FIRSTCITY FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2004 or

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

Commission file number 033-19694

FirstCity Financial Corporation

(Exact name of Registrant as Specified in Its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		76-0243729 (I.R.S. Employer Identification No.)

6400 Imperial Drive, Waco, TX (Address of Principal Executive Offices)		76712 (Zip Code)

(254) 751-1750
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of common stock, par value $.01 per share, outstanding at May 6, 2004 was 11,224,937.

TABLE OF CONTENTS


PART I
	Item 1. Financial Statements
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WAMCO PARTNERSHIPS
Combined Financial Statements
WAMCO PARTNERSHIPS
COMBINED BALANCE SHEETS
WAMCO PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
WAMCO PARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
WAMCO PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
WAMCO PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
5th Amend. to Term Loan & Revolving Credit Agmt.
Separation Agreement - G. Stephen Fillip
Consultant Agreement - G. Stephen Fillip
Certification of CEO pursuant to Section 302
Certification of CFO pursuant to Section 302
Certification of CEO pursuant to Section 906
Certification of CFO pursuant to Section 906

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	March 31,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Cash and cash equivalents	$	2,753		$	2,745
Portfolio Assets, net		6,998			4,525
Loans receivable from Acquisition Partnerships held for investment		15,849			17,313
Equity investments		75,106			73,146
Deferred tax asset, net		20,101			20,101
Service fees receivable from affiliates		1,320			1,390
Other assets, net		9,056			6,769
Net assets of discontinued operations		5,882			6,150

Total Assets	$	137,065		$	132,139

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable to affiliates	$	82,994		$	88,628
Notes payable other		4,912			2,432
Preferred stock subject to mandatory redemption, including accumulated dividends in arrears of $1,260 and $1,193 at March 31, 2004 and December 31, 2003, respectively, (par value $.01; redemption value of $21 per share; 2,000,000 shares authorized; 126,291 shares issued and outstanding		3,912			3,846
Minority interest		4,958			3,972
Other liabilities		7,391			4,292

Total Liabilities		104,167			103,170
Commitments and contingencies (note 10) Stockholders’ equity:
Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued and outstanding: 11,224,937 and 11,193,687, respectively)		112			112
Paid in capital		99,260			99,168
Accumulated deficit		(69,074	)		(73,923	)
Accumulated other comprehensive income		2,600			3,612

Total Stockholders’ Equity		32,898			28,969

Total Liabilities and Stockholders’ Equity	$	137,065		$	132,139

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
	March 31,
	2004			2003
Revenues:
Servicing fees from affiliates	$	3,032		$	3,507
Gain on resolution of Portfolio Assets		75			695
Equity in earnings of investments		9,212			2,091
Interest income from affiliates		444			915
Interest income — other		85			188
Other income		1,338			362

Total revenues		14,186			7,758
Expenses:
Interest and fees on notes payable to affiliates		2,529			1,891
Interest and fees on notes payable — other		69			62
Interest on shares subject to mandatory redemption		66			—
Salaries and benefits		4,077			3,496
Provision for loan and impairment losses		—			34
Occupancy, data processing, communication and other		1,452			1,994

Total expenses		8,193			7,477
Earnings from continuing operations before income taxes and minority interest		5,993			281
Provision for income taxes		(112	)		(121	)

Earnings from continuing operations before minority interest		5,881			160
Minority interest		(1,032	)		(179	)

Earnings (loss) from continuing operations		4,849			(19	)
Loss from discontinued operations		—			—

Net earnings (loss)		4,849			(19	)
Accumulated preferred dividends in arrears		—			(66	)

Net earnings (loss) to common stockholders	$	4,849		$	(85	)

Basic earnings (loss) per common share are as follows:
Earnings (loss) from continuing operations	$	.43		$	(0.01	)
Discontinued operations		—			—
Net earnings (loss) to common stockholders	$	.43		$	(0.01	)
Weighted average common shares outstanding		11,198			11,202
Diluted earnings (loss) per common share are as follows:
Earnings (loss) from continuing operations	$	.41		$	(0.01	)
Discontinued operations		—			—
Net earnings (loss) to common stockholders	$	.41		$	(0.01	)
Weighted average common shares outstanding		11,792			11,202

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

(Dollars in thousands)
(Unaudited)


											Accumulated
	Number of										Other			Total
	Common			Common		Paid in		Accumulated			Comprehensive			Stockholders'
	Shares			Stock		Capital		Deficit			Income			Equity
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
Exercise of common stock options		6,250			—		12		—			—			12
Refund of unconverted common stock		(17,234	)		—		144		—			—			144
Comprehensive income:
Net earnings for 2003		—			—		—		9,187			—			9,187
Foreign currency items		—			—		—		—			2,157			2,157
Unrealized net loss on securitization		—			—		—		—			(1,228	)		(1,228	)

Total comprehensive income															10,116

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

Balances, December 31, 2003		11,193,687			112		99,168		(73,923	)		3,612			28,969
Exercise of common stock options		31,250			—		92		—			—			92
Comprehensive income:
Net earnings for the first three months of 2004		—			—		—		4,849			—			4,849
Foreign currency items		—			—		—		—			(1,034	)		(1,034	)
Unrealized net gain on securitization		—			—		—		—			22			22

Total comprehensive income															3,837

Balances, March 31, 2004		11,224,937		$	112	$	99,260	$	(69,074	)	$	2,600		$	32,898

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)
(Unaudited)


	Three Months Ended
	March 31,
	2004			2003
Cash flows from operating activities:
Net earnings (loss)	$	4,849		$	(19	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Proceeds from resolution of Portfolio Assets		249			3,003
Gain on resolution of Portfolio Assets		(75	)		(695	)
Purchase of Portfolio Assets and loans receivable, net		(2,717	)		—
Provision for loan and impairment losses		—			34
Equity in earnings of investments		(9,212	)		(2,091	)
Proceeds from performing Portfolio Assets and loans receivable, net		1,909			971
Capitalized interest and costs on Portfolio Assets and loans receivable		(48	)		(84	)
Depreciation and amortization		205			192
(Increase) decrease in service fees receivable from affiliate		70			(289	)
(Increase) decrease in other assets		(175	)		31
Change in estimated notes payable to affiliates		(759	)		—
Increase in other liabilities		1,263			157

Net cash provided by (used in) operating activities		(4,441	)		1,210

Cash flows from investing activities:
Property and equipment, net		(106	)		(441	)
Contributions to Acquisition Partnerships and Servicing Entities		(397	)		(75	)
Distributions from Acquisition Partnerships and Servicing Entities		6,987			4,892

Net cash provided by investing activities		6,484			4,376

Cash flows from financing activities:
Borrowings under notes payable to affiliates		1,395			500
Borrowing under notes payable — other		2,664			—
Payments of notes payable to affiliates		(6,270	)		(6,493	)
Payments of notes payable — other		(184	)		(609	)
Payments for tender of redeemable preferred stock		—			(50	)
Proceeds from issuance of common stock		92			1

Net cash used in financing activities		(2,303	)		(6,651	)

Net cash used in continuing operations		(260	)		(1,065	)
Net cash provided by (used in) discontinued operations		268			(184	)

Net increase (decrease) in cash and cash equivalents	$	8		$	(1,249	)
Cash and cash equivalents, beginning of period		2,745			4,118

Cash and cash equivalents, end of period	$	2,753		$	2,869

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,391		$	1,607
Income taxes		79			222
Non-cash financing activities:
Dividends accumulated and not paid on preferred stock		66			66
Balance of redeemable preferred stock and associated dividends relinquished in recapitalization transaction		—			74

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004
(Dollars in thousands, except per share data)

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

FirstCity Financial Corporation (the “Company” or “FirstCity”) is a financial services company with offices throughout the United States and Mexico, with a presence in France. At December 31, 2003, the Company was engaged in two principal reportable segments: (i) portfolio asset acquisition and resolution and (ii) consumer lending through the Company’s minority investment in Drive Financial Services LP (“Drive”).

The unaudited consolidated financial statements of FirstCity Financial Corporation (“FirstCity” or the “Company”) reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity’s consolidated financial position at March 31, 2004, and its results of operations and cash flows for the three-month periods ended March 31, 2004 and 2003.

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

Basic net earnings (loss) per common share calculations are based upon the weighted average number of common shares outstanding. Earnings (losses) included in the earnings (loss) per common share calculation are reduced by minority interest and increased for preferred stock dividends. Potentially dilutive common share equivalents include warrants and stock options in the diluted loss per common share calculations.

The effects of any common stock equivalents are antidilutive for the first quarter of 2003 due to the net loss for the period; therefore, diluted loss per common share is reported the same as basic loss per common share for that period.

At March 31, 2004, the Company has three stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As required by FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, the following table represents the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.


	Three Months
	Ended
	March 31,
	2004			2003
Net earnings (loss) to common stockholders, as reported	$	4,849		$	(85	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(21	)		(49	)

Pro forma net earnings (loss) to common stockholders	$	4,828		$	(134	)

Net earnings (loss) per common share:
Basic — as reported	$	0.43		$	(0.01	)

Basic — pro forma	$	0.43		$	(0.01	)

Diluted — as reported	$	0.41		$	(0.01	)

Diluted — pro forma	$	0.41		$	(0.01	)

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2) Restructure, Liquidity and Capital Resources

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

In December 2002, FirstCity completed a recapitalization in which holders of redeemable preferred stock, par value $.01 per share, (“New Preferred Stock”) exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million in cash. As a result, common equity was increased by $18.9 million. During the first quarter of 2003, 4,400 shares of New Preferred Stock were redeemed for 8,200 shares of common stock and $50,000 in cash. FirstCity also recorded a $4 million gain in December 2002 from the release of its guaranty of Drive’s indebtedness to BoS(USA) Inc. (“BoS(USA)”). BoS(USA)’s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings Corporation held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom were Senior Vice Presidents of FirstCity, by issuing 400,000 shares of common stock of the Company and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million out of certain cash collections from servicing income from Portfolios in Mexico. FirstCity valued the loans at the inception date using an imputed interest rate of 4.56% based on the Company’s cost of funds on that date. During the first quarter of 2004, the Company reduced the estimated carrying value of these loans based on an imputed interest rate of 6.94% and revised cash flow projections. FirstCity recorded the change in estimate of $.8 million to other income. At March 31, 2004, these notes had a combined balance of $.5 million and mature in December 2011. The Company evaluates the contingent amount of these outstanding notes on a quarterly basis and will make adjustments to the estimated liability as changes in estimated cash flows supporting these notes change.

