-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MI2O7zCY34jbENMbQOMVTg9jsPpMyRnHF0a/0WEyYKalNJrh1e5IqFSwFd07mxMb zrAqKRWLkomoWGgkXcLyNA== 0000909518-98-000544.txt : 19980817 0000909518-98-000544.hdr.sgml : 19980817 ACCESSION NUMBER: 0000909518-98-000544 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTCITY FINANCIAL CORP CENTRAL INDEX KEY: 0000828678 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 760243729 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26500 FILM NUMBER: 98688465 BUSINESS ADDRESS: STREET 1: 6400 IMPERIAL DRIVE CITY: WACO STATE: TX ZIP: 76712 BUSINESS PHONE: 2547511750 MAIL ADDRESS: STREET 1: 6400 IMPERIAL DRIVE CITY: WACO STATE: TX ZIP: 76712 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY BANCORPORATION OF TEXAS INC/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY ACQUISITION CORP DATE OF NAME CHANGE: 19880523 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-7614 FIRSTCITY FINANCIAL CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 76-0243729 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 6400 IMPERIAL DRIVE, WACO, TX 76712 (Address of Principal Executive (Zip Code) Offices) (254) 751-1750 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] The number of shares of common stock, par value $.01 per share, outstanding at August 1, 1998 was 8,260,582. FORWARD LOOKING INFORMATION This Quarterly Report on Form 10-Q may contain forward-looking statements. The factors identified under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations are important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. When any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that, while such assumptions or bases are believed to be reasonable and are made in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. When, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe," "expect," "estimate," "project," "anticipate" and similar expressions identify forward-looking statements. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 1998 DECEMBER 31, 1997 -------------------- -------------------- ASSETS Cash and cash equivalents $30,531 $31,605 Portfolio Assets, net 68,476 89,951 Loans receivable, net 55,912 90,115 Mortgage loans held for sale 1,021,185 533,751 Investment securities 43,046 6,935 Equity investments in and advances to Acquisition Partnerships 36,076 35,529 Mortgage servicing rights 124,242 69,634 Receivable for servicing advances and accrued interest 34,040 21,410 Deferred tax benefit, net 32,185 30,614 Other assets, net 64,346 30,575 -------------------- -------------------- Total Assets $1,510,039 $940,119 ==================== ==================== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $1,227,966 $750,781 Other liabilities 68,164 34,672 -------------------- -------------------- Total Liabilities 1,296,130 785,453 Commitments and contingencies -- -- Redeemable preferred stock: Special preferred stock, including dividends of $669 (nominal stated value of $21 per share; 2,500,000 shares authorized; 849,777 shares issued and outstanding) 18,515 18,515 Adjusting rate preferred stock, including dividends of $846 (redemption value of $21 per share; 2,000,000 shares authorized; 1,073,704 shares issued and outstanding) 23,393 23,393 Shareholders' equity: Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding) -- -- Common stock (par value $.01 per share; 100,000,000 authorized; issued and outstanding: 8,260,582 and 6,526,510 shares, 83 65 respectively) Paid in capital 78,091 29,509 Retained earnings 93,827 83,184 -------------------- -------------------- Total Shareholders' Equity 172,001 112,758 -------------------- -------------------- Total Liabilities, Redeemable Preferred Stock and Shareholders' $1,510,039 $940,119 Equity ==================== ====================
See accompanying notes to consolidated financial statements. 3 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ ----------------------------- 1998 1997 1998 1997 -------------- ------------ ------------ ------------- Revenues: Gain on sale of mortgage and other loans $28,303 $7,999 $48,572 $13,320 Gain on sale of automobile loans 2,434 -- 2,434 -- Net mortgage warehouse income 2,395 526 4,117 1,292 Gain on sale of mortgage servicing rights -- 2,263 -- 4,529 Servicing fees: Mortgage 5,588 3,414 10,282 6,985 Other 1,250 1,660 2,363 9,522 Gain on resolution of Portfolio Assets 2,839 4,891 5,936 10,192 Equity in earnings of Acquisition Partnerships 1,523 2,772 4,737 4,313 Rental income on real estate Portfolios 75 87 156 157 Interest income 2,898 3,449 6,697 6,228 Other income 2,239 2,409 6,276 3,570 Interest income on Class A Certificate -- 1,515 -- 3,174 -------------- ------------ ------------ ------------- Total revenues 49,544 30,985 91,570 63,282 Expenses: Interest on other notes payable 3,304 3,650 6,722 6,512 Salaries and benefits 20,447 10,293 36,464 19,284 Amortization: Mortgage servicing rights 4,126 1,596 7,302 3,143 Other 373 812 805 1,765 Provision for loan losses 575 1,357 2,927 2,155 Provision for valuation of mortgage servicing rights 500 -- 500 -- Occupancy, data processing, communication and other 13,121 8,608 24,812 16,185 -------------- ------------ ------------ ------------- Total expenses 42,446 26,316 79,532 49,044 Net earnings before minority interest, preferred 7,098 12,038 dividends and income taxes 4,669 14,238 Benefit (provision) for income taxes 755 (230) 1,396 (582) -------------- ------------ ------------ ------------- Net earnings before minority interest and preferred 7,853 4,439 13,434 13,656 dividends Minority interest 229 69 14 69 Preferred dividends 1,515 1,515 3,030 3,174 -------------- ------------ ------------ ------------- Net earnings to common shareholders $6,109 $2,855 $10,390 $10,413 ============== ============ ============ ============= Net earnings per common share-- basic $0.84 $0.44 $1.51 $1.60 Net earnings per common share-- diluted $0.83 $0.44 $1.47 $1.58 Weighted average common shares outstanding-- basic 7,243 6,517 6,889 6,517 Weighted average common shares outstanding-- diluted 7,401 6,549 7,045 6,575
See accompanying notes to consolidated financial statements. 4 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NUMBER OF COMMON PAID IN RETAINED TOTAL COMMON SHARES STOCK CAPITAL EARNINGS SHAREHOLDERS' EQUITY -------------- -------------- -------------- -------------- ----------------- BALANCES, JANUARY 1, 1997 6,513,346 $65 $29,783 $54,954 $84,802 Exercise of warrants, options and 13,164 -- 318 -- 318 employee stock purchase plan Change in subsidiary year end -- -- -- (1,195) (1,195) Net earnings, after minority -- -- -- 35,628 35,628 interest, for 1997 Preferred dividends -- -- -- (6,203) (6,203) Other -- -- (592) -- (592) -------------- -------------- -------------- -------------- ----------------- BALANCES, DECEMBER 31, 1997 6,526,510 65 29,509 83,184 112,758 Exercise of warrants, options and 491,922 5 12,275 -- 12,280 employee stock purchase plan Issuance of common stock to acquire 41,000 1 2,149 -- 2,150 the minority interest of subsidiary Issuance of common stock in public 1,201,150 12 34,158 -- 34,170 offering Net earnings, after minority -- -- -- 13,420 13,420 interest, for six months ended June 30, 1998 Foreign currency translation and -- -- -- 253 253 other adjustments Preferred dividends -- -- -- (3,030) (3,030) -------------- -------------- -------------- -------------- ----------------- BALANCES, JUNE 30, 1998 8,260,582 $83 $78,091 $93,827 $172,001 ============== ============== ============== ============== =================
See accompanying notes to consolidated financial statements. 5 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------------- 1998 1997 -------------- -------------- Cash flows from operating activities: Net earnings before minority interest and preferred $13,434 $13,656 dividends Adjustments to reconcile net earnings to net cash used in operating activities, net of effect of acquisitions: Proceeds from resolution of Portfolio Assets 30,032 30,122 Gain on resolution of Portfolio Assets (5,936) (10,192) Purchase of Portfolio Assets and loans receivable, (11,827) (20,791) net Origination of automobile receivables (57,762) (50,071) Gain on sale of mortgage servicing rights -- (4,529) Increase in mortgage loans held for sale (487,434) (87,131) Increase in construction loans receivable (9,569) (5,488) Originated mortgage servicing rights (62,409) (20,981) Purchases of mortgage servicing rights (69) (5,677) Proceeds from sale of mortgage servicing rights -- 13,826 Provision for loan losses and valuation of mortgage 3,427 2,155 servicing rights Equity in earnings of Acquisition Partnerships (4,737) (4,313) Proceeds from performing Portfolio Assets and loans 57,491 46,457 receivable, net (Increase) decrease in net deferred tax asset (1,571) 13 Depreciation and amortization 9,185 7,360 Increase in other assets (32,221) (34,246) Increase in other liabilities 38,775 11,795 -------------- -------------- Net cash used in operating activities (521,191) (118,035) -------------- -------------- Cash flows from investing activities: Payments on advances to acquisition partnerships and -- 1,029 affiliates Acquisition of subsidiaries -- 1,118 Principal payments on Class A Certificate -- 33,807 Property and equipment, net (3,269) (1,752) Contributions to Acquisition Partnerships (13,581) (11,378) Distributions from Acquisition Partnerships 15,653 7,759 -------------- -------------- Net cash provided by (used in) investing (1,197) 30,583 activities -------------- -------------- Cash flows from financing activities: Borrowings under notes payable 10,630,721 4,754,364 Payments of notes payable (10,152,827) (4,640,385) Purchase of special preferred stock -- (12,567) Proceeds from issuance of common stock 46,450 111 Distributions to minority interest -- (5,669) Preferred dividends paid (3,030) (3,597) Other increases in paid in capital -- 311 -------------- -------------- Net cash provided by financing activities 521,314 92,568 -------------- -------------- Net increase (decrease) in cash $(1,074) $5,116 Cash, beginning of period 31,605 16,445 -------------- -------------- Cash, end of period $30,531 $21,561 ============== ============== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $28,867 $15,621 Income taxes $231 $104
See accompanying notes to consolidated financial statements. 6 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) BASIS OF PRESENTATION The unaudited consolidated financial statements of FirstCity Financial Corporation ("FirstCity" or the "Company") reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity's financial position at June 30, 1998, the results of operations and the cash flows for the three month and six month periods ended June 30, 1998 and 1997. Additionally, the Company's merger with Harbor Financial Group, Inc. ("Mortgage Corp.") on July 1, 1997 has been accounted for as a pooling of interests. The accompanying consolidated financial statements have been retroactively restated to reflect the pooling of interests. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimation of future collections on purchased portfolio assets used in the calculation of net gain on resolution of portfolio assets, interest rate environments, prepayment speeds of loans in servicing portfolios, collectibility on loans held in inventory and for investment. Actual results could differ materially from those estimates. Certain amounts in the financial statements for prior periods have been reclassified to conform with current financial statement presentation. (2) MERGERS AND ACQUISITIONS On July 1, 1997, the Company merged with Mortgage Corp. (the "Harbor Merger"). The Company issued 1,580,986 shares of its common stock in exchange for 100% of Mortgage Corp.'s outstanding capital stock in a transaction accounted for as a pooling of interests. Mortgage Corp. originates and services residential and commercial mortgage loans. Mortgage Corp. had approximately $12 million in equity, assets of over $300 million and 700 employees prior to the Harbor Merger. At year end 1997, an unrelated party exercised warrants to acquire a four percent minority interest in Mortgage Corp.'s subsidiary, Harbor Financial Mortgage Corporation. On March 31, 1998, the Company issued 41,000 shares of common stock in exchange for the four percent minority interest in this subsidiary. 7 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's net revenues, net earnings to common shareholders and net earnings per common share, for the three months and six months ended June 30, 1997, before and after the Harbor Merger are summarized as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1997 1997 ------------------------- ------------------ Net revenues (including equity earnings): Before 1997 pooling $15,273 $34,838 1997 pooling 15,712 28,444 After 1997 pooling 30,985 63,282 Net earnings to common shareholders: Before 1997 pooling $2,066 $8,966 1997 pooling 789 1,447 After 1997 pooling 2,855 10,413 Net earnings per common share - diluted: Before 1997 pooling $0.42 $1.79 1997 pooling 0.02 (0.21) After 1997 pooling 0.44 1.58
In the first quarter of 1997, FirstCity received $6.8 million (recorded as servicing fees) from the FirstCity Liquidating Trust (the "Trust") for termination of the Investment Management Agreement. (3) PORTFOLIO ASSETS Portfolio Assets are summarized as follows:
JUNE 30, DECEMBER 1998 31,1997 ---------------- --------------- Non-performing $106,757 $130,657 Performing 12,187 16,131 Real estate 16,721 22,777 ---------------- --------------- Total 135,665 169,565 Discount required to reflect Portfolio Assets at (67,189) (79,614) carrying value ---------------- --------------- Portfolio Assets, net $68,476 $89,951 ================ ===============
Portfolio Assets are pledged to secure non-recourse notes payable. (4) LOANS RECEIVABLE Loans receivable are summarized as follows:
JUNE 30, DECEMBER 31, 1998 1997 ----------------- ----------------- Construction loans receivable $29,163 $19,594 Residential mortgage and other loans held for 8,364 6,386 investment Automobile and consumer finance receivables 24,876 73,417 Allowance for loan losses (6,491) (9,282) ----------------- ----------------- Loans receivable, net $55,912 $90,115 ================= ================= 8
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The activity in the allowance for loan losses is summarized as follows for the periods indicated:
SIX MONTHS ENDED JUNE 30, -------------------------- 1998 1997 ------------- ------------ Balances, beginning of period $9,282 $2,693 Provision for loan losses 2,852 2,155 Discounts acquired 8,649 4,936 Reduction in contingent liabilities -- 458 Allocation of reserves to sold loans (7,602) -- Charge off activity: Principal balances charged off (8,956) (7,460) Recoveries 2,266 1,158 ------------- ------------ Net charge offs (6,690) (6,302) ------------- ------------ Balances, end of period $6,491 $3,940 ============= ============
During 1997, a note recorded at the time of original purchase of the initial automobile finance receivables pool and contingent on the ultimate performance of the pool was adjusted to reflect a reduction in anticipated payments due pursuant to the contingency. The reduction in the recorded contingent liability was recorded as an increase in the allowance for losses. (5) MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale include loans collateralized by first lien mortgages on one-to-four family residences as follows:
JUNE 30, 1998 DECEMBER 31,1997 -------------- ------------------ Residential mortgage loans $993,677 $522,970 Unamortized premiums and discounts 27,508 10,781 -------------- ------------------ $1,021,185 $533,751 ============== ==================
(6) INVESTMENT SECURITIES The Company has investment securities (investments) consisting of rated securities, retained interests and related interest only strips (collectively referred to as residual interests) which are all attributable to loans sold through securitization transactions by the Company. The investments are accounted for in accordance with SFAS No.115, "Accounting for Investments in Certain Debt and Equity Marketable Securities" and classified as available for sale. Accordingly, the Company records these investments at estimated fair value. The increases or decreases in estimated fair value are recorded as unrealized gains or losses in the accompanying consolidated statement of shareholders' equity. The determination of fair value is based on the present value of the anticipated excess cash flows using valuation assumptions unique to each securitization. As of June 30, 1998 and December 31, 1997 the Company had recorded no unrealized gain or loss on the investments. Investments are comprised of the following as of the dates indicated.
JUNE 30, DECEMBER 1998 31,1997 ---------------- --------------- Rated securities $2,801 $ -- Interest only strips 19,849 3,396 Retained interests 20,164 3,308 Other securities 88 -- Accrued interest 144 231 ---------------- --------------- Investment securities $43,046 $6,935 ================ ===============
9 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The activity in investments for the six months ended June 30, 1998 and the year ended December 31, 1997 is as follows:
JUNE 30, DECEMBER 1998 31,1997 ---------------- --------------- Balance, beginning of period $6,935 $ -- Cost allocated from securitizations 37,175 6,925 Interest accreted. 688 548 Increase in other securities, net 88 -- Cash received from trusts (1,840) (538) ---------------- --------------- Balance, end of period $43,046 $6,935 ================ ===============
The investments are valued using discount rates ranging from 12% to 15% for both home equity and consumer residual interests. Estimated loss rates range from 1.5% to 14% and prepayment assumptions range from 12% to 30% and 3% to 5% on home equity and consumer residual interests, respectively. (7) INVESTMENTS IN ACQUISITION PARTNERSHIPS The Company has investments in Acquisition Partnerships and their general partners that are accounted for on the equity method. The condensed combined financial position and results of operations of the Acquisition Partnerships, which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized below: CONDENSED COMBINED BALANCE SHEETS
JUNE 30, DECEMBER 1998 31,1997 --------------- ---------------- Assets $278,649 $338,484 =============== ================ Liabilities $186,025 $250,477 Net equity 92,624 88,007 --------------- ---------------- $278,649 $338,484 =============== ================ Company's equity in Acquisition Partnerships $36,076 $35,529 =============== ================
CONDENSED COMBINED SUMMARY OF EARNINGS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ---------------------------- 1998 1997 1998 1997 ------------ ------------- ------------ ------------ Proceeds from resolution of Portfolio Assets $30,070 $91,068 $87,628 $115,652 Gross margin 9,110 11,857 27,643 19,558 Interest income on performing portfolio 2,169 1,822 4,622 3,728 assets Net earnings $3,860 $7,424 $12,982 $11,015 ============ ============= ============ ============ Company's equity in earnings of Acquisition $1,523 $2,772 $4,737 $4,313 Partnerships ============ ============= ============ ============
(8) PREFERRED STOCK AND SHAREHOLDERS' EQUITY In May 1998, the Company closed the public offering of 1,542,150 shares of FirstCity common stock, of which 341,000 shares were sold by selling shareholders. Net proceeds (after expenses) of $34.2 million were used to retire debt. 10 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On May 11, 1998, the Company notified holders of its outstanding warrants to purchase shares of common stock that it was exercising its option to repurchase such warrants for $1.00 each. In June 1998, as a result of such notification, warrants representing 471,380 shares of common stock were exercised for an aggregate warrant purchase price of $11.8 million. In the first six months of 1997, the Company purchased 537,430 shares of special preferred stock. In the third quarter of 1997, 1,073,704 shares of special preferred stock were exchanged for a like number of shares of adjusting rate preferred stock. At June 30, 1998, accrued dividends totaled $.7 million for special preferred stock and $.8 million for adjusting rate preferred stock, or $.7875 per share, and were paid on July 15, 1998. On July 17, 1998 the Company filed a shelf registration statement with the Securities and Exchange Commission which allows the Company to issue up to $250 million in debt and equity securities from time to time in the future. The registration statement became effective July 28, 1998. Earnings per share ("EPS") has been calculated in conformity with SFAS No. 128, Earnings Per Share, and all prior periods have been restated. A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 1998 1997 1998 1997 ----------- ---------- ------------ ---------- Net earnings to common shareholders $6,109 $2,855 $10,390 $10,413 =========== ========== ============ ========== Weighted average common shares outstanding - basic 7,243 6,517 6,889 6,517 Effect of dilutive securities: Assumed exercise of stock options 78 32 76 45 Assumed exercise of warrants 80 -- 80 13 ----------- ---------- ------------ ---------- Weighted average common shares outstanding - diluted 7,401 6,549 7,045 6,575 =========== ========== ============ ========== Net earnings per common share - basic $0.84 $0.44 $1.51 $1.60 Net earnings per common share - diluted $0.83 $0.44 $1.47 $1.58
The Company adopted Financial Accounting Standards Board Statement No. 130, Reporting Comprehensive Income ("SFAS 130") as of January 1, 1998. SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 also requires the accumulated balance of other comprehensive income to be displayed separately in the equity section of the consolidated balance sheet. The accumulated balance of other comprehensive income at each of June 30, 1998 and December 31, 1997 was $(1) and $44, respectively, and other comprehensive income for the six months ended June 30, 1998 and 1997 was $(45) and $0, respectively. The adoption of this statement had no material impact on net earnings or shareholders' equity. (9) INCOME TAXES Federal income taxes are provided at a 35% rate. Net operating loss carry forwards ("NOLs") are available to FirstCity and are recognized as an offset to the provision in the period during which the benefit is determined to be realizable. During the first six months of 1998, FirstCity recognized a deferred tax benefit of $1.5 million (compared to $.6 million in the first six months of 1997). Realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income prior to expiration of the net operating loss carry forwards. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carry forward period change. 11 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings in the ordinary course of business. In the opinion of management, the resolution of such matters will not have a material adverse impact on the consolidated financial condition, results of operations or liquidity of the Company. FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company is a 50% owner in an entity that is obligated to advance up to $2.5 million toward the acquisition of Portfolio Assets from financial institutions in California. At June 30, 1998, advances of $.2 million had been made under the obligation. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a diversified financial services company engaged in residential and commercial mortgage banking ("Mortgage Corp."), Portfolio Asset acquisition and resolution ("Commercial Corp.") and consumer lending ("Consumer Corp."). The mortgage banking business involves the origination, acquisition and servicing of residential and commercial mortgage loans and the subsequent warehousing, sale or securitization of such loans through various public and private secondary markets. The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to Face Value and servicing and resolving such Portfolios in an effort to maximize the present value of the ultimate cash recoveries. The Company also seeks opportunities to originate and retain high yield commercial loans to businesses and to finance real estate projects that are unable to access traditional lending sources. The consumer lending business involves the acquisition, origination, warehousing, securitization and servicing of consumer receivables. The Company's current consumer lending operations are focused on the acquisition of sub-prime automobile receivables. The Company's financial results are affected by many factors including levels of and fluctuations in interest rates, fluctuations in the underlying values of real estate and other assets, and the availability and prices for loans and assets acquired in all of the Company's businesses. The Company's business and results of operations are also affected by the availability of financing with terms acceptable to the Company and the Company's access to capital markets, including the securitization markets. The Harbor Merger, which occurred in July 1997, was accounted for as a pooling of interests. The Company's historical financial statements have therefore been retroactively restated to include the financial position and results of operations of Mortgage Corp. for all periods presented. As a result of the significant period to period fluctuations in the revenues and earnings of the Company's Portfolio Asset acquisition and resolution business, period to period comparisons of the Company's results of operations may not be meaningful. ANALYSIS OF REVENUES AND EXPENSES The following table summarizes the revenues and expenses of each of the Company's businesses and presents the contribution that each business makes to the Company's operating margin. SUMMARY OF REVENUES AND EXPENSES (IN THOUSANDS, EXCEPT PER SHARE DATA)
SECOND QUARTER SIX MONTHS ENDED JUNE 30, --------------------------------- ------------------------------ 1998 1997 1998 1997 --------------- -------------- ------------- ------------- MORTGAGE BANKING: Revenues: Net mortgage warehouse income $2,395 $526 $4,117 $1,292 Gain on sale of mortgage loans 28,303 7,999 48,572 13,320 Servicing fees 5,588 3,414 10,282 6,985 Other 1,552 3,773 3,556 6,848 --------------- -------------- ------------- ------------- Total 37,838 15,712 66,527 28,445 Expenses: Salaries and benefits 17,216 7,647 30,151 13,573 Amortization of mortgage servicing rights 4,126 1,596 7,302 3,143 Provision for valuation of mortgage servicing rights 500 -- 500 -- Interest on other notes payables 486 304 987 559 Occupancy, data processing, communication and other 9,410 4,887 17,514 8,846 --------------- -------------- ------------- ------------- Total 31,738 14,434 56,454 26,121 --------------- -------------- ------------- ------------- Operating contribution before direct taxes $6,100 $1,278 $10,073 $2,324 =============== ============== ============= ============= Operating contribution, net of direct taxes $6,100 $833 $9,984 $1,491 =============== ============== ============= ============= PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: Gain on resolution of Portfolio Assets $2,839 $4,891 $5,936 $10,192 Equity in earnings of Acquisition Partnerships 1,523 2,772 4,737 4,313 Servicing fees (1) 666 1,554 1,395 9,382
13
SECOND QUARTER SIX MONTHS ENDED JUNE 30, --------------------------------- ------------------------------ 1998 1997 1998 1997 --------------- -------------- ------------- ------------- Other 512 1,001 2,510 2,033 --------------- -------------- ------------- ------------- Total 5,540 10,218 14,578 25,920 Expenses: Salaries and benefits 1,100 1,268 2,267 2,883 Interest on other notes payable 1,336 1,762 2,812 3,214 Asset level expenses, occupancy, data processing and 1,886 2,835 4,098 6,033 other --------------- -------------- ------------- ------------- Total 4,322 5,865 9,177 12,130 --------------- -------------- ------------- ------------- Operating contribution before direct taxes $1,218 $4,353 $5,401 $13,790 =============== ============== ============= ============= Operating contribution, net of direct taxes $1,223 $4,348 $5,392 $13,685 =============== ============== ============= ============= CONSUMER LENDING: Revenues: Gain on sale of automobile loans $2,434 $ -- $2,434 $ -- Interest income 2,659 2,777 5,225 4,869 Servicing fees and other 653 186 1,043 234 --------------- -------------- ------------- ------------- Total 5,746 2,963 8,702 5,103 Expenses: Salaries and benefits 1,292 592 2,404 1,097 Provision for loan losses 500 1,357 2,852 2,155 Interest on other notes payable 939 1,113 1,819 1,835 Occupancy, data processing and other 1,658 761 2,765 1,594 --------------- -------------- ------------- ------------- Total 4,389 3,823 9,840 6,681 =============== ============== ============= ============= Operating contribution before direct taxes $1,357 $(860) $(1,138) $(1,578) =============== ============== ============= ============= Operating contribution, net of direct taxes $1,357 $(862) $(1,138) $(1,581) =============== ============== ============= ============= Total operating contribution, net of direct taxes $8,680 $4,319 $14,238 $13,595 =============== ============== ============= ============= CORPORATE OVERHEAD: Interest income on Class A Certificate (2) $ -- $1,515 $3,174 $ -- Salaries and benefits, occupancy, professional and (1,806) (1,764) (2,318) (3,782) other income and expenses, net Deferred tax benefit 750 300 1,500 600 --------------- -------------- ------------- ------------- Net earnings before preferred dividends 7,624 4,370 13,420 13,587 Preferred dividends 1,515 1,515 3,030 3,174 --------------- -------------- ------------- ------------- Net earnings to common shareholders $6,109 $2,855 $10,390 $10,413 =============== ============== ============= ============= SHARE DATA: Net earnings per common share-- basic $0.84 $0.44 $1.51 $1.60 Net earnings per common share-- diluted $0.83 $0.44 $1.47 $1.58 Weighted average common shares outstanding - basic 7,243 6,517 6,889 6,517 Weighted average common shares outstanding - diluted 7,401 6,549 7,045 6,575
(1) Includes $6.8 million received as a result of terminating the Investment Management Agreement with FirstCity Liquidating Trust in first quarter 1997. (2) Prior to June 30, 1997, income was received from FirstCity Liquidating Trust equal to the Company's preferred stock dividend obligation. ORIGINATION AND OTHER FINANCIAL DATA: Mortgage Corp.:
SECOND QUARTER SIX MONTHS ENDED JUNE 30, --------------------------------- ------------------------------ 1998 1997 1998 1997 --------------- -------------- ------------- ------------- Origination of residential mortgage loans: Conventional $1,584,727 $466,256 $2,945,592 $876,352 Agency 377,364 118,060 708,592 201,291
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SECOND QUARTER SIX MONTHS ENDED JUNE 30, --------------------------------- ------------------------------ 1998 1997 1998 1997 --------------- -------------- ------------- ------------- Home equity 89,022 48,477 147,284 59,522 Other 37,075 16,235 56,987 24,138 --------------- -------------- ------------- ------------- Total $2,088,188 $649,028 $3,858,455 $1,161,303 =============== ============== ============= ============= Origination of commercial mortgage loans: Correspondent $67,985 $42,474 $181,250 $42,474 Construction 12,767 15,623 28,363 26,380 --------------- -------------- ------------- ------------- Total $80,752 $58,097 $209,613 $68,854 =============== ============== ============= ============= Acquisition of Home Equity Loans $69,312 $ -- $105,728 $ -- Commercial Corp.: Aggregate purchase price of assets acquired $17,869 $10,949 $69,840 $58,187 Proceeds from resolution 43,126 106,348 117,660 145,774 Consumer Corp.: Aggregate acquisition of automobile and other $33,255 $21,980 $66,630 $53,104 consumer receivables
MORTGAGE BANKING The following table presents selected information regarding the revenues and expenses of the Company's mortgage banking business. ANALYSIS OF SELECTED REVENUES AND EXPENSES MORTGAGE BANKING (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED SECOND QUARTER JUNE 30, ------------------------------- -------------------------- 1998 1997 1998 1997 --------------- ------------- ----------- ------------- WAREHOUSE INVENTORY: Average inventory balance $745,982 $207,978 $907,195 $226,474 Net mortgage warehouse income: Dollar amount 2,395 526 4,117 1,292 Annualized percentage of average inventory 1.28% 1.01% 0.91% 1.14% balance GAIN ON SALE OF MORTGAGE LOANS: Gain on sale of mortgage loans as a percentage of loans sold: Residential 1.15% 1.21% 1.26% 1.13% Home Equity 4.43% 4.44% 4.59% 4.20% Securitized Home Equity 1.24% -- 1.24% -- OMSR income as a percentage of residential 1.78% 1.68% 1.80% 1.72% mortgage loans sold SERVICING REVENUES: Average servicing portfolios: Residential $5,621,502 $3,496,301 $5,119,061 $3,462,207 Commercial 1,388,470 978,812 1,433,898 623,561 Sub-serviced 1,099,795 833,533 960,261 824,958 Servicing fees: Residential $5,123 $2,991 $9,407 $6,323 Commercial 247 210 485 253 Sub-serviced 218 213 390 409 --------------- ------------- ----------- ------------- Total $5,588 $3,414 $10,282 $6,985 Annualized servicing fee percentage: Residential 0.36% 0.34% 0.37% 0.37% Commercial 0.07% 0.09% 0.07% 0.08% Sub-serviced 0.08% 0.10% 0.08% 0.10% Gain on sale of servicing rights $-- $2,263 $ -- $4,529 Amortization of servicing rights: Servicing rights amortization $4,126 $1,596 $7,302 $3,143
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SIX MONTHS ENDED SECOND QUARTER JUNE 30, ------------------------------- -------------------------- 1998 1997 1998 1997 --------------- ------------- ----------- ------------- Servicing rights amortization as a 0.29% 0.18% 0.29% 0.18% percentage of average residential servicing portfolio (annualized) PERSONNEL: Personnel expenses $17,216 $7,647 $30,151 $13,573 Number of personnel (at period end): Production 511 313 Servicing 146 120 Other 710 338 --------------- ------------- Total 1,367 771 =============== =============
PORTFOLIO ASSET ACQUISITION AND RESOLUTION During the first quarter of 1997, the Trust terminated the Investment Management Agreement and paid Commercial Corp. a termination payment of $6.8 million representing the present value of servicing fees projected to have been earned by Commercial Corp. upon the liquidation of the assets of the Trust, which was expected to occur principally in 1997. The following table presents selected information regarding the revenues and expenses of the Company's Portfolio Asset acquisition and resolution business. ANALYSIS OF SELECTED REVENUES AND EXPENSES PORTFOLIO ASSET ACQUISITION AND RESOLUTION (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED SECOND QUARTER JUNE 30, ------------------------------- -------------------------- 1998 1997 1998 1997 --------------- ------------- ----------- ------------- GAIN ON RESOLUTION OF PORTFOLIO ASSETS: Average investment: Nonperforming Portfolios $42,201 $57,445 $46,005 $51,667 Performing Portfolios 13,177 8,335 14,956 8,314 Real estate Portfolios 17,639 21,773 18,053 22,810 Gain on resolution of Portfolio Assets: Nonperforming Portfolios $1,626 $4,057 $3,889 $8,029 Performing Portfolios -- -- 299 -- Real estate Portfolios 1,213 834 1,748 2,163 --------------- --------------- ------------ ----------- Total $2,839 $4,891 $5,936 $10,192 =============== =============== ============ =========== Interest income on performing Portfolios $455 $571 $1,186 $1,061 Gross profit percentage on resolution of Portfolio Assets: Nonperforming Portfolios 20.37% 32.05% 21.97% 34.47% Performing Portfolios -- -- 7.99% -- Real estate Portfolios 22.26% 31.82% 20.35% 31.67% Weighted average gross profit percentage 21.74% 32.01% 19.77% 33.84% Interest yield on performing 13.81% 27.40% 15.86% 25.52% Portfolios (annualized) SERVICING FEE REVENUES: Acquisition partnerships $648 $1,510 $1,308 $2,383 Trust -- -- -- 6,800 Affiliates 18 44 87 199 --------------- --------------- ------------ ----------- Total $666 $1,554 $1,395 $9,382 =============== =============== ============ =========== PERSONNEL: Personnel expenses $1,100 $1,268 $2,267 $2,883 Number of personnel (at period end): Production 11 11 Servicing 70 92 --------------- --------------- Total 81 103 =============== ===============
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SIX MONTHS ENDED SECOND QUARTER JUNE 30, ------------------------------- -------------------------- 1998 1997 1998 1997 --------------- ------------- ----------- ------------- Interest expense: Average debt $70,641 $81,298 $73,589 $71,038 Interest expense 1,336 1,703 2,812 3,154 Average yield (annualized) 7.56% 8.38% 7.64% 8.88%
The following chart presents selected information regarding the revenues and expenses of the Acquisition Partnerships. ANALYSIS OF SELECTED REVENUES AND EXPENSES ACQUISITION PARTNERSHIPS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED SECOND QUARTER JUNE 30, ------------------------------- -------------------------- 1998 1997 1998 1997 --------------- ------------- ----------- ------------- GAIN ON RESOLUTION OF PORTFOLIO ASSETS: Gain on resolution of Portfolio $9,110 $11,857 $27,643 $19,558 Assets Gross profit percentage on resolution of 30.30% 13.02% 31.55% 16.91% Portfolio Assets Interest income on performing Portfolios 2,169 1,822 4,622 3,728 Other income 163 567 333 858 INTEREST EXPENSE: Interest expense $3,016 $3,174 $6,957 $6,158 Average yield (annualized) 7.03% 9.59% 7.04% 9.19% OTHER EXPENSES: Servicing fees $1,364 $1,664 $2,785 $2,667 Legal 577 643 985 1,224 Property protection 958 1,303 1,994 2,266 Other 1,667 38 6,895 814 ----------------- ---------------- ------------- ----------- Total other expenses 4,566 3,648 12,659 6,971 ----------------- ---------------- ------------- ----------- NET EARNINGS $3,860 $7,424 $12,982 $11,015 ================= ================ ============= ===========
17 CONSUMER LENDING The following chart presents selected information regarding the revenues and expenses of Consumer Corp.'s consumer lending business. ANALYSIS OF SELECTED REVENUES AND EXPENSES CONSUMER LENDING (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED SECOND QUARTER JUNE 30, ------------------------------- -------------------------- 1998 1997 1998 1997 --------------- ------------- ----------- ------------- INTEREST INCOME: Average loans and investments: Auto $45,697 $59,158 $51,085 $51,223 Investments 22,677 3,463 18,278 1,732 Interest income: Auto $2,221 $2,517 $4,470 $4,530 Investments 392 78 689 78 Average yield (annualized): Auto 19.44% 17.02% 17.50% 17.69% Investments 6.91% 9.01% 7.54% 9.01% SERVICING FEE REVENUES: Affiliates $584 $106 $968 $140 PERSONNEL: Personnel expenses $1,292 $592 $2,404 $1,097 Number of personnel (at period end): Production 67 45 Servicing 97 20 --------------- ---------------- Total 164 65 =============== ================ INTEREST EXPENSE: Average debt $41,521 $50,438 $41,158 $41,586 Interest expense 939 1,113 1,819 1,808 Average yield (annualized) 9.05% 8.83% 8.84% 8.69%
BENEFIT (PROVISION) FOR INCOME TAXES The Company has substantial federal NOLs, which can be used to offset the tax liability associated with the Company's pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing an allowance to value the net deferred tax asset at a value commensurate with the Company's expectation of being able to utilize the recognized benefit in the next three to four year period. Such estimates are reevaluated on a quarterly basis with the adjustment to the allowance recorded as an adjustment to the income tax expense generated by the quarterly earnings. Significant events that change the Company's view of its currently estimated ability to utilize the tax benefits, such as the Harbor Merger in the third quarter of 1997, result in substantial changes to the estimated allowance required to value the deferred tax benefits recognized in the Company's periodic financial statements. Similar events could occur in the future, and would impact the quarterly recognition of the Company's estimate of the required valuation allowance associated with its NOLs. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this Quarterly Report on Form 10-Q. SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997 The Company reported net earnings before minority interest and preferred dividends of $7.9 million in the second quarter of 1998 (including a $.8 million deferred tax benefit) compared to $4.4 million in the second quarter of 1997. Net earnings to common shareholders were $6.1 million in 1998 compared to $2.9 million in 1997. On a per share basis, basic net earnings attributable to common shareholders were $.84 in 1998 compared to $.44 in 1997. Diluted net earnings per common share were $.83 in 1998 compared to $.44 in 1997. 18 Mortgage Banking Mortgage Corp. experienced significant revenue growth in the second quarter of 1998 relative to 1997 increasing to $37.8 million from $15.7 million. The direct retail group ("Direct Retail") and the broker retail group ("Broker Retail") origination networks experienced substantial growth in levels of origination volume reflecting, in part, the level of capital that has been contributed to Mortgage Corp. by the Company following the Harbor Merger and relatively lower market interest rates in 1998 compared to 1997. Such revenue growth was partially offset by increases in operating expenses associated with the increased levels of origination volume. The Company entered the mortgage conduit business in August 1997 with the formation of FirstCity Capital Corporation ("Capital Corp."). Capital Corp. has generated interest revenue from its acquired Home Equity Loans, has incurred interest expense to finance the acquisition of such loans and has incurred general and administrative expenses in its start-up phase. Gain on sale of mortgage loans. Gain on sale of mortgage loans increased by 254% to $28.3 million in 1998 from $8.0 million in 1997. This increase was the result of substantial increases in the levels of residential mortgage loan origination generated principally by the Broker Retail network of Mortgage Corp. and, to a lesser extent, the Direct Retail network of Mortgage Corp., and the resulting sales of such loans to government agencies and other investors. The change in the gain on sale percentage is the result of the sale of approximately $2.3 billion of mortgage loans in 1998 (compared to $.6 billion in 1997) and the overall mix and pricing of the loans sold. Net mortgage warehouse income. Net mortgage warehouse income increased by 355% to $2.4 million in 1998 from $.5 million in 1997. This is the result of a significant increase in the average balance of loans held in inventory during the year coupled with an increase in the spread earned between the interest rate on the underlying mortgages and the interest cost of the warehouse credit facility. Servicing fee revenues. Servicing fee revenues increased by 64% to $5.6 million in 1998 from $3.4 million in 1997 as a result of an increase in the size of the servicing portfolio. The average residential servicing portfolio increased $2.1 billion over second quarter 1997, to a level of $5.6 billion, accounting for the majority of the increase in the servicing fee revenue. Other revenues. Other revenues decreased by 59% to $1.6 million in 1998 from $3.8 million in 1997. This decrease resulted from Mortgage Corp.'s decision to retain, rather than sell, servicing rights in 1998. The sale of servicing rights in 1997 resulted in a gain on sale of $2.3 million. Operating expenses. Operating expenses of Mortgage Corp. increased by 120% to $31.7 million in 1998 from $14.4 million in 1997. The expansion of the Broker Retail and Direct Retail operation as well as the commencement of Capital Corp.'s operations in late 1997 also contributed to the period to period increases. The acquisition of MIG in 1997, which was accounted for as a purchase by Mortgage Corp., produced higher relative totals for all components of Mortgage Corp.'s operating expenses in 1998. Salaries and benefits increased by $9.6 million in 1998 reflecting the 596 additional staff required to support the increase in origination volumes derived principally from the Broker Retail network and, to a lesser extent, the Direct Retail network, and the increase in the size and number of loans in the residential and commercial servicing portfolios in 1998. Amortization of mortgage servicing rights increased in 1998 as a result of the substantially larger investment in mortgage servicing rights in 1998. In consideration of the uncertainty as to the direction of future interest rates, the Company has begun, through periodic provisions, to build an allowance against any future valuation impairments of the mortgage servicing rights. During the quarter the Company added $.5 million to this provision, resulting in a total allowance of $1.0 million, or .84% of total mortgage servicing rights. Interest on other notes payable (the portion not associated with Mortgage Corp.'s warehouse credit facility) increased due to increased working capital borrowings during 1998. Occupancy expense increased by $.5 million in 1998 as the result of the opening or acquisition of several new offices in the Broker Retail and Direct Retail networks. Increases in data processing, communication and other expenses in 1998 resulted from the substantial increases in production and servicing volumes. Portfolio Asset Acquisition and Resolution Commercial Corp. purchased $17.9 million of Portfolio Assets during the second quarter of 1998 for its own account and through the Acquisition Partnerships compared to $10.9 million of acquisitions in the second quarter of 1997. Commercial Corp.'s quarter end investment in Portfolio Assets decreased to $68.5 million in 1998 from $90.0 million in 1997. Commercial Corp. invested $8.2 million in equity in Portfolio Assets in 1998 compared to $6.2 million in 1997. Net gain on resolution of Portfolio Assets. Proceeds from the resolution of Portfolio Assets decreased by 15% to $13.1 million in 1998 from $15.3 million in 1997. The net gain on resolution of Portfolio Assets decreased by 42% to $2.8 million in 1998 from $4.9 million in 1997 as the result of a lower gross profit percentage in 1998. The gross profit percentage on the proceeds from the resolution of Portfolio Assets in 1998 was 21.7% as compared to 32.0% in 1997. Equity in earnings of Acquisition Partnerships. Proceeds from the resolution of Portfolio Assets for the Acquisition Partnerships decreased by 67% to $30.1 million in 1998 from $91.1 million in 1997 while the gross profit percentage on proceeds increased to 30.3% in 1998 from 13.0% in 1997. Other expenses of the Acquisition Partnerships increased by $.9 million in 1998 generally reflecting costs associated with the resolution of Portfolio Assets in Europe which generated proceeds of $16.2 million. The net result was an overall decrease in the net income of the Acquisition Partnerships of 48% to $3.9 million in 1998 from $7.4 million in 1997. As a result, Commercial Corp.'s equity earnings from Acquisition Partnerships decreased by 45% to $1.5 million in 1998 from $2.8 million in 1997. Servicing fee revenues. Servicing fees decreased by 57% to $.7 million in 1998 from $1.6 million in 1997 as a result of lower domestic collection levels in the Acquisition Partnerships and affiliated entities. Other revenues. Other revenues decreased to $.5 million in 1998 from $1.0 million in 1997. Operating expenses. Operating expenses declined to $4.3 million in 1998 from $5.9 million in 1997 primarily as a result of reduced salaries and benefits and lower asset level expenses. Salaries and benefits declined in 1998 as a result of the consolidation of some of the servicing offices (Portfolios being serviced in the closed offices reached final resolution). Interest on other notes payable declined $.4 million primarily as a result of lower average borowings. Asset level expenses incurred in connection with the servicing of Portfolio Assets decreased in 1998 as a result of the decrease in investments in Portfolio Assets in 1998. Occupancy and other expenses decreased as a result of the consolidation of servicing offices in 1998. Consumer Lending Consumer Corp.'s revenues and expenses in 1997 were derived principally from its original sub-prime automobile financing program. Consumer Corp. terminated its obligations to the financial institutions participating in such program effective as of January 31, 19 1998. In late 1997 Consumer Corp., through its 80% owned subsidiary, Funding Corp., established a new sub-prime automobile financing program through which it originates automobile loans through direct relationships with franchised automobile dealerships. Substantially all of Consumer Corp.'s activities are expected to be conducted through Funding Corp. during 1998. Gain on sale of automobile loans. Funding Corp. completed a securitization of $50 million in automobile loans, recognizing a gain of $2.4 million in the second quarter of 1998. Consumer Corp. has retained subordinated interests in the form of nonrated tranches and excess spreads resulting from three securitization transactions it has completed reflecting an aggregate investment of $34.1 million in such interests at June 30, 1998. Interest and other income. Interest income on consumer loans was relatively flat in the second quarter of 1998 as compared to the second quarter of 1997. Other income increased $.5 million due to an increase in service fee revenues from securitization trusts. Interest expense. Interest expense decreased by 16% to $.9 million in 1998 from $1.1 million in 1997 as a result of a decrease in the average outstanding level of borrowings secured by automobile receivables to $41.5 million in 1998 from $50.4 million in 1997. The average rate at which such borrowings incurred interest increased to 9.05% from 8.83% for the same period. Operating expenses. Salaries and benefits increased by 118% to $1.3 million in 1998 from $.6 million in 1997 as a result of the increased levels of operating activity in 1998. Other expenses increased $.9 million due to the growth of the origination and servicing operations. Provision for loan losses. The provision for loan losses on automobile receivables decreased by 63% to $.5 million in 1998 from $1.4 million in 1997. Consumer Corp. previously increased its rate of provision for loan losses based on its determination that the discount rate at which it acquired loans under its prior origination program did not properly provide for the losses expected to be realized on the acquired loans. The origination program currently operated by Funding Corp. generally allows for the acquisition of loans from automobile dealerships at a larger discount from par than Consumer Corp.'s original financing program. The Company believes that such acquisition prices more closely approximate the expected loss per occurrence on the loans originated. To the extent that Funding Corp. cannot match such discount to expected losses, additional provisions might, in the future, be required to properly provide for the risk of loss on the loans originated. The Company expects to incur provisions for loan losses in 1998 on automobile loans acquired by it during early 1998 through its previous origination program. 20 Other Items Affecting Net Earnings The following items affect the Company's overall results of operations and are not directly related to any one of the Company's businesses discussed above. Corporate overhead. Interest income on the Class A Certificate during the second quarter of 1997 represents reimbursement to the Company from the Trust of dividends through June 30, 1997, of $1.5 million on special preferred stock. Company level interest expense was relatively flat year to year . Other corporate income increased due to interest earned on the excess liquidity derived from the Trust's redemption of the Class A Certificate. Salary and benefits, occupancy and professional fees account for the majority of other overhead expenses, which remained relatively flat compared to 1997. Income taxes. Federal income taxes are provided at a 35% rate applied to taxable income and are offset by NOLs that the Company believes are available to it as a result of the Merger. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company reported a deferred tax benefit of $.8 million in 1998 as compared to a benefit of $.3 million in 1997. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 The Company reported net earnings before minority interest and preferred dividends of $13.4 million in the first six months of 1998 (including a $1.5 million deferred tax benefit) compared to $13.7 million in the first six months of 1997. Net earnings to common shareholders were $10.4 million in both periods. On a per share basis, basic net earnings attributable to common shareholders were $1.51 in 1998 compared to $1.60 in 1997. Diluted net earnings per common share were $1.47 in 1998 compared to $1.58 in 1997. The 1997 results reflect the positive effect of the $6.8 million, or $1.03 per share, payment from the Trust in settlement of the Investment Management Agreement. Mortgage Banking Gain on sale of mortgage loans. Gain on sale of mortgage loans increased by 265% to $48.6 million in the first six months of 1998 from $13.3 million in the first six months of 1997. This increase was the result of substantial increases in the levels of residential mortgage loan origination generated principally by the Broker Retail network of Mortgage Corp. and, to a lesser extent, the Direct Retail network of Mortgage Corp., and the resulting sales of such loans to government agencies and other investors. The change in the gain on sale percentage is the result of the sale of approximately $3.5 billion of mortgage loans in 1998 (compared to $1.1 billion in 1997) and the overall mix and pricing of the loans sold. Net mortgage warehouse income. Net mortgage warehouse income increased by 219% to $4.1 million in 1998 from $1.3 million in 1997. This is the result of a significant increase in the average balance of loans held in inventory during the year offset by a decrease in the spread earned between the interest rate on the underlying mortgages and the interest cost of the warehouse credit facility as the overall levels of interest rates on residential mortgage loans reached their lowest levels in several years. Servicing fee revenues. Servicing fee revenues increased by 47% to $10.3 million in 1998 from $7.0 million in 1997 as a result of an increase in the size of the servicing portfolio. Mortgage Corp. substantially increased its commercial mortgage servicing portfolio and its ability to originate commercial mortgage loans for correspondents and conduit lenders with the purchase, in the second quarter of 1997, of MIG. Other revenues. Other revenues decreased by 48% to $3.6 million in 1998 from $6.8 million in 1997. This decrease resulted from Mortgage Corp.'s decision to retain, rather than sell, servicing rights in 1998. The sale of servicing rights in 1997 resulted in a gain on sale of $4.5 million. Operating expenses. Operating expenses of Mortgage Corp. increased by 116% to $56.5 million in 1998 from $26.1 million in 1997. The expansion of the Broker Retail and Direct Retail operation as well as the commencement of Capital Corp.'s operations in late 1997 also contributed to the period to period increases. The acquisition of MIG in 1997, which was accounted for as a purchase by Mortgage Corp., produced higher relative totals for all components of Mortgage Corp.'s operating expenses in 1998. Salaries and benefits increased by $16.6 million in 1998 reflecting the additional staff required to support the increase in origination volumes derived principally from the Broker Retail network and, to a lesser extent, the Direct Retail network, and the increase in the size and number of loans in the residential and commercial servicing portfolios in 1998. Amortization of mortgage servicing rights increased in 1998 as a result of the substantially larger investment in mortgage servicing rights in 1998. Interest on other notes payable (the portion not associated with Mortgage Corp.'s warehouse credit facility) increased due to increased working capital borrowings during 1998. 21 Occupancy expense increased by $3 million in 1998 as the result of the opening or acquisition of several new offices in 1997 in the Broker Retail and Direct Retail networks. Increases in data processing, communication and other expenses in 1998 resulted from the substantial increases in production and servicing volumes. Portfolio Asset Acquisition and Resolution Commercial Corp. purchased $69.8 million of Portfolio Assets during the first six months of 1998 for its own account and through the Acquisition Partnerships compared to $58.2 million of acquisitions in the first six months of 1997. Commercial Corp.'s quarter end investment in Portfolio Assets decreased to $68.5 million in 1998 from $90.0 million in 1997. Commercial Corp. invested $16.9 million in equity in Portfolio Assets in 1998 compared to $12.3 million in 1997. Net gain on resolution of Portfolio Assets. Proceeds from the resolution of Portfolio Assets were flat year to year. The net gain on resolution of Portfolio Assets decreased by 42% to $5.9 million in 1998 from $10.2 million in 1997 as the result of a lower gross profit percentage in 1998. The gross profit percentage on the proceeds from the resolution of Portfolio Assets in 1998 was 19.8% as compared to 33.8% in 1997. Equity in earnings of Acquisition Partnerships. Proceeds from the resolution of Portfolio Assets for the Acquisition Partnerships decreased by 24% to $87.6 million in 1998 from $115.7 million in 1997 while the gross profit percentage on proceeds increased to 31.6% in 1998 from 16.9% in 1997. Interest income in the Acquisition Partnerships increased $.9 million and interest expense increased $.8 million in 1998 as a result of increased levels of interest earning assets and interest bearing liabilities carried by the Acquisition Partnerships in the first six months of 1998 as compared to 1997. Other expenses of the Acquisition Partnerships increased by $5.7 million in 1998 generally reflecting costs associated with the resolution of Portfolio Assets in Europe which generated proceeds of $58.2 million. The net result was an overall increase in the net income of the Acquisition Partnerships of 18% to $13.0 million in 1998 from $11.0 million in 1997. As a result, Commercial Corp.'s equity earnings from Acquisition Partnerships increased by 9.8% to $4.7 million in 1998 from $4.3 million in 1997. Servicing fee revenues. Servicing fees reported during 1997 included the receipt of a $6.8 million cash payment related to the early termination of a servicing agreement between the Company and the Trust, under which the Company serviced the assets of the Trust. The $6.8 million payment represents the present value of servicing fees projected to have been earned by Commercial Corp. upon liquidation of the Trust assets, which was expected to occur principally in 1997. Excluding fees related to Trust assets, servicing fees decreased by 46% to $1.4 million in 1998 from $2.6 million in 1997 as a result of lower domestic collection levels in the Acquisition Partnerships and affiliated entities. Other revenues. Other revenues increased to $2.5 million in 1998 compared to $2.0 million in 1997 principally as a result of interest income derived from Performing Purchased Asset Portfolios in 1998. Operating expenses. Operating expenses declined to $9.2 million in 1998 from $12.1 million in 1997 primarily as a result of reduced salaries and benefits, lower asset level expenses and reduced amortization expense. Salaries and benefits declined in 1998 as a result of the consolidation of some of the servicing offices (Portfolios being serviced in the closed offices reached final resolution). Interest on other notes payable declined $.4 million. Asset level expenses incurred in connection with the servicing of Portfolio Assets decreased in 1998 as a result of the decrease in investments in Portfolio Assets in 1998. Occupancy and other expenses decreased as a result of the consolidation of servicing offices in 1998. Consumer Lending Interest and other income. Interest income increased by 7.3% to $5.2 million in the first six months of 1998 from $4.9 million in the first six months of 1997, reflecting increased levels of loan origination activity in 1998 and an increase in the average balance of investments held by Consumer Corp. during 1998. Other income increased $.8 million due to increased service fee revenue from securitization trusts. Interest expense. Interest expense was relatively flat period to period. Operating expenses. Salaries and benefits increased by 119% to $2.4 million in 1998 from $1.1 million in 1997 as a result of the increased levels of operating activity in 1998. Other expenses increased $1.2 million due to the growth in the origination and servicing operations. 22 Provision for loan losses. The provision for loan losses on automobile receivables increased by 32% to $2.9 million in 1998 from $2.2 million in 1997. Consumer Corp. increased its rate of provision for loan losses based on its determination that the discount rate at which it acquired loans under its previous origination program did not properly provide for the losses expected to be realized on the acquired loans. Other Items Affecting Net Earnings. The following items affect the Company's overall results of operations and are not directly related to any one of the Company's businesses discussed above. Corporate overhead. Interest income on the Class A Certificate during 1997 represents reimbursement to the Company from the Trust of dividends through June 30, 1997, of $3.2 million on special preferred stock. Company level interest expense increased by 22% to $1.1 million in the first six months of 1998 from $.9 million in the first six months of 1997 as a result of higher volumes of debt associated with the equity required to purchase Portfolio Assets, equity interests in Acquisition Partnerships and capital support to operating subsidiaries. Other corporate income increased due to interest earned on the excess liquidity derived from the Trust's redemption of the Class A Certificate. Salary and benefits, occupancy and professional fees account for the majority of other overhead expenses, which decreased in 1998 compared to 1997, as a result of the decrease in the amount of executive and other officer bonuses granted in 1998. Income taxes. Federal income taxes are provided at a 35% rate applied to taxable income and are offset by NOLs that the Company believes are available to it as a result of the Merger. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company reported a deferred tax benefit of $1.5 million in 1998 as compared to a benefit of $.6 million in 1997. LIQUIDITY AND CAPITAL RESOURCES Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to the Acquisition Partnerships, investments in expanding businesses to support their growth, retirement of and dividends on preferred stock, and other investments by the Company. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated debt and dividends from the Company's subsidiaries, short-term borrowings from revolving lines of credit, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings. On July 17, 1998 the Company filed a shelf registration statement with the Securities and Exchange Commission which allows the Company to issue up to $250 million in debt and equity securities from time to time in the future. The registration statement became effective July 28, 1998. In May 1998, the Company closed the public offering of 1,542,150 shares of FirstCity common stock, of which 341,000 shares were sold by selling shareholders. Net proceeds (after expenses) of $34.2 million were used to retire debt. In June 1998, the Company received $11.8 million from the exercise of warrants. In the future, the Company anticipates being able to raise capital through a variety of sources including, but not limited to, public debt or equity offerings (subject to limitations related to the preservation of the Company's NOLs), thus enhancing the investment and growth opportunities of the Company. The Company believes that these and other sources of liquidity, including refinancing and expanding the Company's revolving credit facility to the extent necessary, securitizations, and funding from senior lenders for Acquisition Partnership investments and direct portfolio and business acquisitions, should prove adequate to continue to fund the Company's contemplated activities and meet its liquidity needs. The Company and each of its major operating subsidiaries have entered into one or more credit facilities to finance its respective operations. Each of the operating subsidiary credit facilities is nonrecourse to the Company and the other operating subsidiaries, except as discussed below. Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships, as of June 30, 1998 the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $1,992 million and outstanding borrowings of $1,225 million. The following table summarizes the material terms of the credit facilities to which the Company, its major operating subsidiaries and the Acquisition Partnerships were parties and the outstanding borrowings under such facilities as of June 30, 1998. 23 CREDIT FACILITIES
OUTSTANDING PRINCIPAL BORROWINGS AS OF AMOUNT JUNE 30, 1998 INTEREST RATE OTHER TERMS AND CONDITIONS ------ ------------- ------------- -------------------------- (DOLLARS IN MILLIONS) FIRSTCITY Company Credit Prime or Secured by the assets of Facility $ 50 $ 1 LIBOR + 2.625% the Company, expires April 30, 1999 Term fixed asset facility 1 1 Fixed 9.25% Secured by certain fixed assets, expires January 1, 2001 MORTGAGE CORP. Warehouse facility 670 497 LIBOR + 0.5% to 2.5% Revolving line to warehouse residential mortgage loans, expires March 31, 1999 Supplemental warehouse facility 36 25 LIBOR + 0.5% to 2.25% Revolving line to warehouse residential mortgage loans and related receivables, expires March 31, 1999 FNMA warehouse facility 700 495 Fed Funds+ 0.5% to 1.0% Open facility to fund committed loans to FNMA and other Operating line 47 45 LIBOR + 2.25% Revolving operating line secured by the unencumbered assets of Harbor, expires December 15, 2002 CAPITAL CORP. Warehouse facility 200 28 LIBOR + 0.75% Repurchase agreement to facilitate the acquisition of Home Equity Loans, expires March 30, 1999 Warehouse facility 48 4 Fixed 6.85% Repurchase agreement to facilitate the acquisition of Home Equity Loans, expired July 31, 1998 COMMERCIAL CORP. Portfolio acquisition Acquisition facility to facility 100 36 LIBOR + 2.5% acquire Portfolio Assets, expires February 28, 1999 (includes $23 million advanced to unconsolidated Acquisition Partnerships
24
OUTSTANDING PRINCIPAL BORROWINGS AS OF AMOUNT JUNE 30, 1998 INTEREST RATE OTHER TERMS AND CONDITIONS ------ ------------- ------------- -------------------------- (DOLLARS IN MILLIONS) French acquisition facility 15 9 French franc LIBOR + 3.5% Acquisition facility to fund equity investments in French Portfolio Assets, expires March 31, 1999. Guaranteed by Commercial Corp. and the Company. Term facility (1) 15 -- Prime + 7% Term facility to finance the purchase of mortgage servicing rights from Mortgage Corp., expires October 30, 1998. Guaranteed by the Company Term acquisition facilities 40 40 Fixed at 7.66% Acquisition facilities for existing Portfolio Assets. Secured by portfolio assets. Expires June 5, 2002 CONSUMER CORP. Warehouse facility 70 54 LIBOR + 3% Revolving line secured by automobile receivables, expires May 31, 1999 UNCONSOLIDATED ACQUISITION PARTNERSHIPS Senior and subordinated Term acquisition 62 62 Fixed at 7.51% to 10.17%, loans secured by Portfolio facilities LIBOR + 3% to 6.5% and Assets, various maturities Prime + 2% to 7%
- --------------------------------- (1) The facility was entered into as of July 24, 1998. Outstanding borrowings under the facility as of July 27, 1998 were $15 million. 25 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of shareholders (the "Annual Meeting") on May 21, 1998. The following items of business were considered at the Annual Meeting. (a) Election of Directors All standing directors were elected as directors to serve as members of the Company's Board of Directors until the Company's 1999 annual meeting of shareholders. The number of votes cast for each nominee was as follows:
Votes Cast Votes Nominee For Against Abstained ------------------------- ----------------------- ----------------------- ------------------------- James R. Hawkins 5,721,876 0 6,826 C. Ivan Wilson 5,724,452 0 4,250 James T. Sartain 5,724,452 0 4,250 Rick R. Hagelstein 5,724,452 0 4,250 Matt A. Landry, Jr. 5,724,452 0 4,250 Richard J. Gillen 5,724,452 0 4,250 Richard E. Bean 5,724,452 0 4,250 Bart A. Brown, Jr. 5,724,452 0 4,250 Donald J. Douglass 5,724,452 0 4,250 David W. MacLennan 5,724,452 0 4,250 Thomas E. Smith 5,724,452 0 4,250
(b) Ratification of Appointment of Auditors A proposal to ratify the Board of Directors' appointment of KPMG Peat Marwick LLP as the Company's independent auditors for 1998 was approved by the shareholders. The number of votes for the proposal: 5,712,478; votes withheld: 8,236; abstentions: 7,988. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2.1 -- Joint Plan of Reorganization by First City Bancorportion 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 by reference herein 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) 4.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 26 4.2 -- Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company (incorporated herein by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 4.3 -- 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) 4.4 -- Registration Rights Agreement, dated July 1, 1997, among the Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial Mortgage Company Employees Pension Plan, Lindsey Capital Corporation, Ed Smith and Thomas E. Smith (incorporated herein by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 10.1 -- Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as of July 1998, between Lehman Commercial Paper Inc. and FHB Funding Corp. 10.2 -- Warehouse Credit Agreement, dated as of April 30, 1998, among ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation, FirstCity Auto Receivables L.L.C. and FirstCity Financial Corporation 10.3 -- Servicing Agreement, dated as of April 30, 1998, among FirstCity Auto Receivables L.L.C., FirstCity Servicing Corporation of California, FirstCity Consumer Lending Corporation and ContiTrade Services L.L.C. 10.4 -- Security and Collateral Agent Agreement, dated as of April 30, 1998, among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C. and Chase Bank of Texas, National Association 10.5 -- Loan Agreement, dated as of July 24, 1998, between FirstCity Commercial Corporation and CFSC Capital Corp. XXX 10.6 -- Loan Agreement, dated April 8, 1998, between Bank of Scotland and the Company 10.7 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company 27.1 -- Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q being submitted to the Securities and Exchange Commission. Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933, Section 18 of the Securities Act of 1934, as amended, or Section 323 of the Trust Indenture Act of 1939, as amended, or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates.) (b) Reports on Form 8-K. The following Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 was filed by the Registrant with the Commission: 1. A Form 8-K was filed, dated April 29, 1998, regarding the first quarter results. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTCITY FINANCIAL CORPORATION By: /s/ Matt A. Landry, Jr. -------------------------------------- Name: Matt A. Landry, Jr. Title: Executive Vice President and Chief Administrative Officer (Duly authorized officer and principal financial and accounting officer of the Registrant) Dated: August 13, 1998 28 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- 2.1 -- Joint Plan of Reorganization by First City Bancorportion 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 by reference herein 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) 4.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 4.2 -- Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company (incorporated herein by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 4.3 -- 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) 4.4 -- Registration Rights Agreement, dated July 1, 1997, among the Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial Mortgage Company Employees Pension Plan, Lindsey Capital Corporation, Ed Smith and Thomas E. Smith (incorporated herein by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 10.1 -- Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as of July 1998, between Lehman Commercial Paper Inc. and FHB Funding Corp. 10.2 -- Warehouse Credit Agreement, dated as of April 30, 1998, among ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation, FirstCity Auto Receivables L.L.C. and FirstCity Financial Corporation 10.3 -- Servicing Agreement, dated as of April 30, 1998, among FirstCity Auto Receivables L.L.C., FirstCity Servicing Corporation of California, FirstCity Consumer Lending Corporation and ContiTrade Services L.L.C. 10.4 -- Security and Collateral Agent Agreement, dated as of April 30, 1998, among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C. and Chase Bank of Texas, National Association 10.5 -- Loan Agreement, dated as of July 24, 1998, between FirstCity Commercial Corporation and CFSC Capital Corp. XXX 10.6 -- Loan Agreement, dated April 8, 1998, between Bank of Scotland and the Company 10.7 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company 27.1 -- Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q being submitted to the Securities and Exchange Commission. Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933, Section 18 of the Securities Act of 1934, as amended, or Section 323 of the Trust Indenture Act of 1939, as amended, or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates.) EX-10 2 EXHIBIT 10.1 MASTER REPURCHASE AGREEMENT GOVERNING PURCHASES AND SALES OF MORTGAGE LOANS Dated as of July __, 1998 Between LEHMAN COMMERCIAL PAPER INC., as Buyer and FHB FUNDING CORP., as Seller 1. APPLICABILITY From time to time for a period of 364 days from the date hereof, the parties hereto may, subject to the terms hereof, enter into transactions in which FHB Funding Corp. ("Seller") agrees to transfer to Lehman Commercial Paper Inc. ("Buyer") Mortgage Loans against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Mortgage Loans at a date certain not later than the date of transfer specified in the Confirmation, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be governed by this Agreement and the related Confirmation, unless otherwise agreed in writing. Each Transaction shall commence on the Purchase Date and terminate on the Repurchase Date therefor and shall be limited to a maximum of 30 days, after which, subject to Section 20 below, Buyer and Seller may agree to roll such Transaction into a new Transaction that shall likewise have a maximum term of 30 days. This Agreement does not constitute a commitment of Buyer or Seller to enter into Transactions but rather sets forth the procedures to be followed in connection with requests to enter into Transactions by Seller to Buyer. Seller hereby acknowledges that Buyer is under no obligation to agree to enter into Transactions under this Agreement. 2. DEFINITIONS "Act of Insolvency" means, with respect to any party and its Affiliates, (i) the filing of a petition, commencing, or authorizing the commencement of any case HOFS02...:\92\54892\0011\1612\AGR7308K.49A or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law relating to the protection of creditors, or suffering any such petition or proceeding to be commenced by another which is consented to, not timely contested or results in entry of an order for relief; (ii) the seeking the appointment of a receiver, trustee, custodian or similar official for such party or an Affiliate or any substantial part of the property of either, (iii) the appointment of a receiver, conservator, or manager for such party or an Affiliate by any governmental agency or authority having the jurisdiction to do so; (iv) the making or offering by such party or an Affiliate of a composition with its creditors or a general assignment for the benefit of creditors, (v) the admission by such party or an Affiliate of such party of its inability to pay its debts or discharge its obligations as they become due or mature; or (vi) that any governmental authority or agency or any person, agency or entity acting or purporting to act under governmental authority shall have taken any action to condemn, seize or appropriate, or to assume custody or control of, all or any substantial part of the property of such party or of any of its Affiliates, or shall have taken any action to displace the management of such party or of any of its Affiliates or to curtail its authority in the conduct of the business of such party or of any of its Affiliates. "Additional Loans" means Mortgage Loans or cash provided by Seller to Buyer or its designee pursuant to Section 4(a). "Affiliate" means an affiliate of a party as such term is defined in the United States Bankruptcy Code in effect from time to time. "Agency" means FNMA, FHLMC or GNMA. "Agreement" means this Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans between Buyer and Seller, as amended from time to time. "Balloon Mortgage Loan" means any Mortgage Loan with a maturity date of under fifteen (15) years that provided on the date of origination for scheduled payments by the Mortgagor based upon an amortization schedule extending beyond its maturity date. "Business Day" means a day other than (i) a Saturday or Sunday, or (ii) a day on which the Buyer or the New York Stock Exchange is authorized or obligated by law or executive order to be closed. "Buyer" has the meaning specified in Section 1. "Capital Lease" shall mean any lease or similar arrangement which is of such a nature that payment obligations of the lessee or obligor thereunder are 2 required to be capitalized and shown as liabilities upon a balance sheet of such lessee or obligor prepared in accordance with GAAP or for which the amount of the asset and liability thereunder as if so capitalized should be disclosed in a note to such balance sheet. "Collateral" has the meaning specified in Section 6. "Collateral Amount" means, with respect to any Transaction, the amount obtained by application of the applicable Collateral Amount Percentage to the related Repurchase Price for such Transaction. "Collateral Amount Percentage" means the amount set forth in the Confirmation which, in any event, (i) shall not be less than 103% with respect to all Mortgage Loans in determining whether a Market Value Collateral Deficit exists pursuant to the first sentence of Section 4(a) hereof and (ii) shall not be less than 105% with respect to all Mortgage Loans in determining whether a Securitization Value Collateral Deficit exists pursuant to the second sentence of Section 4(a) hereof. "Collateral Deficit" means either a Market Value Collateral Deficit or a Securitization Value Collateral Deficit. "Collateral Information" means the following information with respect to each Mortgage Loan: (i) Seller's loan number, (ii) the Mortgagor's name, (iii) the address of the Mortgaged Property, (iv) the current interest rate, (v) the original balance, (vi) current balance as of the last day of the immediately preceding month, (vii) the paid to date, (viii) the appraisal value of the Mortgaged Property as of origination, (ix) whether interest rate is fixed or adjustable (and if adjustable, the ARM terms, including the index, spread, adjustment frequency, next adjustment date, caps and floors), (x) the occupancy status of the Mortgaged Property as of origination (including whether owner occupied), (xi) whether the Mortgage Loan is a Balloon Loan, (xii) the first payment date, (xiii) the maturity date, (xiv) the principal and interest payment, (xv) the property type of the Mortgaged Property as of origination, (xvi) the applicable credit grade, (xvii) the note date, (xviii) whether the Mortgage Loan is a Wet Ink Mortgage Loan, and (xix) the lien position of the Mortgage Loan. "Confirmation" has the meaning specified in Section 3(a). "Custodial Agreement" means that certain custodial agreement, dated as of July __, 1998, by and among Buyer, Seller and the Custodian, who will initially be The Bank of New York. "Custodial Delivery" means the form executed by Seller in order to deliver the Mortgage Loan Schedule and/or the Mortgage File to Buyer or its 3 designee (including the Custodian) pursuant to Section 7, a form of which is attached hereto as Exhibit II. Such form shall indicate any Mortgage Loans which are Wet Ink Mortgage Loans or Correspondent Loans. "Custodian" means the custodian under the Custodial Agreement. "'C' Loan" means a Mortgage Loan made by Seller to a Mortgagor with a 'C' or 'C-' credit history which is underwritten in accordance with Seller's underwriting guidelines for 'C'or 'C-' credit Mortgage Loans, a copy of which is attached as Exhibit VI hereto. "Delinquent" means, with respect to any Mortgage Loan, the period of time from the date on which a Mortgagor fails to pay an obligation under the terms of such Mortgage Loan (without regard to any applicable grace periods) to the date on which such payment is made. "Event of Default" has the meaning specified in Section 13. "First Mortgage" means a Mortgage that is a first lien on the related Mortgaged Property. "FHLMC" means the Federal Home Loan Mortgage Corporation. "FNMA" means the Federal National Mortgage Association. "GAAP" shall mean generally accepted accounting principles as in effect from time to time in the United States. "GNMA" means the Government National Mortgage Association. "Hedge" means, with respect to any or all of the Purchased Mortgage Loans, any interest rate swap, cap or collar agreement or similar arrangements providing for protection against fluctuations in interest rates or the exchange of nominal interest obligations, either generally or under specific contingencies, entered into by Seller with Buyer or its Affiliates, and reasonably acceptable to the Buyer. "HUD" means the United States Department of Housing and Urban Development. "Income" means, with respect to any Purchased Mortgage Loan at any time, any principal thereof then payable and all interest or other distributions payable thereon less any related servicing fee(s) charged by a subservicer. 