-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MwXD0ZkodK/UnZPChEmhrAcq6Md2xi1LE1Ik5hI742+Ptyz3V53NOv8jD3iJhQTZ FCpMSOEhS8xF9gj4YuK4sg== 0000950129-03-002031.txt : 20030415 0000950129-03-002031.hdr.sgml : 20030415 20030415160625 ACCESSION NUMBER: 0000950129-03-002031 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTCITY FINANCIAL CORP CENTRAL INDEX KEY: 0000828678 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 760243729 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-19694 FILM NUMBER: 03650662 BUSINESS ADDRESS: STREET 1: 6400 IMPERIAL DRIVE CITY: WACO STATE: TX ZIP: 76712 BUSINESS PHONE: 2547511750 MAIL ADDRESS: STREET 1: 6400 IMPERIAL DRIVE CITY: WACO STATE: TX ZIP: 76712 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY ACQUISITION CORP DATE OF NAME CHANGE: 19880523 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY BANCORPORATION OF TEXAS INC/ DATE OF NAME CHANGE: 19920703 10-K 1 h03364e10vk.txt FIRSTCITY FINANCIAL CORP - DECEMBER 31, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS COMMON STOCK, PAR VALUE $.01 ADJUSTING RATE PREFERRED STOCK, PAR VALUE $.01 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The number of shares of common stock outstanding at March 26, 2003 was 11,195,076. As of such date, the aggregate market value of the voting and non-voting common equity held by non-affiliates, based upon the closing price of the common stock on the Nasdaq National Market System, was approximately $14,314,572. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FIRSTCITY FINANCIAL CORPORATION TABLE OF CONTENTS
PAGE ---- PART I Item 1 Business.................................................... 2 Item 2 Properties.................................................. 12 Item 3 Legal Proceedings........................................... 12 Item 4 Submission of Matters to a Vote of Security Holders......... 13 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters......................................... 13 Item 6 Selected Financial Data..................................... 14 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 15 Item 7A Quantitative and Qualitative Disclosures About Market Risk........................................................ 47 Item 8 Financial Statements and Supplementary Data................. 50 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 132 PART III Item 10 Directors and Executive Officers of the Registrant.......... 132 Item 11 Executive Compensation...................................... 135 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 138 Item 13 Certain Relationships and Related Transactions.............. 139 Item 14 Controls and Procedures..................................... 141 PART IV Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 141
1 FORWARD LOOKING INFORMATION This Annual Report on Form 10-K, as amended, may contain forward-looking statements. The factors identified under "Risk Factors" contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, FirstCity Financial Corporation (the "Company" or "FirstCity"). When any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that, while such assumptions or bases are believed to be reasonable and are made in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. When, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe," "expect," "estimate," "project," "anticipate" and similar expressions identify forward-looking statements. PART I ITEM 1. BUSINESS GENERAL FirstCity, a Delaware corporation, is a financial services company headquartered in Waco, Texas with offices throughout the United States and Mexico and a presence in France. The Company began operating in 1986 as a specialty financial services company focused on acquiring and resolving distressed loans and other assets purchased at a discount relative to the aggregate unpaid principal balance of the loans or the appraised value of the other assets ("Face Value"). To date the Company has acquired, for its own account and through various affiliated partnerships, pools of assets or single assets (collectively referred to as "Portfolio Assets" or "Portfolios") with a Face Value of approximately $7.1 billion. The Company's servicing expertise, which it has developed largely through the resolution of distressed assets, is a cornerstone of its growth strategy. Today the Company is engaged in two principal businesses: (i) Portfolio Asset acquisition and resolution and (ii) consumer lending through the Company's minority investment in Drive Financial Services LP ("Drive"). See Note 8 of the Company's Consolidated Financial Statements for certain financial information about these two segments of the Company. BUSINESS STRATEGY The Company's core business is the acquisition, management, servicing and resolution of Portfolio Assets. Key elements of the Company's overall business strategy include: - Increasing the Company's investments in Portfolio Assets acquired from financial institutions and government agencies, both for its own account or through investment entities formed with Cargill Financial Services Corporation ("Cargill", "CFSC" or "Cargill Financial") or one or more other co-investors, thereby capitalizing on the expertise of partners whose skills complement those of the Company. - Identifying and acquiring, through non-traditional niche sources, distressed assets that meet the Company's investment criteria, which may involve the utilization of special acquisition structures. - Acquiring, managing, servicing and resolving Portfolio Assets in certain international markets, either separately or in partnership with others, including Cargill. - Capitalizing on the Company's servicing expertise to enter into new markets with servicing agreements that provide for reimbursement of costs of entry and operations plus an incentive servicing fee after certain thresholds are met without requiring substantial equity investments. 2 - Retaining a minority interest investment in Drive. - Maximizing growth in operations, thereby permitting the utilization of the Company's net operating loss carryforwards ("NOLs"). BACKGROUND The Company began operating in the financial service business in 1986 as a purchaser of distressed assets from the Federal Deposit Insurance Corporation ("FDIC") and the Resolution Trust Corporation ("RTC"). From its original office in Waco, Texas, with a staff of four professionals, the Company's asset acquisition and resolution business grew to become a significant participant in an industry fueled by the problems experienced by banks and thrifts throughout the United States. In the late 1980s, the Company also began acquiring assets from healthy financial institutions interested in eliminating nonperforming assets from their portfolios. The Company began its relationship with Cargill in 1991. Since that time, the Company and Cargill have formed a series of Acquisition Partnerships through which they have jointly acquired over $6.2 billion in Face Value of Portfolio Assets. In July 1995, the Company acquired by merger (the "Merger") First City Bancorporation of Texas, Inc. ("FCBOT"), a former bank holding company that had been engaged in a proceeding under Chapter 11 of the Bankruptcy Code since November 1992. As a result of the Merger, the common stock of the Company became publicly held and the Company received $20 million of additional equity capital and entered into an incentive-based servicing agreement to manage approximately $300 million in assets for the benefit of the former equity holders of FCBOT. In addition, as a result of the Merger, the Company retained FCBOT's rights to approximately $596 million in NOLs, which the Company believes it can use to offset taxable income generated by the Company and its consolidated subsidiaries. Following the Merger, the Company adopted a growth and diversification strategy designed to capitalize on its servicing and credit expertise to expand into additional financial service businesses. To that end, in July 1997 the Company acquired Harbor Financial Group, Inc. and its subsidiaries (collectively referred to as "Mortgage Corp."), a company engaged in the residential and commercial mortgage banking business since 1983. During 1997, the Company also expanded into related niche financial services markets, such as mortgage conduit banking, conducted through FC Capital Corp. ("Capital Corp."), a subsidiary of the Company, and such as consumer finance, conducted through FirstCity Consumer Lending Corporation ("Consumer Corp."), a subsidiary of the Company. Effective during the third quarter of 1999, management of the Company adopted formal plans to discontinue the operations of Mortgage Corp. and Capital Corp. These entities comprised the operations that were previously reported as the Company's mortgage banking operations. Because the Company formally adopted plans to discontinue the operations of Mortgage Corp. and Capital Corp., and operations at each such entity have ceased, the results of historical operations have been reflected as discontinued operations. On October 14, 1999, Harbor Financial Group, Inc. ("Harbor Parent"), Harbor Financial Mortgage Corporation ("Harbor") and four subsidiaries of Harbor filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. On December 14, 1999, these bankruptcy proceedings were converted to liquidation proceedings under Chapter 7 of the United States Bankruptcy Code. John H. Litzler, the Chapter 7 Trustee in the bankruptcy proceedings (the "Trustee"), initiated adversary proceedings on May 25, 2001 against FirstCity and various current and former directors and officers of FirstCity and Mortgage Corp. alleging breach of fiduciary duties, mismanagement, and self-dealing by FirstCity and Harbor directors and officers, and improper transfer of funds from the Harbor related entities to FirstCity. The claims also included fraudulent and preferential transfer of assets of the Harbor entities, fraud and conspiracy. The Trustee, FirstCity, the other defendants and the insurers providing Director's and Officer's Insurance coverage for FirstCity and its subsidiaries (the "Insurers") settled the claims brought in the adversary proceedings with the approval of the Bankruptcy Court. Under the terms of the settlement agreement, the Trustee released the defendants, their affiliates and subsidiaries from any and all claims which were brought or could have been brought by the Trustee against any of the defendants, any past and present officers and directors of FirstCity or any affiliates or subsidiaries of FirstCity. 3 As a result of the liquidity constraints created by the discontinued operations of Mortgage Corp. and Capital Corp., in the third quarter of 2000, Consumer Corp. completed the 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 BoS(USA), Inc. ("BoS(USA)"), a wholly-owned subsidiary of Bank of Scotland (together with BoS(USA), the "Senior Lenders"), for a purchase price of $15 million cash. The transaction generated $75 million in cash and resulted in a gain of $12.1 million ($4 million was deferred and recognized in the December 2002 recapitalization discussed below). Simultaneously, the Senior Lenders and the Company completed a debt restructure whereby the Company reduced the outstanding debt under its senior and subordinate facilities from $113 million to approximately $44 million. The Company also retired approximately $6.4 million of debt owed to other lenders. In December 2002, FirstCity completed a recapitalization in which holders of FirstCity's redeemable preferred stock, par value $.01 per share ("New Preferred Stock"), representing 89.3% of the 1,222,901 share previously outstanding, exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million. Upon the completion of the recapitalization, 130,691 shares of New Preferred Stock remained outstanding. As a result, common equity was increased by $18.9 million. FirstCity also recognized the $4 million gain (previously deferred) from the release of its guaranty of Drive's indebtedness to BoS(USA). BoS(USA)'s warrant to purchase 1,975,000 shares on non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom are Senior Vice Presidents of FirstCity by issuing 400,000 shares of common stock of the Company and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million in accordance with certain cash collections from servicing income from Portfolio asset acquisitions in Mexico. As a part of the recapitalization, BoS(USA) provided a non-recourse loan in the amount of $16 million to FirstCity