			7,764

		Total Assets	$	128,415		$	126,456

LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Liabilities:
	Notes payable to affiliates		$	91,796		$	95,560
	Notes payable — other			1,424			1,113
	Preferred stock subject to mandatory redemption, including accumulated dividends in arrears of $1,127 and $0, respectively)			3,779			—
	Minority interest			3,704			4,052
	Other liabilities			3,680			3,274

		Total Liabilities		104,383			103,999
Commitments and contingencies (Note 10)
Redeemable preferred stock:
	Preferred stock subject to mandatory redemption, including accumulated dividends in arrears of $0 and $960, respectively (par value $.01; redemption value of $21 per share; 2,000,000 shares authorized; shares issued and outstanding: 126,291 and 130,691, respectively)			—			3,705
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; shares issued and outstanding: 11,187,437 and 11,195,076, respectively)			112			112
	Paid in capital			99,156			98,934
	Accumulated deficit			(77,472	)		(82,977	)
	Accumulated other comprehensive income			2,236			2,683

		Total Shareholders’ Equity		24,032			18,752

		Total Liabilities, Redeemable Preferred Stock and Shareholders’ Equity	$	128,415		$	126,456

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenues:
	Servicing fees from affiliates		$	3,574		$	3,263		$	11,167		$	9,655
	Gain on resolution of Portfolio Assets			112			225			1,079			925
	Equity in earnings of investments			5,187			1,277			14,211			6,691
	Interest income from affiliates			501			962			2,327			3,063
	Interest income — other			98			280			443			841
	Gain on sale of interest in equity investments			—			—			—			1,779
	Other income			545			534			1,161			1,710

		Total revenues		10,017			6,541			30,388			24,664
Expenses:
	Interest and fees on notes payable to affiliates			1,855			1,503			5,550			4,439
	Interest and fees on notes payable — other			20			64			134			301
	Interest on shares subject to mandatory redemption			66			—			66			—
	Salaries and benefits			3,823			3,545			11,417			9,705
	Provision for loan and impairment losses			23			157			1			278
	Occupancy, data processing, communication and other			2,189			2,219			5,919			6,589

		Total expenses		7,976			7,488			23,087			21,312
Earnings (loss) from continuing operations before income taxes and minority interest				2,041			(947	)		7,301			3,352
Benefit (provision) for income taxes				171			(28	)		(83	)		(35	)

Earnings (loss) from continuing operations before minority interest				2,212			(975	)		7,218			3,317
Minority interest				(372	)		(162	)		(1,160	)		(1,086	)

Earnings (loss) from continuing operations				1,840			(1,137	)		6,058			2,231
Loss from discontinued operations				—			(5,700	)		(420	)		(7,700	)

Net earnings (loss)				1,840			(6,837	)		5,638			(5,469	)
Accumulated preferred dividends in arrears				—			(642	)		(133	)		(1,926	)

Net earnings (loss) to common shareholders			$	1,840		$	(7,479	)	$	5,505		$	(7,395	)

Basic earnings (loss) per common share are as follows:
	Earnings (loss) from continuing operations		$	0.16		$	(0.21	)	$	0.53		$	0.04
	Discontinued operations		$	—		$	(0.68	)	$	(0.04	)	$	(0.92	)
	Net earnings (loss) to common shareholders		$	0.16		$	(0.89	)	$	0.49		$	(0.88	)
	Weighted average common shares outstanding			11,204			8,376			11,203			8,376
Diluted earnings (loss) per common share are as follows:
	Earnings (loss) from continuing operations		$	0.16		$	(0.21	)	$	0.53		$	0.04
	Discontinued operations		$	—		$	(0.68	)	$	(0.04	)	$	(0.92	)
	Net earnings (loss) to common shareholders		$	0.16		$	(0.89	)	$	0.49		$	(0.88	)
	Weighted average common shares outstanding			11,371			8,376			11,259			8,376

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)


												Accumulated
		Number of										Other			Total
		Common			Common		Paid in		Accumulated			Comprehensive			Shareholders’
		Shares			Stock		Capital		Deficit			Income			Equity

Balances, December 31, 2001			8,376,500		$	84	$	79,645	$	(76,728	)	$	876		$	3,877
Issuance of common stock in exchange for redeemable preferred stock			2,417,388			24		18,891		—			—			18,915
Issuance of common stock to acquire minority interest in subsidiary			400,000			4		396		—			—			400
Issuance of shares through employee stock purchase plan			1,188			—		2		—			—			2
Comprehensive loss:
	Net loss for 2002		—			—		—		(3,771	)		—			(3,771	)
	Foreign currency items		—			—		—		—			1,782			1,782
	Unrealized net gain on securitization		—			—		—		—			25			25

Total comprehensive loss																(1,964	)

Preferred dividends			—			—		—		(2,478	)		—			(2,478	)

Balances, December 31, 2002			11,195,076			112		98,934		(82,977	)		2,683			18,752
Issuance of common stock in exchange for redeemable preferred stock			8,200			—		75		—			—			75
Issuance of shares through employee stock purchase plan			1,395			—		3		—			—			3
Refund of unconverted Common Stock			(17,234	)		—		144		—			—			144
Comprehensive income:
	Net earnings for the first nine months of 2003		—			—		—		5,638			—			5,638
	Foreign currency items		—			—		—		—			760			760
	Unrealized net loss on securitization		—			—		—		—			(1,207	)		(1,207	)

Total comprehensive income																5,191

Preferred dividends			—			—		—		(133	)		—			(133	)

Balances, September 30, 2003			11,187,437		$	112	$	99,156	$	(77,472	)	$	2,236		$	24,032

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


				Nine Months Ended
				September 30,

				2003			2002

Cash flows from operating activities:
	Net earnings (loss)			$	5,638		$	(5,469	)
	Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
		Loss from discontinued operations			420			7,700
		Proceeds from resolution of Portfolio Assets			6,314			2,998
		Gain on resolution of Portfolio Assets			(1,079	)		(925	)
		Purchase of Portfolio Assets and advances on loans receivable, net			(5,174	)		(4,019	)
		Provision for loan and impairment losses			1			278
		Equity in earnings of investments			(14,211	)		(6,691	)
		Proceeds from performing Portfolio Assets and loans receivable, net			3,471			4,036
		Capitalized interest and costs on Portfolio Assets and loans receivable			(172	)		103
		Depreciation and amortization			658			528
		Increase in other assets			(2,560	)		(3,012	)
		Gain on sale of interest in equity investments			—			(1,779	)
		Gain on early extinguishment of debt			—			(691	)
		Increase in other liabilities			1,127			2,348

			Net cash used in operating activities		(5,567	)		(4,595	)

Cash flows from investing activities:
	Purchase of minority interest by consolidated subsidiary				(1,399	)		—
	Proceeds from sale of interest in equity investment				—			3,373
	Property and equipment, net				(774	)		(346	)
	Contributions to Acquisition Partnerships and Servicing Entities				(11,367	)		(10,216	)
	Distributions from Acquisition Partnerships and Servicing Entities				20,564			19,510

			Net cash provided by investing activities		7,024			12,321

Cash flows from financing activities:
	Borrowings under notes payable to affiliates				18,090			18,355
	Borrowings under notes payable — other				3,241			438
	Payments of notes payable to affiliates				(22,018	)		(18,287	)
	Payments of notes payable — other				(2,930	)		(4,719	)
	Refund on unconverted Common Stock				144			—
	Payments for tender of redeemable preferred stock				(50	)		—
	Proceeds from issuance of common stock				3			—

			Net cash used in financing activities		(3,520	)		(4,213	)

			Net cash provided by (used in) continuing operations		(2,063	)		3,513
			Net cash provided by (used in) discontinued operations		998			(836	)

Net increase (decrease) in cash and cash equivalents				$	(1,065	)	$	2,677
Cash and cash equivalents, beginning of period					4,118			5,583

Cash and cash equivalents, end of period				$	3,053		$	8,260

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
		Interest		$	4,785		$	4,160
		Income taxes			314			56
	Non-cash financing activities:
		Dividends accumulated and not paid on preferred stock			133			1,926

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Dollars in thousands, except per share data)

(1) Basis of Presentation, Earnings per Common Share and Stock-Based Compensation

The unaudited consolidated financial statements of FirstCity Financial Corporation (“FirstCity” or the “Company”) reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity’s consolidated financial position at September 30, 2003, and the results of operations for the three-month and nine-month periods ended September 30, 2003 and 2002, and cash flows for the nine-month periods ended September 30, 2003 and 2002.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimation of future collections on purchased portfolios of assets or single assets (collectively referred to as “Portfolio Assets” or “Portfolios”) used in the calculation of net gain on resolution of Portfolio Assets, interest rate environments, valuation of the deferred tax asset, and prepayment speeds and collectibility of loans held in inventory, in securitization trusts and held for investment. Actual results could differ materially from those estimates.

Basic earnings per common share are computed based on the weighted average of common shares outstanding during the period. Diluted earnings per common share are computed based on the weighted average number of common shares and common stock equivalents, which includes options outstanding under the Company’s stock option plans and outstanding warrants. Options for 203,000 shares and a warrant for 425,000 shares of common stock were potentially dilutive. The effects of common stock equivalents were antidilutive for the three and nine month periods ended September 30, 2002.

At September 30, 2003, the Company has two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As required by FASB Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the following table represents the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.


		Three Months						Nine Months
		Ended						Ended
		September 30,						September 30,

		2003			2002			2003			2002

Net earnings (loss) to common stockholders, as reported		$	1,840		$	(7,479	)	$	5,505		$	(7,395	)
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(54	)		(49	)		(152	)		(159	)

Pro forma net earnings (loss) to common stockholders		$	1,786		$	(7,528	)	$	5,353		$	(7,544	)

Net earnings per common share:
Basic — as reported		$	0.16		$	(0.89	)	$	0.49		$	(0.88	)

Basic — pro forma		$	0.16		$	(0.90	)	$	0.48		$	(0.90	)

Diluted — as reported		$	0.16		$	(0.89	)	$	0.49		$	(0.88	)

Diluted — pro forma		$	0.16		$	(0.90	)	$	0.48		$	(0.90	)

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(2) Restructure, Liquidity and Capital Resources

Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to entities formed to acquire Portfolios (“Acquisition Partnerships”), retirement of and interest on preferred stock, and other investments by FirstCity. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt and dividends from the Company’s subsidiaries, short-term borrowings from revolving lines of credit, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

In December 2002, FirstCity completed a recapitalization in which holders of redeemable preferred stock, par value $.01 per share, (“New Preferred Stock”) exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million in cash. As a result, common equity was increased by $18.9 million. During the first quarter of 2003, 4,400 shares of New Preferred Stock were redeemed for 8,200 shares of common stock and $50,000 in cash. FirstCity also recorded a $4 million gain in December 2002 from the release of its guaranty of Drive’s indebtedness to BoS(USA), Inc. (“BoS(USA)”). BoS(USA)’s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings Corporation held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom are Senior Vice Presidents of FirstCity, by issuing 400,000 shares of common stock of the Company and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million out of certain cash collections from servicing income from Portfolios in Mexico.

As a part of the recapitalization, BoS(USA) provided a non-recourse loan in the amount of $16 million to FirstCity which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity’s debt to the Bank of Scotland (together with BoS(USA), the “Senior Lenders”). The $16 million loan is secured by a 20% interest in Drive (64.51% of FirstCity’s remaining 31% interest in Drive) and other assets of Consumer Lending Corporation (“Consumer Corp.”). In connection with the $16 million loan, FirstCity is obligated to pay an arrangement fee to BoS(USA) equal to 20% of all amounts received by FirstCity in excess of $16 million from any sale or other disposition of FirstCity’s 20% interest in Drive and all dividends and other distributions paid by Drive or its general partner on FirstCity’s 20% interest in Drive. Management of the Company believes the value of FirstCity’s 20% ownership interest of Drive does not exceed $16 million as of September 30, 2003.

In connection with the recapitalization, the Senior Lenders refinanced the remainder of the Company’s debt facilities ($44 million outstanding at September 30, 2003). The Senior Lenders also provided new financing to FirstCity, with a total commitment of up to $59 million, consisting of (a) a $5 million revolving credit loan and (b) an acquisition term loan in an amount up to $54 million ($20 million available at September 30, 2003). The aggregate amount of outstanding loans under the total commitment by the Senior Lenders for the refinancing and the new financing at any time may not exceed $77 million.

BoS(USA) has a warrant to purchase 425,000 shares of the Company’s voting Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants in connection with this existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company’s voting Common Stock.

In the third quarter of 1999, dividends on the Company’s redeemable preferred stock (“New Preferred Stock”) were suspended. At September 30, 2003, accumulated dividends in arrears on New Preferred Stock totaled $1.1 million, or $8.92 per share. Since the Company failed to pay quarterly dividends for six consecutive quarters, the holders of New Preferred Stock are entitled to exercise their right to elect two directors to the Company’s Board until cumulative dividends have been paid in full. To exercise this right, the holders of the New Preferred Stock must follow certain prescribed actions set fourth in the Certificate of Designations of the Company’s New Preferred Stock. To date, the holders of the New Preferred Stock have not exercised this right. Dividends on outstanding shares of New Preferred Stock of FirstCity will be restricted until the Tranche II term loan is paid in full. Given the continued high debt levels of the Company, and management’s priority of assuring adequate levels of liquidity, the Company does not anticipate that dividends on New Preferred Stock will be paid in the foreseeable future.

The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a subsidiary of Cargill. This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March 2005. At September 30, 2003, approximately $25 million was outstanding under this facility.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Management believes that the BoS(USA) loan facilities along with the liquidity from the Cargill facility, the related fees generated from the servicing of assets and equity distributions from existing Acquisition Partnerships and wholly owned portfolios will allow the Company to meet its obligations as they come due during the next twelve months.