As a part of the recapitalization, BoS(USA) provided a non-recourse loan in the amount of $16 million to FirstCity, which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity’s debt to the Bank of Scotland (together with BoS(USA), the “Senior Lenders”). The $16 million loan is secured by a 20% interest in Drive (64.51% of FirstCity’s remaining 31% interest in Drive) and other assets of Consumer Lending Corporation (“Consumer Corp.”) as are necessary and only to the extent to allow the Senior Lenders to realize the security interest in the 20% interest in Drive. In connection with the $16 million loan, the Company agreed to pay a contingent fee to BoS (USA) Inc. equal to 20% of all amounts received by the Company upon any sale of the Company’s 20% interest in Drive or any receipt of distributions from Drive related to the 20% ownership interest, once such payments exceed $16 million in the aggregate. During the first quarter of 2004, the Company recorded $.8 million of additional interest expense related to the contingent fee. The Company currently estimates that additional interest expense will be recognized in the amount of $160,000 per quarter through December 2007. This additional interest expense currently has no impact on the Company’s cash flow. The payment of the interest and any gain or income resulting from any sale or distribution will not be recognized until a sale occurs or distribution is received. The Company has no present plans to sell any interest in Drive and does not anticipate that any distributions will be made from Drive in the near future that would result in an obligation to pay a contingent fee.

In connection with the recapitalization, the Senior Lenders refinanced the remainder of the Company’s debt facilities ($40 million outstanding at March 31, 2004). The Senior Lenders also provided new financing to FirstCity, with a total commitment of up to $59 million, consisting of (a) a $5 million revolving credit loan and (b) an acquisition term loan in an amount up to $54 million. The aggregate amount of outstanding loans under the total commitment by the Senior Lenders for the refinancing and the new financing at any time may not exceed $77 million. Effective as of March 31, 2004, the Company and the Senior Lenders amended the acquisition term loan facility providing for a total amount of term loans to be made up to $54 million in the aggregate to (i) make it into a revolving loan facility providing for a maximum principal balance of loans outstanding at any time of $45 million, (ii) allow loans to be made in Euros up to a maximum amount in Euros that is equivalent to $22.5 million U.S. dollars, (iii) allow loans to be made for acquisition of Portfolio Assets originated outside the United States of up to $22.5 million, (iv) provide for an interest rate of Libor plus 3.75%, (v) provide for the commitment commission to increase from 0.25% to 0.375%, (vi) provide for distribution of 35% of collections from Asset Portfolios to the Company, provided that the aggregate outstanding principal balances of all loans under the facility does not exceed 65% of the total equity interests in Acquisition Partnerships pledged to secure the acquisition facility, and (vii) provide for other modifications that would facilitate the use of the acquisition facility in the United States and other countries. The amended facility continues to provide that the aggregate amount of all outstanding loans under the loan facilities refinanced with the

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Senior Lenders in December 2002 ($40 million outstanding at March 31, 2004) and the amended acquisition facility and the related $5 million revolving loan are limited to $77 million.

BoS(USA) has a warrant to purchase 425,000 shares of the Company’s voting Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants in connection with this existing warrant for 425,000 shares under certain specific situations to retain its ability to acquire approximately 4.86% of the Company’s voting Common Stock. The warrant will expire on August 31, 2010, if it is not exercised prior to that date.

In the third quarter of 1999, dividends on the Company’s New Preferred Stock were suspended. At March 31, 2004, accumulated dividends in arrears on New Preferred Stock totaled $1.3 million, or $9.98 per share. Since the Company failed to pay quarterly dividends for six consecutive quarters, the holders of New Preferred Stock are entitled to exercise their right to elect two directors to the Company’s Board until cumulative dividends have been paid in full. To exercise this right, the holders of the New Preferred Stock must follow certain prescribed actions set forth in the Certificate of Designations of the Company’s New Preferred Stock. To date, the holders of the New Preferred Stock have not exercised this right. Dividends on outstanding shares of New Preferred Stock of FirstCity will be restricted until the Tranche II term loan is paid in full. Given the continued high debt levels of the Company, and management’s priority of assuring adequate levels of liquidity, the Company does not anticipate that dividends on New Preferred Stock will be paid prior to September 30, 2005, the date fixed for redemption of the New Preferred Stock.

The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a subsidiary of Cargill. This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March 2005. At March 31, 2004, approximately $23 million was outstanding under this facility.

In September 2003, FirstCity entered into a Portfolio acquisition facility line of credit with Greenwich Capital Financial Products, Inc., which provides borrowings up to $30 million. The facility obligation was zero at March 31, 2004 and matures September 2004.

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

(3) New Accounting Pronouncements

In November 2003, the FASB issued Staff Position, No. 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“Staff Position 150-3”). Staff Position 150-3 defers the application of various provisions of SFAS 150 for specified mandatorily redeemable noncontrolling interests in consolidated limited-life entities. FirstCity has minority interests in various limited-life partnerships with a carrying value of $.8 million at March 31, 2004. The estimated amount that would be paid to the minority interest holder if the instruments were to be settled at March 31, 2004 is $.8 million.

In December 2003, the Accounting Standards Executive Committee issued Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 limits the yield that may be accreted on a loan portfolio to the excess of undiscounted expected cash flows over the initial investment in the loan portfolio. FirstCity will be required to account for all loans acquired after 2004 in accordance with SOP 03-3. For loans acquired prior to January 1, 2005, FirstCity will adopt the provisions of SOP 03-3 on a prospective basis.

In December 2003, the FASB issued a revision to Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46R”), which was originally issued in January 2003. FIN 46R provides guidance on the consolidation of certain entities when control exists through other than voting (or similar) interests and was effective immediately with respect to entities created after January 31, 2003. For certain special purpose entities created prior to February 1, 2003, FIN 46R became effective for financial statements issued after December 15, 2003. For all other entities created prior to February 1, 2003 FIN 46R became effective January 1, 2004.

FIN 46R requires consolidation by the majority holder of expected residual gains and losses of the activities of a variable interest entity (“VIE”). FirstCity holds significant variable interests in certain domestic Acquisition Partnerships and all of the French and

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Mexico partnerships, which would be characterized as VIE’s. However, FirstCity is not deemed to be the primary beneficiary of any of these entities. At March 31, 2004, FirstCity’s maximum exposure to loss as a result of its involvement with the VIE’s is $32 million.

(4) Discontinued Operations

The net assets related to the resolution of activity from the Company’s investment in discontinued operations was $5,882 at March 31, 2004. No provisions were recorded during the first quarter of 2004 and 2003. The net assets from discontinued operations consist of the following:


	March 31,			December 31,
	2004			2003
Estimated future gross cash receipts on residual interests in securitizations	$	6,150		$	6,399
Accrual for loss on operations and disposal of discontinued operations, net		(268	)		(249	)

Net assets of discontinued operations	$	5,882		$	6,150

The only assets remaining from discontinued operations are the investment securities resulting from the retention of residual interests in securitization transactions. Although the liquidation or run-off of these investment securities will last longer than one year, the Company is contractually obligated to service the securitized assets. The Company has considered the estimated future gross cash receipts for such investment securities in the computation of the value of such investment securities. The cash flows are collected over a period of time and are valued using prepayment assumptions of 33% for fixed rate loans and 23% to 25% for variable rate loans. Overall loss rates are estimated from 3% to 13% of collateral.

(5) Portfolio Assets

Portfolio Assets are summarized as follows:


	March 31,			December 31,
	2004			2003
Non-performing Portfolio Assets	$	30,344		$	27,071
Performing Portfolio Assets		2,636			2,682
Real estate Portfolios		283			283

Total Portfolio Assets		33,263			30,036
Adjusted purchase discount required to reflect Portfolio Assets at carrying value		(26,265	)		(25,511	)

Portfolio Assets, net	$	6,998		$	4,525

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

(6) Loans Receivable from Acquisition Partnerships Held for Investment

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


	March 31,		December 31,
	2004		2003
Mexico	$	12,723	$	13,351
France		1,689		2,604
Domestic		1,399		1,358
Chile		38		—

	$	15,849	$	17,313

There were no provisions recorded on these loans during the first three months of 2004 and 2003. The loans receivable from Acquisition Partnerships are secured by the assets/loans acquired by the partnerships with purchase money loans provided by affiliates of the investors to the partnerships to purchase the asset pools held in those entities. These loans are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each pool to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment were necessary.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Equity method earnings (losses) which were recorded to increase (reduce) the loans and interest receivable from the Mexican partnerships were $.1 million and $(1.9) million during the first three months of 2004 and 2003, respectively, in compliance with EITF 98-13, Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee.