which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity's debt to the Senior Lenders. The $16 million loan is secured by a 20% interest in Drive (64.51% of FirstCity's remaining 31% interest in Drive) and other assets of Consumer Corp. to allow BoS(USA) to realize upon the 20% Drive interest in the event of default by FirstCity. In connection with the $16 million loan, FirstCity is obligated to pay an arrangement fee to BoS(USA) equal to 20% of all amounts received by FirstCity in excess of $16 million from any sale or other disposition of FirstCity's 20% interest in Drive and all dividends and other distributions paid by Drive or its general partner on FirstCity's 20% interest in Drive. PORTFOLIO ASSET ACQUISITION AND RESOLUTION The Company engages in the Portfolio Asset acquisition and resolution business through its wholly owned subsidiary, FirstCity Commercial Corporation, and its subsidiaries ("Commercial Corp."). In the Portfolio Asset acquisition and resolution business Commercial Corp. acquires and resolves portfolios of performing and nonperforming commercial and consumer loans and other assets that are generally acquired at a discount to Face Value. Purchases may be in the form of pools of assets or single assets. Performing assets are those as to which debt service payments are being made in accordance with the original or restructured terms of such assets. Nonperforming assets are those as to which debt service payments are not being made in accordance with the original or restructured terms of such assets, or as to which no debt service payments are being made. Portfolios are designated as nonperforming unless substantially all of the assets comprising the Portfolio are performing. Once a Portfolio has been designated as either performing or nonperforming, such designation is generally not changed for accounting purposes regardless of the performance of the assets comprising the Portfolio. Portfolios are either acquired for Commercial Corp.'s own account or through investment entities formed with Cargill or one or more other co-investors (each such entity, an "Acquisition Partnership"). See "-- Relationship with Cargill". To date, Commercial Corp. and the Acquisition Partnerships have acquired over $7.1 billion in Face Value of assets, with FirstCity's equity investment being $235 million. 4 SOURCES OF ASSETS ACQUIRED In the early 1990s large quantities of nonperforming assets were available for acquisition from the RTC and the FDIC. Since 1993, sellers of nonperforming assets have included private sellers as well as government agencies such as the Small Business Administration. Private sellers include financial institutions, insurance companies, and other institutional lenders, both in the United States and in various foreign countries. As a result of mergers, acquisitions and corporate downsizing efforts, other business entities frequently seek to dispose of excess real estate or other financial assets not meeting the strategic needs of a seller. Sales of such assets improve the seller's balance sheet, reduce overhead costs, reduce staffing requirements and avoid management and personnel distractions associated with the intensive and time-consuming task of resolving loans and disposing of real estate. Consolidations within a broad range of industries, especially banking, have augmented the trend of financial institutions and other sellers packaging and selling asset portfolios to investors as a means of disposing of nonperforming loans or other surplus or non-strategic assets. PORTFOLIO ASSETS Commercial Corp. acquires and manages Portfolio Assets, which are generally purchased at a discount to Face Value by Commercial Corp. or through Acquisition Partnerships. The Portfolio Assets are generally nonhomogeneous assets, including loans of varying qualities that are unsecured or secured by diverse collateral types and real estate. Some of the secured Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based either on real estate, business assets or other collateral cash flow. Consumer loans may be secured (by real or personal property) or unsecured. Portfolio Assets may be designated as performing or nonperforming. Commercial Corp. generally expects to resolve Portfolio Assets within five years after purchase. To date, a substantial majority of the Portfolio Assets acquired by Commercial Corp. have been designated as nonperforming. Commercial Corp. seeks to resolve nonperforming Portfolio Assets through (i) a negotiated settlement with the borrower in which the borrower pays all or a discounted amount of the loan, (ii) conversion of the loan into a performing asset through extensive servicing efforts followed by either a sale of the loan to a third party or retention of the loan by Commercial Corp. or the Acquisition Partnership or (iii) foreclosure of the loan and sale of the collateral securing the loan. Commercial Corp. has substantial experience acquiring, managing and resolving a wide variety of asset types and classes. As a result, it does not limit itself as to the types of Portfolios it will evaluate and purchase. Commercial Corp.'s willingness to acquire Portfolio Assets is generally determined by factors including the information that is available regarding the assets in a Portfolio, the price at which the Portfolio can be acquired and the expected net cash flows from the resolution of such assets. Commercial Corp. has acquired Portfolio Assets in virtually all 50 states, the Virgin Islands, Puerto Rico, France, Japan and Mexico. Commercial Corp. believes that its willingness to acquire nonhomogeneous Portfolio Assets without regard to geographic location provides it with an advantage over certain competitors that limit their activities to either a specific asset type or geographic location. Commercial Corp. also seeks to capitalize on emerging opportunities in foreign countries in which the market for nonperforming loans of the type generally purchased by Commercial Corp. is less efficient than the market for such assets in the United States. Through December 31, 2002, Commercial Corp. has acquired, with Cargill and a local French partner, fifteen Portfolios in France consisting of approximately 26,000 assets for an aggregate purchase price of approximately $358 million. These assets had a Face Value of approximately $1.4 billion. Commercial Corp.'s share of the equity interest in the Portfolios acquired in France ranges from 10% to 33.33% and Commercial Corp. has made a total equity investment in these Portfolios of approximately $28.6 million. Commercial Corp. owns a 10% interest in MCS et Associates ("MCS"), a French asset servicing company, and Commercial Corp. is, in conjunction with MCS and Cargill, actively pursuing opportunities to purchase additional pools of Portfolio Assets in France and other areas of Western Europe. In addition, Commercial Corp. has formed a Mexican asset servicing company, which has offices in Guadalajara and Mexico City, Mexico, that facilitates Commercial Corp.'s participation 5 in acquisition of Portfolios in Mexico. Through December 31, 2002, Commercial Corp. and its various partners have acquired ten Portfolios in Mexico consisting of an aggregate of approximately 49,000 assets for an aggregate purchase price of approximately $426 million. These assets had a Face Value of approximately $2.2 billion. Commercial Corp.'s share of the equity interest in the Portfolios acquired in Mexico ranges from 3.2% to 25%, and Commercial Corp. has made a total investment in these Portfolios of approximately $31 million. The following table presents selected data for the Portfolio Assets acquired by Commercial Corp. PORTFOLIO ASSETS
YEAR ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 -------- -------- ---------- (DOLLARS IN THOUSANDS) Face Value.......................................... $702,019 $766,904 $1,578,932 Total purchase price................................ $171,769 $224,927 $ 394,927 Total equity invested(1)............................ $ 66,932 $139,273 $ 341,736 Commercial Corp. equity invested.................... $ 16,717 $ 24,319 $ 22,140 Total number of Portfolio Assets.................... 11,453 8,099 47,320
- --------------- (1) Includes investments made in the form of equity and notes receivable from the Acquisition Partnerships payable to affiliates of the Company. SOURCES OF PORTFOLIO ASSETS Commercial Corp. develops its Portfolio Asset opportunities through a variety of sources. The activities or contemplated activities of expected sellers are publicized in industry publications and through other similar sources. Commercial Corp. also maintains relationships with a variety of parties involved as sellers or as brokers or agents for sellers. Many of the brokers and agents concentrate by asset type and have become familiar with Commercial Corp.'s acquisition criteria and periodically approach Commercial Corp. with identified opportunities. In addition, repeat business referrals from Cargill or other co-investors in Acquisition Partnerships, repeat business from previous sellers, focused marketing by Commercial Corp. and the nationwide presence of Commercial Corp. and the Company are important sources of business. Commercial Corp. identifies investment opportunities in foreign markets in much the same manner as in the United States. In varying degrees of volume and efficiency, the markets of Europe, Asia, and Latin America all include sellers of nonperforming assets. In some countries, such as Mexico, the government has taken a very active role in the management and orderly disposition of these types of assets. Commercial Corp.'s established presence in Mexico and France provides a strong base for the identification, valuation, and acquisition of assets in those countries, as well as in adjacent markets. Commercial Corp. continues to identify partners who have contacts within various foreign markets and can or assist in locating Portfolio Asset opportunities with Commercial Corp. ASSET ANALYSIS AND UNDERWRITING Prior to making an offer to acquire any Portfolio, Commercial Corp. performs an extensive evaluation of the assets that comprise the Portfolio. If, as is often the case, the Portfolio Assets are nonhomogeneous, Commercial Corp. will evaluate all individual assets determined to be significant to the total of the proposed purchase. If the Portfolio Assets are homogenous in nature, a sample of the assets comprising the Portfolio may be selected for evaluation. The evaluation of individual assets generally includes analyzing the credit and collateral file or other due diligence information supplied by the seller. Based upon such seller-provided information, Commercial Corp. will undertake additional evaluations of the asset, that, to the extent permitted by the seller, will include site visits to, and environmental reviews of the property securing the loan or the asset proposed to be purchased. Commercial Corp. will also analyze relevant local economic and market conditions 6 based on information obtained from its prior experience in the market or from other sources, such as local appraisers, real estate principals, realtors and brokers. The evaluation further includes an analysis of an asset's projected cash flow and sources of repayment, including the availability of third party guarantees. Commercial Corp. values loans (and other assets included in a portfolio) on the basis of its estimate of the present value of estimated cash flow to be derived in the resolution process. Once the cash flow estimates for a proposed purchase and the financing and partnership structure, if any, are finalized, Commercial Corp. can complete the determination of its proposed purchase price for the targeted Portfolio Assets. Purchases are subject to purchase and sale agreements between the seller and the purchasing affiliate of Commercial Corp. The analysis and underwriting procedure in foreign markets follows the same extensive diligence philosophy as that employed by the Company domestically. Additional risks are evaluated in foreign markets, including currency strength, short and long-term market stability and political concerns. These risks are evaluated and priced into the cost of the acquisition. SERVICING After a Portfolio is acquired, Commercial Corp. assigns the Portfolio Assets to account servicing officers who are independent of the personnel that performed the due diligence evaluation in connection with the purchase of the Portfolio. Portfolio Assets are serviced either at the Company's