(3) New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, FirstCity must apply the provisions of FIN 46 as of December 31, 2003. Based on the new criteria in the Interpretation, FIN 46 also requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the entity will consolidate or disclose information about variable interest entities when FIN 46 becomes effective. Although management is still evaluating the impact of FIN 46, the adoption is not expected to have a material effect. Presently the Company does not believe that any of its equity investments will qualify for consolidation in accordance with FIN 46.

In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company currently has no derivatives or hedging relationships, and therefore, the adoption of SFAS 149 had no effect on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS establishes standards for how an issuer measures certain financial instruments with characteristics of both liabilities and equity and classifies them in its statement of financial position. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003. As it relates to FirstCity, on July 1, 2003, the carrying value of the New Preferred Stock was $3.7 million and approximated fair value. Beginning with the third quarter of 2003, the New Preferred Stock is be presented as a liability in the consolidated financial statements and any related accretion of discount and dividends are charged to the consolidated results of operations.

In November 2003, the FASB issued Staff Position, No. 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“Staff Position 150-3”). Staff Position 150-3 defers the application of various provisions of SFAS 150 for specified mandatorily redeemable noncontrolling interests in consolidated limited-life entities. FirstCity has minority interests in various limited-life partnerships with a carrying value of $895 at September 30, 2003. The estimated amount that would be paid to the minority interest holder if the instruments were to be settled at September 30, 2003 is $949.

(4) Discontinued Operations

The anticipated net realizable value of the Company’s investment in discontinued operations was $6,346 at September 30, 2003. During the third quarter of 2003, the Company received $1.4 million in cash flows from the Company’s residual interest in the FC Capital 1998-1 securitization trust. The Company recorded a provision of $.4 million in the first nine months of 2003 and $7.7 million in the first nine months of 2002 for additional losses from discontinued operations. The provisions primarily relate to reductions in anticipated future cash flows from securitization trusts due to increased expected prepayments and losses. The net assets from discontinued operations consist of the following:


		September 30,			December 31,
		2003			2002

Estimated future gross cash receipts on residual interests in securitizations		$	6,577		$	8,764
Accrual for loss on operations and disposal of discontinued operations, net			(231	)		(1,000	)

	Net assets of discontinued operations	$	6,346		$	7,764

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The only assets remaining from discontinued operations are the investment securities resulting from the retention of residual interests in securitization transactions. Although the liquidation or run-off of these investment securities will last longer than one year, the Company is contractually obligated to service the securitized assets. The Company has considered the estimated future gross cash receipts for such investment securities in the computation of the value of such investment securities. The cash flows are collected over a period of time and are valued using prepayment assumptions of 38% to 47% for fixed rate loans and 25% to 35% for variable rate loans. Overall loss rates are estimated from 3% to 11% of collateral.

(5) Portfolio Assets

Portfolio Assets are summarized as follows:


		September 30,			December 31,
		2003			2002

Non-performing Portfolio Assets		$	25,557		$	39,241
Performing Portfolio Assets			2,979			7,761
Real estate Portfolios			887			1,242

	Total Portfolio Assets		29,423			48,244
Adjusted purchase discount required to reflect Portfolio Assets at carrying value			(25,351	)		(38,424	)

	Portfolio Assets, net	$	4,072		$	9,820

Portfolio Assets are pledged to secure non-recourse notes payable.

(6) Loans Receivable from Acquisition Partnerships Held for Investment

Loans receivable from Acquisition Partnerships held for investment consist primarily of loans from certain partnerships located in Mexico and France and are summarized as follows:


	September 30,		December 31,
	2003		2002

Mexico	$	14,333	$	16,399
France		3,246		—
Domestic		1,416		1,301

	$	18,995	$	17,700

There were no provisions recorded on these loans during the first nine months of 2003 and 2002. The loans receivable from the Mexican partnerships are secured by the assets/loans acquired by the Mexican partnerships with purchase money loans provided by affiliates of the investors in the Mexican partnerships to purchase the asset pools held in those entities. These loans are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each pool to determine that the cash flows are sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment are necessary. Equity method losses, which were recorded to reduce the loans and interest receivable from the Mexican partnerships, were $1.8 million and $2.1 million during the first nine months of 2003 and 2002, respectively, in compliance with EITF 98-13, Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee. During the third quarter of 2003, the Company amended loan agreements with three Mexican partnerships to provide for no interest to be payable with respect to periods after the effective date of the amendment. This change had no impact on the consolidated net earnings as the effect is offset through equity earnings in the partnerships.

At September 30, 2003, the Company has a $3.2 million loan receivable from one French Acquisition Partnership. This loan is secured by the assets/loans held by the Partnership and is evaluated for impairment in the same manner as the loans to the Mexican Partnerships described above. The results of this evaluation indicated that the cash flows from the underlying assets will be sufficient to repay the loan and no allowance for impairment is necessary.

(7) Equity Investments

The Company has investments in Acquisition Partnerships and their general partners and investments in servicing entities that are accounted for under the equity method. The condensed combined financial position and results of operations of the Acquisition

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Partnerships (excluding servicing entities), which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized below:

Condensed Combined Balance Sheets


	September 30,		December 31,
	2003		2002

Assets	$	518,124	$	585,435

Liabilities	$	463,232	$	480,713
Net equity		54,892		104,722

	$	518,124	$	585,435

Equity investment in Acquisition Partnerships	$	48,029	$	46,029
Equity investment in servicing entities		3,932		3,247

	$	51,961	$	49,276

Condensed Combined Summary of Operations


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

Proceeds from resolution of Portfolio Assets	$	69,506		$	46,473		$	187,699		$	221,106
Gain on resolution of Portfolio Assets		29,169			16,849			72,403			69,532
Interest income on performing Portfolio Assets		1,756			2,699			5,884			11,961
Net loss		(7,880	)		(4,826	)		(11,838	)		(6,711	)

Equity in earnings of Acquisition Partnerships	$	3,007		$	912		$	8,135		$	6,494
Equity in earnings of servicing entities		155			12			474			692

	$	3,162		$	924		$	8,609		$	7,186

The assets and equity of the Acquisition Partnerships and FirstCity’s equity investments in the Acquisition Partnerships are summarized by geographic region below. The WAMCO Partnerships represent limited partnerships and limited liability companies in which the Company has a common ownership with Cargill. MinnTex Investment Partners LP is considered to be a significant subsidiary of FirstCity.


			September 30,			December 31,
			2003			2002

Assets:
	Domestic:
		WAMCO Partnerships	$	186,529		$	189,392
		MinnTex Investment Partners LP		1,991			3,733
		Other		15,728			15,758
	Mexico			199,901			246,087
	France			113,975			130,465

			$	518,124		$	585,435

Equity (deficit):
	Domestic:
		WAMCO Partnerships	$	83,317		$	80,059
		MinnTex Investment Partners LP		1,857			3,569
		Other		3,784			3,643
	Mexico			(98,898	)		(51,567	)
	France			64,832			69,018

			$	54,892		$	104,722

Equity investment in Acquisition Partnerships:
	Domestic:
		WAMCO Partnerships	$	32,131		$	29,951
		MinnTex Investment Partners LP		613			1,178
		Other		2,258			2,316
	Mexico			1,044			1,108
	France			11,983			11,476

			$	48,029		$	46,029

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Revenues and earnings (loss) of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships are summarized by geographic region below.


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenues:
	Domestic:
		WAMCO Partnerships	$	8,102		$	5,688		$	26,143		$	37,069
		MinnTex Investment Partners LP		3,200			1,918			9,908			3,915
		Other		59			12			97			423
	Mexico			7,113			8,807			19,251			29,554
	France			12,979			3,695			24,425			12,334

			$	31,453		$	20,120		$	79,824		$	83,295

Net earnings (loss):
	Domestic:
		WAMCO Partnerships	$	4,776		$	2,210		$	15,032		$	23,936
		MinnTex Investment Partners LP		2,841			1,232			8,751			2,423
		Other		(184	)		(83	)		(414	)		104
	Mexico			(24,391	)		(10,464	)		(51,126	)		(40,875	)
	France			9,078			2,279			15,919			7,701

			$	(7,880	)	$	(4,826	)	$	(11,838	)	$	(6,711	)

Equity in earnings (loss) of Acquisition Partnerships:
	Domestic:
		WAMCO Partnerships	$	1,599		$	923		$	5,284		$	6,797
		MinnTex Investment Partners LP		937			407			2,888			800
		Other		(56	)		(21	)		(81	)		214
	Mexico			(1,104	)		(812	)		(2,774	)		(2,726	)
	France			1,631			415			2,818			1,409

			$	3,007		$	912		$	8,135		$	6,494

FirstCity also has an investment in Drive that is accounted for under the equity method. The condensed consolidated financial position and results of operations of Drive are summarized below:

Condensed Consolidated Balance Sheets


			September 30,			December 31,
			2003			2002

Cash			$	25,551		$	14,337
Restricted cash				41,124			12,124
Retail installment contracts, net				577,973			367,520
Residual interests in securitizations				37,435			63,202
Other assets				18,677			14,494

	Total assets		$	700,760		$	471,677

Notes payable			$	648,953		$	434,422
Other liabilities				15,520			14,123

	Total liabilities			664,473			448,545
Net equity				36,287			23,132

			$	700,760		$	471,677

Equity investment in Drive			$	14,058		$	9,066
	Minority interest			(2,809	)		(1,812	)

		Net investment in Drive	$	11,249		$	7,254

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Condensed Consolidated Summary Of Operations


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Finance and other interest income			$	50,349		$	34,558		$	135,834		$	60,289
Interest expense				8,583			4,895			22,880			10,638

		Net interest margin		41,766			29,663			112,954			49,651

Provision for credit losses on retail installment contracts				16,803			16,320			46,831			16,340
Impairment of residual interests in securitizations, including servicing asset				3,904			112			6,361			112

		Net interest margin after provision for credit losses and impairments		21,059			13,231			59,762			33,199

Other revenues:
	Servicing income			6,333			4,977			17,762			14,212
	Other income			607			337			1,733			751

		Total other revenues		6,940			5,314			19,495			14,963

Costs and expenses:
	Salaries and benefits			11,397			9,832			34,483			30,279
	Servicing expense			8,497			4,460			21,950			10,867
	Occupancy, data processing, communication, and other			2,876			3,340			8,094			8,292

		Total costs and expenses		22,770			17,632			64,527			49,438

		Net income (loss)	$	5,229		$	913		$	14,730		$	(1,276	)

Equity in earnings (loss) of Drive			$	2,025		$	353		$	5,602		$	(495	)
Minority interest				(404	)		(71	)		(1,119	)		99

	Net equity in earnings (loss) of Drive		$	1,621		$	282		$	4,483		$	(396	)

(8) Segment Reporting

The Company is engaged in two reportable segments: (i) Portfolio Asset acquisition and resolution; and (ii) consumer lending. These segments have been segregated based on products and services offered. The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such Portfolios in an effort to maximize the present value of the ultimate cash recoveries. The consumer lending business is conducted through the Company’s equity investment in Drive. Drive is a specialized consumer finance company engaged in the purchase, securitization and servicing of retail installment contracts originated by automobile dealers. The following is a summary of results of operations for each of the segments and reconciliation to earnings from continuing operations for the three months and nine months ended September 30, 2003 and 2002.


				Three Months Ended				Nine Months Ended
				September 30,				September 30,

				2003		2002		2003		2002

Portfolio Asset Acquisition and Resolution:
	Revenues:
		Servicing fees		$	3,574	$	3,263	$	11,167	$	9,655
		Gain on resolution of Portfolio Assets			112		225		1,079		925
		Equity in earnings of investments			3,162		924		8,609		7,186
		Interest income			598		1,240		2,767		3,899
		Gain on sale of interest in equity investment			—		—		—		1,779
		Other			405		491		888		1,588

			Total		7,851		6,143		24,510		25,032
	Expenses:
		Interest and fees on notes payable			587		628		1,848		2,132
		Salaries and benefits			2,972		2,809		9,117		7,298
		Provision for loan and impairment losses			23		157		1		278
		Occupancy, data processing, communication and other			1,492		1,581		4,062		4,754

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


				Three Months Ended						Nine Months Ended
				September 30,						September 30,

				2003			2002			2003		2002

		Minority interest			(32	)		91			41		1,185

			Total		5,042			5,266			15,069		15,647

	Operating contribution before direct taxes			$	2,809		$	877		$	9,441	$	9,385

	Operating contribution, net of direct taxes			$	3,005		$	849		$	9,418	$	9,350

Consumer Lending:
	Revenues:
		Equity in earnings (loss) of investment		$	2,025		$	353		$	5,602	$	(495	)

			Total		2,025			353			5,602		(495	)
	Expenses:
		Interest and fees on notes payable			85			—			273		—
		Occupancy, data processing, communication and other			21			2			33		10
		Minority interest			404			71			1,119		(99	)

			Total		510			73			1,425		(89	)

	Operating contribution (loss) before direct taxes			$	1,515		$	280		$	4,177	$	(406	)

	Operating contribution (loss), net of direct taxes			$	1,491		$	280		$	4,118	$	(406	)

			Total operating contribution, net of direct taxes	$	4,496		$	1,129		$	13,536	$	8,944
Corporate Overhead:
	Corporate interest expense				1,269			939			3,629		2,608
	Salaries and benefits, occupancy, professional and other income and expenses, net				1,387			1,327			3,849		4,105

	Earnings (loss) from continuing operations			$	1,840		$	(1,137	)	$	6,058	$	2,231

All of the revenues from the consumer lending segment are attributable to domestic operations. Revenues from the Portfolio Asset acquisition and resolution segment are attributable to domestic and foreign operations as follows:


		Three Months				Nine Months
		Ended				Ended
		September 30,				September 30,

		2003		2002		2003		2002

Domestic		$	4,109	$	3,361	$	13,903	$	15,322
Mexico			1,869		2,379		7,089		5,746
France			1,873		401		3,518		3,957
Other foreign			—		2		—		7

	Total	$	7,851	$	6,143	$	24,510	$	25,032

Total assets for each of the segments and a reconciliation to total assets is as follows:


			September 30,		December 31,
			2003		2002

Portfolio acquisition and resolution assets
	Domestic		$	40,515	$	44,610
	Mexico			15,412		17,542
	France			20,069		15,592
Consumer assets				14,092		9,127
Deferred tax benefit, net				20,101		20,101
Cash				3,053		4,118
Other assets, net				8,827		7,602
Net assets of discontinued operations				6,346		7,764

		Total assets	$	128,415	$	126,456

(9) Income Taxes

Federal income taxes are provided at a 35% rate. The Company has substantial net operating losses (“NOLs”), which can be used to offset the tax liability associated with the Company’s pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing a valuation allowance to value the net deferred tax asset at a level, which more likely than not, will be realized. Realization is determined based on

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

management’s expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from its continuing operations prior to expiration of the NOLs. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset, net of the allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

(10) Commitments and Contingencies

Periodically, FirstCity, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. FirstCity does not believe that there is any proceeding threatened or pending against it, its subsidiaries, its affiliates or the Acquisition Partnerships which, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

In connection with the transactions contemplated by the Securities Purchase Agreement, effective August 1, 2000, Consumer Corp. and FirstCity Funding LP (“Funding LP”) contributed all of the assets utilized in the operations of the automobile finance operation to Drive pursuant to the terms of a Contribution and Assumption Agreement by and between Consumer Corp. and Drive, and a Contribution and Assumption Agreement by and between Funding LP and Drive (collectively, the “Contribution Agreements”). Drive assumed substantially all of the liabilities of the automobile finance operation as set forth in the Contribution Agreements.

