10-Q 1 h87282e10-q.txt FIRSTCITY FINANCIAL CORPORATION - DATED 3/31/01 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 033-19694 ------------------------ FIRSTCITY FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0243729 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 6400 IMPERIAL DRIVE, WACO, TX 76712 (Address of Principal Executive Offices) (Zip Code)
(254) 751-1750 (Registrant's Telephone Number, Including Area Code) ------------------------ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] The number of shares of common stock, par value $.01 per share, outstanding at May 15, 2001 was 8,375,533. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ ASSETS Cash and cash equivalents................................... $ 7,224 $ 8,043 Portfolio Assets, net....................................... 27,297 30,018 Loans receivable, net....................................... 17,771 14,539 Equity investments.......................................... 41,122 39,022 Deferred tax benefit, net................................... 20,101 20,101 Other assets, net........................................... 8,879 8,824 Net assets of discontinued operations....................... 20,842 20,444 -------- -------- Total Assets...................................... $143,236 $140,991 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Notes payable............................................. $ 94,108 $ 93,764 Other liabilities......................................... 8,967 9,216 -------- -------- Total Liabilities................................. 103,075 102,980 Commitments and contingencies............................... -- -- Redeemable preferred stock: Adjusting rate preferred stock, including accumulated dividends in arrears of $4,494 and $3,852, respectively (par value $.01; redemption value of $21 per share; 2,000,000 shares authorized; 1,222,901 shares issued and outstanding)....................................... 30,175 29,533 Shareholders' equity: Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)........................................... -- -- Common stock (par value $.01 per share; 100,000,000 shares authorized; issued and outstanding: 8,375,533 and 8,368,344 shares, respectively)........................ 84 84 Paid in capital........................................... 79,643 79,634 Accumulated deficit....................................... (70,148) (71,131) Accumulated other comprehensive income (loss)............. 407 (109) -------- -------- Total Shareholders' Equity........................ 9,986 8,478 -------- -------- Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity............................ $143,236 $140,991 ======== ========
See accompanying notes to consolidated financial statements. 2 3 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 ------- -------- Revenues: Servicing fees............................................ $2,465 $ 3,296 Gain on resolution of Portfolio Assets.................... 218 1,081 Equity in earnings of investments......................... 2,060 2,613 Interest income........................................... 1,240 5,005 Gain on sale of interest in equity investment............. 3,134 -- Gain on sale of automobile loans.......................... -- 2,836 Other income.............................................. 120 845 ------ ------- Total revenues.................................... 9,237 15,676 Expenses: Interest and fees on notes payable........................ 2,442 5,509 Salaries and benefits..................................... 2,223 4,670 Provision for loan and impairment losses.................. 585 1,105 Occupancy, data processing, communication and other....... 2,578 4,262 ------ ------- Total expenses.................................... 7,828 15,546 Earnings from continuing operations before income taxes and minority interest......................................... 1,409 130 Benefit (provision) for income taxes........................ 15 (19) ------ ------- Earnings from continuing operations before minority interest.................................................. 1,424 111 Minority interest........................................... 201 (240) ------ ------- Earnings (loss) from continuing operations.................. 1,625 (129) Loss from discontinued operations........................... -- -- ------ ------- Net earnings (loss)......................................... 1,625 (129) Accumulated preferred dividends in arrears.................. (642) (642) ------ ------- Net earnings (loss) to common shareholders.................. $ 983 $ (771) ====== ======= Basic and diluted earnings (loss) per common share are as follows: Earnings (loss) from continuing operations................ $ 0.12 $ (0.09) Weighted average common shares outstanding................ 8,368 8,333
See accompanying notes to consolidated financial statements. 3 4 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) (UNAUDITED)
ACCUMULATED OTHER TOTAL NUMBER OF COMMON PAID IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' COMMON SHARES STOCK CAPITAL DEFICIT INCOME (LOSS) EQUITY ------------- ------- -------- ----------- ------------- ------------- BALANCES, DECEMBER 31, 1999...... 8,333,300 $83 $79,562 $(52,663) $(395) $ 26,587 Purchase of shares through employee stock purchase plan... 35,044 1 72 -- -- 73 Comprehensive loss: Net loss for 2000.............. -- -- -- (15,900) -- (15,900) Foreign currency items......... -- -- -- -- 286 286 -------- Total comprehensive loss......... (15,614) -------- Preferred dividends.............. -- -- -- (2,568) -- (2,568) --------- --- ------- -------- ----- -------- BALANCES, DECEMBER 31, 2000...... 8,368,344 84 79,634 (71,131) (109) 8,478 Purchase of shares through employee stock purchase plan... 7,189 -- 9 -- -- 9 Comprehensive income: Net earnings for the first three months of 2001......... -- -- -- 1,625 -- 1,625 Foreign currency items......... -- -- -- -- (464) (464) Unrealized gain of equity investment................... -- -- -- -- 980 980 -------- Total comprehensive income....... 2,141 -------- Preferred dividends.............. -- -- -- (642) -- (642) --------- --- ------- -------- ----- -------- BALANCES, MARCH 31, 2001......... 8,375,533 $84 $79,643 $(70,148) $ 407 $ 9,986 ========= === ======= ======== ===== ========
See accompanying notes to consolidated financial statements 4 5 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------------- 2001 2000 --------- -------- Cash flows from operating activities: Net earnings (loss)....................................... $ 1,625 $ (129) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Proceeds from resolution of Portfolio Assets........... 1,841 4,286 Gain on resolution of Portfolio Assets................. (218) (1,081) Purchase of Portfolio Assets and loans receivable, net................................................... (3,955) (334) Origination of automobile receivables, net of purchase discount.............................................. -- (51,660) Provision for loan and impairment losses............... 585 1,105 Equity in earnings of investments...................... (2,060) (2,613) Proceeds from performing Portfolio Assets and loans receivable, net....................................... 1,259 40,379 Depreciation and amortization.......................... 251 693 Increase in other assets............................... (717) (7,674) Gain on sale of interest in equity investment.......... (3,134) -- Increase in other liabilities.......................... 322 4,135 -------- -------- Net cash used in operating activities............. (4,201) (12,893) -------- -------- Cash flows from investing activities: Proceeds from sale of interest in equity investment....... 7,000 -- Property and equipment, net............................... (85) 481 Contributions to Acquisition Partnerships and Servicing Entities............................................... (5,778) (1,659) Distributions from Acquisition Partnerships and Servicing Entities............................................... 2,345 2,418 -------- -------- Net cash provided by investing activities......... 3,482 1,240 -------- -------- Cash flows from financing activities: Borrowings under notes payable............................ 11,197 55,894 Payments of notes payable................................. (10,908) (41,428) Proceeds from issuance of common stock.................... 9 34 -------- -------- Net cash provided by financing activities......... 298 14,500 -------- -------- Net cash provided by (used in) continuing operations...................................... (421) 2,847 Net cash used by discontinued operations.......... (398) (1,133) -------- -------- Net increase (decrease) in cash and cash equivalents........ $ (819) $ 1,714 Cash and cash equivalents, beginning of period.............. 8,043 11,263 -------- -------- Cash and cash equivalents, end of period.................... $ 7,224 $ 12,977 ======== ======== Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Interest............................................... $ 2,293 $ 4,638 Income taxes........................................... (15) 19 Non-cash investing activities: Residual interests received as a result of sales of loans through securitizations......................... -- 5,713 Non-cash financing activities: Dividends accumulated and not paid on preferred stock................................................. 642 642