headquarters or in one of Commercial Corp.'s other offices. Commercial Corp. generally establishes servicing operations in locations in close proximity to significant concentrations of Portfolio Assets. Most of such offices are considered temporary and are reviewed for closing after the assets in the geographic region surrounding the office are substantially resolved. The assigned account servicing officer develops a business plan and budget for each asset based upon an independent review of the cash flow projections developed during the investment evaluation, physical inspections of assets or collateral underlying the related loans, evaluation of local market conditions and discussions with the relevant borrower. Budgets are periodically reviewed and revised as necessary. Commercial Corp. employs loan-tracking software and other operational systems that are generally similar to systems used by commercial banks, but which have been enhanced to track both the collected and the projected cash flows from Portfolio Assets. Commercial Corp. services all of the Portfolio Assets owned for its own account, all of the Portfolio Assets owned by the Acquisition Partnerships and, to a very limited extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United States, Commercial Corp. generally earns a servicing fee, which is a percentage of gross cash collections generated rather than a management fee based on the Face Value of the asset being serviced. The rate of servicing fee charged is generally a function of the average Face Value of the assets within each pool being serviced (the larger the average Face Value of the assets in a Portfolio, the lower the fee percentage within the prescribed range), the type of assets and the level of servicing required on each assets. For the Mexican Acquisition Partnerships, Commercial Corp. earns a servicing fee based on costs of servicing plus a profit margin. The Company also has certain consulting contracts with its Mexican investment entities pursuant to which the Company is entitled to additional compensation for servicing once a specified return to the investors has been achieved. The Acquisition Partnerships in France are serviced by MCS in which the Company maintains a 10% equity interest. STRUCTURE AND FINANCING OF PORTFOLIO ASSET PURCHASES Portfolio Assets are either acquired for the account of a subsidiary of Commercial Corp. or through the Acquisition Partnerships. Portfolio Assets owned directly by a subsidiary of Commercial Corp. may be funded with loans made by Commercial Corp. to its subsidiaries, equity financing provided by an affiliate of Cargill, BOS(USA) or other third parties and secured debt that is recourse only to the Acquisition Partnership. Each Acquisition Partnership is a separate legal entity, (generally a limited partnership, but may instead be a limited liability company, trust, corporation or other type of entity). Commercial Corp. and an investor typically form a corporation to serve as the corporate general partner of each Acquisition Partnership. 7 Generally, for domestic Acquisition Partnerships, Commercial Corp. and another investor each own 50% of the general partner and a 49.5% limited partnership interest in the domestic Acquisition Partnership (the general partner owns the other 1% interest). Cargill or its affiliates are the investor in the vast majority of the Acquisition Partnerships currently in existence. See "-- Relationship with Cargill." Certain institutional investors have also held limited partnership interests in the Acquisition Partnerships and may hold interests in the related corporate general partners. The Acquisition Partnerships are generally financed by debt, secured only by the assets of the individual entity, and are nonrecourse to the Company, Commercial Corp., its co-investors and the other Acquisition Partnerships. Commercial Corp. believes that this legal structure insulates it, the Company and the other Acquisition Partnerships from certain potential risks, while permitting Commercial Corp. to share in the economic benefits of each Acquisition Partnership. Senior secured acquisition financing currently provides the majority of the funding for the purchase of Portfolios. FirstCity and the Acquisition Partnerships have relationships with a number of senior lenders including Cargill. Senior acquisition financing is obtained at variable interest rates ranging from LIBOR to prime based pricing with negotiated spreads to the base rates. The final maturity of the senior secured acquisition debt is normally two years from the date of funding of each advance under the facility. The terms of the senior acquisition debt of the Acquisition Partnerships may allow, under certain conditions, distributions to equity partners before the debt is repaid in full. Prior to maturity of the senior acquisition debt, the Acquisition Partnerships typically refinance the senior acquisition debt with long-term debt secured by the assets of partnerships. Such long-term debt generally accrues interest at a lower rate than the senior acquisition debt, has collateral terms similar to the senior acquisition debt, and permits distributions of excess cash flow generated by the Acquisition Partnership to the equity partners so long as the partnership is in compliance with applicable financial covenants. In foreign markets, Commercial Corp. conducts cautious analysis with respect to the establishment of ownership structures. Prior to investment, Commercial Corp., in conjunction with its co-investors, performs significant due diligence and planning on the tax, licensing, and other ownership issues of the particular country. As in the United States, each foreign Acquisition Partnership is a separate legal entity, generally formed as the equivalent of a limited liability company or a liquidating trust. Over the years, Commercial Corp. has cultivated successful relationships with several investors in its international acquisitions. RELATIONSHIP WITH CARGILL Cargill, a diversified financial services company, is a wholly owned subsidiary of Cargill, Incorporated, which is generally regarded as one of the world's largest privately held corporations and has offices worldwide. Cargill and its affiliates provide significant debt and equity financing to the Acquisition Partnerships. In addition, Commercial Corp. believes its relationship with Cargill significantly enhances Commercial Corp.'s credibility as a purchaser of Portfolio Assets and facilitates its ability to expand into related businesses and foreign markets. Under a Right of First Refusal Agreement and Due Diligence Reimbursement Agreement effective as of January 1, 1998, as amended (the "Right of First Refusal Agreement") among the Company, FirstCity Servicing Corporation, Cargill and its wholly owned subsidiary CFSC Capital Corp. II ("CFSC"), if the Company receives an invitation to bid on or otherwise obtains an opportunity to acquire interests in loans, receivables, real estate or other assets located in the United States, Canada, Latin America, or the Caribbean in which the aggregate amount to be bid exceeds $4 million, or $500 thousand for consumer assets, the Company is required to follow a prescribed notice procedure pursuant to which CFSC has the option to participate in the proposed purchase by requiring that such purchase or acquisition be effected through an Acquisition Partnership formed by the Company and Cargill (or an affiliate). The Right of First Refusal Agreement does not prohibit the Company from holding discussions with entities other than CFSC regarding potential joint purchases of interests in loans, receivables, real estate or other assets, provided that any such purchase is subject to CFSC's right to participate in the Company's share of the investment. The Right of First Refusal Agreement further provides that, subject to certain conditions, CFSC will pay to the Company a 8 monthly amount to cover due diligence expense, plus 50% of the third party due diligence expenses incurred by the Company in connection with proposed asset purchases. The Right of First Refusal Agreement is a restatement and extension of a similar agreement entered into among the Company, certain members of the Company's management and Cargill in 1992. The Right of First Refusal Agreement has a termination date of February 1, 2006 and will renew automatically for an additional year on an annual basis thereafter unless either party gives notice to the other of its desire to discontinue the arrangement six months prior to the termination date. Future increases in the Company's investments in Portfolio Assets acquired from institutions and government agencies may be obtained through investment entities formed with Cargill, whereby Cargill shares a general partner interest, thereby capitalizing on the expertise of Cargill whose skills complement those of the Company. BUSINESS STRATEGY Historically, Commercial Corp. has leveraged its expertise in asset resolution and servicing by investing in a wide variety of asset types across a broad geographic scope. Commercial Corp. continues to follow this investment strategy and seeks expansion opportunities into new asset classes and geographic areas when it believes it can achieve attractive risk adjusted returns. The following items are significant elements of Commercial Corp.'s business strategy in the portfolio acquisition and resolution business: - Traditional markets. Commercial Corp. believes it will continue to invest in Portfolio Assets acquired from financial institutions and government agencies, both for its own account or through investment entities formed with Cargill or one or more other co-investors. - Niche markets. Commercial Corp. believes it will continue to pursue profitable private market niches in which to invest. The niche investment opportunities that Commercial Corp. has pursued to date include (i) the acquisition of improved or unimproved real estate, including excess retail sites, and (ii) periodic purchases of single financial or real estate assets from banks and other financial institutions with which Commercial Corp. has established relationships, and from a variety of other sellers that are familiar with the Company's reputation for acting quickly and efficiently. - Foreign markets. Commercial Corp. believes that the foreign markets for Portfolio Assets are less developed than the U.S. market, and therefore provide a greater opportunity to achieve attractive risk adjusted returns. Commercial Corp. has purchased Portfolio Assets in France, Japan (sold in 1999) and Mexico and expects to continue to seek purchase opportunities outside of the United States. CONSUMER LENDING The Company historically conducted all of its consumer receivable origination activities through Consumer Corp. Consumer Corp.'s focus had been on the origination and servicing of sub-prime consumer automobile loans. Such loans are extended to borrowers who evidence an ability and willingness to repay credit, but have experienced an adverse event, such as a job loss, illness or divorce, or have had past credit problems, such as delinquency, bankruptcy, repossession or charge-offs. In the third quarter of 2000, Consumer Corp. formed Drive and transferred the entire operations of its automobile finance platform to Drive. Consumer Corp. sold a 49% equity interest in Drive IFA-GP and IFA-LP, subsidiaries of BoS(USA), a wholly owned subsidiary of Bank of Scotland. See "Background" for additional information related to formation and structure of Drive. As a result of the sale, the majority of Consumer Corp.'s operations have been accounted for under the equity method since August 1, 2000. Drive is a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers. Drive acquires retail installment contracts principally from manufacturer-franchised dealers in connection with their sale of used and new automobiles and light duty trucks to "sub-prime" customers with limited credit histories or past credit problems. At the present, Drive does not extend credit directly to consumers, nor does it purchase retail installment contracts from other financial institutions. 