In addition, in the Securities Purchase Agreement, the Company, Consumer Corp., Funding LP and Funding GP made various representations and warranties concerning (i) their respective organizations, (ii) the automobile finance operation conducted by Consumer Corp. and Funding LP, and (iii) the assets transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and IFA-LP from damages resulting from a breach of any representation or warranty contained in the Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligation under the Securities Purchase Agreement survives for a period of seven (7) years from August 25, 2000 (the “Closing Date”) with respect to tax-related representations and warranties and for thirty months from the Closing Date with respect to all other representations and warranties. Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the Securities Purchase Agreement until the aggregate amount payable exceeds $.25 million, and then only for the amount in excess of $.25 million in the aggregate; however certain representations and warranties are not subject to this $.25 million threshold. Pursuant to the terms of the Contribution Agreements, Consumer Corp. and Funding LP have agreed to indemnify Drive from any damages resulting in a material adverse effect on Drive resulting from breaches of representations or warranties, failure to perform, pay or discharge liabilities other than the assumed liabilities, or claims, lawsuits or proceedings resulting from the transactions contemplated by the Contribution Agreements. Pursuant to the terms of the Contribution Agreements, Drive has agreed to indemnify Consumer Corp. and Funding LP for any breach of any representation or warranty by Drive, the failure of Drive to discharge any assumed liability, or any claims arising out of any failure by Drive to properly service receivables after August 1, 2000. Liability for indemnification pursuant to the terms of the Contribution Agreements will not arise until the total of all losses with respect to such matters exceeds $.25 million and then only for the amount by which such losses exceed $.25 million; however this limitation will not apply to any breach of which the party had knowledge at the time of the Closing Date or any intentional breach by a party of any covenant or obligation under the Contribution Agreements.

The Company has agreed to indemnify BoS(USA) for up to 31% of losses, which might arise as a result of agreements BoS(USA) executed as a sponsor in connection with the securitizations completed by Drive. The Company also agreed to provide support in connection with securitizations by Consumer Corp. and Drive prior to the acquisition by BoS(USA) of the interest in Drive in August 2000. Management of the Company currently does not believe it is likely that FirstCity will be required to make payments on these indemnification agreements.

FirstCity is obligated to pay BOS(USA) an arrangement fee related to the $16 million loan equal to 20% of all proceeds and other amounts paid to FirstCity from any sale or other disposition (regardless of when such sale or other disposition occurs) of, and of all dividends and other distributions paid to FirstCity by Drive or its general partner (regardless of when such dividend or other distribution occurs) on, its 20% interest in Drive, in each case in excess of $16 million in the aggregate. As of September 30, 2003 the Company has not accrued any amount related to this contingent liability. The Company’s maximum loss exposure related to this

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

contingency is the amount of the arrangement fee that would be calculated in the event the fair value of Drive exceeds $16 million in the future.

The Company guarantees certain debt of a domestic Acquisition Partnership. In the event of default, the Company would assume losses related to this guarantee to the extent that they exceed the value of the collateral up to a maximum exposure of $.7 million as of September 30, 2003.

The Company has recently discovered that it has issued more shares of its Common Stock than it should have under the terms of one of the Company’s employee benefit plans. The FirstCity 1995 Employee Stock Purchase Plan (the “Plan”) provides that 100,000 shares of Common Stock were available to employees of the Company, subject to appropriate adjustment for stock dividends, stock splits or combination of shares, recapitalization or other changes in the Company’s capitalization. The Company registered 100,000 shares of Common Stock that were to be issued under the Plan and such additional shares of Common Stock as would become issuable pursuant to the antidilution provisions of the Plan pursuant to a registration statement on Form S-8. The Company has issued a total of 138,578 shares of Common Stock under the Plan. The additional 38,578 shares of Common Stock were issued during 2000, 2001 and 2003 (including 227 shares during the quarter ended September 30, 2003) as a result of a misinterpretation of the adjustment provision by the employees administering the Plan.

The average exercise price of options for the 38,578 additional shares issued under the Plan was $1.55 and the highest exercise price of options for such shares was $3.37. The closing price of the Common Stock as of November 11, 2003 was $4.27. The Company is currently evaluating the legal issues involved with this over-issuance of 38,578 shares of Common Stock in order to determine whether any securities laws have been violated, and, if so, how it will comply with such laws.

WAMCO PARTNERSHIPS

Combined Financial Statements
September 30, 2003
(Unaudited)

WAMCO PARTNERSHIPS

COMBINED BALANCE SHEETS
(Unaudited)


		September 30,		December 31,
		2003		2002

		(Dollars in thousands)
ASSETS
Cash		$	12,238	$	13,035
Portfolio Assets, net			151,987		147,686
Investments in partnerships			2,350		2,302
Investments in trust certificates			—		7,883
Deferred profit sharing			19,187		17,671
Other assets, net			767		815

		$	186,529	$	189,392

LIABILITIES AND PARTNERS’ CAPITAL
Notes payable (including $43,739 and $46,137 to affiliates in 2003 and 2002, respectively)		$	77,974	$	79,891
Deferred compensation			22,194		21,706
Other liabilities (including $1,564 and $1,862 to affiliates in 2003 and 2002, respectively)			3,044		3,392

	Total liabilities		103,212		104,989
Commitments and contingencies (note 8)
Preferred equity			—		4,344
Partners’ capital			83,317		80,059

		$	186,529	$	189,392

See accompanying notes to combined financial statements.

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF OPERATIONS
(Unaudited)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

		(Dollars in thousands)
Proceeds from resolution of Portfolio Assets		$	17,563		$	12,382		$	64,048		$	117,983
Cost of Portfolio Assets resolved			11,000			9,084			43,191			91,843

	Gain on resolution of Portfolio Assets		6,563			3,298			20,857			26,140
Interest income on performing Portfolio Assets			1,262			1,926			4,194			9,515
Interest and fees on notes payable — affiliates			(589	)		(839	)		(2,109	)		(4,312	)
Interest and fees on notes payable — other			(394	)		(592	)		(1,361	)		(1,496	)
Provision for loan losses			(378	)		(108	)		(904	)		(207	)
Servicing fees — affiliate			(762	)		(665	)		(2,581	)		(3,191	)
General, administrative and operating expenses			(1,203	)		(1,274	)		(4,156	)		(3,927	)
Other income, net			277			464			1,092			1,414

	Net earnings	$	4,776		$	2,210		$	15,032		$	23,936

See accompanying notes to combined financial statements.

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
(Unaudited)


								Class B
		Class A Equity						Equity

		General			Limited			Limited			General			Limited
		Partners			Partners			Partners			Partners			Partners			Total

								(Dollars in thousands)
Balance at December 31, 2001		$	131		$	6,402		$	1,108		$	1,082		$	81,526		$	90,249
	Contributions		—			—			—			159			15,812			15,971
	Distributions		(43	)		(2,119	)		(126	)		(605	)		(51,305	)		(54,198	)
	Comprehensive income:
	Net earnings		28			1,376			76			300			25,761			27,541
	Unrealized net gain on securitizations		7			351			5			3			130			496

	Total comprehensive income		35			1,727			81			303			25,891			28,037

Balance at December 31, 2002			123			6,010			1,063			939			71,924			80,059
	Contributions		—			—			—			224			19,555			19,779
	Distributions		(85	)		(4,159	)		(312	)		(353	)		(25,205	)		(30,114	)
	Comprehensive income:
	Net earnings		35			1,738			55			222			12,982			15,032
	Unrealized net loss on securitizations		(21	)		(1,018	)		(5	)		(17	)		(378	)		(1,439	)

	Total comprehensive income		14			720			50			205			12,604			13,593

Balance at September 30, 2003		$	52		$	2,571		$	801		$	1,015		$	78,878		$	83,317

See accompanying notes to combined financial statements.

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)


				Nine Months Ended
				September 30,

				2003			2002

				(Dollars in thousands)
Cash flows from operating activities:
	Net earnings			$	15,032		$	23,936
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Amortization of loan origination and commitment fees			335			414
		Amortization of deferred profit sharing			1,796			661
		Accretion of unrealized gain on trust certificates			(197	)		(203	)
		Provision for loan losses			904			207
		Gain on resolution of Portfolio Assets			(20,857	)		(26,140	)
		Purchase of Portfolio Assets			(49,734	)		(12,639	)
		Advances on Portfolio Asset lines of credit			(39,127	)		—
		Receipts on Portfolio Assets lines of credit			40,033			—
		Capitalized costs on Portfolio Assets			(1,170	)		(3,662	)
		Capitalized interest on Portfolio Assets			(742	)		(654	)
		Proceeds from resolution of Portfolio Assets			64,048			117,983
		Principal payments on Performing Portfolio Assets			8,246			20,554
		Increase in deferred profit sharing			(3,312	)		(2,704	)
		Increase in other assets			(225	)		(17	)
		Increase in deferred compensation			3,312			2,704
		Deferred compensation paid			(2,824	)		(1,730	)
		Decrease in other liabilities			(348	)		(849	)

			Net cash provided by operating activities		15,170			117,861
Cash flows from investing activities:
	Contribution to subsidiaries				(48	)		—
	Change in trust certificates				676			1,291

			Net cash provided by investing activities		628			1,291
Cash flows from financing activities:
	Borrowing of debt – affiliates				31,569			24,564
	Borrowing of debt				26,000			28,500
	Repayment of debt – affiliates				(38,126	)		(104,994	)
	Repayment of debt				(25,519	)		(30,640	)
	Repayment of preferred equity				(184	)		(192	)
	Capital contributions				19,779			8,198
	Capital distributions				(30,114	)		(50,016	)

			Net cash used in financing activities		(16,595	)		(124,580	)

Net decrease in cash					(797	)		(5,428	)
Cash at beginning of period					13,035			13,397

Cash at end of period				$	12,238		$	7,969

Supplemental disclosure of cash flow information:

Cash paid for interest was $2,972 and $5,460 for the nine months ended September 30, 2003 and 2002, respectively.

Unrealized net gain (loss) on trust certificates recorded in partners’ capital was $(1,242) and $829 for the nine months ended September 30, 2003 and 2002, respectively.

See accompanying notes to combined financial statements.

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 2003
(Dollars in thousands)
(Unaudited)

(1) Basis of Presentation

The unaudited combined financial statements of the WAMCO Partnerships reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the combined financial position at September 30, 2003, and the results of operations for the three-month and nine-month periods ended September 30, 2003 and 2002, and cash flows for the nine-month periods ended September 30, 2003 and 2002.

(2) Organization and Partnership Agreements

The combined financial statements represent domestic limited partnerships and limited liability companies (“Acquisition Partnerships” or “Partnerships”) and include WAMCO III, Ltd. (“WAMCO III”); WAMCO IX, Ltd.; WAMCO XXIV, Ltd.; WAMCO XXV, Ltd.; WAMCO XXVI Ltd.; WAMCO XXVII Ltd.; WAMCO XXVIII Ltd. (“WAMCO XXVIII”); WAMCO XXIX, Ltd.; WAMCO XXX, Ltd.; WAMCO 31, Ltd. (“WAMCO 31”), Calibat Fund, LLC; First B Realty, Ltd.; First Paradee, Ltd.; FirstStreet Investments LLC (“FirstStreet”); FC Properties, Ltd. (“FC Properties”); and Community Development Investment, LLC. FirstCity Financial Corporation or its subsidiaries, FirstCity Commercial Corporation and FirstCity Holdings Corporation (together “FirstCity”), own limited partnership interests and participate as equity owners in the general partners in common with Cargill Financial Services, Inc. in all of the Partnerships. FC Properties and WAMCO XXVIII are considered significant subsidiaries of FirstCity.

The Partnerships were formed to acquire, hold and dispose of Portfolio Assets acquired from the Federal Deposit Insurance Corporation, Resolution Trust Corporation and other nongovernmental agency sellers, pursuant to certain purchase agreements or assignments of such purchase agreements. In accordance with the purchase agreements, the Partnerships retain certain rights of return regarding the assets in the event of a breach of a representation or a warranty related to an asset.

Generally, the partnership agreements of the Partnerships provide for certain preferences as to the distribution of cash flows. Proceeds from disposition of and payments received on the Portfolio Assets are allocated based on the partnership and other agreements which ordinarily provide for the payment of interest and mandatory principal installments on outstanding debt before payment of intercompany servicing fees and return of capital and restricted distributions to partners.