See accompanying notes to consolidated financial statements. 5 6 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) BASIS OF PRESENTATION AND EARNINGS (LOSS) PER COMMON SHARE The unaudited consolidated financial statements of FirstCity Financial Corporation ("FirstCity" or the "Company") reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity's financial position at March 31, 2001, the results of operations and the cash flows for the three-month periods ended March 31, 2001 and 2000. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimation of future collections on purchased portfolio assets used in the calculation of net gain on resolution of portfolio assets, interest rate environments, valuation of the deferred tax asset, and prepayment speeds and collectibility of loans held in inventory, in securitization trusts and held for investment. Actual results could differ materially from those estimates. In the third quarter of 2000, FirstCity Consumer Lending Corporation ("Consumer Corp."), a wholly-owned subsidiary of FirstCity, completed a sale of a 49% equity interest in its automobile finance operation to IFA Drive GP Holdings LLC ("IFA-GP") and IFA Drive LP Holdings LLC ("IFA-LP"), wholly-owned subsidiaries of IFA Incorporated ("IFA Parent"), for a purchase price of $15 million cash pursuant to the terms of a Securities Purchase Agreement (the "Securities Purchase Agreement"), by and among the Company, Consumer Corp., FirstCity Funding LP ("Funding LP"), and FirstCity Funding GP Corp. ("Funding GP"), IFA-GP and IFA-LP. The new entity formed to facilitate the transaction is Drive Financial Services LP ("Drive"). As a result of this sale, the Company no longer consolidates the financial statements of its automobile finance operation since August 1, 2000, but instead records its investment under the equity method of accounting. The effects of any common stock equivalents are antidilutive for the three months ended March 31, 2001 and 2000; therefore, diluted earnings (loss) per common share is reported the same as basic earnings (loss) per common share. (2) LIQUIDITY AND CAPITAL RESOURCES Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, equity for the acquisition of pools of assets or single assets (collectively referred to as "Portfolio Assets" or "Portfolios"), investments in and advances to the investment entities formed to hold Portfolio Assets (each such entity, an "Acquisition Partnership"), retirement of and dividends on preferred stock, and other investments by the Company. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt, dividends from the Company's subsidiaries, short-term borrowings from revolving lines of credit, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings. In connection with the restructuring of the Company's Senior Facility that occurred in the third quarter of 2000 in connection with the sale of the Company's automobile finance operation, the Company and IFA Parent amended IFA Parent's option to acquire a warrant for 1,975,000 shares of non-voting Common Stock, which was granted to IFA Parent in December 1999 in connection with the $25 million subordinated debt facility. The option, as amended, allows IFA Parent to acquire a warrant for 1,975,000 shares of the Company's non-voting Common Stock; the option can be exercised after August 31, 2001 if the Company's 6 7 $12 million Term Loan B owed to IFA Parent and Bank of Scotland remains outstanding, but not prior to that date. The strike price of $2.3125 remains the same. In the event that prior to August 31, 2001 the Company either (a) refinances the $12 million Term Loan B with subordinated debt, or (b) pays off the balance of Term Loan B from proceeds of an equity offering, then the option to acquire a warrant for 1,975,000 shares of non-voting Common Stock will terminate. IFA Parent also retains its warrant to purchase 425,000 shares of the Company's voting Common Stock at $2.3125 per share, which was issued in connection with the Company's debt restructure in December 1999. In the event that Term Loan B is terminated prior to August 31, 2001 through a transaction involving the issuance of warrants, IFA Parent is entitled to additional warrants in connection with this existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's voting Common Stock. Dividends on outstanding preferred stock of FirstCity will be restricted until Term Loan B is paid in full. Given the continued high debt levels of the Company, and management's priority of assuring adequate levels of liquidity, the Company does not anticipate that preferred dividends will be paid in 2001. Management continues to evaluate various alternatives, including an overall corporate restructure to maximize long term stockholder value. During the second quarter of 2000, the Portfolio Asset acquisition and resolution group of the Company entered into a $17 million loan facility with Cargill. This facility is being used exclusively to provide equity in new portfolio acquisitions in partnerships with Cargill. In January 2001, this facility was increased to $30 million. As of March 31, 2001, the Company has $23 million outstanding under this facility. Management believes that the IFA Parent loan facilities along with the liquidity from the Cargill line, the related fees generated from the servicing of assets and equity distributions from existing Acquisition Partnerships and wholly owned portfolios will allow the Company to meet its obligations as they come due during the next twelve months. (3) NEW ACCOUNTING PRONOUNCEMENTS Statements of Financial Accounting Standards No. 133 and No. 138 (SFAS 133 and 138), Accounting for Derivative Instruments and Hedging Activities, requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS 133 and 138 require that changes in fair value of a derivative be recognized currently in earnings unless specific hedge accounting criteria are met. The Company adopted SFAS 133 and 138 on January 1, 2001, and there was no impact on the consolidated financial statements as the Company had no derivatives. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a replacement of FASB Statement No. 125 (SFAS 140). This Statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. SFAS 140 is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. In connection with discontinued operations, the Company has investment securities resulting from the retention of residual interests in securitization transactions. Management has determined that this statement did not have an impact on the consolidated financial statements. 7 8 (4) DISCONTINUED OPERATIONS The net assets from discontinued operations consist of the following:
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ Estimated future gross cash receipts on residual interests in securitizations........................................ $23,901 $24,652 Accrual for loss on operations and disposal of discontinued operations, net........................................... (3,059) (4,208) ------- ------- Net assets of discontinued operations............. $20,842 $20,444 ======= =======
(5) PORTFOLIO ASSETS Portfolio Assets are summarized as follows:
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ Non-performing Portfolio Assets............................. $55,055 $55,807 Performing Portfolio Assets................................. 14,206 15,162 Real estate Portfolios...................................... 3,001 3,075 ------- ------- Total Portfolio Assets................................. 72,262 74,044 Adjusted purchase discount required to reflect Portfolio Assets at carrying value.................................. (44,965) (44,026) ------- ------- Portfolio Assets, net.................................. $27,297 $30,018 ======= =======
Portfolio Assets are pledged to secure non-recourse notes payable. (6) LOANS RECEIVABLE Other loans held for investment are primarily loans from certain Acquisition Partnerships. Loans receivable are summarized as follows:
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ Consumer finance receivables................................ $ 261 $ 332 Other loans held for investment............................. 17,510 14,207 ------- ------- Loans receivable, net............................. $17,771 $14,539 ======= =======
(7) EQUITY INVESTMENTS The Company has investments in Acquisition Partnerships and their general partners and investments in Servicing Entities that are accounted for under the equity method. The condensed combined financial position 8 9 and results of operations of the Acquisition Partnerships (excluding Servicing Entities), which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized below: CONDENSED COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ Assets...................................................... $664,394 $603,353 ======== ======== Liabilities................................................. $511,538 $471,336 Net equity.................................................. 152,856 132,017 -------- -------- $664,394 $603,353 ======== ======== Equity investment in Acquisition Partnerships............... $ 36,082 $ 33,862 Equity investment in Servicing Entities..................... 1,972 1,422 -------- -------- $ 38,054 $ 35,284 ======== ========
CONDENSED COMBINED SUMMARY OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 -------- -------- Proceeds from resolution of Portfolio Assets................ $61,785 $29,282 Gain on resolution of Portfolio Assets...................... 30,258 13,738 Interest income on performing Portfolio Assets.............. 5,027 5,222 Net earnings (loss)......................................... (5,102) 10,051 ======= ======= Equity in earnings of Acquisition Partnerships.............. $ 3,125 $ 2,592 Equity in earnings of Servicing Entities.................... 829 21 ------- ------- $ 3,954 $ 2,613 ======= =======
Since August 1, 2000, the Company's investment in Drive has been accounted for under the equity method. The condensed consolidated financial position and results of operations of Drive are summarized below: CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ Assets...................................................... $255,634 $164,208 ======== ======== Liabilities................................................. $247,716 $154,561 Net equity.................................................. 7,918 9,647 -------- -------- $255,634 $164,208 ======== ======== Equity investment in Drive.................................. $ 3,068 $ 3,738 Minority interest......................................... (613) (748) -------- -------- Net investment in Drive........................... $ 2,455 $ 2,990 ======== ========
9 10 CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 ------------------ Revenues.................................................... $ 6,502 Expenses.................................................... 11,391 ------- Net loss.................................................... $(4,889) ======= Equity in loss of Drive..................................... $(1,894) Minority interest......................................... (378) ------- Net equity in loss of Drive............................... $(1,516) =======
(8) SEGMENT REPORTING The Company is engaged in two reportable segments (i) portfolio asset acquisition and resolution; and (ii) consumer lending. These segments have been segregated based on products and services offered by each. As a result of the sale of a 49% equity interest in the Company's automobile finance operation, the net operations of Drive have been recorded (since August 1, 2000) as equity in earnings of investments. The following is a summary of results of operations for each of the segments and a reconciliation to earnings (loss) from continuing operations for the three months ended March 31, 2001 and 2000.