9 During 2002, Drive elected not to use gain on sale treatment when assets were securitized. Instead, Drive pursued a strategy to grow the balance sheet and record interest income from loans and interest expense on the related debt as incurred to build an earnings stream over time. GOVERNMENT REGULATION Portfolio Asset Acquisition and Resolution -- Certain aspects of the Company's Portfolio Asset acquisition and resolution business are subject to regulation under various federal, state and local statutes and regulations that impose requirements and restrictions affecting, among other things, disclosures to obligors, the terms of secured transactions, collection, repossession and claims handling procedures, multiple qualification and licensing requirements for doing business in various jurisdictions, and other trade practices. Consumer Lending -- Numerous federal and state consumer protection laws and related regulations impose substantial requirements upon lenders and servicers involved in consumer finance. These laws include the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z, state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code, and state motor vehicle retail installment sales acts, retail installment sales acts and other similar laws. Also, state laws impose finance charge ceilings and other restrictions on consumer transactions and require contract disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. In addition, as an affiliate of BoS (USA), Drive is subject to regulatory oversight by the Federal Reserve Bank and the Office of the Comptroller of Currency, who may periodically review the operations of Drive when examining the safety and soundness of BoS (USA)'s and Bank of Scotland's operations in the United States. COMPETITION Portfolio Asset Acquisition and Resolution -- The Portfolio Asset acquisition business is highly competitive. Some of the Company's principal competitors are substantially larger and better capitalized than the Company. Because of these resources, these companies may be better able than the Company to acquire Portfolio Assets, to pursue new business opportunities or to survive periods of industry consolidation. Generally, there are three aspects of the distressed asset business: due diligence, Portfolio management, and servicing. The Company is a major participant in all three areas. In comparison, certain of its competitors (including certain securities and banking firms) have historically competed primarily as portfolio purchasers and have customarily engaged other parties to conduct due diligence on potential Portfolio purchases and to service acquired assets, and certain other competitors (including certain banking and other firms) have historically competed primarily as servicing companies. The Company believes that its ability to acquire Portfolios for its own account and through Acquisition Partnerships will be an important component of the Company's overall future growth. Acquisitions of Portfolios are often based on competitive bidding, which involves the danger of bidding too low (which generates no business), or bidding too high (which could result in the purchase of a Portfolio at an economically unattractive price). Consumer Lending -- The automobile finance industry is the second largest consumer finance market in the United States. The vast majority of automobile financing is provided by captive finance subsidiaries of major auto manufacturers, banks, and credit unions for vehicles purchased by "A" credit consumers or "prime" consumers. Primary lenders tend to avoid or do not consistently serve the sub-prime market, in which predominantly used automobiles are purchased by borrowers with "B," "C," or "D" credit. The sub-prime consumer market estimated at approximately $60 billion per year is served mainly by independent finance companies such as Drive. The Company believes that the sub-prime, consumer automobile market is growing because of a number of factors including (i) economic trends, (ii) the extension of the average useful life of automobiles, and 10 (iii) the increasing number of late model used automobiles being offered for sale including former rental cars and off-lease vehicles. The Company believes Drive is well positioned to maximize on this opportunity due to its talented management team, strong financial partner in BoS(USA), growth of market saturation, consistent record of success of its business model and an attractive net margin environment, assisted by the low wholesale interest market. Drive is currently represented in 20 states with concentrations in the Texas, California, Georgia and North Carolina markets, which represent 34%, 14%, 6% and 6% respectively of business written in the last year. Drive purchased $415 million in receivable contracts in 2002, which represents a fraction of 1% of the potential market. The Company believes there is ample room to grow both in current markets and in new markets not yet serviced. Sub-prime competition varies from market to market, but the largest competitors seen in most markets include Americredit Corporation, Household Finance, WFS Finance and Capital One. Each of these competes in a different credit sector within Drive's market and all are currently moving upwards in the credit cycle as the economy changes. Drive believes it has opportunities to grow its market share, at the lowest end of the credit spectrum, through controlled use of its business model. EMPLOYEES The Company had 242 employees as of December 31, 2002. No employee is a member of a labor union or party to a collective bargaining agreement. The Company believes that its employee relations are good. RELATIONSHIP WITH THE BANK OF SCOTLAND FirstCity has had a significant relationship with the Bank of Scotland or its subsidiaries since September 1997. In connection with the recapitalization, FirstCity and the Senior Lenders entered into a loan agreement that refinanced the Company's existing debt with the Senior Lenders ($50 million outstanding at December 31, 2002). The Senior Lenders also provided new financing to FirstCity, with a total commitment of up to $59 million, consisting of (a) a $5 million revolving credit loan and (b) an acquisition term loan in an amount up to $54 million, which were both unfunded as of December 31, 2002. The aggregate amount of outstanding loans under the total commitment by the Senior Lenders for the refinancing and the new financing at any time may not exceed $77 million. BoS(USA) has a warrant to purchase 425,000 shares of the Company's voting Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants in connection with the existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's voting Common Stock. Drive has a warehouse line of credit with BoS(USA), which provides borrowings up to $200 million (increased from $150 million in May 2002). Drive's obligation under this arrangement at December 31, 2002 was $160 million. The debt is secured by Drive's retail installment contracts and has been extended to July 2003. Effective February 28, 2003, Drive's warehouse line of credit agreement with BoS(USA) was amended. The amendment increased the borrowing limits up to $250 million and changed the maturity date to February 27, 2004. In addition, with respect to Drive, BoS(USA) has entered into certain agreements with Drive (the "Sponsor Agreements") that require BoS(USA), under certain circumstances to (a) purchase nonconforming contracts in the event that the seller, the servicer, or the related originator fails to repurchase any contract that is required to be repurchased, (b) pay certain premiums and other expenses, (c) indemnify the collateral agent and the insurance provider from certain types of losses, and (d) to make certain secondary servicer advances. BoS(USA) has required FirstCity to indemnify BoS(USA) for 31% (the amount of its direct and indirect ownership in Drive) of any losses resulting under the terms of the Sponsor Agreements. To date, FirstCity has not paid any amounts in connection with its obligations pursuant to the Sponsor Agreements. BoS(USA) has also entered into agreements to pay certain fees and expenses, to repurchase contracts under certain circumstances and to indemnify other parties to certain securitizations of Drive from certain liabilities pursuant to the securitization documents. BoS(USA) has required FirstCity to indemnify 11 BoS(USA) for 31% (the ownership interest held directly and indirectly by Consumer Corp. In Drive) of any losses suffered by BoS(USA) under those agreements. To date, FirstCity has not paid any amounts in connection with its obligations pursuant to the those agreements. ITEM 2. PROPERTIES The Company leases all its office locations. The Company leases its current headquarters building from a related party under a noncancellable operating lease, which expires December 31, 2006. All leases of the other offices of the Company and subsidiaries expire prior to 2005. The following is a list of the Company's principal physical properties leased as of December 31, 2002.
LOCATION FUNCTION BUSINESS SEGMENT - -------- -------- ---------------- Waco, Texas................. Executive Offices Corporate/Commercial Golden Valley, Minnesota.... Servicing Offices Commercial Richmond, Virginia.......... Servicing Offices Commercial Guadalajara, Mexico......... Servicing Offices Commercial Mexico City, Mexico......... Servicing Offices Commercial Dallas, Texas............... Drive Executive & Servicing Offices Consumer Cypress, California......... Drive Servicing Offices Consumer
ITEM 3. LEGAL PROCEEDINGS On October 14, 1999, Harbor Financial Group, Inc. ("Harbor Parent"), Harbor Financial Mortgage Corporation ("Harbor") and four subsidiaries of Harbor 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. On December 14, 1999, the bankruptcy proceedings were converted to liquidation proceedings under Chapter 7 of the United States Bankruptcy Code. John H. Litzler, the Chapter 7 Trustee in the bankruptcy proceedings (the "Trustee"), initiated adversary proceedings on May 25, 2001 against FirstCity and various current and former directors and officers of FirstCity and Harbor alleging breach of fiduciary duties, mismanagement, and self-dealing by FirstCity and Harbor directors and officers, and improper transfer of funds from the Harbor related entities to FirstCity. The claims also included fraudulent and preferential transfer of assets of the Harbor entities, fraud and conspiracy. The Trustee, FirstCity, the other defendants and the insurers providing Director's and Officer's Insurance coverage for FirstCity and its subsidiaries (the "Insurers") agreed to a settlement and compromise of the claims brought in the adversary proceedings, which was approved by the Bankruptcy Court. Under the terms of the settlement agreement, the Trustee released the defendants, their affiliates and subsidiaries from any and all claims which were brought or could have been brought by the Trustee against any of the defendants, any past and present officers and directors of FirstCity or any affiliates or subsidiaries of FirstCity in consideration of (i) the payment of the sum of $3,575,000 by the Insurers to the Trustee, (ii) a payment by FirstCity to the Trustee in the sum of $225,000, and (iii) the release of any and all claims of FirstCity and its affiliates and subsidiaries and of the individual defendants in the bankruptcy proceedings against the Trustee, including administrative and expense claims, with the exception of a portion of the administrative claim of FirstCity as noted below. FirstCity's administrative claim in the Bankruptcy Case was allowed in the amount of $300,000, which claim FirstCity assigned to the Insurers and was paid by the Trustee directly to the Insurers. Periodically, FirstCity, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. FirstCity does not believe that there is any proceeding threatened or pending against it, its subsidiaries, its affiliates or the Acquisition Partnerships which, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders (the "Annual Meeting") on December 17, 2002. The following items for business were considered at the Annual Meeting. (a) ELECTION OF DIRECTORS The following were elected as directors to serve as members of the Company's Board of Directors until the Company's 2003 annual meeting of stockholders. The number of votes cast for each nominee was as follows:
VOTES NOMINEE VOTES FOR AGAINST ABSTAINED - ------- --------- ------- --------- James R. Hawkins...................................... 6,459,638 162,000 0 C. Ivan Wilson........................................ 6,459,638 52,000 0 James T. Sartain...................................... 6,459,638 162,000 0 Richard E. Bean....................................... 6,459,638 52,000 0 Dane Fulmer........................................... 6,459,638 52,000 0 Robert E. Garrison II................................. 6,459,638 52,000 0 Jeffery D. Leu........................................ 6,459,638 52,000 0