The partnership agreement for WAMCO III provides for Class A and Class B Equity partners. The Class A Equity partners are WAMCO III of Texas, Inc., FirstCity Commercial Corporation and CFSC Capital Corp. II, and the Class B Equity partner is CFSC Capital Corp. II. The Class B Equity limited partner is allocated 20% net income or loss, excluding equity earnings in FirstStreet, recognized by the partnership prior to allocation of net income or loss to the Class A Equity partners. Net earnings in FirstStreet are allocated to the Class A Equity partners in proportion to their respective ownership percentages. Net income or loss is credited or charged to the Class A Equity partners’ capital accounts in proportion to their respective capital account balances after the 20% allocation to the Class B Equity limited partner. Distributions are allocated using the same methodology as net income or loss. The Class B Equity limited partner is not required to make capital contributions.

During September 2003, WAMCO XXIX, Ltd. was merged with and into WAMCO XXVII, Ltd. with WAMCO XXVII, Ltd being the surviving entity. Also during September 2003, Community Development Investment, LLC. was merged with and into WAMCO XXIV, Ltd. with WAMCO XXIV, Ltd being the surviving entity.

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(3) Combining Financial Statements

FC Properties and WAMCO XXVIII are considered significant subsidiaries of FirstCity. The following tables summarize the combining balance sheets and changes in partners’ capital of the WAMCO Partnerships as of September 30, 2003 and December 31, 2002, the related combining statements of operations for the three months and nine months ended September 30, 2003 and 2002, and combining cash flows for the nine months ended September 30, 2003 and 2002.

COMBINING BALANCE SHEETS
September 30, 2003


		FC		WAMCO		Other
		Properties		XXVIII		Partnerships		Combined

				(Dollars in thousands)
				(Unaudited)
ASSETS
Cash		$	1,316	$	924	$	9,998	$	12,238
Portfolio Assets, net			13,795		21,887		116,305		151,987
Investments in partnerships			—		—		2,350		2,350
Deferred profit sharing			19,187		—		—		19,187
Other assets, net			12		175		580		767

		$	34,310	$	22,986	$	129,233	$	186,529

LIABILITIES AND PARTNERS’ CAPITAL
Notes payable		$	—	$	9,933	$	68,041	$	77,974
Deferred compensation			22,194		—		—		22,194
Other liabilities			349		1,227		1,468		3,044

	Total liabilities		22,543		11,160		69,509		103,212
Partners’ capital			11,767		11,826		59,724		83,317

		$	34,310	$	22,986	$	129,233	$	186,529

Notes payable owed to affiliates included in above balances		$	—	$	—	$	43,739	$	43,739
Other liabilities owed to affiliates included in above balances		$	—		750		814		1,564

COMBINING BALANCE SHEETS
December 31, 2002


		FC		WAMCO		Other
		Properties		XXVIII		Partnerships		Combined

				(Dollars in thousands)
				(Unaudited)
ASSETS
Cash		$	1,484	$	2,440	$	9,111	$	13,035
Portfolio Assets, net			15,182		32,341		100,163		147,686
Investments in partnerships			—		—		2,302		2,302
Investments in trust certificates			—		—		7,883		7,883
Deferred profit sharing			17,671		—		—		17,671
Other assets, net			5		346		464		815

		$	34,342	$	35,127	$	119,923	$	189,392

LIABILITIES AND PARTNERS’ CAPITAL
Notes payable		$	—	$	18,882	$	61,009	$	79,891
Deferred compensation			21,706		—		—		21,706
Other liabilities			540		1,301		1,551		3,392

	Total liabilities		22,246		20,183		62,560		104,989
Preferred equity			—		—		4,344		4,344
Partners’ capital			12,096		14,944		53,019		80,059

		$	34,342	$	35,127	$	119,923	$	189,392

Notes payable owed to affiliates included in above balances		$	—	$	—	$	46,137	$	46,137
Other liabilities owed to affiliates included in above balances			20		1,196		646		1,862

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

COMBINING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2003


		FC			WAMCO			Other
		Properties			XXVIII			Partnerships			Combined

					(Dollars in thousands)
					(Unaudited)
Proceeds from resolution of Portfolio Assets		$	2,682		$	1,998		$	12,883		$	17,563
Cost of Portfolio Assets resolved			461			1,553			8,986			11,000

Gain on resolution of Portfolio Assets			2,221			445			3,897			6,563
Interest income on performing Portfolio Assets			—			262			1,000			1,262
Interest and fees expense – affiliates			—			(169	)		(420	)		(589	)
Interest and fees expense – other			—			(145	)		(249	)		(394	)
Provision for loan losses			(1	)		(32	)		(345	)		(378	)
Service fees – affiliate			(80	)		(99	)		(583	)		(762	)
General, administrative and operating expenses			(432	)		(288	)		(483	)		(1,203	)
Other income, net			—			2			275			277

	Net earnings	$	1,708		$	(24	)	$	3,092		$	4,776

COMBINING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2002


		FC			WAMCO			Other
		Properties			XXVIII			Partnerships			Combined

					(Dollars in thousands)
		(Unaudited)
Proceeds from resolution of Portfolio Assets		$	99		$	6,818		$	5,465		$	12,382
Cost of Portfolio Assets resolved			9			4,990			4,085			9,084

Gain on resolution of Portfolio Assets			90			1,828			1,380			3,298
Interest income on performing Portfolio Assets			—			611			1,315			1,926
Interest and fees expense – affiliates			—			(195	)		(644	)		(839	)
Interest and fees expense – other			(9	)		(321	)		(262	)		(592	)
Provision for loan losses			—			—			(108	)		(108	)
Service fees – affiliate			(3	)		(312	)		(350	)		(665	)
General, administrative and operating expenses			(413	)		(602	)		(259	)		(1,274	)
Other income, net			6			7			451			464

	Net earnings	$	(329	)	$	1,016		$	1,523		$	2,210

See accompanying notes to combined financial statements.

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

COMBINING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2003


		FC			WAMCO			Other
		Properties			XXVIII			Partnerships			Combined

					(Dollars in thousands)
					(Unaudited)
Proceeds from resolution of Portfolio Assets		$	8,654		$	11,255		$	44,139		$	64,048
Cost of Portfolio Assets resolved			1,954			8,467			32,770			43,191

Gain on resolution of Portfolio Assets			6,700			2,788			11,369			20,857
Interest income on performing Portfolio Assets			—			1,040			3,154			4,194
Interest and fees expense – affiliates			—			(495	)		(1,614	)		(2,109	)
Interest and fees expense – other			—			(555	)		(806	)		(1,361	)
Provision for loan losses			(1	)		(206	)		(697	)		(904	)
Service fees – affiliate			(259	)		(481	)		(1,841	)		(2,581	)
General, administrative and operating expenses			(2,533	)		(490	)		(1,133	)		(4,156	)
Other income, net			—			7			1,085			1,092

	Net earnings	$	3,907		$	1,608		$	9,517		$	15,032

COMBINING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2002


		FC			WAMCO			Other
		Properties			XXVIII			Partnerships			Combined

					(Dollars in thousands)
					(Unaudited)
Proceeds from resolution of Portfolio Assets		$	5,819		$	43,141		$	69,023		$	117,983
Cost of Portfolio Assets resolved			1,698			31,026			59,119			91,843

Gain on resolution of Portfolio Assets			4,121			12,115			9,904			26,140
Interest income on performing Portfolio Assets			—			2,304			7,211			9,515
Interest and fees expense – affiliates			—			(1,625	)		(2,687	)		(4,312	)
Interest and fees expense – other			(9	)		(331	)		(1,156	)		(1,496	)
Provision for loan losses			(17	)		—			(190	)		(207	)
Service fees – affiliate			(175	)		(1,385	)		(1,631	)		(3,191	)
General, administrative and operating expenses			(1,571	)		(1,270	)		(1,086	)		(3,927	)
Other income, net			16			29			1,369			1,414

	Net earnings	$	2,365		$	9,837		$	11,734		$	23,936

See accompanying notes to combined financial statements.

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

COMBINING STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL


		FC			WAMCO			Other
		Properties			XXVIII			Partnerships			Combined

					(Dollars in thousands)
					(Unaudited)
Balance at December 31, 2001		$	12,024		$	24,810		$	53,415		$	90,249
	Contributions		—			—			15,971			15,971
	Distributions		(2,596	)		(20,668	)		(30,934	)		(54,198	)
	Net earnings		2,668			10,802			14,071			27,541
	Unrealized net gain on securitizations		—			—			496			496

	Total comprehensive income		2,668			10,802			14,567			28,037

Balance at December 31, 2002			12,096			14,944			53,019			80,059
	Contributions		—			—			19,779			19,779
	Distributions		(4,236	)		(4,726	)		(21,152	)		(30,114	)
	Net earnings		3,907			1,608			9,517			15,032
	Unrealized net loss on securitizations		—			—			(1,439	)		(1,439	)

	Total comprehensive income		3,907			1,608			8,078			13,593

Balance at September 30, 2003		$	11,767		$	11,826		$	59,724		$	83,317

COMBINING STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2003


				FC			WAMCO			Other
				Properties			XXVIII			Partnerships			Combined

							(Dollars in thousands)
							(Unaudited)
Cash flows from operating activities:
	Net earnings			$	3,907		$	1,608		$	9,517		$	15,032
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Amortization of loan origination and commitment fees			—			131			204			335
		Amortization of deferred profit sharing			1,796			—			—			1,796
		Accretion of unrealized gain on trust certificates			—			—			(197	)		(197	)
		Provision for loan losses			1			206			697			904
		Gain on resolution of Portfolio Assets			(6,700	)		(2,788	)		(11,369	)		(20,857	)
		Purchase of Portfolio Assets			—			—			(49,734	)		(49,734	)
		Advances on Portfolio Asset lines of credit			—			—			(39,127	)		(39,127	)
		Receipts on Portfolio Asset lines of credit			—			—			40,033			40,033
		Capitalized costs on Portfolio Assets			(568	)		(258	)		(344	)		(1,170	)
		Capitalized interest on Portfolio Assets			—			(81	)		(661	)		(742	)
		Proceeds from resolution of Portfolio Assets			8,654			11,255			44,139			64,048
		Principal payments on Performing Portfolio Assets			—			2,120			6,126			8,246
		Increase in deferred profit sharing			(3,312	)		—			—			(3,312	)
		Decrease (increase) in other assets			(7	)		40			(258	)		(225	)
		Increase in deferred compensation			3,312			—			—			3,312
		Deferred compensation paid			(2,824	)		—			—			(2,824	)
		Decrease in other liabilities			(191	)		(74	)		(83	)		(348	)

			Net cash provided by (used in) operating activities		4,068			12,159			(1,057	)		15,170
Cash flows from investing activities:
	Contribution to subsidiaries				—			—			(48	)		(48	)
	Change in trust certificates				—			—			676			676

			Net cash provided by investing activities		—			—			628			628
Cash flows from financing activities:
	Borrowing of debt – affiliates				—			—			31,569			31,569
	Borrowing of debt				—			—			26,000			26,000
	Repayment of debt – affiliates				—			—			(38,126	)		(38,126	)
	Repayment of debt				—			(8,949	)		(16,570	)		(25,519	)
	Repayment of preferred equity				—			—			(184	)		(184	)
	Capital contributions				—			—			19,779			19,779
	Capital distributions				(4,236	)		(4,726	)		(21,152	)		(30,114	)

			Net cash provided by (used in) financing activities		(4,236	)		(13,675	)		1,316			(16,595	)

Net increase (decrease) in cash					(168	)		(1,516	)		887			(797	)
Cash at beginning of period					1,484			2,440			9,111			13,035

Cash at end of period				$	1,316		$	924		$	9,998		$	12,238

Supplemental disclosure of cash flow information
Cash paid for interest				$	—		$	960		$	2,012		$	2,972

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

COMBINING STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002


				FC			WAMCO			Other
				Properties			XXVIII			Partnerships			Combined

				(Dollars in thousands)
				(Unaudited)
Cash flows from operating activities:
	Net earnings			$	2,365		$	9,837		$	11,734		$	23,936
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Amortization of loan origination and commitment fees			—			44			370			414
		Amortization of deferred profit sharing			661			—			—			661
		Accretion of unrealized gain on trust certificates			—			—			(203	)		(203	)
		Provision for loan losses			17			—			190			207
		Gain on resolution of Portfolio Assets			(4,121	)		(12,115	)		(9,904	)		(26,140	)
		Purchase of Portfolio Assets			—			—			(12,639	)		(12,639	)
		Capitalized costs on Portfolio Assets			(1,381	)		(2,134	)		(147	)		(3,662	)
		Capitalized interest on Portfolio Assets			—			(92	)		(562	)		(654	)
		Proceeds from resolution of Portfolio Assets			5,819			43,141			69,023			117,983
		Principal payments on Performing Portfolio Assets			—			5,396			15,158			20,554
		Increase in deferred profit sharing			(2,704	)		—			—			(2,704	)
		(Increase) decrease in other assets			(7	)		(304	)		294			(17	)
		Increase in deferred compensation			2,704			—			—			2,704
		Deferred compensation paid			(1,730	)		—			—			(1,730	)
		Increase (decrease) in other liabilities			(61	)		179			(967	)		(849	)

			Net cash provided by operating activities		1,562			43,952			72,347			117,861
Cash flows from investing activities:
	Change in trust certificates				—			—			1,291			1,291

			Net cash provided by investing activities		—			—			1,291			1,291
Cash flows from financing activities:
	Borrowing of debt – affiliates				—			—			24,564			24,564
	Borrowing of debt				—			28,500			—			28,500
	Repayment of debt – affiliates				—			(47,964	)		(57,030	)		(104,994	)
	Repayment of debt				—			(7,380	)		(23,260	)		(30,640	)
	Repayment of preferred equity				—			—			(192	)		(192	)
	Capital contributions				—			—			8,198			8,198
	Capital distributions				(2,595	)		(19,099	)		(28,322	)		(50,016	)

			Net cash used in financing activities		(2,595	)		(45,943	)		(76,042	)		(124,580	)

Net decrease in cash					(1,033	)		(1,991	)		(2,404	)		(5,428	)
Cash at beginning of period					1,942			3,510			7,945			13,397

Cash at end of period				$	909		$	1,519		$	5,541		$	7,969

Supplemental disclosure of cash flow information
Cash paid for interest				$	—		$	1,997		$	3,463		$	5,460

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(3) Portfolio Assets

Portfolio Assets are summarized as follows:


		September 30, 2003

		FC		WAMCO			Other
		Properties		XXVIII			Partnerships			Combined

Non-performing Portfolio Assets		$	—	$	38,969		$	154,110		$	193,079
Performing Portfolio Assets			—		15,017			57,501			72,518
Real estate Portfolios			13,795		—			4,182			17,977

	Total Portfolio Assets		13,795		53,986			215,793			283,574
Discount required to reflect Portfolio Assets at carrying value			—		(32,099	)		(99,488	)		(131,587	)

	Portfolio Assets, net	$	13,795	$	21,887		$	116,305		$	151,987


		December 31, 2002

		FC		WAMCO			Other
		Properties		XXVIII			Partnerships			Combined

Non-performing Portfolio Assets		$	—	$	60,386		$	141,468		$	201,854
Performing Portfolio Assets			—		20,404			59,461			79,865
Real estate Portfolios			15,182		—			1,129			16,311

	Total Portfolio Assets		15,182		80,790			202,058			298,030
Discount required to reflect Portfolio Assets at carrying value			—		(48,449	)		(101,895	)		(150,344	)

	Portfolio Assets, net	$	15,182	$	32,341		$	100,163		$	147,686

Portfolio Assets are pledged to secure non-recourse notes payable. During the second quarter of 2002, three Partnerships (WAMCO XXVII, WAMCO XXVIII and WAMCO XXIX) completed a bulk loan sale of performing and non-performing Portfolio Assets with a carrying value of $59,149. Total proceeds on the sale were $71,128 generating a gain on resolution of Portfolio Assets of $11,979.