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 -------- ------- PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: Servicing fees......................................... $ 2,465 $1,623 Gain on resolution of Portfolio Assets................. 218 1,081 Equity in earnings of investments...................... 3,954 2,613 Interest income........................................ 1,223 394 Gain on sale of interest in equity investment.......... 3,134 -- Other.................................................. 120 633 ------- ------ Total............................................. 11,114 6,344 Expenses: Interest and fees on notes payable..................... 1,035 620 Salaries and benefits.................................. 1,520 1,414 Provision for loan and impairment losses............... 585 -- Occupancy, data processing and other................... 2,291 1,454 ------- ------ Total............................................. 5,431 3,488 ------- ------ Operating contribution before direct taxes................ $ 5,683 $2,856 ======= ====== Operating contribution, net of direct taxes............... $ 5,699 $2,840 ======= ====== CONSUMER LENDING: Revenues: Servicing fees......................................... $ -- $1,673 Equity in loss of investment........................... (1,894) -- Interest income........................................ 2 4,583 Gain on sale of automobile loans....................... -- 2,836 Other.................................................. -- 50 ------- ------ Total............................................. (1,892) 9,142
10 11
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 -------- ------- Expenses: Interest and fees on notes payable..................... -- 1,108 Salaries and benefits.................................. -- 2,426 Provision for loan and impairment losses............... -- 1,105 Occupancy, data processing and other................... (369) 2,304 ------- ------ Total............................................. (369) 6,943 ------- ------ Operating contribution (loss) before direct taxes......... $(1,523) $2,199 ======= ====== Operating contribution (loss), net of direct taxes........ $(1,523) $2,191 ======= ====== Total operating contribution, net of direct taxes.......................................... $ 4,176 $5,031 CORPORATE OVERHEAD: Corporate interest expense................................ 1,407 3,781 Salaries and benefits, occupancy, professional and other income and expenses, net............................... 1,144 1,379 ------- ------ Earnings (loss) from continuing operations................ $ 1,625 $ (129) ======= ======
Revenues from the Portfolio Asset acquisition and resolution business attributable to foreign operations were $3,079 and $1,442, respectively, in the three months ended March 31, 2001 and 2000. Total assets for each of the segments and a reconciliation to total assets is as follows:
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ Portfolio acquisition and resolution assets Domestic.................................................. $ 54,962 $ 55,218 Mexico.................................................... 18,987 15,521 France.................................................... 9,038 8,828 Consumer assets............................................. 3,329 4,069 Deferred tax benefit, net................................... 20,101 20,101 Other assets, net........................................... 15,977 16,810 Net assets of discontinued operations....................... 20,842 20,444 -------- -------- Total assets...................................... $143,236 $140,991 ======== ========
(9) PREFERRED STOCK AND SHAREHOLDERS' EQUITY In the third quarter of 1999, dividends on the Company's adjusting rate preferred stock were suspended. At March 31, 2001, accumulated dividends in arrears on such preferred stock totaled $4.5 million, or $3.675 per share. Since the Company failed to pay quarterly dividends for six consecutive quarters, the holders of adjusting rate preferred stock are entitled to elect two directors to the Company's Board until cumulative dividends have been paid in full. Given the continued high debt levels of the Company, and management's priority of assuring adequate levels of liquidity, the Company does not anticipate that preferred dividends will be paid in 2001. Management continues to evaluate various alternatives, including an overall corporate restructure to maximize long term stockholder value. In connection with the restructuring of the Company's Senior Facility in the third quarter of 2000, the Company and IFA Parent amended IFA Parent's option to acquire a warrant for 1,975,000 shares of non-voting Common Stock, which was granted to IFA Parent in December 1999 in connection with the $25 million subordinated debt facility. The option, as amended, allows IFA Parent to acquire a warrant for 1,975,000 shares of the Company's non-voting Common Stock; the option can be exercised after August 31, 2001 if Term Loan B remains outstanding, but not prior to that date. The strike price of $2.3125 per share 11 12 remains the same. In the event that prior to August 31, 2001 the Company either (a) refinances the $12 million Term Loan B with subordinated debt, or (b) pays off the balance of Term Loan B from proceeds of an equity offering, then the option to acquire a warrant for 1,975,000 shares of non-voting Common Stock will terminate. IFA Parent also retains its warrant to purchase 425,000 shares of the Company's voting Common Stock at $2.3125 per share, which was issued in connection with the debt restructure in December 2000. In the event that Term Loan B is terminated prior to August 31, 2001 through a transaction involving the issuance of warrants, IFA Parent is entitled to additional warrants in connection with this existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's voting Common Stock. (10) INCOME TAXES Federal income taxes are provided at a 35% rate. The Company has substantial federal net operating loss carryforwards ("NOLs"), which can be used to offset the tax liability associated with the Company's pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing an allowance to value the net deferred tax asset at a value commensurate with the Company's expectation of being able to utilize the recognized benefit in the foreseeable future. Such estimates are reevaluated on a quarterly basis with the adjustment to the allowance recorded as an adjustment to the income tax expense generated by the quarterly operating results. Significant events that change the Company's view of its currently estimated ability to utilize the tax benefits result in substantial changes to the estimated allowance required to value the deferred tax benefits recognized in the Company's periodic financial statements. During the quarters ended March 31, 2001 and 2000, management deemed that an adjustment to the valuation allowance was not necessary. Additional events could occur in the future that may impact the quarterly recognition of the Company's estimate of the required valuation allowance associated with its NOLs. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset will be realized. (11) COMMITMENTS AND CONTINGENCIES The Company and Harbor Financial Group, Inc. (formerly known as FirstCity Financial Mortgage Corporation) filed suit in the Federal District Court for the Western District of Texas, Waco Division, against Chase Bank of Texas, N.A. and Chase Securities, Inc. in September 1999 seeking damages resulting from alleged violations by the defendants of the Bank Holding Company Act and from civil conspiracy engaged in by the defendants, and injunctive relief, arising from an engagement letter entered into between the Company and Chase Securities, Inc. relating to the sale of assets or securities of Harbor Financial Group, Inc., Harbor Financial Mortgage Corporation and their subsidiaries (collectively "Harbor"). The Company alleged that Chase Bank of Texas, N.A. conditioned its extension of credit to Harbor on the retention of Chase Securities, Inc. by the Company and Harbor violated the Bank Holding Company Act. The Company additionally sought a judicial declaration that the plaintiffs were not obligated to pay any commission to Chase Securities, Inc. under the engagement letter. The actual damages sought by the Company were in excess of $200 million. The Company also sought recovery of three times its damages pursuant to the Bank Holding Company Act and recovery of its costs of court, including reasonable attorneys fees. A motion to dismiss the Texas suit was granted based upon a provision in the engagement letter that provided that any suit arising from the engagement letter would be pursued in the State of New York. The Company has requested leave of the Supreme Court for the State of New York to amend its answer in that proceeding to include these claims as a counterclaim to the suit brought by Chase Securities, Inc. and an action against Chase Bank of Texas, N.A. On October 4, 1999, Chase Securities, Inc. filed suit against the Company before the Supreme Court for the State of New York, County of New York: Commercial Part seeking recovery of $2.4 million as the balance of a transaction fee allegedly due it under the terms of the engagement letter and other just and proper relief. The Company denies that it has any liability to Chase Securities, Inc. and intends to vigorously defend the suit. The Company has asserted as a defense to this action the violations of the Bank Holding Company Act asserted in the litigation pending before the Federal District Court for the Western District of Texas. The Company has sought leave to amend its answer in the suit to include a counterclaim against Chase Securities, 12 13 Inc. and an action against Chase Bank of Texas, N.A. under the Bank Holding Company Act as is asserted in the Texas suit. On October 14, 1999, Harbor Financial Group, Inc. and its subsidiaries (collectively referred to as "Mortgage Corp.") filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code before the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. In a motion filed in those proceedings requesting the appointment of a Chapter 11 Trustee, the debtors stated that they were reviewing pre-petition transfers to the Company to determine if those transfers are avoidable. On December 14, 1999, the bankruptcy proceedings were converted to liquidations under Chapter 7 of the United States Bankruptcy Code. The Chapter 7 Trustee has not initiated an action against the Company to assert an avoidance action to recover any preferential transfers. The Company believes that it has valid defenses to any allegations that might be made to avoid any pre-petition transfers in connection with the Mortgage Corp. bankruptcy proceedings. Periodically, the Company, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. The Company does not believe that there is any proceeding threatened or pending against it, its subsidiaries, its affiliates or the Acquisition Partnerships which, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company, its subsidiaries, its affiliates or the Acquisition Partnerships. The Company is a 50% owner in an entity that is obligated to advance up to $2.5 million toward the acquisition of Portfolio Assets from financial institutions in California. At March 31, 2001, advances of $2.4 million had been made under the obligation. In connection with the transactions contemplated by the Securities Purchase Agreement, effective August 1, 2000, Consumer Corp. and Funding LP contributed all of the assets utilized in the operations of the automobile finance operation to Drive pursuant to the terms of a Contribution and Assumption Agreement by and between Consumer Corp. and Drive, and a Contribution and Assumption Agreement by and between Funding LP and Drive (collectively, the "Contribution Agreements"). Drive assumed substantially all of the liabilities of the automobile finance operation as set forth in the Contribution Agreements. In addition, in the Securities Purchase Agreement, the Company, Consumer Corp., Funding LP and Funding GP made various representations and warranties concerning (i) their respective organizations, (ii) the automobile finance operation conducted by Consumer Corp. and Funding LP, and (iii) the assets transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer Corp., Funding LP and Funding GP also agreed to indemnify IFA, IFA-GP and IFA-LP from damages resulting from a breach of any representation or warranty contained in the Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligation under the Securities Purchase Agreement survives for a period of seven (7) years from August 25, 2000 (the "Closing Date") with respect to tax-related representations and warranties and for thirty months from the Closing Date with respect to all other representations and warranties. Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the Securities Purchase Agreement until the aggregate amount payable exceeds $.25 million, and then only for the amount in excess of $.25 million in the aggregate; however certain representations and warranties are not subject to this $.25 million threshold. Pursuant to the terms of the Contribution Agreements, Consumer Corp. and Funding LP have agreed to indemnify Drive from any damages resulting in a material adverse effect on Drive resulting from breaches of representations or warranties, failure to perform, pay or discharge liabilities other than the assumed liabilities, or claims, lawsuits or proceedings resulting from the transactions contemplated by the Contribution Agreements. Pursuant to the terms of the Contribution Agreements, Drive has agreed to indemnify Consumer Corp. and Funding LP for any breach of any representation or warranty by Drive, the failure of Drive to discharge any assumed liability, or any claims arising out of any failure by Drive to properly service receivables after August 1, 2000. Liability for indemnification pursuant to the terms of the Contribution Agreements will not arise until the total of all losses with respect to such matters exceeds $.25 million and then only for the amount by which such losses exceed $.25 million; however this limitation will not 13 14 apply to any breach of which the party had knowledge at the time of the Closing Date or any intentional breach by a party of any covenant or obligation under the Contribution Agreements. The Company also provided a guaranty limited to a maximum of up to $4 million of a $60 million loan to Drive by IFA Parent. The Company, Consumer Corp. and Funding L.P. secured the guaranty with security interests in their respective ownership interest in Consumer Corp., Funding L.P. and Drive. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company is a financial services company engaged in Portfolio Asset acquisition and resolution ("Commercial Corp.") and consumer lending through its investment in Drive. 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 by Drive. Drive's current consumer lending operations are focused on the acquisition of sub-prime automobile receivables. The Company reported earnings for the quarter ended March 31, 2001 of $1.6 million. After accrued and unpaid dividends on the Company's preferred stock, net earnings to common shareholders were $1.0 million or $0.12 per share on a diluted basis. Profits were derived mainly from the partial liquidation of a portfolio interest held by Commercial Corp. Components of the quarterly earnings for the first quarter 2001, compared to the first quarter 2000 were as follows:
THREE MONTHS ENDED MARCH 31, ------------------ 2001 2000 ------- ------- Portfolio Asset Acquisition and Resolution.................. $ 5,699 $ 2,840 Consumer.................................................... (1,523) 2,191 Corporate interest.......................................... (1,407) (3,781) Corporate overhead.......................................... (1,144) (1,379) Accrued preferred dividends................................. (642) (642) ------- ------- Net earnings (loss) to common shareholders........ $ 983 $ (771) ======= =======
The Company's financial results are affected by many factors including levels of and fluctuations in interest rates, fluctuations in the underlying values of real estate and other assets, the timing of and ability to liquidate assets, and the availability and prices for loans and assets acquired in all of the Company's businesses. The Company's business and results of operations are also affected by the availability of financing with terms acceptable to the Company and the Company's access to capital markets, including the securitization markets. As a result of the significant period to period fluctuations in the revenues and earnings or losses of the Company's Portfolio Asset acquisition and resolution business, the sale of the Company's interest in its automobile finance operation, and the timing of securitization transactions of Drive (previously performed by Consumer Corp.), period to period comparisons of the Company's results of continuing operations may not be meaningful. ANALYSIS OF REVENUES AND EXPENSES The Company reported net earnings to common stockholders for the quarter ended March 31, 2001 of $1.0 million. As a result of the sale of interest in the automobile finance operation, the net operations of Drive have been recorded (since August 1, 2000) as equity in earnings of investments. 14 15 PORTFOLIO ASSET ACQUISITION AND RESOLUTION The strong earnings contribution from Commercial Corp. during the quarter was a result of good collections from U.S. investments and a gain of $3.1 million from the sale of a 35% equity interest in an Acquisition Partnership to CSFC Capital Corp. II. The partnership is comprised mainly of real estate located in Texas. The sale reduces the Company's exposure to fluctuating prices of real estate and reduces the Company's debt. Acquisitions for the quarter of $87 million were comprised of four portfolios -- two large domestic portfolios totaling $66 million, a $19 million portfolio in Mexico, and a $2 million portfolio in France. The Company invested $4.1 million in the domestic portfolios, $3.9 million in the portfolio in Mexico, and $.4 million in the portfolio in France, for an aggregate investment of $8.4 million. Aggregate acquisitions by the Company are as follows:
FIRSTCITY PURCHASE INVESTED PRICE EQUITY -------- --------- First Quarter 2001.......................................... $ 87,406 $ 8,418 Total 2000.................................................. 394,927 22,140 Total 1999.................................................. 210,799 11,203 Total 1998.................................................. 139,691 28,478 Total 1997.................................................. 183,229 37,109
The Company believes that the prospects for investment in distressed assets in 2001 continue to be favorable. The Company is pleased with the level and execution of acquisitions to date. The following table presents selected information regarding the revenues and expenses of the Company's Portfolio Asset acquisition and resolution business. ANALYSIS OF SELECTED REVENUES AND EXPENSES PORTFOLIO ASSET ACQUISITION AND RESOLUTION
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 -------- -------- GAIN ON RESOLUTION OF PORTFOLIO ASSETS: Average investment: Nonperforming Portfolios.................................. $14,760 $21,043 Performing Portfolios..................................... 11,057 8,722 Real estate Portfolios.................................... 3,056 7,198 Loans receivable.......................................... 14,830 775 Gain on resolution of Portfolio Assets: Nonperforming Portfolios.................................. 213 722 Performing Portfolios..................................... -- -- Real estate Portfolios.................................... 5 359 ------- ------- Total............................................. $ 218 $ 1,081 Interest income on performing Portfolios and loans receivable................................................ $ 1,167 $ 394 Gross profit percentage on resolution of Portfolio Assets: Nonperforming Portfolios.................................. 11.67% 25.24% Performing Portfolios..................................... -- -- Real estate Portfolios.................................... 27.75% 25.20% Weighted average gross profit percentage.................. 11.84% 25.22% Interest yield on performing Portfolios and loans receivable (annualized).............................................. 18.03% 16.58% Gain on sale of equity investment........................... $ 3,134 $ --
15 16
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 -------- -------- Servicing fee revenues...................................... $ 2,465 $ 1,623 PERSONNEL: Personnel expenses.......................................... $ 1,520 $ 1,414 Number of personnel (at period end): Production................................................ 26 13 Servicing................................................. 87 58 INTEREST EXPENSE: Average debt................................................ $41,109 $29,813 Interest expense............................................ 1,035 620 Average cost (annualized)................................... 10.07% 8.32%
The following table presents selected information regarding the revenues and expenses of the Acquisition Partnerships. ANALYSIS OF SELECTED REVENUES AND EXPENSES ACQUISITION PARTNERSHIPS
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 -------- -------- Revenues: Gain on resolution of Portfolio Assets.................... $30,258 $13,738 Gross profit percentage on resolution of Portfolio Assets................................................. 48.97% 46.92% Interest income........................................... $ 5,027 $ 5,222 Other income.............................................. 779 428 Interest expense(1): Interest expense.......................................... $18,450 $ 3,965 Average cost (annualized)................................. 15.88% 8.74% Other expenses: Servicing fees............................................ $ 2,918 $ 1,857 Other..................................................... 19,798 3,515 ------- ------- Total other expenses.............................. 22,716 5,372 ------- ------- Net earnings (loss).................................. $(5,102) $10,051 ======= ======= Equity in earnings of Acquisition Partnerships.............. $ 3,125 $ 2,592 Equity in earnings of Servicing Entities.................... 829 21 ------- ------- $ 3,954 $ 2,613 ======= =======
--------------- (1) Interest expense includes interest on loans to the Acquisition Partnerships located in Mexico from affiliates of the investor groups. The rates on these loans range between 19% and 20%. The average cost on debt excluding the Mexican Acquisition Partnerships was 7.99% and 8.64% for 2001 and 2000, respectively. CONSUMER LENDING During the quarter Consumer Corp. realized a loss of $1.5 million through its 31% direct and indirect ownership interest in Drive, primarily as a result of increased provisions related to the loans available for sale, 16 17 as well as the lack of securitization gains during the quarter. The delinquencies on the present portfolio are currently less than five percent and the performance of Drive continues to be favorable. Drive did not conduct a securitization in the first quarter; however, the Company anticipates that Drive will complete a securitization of over $280 million of face value of automobile receivables during the month of May. Earnings from Drive may correlate closely with the timing, size and execution of securitizations and depend primarily on the structure of such transactions. PROVISION FOR INCOME TAXES The Company has substantial federal net operating loss carryforwards ("NOLs"), which can be used to offset the tax liability associated with the Company's pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing an allowance to value the net deferred tax asset at a value commensurate with the Company's expectation of being able to utilize the recognized benefit in the foreseeable future. Such estimates are reevaluated on a quarterly basis with the adjustment to the allowance recorded as an adjustment to the income tax expense generated by the quarterly operating results. Significant events that change the Company's view of its currently estimated ability to utilize the tax benefits result in substantial changes to the estimated allowance required to value the deferred tax benefits recognized in the Company's periodic financial statements. During the quarters ended March 31, 2001 and 2000, management deemed that an adjustment to the valuation allowance was not necessary. Additional events could occur in the future, that may impact the quarterly recognition of the Company's estimate of the required valuation allowance associated with its NOLs. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset will be realized. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this Quarterly Report on Form 10-Q. FIRST QUARTER 2001 COMPARED TO FIRST QUARTER 2000 The Company reported earnings from continuing operations of $1.6 million in the first quarter of 2001. Net earnings to common stockholders were $1.0 million in the first quarter of 2001 compared to a loss of $.8 million in the first quarter of 2000. On a per share basis, basic and diluted net earnings attributable to common stockholders were $.12 in the first quarter of 2001 compared to a loss of $.09 in the first quarter of 2000. Portfolio Asset Acquisition and Resolution The operating contribution of $5.7 million in the first quarter of 2001 increased by $2.9 million, or 101%, compared with the first quarter of 2000. Commercial Corp. purchased $87.4 million of Portfolio Assets during the first quarter of 2001 through the Acquisition Partnerships compared to $13.6 million in acquisitions in the first quarter of 2000. Commercial Corp.'s quarter end investment in Portfolio Assets decreased to $27.3 million in the first quarter of 2001 from $35.5 million in the first quarter of 2000. Commercial Corp. invested $8.4 million in equity in Portfolio Assets in the first quarter of 2001 compared to $1.8 million in the first quarter of 2000. Servicing fee revenues. Servicing fees increased by 52% to $2.5 million in the first quarter of 2001 from $1.6 million in the first quarter of 2000 primarily as a result of increased operations from Acquisition Partnerships in Mexico formed during 2000 and 1999. The service fees for the Mexico Acquisition Partnerships are based on operating expenses, unlike the Acquisition Partnerships in the United States and France, which are based on collections. 17 18 Gain on resolution of Portfolio Assets. Proceeds from the resolution of Portfolio Assets decreased by 57% to $1.8 million in the first quarter of 2001 from $4.3 million in the first quarter of 2000. The net gain on resolution of Portfolio Assets decreased 80% or $.9 million, primarily as a result of the decreased proceeds. The weighted average gross profit percentage on the resolution of Portfolio Assets in the first quarter of 2001 was 11.8% as compared to 25.2% in the first quarter of 2000. Equity in earnings of investments. Commercial Corp.'s equity in earnings of Acquisition Partnerships increased 21% to $3.1 million in the first quarter of 2001 compared to $2.6 million in the first quarter of 2000. However, the Acquisition Partnerships reflected a net loss of $5.1 million in the first quarter of 2001 compared to net earnings of $10.1 million in the first quarter of 2000. The current period net loss resulted from tax provisions in certain Mexico Partnerships. The impact of these losses was minimal to Commercial Corp. due to its small equity ownership in the Mexico Partnerships (approximately 5%). The primary reason for the increase in the equity earnings of Acquisition Partnerships reflected by the Company is the increase in net income of the domestic Acquisition Partnerships of $3.2 million or 76%. Equity in earnings of Servicing Entities were $.8 million in the first quarter of 2000 due to significant earnings recorded by one French entity in which the Company has a 33% ownership. Interest income. Interest income increased $.8 million or 210% as a result of increased balances of investment loans receivable from the Mexico Acquisition Partnerships. Gain on sale of interest in equity investment. During the period, the Company sold a portion of its equity investment in a domestic Acquisition Partnership for $7.0 million resulting in a gain of $3.1 million. Other revenues. Other revenues declined $.5 million or 81% primarily due to certain consulting fees received in the first quarter of 2000. These fees will vary from period to period. Operating expenses. Operating expenses increased $1.9 million or 56% primarily as a result of increased debt costs, the write-down of a Portfolio Asset, and increased operating costs in Mexico. Interest and fees on notes payable increased $.4 million or 67% due to average debt for the quarter increasing to $41.1 million in the first quarter of 2001 from $29.8 million in the first quarter of 2000. Also, the average cost of borrowing increased from 8.3% in the first quarter of 2000 to 10.1% in the first quarter of 2001. Salaries and benefits were consistent from period to period. The provision for loan and impairment losses totaled $.6 million and can be attributed to the write-down in estimated future collections of one of the Portfolio Asset pools. Occupancy, data processing and other expenses increased $.8 million or 58% due to increased operations in Mexico. Consumer Lending The operating loss for the first quarter of 2001 was $1.5 million compared to an operating contribution of $2.2 million during the first quarter of 2000. In the first quarter of 2001, the loss relates entirely to losses in the Company's equity investment in Drive, which recorded increased provisions related to the loans available for sale, as well as the lack of securitization gains during the quarter. In the first quarter of 2000, the automobile finance operations were consolidated with the Company, which recognized a securitization gain of $2.8 million. Service fees. Service fee income decreased due to the sale of 49% of the Company's equity interest in the automobile finance operation. Equity in loss of investment. As a result of the sale of 49% of the equity interest in the Company's automobile finance operation, the Company's interest in the net operations of Drive was recorded (since August 1, 2000) as equity in earnings of investments. Interest income. Interest income on consumer loans decreased due to the sale of 49% of the Company's equity interest in its automobile finance operation. 18 19 Operating expenses. Total operating expenses declined primarily as a result of the sale of 49% of the Company's equity interest in its automobile finance operation. Other Items Affecting Operations The following items affect the Company's overall results of operations and are not directly related to any one of the Company's businesses discussed above. Corporate overhead. Company level interest expense decreased by 63% to $1.4 million in the first quarter of 2001 from $3.8 million in the first quarter of 2000 as a result of lower levels of debt. Other corporate overhead expenses were consistent from period to period. Income taxes. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the first quarters of 2001 and 2000. LIQUIDITY AND CAPITAL RESOURCES Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to the Acquisition Partnerships, retirement of and dividends on preferred stock, and other investments by the Company. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt, dividends from the Company's subsidiaries, short-term borrowings from revolving lines of credit, proceeds from equity market transactions and securitizations and other structured finance transactions and other special purpose short-term borrowings. In connection with the restructuring of the Company's Senior Facility that occurred in the third quarter of 2000 in connection with the sale of the Company's automobile finance operation, the Company and IFA Parent amended IFA Parent's option to acquire a warrant for 1,975,000 shares of non-voting Common Stock, which was granted to IFA Parent in December 1999 in connection with the $25 million subordinated debt facility. The option, as amended, allows IFA Parent to acquire a warrant for 1,975,000 shares of the Company's non-voting Common Stock; the option can be exercised after August 31, 2001 if the Company's $12 million Term Loan B owed to IFA Parent and The Bank of Scotland remains outstanding, but not prior to that date. The strike price of $2.3125 remains the same. In the event that prior to August 31, 2001 the Company either (a) refinances the $12 million Term Loan B with subordinated debt, or (b) pays off the balance of Term Loan B from proceeds of an equity offering, then the option to acquire a warrant for 1,975,000 shares of non-voting Common Stock will terminate. IFA Parent also retains its warrant to purchase 425,000 shares of the Company's voting Common Stock at $2.3125 per share, which was issued in connection with the Company's debt restructure in December 2000. In the event that Term Loan B is terminated prior to August 31, 2001 through a transaction involving the issuance of warrants, IFA Parent is entitled to additional warrants in connection with this existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's voting Common Stock. Currently, the Company has approximately 1.2 million preferred shares outstanding with accrued and unpaid dividends of approximately $4.5 million. Term Loan B, which resulted from the corporate debt restructure completed in August 2000, restricts the payment of dividends on these shares until it is repaid in full. Given the continued high debt levels of the Company, and management's priority of assuring adequate levels of liquidity, the Company does not anticipate that preferred dividends will be paid in 2001. Management continues to evaluate various alternatives, including an overall corporate restructure to maximize long term shareholder value. During the second quarter of 2000, the Portfolio Asset acquisition and resolution group of the Company entered into a $17 million loan facility with Cargill. This facility is being used exclusively to provide equity in new portfolio acquisitions in partnerships with Cargill. In January 2001, this facility was increased to $30 million. As of March 31, 2001, the Company has $23 million outstanding under this facility. 19 20 The Company and each of its major operating subsidiaries have entered into one or more credit facilities to finance their respective operations. Each of the operating subsidiary credit facilities is nonrecourse to the Company, except as described below. The Company and Funding LP are parties to an Insurance Agreement and Letter Agreement related to the FCAR LLC Retail Automobile Installment Loan Agreement Financing Facility provided by Enterprise Funding Corporation (the "Enterprise Facility"). These agreements require the Company and Funding LP, as servicer and seller, to (i) purchase nonconforming contracts in the event that the seller, the servicer, or the related originator fails to repurchase any contract which is required to be repurchased, (ii) pay certain premiums and other expenses, and (iii) indemnify Enterprise Funding Corporation, the collateral agent, and the insurance provider. Additionally, the Company, pursuant to the terms of the Letter Agreement, has agreed to make certain secondary servicer advances. The Enterprise Facility was terminated on April 6, 2001 in connection with a $100 million warehouse facility provided by Enterprise Funding Corporation. The Company has agreed to indemnify IFA Parent for 31% of losses which might arise as a result of agreements IFA Parent executed as a sponsor in connection with the $100 million warehouse facility and the securitizations completed by Drive. The Company has also provided a guaranty limited to a maximum amount of up to $4 million of a $60 million term loan from IFA Parent to Drive. Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships and the term and warehouse facilities of Drive, as of March 31, 2001, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $111 million and outstanding borrowings of $94 million. Management believes that the IFA Parent loan facilities, along with the liquidity from the Cargill line, the related fees generated from the servicing of assets and equity distributions from existing Acquisition Partnerships and wholly-owned portfolios will allow the Company to meet its obligations as they come due during the next twelve months. The following table summarizes the material terms of the credit facilities to which the Company, its major operating subsidiaries and the Acquisition Partnerships were parties to as of May 15, 2001 and the outstanding borrowings under such facilities as of March 31, 2001. CREDIT FACILITIES