(b) RATIFICATION OF APPOINTMENT OF AUDITORS A proposal to ratify the Board of Directors' appointment of KPMG LLP as the Company's independent auditors for 2002 was approved by the stockholders. The number of votes for the proposal: 6,580,995; votes against: 17,543; abstentions: 23,100. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON AND PREFERRED STOCK DATA The Company's common stock, $.01 par value per share ("Common Stock"), and redeemable preferred stock, par value $.01 per share ("New Preferred Stock") are listed on the Nasdaq National Market System under the symbols FCFC and FCFCO, respectively. The number of holders of record of Common Stock on March 12, 2003 was approximately 527. High and low stock prices for the Common Stock and New Preferred Stock in 2002 and 2001 are displayed in the following table:
2002 2001 -------------- -------------- MARKET PRICE MARKET PRICE -------------- -------------- QUARTER ENDED HIGH LOW HIGH LOW - ------------- ------ ----- ------ ----- Common Stock: March 31........................................... $ 1.52 $1.07 $ 2.03 $1.00 June 30............................................ 1.39 0.74 1.74 1.00 September 30....................................... 1.30 0.40 2.00 1.35 December 31........................................ 1.41 0.40 2.00 0.90 New Preferred Stock: March 31........................................... $10.30 $7.00 $10.31 $7.06 June 30............................................ 10.50 5.30 8.74 7.25 September 30....................................... 12.78 8.50 8.50 5.00 December 31........................................ 14.60 9.00 8.63 6.05
13 The Company has never declared or paid a dividend on the Common Stock. The Company currently intends to retain future earnings to finance its growth and development and therefore does not anticipate that it will declare or pay any dividends on the Common Stock in the foreseeable future. Any future determination as to payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors that the Board of Directors deems relevant. The Company's loan facilities with the Senior Lenders and certain other credit facilities to which the Company and its subsidiaries are parties contain restrictions relating to the payment of dividends and other distributions. In the third quarter of 1999, dividends on the New Preferred Stock were suspended. Given the continued high debt levels of the Company, and management's priority of assuring adequate levels of liquidity, the Company does not anticipate that dividends on shares of New Preferred Stock will be paid in 2003. FirstCity also acquired the minority interest in FirstCity Holdings held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom are Senior Vice Presidents of FirstCity by issuing 400,000 shares of unregistered common stock of the Company and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million in accordance with certain cash collections from servicing income from Portfolio asset acquisitions in Mexico. The sale of the 400,000 shares of Common Stock was an exempt transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 6. SELECTED FINANCIAL DATA In December 2002, FirstCity completed a recapitalization in which holders of the New Preferred Stock exchanged 1,092,210 shares of New Preferred Stock, representing 89.3% of the 1,222,901 shares previously outstanding, for 2,417,388 shares of common stock and $10.5 million. As a result, common equity was increased by $18.9 million. Upon the completion of the recapitalization, 130,691 shares of New Preferred Stock remained outstanding. FirstCity also recorded a $4 million gain from the release of its guaranty of Drive's indebtedness to BoS(USA). BoS(USA)'s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled in connection with the recapitalization. FirstCity issued 400,000 shares of common stock to acquire the minority interest in FirstCity Holdings Inc. Simultaneously with the closing of the exchange offer for New Preferred Stock in December 2002 and the other transactions contemplated by the recapitalization, FirstCity and the Senior Lenders entered into a loan agreement that refinanced the Company's existing financings with the Senior Lenders. The Senior Lenders also provided new financing to FirstCity, with a total commitment by Bank of Scotland of up to $59 million, consisting of (a) a $5 million revolving credit loan and (b) an acquisition term loan in an amount up to $54 million. The aggregate amount of outstanding loans under the total commitment by the Senior Lenders for the refinancing and the new financing at any time may not exceed $77 million. In the third quarter of 2000, Consumer Corp. completed a sale of a 49% equity interest in its automobile finance operation to IFA-GP and IFA-LP. 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. Effective during the third quarter of 1999, management of the Company adopted formal plans to discontinue the operations of Mortgage Corp and Capital Corp. These entities comprise the operations that were previously reported as the Company's residential and commercial mortgage banking business. Because the Company formally adopted plans to discontinue the operations of Mortgage Corp. and Capital Corp., and operations at each such entity have ceased, the results of historical operations have been reflected as discontinued operations. On October 14, 1999, Harbor Financial Group, Inc. ("Harbor Parent"), Harbor Financial Mortgage Corporation ("Harbor") and four subsidiaries of Harbor filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. On December 14, 1999, these bankruptcy proceedings were converted to liquidation proceedings under Chapter 7 of the United States Bankruptcy Code. John H. Litzler, the Chapter 7 Trustee in the bankruptcy proceedings (the "Trustee"), initiated adversary proceedings on May 25, 2001 alleging various claims against FirstCity and various current and former directors and officers of FirstCity 14 and Mortgage Corp. The Trustee, FirstCity, the other defendants and the insurers providing Director's and Officer's Insurance coverage for FirstCity and its subsidiaries (the "Insurers") settled the all claims brought in the adversary proceedings with the approval of the Bankruptcy Court. Under the terms of the settlement agreement, the Trustee released the defendants, their affiliates and subsidiaries from any and all claims which were brought or could have been brought by the Trustee against any of the defendants, any past and present officers and directors of FirstCity or any affiliates or subsidiaries of FirstCity. FirstCity did not guarantee the indebtedness of Mortgage Corp. and has previously reached agreement with its Senior lenders to permanently waive any events of default related to Mortgage Corp., including bankruptcy. The Selected Financial Data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 and with the related Consolidated Financial Statements and Notes thereto under Item 8 of this Annual Report on Form 10-K, respectively. SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998 -------- -------- -------- --------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues(2)............................ $ 35,988 $ 38,411 $ 53,009 $ 58,928 $ 51,544 Expenses............................... 28,688 33,860 56,288 58,197 51,719 Earnings (loss) from continuing operations(2)........................ 5,943 2,171 (10,900) (5,819) 785 Loss from discontinued operations...... (9,714) (5,200) (5,000) (102,337) (20,977) Net loss............................... (3,771) (3,029) (15,900) (108,156) (20,192) Redeemable preferred dividends......... 2,478 2,568 2,568 2,568 5,186 Net loss to common stockholders(1)..... (6,249) (5,597) (18,468) (110,724) (25,378) Earnings (loss) from continuing operations before accounting change per common share -- Basic(1)............................. 0.40 (0.01) (1.61) (0.92) (0.58) Diluted(1)........................... 0.40 (0.01) (1.61) (0.92) (0.58) Net loss per common share -- Basic(1)............................. (0.74) (0.67) (2.21) (13.33) (3.35) Diluted(1)........................... (0.74) (0.67) (2.21) (13.33) (3.35) Dividends per common share............. -- -- -- -- -- At year end: Total assets......................... 126,456 138,893 140,991 230,622 336,643 Total notes payable.................. 96,673 91,209 93,764 169,792 165,922 Preferred stock...................... 3,705 32,101 29,533 26,965 26,323 Total common equity.................... 18,752 3,877 8,478 26,587 136,955
- --------------- (1) Includes $1.2 million of deferred tax benefits related to the recognition of benefits to be realized from net operating loss carryforwards (NOLs) in 1998 and deferred tax provisions of $7.0 million and $4.9 million, respectively, in 2000 and 1999. (2) Refer to SFAS 145 for 2000 reclassification as discussed in note 1(r) to the consolidated financial statements. ITEM 7. 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, conducted through Commercial Corp., and in consumer lending, through its investment in Drive. 15 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 of the Company's Portfolio Asset acquisition and resolution business, the sale of the interest in the automobile finance operation, and the timing of securitization transactions and structuring of Drive, period to period comparisons of the Company's results of continuing operations may not be meaningful. 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 Annual Report on Form 10-K. 2002 COMPARED TO 2001 The Company reported earnings from continuing operations of $5.9 million, including a $4 million gain from the release of its guaranty of Drive's indebtedness, in 2002 compared to $2.2 million in 2001. Loss from discontinued operations was $9.7 million in 2002 and $5.2 million in 2001. Net loss to common stockholders was $6.2 million in 2002 compared to $5.6 million in 2001. On a per share basis, basic and diluted net loss attributable to common stockholders was $.74 in 2002 compared to $.67 in 2001. Portfolio Asset Acquisition and Resolution The operating contribution of $11.2 million in 2002 increased by $3.5 million, or 45%, compared with 2001. Commercial Corp. purchased $172 million of Portfolio Assets during 2002 through the Acquisition Partnerships compared to $225 million in acquisitions in 2001. Commercial Corp.'s investment in Portfolio Assets decreased to $9.8 million in 2002 from $14.2 million in 2001 as a result of normal liquidation. Commercial Corp. invested $16.7 million in equity in Portfolio Assets in 2002 compared to $24.3 million in 2001. Servicing fee revenues. Servicing fee revenues increased by 32% to $12.7 million in 2002 from $9.6 million in 2001 primarily as a result of increased collections in domestic Acquisition Partnerships. In June 2002, three domestic Acquisition Partnerships completed a bulk loan sale of performing and non-performing Portfolio Assets with a carrying value of $59 million for proceeds of $71 million. As a result of the sale, the Company recorded servicing fee revenues of $.9 million. Also, FirstCity received higher service fees on one portfolio acquired in 2002 due to the type of assets and level of servicing required on each asset. Gain on resolution of Portfolio Assets. The net gain on resolution of Portfolio Assets was flat from year to year. Equity in earnings of investments. Equity in earnings of Acquisition Partnerships decreased 14% to $8.4 million in 2002 compared to $9.7 million in 2001. Net loss in the combined Acquisition Partnerships was $13.2 million in 2002 compared to earnings of $14.2 million in 2001 due to significant losses in Mexico, in which the Company has smaller equity investments compared to investments in the United States and France. See Note 6 of the Company's consolidated financial statements for a comparison of earnings of the Acquisition Partnerships and equity in earnings of those entities summarized by geographic region. Equity in earnings of Servicing Entities was $.8 million in 2002 compared to $1.0 million in 2001. Interest income. Interest income decreased $.7 million or 12% due to average balances in Portfolio Assets and loans receivable decreasing to $31.6 million in 2002 from $40.7 million in 2001. 