(4) Interest Related to Residual Interest in Trust Certificates

Residual certificates held by FirstStreet to which FirstStreet receives all the economic benefits and risks consist of retained interests in the amount of $0 and $7,883 at September 30, 2003 and December 31, 2002, respectively. FirstStreet recognized interest income on these certificates utilizing a yield of 21.5% for eight months ended August 31, 2003 and 20.9% for the nine months ended September 30, 2002. During September 2003 FirstStreet purchased the underlying assets from the trust. At the time of this purchase, these assets were included in the Performing Portfolio Assets at their remaining historical cost of $5,902 and the remaining balance for the adjustment to market value of $905 was reversed against its corresponding balance of unrealized net gain on securitizations in the FirstStreet’s equity.

(5) Deferred Profit Sharing and Deferred Compensation

In connection with the formation of FC Properties, an agreement was entered into which provided for potential payments to the project manager based on a percentage of total estimated sales. An equal amount of deferred profit participation and deferred compensation is recorded based on such estimates with the deferred profit participation being amortized into expense in proportion to actual sales realized. No profit participation was paid until the limited partners recognized a 20% return on their investment. At September 30, 2003 and December 31, 2002, the estimated liability for this profit participation was $22,194 and $21,706, respectively, and was included in deferred compensation in the accompanying combined balance sheets. Additionally, amortization of $1,796 and $661 was recognized during the nine months ended September 30, 2003 and 2002, respectively, and has been included in general, administrative and operating expenses in the accompanying combined statements of operations.

Effective March 31, 2001, the limited partners’ 20% return on their investment was met. Consequently, payments against the deferred compensation liability began in April 2001 and will continue thereafter. Payments in the amount of $2,824 and 1,730 were made to the project manager during the nine months ended September 30, 2003 and 2002, respectively.

(6) Transactions with Affiliates

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

Under the terms of the various servicing agreements between the Partnerships and FirstCity, FirstCity receives a servicing fee based on proceeds from resolution of the Portfolio Assets for processing transactions on the Portfolio Assets and for conducting settlement, collection and other resolution activities. Included in the accompanying combined statements of operations are $2,581 and $3,191 in servicing fees incurred by the Partnerships during the nine months ended September 30, 2003 and 2002, respectively.

(7) Preferred Equity

In 1999, CFSC Capital Corp. XXX contributed $3,556 as preferred equity in Community Development Investment, LLC. This preferred equity was converted to a note payable on August 30, 2003. The balance converted was $4,159. The note agreement has terms similar to the preferred equity and a maturity date of August 30, 2006. The note agreement requires interest to be paid at a rate equal to the London Interbank Offering Rate (1.12% at September 30, 2003) plus 5%. Interest in the amount of $8 and $11 has been accrued at September 30, 2003 and December 31, 2002, respectively. Interest expense on the preferred equity totaled $180 (plus additional $21 after being converted to note payable) and $237 during the nine months ended September 30, 2003 and 2002, respectively. This interest expense is included in interest and fees on notes payable — affiliates in the accompanying combined statements of operations.

On July 1, 2003, the Partnerships adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for how an issuer measures certain financial instruments with characteristics of both liabilities and equity and classifies them in its statement of financial position. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. At September 30, 2003, SFAS 150 had no impact on the combined financial statements since the preferred equity was converted to a note payable.

(8) Commitments and Contingencies

WAMCO 31 owns a pool of loans that includes three lines of credit with a combined outstanding balance of $3.4 million at September 30, 2003. The maximum commitment associated with these lines was $9.4 million at September 30, 2003. After reserves and borrowing base requirements, the total availability was $1.9 million at September 30, 2003.

The Partnerships are involved in various legal proceedings in the ordinary course of business. In the opinion of management, the resolution of such matters will not have a material adverse impact on the combined financial position, results of operations or liquidity of the Partnerships.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

FirstCity is a financial services company engaged in the acquisition and resolution of portfolios of assets or single assets (collectively referred to as “Portfolio Assets”). The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such portfolios in an effort to maximize the present value of the ultimate cash recoveries. FirstCity also has an equity investment in Drive Financial Services LP (“Drive”), which is engaged in the acquisition, origination, warehousing, securitization and servicing of sub-prime automobile receivables.

The Company’s financial results are affected by many factors including levels of and fluctuations in interest rates, fluctuations in the underlying values of real estate and other assets, the timing of and ability to liquidate assets, and the availability and prices for loans and assets acquired in all of the Company’s businesses. The Company’s business and results of operations are also affected by the availability of financing with terms acceptable to the Company and the Company’s access to capital markets, including the securitization markets.

As a result of the significant period to period fluctuations in the revenues and earnings and losses of the Company’s Portfolio Asset acquisition and resolution business, and the type of securitization transactions of Drive, period to period comparisons of the Company’s results of continuing operations may not be meaningful.

The Company reported earnings from continuing operations for the three months and nine months ended September 30, 2003 of $1.8 million and $6.1 million, respectively. Net earnings to common stockholders were $1.8 million or $.16 per share on a basic and diluted basis for the quarter. For the nine months ended September 30, 2003, net earnings to common stockholders were $5.5 million or $.49 per share on a basic and diluted basis.


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Portfolio Asset Acquisition and Resolution		$	3,005		$	849		$	9,418		$	9,350
Consumer			1,491			280			4,118			(406	)
Corporate interest			(1,269	)		(939	)		(3,629	)		(2,608	)
Corporate overhead			(1,387	)		(1,327	)		(3,849	)		(4,105	)

	Earnings (loss) from continuing operations		1,840			(1,137	)		6,058			2,231
Accrued preferred dividends			—			(642	)		(133	)		(1,926	)
Loss from discontinued operations			—			(5,700	)		(420	)		(7,700	)

	Net earnings (loss) to common shareholders	$	1,840		$	(7,479	)	$	5,505		$	(7,395	)

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.

Third Quarter 2003 Compared to Third Quarter 2002

The Company reported earnings from continuing operations of $1.8 million in the third quarter of 2003. Net earnings to common stockholders were $1.8 million in the third quarter of 2003 compared to a loss of $7.5 million in the third quarter of 2002. On a per share basis, basic and diluted net earnings attributable to common stockholders were $.16 in the third quarter of 2003 compared to a loss of $.49 in the third quarter of 2002.

Portfolio Asset Acquisition and Resolution

The operating contribution from the Portfolio Asset acquisition and resolutions segment was $3.0 million in the third quarter of 2003 compared to $.8 million in the third quarter of 2002. FirstCity purchased $39 million of Portfolio Assets during the third quarter of 2003 through the Acquisition Partnerships, compared to $51 million in acquisitions in the third quarter of 2002. FirstCity’s investment in these acquisitions was $3.9 million and $2.6 million in the third quarter of 2003 and 2002, respectively. There were no purchases of wholly owned Portfolio Assets during either period. FirstCity’s quarter end investment in wholly owned Portfolio Assets

decreased to $4.1 million from $10.5 million at September 30, 2003 and 2002, respectively, with regular collections and sales from those Portfolios.

Servicing fee revenues. Servicing fee revenues were flat from period to period. Service fees from the Mexican partnerships (including incentive servicing fees) increased $.4 million or 22% from $2.5 million in the third quarter of 2002 due to increased servicing responsibilities in Mexico as a result of bringing the majority of the servicing responsibilities in-house and not using third party servicers to provide the servicing function for the Mexican partnerships. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. Service fees from the domestic Acquisition Partnerships decreased from $1.2 million in the third quarter of 2002 to $1.1 million in 2003.

Gain on resolution of Portfolio Assets. The net gain on resolution of Portfolio Assets decreased from $.2 million in the third quarter of 2002 to $.1 million in the third quarter of 2003. The weighted average gross profit percentage on the resolution of Portfolio Assets in the third quarter of 2003 declined to 6% as compared to 37% in the third quarter of 2002 primarily as a result of a payoff of five performing loans generating proceeds of $1.5 million and no gain.

Equity in earnings of investments. Equity in earnings of Acquisition Partnerships increased 230% to $3.0 million in the third quarter of 2003 compared to $.9 million in the third quarter of 2002. The Acquisition Partnerships reflected a combined loss of $7.9 million in the third quarter of 2003 compared to a combined loss of $4.8 million in the third quarter of 2002. Following is a discussion of equity earnings by geographic region.

• Domestic — Equity in earnings of domestic Acquisition Partnerships increased 89% to $2.5 million in the third quarter of 2003 from $1.3 million in 2002 primarily due to a $.5 million increase in equity earnings from MinTex Investment Partners LP that began operations in 2002 and $.5 million in equity earnings from one WAMCO partnership that began operations in 2003.

• Mexico — Equity in losses of Mexican Acquisition Partnerships were $1.1 million in the third quarter of 2003 compared to $.8 million in 2002. These partnerships reflected losses of $24.4 million in the third quarter of 2003 compared to a $10.5 million loss in 2002. The partnerships recorded foreign exchange losses of $14 million in the third quarter of 2003 compared to foreign exchange losses of $8 million in 2002. Interest expense of $12 million and $13 million were recorded during the third quarter of 2003 and 2002, respectively. This interest is owed to affiliates of the investors of these partnerships, of which FirstCity recorded $.4 million and $.9 million, respectively, as interest income. Excluding effects of foreign currency transactions and interest expense, these partnerships reflected adjusted net earnings of $2.1 million in the third quarter of 2003 compared to $10.0 million in 2002, which is primarily due to the Mexican partnerships receiving $4.6 million or 22% less collections in the third quarter of 2003 compared to 2002. Also, in the third quarter of 2002, two Mexico partnerships recorded approximately $9 million of deferred tax income as a result of net operating losses in those entities. The Company continues to see opportunities to invest in Mexico that are favorable taking into consideration the currency risk and continues to monitor the foreign currency exposure on a daily basis and evaluate the advisability of hedging these investments through analysis of currency forecasts, the cost of hedging those investments and the available liquidity to do so.

• France — Equity in earnings of Acquisition Partnerships located in France increased from $.4 million in the third quarter of 2002 to $1.6 million in the third quarter of 2003. This increase is principally due to the addition of three French Partnerships during 2002 and two in 2003, which accounted for $1.0 million in equity in earnings in the first nine months of 2003.

Interest income. Interest income decreased 52% from $1.2 million in the third quarter of 2002 to $.6 million in the third quarter of 2003 primarily due to the Company amending three loan agreements from Acquisition Partnerships located in Mexico to provide for no interest to be payable with respect to periods after the effective date of the amendment. This change had no impact on the consolidated net earnings as the effect is offset through equity earnings in these Partnerships.

Other income. Other income was flat from quarter to quarter.

Expenses. Operating expenses were relative flat from quarter to quarter.

Interest and fees on notes payable was flat from quarter to quarter. The average debt for the quarter decreased to $27.1 million in the third quarter of 2003 from $28.6 million in the third quarter of 2002.

Salaries and benefits increased $.2 million, or 6%, due to increased servicing personnel in Mexico. Total personnel within the Portfolio Asset acquisition and resolution segment increased from 172 to 236 at September 30, 2002 and 2003, respectively, with the

personnel in Mexico increasing from 97 to 173. FirstCity also recorded additional servicing fee revenues with the increased servicing responsibilities in Mexico.

The provision for loan and impairment losses totaled $23,000 in the third quarter of 2003 compared to $157,000 in the third quarter of 2002.

Impairment on performing Portfolio Assets is measured based on the present value of the expected future cash flows in the aggregate discounted at the loans’ risk adjusted rates, which approximates the effective interest rates, or the fair value of the collateral, less estimated selling costs, if any loans are collateral dependent and foreclosure is probable. Impairment on nonperforming Portfolios is evaluated by analyzing the expected future cash flows from the underlying assets within each Portfolio. The expected future cash flows are reviewed monthly and adjusted as deemed necessary. Changes in various factors including, but not limited to, economic conditions, deterioration of collateral values, deterioration in the borrower’s financial condition and other conditions described in the risk factors discussed later in this document, could have a negative impact on the estimated future cash flows of the Portfolio. Significant decreases in estimated future cash flows can reduce a Portfolio’s present value to below the Company’s carrying value of that Portfolio, causing impairment.