FUNDED AND UNFUNDED OUTSTANDING COMMITMENT BORROWINGS AMOUNT AS OF AS OF MAY 15, 2001 MARCH 31, 2001 INTEREST RATE OTHER TERMS AND CONDITIONS ------------ -------------- ------------- --------------------------- (DOLLARS IN MILLIONS) FIRSTCITY Company Senior Facility: Revolving Line of $ 10 $ -- LIBOR+2.5% Secured by the assets of Credit................. Term Loan A.............. 31 31 LIBOR+2.5% the Company, matures Term Loan B.............. 12 12 Prime December 31, 2003 Term credit facility....... 8 8 LIBOR+5.0% Secured by ownership interests in certain acquisition partnerships matures February 2002 COMMERCIAL CORP. Acquisition facilities..... 7 7 LIBOR+4.0% Secured by existing Portfolio Assets, matures June 15, 2001 Term facilities............ 13 13 Fixed at Secured by Portfolio 7.00% to Assets, matures June 5, 7.66% 2002 and November 7, 2002
20 21
FUNDED AND UNFUNDED OUTSTANDING COMMITMENT BORROWINGS AMOUNT AS OF AS OF MAY 15, 2001 MARCH 31, 2001 INTEREST RATE OTHER TERMS AND CONDITIONS ------------ -------------- ------------- --------------------------- (DOLLARS IN MILLIONS) Equity investment 30 23 LIBOR+4.5% Acquisition facility for facility................. ---- ---- the investment in future acquisition partnerships, matures March 2002 Total............. $111 $ 94 ==== ==== Unconsolidated Acquisition Partnerships term Facilities(1).......... $213 $213 Fixed at 10%, Secured by Portfolio ==== ==== LIBOR+2.25% Assets, various Maturities to 5% and Prime+1% to 7% Unconsolidated Drive Warehouse Facility....... $150 $130 LIBOR+1% Secured by warehouse inventory, Commitment Termination Date is February 15, 2002; Final Scheduled Payment Date matures 72 months after Commitment Termination Date Warehouse Facility....... 100 40 Rate based on Secured by warehouse commercial inventory, matures April paper rates 2002 combined with certain facility fees Term Facility............ 43 43 LIBOR Secured by residual ---- ---- interests, matures August 18, 2003 $213 $293 ==== ====
--------------- (1) In addition to the term acquisition facilities of the unconsolidated Acquisition Partnerships, the Mexican Acquisition Partnerships also have term debt of approximately $254 million outstanding as of March 31, 2001 owed to affiliates of the investor groups. Of this amount, the Company has recorded approximately $16 million as Loans Receivable on the Consolidated Balance Sheets. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q or incorporated by reference from time to time, including, but not limited to, statements relating to the Company's strategic objectives and future performance, which are not historical facts, may be deemed to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, performance or achievements, and may contain the words "expect," "intend," "plan," "estimate," "believe," "will be," "will continue," "will likely result," and similar expressions. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. There are many important factors that could cause the Company's actual results to differ materially from those indicated in the forward-looking statements. Such factors include, but are not limited to, the performance of the Company's subsidiaries and affiliates, the availability of Portfolio Assets; assumptions underlying asset performance; the impact of certain covenants in loan agreements of the Company and its subsidiaries; continued availability of the Company's credit facilities; the degree to which the Company is leveraged; the ability of the Company to utilize NOLs; interest rate risk; prepayment speeds; delinquency and default rates; credit loss rates; changes (legislative and 21 22 otherwise) in the asset securitization industry; demand for the Company's services; fluctuations in residential and commercial real estate values; risk of declining value of collateral; capital market conditions, including the markets for asset-backed securities; risks associated with foreign operations; currency exchange rate fluctuations; general economic conditions; changes in foreign political, social and economic conditions; regulatory initiatives and compliance with governmental regulations; the ability to attract and retain qualified personnel; uncertainties of any litigation that might arise in a bankruptcy proceeding; factors more fully discussed and identified in the Company's Annual Report on Form 10-K, filed April 13, 2001 (including those discussed under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"), as well as in other Securities and Exchange Commission filings. Many of these factors are beyond the Company's control. In addition, it should be noted that past financial and operational performance of the Company is not necessarily indicative of future financial and operational performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Form 10-Q speak only as of the date of this Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's operations are materially impacted by net gains on sales of loans and net interest margins. The level of gains from loan sales the Company achieves is dependent on demand for the products originated. Net interest margins are dependent on the Company to maintain the spread or interest differential between the interest it charges the customer for loans and the interest the Company is charged for the financing of those loans. The following describes each component of interest bearing assets held by the Company and how each could be affected by changes in interest rates. The Company invests in Portfolio Assets both directly through consolidated subsidiaries and indirectly through equity investments in Acquisition Partnerships. Portfolio Assets consist of investments in pools of non-homogenous assets that predominantly consist of loan and real estate assets. Earnings from these assets are based on the estimated future cash flows from such assets and recorded when those cash flows occur. The underlying loans within these pools bear both fixed and variable rates. Due to the non-performing nature and history of these loans, changes in prevailing benchmark rates (such as the prime rate or LIBOR) generally have a nominal effect on the ultimate future cash flow to be realized from the loan assets. Furthermore, these pools of assets are held for sale, not for investment; therefore, the disposition strategy is to liquidate these assets as quickly as possible. Loans receivable consists of investment loans made to Acquisition Partnerships and bear interest based on both fixed and variable rates. Rising interest rates would negatively affect the ability and speed of payment on these loans. The Company's equity investment in Drive is materially impacted by net gains realized on securitization transactions and net interest margins. The sub-prime loans that Drive sells are included in asset-backed securities the investor or purchaser issues. These securities are priced at spreads over the LIBOR or an equivalent term treasury security. These spreads are determined by demand for the security. Demand is affected by the perception of credit quality and prepayment risk associated with the loans Drive originates and sells. The timing and size of the securitizations could also have a material effect on the net income of Drive. Interest rates offered to customers also affect prices paid for loans. These rates are determined by review of competitors' rate offerings to the public and current prices being paid to Drive for the products. Drive does not hedge these price risks. Drive's residual interests in securitizations represent the present value of the excess cash flows Drive expects to receive over the life of the underlying sub-prime automobile loans. The sub-prime automobile residual interests are affected less by prepayment speeds due to the shorter term of the underlying assets and the fact that the loans are fixed rate, generally at the highest rate allowable by law. 22 23 Additionally the Company has various sources of financing which have been previously described in the Liquidity and Capital Resources section of Item 2. In summary, the Company would be negatively impacted by rising interest rates and declining prices for its sub-prime loans. Rising interest rates would negatively impact the value of residual interests in securitizations and costs of borrowings. Declining prices for the Company's sub-prime loans would adversely affect the levels of gains achieved upon the sale of those loans. There have been no material changes in the quantitative and qualitative risks of the Company since December 31, 2000. 23 24 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and Harbor Financial Group, Inc. (formerly known as FirstCity Financial Mortgage Corporation) filed suit in the Federal District Court for the Western District of Texas, Waco Division, against Chase Bank of Texas, N.A. and Chase Securities, Inc. in September 1999 seeking damages resulting from alleged violations by the defendants of the Bank Holding Company Act and from civil conspiracy engaged in by the defendants, and injunctive relief, arising from an engagement letter entered into between the Company and Chase Securities, Inc. relating to the sale of assets or securities of Harbor Financial Group, Inc., Harbor Financial Mortgage Corporation and their subsidiaries (collectively "Harbor"). The Company alleged that Chase Bank of Texas, N.A. conditioned its extension of credit to Harbor on the retention of Chase Securities, Inc. by the Company and Harbor violated the Bank Holding Company Act. The Company additionally sought a judicial declaration that the plaintiffs were not obligated to pay any commission to Chase Securities, Inc. under the engagement letter. The actual damages sought by the Company were in excess of $200 million. The Company also sought recovery of three times its damages pursuant to the Bank Holding Company Act and recovery of its costs of court, including reasonable attorneys fees. A motion to dismiss the Texas suit was granted based upon a provision in the engagement letter that provided that any suit arising from the engagement letter would be pursued in the State of New York. The Company has requested leave of the Supreme Court for the State of New York to amend its answer in that proceeding to include these claims as a counterclaim to the suit brought by Chase Securities, Inc. and an action against Chase Bank of Texas, N.A. On October 4, 1999, Chase Securities, Inc. filed suit against the Company before the Supreme Court for the State of New York, County of New York: Commercial Part seeking recovery of $2.4 million as the balance of a transaction fee allegedly due it under the terms of the engagement letter and other just and proper relief. The Company denies that it has any liability to Chase Securities, Inc. and intends to vigorously defend the suit. The Company has asserted as a defense to this action the violations of the Bank Holding Company Act asserted in the litigation pending before the Federal District Court for the Western District of Texas. The Company has sought leave to amend its answer in the suit to include a counterclaim against Chase Securities, Inc. and an action against Chase Bank of Texas, N.A. under the Bank Holding Company Act as is asserted in the Texas suit. On October 14, 1999, Mortgage Corp. filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code before the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. In a motion filed in those proceedings requesting the appointment of a Chapter 11 Trustee, the debtors stated that they were reviewing pre-petition transfers to the Company to determine if those transfers are avoidable. On December 14, 1999, the bankruptcy proceedings were converted to liquidations under Chapter 7 of the United States Bankruptcy Code. The Chapter 7 Trustee has not initiated an action against the Company to assert an avoidance action to recover any preferential transfers. The Company believes that it has valid defenses to any allegations that might be made to avoid any pre-petition transfers in connection with the Mortgage Corp. bankruptcy proceedings. Periodically, the Company, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. The Company does not believe that there is any proceeding threatened or pending against it, its subsidiaries, its affiliates or the Acquisition Partnerships which, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company, its subsidiaries, its affiliates or the Acquisition Partnerships. ITEM 3. DEFAULTS UPON SENIOR SECURITIES In the third quarter of 1999, dividends on the Company's adjusting rate preferred stock were suspended. At March 31, 2001, accumulated dividends in arrears on such preferred stock totaled $4.5 million, or $3.675 per share. 