4 "LIBOR" means the London Interbank Offered Rate for one-month United States dollar deposits as set forth on page 3750 of Telerate as of 11:00 a.m., London time, on the date that a Transaction is entered into. "Loan-to-Value Ratio" means with respect to any Mortgage Loan as of any date, the fraction, expressed as a percentage, the numerator of which is the principal balance of such Mortgage Loan at the date of determination and the denominator of which is the value of the related Mortgaged Property as set forth in the appraisal of such Mortgaged Property obtained in connection with the origination of such Mortgage Loan. For purposes of calculating a Mortgage Loan secured by a Second Mortgage, the principal balance of the related First Mortgage as well as the Second Mortgage shall be included in the numerator. "Market Value" means as of any date with respect to any Mortgage Loan, the price at which such Mortgage Loan could readily be sold as determined by Buyer in its sole discretion; provided, however, that Buyer shall not take into account, for purposes of calculating Market Value, any Mortgage Loan (i) which has been subject to Transactions hereunder for more than 90 days, (ii) which, together with the other Mortgage Loans subject to then outstanding Transactions, would cause the 30+ Delinquency Percentage to exceed 3.0%, (iii) which is a Wet Ink Mortgage Loan for more than 7 Business Days, (iv) which are more than 59 days Delinquent (v) which, together with the other Mortgage Loans subject to then outstanding Transactions, would cause the 60+Percentage to exceed 10.0%, or (vi) with respect to which there is a breach of a representation, warranty or covenant made by Seller in this Agreement that materially adversely affects Buyer's interest in such Mortgage Loan and which breach has not been cured, within the specified time period. "Market Value Collateral Deficit" has the meaning specified in Section 4(a). "Mortgage" means a mortgage, deed of trust, deed to secure debt or other instrument, creating a valid and enforceable first or second lien on or a first or second priority ownership interest in an estate in fee simple in real property and the improvements thereon, securing a mortgage note or similar evidence of indebtedness. "Mortgage File" means the documents specified as the "Mortgage File" in Section 7(d), together with any additional documents and information required to be delivered to Buyer or its designee (including the Custodian) pursuant to this Agreement. "Mortgage Loan" means (i) a non-securitized whole loan, namely a conventional mortgage loan secured by a first or second lien on a one-to-four family residential property which conforms to Seller's underwriting guidelines, as amended 5 from time to time (including, without limitation, Wet-Ink Mortgage Loans) or (ii) another type of non-securitized whole loan as may be agreed upon in writing by the parties hereto from time to time. "Mortgage Loan Schedule" means a schedule of Mortgage Loans attached to each Trust Receipt, Confirmation and Custodial Delivery. "Mortgage Note" means a note or other evidence of indebtedness of a Mortgagor secured by a Mortgage. "Mortgaged Property" means the real property securing repayment of the debt evidenced by a Mortgage Note. "Mortgagee" means the record holder of a Mortgage Note secured by a Mortgage. "Mortgagor" means the obligor on a Mortgage Note and the grantor of the related Mortgage. "Net Income" of any Person shall mean, for any period, the net income (or net deficit), excluding all extraordinary, unusual, non-recurring and/or non-operating items of such Person for such period, determined in accordance with GAAP. "Periodic Payment" has the meaning specified in Section 5(b). "Person" means an individual, partnership, corporation, joint stock company, trust, limited liability company, limited liability partnership or unincorporated organization or a governmental agency or political subdivision thereof. "Price Differential" means, with respect to any Transaction hereunder as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the Repurchase Date (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction). "Pricing Rate" means the per annum percentage rate specified in the Confirmation for determination of the Price Differential which shall not exceed LIBOR plus the applicable Pricing Spread. 6 "Pricing Spread" means 1.25% with respect to any Mortgage Loan; provided that during any period for which any such Mortgage Loans are Wet Ink Mortgage Loans, the applicable Pricing Spread in respect of such Mortgage Loan shall be increased by an additional 0.15% and during any period for which Lehman has funded the DDA Account (as defined in the Custody Agreement) in respect of Mortgage Loans prior to the Custodian receiving the related Mortgage Notes, the Pricing Spread applicable to such amounts shall be increased by an additional .15% "Prime Rate" means, with respect to any date of determination, the rate of interest published by The Wall Street Journal, northeast edition, as the "prime rate," as most recently available as of the date of determination. "Purchase Date" means the date on which Purchased Mortgage Loans are transferred by Seller to Buyer or its designee (including the Custodian) as specified in the Confirmation. "Purchase Price" means on each Purchase Date, the price at which Purchased Mortgage Loans are transferred by Seller to Buyer or its designee (including the Custodian); which shall in no event exceed the outstanding principal amount of such Purchased Mortgage Loans. "Purchased Mortgage Loans" means the Mortgage Loans sold by Seller to Buyer in a Transaction, any Additional Loans and any Substituted Mortgage Loans. "Replacement Loans" has the meaning specified in Section 14(b)(ii). "Repurchase Date" means the date on which Seller is to repurchase the Purchased Mortgage Loans from Buyer, including any date determined by application of the provisions of Sections 3 or 14, as specified in the Confirmation; provided that in no event shall such date be more than 30 days after the related Purchase Date. "Repurchase Price" means the price at which Purchased Mortgage Loans are to be transferred from Buyer or its designee (including the Custodian) to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination decreased by all cash, Income and Periodic Payments actually received by Buyer pursuant to Sections 4(a), 5(a) and 5(b), respectively. "Second Mortgage" means a Mortgage that is a second lien on the Mortgaged Property. 7 "Securitization Value" means, as of any date with respect to any Mortgage Loans, the price at which such Mortgage Loans could be securitized and sold in a securitization as determined by Buyer in its sole discretion; provided, however, that Buyer shall not take into account, for purposes of calculating Securitization Value, any Mortgage Loan (i) which has been subject to Transactions for more than 180 days, (ii) which, together with the other Mortgage Loans subject to then outstanding Transactions, would cause the 30+ Delinquency Percentage to exceed 3.0%, (iii) which is a Wet Ink Mortgage Loan for more than 7 Business Days, (iv) which are more than 59 days Delinquent, (v) which, together with the other Mortgage Loans subject to then outstanding Transactions, would cause the 60+Percentage to exceed 10.0%, or (vi) with respect to which there is a breach of a representation, warranty or covenant made by Seller in this Agreement that materially adversely affects Buyer's interest in such Mortgage Loan and which breach has not been cured within the specified time period. "Securitization Value Collateral Deficit" has the meaning specified in Section 4(a). "Seller" has the meaning specified in Section 1. "Servicing Agreement" has the meaning specified in Section 25. "Servicing Records" has the meaning specified in Section 25. "60+ Percentage" means the fraction, expressed as a percentage, the numerator of which is the aggregate Purchase Price of Purchased Mortgage Loans subject to then outstanding Transactions which have remained subject to Transactions for more than 60 days. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other Person of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions of such corporation, partnership or other Person (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other Person shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Substituted Mortgage Loans" means any Mortgage Loans substituted for Purchased Mortgage Loans in accordance with Section 9 hereof. 8 "30+ Delinquency Percentage" means the fraction, expressed as a percentage, the numerator of which is the aggregate Purchase Price of Purchased Mortgage Loans subject to then outstanding Transactions which are more than 30 days Delinquent and the denominator of which is the aggregate Purchase Price of all Purchased Mortgage Loans subject to then outstanding Transactions. "Transaction" has the meaning specified in Section 1. "Trust Receipt" means a trust receipt issued by Custodian to Buyer confirming the Custodian's possession of certain mortgage loan files which are the property of and held by Custodian for the benefit of the Buyer or the registered holder of such trust receipt. "Wet Ink Mortgage Loan" means a Mortgage Loan for which a Mortgage File has not been delivered to the Custodian. 3. INITIATION; CONFIRMATION; TERMINATION; MAXIMUM TRANSACTION AMOUNTS (a) An agreement to enter into a Transaction may be entered into orally or in writing at the initiation of Seller. In any event, Buyer shall confirm the terms of each Transaction by issuing a written confirmation to Seller promptly after the parties enter into such Transaction in the form of Exhibit I attached hereto (a "Confirmation"). Such Confirmation shall describe the Purchased Mortgage Loans, identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate applicable to the Transaction, (v) the applicable Collateral Amount Percentages and (vi) additional terms or conditions not inconsistent with this Agreement. After receipt of the Confirmation, Seller shall, subject to the provisions of subsection (c) below, sign the Confirmation and promptly return it to Buyer. With respect to any Transaction, and subject to the terms and conditions herein, the Purchase Date shall be within 2 Business Days of the date on which Seller initiated the Transaction pursuant to the first sentence of this paragraph. (b) Any Confirmation by Buyer shall be deemed to have been received by Seller on the date actually received by Seller. (c) Each Confirmation, together with this Agreement, shall be conclusive evidence of the terms of the Transaction(s) covered thereby unless objected to in writing by Seller no more than two (2) Business Days after the date the Confirmation was received by Seller or unless a corrected Confirmation is sent by Buyer. An objection sent by Seller must state specifically that writing which is an objection, must specify the provision(s) being objected to by Seller, must set forth 9 such provision(s) in the manner that the Seller believes they should be stated, and must be received by Buyer no more than two (2) Business Days after the Confirmation was received by Seller. (d) In the case of Transactions terminable upon demand, such demand shall be made by Seller by telephone or otherwise, no later than 1:00 p.m. (New York Time) on the second Business Day prior to the day on which such termination will be effective. (e) On the Repurchase Date, termination of the Transaction will be effected by transfer to Seller or its designee of the Purchased Mortgage Loans (and any Income in respect thereof received by Buyer not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Section 5) against the simultaneous transfer of the Repurchase Price to an account of Buyer. Seller is obligated to obtain the Mortgage Files from Buyer or its designee at Seller's expense on the Repurchase Date. (f) With respect to all Transactions hereunder, the aggregate Purchase Price for all Purchased Mortgage Loans at any one time subject to then outstanding Transactions under this Agreement shall not exceed $200,000,000. (g) The aggregate Purchase Price of all Purchased Mortgage Loans which relate to Wet Ink Mortgage Loans shall not represent more than 20% of the aggregate Purchase Price for all Purchased Mortgage Loans which are subject to then outstanding Transactions. Seller covenants to deliver the Mortgage File to the Custodian within 7 Business Days from its respective Purchase Date and to the cause related Mortgage Note for each funded Mortgage Loan to be faxed to the Custodian. (g) The aggregate Purchase Price of all Purchased Mortgage Loans which are secured by a Mortgage Loan that has a Loan to Value in excess of 95% shall be reduced by 5% and any Mortgage Loans with a Loan to Value in excess of 90% shall not represent more than the greater of $25,000,000 or 35% of the aggregate Purchase Price for all Purchased Mortgage Loans which are subject to then outstanding Transactions. (h) Seller may only sell under this Agreement its interest in Mortgage Loans that are (x) originated and owned by Seller or (b) originated by Innovative Funding Inc. ("Innovative") provided that (i) such Mortgage Loans must be purchased by Seller within 45 days of funding, and (ii) such Mortgage Loans acquired from Innovative comply with the representations and warranties contained in Exhibit V. 10 4. COLLATERAL AMOUNT MAINTENANCE (a) If at any time the aggregate Market Value of all Purchased Mortgage Loans subject to then outstanding Transactions is less than the aggregate Collateral Amount for all such Transactions (a "Market Value Collateral Deficit"), then Buyer may by notice to Seller require Seller to transfer to Buyer or its designee (including the Custodian) Mortgage Loans ("Additional Loans") or cash, so that the cash and aggregate Market Value of the Purchased Mortgage Loans, including any such Additional Loans, will thereupon equal or exceed the aggregate Collateral Amount. If at any time the aggregate Securitization Value of all Purchased Mortgage Loans subject to then outstanding Transactions is less than the aggregate Collateral Amount for all such Transactions (a "Securitization Value Collateral Deficit"), then Buyer may by notice to Seller require Seller to transfer to Buyer or its designee (including the Custodian) Additional Loans or cash, so that the cash and aggregate Securitization Value of such Purchased Mortgage Loans, including any such Additional Loans, will thereupon equal or exceed the aggregate Collateral Amount. (b) Notice required pursuant to subsection (a) above may be given by any means of telecopier or telegraphic transmission. A notice for the payment or delivery in respect of a Collateral Deficit received on any Business Day must be met not later than 5:00 p.m. on the second Business Day following the Business Day on which the notice was given. The failure of Buyer, on any one or more occasions, to exercise its rights under subsection (a) of this Section shall not change or alter the terms and conditions to which this Agreement is subject or limit the right of the Buyer to do so at a later date. Buyer and Seller agree that a failure or delay to exercise its rights under subsections (a) of this Section shall not limit Buyer's rights under this Agreement or otherwise existing by law or in any way create additional rights for Seller. (c) In the event that Seller fails to comply with the provisions of this Section 4, Buyer shall not enter into any additional Transactions hereunder after the date of such failure, unless such failure is satisfactorily cured or waived. 5. INCOME PAYMENTS (a) Where a particular Transaction's term extends over an Income payment date on the Purchased Mortgage Loans subject to that Transaction such Income shall be the property of Buyer. Notwithstanding the foregoing, so long as no Event of Default shall have occurred and be continuing, Seller shall be entitled to all Income with respect to Purchased Mortgage Loans subject to Transactions. Upon the occurrence and continuance of an Event of Default, all Income with respect to Purchased Mortgage Loans subject to Transactions shall be held in a segregated 11 account established by the Custodian for the benefit of Buyer and distributed under the Custodial Agreement. (b) Notwithstanding that Buyer and Seller intend that the Transactions hereunder be sales to Buyer of the Purchased Mortgage Loans, Seller shall pay by wire transfer to Buyer the Price Differential (less any amount of such Price Differential previously paid by Seller to Buyer)(each such payment, a "Periodic Payment") on the first Business Day of each month. (c) Buyer shall offset against the Repurchase Price of each such Transaction all Income and Periodic Payments actually received by Buyer pursuant to Sections 5(a) and (b), respectively. 6. SECURITY INTEREST (a) Buyer and the Seller intend that the Transactions hereunder be sales to Buyer of the Purchased Mortgage Loans and not loans from Buyer to Seller secured by the Purchased Mortgage Loans. However, in order to preserve Buyer's rights under this Agreement in the event that a court or other forum recharacterizes the Transactions hereunder as loans and as security for the performance by Seller of all of Seller's obligations to Buyer under this Agreement and the Transactions entered into pursuant to this Agreement, Seller grants Buyer a first priority security interest in (x) the Purchased Mortgage Loans, the Servicing Records, the insurance relating to the Purchased Mortgage Loans, Income, any and all Hedges, any and all custodial accounts and escrow accounts relating to the Purchased Mortgage Loans, and any other contract rights, general intangibles and other assets relating to the Purchased Mortgage Loans or any interest in the Purchased Mortgage Loans and the servicing of the Purchased Mortgage Loans and (y) any and all replacements, substitutions, distributions on or proceeds of any and all of the foregoing (collectively, the "Collateral"). (b) Seller shall pay all fees and expenses associated with perfecting Buyer's security interest in the Collateral, including, without limitation, the cost of filing financing statements under the Uniform Commercial Code and recording assignments of Mortgage, as and when required by Buyer in its sole discretion, provided however that Buyer shall not file any assignments of Mortgage prior to an Event of Default hereunder by Seller. (c) Seller covenants to take such further actions as are necessary in order to perfect Buyer's first priority security interest in the Hedges. 12 7. PAYMENT, TRANSFER AND CUSTODY (a) Unless otherwise mutually agreed in writing, all transfers of funds hereunder shall be in immediately available funds. (b) On or before each Purchase Date, Seller shall deliver or cause to be delivered to Buyer or its designee the Custodial Delivery in the form attached hereto as Exhibit II. (c) On the Purchase Date for each Transaction, ownership of the Purchased Mortgage Loans shall be transferred to the Buyer or its designee (including the Custodian) against the simultaneous transfer of the Purchase Price to an account of Seller specified in the Confirmation. Seller, simultaneously with the delivery to Buyer or its designee (including the Custodian) of the Purchased Mortgage Loans relating to each Transaction hereby sells, transfers, conveys and assigns to Buyer or its designee (including the Custodian) without recourse, but subject to the terms of this Agreement, all the right, title and interest of Seller in and to the Purchased Mortgage Loans together with all right, title and interest in and to the proceeds of any related insurance policies. (d) In connection with each sale, transfer, conveyance and assignment, on or prior to each Purchase Date with respect to each Mortgage Loan which is not a Wet Ink Mortgage Loan (or with respect to item (vii) below within seven Business Days after the Purchase Date), the Seller shall deliver or cause to be delivered and released to the Custodian the following documents (collectively the "Mortgage File"), pertaining to each of the Purchased Mortgage Loans identified in the Custodial Delivery delivered therewith: (i) the original Mortgage Note bearing all intervening endorsements, endorsed "Pay to the order of ________ without recourse, and without representation or warranty, express or implied" and signed in the name of the last endorsee (the "Last Endorsee") by an authorized officer (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[the Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[the Last Endorsee], formerly known as [previous name]"); (ii) the original of any guarantee executed in connection with the Mortgage Note (if any); 13 (iii) the original Mortgage with evidence of recording thereon or copies certified by Seller [or its agent] to have been sent for recording; (iv) the originals of all assumption, modification, consolidation or extension agreements, with evidence of recording thereon or copies certified by Seller [or its agent] to have been sent for recording; (v) the original assignment of Mortgage in blank for each Mortgage Loan, in form and substance acceptable for recording and signed in the name of the Last Endorsee (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[the Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[the Last Endorsee], formerly known as [previous name]"); (vi) the originals of all intervening assignments of mortgage with evidence of recording thereon or copies certified by Seller [or its agent] to have been sent for recording; (vii) the original policy of title insurance or a true copy thereof or, if such policy has not yet been delivered by the insurer, the commitment or binder to issue the same (which may be marked by the title insurance company to reflect changes); and (viii) the original or a certified copy of any security agreement, chattel mortgage or equivalent document executed in connection with the Mortgage (if any). (e) In connection with each sale, transfer, conveyance and assignment with respect to each Mortgage Loan which is a Wet Ink Mortgage Loan, on or prior to the seventh Business Day following each Purchase Date, Seller shall deliver or cause to be delivered to the Custodian a complete Mortgage File. Further, if requested by Buyer, on the Purchase Date with respect to each Mortgage Loan which is a Wet Ink Mortgage Loan, Seller shall fax an executed copy of the respective Mortgage Note to the Custodian. On the date on which the Buyer receives a Trust Receipt from the Custodian certifying that a complete Mortgage File with respect to a Wet Ink Mortgage Loan is in the possession of the Custodian, such Wet Ink Mortgage Loan be deemed a standard Mortgage Loan (and no longer a Wet Ink Mortgage Loan) for all purposes hereunder including, without limitation, 14 determination of the Pricing Spread and compliance with subsection (aaa) of Exhibit V. (f) With respect to all of the Mortgage Loans delivered by Seller to Buyer or its designee (including the Custodian), Seller shall execute an omnibus power of attorney substantially in the form of Exhibit III attached hereto irrevocably appointing Buyer, upon the occurrence and during the continuation of an Event of Default, its attorney-in-fact with full power to complete and record the assignment of Mortgage, complete the endorsement of the Mortgage Note and take such other steps as may be necessary or desirable to enforce Buyer's rights against such Mortgage Loans, the related Mortgage Files and the Servicing Records. (g) Buyer shall deposit the Mortgage Files representing the Purchased Mortgage Loans, or direct that the Mortgage Files be deposited directly, with the Custodian. The Mortgage Files shall be maintained in accordance with the Custodial Agreement. (h) Any Mortgage Files not delivered to Buyer or its designee (including the Custodian) are and shall be held in trust by Seller or its designee for the benefit of Buyer as the owner thereof. Seller or its designee shall maintain a copy of the Mortgage File and the originals of the Mortgage File not delivered to Buyer or its designee. The possession of the Mortgage File by Seller or its designee is at the will of the Buyer for the sole purpose of servicing the related Purchased Mortgage Loan, and such retention and possession by the Seller or its designee is in a custodial capacity only. The books and records (including, without limitation, any computer records or tapes) of Seller or its designee shall be marked appropriately to reflect clearly the sale of the related Purchased Mortgage Loan to Buyer. Seller or its designee (including the Custodian) shall release its custody of the Mortgage File only in accordance with written instructions from Buyer, unless such release is required as incidental to the servicing of the Purchased Mortgage Loans or is in connection with a repurchase of any Purchased Mortgage Loan by Seller. 8. REHYPOTHECATION OR PLEDGE OF PURCHASED MORTGAGE LOANS Title to all Purchased Mortgage Loans shall pass to Buyer and Buyer shall have free and unrestricted use of all Purchased Mortgage Loans. Nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Mortgage Loans or otherwise pledging, repledging, hypothecating, or rehypothecating the Purchased Mortgage Loans, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Mortgage Loans to Seller pursuant to this Agreement or any Confirmation, as applicable. Nothing contained in this Agreement shall obligate Buyer to segregate any Purchased Mortgage Loans delivered 15 to Buyer by Seller. In the event of a material adverse change in the repurchase markets that results in Buyer being unable to finance its position through its traditional repurchase counterparties, Buyer may accelerate the Repurchase Date for any outstanding Transactions following reasonable written notice to Seller of the occurrence of such event. 9. SUBSTITUTION (a) Subject to Section 9(b), Seller may, upon one (1) Business Days' written notice to Buyer, with a copy to Custodian, substitute other Mortgage Loans for any Purchased Mortgage Loans. Such substitution shall be made by transfer to Buyer or its designee (including the Custodian) of the Mortgage Files of such other Mortgage Loans together with a Custodial Delivery and transfer to Seller or its designee of the Purchased Mortgage Loans requested for release. After substitution, the substituted Mortgage Loans, shall be deemed to be Purchased Mortgage Loans subject to the same Transaction as the released Mortgage Loans. (b) Notwithstanding anything to the contrary in this Agreement, Seller may not substitute other Mortgage Loans for any Purchased Mortgage Loans (i) if after taking into account such substitution, a Collateral Deficit would occur or (ii) such substitution would cause a breach of any provision of this Agreement. 10. REPRESENTATIONS AND WARRANTIES (a) Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance; (ii) it will engage in such Transactions as principal; (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf; (iv) this Agreement is legal, valid and binding obligation of it, enforceable against it in accordance with its terms, (v) no approval, consent or authorization of the Transactions contemplated by this Agreement from any federal, state, or local regulatory authority having jurisdiction over it is required or, if required, such approval, consent or authorization has been or will, prior to the Purchase Date, be obtained; (vi) the execution, delivery, and performance of this Agreement and the Transactions hereunder will not violate any law, regulation, order, judgment, decree, ordinance, charter, by-law, or rule applicable to it or its property or constitute a default (or an event which, with notice or lapse of time, or both would constitute a default) under or result in a breach of any agreement or other instrument by which it is bound or by which any of its assets are affected; (vii) it has received approval and authorization to enter into this Agreement and each and every Transaction actually entered into hereunder pursuant to its internal policies and procedures; and (viii) neither this Agreement nor any Transaction pursuant hereto 16 are entered into in contemplation of insolvency or with intent to hinder, delay or defraud any creditor. (b) Seller represents and warrants to Buyer that as of the Purchase Date for the purchase of any Purchased Mortgage Loans by Buyer from Seller and as of the date of this Agreement and any Transaction hereunder and at all times while this Agreement and any Transaction hereunder is in full force and effect: (i) Organization. Seller is duly organized, validly existing and in good standing under the laws and regulations of the state of New York and where required is duly licensed, qualified, and in good standing in every state where Seller transacts business and in any state where any Mortgaged Property is located if the laws of such state require licensing or qualification in order to conduct business of the type conducted by Seller therein except where the failure to be so licensed or qualified would not have a material adverse effect on the financial condition of the Seller or the Purchased Mortgage Loans. (ii) No Litigation. There is no action, suit, proceeding, arbitration or investigation pending or, to the best knowledge of Seller, threatened against Seller which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of Seller, or in any material impairment of the right or ability of Seller to carry on its business substantially as now conducted, or in any material liability on the part of Seller, or which if adversely determined would affect the validity of this Agreement or the Purchased Mortgage Loans in the aggregate or of any action taken or to be taken in connection with the obligations of Seller contemplated herein, or which would be likely to impair materially the ability of Seller to perform under the terms of this Agreement; (iii) No Broker. Seller has not dealt with any broker, investment banker, agent, or other person, except for Buyer, who may be entitled to any commission or compensation in connection with the sale of Purchased Mortgage Loans pursuant to this Agreement; (iv) Good Title to Collateral. All Purchased Mortgage Loans shall be free and clear of any lien, encumbrance or impediment to transfer, and Seller has good, valid and indefeasible title and the right to sell and transfer such Purchased Mortgage Loans to Buyer. 17 (v) Delivery of Mortgage File. With respect to each Purchased Mortgage Loans which is not a Wet Ink Mortgage Loan, the Mortgage Note, the Mortgage, the assignment of Mortgage and any other documents required to be delivered under this Agreement and the Custodial Agreement for such Mortgage Loan have been delivered to the Custodian. Seller or its designee is in possession of a complete, true and accurate Mortgage File with respect to each Mortgage Loan, except for such documents the originals of which have been delivered to the Custodian. (vi) Selection Process. The Purchased Mortgage Loans were selected from among the outstanding mortgage loans in Seller's portfolio as to which the representations and warranties set forth in this Agreement could be made and such selection was not made in a manner so as to affect adversely the interests of Buyer. (vii) [reserved] (viii) No Untrue Statements. To the best of Seller's knowledge, neither this Agreement nor any written statement made, or any report or other document issued or delivered or to be issued or delivered by Seller pursuant to this Agreement or in connection with the transactions contemplated hereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading; (ix) Origination/Acquisition Practices. The origination or acquisition practices used by Seller with respect to each Mortgage Loan (i) have been and are in all respects legal and proper in the mortgage origination business and (ii) are in accordance with the underwriting guidelines attached hereto as Exhibit VI; (x) Performance of Agreement. Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement on its part to be performed; (xi) Seller Not Insolvent. Seller is not insolvent; and (xii) No Event of Default. No Event of Default has occurred and is continuing hereunder. 18 (c) Seller represents and warrants to the Buyer that each Purchased Mortgage Loan sold hereunder and each pool of Purchased Mortgage Loans sold in a Transaction hereunder, as of the related Purchase Date conform to the representations and warranties set forth in Exhibit V attached hereto and that each Mortgage Loan delivered hereunder as Additional Loans or Substituted Mortgage Loans, as of the date of such delivery, conforms to the representations and warranties set forth in Exhibit V hereto. Seller further represents and warrants to the Buyer that, as of the date of its delivery, the Collateral Information with respect to each Purchased Mortgage Loan is complete, true and correct in all material respects. It is understood and agreed that the representations and warranties set forth in Exhibit V hereto, if any, shall survive delivery of the respective Mortgage File to Buyer or its designee (including the Custodian). (d) On the Purchase Date for any Transaction, Buyer and Seller shall each be deemed to have made all the foregoing representations with respect to itself as of such Purchase Date. 11. NEGATIVE COVENANTS OF THE SELLER On and as of the date of this Agreement and each Purchase Date and until this Agreement is no longer in force with respect to any Transaction, Seller covenants that it will not: (a) take any action which would materially directly or indirectly impair or adversely affect Buyer's title to or the value of the Purchased Mortgage Loans; (b) pledge, assign, convey, grant, bargain, sell, set over, deliver or otherwise transfer any interest in the Purchased Mortgage Loans to any person not a party to this Agreement nor will the Seller create, incur or permit to exist any lien, encumbrance or security interest in or on the Purchased Mortgage Loans except as described in Section 6 of this Agreement; (c) create, incur or permit to exist any lien, encumbrance or security interest in or on any of the Collateral without the prior express written consent of Buyer; (d) permit the ratio of Tangible Net Worth to Indebtedness to exceed 10:1 (as such terms are defined in GAAP). 12. AFFIRMATIVE COVENANTS OF THE SELLER For so long as this Agreement is in effect: 19 (a) Seller covenants that it will promptly notify Buyer of any material adverse change in the business operations and/or financial condition of the Seller; (b) Seller shall provide Buyer with copies of such documentation as Buyer may reasonably request evidencing the truthfulness of the representations set forth in Section 10, including but not limited to resolutions evidencing the approval of this Agreement by Seller's board of directors or loan committee, copies of the minutes of the meetings of Seller's board of directors or loan committee at which this Agreement and the Transactions contemplated by this Agreement were approved; (c) Seller shall, at Buyer's request, take all action reasonably necessary to ensure that Buyer will have a first or second priority security interest, as applicable, in the Collateral, including, among other things, filing such Uniform Commercial Code financing statements as Buyer may reasonably request; (d) Seller shall notify Buyer no later than one (1) Business Day after obtaining actual knowledge thereof, if any event has occurred that constitutes an Event of Default with respect to Seller or any event that with the giving of notice or lapse of time, or both, would become an Event of Default with respect to Seller; (e) Seller covenants that each Mortgage Loan subject to this Agreement shall be serviced by a servicer approved by Buyer; (f) Seller covenants to provide Buyer with a copy of any material changes to Seller's underwriting guidelines prior to the effectiveness of any such change; (g) Seller covenants for the term of this Agreement to provide Buyer or its designee with the exclusive option and right (but not the obligation) of acting as lead managing underwriter or placement agent for any securities of Seller or its Affiliates which are collateralized by, or representing interests in, Mortgage Loans that are or were subject to Transactions hereunder (each such transaction, a "Securitization"). Each Securitization shall contain terms mutually acceptable to Buyer and Seller (including, without limitation, customary and competitive compensation provisions as well as customary provisions regarding representations and warranties, covenants, delivery terms, conditions, indemnification, contribution and termination). If Buyer or its affiliate declines to participate in any Securitization (and the failure to respond to Seller within 14 days after receipt of a written offer shall be deemed to be declining), Seller or its subsidiaries may cause such transaction to be executed by others without prejudice to Buyer's rights as to future transactions or without any other penalty; 20 (h) Seller covenants to provide Buyer on the fifth Business Day of each month, either by direct modem electronic transmission or via a computer diskette, the Collateral Information in computer readable format with respect to all Purchased Mortgage Loans then subject to Transactions; (i) Seller covenants to provide Buyer with the following financial and reporting information: (i) Within 90 days after the last day of its fiscal year, Seller's audited combined and combining statements of income and statements of changes in cash flow for such year and balance sheets as of the end of such year in each case presented fairly in accordance with GAAP, and accompanied, in all cases, by a report of a nationally recognized independent certified public accounting firm consented to by Buyer (which consent shall not be unreasonably withheld); (ii) Within 60 days after the last day of the first three fiscal quarters in any fiscal year, Seller's combined and combining statements of income and statements of changes in cash flow for such quarter and balance sheets as of the end of such quarter presented fairly in accordance with GAAP; (iii) Within 30 days after the last day of each calendar quarter an officer's certificate from a senior officer of the Seller addressed to Buyer certifying that, as of such calendar quarter, (x) Seller is in compliance with all of the terms, conditions and requirements of this Agreement, and (y) no Event of Default exists; and (iv) As soon as available, copies of all proxy statements, financial statements, and reports which Seller sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements under the Securities Act of 1933, as amended, which it files with the Securities and Exchange Commission or any government authority which may be substituted therefor, or with any national securities exchange. 13. EVENTS OF DEFAULT If any of the following events (each an "Event of Default") occur, Seller and Buyer shall have the rights set forth in Section 14, as applicable: (a) Seller fails to satisfy or perform any material obligation or covenant under this Agreement including the failure to perform on any Repurchase 21 Date; and if such failure is not related to the payment of money or delivery of additional Collateral pursuant to Section 4 above, such failure is not cured within 3 Business Days; (b) an Act of Insolvency occurs with respect to Seller; (c) any representation made by Seller shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated; (d) Seller shall admit its inability to, or its intention not to, perform any of its obligations hereunder; (e) any governmental, regulatory, or self-regulatory authority, including, but not limited to, the Agencies, takes any action to remove, limit, restrict, suspend or terminate the rights, privileges, or operations of the Seller or any of its Affiliates, including suspension as an issuer, lender or seller/servicer of mortgage loans, which suspension has a material adverse effect on the ordinary business operations of Seller or Seller's Affiliate, and which continues for more than 3 Business Days; (f) Seller dissolves, merges or consolidates with another entity (unless (A) it is the surviving party or (B) the entity into which it merges or consolidates has equity and a market value of at least that of the Seller immediately prior to such merger or consolidation and such entity expressly assumes the obligations of the Seller at the time of such merger or consolidation), or sells, transfers, or otherwise disposes of a material portion of its business or assets; (g) Buyer, in its good faith judgment, believes that there has been a material adverse change in the business, operations, corporate structure or financial condition of Seller or that Seller will not meet any of its obligations under any Transaction pursuant to this Agreement, the Custodial Agreement or any other agreement between the parties; (h) Seller is in default under any other agreement for borrowed money in an amount exceeding $1,000,000, provided, however, such a default shall not constitute an Event of Default if the exercise of such remedies as are available to Seller's counterparty with respect to such default would not result in a material adverse change in the business operations or financial condition of the Seller; (i) A final judgment by any competent court in the United States of America for the payment of money in an amount of at least $100,000 is rendered against the Seller, and the same remains undischarged or unpaid for a period of sixty 22 (60) days during which execution of such judgment is not effectively stayed or appealed or the amount in question is not placed with an escrow agent; (j) This Agreement shall for any reason cease to create a valid, first priority security interest in any of the Purchased Mortgage Loans purported to be covered hereby; or (k) A Market Value Collateral Deficit or Securitization Value Collateral Deficit occurs with respect to Seller or Buyer, as applicable, and is not eliminated within the time period specified in Section 4(b). 14. REMEDIES (a) If an Event of Default occurs with respect to Seller, the following rights and remedies are available to Buyer: (i) At the option of Buyer, exercised by written notice to Seller (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed immediately to occur, (ii) If Buyer exercises or is deemed to have exercised the option referred to in subsection (a)(i) of this Section, (A) Seller's obligations hereunder to repurchase all Purchased Mortgage Loans in such Transactions shall thereupon become immediately due and payable, (B) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of, on a 360 day per year basis for the actual number of days during the period from and including the date of the exercise or deemed exercise of such option to but excluding the date of payment of the Repurchase Price as so increased, (x) the greater of the Prime Rate or the Pricing Rate for each such Transaction to (y) the Repurchase Price for such Transaction as of the Repurchase Date as determined pursuant to subsection (a)(i) of this Section (decreased as of any day by (I) any amounts actually in the possession of Buyer pursuant to clause (C) of this subsection, (II) any proceeds from the sale of Purchased Mortgage Loans applied to the Repurchase Price pursuant to 23 subsection (a)(xii) of this Section, and (III) any amounts applied to the Repurchase Price pursuant to subsection (a)(iii) of this Section), and (C) all Income actually received by the Buyer or its designee (including the Custodian) pursuant to Section 5 shall be applied to the aggregate unpaid Repurchase Price owed by Seller. (iii) After one Business Day's notice to Seller (which notice need not be given if an Act of Insolvency shall have occurred, and which may be the notice given under subsection (a)(i) of this Section), Buyer may (A) immediately sell, without notice or demand of any kind, at a public or private sale and at such price or prices Buyer may reasonably deem satisfactory any or all Purchased Mortgage Loans subject to a Transaction hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Mortgage Loans, to give Seller credit for such Purchased Mortgage Loans in an amount equal to the Market Value of the Purchased Mortgage Loans against the aggregate unpaid Repurchase Price and any other amounts owing by Seller hereunder. The proceeds of any disposition of Purchased Mortgage Loans shall be applied first to the costs and expenses incurred by Buyer in connection with Seller's default; second to consequential damages, including but not limited to costs of cover and/or related hedging transactions; third to the Repurchase Price; and fourth to any other outstanding obligation of Seller to Buyer or its Affiliates. (iv) The parties recognize that it may not be possible to purchase or sell all of the Purchased Mortgage Loans on a particular Business Day, or in a transaction with the same purchaser, or in the same manner because the market for such Purchased Mortgage Loans may not be liquid. In view of the nature of the Purchased Mortgage Loans, the parties agree that liquidation of a Transaction or the underlying Purchased Mortgage Loans does not require a public purchase or sale and that a good faith private purchase or sale shall be deemed to have been made in a commercially reasonable manner. Accordingly, Buyer may elect, in its sole discretion, the time and manner of liquidating any Purchased Mortgage Loan and nothing contained herein shall (A) obligate Buyer to liquidate any Purchased Mortgage Loan on the occurrence of an Event of Default or to liquidate all Purchased Mortgage Loans in the same manner or on the same Business Day or (B) constitute a waiver of any right or remedy of Buyer. However, in recognition of the parties' agreement that the 24 Transactions hereunder have been entered into in consideration of and in reliance upon the fact that all Transactions hereunder constitute a single business and contractual relationship and that each Transaction has been entered into in consideration of the other Transactions, the parties further agree that Buyer shall use its best efforts to liquidate all Transactions hereunder upon the occurrence of an Event of Default as quickly as is prudently possible in the reasonable judgment of Buyer. (v) Buyer shall, without regard to the adequacy of the security for the Seller's obligations under this Agreement, be entitled to the appointment of a receiver by any court having jurisdiction, without notice, to take possession of and protect, collect, manage, liquidate, and sell the Collateral or any portion thereof, and collect the payments due with respect to the Collateral or any portion thereof. Seller shall pay all costs and expenses incurred by Buyer in connection with the appointment and activities of such receiver. (vi) Seller agrees that Buyer may obtain an injunction or an order of specific performance to compel Seller to fulfill its obligations as set forth in Section 25, if Seller fails or refuses to perform its obligations as set forth therein. (vii) Seller shall be liable to Buyer for the amount of all expenses, reasonably incurred by Buyer in connection with or as a consequence of an Event of Default, including, without limitation, reasonable legal fees and expenses and reasonable costs incurred in connection with hedging or covering transactions. (viii) Buyer shall have all the rights and remedies provided herein, provided by applicable federal, state, foreign, and local laws (including, without limitation, the rights and remedies of a secured party under the Uniform Commercial Code of the State of New York, to the extent that the Uniform Commercial Code is applicable, and the right to offset any mutual debt and claim), in equity, and under any other agreement between Buyer and Seller. (ix) Buyer may exercise one or more of the remedies available to Buyer immediately upon the occurrence of an Event of Default and, except to the extent provided in subsections (a)(i) and (iii) of this Section, at any time thereafter without notice to Seller. All rights and remedies arising under this Agreement as amended from time-to-time hereunder are cumulative and not exclusive of any other rights or remedies which Buyer may have. 25 (x) In addition to its rights hereunder, Buyer shall have the right to proceed against any assets of Seller which may be in the possession of Buyer or its designee (including the Custodian) including the right to liquidate such assets and to set off the proceeds against monies owed by Seller to Buyer pursuant to this Agreement. Buyer may set off cash, the proceeds of the liquidation of the Purchased Mortgage Loans, any Collateral or its proceeds, and all other sums or obligations owed by Seller to Buyer against all of Seller's obligations to Buyer, whether under this Agreement, under a Transaction, or under any other agreement between the parties, or otherwise, whether or not such obligations are then due, without prejudice to Buyer's right to recover any deficiency. Any cash, proceeds, or property in excess of any amounts due, or which Buyer reasonably believes may become due, to it from Seller shall be returned to Seller after satisfaction of all obligations of Seller to Buyer. (xi) Buyer may enforce its rights and remedies hereunder without prior judicial process or hearing, and Seller hereby expressly waives any defenses Seller might otherwise have to require Buyer to enforce its rights by judicial process. Seller also waives any defense Seller might otherwise have arising from the use of nonjudicial process, enforcement and sale of all or any portion of the Collateral, or from any other election of remedies. Seller recognizes that nonjudicial remedies are consistent with the usages of the trade, are responsive to commercial necessity and are the result of a bargain at arm's length. (xii) [reserved] (xiii) Notwithstanding the foregoing remedies, if the Event of Default (other than an Event of Default under Section 13(a)(xi)) arises from a breach of any representation or warranty set forth in Sections 10(b)(iii), (v) or (ix) or in Exhibit V attached hereto with respect to a Purchased Mortgage Loan, then Seller may elect to cure such default by repurchasing such Mortgage Loan or substituting for such Mortgage Loan within two (2) Business Days of such Event of Default, provided, however, that (ii) any such substistuted Collateral otherwise conforms to this Agreement and (ii) Seller shall not have the right to make the foregoing election if such breach causes a default with respect to Mortgage Loans that in the aggregate represent ten percent (10%) or more of the aggregate Purchase Price of all Purchased Mortgage Loans subject to then outstanding Transactions. The repurchase price for any such repurchase shall be the outstanding Repurchase Price of such Mortgage Loan, as the case may be, less any Income received by Buyer. 26 Any such substitution shall be performed in accordance with Section 9 of this Agreement. (b) If an Event of Default occurs with respect to Buyer, the following rights and remedies are available to Seller: (i) Upon tender by Seller of payment of the aggregate Repurchase Price for all such Transactions, Buyer's right, title and interest in all Purchased Mortgage Loans subject to such Transactions shall be deemed transferred to Seller, and Buyer shall deliver or cause to be transferred all such Purchased Mortgage Loans to Seller or its designee at Buyer's expense. (ii) If Seller exercises the option referred to in subsection (b)(i) of this Section and Buyer fails to deliver or cause to be delivered the Purchased Mortgage Loans to Seller or its designee, after one Business Day's notice to Buyer, Seller may (A) purchase Mortgage Loans ("Replacement Loans") that are as similar as is reasonably practicable in characteristics, outstanding principal amounts (as a pool) and interest rate to any Purchased Mortgage Loans that are not delivered by Buyer to Seller or its designee as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Loans, to be deemed to have purchased Replacement Loans at a price therefor on such date, equal to the Market Value of the Purchased Mortgage Loans. (iii) Buyer shall be liable to the Seller, and Buyer shall pay to the Seller on demand, (A) with respect to Purchased Mortgage Loans (other than Additional Loans), for any excess of the price paid (or deemed paid) by Seller for Replacement Loans therefor over the Repurchase Price for such Purchased Mortgage Loans and (B) with respect to Additional Loans, for the price paid (or deemed paid) by Seller for the Replacement Loans therefor. In addition, Buyer shall be liable to Seller for interest on such remaining liability with respect to each such purchase (or deemed purchase) of Replacement Loans calculated on a 360-day year basis for the actual number of days during the period from and including the date of such purchase (or deemed purchase) until paid in full by Buyer. Such interest shall be at the greater of the Pricing Rate or the Prime Rate. (iv) Buyer shall be liable to Seller for the amount of all expenses reasonably incurred by Seller in connection with or as a consequence of an Event of Default, including, without limitation, reasonable legal expenses and reasonable expenses and losses incurred in 27 connection with covering existing hedging transactions with respect to the Purchased Mortgage Loans. (v) Seller shall have all the rights and remedies provided herein, provided by applicable federal, state, foreign, and local laws, in equity, and under any other agreement between Buyer and Seller, including, without limitation, the right to offset any debt or claim. (vi) Seller may exercise one or more of the remedies available to Seller immediately upon the occurrence of an Event of Default and at any time thereafter without notice to Buyer. All rights and remedies arising under this Agreement as amended from time-to-time hereunder are cumulative and not exclusive of any other rights or remedies which Seller may have. 15. ADDITIONAL CONDITIONS Seller shall, on the date of the initial Transaction hereunder and, upon the reasonable request of Buyer (but no more than once annually), on the date of any subsequent Transaction, cause to be delivered to Buyer, with reliance thereon permitted as to any Person that purchases the Purchased Mortgage Loan from Buyer in a repurchase transaction, a favorable opinion or opinions of counsel with respect to the matters set forth in Exhibit IV attached hereto. In addition, on the date of the initial Transaction, Seller shall execute a letter agreement with Buyer with respect to certain fees owed hereunder and other matters reasonably required by Buyer. 16. SINGLE AGREEMENT Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and that each has been entered into in consideration of the other Transactions. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries, and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries, and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries, and other transfers may be applied against each other and netted; provided, however, that the parties hereto acknowledge and agree that each Purchased Mortgage 28 Loan is identified and unique and nothing in this Agreement should limit or reduce Buyer's obligation to deliver the Purchased Mortgage Loans to Seller as and when provided herein. 17. NOTICES AND OTHER COMMUNICATIONS Unless another address is specified in writing by the respective party to whom any written notice or other communication is to be given hereunder, all such notices or communications shall be in writing or confirmed in writing and delivered at the respective addresses set forth in the Confirmation. 18. ENTIRE AGREEMENT; SEVERABILITY This Agreement together with the applicable Confirmation and the Custodial Agreement constitutes the entire understanding between Buyer and Seller with respect to the subject matter it covers and shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions involving Purchased Mortgage Loans. By acceptance of this Agreement, Buyer and Seller acknowledge that they have not made, and are not relying upon, any statements, representations, promises or undertakings not contained in this Agreement. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 19. NON-ASSIGNABILITY The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by Seller without the prior written consent of Buyer. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. Nothing in this Agreement express or implied, shall give to any person, other than the parties to this Agreement and their successors hereunder, any benefit or any legal or equitable right, power, remedy or claim under this Agreement. 20. TERMINABILITY This Agreement shall terminate upon the earlier of (a) 30 days' written notice from either party to the other to such effect or (b) 364 days from the date hereof, except that this Agreement shall, notwithstanding the clause above, remain applicable to any Transaction then outstanding. Notwithstanding any such termination or the occurrence of an Event of Default, (i) all of the representations and warranties 29 hereunder (including those made in Exhibit V) and (ii) the covenants of Seller made in subsection (g) of Section 12 shall each continue and survive. 21. GOVERNING LAW THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 22. CONSENT TO JURISDICTION AND ARBITRATION The parties irrevocably agree to submit to the personal jurisdiction of the United States District Court for the Southern District of New York, the parties irrevocably waiving any objection thereto. If, for any reason, federal jurisdiction is not available, and only if federal jurisdiction is not available, the parties irrevocably agree to submit to the personal jurisdiction of the Supreme Court of the State of New York, the parties irrevocably waiving any objection thereto. Notwithstanding the foregoing two sentences, at either party's sole option exercisable at any time not later than thirty (30) days after an action or proceeding has been commenced, the parties agree that the matter may be submitted to binding arbitration in accordance with the commercial rules of the American Arbitration Association then in effect in the State of New York and judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof within the City, County and State of New York; provided, however, that the arbitrator shall not amend, supplement, or reform in any regard this Agreement or the terms of any Confirmation, the rights or obligations of any party hereunder or thereunder, or the enforceability of any of the terms hereof or thereof. Any arbitration shall be conducted before a single arbitrator who shall be reasonably familiar with repurchase transactions and the secondary mortgage market in the City, County, and State of New York. 23. NO WAIVERS, ETC. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Any such waiver or modification shall be effective only in the specific instance and for the specific purpose for which it was given. 30 24. INTENT The parties understand and intend that this Agreement and each Transaction hereunder constitute a "repurchase agreement" and a "securities contract" as those terms are defined under the relevant provisions of Title 11 of the United States Code, as amended. 25. SERVICING (a) Notwithstanding the purchase and sale of the Purchased Mortgage Loans hereby, Seller shall continue to cause the Purchased Mortgage Loans to be serviced and special serviced by ___________ Mortgagor or another servicer reasonably acceptable to Buyer, respectively, for the benefit of Buyer and, if Buyer shall exercise its rights to pledge or hypothecate the Purchased Mortgage Loan prior to the related Repurchase Date pursuant to Section 8, Buyer's assigns; provided, however, that the obligations of Seller to service the Purchased Mortgage Loans shall cease, at Seller's option, upon the payment by Seller to Buyer of the Repurchase Price therefor. Seller shall cause the Purchased Mortgage Loans to be serviced in accordance with the servicing standards maintained by other prudent mortgage lenders with respect to mortgage loans similar to the Purchased Mortgage Loans. (b) Seller agrees that Buyer is the owner of all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of Purchased Mortgage Loans (the "Servicing Records"). Seller grants Buyer a security interest in all servicing fees and rights relating to the Purchased Mortgage Loans and all Servicing Records to secure the obligation of the Seller or its designee to service in conformity with this Section and any other obligation of Seller to Buyer. Seller covenants to safeguard such Servicing Records and to deliver them promptly to Buyer or its designee (including the Custodian) at Buyer's request and upon Event of Default. (c) Upon the occurrence and continuance of an Event of Default, Buyer may, in its sole discretion, (i) sell its right to the Purchased Mortgage Loans on a servicing released basis or (ii) terminate the servicers of the Purchased Mortgage Loans with or without cause, in each case without any obligation on the part of Buyer to pay any termination fees owed by Seller. (d) Seller shall not employ any servicers or special servicer other than _____________, to service the Purchased Mortgage Loans without the prior written approval of Buyer, which approval will not be unreasonably withheld. 31 (e) Seller shall cause the servicer to execute a letter agreement with Buyer acknowledging Buyer's security interest and agreeing that, upon notice from Buyer (or the Custodian on its behalf) that an Event of Default has occurred and in continuing hereunder, it shall deposit all Income with respect to the Purchased Mortgage Loans in the account specified in the third sentence of Section 5(a). 26. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that in the case of Transactions in which one of the parties is an "insured depository institution" as that term is defined in Section 1831(a) of Title 12 of the United States Code, as amended, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Savings Association Insurance Fund or the Bank Insurance Fund, as applicable. 27. RESERVED 28. MISCELLANEOUS (a) Buyer shall be authorized to accept orders and take any other action affecting any accounts of the Seller in response to instructions given in writing or orally by telephone or otherwise by any person authorized to act on behalf of the Seller. (b) If there is any conflict between the terms of this Agreement or any Transaction entered into hereunder and the Custodial Agreement, this Agreement shall prevail. (c) If there is any conflict between the terms of a Confirmation or a corrected Confirmation issued by the Buyer and this Agreement, the corrected Confirmation shall prevail. (d) This Agreement may be executed in counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. (e) Seller agrees to reimburse Buyer for all reasonable costs and expenses of Buyer in connection with this Agreement including, without limitation, (i) the fees, expenses and disbursement of counsel to Buyer, (ii) due diligence expenses and (iii) on-going auditing fees; provided that with respect to the establishment of this Agreement, Seller shall be responsible for up to $50,000 pursuant to this paragraph. 32 (f) Seller and Buyer agree to maintain the confidentiality of this Agreement and its terms and agree not to disclose this Agreement or its terms to any other party except as required for the enforcement of its terms or as required by law, regulatory requirements or court order or discovery. In the event Seller determines, in consultation with legal counsel experienced in securities regulation, that the Agreement must be filed with the Securities and Exchange Commission pursuant to applicable law, such filing may only be made after consultation with Buyer and agreement upon redaction of certain terms of the Agreement (including, without limitation, the Pricing Spread), provided that nothing herein is intended to prevent Seller from complying with applicable laws and requirements of the Securities Act of 1933, as amended or regulations promulgated thereunder. (g) The headings in this Agreement are for convenience of reference only and shall not affect the interpretation or construction of this Agreement. [Signature page follows.] 33 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date set forth above. LEHMAN COMMERCIAL PAPER INC., Buyer By: ----------------------------------------- Title: Date: FHB FUNDING CORP., Seller By: ----------------------------------------- Title: Date: 34 EXHIBITS -------- EXHIBIT I Confirmation EXHIBIT II Form of Custodial Delivery EXHIBIT III Form of Power of Attorney EXHIBIT IV Opinion of Counsel to Seller EXHIBIT V Representations and Warranties Regarding Mortgage Loan EXHIBIT VI Seller's Underwriting Guidelines 35 EXHIBIT I Form of Confirmation Letter (date) FHB Funding Corp. - ------------------------------------- - ------------------------------------- - ------------------------------------- Attention: -------------------------- Confirmation No.: ------------------- Ladies/Gentlemen: This letter confirms our oral agreement to purchase from you the Mortgage Loans listed in Appendix I hereto, pursuant to the Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans between us, dated as of July __, 1998 (the "Agreement"), as follows: Purchase Date: Mortgage Loans to be Purchased: See Appendix I hereto. [Appendix I to Confirmation Letter will list Mortgage Loans] Aggregate Principal Amount of Purchased Mortgage Loans: Purchase Price: Pricing Rate: Repurchase Date: Repurchase Price: Collateral Amount Percentage with respect to Market Value: 36 Names and addresses for communications: Buyer: Lehman Commercial Paper Inc. 200 Vesey Street 9th Floor New York, New York 10285-0900 Attention: Central Funding Department Seller: FHB Funding Corp. ------------------------------------- ------------------------------------- ------------------------------------- Attention: -------------------------- LEHMAN COMMERCIAL PAPER INC. By: ----------------------------------------- Name: Title: Agreed and Acknowledged: FHB FUNDING CORP., Seller By: ----------------------------------------- Name: Title: 37 EXHIBIT II Form of Custodial Delivery On this ____ day of ___________, 199__, FHB Funding Corp. ("Seller"), as the Seller under that certain Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as of July __, 1998 (the "Repurchase Agreement") between the Seller and Lehman Commercial Paper Inc. ("Buyer"), does hereby deliver to __________________ ("Custodian"), as custodian under that certain Custodial Agreement, dated as of July, 1998, among Buyer, Seller and Custodian the Mortgage Files with respect to the Mortgage Loans to be purchased by Buyer pursuant to the Repurchase Agreement, which Mortgage Loans are listed on the Mortgage Loan Schedule attached hereto and which Mortgage Loans shall be subject to the terms of the Custodial Agreement on the date hereof. With respect to the Mortgage Files delivered hereby, for the purposes of issuing the Trust Receipt, the Custodian shall review the Mortgage Files to ascertain delivery of the documents listed in Annex A attached to the Custodial Agreement. [The Mortgage Loans delivered hereby constitute Additional Collateral delivered pursuant to Section 7 of the Custodial Agreement].][The Mortgage Loans delivered hereby constitute Substituted Collateral pursuant to Section 6 of the Custodial Agreement and are intended to be substituted for the Purchased Mortgage Loans listed on the [schedule attached hereto][Request for Release of Documents and receipt delivered herewith]. The Purchased Mortgage Loans to be released shall be delivered to _______________.] Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Custodial Agreement. IN WITNESS WHEREOF, the Seller has caused its name to be signed hereto by its officer thereunto duly authorized as of the day and year first above written. FHB FUNDING CORP., Seller By: ----------------------------------------- Name: Title: 38 EXHIBIT III Form of Power of Attorney "Know All Men by These Presents, that FHB Funding Corp. ("Seller"), does hereby appoint Lehman Commercial Paper Inc. ("Buyer"), its attorney-in-fact to act in Seller's name, place and stead in any way which Seller could do with respect to (i) the completion of the endorsements of the Mortgage Notes and the Assignments of Mortgages, (ii) the recordation of the assignments of Mortgages and (iii) the enforcement of the Seller's rights under the Mortgage Loans purchased by Buyer pursuant to a Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of July _, 1998 between Seller and Buyer (the "Master Agreement") and to take such other steps as may be necessary or desirable to enforce Buyer's rights against such Mortgage Loans, the related Mortgage Files and the Servicing Records to the extent that Seller is permitted by law to act through an agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Master Agreement. TO INDUCE ANY THIRD PARTY TO ACT HEREUNDER, SELLER HEREBY AGREES THAT ANY THIRD PARTY RECEIVING A DULY EXECUTED COPY OR FACSIMILE OF THIS INSTRUMENT MAY ACT HEREUNDER, AND THAT REVOCATION OR TERMINATION HEREOF SHALL BE INEFFECTIVE AS TO SUCH THIRD PARTY UNLESS AND UNTIL ACTUAL NOTICE OR KNOWLEDGE OF SUCH REVOCATION OR TERMINATION SHALL HAVE BEEN RECEIVED BY SUCH THIRD PARTY, AND SELLER ON ITS OWN BEHALF AND ON BEHALF OF SELLER'S ASSIGNS, HEREBY AGREES TO INDEMNIFY AND HOLD HARMLESS ANY SUCH THIRD PARTY FROM AND AGAINST ANY AND ALL CLAIMS THAT MAY ARISE AGAINST SUCH THIRD PARTY BY REASON OF SUCH THIRD PARTY HAVING RELIED ON THE PROVISIONS OF THIS INSTRUMENT. IN WITNESS WHEREOF Seller has caused this Power of Attorney to be executed and the Seller's seal to be affixed this __ day of July, 1998. FHB FUNDING CORP. (Seal) By: ----------------------------------------- Name: Title: 39 EXHIBIT IV OPINION OF SELLER'S COUNSEL 40 EXHIBIT V Representations and Warranties Regarding Mortgage Loans The Seller represents and warrants to the Buyer that, with respect to each Mortgage Loan sold in a Transaction hereunder, as of the related Purchase Date: (a) Mortgage Loans as Described. The information set forth in the Mortgage Loan Schedule is complete, true and correct in all material respects; (b) Payments Current Within 59 Days. The Mortgage Loan, together with the other Purchased Mortgage Loans subject to Transactions, would not cause the 30+ Delinquency Percentage to exceed 3.0%, and is not more than 59 days Delinquent; (c) No Outstanding Charges. There are no defaults in complying with the terms of the Mortgage, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable. Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the Mortgagor, directly or indirectly, for the payment of any amount required under the Mortgage Loan, except for interest accruing from the date of the Mortgage Note or date of disbursement of the Mortgage Loan proceeds, whichever is greater, to the day which precedes by one month the due date of the first installment of principal and interest; (d) Original Terms Unmodified. The terms of the Mortgage Note and Mortgage have not been impaired, waived, altered or modified in any respect, except by a written instrument which has been recorded, if necessary to protect the interests of Buyer and which has been delivered to Buyer or its designee (including the Custodian). The substance of any such waiver, alteration or modification has been approved by the issuer of any related primary mortgage guarantee policy (a "PMI Policy") and the title insurer, to the extent required by the policy, and its terms are reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in whole or in part, except in connection with an assumption agreement approved by the issuer of any related PMI Policy and the title insurer, to the extent required by the policy, and which assumption agreement is included in the Mortgage File delivered to Buyer or its designee (including the Custodian); (e) No Defenses. The Mortgage Loan is not subject to any right of rescission, set-off, counterclaim or defense, including without limitation the defense of 41 usury, nor will the operation of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any right thereunder, render either the Mortgage Note or the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including without limitation the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (f) Insurance Policies in Effect. The fire and casualty insurance policy covering the Mortgaged Property (1) affords (and will afford) sufficient insurance against fire and such other risks as are usually insured against in the broad form of extended coverage insurance from time to time available, as well as insurance against flood hazards if the Mortgaged Property is an area identified by the Federal Emergency Management Agency as having special flood hazards; (2) is a standard policy of insurance for the locale where the Mortgaged Property is located, is in full force and effect, and the amount of the insurance is in the amount of the full insurable value of the Mortgaged Property on a replacement cost basis or the unpaid balance of the Mortgage Loans, whichever is less; (3) names (and will name) the present owner of the Mortgaged Property as the insured; and (4) contains a standard mortgagee loss payable clause in favor of Seller. All individual insurance policies with respect to the Mortgage Loan are the valid and binding obligation of the insurer and contain a standard mortgage clause naming Seller, its successors and assigns, as Mortgagee. All premiums thereon have been paid. The Mortgage obligates the Mortgagor thereunder to maintain all such insurance policies at the Mortgagor's cost and expense, and upon the Mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain and maintain such insurance at the Mortgagor's cost and expense and to seek reimbursement therefor from the Mortgagor; (g) Compliance with Applicable Laws. Any and all requirements of any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the origination and servicing of the Mortgage Loan have been complied with, and Seller shall maintain in its possession, available for Buyer's inspection, and shall deliver to Buyer upon demand, evidence of compliance with all such requirements; (h) No Satisfaction of Mortgage. The Mortgage has not been satisfied, canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission; (i) Location and Type of Mortgaged Property. The Mortgaged Property is located in the state identified in the Mortgage Loan Schedule and consists 42 of a parcel of real property with a detached single family residence erected thereon, or a two- to four-family dwelling, or an individual condominium unit in a condominium project, or an individual unit in a planned unit development and no residence or dwelling is a mobile home or a manufactured dwelling which is not permanently affixed to real property. No portion of the Mortgaged Property is used for commercial purposes (except that up to 5% of the Purchased Mortgage Loans can relate to mixed-use property); (j) Valid First or Second Lien. The Mortgage is a valid, subsisting and enforceable first or second lien on the Mortgaged Property, including all buildings on the Mortgaged Property and all installations and mechanical, electrical, plumbing, heating and air conditioning systems located in or annexed to such buildings, and all additions, alterations and replacements made at any time with respect to the foregoing. The lien of the Mortgage is subject only to: (1) the lien of current real property taxes and special assessments not yet due and payable; (2) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Mortgage Loan and (i) referred to or to otherwise considered in the appraisal made for the originator of the Mortgage Loan or (ii) which do not adversely affect the appraised value of the Mortgaged Property set forth in such appraisal; (3) in the case of a Mortgaged Property that is a condominium or an individual unit in a planned unit development, liens for common charges permitted by statute; (4) in the case where the Mortgage Loan is secured by a Second Mortgage (and represented on the Mortgage Loan Schedule as such), the lien of the First Mortgage; and (5) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property. Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Mortgage Loan establishes and creates a valid, subsisting and enforceable first or second lien and first or second priority 43 security interest on the property described therein and Seller has full right to pledge and assign the same to Buyer or its designee (including the Custodian). (k) Validity of Mortgage Documents. The Mortgage Note and the Mortgage are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to or affecting the rights of creditor's generally, and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law.) All parties to the Mortgage Note and the Mortgage had legal capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have been duly and properly executed by such parties. The Mortgagor is a natural person who is a party to the Mortgage Note and the Mortgage in an individual capacity, and not in the capacity of a trustee or otherwise; (l) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan have been fully disbursed and there is no requirement for future advances thereunder, and any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is not entitled to any refund of any amounts paid or due under the Mortgage Note or Mortgage; (m) Ownership. Seller is the sole owner of record and holder of the Mortgage Loan. The Mortgage Loan is not assigned or pledged except as provided in this Agreement, and Seller has good and indefeasible title thereto, and has full right to pledge and assign the Mortgage Loan to Buyer or its designee (including the Custodian) free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest, and has full right and authority subject to no interest or participation of, or agreement with, any other party, to sell and assign each Mortgage Loan pursuant to this Agreement (except a first lien where the Mortgage Loan is secured by a second lien); (n) Doing Business. To the best of Seller's knowledge, all parties which have had any interest in the Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (1) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (2) organized under the laws of such state, or (3) qualified to do business in such state, or (4) federal savings and loan associations or national banks having principal offices in such state, or (5) not doing business in such state; 44 (o) LTV. No Mortgage Loan has a Loan-to-Value Ratio of more than 100%. (p) Title Insurance. The Mortgage Loan is covered by an ALTA mortgage title insurance policy or such other form of policy acceptable to FNMA or FHLMC, issued by and constituting the valid and binding obligation of a title insurer generally acceptable to prudent mortgage lenders that regularly originate or purchase mortgage loans comparable to the Mortgage Loans for sale to prudent investors in the secondary market that invest in mortgage loans such as the Mortgage Loans and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring Seller, its successors and assigns, as to the first or second priority lien of the Mortgage, as applicable. Seller is the sole named insured of such mortgage title insurance policy, the assignment to Buyer or the Custodian as assignee of Buyer of Seller's interest in such mortgage title insurance policy does not require the consent of or notification to the insurer or the same has been obtained, and such mortgage title insurance policy is in full force and effect and will be in full force and effect and inure to the benefit of Buyer upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such mortgage title insurance policy and no prior holder of the related Mortgage, including Seller, has done, by act or omission, anything that would impair the coverage of such mortgage title insurance policy; (q) No Defaults. There is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note and no event which to the best knowledge of Seller, with the passage of time or with notice and the expiration of any grace or cure period, other than the failure to make, prior to expiration of the applicable grace period, the monthly payment due immediately prior to the related Purchase Date if such Purchase Date occurs prior to the expiration of such grace period, would constitute a default, breach, violation or event of acceleration, and neither Seller nor its predecessors have waived any default, breach, violation or event of acceleration; (r) No Mechanics' Liens. There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage except those that are stated in the title insurance policy and for which related losses are affirmatively insured against by such title insurance policy; (s) Location of Improvements; No Encroachments. All improvements which were considered in determining the appraised value of the Mortgaged Property lay wholly within the boundaries and building restriction lines of the Mortgaged Property and no improvements on adjoining properties encroach upon 45 the Mortgaged Property except those that are stated in the title insurance policy and for which related losses are affirmatively insured against by such title insurance policy. No improvement located on or being part of the mortgaged property is in violation of any applicable zoning law or regulation; (t) Origination. The Mortgage Loan was originated, or purchased and reunderwritten, by Seller. The documents, instruments and agreements submitted for loan underwriting were not falsified and contain no untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the information and statements therein not misleading. (u) Customary Provisions. The Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. To the best knowledge of the Seller, there is no homestead or other exemption available to a Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage; (v) Occupancy of the Mortgaged Property. As of the related Purchase Date the Mortgaged Property is capable of being lawfully occupied under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. Either that the Mortgagor represented at the time of origination of the Mortgage Loan that the Mortgagor would occupy the Mortgaged Property as the Mortgagor's primary residence or second home or the Mortgaged Property is capable of being occupied pursuant to terms that approximate current standard market rental terms and rates; (w) No Additional Collateral. The Mortgage Note is not and has not been secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in (j) above; (x) Deeds of Trust. In the event the Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by Buyer to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor; 46 (y) [reserved]; (z) Purchase of Mortgage Documents. Each of the documents and instruments included in the Mortgage File is duly executed and in due and proper form and each such document or instrument is in a form generally acceptable to prudent institutional mortgage lenders that regularly originate and purchase mortgage loans; (aa) Condominiums/Planned Unit Developments. If the Mortgaged Property is a condominium unit or a planned unit development (other than a de minimus planned unit development) such condominium or planned unit development project meets FNMA eligibility requirements for sale to FNMA or is located in a condominium or planned unit development project which has received FNMA project approval and the representations and warranties required by FNMA with respect to such condominium or planned unit development have been made and remain true and correct in all respects; (bb) Transfer of Mortgage Loans. The assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located; (cc) Due on Sale. The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the Mortgagee thereunder; (dd) No Buydown Provisions; No Graduated Payments or Contingent Interests. The Mortgage Loan does not contain provisions pursuant to which monthly payments are paid or partially paid with funds deposited in any separate account established by Seller, the Mortgagor or anyone on behalf of the Mortgagor, or paid by any source other than the Mortgagor nor does it contain any other similar provisions currently in effect which may constitute a "buydown" provision. The Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan does not have a shared appreciation or other contingent interest feature; (ee) Consolidation of Future Advances. Any future advances made prior to the Purchase Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having first or second lien priority, as applicable, by a title insurance policy or an endorsement to the policy insuring the mortgagee's consolidated interest. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan; 47 (ff) Mortgaged Property Undamaged. There is no proceeding pending or threatened for the total or partial condemnation of the Mortgaged Property. The Mortgaged Property is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty so as to affect adversely the value of the Mortgaged Property as security for the Mortgage Loan or the use for which the premises were intended; (gg) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The origination and collection practices used with respect to the Mortgage Loan have been in all respects in accordance with industry custom and practice, and have been in all respects legal and proper. With respect to escrow deposits and escrow payments, all such payments are in the possession of Seller or servicer and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All escrow payments have been collected in full compliance with state and federal law. If an escrow of funds has been established, it is not prohibited by applicable law and has been established in an amount sufficient to pay for every item that remains unpaid and has been assessed but is not yet due and payable. No escrow deposits or escrow payments or other charges or payments due Seller have been capitalized under the Mortgage or the Mortgage Note. All mortgage interest rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state and local law has been properly paid and credited; (hh) Conversion to Fixed Interest Rate. None of the Mortgage Notes contain a provision allowing the Mortgagor to convert the Mortgage Note from an adjustable interest rate Mortgage Note to a fixed interest rate Mortgage Note; (ii) Appraisal. The Mortgage File contains an appraisal of the related Mortgaged Property signed prior to the approval of the Mortgage Loan application by a qualified appraiser, duly appointed by the originator of the Mortgage Loan, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, other than as an employee of the lender, and whose compensation is not affected by the approval or disapproval of the Mortgage Loan, and the appraisal and appraiser both satisfy the requirements of Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 and the regulations promulgated thereunder, all as in effect on the date the Mortgage Loan was originated; (jj) Soldiers' and Sailors' Relief Act. The Mortgagor has not notified Seller, and Seller has no knowledge of any relief requested or allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of 1940; 48 (kk) Environmental Matters. The Mortgaged Property is free from any and all toxic or hazardous substances and there exists no violation of any local, state or federal environmental law, rule or regulation; (ll) Second Mortgages. The Mortgage Loan, together with the other Purchased Mortgage Loans subject to then outstanding Transactions does not cause the aggregate Purchase Price of all Purchased Mortgage Loans which are secured by Second Mortgages to exceed 30% of the aggregate Purchase Price for all Purchased Mortgage Loans which are subject to then outstanding Transactions. With respect to each Mortgage Loan secured by a Second Mortgage lien on the related Mortgaged Property: (A) if the Loan-to-Value Ratio is higher than 70%, either the related First Mortgage does not provide for a balloon payment or the maturity date of each Mortgage Loan with respect to which a First Mortgage on the related Mortgaged Property provides for a balloon payment is prior to the maturity date of the Mortgage Loan relating to such first lien; (B) the related first lien on any Mortgaged Property with respect to which the related Mortgage Loan secured by a second lien does not provide for negative amortization; (C) either no consent for the Mortgage Loan secured by a Second Mortgage on the related Mortgaged Property is required by the holder of the related First Mortgage or such consent has been obtained and is contained in the Mortgage File; and (D) the related First Mortgage is not held by an individual (to the extent the aggregate principal amount of Second Mortgages in which the First Mortgage is held by an individual is in excess of 5% of the aggregate principal amount of Mortgage Loans in the facility); (mm) Seller Origination. The Mortgage Loan was originated or purchased and reunderwritten by Seller; (nn) "C" Loans. In the event such Mortgage Loan is a "C" Loan, the aggregate unpaid principal balance of such Mortgage Loan, together with the other Purchased Mortgage Loans subject to then outstanding Transactions, does not cause the aggregate Purchase Price of all Purchased Mortgage Loans which are "C" Loans to exceed 20% of the aggregate unpaid principal balance for all Purchased Mortgage Loans which are subject to then outstanding Transactions; 49 (oo) No Construction Loans. No Mortgage Loan is a construction loan; (pp) Selection by Seller. No Mortgage Loan was selected for inclusion under this Agreement on any basis which was intended to have a material adverse effect on Buyer; (qq) Manufactured Housing. No Mortgage Loans relate to a manufactured housing unit which is not permanently affixed to real property. If the Mortgage Loan relates to a permanently affixed manufactured housing unit or mixed use property, such Mortgage Loan together with all other such Mortgage Loans then subject to Transactions shall not exceed 3% of the aggregate Purchase Price; (rr) [reserved] (ss) No Bankruptcy of Mortgagor. None of the Mortgage Loans are subject to a bankruptcy plan; (tt) Conformance to Underwriting Standards. Each Mortgage Loan conforms to the Seller's underwriting guidelines supplied to Buyer by Seller, or is an approved exception thereto, provided that such exception does not materially impact the value of such Mortgage Loan; (uu) Qualified Mortgage. Each Mortgage Loan constitutes a "qualified mortgage" within the meaning of Section 860G(a)(3) of the Code; (vv) [Reserved]; (ww) Balloon Mortgage Loans. If the Mortgage Loan is a Balloon Mortgage Loan, such Mortgage Loan together with all other Balloon Mortgage Loans subject to Transactions, does not exceed 20% of the aggregate Purchase Price; (xx) Owner Occupied. In the event such Mortgage Loan relates to a Mortgaged Property which is non-owner occupied, the Mortgage Loan, together with the other Purchased Mortgage Loans subject to Transactions relating to Mortgaged Properties which are non-owner occupied, does not exceed 20% of the aggregate outstanding unpaid principal balance of all Purchased Mortgage Loans subject to Transactions; (yy) Payment Terms. With respect to adjustable rate Mortgage Loans, the mortgage interest rate is adjusted annually or semi-annually on each interest rate adjustment date to equal the index plus the gross margin, rounded up or down to the nearest 1/8%, subject to the mortgage interest rate cap. With respect to fixed rate Mortgage Loans, the Mortgage Note is payable each month in equal monthly 50 installments of principal and interest. With respect to adjustable rate Mortgage Loans, installments of interest are subject to change due to the adjustments to the mortgage interest rate on each interest rate adjustment date, with interest calculated and payable in arrears, sufficient to amortize the Mortgage Loan fully by the stated maturity date, over an original term of not more than thirty years from commencement of amortization; and (aaa) Wet Ink Mortgage Loans. In the event such Mortgage Loan is a Wet Ink Mortgage Loan, the Mortgage Loan, together with the other Wet Ink Mortgage Loans subject to then outstanding Transactions does not cause the aggregate unpaid principal balance of all Purchased Mortgage Loans which are Wet Ink Mortgage Loans to exceed $40,000,000. It is understood and agreed that the representations and warranties set forth in this Exhibit V shall survive delivery of the respective Mortgage Files to the Custodian on behalf of Buyer. 51 EX-10 3 ================================================================================ -------------------- WAREHOUSE CREDIT AGREEMENT DATED AS OF APRIL 30, 1998 -------------------- AMONG CONTITRADE SERVICES L.L.C., FIRSTCITY CONSUMER LENDING CORPORATION, FIRSTCITY AUTO RECEIVABLES L.L.C., AND FIRSTCITY FINANCIAL CORPORATION ================================================================================ TABLE OF CONTENTS