(7) Equity Investments

The Company has investments in Acquisition Partnerships and their general partners and investments in servicing entities that are accounted for under the equity method. The condensed combined financial position and results of operations of the Acquisition Partnerships (excluding servicing entities), which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized below:

Condensed Combined Balance Sheets


	March 31,		December 31,
	2004		2003
Assets	$	484,959	$	525,493

Liabilities	$	406,323	$	441,677
Net equity		78,636		83,816

	$	484,959	$	525,493

Equity investment in Acquisition Partnerships	$	49,787	$	53,098
Equity investment in servicing entities		4,587		4,381

	$	54,374	$	57,479

Condensed Combined Summary of Operations


	Three Months Ended
	March 31,
	2004		2003
Proceeds from resolution of Portfolio Assets	$	62,335	$	57,582
Gain on resolution of Portfolio Assets		20,569		20,989
Interest income on performing Portfolio Assets		2,899		2,145
Net earnings (loss)		16,044		(21,038	)

Equity in earnings of Acquisition Partnerships	$	3,845	$	1,014
Equity in earnings of servicing entities		330		216

	$	4,175	$	1,230

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


	March 31,		December 31,
	2004		2003
Assets:
Domestic:
WAMCO Partnerships	$	189,821	$	205,134
MinnTex Investment Partners LP		1,446		1,530
Other		10,153		10,164
Mexico		177,656		186,431
France		105,883		122,234

	$	484,959	$	525,493

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	March 31,			December 31,
	2004			2003
Equity (deficit):
Domestic:
WAMCO Partnerships	$	82,242		$	84,589
MinnTex Investment Partners LP		1,334			1,418
Other		6,130			6,218
Mexico		(83,462	)		(86,412	)
France		72,392			78,003

	$	78,636		$	83,816

Equity investment in Acquisition Partnerships:
Domestic:
WAMCO Partnerships	$	32,902		$	33,413
MinnTex Investment Partners LP		440			514
Other		3,024			3,037
Mexico		944			1,021
France		12,477			15,113

	$	49,787		$	53,098

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


	Three Months Ended
	March 31,
	2004			2003
Revenues:
Domestic:
WAMCO Partnerships	$	6,435		$	6,352
MinnTex Investment Partners LP		2,530			3,255
Other		43			10
Mexico		4,238			7,006
France		10,466			7,026

	$	23,712		$	23,649

Net earnings (loss):
Domestic:
WAMCO Partnerships	$	2,569		$	3,367
MinnTex Investment Partners LP		2,253			2,859
Other		(182	)		(136	)
Mexico		3,700			(31,518	)
France		7,704			4,390

	$	16,044		$	(21,038	)

Equity in earnings (loss) of Acquisition Partnerships:
Domestic:
WAMCO Partnerships	$	1,267		$	1,434
MinnTex Investment Partners LP		743			944
Other		(61	)		(30	)
Mexico		112			(2,061	)
France		1,784			727

	$	3,845		$	1,014

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

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidated Balance Sheets


	March 31,			December 31,
	2004			2003
Cash	$	31,825		$	19,013
Restricted cash		60,931			47,623
Retail installment contracts, net		770,042			623,389
Residual interests in securitizations		30,087			29,094
Other assets		22,243			19,711

Total assets	$	915,128		$	738,830

Notes payable	$	836,342		$	683,758
Other liabilities		25,272			14,631

Total liabilities		861,614			698,389
Net equity		53,514			40,441

	$	915,128		$	738,830

Equity investment in Drive	$	20,732		$	15,667
Minority interest		(4,143	)		(3,131	)

Net investment in Drive	$	16,589		$	12,536

Condensed Consolidated Summary Of Operations


	Three Months Ended March 31,
	2004			2003
Finance and other interest income	$	60,443		$	39,303
Interest expense		9,208			6,193

Net interest margin		51,235			33,110

Provision for credit losses on retail installment contracts		24,500			14,164
Impairment of residual interests in securitizations, including servicing asset		—			1,217

Net interest margin after provision for credit losses and impairments		26,735			17,729

Other revenues:
Servicing income		7,185			5,592
Other income		941			554

Total other revenues		8,126			6,146

Costs and expenses:
Salaries and benefits		9,716			12,480
Servicing expense		8,656			6,434
Occupancy, data processing, communication, and other		3,488			2,471

Total costs and expenses		21,860			21,385

Net income	$	13,001		$	2,490

Equity in earnings of Drive	$	5,037		$	861
Minority interest		(1,007	)		(172	)

Net equity in earnings of Drive	$	4,030		$	689

(8) Segment Reporting

The Company is engaged in two reportable segments: (i) Portfolio Asset acquisition and resolution; and (ii) consumer lending. These segments have been segregated based on products and services offered. The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such Portfolios in an effort to maximize the present value of the ultimate cash recoveries. The consumer lending business is conducted through the Company’s equity investment in Drive. Drive is a specialized consumer finance company engaged in the purchase, securitization and servicing of retail installment

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

contracts originated by automobile dealers. The following is a summary of results of operations for each of the segments and reconciliation to earnings (loss) from continuing operations for the three months ended March 31, 2004 and 2003.


	Three Months Ended
	March 31,
	2004		2003
Portfolio Asset Acquisition and Resolution:
Revenues:
Servicing fees	$	3,032	$	3,507
Gain on resolution of Portfolio Assets		75		695
Equity in earnings of investments		4,175		1,230
Interest income		529		1,102
Other		1,131		302

Total		8,942		6,836
Expenses:
Interest and fees on notes payable		779		686
Salaries and benefits		3,041		2,842
Provision for loan and impairment losses		—		34
Occupancy, data processing, communication and other		999		1,381
Minority interest		26		7

Total		4,845		4,950

Operating contribution before direct taxes	$	4,097	$	1,886

Operating contributiong, net of direct taxes	$	4,043	$	1,777

Consumer Lending:
Revenues:
Equity in earnings of investment	$	5,037	$	861
Other		3		—

Total		5,040		861
Expenses:
Interest and fees on notes payable		885		95
Occupancy, data processing, communication and other		3		5
Minority interest		1,006		172

Total		1,894		272

Operating contribution before direct taxes	$	3,146	$	589

Operating contribution, net of direct taxes	$	3,118	$	576

Total operating contribution, net of direct taxes	$	7,161	$	2,353
Corporate Overhead:
Corporate interest expense		1,000		1,172
Salaries and benefits, occupancy, professional and other income and expenses, net		1,312		1,200

Earnings (loss) from continuing operations	$	4,849	$	(19	)

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


	Three Months
	Ended
	March 31,
	2004		2003
Domestic	$	4,143	$	4,407
Mexico		2,588		1,425
France		2,202		1,004
Other foreign		9		—

Total	$	8,942	$	6,836

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	March 31,		December 31,
	2004		2003
Cash	$	2,753	$	2,745
Portfolio acquisition and resolution assets Domestic		44,776		42,872
Mexico		13,699		14,468
France		19,598		23,088
Other foreign		49		—
Consumer assets		20,732		15,685
Deferred tax asset, net		20,101		20,101
Other assets, net		9,475		7,041
Net assets of discontinued operations		5,882		6,150

Total assets	$	137,065	$	132,139

(9) Income Taxes

Federal income taxes are provided at a 35% rate. The Company has substantial net operating loss carryforwards for federal income tax purposes (“NOLs”), which can be used to offset the tax liability associated with the Company’s pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing a valuation allowance to value the net deferred tax asset at a level, which more likely than not, will be realized. Realization is determined based on management’s expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from its continuing operations prior to expiration of the NOLs. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset, net of the allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

(10) Commitments and Contingencies

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

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

In addition, in the Securities Purchase Agreement, the Company, Consumer Corp., Funding LP and Funding GP made various representations and warranties concerning (i) their respective organizations, (ii) the automobile finance operation conducted by Consumer Corp. and Funding LP, and (iii) the assets transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and IFA-LP from damages resulting from a breach of any representation or warranty contained in the Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligation under the Securities Purchase Agreement survives for a period of seven (7) years from August 25, 2000 (the “Closing Date”) with respect to tax-related representations and warranties and for thirty months from the Closing Date with respect to all other representations and warranties. Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the Securities Purchase Agreement until the aggregate amount payable exceeds $.25 million, and then only for the amount in excess of $.25 million in the aggregate; however certain representations and warranties are not subject to this $.25 million threshold. Pursuant to

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the terms of the Contribution Agreements, Consumer Corp. and Funding LP have agreed to indemnify Drive from any damages resulting in a material adverse effect on Drive resulting from breaches of representations or warranties, failure to perform, pay or discharge liabilities other than the assumed liabilities, or claims, lawsuits or proceedings resulting from the transactions contemplated by the Contribution Agreements. Pursuant to the terms of the Contribution Agreements, Drive has agreed to indemnify Consumer Corp. and Funding LP for any breach of any representation or warranty by Drive, the failure of Drive to discharge any assumed liability, or any claims arising out of any failure by Drive to properly service receivables after August 1, 2000. Liability for indemnification pursuant to the terms of the Contribution Agreements will not arise until the total of all losses with respect to such matters exceeds $.25 million and then only for the amount by which such losses exceed $.25 million; however this limitation will not apply to any breach of which the party had knowledge at the time of the Closing Date or any intentional breach by a party of any covenant or obligation under the Contribution Agreements.

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

FirstCity is obligated to pay BoS(USA) an arrangement fee related to the $16 million loan equal to 20% of all proceeds and other amounts paid to FirstCity from any sale or other disposition (regardless of when such sale or other disposition occurs) of, and of all dividends and other distributions paid to FirstCity by Drive or its general partner (regardless of when such dividend or other distribution occurs) on, its 20% interest in Drive, in each case in excess of $16 million in the aggregate. As of March 31, 2004 the Company has accrued $.8 million of additional interest expense related to this contingent fee. The Company currently estimates that additional interest expense will be recognized in the amount of $160,000 per quarter through December 2007. This additional interest expense currently has no impact on the Company’s cash flow. The payment of the interest and any gain or income resulting from any sale or distribution will not be recognized until a sale occurs or distribution is received. The Company has no present plans to sell any interest in Drive and does not anticipate that any distributions will be made from Drive in the near future that would result in an obligation to pay a contingent fee.