16 Gain on sale of interest in equity investments. During 2002, the Company sold its investment in eight French Acquisition Partnerships to existing investors in those entities. FirstCity received proceeds of $3.4 million on the sale resulting in a gain of $1.8 million. During 2001, the Company sold equity investments in two domestic Acquisition Partnerships for $7.6 million resulting in a gain of $3.3 million. Operating expenses. Operating expenses decreased $3.9 million or 16% primarily as a result of decreased debt costs and lower write-downs of Portfolio Assets, offset by increased operating costs in Mexico. Interest and fees on notes payable decreased $1.2 million or 29% due to average debt for 2002 decreasing to $28.9 million from $42.3 million in 2001. Also, the average cost of borrowing decreased from 9.8% in 2001 to 9.2% in 2002. Salaries and benefits increased $1.9 million or 25% primarily due to increased servicing personnel in Mexico. Total personnel within the Portfolio Asset acquisition and resolution segment increased from 150 at year end 2001 to 212 at year end 2002, with the personnel in Mexico increasing from 81 at year end 2001 to 137 at year end 2002. The provision for loan and impairment losses was $.3 million in 2002 compared to $3.3 million in 2001. Minimal provisions were recorded in 2002 for performing and non-performing Portfolios, as the economic conditions during that period did not negatively impact the Company's expectation of future cash flows. In 2001, provisions of $1.6 million in four non-performing Portfolios and $.6 million in two performing Portfolios were recorded as estimated future collections were reduced primarily due to the Company accepting discounted payoffs in lieu of extended payouts. Impairment on performing Portfolio Assets is measured based on the present value of the expected future cash flows in the aggregate discounted at the loans' risk adjusted rates, which approximates the effective interest rates, or the fair value of the collateral, less estimated selling costs, if any loans are collateral dependent and foreclosure is probable. The evaluation of impairment on non-performing Portfolios is determined based on the review of the estimated future cash receipts, which represents the net realizable value of the non-performing pool. The expected future cash flows are reviewed monthly and adjusted as deemed necessary. Changes in various factors including, but not limited to, economic conditions, deterioration of collateral values, deterioration in the borrowers financial condition and other conditions described in the risk factors discussed later in this document, could have a negative impact on the estimated future cash flows of the Portfolio. Significant decreases in estimated future cash flows can reduce a Portfolio's present value to below the Company's carrying value of that Portfolio, causing impairment. The Company recorded permanent valuation impairments of $.2 million in 2002 and $1.1 million in 2001 on one real estate Portfolio due to deterioration of property values and market conditions, as well as additional expected disposal costs. For real estate Portfolios, the evaluation of impairment is determined quarterly based on the review of the estimated future cash receipts less estimated costs to sell, which represents the net realizable value of the real estate Portfolio. A valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. Impairment on loans receivable from Acquisition Partnerships is determined based on the review of the estimated future cash receipts of the underlying nonperforming Portfolio Assets of each related Acquisition Partnership. Principally all of the loans receivable are from certain Acquisition Partnerships located in Mexico. The cash flows used to pay down these loans come from collections received on non-performing Portfolio Assets owned by the Acquisition Partnerships. The estimated future cashflows of Portfolio Assets owned by Acquisition Partnerships are reviewed in a similar manner to Portfolio Assets owned by the Company. No impairment was required in 2002 and 2001 as the estimated future cash flows from the underlying Portfolio Assets of the Acquisition Partnerships supported the pay-down of the loans receivable from Acquisition Partnerships. Occupancy, data processing and other expenses decreased $1.7 million or 18% during the period due to a decrease in servicing fee expense in Mexico of $2.9 million offset by increases in foreign currency exchange rate expense of $.5 million, minority interest expense of $.3 million, occupancy expense of $.3 million and travel expense of $.1 million. In 2001 fees to third party servicers in Mexico were paid by the Company 17 through August of 2001,from September 2001 to the present the Mexican Acquisition Partnerships have paid third party servicers directly. Consumer Lending The operating contribution for 2002 was $3.5 million compared to $4.4 million (net of a $.3 million cumulative effect of accounting change) during 2001. Equity in earnings of investment. FirstCity recorded equity in loss of Drive of $.5 million in 2002 compared to equity in earnings of $5.9 million in 2001. Drive recorded a net loss of $1.6 million in 2002 compared to earnings of $14.5 million in 2001. In 2002, Drive structured its securitizations as financings and did not to use gain on sale treatment when assets were securitized. Drive pursued a strategy to grow the balance sheet and record interest income from loans and interest expense on the related debt as incurred to build an earnings stream over time. Gain on sale of interest in Drive. FirstCity recognized a $4 million deferred gain in the fourth quarter of 2002 as a result of the release of FirstCity's guaranty of a $60 million loan to Drive by BoS(USA). The guaranty was released in connection with the closing of the Company's recapitalization in December 2002. Operating expenses. Total operating expenses declined primarily as a result of minority interest income of $.1 million in 2002 compared to minority interest expense of $1.1 million in 2001. Minority interest expense is directly attributable to earnings and losses of Drive. 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 17% to $3.9 million in 2002 from $4.6 million in 2001 as a result of lower levels of debt. Other corporate overhead expenses were flat from year to year. 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 2002 and 2001. 2001 COMPARED TO 2000 The Company reported earnings from continuing operations of $2.2 million in 2001 compared to a loss from continuing operations of $10.9 million in 2000. Loss from discontinued operations was $5.2 million in 2001 and $5.0 million in 2000. Net loss to common stockholders was $5.6 million in 2001 compared to a loss of $18.5 million in 2000. On a per share basis, basic and diluted net loss attributable to common stockholders was $.67 in 2001 compared to a loss of $2.21 in 2000. Portfolio Asset Acquisition and Resolution The operating contribution of $7.7 million in 2001 increased by $4.4 million, or 130%, compared with 2000. Commercial Corp. purchased $225 million of Portfolio Assets during 2001 through the Acquisition Partnerships compared to $395 million in acquisitions in 2000. Commercial Corp.'s investment in Portfolio Assets decreased to $14.2 million in 2001 from $30.0 million in 2000. Commercial Corp. invested $24.3 million in equity in Portfolio Assets in 2001 compared to $22.1 million in 2000. Servicing fee revenues. Servicing fees increased by 27% to $9.6 million in 2001 from $7.6 million in 2000 primarily as a result of increased operations from Acquisition Partnerships in Mexico formed during 2000 and 1999. The servicing fees for the Mexico Acquisition Partnerships are based on operating expenses, unlike the Acquisition Partnerships in the United States and France, which are primarily based on collections. 18 Gain on resolution of Portfolio Assets. Proceeds from the resolution of Portfolio Assets decreased by 39% to $8.8 million in 2001 from $14.4 million in 2000. The net gain on resolution of Portfolio Assets decreased 66% or $2.1 million, primarily as a result of the decreased proceeds and lower gross profit. The weighted average gross profit percentage on the resolution of Portfolio Assets in 2001 was 11.9% as compared to 21.7% in 2000. Equity in earnings of investments. Commercial Corp.'s equity in earnings of Acquisition Partnerships increased 35% to $9.7 million in 2001 compared to $7.2 million in 2000. Net earnings in the combined Acquisition Partnerships declined 61% to $14.2 million in 2001 compared to $36.8 million in 2000 due to significant losses in Mexico, in which the Company has smaller equity investments compared to investments in the United States and France. See Note 6 of the Company's consolidated financial statements for a comparison of earnings of the Acquisition Partnerships and equity in earnings of those entities summarized by geographic region. Equity in earnings of Servicing Entities were $1.0 million in 2001 due to earnings recorded by one French entity, in which the Company has a 10% ownership. Interest income. Interest income increased $3.7 million as a result of increased balances of investment loans receivable from the Mexico Acquisition Partnerships. Gain on sale of interest in equity investments. During the period, the Company sold equity investments in domestic Acquisition Partnerships for $7.6 million resulting in a gain of $3.3 million. Operating expenses. Operating expenses increased $6.7 million or 38% 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 $.9 million or 26% due to average debt for 2001 increasing to $42.3 million from $32.9 million in 2000. Salaries and benefits increased $2.1 million or 39% primarily due to increased servicing personnel in Mexico. Total personnel within the Portfolio Asset acquisition and resolution segment increased from 105 at year end 2000 to 150 at year end 2001, with the personnel in Mexico increasing from 31 at year end 2000 to 81 at year end 2001. The provision for loan and impairment losses totaled $3.3 million in 2001 and is primarily attributed to write-downs of $1.6 million and $.6 million in estimated future collections of four nonperforming Portfolios and two performing Portfolios, respectively. Also, the Company recorded permanent valuation impairments of $1.1 million on one real estate Portfolio. In 2000, the provision of $2.0 million was related to an impairment valuation on one real estate Portfolio. In 2001, provisions of $1.6 million in four non-performing Portfolios and $.6 million in two performing Portfolios were recorded as estimated future collections were reduced primarily due to the Company accepting discounted payoffs in lieu of extended payouts. No provision was recorded in 2000 for performing or non-performing Portfolios as the economic conditions during that period did not negatively impact the Company's expectation of future cash flows. Impairment on both performing and non-performing Portfolio Assets is measured based on the present value of the expected future cash flows in the aggregate discounted at the loans' risk adjusted rates, which approximates the effective interest rates, or the fair value of the collateral, less estimated selling costs, if any loans are collateral dependent and foreclosure is probable. The expected future cash flows are reviewed monthly and adjusted as deemed necessary. Changes in various factors including, but not limited to, economic conditions, deterioration of collateral values, deterioration in the borrowers financial condition and other conditions described in the risk factors discussed later in this document, could have a negative impact on the estimated future cash flows of the Portfolio. Significant decreases in estimated future cash flows can reduce a Portfolio's present value to below the Company's carrying value of that Portfolio, causing impairment. The Company recorded permanent valuation impairments of $1.1 million in 2001 and $2.0 million in 2000 on one real estate Portfolio due to deterioration of property values and market conditions, as well as additional expected disposal costs. For Real estate Portfolios, the evaluation of impairment is determined quarterly based on the review of the estimated future cash receipts less estimated costs to sell, which 19 represents the net realizable value of the real estate Portfolio. A valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. Impairment on loans receivable from Acquisition Partnerships is determined based on the review of the estimated future cash receipts of the underlying nonperforming Portfolio Assets of each related Acquisition Partnership. Principally all of the loans receivable are from certain Acquisition Partnerships located in Mexico. The cash flows used to pay down these loans come from collections received on non-performing Portfolio Assets owned by the Acquisition Partnerships. The estimated future cashflows of Portfolio Assets owned by Acquisition Partnerships are reviewed in a similar manner to Portfolio Assets owned by the Company. No impairment was required in 2001 and 2000 as the estimated future cash flows from the underlying Portfolio Assets of the Acquisition Partnerships supported the pay-down of the loans receivable from Acquisition Partnerships. Occupancy, data processing and other expenses increased $2.4 million or 34% during the period due to increased operations in Mexico. Consumer Lending The operating contribution for 2001 was $4.4 million (net of a $.3 million cumulative effect of accounting change) compared to $10.4 million during 2000. In 2001, the contribution resulted primarily from equity in earnings of $5.9 million from Drive. The automobile finance operations were consolidated with the Company until the Company's sale of a 49% interest in Drive on August 1, 2000. Excluding equity in earnings of investment, revenues decreased due to the sale of 49% of the Company's equity interest in the automobile finance operation. Equity in earnings 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 has been recorded (since August 1, 2000) as equity in earnings of investments. 