PAGE SECTION 1. DEFINITIONS.....................................................................................1 1.1. DEFINED TERMS...................................................................................1 SECTION 2. AMOUNT AND TERMS OF LENDER FUNDING COMMITMENT...................................................2 2.1. LENDER FUNDING COMMITMENT.......................................................................2 2.2. PROMISSORY NOTE.................................................................................2 2.3. AVAILABILITY OF BORROWINGS......................................................................2 2.4. INTEREST........................................................................................3 2.5. PRINCIPAL PAYMENTS ON THE LOAN..................................................................3 2.6. SECURITY AND COLLATERAL AGENT AGREEMENT.........................................................3 2.7. DEPOSITS TO COLLECTION ACCOUNT..................................................................4 2.8. PROCEEDS........................................................................................4 2.9. TAXES...........................................................................................4 SECTION 3. REPRESENTATIONS AND WARRANTIES..................................................................5 3.1. REPRESENTATIONS AND WARRANTIES OF BORROWER......................................................5 3.2. REPRESENTATIONS AND WARRANTIES OF FIRSTCITY CONSUMER............................................8 3.3. REPRESENTATIONS AND WARRANTIES OF FIRSTCITY FINANCIAL..........................................11 SECTION 4. CONDITIONS PRECEDENT...........................................................................13 4.1. CONDITIONS TO INITIAL ADVANCE..................................................................13 4.2. CONDITIONS TO EACH ADVANCE.....................................................................15 SECTION 5. RELEASE OF LIENS...............................................................................16 SECTION 6. AFFIRMATIVE COVENANTS..........................................................................16 6.1. FINANCIAL STATEMENTS...........................................................................16 6.2. CERTIFICATES; OTHER INFORMATION................................................................17 6.3. PAYMENT OF OBLIGATIONS.........................................................................17 i 6.4. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE...............................................17 6.5. MAINTENANCE OF PROPERTY; INSURANCE.............................................................17 6.6. INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS; AUDIT REPORTS..........................18 6.7. NOTICES........................................................................................18 6.8. DELIVERY OF OTHER REPORTS......................................................................19 6.9. APPROVAL OF NEW ORIGINATORS....................................................................19 6.10. FURTHER ASSURANCES.............................................................................19 6.11. COOPERATION IN MAKING CALCULATIONS.............................................................19 6.12. SECURITIZATION.................................................................................20 6.13. ADDITIONAL CREDIT SUPPORT......................................................................20 6.14. MINIMUM NET WORTH..............................................................................20 6.15. UNDERWRITING AND REVIEW........................................................................20 6.16. CERTAIN INFORMATION............................................................................20 6.17. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE...............................................20 6.18. NOTICES........................................................................................20 6.19. MAINTENANCE OF CONTROL.........................................................................21 6.20. FURTHER ASSURANCES.............................................................................21 6.21. MAINTENANCE OF CONTROL-BORROWER................................................................21 SECTION 7. NEGATIVE COVENANTS.............................................................................21 7.1. LIMITATION ON DEBT.............................................................................21 7.2. LIMITATION ON LIENS............................................................................21 7.3. LIMITATION ON FUNDAMENTAL CHANGES..............................................................22 7.4. SALE, TRANSFER OR ENCUMBRANCE OF ASSETS........................................................22 7.5. CONTRACTS......................................................................................22 7.6. LIMITATION ON DIVIDENDS........................................................................22 ii 7.7. LIMITATIONS ON BORROWER'S BUSINESS AND ACTIVITIES..............................................22 7.8. LIMITATION ON INVESTMENTS, LOANS AND ADVANCES..................................................23 7.9. TRANSACTIONS WITH AFFILIATES...................................................................23 7.10. SALE AND LEASEBACK.............................................................................23 7.11. CERTIFICATE OF FORMATION.......................................................................23 7.12. FISCAL YEAR....................................................................................23 7.13. LIMITATION ON NEGATIVE PLEDGE CLAUSES..........................................................23 7.14. ACTIVITIES OF BORROWER.........................................................................23 7.15. AGREEMENTS.....................................................................................24 7.16. BANK ACCOUNTS..................................................................................24 7.17. LOCKBOX PROVIDERS..............................................................................24 7.18. SUBORDINATED DEBT..............................................................................24 7.19. MARGIN SECURITIES..............................................................................24 7.20. NO COMMINGLING.................................................................................24 7.21. GUARANTEES.....................................................................................24 7.22. AMENDMENT OF FACILITY AGREEMENTS...............................................................24 7.23. POLICIES.......................................................................................25 7.24. MISCELLANEOUS..................................................................................25 SECTION 8. REMEDIES UPON DEFAULT..........................................................................25 8.1. ACCELERATION...................................................................................25 8.2. FILES..........................................................................................25 8.3. COLLECTIONS....................................................................................25 8.4. POWER OF ATTORNEY..............................................................................26 SECTION 9. FUNDING COMMITMENT OF FIRSTCITY................................................................26 9.1. FUNDING COMMITMENT.............................................................................26 9.2. FIRSTCITY FINANCIAL TO PROVIDE SUBORDINATE FINANCING...........................................27 iii 9.3. INDEMNIFICATION................................................................................27 SECTION 10. MISCELLANEOUS..................................................................................27 10.1. AMENDMENTS AND WAIVERS.........................................................................27 10.2. NOTICES........................................................................................28 10.3. NO WAIVER; CUMULATIVE REMEDIES.................................................................29 10.4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.....................................................29 10.5. PAYMENT OF EXPENSES AND TAXES..................................................................29 10.6. SUCCESSORS AND ASSIGNS; PARTICIPATIONS.........................................................30 10.7. TERMINATION....................................................................................31 10.8. COUNTERPARTS...................................................................................31 10.9. SEVERABILITY...................................................................................31 10.10. INTEGRATION; CONSTRUCTION......................................................................31 10.11. LIMITED LIABILITY..............................................................................31 10.12. GOVERNING LAW..................................................................................32 10.13. SUBMISSION TO JURISDICTION; WAIVERS............................................................32 10.14. ACKNOWLEDGEMENTS...............................................................................33 10.15. WAIVER OF JURY TRIAL...........................................................................33
EXHIBITS Exhibit A - Definition List Exhibit B - Form of Promissory Note Exhibit C - Notice of Borrowing Exhibit D - Reserved Exhibit E - Reserved Exhibit F - Underwriting Guidelines Exhibit G - Charge Off Policy Exhibit H - Lockbox Agreement iv WAREHOUSE CREDIT AGREEMENT WAREHOUSE CREDIT AGREEMENT, dated as of April 30, 1998 (this "Credit Agreement"), by and among CONTITRADE SERVICES L.L.C., a Delaware limited liability company ("Lender"), FIRSTCITY AUTO RECEIVABLES L.L.C., a Texas limited liability company ("Borrower"), FIRSTCITY CONSUMER LENDING CORPORATION, a Texas corporation ("FirstCity Consumer"), and FIRSTCITY FINANCIAL CORPORATION, a Delaware corporation (together with the Borrower and FirstCity Consumer, the "FirstCity Entities"). W I T N E S S E T H: WHEREAS, Borrower desires to purchase certain Contracts from time to time; and WHEREAS, Borrower has requested that Lender make the Loan to Borrower, the proceeds of which shall be used to purchase Contracts; and WHEREAS, as security for its obligations under this Credit Agreement, Borrower shall pledge the Collateral; and WHEREAS, subject to the terms and conditions set forth herein, Lender is willing to make the Loan to Borrower. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1. Defined Terms. (a) As used in this Credit Agreement, the Promissory Note, the Servicing Agreement, the Security and Collateral Agent Agreement, the Paying Agent Agreement, the IBSA, or any certificate or other document made or delivered pursuant hereto or thereto (collectively, the "Facility Agreements"), the capitalized terms used herein and therein shall, unless otherwise defined herein or therein, have the meanings assigned to them in the Definitions List dated as of the date hereof that refers to this Credit Agreement, which is incorporated herein by reference and attached as Exhibit A hereto (the "Definitions List"). (b) As used herein or in any other Facility Agreement, accounting terms not defined in the Definitions List and accounting terms partly defined in the Definitions List to the extent not defined shall have the respective meanings given to them under GAAP. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Credit Agreement shall refer to this Credit Agreement as a whole and not to any particular provision of this Credit Agreement, and Section, subsection and Exhibit references are to this Credit Agreement unless otherwise specified. (d) Capitalized terms used herein or in any other Facility Agreement shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF LENDER FUNDING COMMITMENT 2.1. Lender Funding Commitment. (a) Subject to the terms and conditions hereof, Lender agrees to make revolving credit loans (collectively, "Advances" or the "Loan", and, individually, an "Advance") to Borrower from time to time during the Commitment Period, as requested by the Borrower; provided, however, that in no event shall Lender make any Advance, if (x) after giving effect to such Advance the Outstanding Facility Balance would exceed either (i) the Maximum Loan Amount or (ii) the Borrowing Base or (y) an Event of Default or an Unmatured Event of Default shall have occurred and be continuing and not waived by Lender. Funds may be borrowed, repaid and reborrowed on a revolving basis subject to the terms and conditions set forth herein. The lending arrangement described herein is referred to herein as the "Facility". (b) The Facility will cancel automatically on the Commitment Termination Date; provided, however, that the Borrower may request a renewal, in writing (a "Renewal Request"), not more than 120 days prior to the Commitment Termination Date; and provided, further, that the Lender must notify the Borrower, in writing, by the later of (x) 30 days from receipt by the Lender of the Renewal Request or (y) at least 60 days prior to the Commitment Termination Date that it has elected to renew the Facility. (c) If the Facility is not renewed pursuant to Section 2.1(b), Lender shall extend the Facility 60 days if no Event of Default or Unmatured Event of Default shall have occurred and be continuing and if the Borrower delivers to the Lender (i) a commitment letter, acceptable to the Lender, for a replacement warehouse loan facility from a financial institution acceptable to the Lender or (ii) a guarantee, from a party acceptable to the Lender, of all amounts payable under the Facility. 2.2. Promissory Note. The Borrower shall, in connection with the Facility, execute and deliver a promissory note, substantially in the form of Exhibit B hereto (the "Promissory Note"), payable to the order of Lender. Borrower is obligated to make payments to Lender as provided in this Agreement whether or not Borrower has executed the Promissory Note. The actual amount Borrower is obligated to pay the Lender shall be determined by this Agreement and the records of the Lender, regardless of the terms of the Promissory Note. Any Promissory Note executed in connection with the Facility need not be amended to reflect changes made to this Agreement. The records of the Lender shall, absent demonstrable error, be conclusive evidence at any time as to the amount of the Loan, the interest due thereon, and all other amounts owed in connection with this Agreement with respect to the Borrower. The Promissory Note shall (a) be dated the Closing Date, (b) be stated to mature on the Commitment Termination Date and (c) provide for the payment of interest in accordance with Section 2.4. 2.3. Availability of Borrowings. Borrower may request an Advance on any Business Day during the Commitment Period, subject to the provisions contained in Section 2.1, by giving Lender, with a copy to the Collateral Agent, prior irrevocable notice of each borrowing in the form of Exhibit C hereto ("Notice of Borrowing") by 11:00 A.M. (New York City time) on the second Business Day prior to a Borrowing Date which shall specify (a) the Borrowing Date for such borrowing, (b) the Outstanding Facility Balance on such date (prior to the making of the requested 2 Advance), (c) the Borrowing Base applicable to such Advance, and (d) the Available Facility Amount; provided, however, that Lender shall not be obligated to make more than one Loan in any single calendar week. Subject to satisfaction of the conditions precedent set forth in Section 4 hereof, the proceeds of such Advance will be made available to Borrower by Lender by wire transfer of immediately available funds to the Collection Account. The amount of such Advance shall be paid out from the Collection Account as set forth in Section 2.03(a) of the Paying Agent Agreement. 2.4. Interest. Interest shall accrue on the Outstanding Facility Balance at a fluctuating rate per annum equal to (i) in the case of the Contracts originated by FirstCity Funding or the N.A.F. Entities, LIBOR plus three percent (3.00%) and (ii) in the case of Contracts originated by FirstCity Consumer Finance, LIBOR plus one and one-half percent (1.50%). Interest accrued on the Loans shall be paid monthly in arrears on the third day of each calendar month, or if such day is not a Business Day the next succeeding Business Day, commencing in the first calendar month following the Closing Date (each such date, a "Payment Date"). Upon the occurrence, and during the continuance of, an Event of Default, the Outstanding Facility Balance shall bear interest at the rate per annum equal to LIBOR plus seven percent (7.00%); provided, however, that no provision of this Agreement shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable law; and provided, further, that interest shall not be considered paid by any distribution if at any time such distribution is rescinded or must be returned for any reason. Interest shall accrue on the basis of a 360-day year and the actual number of days elapsed. 2.5. Principal Payments on the Loan. (a) Other than as set forth in Section 2.03(a)(i), (ii) and (iii) of the Paying Agent Agreement, the Borrower shall prepay the Loan with the proceeds of a Securitization to at least an extent such that the Outstanding Facility Balance (after such prepayment) does not exceed the Borrowing Base (after taking into account the Contracts transferred from the Facility to the Securitization). Any such prepayment shall be accompanied by payment of all accrued and unpaid interest thereon and all fees and other amounts due to the Lender hereunder through the date of such prepayment. (b) Borrower shall pay the Outstanding Facility Balance, together with any accrued and unpaid interest thereon, and any other sums due pursuant to the terms hereof as set forth in Section 2.0(3)(a)(iv) and (v) of the Paying Agent Agreement and otherwise on or before the Commitment Termination Date. 2.6. Security and Collateral Agent Agreement. The Facility is secured pursuant to a Security and Collateral Agent Agreement, dated as of the date hereof (the "Security and Collateral Agent Agreement"), among the Borrower, the Lender and Chase Bank of Texas, National Association, as Collateral Agent (together with any successors thereto, the "Collateral Agent"). 3 2.7. Deposits to Collection Account. (a) Borrower shall cause the Paying Agent to establish on or prior to the Closing Date, a bank account in the name of the Borrower (the "Collection Account"), as set forth in Section 2.01 of the Paying Agent Agreement. The Collection Account shall at all times be an Eligible Deposit Account. All amounts held in such account shall, to the extent permitted by applicable laws, rules and regulations, be invested by the Collateral Agent at the written direction of the Borrower, in Permitted Investments which mature prior to the following Payment Date, or such earlier date as may be specified by the Borrower. Investments in Permitted Investments shall not be sold or otherwise disposed of prior to their maturity unless (x) a Securitization or an Event of Default shall have occurred and be continuing, (y) the Lender shall have instructed the Borrower to sell or otherwise dispose of such investments prior to their maturity or (z) as needed to fund the disbursements listed in Section 2.03(a) of the Paying Agent Agreement. Should the Collection Account no longer be an Eligible Deposit Account, then the Borrower shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which the Lender shall consent), with such bank's or trust company's assistance as necessary, cause the Collection Account to be moved to a bank or trust company such that the Collection Account will be an Eligible Deposit Account. Investment earnings on funds deposited in the Collection Account shall be deposited in the Collection Account. (b) The Servicer shall cause each Lockbox Provider to deposit, within 1 Business Day of Receipt, all available Collections received by each such Lockbox Provider into Wells Fargo Account #0221688385 (the "Lockbox Account"). Within 2 Business Days of Receipt, the Servicer shall cause each Lockbox Provider to transfer such payments into the Collection Account. (c) All Collections received directly by the Borrower or the Servicer shall be held by the Borrower or the Servicer, as applicable, in trust for the benefit of the Lender. Borrower shall remit for deposit, and shall cause the Servicer to remit for deposit, no later than the close of business on the day received, such Collections in the Collection Account. (d) Borrower may, from time to time, deposit cash and/or deliver to the Paying Agent Permitted Investments to be credited to the Collection Account. 2.8. Proceeds. The proceeds of the Loan shall be used by Borrower solely to finance the purchase or holding of Eligible Contracts, and to pay other amounts expressly permitted under the terms and conditions of the Facility Agreements, provided, however, if the Loan is prepaid, proceeds can be re-borrowed up to the Available Facility Amount. 2.9. Taxes. All payments made by Borrower under this Credit Agreement and the Promissory Note shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority having taxing authority, excluding income taxes and franchise taxes (imposed in lieu of income taxes) imposed on Lender, as a result of any present or former connection between the jurisdiction of the government or taxing authority imposing such tax or any political subdivision or taxing authority thereof or therein and Lender (excluding a connection arising solely 4 from Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Credit Agreement or the Promissory Note) (all such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called "Taxes"). If any Taxes are required to be withheld from any amounts payable to or under the Promissory Note, the amounts so payable to Lender shall be increased to the extent necessary to yield to Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Credit Agreement and the Promissory Note. Whenever any Taxes are payable by Borrower, as promptly as possible thereafter Borrower shall send to Lender a certified copy of an original official receipt received by Borrower showing payment thereof. If Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to Lender the required receipts or other required documentary evidence, Borrower shall indemnify Lender for any incremental Taxes, interest or penalties that Lender is legally required to pay as a result of any such failure. The agreements in this subsection shall survive the termination of this Credit Agreement and the payment of the Promissory Note. SECTION 3. REPRESENTATIONS AND WARRANTIES 3.1. Representations and Warranties of Borrower. To induce Lender to enter into this Credit Agreement and to make the Advances, Borrower hereby represents and warrants to Lender that: (a) Existence; Compliance with Law. Borrower (i) is duly organized, validly existing and in good standing under the laws of Texas, (ii) has the power and authority, and the legal right, as a Texas limited liability company, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (iii) is duly qualified as a foreign limited liability company, is in good standing and has all licenses (in full force and effect) under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and/or licensing and (iv) is in compliance with all Requirements of Law. (b) Power; Authorization; Enforceable Obligations. Borrower has the power and authority, and the legal right, as a Texas limited liability company, to make, deliver and perform this Credit Agreement and the other Facility Agreements to which it is a party and to borrow hereunder and has taken all necessary action to authorize the borrowings on the terms and conditions of this Credit Agreement and the other Facility Agreements to which it is a party and to authorize the execution, delivery and performance of this Credit Agreement and the other Facility Agreements to which it is a party. All consents or authorizations of, filing with or other act by or in respect of, any Governmental Authority or any other Person required to be obtained, made or given by it in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Credit Agreement or the other Facility Agreements to which it is a party have been so obtained, made or received. This Credit Agreement and each other Facility Agreement to which it is a party has been duly executed and delivered on behalf of Borrower. This Credit Agreement and each other Facility Agreement to which it is a party constitutes a legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by 5 general equitable principles (whether enforcement is sought by proceedings in equity or at law). (c) No Legal Bar. The execution, delivery and performance of this Credit Agreement and the other Facility Agreements, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of Borrower and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation other than the Lien set forth herein. (d) No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or threatened, by or against Borrower or against any of its properties or revenues (i) with respect to this Credit Agreement or the other Facility Agreements or any of the transactions contemplated hereby or thereby, or (ii) which could have a material adverse effect on the business, prospects, properties, assets, operations or condition, financial or otherwise, of Borrower, or the ability of Borrower to perform its obligations hereunder or under the other Facility Agreements. (e) No Default; No Event of Default. Borrower is not in default under or with respect to any of its Contractual Obligations in any respect which could have a material adverse effect on the business, operations, properties, assets, condition or prospects, financial or otherwise, of Borrower, or on the ability of Borrower to perform its obligations hereunder or under the other Facility Agreements. No Event of Default or Unmatured Event of Default has occurred or is continuing. (f) No Burdensome Restrictions. Borrower is not a party to or subject to any Contractual Obligation (other than the Facility Agreements) which could have a material adverse effect on the business, properties, assets, operations, condition or prospects, financial or otherwise, of Borrower, or on the ability of Borrower to carry out its obligations hereunder or under the other Facility Agreements. (g) Taxes. Borrower has filed or caused to be filed all federal, state and other tax returns which are required to be filed by it, or has filed extensions with respect thereto (which extensions have not expired) and has paid all taxes shown to be due and payable on said returns or on any federal, state and other tax assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority having taxing power; no tax Lien has been filed against it, and no claim is being asserted by any Governmental Authority with respect to any such tax, fee or other charge. (h) ERISA. Borrower has not participated in any Multiemployer Plan. Borrower has not maintained any Single-Employer Plan. (i) Investment Company Act; Other Regulations. Borrower is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. Borrower is not subject to regulation under any federal or state statute or regulation which limits its ability to incur Debt. 6 (j) Subsidiaries. Borrower has no Subsidiaries, other than Subsidiaries formed in connection with any Securitization. (k) Purpose of Advances. The proceeds of the Advances shall be used by Borrower to purchase Eligible Contracts and for other purposes expressly permitted by the Facility Agreements. (l) No Deduction. Borrower is not required to make any deduction or withholding from payments to be made by it to Lender under this Credit Agreement, and the execution and performance of this Credit Agreement and any of the other Facility Agreements does not make Borrower liable for any registration tax, stamp duty or similar tax or duty imposed by any authority of or within its jurisdiction of creation, which tax or duty has not been, or will not be, paid when due. (m) No Other Debt. Borrower has no liability in respect of any Debt or in respect of any guarantee by Borrower of the obligations of another under which the lender, creditor or lessor or the Person in whose favor such guarantee is given has any right, by operation of law or otherwise, to have any claim in respect of such obligation or guarantee satisfied out of any assets of Borrower, other than Subordinated Debt consented to by Lender in writing. (n) Title; Liens. Except for the Liens granted to the Lender pursuant to the Facility Agreements and any Subordinate Liens consented to by the Lender in writing, Borrower owns each item of the Collateral free and clear of any and all Liens or claims of others. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of the Lender pursuant to the Facility Agreements. (o) Ownership of Contracts. Each purchase by Borrower of Contracts constitutes a valid sale of the Contracts to Borrower and creates in favor of Borrower a perfected ownership interest in and valid, legal and equitable title to such Contracts, which ownership interest is not subject to any Lien. (p) No Petition. There is no intent to file a voluntary petition under the federal bankruptcy laws with respect to Borrower and Borrower is not insolvent or generally unable to pay its debts as they become due. (q) Eligible Contracts. Each Contract is an Eligible Contract. With respect to each such Contract, (i) no effective financing statement, lien notation on any certificate of title or other instrument similar in effect covering all or any part of such Contract or the security therefor, which would give the Person filing, named on or entitled to the benefit of such statement or instrument priority senior to or pari passu with the Borrower, is on file in any recording office or is otherwise effective except such as may be filed in favor of the Dealer, the related Originator or the Borrower and collaterally assigned to Lender in accordance with the Facility Agreements; and (ii) the Vehicle, including any equipment sold and financed in connection with such Contract, is the subject of an application for a certificate of title to be issued in the name of the Obligor which will indicate a security interest therein held by the 7 Originators, and to be held in the possession of the Servicer, in the appropriate form and in compliance with all appropriate procedures as may be necessary under applicable law to cause a perfected and first priority security interest to exist in favor of, or for the benefit of, the Borrower, to secure the obligations of such Obligor under such Contract; and (iii) it is in compliance with the Underwriting Criteria. (r) Representations and Warranties in Facility Agreements. The representations and warranties of the Borrower contained in each of the Facility Agreements to which it is a party and in any document, certificate or instrument delivered pursuant to any such Facility Agreement are true and correct and the Lender may rely on such representations and warranties, if not made directly to the Lender, as if such representations and warranties were made directly to the Lender. (s) Principal Place of Business. The Borrower's principal place of business is located at 6400 Imperial Drive, Waco, Texas 76712. 3.2. Representations and Warranties of FirstCity Consumer. To induce Lender to enter into this Credit Agreement and to make the Loans, FirstCity Consumer hereby represents and warrants to Lender that: (a) Financial Condition. (i) The consolidated balance sheet of FirstCity Consumer as of February 28, 1998 and reflecting all Closing Date transactions is complete and correct and presents fairly the financial condition of FirstCity Consumer as at such date. As of the Closing Date, FirstCity Consumer does not have any Debt, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction except to the extent reflected as a liability on the balance sheet referred to above. Such balance sheet has been prepared in accordance with GAAP. (ii) The consolidated balance sheet of FirstCity Funding as of February 28, 1998 and reflecting all Closing Date transactions is complete and correct and presents fairly the financial condition of FirstCity Funding as at such date. As of the Closing Date, FirstCity Funding does not have any Debt, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction except to the extent reflected as a liability on the balance sheet referred to above. Such balance sheet has been prepared in accordance with GAAP. (b) Corporate Existence; Compliance with Law. FirstCity Consumer (i) is duly organized, validly existing and in good standing under the laws of Texas, (ii) has the power and authority, and the legal right, as a Texas corporation, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (iii) is duly qualified as a foreign corporation, is in good standing and has all licenses (in full force and effect) under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and/or licensing and (iv) is in compliance with all Requirements of Law. 8 (c) Corporate Power; Authorization; Enforceable Obligations. FirstCity Consumer has the power and authority, and the legal right, as a Texas corporation, to make, deliver and perform this Credit Agreement and the other Facility Agreements to which it is a party and to borrow hereunder and has taken all necessary action to authorize the borrowings on the terms and conditions of this Credit Agreement and the other Facility Agreements to which it is a party and to authorize the execution, delivery and performance of this Credit Agreement and the other Facility Agreements to which it is a party. All consents or authorizations of, filing with or other act by or in respect of, any Governmental Authority or any other Person required to be obtained, made or given by it in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Credit Agreement or the other Facility Agreements to which it is a party have been so obtained, made or received. This Credit Agreement and each other Facility Agreement to which it is a party has been duly executed and delivered on behalf of FirstCity Consumer. This Credit Agreement and each other Facility Agreement to which it is a party constitutes a legal, valid and binding obligation of FirstCity Consumer enforceable against FirstCity Consumer in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (d) No Legal Bar. The execution, delivery and performance of this Credit Agreement and the other Facility Agreements, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of FirstCity Consumer and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation other than the Lien set forth herein. (e) No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or threatened, by or against FirstCity Consumer or against any of its properties or revenues. (f) No Default; No Event of Default. FirstCity Consumer is not in default under or with respect to any of its Contractual Obligations in any respect which could have a material adverse effect on the business, operations, properties, assets, condition or prospects, financial or otherwise, of FirstCity Consumer, or on the ability of FirstCity Consumer to perform its obligations hereunder or under the other Facility Agreements. No Event of Default or Unmatured Event of Default has occurred or is continuing. (g) No Burdensome Restrictions. FirstCity Consumer is not a party to or subject to any Contractual Obligation (other than the Facility Agreements) which could have a material adverse effect on the business, properties, assets, operations, condition or prospects, financial or otherwise, of FirstCity Consumer, or on the ability of FirstCity Consumer to carry out its obligations hereunder or under the other Facility Agreements. (h) Taxes. FirstCity Consumer has filed or caused to be filed all federal, state and other tax returns which are required to be filed by it, or has filed extensions with respect thereto (which extensions have not expired) and has paid all taxes shown to be due and payable on said returns or on any federal, state and other tax assessments made against it or any of its property 9 and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority having taxing power; no tax Lien has been filed against it, and no claim is being asserted by any Governmental Authority with respect to any such tax, fee or other charge. (i) Investment Company Act; Other Regulations. FirstCity Consumer is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. FirstCity Consumer is not subject to regulation under any federal or state statute or regulation which limits its ability to incur Debt. (j) No Deduction. FirstCity Consumer is not required to make any deduction or withholding from payments to be made by it to Lender under this Credit Agreement, and the execution and performance of this Credit Agreement and any of the other Facility Agreements does not make FirstCity Consumer liable for any registration tax, stamp duty or similar tax or duty imposed by any authority of or within its jurisdiction of creation, which tax or duty has not been, or will not be, paid when due. (k) No Petition. There is no intent to file a voluntary petition under the federal bankruptcy laws with respect to FirstCity Consumer and FirstCity Consumer is not insolvent or generally unable to pay its debts as they become due. (l) Eligible Contracts. Each Contract is an Eligible Contract. With respect to each such Contract, (i) no effective financing statement, lien notation on any certificate of title or other instrument similar in effect covering all or any part of such Contract or the security therefor, which would give the Person filing, named on or entitled to the benefit of such statement or instrument priority senior to or pari passu with the Borrower, is on file in any recording office or is otherwise effective except such as may be filed in favor of the Dealer, the related Originator or the Borrower and collaterally assigned to Lender in accordance with the Facility Agreements; and (ii) the Vehicle, including any equipment sold and financed in connection with such Contract is the subject of an application for a certificate of title to be issued in the name of the Obligor which will indicate a security interest therein held by the Originator and to be held in the possession of the Servicer, in the appropriate form and in compliance with all appropriate procedures as may be necessary under applicable law to cause a perfected and first priority security interest to exist in favor of, or for the benefit of, to secure the obligations of such Obligor under such Contract; and (iii) it is in compliance with each Originator's Underwriting Criteria. (m) Representations and Warranties in Facility Agreements. The representations and warranties of FirstCity Consumer contained in each of the Facility Agreements to which it is a party and in any document, certificate or instrument delivered pursuant to any such Facility Agreement are true and correct and the Lender may rely on such representations and warranties, if not made directly to the Lender, as if such representations and warranties were made directly to the Lender. (n) Principal Place of Business. FirstCity Consumer's principal place of business is located at 6400 Imperial Drive, Waco, Texas 10 3.3. Representations and Warranties of FirstCity Financial. To induce Lender to enter into the Credit Agreement and to make the Advances, FirstCity Financial hereby represents and warrants to Lender that: (a) Corporate Existence; Compliance with Law. FirstCity Financial (i) is duly organized, validly existing and in good standing under the laws of Delaware, (ii) has the power and authority, and the legal right, as a Delaware corporation, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (iii) is duly qualified as a foreign corporation and is in good standing and has all licenses (in full force and effect) under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and/or licensing and (iv) is in compliance with all Requirements of Law. (b) Corporate Power; Authorization; Enforceable Obligations. FirstCity Financial has the power and authority, and the legal right, as a Delaware corporation, to make, deliver and perform all obligations under this Credit Agreement and has taken all necessary action to authorize its obligations hereunder on the terms and conditions hereof to authorize the execution, delivery and performance of this Credit Agreement. All consents or authorizations of, filing with or other act by or in respect of, any Governmental Authority or any other Person required to be obtained, made or given by it in connection with its obligations hereunder or with the execution, delivery, performance, validity or enforceability of this Credit Agreement have been so obtained, made or received. This Credit Agreement has been duly executed and delivered on behalf of FirstCity Financial. This Credit Agreement constitutes a legal, valid and binding obligation of FirstCity Financial enforceable against FirstCity Financial in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (c) No Legal Bar. The execution, delivery and performance by FirstCity Financial of this Credit Agreement and its obligations hereunder will not violate any Requirement of Law or Contractual Obligation of FirstCity Financial and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. (d) No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or threatened, by or against FirstCity Financial or against any of its properties or revenues (i) with respect to this Credit Agreement or any of the transactions contemplated hereby, or (ii) which could have a material adverse effect on the business, prospects, properties, assets, operations or condition, financial or otherwise, of FirstCity Financial or the ability of FirstCity Financial to perform its obligations hereunder. (e) No Default; No Event of Default. FirstCity Financial is not in default under or with respect to any of its Contractual Obligations in any respect which could have a material adverse effect on the business, operations, properties, assets, condition or prospects, financial or otherwise, 11 of FirstCity Financial or on the ability of FirstCity Financial to perform its obligations hereunder. (f) No Burdensome Restrictions. FirstCity Financial is not a party to or subject to any Contractual Obligation which could have a material adverse effect on the business, properties, assets, operations, condition or prospects, financial or otherwise, of FirstCity Financial, or on the ability of FirstCity Financial to carry out its obligations hereunder or under the other Facility Agreements. (g) Taxes. FirstCity Financial has filed or caused to be filed all federal, state and other tax returns which are required to be filed by it, or has filed extensions with respect thereto (which extensions have not expired) and has paid all taxes shown to be due and payable on said returns or on any federal, state and other tax assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority having taxing power; no tax Lien has been filed against it, and no claim is being asserted by any Governmental Authority with respect to any such tax, fee or other charge except, in each case, for filings which, if not made, taxes which, if not paid, and tax Liens which, if imposed, would not, in the aggregate, have a material adverse effect on the business, properties, assets, operations, condition or prospects, financial or otherwise, of FirstCity Financial, or on the ability of FirstCity Financial to carry out its obligations hereunder or under the other Facility Agreements. (h) ERISA. Neither FirstCity Financial, nor any other person, including any fiduciary, has engaged in any prohibited transaction (as defined in section 4975 of the Code or section 406 of ERISA) which could subject FirstCity Financial or any entity which they have an obligation to indemnify to any material tax or penalty imposed under section 4975 of the Code or section 502(I) of ERISA. Each Employee Benefit Plan and Single-Employer Plan is administered in accordance with its terms and compliance with all applicable law. The projected benefit obligations of each Single-Employer Plan does not exceed the fair market value of assets allocated to each such Single-Employer Plan as of the end of the most recent plan year. There is no lien outstanding or security interest given in connection with a Single-Employer Plan. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Single-Employer Plan. No member of the ERISA Group has incurred or expects to incur any liability under Title IV of ERISA (other than the payment of premiums), or withdrawal liability (contingent or otherwise) under a Multiemployer Plan. No Multiemployer Plan is terminating, in Reorganization or insolvent within the meaning of section 4245 of ERISA. FirstCity Financial has no material liability for retiree medical and life benefits (contingent or otherwise). (i) Investment Company Act; Other Regulations. FirstCity Financial is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. Borrower is not subject to regulation under any federal or state statute or regulation which limits its ability to incur Debt. (j) No Deduction. FirstCity Financial is not required to make any deduction or withholding from payments to be made by it to Lender under this Credit Agreement and the execution and performance of this Credit Agreement and any of the other Facility Agreements does not make FirstCity Financial liable 12 for any registration tax, stamp duty or similar tax or duty imposed by any authority of or within its jurisdiction of creation, which tax or duty has not been, or will not be, paid when due. (k) No Petition. There is no intent to file a voluntary petition under the federal bankruptcy laws with respect to FirstCity Financial and FirstCity Financial is not insolvent or generally unable to pay its debts as they become due. (l) Principal Place of Business. FirstCity Financial's principal place of business is located at 6400 Imperial Drive, Waco, Texas 76712. (m) Financial Condition. The audited, consolidated balance sheet of FirstCity Financial as of December 31, 1997 and the related, consolidated statements of income and of cash flows for the periods ended on such date, are complete and correct and present fairly the financial condition of FirstCity Financial as at such date, and the results of its operations and its consolidated cash flows for the period then ended. Such financial statements have been audited by KPMG Peat Marwick, FirstCity Financial's independent certified public accountants. FirstCity Financial does not have, and at the date of the December 31, 1997 balance sheet referred to above, did not have any material Debt, material contingent liability or material liability for taxes, or any long-term lease or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction except (i) to the extent reflected as a liability on the balance sheet referred to above or (ii) liabilities incurred in the ordinary course of business since the date of such balance sheet and fully reflected on FirstCity Financial's books of account. Since the date of the December 31, 1997 balance sheet referred to above, there has been no material change in the condition or prospects, financial or otherwise, of FirstCity Financial except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the period covered thereby. (n) Tangible Net Worth Requirement. The Tangible Net Worth Requirement is met. SECTION 4. CONDITIONS PRECEDENT 4.1. Conditions to Initial Advance. The agreement of Lender to fund the initial Advance is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan on the Closing Date, of the following conditions precedent: (a) Facility Agreements. Each of the Facility Agreements shall have been duly executed and delivered by the parties thereto and Lender shall have received executed copies thereof, and of such other documents or instruments as may be reasonably requested by Lender. (b) Organization; Incumbency. (i) Lender shall have received copies of the certificate of formation of Borrower certified by the Secretary of State or other appropriate official of the State of Delaware and the operating agreement of Borrower certified as of the Closing Date as complete and correct copies thereof by a Responsible Officer, (ii) good standing certificates for 13 Borrower issued by the Secretary of State or other appropriate official of the State of Delaware and each jurisdiction where the conduct of Borrower's business activities or its ownership of properties makes qualification necessary and (iii) a certificate of a Responsible Officer of Borrower, certifying the names and true signatures of the officers of Borrower authorized to sign the Facility Agreements to which it is a party. (c) Credit Committee Approval. Lender shall have received the approval of its credit committee with respect to the transactions contemplated by the Facility Agreements. (d) No Violation. The consummation of the transactions contemplated hereby and by the other Facility Agreements shall not contravene, violate or conflict with, nor involve Borrower in any violation of, any Requirement of Law except to the extent that any such contravention, violation, conflict or involvement would not adversely affect the transactions contemplated hereby and by the other Facility Agreements. (e) Legal Opinions. Lender shall have received the executed legal opinion of counsel to Borrower, FirstCity Financial and FirstCity Consumer, which shall be reasonably satisfactory to Lender and its counsel and which shall address the security interest in the vehicles described in Section 3.1 (q)(ii) hereof. (f) Collection Account. Borrower shall have caused the Collection Account to be established. (g) Lien Certificate. Lender shall have received a certificate of a Responsible Officer of Borrower to the effect that the Collateral is not subject to any Lien, except Liens created by the Facility Agreements. (h) UCC Searches. Lender shall have received lien searches and other evidence as to the absence of any Lien on or security interest in the Collateral in form and substance satisfactory to Lender. Any termination statements or releases requested by Lender to be filed with respect to the Contracts shall have been filed. (i) Filings. Lender shall have received acknowledgment copies of proper financing statements, duly filed under the UCC of all jurisdictions that Lender may deem necessary or desirable in order to perfect the security interests created by this Credit Agreement and the other Facility Agreements and all other filings, notifications, consents and recordings necessary to consummate the transactions contemplated hereunder and under the other Facility Agreements shall be accomplished and Lender shall have received evidence of such filings, notifications, consents and recordings satisfactory in form and substance to Lender. (j) Lockbox Accounts. Borrower shall have established or caused to have been established Lockbox Accounts in its name and the name of the Lender and shall have received an executed Lockbox Agreement (a "Lockbox Agreement") for each Lockbox Account from each Lockbox Provider. All Obligors shall have been instructed to remit Collections to a Lockbox Account. (k) Consents. Lender shall have received copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by Borrower and the validity and 14 enforceability against it of the Facility Agreements to which it is a party and such consents, licenses and approvals shall be in full force and effect. (l) Insurance. Lender shall have received evidence that the Blanket Policy is in full force and effect. (m) Servicer's Certificates. Lender shall have received a certificate from the Servicer confirming the loss and delinquency status of the portfolio immediately prior to Closing. (n) No Default. Neither FirstCity Consumer nor the Borrower is in default under any agreement to which either is a party. (o) Due Diligence. Lender shall have had the opportunity to conduct legal, financial, operational and key man due diligence on the FirstCity Entities and FirstCity Financial. (p) Servicing Agreement. Borrower, the Servicer, the Lender and the Collateral Agent shall have entered into the Servicing Agreement. 4.2. Conditions to Each Advance. The agreement of Lender to fund any Advance requested to be made by it on any date (including, without limitation, the initial Advance) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by Borrower and FirstCity Consumer in or pursuant to any of the Facility Agreements, shall be true and correct on and as of such date as if made on and as of such date. (b) Notice of Borrowing. Borrower shall have delivered to Lender a Notice of Borrowing within the time period specified in Section 2.3. (c) Section 2.1 Requirements. After giving effect to the Advance to be made on such day, the Outstanding Facility Balance does not exceed either (x) the Maximum Loan Amount or (y) the Borrowing Base. (d) Evidence of Pledge. Prior to the release of the proceeds of such Advance in consideration of the Borrower's acquisition of any Contracts, Lender shall have received a Borrowing Base confirmation from the Collateral Agent not later than 12 noon, New York time, on the day on which such amounts are to be released. (e) Additional Documents. The Lender shall have received each additional document, instrument, legal opinion or item of information reasonably requested by Lender with respect of any aspect or consequence of the transactions contemplated hereby or by any other Facility Agreement. (f) Additional Matters. All proceedings, documents, instruments and legal matters specified in subsection 4.1 hereof, or required after the Closing Date, shall be satisfactory in form and substance to Lender. 15 (g) Event of Default. No Event of Default or Unmatured Event of Default shall have occurred and be continuing to occur. Each borrowing by Borrower hereunder shall constitute a representation and warranty by Borrower as of the date of such Loan that the conditions contained in this subsection 4.2 have been satisfied. SECTION 5. RELEASE OF LIENS In connection with any payment of principal on the Facility, upon receipt of a written request from the Borrower to the Lender, the Lender shall take such actions as are necessary to release or cause the lien of the Lender on the related Contract to be released and to cause the related Contract Files to be returned to the Borrower; as used in this Section 5, the "related Contracts" shall be those Contracts, specified by Borrower to be released from this Facility; provided that, following such release and the related payment of principal on the Facility, the Outstanding Facility Balance does not exceed the Borrowing Base. Upon payment in full of all Obligations, termination of all obligations of Lender to make Advances hereunder and expiration or termination of this Credit Agreement, the Lender shall take such actions as are necessary to release or cause the Lien of the Lender on the Collateral to be released and to cause the Contract Files then held by the Collateral Agent to be returned to the Borrower. To the extent the Borrower consummates a Securitization and so long as the proceeds thereof are applied to repay Loans hereunder, the Lender shall take such actions as are necessary to release the Lien of the Lender on the related Collateral and shall instruct the Collateral Agent to deliver possession of the related Contracts and Contract Files in the Collateral Agent's possession which will be used as collateral for such securities. SECTION 6. AFFIRMATIVE COVENANTS FirstCity Consumer, FirstCity Financial and/or the Borrower hereby agree that, so long as this Credit Agreement remains in effect, FirstCity Consumer, FirstCity Financial and/or the Borrower shall: 6.1. Financial Statements. FirstCity Financial shall furnish to Lender, commencing with the year ending December 31, 1997: (i) as soon as available, but in any event within 120 days after the end of each fiscal year of FirstCity Financial a copy of the audited consolidated balance sheet as at the end of such year and the related audited consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year and including all footnotes thereto and management discussions and analysis contained therein, audited by KPMG Peat Marwick or another nationally recognized accounting firm acceptable to Lender (the "Accountants"). (ii) as soon as available, but in any event not later than 60 days after the end of each fiscal quarter of FirstCity Financial, the unaudited consolidated balance sheet of FirstCity Financial and the related audited consolidated statements of income and cash flows of FirstCity Financial for such period and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year. 16 (iii) as soon as available, but in any event not later than 20 days after the end of each month, the unaudited consolidated balance sheet of FirstCity Funding and FirstCity Consumer Finance as at the end of such month and the related unaudited consolidated statements of income for such period, setting forth in each case in comparative form the figures for the previous year. 6.2. Certificates; Other Information. FirstCity Consumer shall furnish to Lender: (a) concurrently with the delivery of the financial statements referred to in subsection 6.1(a), a certificate of the Accountants reporting on such financial statements stating that (i) such audit was made in accordance with GAAP and (ii) no knowledge was obtained of any Event of Default or Unmatured Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsection 6.1, a certificate of a Responsible Officer stating that each of FirstCity Consumer and the Borrower during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Credit Agreement and the other Facility Agreements to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Unmatured Event of Default or Event of Default, except as specified in such certificate; (c) copies of all financial statements, reports and other communications that FirstCity Consumer or the Borrower may make to, or file or have with, the SEC or any state securities commission contemporaneously with the filing thereof; (d) at the time of each securitization or whole-loan sale, a comfort letter from the Accountants covering the loss and delinquency statistics on the Servicer's servicing portfolio of the Borrower's contracts; and (e) promptly, such additional financial and other information as Lender may from time to time reasonably request. 6.3. Payment of Obligations. The FirstCity Entities shall pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, each of their obligations (with a balance of $50,000 or more) of whatever nature. 6.4. Conduct of Business and Maintenance of Existence. The FirstCity Entities shall continue to engage in business of the same type as now conducted by them and preserve, renew and keep in full force and effect their existence and take all action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of their business; and comply in all material respects with all Contractual Obligations and Requirements of Law. 6.5. Maintenance of Property; Insurance. The FirstCity Entities shall keep all property useful and necessary in their business in good working order and condition; maintain, or 17 cause to be maintained on their behalf, with financially sound and reputable insurance companies, the Blanket Policy and insurance on all their property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to Lender, at least annually, and otherwise upon written request, full information as to the insurance carried. 6.6. Inspection of Property; Books and Records; Discussions; Audit Reports. FirstCity Consumer and the Borrower shall each (a) keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records on prior notice during normal business hours and to discuss the business, prospects, operations, properties and financial and other condition of FirstCity Financial with officers and employees of FirstCity Consumer and the Borrower and with its independent certified public accountants. (b) permit all accountants and auditors employed by FirstCity Consumer and the Borrower at any time to exhibit and deliver to the Lender copies of any and all of FirstCity Consumer's and the Borrower's financial statements, trial balances or other accounting records of any sort in the accountant's or auditor's possession and to disclose to the Lender any information they may have concerning the Borrower's financial status and business operations which the Lender may reasonably request. FirstCity Consumer and the Borrower shall authorize all federal, state and municipal authorities to furnish to the Lender copies of reports or examinations relating to FirstCity Consumer or the Borrower, whether made by FirstCity Consumer, the Borrower or otherwise. (c) permit the Lender to conduct at any time and from time to time, and fully cooperate with, field examinations and audits of the business affairs of FirstCity Consumer and/or the Borrower. FirstCity Consumer shall reimburse the Lender for all reasonable costs and expenses in connection with such examinations. (d) permit the Lender to inspect the Collateral, during normal business hours and upon reasonable notice; the Borrower shall reimburse the Lender for the reasonable expenses of the Lender in conducting any such inspection. (e) deliver promptly upon receipt thereof, one copy of each other report submitted to the Borrower by its independent accountants, including management letters and "comment" letters, in connection with any annual, interim or special audit report made by them of the books of the Borrower. 6.7. Notices. The Borrower or FirstCity Consumer shall promptly give notice to Lender, the Collateral Agent and the Paying Agent of: (a) the occurrence of any Event of Default or Unmatured Event of Default; 18 (b) any (i) default or event of default by Borrower or FirstCity Consumer under any Contractual Obligation of Borrower or FirstCity Consumer or (ii) litigation, investigation or proceeding which may exist at any time affecting the Borrower or FirstCity Consumer and which is likely to result in a material adverse change in the financial condition or business prospects of the Borrower or of FirstCity Consumer; (c) a material adverse change in the business, properties, assets, operations, prospects or condition (financial or otherwise) of the Borrower, FirstCity Consumer or FirstCity Financial; and (d) any change in its principal place of business or chief executive office from the address set forth in paragraph (v) of subsection 3.1. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the FirstCity Entities propose to take with respect thereto. 6.8. Delivery of Other Reports. The FirstCity Entities shall furnish any reports required to be delivered by the FirstCity Entities pursuant to any Facility Agreement to which any FirstCity Entity is a party or which any FirstCity Entity has signed. 6.9. Approval of New Originators. The Originators are FirstCity Funding, FirstCity Consumer Finance and the N.A.F. Entities. The FirstCity Entities shall not execute an agreement with a new Originator unless they have received approval of the new Originator and the new agreement from the Lender, which approval shall not be unreasonably withheld. The Borrower shall inform the Collateral Agent in writing of the approval by Lender of any new Originator. 6.10. Further Assurances. The FirstCity Entities shall do such further acts and things and execute and deliver to Lender such assignments, agreements, financing statements, powers and instruments as are required by Lender to carry into effect the purposes of this Credit Agreement and the other Facility Agreements or to better assure and confirm unto Lender its rights, powers and remedies hereunder and under the other Facility Agreements, including, without limitation, to obtain such consents and give such notices, and to file and record all such documents, financing statements and instruments, and renew each such consent, notice, filing and recordation, at such time or times, in such manner and at such places, as may be necessary or desirable to preserve and protect the position of Lender hereunder and under the other Facility Agreements. This covenant shall survive the termination of this Credit Agreement. 6.11. Cooperation in Making Calculations. The FirstCity Entities shall cooperate with Lender at all times in the calculation of all formulas used in any Facility Agreement, including, without limitation, delivering in written or electronic form any and all data and other information as may be so required. The FirstCity Entities hereby agree to provide all such information or data on or before each date, without prior request by Lender, as required to make any such calculation, and to provide such information and data in such form as may be immediately used by Lender without further interpretation or purchase or license of any software. The FirstCity Entities do hereby further agree that if they fail to provide any 19 such information or data as required in this subsection 6.11, Lender may use any estimate of any amount or calculation that it, in its sole discretion, determines. 6.12. Securitization. The Borrower shall use its best efforts to effect a refinancing of the Loans through the issuance by Borrower or an Affiliate of asset backed securities secured by Contracts (each such refinancing a "Securitization") on a semi-annual basis. 6.13. Additional Credit Support. The FirstCity Entities will deliver or cause to be delivered to the Lender any and all subordinate securities (together with appropriate, fully-executed bond powers and assignments) received by them or by any Affiliate of the FirstCity Entities pursuant to any Securitization in order to create a first-priority, perfected security interest therein in favor of the Lender. 6.14. Minimum Net Worth. For so long as there are any Obligations to Lender, the Borrower shall maintain at all times the Tangible Net Worth Requirement. 6.15. Underwriting and Review. (a) FirstCity Consumer shall review each Contract for compliance with each Originator's Underwriting Criteria. The Borrower agrees to pay up to $20,000 per year in additional fees and expenses of a third-party contract reviewer (such as Baker and Associates); provided, that if any such review reveals material inconsistencies in the application of each Originator's Underwriting Criteria, the Lender may require additional reviews to be performed, all at the Borrower's expense. 6.16. Certain Information. FirstCity Financial shall furnish to Lender copies of all financial statements, reports and other communications that FirstCity Financial may make to, or file or have with, the SEC (contemporaneously with the filing thereof with the SEC) pursuant to the Securities Exchange Act of 1934, as amended, together with, promptly, such additional financial and other information as Lender may from time to time reasonably request. 6.17. Conduct of Business and Maintenance of Existence. FirstCity Financial shall continue to engage in business of the same type as now conducted by it and preserve, renew and keep in full force and effect its existence and take all action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business; and comply in all material respects with all Contractual Obligations and Requirements of Law. 6.18. Notices. FirstCity Financial shall promptly give notice to Lender of: (a) the occurrence of any Event of Default or Unmatured Event of Default, in either case, under this Credit Agreement; (b) any (i) default or event of default by FirstCity under any Contractual Obligation of FirstCity Financial or (ii) litigation, investigation or proceeding which may exist at any time affecting FirstCity Financial, which, in either case, is likely to have a material adverse effect on the financial condition or prospects of FirstCity Financial or the ability of FirstCity Financial to perform its obligations hereunder; 20 (c) a material adverse change in the business, properties, assets, operations, prospects or condition (financial or otherwise) of FirstCity Financial. (d) any change in its principal place of business or chief executive office from the address set forth in Section 3.3(k) hereof. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action FirstCity proposes to take with respect thereto. 6.19. Maintenance of Control. FirstCity Financial hereby covenants and agrees to maintain direct or indirect ownership of (i) at least 100% of the issued and outstanding shares of capital stock of FirstCity Consumer, (ii) 100% of the issued and outstanding shares of capital stock of FirstCity Servicing Corporation of California, (iii) 100% of the issued and outstanding shares of capital stock of FirstCity Consumer Finance and (iv) at least 80% of the issued and outstanding shares of capital stock of FirstCity Funding. 6.20. Further Assurances. FirstCity Financial shall do such further acts and things and execute and deliver to Lender such assignments, agreements, financing statements, powers and instruments as are required by Conti to carry into effect the purposes of this Commitment or to better assure and confirm unto Conti its rights, powers and remedies hereunder, including, without limitation, to obtain such consents and give such notices, and to file and record all such documents, financing statements and instruments, and renew each such consent, notice, filing and recordation, at such time or times, in such manner and at such places, as may be necessary or desirable to preserve and protect the position of Conti hereunder. This covenant shall survive the termination of Section 9 hereunder. 6.21. Maintenance of Control-Borrower. FirstCity Financial hereby covenants and agrees that it or an Affiliate will maintain direct or indirect ownership of 100% of membership interests in the Borrower at all times. SECTION 7. NEGATIVE COVENANTS Each FirstCity Entity hereby agrees that, so long as this Credit Agreement remains in effect, it shall directly or indirectly ensure that the negative covenants set forth in this Section 7 are fully complied with, except with the prior written consent of the Lender, in its sole discretion. 7.1. Limitation on Debt. The Borrower shall not create, incur, assume or suffer to exist any Debt, except (i) indebtedness in respect of the Loans, the Promissory Note, and other obligations of the FirstCity Entities under the Facility Agreements and, (ii) Subordinated Debt which is subordinated to the Obligations on terms reasonably satisfactory to Lender. 7.2. Limitation on Liens. The Borrower shall not create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, including, without limitation, the Collateral, whether now owned or hereafter acquired, except Subordinate Liens. 21 7.3. Limitation on Fundamental Changes. Neither the Borrower nor FirstCity Consumer, except as expressly permitted by the Facility Agreements, enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business. 7.4. Sale, Transfer or Encumbrance of Assets. The Borrower shall not sell, lease, or otherwise dispose of, move, relocate, or transfer, whether by sale or otherwise, any of its property, business or assets, including, without limitation, the Collateral, (whether now owned or hereafter acquired) except for (i) the movement of assets in the ordinary course of business to locations disclosed in advance to Lender and where Borrower has executed and tendered to Lender appropriate UCC-1 financing statements for filing or taken other steps required to enable Lender to perfect its lien and (ii) Securitizations. 7.5. Contracts. (a) The Borrower shall not sell, assign or otherwise encumber any Contract except as expressly permitted by the Facility Agreements; or (b) The Borrower shall not cancel, terminate, amend, modify or waive any term or condition of any Contract (including the granting of rebates or adjustments with respect thereto), or the related certificates of title except in accordance with the Credit and Collection Policy. 7.6. Limitation on Dividends. The Borrower shall not declare or pay any dividend on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Borrower. 7.7. Limitations on Borrower's Business and Activities. (a) The business to be conducted by the Borrower shall be limited to the following: (i) acquiring, owning, purchasing, holding, transferring, pledging and otherwise dealing with the Contracts; (ii) issuing, transferring, assigning and financing the Promissory Note; (iii) transferring the Borrower's right to any cash flow to the Lender; and (iv) engaging in any other acts or activities to accomplish the foregoing. (b) The Borrower shall not: (i) consolidate or merge with or into any other entity or person or dissolve or liquidate or transfer its properties and assets to any entity; (ii) hold itself out as being liable for the debts of any other party, form any subsidiaries or act in any name other than its own; (iii) except as provided in Section 7.20 hereof, commingle its funds and assets with those of any other company; or (iv) file or otherwise initiate (w) a voluntary petition for relief under any chapter of the Bankruptcy Code, (x) a receivership, conservatorship or custodianship, (y) assignment for the benefit of creditors or (z) any other bankruptcy or insolvency proceeding. 22 7.8. Limitation on Investments, Loans and Advances. Neither the Borrower nor FirstCity Consumer shall make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person, except: (a) purchases of Contracts; (b) investments in Permitted Investments of funds, if any, on deposit in the Collection Account; and (c) capitalization of any special purpose entity formed for the purpose of a Securitization. 7.9. Transactions with Affiliates. The Borrower shall not enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate, except for transactions expressly permitted by the Facility Agreements, and transactions in the ordinary course of Borrower's business and which are upon fair and reasonable terms not less favorable to Borrower than it would obtain in a comparable arm's length transaction with a person that is not an Affiliate. 7.10. Sale and Leaseback. The Borrower shall not enter into any arrangement with any Person providing for the leasing by the Borrower of real or personal property which has been or is to be sold or transferred by the Borrower to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of Borrower. 7.11. Certificate of Formation. The Borrower shall not amend its Certificate of Formation. 7.12. Fiscal Year. The Borrower shall not permit the fiscal year of Borrower to end on a day other than December 31. 7.13. Limitation on Negative Pledge Clauses. The Borrower shall not enter into any agreement with any Person other than Lender which prohibits or limits the ability of Borrower to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired. 7.14. Activities of Borrower. The Borrower shall not engage in any business or activity of any kind, or enter into any transaction or indenture, mortgage, instrument, agreement, contract, lease or other undertaking or expend any funds (other than incidental expenses incurred in the ordinary course of business), which are not directly related to the transactions contemplated and authorized hereby or by the other Facility Agreements other than an agreement or other arrangement approved in writing by Lender to share taxes of any affiliated, consolidated, unitary, combined or similar group including Borrower, such approval not to be unreasonably withheld. 23 7.15. Agreements. The Borrower shall not, except for the Facility Agreements, and as expressly permitted by the Facility Agreements, become a party to, or permit any of its properties to be bound by, any indenture, mortgage, instrument, contract, agreement, lease or other undertaking, or issue any power of attorney except to Lender except for instruments, contracts, agreements or leases entered into in the ordinary course of the Borrower's business which are necessary or desirable in furtherance of the transactions contemplated by the Facility Agreements. 7.16. Bank Accounts. The FirstCity Entities shall not, except as otherwise permitted by this Credit Agreement, move the Bank Accounts from the institution at which they are maintained on the Closing Date. 7.17. Lockbox Providers. The FirstCity Entities shall not terminate any Lockbox Provider or Lockbox Agreement pursuant to Section 4.1(j) hereof, or make any change in its instructions to Obligors regarding payments to be made to the Lockbox Provider, and shall not add any Lockbox Provider with respect to the Contracts unless the Lender shall have received notice of such addition of any Lockbox Provider and a Lockbox Agreement executed by Borrower, the Lender and such Lockbox Provider shall have been delivered to the Lender; or deposit or otherwise credit, or cause or permit to be so deposited or credited, Collections to any Lockbox Account except the Lockbox Accounts and the Collection Account. 