For real estate Portfolios, the evaluation of impairment is determined quarterly based on the review of the estimated future cash receipts less estimated costs to sell, which represents the net realizable value of the real estate Portfolio. A valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified.

There were no provisions recorded on loans receivable from Acquisition Partnerships during the third quarter of 2003 and 2002. The loans receivable from the Mexican partnerships are secured by the assets/loans acquired by the Mexican partnerships with purchase money loans provided by affiliates of the investors in the Mexican partnerships to purchase the asset pools held in those entities. These loans are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each pool to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment were necessary.

Occupancy, data processing, communication and other expenses was flat from quarter to quarter.

Minority interest income was $32,000 in the third quarter of 2003 compared to expense of $91,000 in 2002. In December 2002, FirstCity acquired the minority interest in FirstCity Holdings as part of a recapitalization, and in April 2003, acquired the minority interest in MCSFC LP.

Consumer Lending

FirstCity’s consumer lending segment consists of the Company’s net investment in Drive. The operating contribution for the third quarter of 2003 was $1.5 million compared to $.3 million during the third quarter of 2002. Drive recorded net income of $5.2 million in the third quarter of 2003 compared to $.9 million in the third quarter of 2002. Drive’s inventory of retail installments contracts has grown from $311 million at September 30, 2002 to $578 million at September 30, 2003. Consequently, net interest margin after provision for credit losses and impairments at Drive rose from $13.2 million to $21.1 million during the third quarter of 2002 and 2003, respectively. The provisions for impairment on residual assets of $3.9 million was related to higher losses and delinquencies as a result of market and general economic conditions and are more prevalent in pools of loans originated prior to September 2001. Recent market conditions do indicate initial signs of improvement but Drive Management continues to monitor trends in cash flow and performance to determine the impact upon the need for additional provisions.

Other Items Affecting Operations

The following items affect the Company’s overall results of operations and are not directly related to any one of the Company’s businesses discussed above.

Corporate interest and overhead. Company level interest expense increased by 35% to $1.3 million in the third quarter of 2003 from $.9 million in the third quarter of 2002 primarily due to increased effective interest costs. Other corporate overhead expenses were flat from period to period.

Income taxes. Benefit for income taxes was $171,000 in the third quarter of 2003 and primarily related to state income taxes on FirstCity’s operations in Minnesota, which began in April 2002. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the third quarters of 2003 and 2002.

Discontinued Operations. The Company recorded a provision of $5.7 million in the third quarter of 2002 for additional losses from discontinued operations. No provision was required in the third quarter 2003. The provision in 2002 primarily related to a decrease in the estimated future gross cash receipts on residual interests in securitizations. These securities are in “run-off,” and the Company is contractually obligated to service these assets. The assumptions used in the valuation model consider both industry as well as the Company’s historical experience. The decrease in the estimated future gross cash receipts was partially a result of the actual losses exceeding the losses projected by the valuation model. In addition, prepayment assumptions increased to take into consideration the lower market rates and higher than predicted actual prepayments over the past quarter. As the securities “run off,” assumptions are reviewed in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary.

First Nine Months of 2003 Compared to First Nine Months of 2002

The Company reported earnings from continuing operations of $6.1 million in the first nine months of 2003. Net earnings to common stockholders were $5.5 million in the first nine months of 2003 compared to a loss of $7.4 million in the first nine months of 2002. On a per share basis, basic and diluted net earnings attributable to common stockholders were $.49 in the first nine months of 2003 compared to a loss of $.88 in the first nine months of 2002.

Portfolio Asset Acquisition and Resolution

The operating contribution was $9.4 million in the first nine months of 2003 and 2002. FirstCity purchased $72 million of Portfolio Assets during the first nine months of 2003 through the Acquisition Partnerships, compared to $121 million in acquisitions in the first nine months of 2002. FirstCity’s investment in these acquisitions was $15.3 million and $11.7 million in the first nine months of 2003 and 2002, respectively. There were no purchases of wholly owned Portfolio Assets during either period. FirstCity’s quarter end investment in wholly owned Portfolio Assets decreased to $4.1 million from $10.5 million at September 30, 2003 and 2002, respectively, with regular collections from those Portfolios.

Servicing fee revenues. Servicing fee revenues increased 16% from $9.7 million in the first nine months of 2002 to $11.2 million in 2003. Service fees from the Mexican partnerships (including incentive service fees) increased $2.2 million or 42% with increased servicing responsibilities in Mexico as a result of bringing the majority of the servicing responsibilities in-house and not using third party servicers to provide the servicing function for the Mexican partnerships. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. Service fees from the domestic Acquisition Partnerships decreased from $4.4 million in the first nine months of 2002 to $3.7 million in 2003. In June 2002, three domestic Acquisition Partnerships completed a bulk loan sale of performing and non-performing Portfolio Assets with a carrying value of $59 million for proceeds of $71 million. As a result of the sale, FirstCity recorded servicing fee revenues of $.9 million. In June 2003, FirstCity and several Acquisition Partnerships completed another loan sale of performing and non-performing Portfolio Assets with a carrying value of $8.3 million for proceeds of $10.0 million, resulting in $.3 million of service fees.

Gain on resolution of Portfolio Assets. The net gain on resolution of Portfolio Assets increased from $.9 million in the first nine months of 2002 to $1.1 million in the first nine months of 2003. The gross profit percentage on the resolution of Portfolio Assets in the first nine months of 2003 was 17% as compared to 31% in the first nine months of 2002 as a result of a payoff of five performing loans generating proceeds of $1.5 million and no gain.

Equity in earnings of investments. Equity in earnings of Acquisition Partnerships increased 25% to $8.1 million in the first nine months of 2003 compared to $6.5 million in the first nine months of 2002. The Acquisition Partnerships reflected a net loss of $11.8 million in the first nine months of 2003 compared to $6.7 million in the first nine months of 2002. Following is a discussion of equity earnings by geographic region.

• Domestic — Equity in earnings of domestic Acquisition Partnerships was $8.1 million in the first nine months of 2003 compared to $7.8 million in 2002. Equity in earnings in MinnTex Investment Partners LP, which began operations in April 2002, was $2.9 million in the first nine months of 2003 compared to $.8 million in 2002. Also, equity in earnings in the

WAMCO partnerships declined $1.5 million or 22% primarily due a bulk loan sale of performing and non-performing Portfolio Assets with a carrying value of $59 million for proceeds of $71 million.

• Mexico — Equity in loss of Mexican Acquisition Partnerships was $2.8 million in the first nine months of 2003 compared to $2.7 million in 2002. These partnerships reflected a loss of $51.1 million in the first nine months of 2003 compared to $40.9 million in 2002. The partnerships recorded foreign exchange losses of $20.4 million in the first nine months of 2003 compared to $17.9 million in 2002. Interest expense of $37.0 million and $41.6 million were recorded during the first nine months of 2003 and 2002, respectively. This interest is owed to the investors of these partnerships, of which FirstCity recorded $2.1 million and $3.0 million, respectively, as interest income. Excluding effects of foreign currency transactions and interest expense, these partnerships reflected adjusted net earnings of $6.3 million in the first nine months of 2003 compared to $18.6 million in 2002, which is primarily due to the Mexican partnerships receiving $22.9 million or 33% less collections in the first nine months of 2003 compared to 2002. The Company continues to see opportunities to invest in Mexico that are favorable taking into consideration the currency risk and continues to monitor the foreign currency exposure on a daily basis and evaluate the advisability of hedging these investments through analysis of currency forecasts, the cost of hedging those investments and the available liquidity to do so.

• France — Equity in earnings of Acquisition Partnerships located in France increased 100% to $2.8 million in the first nine months of 2003 compared to $1.4 million in 2002. This increase is principally due to the addition of three French Partnerships during 2002 and two in 2003, which accounted for $1.6 million in equity in earnings in the first nine months of 2003. In addition, the Company sold in June 2002 its investment in eight French Partnerships, which accounted for $.4 million in equity in earnings in the first nine months of 2002. During the first nine months of 2003, FirstCity also recorded $.8 million in foreign currency transaction gains (included in other expenses) relating to investments in France as the euro relative to the dollar appreciated from 1.05 at December 31, 2002 to 1.16 at September 30, 2003.

Interest income. Interest income decreased 29% from $3.9 million in the first nine months of 2002 to $2.8 million in the first nine months of 2003 primarily due to the Company amending three loan agreements from Acquisition Partnerships located in Mexico to provide for no interest to be payable with respect to periods after the effective date of the amendment.. This change had no impact on the consolidated net earnings as the effect is offset through equity earnings in these Partnerships.

Gain on Sale of interest in equity investments. In the June 2002, FirstCity sold its investment in eight French Acquisition Partnerships for $3.4 million resulting in a gain of $1.8 million.

Other income. Other income decreased 44% from $1.6 million in the first nine months of 2002 to $.9 million in the first nine months of 2003 primarily due to a $.7 million gain on the early extinguishment of debt recorded in 2002.

Expenses. Operating expenses decreased $.6 million or 4%, primarily due to reductions in minority interest expense, interest and other expenses, offset by increases in salaries and benefits in Mexico.

Interest and fees on notes payable decreased 13% to $1.8 million in the first nine months of 2003 from $2.1 million in 2002. The average debt decreased to $26.4 million in the first nine months of 2003 from $33.6 million in the first nine months of 2002. This decrease in debt balances was partially offset by increased effective interest costs of 9.4% in the first nine months of 2003 compared to 8.5% in 2002.

Salaries and benefits increased $1.8 million, or 25%, due to increased servicing personnel in Mexico. Total personnel within the Portfolio Asset acquisition and resolution segment increased from 172 to 236 at September 30, 2002 and 2003, respectively, with the personnel in Mexico increasing from 97 to 173. FirstCity also recorded additional servicing fee revenues with the increased servicing responsibilities in Mexico.

The provision for loan and impairment losses was $1,000 in the first nine months of 2003 and includes a $61,000 recovery on one real estate Portfolio. The provision for loan and impairment losses totaled $.3 million in the first nine months of 2002.

Minimal provisions were recorded in the first nine months of 2003 and 2002 for performing or non-performing Portfolios as the economic conditions during that period did not negatively impact the Company’s expectation of future cash flows.

The Company recorded permanent valuation impairments of $.2 million in the first nine months of 2002 on two real estate Portfolios due to deterioration of property values and market conditions, as well as additional expected disposal costs.

Occupancy, data processing, communication and other expenses declined $.7 million or 15% primarily due to net foreign currency gains of $.7 million in the first nine months of 2003 compared to $89,000 in 2002.

Minority interest expense was $1.2 million in the first nine months of 2002. In December 2002, FirstCity acquired the minority interest in FirstCity Holdings as part of a recapitalization, and in April 2003, acquired the minority interest of MCSFC LP.

Consumer Lending

FirstCity’s consumer lending segment consists of the Company’s net investment in Drive. The operating contribution for the first nine months of 2003 was $4.1 million compared to a loss of $.4 million during the first nine months of 2002. Drive recorded net income of $14.7 million in the first nine months of 2003 compared to a loss of $1.3 million in the first nine months of 2002. Drive’s inventory of retail installments contracts has grown from $311 million at September 30, 2002 to $578 million at September 30, 2003. Consequently, net interest margin after provision for credit losses and impairments at Drive rose from $33.2 million to $59.8 million during the first nine months of 2002 and 2003, respectively. The provisions for impairment on residual assets of $6.3 million for the nine months was related to higher losses and delinquencies as a result of market and general economic conditions and are more prevalent in pools of loans originated prior to September 2001. Recent market conditions do indicate initial signs of improvement but Drive Management continues to monitor trends in cash flow and performance to determine the impact upon the need for additional provisions.

Other Items Affecting Operations

The following items affect the Company’s overall results of operations and are not directly related to any one of the Company’s businesses discussed above.

Corporate interest and overhead. Company level interest expense increased by 39% to $3.6 million in the first nine months of 2003 from $2.6 million in the first nine months of 2002 due to increased effective interest costs. Other corporate overhead expenses were flat from period to period.

Income taxes. Provision for income taxes was $83,000 in the first nine months of 2003 and primarily related to state income taxes on FirstCity’s operations in Minnesota, which began in April 2002. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the first nine months of 2003 and 2002.

Discontinued Operations. The Company recorded a provision of $.4 million in the first nine months of 2003 for additional losses from discontinued operations compared to $7.7 million in 2002. The additional provisions primarily relate to a decrease in the estimated future gross cash receipts on residual interests in securitizations. These securities are in “run-off,” and the Company is contractually obligated to service these assets. The assumptions used in the valuation model consider both industry as well as the Company’s historical experience. The decrease in the estimated future gross cash receipts is partially a result of the actual losses exceeding the losses projected by the valuation model. In addition, prepayment assumptions have increased to take into consideration the lower market rates and higher than predicted actual prepayments over the past quarter. As the securities “run off,” assumptions are reviewed in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary.