24 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.2 -- Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.1 -- Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.2 -- Warrant Agreement, dated July 3, 1995, by and between the Company and American Stock Transfer & Trust Company, as Warrant Agent (incorporated herein by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.3 -- Registration Rights Agreement, dated July 1, 1997, among the Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial Mortgage Company Employees Pension Plan, Lindsey Capital Corporation, Ed Smith and Thomas E. Smith. (incorporated herein by reference to Exhibit 4.3 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.4 -- Stock Purchase Agreement, dated March 24, 1998, between the Company and Texas Commerce Shareholders Company. (incorporated herein by reference to Exhibit 4.4 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.5 -- Registration Rights Agreement, dated March 24, 1998, between the Company and Texas Commerce Shareholders Company. (incorporated herein by reference to Exhibit 4.5 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 24, 1998). 10.1 -- Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995 (incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 10.2 -- Investment Management Agreement, dated July 3, 1995, between the Company and FirstCity Liquidating Trust (incorporated herein by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 10.3 -- Lock-Box Agreement, dated July 11, 1995, among the Company, NationsBank of Texas, N.A., as lock-box agent, FirstCity Liquidating Trust, FCLT Loans, L.P., and the other Trust-Owned Affiliates signatory thereto, and each of NationsBank of Texas, N.A. and Fleet National Bank, as co-lenders (incorporated herein by reference to Exhibit 10.3 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.4 -- Custodial Agreement, dated July 11, 1995, among Fleet National Bank, as custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and the Company (incorporated herein by reference to Exhibit 10.4 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.5 -- Tier 3 Custodial Agreement, dated July 11, 1995, among the Company, as custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and the Company, as servicer (incorporated herein by reference to Exhibit 10.5 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.6 -- 12/97 Amended and Restated Facilities Agreement, dated effective as of December 3, 1997, among Harbor Financial Mortgage Corporation, New America Financial, Inc., Texas Commerce Bank National Association and the other warehouse lenders party thereto. (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.7 -- Modification Agreement, dated January 26, 1998, to the Amended and Restated Facilities Agreement, dated as of December 3, 1997, among Harbor Financial Mortgage Corporation, New America Financial, Inc. and Chase Bank of Texas, National Association (formerly known as Texas Commerce Bank National Association). (incorporated herein by reference to Exhibit 10.7 of the company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.8 -- $50,000,000 3/98 Chase Texas Temporary Additional Warehouse Note, dated March 17, 1998, by Harbor Financial Mortgage Corporation and New America Financial, Inc., in favor of Chase Bank of Texas, National Association. (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.9 -- Employment Agreement, dated as of July 1, 1997, by and between Harbor Financial Mortgage Corporation and Richard J. Gillen. (incorporated herein by reference to Exhibit 10.9 of the Company's 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.10 -- Employment Agreement, dated as of September 8, 1997, by and between FirstCity Funding Corporation and Thomas R. Brower, with similar agreements between FC Capital Corp. and each of James H. Aronoff and Christopher J. Morrissey. (incorporated herein by reference to Exhibit 10.10 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.11 -- Shareholder Agreement, dated as of September 8, 1997, among FirstCity Funding Corporation, FirstCity Consumer Lending Corporation, Thomas R. Brower, Scot A. Foith, Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves, Stephen H. Trent and Blake P. Bozman. (incorporated herein by reference to Exhibit 10.11 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.12 -- Revolving Credit Loan Agreement, dated as of March 20, 1998, by and between FC Properties, Ltd. and Nomura Asset Capital Corporation. (incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.13 -- Revolving Credit Loan Agreement, dated as of February 27, 1998, by and between FH Partners, L.P. and Nomura Asset Capital Corporation. (incorporated herein by reference to Exhibit 10.13 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.14 -- Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.15 -- 60,000,000 French Franc Revolving Promissory Note, dated September 25, 1997, by J-Hawk International Corporation in favor of the Bank of Scotland. (incorporated herein by reference to Exhibit 10.15 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.16 -- Loan Agreement, dated as of September 25, 1997, by and between Bank of Scotland and J-Hawk International Corporation. (incorporated herein reference to Exhibit 10.16 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.17 -- Guaranty Agreement, dated as of September 25, 1997, by J-Hawk (incorporated herein by reference to Exhibit 10.17 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.18 -- Guaranty Agreement, dated as of September 25, 1997, by FirstCity Financial Corporation in favor of Bank of Scotland. (incorporated herein by reference to Exhibit 10.18 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.19 -- Warehouse Credit Agreement, dated as of May 17, 1996, among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust and National Auto Funding Corporation. (incorporated herein by reference to Exhibit 10.19 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.20 -- Funding Commitment, dated as of May 17, 1996 by and between ContiTrade Services L.L.C. and The Company. (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.21 -- Revolving Credit Agreement, dated as of December 29, 1995, by and between the Company and Cargill Financial Services Corporation, as amended by the Eighth Amendment to Revolving Credit Agreement dated February 1998. (incorporated herein by reference to Exhibit 10.21 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.22 -- Master Repurchase Agreement Governing Purchased and Sales of Mortgage Loans, dated as of July 1998, between Lehman Commercial Paper Inc. and FHB Funding Corp. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 18, 1998). 10.23 -- Warehouse Credit Agreement, dated as of April 30, 1998 among ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation, FirstCity Auto Receivables L.L.C. and FirstCity Financial Corporation. (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.24 -- Servicing Agreement, dated as of April 30, 1998 among FirstCity Auto Receivables L.L.C., FirstCity Servicing Corporation of California, FirstCity Consumer Lending Corporation and ContiTrade Services L.L.C. (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.25 -- Security and Collateral Agreement, dated as of April 30, 1998 among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C. and Chase Bank of Texas, National Association. (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.26 -- Loan Agreement, dated as of July 24, 1998, between FirstCity Commercial Corporation and CFSC Capital Corp. XXX (incorporated herein by reference Exhibit 10.5 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.27 -- Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.28 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.29 -- Employment Agreement, dated October 1, 1998, by and between FirstCity. Financial Mortgage Corporation, and Buddy L. Terrell (incorporated herein by reference to Exhibit 10.29 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.30 -- Security Agreement, dated as of April 30, 1998 among Enterprise Funding Corporation, FCAR Receivables L.L.C., MBIA Insurance Corporation, FirstCity Funding Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a Loan Servicing enterprise (incorporated herein by reference to Exhibit 10.30 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.31 -- Note purchase agreement, dated March 30, 1999 among Enterprise Funding Corporation, FCAR Receivables, L.L.C. and NationsBank, N.A. (incorporated herein by reference to Exhibit 10.31 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.32 -- Custodian Agreement, dated March 30, 1999, among FCAR Receivables L.L.C., FirstCity Funding Corporation, NationsBank, N.A., Enterprise Funding Corporation and Chase Bank of Texas, N.A. (incorporated herein by reference to Exhibit 10.32 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.33 -- 100,000,000 dollar form of note, dated March 30, 1999 among FCAR Receivables LLC, Enterprise Funding Corporation and NationsBank, N.A. (incorporated herein by reference to Exhibit 10.33 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.33 -- Credit agreement dated effective as of May 28, 1999 made by and among Harbor Financial Mortgage, New America Financial, Inc., FirstCity Financial Mortgage Corporation, and Guaranty Federal Bank F.S.B. as Administrative Agent and Bank One, Texas, N.A. as Collateral Agent (incorporated herein by reference to Exhibit 10.33 of the Company's Form 10-Q dated August 16, 1999, filed with the commission on August 16, 1999). 10.34 -- Tenth Amendment to Loan Agreement, dated August 11, 1999 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.34 of the Company's Form 10-Q dated August 16, 1999, filed with the Commission on August 16, 1999). 10.35 -- Amended and Restated Loan Agreement, dated December 20, 1999, by and among FirstCity Financial Corporation as Borrower and The Lenders Named Herein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 22, 1999, filed with the commission on December 28, 1999). 10.36 -- Subordinated Secured Senior Note Purchase Agreement, dated December 20, 1999, between FirstCity Financial Corporation, as Issuer and IFA Corporation, as Purchaser (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated December 22, 1999, filed with the commission on December 28, 1999). 10.37 -- Employment Agreement, dated October 1, 1999, by and between FirstCity Commercial Corporation and Terry R. DeWitt. (incorporated herein by reference to Exhibit 10.37 of the Company's Form 10-K dated April 6, 2000, filed with the commission on April 6, 2000). 10.38 -- Employment Agreement, dated October 1, 1999, by and between FirstCity Commercial Corporation and G. Stephen Fillip. (incorporated herein by reference to Exhibit 10.38 of the Company's Form 10-K dated April 6, 2000, filed with the commission on April 6, 2000). 10.39 -- Shareholder Agreement, dated October 1, 1999, by and among FirstCity Holdings Corporation, FirstCity Commercial Corporation, Terry R. DeWitt, G. Stephen Fillip and James C. Holmes. (incorporated herein by reference to Exhibit 10.39 of the Company's Form 10-K dated April 6, 2000, filed with the commission on April 6, 2000).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.40 -- Securities Purchase Agreement, dated as of August 18, 2000, by and among the Company, Consumer Corp., Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein by reference to Exhibit 10.40 of the Company's Form 8-K dated August 25, 2000, filed with the commission on September 11, 2000). 10.41 -- Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company's Form 8-K dated August 25, 2000, filed with the commission on September 11, 2000). 10.42 -- Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company's Form 8-K dated August 25, 2000, filed with the commission on September 11, 2000). 10.43 -- Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company's Form 8-K dated August 25, 2000, filed with the commission on September 11, 2000).