7.18. Subordinated Debt. The Borrower shall not make or take any action to authorize or effect any payment of principal on or in respect of any part or all of any Debt that is by its terms subordinated to the Obligations or voluntarily prepay any such Debt or otherwise repurchase, redeem or retire any instrument evidencing any such Debt. 7.19. Margin Securities. The Borrower shall not own, purchase or acquire (or enter into any contract to purchase or acquire) any "margin security" as defined by any regulation of the Federal Reserve Board as now in effect or as the same may hereinafter be in effect. 7.20. No Commingling. The Borrower shall maintain separate bank accounts and no funds of the Borrower shall be commingled with funds of any other entity, provided, however, that Lockbox funds from the FirstCity securitization dated as of February 11, 1998, or any other FirstCity auto loan securitization, may be commingled with funds deposited in the Lockbox hereunder. The Borrower shall not maintain bank accounts other than those which have been identified in writing to the Lender. 7.21. Guarantees. None of the Borrower, FirstCity Consumer Finance or FirstCity Funding will guarantee (directly or indirectly), endorse or otherwise become contingently liable (directly or indirectly) for the obligations of, or own or purchase any stock, obligations or securities of or any other interest in, or make any capital contribution to, any other Person. 7.22. Amendment of Facility Agreements. The FirstCity Entities will not amend the Facility Agreements without the prior written approval of the Lender, such approval not to be unreasonably withheld. 24 7.23. Policies. The FirstCity Entities shall not amend the Credit and Collection Policy or each Originator's Underwriting Criteria without the prior written approval of Lender, such approval not to be unreasonably withheld. 7.24. Miscellaneous. (i) The Borrower will at all times hold itself out to the public under the Borrower's own name and as a separate and distinct entity from FirstCity Financial, FirstCity Funding, FirstCity Consumer, FirstCity Consumer Finance, the N.A.F. Entities, and FirstCity Servicing. (ii) The Borrower will at all times be responsible for the payment of all its obligations and indebtedness, will at all times maintain a business office, records, books of account, and funds separate from any other entity and will observe all customary formalities of independent existence. SECTION 8. REMEDIES UPON DEFAULT 8.1. Acceleration. Upon the occurrence of one or more Events of Default (other than pursuant to clause (e) of the definition of Event of Default), the Lender may cease making Advances, and may immediately declare all or any portion of the Obligations to be immediately due and payable. Upon such declaration, the Obligations shall become immediately due and payable without presentation, demand or further notice of any kind to the Borrower. Upon the occurrence of an Event of Default specified in clause (e) of the definition of Event of Default, the Lender shall immediately cease making Advances and the Obligations shall automatically accelerate and become due and payable, without any further action of the Lender. Upon acceleration of the Obligations for any reason, Borrower shall thereupon be obligated to pay to Lender the Obligations then outstanding, and Lender shall not be obligated to make any further Advance under this Credit Agreement. 8.2. Files. Upon the occurrence of one or more Events of Default, the Lender shall have the right to obtain physical possession of the Collateral, on a servicing-retained or servicing-released basis, as Lender may elect, together with all files of Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come into the possession of Borrower or any third party acting for Borrower, including the Collateral Agent and the Servicer. 8.3. Collections. Upon the occurrence of one or more Events of Default, Lender may exercise all rights and remedies under each Contract, lease, security agreement and other contract included among the Collateral as are afforded to the secured party thereunder or which are otherwise afforded to Borrower thereunder; Lender may, subject to the rights of Obligors, recover possession of any tangible personal property under any Contract, and require that the same be assembled and delivered to a specific location. Without limiting the foregoing, the Lender shall have the right to give direction to the Servicer, replace or remove the Servicer, collect and receive all further payments made on the Collateral, to instruct the Obligors to make payments to a Lockbox Account or other location designated by the Lender, to control deposits to and disbursements from the Collection Account, to notify Lockbox Providers to follow 25 the instructions of the Lender, and if any payments are received by Borrower, the Borrower shall not commingle the amounts received with other funds of the Borrower and shall promptly pay them over to the Lender. In addition, the Lender shall have the right to dispose of all or any part of the Collateral as provided in the other documents executed in connection herewith, or in any commercially reasonable manner, or as provided by law. The Lender shall be entitled to place the Contracts which it recovers after any default in a pool for issuance of automobile loan receivable pass-through securities and to sell such securities at the then prevailing price for such securities in the open market as a commercially reasonable disposition of collateral subject to the applicable requirements of the UCC. The Lender shall also be entitled to sell (on a servicing-retained or servicing-released basis, as Lender may elect) any or all of such Contracts individually for the prevailing price as a commercially reasonable disposition of collateral subject to the applicable requirements of the UCC and to retitle in Lender's or Lender's nominee's name, the subordinate certificates referenced in Section 6.13 hereof. Any surplus which exists after payment and performance in full of the Loans and any other Obligations which arise hereunder shall be promptly paid over to Borrower or otherwise disposed of in accordance with the UCC or other applicable law. The specification in this subsection 8.3 of manners of disposition of collateral as being commercially reasonable shall not preclude the use of other commercially reasonable methods (as contemplated by the UCC) at the option of the Lender. 8.4. Power of Attorney. Borrower hereby authorizes the Lender, at Borrower's expense, to file such financing statement or statements relating to the Collateral without Borrower's signature thereon as Lender at its option may deem appropriate, and appoints the Lender as the Borrower's attorney-in-fact (but without requiring the Lender to act) to execute any such financing statement or statements in Borrower's name and to perform all other acts which the Lender deems appropriate to perfect and continue the security interest granted hereby and to protect, preserve and realize upon the Collateral, including, but not limited to, the right to endorse notes and instruments, complete blanks in documents and sign assignments on behalf of Borrower as its attorney-in-fact and to prove and adjust any losses and to endorse any loss drafts under applicable insurance policies. This power of attorney is coupled with an interest and is irrevocable without the Lender's consent. Notwithstanding the foregoing, the power of attorney hereby granted shall only be effective during the occurrence and continuance of any Event of Default hereunder. SECTION 9. FUNDING COMMITMENT OF FIRSTCITY 9.1. Funding Commitment. (a) If, on any Payment Date, or any other date on which amounts are due to the Lender hereunder (including, without limitation, in connection with an acceleration of the Loan), the full amount then due to the Lender is not received by the Lender on such date, FirstCity Financial shall, within two Business Days of receipt by FirstCity Financial of written demand from Lender, pay to Lender, in immediately available funds, the lesser of (i) the amount of such shortfall and (ii) 25% of the aggregate Outstanding Contract Balance of the Contracts which were subject to advances made by the Lender less the Outstanding Contract Balance of any Contracts released by the Lender as of the related Determination Date. 26 (b) In furtherance of the foregoing, FirstCity Financial hereby covenants and agrees with the Lender that FirstCity Financial shall (i) monitor the Borrower's loan acquisition and securitization program (the "Program") and each of the Facility Agreements, (ii) report to the Lender the progress of such Program and compliance with the Facility Agreements, including, without limitation, the Borrower's and FirstCity Financial's respective reporting requirements under each of the Facility Agreements, as applicable, and (iii) use its best efforts to take all other steps necessary to insure the success of the Borrower's Program and each of the Borrower's and FirstCity Financial's respective performances under each of the Facility Agreements, as applicable, including, without limitation, compliance with the Borrower's and FirstCity Financial's respective reporting obligations thereunder, including, without limitation, the reporting of delinquency, default and loss information with regard to the Contracts as well as the reporting of any default or prospective default under any of the Facility Agreements. 9.2. FirstCity Financial to Provide Subordinate Financing. FirstCity Financial hereby agrees and covenants with Lender that FirstCity Financial shall provide sufficient Subordinate Financing in connection with each securitization transaction with respect to the Contracts as may be required by independent third parties (such as the Rating Agencies and/or Credit Enhancer(s)), it being acknowledged that such level of Subordinate Financing so determined by such independent third parties shall constitute a "market" level. 9.3. Indemnification. FirstCity Financial will indemnify Conti against any losses, claims, damages or liabilities to which Conti may become subject in connection with any matter related to or arising out of a default by FirstCity Financial under this Commitment; provided, however, there shall be excluded from such indemnification any such loss, claim, damage or liability which results from the gross negligence or willful misconduct of Conti in performing the services which it is to render pursuant to this Credit Agreement or the other Facility Agreements. SECTION 10. MISCELLANEOUS 10.1. Amendments and Waivers. None of this Credit Agreement, the Promissory Note, any other Facility Agreement to which Lender or Borrower is a party, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. Lender, the Collateral Agent and Borrower may, from time to time, enter into written amendments, supplements or modifications hereto and to the Promissory Note and the other Facility Agreements to which they are parties for the purpose of adding any provisions to this Credit Agreement or the Promissory Note or such other Facility Agreements or changing in any manner the rights of Lender, the Collateral Agent or Borrower hereunder or thereunder and, in addition, waiving, on such terms and conditions as Lender may specify in such instrument, any of the requirements of this Credit Agreement or the Promissory Note or such other Facility Agreements or any Unmatured Event of Default or Event of Default and its consequences. Any such waiver and any such amendment, supplement or modification shall be binding upon Lender and all future holders of the Promissory Note. In the case of any waiver, Lender and Borrower shall be restored to their former position and rights hereunder and under the Promissory Note and any other Facility Agreements to which they are parties, and any Unmatured Event of Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Unmatured Event of Default or Event of Default, or impair any right consequent thereon. 27 10.2. Notices. Except where telephonic instructions or notices are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by overnight courier service, or by registered, certified or express mail, postage prepaid, return receipt requested, or by facsimile copy (accompanied by a telephonic confirmation or receipt thereof), or telegram (with messenger delivery specified in the case of a telegram) and shall be deemed to be delivered for purposes of this Credit Agreement on: (a) the second Business Day following the day on which such notice was placed in the custody of the U.S. Postal Service, (b) the next Business Day following the day on which such notice was placed in the custody of any overnight courier service, including express mail service or (c) the same Business Day on which such notice is sent by telegram, messenger or facsimile. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this subsection, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective facsimile numbers) indicated below, and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such party below: If to Borrower: FirstCity Auto Receivables L.L.C. Box 8216 6400 Imperial Drive Waco, Texas 76714-8216 Facsimile Number: (817) 751-1757 Telephone Number: (817) 751-1750 Attention: Jim Moore If to FirstCity Consumer: Box 8216 6400 Imperial Drive Waco, Texas 76714-8216 Facsimile Number: (817) 751-1757 Telephone Number: (817) 751-1750 Attention: Jim Moore If to Lender: ContiTrade Services L.L.C. 277 Park Avenue, 38th Floor New York, New York 10172 Tel. No.: 212-207-2822 Telecopier No.: 212-207-2935 Attention: Chief Counsel 28 10.3. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Lender; any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 10.4. Survival of Representations and Warranties. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Credit Agreement and the Promissory Note. 10.5. Payment of Expenses and Taxes. Borrower agrees, on demand, and except as otherwise specifically set forth herein, to (a) pay or reimburse Lender and the Collateral Agent for all out-of-pocket costs and expenses incurred in connection with the preparation and execution of this Credit Agreement, the Promissory Note and the other Facility Agreements and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, subject to the limitations in Section 5.2 hereof, any and all collateral audit fees and the reasonable fees and disbursements of counsel to Lender, (b) pay or reimburse Lender for all of its costs incurred in connection with its due diligence review of Borrower and all of its out-of-pocket expenses incurred in connection with the preparation, negotiation and execution of the Facility Agreements, (c) pay or reimburse Lender and the Collateral Agent for all out-of-pocket costs and expenses incurred in connection with the preparation and execution of any amendment, modification or supplement to this Credit Agreement, the Promissory Note and the other Facility Agreements and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, any and all collateral audit fees and the reasonable fees and disbursements of counsel to Lender, (d) pay or reimburse Lender for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Credit Agreement, the Promissory Note, the other Facility Agreements and any such other documents, including, without limitation, reasonable fees and disbursements of counsel to Lender, (e) pay, indemnify, and hold Lender, its directors, members, officers, employees, agents and Affiliates, harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, any registration tax, stamp, duty and other similar taxes or duties, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Credit Agreement, the Promissory Note, the other Facility Agreements and any such other documents (other than income taxes and franchise taxes), and (f) pay, indemnify, and hold Lender, its directors, members, officers, employees, agents and Affiliates, harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Credit Agreement, the Promissory Note and the other Facility Agreements (all the foregoing, collectively, the "indemnified liabilities"), provided that Borrower has no obligation hereunder to the Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Lender. 29 10.6. Successors and Assigns; Participations. (a) This Credit Agreement shall be binding upon and inure to the benefit of Borrower and Lender, and all future holders of the Promissory Note and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights or obligations under this Credit Agreement and Lender, except as set forth in paragraph (b) below, may not assign or transfer any of its rights or obligations under this Credit Agreement without (except following the occurrence of, and during the continuance of, an Event of Default) the prior consent of Borrower, which consent shall not unreasonably be withheld; provided, however, that if Lender desires to assign, transfer, sell or otherwise dispose of all of its right, title and interest in the Collateral or the Obligations owed to it under the Facility Agreements to any institutional investor pursuant to any repurchase agreement or similar arrangement, or to a Subsidiary or Affiliate of Continental Grain Company, the consent of Borrower shall not be required. (b) Lender may, in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to it, the Promissory Note, the Facility or any other interest of Lender hereunder and under the other Facility Agreements. In the event of any such sale by Lender of participating interests to a Participant, Lender's obligations under this Credit Agreement to the other parties hereto shall remain unchanged, Lender shall remain solely responsible for the performance thereof, Lender shall remain the holder of the Promissory Note for all purposes under this Credit Agreement and the other Facility Agreements, and Borrower shall continue to deal solely and directly with Lender in connection with Lender rights and obligations under this Credit Agreement and the other Facility Agreements. Borrower agrees that if amounts outstanding under this Credit Agreement and the Promissory Note are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of the Commitment Termination Date, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Credit Agreement and the Promissory Note to the same extent as if the amount of its participating interest were owing directly to it under this Credit Agreement or the Promissory Note. Borrower also agrees that each Participant shall be entitled to the benefits of Subsections 2.9 and 9.5 with respect to its participation in the Facility and the Loans outstanding from time to time; provided, that no Participant shall be entitled to receive any greater amount pursuant to such subsections than Lender would have been entitled to receive in respect of the amount of the participation transferred by Lender to such Participant had no such transfer occurred. (c) Borrower authorizes Lender to disclose to any Participant and any prospective Participant any and all financial information in its possession concerning the Borrower and its Affiliates which has been delivered to it by or on behalf of such Person pursuant to this Credit Agreement or which has been delivered to it by or on behalf of such Person in connection with its credit evaluation of Borrower and its Affiliates prior to becoming a party to this Credit Agreement; provided such Participant agrees to keep such financial information confidential unless required to be disclosed by applicable Requirements of Law. 30 (d) If, pursuant to this Subsection 10.6, any interest in this Credit Agreement or the Promissory Note is transferred or assigned to any Participant or assignee which is organized under the laws of any jurisdiction other than the United States or any state thereof, Lender shall cause such Participant or assignee, as a condition to the effectiveness of such transfer, (i) to represent to Lender and Borrower that under applicable law and treaties then in effect no taxes will be required to be withheld by Borrower or Lender with respect to any payments to be made to such Participant or assignee, in respect of the Loans, (ii) to furnish to Borrower either U.S. Internal Revenue Service Form 4224 (or any successor form) or U.S. Internal Revenue Service Form 1001 (or any successor form) (wherein such Participant or assignee claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder) and (iii) to agree (for the benefit of Lender and Borrower) timely to provide Lender and Borrower a new Form 4224 (or any successor form) or Form 1001 (or any successor form) upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with and if permitted under applicable U.S. laws and regulations and amendments then in effect duly executed and completed by such Participant or assignee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (e) Lender shall not grant to any Participant the right to consent to any amendment or waiver entered into in accordance with subsection 10.1 except for any such amendment or waiver which would increase the Lender Funding Commitment, or reduce the amount or extend the due date of any principal of or interest on the Promissory Note. 10.7. Termination. This Credit Agreement (except for Sections 10.4 and 10.5) shall terminate following the Commitment Termination Date upon payment in full of all outstanding principal, interest and other amounts due hereunder to Lender. 10.8. Counterparts. This Credit Agreement may be executed by one or more of the parties to this Credit Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 10.9. Severability. Any provision of this Credit Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.10. Integration; Construction. This Credit Agreement represents the agreement of Borrower and Lender with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Facility Agreements. 10.11. Limited Liability. No recourse under any Facility Agreement shall be had against, and no personal liability shall attach to, any officer, employee, director, member, affiliate, beneficial owner, trustee or shareholder of any party hereto, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise in respect of any of the Facility Agreements, it being expressly agreed and understood that each 31 Facility Agreement is solely a corporate or trust obligation of each party hereto, and that any and all personal liability, either at common law or in equity, or by statute or constitution, of every such officer, employee, director, member, affiliate, beneficial owner, trustee or shareholder for breaches by any party hereto of any obligations under any Facility Agreement is hereby expressly waived as a condition of and in consideration for the execution and delivery of this Agreement. 10.12. GOVERNING LAW. THIS CREDIT AGREEMENT AND THE PROMISSORY NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS CREDIT AGREEMENT AND THE PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. 10.13. SUBMISSION TO JURISDICTION; WAIVERS. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: (a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SUBSECTION 10.2 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND (e) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. 32 10.14. Acknowledgements. Borrower and FirstCity Consumer each hereby acknowledge that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Credit Agreement, the Promissory Note and the other Facility Agreements; (b) the Lender has no fiduciary relationship to Borrower or FirstCity Consumer, and the relationship between Lender and Borrower is solely that of debtor and creditor; and (c) no joint venture exists between Borrower, FirstCity Consumer and Lender. 10.15. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT OR THE PROMISSORY NOTE OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 33 IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed and delivered in New York, New York by their proper and duly authorized officers, members or trustees as of the day and year first above written. FIRSTCITY AUTO RECEIVABLES L.L.C. ----------------------------------------- By: Name: Title: FIRSTCITY CONSUMER LENDING CORPORATION ----------------------------------------- By: Name: Title: FIRSTCITY FINANCIAL CORPORATION ----------------------------------------- By: Name: Title: CONTITRADE SERVICES L.L.C. ------------------------------------------ By: Name: Authorized Signatory ------------------------------------------- Name: Authorized Signatory 34 EXHIBIT A DEFINITIONS LIST Adjusted Eligible Contract Balance: On any date, the amount described in clause (y) of the definition of "Borrowing Base." Advance: As defined in Subsection 2.1 of the Credit Agreement. Advance Rate: For each Contract which is designated "tier 1," "tier 2," "tier 3" or "tier 4" under the Underwriting Criteria, 85%. For each Contract originated by FirstCity Consumer, 95%. Affiliate: As to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" or "controlled" have meanings correlative to the foregoing. Notwithstanding the foregoing, no "acquisition vehicle" (such as WAMCO XXIII, Ltd.) shall be considered an "Affiliate" of FirstCity Financial or any FirstCity Entity. Annual Percentage Rate: The annual rate of interest applicable to each Contract, as disclosed therein. Available Amount: As defined in Subsection 9.1(c). Available Facility Amount: On any date, the excess, if any, of (a) the Borrowing Base, as of such date, minus (b) the Outstanding Facility Balance (not to exceed the Maximum Loan Amount). Bank Accounts: Collectively, the Lockbox Account and the Collection Account. Bankruptcy Event: With respect to a Person, (a) such Person or any of its Affiliates (if any) shall commence any case, proceeding or other action (i) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or such Person or any of its Affiliates shall make a general assignment for the benefit of its creditors; or (b) there shall be commenced against such Person or any of its Affiliates any case, proceeding or other action of a nature referred to in clause (a) above which (i) results in the entry of an order for relief or any such adjudication or appointment or (ii) remains undismissed, undischarged or unbonded for a period of 60 days; or (c) there shall be commenced against such Person or any of its Affiliates any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which A-1 shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (d) such Person or any of its Affiliates shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (a), (b), or (c) above; or (e) such Person or any of its Affiliates shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due. Blanket Policy: An Insurance Policy maintained by the Borrower and its assignees for "vendor's single interest" coverage with respect to each Vehicle. Borrower: FirstCity Auto Receivables L.L.C., a Texas limited liability company. Borrowing Base: As determined by the Collateral Agent pursuant to Section 7.08(a)(v) of the Security and Collateral Agent Agreement, on any day, an amount equal to the product of (x) the applicable Advance Rate and (y) the Outstanding Contract Balance of all Contracts which are not Defaulted or Liquidated, less the Outstanding Contract Balance of Contracts (a) as to which the Collateral Agent has not confirmed that it has possession thereof and (b) Contracts that do not have a certificate of title by the 121st day of its origination. Borrowing Date: Any Business Day specified in a notice pursuant to subsection 2.3 of the Credit Agreement as a date on which Borrower requests Lender to make Loans thereunder. Business Day: A day of the year on which banks are not required or authorized to close in New York City, New York, Wilmington, Delaware, Dallas, Texas and Los Angeles, California. Capital Stock: With respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. Change of Control: (i) Except with respect to a securitization contemplated by the Facility Agreements, all or substantially all of any of the Borrowers', FirstCity Funding's, FirstCity Consumer's or FirstCity Servicing's assets are sold, leased, transferred or otherwise disposed of as an entirety or substantially as an entirety (in one transaction or in a series of transactions) to any Person or Persons which are not at least 80% owned, directly or indirectly, by FirstCity Financial; or (ii) the beneficial owners or trustees of either of the FirstCity Entities consummate, or approve a definitive agreement or plan for: (A) any merger, consolidation, exchange of certificates, recapitalization, restructuring or other business combination with or into another corporation or any sale of beneficial ownership of any of the Borrower, FirstCity Funding, FirstCity Consumer or FirstCity Servicing (for purposes of this definition, a "Transaction") pursuant to which (x) any of the Borrower, FirstCity Funding, FirstCity Consumer or FirstCity Servicing will not survive, A-2 or (y) FirstCity Financial, directly or indirectly, will not hold at least 80% of the beneficial interest in any of the Borrower, FirstCity Funding, FirstCity Consumer or FirstCity Servicing after such Transaction, or (z) FirstCity Financial, directly or indirectly, is entitled to receive any cash, securities or other property, except any such Transaction as a result of which at least 80% of the beneficial ownership of the surviving Person is owned, directly or indirectly, by FirstCity Financial, or (B) the liquidation or dissolution of any of the Borrower, FirstCity Funding, FirstCity Consumer or FirstCity Servicing. Closing Date: April 30, 1998. Code: The United States Internal Revenue Code of 1986, amended. Collateral: As defined in Section 2 of the Security and Collateral Agent Agreement. Collateral Agent: Chase Bank of Texas, National Association, acting in its capacity as Collateral Agent under the Security and Collateral Agent Agreement and any successor Collateral Agent appointed pursuant to the Security and Collateral Agent Agreement. Collateral Agent Certification: As defined in Section 7.08(a)(i) of the Security and Collateral Agent Agreement. Collection Account: The Collection Account maintained by the Collateral Agent pursuant to the Paying Agent Agreement. Collection Period: With respect to any Payment Date, the calendar month (or portion of such calendar month, in the case of the first Payment Date) immediately preceding such Payment Date. Collections: All amounts (including, without limitation, Recoveries) due and owing on, or otherwise received by Borrower in respect of the Contracts and the Vehicles. Commitment Period: The period from and including the date hereof to but not including the Commitment Termination Date. Commitment Termination Date: May 30, 1998; or such later date to which the Commitment Termination Date may be extended pursuant to Section 2.1(b) of this Credit Agreement. Computer Tape: A computer tape generated by the Borrower containing, without limitation, the information set forth on the Contract List. Conti: The Lender and its Affiliates. ContiFinancial: ContiFinancial Services Corporation, a Delaware Corporation. A-3 Contract: Each retail installment sale contract for a Vehicle that was originated by an Originator, and all rights and obligations thereunder. Contract File: Each original Contract, a record of the information supplied by the Obligor in the original credit application, together with any other documents relating thereto each of which are delivered to and held by the Collateral Agent (including, but not limited to, the application for title registration). Contract List: Each schedule of Contracts delivered by Borrower to Lender and the Collateral Agent with respect to each Borrowing Date identifying, in such detail as such parties may require, each Contract being purchased by Borrower, delivered to the Lender and, for so long as the Security and Collateral Agent Agreement is in effect, the Collateral Agent, pledged by Borrower to the Lender, organized by the name of the Obligor and the state in which the Obligor's billing address is located and setting forth for each such Contract: (i) a number identifying the Contract, (ii) the original amount financed of such Contract, (iii) Annual Percentage Rate, (iv) the original maturity of the Contract, (v) the remaining maturity of the Contract, (vi) the amount of the Obligor's monthly payment, (vii) the purchase price of such Contract, (viii) the name of the Obligor on such Contract, (ix) the address of the Obligor on such Contract, (x) the Outstanding Balance of such Contract and (xi) the name of the holder of the Lien on such Contract. Contractual Obligation: As to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. Credit Agreement: This Warehouse Credit Agreement dated as of April 30, 1998 among Borrower, Lender, FirstCity Consumer and FirstCity Financial. Credit and Collection Policy: The credit and collection policy in effect as of the Closing Date. Credit Enhancer: A monoline insurer, letter of credit bank or other third- party supplier of credit enhancement, if any. Dealer Assignment: Any agreement pursuant to which a Contract or security interest in a Vehicle has been transferred, sold or assigned by a Vehicle Dealer to Borrower (to an Originator and then assigned to Borrower). Debt: Of a Person on any day, the sum on such day of (a) indebtedness for borrowed money or for the deferred purchase price of property or services, or evidenced by bonds, notes or other similar instruments, (b) obligations as lessee under any operating leases and any leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, and (c) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (a) or (b) above. A-4 Defaulted Contract: As of any Determination Date, any Contract that as of the end of the preceding Collection Period (a) is classified by the Borrower, on a contractual basis, as 61 or more days past due, or (b) with respect to which the related Vehicle has been repossessed by Borrower and the notice of intent to sell has expired, or (c) with respect to which the related Vehicle has been voluntarily repossessed. Delinquency Ratio: With respect to a Determination Date, the aggregate Outstanding Contract Balances of all contracts in the Servicer's entire servicing portfolio which are thirty-one (31) or more days past due as of the end of the preceding Collection Period divided by the aggregate Outstanding Contract Balances of all contracts in the Servicer's entire servicing portfolio as of the end of such preceding Collection Period. Delinquent Contract: Any Contract (a) that is classified by the Borrower, on a contractual basis, as 31 or more days past due and (b) that is not a Liquidated Contract. Deposit Amount: means all funds deposited in the Collection Account (i) by the Borrower, pursuant to Section 2.01(a)(iii) of the Paying Agent Agreement or (ii) by the Lender, pursuant to Section 2.01(a)(i) of the Paying Agent Agreement in each case (a) since the end of the immediately preceding Collection Period and (b) which remain on deposit in the Collection Account at the time of the Borrowing Base calculation is being made and, thus have not been applied to the acquisition of Contracts. Deposited Funds: On any day, all Principal Collections on deposit in or otherwise to the credit of the Collection Account at the close of business on the previous Business Day. Determination Date: With respect to a Collection Period, the tenth day following the end of such Collection Period. Dollars and $: Lawful money of the United States of America. Eligible Contract: On any day, a Contract (a) that arises from the completed delivery of a Vehicle and which has been fully performed by Borrower and the Dealer party thereto, (b) that arises from the normal course of the Dealer's business, (c) that is not a Defaulted Contract, (d) that is not a Delinquent Contract; (e) the Obligor of which is a natural person residing in any state of the United States or the District of Columbia, (f) the Obligor of which is not a government or governmental subdivision or agency, (g) the Obligor of which has full power and capacity to enter into such Contract and perform his or her obligations thereunder, (h) as to which the Obligor has executed and delivered an original note that is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor in accordance with its terms, (i) that is denominated and payable in Dollars in the United States, (j) that is not subject to any dispute, litigation, counterclaim or defense, or any offset or right of offset at the time of purchase by Borrower, (k) that has an original term to maturity of not less than 24 nor more than 72 months, provided that no more than 1% shall have original terms to maturity greater than 60 months, (l) that provides for equal monthly payments which will cause the Contract to fully amortize during its term, (m) that has an Annual Percentage Rate of not less than the lesser of (A) 500 basis points over the two-year Treasury rate in effect on the date of origination of such Contract and (B) the maximum interest rate permissible by law with respect to such Contract, (n) that, together with A-5 the note applicable thereto, does not contravene any Requirements of Law applicable thereto, (o) with respect to which all required consents, approvals and authorizations have been obtained, (p) as to which the security interest in the Vehicle securing such Contract has been recorded in the name of Originator and which security interest is in full force and effect and subject to no prior or equal liens, claims or encumbrances, (q) which was originated using each Originator's Underwriting Criteria, (r) that requires the Borrower to be named as loss payee or beneficiary (as applicable) under an insurance policy with respect to the Vehicle financed by such Contract and entitles the Borrower to the benefits of such insurance policy (s) that, if such Contract is a Modified Contract, the Lender has not given the Borrower notice that such Contract is to be excluded as not being an Eligible Contract and (t) as to which the Collateral Agent has issued a Collateral Agent's Certification listing no exceptions. Eligible Deposit Account: Either (i) a segregated account with an Eligible Institution or (ii) a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States of America or any one of the States thereof or the District of Columbia (or any domestic branch of a foreign bank), having corporate trust powers and acting as trustee for funds deposited in such account, so long as any of the securities of such depository institution have a credit rating acceptable to the Lender. Eligible Institution: A depository institution organized under the laws of the United States of America or any one of the States thereof or the District of Columbia (or any domestic branch of a foreign bank), (A) which has either (1) a long-term unsecured debt rating of at least AA by S&P and Aa by Moody's or otherwise acceptable to the Lender or (2) a short-term unsecured debt rating or certificate of deposit rating of at least A-1 by S&P and P-1 by Moody's or otherwise acceptable to the Lender and (B) whose deposits are insured by the FDIC. Employee Benefit Plan: Any plan, agreement, arrangement or commitment which is an employee benefit plan, as defined in section 3(3) of ERISA, maintained by FirstCity Consumer or with respect to which FirstCity Consumer has any liability or obligation to contribute. ERISA: The Employee Retirement Income Security Act of 1974, as amended. ERISA Group: FirstCity Financial and any entity required to be aggregated with the FirstCity Consumer under Section 414(b), (c), (m) or (o) of the Code. Event of Default: The occurrence of any of the following events: (a) Borrower fails to pay when due any amount payable under the Credit Agreement. (b) Any representation or warranty made or deemed made by Borrower or FirstCity Consumer, in any capacity which is contained in the Facility Agreements or in any agreement, written report or written information furnished at any time under or required by the Facility Agreements shall prove to have been false or incorrect on or as of the date made or deemed made, which remains uncured for five Business Days following FirstCity Consumer's receipt of notice thereof, and which is likely to have a material, adverse effect on the financial condition or business prospects of the Borrower or of FirstCity Consumer. A-6 (c) (i) Borrower (x) defaults in any payment of principal of or interest on any Debt, beyond the period of grace, if any, provided in the instrument or agreement under which such Debt was created or (y) defaults in the observance or performance of any agreement or condition contained in any instrument or agreement to which it is a party or by which its property or assets are bound, which remains uncured for five Business Days following the Borrower's and FirstCity Consumer's receipt of notice thereof. (ii) FirstCity Consumer (x) defaults in any payment of principal of or interest on any Debt, beyond the period of grace, if any, provided in the instrument or agreement under which such Debt was created and which has an outstanding principal balance of $50,000 or more or (y) defaults in the observance or performance of any agreement or condition contained in any instrument or agreement to which it is a party or by which its property or assets are bound, which remains uncured for five Business Days following FirstCity Consumer's receipt of notice thereof, and which is likely to have a material adverse effect on the financial condition or business prospects of FirstCity Consumer. (iii) FirstCity Financial (x) defaults in any payment of principal of or interest on any Debt, beyond the period of grace, if any, provided in the instrument or agreement under which such Debt was created and which has an outstanding principal balance of $50,000 or more or (y) defaults in the observance or performance of any agreement or condition contained in any instrument or agreement to which it is a party or by which its property or assets are bound, which remains uncured for five Business Days following FirstCity Financial's receipt of notice thereof, and which is likely to have a material adverse effect on the financial condition or business prospects of FirstCity Financial; provided, however, that only payments due from FirstCity Financial, if any, with respect to any acquisition partnership shall apply with respect to this provision. (d) For any reason, Borrower shall cease to have a valid and perfected first priority ownership interest in the Contracts or Lender shall cease to have a valid and perfected first priority security interest in the Collateral or any other collateral pledged under the Facility Agreements or any other Operative Document shall cease to be in full force and effect or cease to be the legal, valid, binding and enforceable obligation of any party thereto. (e) A Bankruptcy Event shall occur with respect to any of the FirstCity Entities. (f) One or more judgments or decrees (in the case of FirstCity Consumer, in an aggregate amount in excess of $50,000) shall have been entered against any FirstCity Entity which is not paid, bonded, stayed or covered by insurance, provided, that this clause shall not apply to actions relating to individual Contracts, unless a material portion of the Contracts is affected. A-7 (g) Borrower or FirstCity Consumer becomes liable for environmental remediation or compliance expenses or fines, penalties or other charges related to environmental matters in excess of $50,000. (h) (i) FirstCity Consumer or any other person engages in a transaction in connection with which FirstCity Consumer or any entity which it has an obligation to indemnify could be subject to liability for either a civil penalty assessed pursuant to section 502(I) of ERISA or a tax imposed by section 4975 of the Code; (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA or Section 412 of the Code), whether or not waived, shall exist with respect to any Single Employer Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Lender, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) any member of the ERISA Group shall, or in the reasonable opinion of Lender is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist, with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject Borrower or any ERISA Affiliate to any tax, penalty or other liabilities which are materially adverse to the business, operations, prospects, property or financial or other condition of FirstCity Consumer. (i) Any financial statement delivered pursuant to the Facility Agreements and reported on by any independent certified public accountants shall contain any qualification or exception, or qualification arising out of the scope of the audit. (j) A material adverse change from the date hereof in the business, properties, operations, prospects or financial or other condition of Borrower, FirstCity Consumer, or FirstCity Financial as determined by Lender in its reasonable, good faith business judgment. (k) A material adverse change from the date hereof in the collectibility of the Contracts taken as a whole. (l) Borrower or FirstCity Consumer becomes an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (m) Borrower shall fail to provide any information required to be provided by Sections 6.1 and 6.2 of this Credit Agreement by the time required thereby. (n) Borrower or FirstCity Consumer shall default in the observance or performance of any other term, condition or covenant under the Facility Agreements and such failure to observe or perform continues for five Business Days. A-8 (o) As of any Determination Date, the Rolling Delinquency Ratio is greater than or equal to 15%. (p) As of any Determination Date, the Delinquency Ratio is greater than or equal to 20%. (q) The Net Loss Ratio is greater than or equal to, on an annualized basis, 19% during April, May or June 1998, 16% during July, August or September 1998, and 13% thereafter. (r) As of any Determination Date, the average of the Recovery Percentages for the three preceding Collection Periods is less than 40%. (s) As of any date, the Outstanding Facility Balance exceeds the Borrowing Base. (t) A Change of Control shall occur. (u) The aggregate principal amount of Contracts originated by FirstCity Consumer is less than $20,000,000 for the first six months following the Closing Date. (v) Borrower fails to observe the financial covenant set forth in Section 6.14 of the Credit Agreement. (w) FirstCity Financial fails to observe the covenant set forth in Section 6.17 of the Credit Agreement. (x) Any default occurs under the Servicing Agreement. (y) Any FirstCity Entity shall default in the observance or performance of any term, condition or covenant in any other Facility Agreement and such failure to observe or perform continues for five Business Days. (z) Any default by FirstCity Consumer under the IBSA. Facility: As defined in Section 2.1(a) of this Credit Agreement. Facility Agreements: The collective reference to the Credit Agreement, the Promissory Note, the Security and Collateral Agent Agreement, the Servicing Agreement, the IBSA, and any other agreement or instrument related or delivered to any party to any of the foregoing pursuant to or in connection with any of the foregoing. FDIC: The Federal Deposit Insurance Corporation or any successor thereof. File: With respect to each Contract to be purchased by Borrower: (a) the original Dealer Assignment; (b) the fully executed original of the Contract; A-9 (c) documents evidencing or related to any Insurance Policy with respect to a Vehicle; (d) the original or a copy of the credit application of the Obligor, fully executed by such Obligor, such application to be in a form substantially similar to that included in the Credit and Collection Policy; (e) where permitted by law, the original certificate of title and otherwise such documents, if any, that the Servicer keeps on file in accordance with its customary procedures and the Credit and Collection Policy indicating that the Vehicle is owned by the Obligor and subject to the interest of Borrower as first lienholder or secured party; and (f) any and all other documents that Borrower, Collateral Agent or Servicer keeps on file in accordance with its procedures relating to the Contract, Obligor or Vehicle. Finance Charges: Interest charges, late charges, and other fees, charges and similar items with respect to Contracts. FirstCity Consumer: FirstCity Consumer Lending Corporation, a Texas corporation. FirstCity Consumer Finance: FirstCity Consumer Finance Corporation, a Texas corporation. FirstCity Entities: The Borrower, FirstCity Consumer, FirstCity Financial and all subsidiaries (including trusts) of FirstCity Consumer. FirstCity Financial: FirstCity Financial Corporation, a Delaware corporation. FirstCity Funding: FirstCity Funding Corporation, a Texas corporation. GAAP: Generally accepted accounting principles in effect from time to time in the United States of America. Governmental Authority: Any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. IBSA: The Investment Banking Services Agreement dated as of May 17, 1996 between National Auto Funding Corporation and ContiFinancial, as amended. Insolvency: With respect to any Multiemployer Plan, the condition that such plan is insolvent within the meaning of Section 4245 of ERISA. Interest Period: With respect to any Payment Date, the prior calendar month. A-10 Lender: ContiTrade Services L.L.C. Lender Commitment: $50,000,000, or such other amount agreed upon in writing by Borrower and Lender. LIBOR: With respect to any Advance, (x) through the end of the Interest Period in which such Advance is made, one-month LIBOR on the related Borrowing Date, and (y) for subsequent Interest Periods, one-month LIBOR on the first day of such Interest Period, in either case as published on such date in the Wall Street Journal. Lien: Any lien, mortgage, security interest, pledge, hypothecation, charge, equity, encumbrance or right of any kind whatsoever (except any lien, mortgage, security interest, pledge, hypothecation, charge, equity, encumbrance or right of any kind granted under the Credit Agreement with respect to the Contracts). Liquidated Contract: A Contract which is a charged off Contract, according to the charge-off policy attached hereto as Exhibit G. Loan: As defined in subsection 2.1 of the Credit Agreement. Lockbox Account: The Wells Fargo Account #022168835 into which each Lockbox Provider deposits all available Collections. Lockbox Agreement: The Lockbox Agreement attached hereto as Exhibit H. Lockbox Provider: Fiserv Corporation. Maximum Loan Amount: At any time, the lesser of (a) $50,000,000 and (b) the Borrowing Base. Modified Contract: As defined in Section 2.2(b) of the Servicing Agreement. Moody's: Moody's Investors Service, Inc. Multiemployer Plan: A "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which any member of the ERISA Group is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. N.A.F. Entities: N.A.F. Auto Loan Trust, a Delaware business trust and National Auto Funding Corporation, a Texas corporation. Net Loss. For a Collection Period, the remaining Contract Balance of any Contracts liquidated during such period, less any Recoveries received during such period on Contracts liquidated during prior Collection Periods. Net Loss Ratio: As of any Determination Date, the average, over the three most recent Collection Periods, of the product of (a)(i) the Net Loss for such Collection Period, divided by (ii) the principal balance of all contracts in the Servicer's entire servicing portfolio outstanding at the end of such Collection Period and (b) 12. A-11 Notice of Borrowing: As defined in Section 2.3 of the Credit Agreement. Obligations: All the unpaid principal amount of, and interest on (including interest accruing on or after any Bankruptcy Event, whether or not a claim for post-filing or post-petition interest is allowed in a proceeding relating thereto, and interest on overdue interest), the Promissory Note and all other obligations and liabilities of Borrower or any Affiliate of the FirstCity Entities to Lender or any Affiliate of Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, the Promissory Note, the Facility Agreement and any other document executed and delivered in connection therewith whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to Lender) or otherwise. Obligor: Each Person who is indebted on a Contract. Originators: The N.A.F. Entities, FirstCity Consumer Finance, FirstCity Funding, and any originator approved by the Lender subject to Section 6.9 hereof. Outstanding Contract Balance: On any day, with respect to any Contract, the principal amount due and owing on such Contract on such day. Outstanding Facility Balance: On any day, with respect to the Loan, the outstanding principal amount of the Loan on such day. Paying Agent: The Collateral Agent, acting in its capacity as paying agent under the Paying Agent Agreement. Paying Agent Agreement: The Paying Agent Agreement dated as of April 30, 1998 among Borrower, Lender and the Paying Agent. Payment Date: As defined in Section 2.4 of the Credit Agreement. PBGC: The Pension Benefit Guaranty Corporation established under ERISA. Permitted Investments: Book-entry securities, negotiable instruments or securities represented by instruments in bearer or registered form which evidence: (i) direct obligations of, and obligations fully guaranteed as to timely payment by, the United States of America; (ii) demand deposits, time deposits or certificates of deposit of any depository institution or trust company incorporated under the laws of the United States of America or any state thereof (or any domestic branch of a foreign bank) and subject to supervision and examination by Federal or State banking or depository institution authorities; provided, however, that at the time of the investment or contractual commitment to invest therein, the commercial paper or other A-12 short-term unsecured debt obligations (other than such obligations the rating of which is based on the credit of a person other than such depository institution or trust company) thereof shall have a credit rating from each of S&P and Moody's in the highest investment category granted thereby; (iii) commercial paper having, at the time of the investment or contractual commitment to invest therein, a rating from each of S&P and Moody's in the highest investment category granted thereby; (iv) investments in money market funds, including, without limitation, the VISTA money market funds so long as such funds are rated Aaa by Moody's or AAAm by S&P, and any other funds for which the Paying Agent or an affiliate thereof serves as an investment advisor, administrator, shareholder, servicing agent and/or custodian or sub-custodian; (v) demand deposits, time deposits and certificates of deposit which are fully insured by the FDIC; (vi) bankers' acceptances issued by any depository institution or trust company referred to in clause (ii) above; and (vii) repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States of America or any agency or instrumentality thereof, the obligations of which are backed by the full faith and credit of the United States of America, in either case entered into with a depository institution or trust company (acting as principal) the deposits of which are insured by the FDIC. Person: An individual, a partnership, a corporation, a limited liability company, a limited liability partnership, a business trust, a joint stock company, a trust, an unincorporated association, a joint venture, a Governmental Authority or other entity of whatever nature. Plan: Any employee benefit plan defined in Section 3(3) of ERISA in respect of which any member of the ERISA Group is or at any time within the immediately preceding five years was an "employer" as defined in Section 3(5) of ERISA or may have liability, including liability as a substantial employer, within the meaning of Section 4063 of ERISA and as a contributing sponsor under Section 4069 of ERISA. Principal Collections: Collections other than Finance Charges. Program: As defined in Subsection 9.1(c). Promissory Note: The note issued pursuant to Section 2.2 of the Credit Agreement. Rating Agencies: Moody's Investors Service, Standard & Poor's Corporation, Duff & Phelps Credit Rating Service and Fitch Investors Service. A-13 Recoveries: With respect to any Collection Period, the aggregate amount of all cash received by Borrower net of expenses during such Collection Period in respect of any Contract which is a liquidated Contract. Recovery Percentage: With respect to any Collection Period, the percentage equivalent of a fraction, the numerator of which is the aggregate amount of Recoveries deposited in the Collection Account during such Collection Period in respect of Contracts which became Liquidated Contracts during such Collection Period and the denominator of which is the aggregate Outstanding Balance of such Liquidated Contracts. Reorganization: With respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. Reportable Event: Any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder other than those events as to which the thirty day notice period is waived under subsections .13, .14, .18, .19 or .20 of PBGC regulation Section 2615. Requirements of Law: As to any Person, the Certificate of Incorporation and By-laws or other organizational or governing documents of such Person and any law, treaty, rule or regulation or determination of any arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. Responsible Officer: As to any Person, the chief executive officer, president, vice president-operations, chief financial officer, controller, secretary or treasurer of a corporation, provided, that (a) with respect to any certificate to be delivered by a Responsible Officer, such Responsible Officer shall have personal knowledge of the subject matter of such certificate, and (b) with respect to any other matter to be undertaken by a Responsible Officer, such Responsible Officer shall be duly authorized by all necessary corporate or other action with respect to such matter. Rolling Delinquency Ratio: With respect to any Determination Date, the average, as of the last day of each of the three preceding Collection Periods, of the aggregate Outstanding Contract Balances of all Contracts which are 31 or more days past due as of the end of the preceding Collection Period divided by the aggregate Outstanding Contract Balances of all Contracts as of the end of such preceding Collection Period. S&P: Standard & Poor's Ratings Services, a Division of The McGraw Hill Companies, Inc. SEC: The Securities and Exchange Commission. Securitization: As defined in Section 6.12 of this Credit Agreement. Security and Collateral Agent Agreement: The Security and Collateral Agent Agreement dated as of April 30, 1998 among Borrower, Lender and the Collateral Agent. Servicer: FirstCity Servicing Corporation of California. A-14 Servicing Agreement: The Servicing Agreement dated as of April 30, 1998 among Borrower, the Servicer and the Collateral Agent. Servicing Report: The report to be delivered by Borrower pursuant to Section 6.2 of the Credit Agreement, substantially in the form of Exhibit I thereto. Single-Employer Plan: A single employer plan, as defined in Section 4001(a)(15) of ERISA, which (a) is maintained for employees of Borrower or an ERISA Affiliate thereof and no Person other than the Borrower and their ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate thereof could have liability under Title IV of ERISA in the event such plan has been or were to be terminated. Subordinated Debt: Any Debt which (x) is by its terms subordinated to the Obligations, and (y) provides for a non-petition covenant against Borrower. Subordinated Lien: A Lien approved in writing by the Lender, and which secures any Subordinated Debt. Subordinate Financing: Any combination of the following: cash, purchase of a "B piece" or "residual" certificate, funding of an initial reserve account deposit, issuance of a guaranty, serving as account party on a letter of credit, or other form of subordinate financing in the related securitization. Such subordinate financing shall be acceptable to the Rating Agencies and the Credit Enhancer. Subsidiary: As to any Person, any Person of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Capital Stock or beneficial interest thereof. Tangible Assets: All assets of Borrower except: (i) deferred assets, other than prepaid insurance and prepaid taxes, (ii) patents, copyrights, trademarks, trade names, non-compete agreements, franchises and similar intangibles, (iii) good will, including any amounts, however designated on the balance sheet of Borrower, representing the excess of the purchase price paid for assets or stock over the value assigned thereto on the books of Borrower, (iv) unamortized debt discount and expense, and (v) accounts, notes and other receivables due from Affiliates or employees. Tangible Net Worth: At any date means a sum equal to (i) the net book value (after deducting related depreciation, amortization and other proper reserves) at which the Tangible Assets of Borrower would be shown on a balance sheet at such date in accordance with GAAP applied on a consistent basis, minus (ii) the amount at which the liabilities of Borrower (excluding Subordinated Debt) would be shown on such balance sheet in accordance with GAAP, and including as liabilities all reserves, required in accordance with GAAP, for contingencies and other potential liabilities. Tangible Net Worth Requirement: The total Tangible Net Worth of FirstCity Financial is equal to at least $95 million. Taxes: As defined in Section 2.10 of the Credit Agreement. A-15 UCC: The Uniform Commercial Code as in effect in the specified jurisdiction or, if no jurisdiction is specified, as in effect in the state whose law, by agreement of the parties, governs the document or agreement in which the term "UCC" appears. Underwriting Criteria: The criteria agreed upon for underwriting Contracts between Borrower and Lender and attached to the Credit Agreement as Exhibit K. Unmatured Event of Default: Any of the events specified in the definition of Event of Default, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. Vehicle: Any new or used automobile or light truck that secures a Contract. Vehicle Dealer: Any seller of automobile or light trucks that originated one or more of the Contracts and transferred, sold or assigned the respective Contract, directly or indirectly, to Borrower under a Dealer Assignment. A-16 EXHIBIT B PROMISSORY NOTE New York, New York April 30, 1998 FOR VALUE RECEIVED, the undersigned, FirstCity Auto Receivables L.L.C., a Delaware limited liability company (the "Borrower"), promises to pay to the order of ContiTrade Services L.L.C. ("Lender"), on the date specified in Section 2.5 of the Credit Agreement hereinafter referred to, at the office of Lender at 277 Park Avenue, New York, New York, in lawful money of the United States of America and in immediately available funds, the principal amount of FIFTY MILLION DOLLARS AND NO CENTS ($50,000,000), or if less, the aggregate unpaid principal amount of all Advances made by Lender to Borrower pursuant to the Credit Agreement, and to pay interest at such office, in like money, from the date hereof on the unpaid principal amount of such Loans from time to time outstanding at the rate and on the dates specified in Section 2.4 of the Credit Agreement. Lender is authorized to record, on the schedule annexed thereto and made a part hereof or on other appropriate records of Lender, the date and amount of each Loan made by Lender, each continuation thereof, the interest rate from time to time on each Loan and the date and amount of each payment or repayment of principal thereof. Any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded, provided that the failure of Lender to make any such recordation (or any error in such recordation) shall not affect the obligations of Borrower hereunder or under the Credit Agreement in respect of the Loan. This Promissory Note is the Promissory Note referred to in the Warehouse Credit Agreement dated as of April 30, 1998 (as amended, supplemented or otherwise modified and in effect from time to time, the "Credit Agreement") among Borrower, Lender, FirstCity Consumer Lending Corporation and FirstCity Financial Corporation, and is entitled to the benefits thereof. Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement. This Promissory Note is subject to original and mandatory prepayment as provided in the Credit Agreement. Upon the occurrence of an Event of Default, the Lender shall have all of the remedies specified in the Credit Agreement, and Borrower hereby waives presentment, demand, protest and all notices of any kind. B-1 THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. FIRSTCITY AUTO RECEIVALBES CORP. By: ----------------------------------- Name: Title: B-2 Schedule 1 to PROMISSORY NOTE ---------------
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B-3 EXHIBIT C NOTICE OF BORROWING FirstCity Auto Receivables L.L.C. ("Borrower") hereby requests that ContiTrade Services L.L.C. make a Loan to it on [insert Borrowing Date] in the amount of [amount of Loan requested] by crediting the Collection Account by 4:00 p.m. (New York City time) on [insert Borrowing Date] (capitalized terms used herein have the meaning assigned to them in the Warehouse Credit Agreement dated as of April 30, 1998 as amended, modified or supplemented from time to time). Borrower hereby certifies to Lender that: 1. The representations and warranties of Borrower contained in the Credit Agreement are true and correct in all material respects on and as of this day. 2. Borrower is in compliance with all of the terms and provisions set forth in the Credit Agreement required to be complied with or performed by Borrower on or before the date hereof. 3. No Event of Default or Default (as defined in the Credit Agreement) has occurred and is continuing as of today's date. 4. The Collateral is not subject to any Lien, except Liens created by the Operative Documents. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to them in the Credit Agreement. 5. The Outstanding Facility Balance (prior to the making of the requested Advance) on the date hereof is $__________. 6. The Borrowing Base applicable to the requested Advance is $_________. 7. The Available Facility Amount is $____________. IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate this _______ day of ________________, _____. FIRSTCITY AUTO RECEIVABLES L.L.C. By: ----------------------------------- Name: Title: EX-10 4 EXEECUTED COPY -------------- SERVICING AGREEMENT among FIRSTCITY AUTO RECEIVABLES L.L.C. as the Borrower FIRSTCITY SERVICING CORPORATION OF CALIFORNIA as the Servicer FIRSTCITY CONSUMER LENDING CORPORATION and CONTITRADE SERVICES L.L.C. as the Lender --------------------------- Dated as of April 30, 1998 --------------------------- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS..........................................................1 SECTION 1.1 DEFINITIONS.......................................1 SECTION 1.2 USAGE OF TERMS....................................3 SECTION 1.3 CALCULATIONS......................................4 SECTION 1.4 SECTION REFERENCES................................4 SECTION 1.5 NO RECOURSE.......................................4 ARTICLE II ADMINISTRATION AND SERVICING OF CONTRACTS...........................4 SECTION 2.1 DUTIES OF THE SERVICER............................4 SECTION 2.2 COLLECTION OF CONTRACT PAYMENTS; MODIFICATION AND AMENDMENT OF CONTRACTS; LOCKBOX AGREEMENTS..................5 SECTION 2.3 REALIZATION UPON CONTRACTS........................6 SECTION 2.4 INSURANCE.........................................7 SECTION 2.5 MAINTENANCE OF SECURITY INTERESTS IN VEHICLES.....8 SECTION 2.6 COVENANTS, REPRESENTATIONS AND WARRANTIES OF SERVICER........................................................8 SECTION 2.7 INDEMNIFICATION..................................10 SECTION 2.8 SERVICING FEE; PAYMENT OF CERTAIN EXPENSES BY SERVICER.......................................................11 SECTION 2.9 SERVICER'S CERTIFICATE...........................11 SECTION 2.10 ANNUAL INDEPENDENT ACCOUNTANTS' REPORT...........11 SECTION 2.11 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING CONTRACTS................................12 SECTION 2.12 PROVISION OF INFORMATION.........................12 SECTION 2.13 FIDELITY BOND....................................12 ARTICLE III LIABILITY AND INDEMNITIES.........................................12 SECTION 3.1 LIABILITY OF SERVICER; INDEMNITIES...............12 SECTION 3.2 MERGER OR CONSOLIDATION OF, OR ASSUMPTION OF THE OBLIGATIONS OF, THE SERVICER..................................13 SECTION 3.3 LIMITATION ON LIABILITY OF SERVICER AND OTHERS.........................................................14 SECTION 3.4 DELEGATION OF DUTIES.............................14 SECTION 3.5 SERVICER NOT TO RESIGN...........................14 ARTICLE IV SERVICER TERMINATION EVENTS........................................15 SECTION 4.1 SERVICER TERMINATION EVENT.......................15 SECTION 4.2 CONSEQUENCES OF A SERVICER TERMINATION EVENT.....16 SECTION 4.3 APPOINTMENT OF SUCCESSOR.........................16 SECTION 4.4 WAIVER OF PAST DEFAULTS..........................17 ARTICLE V MISCELLANEOUS PROVISIONS............................................17 SECTION 5.1 AMENDMENT........................................17 SECTION 5.2 GOVERNING LAW....................................17 SECTION 5.3 SEVERABILITY OF PROVISIONS.......................17 SECTION 5.4 ASSIGNMENT.......................................17 SECTION 5.5 WAIVER...........................................17 SECTION 5.6 COUNTERPARTS.....................................18 SECTION 5.7 NOTICES..........................................18 SECTION 5.8 SUCCESSORS AND ASSIGNS...........................19 EXHIBIT A Form Of Servicer's Certificate EXHIBIT B Form Of Servicer's Daily Report THIS SERVICING AGREEMENT (this "Agreement"), dated as of April 30, 1998, among FIRSTCITY AUTO RECEIVABLES L.L.C., a Delaware limited liability company (the "Borrower"), FIRSTCITY SERVICING CORPORATION OF CALIFORNIA, a California corporation (the "Servicer"), FIRSTCITY CONSUMER LENDING CORPORATION, a Texas corporation ("FC CONSUMER"), CONTITRADE SERVICES L.L.C., a Delaware limited liability company, as Lender (the "Lender"). WHEREAS, the Borrower is entering into a Warehouse Credit Agreement dated as of April 30, 1998 (the "Credit Agreement") with the Lender, providing for the making of Advances by the Lender secured by the Contracts, WHEREAS, the Servicer has agreed to service the Contracts, pursuant to the terms of this Agreement, NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Borrower, FC Consumer, the Servicer and the Lender. ARTICLE I DEFINITIONS Section 1.1 Definitions. As used in this Agreement, defined terms have their respective meanings as set forth in the Definitions List attached to the Credit Agreement, or as set forth below: Accountants' Report: The report of a firm of nationally recognized independent accountants described in Section 2.10 hereof. (a) Basic Servicing Fee: With respect to any Collection Period, the fee payable to the Servicer for services rendered during such Collection Period, which shall be equal to one-twelfth of the Basic Servicing Fee Rate multiplied by the sum of the Principal Balances for all Contracts (other than any Contract which was 120 or more days delinquent as of the first day of such Collection Period) as of the first day of the Collection Period. Basic Servicing Fee Rate: 3.00% per annum, payable monthly at one-twelfth of the annual rate for each contract originated by National Auto Funding Corporation and FirstCity Funding, and 1.00% per annum for each contract originated by FC Consumer Finance Corporation. Blanket Policy: Shall have the meaning set forth in Section 2.4(c) hereof. Collected Funds: With respect to any Determination Date, the amount of funds in the Collection Account representing collections on the Contracts during the related Collection Period, including all Recoveries collected during the related Collection Period. Collection Account: The account designated as the Collection Account in, and which is established and maintained pursuant to, the Paying Agent Agreement. Collection Records: Computer generated records relating to collection efforts, payment histories and account activity with respect to the Contracts. 1 Cram Down Loss: With respect to a Contract, if a court of appropriate jurisdiction in an insolvency proceeding shall have issued an order reducing the amount owed on a Contract or otherwise modifying or restructuring the scheduled payments to be made on a Contract, an amount equal to the excess of the Outstanding Contract Balance of such Contract immediately prior to such order over the Outstanding Contract Balance of such Contract as so reduced. A "Cram Down Loss" shall be deemed to have occurred on the date of issuance of such order. Dealer: A seller of new or used automobiles or light trucks that originated one or more of the Contracts and sold the respective Contract, directly or indirectly, to the Borrower. Determination Date: With respect to a Collection Period, the tenth day following the end of such Collection Period. Electronic Ledger: The electronic master record of the retail installment sales contracts or installment loans of the Servicer. Eligible Servicer: FirstCity Servicing Corporation of California, or another Person which at the time of its appointment as Servicer, (i) is servicing a portfolio of motor vehicle retail installment sales contracts and/or motor vehicle installment loans, (ii) is legally qualified and has the capacity to service the Contracts, (iii) has demonstrated the ability professionally and competently to service a portfolio of motor vehicle retail installment sales contracts and/or motor vehicle installment loans similar to the Contracts with reasonable skill and care, and (iv) is qualified and entitled to use, pursuant to a license or other written agreement, and agrees to maintain the confidentiality of, the software which the Servicer uses in connection with performing its duties and responsibilities under this Agreement or otherwise has available software which is adequate to perform its duties and responsibilities under this Agreement. Independent Accountants: Shall have the meaning set forth in Section 2.10(a) hereof. Insurance Policies: All insurance policies covering physical damage, theft, mechanical breakdown or similar event with respect to a Vehicle or loss of such Vehicle or credit life or credit disability insurance with respect to payments due on a Contract or otherwise benefiting the holder of the Contracts. Lien Certificate: With respect to a Vehicle, an original certificate of title, certificate of lien or other notification issued by the Registrar of Titles of the applicable state to a secured party which indicates that the lien of the secured party on the Vehicle is recorded on the original certificate of title. In any jurisdiction in which the original certificate of title is required to be given to the Obligor, the term "Lien Certificate" shall mean only a certificate or notification issued to a secured party. Lockbox Provider: Fiserv Corporation or any other depository institution named by the Servicer and acceptable to the Lender and FC Consumer. Opinion of Counsel: A written opinion of counsel reasonably acceptable to the Lender, which opinion is acceptable in form and substance to the Lender. Paying Agent: Chase Bank of Texas, National Association, acting in its capacity as paying agent under the Paying Agent Agreement. 2 Paying Agent Agreement: The Paying Agent Agreement dated as of April 30, 1998 among Borrower, Lender and the Paying Agent. Program Administration Manual: The Program Administration Manual in effect as of the date hereof, as modified from time to time. Recoveries: With respect to any Collection Period, the aggregate amount of all cash received by Borrower net of expenses during such Collection Period in respect of any Contract which is a Liquidated Contract. Registrar of Titles: With respect to any state, the governmental agency or body responsible for the registration of, and the issuance of certificates of title relating to, motor vehicles and liens thereon. Servicer: FirstCity Servicing Corporation of California, a California corporation. Servicing Procedures Manual: The servicing manual previously delivered to the Lender, as amended from time to time. Servicing Records: All records and data maintained in electronic form by the Servicer with respect to the Contracts, including the following with respect to each Contract: the account number; the originating Dealer; Obligor name; Obligor address; Obligor home phone number; Obligor business phone number; original Outstanding Contract Balance; original term; Annual Percentage Rate; current Outstanding Contract Balance; current remaining term; origination date; first payment date; final scheduled payment date; next payment due date; date of most recent payment; new/used classification; Collateral description; days currently delinquent; number of contract extensions (months) to date; amount of Scheduled Payment; current Insurance Policy expiration date; and past due late charges. Servicer's Certificate: With respect to each Determination Date, a certificate, completed by and executed on behalf of the Servicer, in accordance with Section 2.9 hereof, substantially in the form attached hereto as Exhibit A hereto. Simple Interest Method: The method of allocating a fixed level payment on an obligation between principal and interest, pursuant to which the portion of such payment that is allocated to interest is equal to (a) the product of the fixed rate of interest on such obligation multiplied by the period of time (expressed as a fraction of a year, based on the actual number of days in the calendar month and 365 days in the calendar year) elapsed since the preceding payment under the obligation was made plus (b) accrued and unpaid interest. Supplemental Servicing Fee: With respect to any Collection Period, all administrative fees, expenses and charges paid by or on behalf of Obligors, including late fees, prepayment fees and liquidation fees collected on the Contracts during such Collection Period which have been approved by FC Consumer for payment to the Servicer. Vehicle: A new or used automobile or light truck, van or mini-van together with all accessories thereto, securing or purporting to secure an Obligor's indebtedness under a Contract. Section 1.2 Usage of Terms. With respect to all terms used in this Agreement, the singular includes the plural and the plural the singular; words importing any gender include the 3 other gender; references to "writing" include printing, typing, lithography, and other means of reproducing words in a visible form; references to agreements and other contractual instruments include all subsequent amendments thereto or changes therein entered into in accordance with their respective terms and not prohibited by this Agreement; references to Persons include their permitted successors and assigns; and the terms "include" or "including" mean "include without limitation" or "including without limitation." Section 1.3 Calculations. All calculations of the amount of the Basic Servicing Fee shall be made on the basis of a 360-day year consisting of twelve 30-day months. Section 1.4 Section References. All references to Articles, Sections, paragraphs, subsections, exhibits and schedules shall be to such portions of this Agreement unless otherwise specified. Section 1.5 No Recourse. No recourse may be taken, directly or indirectly, under this Agreement or any certificate or other writing delivered in connection herewith or therewith, against any stockholder, officer, or director, as such, of the Borrower, FC Consumer, the Servicer or the Lender or of any such stockholder, officer or director of any predecessor or successor of any of them. ARTICLE II ADMINISTRATION AND SERVICING OF CONTRACTS Section 2.1 Duties of the Servicer. (a) The Servicer is hereby authorized to act as agent for the Borrower and in such capacity shall manage, service, administer and make collections on the Contracts, and perform the other actions required by the Servicer under this Agreement. The Servicer agrees that its servicing of the Contracts shall be carried out in accordance with customary and usual procedures of institutions which service motor vehicle retail installment sales contracts and, to the extent more exacting, the degree of skill and attention that the Servicer exercises from time to time with respect to all comparable motor vehicle receivables that it services for itself or others in accordance with the Program Administration Manual as in effect at the current time for servicing all its other comparable motor vehicle receivables or, if not addressed therein, then in the Servicing Procedures Manual. The Servicer's duties shall include, without limitation, collection and posting of all payments, responding to inquiries of Obligors on the Contracts, investigating delinquencies, sending payment statements to Obligors, reporting any required tax information to Obligors, policing the Collateral, complying with the terms of the Lockbox Agreement, accounting for collections, providing the Collateral Agent a daily report containing the information necessary to calculate the Borrowing Base and furnishing monthly and annual statements to the Collateral Agent and the Lender with respect to distributions, monitoring the status of Insurance Policies with respect to the Vehicles, providing information as required hereby, cooperating with the reasonable requests of the Lender and performing the other duties specified herein. The Servicer shall also administer and enforce all rights and responsibilities of the holder of the Contracts provided for in the Dealer Assignments and the Insurance Policies, to the extent that such Dealer Assignments and Insurance Policies relate to the Contracts, the Vehicles or the Obligors. To the extent consistent with the standards, policies and procedures otherwise required hereby, the Servicer shall follow its customary standards, policies, and procedures and shall have full power and authority, acting alone, to do any and all things in connection with such managing, servicing, administration and collection that it may deem necessary or desirable. 