Portfolio Asset Acquisition and Resolution

Aggregate acquisitions by the Company are as follows (dollars in thousands):


	Purchase		FirstCity
	Price		Investment

First nine months of 2003	$	71,508	$	15,295
Total 2002		171,769		16,717
Total 2001		224,927		24,319


	Purchase		FirstCity
	Price		Investment

Total 2000		394,927		22,140
Total 1999		210,799		11,203

The following table presents selected information regarding the revenues and expenses of the Company’s Portfolio Asset acquisition and resolution business:

Analysis of Selected Revenues and Expenses
Portfolio Asset Acquisition and Resolution


				Three Months Ended						Nine Months Ended
				September 30,						September 30,

				2003			2002			2003			2002

Income from Portfolio Assets and Loans Receivable:
Average investment in Portfolio Assets and loans receivable:
		Domestic		$	6,014		$	12,347		$	7,921		$	13,564
		Mexico			15,226			18,274			15,153			19,236
		France			3,486			—			1,394			—

			Total	$	24,726		$	32,453		$	24,468		$	32,800

Income from Portfolio Assets and loans receivable:
		Domestic		$	241		$	485		$	1,616		$	1,769
		Mexico			414			947			2,147			2,953
		France			47			—			64			—

			Total	$	702		$	1,432		$	3,827		$	4,722

	Average return (annualized):
		Domestic			16.0	%		15.7	%		27.2	%		17.4	%
		Mexico			10.9	%		20.7	%		18.9	%		20.5	%
		France			5.4	%		—			6.1	%		—
			Total		11.4	%		17.7	%		20.9	%		19.2	%
Servicing fee revenues:
	Domestic partnerships:
		$ Collected		$	23,646		$	26,653		$	88,341		$	162,864
		Servicing fee revenue			1,121			1,249			3,703			4,399
		Average servicing fee %			4.7	%		4.7	%		4.2	%		2.7	%
	Mexico partnerships:
		$ Collected		$	16,331		$	20,895		$	46,356		$	69,245
		Servicing fee revenue			2,348			1,792			7,227			4,778
		Average servicing fee %			14.4	%		8.6	%		15.6	%		6.9	%
	Incentive service fees			$	105		$	222		$	237		$	478
	Total Service Fees:
		$ Collected		$	39,977		$	47,548		$	134,697		$	232,109
		Servicing fee revenue			3,574			3,263			11,167			9,655
		Average servicing fee %			8.9	%		6.9	%		8.3	%		4.2	%
Personnel:
Personnel expenses				$	2,972		$	2,809		$	9,117		$	7,298
	Number of personnel (at period end):
		Domestic			58			70
		Mexico			178			102
Interest expense:
	Average debt			$	27,076		$	28,617		$	26,354		$	33,609
	Interest expense				587			628			1,848			2,132
	Average cost (annualized)				8.7	%		8.8	%		9.4	%		8.5	%

The following table presents selected information regarding the revenues and expenses of the Acquisition Partnerships:

Analysis of Selected Revenues and Expenses
Acquisition Partnerships


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenues:
	Gain on resolution of Portfolio Assets		$	29,169		$	16,849		$	72,403		$	69,532
	Gross profit percentage on resolution of Portfolio Assets			41.97	%		36.26	%		38.57	%		31.45	%
	Interest income		$	1,756		$	2,699		$	5,884		$	11,961
	Other income			528			572			1,537			1,802
Interest expense(1):
	Interest expense		$	13,648		$	14,322		$	42,197		$	48,121
	Average cost (annualized)			15.22	%		14.55	%		14.74	%		15.16	%
Other expenses:
	Service fees			4,719			3,199			14,160			14,271
	Other operating costs			6,838			3,816			15,820			11,358
	Foreign currency loss			14,350			7,894			20,440			17,914
	Income taxes			(222	)		(4,285	)		(955	)		(1,658	)

		Total other expenses (income)		25,685			10,624			49,465			41,885

		Net earnings (loss)	$	(7,880	)	$	(4,826	)	$	(11,838	)	$	(6,711	)

Equity in earnings of Acquisition Partnerships			$	3,007		$	912		$	8,135		$	6,494
Equity in earnings of Servicing Entities				155			12			474			692

			$	3,162		$	924		$	8,609		$	7,186

(1)

Interest expense includes interest on loans to the Acquisition Partnerships located in Mexico from affiliates of the investor groups. The rates on these loans range from 19% to 20%. The average cost on debt excluding the Mexican Acquisition Partnerships was 5.1% and 5.9% for the three months ended September 30, 2003 and 2002, respectively and 5.4% and 6.2% for the nine months ended September 30, 2003 and 2002, respectively.

Consumer Lending

The following table presents selected information regarding consumer lending:

Analysis of Selected Data
Consumer Lending


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Retail installment contracts acquired		$	128,688		$	100,430		$	382,513		$	314,611
Origination characteristics:
	Face value to wholesale value		96.02	%		98.07	%		97.84	%		99.69	%
	Weighted average coupon		20.99	%		20.93	%		20.98	%		21.02	%
	Purchase discount (% of face value)		17.72	%		15.02	%		17.43	%		15.41	%
Servicing portfolio
	Owned	$	113,046		$	170,387
	Securitized		695,707			493,371

	Total	$	808,753		$	663,758

	Owned — number of contracts		9,865			14,568
	Securitized — number of contracts		65,745			44,497

	Total number of contracts		75,610			59,065

Defaults (% of original loan balance at time of default)			22.01	%		18.73	%
Net losses on defaults after recovery			11.47	%		9.30	%
Delinquencies (% of total serviced portfolio)			5.92	%		7.53	%

Provision for Income Taxes

The Company has substantial NOLs, which can be used to offset the tax liability associated with the Company’s pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the

benefit as an asset and then establishing a valuation allowance to value the net deferred tax asset at a level, which more likely than not, will be realized. Realization is determined based on management’s expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from its continuing operations prior to expiration of the NOLs. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset, net of the allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

Liquidity and Capital Resources

Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to the Acquisition Partnerships, retirement of and dividends on preferred stock, and other investments by the Company. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt and dividends from the Company’s subsidiaries, short-term borrowings from revolving lines of credit, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

In December 2002, FirstCity completed a recapitalization in which holders of New Preferred Stock exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million in cash. As a result, common equity was increased by $18.9 million. During the first quarter of 2003, 4,400 shares of New Preferred Stock were redeemed for 8,200 shares of common stock and $50,000 in cash. FirstCity also recorded a $4 million gain from the release of its guaranty of Drive’s indebtedness to BoS(USA). BoS(USA)’s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom are Senior Vice Presidents of FirstCity, by issuing 400,000 shares of common stock of the Company and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million in accordance with certain cash collections from servicing income from Portfolio asset acquisitions in Mexico.

As a part of the recapitalization, BoS(USA) provided a non-recourse loan in the amount of $16 million to FirstCity which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity’s debt to the Senior Lenders. The $16 million loan is secured by a 20% interest in Drive (64.51% of FirstCity’s remaining 31% interest in Drive) and other assets of Consumer Corp. In connection with the $16 million loan, FirstCity is obligated to pay an arrangement fee to BoS(USA) equal to 20% of all amounts received by FirstCity in excess of $16 million from any sale or other disposition of FirstCity’s 20% interest in Drive and all dividends and other distributions paid by Drive or its general partner on FirstCity’s 20% interest in Drive. Management of the Company believes the value of FirstCity’s 20% ownership interest of Drive does not exceed $16 million as of September 30, 2003.

Currently, the Company has approximately 126,291 shares of New Preferred Stock outstanding with accrued and unpaid dividends of approximately $1.1 million. The Company’s loan agreement with the Senior Lenders restricts the payment of dividends on these shares until it is repaid in full. Given the continued high debt levels of the Company, and management’s priority of assuring adequate levels of liquidity, the Company does not anticipate that dividends on shares of New Preferred Stock will be paid in the foreseeable future.

FirstCity has a $35 million loan facility with CFSC Capital Corp. XXX, a subsidiary of Cargill. This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March 2005. At September 30, 2003, approximately $25 million was outstanding under this facility.

In June 2003, James R. Hawkins, Chairman of the Board and James T. Sartain, President and Chief Executive Officer executed a note purchase agreement with a wholly-owned subsidiary, which obligates them to purchase a note executed by the subsidiary to a bank in the principal amount of $2.7 million ($1.1 million outstanding at September 30, 2003) if a default occurs under the note within thirty days of written request by the bank.

Drive has a warehouse line of credit with BoS(USA), which provides borrowings up to $250 million (increased from $200 million in February 2003). Drive’s obligation under this arrangement at September 30, 2003 was $97 million. The debt is secured by Drive’s retail installment contracts and has been extended to February 2004.

Drive also has a warehouse line of credit agreement with Variable Funding Capital Corporation, a subsidiary of First Union National Bank, which provides borrowings up to $100 million. Drive’s obligation under the arrangement at September 30, 2003 was zero. The debt will be secured by Drive’s retail installment contracts and terminates September 2004.

The Company and each of its major operating subsidiaries have entered into one or more credit facilities to finance their respective operations. Each of the operating subsidiary credit facilities is nonrecourse to the Company. The Company has agreed to indemnify BoS(USA) for up to 31% of losses, which might arise as a result of agreements BoS(USA) executed as a sponsor in connection with the securitizations completed by Drive. The Company also agreed to provide support in connection with securitizations by Consumer Corp. and Drive prior to the acquisition by BoS(USA) of the interest in Drive in August 2000. Management of the Company currently does not believe it is likely that FirstCity will be required to make payments on these indemnification agreements.

Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships and the term and warehouse facilities of Drive, as of September 30, 2003, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $122 million and outstanding borrowings of $92 million.

Management believes that the BoS(USA) loan facilities, along with the liquidity from the Cargill Facility, the related fees generated from the servicing of assets, equity distributions from existing Acquisition Partnerships and wholly owned portfolios, as well as sales of interests in equity investments, will allow the Company to meet its obligations as they come due during the next twelve months.

The following table summarizes the material terms of the credit facilities to which the Company, its major operating subsidiaries and the Acquisition Partnerships were parties to as of November 12, 2003 and the outstanding borrowings under such facilities as of September 30, 2003.

Credit Facilities

Funded and

Unfunded

Outstanding

Commitment

Borrowings

Amount as of

as of

November 12,

September 30,

Other Terms

2003

Interest Rate

and Conditions

(Dollars in millions)

FirstCity

Company Senior Facility:

Revolving Line of Credit

LIBOR + 2.75%

Secured by the assets

of the Company,

matures December 2003

Portfolio Acquisition

Loan (Term)

LIBOR + 2.75%

Secured by the assets

of the Company,

matures November 2006

Tranche I (Term)

Prime + 2.5%

Secured by the assets

of the Company,

matures December 2006

Tranche II (Term)

Fixed at 8.77%

Secured by the assets

Funded and

Unfunded

Outstanding

Commitment

Borrowings

Amount as of

as of

November 12,

September 30,

Other Terms

2003

Interest Rate

and Conditions

of the Company,

matures December 2007

Commercial Corp.

Term facility

LIBOR + 1.0%

Secured by existing

Portfolio Assets,

matures January 2004

Equity investment facility

Maximum of Fixed at

Acquisition facility

8.5% or LIBOR + 4.5%

for the investment in

future Acquisition

partnerships, matures

March 2005

Unsecured loans

Fixed at 4.5% to 7.0%

Consumer Corp.

Term loan

LIBOR + 1.0%

Secured by equity

interest in Drive,

matures December 2007,

non-recourse

Total

122

Unconsolidated

Acquisition

Partnerships term

Facilities(1)

135

Various rates

Secured by Portfolio

Assets, various

maturities

Unconsolidated

Drive

Warehouse Facility

250

Prime - .75%

Secured by warehouse

inventory, matures

February 2004

Warehouse Facility

100

—

Rate based on

Secured by warehouse

Commercial paper rates

inventory, matures

combined with Certain

September 2004

facility fees

Bonds payable

492

Fixed at 1.09% To

Secured by retail

4.09%

installment Contracts,

various maturities

through October 2009

Subordinate capital

Facility

Fixed at 16%

Secured by all assets

of Drive, matures

February 2006

Term Facility

LIBOR + 1%;

Secured by residual

interests, matures

February 2004

913

649

(1)

In addition to the term acquisition facilities of the unconsolidated Acquisition Partnerships, the Mexican Acquisition Partnerships also have term debt of approximately $237 million outstanding as of September 30, 2003 owed to affiliates of the investor groups. Of this amount, the Company has recorded approximately $14 million as Loans Receivable on the Consolidated Balance Sheets.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q or incorporated by reference from time to time, including, but not limited to, statements relating to the Company’s strategic objectives and future performance, which are not historical facts, may be deemed to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. There are many important factors that could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. Such factors include, but are not limited to, the performance of the Company’s subsidiaries and affiliates; the availability of Portfolio Assets; assumptions underlying Portfolio Asset performance; risks associated with foreign operations; currency exchange rate fluctuations; interest rate risk; the degree to which the Company is leveraged; FirstCity’s continued need for financing; availability of the Company’s credit facilities; the impact of certain covenants in loan agreements of FirstCity and its subsidiaries; risks of declining value of loans, collateral or assets; the ability of the Company to utilize NOLs; uncertainties of any litigation that might arise from discontinued operations; general economic conditions; foreign social and economic conditions; changes (legislative and otherwise) in the asset securitization industry; fluctuations in residential and commercial real estate values; capital market conditions, including the markets for asset-backed securities; factors more fully discussed and identified in the Company’s Annual Report on Form 10-K, filed April 15, 2003 (including those discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), as well as in other Securities and Exchange Commission filings of the Company. Many of these factors are beyond the Company’s control. In addition, it should be noted that past financial and operational performance of the Company is not necessarily indicative of future financial and operational performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Form 10-Q speak only as of the date of this Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company’s operations are materially impacted by net gains on sales of loans and net interest margins. The level of gains from loan sales the Company achieves is dependent on demand for the products originated. Net interest margins are dependent on the Company ability to maintain the spread or interest differential between the interest it charges the customer for loans and the interest the Company is charged for the financing of those loans. The following describes each component of interest bearing assets held by the Company and how each could be affected by changes in interest rates.

The Company invests in Portfolio Assets both directly through consolidated subsidiaries and indirectly through equity investments in Acquisition Partnerships. Portfolio Assets consist of investments in pools of non-homogenous assets that predominantly consist of loan and real estate assets. Earnings from these assets are based on the estimated future cash flows from such assets and recorded when those cash flows occur. The underlying loans within these pools bear both fixed and variable rates. Due to the non-performing nature and history of these loans, changes in prevailing benchmark rates (such as the prime rate or LIBOR) generally have a nominal effect on the ultimate future cash flow to be realized from the loan assets. Furthermore, these pools of assets are held for sale, not for investment; therefore, the disposition strategy is to liquidate these assets as quickly as possible.

Loans receivable consist of investment loans made to Acquisition Partnerships located in Mexico and bear interest at predominately fixed rates. The collectibility of these loans is directly related to the underlying Portfolio Assets of those Acquisition Partnerships, which are non-performing in nature. Therefore, changes in benchmark rates would have minimal effect on the collectibility of these loans.