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended
	March 31,
	2004			2003
	(Dollars in thousands)
Cash flows from operating activities:
Net earnings	$	2,569		$	3,367
Adjustments to reconcile net earnings to net cash provided by operating activities:
Amortization of loan origination and commitment fees		130			96
Amortization of deferred profit sharing		296			—
Accretion of unrealized gain on trust certificates		—			(81	)
Provision for loan losses		587			444
Gain on resolution of Portfolio Assets		(4,838	)		(4,420	)
Purchase of Portfolio Assets		(3,908	)		—
Net receipts on Portfolio Asset lines of credit		117			—
Capitalized costs on Portfolio Assets		(281	)		(458	)
Capitalized interest on Portfolio Assets		(362	)		(184	)
Proceeds from resolution of Portfolio Assets		20,413			15,889
Principal payments on Performing Portfolio Assets		1,950			2,243
Decrease (increase) in deferred profit sharing		44			(1,314	)
Increase in other assets		(533	)		(35	)
Increase (decrease) in deferred compensation		(44	)		1,314
Deferred compensation paid		—			(58	)
Decrease in other liabilities		(620	)		(1,254	)

Net cash provided by operating activities		15,520			15,549
Cash flows from investing activities:
Contribution to subsidiaries		(11	)		(29	)
Change in trust certificates		—			318

Net cash provided by (used in) investing activities		(11	)		289
Cash flows from financing activities:
Borrowing of debt — affiliates		3,126			118
Borrowing of debt		43,900			—
Repayment of debt — affiliates		(43,638	)		(7,394	)
Repayment of debt		(9,690	)		(4,116	)
Repayment of preferred equity		—			(51	)
Capital contributions		793			—
Capital distributions		(5,709	)		(6,267	)

Net cash used in financing activities		(17,218	)		(17,710	)

Net decrease in cash		(1,709	)		(1,872	)
Cash at beginning of period		15,044			13,035

Cash at end of period	$	13,335		$	11,163

Supplemental disclosure of cash flow information:

Cash paid for interest was $1,941 and $1,189 for the three months ended March 31, 2004 and 2003, respectively.

Unrealized net loss on trust certificates recorded in partners’ capital was zero and $331 for the three months ended March 31, 2004 and 2003, respectively.

See accompanying notes to combined financial statements.

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS

March 31, 2004
(Dollars in thousands)
(Unaudited)

(1) Basis of Presentation

The unaudited combined financial statements of the WAMCO Partnerships reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the combined financial position at March 31, 2004, and the results of operations and cash flows for the three-month periods ended March 31, 2004 and 2003.

(2) Organization and Partnership Agreements

The combined financial statements represents domestic Texas limited partnerships and limited liability companies (“Acquisition Partnerships” or “Partnerships”) and include the accounts of WAMCO III, Ltd. (“WAMCO III”); WAMCO IX, Ltd. (“WAMCO IX”); WAMCO XXIV, Ltd. (“WAMCO XXIV”); WAMCO XXV, Ltd. (“WAMCO XXV”); WAMCO XXVI, Ltd.; WAMCO XXVII, Ltd.; WAMCO XXVIII, Ltd. (“WAMCO XXVIII”); WAMCO XXIX, Ltd.; WAMCO XXX, Ltd. (“WAMCO XXX”); WAMCO 31, Ltd. (“WAMCO 31”); WAMCO 32, Ltd. (“WAMCO 32”); WAMCO 33, Ltd. (“WAMCO 33”); SOWAMCO XXIX, Ltd. (“SOWAMCO XXIX”); Calibat Fund, LLC; First B Realty, Ltd.; First Paradee, Ltd.; FirstStreet Investments LLC (“FirstStreet”); FC Properties, Ltd. (“FC Properties”); and Community Development Investment, LLC. FirstCity Financial Corporation or its subsidiaries, FirstCity Commercial Corporation and FirstCity Holdings Corporation (together “FirstCity”), share limited partnership interests and participate as general partners in common with Cargill Financial Services, Inc. in all of the Partnerships. FC Properties, WAMCO XXVII and WAMCO XXX are considered to be significant subsidiaries of FirstCity.

The Partnerships were formed to acquire, hold and dispose of Portfolio Assets acquired from the Federal Deposit Insurance Corporation, Resolution Trust Corporation and other nongovernmental agency sellers, pursuant to certain purchase agreements or assignments of such purchase agreements. In accordance with the purchase agreements, the Partnerships may retain certain rights of return regarding the assets related to representations and warranties as set forth in and according to the terms and conditions of the purchase agreements.

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

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

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

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

(3) Combining Financial Statements

FC Properties, WAMCO XXVIII and WAMCO XXX are considered to be significant subsidiaries of FirstCity. The following tables summarize the combining balance sheets and changes in partners’ capital of the WAMCO Partnerships as of March 31, 2004 and December 31, 2003, the related combining statements of operations and combining cash flows for the three months ended March 31, 2004 and 2003.

Combining Balance Sheets
March 31, 2004


	FC		WAMCO		WAMCO		Other
	Properties		XXVIII		XXX		Partnerships		Combined
			(Dollars in thousands)
ASSETS
Cash	$	1,440	$	1,305	$	2,076	$	8,514	$	13,335
Portfolio Assets, net		13,120		15,834		15,799		110,250		155,003
Investments in partnerships		—		—		—		2,361		2,361
Deferred profit sharing		17,933		—		—		—		17,933
Other assets, net		21		54		152		962		1,189

	$	32,514	$	17,193	$	18,027	$	122,087	$	189,821

LIABILITIES AND PARTNERS’ CAPITAL
Notes payable	$	—	$	5,907	$	9,210	$	68,527	$	83,644
Deferred compensation		21,422		—		—		—		21,422
Other liabilities		217		795		170		1,331		2,513

Total liabilities		21,639		6,702		9,380		69,858		107,579
Partners’ capital		10,875		10,491		8,647		52,229		82,242

	$	32,514	$	17,193	$	18,027	$	122,087	$	189,821

Notes payable owed to affiliates included in above balances	$	—	$	—	$	—	$	24,712	$	24,712
Other liabilities owed to affiliates included in above balances		21		577		134		780		1,512

Combining Balance Sheets
December 31, 2003


	FC		WAMCO		WAMCO		Other
	Properties		XXVIII		XXX		Partnerships		Combined
			(Dollars in thousands)
ASSETS
Cash	$	1,526	$	539	$	3,897	$	9,082	$	15,044
Portfolio Assets, net		13,340		17,780		19,086		118,475		168,681
Investments in partnerships		—		—		—		2,350		2,350
Deferred profit sharing		18,273		—		—		—		18,273
Other assets, net		5		101		187		493		786

	$	33,144	$	18,420	$	23,170	$	130,400	$	205,134

LIABILITIES AND PARTNERS’ CAPITAL
Notes payable	$	—	$	6,829	$	13,393	$	75,724	$	95,946
Deferred compensation		21,466		—		—		—		21,466
Other liabilities		533		987		209		1,384		3,133

Total liabilities		22,019		7,816		13,602		77,108		120,545
Partners’ capital		11,125		10,604		9,568		53,292		84,589

	$	33,144	$	18,420	$	23,170	$	130,400	$	205,134

Notes payable owed to affiliates included in above balances	$	—	$	—	$	—	$	71,224	$	71,224
Other liabilities owed to affiliates included in above balances		1		572		163		867		1,603

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

COMBINING STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2004


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
				(Dollars in thousands)
Proceeds from resolution of Portfolio Assets	$	687		$	2,052		$	4,350		$	13,324		$	20,413
Cost of Portfolio Assets resolved		251			1,513			3,370			10,441			15,575

Gain on resolution of Portfolio Assets		436			539			980			2,883			4,838
Interest income on performing Portfolio Assets		—			60			—			1,527			1,587
Interest and fees expense — affiliate		—			(114	)		—			(500	)		(614	)
Interest and fees expense — other		—			(104	)		(133	)		(392	)		(629	)
Provision for loan and impairment losses		—			(35	)		—			(552	)		(587	)
Service fees — affiliate		(21	)		(92	)		(152	)		(590	)		(855	)
General, administrative and operating expenses		(666	)		(38	)		(109	)		(367	)		(1,180	)
Other income, net		1			1			2			5			9

Net earnings	$	(250	)	$	217		$	588		$	2,014		$	2,569

COMBINING STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2003


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
				(Dollars in thousands)
Proceeds from resolution of Portfolio Assets	$	232		$	2,981		$	10,633		$	2,043		$	15,889
Cost of Portfolio Assets resolved		39			2,141			7,813			1,476			11,469

Gain on resolution of Portfolio Assets		193			840			2,820			567			4,420
Interest income on performing Portfolio Assets		—			410			—			1,113			1,523
Interest and fees expense — affiliate		—			(162	)		(476	)		(317	)		(955	)
Interest and fees expense — other		—			(221	)		—			(183	)		(404	)
Provision for loan and impairment losses		—			(112	)		—			(332	)		(444	)
Service fees — affiliate		(7	)		(152	)		(352	)		(146	)		(657	)
General, administrative and operating expenses		(146	)		(73	)		(130	)		(176	)		(525	)
Other income, net		—			2			3			404			409

Net earnings	$	40		$	532		$	1,865		$	930		$	3,367

COMBINING STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
Year Ended December 31, 2003 and Three Months Ended March 31, 2004


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
				(Dollars in thousands)
Balance at December 31, 2002	$	12,096		$	14,944		$	12,151		$	40,868		$	80,059

Contributions		—			—			—			30,182			30,182
Distributions		(4,880	)		(7,291	)		(7,925	)		(24,645	)		(44,741	)
Net earnings		3,909			2,951			5,342			8,326			20,528
Unrealized net gain on Securitization		—			—			—			(1,439	)		(1,439	)