4 Without limiting the generality of the foregoing, the Servicer is hereby authorized and empowered by the Borrower to execute and deliver, on behalf of the Borrower, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Contracts and with respect to the Vehicles; provided, however, that notwithstanding the foregoing, the Servicer shall not, except pursuant to an order from a court of competent jurisdiction, release an Obligor from payment of any unpaid amount under any Contract or waive the right to collect the unpaid balance of any Contract from the Obligor, except that the Servicer may forego collection efforts if the amount reasonably expected to be recovered by the Servicer (net of the Servicer's expenses) is de minimis and if it would forego collection in accordance with its customary procedures. The Servicer is hereby authorized to commence, in its own name or in the name of the Borrower, a legal proceeding to enforce a Contract pursuant to Section 2.3 hereof or to commence or participate in any other legal proceeding (including, without limitation, a bankruptcy proceeding) relating to or involving a Contract, an Obligor or a Vehicle. If the Servicer commences or participates in such a legal proceeding in its own name, the Collateral Agent shall thereupon be deemed to have automatically assigned such Contract to the Servicer solely for purposes of commencing or participating in any such proceeding as a party or claimant, and the Servicer is authorized and empowered by the Borrower to execute and deliver in the Servicer's name any notices, demands, claims, complaints, responses, affidavits or other documents or instruments in connection with any such proceeding. Section 2.2 Collection of Contract Payments; Modification and Amendment of Contracts; Lockbox Agreements. (a) Consistent with the standards, policies and procedures required by this Agreement, the Servicer shall make reasonable efforts to collect all payments called for under the terms and provisions of the Contracts as and when the same shall become due, and shall follow such collection procedures as it follows with respect to all comparable automobile receivables that it services for itself or others and otherwise act with respect to the Contracts, the Dealer Assignments, the Insurance Policies and the other Collateral in such manner as will, in the reasonable judgment of the Servicer, maximize the amount to be received by the Borrower with respect thereto. The Servicer is authorized in its discretion to waive any prepayment charge, late payment charge or any other similar fees that may be collected in the ordinary course of servicing any Contract. (b)(i) The Servicer may at any time agree to a modification or amendment of a Contract in order to (x) change the Obligor's regular due date to a date within 30 days in which such due date occurs or (y) re-amortize the scheduled payments on the Contract following a partial prepayment of principal. (ii) The Servicer may grant payment extensions on, or other modifications or amendments to, a Contract (including those modifications permitted by Section 2.2(b) hereof) in accordance with its customary procedures attached hereto as Exhibit B if the Servicer believes in good faith that such extension, modification or amendment is necessary to avoid a default on such Contract, will maximize the amount to be received by the Borrower with respect to such Contract, and is otherwise in the best interests of the Borrower. Any Contract which is modified pursuant to this Section is referred to herein as a "Modified Contract." (c) The Servicer shall use its best efforts to cause Obligors to make all payments on the Contracts, whether by check or through the Automated Clearing House (ACH) system, to be made directly to one or more Lockbox Providers, acting as agent for the Lender pursuant to a Lockbox Agreement. 5 The Servicer shall use its best efforts to cause any Lockbox Provider to deposit all payments on the Contracts in the Lockbox Account on the Business Day of receipt, and to cause all amounts credited to the Lockbox Account on account of such payments to be transferred to the Collection Account, no later than the second Business Day after receipt of such payments. The Lockbox Account shall be the demand deposit account #0221688385 held by the Wells Fargo Bank in the name of the Servicer, or at the request of the Lender an Eligible Deposit Account satisfying clause (i) of the definition thereof. The Servicer has notified each Obligor with respect to the Contracts serviced by the Servicer on the Closing Date to make such payments thereafter directly to the Lockbox Provider. Notwithstanding any Lockbox Agreement, or any of the provisions of this Agreement relating to the Lockbox Agreement, the Servicer shall remain obligated and liable to the Borrower and the Lender for servicing and administering the Contracts and the other Collateral in accordance with the provisions of this Agreement without diminution of such obligation or liability by virtue thereof. In the event the Servicer shall for any reason no longer be acting as such, a successor Servicer shall thereupon assume all of the rights and, from the date of assumption, all of the obligations of the outgoing Servicer under the Lockbox Agreement. The successor Servicer shall not be liable for any acts, omissions or obligations of the Servicer prior to such succession. In such event, the successor Servicer shall be deemed to have assumed all of the outgoing Servicer's interest therein and to have replaced the outgoing Servicer as a party to each such Lockbox Agreement to the same extent as if such Lockbox Agreement had been assigned to the successor Servicer, except that the outgoing Servicer shall not thereby be relieved of any liability or obligations on the part of the outgoing Servicer to the Lockbox Provider under such Lockbox Agreement. The outgoing Servicer shall, upon request of the Borrower, but at the expense of the outgoing Servicer, deliver to the successor Servicer all documents and records relating to each such Agreement and an accounting of amounts collected and held by the Lockbox Provider and otherwise use its best efforts to effect the orderly and efficient transfer of any Lockbox Agreement to the successor Servicer. In the event that the Lender elects to change the identity of the Lockbox Provider, the Servicer, at its expense, shall cause the Lockbox Provider to deliver, at the direction of the Lender, to the Collateral Agent or a successor Lockbox Provider, all documents and records relating to the Contracts and all amounts held (or thereafter received) by the Lockbox Provider (together with an accounting of such amounts) and shall otherwise use its best efforts to effect the orderly and efficient transfer of the lockbox arrangements and the Servicer shall notify the Obligors to make payments to the Lockbox Account established by the successor. (d) The Servicer shall remit all payments by or on behalf of the Obligors received directly by the Servicer to the Lockbox Account, without deposit into any intervening account as soon as practicable, but in no event later than the Business Day after receipt thereof. Section 2.3 Realization Upon Contracts. (a) Consistent with the standards, policies and procedures required by this Agreement, the Program Administration Manual and the Servicing Procedures Manual, the Servicer shall use its best efforts to repossess (or otherwise comparably convert the ownership of) and liquidate any Vehicle securing a Contract with respect to which the Servicer has determined that payments thereunder are not likely to be resumed, as soon as is practicable after default on such Contract. 6 The Servicer is authorized to follow such customary practices and procedures as it shall deem necessary or advisable, consistent with the standard of care required by Section 2.1 hereof, which practices and procedures may include reasonable efforts to realize upon any recourse to Dealers, selling the related Vehicle at public or private sale, the submission of claims under an Insurance Policy and other actions by the Servicer in order to realize upon such a Contract. The foregoing is subject to the provision that in any case in which the Vehicle shall have suffered damage, the Servicer shall not expend funds in connection with any repair or towards the repossession of such Vehicle unless it shall determine in its discretion that such repair and/or repossession shall increase the proceeds of liquidation of the related Contract by an amount greater than the amount of such expenses. All amounts received upon liquidation of a Vehicle shall be remitted directly by the Servicer to the Lockbox Account without deposit into any intervening account as soon as practicable, but in no event later than the Business Day after receipt thereof. The Servicer shall be entitled to recover all reasonable expenses incurred by it in the course of repossessing and liquidating a Vehicle, which expenses shall be properly documented by the Servicer and reviewed by FC Consumer, but only out of the cash proceeds of such Vehicle, any deficiency obtained from the Obligor or any amounts received from the related Dealer, as set forth in Section 2.03(a)(iii) of the Paying Agent Agreement to the extent of such expenses. The Servicer shall recover such reasonable expenses based on the information contained in the Servicer's Certificate delivered on the related Determination Date. The Servicer shall pay on behalf of the Borrower any personal property taxes assessed on repossessed Vehicles; the Servicer shall be entitled to reimbursement of any such tax from Recoveries with respect to such Contract, as set forth in Section 2.03(a)(iii) of the Paying Agent Agreement. (b) If the Servicer elects to commence a legal proceeding to enforce a Dealer Assignment, the act of commencement shall be deemed to be an automatic assignment from the Collateral Agent to the Servicer of the rights under such Dealer Assignment for purposes of collection only. If, however, in any enforcement suit or legal proceeding, it is held that the Servicer may not enforce a Dealer Assignment on the grounds that it is not a real party in interest or a Person entitled to enforce the Dealer Assignment, the Collateral Agent, at the Borrower's expense, shall take such steps as the Servicer deems necessary to enforce the Dealer Assignment, including bringing suit in its name. All amounts recovered shall be remitted directly by the Servicer to the Lockbox Account without deposit into any intervening account as soon as practicable, but in no event later than the Business Day after receipt thereof. Section 2.4 Insurance. (a) The Servicer shall monitor the status of the Insurance Policies in accordance with its customary servicing procedures. If the Servicer shall determine that an Obligor has failed to obtain or maintain a physical loss and damage insurance policy covering the related Vehicle (including during the repossession of such Vehicle) the Servicer shall be diligent in carrying on its customary servicing procedures to enforce the rights of the holder of the Contract thereunder to ensure that the Obligor obtains such physical loss and damage insurance. (b) The Servicer may sue to enforce or collect upon the Insurance Policies, in its own name, if possible, or as agent of the Borrower. If the Servicer elects to commence a legal proceeding to enforce an Insurance Policy, the act of commencement shall be deemed to be an automatic assignment of the rights of the Borrower under such Insurance Policy to the Servicer for purposes of collection only. (c) The Premiums incurred by the Borrower in maintaining such Blanket Policy shall be paid by the Borrower as set forth in Section 2.03(a)(vi) of the Paying Agent Agreement. Section 2.5 Maintenance of Security Interests in Vehicles. 7 Section 2.5 Maintenance of Security Intersts in Vehicles. Consistent with the policies and procedures required by this Agreement, the Servicer shall take such steps as are necessary to maintain perfection of the security interest created by each Contract in the related Vehicle on behalf of the Borrower, including but not limited to obtaining the execution by the Obligors and the recording, registering, filing, re-recording, re-filing, and re-registering of all security agreements, financing statements and continuation statements as are necessary to maintain the security interest granted by the Obligors under the respective Contracts. The Lender hereby authorizes the Servicer, and the Servicer agrees, to take any and all steps necessary to re-perfect such security interest on behalf of the Borrower as necessary because of the relocation of a Vehicle or for any other reason. Section 2.6 Covenants, Representations and Warranties of Servicer. The Servicer hereby makes the following representations, warranties and covenants to the other parties hereto and the Lender on which the Collateral Agent shall rely in accepting the Contracts. (a) The Servicer covenants as follows: (i) Liens in Force. The Vehicle securing each Contract shall not be released in whole or in part from the security interest granted by the Contract, except upon payment in full of the Contract or as otherwise contemplated herein; (ii) No Impairment. The Servicer shall do nothing to impair the rights of the Borrower in the Contracts, the Dealer Assignments, the Insurance Policies or the other Collateral; (iii) No Amendments. The Servicer shall not extend or otherwise amend the terms of any Contract, except in accordance with Section 2.2 hereof; (iv) Servicing of Contracts. The Servicer shall service the Contracts as required by the terms of this Agreement and in material compliance with the current Servicing Procedures Manual for servicing all its other comparable motor vehicle receivables; (v) Credit Bureaus. The Servicer shall supply such customary payment history information to credit reporting bureaus on a monthly basis as is permissible under applicable law; (vi) Licenses and Approvals. The Servicer shall obtain and maintain all necessary licenses and approvals in all jurisdictions in which the ownership or lease of property or the conduct of its business (involving the servicing of the Contracts as required by this Agreement) requires; (vii) Possession of Collateral. The Servicer shall hold all Collateral items in its possession as custodian on behalf of the Lender; (viii) Delivery of Loan Documents. The Servicer, as requested by the Lender, shall deliver to the Lender any Lien Certificate, credit application, Contract, or other Collateral item which is in possession of the Servicer, within three Business Days of the Lender's request. To the extent that the Servicer does not so deliver any requested item with respect to any Contract by the opening of business on the fourth Business Day following such request, the Servicer shall deposit on the Lockbox Account an amount not less than 85% of such Contract's Outstanding Contract Balance; 8 (ix) Lien Certificates; Tracking. The Servicer shall track receipt of all Lien Certificates received by it, and shall report to FC Consumer and the Lender on each Determination Date all Lien Certificates received by it during the prior Collection Period, together with all Lien Certificates not yet received as of the end of the prior Collection Period, as well as the origination dates of the related Contracts; and (x) Borrowing Base Report. The Servicer shall send to the Collateral Agent a daily report by no later than 10 AM New York time containing the information necessary to calculate the Borrowing Base. (b) The Servicer represents and warrants to the other parties hereto as of the Closing Date as to itself: (i) Organization and Good Standing. The Servicer has been duly organized and is validly existing and in good standing under the laws of the State of California, with power, authority and legal right to own its properties and to conduct its business as such properties are currently owned and such business is currently conducted, and had at all relevant times, and now has, power, authority and legal right to enter into and perform its obligations under this Agreement; (ii) Due Qualification. The Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions as shall require such qualification; in which the ownership or lease of property or the conduct of its business (involving the servicing of the Contracts as required by this Agreement) requires; (iii) Power and Authority. The Servicer has the power and authority to execute and deliver this Agreement and to carry out its terms and their terms, and the execution, delivery and performance of this Agreement have been duly authorized by the Servicer by all necessary corporate action; (iv) Binding Obligation. This Agreement and the Servicer's Facility Agreements shall constitute legal, valid and binding obligations of the Servicer enforceable in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies, regardless of whether such enforceability is considered in a proceeding in equity or at law; (v) No Violation. The consummation of the transactions contemplated by this Agreement, and the fulfillment of the terms of this Agreement, shall not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of the Servicer, or any indenture, agreement, mortgage, deed of trust or other instrument to which the Servicer is a party or by which it is bound or any of its properties are subject, or result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement, mortgage, deed of trust or other instrument, other than this Agreement, or violate any law, order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or any of its properties, or in any way materially adversely affect the interest of the Borrower in any Contract, or affect the Servicer's ability to perform its obligations under this Agreement; 9 (vi) No Proceedings. There are no proceedings or investigations pending or, to the Servicer's knowledge, threatened against the Servicer, before any court, regulatory body, administrative agency or other tribunal or governmental instrumentality having jurisdiction over the Servicer or its properties (A) asserting the invalidity of this Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement, (C) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement, or (D) that could have a material adverse effect on the Contracts. (vii) Approvals. All approvals, authorizations, consents, orders or other actions of any person, corporation or other organization, or of any court, governmental agency or body or official, required in connection with the execution and delivery by the Servicer of this Agreement and the consummation of the transactions contemplated hereby have been or will be taken or obtained on prior to the Closing Date. (viii) No Consents. The Servicer is not required to obtain the consent of any other party or any consent, license, approval or authorization, or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity or enforceability of this Agreement; (ix) Year 2000 Compliance. Services provided under this Agreement are year 2000 compliant, will function and operate prior to, during and after the calendar year 2000 in accordance with their specifications and will provide the required output without experiencing abnormal ending dates and/or invalid or incorrect years and shall incorporate century recognition date data, calculations that use same century and multi-century formulas and date values that reflect the correct century in all transactions. Without limiting the generality of the foregoing, the Servicer further represents and warrants that the services provided under this Agreement will process, manage and manipulate data involving dates, including single century and multi-century formulas, and will not cause an abnormally ending scenario within the application or generate incorrect values or invalid results involving such dates; provide that all date-related user interface functionalities and data fields include the indication of century; and provide that all date-related data interface functionalities include the indication of century. Notwithstanding any limitation on the Servicer's liability contained elsewhere herein, the Servicer shall indemnify and hold harmless the Lender, its subsidiaries and affiliates, and its and their directors, officers, employees and agents from all costs, loss, damage and expense arising from any breach of this warranty. (x) Chief Executive Office. The chief executive office of the Servicer is located at 14101 Myford Road, Tustin, California 92680. Section 2.7 Indemnification. The Servicer shall indemnify the Lender, the Collateral Agent and the Borrower against all costs, expenses, losses, damages, claims and 10 liabilities, including reasonable fees and expense; of counsel, which may be asserted against or incurred by any of them as a result of third party claims arising out of the events or facts giving rise to a breach of the covenants or representations and warranties set forth in Section 2.5 or 2.6 hereof. Section 2.8 Servicing Fee; Payment of Certain Expenses by Servicer. (a) On each Distribution Date, the Servicer shall be entitled to receive out of the Collection Account the Basic Servicing Fee for the related Collection Period pursuant to the Paying Agent Agreement. The Servicer may retain any Supplemental Servicing Fee, or may receive such amounts from the Collection Account payable pursuant to the Paying Agent Agreement. (b) The Servicer shall be required to pay all expenses incurred by it in connection with its activities under this Agreement. The Servicer shall be liable for the fees and expenses of the Lockbox Provider (and any fees under the Lockbox Agreement) and the Independent Accountants. Section 2.9 Servicer's Certificate. (a) No later than 10:00 a.m. Eastern time on each Determination Date, the Servicer shall deliver to the Collateral Agent, FC Consumer and the Lender a Servicer's Certificate executed by a Responsible Officer of the Servicer substantially in the form of Exhibit A hereto, which shall, among other things, state that (i) a review of the activities of the Servicer during the preceding period (or such other period as shall have elapsed from the Closing Date to the date of the first such certificate) and of its performance under this Agreement has been made, under such officer's supervision, and (ii) to such officer's knowledge, based on such review, the Servicer has fulfilled all its obligations under this Agreement throughout such period, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof. (b) The Servicer shall deliver to the Borrower, the Collateral Agent and the Lender, promptly after having obtained knowledge thereof, but in no event later than two Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become a Servicer Termination Event under Section 4.1 hereof. (c) On each Business Day, the Servicer shall deliver to the Collateral Agent, by no later than 10:00 a.m. Eastern time, the Servicer's Daily Report in the form set forth as Exhibit C hereto. Section 2.10 Annual Independent Accountants' Report. Section 2.10 Annual Independent Accountants' Report. (a) The Servicer shall deliver to the Lender, the Borrower and the Collateral Agent, on or before April 30th of each year beginning in the year 1998, an Officer's Certificate, dated as of the preceding December 31st, stating that (i) a review of the activities of the Servicer during the preceding 12-month period and of its performance under this Agreement has been made under such officer's supervision and (ii) to the best of such officer's knowledge, based on such review, the Servicer has fulfilled all its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof. (b) The Servicer will deliver to the Lender, the Borrower and the Collateral Agent, on or before April 30th of each year beginning in the year 1999, a copy of a report prepared by a firm of nationally recognized independent public accountants (the "Independent Accountants"), who may also render other 11 services to the Servicer or any of its Affiliates or to the Seller addressed to the Board of Directors of the Servicer or any of its Affiliates, the Lender and the Collateral Agent and dated during the current year, to the effect that such firm has examined the Servicer's policies and procedures and issued its report thereon and expressing a summary of findings (based on certain procedures performed on the documents, records and accounting records that such accountants considered appropriate under the circumstances) relating to the servicing of its portfolio of contracts during the preceding calendar year and that such servicing and administration was conducted in compliance with the terms of this Agreement, except for (i) such exceptions as such firm shall believe to be immaterial and (ii) such other exceptions as shall be set forth in such report and that such examination (1) was performed in accordance with standards established by the American Institute of Certified Public Accountants, and (2) included necessary procedures related to automotive loans serviced for others in accordance with the Uniform Single Attestation Program. Such report shall also indicate that the firm is independent of the Servicer and its Affiliates within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. Section 2.11 Access to Certain Documentation and Information Regarding Contracts. The Servicer shall provide to representatives of the Borrower, the Lender and the Collateral Agent reasonable access to the documentation regarding the Contracts. Each of the Borrower and the Servicer will permit any authorized representative or agent designated by the Lender to visit and inspect any of the properties of the Borrower or the Servicer, as the case may be, to examine the corporate books and financial records of the Borrower or Servicer, as the case may be, its records relating to the Contracts, and make copies thereof or extracts therefrom and to discuss the affairs, finances, and accounts of the Borrower or Servicer, as the case may be, with its principal officers, as applicable, and its independent accountants. Any expense incidental to the exercise by the Lender of any right under this Section 2.11 shall be borne by the Servicer. Such access shall be afforded without charge but only upon reasonable request and during normal business hours. Nothing in this Section 2.11 shall derogate from the obligation of the Servicer to observe any applicable law prohibiting disclosure of information regarding the Obligors, and the failure of the Servicer to provide access as provided in this Section 2.11 as a result of such obligation shall not constitute a breach of this Section 2.11. Section 2.12 Provision of Information. On the first Business Day of each month, the Servicer will deliver to the Lender a computer tape or a diskette (or any other electronic transmission acceptable to the Lender) in a format reasonably acceptable to the Lender containing the Collection Records with respect to the Contracts as of the last Business Day of the prior month. Section 2.13 Fidelity Bond. The Servicer shall maintain a fidelity bond in such form and amount as is customary in the industry for entities acting as servicers of consumer contracts on behalf of institutional investors, which amount shall provide coverage of not less than $4,000,000 in the aggregate and single-occurrence coverage of $2,000,000. ARTICLE III LIABILITY AND INDEMNITIES Section 3.1 Liability of Servicer; Indemnities. (a) The Servicer shall be liable hereunder only to the extent of the obligations in this Agreement specifically undertaken by the Servicer and the representations made by the Servicer. 12 (b) The Servicer shall defend, indemnify and hold harmless the Borrower, the Collateral Agent, FC Consumer, the Lender and their respective officers, directors, agents and employees from and against any and all costs, expenses losses, damages, claims and liabilities, including reasonable fees and expenses of counsel and expenses of litigation arising out of or resulting from the use, ownership or operation by the Servicer or any Affiliate thereof of any Vehicle; (c) The Servicer shall indemnify, defend and hold harmless the Borrower, the Lender, FC Consumer, and the Collateral Agent, their respective officers, directors, agents and employees from and against any and all costs, expenses, losses, claims, damages, and liabilities to the extent that such cost, expense, loss, claim, damage, or liability arose out of, or was imposed upon such indemnified party through the breach of this Agreement, the negligence, willful misfeasance, or bad faith of the Servicer in the performance of its duties under this Agreement or by reason of reckless disregard of its obligations and duties under this Agreement; (d) For purposes of this Section 3.1, in the event of the termination of the rights and obligations of the Servicer (or any successor thereto pursuant to Section 3.2 hereof) as Servicer pursuant to Section 4.1 hereof, or a resignation by such Servicer pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer pursuant to Section 4.3 hereof. The provisions of this Section 3.1(d) shall in no way affect the survival pursuant to Section 3.1(e) hereof of the indemnification by the Servicer provided by Sections 3.1(a) and 3.1(b) hereof; and (e) Indemnification under this Article shall survive the termination of this Agreement and shall include reasonable fees and expenses of counsel and expenses of litigation. If the Servicer shall have made any indemnity payments pursuant to this Article and the recipient thereafter collects any of such amounts from others, the recipient shall promptly repay such amounts collected to the Servicer, without interest. Notwithstanding any other provision of this Agreement, the obligations of the Servicer described in this Section shall not terminate or be deemed released upon the resignation or termination of FirstCity Servicing Corporation of California as the Servicer and shall survive any termination of this Agreement. Section 3.2 Merger or Consolidation of, or Assumption of the Obligations of, the Servicer. Section 3.2 Merger or Consolidation of, or Assumption of the Obligations of, the Servicer The Servicer shall not merge or consolidate with any other Person, convey, transfer or lease substantially all its assets as an entirety to another Person, or permit any other Person to become the successor to the Servicer's business unless, after the merger, consolidation, conveyance, transfer, lease or succession, the successor or surviving entity shall be an Eligible Servicer and shall be capable of fulfilling the duties of the Servicer contained in this Agreement. Any Person (i) into which the Servicer may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Servicer shall be a party, (iii) which acquires by conveyance, transfer, or lease substantially all of the assets of the Servicer, or (iv) succeeding to the business of the Servicer, in any of the foregoing cases shall execute an agreement of assumption to perform every obligation of the Servicer under this Agreement and, whether or not such assumption agreement is executed, shall be the successor to the Servicer under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement, anything in this Agreement to the contrary notwithstanding; provided, however, that nothing contained herein shall be deemed to release the Servicer from any obligation. The Servicer shall provide notice of any merger, consolidation or succession pursuant to this Section 3.2(a) to the Borrower, FC Consumer, the Lender and the Collateral Agent. Notwithstanding the foregoing, as 13 a condition to the consummation of the transactions referred to in clauses (i), (ii), (iii) and (iv) above, (x) immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 2.6 hereof shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction), (y) the Servicer shall have delivered to the Borrower, the Collateral Agent, FC Consumer and the Lender an Officer's Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section 3.2(a) and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, and (z) the Servicer shall have delivered an opinion of counsel to the Borrower, the Collateral Agent, FC Consumer, and the Lender, stating, in the opinion of such counsel, either (A) all financing statements and continuation statements and amendments thereto have been executed and filed that are necessary to preserve and protect the interest of the Collateral Agent in the Collateral and reciting the details of the filings or (B) no such action shall be necessary to preserve and protect such interest. Section 3.3 Limitation on Liability of Servicer and Others. Neither the Servicer, nor any of the directors or officers or employees or agents of the Servicer shall be under any liability to the Borrower, the Lender or FC Consumer, except as provided in this Agreement, for any action taken or for refraining from the taking of any action pursuant to this Agreement; provided, however, that this provision shall not protect the Servicer, or any such person against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence (excluding errors in judgment) in the performance of duties (including negligence with respect to the Servicer' s indemnification obligations hereunder), by reason of reckless disregard of obligations and duties under this Agreement or any violation of law by the Servicer, or such person, as the case may be; further provided, that this provision shall not affect any liability to indemnify the Collateral Agent for costs, taxes, expenses, claims, liabilities, losses or damages paid by the Collateral Agent in its individual capacity. The Servicer, and any director, officer, employee or agent of the Servicer may rely in good faith on the advice of counsel or on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising under this Agreement. Section 3.4 Delegation of Duties. So long as FirstCity Servicing Corporation of California is the Servicer, the Servicer may delegate duties under this Agreement to an Affiliate of FirstCity Servicing Corporation of California with the prior written consent of the FC Consumer, the Lender and the Borrower. The Servicer also may at any time perform the specific duty of repossession of Vehicles through sub-contractors who are in the business of repossessing vehicles which secure automotive receivables, and may perform other specific duties through such sub-contractors with the prior written consent of the Lender, provided, however, that no such delegation or subcontracting duties by the Servicer shall relieve the Servicer of its responsibility with respect to such duties. Section 3.5 Servicer Not to Resign. (a) Subject to the provisions of Section 3.2 hereof, the Servicer shall not resign from the obligations and duties imposed on it by this Agreement as Servicer except with the prior written consent of the Lender. No resignation of the Servicer shall become effective until an entity acceptable to the Lender shall have assumed the responsibilities and obligations of the Servicer. (b) The Borrower may, with the prior written consent of the Lender upon 45 days' notice to the Servicer, terminate the Servicer as Servicer hereunder without cause. 14 ARTICLE IV SERVICER TERMINATION EVENTS Section 4.1 Servicer Termination Event. For purposes of this Agreement, each of the following shall constitute a "Servicer Termination Event": (a) Any failure by the Servicer to deliver to the Lockbox or to the Collateral Agent for distribution any proceeds or payment required to be so delivered under the terms hereof that continues unremedied for a period of two Business Days after written notice is received by the Servicer or after discover of such failure by a Responsible Officer of the Servicer; (b) Failure by the Servicer (i) to deliver the Servicer's Certificate required by Section 2.9 hereof within five (5) days after the date such certificate is required to be delivered; (c) Failure on the part of the Servicer to observe its covenants any agreements set forth in Section 3.2(a) hereof; (d) Failure on the part of the Servicer duly to observe or perform in any material respect any other covenants or agreements of the Servicer which failure continues unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been give to the Servicer by the Collateral Agent or the Lender; (e) The entry of a decree or order for relief by a court or regulatory authority having jurisdiction in respect of the Servicer in an involuntary case under the federal bankruptcy laws, as now or hereafter in effect, or another present or future, federal or state, bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Servicer or of any substantial part of their respective properties or ordering the winding up or liquidation of the affairs of the Servicer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the commencement of an involuntary case under the federal bankruptcy laws, as now or hereinafter in effect, or another present or future federal or state bankruptcy, insolvency or similar law and such case is not dismissed within 60 days; or (f) The commencement by the Servicer of a voluntary case under the federal bankruptcy laws, as now or hereafter in effect, or any other present or future, federal or state, bankruptcy, insolvency or similar law, or the consent by the Servicer to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Servicer or of any substantial part of its property or the making by the Servicer of an assignment for the benefit of creditors or the failure by the Servicer generally to pay its debts as such debts become due or the taking of corporate action by the Servicer in furtherance of any of the foregoing; (g) Any representation, warranty or statement of the Servicer made in this Agreement or any certificate, report or other writing delivered pursuant hereto shall prove to be incorrect in any material respect as of the time when the same shall have been made, and the incorrectness of such representation, warranty or statement has a material adverse effect on the Borrower or the Lender and, within 30 days after written notice thereof shall have been given to the Servicer by the Lender, the circumstances or condition in respect of which such representation, warranty or statement was incorrect shall not have been eliminated or otherwise cured; 15 (h) A material adverse change from the date hereof in the business, properties, operations, prospects or financial or other condition of the Servicer, as determined by Lender in its reasonable, good faith business judgment; or (i) The occurrence of an "Event of Default" under the Credit Agreement which is not waived by the Lender. Section 4.2 Consequences of a Servicer Termination Event. Section 4.2 Consequences of a Servicer Termination Event. If a Servicer Termination Event shall occur and be continuing, the Lender shall thereafter have the right to direct all activities of the Servicer with respect to the Collateral, including the right to direct the Servicer to deliver any portion of the Collateral then held by the Servicer to the location designated by the Lender; in addition, by notice given in writing to the Servicer may terminate all of the rights and obligations of the Servicer under this Agreement. On or after the receipt by the Servicer of such written notice, all authority, power, obligations and responsibilities of the Servicer under this Agreement automatically shall pass to, be vested in and become obligations and responsibilities of the successor Servicer selected by the Lender pursuant to Section 4.3 hereof. Section 4.3 Appointment of Successor. (a) On and after (i) the time the Servicer receives a notice of termination pursuant to Section 4.2 hereof or (ii) upon the resignation of the Servicer pursuant to Section 3.5, hereof the successor Servicer shall be the successor in all respects to the Servicer in its capacity as servicer under this Agreement and the transactions set forth or provided for in this Agreement, and shall be subject to all the responsibilities, restrictions, duties, liabilities and termination provisions relating thereto placed on the Servicer by the terms and provisions of this Agreement; provided, however, that the successor Servicer (i) shall not be liable for any acts, omissions or obligations of the Servicer prior to such succession or for any breach by the Servicer or any of its representations and warranties contained in this Agreement or in any related document or agreement and (ii) shall have no duty or obligation with respect to the Servicer's obligations set forth in Section 2.8(b) hereof. The successor Servicer is authorized and empowered by this Agreement to execute and deliver, on behalf of the prior Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement of the Contracts and the other Collateral and related documents to show the Collateral Agent as lienholder or secured party on the related Lien Certificates, or otherwise. The prior Servicer agrees to cooperate with the successor Servicer in effecting the termination of the responsibilities and rights of the prior Servicer under this Agreement, including, without limitation, the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the prior Servicer for deposit, or have been deposited by the prior Servicer, in the Collection Account or thereafter received with respect to the Contracts and the delivery to the successor Servicer of all Contract Files, Servicing Records and Collection Records and a computer tape in readable form containing all information necessary to enable the successor Servicer or a successor Servicer to service the Contracts and the other Collateral. If requested by the Lender, the successor Servicer or successor Servicer shall terminate the Lockbox Agreement and direct the Obligors to make all payments under the Contracts directly to the successor Servicer (in which event the successor Servicer shall process such payments in accordance with Section 2.2(e) hereof), or to a lockbox established by the successor Servicer at the direction of the Lender, at the prior Servicer's expense. The successor Servicer may set off and deduct any amounts owed by the terminated Servicer from any amounts payable to the terminated Servicer pursuant to the preceding sentence. The terminated Servicer shall grant the Collateral Agent, the successor Servicer and the Lender reasonable access to the terminated Servicer's premises at the terminated 16 Servicer's expense. If a successor Servicer is acting as Servicer hereunder, it shall be subject to termination under Section 4.2 hereof upon the occurrence of any Servicer Termination Event applicable to it as Servicer. (b)Any successor Servicer shall be entitled to such compensation (whether payable out of the Collection Account or otherwise) as the Servicer would have been entitled to under the Agreement if the Servicer had not resigned or been terminated hereunder. If any successor Servicer is appointed for any reason, the Lender and such successor Servicer may agree on additional compensation to be paid to such successor Servicer, which additional compensation shall be payable out of funds on deposit in the Collection Account. In addition, any successor Servicer shall be entitled, out of funds in the Collection Account, to reasonable transition expenses incurred in acting as successor Servicer. Section 4.4 Waiver of Past Defaults. The Lender may waive any default by the Servicer in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Termination Event arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon. ARTICLE V MISCELLANEOUS PROVISIONS Section 5.1 Amendment. This Agreement may be amended from time to time by the parties hereto only by a written instrument executed by all such parties and consented to by the Lender. Section 5.2 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the principles of conflicts of laws thereof and the obligations, rights and remedies of the parties under this Agreement shall be determined in accordance with such laws. Section 5.3 Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 5.4 Assignment. Notwithstanding anything to the contrary contained in this Agreement, except as provided in Section 3.2 hereof and as provided in the provisions of the Agreement concerning the resignation of the Servicer, this Agreement may not be assigned by any party hereto without the prior written consent of the other parties hereto. Section 5.5 Waiver. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: (i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH 17 IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO IT AT THE RESPECTIVE ADDRESS SET FORTH IN SECTION 5.7 HEREOF OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION: (v) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVED IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL, DAMAGES; AND (vi) EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS SERVICING AGREEMENT OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. Section 5.6 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and all of which counterparts shall constitute but one and the same instrument. Section 5.7 Notices. All demands, notices and communications under this Agreement shall be in writing, personally delivered or mailed by certified mail-return receipt requested, and shall be deemed to have been duly given upon receipt (a) in the case of the Servicer, the Borrower or FC Consumer, at the following address: Box 8216, 6400 Imperial Drive, Waco, Texas 76714-8216, (b) in the case of the Collateral Agent, at the following address: Chase Bank of Texas, National Association, 2200 Ross Avenue, 5th Floor, Dallas, Texas 75201, Attention: Mike Scrivner, FirstCity Auto Receivables L.L.C., fax 214-965-3577, and (c) in the case of the Lender, at the following address: ContiTrade Services L.L.C., 277 Park Avenue, New York, New York 10172, phone 212-207-2822, fax 212-207-2935, Attention: Chief Counsel, or at such other address as shall be designated by any such party in a written notice to the other parties. 18 Section 5.8 Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and assigns, and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns permitted hereunder. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Borrower, the Servicer, FC Consumer, the Lender and the Collateral Agent and their respective permitted successors and assigns, if any. IN WITNESS WHEREOF, the Borrower, the Servicer, FC Consumer and the Lender have caused this Servicing Agreement to be duly executed by their respective officers, effective as of the day and year first above written. FIRSTCITY AUTO RECEIVABLES L.L.C. By -------------------------------------------- Name: Title: FIRSTCITY SERVICING CORPORATION OF CALIFORNIA By -------------------------------------------- Name: Title: FIRSTCITY CONSUMER LENDING CORPORATION By -------------------------------------------- Name: Title: CONTITRADE SERVICES L.L.C. By -------------------------------------------- Name: Title: By -------------------------------------------- Name: Title: 20 EXHIBIT A --------- FORM OF SERVICER'S CERTIFICATE ------------------------------ FIRSTCITY SERVICING CORPORATION OF CALIFORNIA --------------------------------------------- Monthly Servicing Report: FirstCity Auto Receivables L.L.C. Collection Period Ending: dd/mm/yy 21 EXHIBIT B --------- FORM OF SERVICER'S DAILY REPORT ------------------------------- FIRSTCITY SERVICING CORPORATION OF CALIFORNIA --------------------------------------------- Daily Report: FirstCity Auto Receivables L.L.C. Date: dd/mm/yy Aggregate Contract Balance (Gross) $----------------- Less Defaulted Contracts ($ ) ----------------- Less Liquidated Contracts ($ ) ----------------- Equals Aggregate Contract Balance $----------------- Aggregate Contract Balance of Contracts that lack a certificate of title within 121 days o $----------------- origination 22 EX-10 5 EXECUTED COPY ------------- SECURITY AND COLLATERAL AGENT AGREEMENT among FIRSTCITY AUTO RECEIVABLES L.L.C. (as Borrower) CONTITRADE SERVICES L.L.C. (as Lender) and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (as Collateral Agent) ------------------------- Dated as of April 30, 1998 ------------------------- TABLE OF CONTENTS Page SECTION 1. DEFINED TERMS................................................1 SECTION 2. SECURITY INTERESTS...........................................2 SECTION 3. CERTAIN RIGHTS OF LENDER WITH RESPECT TO COLLATERAL..........3 SECTION 4. REMEDIES UPON THE OCCURRENCE OF AN EVENT OF DEFAULT..........4 SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS....................5 SECTION 6. [RESERVED]...................................................6 SECTION 7. THE COLLATERAL AGENT.........................................6 7.01. APPOINTMENT..................................................6 7.02. EXCULPATORY PROVISIONS.......................................7 7.03. RELIANCE BY COLLATERAL AGENT.................................7 7.04. NOTICE OF DEFAULT............................................7 7.05. NON-RELIANCE ON COLLATERAL AGENT.............................8 7.06. SUCCESSOR COLLATERAL AGENT...................................8 7.07. DELIVERY OF COLLATERAL AND PERMITTED INVESTMENTS.............9 7.08. DUTIES AND COVENANTS OF COLLATERAL AGENT.....................9 SECTION 8. AMENDMENTS AND WAIVERS......................................10 SECTION 9. NOTICES.....................................................11 SECTION 10. LIMITATION ON COLLATERAL AGENT'S DUTY IN RESPECT OF COLLATERAL...............................................12 SECTION 11. SEVERABILITY................................................12 SECTION 12. NO WAIVER; CUMULATIVE REMEDIES..............................12 SECTION 13. PAYMENT OF EXPENSES AND TAXES...............................12 SECTION 14. SUCCESSORS AND ASSIGNS; GOVERNING LAW; WAIVERS..............14 i SECTION 15. ENFORCEMENT RIGHTS OF LENDER................................15 SECTION 16. BANKRUPTCY PETITION AGAINST THE BORROWER....................15 SECTION 17. MISAPPLICATION OF FUNDS.....................................15 SECTION 18. COUNTERPART SIGNATURES......................................15 SECTION 19. THIRD PARTY BENEFICIARY.....................................16 SECTION 20. STATUS OF COLLATERAL AGENT..................................16 SECTION 21. ACTS OF LENDER..............................................16 EXHIBIT A -- Form of Trust Receipt EXHIBIT B -- Form of Power of Attorney ii SECURITY AND COLLATERAL AGENT AGREEMENT SECURITY AND COLLATERAL AGENT AGREEMENT, dated as of April 30, 1998, made by and among FIRSTCITY AUTO RECEIVABLES L.L.C., a Delaware limited liability company (the "Borrower"), CONTITRADE SERVICES, L.L.C., a Delaware Limited Liability Company (the "Lender") and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION ("CBT"), as collateral agent (in such capacity, the "Collateral Agent"). W I T N E S S E T H WHEREAS, the Borrower has entered into a Warehouse Credit Agreement dated as of April 30, 1998 (as may from time to time, be amended, supplemented, or modified, the "Credit Agreement" with the Lender, the Borrower, FirstCity Consumer Lending Corporation ("FC Consumer") and FirstCity Financial Corporation ("FirstCity Financial"), pursuant to which the Borrower will take out loans (the "Loans") from time to time; WHEREAS, the Borrower intends to purchase Contracts from FirstCity Funding Corporation, FirstCity Consumer Finance Corporation, and N.A.F. Auto Loan Trust; WHEREAS, it is a condition to the obligations of the Lender to make the Facility available to the Borrower that this Security and Collateral Agent Agreement be executed and delivered. NOW, THEREFORE, to induce the Lender to make the Facility available to the Borrower the parties hereto hereby agree as follows: SECTION 1. DEFINED TERMS. (a) The terms "inventory", "goods", "accounts", "contract rights", "chattel paper", "general intangibles", and "documents" have the respective meanings ascribed in the UCC. (b) Capitalized terms used herein undefined shall, unless otherwise defined herein, have the respective meanings ascribed in the Credit Agreement, including the "Definitions List" attached as Exhibit A thereto; and the following terms shall have the following meanings: "Assignment" shall mean an assignment executed pursuant to the Master Purchase Agreement. "Collateral" shall have the meaning assigned to such term in Section 2 hereof. "Collateral Agent Fee" shall have the meaning set forth in a separate letter agreement between Borrower and the Collateral Agent. "Contract Acquisition Disbursement Request" shall mean the disbursement request made from time to time pursuant to Section 2.03(a)(i) of the Paying Agent Agreement. "Master Purchase Agreement" shall mean the Master Purchase Agreement dated as of April 30, 1998 by and among the Borrower, FirstCity Consumer Finance Corporation, FirstCity Funding Corporation, N.A.F. Auto Loan Trust, and National Auto Funding Corporation. "Proceeds" shall have the meaning assigned such term under the UCC of the State of New York, and of each other jurisdiction whose law governs the grant or perfection of the Collateral Agent's interest in the particular proceeds of the Collateral and shall also include (to the extent not already included): (i) any and all proceeds of any insurance, indemnity, warranty, guaranty or letter of credit payable to the Borrower from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or rights to amounts payable to the Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority), (iii) any and all other amounts, products, rents or profits from time to time paid or payable under or in connection with the Collateral and (iv) all additions to or substitutions or replacements for any of the Collateral. "Responsible Officer" shall mean, when used with respect to the Collateral Agent, any officer within the corporate trust department in Dallas, Texas (or any successor thereof) including any vice president, assistant vice president, or any officer or assistant officer of the Collateral Agent customarily performing functions similar to those performed by any of the above-designated officers. SECTION 2. SECURITY INTERESTS. (a) As security for the prompt, complete and unconditional payment and performance of all Obligations of the Borrower, the Borrower hereby pledges, assigns, transfers and delivers (except that certificates of title are not being delivered to the Collateral Agent and the stated lienholder thereon shall be any of FirstCity Consumer Finance, FirstCity Funding or either of the N.A.F. Entities) to the Collateral Agent for the benefit of the Lender, and grants to the Collateral Agent for the benefit of the Lender, a continuing first lien on, and first and prior security interest in, all of the Borrower's assets and properties, real, personal and mixed, tangible and intangible, of any kind or description, whether now owned or at any time hereafter acquired, whether now existing or hereafter acquired, and wherever located (collectively, the "Collateral") including, without limitation all estate, right, title and interest in, to and under: (i) all inventory, goods, accounts, contract rights, chattel paper, instruments, general intangibles and documents; (ii) each Contract, including without limitation, all rights to payments thereunder, purchased by or otherwise conveyed to or established by the Borrower; 2 (iii) each Vehicle and all other property, now or hereafter acquired, securing or evidenced by, each Contract including, without limitation, the certificate of title relating to each Vehicle, any insurance proceeds with respect to any Vehicle or Contract, the proceeds of any repossession and liquidation of a Vehicle, rights under judgments with respect to defaulted obligors, right to deficiency judgments with respect to defaulted obligors and rights under any service contracts with respect to any Vehicle; (iv) all bank and trust accounts (including, without limitation, the Lockbox Account and the Collection Account) and all moneys, checks, instruments, documents, securities, investments, deposits and other credits (whether or not permitted by the Facility Agreements) credited to the Collection Account, or otherwise held by the Collateral Agent; (v) the certificates of title relating to the Contracts, credit applications, payment history records, and other origination and servicing records relating to the Contracts; (vi) all securities and other investments held at any time by the Borrower including any and all subordinate certificates (including any "interest only" certificates and the rights to any other distributions from any securitization) received by the Borrower or any Affiliate of the Borrower from any securitization, together with appropriate bond powers, duly executed (the "Subordinate Certificates"); (vii) each Facility Agreement; and (viii) all Proceeds of any of the foregoing. (b) All rights of the Collateral Agent and the Lender and all liens and security interests granted hereunder, shall be absolute, unconditional and irrevocable unless and until released pursuant to the Facility Agreements, irrespective of any condition or circumstance whatsoever. (c) The grant of the security interest to the Collateral Agent pursuant to this Section 2 shall not: (i) relieve the Borrower from the performance of any term, covenant, condition or agreement on the Borrower's part to be performed or observed under or in connection with the Collateral, (ii) impose any obligation on the Collateral Agent or the Lender to perform or observe any such term, covenant, condition or agreement on the Borrower's part to be so performed or observed, or (iii) impose any liability on the Collateral Agent or the Lender for any act or omission on the part of the Borrower, or any Person acting as agent for or on behalf of the Borrower, relative to or for any breach of any representation or warranty on the part of the Borrower in connection with the Collateral. SECTION 3. CERTAIN RIGHTS OF LENDER WITH RESPECT TO COLLATERAL. Upon the occurrence and during the continuance of an Event of Default, the Borrower hereby irrevocably authorizes the Collateral Agent to execute and deliver, as the attorney-in-fact of the Borrower, any consent, waiver or amendment which, under the terms of any Facility Agreement, is or may 3 be executed and delivered by the Borrower with respect to the Collateral, subject to the provisions of the Facility Agreements; provided, however, that the Collateral Agent shall have no duty or obligation to execute and deliver any such consent, waiver or amendment unless directed in writing to take the actions specified therein by the Lender; and provided, further, that the Collateral Agent shall not be required to take any action which the Collateral Agent reasonably believes may be contrary to applicable law or which would expose the Collateral Agent to financial liability if the Collateral Agent has reasonable grounds to believe that repayment of such financial liability is not reasonably assured to it. The Borrower hereby agrees to remit to the Collateral Agent for deposit in accordance with this Agreement any and all Proceeds of any Collateral received by the Borrower (other than money paid to the Borrower by the Collateral Agent in accordance with the Facility Agreements). SECTION 4. REMEDIES UPON THE OCCURRENCE OF AN EVENT OF DEFAULT. (a) (i) If at any time an Event of Default shall have occurred and be continuing, the Collateral Agent shall, if directed in writing by the Lender, without demand of performance or other demand, advertisement or notice of any kind (except for any notice of the time and place of public or private sale required by law) to or upon the Borrower or any other Person (all of which demands, advertisements and/or notices are hereby expressly waived), and in its own name or in the name of the Lender, forthwith demand, collect, receive, sue for, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, grant an option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any location or locations at the option of the Collateral Agent acting upon any instructions received from the Lender, all upon such terms and conditions and at such prices as the Lender may deem advisable, for cash or on credit or for future delivery without assumption of any credit risk, with the right of the Collateral Agent or the Lender upon any such public sale or sales to purchase the whole or any part of said Collateral so sold, free of any right of redemption in the Borrower, which right is hereby expressly waived and released. At the instruction of the Lender, the Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. (ii) If at any time an Event of Default shall have occurred and be continuing and the Lender has given written notice to the Collateral Agent as to the disposition of the Collateral or as to the exercise of remedies against the Collateral, the Collateral Agent hereby agrees to follow such direction; provided, however, no provision of this Agreement shall require the Collateral Agent to take any action which it or its counsel deems to be unlawful nor shall the Collateral Agent be obligated to expend or risk its own funds or otherwise incur any financial liability in the performance of any rights, powers or duties hereunder, if the Collateral Agent shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Until all Obligations have been repaid and satisfied in full, the Collateral Agent shall be obligated, subject to the foregoing proviso, to take direction only from the Lender as to, upon the occurrence and during the continuance of an Event of Default, the disposition of the Collateral, or the exercise of remedies against the Collateral. 4 (iii) If an Event of Default shall have occurred and be continuing, then the Collateral Agent shall, if directed by the Lender, at any time thereafter, without demand of performance or other demand, succeed to the Borrower's rights and privileges with respect to each Facility Agreement. (iv) If an Event of Default shall have occurred and be continuing, the Collateral Agent shall, if directed by the Lender, at the expense of the Borrower or the Lender, cause the Subordinate Certificates to be re-registered in the name of the Lender (which Subordinate Certificates will in turn be re-registered to the appropriate FirstCity Entity, at its expense, when and if all Obligations have been repaid and satisfied in full). (b) If any notification of a proposed disposition of the Collateral is required by law, such notification shall be deemed reasonably and properly given if made in any manner provided in Section 9 hereof at least ten days before such disposition. (c) In addition to the rights, powers and remedies granted to it in this Security and Collateral Agent Agreement and in any other instrument or agreement securing, evidencing or relating to the Loans, the Collateral Agent shall have all of the rights, powers and remedies now or hereafter permitted in law or equity, including, without limitation, those of a secured party under the UCC of the State of New York and any other applicable jurisdiction. SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Borrower represents, warrants and agrees that: (a) No security agreement, financing statement, equivalent security or lien instrument or continuation statement listing the Borrower as debtor covering all or any part of the Collateral is on file or of record in any jurisdiction, except such as may have been filed, for the benefit of the Lender recorded or made by the Borrower in favor of the Collateral Agent pursuant to this Security and Collateral Agent Agreement or the Credit Agreement. (b) This Security and Collateral Agent Agreement is effective to create a valid and continuing Lien on the Collateral in favor of the Collateral Agent for the benefit of the Lender, which Lien is prior to all other Liens, and is enforceable as such as against creditors of and purchasers from the Borrower. All action necessary or desirable to protect and perfect such security interest has been duly taken. (c) The Borrower's chief executive office is at Box 8216, 6400 Imperial Drive, Waco, Texas, 76714-8216. The Borrower will not change its name and will not change its principal place of business or chief executive office unless the Borrower shall have given the Collateral Agent at least thirty (30) days prior written notice thereof and shall have taken all action necessary to assure continuous perfection of the security interest held by the Collateral Agent in the Collateral as evidenced by an opinion of counsel addressed to the Collateral Agent and the Lender to the effect that the lien and security interest created by this Security and Collateral Agent Agreement with respect to such Collateral will continue to be maintained, and that the priority thereof will not be affected, after giving effect to such action or actions. 5 (d) At any time and from time to time, and at the sole expense of the Borrower, the Borrower will promptly and duly execute and deliver any and all such further instruments and documents and take such further action as the Lender may reasonably deem desirable in obtaining the full benefits of this Security and Collateral Agent Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the liens and security interests granted hereby. The Borrower also hereby authorizes the Collateral Agent to file any such financing or continuation statement that requires the signature of the Borrower to the extent permitted by applicable law; provided, however, that such authorization shall not be deemed to create a duty in the Collateral Agent to monitor the compliance of the Borrower with the foregoing covenants and provided further that the duty of the Collateral Agent to execute any instrument pursuant to the authorizations of Section 5(d) or (f) shall arise only if a Responsible Officer of the Collateral Agent has actual knowledge, or has received written notice, of the failure of the Borrower to comply with the foregoing covenants. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument, or any chattel paper, the Borrower shall, upon request of the Lender, duly endorse such note, instrument or chattel paper to the order of the Collateral Agent and deliver such note, instrument or chattel paper to the Collateral Agent promptly, and shall take such other actions and execute such other documents as shall be requested by the Lender to perfect the Collateral Agent's interest in such note, instrument or chattel paper. (e) The Borrower will warrant and defend the Collateral Agent's right, title and interest in and to the Collateral, for the benefit of the Lender against the claims and demands of all Persons whomsoever. (f) All authorizations in this Security and Collateral Agent Agreement for the Collateral Agent to endorse checks, instruments and securities and to execute, deliver and file financing statements, continuation statements, security agreements and other instruments with respect to the Collateral are powers coupled with an interest and are irrevocable so long as any Loans are outstanding. (g) The Borrower shall deliver to the Collateral Agent all Contract Acquisition Disbursement Requests by 2:00 p.m., Dallas time, on the applicable date of delivery. SECTION 6. [Reserved] SECTION 7. THE COLLATERAL AGENT. 7.01. Appointment. By accepting the benefits of the security interest granted herein, the Lender hereby designates and appoints Chase Bank of Texas, National Association as the Collateral Agent of the Lender under this Security and 6 Collateral Agent Agreement, and the Lender authorizes Chase Bank of Texas, National Association as the Collateral Agent for the Lender, to take such action on its behalf under the provisions of this Security and Collateral Agent Agreement and to exercise such powers and perform such duties as are expressly delegated to the Collateral Agent by the terms of this Security and Collateral Agent Agreement together with such other powers as are reasonably incidental thereto but in each instance solely at the written instruction of the Lender. Notwithstanding any provision to the contrary elsewhere in this Security and Collateral Agent Agreement, the Collateral Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with the Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Security and Collateral Agent Agreement or otherwise exist against the Collateral Agent. Chase Bank of Texas, National Association hereby accepts its appointment as Collateral Agent, subject to, and in reliance upon, the provision of this Section 7.01. 7.02. Exculpatory Provisions. Neither the Collateral Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Security and Collateral Agent Agreement (except for its or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to the Lender for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained herein or in any other Facility Agreement, or in any certificate, report, statement or other document referred to or provided for in, or received by the Collateral Agent under or in connection with, this Agreement, any other Facility Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency (except with respect to the Collateral Agent) of this Agreement, any other Facility Agreement, or the Collateral or for any failure of the Borrower to perform its obligations hereunder or under any other Facility Agreement. The Collateral Agent shall not be under any obligation to the Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, any of the Facility Agreements, or to inspect the properties, books or records of the Borrower. 7.03. Reliance by Collateral Agent. The Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any Loan, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Collateral Agent. The Collateral Agent shall be fully justified in failing or refusing to take any action under this Security and Collateral Agent Agreement unless it shall first receive such written advice or concurrence as it deems appropriate or it shall first be indemnified to its satisfaction against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Collateral Agent may from time to time consult with legal counsel, independent accountants or other experts of its own selection in the event of any disagreement, controversy, question or doubt as to the construction of any provision of this Agreement or any of its duties hereunder, and the Collateral Agent shall be fully protected in acting in good faith in reliance upon the advice or opinion of any such counsel or other expert. 7.04. Notice of Default. The Collateral Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default under the Credit Agreement unless a Responsible Officer has received written notice from the Lender or the 7 Borrower referring to this Security and Collateral Agent Agreement and describing such Event of Default or unless a Responsible Officer otherwise has actual knowledge of such Event of Default. 7.05. Non-Reliance on Collateral Agent. Neither the Collateral Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to the Lender, and no act by the Collateral Agent hereafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Collateral Agent to the Lender. The Lender represents (or will be deemed to have represented at such time as such party becomes a Lender hereunder) to the Collateral Agent that it has, independently and without reliance upon the Collateral Agent, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and made its own decision to extend credit to the Borrower. The Lender will, independently and without reliance upon the Collateral Agent, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Security and Collateral Agent Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished by the Collateral Agent hereunder, the Collateral Agent shall have no duty or responsibility to provide the Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrower which may come into the possession of the Collateral Agent or any of its officers, directors, employees, agencies, attorneys-in-fact or affiliates. 7.06. Successor Collateral Agent. The Collateral Agent may resign as collateral agent upon 60 days' notice to the Borrower, FC Consumer and the Lender. The Collateral Agent may be removed at any time by the Lender. No such resignation or removal shall be effective unless and until a successor collateral agent named by the Borrower and approved by the Lender has accepted appointment as such pursuant to this Agreement and in the case of a removal, any and all amounts then due to the Collateral Agent hereunder have been paid in full. Such successor collateral agent shall succeed to the rights, powers and duties of the Collateral Agent, and the term "Collateral Agent" shall mean such successor collateral agent effective upon its appointment, and the former Collateral Agent's rights, powers and duties as Collateral Agent shall be terminated, without any other or further act or deed on the part of such former Collateral Agent. Such successor collateral agent shall be entitled to amend any UCC financing statements and any other filings, recordation and declarations it deems advisable or necessary in connection with such termination and cancellation. After any retiring Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Section 7.06 and Section 13 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Collateral Agent under this Security and Collateral Agent Agreement . Notwithstanding the foregoing, if no successor collateral agent shall be appointed as aforesaid, or if appointed, such successor shall not have accepted its appointment within thirty (30) days after resignation of the Collateral Agent, the Collateral Agent may petition a court of competent jurisdiction to make such appointment. 8 7.07. Delivery of Collateral and Permitted Investments. All certificates representing or evidencing the Collateral and Permitted Investments from time to time which are delivered to and held by or on behalf of the Collateral Agent pursuant hereto shall, in the case of the Collateral, be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank. The Lender hereby appoints CBT as its agent for the purpose of holding the Collateral and Permitted Investments which are delivered to it. The Collateral Agent shall be the agent solely of the Lender and shall not be the agent of the Borrower. The Collateral Agent shall not release possession of any Contract, any Permitted Investments or the security interest in any Vehicle or Permitted Investment except as permitted in the next sentence, or upon the written instruction of the Lender. The Collateral Agent shall not release possession of any Contracts to the Servicer or any documents in the related Contract Files thereto except (i) upon receipt of a trust receipt substantially in the form attached hereto as Exhibit A obligating the Servicer to hold same in trust for the benefit of the Lender and obligating the Servicer to return same when the need therefor no longer exists unless such Trust Receipt indicates that the related Contract has been paid in full. 7.08. Duties and Covenants of Collateral Agent. (a) The Collateral Agent undertakes to perform the duties as are set forth in this Agreement, including, without limitation: (i) reviewing each Contract delivered to it by the Borrower against the Contract List attached to the related Contract Acquisition Disbursement Request, ascertaining whether the information listed in items (i), (ii), (iii), (viii) and (xi) of the Contract List is accurate with respect to such Contract; with respect to any Contract Acquisition Disbursement Request, on the third Business Day of the calendar week following the calendar week in which such Contract Acquisition Disbursement Request and the related Contract are received by the Collateral Agent, provide a certification to the Borrower and the Lender (the "Collateral Agent's Certification") listing (x) the Contracts so reviewed by the Collateral Agent and in its possession and (y) whether there were any exceptions to the Collateral Agent's review of such items (i), (ii), (iii), (viii) and (xi) on the Contract List; (ii) maintaining possession of such Contracts on behalf of the Lender, and releasing such Contracts from the Collateral Agent's possession only upon the Lender's written instruction or pursuant to Section 7.07 hereof; (iii) upon request, providing information reasonably within its possession and within reasonable time constraints regarding the Collateral to FC Consumer, the Servicer and the Lender; (iv) acting as Collateral Agent of all Contract Files related to the Collateral which are delivered to it; (v) upon request, and no later than noon New York time on any Borrowing Date, providing written confirmation to the Paying Agent and the Lender of the Borrowing Base, and whether a Borrowing 9 Base Deficiency exists; provided, however, that the Collateral Agent shall have received all reports from the Servicer with the information relating to such confirmation by 10 AM New York time, on the date of such confirmation; (vi) cooperating with the Servicer, as requested by the Servicer at the expense of the Borrower, in enforcing any Contracts or Insurance Policies; (vii) furnishing the Servicer with any limited powers of attorney and other documents which the Servicer may reasonably request in writing and which the Servicer deems necessary or appropriate and take any other steps which the Servicer may deem necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties under the Servicing Agreement; (viii) providing to the Lender and the Borrower on the third Business Day of each calendar week, a manifest of Contracts held by the Collateral Agent as of the close of business on the last Business Day of the previous calendar week; and (ix) upon a Responsible Officer obtaining actual knowledge of the occurrence of an Event of Servicing Termination or an Event of Default, promptly give notice to the Lender and the Borrower of such occurrence. (b) The Collateral Agent covenants and agrees that it will not release any Lien created hereby on any of the Collateral, release possession of any of the Collateral held by it, or affirmatively create any Lien on the Collateral adverse to the Lien created hereby, except, in all cases, as expressly permitted hereby or as directed by the Lender. The Collateral Agent shall give the Lender prompt written notice of any Liens on any of the Collateral adverse to the Lien created hereby, of which a Responsible Officer obtains actual knowledge. (c) The Lender hereby directs the Collateral Agent to, and the Collateral Agent shall, on the Closing Date, execute and deliver to the Servicer the power of attorney in the form set forth as Exhibit B hereto. The Borrower, irrespective of any other indemnity, agrees to pay, indemnify and hold the Collateral Agent and each of its officers and agents harmless from and against all liabilities, obligations, losses, damages, fines, actions, judgments, costs, expenses or disbursements (including reasonable fees and disbursements of the Collateral Agent's and its designated agents' legal advisers) of any kind or nature resulting from or relating to the power of attorney delivered pursuant to this Section 7.08(c). Such power of attorney shall be a limited revocable power of attorney which shall be deemed revoked upon the occurrence of an Event of Default and shall be revocable at any time by the Collateral Agent upon notice to the Borrower and the Lender. SECTION 8. AMENDMENTS AND WAIVERS. The parties hereto may, from time to time, enter into written amendments, supplements or modifications hereto for the purpose of adding any provision to this Security and Collateral Agent Agreement or changing in any manner the rights of the Collateral Agent or the Borrower hereunder. 10 The Collateral Agent may, but shall not be obligated to, enter into any such supplement, amendment or modification that affects the Collateral Agent's own rights, duties or immunities under this Security and Collateral Agent Agreement or otherwise. The parties hereto agree not to execute any supplement, amendment or modification to any Facility Agreement to which the Collateral Agent is not a party, without the prior written consent of the Collateral Agent, if the effect of such supplement. amendment or modification would be to affect the Collateral Agent's rights, duties, or immunities thereunder or under this Security and Collateral Agent Agreement . SECTION 9. NOTICES. Unless otherwise expressly provided herein, all notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of facsimile notice, when sent, confirmation received, addressed as follows, or to such other addresses as may be hereafter notified by the respective parties hereto: The Borrower: FirstCity Auto Receivables L.L.C. P.O. Box 8216 6400 Imperial Drive Waco, Texas 76714-8216 with a copy to: FirstCity Consumer Finance Corporation P.O. Box 8216 6400 Imperial Drive Waco, Texas 76714-8216 The Collateral Agent: Chase Bank of Texas, National Association 2200 Ross Avenue, 5th Floor Dallas, TX 75201 Attention: Mike Scrivner (FirstCity Auto Receivables L.L.C.) Telecopy: (214) 965-3577 11 The Lender: ContiTrade Services L.L.C. 277 Park Avenue New York, New York 10172 Attention: Chief Counsel Telecopy: (212) 207-2935 provided, that any notice to or upon the Borrower shall be deemed to have been duly given or made as aforesaid when so given or made to the Borrower whether or not any other party indicated above as the recipient of a copy thereof shall have received a copy of each notice. SECTION 10. LIMITATION ON COLLATERAL AGENT'S DUTY IN RESPECT OF COLLATERAL. Except as set forth herein and beyond the safe custody thereof, the Collateral Agent shall not have any duty as to any Collateral in its possession or control or the possession or control of any agent or nominee of it or any income thereof or as to the preservation of rights against prior parties or any other rights pertaining thereto. SECTION 11. SEVERABILITY. Any provision of this Security and Collateral Agent Agreement which is prohibited or unenforceable in any jurisdiction shall as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidation of the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 12. NO WAIVER; CUMULATIVE REMEDIES. Neither the Collateral Agent nor the Lender shall by any act, delay, omission or otherwise be deemed to have waived any of its or their rights or remedies hereunder and no waiver shall be valid unless in writing, signed by the Collateral Agent on behalf of the Lender, and then only to the extent therein set forth. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent or the Lender would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of the Collateral Agent or the Lender any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently and are not exclusive of any rights and remedies provided by law. SECTION 13. PAYMENT OF EXPENSES AND TAXES. (a) The Borrower hereby agrees to pay to the Collateral Agent a fee for its services hereunder equal to the Collateral Agent Fee. The Borrower and FC Consumer, jointly and severally, each agrees to pay, indemnify, and to 12 hold the Collateral Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp and other similar taxes, if any, which may be payable or determined to be payable in connection the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Security and Collateral Agent Agreement , and any such other documents, and to pay, indemnify, and hold the Collateral Agent and its officers, directors, shareholders, employees, agents and representatives harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Security and Collateral Agent Agreement and any such other documents (including but not limited to those incurred by any negligent act or negligent omission to act of the Collateral Agent) (all the foregoing, collectively, the "indemnified liabilities"); provided, that the Borrower and FC Consumer shall not be liable to the Collateral Agent for any losses incurred by the Collateral Agent as a result of the fraudulent actions, misrepresentations, gross negligence or willful misconduct of the Collateral Agent. The obligations of the Borrower and FC Consumer under this Section 13 shall survive the termination of this Security and Collateral Agent Agreement and the discharge of the other obligations of the Borrower hereunder and also shall survive the resignation or removal of the Collateral Agent hereunder. (b) Promptly after receipt by the Collateral Agent of notice of the commencement of any action, such Collateral Agent shall, if a claim in respect thereof is to be made against the Borrower or FC Consumer under this Section 13, notify the Borrower or FC Consumer in writing of the commencement thereof; but the omission so to notify the Borrower will not relieve it from any liability which it may have to the Collateral Agent except to the extent the Borrower is prejudiced thereby. In case any action is brought against the Collateral Agent, and it notifies the Borrower of the commencement thereof, the Borrower will be entitled to appoint counsel satisfactory to the Collateral Agent and the Borrower (who shall not, except with the consent of the Collateral Agent, be counsel to the Borrower or FC Consumer) to represent the Collateral Agent in such action; provided, however, that, if the defendants in any action include both the Collateral Agent and the Borrower and the Collateral Agent shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Borrower, the Collateral Agent shall have the right to select separate counsel to defend such action on behalf of it. Upon receipt of notice from the Borrower to the Collateral Agent of its election so to appoint counsel to defend such action and approval by the Collateral Agent of such counsel, the Borrower will not be liable to the Collateral Agent under this Section 13 for any legal or other expenses subsequently incurred by the Collateral Agent in connection with the defense thereof unless (i) the Collateral Agent shall have employed separate counsel in accordance with the proviso to the next preceding sentence, (ii) the Borrower shall not have employed counsel satisfactory to the Collateral Agent to represent the Collateral Agent within a reasonable time after notice of commencement of the action or (iii) the Borrower has authorized the employment of counsel for the Collateral Agent at the expense of the Borrower; and except that, if clause (i) or (iii) is applicable, such liability shall be only in respect of the counsel referred to in such clause (i) or (iii). (c) The obligations of the Borrower, FC Consumer and the Collateral Agent under this Section 13 shall be in addition to any liability 13 which each of them may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Collateral Agent within the meaning of the Securities Act; and, with respect to the obligation of the Borrower to the Collateral Agent as indemnified party, shall extend, upon the same terms and conditions, to each director of the Collateral Agent. (d) The agreement, indemnities and other statements of the parties hereto in or made pursuant to this Section 13 will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any other parties hereto or any of the officers, directors or controlling persons referred to in this Section 13. The provisions of this Section 13 shall survive the termination or cancellation of this Agreement. SECTION 14. SUCCESSORS AND ASSIGNS; GOVERNING LAW; WAIVERS (a) This Security and Collateral Agent Agreement and all obligations of the Borrower hereunder shall be binding upon the successors and assigns of the Borrower, and shall, together with the rights and remedies of the Collateral Agent hereunder, inure to the benefit of the Collateral Agent, the Lender and their respective successors and assigns. THIS SECURITY AND COLLATERAL AGENT AGREEMENT SHALL BE GOVERNED BY, AND BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. (B) EACH PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY: (i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 9 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; 14 (iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; (v) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES; AND (vi) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. SECTION 1ENFORCEMENT RIGHTS OF LENDER. SECTION 15. ENFORCEMENT RIGHTS OF LENDER. Unless the Collateral Agent shall fail to take action required to be taken by it in the immediately succeeding sentence, no Lender shall have any right directly to enforce the security interests granted by this Security and Collateral Agent Agreement. No Lender shall have any right to require the Collateral Agent to take or fail to take any action under this Security and Collateral Agent Agreement, except as otherwise provided in the Credit Agreement or in this Security and Collateral Agent Agreement. SECTION 16. BANKRUPTCY PETITION AGAINST THE BORROWER. The Collateral Agent hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Loans, it will not institute against, or join any other Person in instituting against, the Borrower any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under the laws of the United States or any state of the United States. SECTION 17. MISAPPLICATION OF FUNDS. The Collateral Agent agrees that any funds incorrectly paid to it by the Borrower shall be promptly returned to the Borrower upon receipt of written notice from the Borrower that such funds were incorrectly paid to the Collateral Agent prior to the Collateral Agent's transfer of such funds in accordance with this Agreement. The Collateral Agent shall be completely protected against any liability for returning such funds in reliance on such written notice that funds were incorrectly paid and shall be entitled to full indemnification therefor. SECTION 18. COUNTERPART SIGNATURES. This Agreement may be executed and delivered to you simultaneously in two (2) or more counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. 15 SECTION 19. THIRD PARTY BENEFICIARY. For all purposes of this Agreement, FC Consumer shall be a third party beneficiary of the agreements and covenants herein contained and the Servicer shall be a third party beneficiary of the provisions of this Agreement which specify the amount and priority of payment of their respective fees. SECTION 20. STATUS OF COLLATERAL AGENT. The parties hereto acknowledge and agree that upon payment in full of all amounts owing under the Credit Agreement and the release of the Lender's security interest in the Collateral, the rights and obligations of the Collateral Agent under this Agreement shall continue but shall be performed solely at the direction of the Borrower. SECTION 21. ACTS OF LENDER. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by the Lender may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by the Lender in person or by agents duly appointed in writing; and except as herein otherwise expressly provided such action shall become effective when such instrument or instruments is or are delivered to the Collateral Agent. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Agreement if made in the manner provided in this Section 21. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any manner that the Collateral Agent deems sufficient. (c) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Lender shall bind the Lender in respect of anything done, omitted or suffered to be done by the Collateral Agent in reliance thereon, whether or not notation of such action is made upon the Promissory Note. 16 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be executed by their duly authorized officers as of the date first set forth above. FIRSTCITY AUTO RECIEVABLES L.L.C. By: /s/ ----------------------------------------- Name: Title: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, as Collateral Agent By: /s/ ----------------------------------------- Name: Title: CONTITRADE SERVICES L.L.C. By: /s/ ----------------------------------------- Name: Title: By: /s/ ----------------------------------------- Name: Title: JOINDER WITH RESPECT TO SECTION 13 ONLY FIRSTCITY CONSUMER LENDING CORPORATION By: /s/ ----------------------------------------- Name: Title: EXHIBIT A --------- FORM OF TRUST RECEIPT DATE FirstCity Auto Receivables L.L.C. Box 8216 6400 Imperial Drive Waco, Texas 76714-8216 Re: Security and Collateral Agent Agreement, dated as of April 30, 1998 (the "Security Agreement") among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C. and Chase Bank of Texas, National Association ---------------------------------------------------------- Ladies and Gentlemen: In accordance with Section 7.07 of the Security Agreement, the undersigned hereby certifies that it has taken possession of the items set forth on Annex I hereto with respect to the Contracts on the attached schedule. The undersigned (i) confirms that it holds such items in trust for the benefit of the Lender and (ii) agrees to promptly return such items to the Collateral Agent after its need for possession of them ceases, except with respect to any Contract paid in full or liquidated, in which case the Servicer shall forward all proceeds and/or recoveries to the Lockbox Account. FIRSTCITY SERVICING CORPORATION OF CALIFORNIA By: /s/ ----------------------------------------- Name: Title: APPROVED - -------- CONTITRADE SERVICES L.L.C. By: /s/ ----------------------------------------- Name: Title: EXHIBIT B --------- FORM OF LIMITED REVOCABLE POWER OF ATTORNEY DATE: APRIL 30, 1998 Pursuant to the direction of Contitrade Services L.L.C. (the "Lender") under Section 7.08(c) of the Security and Collateral Agent Agreement, dated as of April 30, 1998 the ("Security Agreement"), among the Lender, Chase Bank of Texas, National Association, a national banking association ("Chase Bank of Texas"), as Collateral Agent, and FirstCity Auto Receivables L.L.C., as Borrower (the "Borrower"), Chase Bank of Texas hereby permits FirstCity Servicing Corporation of California to act on behalf of Chase Bank of Texas in connection with the Warehouse Credit Agreement, dated as of April 30, 1998 the ("Credit Agreement"), among the Lender, FirstCity Consumer Lending Corporation, the Borrower and FirstCity Financial Corporation, and the Security Agreement, to execute such legal documents and taken such legal proceedings as are required in connection with the repossession and disposition, if necessary, of each item of the collateral described in Annex A to this Power of Attorney, where Chase Bank of Texas is the legal owner of record on an account assigned to FirstCity Servicing Corporation of California for servicing. This is a limited revocable power of attorney and only authorizes FirstCity Servicing Corporation of California to act as expressly set forth herein. This limited revocable power of attorney shall be deemed revoked upon the occurrence of an Event of Default (as defined in the Credit Agreement) and shall be revocable at any time by Chase Bank of Texas upon notice to the Borrower and the Lender. CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, AS COLLATERAL AGENT By: /s/ Michael A. Scrivner, Vice President ------------------------------------ Michael A. Scrivner, Vice President Subscribed and sworn to before me, a Notary Public in and for the County of Dallas, State of Texas, this ___ day of __________, 1998. -------------------------------- Notary Public ACKNOWLEDGED AND APPROVED as of the date first above written CONTITRADE SERVICES L.L.C. By:__________________________ Name:________________________ Title:_________________________ ANNEX A TO LIMITED REVOCABLE POWER OF ATTORNEY DATED APRIL 30, 1998 BY CHASE BANK OF TEXAS, NATIONAL ASSOCIATION Vehicle's No. Debtor's Name Account No. Year, Brand, Model VIN EX-10 6 LOAN AGREEMENT THIS LOAN AGREEMENT dated as of July 24, 1998 (this "Agreement") is between FIRSTCITY COMMERCIAL CORPORATION, a Texas corporation (the "Company") and CFSC CAPITAL CORP. XXX, a Delaware corporation (the "Lender"). The Company has requested and the Lender has agreed to provide the Company with a loan to the Company in the principal amount of $15,000,000.00. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the Company and the Lender agree as follows: ARTICLE I DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION SECTION 1.01. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person, and any other Person in which such Person's direct or indirect equity interest is 10% or more of the total outstanding equity interests of such Person. "Agreement" has the meaning specified in the introduction to this Agreement. "Assignment and Acceptance" has the meaning specified in Section 9.10 (c). "Bankruptcy Code" has the meaning specified in Section 8.01(f). "Board" means the Board of Governors of the Federal Reserve System of the United States (or any successor). "Business Day" means any day (other than a day which is a Saturday, Sunday or legal holiday in the State of Minnesota) on which banks are open for business in Minnetonka, Minnesota. "Capitalized Lease Obligations" means all lease or rental obligations which, pursuant to GAAP, are capitalized for balance sheet purposes. "Change of Control" means any of (i) the failure of the former shareholders of J-Hawk Corporation (predecessor in interest to the Company) to hold at least twenty percent (20%) of the outstanding voting capital stock of the Company, (ii) the failure of any one of James R. Hawkins, James T. Sartain, Rick Hagelstein, Matt Landry or David W. MacLennan (or anyone approved by the Lender in writing in lieu of any of the above Persons) to be a member of the Board of Directors of the Company at any time, (iii) all or substantially all of the assets of the Company are sold in a single transaction or series of related transactions to any Persons or (iv) the Company merges or consolidates with or into any other Person. "Closing Date" means July __, 1998. "Code" means Internal Revenue Code of 1986 and the regulations promulgated thereunder. 2 "Collateral" shall have the meaning set forth in the Security Documents. "Company" has the meaning specified in the introduction to this Agreement. "Default" means the occurrence of any event which with the giving of notice or the passage of time or both could become an Event of Default. "Default Rate" means the lesser of (i) the Highest Lawful Rate and (ii) the Prime Rate plus ten percent (10%) per annum. "Delinquent Fee" has the meaning specified in Section 3.01(a). "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $1,000,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or any successor organization, or a political subdivision of any such country, and having total assets in excess of $1,000,000,000; provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the Organization for Economic Cooperation and Development or any successor organization; (c) the central bank of any country which is a member of the Organization for Economic Cooperation and Development or any successor organization; and (d) any other bank or similar financial institution approved by the Lender. "Environmental Laws" means federal, state or local laws, rules or regulations, and any judicial, arbitral or administrative interpretations thereof, including any judicial, arbitral or administrative order, judgment, permit, approval, decision or determination pertaining to conservation or 3 protection of the environment in effect at the time in question, including the Clean Air Act, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Federal Water Pollution Control Act, the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, the Safe Drinking Water Act, the Toxic Substances Control Act, the Superfund Amendment and Reauthorization Act of 1986, the Hazardous Materials Transportation Act, and comparable state and local laws, and other environmental conservation and protection laws. "ERISA" means the Employee Retirement Income Security Act of 1974 and the regulations promulgated thereunder. "ERISA Affiliate" means (a) any trade or business (whether or not incorporated) which is either a member of the same "controlled group" or under "common control," within the meaning of Section 414 of the Code and the regulations thereunder, with the Company and (b) any Subsidiary of the Company. "Event of Default" has the meaning specified in Section 8.01. "Fannie Mae Mortgage Selling and Servicing Agreement" means that certain Agreement dated 7/27/95 by and between Harbor Financial Mortgage Corporation and Federal National Mortgage Association. "Fees" means all amounts payable pursuant to Section 3.01. "Financials" has the meaning specified in Section 5.07. "GAAP" means generally accepted accounting principles as in effect from time to time as set forth in the opinions, statements and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, the Financial Accounting Standards Board and such other Persons who shall be approved by a significant segment of the accounting profession and concurred in by the independent certified public accountants certifying any audited financial statements of the Company. 4 "Guaranty Agreement" means that certain Guaranty dated of even date herewith from FirstCity Financial Corporation in favor of the Lender. "Guarantor" means FirstCity Financial Corporation. "Hazardous Materials" means (a) hazardous waste as defined in the Resource Conservation and Recovery Act of 1976, or in any applicable federal, state or local law or regulation, (b) hazardous substances, as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable federal, state or local law or regulation or (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable federal, state or local law or regulation, as each such Act, statute or regulation may be amended from time to time. "Highest Lawful Rate" means the maximum nonusurious rate of interest that, under applicable law, may be contracted for, taken, reserved, charged or received by the Lender on the Loans or under the Loan Documents at any time or from time to time. If the maximum rate of interest which, under applicable law, the Lender is permitted to charge the Company on the Loans shall change after the date hereof, to the extent permitted by applicable law, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, as of the effective time of such change without notice to the Company or any other Person. "Indebtedness" means all amounts payable to Lender by Company under the Loan Documents, whether existing or subsequently accruing including without limitation the principal amount of the Loan, interest, fees, costs, and other charges payable hereunder. "Interest Period" means, (a) initially, the period commencing on the Closing Date and ending on the last day of the current calendar month and 5 (b) thereafter, each succeeding monthly period commencing on the first (1st) day of the following calendar month; provided that any Interest Period that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. "Investment" means, as applied to any Person, any direct or indirect purchase or other acquisition by such Person of the assets, stock or other securities of any other Person, or any direct or indirect loan, advance or capital contribution by such Person to any other Person, and any other item which would be classified as an "investment" on a balance sheet of such Person, including any direct or indirect contribution by such Person of property or assets to a joint venture, partnership or other business entity in which such Person retains an interest. "Lien" means, when used with respect to any Person, any mortgage, lien, charge, pledge, security interest or encumbrance of any kind (whether voluntary or involuntary and whether imposed or created by operation of law or otherwise) upon, or pledge of, any of its property or assets, whether now owned or hereafter acquired, or any lease intended as security, any capital lease in the nature of the foregoing, any conditional sale agreement or other title retention agreement, in each case, for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "Loan" has the meaning specified in Section 2.01. "Loan Documents" means this Agreement and the other documents described in Article IV hereof. "Margin" means seven percent (7%) per annum. "Material Adverse Effect" means, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding) a material adverse effect equal to or greater than the lesser of (a) the value of five percent (5%) of the outstanding common stock of the Company and (b) $2,000,000.00. 6 "Maturity Date" means October 30, 1998, unless accelerated pursuant to Section 8.02. "Mortgage Loans" shall have the meaning set forth in the Purchase and Sale Agreement. Multiemployer Plan" means any plan which is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). "Note" has the meaning specified in Section 2.02. "Notice of Default" has the meaning specified in Section 8.02. "Obligations" means all the obligations of the Company now or hereafter existing under the Loan Documents, whether for principal, interest, Fees, expenses, indemnification or otherwise. "Payment Date" means the first (1st) day of each month and the Maturity Date. "Payment Office" means the office of the Lender located at 6000 Clearwater Drive, Minnetonka, Minnesota, 55343, or such other office as the Lender may hereafter designate in writing as such to the other parties hereto. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign or domestic state or political subdivision thereof or any agency of such state or subdivision. 7 "Plan" means any employee pension benefit plan (as defined in Section 3(2) of ERISA), subject to Title IV of ERISA or Section 412 of the Code, other than a Multiemployer Plan, with respect to which the Company or an ERISA Affiliate contributes or has an obligation or liability to contribute, including any such plan that may have been terminated. "Prime Rate" means the prime rate announced to be in effect from time to time, as published as the average rate in The Wall Street Journal. "Purchase and Sale Agreement" means that certain Servicing Income Purchase and Sale Agreement dated July 24, 1998 by and between Harbor Financial Mortgage Corporation and Firstcity Commercial Corporation. Regulation U" means Regulation U of the Board (respecting margin credit extended by banks), as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of barrels, containers and other closed receptacles). "Reportable Event" means an event described in Section 4043(b) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. "Requirements of Environmental Laws" means, as to any Person, the requirements of any applicable Environmental Law relating to or affecting such Person or the condition or operation of such Person's business or its properties, both real and personal. "Responsible Officer" means, with respect to the Company, the chairman of the board of directors, president or any executive or senior vice president. 8 "Security Documents" means (a) that certain Security Agreement dated as of even date herewith and executed by the Company granting the Lender a first priority security interest in the Collateral, (b) any and all other security agreements, pledge agreements, mortgages, assignments, UCC financing statements, registrations of pledge and other similar documents executed by the Company and securing the obligations. "Servicing Rights" shall have the meaning set forth in the Purchase and Sale Agreement. Tangible Net Worth" means: (a) total assets minus (b) the sum of (i) all liabilities and (ii) all intangible assets, including, without limitation, goodwill, patents, trademarks and similar items. "Unfunded Current Liability" means, with respect to any Plan, the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent Plan year exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. SECTION 1.03. Accounting Terms. All accounting terms not defined herein shall be construed in accordance with GAAP, as applicable, and all calculations required to be made hereunder and all financial information required to be provided hereunder shall be done or prepared in accordance with GAAP. ARTICLE II THE LOAN 9 SECTION 2.01. The Loan. Subject to the terms and conditions hereof, the Lender shall make, and Company shall accept, the Loan in a principal amount not to exceed Fifteen Million Dollars ($15,000,000). SECTION 2.02. The Note. The Loans shall be evidenced by a note in favor of the Lender (the "Note"), substantially in the form of Exhibit 2.02 hereto. SECTION 2.03. Intentionally omitted. SECTION 2.04. Intentionally omitted. SECTION 2.05. Intentionally omitted. SECTION 2.06. Voluntary Prepayments. The Company shall have the right to voluntarily prepay the Loan in whole or in part at any time on the following terms and conditions: (a) the Company pays to the Lender all sums necessary to compensate the Lender for all costs and expenses resulting from such prepayment, as reasonably determined by the Lender, including, but not limited to, those costs described in Sections 2.12, and 2.13 hereof; (b) each partial prepayment shall be in an initial aggregate principal amount of $500,000.00 and integral multiples thereof; and (c) each prepayment pursuant to this Section shall be applied first, to the payment of accrued and unpaid interest, and then, to the outstanding principal of the Loan. SECTION 2.07. Mandatory Repayments. (a) The outstanding principal balance of the Loan together with all other Indebtedness shall be repaid on or before the Maturity Date. (b) All accrued but unpaid interest on the Note shall be due and payable on each Payment Date except that interest payable at the Default Rate shall be payable from time to time daily and on demand. (c) On each Payment Date all cash flow from the Collateral will be deposited directly into an account designated by Lender and applied to repayment of the Note as follows: 10 (i) first, to the payment of all accrued and unpaid interest which is then due and payable under the Note; (ii) second, to the payment to Lender of any late charges, Fees, and expenses payable to Lender under the Loan Documents; and (iii) third, to the Lender to reduce the outstanding principal balance of the Loan. (d) In the event that monthly cash flow from the Collateral is insufficient to make the then current interest payment, the Company shall be required to make such payment directly to the Lender. (e) Upon the sale of the Collateral, in whole or in part, all outstanding principal and interest, together with all other Indebtedness shall be immediately due and payable. SECTION 2.08. Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement due from the Company shall be made to the Lender not later than 11:00 a.m. (Minnetonka, Minnesota time) on the date when due and shall be made in lawful money of the United States in immediately available funds at the Payment Office. SECTION 2.09. Interest. (a) Subject to Section 9.08, the Company agrees to pay interest on the total outstanding principal balance of the Loan from the Closing Date to maturity (whether by acceleration or otherwise) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) which shall, during each Interest Period applicable thereto, be equal to the lesser of (i) the Highest Lawful Rate and (ii) the applicable Prime Rate for such Interest Period plus the Margin. (b) Subject to Section 9.08, overdue principal and, to the extent permitted by law, overdue interest in respect of the Loan and all other 11 overdue amounts owing hereunder shall bear interest for each day that such amounts are overdue at a rate per annum equal to the Default Rate. SECTION 2.10. Intentionally omitted. SECTION 2.11. Intentionally omitted. SECTION 2.12. Increased Costs or Taxes. If the application or effectiveness of any applicable law or regulation (i) shall change the basis of taxation of payments to the Lender of the principal of or interest on the Loan made by the Lender or any other fees or amounts payable hereunder (other than taxes imposed on the overall net income of the Lender or franchise taxes imposed upon it by the jurisdiction in which the Lender has an office), (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Lender or (iii) shall impose on the Lender any other condition affecting this Agreement or this Loan, and the result of any of the foregoing shall be to increase the cost to the Lender of maintaining the Loan or to reduce the amount of any sum received or receivable by the Lender hereunder (whether of principal, interest or otherwise) in respect thereof by an amount deemed in good faith by the Lender to be material, then the Company shall pay to the Lender such additional amount as will compensate it for such increase or reduction upon demand. The Lender shall not be entitled to make a demand for and the Borrower shall not be liable for payment of any amount under the terms of this Section 2.12 following the termination of the Obligations hereunder. SECTION 2.13. Intentionally omitted. ARTICLE III FEES 12 SECTION 3.01. Fees. The Company agrees to pay to the Lender a delinquency fee (the "Delinquency Fee") of $150,000.00. The Delinquency Fee shall be due and payable on the Maturity Date if the Loan is not paid in full on or before that date. ARTICLE IV CONDITIONS PRECEDENT SECTION 4.01. Conditions Precedent to the Loan. The obligation of the Lender to make the Loan to the Company is subject to the condition that the Lender shall have received the following: (a) this Agreement executed by the Company; (b) the Note executed by the Company and payable to the order of the Lender ; (c) the Security Documents executed by the Company; (d) the Guaranty Agreement executed by FirstCity Financial Corporation; (e) a certificate of an officer and of the secretary or an assistant secretary of the Company certifying, inter alia, (i) true and complete copies of each of the articles or certificate of incorporation, as amended and in effect of the Company and the Guarantor, the bylaws, as amended and in effect, of the Company and the Guarantor and the resolutions adopted by the Board of Directors of the Company and the Guarantor (A) authorizing the execution, delivery and performance by the Company of this Agreement and the other Loan Documents to which it is or will be a party, (B) approving the forms 13 of the Loan Documents to which it is or will be a party and which will be delivered at or prior to the Closing Date and (C) authorizing officers of the Company to execute and deliver the Loan Documents to which it is or will be a party and any related documents, including, any agreement contemplated by this Agreement, (ii) the incumbency and specimen signatures of the officers of the Company and the Guarantor executing any documents on its behalf and (iii) that there has been no change in the businesses or financial condition of the Company or the Guarantor which could have a Material Adverse Effect; (f) favorable, signed opinions addressed to the Lender from counsel to the Company, in form and substance satisfactory to the Lender and its counsel; (g) the payment to the Lender of all reasonable fees and expenses agreed upon by such parties to be paid on the Closing Date; and (h) certificates of appropriate public officials as to the existence, good standing and qualification to do business as a foreign corporation, as applicable, of the Company and the Guarantor in each jurisdiction in which the ownership of its properties or the conduct of its business requires such qualifications and where the failure to so qualify would have a Material Adverse Effect. The acceptance of the benefits of the Loan shall constitute a representation and warranty by the Company to the Lender that all of the conditions specified in this Section above shall have been satisfied or waived as of that time. SECTION 4.02. Additional Conditions Precedent. The obligation of the Lender to make the Loan is subject to the further conditions precedent that on the Closing Date: (a) The conditions precedent set forth in Section 4.01 shall have theretofore been satisfied or waived. (b) The representations and warranties set forth in Article V 14 shall be true and correct in all material respects as of, and as if such representations and warranties were made on, the Closing Date, and the Company shall submit a certification to the Lender confirming that such representations and warranties are true and correct. (c) No Material Adverse Effect with respect to the Company or the Guarantor shall have occurred since the delivery of the most recent financials. (d) The Lender shall have received such other approvals, opinions or documents as the Lender may reasonably request. SECTION 4.03. Delivery of Documents. The Note, certificates, legal opinions and other documents and papers referred to in this Article IV, unless otherwise specified, shall be delivered to the Lender and shall be reasonably satisfactory in form and substance to the Lender. ARTICLE V REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Agreement and to make the Loan provided for herein, the Company makes, on and as of the Closing Date, the following representations and warranties to the Lender: SECTION 5.01. Organization and Qualification. The Company and the Guarantor (a) are each corporations duly organized, validly existing and in good standing under the laws of the state of their incorporation or organization, (b) each the corporate power to own its property and to carry on its business as now conducted and (c) each is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. 15 SECTION 5.02. Authorization and Validity. The Company has the corporate power and authority to execute, deliver and perform its obligations hereunder and under the other Loan Documents and all such action has been duly authorized by all necessary corporate proceedings on its part. The Loan Documents have been duly and validly executed and delivered by the Company and constitute a valid and legally binding agreement the Company enforceable in accordance with the respective terms thereof, except, in each case, as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally, and by general principles of equity regardless of whether such enforceability is a proceeding in equity or at law. SECTION 5.03. Governmental Consents. No authorization, consent, approval, license or exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is necessary for the valid execution, delivery or performance by the Company of any Loan Document. SECTION 5.04. Conflicting or Adverse Agreements or Restrictions. Neither the Company nor the Guarantor is a party to any contract or agreement or subject to any restriction which would reasonably be expected to have a Material Adverse Effect. All agreements of the Company relating to the lending of money or the issuance of letters of credit by any party are described hereto on Schedule 5.04. Neither the execution nor delivery of the Loan Documents nor compliance with the terms and provisions hereof or thereof will be contrary to the provisions of, or constitute a default under (a) the charter or bylaws of the Company, (b) any applicable law or any applicable regulation, order, writ, injunction or decree of any court or governmental instrumentality or (c) any material agreement to which the Company is a party or by which it is bound or to which it is subject. SECTION 5.05. Title to Assets. The Company has good title to the Collateral and to all material personalty and good and indefeasible title to all material realty as reflected on the Company's books and records as being 16 owned by it, except for properties disposed of in the ordinary course of business, subject to no Liens, except those permitted hereunder or set forth on Schedule 7.04(a). All of such assets have been and are being maintained by the appropriate Person in good working condition in accordance with industry standards. SECTION 5.06. Litigation. No proceedings against or affecting the Company or to Guarantor are pending or, to the knowledge of the Company, threatened before any court or governmental agency or department which involve a reasonable risk of having a Material Adverse Effect except those listed on Schedule 5.06 hereof. SECTION 5.07. Financial Statements. Prior to the Closing Date, the Company has furnished to the Lender the audited consolidated balance sheet of FirstCity Financial Corporation, income statement and statement of cash flow and balance sheet for FirstCity Commercial Corporation as of March 31, 1998 and all quarterly reports of the Company as are currently available (such audited financials and quarterly reports, the "Financials"). The Financials have been prepared in conformity with GAAP consistently applied (except as otherwise disclosed in such financial statements) throughout the periods involved and present fairly, in all material respects, the financial condition of the Company and any consolidated subsidiaries as of the dates thereof and the results of their operations for the periods then ended. As of the Closing Date, no Material Adverse Effect has occurred in the consolidated financial condition of the Company or the Guarantor since March 31, 1998. SECTION 5.08. Default. Neither the Company nor the Guarantor is in default under any material provisions of any instrument evidencing any indebtedness or of any agreement relating thereto, or in default in any respect under any order, writ, injunction or decree of any court, or in default in any respect under or in violation of any order, injunction or decree of any governmental instrumentality, in such manner as to cause a Material Adverse Effect. SECTION 5.09. Investment Company Act. Neither the Company nor the Guarantor is, or is directly or indirectly controlled by or acting on behalf 17 of any Person which is, an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. SECTION 5.10. Public Utility Holding Company Act. Neither the Company nor the Guarantor is a non-exempt "holding company," or is subject to regulation as such, nor is, to the knowledge of the Company's or Subsidiaries' officers, an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 5.11. ERISA. No accumulated funding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, exists or is expected to be incurred with respect to any Plan. No liability to the PBGC (other than required premium payments) has been or is expected by the Company to be incurred with respect to any Plan by the Company or any ERISA Affiliate. Neither the Company nor any ERISA Affiliate has incurred any withdrawal liability under Title IV of ERISA with respect to any Multi-Employer Plans. SECTION 5.12. Tax Returns and Payments. Each of the Company and the Guarantor has filed all federal income tax returns and other tax returns, statements and reports (or obtained extensions with respect thereto) which are required to be filed and has paid or deposited or made adequate provision in accordance with GAAP for the payment of all taxes (including estimated taxes shown on such returns, statements and reports) which are shown to be due pursuant to such returns, except for such taxes as are being contested in good faith and by proceedings. SECTION 5.13. Environmental Matters. Each of the Company and the Guarantor (a) possesses all environmental, health and safety licenses, permits, authorizations, registrations, approvals and similar rights necessary under law or otherwise for the Company or the Guarantor to conduct its operations as now being conducted (other than those with respect to which the failure to possess or maintain would not, individually or in the aggregate for the Company or the Guarantor, have a Material Adverse Effect) and (b) each of such licenses, permits, authorizations, registrations, approvals and similar 18 rights is valid and subsisting, in full force and effect and enforceable by the Company or the Guarantor, and each of the Company and the Guarantor is in compliance with all terms, conditions or other provisions of such permits, authorizations, registrations, approvals and similar rights except for such failure or noncompliance that, individually or in the aggregate for the Company or such Guarantor, would not have a Material Adverse Effect. Except as disclosed on Schedule 5.13, neither the Company nor the Guarantor has received any notices of any violation of, noncompliance with, or remedial obligation under, Requirements of Environmental Laws (which violation or non-compliance has not been cured) and there are no writs, injunctions, decrees, orders or judgments outstanding, or lawsuits, claims, proceedings, investigations or inquiries pending or, to the knowledge of the Company or the Guarantor, threatened, relating to the ownership, use, condition, maintenance or operation of, or conduct of business related to, any property owned, leased or operated by the Company or the Guarantor or other assets of the Company or the Guarantor, other than those violations, instances of noncompliance, obligations, writs, injunctions, decrees, orders, judgments, lawsuits, claims, proceedings, investigations or inquiries that, individually or in the aggregate for the Company or the Guarantor, would not have a Material Adverse Effect. Except as disclosed on Schedule 5.13, there are no material obligations, undertakings or liabilities arising out of or relating to Environmental Laws to which the Company or the Guarantor has agreed, assumed or retained, or by which the Company or the Guarantor is adversely affected, by contract or otherwise. Except as disclosed on Schedule 5.13, neither the Company nor the Guarantor has received a written notice or claim to the effect that such Person is or may be liable to any other Person as the result of a Release or threatened Release of a Hazardous Material. SECTION 5.14. Purpose of Loans. (a) The proceeds of the Loan will be used solely to finance operating expenditures and for certain capital investments of the Company made in the ordinary course of its business. (b) None of the proceeds of the Loan will be used directly or indirectly for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U (herein called "margin stock") or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock. 19 SECTION 5.15. Franchises and Other Rights. Each of the Company and the Guarantor has all franchises, permits, licenses and other authority as are necessary to enable it to carry on its businesses as now being conducted where the absence of such would have a Material Adverse Effect except those listed on Schedule 5.15 hereof. To the best of its knowledge, the Company is not in default in respect of any of such operating rights. SECTION 5.16. Intentionally omitted. SECTION 5.17. Solvency. After giving effect to the Loan hereunder and all other indebtedness of the Company, the Company has (a) capital sufficient to carry on its businesses and transactions, (b) assets, the fair market value of which exceeds its consolidated liabilities (as reflected on the Financials or on the financial statements most recently delivered to the Lender), and (c) sufficient cash flow to pay its existing debts as they mature. SECTION 5.18. Material Facts. There is no fact which the Company has failed to disclose to the Lender in writing which will have a Material Adverse Effect on or, so far as the Company can now foresee, will have a Material Adverse Effect on the assets, business, prospects, profits or condition (financial or otherwise) of the Company, the ability of the Company to perform its obligations under this Agreement, or the Guarantor. No information, exhibit or report furnished by the Company to the Lender in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted a material fact or any fact necessary to make the statement contained therein not materially misleading. SECTION 5.19. Solvency. The Company is, and after giving effect to the transactions contemplated under the Loan Documents will be, solvent. SECTION 5.20. Security Interests. The Security Documents create valid security interests in the Collateral in favor of the Lender securing the Obligations and constitute perfected first priority security interests in the Collateral subject to no Liens other than Liens permitted by Section 7.04. 20 ARTICLE VI AFFIRMATIVE COVENANTS The Company covenants and agrees that on and after the date hereof and for so long as this Agreement is in effect and until the Obligations have been paid in full: SECTION 6.01. Information Covenants. The Company will furnish to the Lender: (a) As soon as available, and in any event within 45 days after the close of each of the first three quarters in each fiscal year of the Company, the consolidated and consolidating balance sheet of the Company and the Guarantor as of the end of such quarterly period and the related consolidated and consolidating statements of income and cash flows for such quarterly period and for the portion of the fiscal year ended at the end of such quarter, setting forth, in each case, comparative consolidated figures for the related periods in the prior fiscal year, all of which shall be certified by the chief financial officer or chief executive officer of the Company as fairly presenting in all material respects, the financial position of the Company and the Guarantor as of the end of such period and the results of their operations for the period then ended in accordance with GAAP, subject to changes resulting from normal year-end audit adjustments. (b) As soon as available, and in any event within 120 days after the close of each fiscal year of the Company, the audited consolidated and the unaudited consolidating balance sheets of the Guarantor and its subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income, stockholders equity and cash flows for such fiscal year, setting forth, in each case, comparative figures for the preceding fiscal year 21 and certified by KPMG Peat Marwick, L.L.P. or other independent certified public accountants of recognized national standing, whose report shall be without limitation as to the scope of the audit and reasonably satisfactory in substance to the Lender. (c) Immediately after any Responsible Officer of the Company obtains knowledge thereof, notice of: (i) any material violation of, noncompliance with, or remedial obligations under, Requirements of Environmental Laws, (ii) any material Release or threatened material Release of Hazardous Materials affecting any property owned, leased or operated by the Company or any of its Subsidiaries, (iii) any event or condition which constitutes a Default or an Event of Default, (iv) any condition or event which, in the opinion of management of the Company, would reasonably be expected to have a Material Adverse Effect on the Company or the Guarantor, (v) any Person having given any written notice to the Company or taken any other action with respect to a claimed material default or material adverse event under any material instrument or material agreement, and (vi) the institution of any litigation which might reasonably be expected in the good faith judgment of the Company either to have a Material Adverse Effect or result in a final, non-appealable judgment or award in excess of $1,000,000.00 with respect to any single cause of action, or the institution of any litigation of any kind by any party against the Company. then, a notice of such event or condition will be delivered to the Lender specifying the nature and period of existence thereof and specifying the notice given or action taken by such Person and the nature of any such claimed default, 22 event or condition and, in the case of an Event of Default or Default, what action has been taken, is being taken or is proposed to be taken with respect thereto. (vii) Any default or condition which threatens or constitutes a default by Harbor Financial Mortgage Corporation under the Fannie Mae Mortgage Selling and Servicing Agreement or any commitment relating thereto. (d) At the time of the delivery of the financial statement provided for in Sections 6.01(a) and 6.01(b), a certificate of a Responsible Officer to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof and the action that is being taken or that is proposed to be taken with respect thereto, which certificate shall set forth the calculations required to establish whether the Company was in compliance with the provisions of Sections 7.10 and 7.11 as at the end of such fiscal period or year, as the case may be. (e) Upon request by the Lender such audits of the Company's procedures and policies and operations in respect of Environmental Laws as the Lender may reasonably request. (f) Promptly upon receipt thereof, a copy of any report or letter submitted to the Company by its independent accountants in connection with any regular or special audit of the Company's records. (g) From time to time and with reasonable promptness, such other information or documents as the Lender may reasonably request. SECTION 6.02. Books, Records and Inspections. The Company and the Guarantor will maintain, and will permit, or cause to be permitted, any Person designated by the Lender to visit and inspect any of the properties of the Company or the Guarantor, to examine the corporate books and financial records of the Company and the Guarantor and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any such corporations with the officers, employees and agents of the Company and the Guarantor and with their independent public accountants, all at such reasonable 23 times and as often as the Lender may request. Such inspections shall be made as often as the Lender reasonably requests, and shall be at the expense of the Company up to $5,000.00 annually. SECTION 6.03. Insurance and Maintenance of Properties. (a) The Company and the Guarantor will keep reasonably adequately insured by financially sound and reputable insurers all of its material property, which is of a character, and in amounts and against such risks, usually and reasonably insured by similar Persons engaged in the same or similar businesses, including, without limitation, insurance against fire, casualty and any other hazards normally insured against. The Company and the Guarantor will at all times maintain insurance against its liability for injury to Persons or property, which insurance shall be by financially sound and reputable insurers and in such amounts and form as are customary for corporations of established reputation engaged in the same or a similar business and owning and operating similar properties, and shall annually provide the Lender a listing of all such insurance and such other certificates and other evidence thereof, as the Lender shall reasonably request. A listing of all presently existing policies of the Company and the Guarantor is attached hereto as Schedule 6.03. (b) The Company will cause all of its material properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all reasonably necessary repairs, renewals and replacements thereof, all as in the reasonable judgment of such Person may be reasonably necessary so that the business carried on in connection therewith may be properly conducted at all times. (c) The Company will name the Lender as a loss payee on all of its insurance policies (other than public liability insurance policies). SECTION 6.04. Payment of Taxes. The Company will pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, except for such amounts that are being contested in good faith and by appropriate proceedings. 24 SECTION 6.05. Corporate Existence. The Company will do all things necessary to preserve and keep in full force and effect (a) its corporate existence and (b) unless the failure to do so would not have a Material Adverse Effect, the rights and franchises of the Company. SECTION 6.06. Compliance with Statutes. The Company will comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property, except to the extent the failure to do so would not reasonably be expected to have a Material Adverse Effect. SECTION 6.07. ERISA. Immediately after any Responsible Officer of the Company or any of its Subsidiaries knows or has reason to know any of the following items are true the Company will deliver or cause to be delivered to the Lender a certificate of the chief financial officer of the Company setting forth details as to such occurrence and such action, if any, the Company or its ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Company or its ERISA Affiliate with respect thereto; that a Reportable Event has occurred or that an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard; that a Multiemployer Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that any required contribution to a Plan or Multiemployer Plan has not been or may not be timely made; that proceedings may be or have been instituted under Section 4069(a) of ERISA to impose liability on the Company or an ERISA Affiliate or under Section 4042 of ERISA to terminate a Plan or appoint a trustee to administer a Plan; that the Company or any ERISA Affiliate has incurred or may incur any liability (including any contingent or secondary liability) on account of the termination of or withdrawal from a Plan or a Multiemployer Plan; and that the Company or an ERISA Affiliate may be required to provide security to a Plan under Section 401(a)(29) of the Code; or any other condition exists or may occur with respect to one or more Plans and/or Multiemployer Plans. SECTION 6.08. Fidelity Bond. The Guarantor shall at all times 25 during the term hereof maintain a fidelity bond in an amount not less than $2,000,000.00 per occurrence and $4,000,000.00 in the aggregate, net of any applicable deductible. ARTICLE VII NEGATIVE COVENANTS The Company covenants and agrees that, unless the Lender shall have otherwise given its written consent, on and after the date hereof and for so long as this Agreement is in effect and until the Indebtedness is paid in full. SECTION 7.01. Change in Business. The Company will not engage in any businesses not of the same general type as those conducted by the Company on the Closing Date. SECTION 7.02. Consolidation, Merger or Sale of Assets. The Company will not wind up, liquidate or dissolve their affairs, or enter into any transaction of merger or consolidation, or sell or otherwise dispose of all or any part of their property or assets (other than sales of inventory and surplus or obsolete assets in the ordinary course of business provided that any disposal does not prejudice the Lender in any way), including the capital stock of any subsidiary, or purchase, lease or otherwise acquire (in one or a series of related transactions) all or any part of the property or assets of any Person or all of the capital stock of any Person. The Company will not permit any of its subsidiaries to wind up, liquidate or dissolve their affairs, or enter into any transaction of merger or consolidation, or sell or otherwise dispose of any capital stock of any subsidiary, or purchase, lease or otherwise acquire (in one or a series of related transactions) all or any part of the property or assets of any Person or all of the capital stock of any Person. SECTION 7.03. Indebtedness. The Company will not create, 26 incur, assume or permit to exist any indebtedness except: (a) Indebtedness existing hereunder; (b) long term indebtedness or unsecured short term indebtedness not to exceed in the aggregate $5,000,000.00; (c) guarantees of any indebtedness of any Person not to exceed in the aggregate $5,000,000.00 other than (e) below; (d) $60,000,000.00 Capital Note from FirstCity Commercial Corporation to FirstCity Financial Corporation; and (e) guarantee of indebtedness of FirstCity Commercial Corporation of Guarantor's debt to Bank of Scotland under a Revolving Credit Agreement dated 4/8/98. SECTION 7.04. Liens. The Company will not create, incur, assume or suffer to exist any Lien upon or with respect to any of its property or assets of any kind whether now owned or hereafter acquired (nor will they covenant with any other Person not to grant such a Lien to the Lender), except (a) Liens existing on the Closing Date and listed on Schedule 7.04(a); (b) Liens for taxes or assessments or other governmental charges or levies, either not yet due and payable or being contested in good faith and by appropriate proceedings for which adequate reserves have been established; (c) Liens securing long term indebtedness permitted under Section 7.03(b) above; and (d) any renewal, extension or replacement of any Lien referred to in subparagraph (a) above; provided, that no Lien arising or existing as a result of such extension, renewal or replacement shall be extended to cover any 27 property not theretofore subject to the Lien being extended, renewed or replaced, and provided further, the principal amount of the indebtedness secured thereby shall not exceed the principal amount of the indebtedness so secured at the time of such extension, renewal or replacement. SECTION 7.05. Intentionally omitted. SECTION 7.06. Intentionally omitted. SECTION 7.07. Change in Accounting. The Company will not change its method of accounting except for (a) immaterial changes permitted by GAAP in which the Company's auditors concur or (b) changes required by GAAP. The Company shall advise the Lender in writing promptly upon making any material change to the extent same is not disclosed in the financial statements required under Section 6.01 hereof. SECTION 7.08. Intentionally omitted. SECTION 7.09. Transactions with Affiliates. The Company will not, directly or indirectly, engage in any transaction with any Affiliate, including the purchase, sale or exchange of assets or the rendering of any service, except in the ordinary course of business or pursuant to the reasonable requirements of its business and, in each case, upon terms that are no less favorable than those which might be obtained in an arm's-length transaction at the time from non-Affiliates. SECTION 7.10. Minimum Tangible Net Worth. The Company will not permit its Tangible Net Worth during the term hereof to be less than $5,000,000.00. SECTION 7.11. Intentionally Omitted SECTION 7.12 The Company shall not permit the sale by Harbor Financial Mortgage Corporation of the Servicing Rights related to the Mortgage Loans without the express written consent of Lender. 28 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES SECTION 8.01. Events of Default. The following events shall constitute Events of Default ("Events of Default") hereunder: (a) any installment of principal or payment of interest on the Note or any payment of any Fee shall not be paid on the date on which such payment is due and such failure is not remedied within five (5) days; or (b) any representation or warranty made or, for purposes of Article V, deemed made by the Company or the Guarantor herein or in any of the Loan Documents or other document, certificate or financial statement delivered in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed made or reaffirmed, as the case may be; or (c) the Company shall fail to perform or observe any duty or covenant contained in Article VII hereof; or (d) the Company or the Guarantor shall fail to perform or observe any duty or covenant contained in this Agreement other than in Article VII, or in any of the Loan Documents, and such failure is not remedied within thirty (30) days; or (e) the Company shall (i) fail to make (whether as primary obligor or as guarantor or other surety) any principal payment of or interest or premium, if any, on any instrument of indebtedness allowed hereunder (other than the Note) outstanding beyond any period of grace provided with respect thereto or (ii) shall fail to duly observe, perform or comply with any agreement with any Person or any term or condition of any instrument of indebtedness in excess 29 of $500,000.00, if such failure causes such obligations to become due prior to any stated maturity; or (f) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company or the Guarantor, or of a substantial part of the property or assets of the Company or the Guarantor, under Title 11 of the United States Code, as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"), or any other federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or the Guarantor for a substantial part of the property or assets of the Company or the Guarantor or (iii) the winding-up or liquidation of the Company or the Guarantor; and such proceeding or petition shall continue undismissed for sixty 60 days or an order or decree approving or ordering any of the foregoing shall be entered; or (g) the Company or the Guarantor shall (i) voluntarily commence any proceeding or file any petition seeking relief under the Bankruptcy Code or any other federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in clause (e) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or the Guarantor or for a substantial part of the property or assets of the Company or the Guarantor, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; or (h) a judgment or order, which with other outstanding judgments and orders against the Company or the Guarantor equal or exceed $1,000,000.00 in the aggregate (to the extent not covered by insurance as to which the respective insurer has acknowledged coverage), shall be entered against the Company or the Guarantor and (i) within thirty (30) days after entry thereof such judgment shall not have been paid or discharged or execution thereof stayed pending appeal or, within thirty (30) days after the expiration 30 of any such stay, such judgment shall not have been paid or discharged or (ii) any enforcement proceeding shall have been commenced (and not stayed) by any creditor or upon such judgment; or (i) the occurrence of a change which has a Material Adverse Effect, in the opinion of the Lender, (A) in the financial condition, business or operations of the Company or the Guarantor (B) in the ability of the Company to make payment hereunder or under the Note or the right of the Lender to enforce any of its remedies to collect any amounts owing under the Loan Documents; or (j) a Change of Control with respect to FirstCity Financial Corporation shall occur. SECTION 8.02. Primary Remedies. In any such event, and at any time after the occurrence of any of the above described events, the Lender may, by written notice to the Company (a "Notice of Default") take any or all of the following actions to enforce any other rights it may have against the Company; provided, that if an Event of Default specified in Section 8.01(f) or Section 8.01(g) shall occur, the following shall occur automatically without the giving of any Notice of Default: (a) declare the principal of and any accrued and unpaid interest, and all obligations owing hereunder, to be, whereupon the same shall become, forthwith due and payable without presentment, demand, notice of demand or of dishonor and non-payment, protest, notice of protest, notice of intent to accelerate, declaration or notice of acceleration or any other notice of any kind, all of which are hereby waived by the Company; and (b) exercise any rights or remedies under any document securing any of the Loan Documents. SECTION 8.03. Other Remedies. Upon the occurrence and during the continuance of any Event of Default and after a Notice of Default, the Lender may proceed to protect and enforce its rights, either by suit in equity or by action at law or both, whether for the specific performance of any covenant or agreement contained in this Agreement or in any other Loan Document 31 or in aid of the exercise of any power granted in this Agreement or in any other Loan Document; or may proceed to enforce the payment of all amounts owing to the Lender under the Loan Documents and any accrued and unpaid interest thereon in the manner set forth herein or therein; it being intended that no remedy conferred herein or in any of the other Loan Documents is to be exclusive of any other remedy, and each and every remedy contained herein or in any other Loan Document shall be cumulative and shall be in addition to every other remedy given hereunder and under the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise. ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments. No amendment or waiver of any provision of this Agreement, the Note or any other Loan Document, nor consent to any departure by the Company herefrom or therefrom, shall in any event be effective unless the same shall be in writing and signed by the Company, as to amendments, and by the Lender in all cases, and then, in any case, such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 9.02. Notices. Except with respect to telephone notifications specifically permitted pursuant to Article II, all notices, consents, requests, approvals, demands and other communications provided for herein shall be in writing (including telecopy communications) and mailed, telecopied, sent by overnight courier or delivered: 32 (a) If to the Company: FirstCity Commercial Corporation P.O. Box 8216 6400 Imperial Drive Waco, Texas 76714 Telecopy No: (817) 751-1208 Attention: Mr. James C. Holmes (b) If to the Lender: CFSC Capital Corp. XXX 6000 Clearwater Drive Minnetonka, Minnesota 55343-9497 Telecopy No: (612) 984-3905 Attention: Mr. Jeffrey A. Parker with copies to: Cargill Financial Services Corporation 6000 Clearwater Drive Minnetonka, Minnesota 55343-9497 Telecopy No: (612) 984-3898 Attention: Ms. Laura H. Witte or, in the case of any party hereto, such other address or telecopy number as such party may hereafter specify for such purpose by notice to the other parties. All communications shall, when mailed, telecopied or delivered, be effective when mailed by certified mail, return receipt requested to any party at its address specified above, or telecopied to any party to the telecopy number set forth above, or delivered personally to any party at its address specified above; provided, that communications to the Lender pursuant to Article II shall not be effective until actually received by the Lender. SECTION 9.03. No Waiver; Remedies. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder, under the Note or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, or any abandonment or discontinuance of any steps to enforce such right, preclude any other or further exercise thereof or the exercise of any other right. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. The remedies herein are cumulative and not exclusive of any other remedies provided by law, at equity or in any other agreement. SECTION 9.04. Costs, Expenses and Taxes. The Company agrees to pay on demand: (a) all reasonable out-of-pocket costs and expenses of the Lender in connection with the preparation, execution and delivery of this Agreement, the Note, the other Loan Documents and the other documents to be delivered 34 hereunder, including the reasonable fees and out-of-pocket expenses of counsel for the Lender with respect thereto and with respect to advising the Lender as to its rights and responsibilities under this Agreement, the Note and the other Loan Documents, and any modification, supplement or waiver of any of the terms of this Agreement or any other Loan Document, (b) all reasonable costs and expenses of the Lender and any other holder of an interest in the Note, and the Obligations of the Company hereunder and under the Loan Documents, including reasonable legal fees and expenses, in connection with a default or the enforcement of this Agreement, the Note and the other Loan Documents and (c) reasonable costs and expenses incurred in connection with third party professional services required by the Lender such as appraisers, environmental consultants, accountants or similar Persons; provided, that prior to any Event of Default hereunder, the Lender will first obtain the consent of the Company to such expense, which consent shall not be unreasonably withheld. Without prejudice to the survival of any other obligations of the Company hereunder and under the Note, the obligations of the Company under this Section shall survive the termination of this Agreement or the replacement of the Lender and the assignment of the Note. SECTION 9.05. Indemnity. (a) The Company shall indemnify the Lender and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages (including reasonable legal fees and expenses) to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from any actual or proposed use by the Company of the proceeds of any extension of credit hereunder or any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing or any of the other Loan Documents, and the Company shall reimburse the Lender and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand for any expenses (including legal fees) reasonably incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. (B) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS 35 THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED HEREUNDER OR THEREUNDER SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS OR DAMAGES: (I) ARISING OUT OF OR RESULTING FROM THE ORDINARY SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON OR (II) IMPOSED UPON SAID PARTY UNDER ANY THEORY OR STRICT LIABILITY. Without prejudice to the survival of any other obligations of the Company hereunder and under the other Loan Documents, the obligations of the Company under this Section shall survive the termination of this Agreement and the other Loan Documents and the payment of the Obligations or the assignment of the Note. SECTION 9.06. Right of Setoff. If any Event of Default shall have occurred and be continuing, the Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits held and other indebtedness owing by the Lender, or any Affiliate, to or for the credit or the account of the Company against any and all the Obligations of the Company now or hereafter existing under this Agreement and the other Loan Documents and other obligations of the Company held by the Lender, irrespective of whether or not the Lender shall have made any demand under this Agreement, its Note or the Obligations and although the Obligations may be unmatured. The rights of the Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which the Lender may have. SECTION 9.07. Governing Law. This Agreement, the Note, the other Loan Documents and all other documents executed in connection herewith shall be deemed to be contracts and agreements executed by the Company and the Lender under the laws of the State of Minnesota and of the United States of America and for all purposes shall be construed in accordance with, and governed by, the laws of said state and of the United States of America. Without limitation of the foregoing, nothing in this Agreement, or in the Note or in any other Loan Document shall be deemed to constitute a waiver of any rights which the Lender may have under applicable federal legislation relating to the amount of interest which the Lender may contract for, take, receive or charge in respect of the Loan and the Loan Documents, including any right to take, receive, reserve and charge interest at the rate allowed by the law of the state where the Lender is located. 36 SECTION 9.08. Interest. Each provision in this Agreement and each other Loan Document is expressly limited so that in no event whatsoever shall the amount paid, or otherwise agreed to be paid, to the Lender or charged, contracted for, reserved, taken or received by the Lender, for the use, forbearance or detention of the money to be loaned under this Agreement or any Loan Document or otherwise (including any sums paid as required by any covenant or obligation contained herein or in any other Loan Document which is for the use, forbearance or detention of such money), exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate, and all amounts owed under this Agreement and each other Loan Document shall be held to be subject to reduction to the effect that such amounts so paid or agreed to be paid, charged, contracted for, reserved, taken or received which are for the use, forbearance or detention of money under this Agreement or such Loan Document shall in no event exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate. Anything in the Note or any other Loan Document to the contrary notwithstanding, the Company shall not be required to pay unearned interest on the Note and the Company shall not be required to pay interest on the Obligations at a rate in excess of the Highest Lawful Rate, and if the effective rate of interest which would otherwise be payable under the Note and such Loan Documents would exceed the Highest Lawful Rate, or if the holder of the Note shall receive any unearned interest or shall receive monies that are deemed to constitute interest which would increase the effective rate of interest payable by the Company under the Note and the other Loan Documents to a rate in excess of the Highest Lawful Rate, then (a) the amount of interest which would otherwise be payable by the Company shall be reduced to the amount allowed under applicable law and (b) any unearned interest paid by the Company or any interest paid by the Company in excess of the Highest Lawful Rate shall in the first instance be credited on the principal of the obligations of the Company (or if all such obligations shall have been paid in full, refunded to the Company). It is further agreed that, without limitation of the foregoing, all calculations of the rate of interest contracted for, reserved, taken, charged or received by the Lender under the Note and the Obligations and under the other Loan Documents are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate, and shall be 37 made, to the extent permitted by usury laws applicable to the Lender, by amortizing, prorating and spreading in equal parts during the period of the full stated term of the Note and this Agreement and all interest at any time contracted for, charged or received by the Lender in connection therewith. SECTION 9.09. Survival of Representations and Warranties. All representations, warranties and covenants contained herein or made in writing by the Company in connection herewith and the other Loan Documents shall survive the execution and delivery of this Agreement, the Note and the other Loan Documents, the termination of the Loan Documents and will bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not. SECTION 9.10. Successors and Assigns; Participations. (a) All covenants, promises and agreements by or on behalf of the Company or the Lender that are contained in this Agreement shall bind and inure to the benefit of their respective permitted successors and assigns. The Company may not assign or transfer any of its rights or obligations hereunder. (b) The Lender may assign to or sell participations to one or more banks of all or a portion of its rights and obligations under this Agreement and the other Loan Documents; provided, that the participating banks or other entities shall be entitled to the cost protection provisions contained in Article II and Section 9.04 and the Company shall continue to deal solely and directly with the Lender in connection with its rights and obligations under this Agreement and the other Loan Documents. Except with respect to cost protections provided to a participant pursuant to this paragraph and the items listed in Section 9.01 hereof, no participant shall be a third party beneficiary of this Agreement nor shall it be entitled to enforce any rights provided to the Lender against the Company under this Agreement. (c) With the prior written consent of the Company and the Lender (which consent shall not be unreasonably withheld), the Lender may assign to one or more other Eligible Assignees all or a portion of its interests, rights, and obligations under this Agreement and the other Loan Documents; provided, however, that (i) each such assignment shall be in a minimum principal 38 amount of not less than $1,000,000.00 and shall be of a constant, and not a varying, percentage of all the Lender's rights and obligations under this Agreement, (ii) the parties to each such assignment shall execute and deliver to the Lender, for its acceptance, an Assignment and Acceptance in form and substance satisfactory to the Lender (an "Assignment and Acceptance") and the Note subject to such assignment and (iii) no assignment shall be effective until receipt by the Lender of a reasonable service fee in respect of said assignment equal to $2,000.00. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof unless otherwise agreed to by the Lender and the Eligible Assignee thereunder (x) the Eligible Assignee thereunder shall be a party hereto and to the other Loan Documents and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of the Lender hereunder and under the other Loan Documents and (y) the Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all of the remaining portion of the Lender's rights and obligations under this Agreement and the other Loan Documents, the Lender shall cease to be a party hereto). (d) Notwithstanding any other provision herein, the Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to the Lender by or on behalf of the Company. SECTION 9.11. Confidentiality. The Lender agrees to exercise its best efforts to keep any information delivered or made available by the Company to it which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by the Lender who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Lender from disclosing such information (a) pursuant to subpoena or upon the order of any court or administrative agency, (b) upon the request or demand of 39 any regulatory agency or authority having jurisdiction over the Lender, (c) which has been publicly disclosed, (d) to the extent reasonably required in connection with any litigation to which the Lender, the Company or its respective Affiliates may be a party, (e) to the extent reasonably required in connection with the exercise of any remedy hereunder, (f) to the Lender's legal counsel and independent auditors and (g) to any actual or proposed participant or assignee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section. The Lender will promptly notify the Company of any information that it is required or requested to deliver pursuant to clause (b) or (c) of this Section and, if the Company is a party to any such litigation, clause (e) of this Section . SECTION 9.12. Separability. Should any clause, sentence, paragraph or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, and the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom and the remainder will have the same force and effectiveness as if such part or parts had never been included herein. SECTION 9.13. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 9.14. Interpretation. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; (iii) the words "herein," "hereof" and "hereunder" and other 40 words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause is intended to authorize any assignment not otherwise permitted by this Agreement; (v) except as expressly provided to the contrary herein, reference to any agreement, document or instrument (including this Agreement) means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and reference to the Note or other note includes the Note issued pursuant hereto in extension or renewal thereof and in substitution or replacement therefor; (vi) unless the context indicates otherwise, reference to any Article, Section, Schedule or Exhibit means such Article or Section hereof or such Schedule or Exhibit hereto; (vii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (viii) with respect to the determination of any period of time, except as expressly provided to the contrary, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, rule or regulation means such as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (b) The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 41 (c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. SECTION 9.15. SUBMISSION TO JURISDICTION. (A) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF MINNESOTA, IN HENNEPIN COUNTY OR ELSEWHERE OR OF THE UNITED STATES FOR THE DISTRICT OF MINNESOTA AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. (B) THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (A) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SECTION 9.16. WAIVER OF JURY TRIAL. THE COMPANY HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM OR RELATING TO ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES, 42 TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. SECTION 9.17. FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT (INCLUDING THE SCHEDULES AND EXHIBITS HERETO), THE NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 43 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. FIRSTCITY COMMERCIAL CORPORATION By: /s/ James C. Holmes ----------------------------- Name: James C. Holmes Title: Senior Vice President CFSC CAPITAL CORP. XXX By: /s/ Jeffery D. Leu ----------------------------- Name: Jeffery D. Leu Title: President 44 Exhibit 2.02 45 Exhibit 5.04 46 Exhibit 7.04(a) 47 Exhibit 5.06 None 48 Exhibit 5.13 49 Exhibit 5.15 None 50 Exhibit 6.03 51 Exhibit 7.04(a) 52 EX-10 7 LOAN AGREEMENT BANK OF SCOTLAND LOAN TO FIRSTCITY FINANCIAL CORPORATION APRIL 8, 1998 HOFS02...:\92\54892\0011\1612\AGR8068M.030 TABLE OF CONTENTS PAGE 1..............................................1.DEFINITIONS AND TERMS.1 1.1.........................................................GAAP13 1.2.....................................................BORROWER13 1.3........................................RULES OF CONSTRUCTION13 2................................................LOANS - GENERAL TERMS14 2.1...............................................REVOLVING LOAN14 2.2.....................................MAXIMUM PRINCIPAL AMOUNT14 2.3..........................MATURITY DATE; TERMINATION OF LOANS16 2.4..........................AUTHORIZED DISBURSEMENT OF PROCEEDS16 2.5..........................................BORROWING PROCEDURE17 2.6...............................................INTEREST RATE.17 2.7..............................................CHANGE OF LAWS.18 2.8...........................................REGULATORY CHANGES18 2.9...................ADVANCES PRIOR TO LIBOR RATE DETERMINATION18 2.10..........................EURODOLLAR ADVANCES AND CONVERSION18 2.11....................................INTEREST PERIOD ELECTION19 2.12........................................................FEES19 2.13.......................................................USURY20 3........................................................PAYMENT TERMS20 3.1......................LOAN ACCOUNT; METHOD OF MAKING PAYMENTS20 3.2............................................INTEREST PAYMENTS21 i 3.3...........................................PRINCIPAL PAYMENTS21 3.4.............................................PLACE OF PAYMENT21 3.5...........................PAYMENT ON MATURITY AND PREPAYMENT21 3.6..............................ADVANCES TO CONSTITUTE ONE LOAN22 3.7......................APPLICATION OF PAYMENTS AND COLLECTIONS22 3.8...........................................MONTHLY STATEMENTS23 4.................................................ANCILLARY AGREEMENTS23 4.1...................................................GUARANTIES23 4.2.......................................NOTE PLEDGE AGREEMENTS23 4.3......................................STOCK PLEDGE AGREEMENTS23 5....................GENERAL WARRANTIES, REPRESENTATIONS AND COVENANTS24 5.1.......................GENERAL REPRESENTATIONS AND WARRANTIES24 5.2..............REAFFIRMATION OF WARRANTIES AND REPRESENTATIONS32 5.3...................SURVIVAL OF WARRANTIES AND REPRESENTATIONS32 6..................................COVENANTS AND CONTINUING AGREEMENTS33 6.1..........................................FINANCIAL COVENANTS33 6.2........................................AFFIRMATIVE COVENANTS33 6.3...........................................NEGATIVE COVENANTS37 6.4.............................................REQUIRED NOTICES41 6.5............................................PAYMENT OF CLAIMS42 6.6........................................YEAR 2000 COMPLIANCE.43 7..............................................................DEFAULT43 7.1...........................................EVENTS OF DEFAULT.43 ii 7.2..........................................REMEDIES CUMULATIVE46 7.3.................................................ACCELERATION46 7.4.....................................................REMEDIES47 7.5............................................INJUNCTIVE RELIEF47 7.6............................ADVANCES DURING UNMATURED DEFAULT47 8.................................CONDITIONS PRECEDENT TO DISBURSEMENT47 8.1..............................................CHECKLIST ITEMS47 8.2............................................NECESSARY ACTIONS47 8.3.........................................CONDITIONS PRECEDENT47 9..............................................................GENERAL48 9.1........................................COMPLIANCE WITH ERISA48 9.2........................................................COSTS54 9.3....................................................STATEMENT54 9.4......................................................NOTICES54 9.5.......................................AMENDMENTS AND WAIVERS55 9.6.......................NO IMPLIED WAIVER; REMEDIES CUMULATIVE55 9.7.................................................SEVERABILITY56 9.8............................INCORPORATION OF OTHER AGREEMENTS56 9.9...................................................ACCEPTANCE57 9.10...................................................KNOWLEDGE57 9.11..........................................WAIVER BY BORROWER57 9.12...............................................GOVERNING LAW57 9.13........................................WAIVER OF MARSHALING58 9.14...........................................LIMITATION BY LAW58 iii 9.15..................SURVIVAL OF REPRESENTATIONS AND WARRANTIES58 9.16..........................................SERVICE OF PROCESS58 9.17...................................REPRESENTATION BY COUNSEL58 9.18.............................................RELEASE OF BANK58 9.19........................................INVALIDATED PAYMENTS59 9.20....................................................HEADINGS59 9.21................................................COUNTERPARTS59 9.22...............................................FAX EXECUTION59 9.23................................NO THIRD PARTY BENEFICIARIES59 9.24...........................................DOMICILE OF LOANS60 9.25............................................ENTIRE AGREEMENT60 9.26................................................CONSTRUCTION60 9.27......................................SUCCESSORS AND ASSIGNS60 9.28..............................................TEXAS LANGUAGE60 9.29.....................................WAIVER OF TRIAL BY JURY61 iv LOAN AGREEMENT THIS LOAN AGREEMENT (this "AGREEMENT"), dated for reference purposes only as of April 8 , 1998 by and between Bank of Scotland, acting through its branch in New York, New York ("BANK"), a foreign banking corporation incorporated under the laws of Scotland with its principal place of business at 565 Fifth Avenue, New York, NY 10017, and FirstCity Financial Corporation, a Delaware corporation ("BORROWER"), with its principal place of business at 6400 Imperial Drive, P.O. Box 8216, Waco, Texas 76714. RECITALS: A. Borrower has requested and Bank has agreed to provide Borrower with a revolving credit facility in an amount not to exceed Fifty Million Dollars ($50,000,000) (the "LOANS"). B. Borrower intends to use the proceeds of the Loans to make loans and other financial accommodations to its Affiliates. C. The Loans will be secured by a pledge of all of Borrower's assets, including the stock or other equity interests of corporations and partnerships owned by Borrower. D. The parties deem it to be in their best interest to set forth their mutual agreements herein. NOW THEREFORE, in consideration of any loan, advance, extension of credit and/or other financial accommodation at any time made by Bank to or for the benefit of Borrower, and of the promises set forth herein, the parties hereto agree as follows: 1. DEFINITIONS AND TERMS. 