The Company’s equity investment in Drive is materially impacted by net interest margins and the ability to securitize the loans Drive originates. During 2002, Drive elected not to use gain on sale treatment when assets were securitized. Instead, Drive pursued a strategy to grow the balance sheet and record interest income from loans and interest expense on the related debt as incurred to build an earnings stream over time. Demand from potential investors in Drive’s securitizations is affected by the perception of credit quality and prepayment risk associated with the loans Drive originates and securitizes. The timing and size and interest rates of the bonds issued as a part of the securitizations could also have a material effect on the net income of Drive. Interest rates offered to customers also affect prices paid for loans. These rates are determined by review of competitors’ rate offerings to the public and current prices being paid to Drive for the products. Drive does not hedge these price risks.

Drive’s residual interests in securitizations represent the present value of the excess cash flows Drive expects to receive over the life of the underlying sub-prime automobile loans. The sub-prime automobile residual interests are affected less by prepayment speeds due to the shorter term of the underlying assets and the fact that the loans are fixed rate, generally at the highest rate allowable by law.

In summary, the Company would be negatively impacted by rising interest rates and declining prices of its sub-prime loans. Rising interest rates would negatively impact the value of residual interests in securitizations currently held and costs of borrowings under the warehouse lines and new secured financings. Declining prices of the Company’s sub-prime loans would adversely affect the levels of gains achieved in the event Drive elects to sell those loans. The Company has not entered into any instruments to minimize this market risk of adverse changes in interest rates or declining prices. There have been no material changes in the quantitative and qualitative risks of the Company since December 31, 2002.

The Company currently has investments in Mexico and France. In France, the Company’s investments are in the form of equity and represent a significant portion of the Company’s total equity investments. As of September 30, 2003, one U.S. dollar equaled .86 Euros as compared to .95 at December 31, 2002. A sharp change of the Euro relative to the U.S. dollar could materially adversely affect the consolidated financial position and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in currency rates. A 5% and 10% incremental depreciation of the Euro would result in an estimated decline in the valuation of the Company’s equity investments in France of approximately $.7 million and $1.4 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Euro relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

In Mexico, approximately 95% of the Company’s investments in Mexico are made through U.S. dollar denominated loans to the Partnerships located in Mexico. The remaining investment is in the form of equity in these same Partnerships. The loans receivable are required to be repaid in U.S. dollars. Although the U.S. dollar balance of these loans will not change due to a change in the Mexican peso, the future estimated cash flows of the underlying assets in Mexico could become less valuable as a result of a change in the exchange rate for the Mexican peso, and thus could affect the overall total returns to the Company on these investments. As of September 30, 2003, one U.S. dollar equaled 10.93 Mexican pesos as compared to 10.31 at December 31, 2002. A 5% and 10% incremental depreciation of the peso would result in an estimated decline in the valuation of the Company’s total investments in Mexico of approximately $.7 million and $1.4 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Mexican peso relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2003. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of management’s evaluation.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

FirstCity was not involved in any material legal proceedings as of September 30, 2003.

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

In the first quarter of 1999, dividends on the Company’s adjusting rate preferred stock were suspended. At September 30, 2003, accumulated dividends in arrears on such preferred stock totaled $1.1 million, or $8.92 per share.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.


Exhibit
Number		Description of Exhibit

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


Exhibit
Number		Description of Exhibit

		the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.2	—	Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

4.1	—	Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998).

9.1	—	Shareholder Voting Agreement, dated as of June 29, 1995, among ATARA I Ltd., James R. Hawkins, James T. Sartain and Cargill Financial Services Corporation. (incorporated herein by reference to Exhibit 9.1 of the Company’s Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998).

10.1	—	Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company’s Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998).

10.2	—	Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company’s Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998)

10.3	—	First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company’s Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998).

10.4	—	Tenth Amendment to Loan Agreement, dated August 11, 1999 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.34 of the Company’s Form 10-Q dated August 16, 1999, filed with the Commission on August 16, 1999).

10.5	—	Amended and Restated Loan Agreement, dated December 20, 1999, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 22, 1999, filed with the Commission on December 28, 1999).

10.6	—	Securities Purchase Agreement, dated as of August 18, 2000, by and among the Company, Consumer Corp., Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein by reference to Exhibit 10.40 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).


Exhibit
Number		Description of Exhibit

10.7	—	Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.8	—	Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.9	—	Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.10	—	Receivables Financing Agreement, dated August 18, 2000, among Drive BOS LP, Drive Financial Services LP, each Lender, IFA Inc. and Wells Fargo Bank Minnesota, N.A. (incorporated herein by reference to Exhibit 10.44 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.11	—	Amendment to Loan Agreement and extension of Promissory Note, dated January 12, 2001, by and between FirstCity Holdings Corporation and CSFC Capital Corp. XXX (incorporated herein by reference to Exhibit 10.45 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.12	—	Second Amendment, dated as of February 16, 2001, to the Receivables Financing Agreement, dated as of August 18, 2000, among Drive BOS LP, Drive Financial Services LP the Lenders party thereto, IPA Incorporated and Wells Fargo Bank Minnesota, NA (incorporated herein by reference to Exhibit 10.46 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.13	—	Subordinate Capital Loan Agreement, dated as of February 16, 2001, among Drive Financial Services LP, DRIVE BOS LP, the financial institutions from time to time party hereto and IFA Incorporated (incorporated herein by reference to Exhibit 10.47 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.14	—	Amended and Restated Amendment #4 (Option and Option Warrant), dated as of December 31, 2001, between the Company and BoS(USA) Inc. (incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K dated January 18, 2002, filed with the Commission on January 18, 2002).

10.15	—	Letter Agreement, dated November 26, 2002, between FirstCity Consumer Lending Corporation and The Governor and Company of the Bank of Scotland, including Form of Promissory Note to be executed by FirstCity Consumer Lending Corporation,


Exhibit
Number		Description of Exhibit

		payable to The Governor and Company of the Bank of Scotland. (incorporated herein by reference to Exhibit 99(d)(5) of the Company’s Form SC TO-I/A dated November 27, 2002, filed with the Commission on November 27, 2002).

10.16	—	Amended and Restated Loan Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent. (incorporated herein by reference to Exhibit 10.16 of the Company’s Form 10-K dated March 28, 2003, filed with the Commission on April 15, 2003).

10.17	—	Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent. (incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-K dated March 28, 2003, filed with the Commission on April 15, 2003).

31.1	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

On August 14, 2003, the Company filed a Current Report on Form 8-K to disclose a press release announcing the Company’s second quarter 2003 results.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		Firstcity Financial Corporation

		By:		/s/ James T. Sartain

				James T. Sartain
				President and Chief Executive
				Officer and Director (Duly authorized officer of the Registrant)

		By:		/s/ J. Bryan Baker

				J. Bryan Baker
				Senior Vice President and Chief
				Financial Officer
				(Duly authorized officer and
				principal financial and accounting
				officer of the Registrant)

Dated: November 14, 2003

INDEX TO EXHIBITS


Exhibit
Number		Description of Exhibit

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).

9.1	—	Shareholder Voting Agreement, dated as of June 29, 1995, among ATARA I Ltd., James R. Hawkins, James T. Sartain and Cargill Financial Services Corporation. (incorporated herein by reference to Exhibit 9.1 of the Company’s Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998).

10.1	—	Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company’s Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998).

10.2	—	Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company’s Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998)

10.3	—	First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company’s Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998).


Exhibit
Number		Description of Exhibit

10.4	—	Tenth Amendment to Loan Agreement, dated August 11, 1999 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.34 of the Company’s Form 10-Q dated August 16, 1999, filed with the Commission on August 16, 1999).

10.5	—	Amended and Restated Loan Agreement, dated December 20, 1999, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 22, 1999, filed with the Commission on December 28, 1999).

10.6	—	Securities Purchase Agreement, dated as of August 18, 2000, by and among the Company, Consumer Corp., Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein by reference to Exhibit 10.40 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.7	—	Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.8	—	Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.9	—	Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.10	—	Receivables Financing Agreement, dated August 18, 2000, among Drive BOS LP, Drive Financial Services LP, each Lender, IFA Inc. and Wells Fargo Bank Minnesota, N.A. (incorporated herein by reference to Exhibit 10.44 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.11	—	Amendment to Loan Agreement and extension of Promissory Note, dated January 12, 2001, by and between FirstCity Holdings Corporation and CSFC Capital Corp. XXX (incorporated herein by reference to Exhibit 10.45 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.12	—	Second Amendment, dated as of February 16, 2001, to the Receivables Financing Agreement, dated as of August 18, 2000, among Drive BOS LP, Drive Financial Services LP the Lenders party thereto, IPA Incorporated and Wells Fargo Bank Minnesota, NA (incorporated herein by reference to Exhibit 10.46 of the Company’s Form 10-K dated April 13, 2001, filed


Exhibit
Number		Description of Exhibit

		with the Commission on April 13, 2001).

10.13	—	Subordinate Capital Loan Agreement, dated as of February 16, 2001, among Drive Financial Services LP, DRIVE BOS LP, the financial institutions from time to time party hereto and IFA Incorporated (incorporated herein by reference to Exhibit 10.47 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.14	—	Amended and Restated Amendment #4 (Option and Option Warrant), dated as of December 31, 2001, between the Company and BoS(USA) Inc. (incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K dated January 18, 2002, filed with the Commission on January 18, 2002).

10.15	—	Letter Agreement, dated November 26, 2002, between FirstCity Consumer Lending Corporation and The Governor and Company of the Bank of Scotland, including Form of Promissory Note to be executed by FirstCity Consumer Lending Corporation, payable to The Governor and Company of the Bank of Scotland. (incorporated herein by reference to Exhibit 99(d)(5) of the Company’s Form SC TO-I/A dated November 27, 2002, filed with the Commission on November 27, 2002).

10.16	—	Amended and Restated Loan Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent. (incorporated herein by reference to Exhibit 10.16 of the Company’s Form 10-K dated March 28, 2003, filed with the Commission on April 15, 2003).

10.17	—	Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent. (incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-K dated March 28, 2003, filed with the Commission on April 15, 2003).

31.1	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	•		Domestic — Equity in earnings of domestic Acquisition Partnerships increased 89% to $2.5 million in the third quarter of 2003 from $1.3 million in 2002 primarily due to a $.5 million increase in equity earnings from MinTex Investment Partners LP that began operations in 2002 and $.5 million in equity earnings from one WAMCO partnership that began operations in 2003.

	•		Mexico — Equity in losses of Mexican Acquisition Partnerships were $1.1 million in the third quarter of 2003 compared to $.8 million in 2002. These partnerships reflected losses of $24.4 million in the third quarter of 2003 compared to a $10.5 million loss in 2002. The partnerships recorded foreign exchange losses of $14 million in the third quarter of 2003 compared to foreign exchange losses of $8 million in 2002. Interest expense of $12 million and $13 million were recorded during the third quarter of 2003 and 2002, respectively. This interest is owed to affiliates of the investors of these partnerships, of which FirstCity recorded $.4 million and $.9 million, respectively, as interest income. Excluding effects of foreign currency transactions and interest expense, these partnerships reflected adjusted net earnings of $2.1 million in the third quarter of 2003 compared to $10.0 million in 2002, which is primarily due to the Mexican partnerships receiving $4.6 million or 22% less collections in the third quarter of 2003 compared to 2002. Also, in the third quarter of 2002, two Mexico partnerships recorded approximately $9 million of deferred tax income as a result of net operating losses in those entities. The Company continues to see opportunities to invest in Mexico that are favorable taking into consideration the currency risk and continues to monitor the foreign currency exposure on a daily basis and evaluate the advisability of hedging these investments through analysis of currency forecasts, the cost of hedging those investments and the available liquidity to do so.

	•		France — Equity in earnings of Acquisition Partnerships located in France increased from $.4 million in the third quarter of 2002 to $1.6 million in the third quarter of 2003. This increase is principally due to the addition of three French Partnerships during 2002 and two in 2003, which accounted for $1.0 million in equity in earnings in the first nine months of 2003.

			WAMCO partnerships declined $1.5 million or 22% primarily due a bulk loan sale of performing and non-performing Portfolio Assets with a carrying value of $59 million for proceeds of $71 million.

	•		Mexico — Equity in loss of Mexican Acquisition Partnerships was $2.8 million in the first nine months of 2003 compared to $2.7 million in 2002. These partnerships reflected a loss of $51.1 million in the first nine months of 2003 compared to $40.9 million in 2002. The partnerships recorded foreign exchange losses of $20.4 million in the first nine months of 2003 compared to $17.9 million in 2002. Interest expense of $37.0 million and $41.6 million were recorded during the first nine months of 2003 and 2002, respectively. This interest is owed to the investors of these partnerships, of which FirstCity recorded $2.1 million and $3.0 million, respectively, as interest income. Excluding effects of foreign currency transactions and interest expense, these partnerships reflected adjusted net earnings of $6.3 million in the first nine months of 2003 compared to $18.6 million in 2002, which is primarily due to the Mexican partnerships receiving $22.9 million or 33% less collections in the first nine months of 2003 compared to 2002. The Company continues to see opportunities to invest in Mexico that are favorable taking into consideration the currency risk and continues to monitor the foreign currency exposure on a daily basis and evaluate the advisability of hedging these investments through analysis of currency forecasts, the cost of hedging those investments and the available liquidity to do so.

	•		France — Equity in earnings of Acquisition Partnerships located in France increased 100% to $2.8 million in the first nine months of 2003 compared to $1.4 million in 2002. This increase is principally due to the addition of three French Partnerships during 2002 and two in 2003, which accounted for $1.6 million in equity in earnings in the first nine months of 2003. In addition, the Company sold in June 2002 its investment in eight French Partnerships, which accounted for $.4 million in equity in earnings in the first nine months of 2002. During the first nine months of 2003, FirstCity also recorded $.8 million in foreign currency transaction gains (included in other expenses) relating to investments in France as the euro relative to the dollar appreciated from 1.05 at December 31, 2002 to 1.16 at September 30, 2003.