Total comprehensive income.		3,909			2,951			5,342			6,887			19,089

Balance at December 31, 2003		11,125			10,604			9,568			53,292			84,589

Contributions		—			—			—			793			793
Distributions					(330	)		(1,509	)		(3,870	)		(5,709	)
Net earnings		(250	)		217			588			2,014			2,569
Unrealized net gain on Securitization		—			—			—			—			—

Total comprehensive income.		(250	)		217			588			2,014			2,569

Balance at March 31, 2004	$	10,875		$	10,491		$	8,647		$	52,229		$	82,242

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

COMBINING STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2004


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
	(Dollars in thousands)
	(Unaudited)
Cash flows from operating activities:
Net earnings (loss)	$	(250	)	$	217		$	588		$	2,014		$	2,569
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Amortization of loan origination and commitment fees		—			44			35			51			130
Amortization of deferred profit sharing.		296			—			—			—			296
Provision for loan losses		—			35			—			552			587
Gain on resolution of Portfolio Assets		(436	)		(539	)		(980	)		(2,883	)		(4,838	)
Purchase of Portfolio Assets		—			—			—			(3,908	)		(3,908	)
Net receipts on Portfolio Asset lines of credit		—			—			—			117			117
Capitalized costs on Portfolio Assets		(31	)		—			(83	)		(167	)		(281	)
Capitalized interest on Portfolio Assets		—			(2	)		—			(360	)		(362	)
Proceeds from resolution of Portfolio Assets		687			2,052			4,350			13,324			20,413
Principal payments on Performing Portfolio Assets		—			400			—			1,550			1,950
Increase in deferred profit sharing		44			—			—			—			44
(Increase) decrease in other assets		(16	)		3			—			(520	)		(533	)
Increase in deferred compensation		(44	)		—			—			—			(44	)
Decrease in other liabilities		(336	)		(192	)		(39	)		(53	)		(620	)

Net cash provided by (used in) operating activities		(86	)		2,018			3,871			9,717			15,520
Cash flows from investing activities:
Contribution to subsidiaries		—			—			—			(11	)		(11	)

Net cash used in investing activities		—			—			—			(11	)		(11	)
Cash flows from financing activities:
Borrowing of debt — affiliate		—			—			—			3,126			3,126
Borrowing of debt		—			—			—			43,900			43,900
Repayment of debt — affiliate		—			—			—			(49,638	)		(49,638	)
Repayment of debt		—			(922	)		(4,183	)		(4,585	)		(9,690	)
Capital contributions		—			—			—			793			793
Capital distributions		—			(330	)		(1,509	)		(3,870	)		(5,709	)

Net cash used in financing activities		—			(1,252	)		(5,692	)		(10,274	)		(17,218	)

Net increase (decrease) in cash		(86	)		766			(1,821	)		(568	)		(1,709	)
Cash at beginning of period		1,526			539			3,897			9,082			15,044

Cash at end of period	$	1,440		$	1,305		$	2,076		$	8,514		$	13,335

Supplemental disclosure of cash flow information — Approximate cash paid for interest	$	—		$	195		$	109		$	1,637		$	1,941

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

COMBINING STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2003


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
	(Dollars in thousands) (Unaudited)

Cash flows from operating activities:
Net earnings	$	40		$	532		$	1,865		$	930		$	3,367
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Amortization of loan origination and commitment fees		—			44			—			52			96
Amortization of deferred profit sharing.		—			—			—			—			—
Accretion of unrealized gain on trust Certificates		—			—			—			(81	)		(81	)
Provision for loan losses		—			112			—			332			444
Gain on resolution of Portfolio Assets		(193	)		(840	)		(2,820	)		(567	)		(4,420	)
Purchase of Portfolio Assets		—			—			—			—			—
Net receipts on Portfolio Asset lines of credit		—			—			—			—			—
Capitalized costs on Portfolio Assets		(135	)		(9	)		(12	)		(302	)		(458	)
Capitalized interest on Portfolio Assets		—			(6	)		—			(178	)		(184	)
Proceeds from resolution of Portfolio Assets		232			2,981			10,633			2,043			15,889
Principal payments on Performing Portfolio Assets		—			1,219			—			1,024			2,243
Increase in deferred profit sharing		(1,314	)		—			—			—			(1,314	)
(Increase) decrease in other assets		(21	)		13			(110	)		83			(35	)
Increase in deferred compensation		1,314			—			—			—			1,314
Deferred compensation and profit sharing paid		(58	)		—			—			—			(58	)
Decrease in other liabilities		(431	)		(118	)		(240	)		(465	)		(1,254	)

Net cash provided by (used in) operating Activities		(566	)		3,928			9,316			2,871			15,549
Cash flows from investing activities:
Contribution to subsidiaries		—			—			—			(29	)		(29	)
Change in trust certificates		—			—			—			318			318

Net cash provided by investing activities		—			—			—			289			289
Cash flows from financing activities:
Borrowing of debt — affiliate		—			—			118			—			118
Repayment of debt — affiliate		—			—			(6,798	)		(596	)		(7,394	)
Repayment of debt		—			(2,199	)		—			(1,917	)		(4,116	)
Repayment of preferred equity		—			—			—			(51	)		(51	)
Capital contributions		—			—			—			—			—
Capital distributions		(88	)		(1,525	)		(728	)		(3,926	)		(6,267	)

Net cash used in financing activities		(88	)		(3,724	)		(7,408	)		(6,490	)		(17,710	)

Net increase (decrease) in cash		(654	)		204			1,908			(3,330	)		(1,872	)
Cash at beginning of period		1,484			2,440			3,621			5,490			13,035

Cash at end of period	$	830		$	2,644		$	5,529		$	2,160		$	11,163

Supplemental disclosure of cash flow information — Approximate cash paid for interest	$	—		$	359		$	375		$	455		$	1,189

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

(4) Portfolio Assets

Portfolio Assets are summarized as follows:


	March 31, 2004
	FC		WAMCO			WAMCO			Other
	Properties		XXVIII			XXX			Partnerships			Combined
Non-performing Portfolio Assets	$	—	$	35,148		$	44,932		$	130,330		$	210,410
Performing Portfolio Assets		—		9,656			—			66,119			75,775
Real estate Portfolios		13,120		—			—			4,063			17,183

Total Portfolio Assets		13,120		44,804			44,932			200,512			303,368
Discount required to reflect Portfolio Assets at carrying value		—		(28,970	)		(29,133	)		(90,262	)		(148,365	)

Portfolio Assets, net	$	13,120	$	15,834		$	15,799		$	110,250		$	155,003


	December 31, 2003
	FC		WAMCO			WAMCO			Other
	Properties		XXVIII			XXX			Partnerships			Combined
Non-performing Portfolio Assets	$	—	$	37,230		$	50,542		$	134,034		$	221,806
Performing Portfolio Assets		—		10,209			—			71,573			81,782
Real estate Portfolios		13,340		—			—			4,214			17,554

Total Portfolio Assets		13,340		47,439			50,542			209,821			321,142
Discount required to reflect Portfolio Assets at carrying value		—		(29,659	)		(31,456	)		(91,346	)		(152,461	)

Portfolio Assets, net	$	13,340	$	17,780		$	19,086		$	118,475		$	168,681

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

(5) Interest Related to Residual Interest in Trust Certificates

There were no residual certificates held by the Partnerships to which the Partnerships receive all the economic benefits and risks at March 31, 2004 and December 31, 2003. The Partnerships recognized interest income on certificates held utilizing a yield of 21.29% for the three months ended March 31, 2003. During September 2003 the Partnerships purchased the underlying assets from the trust. At the time of this purchase, these assets were included in the Performing Portfolio Assets at their remaining historical cost of $5,902 and the remaining balance for the adjustment to market value of $905 was reversed against its corresponding balance of unrealized net gain on securitizations in the Partnerships’ equity.

(6) Deferred Profit Sharing and Deferred Compensation

In connection with the formation of FC Properties, an agreement was entered into which provided for potential payments to the project manager based on a percentage of actual sales proceeds. An equal amount of deferred profit participation and deferred compensation is recorded based on estimates of the projected sales with the deferred profit participation being amortized into expense in proportion to actual sales realized. No profit participation was paid until the limited partners recognized a 20% return on their investment. This return threshold was met in 2001. At March 31, 2004 and December 31, 2003, the estimated liability for this profit participation was $21,422 and $21,466, respectively, and was included in deferred compensation in the accompanying combined balance sheets. Additionally, amortization of $296 and $0 was recognized during the three months ended March 31, 2004 and 2003, respectively, and has been included in general, administrative and operating expenses in the accompanying combined statements of operations.

The achievement of the 20% return on investment resulted in payments of $0 and $58 in deferred profit sharing and commissions during the three months ended March 31, 2004 and 2003, respectively.

(7) Transactions with Affiliates

Under the terms of the various servicing agreements between the Partnerships and FirstCity, FirstCity receives a servicing fee based on proceeds from resolution of the Portfolio Assets for processing transactions on the Portfolio Assets and for conducting settlement, collection and other resolution activities. Included in the accompanying combined statements of operations is $855 and $657 in servicing fees incurred by the Partnerships during the three months ended March 31, 2004 and 2003, respectively.

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

During January 2004, WAMCO 32, Ltd. purchased a pool of loans from WAMCO 31, Ltd. The purchase price was $3.1 million, which was the pool’s net carrying value less deferred service fees payable associated with the pool.

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

(8) Preferred Equity

In 1999, CFSC Capital Corp. XXX contributed $3,556 as preferred equity in Community Development Investment, LLC. This preferred equity was converted to a note payable on August 30, 2003. The balance converted was $4,160. The note agreement has terms similar to the preferred equity and a maturity date of August 30, 2006.