1.1 Definitions. The following words, terms and/or phrases shall have the meanings set forth thereafter and such meanings shall be applicable to the singular and plural form thereof, giving effect to the numerical difference. (a) "ADVANCE": any loan of monies made by Bank to Borrower pursuant to the terms of Section 2.1. (b) "ADVANCE DATE": with respect to each Advance, the Business Day upon which the proceeds of such Advance are to made available to Borrower. (c) "AFFILIATE": any Person (i) in which Borrower, one or more equity interest holders owning twenty-five percent (25%) or more of the total equity interest of Borrower, any Subsidiary, and/or any Parent, individually, jointly and/or severally, now or at any time or times hereafter, has or have an equity or other ownership interest equal to or in excess of twenty-five percent (25%) of the total equity of or other ownership interest in such Person; and/or (ii) which directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with Borrower; and/or (iii) any officer or director of Borrower or any Primary Obligor. For purposes of this definition, "CONTROL" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Stock, by contract or otherwise, and in any case shall include direct or indirect ownership (beneficially or of record) of, or direct or indirect power to vote, 25% or more of the outstanding shares of any class of capital stock of such Person (or in the case of a Person that is not a corporation, 25% or more of any class of equity interest). (d) "AGREEMENT": this Loan Agreement, together with all amendments, modifications, extensions, supplements, restatements replacements and extensions hereto or hereof. (e) "AGREEMENT AND ESTOPPEL CERTIFICATE": an agreement and estoppel certificate executed and delivered by each maker of a Pledged Note, in form and substance acceptable to Bank, in its sole and exclusive discretion. (f) "AND/OR": one or the other or both, or any one or more or all, of the things or Persons in connection with which the conjunction is used. (g) "ASSETS": any and all real, personal and intangible property of a Person, including, without limitation, accounts, chattel paper, contract rights, letters of credit, instruments and documents, equipment, general intangibles, inventory, leases, options, licenses, and real property, whether now existing or hereafter acquired or arising. (h) "BANK": Bank of Scotland, a foreign banking corporation incorporated under the laws of Scotland, and its successors and assigns. (i) "BOOK VALUE": the meaning set forth in Section 2.2(b). (j) "BORROWER": FirstCity Financial Corporation, a Delaware corporation, and its permitted successors and assigns. (k) "BORROWER'S LIABILITIES": all obligations and liabilities of Borrower to Bank under the terms of this Agreement, the Security Agreement, the Note Pledge Agreements, the Stock Pledge Agreements and 2 the other Loan Documents, and all extensions and renewals or refinancing thereof, whether such obligation or liability is direct or indirect, secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, whether heretofore arising, now existing or hereafter arising, however evidenced, created, incurred, acquired or owing and whether now contemplated or hereafter arising. Without limitation of the foregoing, such liability and obligations include the principal amount of Loans, interest, fees, indemnities or expenses under this Agreement and all other Loan Documents, and all extensions, renewals and refinancing thereof, whether or not such Loans were made in compliance with the terms and conditions of this Agreement or in excess of the obligation of Bank to lend. Borrower's Liabilities shall remain Borrower's Liabilities, notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Borrower's Liabilities or any interest therein. (l) "BORROWER'S OBLIGATIONS": all terms, conditions, warranties, representations, agreements, undertakings, covenants and provisions (other than Borrower's Liabilities) to be performed, discharged, kept, observed or complied with by Borrower to or for the benefit of Bank, under the terms of this Agreement and all other Loan Documents, and all extensions and renewals or refinancing thereof, whether such obligation is direct or indirect, secured or unsecured, joint or several, absolute or contingent, due or to become due, whether heretofore arising, now existing or hereafter arising, however evidenced, created, incurred, acquired or owing and whether now contemplated or hereafter arising. Borrower's Obligations shall remain Borrower's Obligations, notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Borrower's Obligations or any interest therein. (m) "BORROWING BASE": the meaning set forth in Section 2.2(b). (n) "BORROWING BASE CERTIFICATE": the certificate delivered by Borrower to Bank in accordance with the provisions of Section 6.2(c)(vi). (o) "BORROWING REQUEST": a request for an Advance setting forth the information required pursuant to Section 2.5(a). (p) "BUSINESS DAY": (i) For all purposes other than as covered by clause (ii) hereof, any day, other than a Saturday, Sunday, a day that is a legal holiday under the laws of the State of Illinois, the State of New York, and the State of Texas or any other day on which banking institutions located in the State of Illinois, the State of New York and the State of Texas are authorized or required by law or other governmental action to close; and (ii) with respect to determinations in connection with, and payments of principal and interest in Eurodollar Advances, any day 3 which is a Business Day described in clause (i) and which is also a day for trading by and between banks in U.S. dollar deposits in the London Interbank Eurodollar Market. (q) "CAPITALIZED LEASE" at any time any lease which is, or is required under GAAP to be, capitalized on the balance sheet of the lessee at such time, and "CAPITALIZED LEASE OBLIGATION" of any Person at any time shall mean the aggregate amount which is, or is required under GAAP to be, reported as a liability on the balance sheet of such Person at such time as lessee under a Capitalized Lease. (r) "CHARGES": all national, Federal, state, county, city, municipal and/or other governmental (or any instrumentality, division, agency, body or department thereof, including without limitation the Pension Benefit Guaranty Corporation) taxes, levies, assessments, charges, liens, claims or encumbrances upon and/or relating to the Borrower's Assets, the Secured Obligations, Borrower's business, Borrower's ownership and/or use of any of its Assets, Borrower's income and/or gross receipts and/or Borrower's ownership and/or use of any of its material Assets. (s) "CONSOLIDATED GROUP": Borrower and those Affiliates of Borrower required to file consolidated tax returns pursuant to Section 1502 of the Code. (t) "COSTS": any and all reasonable costs and expenses (including, without limitation, the reasonable fees and expenses of any counsel, accountants, appraisers or other professionals) incurred by Bank at any time, in connection with: (i) the preparation, negotiation, execution and administration of this Agreement and all other Loan Documents; (ii) the preparation, negotiation and execution of any amendment or modification of this Agreement or the other Loan Documents; (iii) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon the Pledged Property; (iv) the exercise or enforcement of any of the rights of Bank hereunder; (v) any failure by Borrower to perform or observe any of the provisions hereunder; (vi) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Bank, Borrower or any other Person) in any way relating to this Agreement, the other Loan Documents, the Secured Obligations, the Pledged Property, Borrower's affairs or any Affiliate's affairs; (vii) any attempt to enforce any rights of Bank against Borrower or any other Person which may be obligated to Bank by virtue of this Agreement or the other Loan Documents; and (viii) performing any of the obligations relating to or payment of any of Borrower's Obligations hereunder in accordance with the terms hereof. (u) "DEFAULT RATE": interest at the rate of two percent (2%) per annum plus the Prime Interest Rate. 4 (v) "DESIGNATED PERSON": any Person identified as a "DESIGNATED PERSON" on Borrower's Secretary's Certificate dated of even date herewith, as amended or superseded from time to time. (w) "DOLLARS": the lawful currency of the United States of America. (x) "ELIGIBLE NOTE": the meaning set forth in Section 2.2(c). (y) "ENVIRONMENTAL LAWS": any Federal, state or local law, rule, regulation, ordinance, order, code or statute applicable to Borrower or its property, in each case as amended (whether now existing or hereafter enacted or promulgated), controlling, governing or relating to the pollution or contamination of the air, water or land or concerning hazardous, special or toxic materials, wastes or substances, or any judicial or administrative interpretation of such laws, rules or regulations, including, without limitation, the Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), Safe Drinking Water Act (42 U.S.C. ss. 3000(f) et seq.), Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), Clean Air Act (42 U.S.C. ss. 7401 et seq.), and Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. ss. 9601 et seq.). (z) "EQUIPMENT LEASES": all leases or similar agreements pursuant to which Borrower leases equipment. (aa) "EURODOLLAR ADVANCE": any portion of the Loan for which the interest rate is based on the Eurodollar Rate, whether or not Bank obtains Eurodollars equal to all or any portion of such Eurodollar Advance (bb) "EURODOLLAR RATE": the variable rate equal to two and six hundred twenty-five thousandths percent (2.625%) per annum plus the LIBOR Rate. (cc) "EVENT OF DEFAULT": the definition ascribed to this term in Section 7.1. (dd) "EXCLUDED ENTITIES": the definition ascribed to this term in Section 4.3. (ee) "EXCLUDED NOTES": the definition ascribed to this term in Section 4.2. (ff) "FC CAPITAL": FC Capital Corp., a New York corporation. (gg) "FC COMMERCIAL": FirstCity Commercial Corporation, a Texas corporation. 5 (hh) "FC CONSUMER LENDING": FirstCity Consumer Lending Corporation, a Texas corporation. (ii) "FC MORTGAGE": FirstCity Financial Mortgage Corporation, a Delaware corporation. (jj) "FC SERVICING": FirstCity Servicing Corporation, a Texas corporation. (kk) "FEDERAL FUNDS EFFECTIVE RATE": for any day shall mean the rate per annum (rounded upward to the nearest 1/100 of 1%) determined by Bank (which determination shall be conclusive) to be the rate per annum announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight Federal funds transactions arranged by Federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided that if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day on which such rate was announced. (ll) "FEE AGREEMENTS": any partnership agreement, management agreement, consulting agreement, or other agreements pursuant to which Borrower or any Primary Obligor or Secondary Obligor is to be paid fees, distributions, allocations, expense reimbursements, consideration, salary or other compensation in consideration for providing management, personnel or services, in any form whatsoever, from any Affiliate or from any other Person. Services to be rendered under Fee Agreements may include, but not be limited to consulting, collecting revenues, paying operating expenses not paid directly by others, and providing clerical and bookkeeping services. (mm) "FINANCIALS": those financial statements of Borrower and/or any other Loan Party, heretofore, concurrently herewith or hereafter delivered by or on behalf of Borrower and/or any other Loan Party to Bank, including but not limited to those financial statements and reports delivered by Borrower to Bank pursuant to Section 6.2(c). (nn) "GAAP": generally accepted accounting principles applied in the preparation of the financial statements of a Person with such changes thereto as: (i) shall be consistent with the then-effective principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors and successors, and (ii) shall be concurred in by the independent certified public accountants of recognized standing acceptable 6 to Bank reviewing such financial statements of such Person. (oo) "GOVERNMENTAL AUTHORITY": any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal. grand jury or arbitrator, in each case whether foreign or domestic. (pp) "GUARANTIES": the meaning set forth in Section 4.1. (qq) "GUARANTORS": collectively, (i) FC Commercial, (ii) FC Consumer Lending, and (iii) FC Servicing, and each other Person who has guaranteed all or any portion of the Secured Obligations. (rr) "GUARANTY EQUIVALENT": any agreement, document or instrument pursuant to which a Person directly or indirectly guarantees, becomes surety for, endorses, assumes, agrees to indemnify the obligee of any other Person against, or otherwise agrees, becomes or remains liable (contingently or otherwise) for, such obligation, other than by endorsements of instruments in the ordinary course of business. Without limitation, a Guaranty Equivalent shall be deemed to exist if a Person agrees, becomes or remains liable (contingently or otherwise), directly or indirectly: (i) to purchase or assume, or to supply funds for the payment, purchase or satisfaction of, an obligation; (ii) to make any loan, advance, capital contribution or other investment in, or a purchase or lease of any property or services from, a Person; (iii) to maintain the solvency of such Person; (iv) to enable such Person to meet any other financial condition; (v) to enable such Person to satisfy any obligation or to make any payment; (vi) to assure the holder of an obligation against loss; (vii) to purchase or lease property or services from such Person regardless of the non-delivery of or failure to furnish of such property or services; or (viii) in respect of any other transaction the effect of which is to assure the payment or performance (or payment of damages or other remedy in the event of nonpayment or nonperformance) of any obligation. (ss) "INDEBTEDNESS": with respect to any Person, at a particular time (without duplication): (i) all obligations on account of money borrowed by, or credit extended to or on behalf of, or for or on account of deposits with or advances to, such Person; (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (iii) all obligations of such Person for the deferred purchase price of property or services other than trade payables incurred in the ordinary course of business and on terms customary in the trade; (iv) all obligations secured by a Lien on property owned by such Person (whether or not assumed); and all obligations of such Person under Capitalized Leases (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such Capitalized Lease to repossession or sale of such property); (v) the face amount of all letters of credit issued for the account of such Person 7 and, without duplication, the unreimbursed amount of all drafts drawn thereunder, and all other obligations of such Person associated with such letters of credit or draws thereon; (vi) all obligations of such Person in respect of acceptances or similar obligations issued for the account of such Person; (vii) all obligations of such Person under a product financing or similar arrangement; (viii) all obligations of such Person under any interest rate or currency protection agreement, interest rate or currency future, interest rate or currency option, interest rate or currency swap or cap or other interest rate or currency hedge agreement; and (ix) all obligations and liabilities with respect to unfunded vested benefits under any "EMPLOYEE BENEFIT PLAN" or with respect to withdrawal liabilities incurred under ERISA by Borrower or any ERISA Affiliate to a "MULTIEMPLOYER PLAN", as such terms are defined under the Employee Retirement Income Security Act of 1974. (tt) "INDEBTEDNESS INSTRUMENT": any note, mortgage, indenture, chattel mortgage, deed of trust, loan agreement, hypothecation agreement, pledge agreement, security agreement, financing statement or other document, instrument or agreement evidencing or securing the payment of or otherwise relating to the borrowing of monies. Indebtedness Instruments shall include, but not be limited to the Loan Documents. (uu) "INTEREST PERIOD": with respect to any Eurodollar Advance, the period commencing on the date such Eurodollar Advance is made or continued as a Eurodollar Advance, as the case may be, or the date on which a Prime Rate Advance is converted into such Eurodollar Advance as applicable, and ending seven days, or one, two, three and six months thereafter, as Borrower may elect in the applicable Borrowing Request (or as Borrower shall be deemed to have elected, as applicable); provided that any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day. No Interest Period shall terminate after the end of the Maturity Date. (vv) "INTEREST RATE": the Prime Interest Rate or the Eurodollar Rate, as determined in accordance with the provisions of Article 2. (ww) "LIEN": any mortgage, deed of trust, pledge, lien, hypothecation, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. (xx) "LIBOR BREAKAGE FEE": a fee equal to all losses (excluding loss of anticipated profits) costs, or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund or maintain the requested Eurodollar Advance, when, as a 8 result of such failure on the part of Borrower or prepayment by Borrower (including, without limitation, any mandatory prepayment of principal and any prepayment resulting from the liabilities being declared due and payable in accordance with their terms hereof), interest on such Eurodollar Advance is not based on the applicable Eurodollar Rate for the requested Interest Period. (yy) "LIBOR RATE": for each Interest Period, a rate of interest, per annum, equal to: (i) the rate of interest determined by the Bank at which deposits in U.S. Dollars for the relevant Interest Period are offered based on information presented on the Telerate Screen as of 11:00 A.M. (London time) on the applicable Interest Rate Determination Date; provided that if more than one (1) offered rate appears on the Telerate Screen in respect of such Interest Period, the arithmetic mean of all such rates (as determined by the Bank) will be the rate used; provided further that if Telerate ceases to provide LIBOR quotations, such rate shall be the average rate of interest determined by the Bank at which deposits in U.S. Dollars are offered for the relevant Interest Period by banks or other financial institutions selected by Bank to banks in London interbank markets as of 11:00 A.M. (London time) on the applicable Interest Rate Determination Date, multiplied by (ii) the Libor Rate Reserve Percentage. The LIBOR Rate shall be adjusted automatically as of the effective date of each change in the LIBOR Rate Reserve Percentage. The LIBOR Rate shall be calculated in accordance with the foregoing whether or not Bank is actually required to hold reserves in connection with its eurocurrency funding or, if required to hold such reserves, is required to hold reserves at the LIBOR Rate Reserve Percentage. (zz) "LIBOR RATE RESERVE PERCENTAGE": for any day shall mean the percentage (expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as determined in good faith by Bank (which determination shall be conclusive), which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) representing the maximum reserve requirement (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency liabilities") of a member bank in such system. (aaa) "LOAN": any and all loans, advances, extensions of credit and/or other financial accommodations of any kind or nature made by Bank at any time to, for the benefit or at the request of Borrower pursuant to this Agreement and/or any of the other Loan Documents. (bbb) "LOAN DOCUMENTS": this Agreement and the Other Agreements. (ccc) "LOAN PARTY": Borrower and every other Person who is a party to any one or more of the Loan Documents. 9 (ddd) "MATURITY DATE": April 30, 1999, or such earlier date as all of Borrower's Obligations shall be due and payable by acceleration or otherwise. (eee) "MAXIMUM PRINCIPAL AMOUNT": the meaning set forth in Section 2.2(a). (fff) "MONTHLY REPORT": those reports delivered to Bank in accordance with Section 6.2(c)(iii). (ggg) "NAF": National Auto Funding Corporation, a Texas corporation. (hhh) "NOTE": that certain revolving promissory note dated even date herewith, in the original principal amount of $50,000,000 made by Borrower payable to the order of Bank, as said note may hereafter be amended, restated, modified, supplemented, extended or replaced. (iii) "NOTE PLEDGE AGREEMENT": any one or more of those certain Note Pledge Agreements entered into concurrently herewith by Borrower and certain of the Primary Obligors, pursuant to which such Loan Party has pledged to Bank certain promissory notes, including the Eligible Notes. (jjj) "ORGANIC DOCUMENTS": with respect to any Person, its articles or certificate of incorporation, by-laws, shareholder's agreement, certificate of partnership, certificate of limited partnership, partnership agreement, articles of organization, operating agreement, or similar documents or agreements governing its management and the rights and privileges of its equity owners. (kkk) "OTHER AGREEMENTS": the Note, the Note Pledge Agreements, the Stock Pledge Agreements, together with all other agreements, instruments and documents evidencing or securing the Loans or the transactions contemplated herein, including, without limitation, bond agreements, loan agreements, security agreements, guaranties, mortgages, deeds of trust, notes, applications and agreements for letters of credit, letters of credit, advances of credit, bankers acceptances, pledges, powers of attorney, consents, assignments, collateral assignments, contracts, notices, leases, financing statements and all other written matter heretofore, now and/or from time to time hereafter executed by and/or on behalf of Borrower, any other Loan Party and delivered to Bank, or issued by Bank upon the application and/or other request of, and on behalf of, Borrower. (lll) "PARENT": any Person, now or at any time or times hereafter, owning or controlling (alone or with Borrower, any Subsidiary and/or any other Person) at least a majority of the issued and outstanding Stock or other ownership interest of Borrower or any Subsidiary (hereinafter 10 defined). For purposes of this definition, "CONTROL" shall have the same meaning ascribed to this term in Section 1.1(c). (mmm) "PERMITTED LIENS": (i) any liens created in favor of Bank; (ii) liens for Charges which are not yet due and payable or which are expressly permitted pursuant to the terms hereof, or claims and unfunded liabilities under ERISA not yet due and payable or which are being contested in good faith; (iii) liens arising in connection with worker's compensation, unemployment insurance, old age pensions and social security benefits which are not overdue or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest any proceedings commenced for the enforcement of such lien shall have been duly suspended and such provision for the payment of such lien has been made on the books of Borrower (or the applicable Affiliate) as may be required by GAAP; (iv) liens incurred in the ordinary course of business to secure the performance of statutory obligations arising in connection with progress payments or advance payments due under contracts with the United States Government or any agency thereof entered into in the ordinary course of business; (v) any liens securing indebtedness of Borrower (or any Affiliate) to any Persons in an aggregate amount less than $200,000; (vi) ad valorem taxes relating to Assets of First B and First X (as defined on Schedule 1.1(xxx), (vii) as to Secondary Obligors, NAF and/or FC Capital, purchase money liens in connection with the acquisition of Assets, (viii) as to Secondary Obligors NAF, and/or FC Capital, only, liens relating to Indebtedness incurred in connection with warehousing assets or the securitization of Assets, and (ix) those liens disclosed on Schedule 5.1(g). (nnn) "PERSON": any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party or government (whether national, Federal, state, county, city, municipal or otherwise, including without limitation any instrumentality, division, agency, body or department thereof). (ooo) "PLEDGED ENTITIES": those entities whose shareholders, partners, members or other equity owners have pledged an equity interest in such entity to secure the Secured Obligations. (ppp) "PLEDGED NOTES": those certain promissory notes made by certain Primary Obligors payable to the order of Borrower, or made by certain Secondary Obligors payable to the order of a Primary Obligor, which have been pledged to Bank pursuant to a Note Pledge Agreement. (qqq) "PLEDGED PROPERTY": any and all other property (real, personal or intangible) pledged by Borrower or any other Loan Party to secure payment and performance of the Secured Obligations, including but 11 not limited to: (i) any and all Collateral, as defined in the Security Agreement; (ii) any and all interests pledged pursuant to the Note Pledge Agreements; and (iii) any and all interests pledged pursuant to the Stock Pledge Agreements. (rrr) "PRIMARY OBLIGORS": collectively, (i) FC Capital, (ii) FC Commercial, (iii) FC Consumer Lending, (iv) FC Mortgage, (v) FC Servicing, and (vi) NAF. (sss) "PRIME INTEREST RATE": an interest rate equal to the higher of: (i) the Federal Funds Effective Rate plus one-half of one percent (.5%), or (ii) the Prime Rate. (ttt) "PRIME RATE": the prime rate of interest quoted from time to time by the Bank of Scotland as its base rate on corporate loans at large U.S. money center commercial banks on such day; provided that in the event the Bank of Scotland ceases quoting a prime rate, Prime Rate shall mean the per annum rate of interest quoted as the Bank Prime Loan Rate for the most recent weekday for which such rate is quoted in Statistical Release H.15 (519) published from time to time by the Board of Governors of the Federal Reserve System; provided further that in the event that both of the aforesaid indices cease to be published or to quote rates of the aforesaid types, the Prime Rate shall be determined from a comparable index chosen by Bank in good faith. The Prime Rate shall change effective on the date of the publication of any change in the applicable index by which the Prime Rate is determined. (uuu) "PRIME RATE ADVANCE": all or any portion of the Loan which is not a Eurodollar Advance. (vvv) "RECORDS": all books, records, computer records, computer software, ledger cards, programs and other computer materials, customer and supplier lists, invoices, orders and other property and general intangibles at any time evidencing or relating to the Assets. (www) "REDUCTION EVENT": the meaning set forth in Section 2.2(a). (xxx) "SEC": the Securities and Exchange Commission. (yyy) "SECONDARY OBLIGORS": those entities identified on Schedule 1.1(xxx). (zzz) "SECURED OBLIGATIONS": all of Borrower's Liabilities, Borrower's Obligations and all other obligations and liabilities of any other Loan Party to Bank under the terms of this Agreement, the Security Agreement, the Guaranties, the Note Pledge Agreements, the Stock Pledge Agreements and the other Loan Documents, and all extensions and renewals 12 or refinancing thereof, whether such obligation or liability is direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, whether heretofore arising, now existing or hereafter arising, however evidenced, created, incurred, acquired or owing and whether now contemplated or hereafter arising. Without limitation of the foregoing, such liability and obligations include the principal amount of Loans, interest, fees, indemnities or expenses under this Agreement or any other Loan Document, and all extensions, renewals and refinancing thereof, whether or not such Loans were made in compliance with the terms and conditions of this Agreement or in excess of the obligation of the Bank to lend. Secured Obligations shall remain Secured Obligations, notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Secured Obligations or any interest therein. (aaaa) "SECURITIES": shall have the meaning ascribed to that term in the Securities Act of 1934. (bbbb) "SECURITIES LAWS": all applicable Federal and state securities laws and regulations promulgated pursuant thereto. (cccc) "SECURITY AGREEMENTS": those certain security agreements by and between Bank and Borrower, dated even date herewith, or by and between certain Primary Obligors and Bank, each dated even date herewith, as said agreements may be amended, modified, supplemented, extended, renewed or replaced. (dddd) "STOCK": all shares, interests, participations or other equivalents (however designated) of or in a corporation, whether voting or non-voting, including, but not limited to, common stock, warrants, preferred stock, convertible debentures and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing. (eeee) "STOCK PLEDGE AGREEMENT": any one or more of those certain stock pledge agreements, partnership pledge agreements and/or membership interest pledge agreements entered into concurrently hereby by Borrower and other Loan Parties, pursuant to which such Loan Party has pledged to Bank Stock or other equity interests in the Pledged Entities. (ffff) "SUBSIDIARY": any Person at least a majority of whose issued and outstanding Stock or other ownership interests now or at any time hereafter is owned by Borrower, any Primary Obligor or Secondary Obligor, as applicable. (gggg) "TANGIBLE NET WORTH": as determined at any time, the total of shareholders' equity (including capital stock, additional paid-in 13 capital and retained earnings after deducting treasury stock and subordinated indebtedness approved in writing by Bank) of a Person, less the sum of the total amount of any intangible assets, which, for purposes of this definition, shall include, without limitation, general intangibles and, if applicable, all accounts receivable from any Affiliate of such Person or any shareholders or officers of any Affiliate of such Person, all prepaid expenses, any unamortized debt, discount and expense, unamortized deferred charges and good will, all as determined in accordance with GAAP. (hhhh) "UNMATURED DEFAULT": any event or condition which, with the passage of time or the giving of notice or both, would constitute an Event of Default hereunder. 1.2 GAAP. Except as otherwise defined in this Agreement or the other Loan Documents, all accounting terms used herein shall have the meaning ascribed to that term in accordance with GAAP. 1.3 Borrower. Whenever the context so requires, the use of "IT" in reference to Borrower shall mean Borrower as defined above. 1.4 Rules of Construction. In this Agreement, unless a clear contrary intention appears: (a) the singular number includes the plural number and vice versa; reference to any gender includes each other gender; (b) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (c) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; provided that nothing in this clause is intended to authorize any assignment not otherwise permitted by this Agreement; (d) reference to any agreement, document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and reference to any note includes any note issued pursuant to any Loan Document in extension or renewal thereof and in substitution or replacement therefor; (e) unless the context indicates otherwise, reference to any Article, Section, Schedule or Exhibit means such Article or Section hereof or such Schedule or Exhibit hereto: 14 (f) the words "INCLUDING" (and with correlative meaning "INCLUDE") means including, without limiting the generality of any description preceding such term: (g) with respect to the determination of any period of time, the word "from" means "from and including" and the word "to" means "to but excluding;" and (h) reference to any law means such as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (i) The Article and Section headings herein are for convenience only and shall not affect the construction hereof. 2. LOANS - GENERAL TERMS 2.1 Revolving Loan. Subject to the terms and conditions hereof, Bank shall make available to Borrower revolving Loans from time to time in an aggregate principal amount not to exceed at any time outstanding $50,000,000. The Loans shall be further evidenced by the Note. The Loans shall be funded and interest shall accrue and be paid thereon in accordance with this Article 2. The entire unpaid principal balance plus accrued but unpaid interest on the Loans is due and payable on the Maturity Date. 2.2 Maximum Principal Amount. (a) Notwithstanding anything to the contrary contained herein or in any other Loan Document but subject to the limitations set forth in Section 2.2(d), the principal portion of Borrower's Liabilities outstanding at any one time during the term hereof shall not exceed: (i) at any time prior to the occurrence of a Reduction Event, the lesser of (A) $50,000,000 and (B) the Borrowing Base, or (ii) at any time after the occurrence of a Reduction Event, the lesser of (A) ($40,000,000), and (B) the Borrowing Base. The foregoing is collectively referred to herein as the "MAXIMUM PRINCIPAL AMOUNT." As used herein, a "REDUCTION EVENT" shall mean: (y) after the filing of an S-3 in accordance with Section 6.3(f): (i) the sale of Securities pursuant to such filing, (ii) the voluntary withdrawal of such filing, or (iii) the 15 rejection or prohibition by the SEC of such filing, for any reason whatsoever; or (z) ninety (90) days after the date hereof. Notwithstanding anything to the contrary contained herein, it is the intent and agreement of the parties that in the event Bank establishes a co-lending relationship with one or more other lenders and the total amount of the loan to Borrower pursuant to the terms of this Agreement, as amended, is increased, that Bank's lending commitment to Borrower under such amended facility shall be reduced to $40,000,000, whether or not a Reduction Event shall then have occurred. (b) Subject to the limitations set forth in Section 2.2(d), the borrowing base ("BORROWING BASE") applicable to the Loans shall be equal, on any day during the term of this Agreement, to an amount up to 65% of the Book Value of all Eligible Notes. As used herein, "BOOK VALUE" shall mean an amount equal to: (i) the unpaid principal balance of any Eligible Note, exclusive of any interest, fees, charges, penalties or other amounts due or payable thereunder, minus (ii) an amount equal to the negative Tangible Net Worth of any obligor on any Eligible Note. (c) As used herein, "ELIGIBLE NOTE" shall mean any one or more negotiable promissory notes made by a Primary Obligor payable to the order of Borrower, in form and substance acceptable to Bank, in its sole and exclusive discretion, which note: (i) has been pledged to Bank pursuant to the Note Pledge Agreement by and between Borrower and Bank; (ii) has been delivered to Bank by Borrower; (iii) has been endorsed by Borrower payable to the order of Bank; (iv) for which Borrower has delivered to Bank an Agreement and Estoppel Certificate from the maker thereof, all in form and substance acceptable to Bank in its sole and exclusive discretion; and (v) the representations and warranties with respect to which made in the applicable Note Pledge Agreement are true and correct in all material respects. A true, accurate and complete schedule of all Eligible Notes is attached hereto as Schedule 2.2(c); provided however, Borrower shall have the right to amend Schedule 2.2(c) if and when Borrower delivers to Lender an Agreement and Estoppel Certificate from FC Capital relating to that certain Subordinated Promissory Note dated as of January 1, 1998, in the principal amount of $50,000,000 made by FC Capital payable to the order of Borrower. Upon delivery and acceptance of such Agreement and Estoppel Certificate from FC Capital and amendment of Schedule 2.2(c), such note shall be an Eligible Note under the terms of this Agreement. Borrower shall not enter into, amend, modify, supplement, restate or replace any Eligible Note, without in each instance, Bank's prior written consent. (d) In addition to the limitations on Maximum Principal Amount, Book Value and Eligible Notes set forth in other provisions hereof, the 16 Borrowing Base, Eligible Notes and the Maximum Principal Amount shall be limited as follows (i) For the purpose of determining the Borrowing Base, at any one time, the maximum Book Value for any one Eligible Note shall be $30,769,231, resulting in the maximum amount of Loans available to be made with respect to such portion of the Borrowing Base being $20,000,000. (ii) For the purpose of determining the Borrowing Base, at any one time, the maximum aggregate Book Value of Eligible Notes made by NAF and FC Consumer Lending shall be $30,769,231, resulting in the maximum amount of Loans available to be made with respect to such portion of the Borrowing Base being $20,000,000. (iii) Upon Borrower's delivery to Bank of a Borrowing Base Report, Bank shall determine, in its sole and absolute discretion and in the exercise of good faith, which individual notes listed thereon are Eligible Notes. (e) In the event that the outstanding principal balance of the Loan exceeds the Maximum Principal Amount at any time, Borrower shall pay the amount of such excess to Bank, without notice or demand, and any amount not so paid shall bear interest at the Default Rate until paid. Borrower's obligation to pay principal pursuant to this Section 2.2(e) shall include (but not be limited to) an obligation to pay principal in an amount required to reduce the outstanding principal balance to an amount equal to or less than $40,000,000 at all times after the occurrence of a Reduction Event. This is an absolute obligation to pay to Bank the amount of the unpaid principal balance of the Loan in excess of said Maximum Principal Amount, regardless of the cause of such excess. 2.3 Maturity Date; Termination of Loans. Bank's obligation to make any Advance to Borrower pursuant to the provisions hereof shall be in effect until the Maturity Date, unless sooner terminated by Bank upon the occurrence of an Event of Default, an Unmatured Default, or pursuant to the terms hereof. 2.4 Authorized Disbursement of Proceeds. Borrower hereby authorizes and directs Bank to disburse, for and on behalf of Borrower and for Borrower's account, the proceeds of any Loan to such Person as Borrower or any Designated Person shall direct. In addition to Advances of Loan proceeds made pursuant to a Borrowing Request made by Borrower from time to time, Borrower hereby irrevocably authorizes Bank to disburse proceeds of the Loan to pay: (a) interest which is accrued but unpaid and which is due and payable pursuant to the terms hereof and of the Note until the Loan is paid in full; and (b) for any and all Costs. The execution of this Agreement by Borrower shall, and hereby does, 17 constitute an irrevocable direction and authorization to Bank so to disburse such funds described in this Section and to treat such Advances as money loaned pursuant to this Agreement and as indebtedness evidenced by the Note. No further direction or authorization from Borrower shall be necessary for Bank to make such Advances, and all such Advances shall satisfy, to the extent so disbursed, the obligations of Borrower hereunder and shall be evidenced by the Note. Notwithstanding anything to the contrary contained herein, Bank is under no duty or obligation to make such Advances and failure to make such Advances shall not be deemed to be a default by Bank or impair any of Bank's rights or remedies hereunder. 2.5 Borrowing Procedure. (a) In order to request an Advance, Borrower shall hand deliver or telecopy to Bank a duly completed Borrowing Request not later than 11:00 a.m. New York time: (i) at least three (3) Business Days before a proposed Eurodollar Advance and (ii) at least one (1) Business Day before a proposed Prime Rate Advance. Each Borrowing Request shall be irrevocable and shall specify: (w) the number and location of the account to which funds are to be disbursed; (x) the date such Advance is to be made (which shall be a Business Day); (y) the amount of such Advance; and (z) if applicable, the information required to elect that such Advance be a Eurodollar Advance, in compliance with the provisions of Sections 2.10 and 2.11. Each Borrowing Request shall be accompanied by a Borrowing Base Certificate, dated as of the date of such Borrowing Request. (b) If Borrower in respect of an outstanding Eurodollar Advance shall not have delivered a Borrowing Request in accordance with Section 2.5(a) at least three (3) Business Days prior to the end of the Interest Period then in effect for such Eurodollar Advance and requesting that such Eurodollar Advance be refinanced, then Borrower shall (unless Borrower has notified the Bank not fewer than three (3) Business Days prior to the end of such Interest Period, that such Eurodollar Advance is to be repaid at the end of such Interest Period) be deemed to have delivered a Borrowing Request requesting that such Advance be refinanced with a new Advance of equivalent amount, and such new Advance shall bear interest at the Prime Interest Rate. 2.6 Interest Rate. The principal on the Note shall bear interest at the Prime Interest Rate or, to the extent Borrower has fully and timely complied with the provisions of Sections 2.10 and 2.11, at the Eurodollar Rate. Unless Borrower has designated any Advance as a Eurodollar Advance in strict accordance with the terms hereof, Borrower's Liabilities shall bear interest at the Prime Interest Rate. Interest on all Prime Rate Advances shall be computed on a 365-day year for the actual number of days elapsed. Interest on all Eurodollar Advances shall be computed on a 360 day year for the actual number of days elapsed. After the occurrence of an Event of Default and during the continuation thereof, all Loans shall bear interest at the Default Rate. The unpaid principal balance of each Advance shall bear interest at the Interest Rate applicable thereto, determined by 18 Bank in accordance with the provisions hereof, which determination shall be binding upon Borrower, absent manifest error. 2.7 Change of Laws. If Bank shall determine at any time after the date hereof that the adoption of any law, rule or regulation regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by Bank with any request or directive regarding capital adequacy (whether or not having the force of law) from any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Bank's capital as a consequence of its obligations hereunder to a level below that which Bank could have achieved but for such adoption, change or compliance (taking into consideration Bank's policies with respect to capital adequacy) by an amount deemed by Bank to be material, then Borrower shall pay to Bank upon demand such amount or amounts, in addition to the amounts payable under any other provision of this Agreement or the Other Agreements, as will compensate Bank for such reduction. Determinations by Bank for purposes of this Section of the additional amount or amounts required to compensate Bank with respect to the foregoing shall be conclusive in the absence of manifest error. In determining such amount or amounts, Bank may use any reasonable averaging or attribution methods. Notwithstanding the foregoing, no amounts shall be payable by Borrower to Bank under the terms of this Section 2.7 if the Secured Obligations are paid in full on or before ten (10) days after the date on which Bank shall have notified Borrower that amounts will be due under this Section 2.7. In the event of a prepayment pursuant to this Section 2.7, any LIBOR Breakage Fee otherwise payable pursuant to the terms of this Article 2 shall be waived by Bank and shall not be due or payable. 2.8 Regulatory Changes. Notwithstanding any other provision herein contained to the contrary, in the event that any regulatory change shall, in the reasonable determination of Bank, make it unlawful for Bank to make or to maintain any Eurodollar Advance or impose additional restrictions on Eurodollar Advances by Bank, then, the obligation of Bank to make or maintain any such Eurodollar Advance shall be terminated and all outstanding Eurodollar Advances shall automatically be converted to Prime Rate Advances. Bank shall, as promptly as practicable following any such determination, give Borrower a notice thereof that sets forth the basis for any such determination. After such determination and while such determination is in effect, Bank shall not be required to make further Eurodollar Advances. 2.9 Advances Prior to LIBOR Rate Determination. Anything herein to the contrary notwithstanding, after notice but prior to making any requested Eurodollar Advance if, for any reason whatsoever, LIBOR Rates are not then being quoted for the requested Interest Period and in an amount approximating the amount of such Eurodollar Advance, Bank shall give Borrower prompt notice thereof and such Eurodollar Advance (if not yet made) shall be a Prime Rate Advance and no conversions into Eurodollar Advances shall be permitted and no 19 new Eurodollar Advances shall be made so long as such condition exists. 2.10 Eurodollar Advances and Conversion. Provided no Event of Default or Unmatured Default has occurred and is continuing, Borrower shall have the option, subject to the other provisions of this Agreement, to: (i) request that any Advance or any portion of an Advance in a minimum amount of $250,000 and in multiples of $100,000, shall be deemed to be a Eurodollar Advance by giving telephonic notice to Bank at least three Business Days prior to the day any Eurodollar Advance is to be made hereunder specifying the applicable Interest Period; provided that Borrower gives Bank written confirmation by facsimile of its telephonic notice on the same Business Day as such telephone notice is given with respect to such Eurodollar Advance, and (ii) convert on any Business Day, all or any portion of the outstanding principal amount of any Advance or any portion of an Advance, in a minimum amount of $250,000 and in multiples of $100,000, from one type of interest rate advance to another type of interest rate advance by giving at least three (3) Business Days prior telephonic notice to Bank thereof; provided that Borrower gives Bank written confirmation of its telephonic notice by facsimile on the same Business Day that such telephonic notice is given with respect to such conversion hereunder. Notwithstanding the foregoing: (y) no Eurodollar Advance may be converted into a Prime Rate Advance pursuant to this Section 2.10, except effective on the last day of the Interest Period applicable thereto, and (z) Borrower shall have no more than five (5) Eurodollar Advances with different interest periods at any one time. 2.11 Interest Period Election. Borrower may, by prior telephonic notice to Bank, elect the Interest Period(s) to be applicable to all or any portion of any Eurodollar Advance upon the expiration of the Interest Period then applicable to such Eurodollar Advance; provided that such notice is given to Bank at least three (3) Business Days prior to the expiration of the then Interest Period and that Borrower gives written confirmation by facsimile of its telephonic notice on the same Business Day that such telephonic notice is given. In the event Borrower does not make such an election with respect to all or any portion of a Eurodollar Advance for which the Interest Period is expiring, then, upon the expiration of such Interest Period, the portion of such Eurodollar Advance for which no such election has been made shall automatically convert to a Prime Rate Advance. 2.12 Fees. (a) Facility Fee. A facility fee of $475,000 shall be payable by Borrower concurrently herewith. (b) Unused Commitment. Borrower shall pay an unused commitment fee in an amount equal to .125% (on an annual basis, based on a 365-day year) of: (i) at all times prior to a Reduction Event, the difference between $50,000,000 and the daily outstanding principal balance of the Loan, and (ii) at all times after a Reduction Event, the difference between $40,000,000 and the daily outstanding principal balance of the Loan. Such fee shall be payable quarterly in 20 arrears on the last Business Day of each calendar quarter. (c) LIBOR Breakage Fee. In the event of any prepayment of an Advance prior to the end of the then applicable Interest Period (by acceleration or otherwise) or in the event any Advance is not made after delivery of a Borrowing Request in accordance with the terms hereof, for any reason whatsoever, Borrower shall pay to Bank an amount equal to the LIBOR Breakage Fee. (d) Interest on Fees. Any fee payable under Sections 2.12(b) and (c) not paid when due shall bear interest at the Default Rate. 2.13 Usury. The provisions of this Section shall govern and control over any irreconcilably inconsistent provision contained in this Agreement or in any other document evidencing or securing the Loan. Bank shall never be entitled to receive, collect, or apply as interest hereon (for purposes of this Section, the word "INTEREST" shall be deemed to include any sums treated as interest under applicable law governing matters of usury and unlawful interest), any amount in excess of the Highest Lawful Rate (hereinafter defined) and, in the event Bank ever receives, collects, or applies as interest any such excess, such amount which would be excessive interest shall be deemed a partial prepayment of principal and shall be treated hereunder as such; and, if the principal of this Agreement is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Highest Lawful Rate, Borrower and Bank shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) spread the total amount of interest throughout the entire contemplated term of this Agreement, provided, that if this Agreement is paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence hereof exceeds the Highest Lawful Rate, Bank shall refund to Borrower the amount of such excess and, in such event, Bank shall not be subject to any penalties provided by any laws for contracting for, charging or receiving interest in excess of the Highest Lawful Rate. "HIGHEST LAWFUL RATE" shall mean the maximum rate of interest which Bank is allowed to contract for, charge, take, reserve or receive under applicable law after taking into account, to the extent required by applicable law, any and all relevant payments or charges hereunder. 3. PAYMENT TERMS 3.1 Loan Account; Method of Making Payments. Bank shall maintain a Loan Account on its books in which shall be recorded: (i) all Loans made by Bank to Borrower pursuant to this Agreement; (ii) all payments made by Borrower on all Loans; and (iii) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. All entries in the Loan Account shall be made in accordance with Bank's 20 customary accounting practices, in effect from time to time. The failure of Bank to record any of the foregoing shall not in any way limit Borrower's obligations under this Agreement. 3.2 Interest Payments. (a) Accrued interest on all Prime Rate Advances shall be payable monthly, in arrears, on the last Business Day of each month during the term hereof, without notice or demand. (B) Accrued interest on any Eurodollar Advance shall not be due and payable monthly, but, instead, shall be payable in arrears on the last day, of the Interest Period applicable thereto; provided that, in the event Borrower elects a six month interest period, Borrower shall pay accrued interest on the three month anniversary of the Interest Period and at the end of such Interest Period. 3.3 Principal Payments. Borrower shall pay mandatory principal payments at the following times and in the following amounts: (a) The unpaid principal balance, plus all accrued but unpaid interest shall be due and payable in full on the Maturity Date, without notice or demand. (b) In the event of a principal payment on any Pledged Note in an amount in excess, in the aggregate of $500,000, Borrower and the applicable Loan Party shall give immediate notice thereof to Bank and Borrower shall pay to Bank principal in an amount equal to the amount of such principal payment on said Pledged Note; provided that the parties hereby acknowledge that such principal payment shall not reduce the Maximum Principal Amount hereunder, except to the extent that payment of the Pledged Note has reduced the amount of the Borrowing Base. (c) Upon the occurrence of a Reduction Event, Borrower will pay principal in an amount necessary to reduce the outstanding principal balance to an amount less than the Maximum Principal Amount set forth in Section 2.2(a)(ii). (d) Subject to the provisions of Section 3.3(c), in the event that Borrower issues Securities in accordance with the provisions of Section 6.3(f), Borrower shall give immediate notice thereof to Bank and Borrower shall pay to Bank principal in an amount equal to the net proceeds of such issuance; provided that the parties hereby acknowledge that such principal payment shall not reduce the Maximum Principal Amount hereunder. 3.4 Place of Payment. All payments to Bank hereunder and under the Other Agreements shall be payable in immediately available funds on or before noon New York time at the place designated on Exhibit A, or such place or places as Bank may designate in writing to Borrower. All of such payments to Persons other than Bank shall be payable at such place or places as Bank may designate in 21 writing to Borrower. Borrower's Liabilities and the other Secured Obligations will be payable as set forth in the Note, this Agreement, and the Other Agreements. 3.5 Payment on Maturity and Prepayment. On the Maturity Date, whether by acceleration or otherwise, Borrower shall pay to Bank, in full, in cash or other immediately available funds, the outstanding amount of the Loan. Each Prime Rate Advance may be repaid at any time, without premium or penalty by Borrower giving telephonic notice to Bank of such prepayment no later than 10:00 a.m. New York time on the date of such prepayment, confirmed in writing by facsimile of its telephonic notice on the same day. Each Eurodollar Advance may be prepaid on the last day of the Interest Period applicable thereto, but only by Borrower giving telephonic notice to Bank of such prepayment at least three Business Days prior to the day of such prepayment, such notice confirmed in writing by facsimile on the day of the telephonic notice. Prepayment of any Eurodollar Advance during an Interest Period is expressly prohibited. In the event of an attempted prepayment of any Eurodollar Advance during any Interest Period, Bank, at Borrower's option, shall either: (i) hold such funds in a non-interest bearing cash collateral account to secure Borrower's Obligations and to apply such funds to Borrower's Obligations on the last day of the Interest Period, or (ii) apply such funds to Borrower's Obligations, in which event Borrower shall pay to Bank a LIBOR Breakage Fee immediately upon demand therefor, and any amount not so paid shall bear interest at the Default Rate. 3.6 Advances to Constitute One Loan. All Advances, loans and any other financial accommodations provided pursuant to the terms hereof by Bank to Borrower shall constitute one loan and all indebtedness and obligations of Borrower to Bank under this Agreement, the Other Agreements or otherwise shall constitute one general obligation. 3.7 Application of Payments and Collections. (a) Application of Payments. Bank shall have the right unilaterally (and without notice to or the consent of any Person) to allocate any and all payments which may be received by or tendered to Bank made by Borrower or any other Person at any time or from time to time and which relate in any way to the Loan or any other of Borrower's Obligations then due and payable in any order of priority as Bank in its reasonable discretion shall elect, as follows: (i) to the payment of any Costs; (ii) to accrued but unpaid interest, penalties and late payment fees; and (iii) to principal; provided that Bank shall not allocate payments in a manner which would create a LIBOR Breakage Fee or other fee or penalty payable by Borrower which would not otherwise be imposed. Borrower (y) irrevocably waives the right to direct the application of payments and collections received by Bank from or on behalf of Borrower, and (z) agrees that Bank shall have the continuing exclusive right to apply and reapply any and all such payments and collections against the Loan or any other Borrower's Liabilities or the Secured Obligations then due and payable in such manner as Bank may deem appropriate, notwithstanding any entry by Bank upon any of its books and records. 22 (b) Reapplication of Payments. To the extent that Bank receives any payment on account of the Secured Obligations, and any such payment(s) and/or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinated and/or required to be repaid to a trustee, receiver or any other Person under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment(s) or proceeds received, the Secured Obligations or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) and/or proceeds had not been received by Bank and applied on account of the Secured Obligations. 3.8 Monthly Statements. All Advances to Borrower and all other debits and credits provided for in this Agreement shall be evidenced by entries made by Bank in its internal data control systems showing the date, amount and reason for each such debit or credit. Until such time as Bank shall have rendered to Borrower written statements of account as provided herein, the balance in the Loan Account, as set forth on Bank's most recent statement, shall be rebuttably presumptive evidence of the amounts due and owing to Bank by Borrower. At Bank's option, Bank shall render a monthly statement to Borrower setting forth the balance of the Loan Account, including principal, interest, costs, penalties, charges and other fees. Each such statement shall be subject to subsequent adjustment by Bank and Bank's right to reapply payments in accordance with Section 3.7(b), but shall, as to statements of principal and interest then due or having been paid, absent manifest errors or omissions, be presumed correct and binding upon Borrower and shall constitute an account stated unless, within thirty (30) days after receipt of any statement from Bank, Borrower shall deliver to Bank written objection thereto, specifying the error or errors, if any, contained in such statement. 4. ANCILLARY AGREEMENTS 4.1 Guaranties. Concurrently herewith, Borrower shall cause each Guarantor to execute and deliver to Bank a guaranty of payment and performance of all of the Secured Obligations; provided that the liability of each Guarantor shall be limited to the unpaid balance of the Eligible Note made by it payable to the order of Borrower plus enforcement costs. 4.2 Note Pledge Agreements. Concurrently herewith Borrower shall execute and deliver to Bank a Note Pledge Agreement, pursuant to which Borrower shall pledge to Bank each and every promissory note made by an Affiliate payable to the order of Borrower, whether now existing or hereafter arising and whether or not an Eligible Note. Concurrently herewith Borrower shall cause each Primary Obligor to execute and deliver to Bank a Note Pledge Agreement, pursuant to which each Primary Obligor shall pledge to Bank each and every promissory note made by any Affiliate payable to the order of a Primary Obligor, whether now existing or hereafter arising. Notwithstanding the foregoing, Borrower shall not be required to pledge or to require any other Person to pledge: (i) promissory notes 23 made by Borrower or any Primary Obligor payable to the order to an Affiliate which is a general partner of a limited partnership which note had been made to satisfy the capital adequacy requirements imposed upon the general partner of a limited partnership under the Code, or (ii) those notes identified on Schedule 4.2 (those notes referred to in subsection (i), and (ii) above are collectively referred to as "EXCLUDED NOTES"). 4.3 Stock Pledge Agreements. Except as set forth on Schedule 4.3, Borrower shall execute and deliver to Bank a Stock Pledge Agreement, pursuant to which Borrower shall pledge to Bank all of the Stock, shares, membership interests, partnership interest, venture interest and all other equity interests, in any form whatsoever, of each and every Person in which Borrower owns an equity interest, whether now existing or hereafter arising. Except as set forth on Schedule 4.3, Borrower shall cause each Primary Obligor, each Secondary Obligor and each other Affiliate, as Bank shall reasonably request to execute and deliver to Bank a Stock Pledge Agreement, pursuant to which each such Person shall pledge to Bank all of the Stock, shares, membership interests, partnership interest, venture interest and all other equity interests, in any form whatsoever, of each and every Person in which such Person owns an equity interest, whether now existing or hereafter arising. Those Entities identified on Schedule 4.3 (as may be amended from time to time with the prior written consent of Bank in accordance with Section 5.1(e)(iv)) shall be referred to herein as "EXCLUDED ENTITIES" and neither Borrower nor any Affiliate of Borrower shall be obligated to pledge its Stock, partnership interests, membership interests or other equity interest in such Entity. 4.4 Security Agreements. Concurrently herewith Borrower and each Guarantor shall deliver to Bank a security agreement pursuant to which it will grant a security interest in all of its Assets to secure the Secured Obligations. 5. GENERAL WARRANTIES, REPRESENTATIONS AND COVENANTS 5.1 General Representations and Warranties. Except as disclosed in writing to Bank concurrently herewith, Borrower warrants and represents to and covenants with Bank that: (a) Organization. (i) Borrower is and at all times hereafter shall be a corporation, duly organized and existing and in good standing under the laws of the State of Delaware and qualified or licensed to do business and in good standing in all states in which the laws thereof require Borrower to be so qualified and/or licensed and in which the failure to so qualify could have a material adverse effect on the business or assets of Borrower or its ability to perform its obligations under the Loan Documents, including without limitation the State of Texas. 24 (ii) Each Primary Obligor and each Secondary Obligor is and at all times hereafter shall be a corporation or a limited partnership, duly organized and existing and in good standing under the laws of the state of its organization and qualified or licensed to do business and in good standing in all states in which the laws thereof require each Primary Obligor and each Secondary Obligor to be so qualified and/or licensed and in which the failure to so qualify could have a material adverse effect on the business, operation, Assets or condition (financial or otherwise) of such Primary Obligor or Secondary Obligor or its ability to perform its obligations under the Loan Documents or any Eligible Note, to which it is a party. (b) Entity Power. (i) Borrower has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and the Other Agreements, to which it is a party. (ii) Each Primary Obligor and each Secondary Obligor has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform those Loan Documents to which it is a party. (c) Violation of Organizational Documents. (i) The execution, delivery and/or performance by Borrower of this Agreement and the Other Agreements to which it is a party, shall not, by the lapse of time, the giving of notice or otherwise, constitute a violation of any applicable law or a breach of any provision contained in the Organic Documents of Borrower, or contained in any agreement, instrument or document to which Borrower, is now or hereafter a party or by which it or any of its assets is or may become bound. (ii) The execution, delivery and/or performance by each Primary Obligor and each Secondary Obligor of the Other Agreements to which it is a party, shall not, by the lapse of time, the giving of notice or otherwise, constitute a violation of any applicable law or a breach of any provision contained in the Organic Documents of such Primary Obligor or such Secondary Obligor, or contained in any agreement, instrument or document to which such Primary Obligor or such Secondary Obligor is now or 25 hereafter a party or by which it or any of its Assets is or may become bound. (d) Enforceability. (i) This Agreement and the Other Agreements to which Borrower is a party, are and will be the legal, valid and binding agreements of Borrower, enforceable in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); and (ii) Those Other Agreements to which each other Loan Party is a party are and will be the legal, valid and binding agreements of such Loan Party, enforceable in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); (e) Ownership (i) Schedule 5.1(e) sets forth all classes of stock of Borrower, the shareholders thereof (other than members of the general public), addresses of each shareholder, number of shares owned and how the shares are held; (ii) Schedule 5.1 (e) (as may be amended from time to time) sets forth all classes of stock and/or partnership interests of each Primary Obligor and each Secondary Obligor, the shareholders and/or portions thereof, and the addresses, number of shares and/or partnership interests owned and how the shares are held. (iii) Schedule 5.1(e) (as may be amended from time to time) sets forth all options, warrants and other rights to acquire Stock or other equity interests of Borrower, any Primary Obligor, any Secondary Obligor, and any other Pledged Entity, the nature of such option, warrant or right and the conditions for the exercise thereof, with the exception of those warrants to purchase 500,000 shares of the 26 common stock of Borrower which are subject to the Warrant Agreement dated as of July 3, 1995 by and between Borrower and American Stock Transfer & Trust Company, as warrant agent. Bank hereby expressly consents to the transfer, issuance or conveyance of Stock and/or other Equity Interests of any Person in accordance with such options, warrants and rights. (iv) Borrower shall deliver to Bank notice within (10) Business Days after Borrower or any other Loan Party acquires the Stock, Partnership Interest or other equity interest in any Entity after the date hereof. Unless Bank elects not to require Borrower or such other Loan Party to pledge its equity interest in such Entity, Borrower and/or the applicable Loan Party: (A) shall grant to Bank a perfected first security interest in its equity interest in such Entity, (B) shall deliver a Stock Pledge Agreement or such other pledge agreement in form and substance acceptable to Bank, (C) shall amend the applicable Schedules of the applicable Stock Pledge Agreement, (D) shall execute and deliver to the Pledged Entity a notice of lien, (E) shall execute any and all financing statements required by Bank to perfect its security interest, (F) shall deliver the original Stock certificates or other evidence of ownership to Bank, together with an assignment separate from certificate therefor, and (G) shall take such other action to effect and perfect such security interest as Bank shall reasonably require. In the event Bank elects not to require a pledge of such equity interests, Borrower shall amend Schedule 4.3. 27 (f) Fictitious Names. (i) Each of the fictitious names, if any, used by Borrower during the five (5) year period preceding the date of this Agreement is set forth on Schedule 5.1(f) attached hereto (as amended from time to time) and none of such fictitious names are registered trademarks or tradenames with the U.S. Patent and Trademark Office, except as set forth in Schedule 5.1(f); (ii) Each of the fictitious names, if any, used by each Primary Obligor and each Secondary Obligor during the five (5) year period preceding the date of this Agreement is set forth on Schedule 5.1(f) attached hereto (as amended --------------- from time to time), and none of such fictitious names are registered trademarks or tradenames with the U.S. Patent and Trademark Office; provided that, variations on the ------------- corporate name of Primary Obligors and Secondary Obligors in states where used solely for qualifying to do business therein shall and have been excluded from such schedule, with Lender's consent and approval. (g) Title. Schedule 5.1(g) is a true, accurate and complete list of all Liens, relating to the Pledged Property on the date hereof. At all times following acquisition thereof, Borrower shall have good, indefeasible and merchantable title to and ownership of all of its Assets, free and clear of all liens, claims, security interests and encumbrances, except the Permitted Liens. (h) Financial Warranty. Borrower: (i) is now, and at all times hereafter shall be generally paying its debts as they mature, (ii) now owns, and shall at all times hereafter own, property which, at a fair valuation, is greater than the sum of its debt, and (iii) now has, and shall have at all times hereafter, capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage. Primary Obligors and Secondary Obligors (other than SL Funding, as defined on Schedule 1.1(xxx) and NAF): (i) are each now, and at all times hereafter shall be generally paying their respective debts as they mature, and (ii) each now has, and shall have at all times hereafter, capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage. (i) Proceedings. There are no actions or proceedings which are pending or threatened against Borrower, any Primary Obligor or any Secondary Obligor which might result in any material and adverse change in its business, operations, Assets, condition (financial or otherwise) or its ability to fully perform its respective obligations and liabilities under the Loan 28 Documents to which it is a party. (j) Government Contracts. Except as set forth on Schedule 5.1(j), neither Borrower, nor any Primary Obligor or any Secondary Obligor has any government contracts. (k) Adequate Licenses. Borrower, each Primary Obligor and Secondary Obligor possesses adequate Assets, licenses, patents, copyrights, trademarks and tradenames to continue to conduct its business as previously conducted by it and as contemplated in the foreseeable future except such licenses, patents, copyrights, trademarks and trade names the failure of which to obtain could not have a material adverse effect on Borrower's or such Primary Obligor's or Secondary Obligor's business, operations, Assets, condition (financial or otherwise) or ability to perform its obligations under those Loan Documents to which it is a party. (l) Government Permits; Consents. (i) Borrower and each Primary Obligor and Secondary Obligor has and is in good standing with respect to all governmental permits, certificates, consents and franchises necessary to continue to conduct its business as previously conducted prior to the date hereof and to own or lease and operate its properties as now owned or leased by it. None of said permits, certificates, consents or franchises contain any term, provision, condition or limitation more burdensome than such as are generally applicable to Persons engaged in the same or similar business as the applicable Loan Party. (ii) Except for those consents set forth on Schedule 5.1(l), neither Borrower, nor any other Loan Party requires the approval, consent or waiver by any other Person (including but not limited to shareholders, partners, members, equity owners, holders of Indebtedness Instruments, or any owner of any lien upon the Assets of any one or more of them or their Affiliates) for the consummation of the transactions contemplated herein, including but not limited to the borrowing of the Loan, the pledge of the Pledged Property, and the payment and performance of all Secured Obligations. Borrower and each other Loan Party has received the consents described on Schedule 5.1(l) and has delivered a copy thereof to Bank. (m) Charge; Restrictions. Neither Borrower, nor any Primary Obligor nor any Secondary Obligor is a party to (nor are any of its Assets 29 otherwise subject to) any contract or agreement or subject to any Charge (other than ad valorem taxes owed by First X or First B) restriction, judgment, decree or order materially and adversely affecting its business, property, assets, operations or condition, financial or otherwise other than ad valorem taxes not yet due and payable. (n) Compliance with Laws. Neither Borrower, nor any Primary Obligor nor any Secondary Obligor is, or will be during the term hereof, in violation of any applicable statute, regulation, order or ordinance of the United States of America, of any state, city, town, municipality, county or of any other jurisdiction, or of any agency thereof, including the Federal Reserve Board, in any respect materially and adversely affecting its business, operations, Assets, or condition (financial or otherwise) or its ability to perform its obligations under those Loan Documents to which it is a party. (o) Compliance with Indebtedness Instruments. Borrower is not and at no time during the term hereof shall be in default under any Indebtedness Instrument. No Primary Obligor or any Secondary Obligor is, on the date hereof, in default under any Indebtedness Instrument. (p) Financials. The Financials heretofore delivered by Borrower, or any other Loan Party to Bank, fairly and accurately present the assets, liabilities and financial conditions and results of operations of Borrower, and such other Persons described therein as of and for the periods ending on such dates and have been prepared in accordance with generally accepted accounting principles and such principles have been applied on a basis consistently followed in all material respects throughout the periods involved. (q) Tax Returns. Borrower and each other member of the Consolidated Group has filed or caused to be filed all tax returns which are required to be filed, and has paid all Charges shown to be due and payable on said returns or on any assessments made against it or any of its property, and all other Charges imposed on it or any of its properties by any governmental authority except for ad valorem taxes. (r) No Adverse Change. There has been no material and adverse change in the Assets, liabilities or financial condition of Borrower or any Primary Obligor or Secondary Obligor since the date of the Financials. (s) No Indebtedness. Except as disclosed in the most recent Financials heretofore delivered by Borrower to Bank and in Schedule 5.1(s) and Schedule 5.1(t) or otherwise disclosed in writing to Bank, none of Borrower nor any other member of the Consolidated Group has any Indebtedness (except for Indebtedness arising in the ordinary course of its business since the dates reflected in the Financials that is not Indebtedness 30 for borrowed money), has guaranteed or entered into any Guaranty Equivalent (other than as a result of the endorsement of any instrument of items of payment for deposit or collection in the ordinary course of business or as otherwise expressly permitted pursuant to the terms hereof) the obligations of any Person, and there are no actions or proceedings which are pending or, to the best of Borrower's knowledge, threatened against Borrower or any other member of the Consolidated Group which, in any of the foregoing cases, are reasonably likely to result in any material adverse change in its financial condition or materially adversely affect its assets or its ability to fully perform and satisfy its obligations under the Loan Documents. (t) Indebtedness. Attached hereto as Schedule 5.1(t) (as amended from time to time) is a true, accurate, and complete schedule of all Indebtedness, other than the Excluded Notes, owing by any one or more of Borrower, any Primary Obligor, any Secondary Obligor or any other Pledged Entity setting forth: (i) the date such indebtedness was incurred; (ii) the original principal amount thereof and the outstanding principal balance thereof as of the date hereof; (iii) the interest rate payable thereon; (iv) whether such indebtedness is evidenced by a note or other writing and whether any security has been granted to secure payment thereof; (v) the payment terms thereof; (vi) the maturity date thereof; and (vii) whether there has been any notice of default , or to Borrower's knowledge, any default thereunder. (u) Notes. Attached hereto as Schedule 5.1(u) is a true, accurate and complete schedule of all promissory notes made by any Affiliate payable to the order of Borrower, a Primary Obligor and a Secondary Obligor, other than those notes set forth on Schedule 2.2(c) and the Excluded Notes. If at any time after the date hereof, any Affiliate borrows money or otherwise incurs Indebtedness from Borrower, a Primary Obligor or a Secondary Obligor, Borrower shall immediately (i) give Bank notice thereof, (ii) deliver a copy of such note to Bank, (iii) prepare a Schedule 5.1(u)(iii) (other than the excluded Notes) (as amended from time to time) setting forth the maker and holder of such note, the principal amount thereof and the payment terms thereof, and (iv) if requested by Bank, cause the holder of such note to pledge such note to Bank pursuant to a Note Pledge Agreement, in form and substance acceptable to Bank, in its sole and exclusive discretion. (v) No Liability on Bank. The execution, delivery and performance by Borrower and each other Loan Party of this Agreement and/or the Other Agreements will not, except to the extent caused by independent actions of Bank, impose on or subject Bank to any liability, whether fixed or contingent, in respect of any Environmental Law relating to the operation of Borrower's business. Bank's exercise of any of the rights or remedies described in this Agreement or in any of the Other Agreements shall not constitute a breach of any provision contained in any agreement, 31 instrument or document concerning the assignment or license of, or the payment of royalties for, any patents, patent rights, tradenames, trademarks, trade secrets, know-how, copyrights or any other form of intellectual property now or at any time or times hereafter protected as such by any applicable law; (w) Affiliates. Schedule 5.1(w) attached hereto is a true, accurate and complete schedule of Borrower's Affiliates, together with a description of Borrower's relationship to each such Affiliate. (x) Real Property; Environmental Issues. Neither Borrower nor any Primary Obligor nor any Secondary Obligor, other than First X and First B, now owns or at no time in the last five (5) years has owned, any real property. Neither Borrower nor any Primary Obligor nor any Secondary Obligor has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment with respect to any real property. (y) Investment Company Act and Public Utility Holding Company Act. Neither Borrower nor any Primary Obligor or any Secondary Obligor nor the entering into of the Loan Documents, nor the issuance of the Note is subject to any of the provisions of the Investment Company Act of 1940, as amended. Neither Borrower, nor any Primary Obligor or any Secondary Obligor is a "holding company" as defined in the Public Utility Holding Company Act of 1935, as amended, or subject to any other federal or state statute or regulation limiting its ability to insure Indebtedness for money borrowed. (z) Disclosure. Neither this Agreement nor any Loan Document nor any statement, list, certificate or other document or information, nor any schedules to this Agreement or any other Loan Document, delivered or to be delivered to Bank, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make statements contained herein or therein, in light of the circumstances in which they are made, not misleading. (aa) Qualification. (i) Solely by reason of (and without regard to any other activities of Bank in any state in which Assets are located) the entering into, performance and enforcement of this Agreement, the Note and the other Loan Documents by Bank will not constitute doing business by Bank in any of such states or result in any liability of Bank for taxes or other governmental charges; and 32 qualification by Bank to do business in such jurisdiction is not necessary in connection with, and the failure to so qualify will not affect, the enforcement of, or exercise of any rights or remedies under, any of such documents. (ii) No "business activity," "doing business" or similar report or notice is required to be filed by the Bank in any such jurisdiction in connection with the Loans or the transactions contemplated by this Agreement, and the failure to file any such report or notice will not affect the enforcement of, or the exercise of any rights or remedies under, this Agreement or any of the other Loan Documents. 5.2 Reaffirmation of Warranties and Representations. Each request for an Advance made by Borrower pursuant to this Agreement or the Other Agreements shall constitute (i) an automatic warranty and representation by Borrower to Bank that there does not then exist an Event of Default or an Unmatured Default, and (ii) a reaffirmation as of the date of said Borrowing Request that each and every warranty and representation of Borrower contained in this Article 5 and other sections of this Agreement and in the Other Agreements, including without limitation the representations set forth in the Stock Pledge Agreements and Note Pledge Agreements, is true and correct in all material respects, except where such representation or warranty specifically relates to an earlier date. 5.3 Survival of Warranties and Representations. Borrower covenants, warrants and represents to Bank that all representations and warranties of Borrower contained in this Agreement and the Other Agreements shall be true on the date hereof, and shall survive the execution, delivery and acceptance hereof and thereof by the parties thereto and the closing of the transactions described herein and therein or related hereto or thereto. Unless expressly limited by the terms of this Article 5, each representation and warranty shall be deemed to be remade concurrently with each Advance hereunder. 