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. Other revenue of $1.7 million in 2000 consisted of $.8 million gain on early debt extinguishment, $.6 million from the sale of other assets and $.3 million in management fee income paid to the Company by certain Acquisition Partnerships. Company level interest expense decreased by 62% to $4.6 million in 2001 from $12.2 million in 2000 as a result of lower levels of debt. Other corporate overhead expenses declined $1.7 million. 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 2001 and a $7.0 million deferred tax provision in 2000. ANALYSIS OF REVENUES AND EXPENSES The Company reported a net loss to common stockholders for 2002 of $6.2 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 (loss) of investments. 20 The following table summarizes the revenues and expenses of each of the Company's business segments and presents the contribution that each business makes to the Company's operating margin. ANALYSIS OF REVENUES AND EXPENSES
YEAR ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ---------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: Servicing fees......................................... $12,665 $ 9,580 $ 7,555 Gain on resolution of Portfolio Assets................. 1,138 1,049 3,120 Gain on sale of interest in equity investments......... 1,779 3,316 -- Equity in earnings of investments...................... 9,212 10,771 7,369 Interest income........................................ 5,122 5,847 2,143 Other.................................................. 2,185 1,836 1,129 ------- ------- -------- Total................................................ $32,101 32,399 21,316 Expenses: Interest and fees on notes payable..................... 2,946 4,128 3,266 Salaries and benefits.................................. 9,611 7,679 5,531 Provision for loan and impairment losses............... 295 3,277 1,971 Occupancy, data processing and other................... 7,815 9,503 7,083 ------- ------- -------- Total................................................ 20,667 24,587 17,851 ------- ------- -------- Operating contribution before direct taxes................ $11,434 $ 7,812 $ 3,465 ======= ======= ======== Operating contribution, net of direct taxes............... $11,214 $ 7,713 $ 3,354 ======= ======= ======== CONSUMER LENDING: Revenues: Servicing fees......................................... $ -- $ -- $ 3,887 Equity in earnings (loss) of investments............... (532) 5,923 2,223 Interest income........................................ -- 5 12,882 Gain on sale of automobile loans....................... -- -- 2,836 Gain on sale of interest in Drive...................... 4,000 -- 8,091 Other.................................................. 1 9 71 ------- ------- -------- Total................................................ 3,469 5,937 29,990 ------- ------- -------- Expenses: Interest and fees on notes payable..................... 18 -- 3,217 Salaries and benefits.................................. -- -- 7,277 Provision for loan and impairment losses............... -- -- 2,420 Occupancy, data processing and other (net of minority interest)............................................ (93) 1,473 6,706 ------- ------- -------- Total................................................ (75) 1,473 19,620 ------- ------- -------- Operating contribution before direct taxes................ $ 3,544 $ 4,464 $ 10,370 ======= ======= ======== Operating contribution, net of direct taxes............... $ 3,544 $ 4,448 $ 10,362 ======= ======= ======== Total operating contribution, net of direct taxes......... $14,758 $12,161 $ 13,716 ======= ======= ========
21
YEAR ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ---------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CORPORATE OVERHEAD: Other revenue............................................. $ 418 $ 75 $ 1,703 Corporate interest expense................................ (3,858) (4,649) (12,175) Salaries and benefits, occupancy, professional and other expenses.................................................. (5,375) (5,416) (7,144) Deferred tax valuation allowance.......................... -- -- (7,000) ------- ------- -------- Earnings (loss) from continuing operations................ 5,943 2,171 (10,900) Loss from discontinued operations......................... (9,714) (5,200) (5,000) ------- ------- -------- Net loss.................................................. (3,771) (3,029) (15,900) Preferred dividends....................................... (2,478) (2,568) (2,568) ------- ------- -------- Net loss to common stockholders........................... $(6,249) $(5,597) $(18,468) ======= ======= ======== SHARE DATA: Basic and diluted earnings (loss) per common share are as follows: Earnings (loss) from continuing operations before accounting change...................................... $ 0.40 $ (0.01) $ (1.61) Discontinued operations................................ (1.14) (0.62) (0.60) Cumulative effect of accounting change................. -- (0.04) -- Net loss............................................... $ (0.74) $ (0.67) $ (2.21) Weighted average common shares outstanding............. 8,500 8,374 8,351
PORTFOLIO ASSET ACQUISITION AND RESOLUTION In 2002 the Company invested in excess of $16 million in portfolios acquired through Acquisition Partnerships. Acquisitions by the Company over the last five years are summarized as follows:
FIRSTCITY PURCHASE INVESTED PRICE EQUITY -------- --------- (IN THOUSANDS) 1st Quarter................................................. $ 24,479 $ 5,375 2nd Quarter................................................. 52,169 3,738 3rd Quarter................................................. 44,191 2,571 4th Quarter................................................. 50,930 5,033 -------- ------- Total 2002.................................................. $171,769 $16,717 Total 2001.................................................. $224,927 $24,319 Total 2000.................................................. $394,927 $22,140 Total 1999.................................................. $210,799 $11,203 Total 1998.................................................. $139,691 $28,478
The Company believes that prospects for investment in distressed assets in 2003 continue to be positive. In the U.S. due to the current economic conditions opportunities remain strong. Additionally, in the foreign markets, the availability of distressed assets in France and Mexico remains strong. The Company is looking to expand its franchise base into Central and South America as well as other parts of Europe. To capitalize on these opportunities FirstCity has implemented marketing programs to identify new opportunities for investment in Portfolio assets, both on a bid and negotiated basis. Revenues with respect to the Company's Portfolio Asset acquisition and resolution segment consist primarily of (i) servicing fees from Acquisition Partnerships for the servicing activities performed related to the assets held in the Acquisition Partnerships, (ii) equity in earnings of affiliated Acquisition Partnerships 22 and servicing entities, (iii) interest income on performing Portfolio Assets and loans receivable, and (iv) gains on disposition of assets. 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
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) INCOME FROM PORTFOLIO ASSETS AND LOANS RECEIVABLE: Average investment in Portfolio Assets and loans receivable: Domestic........................................ $ 13,068 $ 23,674 $ 34,498 Mexico.......................................... 18,534 17,012 4,898 France.......................................... -- -- -- -------- -------- -------- Total......................................... $ 31,602 $ 40,686 $ 39,396 ======== ======== ======== Income from Portfolio Assets and loans receivable: Domestic........................................ $ 2,208 $ 2,856 $ 3,817 Mexico.......................................... 3,910 3,820 1,088 France.......................................... -- -- -- -------- -------- -------- Total......................................... $ 6,118 $ 6,676 $ 4,905 ======== ======== ======== Average return: Domestic........................................ 16.9% 12.1% 11.1% Mexico.......................................... 21.1% 22.5% 22.2% France.......................................... -- -- -- Total......................................... 19.4% 16.4% 12.5% SERVICING FEE REVENUES: Domestic partnerships: $ Collected..................................... $188,081 $126,591 $ 83,689 Servicing fee revenue........................... 5,469 3,207 2,712 Average servicing fee %......................... 2.9% 2.5% 3.2% Mexico partnerships: $ Collected..................................... $ 85,303 $147,540 $ 83,931 Servicing fee revenue........................... 6,592 5,965 2,923 Average servicing fee % (1)..................... 7.7% 4.0% 3.5% Incentive service fees............................. $ 604 $ 408 $ 1,920 Total Service Fees: $ Collected..................................... $273,384 $274,131 $167,620 Servicing fee revenue........................... 12,665 9,580 7,555 Average servicing fee %......................... 4.6% 3.5% 4.5% PERSONNEL: Personnel expenses................................... $ 9,611 $ 7,679 $ 5,531 Number of personnel (at period end): Production...................................... 25 23 23 Servicing....................................... 187 127 82
23
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) INTEREST EXPENSE: Average debt....................................... $ 31,960 $ 42,310 $ 32,878 Interest expense................................... 2,946 4,128 3,266 Average cost....................................... 9.2% 9.8% 9.9% PROVISION FOR IMPAIRMENT ON PORTFOLIO ASSETS: Non-performing..................................... $ 97 $ 1,627 $ 47 Performing......................................... 4 552 -- Real estate........................................ 194 1,098 1,924 -------- -------- -------- $ 295 $ 3,277 $ 1,971 ======== ======== ========
- --------------- (1) For the Mexican Acquisition Partnerships, the Company earns a servicing fee based on costs of servicing plus a profit margin. The following table presents selected information regarding the revenues and expenses of the Acquisition Partnerships. ANALYSIS OF SELECTED REVENUES AND EXPENSES ACQUISITION PARTNERSHIPS