On July 1, 2003, the Partnerships adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS establishes standards for how an issuer measures certain financial instruments with characteristics of both liabilities and equity and classifies them in its balance sheets. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. At December 31, 2003, SFAS No. 150 had no impact on the combined financial statements since the preferred equity was converted to a note payable.

(9) Commitments and Contingencies

WAMCO 31 owned a pool of loans that includes two lines of credit with a combined outstanding balance of $2.3 million at December 31, 2003. On January 1, 2004, WAMCO 32 purchased this pool from WAMCO 31 at cost and assumed the related lines of credit. The maximum commitment associated with these lines was $4.4 million at March 31, 2004. After reserves and borrowing base requirements, the total availability was $.3 million at March 31, 2004.

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

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

Overview

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

During the first quarter of 2004 the Company recorded earnings to common shareholders on a diluted basis of $4.8 million or $.41 per common share, a significant increase over the first quarter of 2003. The positive earnings were a result of a strong contribution from the Portfolio Asset Acquisition and Resolution segment of $4.0 million compared with $1.8 million for the same period in 2003 and $3.1 million in earnings contribution from the Consumer segment and its related investment in Drive, an increase of $2.5 million over the first quarter of 2003.

The increased earnings contribution from the Portfolio Asset Acquisition business of $2.3 million is primarily related to increases in revenues from investments in France and Mexico when compared to 2003. The increase in France is the result of increased equity earnings from Acquisition Partnerships which reflect strong collections from 2003 acquisitions. The Company’s positive equity earnings from investments in Mexico are a result of Mexican Peso exchange gains of $.5 million during the quarter when compared to a $1.6 million Mexican Peso exchange loss in the first quarter of 2003.

The Company was able to invest $3 million in portfolios acquisitions of $6.7 million during the quarter of which $6.5 million was purchased in the U.S. The Company also invested approximately $.2 million in South America during the quarter and continues to investigate other opportunities to invest in South America.

The Company’s 31% investment in Drive generated $4.0 million for the quarter and net of interest and other expenses resulted in a contribution of $3.1 million from the Consumer segment of the business. Drive had a record origination quarter of $244 million as a result of seasonal trends and a strengthening economy.

Although the Company’s primary revenues are generated by the Portfolio Asset Acquisition and resolution business and the Company’s investment in Drive, other items such as interest expense and the effects of discontinued operations may also have a significant impact on net income. During the first quarter 2004 corporate interest and overhead was down slightly when compared to the first quarter 2003 and there were no provisions from discontinued operations. The Company did receive cash flow from the residual interests of $.2 million during the first quarter 2004.

Overall the Company’s continues to reflect positive growth trends in acquisitions and originations and the resulting increased earnings contribution.

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

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

The Company reported net earnings for the quarter ended March 31, 2004 of $4.8 million or $.41 per share on a diluted basis. Components of the results for the three months ended March 31, 2004 and 2003, respectively, are detailed below (dollars in thousands):


	Three Months Ended
	March 31,
	2004			2003
Portfolio Asset Acquisition and Resolution.	$	4,043		$	1,777
Consumer		3,118			576
Corporate interest		(1,000	)		(1,172	)
Corporate overhead		(1,312	)		(1,200	)

Earnings (loss) from continuing operations		4,849			(19	)
Accrued preferred dividends		—			(66	)
Loss from discontinued operations		—			—

Net earnings (loss) to common stockholders	$	4,849		$	(85	)

Diluted earnings (loss) per common share	$	0.41		$	(0.01	)

Results of Operations

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this Quarterly Report on Form 10-Q.

First Quarter 2004 Compared to First Quarter 2003

The Company reported net earnings of $4.8 million in the first quarter of 2004 compared to a loss of $85,000 in the first quarter of 2003. On a per share basis, diluted net earnings to common stockholders were $.41 in the first quarter of 2004 compared to a loss of $.01 in the first quarter of 2003.

Portfolio Asset Acquisition and Resolution

The operating contribution from the Portfolio Asset acquisition and resolution segment was $4.0 million in the first quarter of 2004 compared to $1.8 million in the first quarter of 2003. FirstCity purchased $6.7 million of Portfolio Assets during the first quarter of 2004 ($4.0 million through Acquisition Partnerships), compared to zero purchases in the first quarter of 2003. The quarter end investment in wholly owned Portfolio Assets decreased to $7.0 million from $7.5 million at March 31, 2004 and 2003, respectively.

Servicing fee revenues. Servicing fee revenues decreased by 14% to $3.0 million in the first quarter of 2004 from $3.5 million in the first quarter of 2003. Service fees from the Mexican partnerships decreased $.5 million or 19% as a result of efforts to reduce operating costs in Mexico. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. Service fees from domestic Partnerships were flat from period to period.

Gain on resolution of Portfolio Assets. The net gain on resolution of Portfolio Assets decreased from $.7 million in the first quarter of 2003 to $75,000 in the first quarter of 2004. The weighted average gross profit percentage on the resolution of Portfolio Assets in the first quarter of 2004 was 30% as compared to 23% in the first quarter of 2003. This change was primarily due to one Portfolio generating proceeds of $2.2 million and a net gain of $.4 million or 18% during 2003.

Equity in earnings of investments. Equity in earnings of Acquisition Partnerships increased 279% to $3.8 million in the first quarter of 2004 compared to $1.0 million in the first quarter of 2003. The Acquisition Partnerships reflected net earnings of $16.0 million in the first quarter of 2004 compared to a net loss of $21.0 million in the first quarter of 2003. Following is a discussion of equity earnings by geographic region.

• Domestic - Equity in earnings of domestic Acquisition Partnerships decreased 17% to $1.9 million in the first quarter of 2004 from $2.3 million in 2003 primarily due to reduced equity earnings from MinnTex Investment Partners LP.

• Mexico - Equity in earnings of Mexican Acquisition Partnerships were $112,000 in the first quarter of 2004 compared to equity in losses of $2.1 million in 2003. These partnerships reflected net earnings of $3.7 million in the first quarter of 2004 compared to a $31.5 million loss in 2003. Approximately $23 million of the losses in 2003 were due to foreign exchange losses recognized by the partnerships as the Mexican peso fell to historical lows during the first quarter of 2003 (FirstCity’s portion of these losses was $1.5 million in 2003). In the first quarter of 2004, the partnerships recorded $6.5 million of foreign exchange gains. In addition, $2.1 million of interest expense was recorded in the first quarter of 2004 compared to $12 million in 2003.

This interest is owed to affiliates of the investors in these partnerships, of which FirstCity recorded $.4 million and $.9 million, respectively, as interest income.

• France - Equity in earnings of Acquisition Partnerships located in France increased 145% to $1.8 million in the first quarter of 2004 from $.7 million in 2003. This increase is principally due to the addition of three French Partnerships during 2003, which accounted for $1.2 million in equity in earnings in 2004. During the first quarter of 2003, FirstCity also recorded $.3 million in foreign currency transactions gains (included in other expenses) relating to investments in France.

Interest income. Interest income decreased 52% from $1.1 million in the first quarter of 2003 to $.5 million in the first quarter of 2004. This decrease is primarily due to the Acquisition Partnerships and their lenders amending three loan agreements with Acquisition Partnerships located in Mexico in 2003 to provide for no interest to be payable with respect to periods after the effective date of the amendments. This change had no impact on the consolidated net earnings, as the effect is offset through equity earnings in these Partnerships. Also, the average balances in Portfolio Assets and loans receivable decreased from $24.9 million in the first quarter of 2003 to $21.8 million in the first quarter of 2004.

Expenses. Operating expenses were $4.8 million in the first quarter of 2004 compared to $5.0 million in 2003.

Interest and fees on notes payable increased 14% from $.7 million in the first quarter of 2003 to $.8 million in 2004. The average debt for the quarter increased from $26.8 million in the first quarter of 2003 to $31.5 million in the first quarter of 2004. The average cost of borrowing decreased from 10.24% in the first quarter of 2003 to 9.90% in the first quarter of 2004.

Salaries and benefits increased $.2 million, or 7% to $3.0 million in the first quarter of 2004 from $2.8 million in 2003. Total personnel within the Portfolio Asset acquisition and resolution segment were 223 and 219 at March 31 2004 and 2003, respectively.

The provision for loan and impairment losses was minimal from period to period.

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

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

There were no provisions recorded on loans receivable from Acquisition Partnerships during the first quarter of 2004 and 2003. The loans receivable from Acquisition Partnerships are secured by the assets/loans acquired by the partnerships with purchase money loans provided by affiliates of the investors in the partnerships to purchase the asset pools held in those entities. These loans are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each pool to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment were necessary.

Occupancy, data processing, communication and other expenses declined 38% from $1.4 million in the first quarter of 2003 to $1.0 million in 2004 primarily due to increased foreign currency gains recorded in 2004.

Minority interest expense was minimal from period to period.

Consumer Lending

FirstCity’s consumer lending segment consists of the Company’s net investment in Drive. The operating contribution for the first quarter of 2004 was $3.1 million compared to $.6 million during the first quarter of 2003.

Equity in earnings of investment. FirstCity recorded equity in earnings of Drive of $5.0 million in the first quarter of 2004 compared to $.9 million in 2003. Drive recorded net income of $13.0 million in the first quarter of 2004 compared to $2.5 million in the first quarter of 2003. Drive’s inventory of retail installments contracts has grown from $443 million at March 31, 2003 to $770 million at March 31, 2004. Consequently, net interest margin after provision for credit losses and impairments at Drive rose from $17.7 million to $26.7 million during the first quarter of 2003 and 2004, respectively.