(b) Reports on Form 8-K. No report on Form 8-K was filed by the Registrant with the Securities and Exchange Commission during the quarterly period ended March 31, 2001. 29 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTCITY FINANCIAL CORPORATION By: /s/ JAMES T. SARTAIN ------------------------------------ James T. Sartain President and Chief Executive Officer and Director (Duly authorized officer of the Registrant) By: /s/ J. BRYAN BAKER ------------------------------------ J. Bryan Baker Senior Vice President and Chief Financial Officer (Duly authorized officer and principal financial and accounting officer of the Registrant) Dated: May 15, 2001 30 31 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.2 -- Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.1 -- Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.2 -- Warrant Agreement, dated July 3, 1995, by and between the Company and American Stock Transfer & Trust Company, as Warrant Agent (incorporated herein by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.3 -- Registration Rights Agreement, dated July 1, 1997, among the Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial Mortgage Company Employees Pension Plan, Lindsey Capital Corporation, Ed Smith and Thomas E. Smith. (incorporated herein by reference to Exhibit 4.3 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.4 -- Stock Purchase Agreement, dated March 24, 1998, between the Company and Texas Commerce Shareholders Company. (incorporated herein by reference to Exhibit 4.4 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 4.5 -- Registration Rights Agreement, dated March 24, 1998, between the Company and Texas Commerce Shareholders Company. (incorporated herein by reference to Exhibit 4.5 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 24, 1998). 10.1 -- Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995 (incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 10.2 -- Investment Management Agreement, dated July 3, 1995, between the Company and FirstCity Liquidating Trust (incorporated herein by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 10.3 -- Lock-Box Agreement, dated July 11, 1995, among the Company, NationsBank of Texas, N.A., as lock-box agent, FirstCity Liquidating Trust, FCLT Loans, L.P., and the other Trust-Owned Affiliates signatory thereto, and each of NationsBank of Texas, N.A. and Fleet National Bank, as co-lenders (incorporated herein by reference to Exhibit 10.3 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.4 -- Custodial Agreement, dated July 11, 1995, among Fleet National Bank, as custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and the Company (incorporated herein by reference to Exhibit 10.4 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.5 -- Tier 3 Custodial Agreement, dated July 11, 1995, among the Company, as custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and the Company, as servicer (incorporated herein by reference to Exhibit 10.5 of the Company's Form 8-A/A dated August 25, 1995 filed with the Commission on August 25, 1995). 10.6 -- 12/97 Amended and Restated Facilities Agreement, dated effective as of December 3, 1997, among Harbor Financial Mortgage Corporation, New America Financial, Inc., Texas Commerce Bank National Association and the other warehouse lenders party thereto. (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.7 -- Modification Agreement, dated January 26, 1998, to the Amended and Restated Facilities Agreement, dated as of December 3, 1997, among Harbor Financial Mortgage Corporation, New America Financial, Inc. and Chase Bank of Texas, National Association (formerly known as Texas Commerce Bank National Association). (incorporated herein by reference to Exhibit 10.7 of the company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.8 -- $50,000,000 3/98 Chase Texas Temporary Additional Warehouse Note, dated March 17, 1998, by Harbor Financial Mortgage Corporation and New America Financial, Inc., in favor of Chase Bank of Texas, National Association. (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.9 -- Employment Agreement, dated as of July 1, 1997, by and between Harbor Financial Mortgage Corporation and Richard J. Gillen. (incorporated herein by reference to Exhibit 10.9 of the Company's 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.10 -- Employment Agreement, dated as of September 8, 1997, by and between FirstCity Funding Corporation and Thomas R. Brower, with similar agreements between FC Capital Corp. and each of James H. Aronoff and Christopher J. Morrissey. (incorporated herein by reference to Exhibit 10.10 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.11 -- Shareholder Agreement, dated as of September 8, 1997, among FirstCity Funding Corporation, FirstCity Consumer Lending Corporation, Thomas R. Brower, Scot A. Foith, Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves, Stephen H. Trent and Blake P. Bozman. (incorporated herein by reference to Exhibit 10.11 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.12 -- Revolving Credit Loan Agreement, dated as of March 20, 1998, by and between FC Properties, Ltd. and Nomura Asset Capital Corporation. (incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.13 -- Revolving Credit Loan Agreement, dated as of February 27, 1998, by and between FH Partners, L.P. and Nomura Asset Capital Corporation. (incorporated herein by reference to Exhibit 10.13 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.14 -- Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.15 -- 60,000,000 French Franc Revolving Promissory Note, dated September 25, 1997, by J-Hawk International Corporation in favor of the Bank of Scotland. (incorporated herein by reference to Exhibit 10.15 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.16 -- Loan Agreement, dated as of September 25, 1997, by and between Bank of Scotland and J-Hawk International Corporation. (incorporated herein reference to Exhibit 10.16 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.17 -- Guaranty Agreement, dated as of September 25, 1997, by J-Hawk (incorporated herein by reference to Exhibit 10.17 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.18 -- Guaranty Agreement, dated as of September 25, 1997, by FirstCity Financial Corporation in favor of Bank of Scotland. (incorporated herein by reference to Exhibit 10.18 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.19 -- Warehouse Credit Agreement, dated as of May 17, 1996, among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust and National Auto Funding Corporation. (incorporated herein by reference to Exhibit 10.19 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.20 -- Funding Commitment, dated as of May 17, 1996 by and between ContiTrade Services L.L.C. and The Company. (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.21 -- Revolving Credit Agreement, dated as of December 29, 1995, by and between the Company and Cargill Financial Services Corporation, as amended by the Eighth Amendment to Revolving Credit Agreement dated February 1998. (incorporated herein by reference to Exhibit 10.21 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.22 -- Master Repurchase Agreement Governing Purchased and Sales of Mortgage Loans, dated as of July 1998, between Lehman Commercial Paper Inc. and FHB Funding Corp. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 18, 1998). 10.23 -- Warehouse Credit Agreement, dated as of April 30, 1998 among ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation, FirstCity Auto Receivables L.L.C. and FirstCity Financial Corporation. (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.24 -- Servicing Agreement, dated as of April 30, 1998 among FirstCity Auto Receivables L.L.C. , FirstCity Servicing Corporation of California, FirstCity Consumer Lending Corporation and ContiTrade Services L.L.C. (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.25 -- Security and Collateral Agreement, dated as of April 30, 1998 among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C. and Chase Bank of Texas, National Association. (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission August 16, 1998). 10.26 -- Loan Agreement, dated as of July 24, 1998, between FirstCity Commercial Corporation and CFSC Capital Corp. XXX (incorporated herein by reference Exhibit 10.5 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.27 -- Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.28 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.29 -- Employment Agreement, dated October 1, 1998, by and between FirstCity. Financial Mortgage Corporation, and Buddy L. Terrell (incorporated herein by reference to Exhibit 10.29 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.30 -- Security Agreement, dated as of April 30, 1998 among Enterprise Funding Corporation, FCAR Receivables L.L.C., MBIA Insurance Corporation, FirstCity Funding Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a Loan Servicing enterprise (incorporated herein by reference to Exhibit 10.30 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.31 -- Note purchase agreement, dated March 30, 1999 among Enterprise Funding Corporation, FCAR Receivables, L.L.C. and NationsBank, N.A. (incorporated herein by reference to Exhibit 10.31 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.32 -- Custodian Agreement, dated March 30, 1999, among FCAR Receivables L.L.C., FirstCity Funding Corporation, NationsBank, N.A., Enterprise Funding Corporation and Chase Bank of Texas, N.A. (incorporated herein by reference to Exhibit 10.32 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.33 -- 100,000,000 dollar form of note, dated March 30, 1999 among FCAR Receivables LLC, Enterprise Funding Corporation and NationsBank, N.A. (incorporated herein by reference to Exhibit 10.33 of the Company's Form 10-Q dated May 17, 1999, filed with the commission on May 17, 1999). 10.33 -- Credit agreement dated effective as of May 28, 1999 made by and among Harbor Financial Mortgage, New America Financial, Inc., FirstCity Financial Mortgage Corporation, and Guaranty Federal Bank F.S.B. as Administrative Agent and Bank One, Texas, N.A. as Collateral Agent (incorporated herein by reference to Exhibit 10.33 of the Company's Form 10-Q dated August 16, 1999, filed with the commission on August 16, 1999). 10.34 -- Tenth Amendment to Loan Agreement, dated August 11, 1999 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.34 of the Company's Form 10-Q dated August 16, 1999, filed with the Commission on August 16, 1999). 10.35 -- Amended and Restated Loan Agreement, dated December 20, 1999, by and among FirstCity Financial Corporation as Borrower and The Lenders Named Herein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 22, 1999, filed with the commission on December 28, 1999). 10.36 -- Subordinated Secured Senior Note Purchase Agreement, dated December 20, 1999, between FirstCity Financial Corporation, as Issuer and IFA Corporation, as Purchaser (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated December 22, 1999, filed with the commission on December 28, 1999). 10.37 -- Employment Agreement, dated October 1, 1999, by and between FirstCity Commercial Corporation and Terry R. DeWitt. (incorporated herein by reference to Exhibit 10.37 of the Company's Form 10-K dated April 6, 2000, filed with the commission on April 6, 2000). 10.38 -- Employment Agreement, dated October 1, 1999, by and between FirstCity Commercial Corporation and G. Stephen Fillip. (incorporated herein by reference to Exhibit 10.38 of the Company's Form 10-K dated April 6, 2000, filed with the commission on April 6, 2000). 10.39 -- Shareholder Agreement, dated October 1, 1999, by and among FirstCity Holdings Corporation, FirstCity Commercial Corporation, Terry R. DeWitt, G. Stephen Fillip and James C. Holmes. (incorporated herein by reference to Exhibit 10.39 of the Company's Form 10-K dated April 6, 2000, filed with the commission on April 6, 2000).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.40 -- Securities Purchase Agreement, dated as of August 18, 2000, by and among the Company, Consumer Corp., Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein by reference to Exhibit 10.40 of the Company's Form 8-K dated August 25, 2000, filed with the commission on September 11, 2000). 10.41 -- Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company's Form 8-K dated August 25, 2000, filed with the commission on September 11, 2000). 10.42 -- Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company's Form 8-K dated August 25, 2000, filed with the commission on September 11, 2000). 10.43 -- Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company's Form 8-K dated August 25, 2000, filed with the commission on September 11, 2000).
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