6. COVENANTS AND CONTINUING AGREEMENTS. 6.1 Financial Covenants. Borrower and all other members of the Consolidated Group, on a consolidated basis, shall, at all times during the term hereof, measured quarterly. (a) maintain a ratio of Indebtedness to Tangible Net Worth equal to or less than 10 to 1; (b) maintain a ratio of EBITDA to interest expense equal to 1.25 to 1; and 33 (c) maintain Tangible Net Worth equal to or greater than $95,000,000. All covenants set forth herein shall be measured quarterly, upon receipt of the statements delivered to Bank pursuant to Section 6.2(c)(iii) or the annual consolidated financial statements delivered in accordance with Section 6.2(c)(i), if available. 6.2 Affirmative Covenants. Borrower warrants and represents to and covenants with Bank that Borrower shall, unless Bank otherwise consents thereto in writing, do all of the following during the term hereof: (a) Representation and Warranties. Subject to Borrower's right to cure set forth in Section 7.1(e), to the extent any representation or warranty contained herein refers to an event or state of facts which exists on the date hereof and shall exist during the term hereof or at the time of each Advance hereunder, said representation or warranty shall be deemed to be an affirmative covenant by Borrower to take all actions, omit to take such actions or cause such actions to be taken which shall be necessary or desirable to cause such representation or warranty to be true and accurate at all times during the term hereof. To the extent any representation, warranty or covenant herein (including the negative covenants set forth in Section 6.3) relates to any other Person (including but not limited to a Primary Obligor, a Secondary Obligor, any Pledged Entity or any other Loan Party) it shall be deemed to be a covenant of Borrower to cause such Person to comply with or otherwise perform such representation, warranty or covenant, whether or not Borrower has the legal, corporate or other ability to cause such compliance or performance. (b) Corporate Existence. Borrower, Primary Obligors and Secondary Obligors shall preserve and maintain their respective corporate existence, rights, privileges and franchises in the jurisdiction of their respective incorporation or organization, and qualify and remain qualified to do business in each other jurisdiction in which such qualification is necessary in view of their respective business or operations, except such jurisdictions where failure to qualify would not have a material adverse effect on Borrower's, Primary Obligor's or Secondary Obligor's (as applicable) business, Assets, operations, condition (financial or otherwise) or ability to perform its respective obligations under the Loan Documents. (c) Records; Reports. Borrower covenants with Bank that Borrower shall keep Records and prepare financial statements and shall cause to be furnished to Bank the following (all of the foregoing and following which comprise financial statements are to be kept and prepared in accordance with GAAP applied on a basis consistent with the Financials unless Borrower's certified public accountants concur in any changes therein and such changes are consistent with then applicable GAAP). 34 (i) As soon as available but not later than ninety (90) days after the close of each fiscal year of Borrower, a consolidated and consolidating balance sheet of Borrower and the other members of the Consolidated Group as at the end of such year, the related statement of operations (including income statement) for such year and a reconciliation of capital for such year, all certified on an unqualified basis by a firm of independent certified public accountants selected by Borrower and acceptable to Bank, in Bank's sole and absolute discretion. (ii) Concurrently with the delivery of the financial statements described in Section (i) above for fiscal years ending after December 31, 1997: (A) a certificate of the aforesaid certified public accountants certifying to Bank that based upon their examination of the affairs of Borrower and the other members of the Consolidated Group, performed in connection with the preparation of said financial statements, they are not aware of the occurrence or existence of any condition or event which constitutes an Event of Default or Unmatured Default, or, if they are aware thereof, the nature thereof, and (B) a reliance letter executed by an authorized partner of the aforesaid certified public accountants, in form and substance reasonably acceptable to Bank, and acknowledging that Bank may rely on such financial statements in connection with this Agreement notwithstanding that Bank is not in privity with such certified public accountants in connection with such financial statements. (iii) As soon as available but not later than thirty (30) days after the end of each calendar month hereafter, a consolidated and consolidating balance sheet of Borrower and the other members of the Consolidated Group as at the end of, and the related statement of operations for, the portion of such Person's fiscal year then elapsed, all certified by the chief financial officer of such Person's to be prepared in accordance with generally accepted accounting principles and to present fairly the financial position and results of operations of such Person for such period. (iv) Concurrently with delivery to its shareholders copies of all financial and other information delivered by Borrower to such Persons, including without limitation, its proxy statements and annual reports to stockholders. Concurrently with delivery to the SEC by Borrower, 35 copies of all reports filed by Borrower with the SEC, including without limitation, all reports on Forms 10K, 10Q or 8K promulgated under the Securities Exchange Act of 1934, as amended. (v) Concurrently with delivery of the Financials required pursuant to Sections 6.2(c)(i) and (iii) hereof, a certificate executed by the President, Treasurer or Chief Financial Officer of Borrower that no Event of Default or Unmatured Default has occurred and is continuing (including but not limited to compliance with the covenants set forth in Section 6.1) or if an Event of Default or Unmatured Default has occurred, setting forth the details of such event and the action which Borrower proposes to take with respect thereto. (vi) Concurrently with each Borrowing Request, each payment by an Affiliate with respect to a Pledged Note and any change in the Borrowing Base, but in no event less often than once each month, a Borrowing Base Certificate, prepared by the Treasurer of Borrower, setting forth in form and detail reasonably acceptable to Bank a schedule of the Book Value of the Eligible Notes (including all detail necessary to the calculation thereof) and a calculation of the ratio of Indebtedness to Tangible Net Worth. (vii) Such other data and information (financial and otherwise) as Bank, from time to time, reasonably may request bearing upon or related to Borrower's or any Guarantor's financial condition and/or results of operations. (d) Insurance. Borrower, Primary Obligors and Secondary Obligors at their sole cost and expense, shall keep and maintain: (i) policies of insurance against all hazards and risks ordinarily insured against by other owners or users of properties in similar business or as reasonably requested in writing by Bank; and (ii) public liability insurance relating to such Person's ownership and use of its Assets. All such policies of insurance shall be in form, with insurers and in such amounts as may be satisfactory to Bank. Borrower shall deliver to Bank the original (or certified) copy of each policy of insurance, and evidence of payment of all premiums for each such policy. Such policies of insurance (except those of public liability) shall contain an endorsement, in form and substance acceptable to Bank, showing losses payable to Bank. Such endorsement or an independent instrument furnished to Bank, shall provide that all insurance companies will give Bank at least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of Borrower 36 or any other Person shall affect the right of Bank to recover under such policy or policies of insurance in case of loss or damage. Borrower hereby directs all insurers under such policies of insurance (except those of public liability) to pay all proceeds payable thereunder directly to Bank. Borrower, irrevocably, appoints Bank (and all officers, employees or agents designated by Bank) as Borrower's true and lawful agent and attorney-in-fact for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect to such policies of insurance. In the event Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then Bank, without waiving or releasing any of Borrower's Obligations or any Event of Default or Unmatured Default hereunder, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto which Bank deems advisable. All sums so disbursed by Bank, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be part of Borrower's Liabilities, payable by Borrower to Bank on demand. The Bank shall also have been named as an additional insured with respect to Borrower's liability insurance. (e) Payment of Charges. Other than ad valorem taxes payable by First X or First B, Borrower, each Primary Obligor and each Secondary Obligor shall pay promptly, when due, all Charges and Borrower, each Primary Obligor and each Secondary Obligor shall not permit the Charges to arise or to remain unpaid, and will promptly discharge the same. In the event Borrower, any Primary Obligor or any Secondary Obligor, at any time or times hereafter, shall fail to pay the Charges or to obtain such discharges as required herein, Borrower shall so advise Bank thereof in writing. Bank may, without waiving or releasing any of Borrower's Obligations or any Event of Default or Unmatured Default hereunder, in its sole and absolute discretion, at any time or times thereafter, make such payment, or any part thereof, or obtain such discharge and take any other action with respect thereto which Bank deems advisable. All sums so paid by Bank and any expenses, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be part of Borrower's Liabilities, payable by Borrower to Bank on demand. Notwithstanding the foregoing, Borrower, any Primary Obligor or any Secondary Obligor may permit or suffer the Charges to attach to its Assets and may dispute, without prior payment thereof, the Charges, on the conditions that: (i) Borrower or the applicable Primary Obligor or Secondary Obligor, in good faith, shall be contesting the same in an appropriate proceeding diligently pursued; (ii) enforcement thereof against any assets of Borrower or the applicable Primary Obligor or Secondary Obligor shall be stayed; and (iii) appropriate reserves therefor shall have been established on 37 the Records of Borrower or the applicable Primary Obligor or Secondary Obligor in accordance with GAAP. (f) Pay Debts. Borrower and each Primary Obligor and Secondary Obligor shall pay or discharge or otherwise satisfy all Indebtedness at or before maturity or before the same becomes delinquent; provided that neither Borrower, nor any Primary Obligor or any Secondary Obligor shall be required to pay any Indebtedness while the same is being contested by it in good faith and by appropriate proceedings so long as Borrower or the applicable Primary Obligor or Secondary Obligor shall have set aside on its books reserves in accordance with GAAP with respect thereto and title to any property of Borrower or the applicable Primary Obligor or Secondary Obligor is not jeopardized. (g) Compliance with Laws. Borrower and each Primary Obligor and Secondary Obligor shall comply with all laws, rules, regulations and governmental orders (federal, state and local), including all Environmental Laws, having applicability to it or to the business or businesses at any time conducted by it, where the failure to so comply would have a material adverse effect, either individually or in the aggregate, on the business, Assets, operations, condition (financial or otherwise) or its ability to perform its obligations under the Loan Documents. (h) Perform Obligations. Borrower and each Primary Obligor and Secondary Obligor shall duly and punctually pay and perform each of its obligations under this Agreement and the Other Agreements in accordance with the terms thereof. (i) Management. As of the date hereof and at all times during the term hereof either (i) both of James Hawkins and James Sartain, or (ii) either James Hawkins or James Sartain and either of Matthew Landry or Rick R. Hagelstein shall be employed full-time with Borrower and shall be responsible for the day to day management of Borrower. 6.3 Negative Covenants. Borrower warrants and represents to and covenants with Bank that neither Borrower, nor any Primary Obligor nor any Secondary Obligor, as the case may be, shall, without Bank's prior written consent, which Bank may or may not give in its sole and absolute discretion, concurrently or hereafter do any of the following: (a) Sell or Encumber Assets. Neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall assign, sell or transfer any of its Assets to any Person, other than in the ordinary course of business, nor permit, grant, or suffer a security interest, lien, claim or encumbrance upon any of its Assets, except the Permitted Liens and ad valorem taxes of First X and First B. (b) Attachment. Neither Borrower, nor any Primary Obligor 38 nor any Secondary Obligor shall permit or suffer any levy, attachment or restraint to be made affecting any of its Assets; (c) Receiver. Neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall permit or suffer any receiver, trustee or assignee for the benefit of creditors, or any other custodian to be appointed to take possession of all or any of its Assets, other than a custodian pursuant to a voluntary custodial agreement entered into to perfect a security interest. (d) Amend Organizational Documents; Business Objectives. Neither Borrower, nor any Primary Obligor or any Secondary Obligor shall make any change: (i) in its Organic Documents or capital structure; or (ii) in any of its business objectives, purposes and operations, including by undertaking additional business activities. Neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall engage in any business not of the same general type as those conducted by them on the date hereof. (e) Mergers and Acquisitions. (i) Neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall merge or consolidate with any Person. Borrower, Primary Obligors and Secondary Obligors shall have the right to acquire the stock or Assets of another Person (whether by sale of Assets or sale or exchange of stock, or purchase, lease or otherwise); provided that any and all such acquisitions shall be through one or more Subsidiaries of Borrower, Primary Obligors or Secondary Obligors and such acquisition shall not violate any other representation, warranty or covenant set forth in this Agreement or any other Loan Document. (ii) NAF will not merge, consolidate or acquire the Assets of any Person, shall not commence any new business venture and shall use the proceeds of any sale or other disposition of its Assets to pay the Eligible Note made by it. (f) Stock Transfers. (i) Except as disclosed in Schedule 5.1(e), as amended from time to time with Bank's consent, and except as permitted pursuant to Section 6.3(f)(ii), neither any Primary Obligor, any Secondary Obligor nor any Pledged Entity shall grant any option, warrant or other right to purchase any equity interest in such Person, without in each case the prior written consent of Bank, which consent shall not be unreasonably withheld. 39 (ii) Notwithstanding anything to the contrary contained herein, Borrower shall have the right to register on Form S-3, and publicly offer and sell equity Securities of Borrower under the following terms and conditions: (w) Borrower shall deliver notice to Bank, within twenty-four (24) hours of the filing with the SEC; (x) Borrower shall fully and timely comply with all Securities Laws and with all terms and provisions of the underwriting agreement pursuant to which such Securities are offered for sale; (y) the prospectus and all other selling materials used by Borrower in such offering shall not contain any misstatement of material fact or omit to state any fact which would render the statements contained therein false or misleading., and (z) pay the proceeds of such offering to Bank, in accordance with the terms hereof. (g) Adverse Transactions. Neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall enter into any transaction which materially and adversely affects its ability to perform its obligations under the Loan Documents or to pay any other Indebtedness. (h) Investments. Neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall make any investment in the Stock or obligations of any Person, except in the ordinary course of its business. (i) Dividends; Payment of Fees, etc. At any time during the term hereof, without Bank's prior written consent which may be withheld in Bank's sole and absolute discretion, neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall: (i) make any distributions or pay any dividends or make any distributions of property or assets with respect to its Stock; (ii) pay any director's fees or any salaries to any director or shareholder unless such shareholder or director is directly and actively employed by Borrower or any Primary Obligor or Secondary Obligor; provided that, Borrower may compensate outside directors in an amount not to exceed $2,000 per meeting and may pay the stated dividends on its special preferred stock and its adjusting preferred stock. (j) Fee Agreements. Attached hereto as Schedule 6.3(j) (as amended from time to time) is a true, accurate and complete schedule of all Fee Agreements to which Borrower or any Primary Obligor or Secondary Obligor is a party.. Bank hereby expressly consents to the performance by Borrower and said Primary Obligors and Secondary Obligors of said Fee Agreements, as in effect on the date hereof. Within ten (10) Business Day after Borrower, any Primary Obligor or any Secondary Obligor has entered into any new Fee Agreement or shall have modified in any material respect any existing Fee Agreement, Borrower shall give Bank notice thereof and amend Schedule 6.3(j), if applicable, and shall, upon request by Bank, deliver 40 a copy of any new or amended Fee Agreement to Bank. Except in the ordinary course of business, Borrower shall not enter into any other transactions with any Affiliate, including, without limitation, agreements for the purchase, sale or exchange of property or the rendering of any services to or by any Affiliate, or enter into, assume or suffer to exist any employment, management, administration, advisory or consulting contract with any Affiliate or, in each of the foregoing cases, with any officer, director or partner of any Affiliate (or a spouse or other relative of any of them). (k) Indebtedness. Neither Borrower nor any Primary Obligor, other than NAF and FC Capital, shall contract, create, incur, assume or suffer to exist any Indebtedness; except for (w) the Loans, , (x) Indebtedness existing on the date hereof and reflected on the Financials of Borrower delivered on such date, (y) Indebtedness disclosed on Schedules 5.1(s) and (t), and (z) unsecured trade payables, unsecured Indebtedness of Borrower to an Affiliate, and purchase money financing (whether secured or unsecured) to parties (other than to Affiliates), incurred in the ordinary course of business that do not exceed, in the aggregate at any time outstanding, $500,000. (l) Loan; Guaranty Debt. Borrower shall not make any loan to any Person, other than loans to Primary Obligors pursuant to the terms of the Eligible Notes. Except as set forth on Schedule 6.3(l), neither Borrower, nor any Primary Obligor or any Secondary Obligor shall enter into any Guaranty Equivalents in the aggregate at any time outstanding exceeding $5,000,000. (m) Pay Indebtedness. Except in the ordinary course of business, neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall defease, prepay, repay, purchase, redeem or otherwise acquire any of its Indebtedness for borrowed money. (n) Issue Power of Attorney. Except pursuant to this Agreement and the Other Agreements, neither Borrower, nor any Primary Obligor nor any Secondary Obligor shall issue any power of attorney or other contract or agreement giving any Person power or control over the day-to-day operations of Borrower's, any Primary Obligor's or any Secondary Obligor's business, other than in connection with Permitted Liens or Indebtedness expressly permitted pursuant to the terms of this Agreement. (o) Amendment of Credit Agreements. Except in the ordinary course of business, neither Borrower, nor any Primary Obligor or any Secondary Obligor, shall amend, modify or extend any note, credit agreement, security agreement or other document, instrument of agreement evidencing or securing Indebtedness of such entity, without in each case Bank's prior written consent; provided that Primary Obligors and Secondary 41 Obligors may extend and renew existing credit facilities without Bank's consent. 6.4 Required Notices. (a) Borrower shall notify Bank and amend Schedule 5.1(t) on the same Business Day that: (i) Borrower makes any additional loans or advances to any Primary Obligor or Secondary Obligor, whether or not evidenced by a writing signed by the obligor thereof; and (ii) Borrower received any payment of principal on any Pledged Note identified on Schedule 5.1(t), (such notice may be given by delivery of a Borrowing Base Certificate in accordance with the provisions hereof. (b) In addition to those notices required elsewhere in this Agreement and in the Stock Pledge Agreement and the Note Pledge Agreement to which Borrower is a party, Borrower shall notify Bank promptly after obtaining knowledge of: (i) except as otherwise previously disclosed, any event or occurrence which Borrower has determined has caused a material loss or decline in value of Borrower's, any Primary Obligor's, or any Secondary Obligor's Assets due to casualty or any other adverse occurrence and the estimated (or actual, if available) amount of such loss or decline; (ii) the institution of any suit or administrative proceeding which, if determined adversely to Borrower, any Primary Obligor or any Secondary Obligor or any Pledged Entity, is reasonably likely to materially adversely affect the operations, financial condition or business of Borrower or any Primary Obligor or any obligor of a Pledged Note, as applicable; (iii) Borrower, any Primary Obligor or any Secondary Obligor or any Pledged Entity becoming subject to any Charge, restriction, judgment, decree or order which could materially and adversely affect Borrower's or a Primary Obligor's business, operations, Assets, condition (financial or otherwise) or ability to perform its respective obligations under the Loan Documents. (iv) the commencement of any lockout, strike or walkout relating to any labor contract to which Borrower, any Primary Obligor or any Secondary Obligor is a party; (v) except as otherwise previously disclosed, any event or occurrence which Borrower, any Primary Obligor or any 42 Secondary Obligor or any Pledged Entity has determined will have a material adverse affect on the ability of any obligor of a Pledged Note to repay such Pledged Note; (vi) the occurrence of a default by Borrower, any Primary Obligor or any Secondary Obligor or any Pledged Entity under any agreement, document or instrument to which it is a party which could materially and adversely affect its business, operations, Assets, condition (financial or otherwise) or ability to perform its respective obligations under the Loan Documents; (vii) the filing of a petition under any section or chapter of the United States Bankruptcy Code or any similar law or regulation shall be filed by or against Borrower, any Primary Obligor, Secondary Obligor, or any Pledged Entity or any such Person shall make an assignment for the benefit of its creditors or if any case or proceeding is filed by or against any such Person for its dissolution or liquidation; (viii)the making of an application for the appointment of a receiver, trustee or custodian for any of the assets of Borrower, any Primary Obligor, or any Secondary Obligor, other than voluntary custodial relationships entered into to perfect security interests; (ix) as soon as possible and in any event within five (5) days after Borrower shall have obtained knowledge of the occurrence of an Event of Default or Unmatured Default, the written statement of the chief financial officer of Borrower setting forth the details of such event and the action which Borrower proposes to take with respect thereto; (x) the exercise of any holder of any option, warrant or right to purchase any equity interest in Borrower, any Primary Obligor, any Secondary Obligor or any other Pledged Entity, other than the exercise of rights disclosed in Section 5.1(e); (xi) the breach of the covenants set forth in Section 6.2(i); and (xii) the issuance or sale of any Securities permitted pursuant to Section 6.3(f). 6.5 Payment of Claims. Bank, in its sole and absolute discretion, 43 without waiving or releasing any of Borrower's Liabilities or Borrower's Obligations or any Event of Default, may at any time or times hereafter, but shall be under no obligation to, pay, acquire and/or accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person against the Assets of Borrower, or any Primary Obligor, or any Secondary Obligor. All sums paid by Bank in respect thereof and all reasonable Costs relating thereto incurred by Bank or for which Bank becomes obligated on account thereof shall be part of Borrower's Liabilities payable by Borrower to Bank on demand and any amount not paid on demand shall bear interest at the Default Rate. 6.6 Year 2000 Compliance. (a) The computer and management information systems of the Borrower, the Primary Obligors and the Secondary Obligors are adequate for the conduct of their business as presently conducted and as proposed to be conducted and there are no material requirements for systems integration, upgrade or replacement, and there are no facilities or software inadequacies that could reasonably be expected to have a material adverse effect on the business of the Borrower, any Primary Obligor, Secondary Obligor. (b) The Borrower, the Primary Obligors and the Secondary Obligors will be Year 2000 Compliant on or before March 31, 1999 and at all times thereafter. As used in the preceding sentence, "Year 2000 Compliant" means the ability of the software and other information processing capabilities of such Person to correctly interpret and process all data in whatever form so as to avoid errors that may otherwise occur because of the inability of software or other information processing capabilities to recognize accurately the year 2000 or subsequent dates. (c) Any reprogramming required to permit the proper functioning of the computer and management information systems of the Borrower and its Subsidiaries during and following the year 2000 will be completed by March 31, 1999 and the cost of such reprogramming is not expected to have a material adverse effect on the business of the Borrower or its Subsidiaries. 44 7. DEFAULT 7.1 Events of Default. The occurrence of any one of the following events shall constitute a default ("EVENT OF DEFAULT") under this Agreement: (a) If Borrower fails or neglects to perform, keep or observe any of Borrower's Obligations or if Borrower fails or neglects to cause any Primary Obligor, Secondary Obligor or any other Loan Party (for any reason whatsoever) to keep or observe any covenant with respect to such Entity set forth herein and the same is not cured within thirty (30) days after Bank gives Borrower notice of such default; provided that a breach of any of the provisions, terms, conditions or covenants contained in Sections 6.2(d), 6.3 and 6.4 shall automatically be an Event of Default without any notice or cure period. (b) If any representation, warranty or material statement, report or certificate made or delivered by any Loan Party, or any of its directors, officers, authorized employees or agents, to Bank is not true and correct; (c) If Borrower fails to pay any of the Secured Obligations, when due and payable or declared due and payable and the same is not cured within five (5) days after Bank gives Borrower notice of such default provided however, that Interest shall accrue at the Default Rate commencing immediately after non-payment; (d) If Borrower shall default under the terms of any Indebtedness Instrument, other than the Loan Documents. (e) If any single Primary Obligor or Secondary Obligor shall default under the terms of any Indebtedness Instrument and such default is not cured within ninety (90) days after the occurrence thereof; provided that such cure period shall not apply if: (i) a default occurs by such Primary Obligor or Secondary Obligor under the terms of any other Indebtedness Instrument securing or evidencing a different borrowing, or (ii) if any other Primary Obligor or Secondary Obligor defaults under the terms of any Indebtedness Instrument during such ninety (90) day cure period. Notwithstanding the foregoing, if any two or more such Persons are obligated for the same Indebtedness and a default occurs thereunder, it shall be deemed to be a default by a single Person for the purposes of this Section 7.1(e). (f) If Borrower fails or neglects to perform, keep or observe any of Borrower's Obligations or to cause any Primary Obligor or Secondary Obligor to keep or observe any representation, warranty or covenant, contained in Section 6.2(e) and the same is not cured within ten (10) days after Bank gives Borrower notice of such default. 45 (g) Ten (10) days after a breach of the representation, warranty and covenant set forth in Section 6.2(i), unless waived by Bank in its sole and exclusive discretion, nothing in this Section 7.1(g) being deemed to be a covenant by Bank to waive such default or an implications that Bank will be reasonable in its decision not to waive such default. (h) If any of Borrower's Assets or the assets of any Primary Obligor, or Secondary Obligor or any portion thereof are attached, seized, subjected to a writ of distress warrant, or are levied upon, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not terminated or dismissed within sixty (60) days thereafter, other than the Assets of First X or First B arising out of the failure to pay ad valorem taxes; (i) If a petition under any section or chapter of the United States Bankruptcy Code or any similar law or regulation shall be filed by Borrower, any Primary Obligor or any Secondary Obligor, or if Borrower, any Primary Obligor or any Secondary Obligor shall make an assignment for the benefit of its creditors or if any case or proceeding is filed by Borrower, any Primary Obligor or any Secondary Obligor for its dissolution or liquidation; (j) If Borrower, any Primary Obligor or any Secondary Obligor is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business affairs or if a petition under any section or chapter of the United States Bankruptcy Code or any similar law or regulation is filed against Borrower, any Primary Obligor or any Secondary Obligor or if any case or proceeding is filed against Borrower, any Primary Obligor or any Secondary Obligor for its dissolution or liquidation and such injunction, restraint or petition is not dismissed or stayed within sixty (60) days after the entry or filing thereof; (k) If an application is made by Borrower, any Primary Obligor, any Secondary Obligor or any Pledged Entity for the appointment of a receiver, trustee or custodian for any of its assets other than a custodian pursuant to a voluntary custodial agreement entered into to perfect a security interest; (l) If an application is made by any Person other than a Loan Party for the appointment of a receiver, trustee, or custodian for any of the Assets of Borrower, any Primary Obligor or any Secondary Obligor or any Pledged Entity and the same is not dismissed within sixty (60) days after the application therefor; (m) Except as expressly permitted pursuant to Section 6.2(e), (i) if a notice of any Charge is filed of record with respect to all or any of Borrower's, any Primary Obligor's, or any Secondary Obligor's Assets, or (ii) if any Charge becomes a lien or encumbrance upon any of its assets and 46 the same is not released within sixty (60) days after the same becomes a lien or encumbrance; (n) The occurrence of a default or Event of Default or Unmatured Default under any agreement, instrument and/or document executed and delivered by any Guarantor to Bank, which is not cured within the time, if any, specified therefor in such agreement, instrument or document or any of the Loan Documents shall fail to grant to Bank on behalf of the Bank the lien or other security interest (if any) intended to be created thereby or any Loan Party thereto shall assert that it is not liable with respect thereto; or any Guarantor shall assert that it is not liable as a guarantor or otherwise under its guarantee agreement executed in connection herewith; (o) The occurrence of an Event of Default under any of the Other Agreements, which is not cured within the time, if any, specified therefor in such Other Agreement; (p) Except as expressly permitted pursuant to the terms hereof, if Borrower, any Primary Obligor, any Secondary Obligor or any Pledged Entity issues to or transfers to any Person any Stock of Borrower, any Primary Obligor, any Secondary Obligor or any Pledged Entity; (q) If any final non-appealable judgment for the payment of money in excess of $250,000 (after giving effect to any amount covered by insurance as to which the insurer shall not have defied or questioned its obligation to pay) shall be rendered against Borrower, any Primary Obligor, or any Secondary Obligor; or final judgment for the payment of money in excess of $250,000 shall be rendered against Borrower, any Primary Obligor, or any Secondary Obligor and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed or diligently contested in good faith by appropriate proceedings; (r) If Borrower or any ERISA Affiliate (1) shall effect a complete or partial withdrawal (as defined in ERISA Sections 4203 or 4205) from a Multiemployer Plan, if such withdrawal could subject either Borrower or any ERISA Affiliate to liability; (2) shall fail to pay when due an amount that is payable by it to the PBGC or to an Employee Benefit Plan; (3) has instituted against it by a fiduciary of any Multiemployer Plan an action to enforce ERISA Section 515 and such proceedings shall not have been dismissed within thirty (30) days thereafter; (4) has imposed against it any tax under Code Section 4980B(a); (5) has assessed against it by the Secretary of Labor a civil penalty with respect to any Employee Benefit Plan under ERISA Section 502(c) or 502(l); (6) shall apply for a waiver of the minimum funding standards of the Code; or (7) shall permit any other event or condition to occur or exist with respect to an Employee Benefit Plan that 47 could subject either Borrower or any ERISA Affiliate to liability; (s) Except as set forth in Section 7.1(d) or (e), a default by Borrower, any Primary Obligor, or any Secondary Obligor shall occur under any agreement, document or instrument (other than this Agreement or any of the other Loan Documents) now or hereafter existing, to which Borrower, any Primary Obligor, or any Secondary Obligor is a party and the effect of such default is reasonably likely to have a material adverse effect on the financial conditions or business operations of such Loan Party; (t) If Borrower, any Primary Obligor, or any Secondary Obligor dissolves, liquidates (other than with respect to a Secondary Obligor upon the disposition of all of its Assets in the ordinary course of its business), or fails to maintain its corporate existence, without the prior written consent of Bank. 7.2 Remedies Cumulative. All of Bank's rights and remedies under this Agreement and the Other Agreements are cumulative and non-exclusive. 7.3 Acceleration. Upon the occurrence an Event of Default and the continuation thereof, without notice by Bank to or demand by Bank to Borrower, Bank shall have no further obligation to and may then forthwith cease advancing monies, extending credit or issuing letters of credit to or for the benefit of Borrower under this Agreement and the Other Agreements. Upon an Event of Default, without notice by Bank to or demand by Bank to Borrower, all Secured Obligations shall be due and payable, forthwith. 7.4 Remedies. Upon the occurrence of an Event of Default and the continuation thereof, Bank, in its sole and absolute discretion, may exercise any and all rights and remedies that it may have under the other Loan Documents, at law or in equity. 7.5 Injunctive Relief. Borrower recognizes that upon the occurrence of an Event of Default, no remedy of law will provide adequate relief to Bank, and agrees that Bank shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 7.6 Advances During Unmatured Default. Upon the occurrence of any Unmatured Default or Event of Default (other than Unmatured Defaults under Section 7.1(e), Bank shall not be obligated to make any Advances; provided that, nothing contained herein shall prohibit Bank from making any Advances. 8. CONDITIONS PRECEDENT TO DISBURSEMENT 8.1 Checklist Items. The obligation of Bank to make the Loan to Borrower is subject to the condition precedent that, in addition to satisfaction of the conditions set forth in Sections 8.2 and 8.3, Bank shall have received, prior to the first disbursement of the proceeds of any of the Loan hereunder all documents, 48 instruments, agreements, notes, evidences of Borrower's authority, and all other instruments as Bank may reasonably request, including but not limited to all items on the documentation checklist, delivered by Bank to Borrower prior to the date hereof. 8.2 Necessary Actions. The obligation of Bank to make the Loan to Borrower is subject to the further condition precedent that all proceedings taken in connection with the transactions contemplated by this Agreement, and all instruments, authorizations and other documents applicable thereto, shall be reasonably satisfactory in form and substance to Bank and its counsel. 8.3 Conditions Precedent. In addition to the foregoing, prior to Bank making of any and all Loans hereunder, all of the following shall have been satisfied in a manner satisfactory to Bank: (a) no change in the condition or operations, financial or otherwise, of Borrower or any other Loan Party shall have occurred which change, in the sole credit judgment of Bank, may have a material adverse effect on Borrower or any other Loan Party; (b) no litigation shall be outstanding or have been instituted or threatened which Bank determines to be material against Borrower or other Loan Party; (c) all of the representations and warranties of Borrower set forth in this Agreement and each of the Other Agreements to which Borrower or other Loan Party is a party shall be true and correct on the date of the contemplated Loan to the same extent as originally made on such date; and (d) no Event of Default or Unmatured Default shall exist or be continuing. 9. GENERAL 9.1 Compliance with ERISA. (a) Representations and Warranties. Borrower hereby represents and warrants that: (i) Schedule 9.1 hereto describes the Employee Benefit Plans to which Borrower or any of its ERISA Affiliates may have obligations; (ii) each Employee Benefit Plan of Borrower or any of its ERISA Affiliates is in compliance in all material respects with its terms and with the applicable provisions of ERISA, the Code and all other statutes and regulations 49 applicable thereto and each such Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified, and each trust related to any such Employee Benefit Plan has been determined to be exempt from federal income tax under Section 501(a) of the Code; (iii) neither Borrower nor any of its ERISA Affiliates maintains or contributes to any Employee Benefit Plan with an actuarial present value of projected benefit obligations that exceeds the fair market value of net assets available for such benefits, calculated on the basis of the actuarial assumptions specified in the most recent actuarial valuation for such Employee Benefit Plan, and no such Employee Benefit Plan provides for subsidized early retirement benefits that could materially adversely affect the funded status of such Employee Benefit Plan or Employee Benefit Plans in the event of a reduction in force or plant closing; (iv) with respect to each Employee Benefit Plan that is a "defined benefit plan," as defined in Section 3(35) of ERISA, the assets of each such Employee Benefit Plan are equal to or greater than the accrued benefits of the participants and beneficiaries thereunder, as determined pursuant to the actuarial methods and assumptions utilized by the PBGC in the event of a plan termination; (v) neither Borrower nor any of its ERISA Affiliates sponsors, maintains, participates in or contributes to any employee welfare benefit plan within the meaning of Section 3(1) of ERISA that provides benefits to employees after termination of employment other than as required by Section 601 of ERISA; as such, neither Borrower nor any of its ERISA Affiliates are currently or will in the future be subject to the accounting recognition and disclosure standards of Statement of Financial Accounting Standards No. 106 (FASB 106); (vi) neither Borrower nor any of its ERISA Affiliates has breached any of the responsibilities, obligations, or duties imposed on them by ERISA or the regulations promulgated thereunder with respect to any Employee Benefit Plan; (vii) neither Borrower nor any ERISA Affiliate has (i) failed to 50 make a required contribution or payment to a Multiemployer Plan or (ii) made or expects to make a complete or partial withdrawal under Sections 4203 or 4205 of ERISA from a Multiemployer Plan; (viii)at the date hereof, the aggregate potential withdrawal liability payment, as determined in accordance with Title IV of ERISA, of Borrower and any ERISA Affiliates with respect to all Employee Benefit Plans that are Multiemployer Plans does not exceed $50,000 and, to the best of Borrower's and its ERISA Affiliate's knowledge, no Multiemployer Plan is in reorganization or insolvent within the meaning of Sections 4241 or 4245 of ERISA. (ix) neither Borrower nor any ERISA Affiliate has failed to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or other payment; (x) neither Borrower nor any ERISA Affiliate is required to provide security to an Employee Benefit Plan under Section 401(a)(29) of the Code due to an Employee Benefit Plan amendment that results in an increase in current liability for the plan year; (xi) no liability to the PBGC has been, or is expected by Borrower or any ERISA Affiliate to be, incurred by Borrower or any ERISA Affiliate, other than the payment of premiums, and there are no premium payments that have became due and which are unpaid; (xii) no events have occurred in connection with any Employee Benefit Plan that might constitute grounds for the termination of any such Employee Benefit Plan by the PBGC or for the appointment by any United States District Court of a trustee to administer any such Employee Benefit Plan; (xiii)no Reportable Event has, in the case of any Employee Benefit Plan maintained by Borrower or an ERISA Affiliate other than a Multiemployer Plan, occurred and is continuing, or to the best of Borrower's knowledge, has occurred and is continuing in the case of any such Employee Benefit Plan that is a Multiemployer Plan; (xiv) no Employee Benefit Plan maintained by Borrower or an ERISA Affiliate had an Accumulated Funding Deficiency, 51 whether or not waived, as of the last day of the most recent fiscal year of such Employee Benefit Plan or, in the case of any Multiemployer Plan, as of the most recent fiscal year of such Multiemployer Plan for which the annual reports of such Multiemployer Plan's actuaries and auditors have been received; and (xv) neither Borrower nor any ERISA Affiliate has engaged in a Prohibited Transaction prior to the date hereof, and the execution, delivery, and carrying out of this Agreement will not involve any non-exempt Prohibited Transactions (within the meaning of Part 4 of Subtitle B of Title I of ERISA) or any transaction in connection with which a tax could be imposed pursuant to Section 4975 of the Code. (b) ERISA Reports. Borrower shall: (i) as soon as possible, and in any event within fifteen (15) Business Days, after Borrower or an ERISA Affiliate knows or has reason to know that, regarding any Employee Benefit Plan with respect to Borrower or an ERISA Affiliate, a Prohibited Transaction or a Reportable Event has occurred (whether or not the requirement for notice, if applicable, of such Reportable Event has been waived by the PBGC), deliver to the Bank a certificate of a responsible officer of Borrower setting forth the details of such Prohibited Transaction or Reportable Event, the action that Borrower proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, Department of Labor, or PBGC; (ii) upon request of the Bank made from time to time, deliver to the Bank a copy of the most recent actuarial report, funding waiver request, and annual report filed with respect to any Employee Benefit Plan maintained by Borrower or an ERISA Affiliate; (iii) upon request of the Bank made from time to time, deliver to the Bank a copy of any Employee Benefit Plan sponsored, contributed to, participated in or maintained by Borrower or any ERISA Affiliate; and (iv) as soon as possible, and in any event within ten (10) Business Days, after it knows or has reason to know that any of the following have occurred with respect to any Employee Benefit Plan maintained, or contributed to, by 52 Borrower or an ERISA Affiliate, deliver to the Bank a certificate of a responsible officer of Borrower setting forth the details of the events described in (a) through (l) and the action that Borrower or any ERISA Affiliate proposes to take with respect thereto, together with a copy of any notice or filing from the PBGC or other agency of the United States government with respect to such of the events described in (a) through (l): (a) any Employee Benefit Plan has been terminated; (b) the Plan Sponsor intends to terminate any Employee Benefit Plan; (c) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate any such Employee Benefit Plan or to appoint a trustee to administer such Employee Benefit Plan, or Borrower or any ERISA Affiliate receives a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; (d) Borrower or any ERISA Affiliate withdraws from any Employee Benefit Plan, or notice of any withdrawal liability is received by Borrower or any ERISA Affiliate; (e) any Employee Benefit Plan has received an unfavorable determination letter from the Internal Revenue Service regarding the qualification of the Employee Benefit Plan under Section 401(a) of the Code; (f) Borrower or any ERISA Affiliate fails to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or payment or has applied for a waiver of the minimum funding standard under Section 412 of the Code; (g) the imposition of any tax under Code Section 4980B(a) or the assessment by the Secretary of Labor of a civil penalty under Sections 502(c) or 502(l) of ERISA; (h) there is a partial or complete withdrawal (as described in ERISA Section 4203 or 4205) by Borrower or any ERISA Affiliate from a Multiemployer Plan; (i) Borrower or any ERISA Affiliate is in "DEFAULT" as defined in ERISA Section 4219(c)(5)) with respect to payments to a Multiemployer Plan required by reason of its complete or partial withdrawal from such Employee Benefit Plan; (j) a Multiemployer Plan is in "REORGANIZATION" or is "INSOLVENT" (as described in Title IV of ERISA) or such Multiemployer Plan intends to terminate or has terminated under Section 4041A of ERISA; (k) the institution of a proceeding by a fiduciary of a Multiemployer Plan against Borrower or any ERISA Affiliate to enforce Section 515 of ERISA; or (1) Borrower or any ERISA Affiliate has increased benefits under any existing Employee Benefit Plan or commenced 53 contributions to an Employee Benefit Plan to which Borrower or any ERISA Affiliate was not previously contributing. For purposes of this Section, Borrower shall be deemed to have knowledge of all facts known by the Plan Administrator of any Employee Benefit Plan of which Borrower or any ERISA Affiliate is the Plan Sponsor. (c) Compliance with ERISA. Borrower and its ERISA Affiliates will not (i) establish, maintain, or operate any Employee Benefit Plan that is not in compliance in all material respects with the provisions of ERISA, the Code, and all other applicable laws, and the regulations and interpretations thereunder; (ii) allow to exist any Accumulated Funding Deficiency with respect to any Employee Benefit Plan, whether or not waived; (iii) terminate any Employee Benefit Plan or withdraw or effect a partial or complete withdrawal (as described in ERISA Section 4203 or 4205) from any Multiemployer Plan, if such termination or withdrawal could subject Borrower or any ERISA Affiliate to liability; (iv) fail to make any required installment or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment; (v) amend any Employee Benefit Plan so as to result in an increase in current liability for the plan year such that Borrower or any ERISA Affiliate is required to provide security to such Employee Benefit Plan under Section 401(a)(29) of the Code; (vi) fail to make any contribution or payment to any Multiemployer Plan which Borrower or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan; (vii) enter into any Prohibited Transaction for which a class exemption is not available or a private exemption previously has not been obtained from the Department of Labor; (viii) permit the occurrence of any Reportable Event, or any other event or condition, which could subject either Borrower or any ERISA Affiliate to liability; or (ix) allow or permit to exist any other event or condition known or that reasonably should be known to Borrower which event or condition could subject either Borrower or any ERISA Affiliate to liability. (d) Definitions. For purposes of this Section 9.1, the following definitions shall apply: (i) "ACCUMULATED FUNDING DEFICIENCY" shall have the meaning assigned to that term in Section 302 of ERISA. (ii) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (iii) "EMPLOYEE BENEFIT PLAN" shall mean an employee benefit plan within the meaning of Section 3(3) of ERISA that is maintained, sponsored, participated in or contributed to 54 by Borrower or any ERISA Affiliate. (iv) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor thereto. (v) "ERISA AFFILIATE" shall mean any corporation, trade or Business that is, along with Borrower, a member of a controlled group of trades or businesses, or a member of any group of organizations, within the meaning of Sections 414(b), (c), (m) or (o) of the Code, and any regulations thereunder. (vi) "MULTIEMPLOYER PLAN" shall mean any plan described in Section 3(37) or 4001(a)(3) of ERISA to which contributions are or have been made by Borrower or any ERISA Affiliate. (vii) "PBGC" shall mean the Pension Benefit Guaranty Corporation or any governmental body succeeding to its functions. (viii)"PLAN Administrator" shall have the meaning assigned to it in Section 3(16)(A) of ERISA. (ix) "PLAN SPONSOR" shall have the meaning assigned to it in Section 3(16)(B) of ERISA. (x) "PROHIBITED TRANSACTION" shall mean a transaction that is prohibited under Code Section 4975 or ERISA Section 406 and not exempt under Code Section 4975 or ERISA Section 408. (xi) "REPORTABLE EVENT" shall mean (a) an event described in Section 4043(c), 4068(a), or 4063(a) of ERISA or in the regulations thereunder, (b) receipt of a notice of withdrawal liability with respect to a Multiemployer Plan pursuant to Section 4202 of ERISA, (c) an event requiring Borrower or any ERISA Affiliate to provide security for an Employee Benefit Plan under Code Section 401(a)(29), (d) any failure to make payments required by Code Section 412(m), (e) the withdrawal of Borrower or any ERISA Affiliate from an Employee Benefit Plan in which it is a "SUBSTANTIAL EMPLOYER" as defined in Section 4001(a)(2) of ERISA, (f) the institution of proceedings to terminate an Employee Benefit Plan by the PBGC, or (g) the filing of a notice to terminate an Employee Benefit Plan or the treatment of an amendment of an Employee 55 Benefit Plan as a termination under Section 4041 of ERISA. 9.2 Costs. Borrower hereby agrees that it shall reimburse Bank on demand, as part of Borrower's Obligations, for any and all Costs and any amount not paid on demand shall bear interest at the Default Rate. 9.3 Statement. Each statement of account by Bank delivered to Borrower relating to the Secured Obligations shall be presumed correct and accurate and shall constitute an account stated between Borrower and Bank unless Bank subsequently corrects such statement of its own volition or, within thirty (30) days after Borrower's receipt of said statement, Borrower delivers to Bank, by registered or certified mail addressed to Bank at the address specified in Section 9.4, written objection thereto specifying the error or errors, if any, which Borrower asserts are contained in any such statement. 9.4 Notices. Any and all notices given in connection with this Agreement shall be deemed adequately given only if in writing (which term, for all purposes of this Agreement and the other Loan Documents, shall include telecopy) and addressed to the party for whom such notices are intended at the address set forth below. All notices shall be sent by personal delivery, Federal Express or other over-night messenger service, first class registered or certified mail, postage prepaid, return receipt requested or by other means at least as fast and reliable as first class mail. A written notice shall be deemed to have been given to the recipient party on the earlier of (a) the date it shall be delivered to the address required by this Agreement; (b) the date delivery shall have been refused at the address required by this Agreement; or (c) with respect to notices sent by mail, the date as of which the postal service shall have indicated such notice to be undeliverable at the address required by this Agreement. Any and all notices referred to in this Agreement, or which either party desires to give to the other, shall be addressed as follows: IF TO BORROWER: FirstCity Financial Corporation 6400 Imperial Drive P.O. Box 8216 Waco, Texas 76714 Attn: James Holmes Telecopy: 254-751-7648 IF TO BANK: Bank of Scotland 565 Fifth Avenue New York, New York 10017 Attn: Loans Administration Telecopy: 212-557-9460 56 WITH A COPY TO: Sachnoff & Weaver, Ltd. Suite 2900 30 South Wacker Drive Chicago, Illinois 60606 Attn: Frank Ballantine, Esq. Telecopy: 312-207-6400 and to Bank of Scotland Chicago Representative Office 181 West Madison Street Suite 3525 Chicago, Illinois 60602 Attn: James Halley Telecopy: 312-263-1143 The above addresses may be changed by notice of such change, mailed as provided herein, to the last address designated. 9.5 Amendments and Waivers. This Agreement and the other Loan Documents may not be modified, altered or amended except by an agreement in writing signed by Borrower and Bank. Borrower expressly agrees that for purposes of this Agreement and each and every other Loan Document: (i) this Agreement and each and every other Loan Document shall be a "credit agreement" under the Illinois Credit Agreements Act, 815 ILCS 160/1 et. seq. (the "ACT"); (ii) the Act applies to this transaction including, but not limited to, the execution of this Agreement and each and every other Loan Document; and (iii) any action on or in any way related to this Agreement and each and every other Loan Document shall be governed by the Act. Borrower may not sell, assign or transfer this Agreement or the Other Agreements or any portion thereof, including, without limitation, Borrower's rights, titles, interests, remedies, powers and/or duties hereunder or thereunder. Borrower hereby consents to Bank's sale, assignment, transfer or other disposition, at any time and from time to time hereafter, of this Agreement or the Other Agreements, or of any portion thereof or participation therein, including, without limitation, Bank's rights, titles, interests, remedies, powers and/or duties. 9.6 No Implied Waiver; Remedies Cumulative. Bank's failure at any time or times hereafter to require strict performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect or diminish any right of Bank thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Bank of an Event of Default or an Unmatured Default by Borrower or any other Loan Party under this Agreement or the Other Agreements shall not suspend, waive or affect any other Event of Default or Unmatured Default by Borrower or any other Loan Party under this Agreement or the Other Agreements, whether the same is prior or subsequent 57 thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or the Other Agreements and no Event of Default or Unmatured Default by Borrower or any other Loan Party under this Agreement or the Other Agreements shall be deemed to have been suspended or waived by Bank unless such suspension or waiver is by an instrument in writing signed by an officer of Bank and directed to Borrower or such applicable other Loan Party specifying such suspension or waiver. 9.7 Severability. If any provision (in whole or in part) of this Agreement or the other Loan Documents or the application thereof to any person or circumstance is held invalid or unenforceable, then such provision shall be deemed modified, restricted, or reformulated to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement or the other Loan Document, as the case may require, and this Agreement and such other Loan Document shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified, restricted, or reformulated or as if such provision had not been originally incorporated herein or therein, as the case may be. The parties further agree to seek a lawful substitute for any provision found to be unlawful. If such modification, restriction or reformulation is not reasonably possible, the remainder of this Agreement and the other Loan Documents and the application of such provision to other persons or circumstances will not be affected thereby and the provisions of this Agreement and the other Loan Documents shall be severable in any such instance. 9.8 Incorporation of Other Loan Documents. The provisions of the Other Agreements are incorporated in this Agreement by this reference thereto. Except as otherwise provided in this Agreement and except as otherwise provided in the Other Agreements by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in the Other Agreements or the other Loan Documents, Bank shall have the right to elect, in its sole and absolute discretion, which provision shall govern and control. Except to the extent provided to the contrary in this Agreement and in the other Loan Documents, no termination or cancellation (regardless of cause or procedure) of this Agreement or the Other Agreements shall in any way affect or impair the powers, obligations, duties, rights and liabilities of Borrower or Bank in any way or respect relating to (a) any transaction or event occurring prior to such termination or cancellation, and/or (b) any of the undertakings, agreements, covenants, warranties and representations of Borrower contained in this Agreement or the Other Agreements. All such undertakings, agreements, covenants, warranties and representations shall survive such termination or cancellation. 9.9 Acceptance. This Agreement and the other Loan Documents are submitted by Borrower to Bank (for Bank's acceptance or rejection thereof) at Bank's principal place of business as an offer by Borrower to borrow monies from 58 Bank now and from time to time hereafter and shall not be binding upon Bank or become effective until and unless accepted by Bank, in writing, at said place of business. If so accepted by Bank, this Agreement and the other Loan Documents and the other Loan Documents shall be deemed to have been made at said place of business. This Agreement and the other Loan Documents and the other Loan Documents shall be governed and controlled by the laws of the State of Illinois as to interpretation, enforcement, validity, construction, effect and in all other respects including, but not limited to, the legality of the interest rate and other charges, but excluding choice of law provisions and perfection of security interests which shall be governed and controlled by the laws of the relevant jurisdiction. 9.10 Knowledge. As used herein the phrase "TO THE BEST OF BORROWER'S KNOWLEDGE" or words of such import shall mean all knowledge, including, actual knowledge and knowledge of matters which any reasonable person in such position knew or should have known, of the respective officers, directors and managers of Borrower. 9.11 Waiver by Borrower. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT OR REQUIRED BY LAW, BORROWER WAIVES (A) PRESENTMENT, DEMAND AND PROTEST, NOTICE OF PROTEST, NOTICE OF PRESENTMENT, DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY BANK ON WHICH BORROWER MAY IN ANY WAY BE LIABLE; (B) ALL RIGHTS TO NOTICE AND A HEARING PRIOR TO BANK'S TAKING POSSESSION OR CONTROL OF, OR TO BANK REPLEVY, ATTACHMENT OR LEVY UPON THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING BANK TO EXERCISE ANY OF BANK'S REMEDIES; AND (C) THE BENEFIT OF ALL VALUATION, APPRAISEMENT, EXTENSION AND EXEMPTION LAWS. 9.12 Governing Law. THIS AGREEMENT HAS BEEN DELIVERED FOR ACCEPTANCE BY BANK IN CHICAGO, ILLINOIS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ILLINOIS. TO THE EXTENT PERMITTED BY APPLICABLE LAW BORROWER HEREBY (a) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT; (b) IRREVOCABLY WAIVES THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT; (c) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; AND (d) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST BANK OR ANY OF THEIR 59 RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY COURT OTHER THAN ONE LOCATED IN COOK COUNTY, ILLINOIS. NOTHING IN THIS SECTION SHALL AFFECT OR IMPAIR BANK'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR BANK'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 9.13 Waiver of Marshaling. All rights of marshaling of assets of Borrower, including any such right with respect to the Pledged Property, are hereby waived by Borrower. 9.14 Limitation by Law. All rights, remedies and powers provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Agreement are intended to be subject to all applicable mandatory provisions of law which may be controlling and to be limited to the extent necessary so that they will not render this Agreement invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. 9.15 Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing by Borrower in connection herewith shall survive the execution and delivery of this Agreement and repayment of the Secured Obligations. Any investigation by Bank shall not diminish in any respect whatsoever its rights to rely on such representations and warranties. 9.16 Service of Process. Borrower hereby irrevocably appoints and designates CT Corporation System, Inc., 208 S. LaSalle Street, Chicago, IL 60604 as its true and lawful attorney-in-fact and duly authorized agent for service of legal process and agrees that service of such process upon such agent and attorney-in-fact shall constitute personal service of such process upon Borrower. 9.17 Representation by Counsel. Borrower hereby represents that it has been represented by competent counsel of its choice in the negotiation and execution of this Agreement and the other Loan Documents; that it has read and fully understood the terms hereof; Borrower and its counsel have been afforded an opportunity to review, negotiate and modify the terms of this Agreement, and that it intends to be bound hereby. In accordance with the foregoing, the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement. 9.18 Release of Bank. Borrower releases Bank from any and all causes of action or claims which Borrower may now or hereafter have for any asserted loss or damage to Borrower claimed to be caused by or arising from any act or omission to act on the part of Bank, its officers, agents or employees, 60 except for willful misconduct or gross negligence. 9.19 Invalidated Payments. To the extent that either Bank receives any payment on account of the Secured Obligations, and any such payment(s) and/or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinated and/or required to be repaid to a trustee, receiver or any other Person under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment(s) or proceeds received, the Secured Obligations or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) and/or proceeds had not been received by Bank and applied on account of the Secured Obligations. 9.20 Headings. The descriptive headings of the various provisions of this Agreement and the other Loan Documents are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 9.21 Counterparts. This Agreement and the other Loan Documents may be executed in any number of counterparts, and by the different parties hereto and thereto on the same or separate counterparts, each of which when so executed and delivered shall be deemed to be an original; all the counterparts for each such Loan Document shall together constitute one and the same agreement. 9.22 Fax Execution. For purposes of negotiating and finalizing this Agreement (including any subsequent amendments thereto), any signed document transmitted by facsimile machine ("FAX") shall be treated in all manner and respects as an original document. The signature of any party by FAX shall be considered for these purposes as an original signature. Any such FAX document shall be considered to have the same binding legal effect as an original document, provided that an original of the faxed document was mailed by first class US Mail or personally delivered to the recipient, on the date of its transmission with proof of the fax transmission. At the request of either party, any FAX document subject to this Agreement shall be re-executed by both parties in an original form. The undersigned parties hereby agree that neither shall raise the use of the FAX or the fact that any signature or document was transmitted or communicated through the use of a FAX as a defense to the formation of this Agreement. 9.23 No Third Party Beneficiaries. This Agreement is solely for the benefit of the Bank, Borrower and their respective successors and assigns (except as otherwise expressly provided herein) and nothing contained herein shall be deemed to confer upon any Person other than Borrower and its successors and assigns any right to insist on or to enforce the performance or observance of any of the obligations contained herein. All conditions to the obligations of the Bank to make the Loans hereunder are imposed solely and exclusively for the benefit of the Bank and its respective successors and assigns and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms 61 and no other Persons shall under any circumstances be deemed to be a beneficiary of such conditions. 9.24 Domicile of Loans. Bank may make, maintain or transfer any of its Loans hereunder to, or for the account of, any branch office, subsidiary or affiliate of Bank. 9.25 Entire Agreement. This Agreement and the other Loan Documents constitute the entire agreement of Borrower and Bank with respect to the subject matter hereof and supersedes all prior and contemporaneous negotiations, agreements, understandings and communications. No representation, understanding, promise or condition concerning the subject matter hereof shall be binding upon Bank unless expressed herein or therein. No course of dealing, course or performance, trade usage or parole evidence of any nature, whether based on actions, omissions or circumstances occurring or existing heretofore or hereafter, may be used in any way to alter or supplement the terms hereof. 9.26 Construction. In this Agreement, unless the context otherwise clearly requires, references to the plural include the singular, the singular the plural, and the part the whole; the neuter case includes the masculine and feminine cases; and "or" is not exclusive. In this Agreement, any references to property (and similar terms) include an interest in such property (or other item referred to); "include," "includes," "including" and similar terms are not limiting; and "hereof," "herein," "hereunder" and similar terms refer to this Agreement as a whole and not to any particular provision; and "expenses," "costs," "out-of-pocket expenses" and similar terms include the charges of in-house counsel, auditors and other professionals of the relevant Person to the extent that such amounts are routinely identified and charged under such Person's cost accounting system. Section and other references in this Agreement are to this Agreement unless otherwise specified. 9.27 Successors and Assigns. This Agreement shall be binding upon Borrower and its successors and assigns, and shall inure to the benefit of and be enforceable by Bank and its successors and assigns. Without limitation of the foregoing, Bank (and any successive assignee or transferee) from time to time may assign or otherwise transfer all or any portion of its rights or obligations under the Loan Documents (including all or any portion of any commitment to extend credit), or any Secured Obligations, to any other Person, and such Secured Obligations (including any Secured Obligations resulting from extension of credit by such other Person under or in connection with the Loan Documents) shall be and remain Secured Obligations entitled to the benefit of this Agreement, and to the extent of its interest in such Secured Obligations such other Person shall be vested with all the benefits in respect thereof granted to Bank in this Agreement or otherwise. 9.28 Texas Language. (a) THIS WRITTEN AGREEMENT (TOGETHER WITH THE 62 OTHER LOAN DOCUMENTS ) REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE MATTERS COVERED HEREBY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. (B) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES HERETO. 9.29 Waiver of Trial by Jury. TO THE EXTENT PERMITTED BY LAW, BORROWER AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE OTHER AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY IN CONNECTION HEREWITH. BORROWER HEREBY EXPRESSLY ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR BANK TO MAKE THE LOAN. 63 IN WITNESS WHEREOF, this Loan Agreement has been duly executed as of the day and year specified at the beginning hereof. BORROWER: FIRSTCITY FINANCIAL CORPORATION a Delaware corporation By: Title: BANK: ----- BANK OF SCOTLAND By: Title: Schedule of Exhibits and Schedules ---------------------------------- Exhibit A Wire Transfer Instruction to Bank of Scotland - --------- Schedule 1.1 (xxx) Schedule of Secondary Obligors Schedule 2.2(c) Schedule of Eligible Notes Schedule 4.2 Schedule of Excluded Notes Schedule 4.3 Schedule of Excluded Entities Schedule 5.1(e) Schedule of Shareholders, Stock and Options Schedule 5.1(f) Schedule of Fictitious Names Schedule 5.1(g) Schedule of Permitted Liens Schedule 5.1(j) Schedule of Government Contracts Schedule 5.1(l) Consents Schedule 5.1(s) Schedule of Other Indebtedness Schedule 5.1(t) Schedule of Affiliate Indebtedness Schedule 5.1(u) Affiliate Notes Schedule 5.1(u)(iii) Schedule of Future Notes (to be delivered post- closing as they arise) Schedule 5.1(w) Schedule of Affiliates Schedule 6.3(j) Fee Agreements Schedule 6.3(l) Guaranty Equivalents Schedule 9.1 ERISA Matters EXHIBIT A WIRE TRANSFER INSTRUCTION TO BANK OF SCOTLAND CITIBANK N.A., NEW YORK ABA NO. 021000089 FOR ACCOUNT OF BANK OF SCOTLAND, NEW YORK ACCOUNT NO.: 36046633 ATTN: LOAN ADMINISTRATION REF: FIRSTCITY FINANCIAL CORPORATION SCHEDULE 1.1 (xxx) SECONDARY OBLIGORS FirstCity Funding Corporation, a Texas corporation FirstCity Consumer Finance Corporation, a Texas corporation SL Funding Corp., a Texas corporation Harbor Financial Mortgage Corporation, a Texas corporation ("HARBOR") Bosque Asset Corporation, a Texas corporation First X Realty, L.P., a Texas limited partnership ("FIRST X") FH Partners, Ltd., a Texas limited partnership First B Realty, Ltd., a Texas limited partnership ("FIRST B") Wamco XVII, Ltd., a Texas limited partnership Wamco XXIV, Ltd., a Texas limited partnership Wamco XXV, Ltd., a Texas limited partnership EX-10 8 FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "AMENDMENT"), dated for reference purposes only as of July 20, 1998 by and between FirstCity Financial Corporation, a Delaware corporation ("BORROWER"), with its principal place of business at 6400 Imperial Drive, P.O. Box 8216, Waco, Texas 76714 and Bank of Scotland, acting through its branch in New York, New York ("BANK") RECITALS: Borrower and BOS have entered into that certain Loan Agreement dated as of April 8, 1998 (the "EXISTING AGREEMENT") pursuant to which Bank agreed to provide credit facilities to Borrower in the original maximum amount of $50,000,000, which the maximum principal amount has been reduced pursuant to the express terms of the Existing Agreement to $40,000,000. Borrower has requested that Bank increase the credit facility to $50,000,000. Bank has agreed to increase the credit facility pursuant to the terms and conditions of this Amendment. The parties deem it to be in their best interest to amend the Existing Agreement to reflect the increase in the maximum loan amount. NOW THEREFORE, in consideration of any loan, advance, extension of credit and/or other financial accommodation at any time made by Bank to or for the benefit of Borrower and Bank agree as follows: 1. Recitals and Definitions. 1.1. Borrower hereby represents and warrants to Bank that the foregoing Recitals are (a) true and accurate, (b) an integral part of this Amendment; and (c) hereby incorporated into this Amendment and made a part hereof. 1.2. All terms capitalized but not expressly defined herein shall, for purposes hereof, have the respective meanings set forth in the Existing Agreement. 2. Amendments to Loan Agreement. The Existing Agreement is hereby amended as follows: 2.1 All references to "Reduction Events" in the Existing Agreement are HOFS02...:\92\54892\0011\1612\AGR8068M.070 hereby deleted. 2.2 Section 2.2(a) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: (A) NOTWITHSTANDING ANYTHING AT ANY TIME TO THE CONTRARY CONTAINED HEREIN OR IN ANY OTHER LOAN DOCUMENT, BUT SUBJECT TO THE LIMITATIONS SET FORTH IN SECTION 2.2(D), THE PRINCIPAL PORTION OF BORROWER'S LIABILITIES OUTSTANDING AT ANY ONE TIME DURING THE TERM HEREOF SHALL NOT EXCEED AN AMOUNT EQUAL TO THE LESSER OF (A) $50,000,000 AND (B) THE BORROWING BASE WHICH AMOUNT IS REFERRED TO HEREIN AS THE "MAXIMUM PRINCIPAL AMOUNT." 2.3 Section 2.2(e) of the Existing Agreement is hereby deleted in its entirety and the following is substituted therefor: (E) IN THE EVENT THAT THE OUTSTANDING PRINCIPAL BALANCE OF THE LOAN EXCEEDS THE MAXIMUM PRINCIPAL AMOUNT AT ANY TIME, BORROWER SHALL PAY THE AMOUNT OF SUCH EXCESS TO BANK, WITHOUT NOTICE OR DEMAND, AND ANY AMOUNT NOT SO PAID SHALL BEAR INTEREST AT THE DEFAULT RATE UNTIL PAID. THIS IS AN ABSOLUTE OBLIGATION TO PAY TO BANK THE AMOUNT OF THE UNPAID PRINCIPAL BALANCE OF THE LOAN IN EXCESS OF SAID MAXIMUM PRINCIPAL AMOUNT, REGARDLESS OF THE CAUSE OF SUCH EXCESS. 2.4 Sections 2.12(b) of the Existing Agreement is hereby deleted in its entity and the following is substituted therefor: (B) UNUSED COMMITMENT. BORROWER SHALL PAY AN UNUSED COMMITMENT FEE IN AN AMOUNT EQUAL TO .125% (ON AN ANNUAL BASIS, BASED ON A 365-DAY YEAR) OF THE DIFFERENCE BETWEEN $50,000,000 AND THE DAILY OUTSTANDING PRINCIPAL BALANCE OF THE LOAN. SUCH FEE SHALL BE PAYABLE QUARTERLY IN ARREARS ON THE LAST BUSINESS DAY OF EACH CALENDAR QUARTER. 2.5 Section 3.3(c) is hereby deleted. 3. Representations and Warranties of Borrower. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. To induce Bank to enter into this Amendment, Borrower hereby represents and warrants to Bank that: (a) Borrower represents and warrants that the execution and delivery of this Amendment, and the performance by Borrower of its obligations under this Amendment and the other Loan Documents, as amended, are within Borrower's corporate powers, have been duly authorized by all necessary corporate action, have received all necessary 2 governmental approvals (if any shall be required) and do not and will not contravene or conflict with any provisions of law, or the Articles of Incorporation or corporate By-Laws of Borrower or of any other agreement binding upon Borrower; (b) Borrower represents and warrants that this Amendment, and each other instrument executed by Borrower concurrently herewith, is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to the general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); (c) Borrower represents and warrants that all of the representations and warranties of Borrower made in the Loan Documents are true and correct as of the date hereof, except where such representation or warranty specifically relates to an earlier date. Borrower hereby expressly remakes and reaffirms each and every representation, warranty and covenant set forth in the Agreement and the other Loan Documents to which Borrower is a party to and for the benefit of Agent and Lenders, as if made on the date herein and fully set forth herein. (d) Borrower represents and warrants that no Event of Default or Unmatured Default under the Loan Documents exists and Borrower is in full compliance with all of the terms, conditions and all provisions of the Agreement and the other Loan Documents. (e) Borrower represents and warrants that it is Borrower's belief, based upon Borrower's best knowledge that Borrower shall, on or before September 30, 1998 publicly offer and sell securities, in the form of preferred stock of Borrower, resulting in net proceeds of sale to Borrower in an amount of not less than $45,000,000 and Borrower has no knowledge that would lead Borrower to believe that such offering of securities shall not be effected or that net proceeds in an amount of less than $45,000,000 would not be paid to Borrower therefrom. Borrower represents and warrants that the sale of such securities shall be effected in compliance with the provisions of Section 6.3(f) of the Loan Agreement and that the net proceeds thereof shall be paid to Bank in accordance with the provisions of Section 3.3(d) of the Loan Agreement. (f) Borrower, Bank and NationsBank, N.A. are in the process of negotiating an amendment of the Loan Agreement, pursuant to which the Maximum Principal Amount would be increased to $75,000,000 and a portion of the Loans would be sold by Bank to NationsBank, N.A., a co-lender. Borrower represents and warrants to Bank that Borrower has no knowledge that would lead Borrower to believe that such amendment will 3 not be effected on or before September 30, 1998. 4. Miscellaneous. 4.1. Fees. In addition to all fees payable by Borrower in connection with the Existing Agreement, Borrower shall pay to Bank $25,000 in connection with this Amendment. 4.2. Reimbursement for Expenses. Upon demand by Bank therefor, Borrower shall reimburse Bank for all reasonable costs, fees and expenses incurred by Bank or for which Bank becomes obligated, in connection with the negotiation, preparation and conclusion of this agreement, including without limitation, reasonable attorney's fees, costs and expenses, search fees, title insurance policy fees, costs and expenses, filing and recording fees and all taxes payable in connection with this Amendment. 4.3. Waiver of Claims. Borrower hereby acknowledges, agrees and affirms that it possesses no claims, defenses, offsets, recoupment or counterclaims of any kind or nature against or with respect to the enforcement of the Loan Agreement, or any other Loan Document or any amendments thereto (collectively, the "CLAIMS"), nor does Borrower now have knowledge of any facts that would or might give rise to any Claims. If facts now exist which would or could give rise to any Claim against or with respect to the enforcement of the Loan Agreement, or any other Loan Document, as amended by the amendments thereto, Borrower hereby unconditionally, irrevocably and unequivocally waives and fully releases any and all such Claims as if such Claims were the subject of a lawsuit, adjudicated to final judgment from which no appeal could be taken and therein dismissed with prejudice. 4.4. Representation by Counsel. Borrower hereby represents that it has been represented by competent counsel of its choice in the negotiation and execution of this Amendment and the other Loan Documents; that it has read and fully understood the terms hereof; Borrower and its counsel have been afforded an opportunity to review, negotiate and modify the terms of this Amendment, and that it intends to be bound hereby. In accordance with the foregoing, the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Amendment. 4.5. Counterparts. This Amendment and the other Loan Documents may be executed in any number of counterparts, and by the different parties hereto and thereto on the same or separate counterparts, each of which when so executed and delivered shall be deemed to be an original; 4 all the counterparts for each such Loan Document shall together constitute one and the same agreement. 4.6. Fax Execution. For purposes of negotiating and finalizing this Amendment (including any subsequent amendments thereto), any signed document transmitted by facsimile machine ("FAX") shall be treated in all manner and respects as an original document. The signature of any party by FAX shall be considered for these purposes as an original signature. Any such FAX document shall be considered to have the same binding legal effect as an original document, provided that an original of the faxed document was mailed by first class US Mail or personally delivered to the recipient, on the date of its transmission with proof of the fax transmission. At the request of either party, any FAX document subject to this Amendment shall be re-executed by both parties in an original form. The undersigned parties hereby agree that neither shall raise the use of the FAX or the fact that any signature or document was transmitted or communicated through the use of a FAX as a defense to the formation of this Amendment and execution of this Amendment and the other Loan Documents; that it has read and fully understood the terms hereof; Borrower and its counsel have been afforded an opportunity to review, negotiate and modify the terms of this Amendment, and that it intends to be bound hereby. In accordance with the foregoing, the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Amendment. The remainder of this page is left intentionally blank. 5 IN WITNESS WHEREOF, this First Amendment to Loan Agreement has been duly executed as of the day and year specified at the beginning hereof. BORROWER: --------- FIRSTCITY FINANCIAL CORPORATION a Delaware corporation By: Title: BANK: BANK OF SCOTLAND By: Title: 6 EX-27 9
5 6-MOS DEC-31-1998 JUN-30-1998 30,531 43,046 1,021,185 0 124,388 0 0 0 1,510,039 0 1,227,966 41,908 0 83 171,918 1,510,039 30,032 115,666 24,096 24,096 69,383 3,427 6,722 12,038 (1,396) 13,434 0 0 0 10,390 1.51 1.47
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