Interest and fees on notes payable. Interest and fees on notes payable increased from $95,000 in the first quarter of 2003 to $.9 million in 2004. During the first quarter of 2004, FirstCity recorded $.8 million of additional interest expense related to the contingent fee arrangement with the Bank of Scotland. See note 10 of the consolidated financial statements for further discussion of this contingent fee.

Other Items Affecting Operations

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

Corporate interest and overhead. Company level interest expense decreased by 15% to $1.0 million in the first quarter of 2004 from $1.2 million in the first quarter of 2003. Average debt declined to $41.4 million in the first quarter of 2004 from $50.5 million in 2003. Also, beginning with the third quarter of 2003, dividends on the New Preferred Stock are included in Corporate interest expense. Other corporate overhead expenses increased 9% to $1.3 million in the first quarter of 2004 from $1.2 million in 2003 primarily due to increased salaries and benefits.

Income taxes. Provision for income taxes was $.1 million in the first quarter of 2004 and 2003 and related primarily to state income taxes and federal alternative minimum taxes. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the first quarters of 2004 and 2003.

Discontinued Operations. The Company recorded no provision for additional losses from discontinued operations during the first quarter of 2004 and 2003. The only assets remaining from discontinued operations are the investment securities resulting from the retention of residual interests in securitization transactions. These securities are in “run-off,” and the Company is contractually obligated to service these assets. The assumptions used in the valuation model consider both industry as well as the Company’s historical experience. As the securities “run off,” assumptions are reviewed in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary.

Portfolio Asset Acquisition and Resolution

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


	Purchase		FirstCity
	Price		Investment
First quarter 2004	$	6,699	$	3,097
Total 2003		129,192		22,944
Total 2002		171,769		16,717
Total 2001		224,927		24,319
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
	March 31,
	2004			2003
Income from Portfolio Assets and Loans Receivable:
Average investment in Portfolio Assets and loans receivable:
Domestic	$	6,490		$	9,558
Mexico		13,133			15,354
France		2,155			—
Other foreign		34			—

Total	$	21,812		$	24,912

Income from Portfolio Assets and loans receivable:
Domestic	$	196		$	913
Mexico		376			878
France		26			—
Other foreign		—			—

Total	$	598		$	1,791

Average return (annualized):
Domestic		12.1	%		38.2	%
Mexico		11.5	%		22.9	%
France		4.8	%		—
Other foreign		—			—
Total		11.0	%		28.8	%
Servicing fee revenues:
Domestic partnerships:
$ Collected	$	26,353		$	24,051
Servicing fee revenue		1,038			1,041
Average servicing fee %		3.9	%		4.3	%
Mexico partnerships:
$ Collected	$	14,846		$	16,512
Servicing fee revenue		1,956			2,395
Average servicing fee %		13.2	%		14.5	%
Incentive service fees	$	38		$	71
Total Service Fees:
$ Collected	$	41,199		$	40,563
Servicing fee revenue		3,032			3,507
Average servicing fee %		7.4	%		8.6	%
Personnel:
Personnel expenses	$	3,041		$	2,842
Number of personnel (at period end):
Domestic		61			76
Mexico		162			143
Interest expense:
Average debt	$	31,483		$	26,788
Interest expense		779			686
Average cost (annualized)		9.90	%		10.24	%

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
	March 31,
	2004			2003
Revenues:
Gain on resolution of Portfolio Assets	$	20,569		$	20,989
Gross profit percentage on resolution of Portfolio Assets		33.0	%		36.5	%
Interest income	$	2,899		$	2,145
Other income		244			515
Interest expense(1):
Interest expense	$	3,744		$	14,486
Average cost (annualized)		4.2	%		14.2	%
Other expenses:
Service fees		3,933			4,474
Other operating costs		6,372			3,641
Foreign currency loss (gain)		(6,538	)		22,988
Income taxes		157			(902	)

Total other expenses		3,924			30,201

Net earnings (loss)	$	16,044		$	(21,038	)

Equity in earnings of Acquisition Partnerships	$	3,845		$	1,014
Equity in earnings of Servicing Entities		330			216

	$	4,175		$	1,230

(1)

Interest expense includes interest on loans to the Acquisition Partnerships located in Mexico from affiliates of the investor groups. The rates on all but three of these loans range from 18% to 20%. The average cost on debt excluding the Mexican Acquisition Partnerships was 5.2% and 5.6% for the three months ended March 31, 2004 and 2003, respectively. As noted above, beginning in 2003, the Acquisition Partnerships and their lenders amended three loan agreements from Mexican Acquisition Partnerships to provide for no interest to be payable with respect to periods after the effective date of the amendment. This change had no impact on the consolidated net earnings as the effect is offset through equity earnings in these Partnerships.

Consumer Lending

FirstCity owns a 31% interest in Drive Financial Services L.P., a sub prime auto lending company. Drive originated $244 million of receivables during the first quarter of 2004 compared to $126 million in 2003. Defaults and losses were 20.77% and 10.98%, respectively, at March 31, 2004 compared to 21.03% and 10.83%, respectively, at March 31, 2003. These statistics reflect the weakness in the economy in prior periods and the resulting impact on used car prices, although recent indicators reflect an upward trend in used car prices. Delinquencies were 11.52% at March 31, 2004, up from 4.66% for the same period last year as a result of a change in collections strategies, which in some instances will allow Drive to provide borrowers additional time to cure delinquencies rather than pursue immediate repossession.

Net income from Drive continues to be positive as originations and the volume of portfolio assets grow over time. Based on information provided by Drive, the Company expects that this positive trend will continue.

The following table details this trend (dollars in thousands):


							Income (Loss)
			Loan		Total		Before Provisions			Provisions			Net Income		FirstCity's
	Originations		Inventory		Assets		on Residual Assets			on Residual Assets			(Loss)		31% Share
2004
1st Quarter	$	244,121	$	770,042	$	915,128	$	13,001		$	—		$	13,001	$	4,031
2003
4th Quarter		102,228		623,389		738,829		6,308	***		(2,087	)		4,221		1,308
3rd Quarter		128,688		577,974		700,760		9,132			(3,904	)		5,228		1,621
2nd Quarter		127,706		511,212		619,269		8,251			(1,240	)		7,011		2,173
1st Quarter		126,118		443,099		551,412		3,707			(1,217	)		2,490		689

***

Net of $3.7 million of additional provisions related to loans receivable.

Note: As of March 31, 2004 Drive holds on its balance sheet residual interests with a book value of $30.1 million compared with $56.6 million as of March 31, 2003.

The following table presents selected information regarding consumer lending:

Analysis of Selected Data
Consumer Lending


	Three Months Ended
	March 31,
	2004			2003
Retail installment contracts acquired	$	244,121		$	126,118
Origination characteristics:
Face value to wholesale value		102.40	%		98.86	%
Weighted average coupon		21.10	%		20.91	%
Purchase discount (% of face value)		17.34	%		17.08	%
Servicing portfolio
Owned	$	437,193		$	163,473
Securitized		561,298			559,983

Total	$	998,491		$	723,456

Owned — number of contracts		34,767			14,570
Securitized — number of contracts		48,452			52,233

Total number of contracts		83,219			66,803

Defaults (% of original loan balance at time of default)		20.77	%		21.03	%
Net losses on defaults after recovery		10.98	%		10.83	%
Delinquencies (% of total serviced portfolio)		11.52	%		4.66	%

Provision for Income Taxes

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

Liquidity and Capital Resources

equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt and dividends from the Company’s subsidiaries, borrowings from revolving lines of credit and other credit facilities, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

Drive has a warehouse line of credit with BoS(USA), which provides borrowings up to $300 million. Drive’s obligation under this arrangement at March 31, 2003 was $197 million. The debt is secured by Drive’s retail installment contracts and has been extended to February 2005.

Drive also has a warehouse line of credit agreement with Variable Funding Capital Corporation, a subsidiary of First Union National Bank, which provides borrowings up to $100 million. During the first quarter of 2004, this facility was amended to increase the borrowing limit to $250 million until the sooner of May 31, 2004 or the close of a secured financing transaction. After that event, the limit returns to $100 million. Drive’s obligation under the arrangement at March 31, 2004 was $172 million. The debt is secured by Drive’s retail installment contracts and terminates September 2004.

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

Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships and the term and warehouse facilities of Drive, as of March 31, 2004, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $163 million and outstanding borrowings of $88 million.

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

The following table summarizes the material terms of the credit facilities to which the Company, its major operating subsidiaries and the Acquisition Partnerships were parties to as of May 11, 2004 and the outstanding borrowings under such facilities as of March 31, 2004.

Credit Facilities

Funded and

Unfunded

Outstanding

Commitment

Borrowings

Amount as of

as of

May 11,

March 31,

2004

Interest Rate

Other Terms 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 2004

Portfolio Acquisition Loan (Term)

LIBOR + 3.75%

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 of the Company, matures December 2007

Commercial Corp.

Term facility

Bank prime + 0.50%

Secured by existing Portfolio Assets, matures December 2004

Equity investment facility

Greater of 8.5% or LIBOR + 4.5%

Acquisition facility for the investment in future Acquisition partnerships, matures March 2005

Portfolio acquisition facility

—

LIBOR + 4.0%

Secured by Portfolio Assets
purchased with The
facility, matures September
2004

Unsecured loans payable to senior management

—

Fixed at 4.5% to 7.0%

Matures December 2011

Other unsecured loans

—

Fixed at 5.4% to 6.5%

Matures 2004

Consumer Corp.

Term loan

LIBOR + 1.0%

Secured by 20% equity interest in Drive, matures December 2007, non-recourse

Total

163

Unconsolidated Acquisition Partnerships Term Facilities(1)

118

Various rates

Secured by Portfolio Assets, various maturities ($11 million due in 2004), non-recourse

Credit Facilities

Funded and

Unfunded

Outstanding

Commitment

Borrowings

Amount as of

as of

May 11,

March 31,

2004

Interest Rate

Other Terms and Conditions

(Dollars in millions)

Unconsolidated Drive

Warehouse Facility

300

198

Prime minus .75%

Secured by warehouse
inventory, matures February
2005

Warehouse Facility

250

172

Rate based on
Commercial paper
rates combined with
Certain facility
fees

Secured by warehouse inventory, matures September 2004

Bonds payable

412

Fixed at 1.09% To 4.09%

Secured by retail installment Contracts, various maturities through October 2009

Subordinate capital Facility

Fixed at 16%

Secured by all assets of Drive, matures February 2006

1,027

836

(1)

In addition to the term acquisition facilities of the unconsolidated Acquisition Partnerships, the Mexican Acquisition Partnerships also have term debt of approximately $223 million outstanding as of March 31, 2004 owed to affiliates of the investor groups. Of this amount, the Company has recorded approximately $14 million as Loans Receivable on the Consolidated Balance Sheets.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q or incorporated by reference from time to time, including, but not limited to, statements relating to the Company’s strategic objectives and future performance, which are not historical facts, may be deemed to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. There are many important factors that could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. Such factors include, but are not limited to, the performance of the Company’s subsidiaries and affiliates; the availability of Portfolio Assets; assumptions underlying Portfolio asset performance; risks associated with foreign operations; currency exchange rate fluctuations; interest rate risk; the degree to which the Company is leveraged; the Company’s continued need for financing; availability of the Company’s credit facilities; the impact of certain covenants in loan agreements of the Company and its subsidiaries; risks of declining value of loans, collateral or assets; the ability of the Company to utilize NOLs; uncertainties of any litigation that might arise from discontinued operations; general economic conditions; foreign social and economic conditions; changes (legislative and otherwise) in the asset securitization industry; fluctuations in residential and commercial real estate values; capital market conditions, including the markets for asset-backed securities; factors more fully discussed and identified in the Company’s Annual Report on Form 10-K, filed March 30, 2004 (including those discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), as well as in other Securities and Exchange Commission filings of the Company. Many of these factors are beyond the Company’s control. In addition, it should be noted that past financial and operational performance of the Company is not necessarily indicative of future financial and operational performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Form 10-Q speak only as of the date of this Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

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

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

In summary, the Company would be negatively impacted by rising interest rates and declining prices of its sub-prime loans. Rising interest rates would negatively impact the value of residual interests in securitizations currently held and costs of borrowings under the warehouse lines and new secured financings. Declining prices of the Company’s sub-prime loans would adversely affect the levels of gains achieved in the event Drive elects to sell those loans. The Company has not entered into any instruments to minimize this market risk of adverse changes in interest rates or declining prices. There have been no material changes in the quantitative and qualitative risks of the Company since December 31, 2003.

The Company currently has investments in Mexico and France. In France, the Company’s investments are in the form of equity and represent a significant portion of the Company’s total equity investments. As of March 31, 2004, one U.S. dollar equaled .82 Euros. A sharp change of the Euro relative to the U.S. dollar could materially adversely affect the financial position and results of operations of the Company. A 5% and 10% incremental depreciation of the Euro would result in an estimated decline in the valuation of the Company’s equity investments in France of approximately $.7 million and $1.3 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Euro relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations. As discussed above, on March 31, 2004, the Company amended its acquisition term loan facility with the Senior Lenders to allow loans to be made in Euros up to a maximum amount in Euros that is equivalent to $22.5 million U.S. dollars. Management of the Company feels that this amended loan agreement will help reduce the risk of adverse effects of currency changes on Euro-denominated investments.

In Mexico, approximately 95% of the Company’s investments in Mexico are made through U.S. dollar denominated loans to the Partnerships located in Mexico. The remaining investment is in the form of equity in these same Partnerships. The loans receivable are required to be repaid in U.S. dollars. Although the U.S. dollar balance of these loans will not change due to a change in the Mexican peso, the future estimated cash flows of the underlying assets in Mexico could become less valuable as a result of a change in the exchange rate for the Mexican peso, and thus could affect the overall total returns to the Company on these investments. As of March 31, 2004, one U.S. dollar equaled 11.1 Mexican pesos. A 5% and 10% incremental depreciation of the peso would result in an estimated decline in the valuation of the Company’s total investments in Mexico of approximately $.9 million and $1.8 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Mexican peso relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of management’s evaluation.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

FirstCity was not involved in any material legal proceedings as of March 31, 2004.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None

Item 3. Defaults Upon Senior Securities

In the first quarter of 1999, dividends on the Company’s adjusting rate preferred stock were suspended. At March 31, 2004, accumulated dividends in arrears on such preferred stock totaled $1.3 million, or $9.98 per share.

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.


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


Exhibit
Number		Description of Exhibit
		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).
10.7	—	Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).
10.8	—	Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).
10.9	—	Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).
10.10	—	Receivables Financing Agreement, dated August 18, 2000, among Drive BOS LP, Drive Financial Services LP, each Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A. (incorporated herein by reference to Exhibit 10.44 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).
10.11	—	Amendment to Loan Agreement and extension of Promissory


Exhibit
Number		Description of Exhibit
		Note, dated January 12, 2001, by and between FirstCity Holdings Corporation and CFSC Capital Corp. XXX (incorporated herein by reference to Exhibit 10.45 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).
10.12	—	Second Amendment, dated as of February 16, 2001, to the Receivables Financing Agreement, dated as of August 18, 2000, among Drive BOS LP, Drive Financial Services LP the Lenders party thereto, IPA Incorporated and Wells Fargo Bank Minnesota, NA (incorporated herein by reference to Exhibit 10.46 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).
10.13	—	Subordinate Capital Loan Agreement, dated as of February 16, 2001, among Drive Financial Services LP, DRIVE BOS LP, the financial institutions from time to time party hereto and IFA Incorporated (incorporated herein by reference to Exhibit 10.47 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).
10.14	—	Amended and Restated Amendment #4 (Option and Option Warrant), dated as of December 31, 2001, between the Company and BoS(USA) Inc. (incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K dated January 18, 2002, filed with the Commission on January 18, 2002).
10.15	—	Letter Agreement, dated November 26, 2002, between FirstCity Consumer Lending Corporation and The Governor and Company of the Bank of Scotland, including Form of Promissory Note to be executed by FirstCity Consumer Lending Corporation, payable to The Governor and Company of the Bank of Scotland. (incorporated herein by reference to Exhibit 99(d)(5) of the Company’s Form SC TO-I/A dated November 27, 2002, filed with the Commission on November 27, 2002).
10.16	—	Amended and Restated Loan Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.16 of the Company’s Form 10-K dated April 15, 2003).
10.17	—	Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-K dated April 15, 2003).
10.18*	—	Fifth amendment, dated March 31, 2004, to the Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders and Bank of Scotland as Agent.
10.19*	—	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation.
10.20*	—	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip.
31.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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).
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


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


Exhibit
Number		Description of Exhibit
		(incorporated herein by reference to Exhibit 99(d)(5) of the Company’s Form SC TO-I/A dated November 27, 2002, filed with the Commission on November 27, 2002).
10.16	-	Amended and Restated Loan Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.16 of the Company’s Form 10-K dated April 15, 2003).
10.17	-	Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-K dated April 15, 2003).
10.18*	-	Fifth amendment, dated March 31, 2004, to the Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders and Bank of Scotland as Agent.
10.19*	-	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation.
10.20*	-	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip.
31.1*	-	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	-	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	-	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
32.2*	-	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.


	FirstCity Financial Corporation
	By:	/s/ James T. Sartain
		James T. Sartain
		President and Chief Executive Officer and Director (Duly authorized officer of the Registrant)


							Class B
	Class A Equity						Equity
	General			Limited			Limited			General			Limited
	Partners			Partners			Partners			Partners			Partners			Total
							(Dollars in thousands)
Balance at December 31, 2002	$	123		$	6,010		$	1,063		$	939		$	71,924		$	80,059
Contributions		—			—			—			332			29,850			30,182
Distributions		(98	)		(4,788	)		(322	)		(546	)		(38,987	)		(44,741	)
Comprehensive income:
Net earnings		41			1,989			55			280			18,163			20,528
Unrealized net loss on securitization		(21	)		(1,018	)		(5	)		(17	)		(378	)		(1,439	)

Total comprehensive income		20			971			50			263			17,785			19,089

Balance at December 31, 2003		45			2,193			791			988			80,572			84,589
Contributions		—			—			—			5			788			793
Distributions		(4	)		(190	)		(18	)		(70	)		(5,427	)		(5,709	)
Comprehensive income:
Net earnings		5			267			12			32			2,253			2,569

Total comprehensive income		5			267			12			32			2,253			2,569

Balance at March 31, 2004	$	46		$	2,270		$	785		$	955		$	78,186		$	82,242

•		Domestic - Equity in earnings of domestic Acquisition Partnerships decreased 17% to $1.9 million in the first quarter of 2004 from $2.3 million in 2003 primarily due to reduced equity earnings from MinnTex Investment Partners LP.

•		Mexico - Equity in earnings of Mexican Acquisition Partnerships were $112,000 in the first quarter of 2004 compared to equity in losses of $2.1 million in 2003. These partnerships reflected net earnings of $3.7 million in the first quarter of 2004 compared to a $31.5 million loss in 2003. Approximately $23 million of the losses in 2003 were due to foreign exchange losses recognized by the partnerships as the Mexican peso fell to historical lows during the first quarter of 2003 (FirstCity’s portion of these losses was $1.5 million in 2003). In the first quarter of 2004, the partnerships recorded $6.5 million of foreign exchange gains. In addition, $2.1 million of interest expense was recorded in the first quarter of 2004 compared to $12 million in 2003.



	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)