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) REVENUES: Gain on resolution of Portfolio Assets............. $ 89,824 $103,599 $ 75,788 Gross profit percentage on resolution of Portfolio Assets.......................................... 33.0% 41.6% 46.4% Interest income.................................... $ 14,380 $ 24,473 $ 18,049 Other income....................................... 2,348 2,929 2,195 INTEREST EXPENSE(1): Interest expense................................... 63,281 72,151 38,289 Average debt....................................... 418,075 472,987 292,707 Average cost (annualized).......................... 15.14% 15.25% 13.1% OTHER EXPENSES: Service fees....................................... $ 17,909 $ 13,735 $ 8,034 Other operating costs.............................. 16,689 22,203 8,639 Income taxes....................................... (3,022) 12,139 2,225 Foreign currency transaction....................... 24,919 (3,399) 2,079 -------- -------- -------- Total other expenses.......................... 56,495 44,678 20,977 -------- -------- -------- Net earnings (loss)........................... $(13,224) $ 14,172 $ 36,766 ======== ======== ======== Equity in earnings of Acquisition Partnerships....... $ 8,418 $ 9,742 $ 7,203 Equity in earnings of servicing entities............. 794 1,029 166 -------- -------- -------- $ 9,212 $ 10,771 $ 7,369 ======== ======== ========
- --------------- (1) Interest expense for 2002, 2001 and 2000 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 24 20%. The average cost on debt excluding the Mexican Acquisition Partnerships was 6.0%, 7.5% and 9.4% for 2002, 2001 and 2000, respectively. CONSUMER LENDING As previously noted, the Company sold a 49% equity interest in the automobile finance operation (conducted through Drive) effective August 1, 2000. Subsequent to the sale, operating activity is recorded using the equity method of accounting. As a result, the majority of operations reported in the Consumer Lending segment are for activity prior to August 1, 2000. Therefore, period-to-period comparisons of Consumer Corp.'s results of operations may not be meaningful. During 2002, Drive structured its securitizations as secured financings and did not use gain on sale treatment when assets were securitized. Instead, Drive pursued a strategy to grow the balance sheet and record interest income from loans and interest expense on the related debt as incurred to build an earnings stream over time. This change in focus resulted in FirstCity recording a loss from the equity interest in Drive of $.5 million for the year. During 2001, Drive completed securitizations of $372 million of face value of automobile receivables and those securitizations were structured as sales and Drive recorded gains from those sales. FirstCity's portion of the earnings from Drive was $5.9 million. ANALYSIS OF SELECTED DATA CONSUMER LENDING
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) Retail installment contracts acquired $..................... $415,713 $412,760 $238,437 Origination characteristics Face value to wholesale value............................. 99.85% 100.10% 100.79% Weighted average coupon................................... 21.02% 20.65% 20.42% Purchase discount (% of face value)....................... 15.54% 15.19% 15.18% Servicing portfolio Owned $................................................... $255,174 $ 82,798 $103,719 Securitized............................................... $428,098 472,381 253,569 Other..................................................... -- -- -- -------- -------- -------- Total $................................................... $683,272 $555,179 $357,288 ======== ======== ======== Owned -- number of contracts.............................. 20,806 7,416 8,096 Securitized -- number of contracts........................ 40,521 40,862 24,015 Other -- number of contracts.............................. -- -- -- -------- -------- -------- Total number of contracts................................. 61,327 48,278 32,111 ======== ======== ======== Defaults (% of total loans acquired)........................ 20.14% 18.05% 15.40% Loss on defaults (% of original loan balance at time of default).................................................. 10.26% 8.91% 6.69% Delinquencies (% of total serviced portfolio)............... 7.25% 8.43% 9.05%
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 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, equity 25 financing available under the Cargill Facility and acquisition term loan provided by the Senior Lenders, proceeds from equity market transactions and securitizations and other structured finance transactions and other special purpose short-term borrowings. In December 2002, FirstCity completed a recapitalization whereby 1,092,210 shares of New Preferred Stock, representing 89.3% of the 1,222,901 shares previously outstanding, were exchanged for 2,417,388 shares of common stock and $10.5 million. As a result, common equity was increased $18.9 million. Upon completion of the recapitalization, 130,691 shares of New Preferred Stock remained outstanding. FirstCity also recorded a $4 million gain from the release of its guaranty of Drive's indebtedness to BoS(USA). BoS(USA)'s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom are Senior Vice Presidents of FirstCity by issuing 400,000 shares of common stock and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million in accordance with certain cash collections from servicing income from Portfolio asset acquisitions in Mexico. As a part of the recapitalization, BoS(USA) provided a non-recourse loan in the amount of $16 million to FirstCity which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity's debt to the Senior Lenders. The $16 million loan is secured by a 20% interest in Drive (64.51% of FirstCity's remaining 31% interest in Drive) and other assets of Consumer Corp. to allow BoS(USA) to realize upon the 20% Drive interest in the event of default by FirstCity. In connection with the $16 million loan, FirstCity is obligated to pay an arrangement fee to BoS(USA) equal to 20% of all amounts received by FirstCity in excess of $16 million from any sale or other disposition of FirstCity's 20% interest in Drive and all dividends and other distributions paid by Drive or its general partner on FirstCity's 20% interest in Drive. In connection with the recapitalization, FirstCity and the Senior Lenders entered into a loan agreement that refinanced the Company's existing debt with the Senior Lenders ($50 million outstanding at December 31, 2002). The Senior Lenders also provided new financing to FirstCity, with a total commitment of up to $59 million, consisting of (a) a $5 million revolving credit loan and (b) an acquisition term loan in an amount up to $54 million, which were both unfunded as of December 31, 2002. The aggregate amount of outstanding loans under the total commitment by the Senior Lenders for the refinancing and the new financing at any time may not exceed $77 million. On November 4, 2002, the Nasdaq Stock Market, Inc. ("Nasdaq") notified the Company that its common stock had failed to meet the listing requirements for the Nasdaq National Market because the common stock had closed below the minimum bid price of $1.00 per share for thirty (30) consecutive trading days. Accordingly, Nasdaq provided the Company ninety (90) calendar days, or until February 2, 2003, to regain compliance. On November 21, 2002, Nasdaq notified the Company that it had regained compliance with this requirement and the matter was closed. BoS(USA) has a warrant to purchase 425,000 shares of the Company's voting Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants in connection with this existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's voting Common Stock. Currently, the Company has approximately 130,691 shares of New Preferred Stock outstanding with accrued and unpaid dividends of approximately $1.0 million. The Company's loan agreement with the Senior Lenders restricts the payment of dividends on these shares until it is repaid in full. Given the continued high debt levels of the Company, and management's priority of assuring adequate levels of liquidity, the Company does not anticipate that dividends on shares of New Preferred Stock will be paid in the foreseeable future. The Portfolio Asset acquisition and resolution group of the Company has a $35 million loan facility (increased from $30 million in August 2002) with CFSC Capital Corp. XXX, a subsidiary of Cargill. This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March, 2005. At December 31, 2002, approximately $25 million was outstanding under this facility. 26 Drive has a warehouse line of credit with BoS(USA), which provides borrowings up to $200 million (increased from $150 million in May 2002). Drive's obligation under this arrangement at December 31, 2002 was $160 million. The debt is secured by Drive's retail installment contracts and has been extended to July 2003. Effective February 28, 2003, Drive's warehouse line of credit agreement with BoS(USA) was amended. The amendment increased the borrowing limits up to $250 million and changed the maturity date to February 27, 2004. Drive also has a warehouse line of credit agreement with Variable Funding Capital Corporation, a subsidiary of First Union National Bank, which provides borrowings up to $100 million. Drive's obligation under the arrangement at December 31, 2002 was $58 million. The debt will be secured by Drive's retail installment contracts and terminates September 2003. FirstCity has not guaranteed and is not otherwise liable for this indebtedness. The Company and each of its major operating subsidiaries have entered into one or more credit facilities to finance their respective operations. Each of the operating subsidiary credit facilities is nonrecourse to the Company. The Company has agreed to indemnify BoS(USA) for up to 31% of losses, which might arise as a result of agreements BoS(USA) executed as a sponsor in connection with the securitizations completed by Drive. The Company also agreed to provide support in connection with securitizations by Consumer Corp. and Drive prior to the acquisition by BoS(USA) of the interest in Drive in August 2000. Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships and the term and warehouse facilities of Drive, as of December 31, 2002, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $134 million and outstanding borrowings of $97 million. Management believes that the BoS(USA) loan facilities, along with the liquidity from the Cargill Facility, the related fees generated from the servicing of assets, equity distributions from existing Acquisition Partnerships and wholly owned portfolios, as well as sales of interests in equity investments, will allow the Company to meet its obligations as they come due during the next twelve months. 27 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 March 17, 2003 and the outstanding borrowings under such facilities as of December 31, 2002. CREDIT FACILITIES
FUNDED AND UNFUNDED OUTSTANDING COMMITMENT BORROWINGS AMOUNT AS OF AS OF MARCH 17, DECEMBER 31, OTHER TERMS 2003 2002 INTEREST RATE AND CONDITIONS ------------ ------------ ------------- -------------- (DOLLARS IN MILLIONS) FIRSTCITY Company Senior Facility: Revolving Line of Credit........... $ 5 $ -- LIBOR + 2.75% Secured by the assets of the Company, matures December 2003 Portfolio Acquisition Loan (Term)........... 22 -- LIBOR + 2.75% Secured by the assets of the Company, matures November 2006 Tranche I (Term).... 38 38 Prime + 2.5% Secured by the assets of the Company, matures December 2006 Tranche II (Term)... 12 12 Fixed at 8.77% Secured by the assets of the Company, matures December 2007 Term credit facility............ 2 2 LIBOR + 5.0% Secured by ownership interests in certain Acquisition partnerships Matures June 2003 COMMERCIAL CORP. Acquisition term facility............ 2 2 LIBOR + 5.0% Secured by existing Portfolio Assets, matures June 2003 Term facility......... 1 1 Fixed at 10.0% Secured by Portfolio Assets, matured June 2002 Equity investment facility............ 35 25 Maximum of Fixed at Acquisition facility 8.5% or LIBOR + 4.5% for the investment in future Acquisition partnerships, Matures March 2005 Unsecured loans....... 1 1 Fixed at 4.5% to 7.0% CONSUMER CORP. Non-recourse Term loan............. 16 16 ---- ---- LIBOR + 1.0% Secured by equity interest in Drive, matures December 2007 Total............ $134 $ 97 ==== ====
28
FUNDED AND UNFUNDED OUTSTANDING COMMITMENT BORROWINGS AMOUNT AS OF AS OF MARCH 17, DECEMBER 31, OTHER TERMS 2003 2002 INTEREST RATE AND CONDITIONS ------------ ------------ ------------- -------------- (DOLLARS IN MILLIONS) UNCONSOLIDATED ACQUISITION PARTNERSHIPS TERM FACILITIES(1)....... $155 $155 ==== ==== Various rates Secured by Portfolio Assets, various Maturities UNCONSOLIDATED DRIVE $200 $160 Warehouse Facility.... LIBOR + 1%; Prime -- Secured by warehouse 1.5% inventory, matures July 2003 100 58 Warehouse Facility.... Rate based on Secured by warehouse Commercial paper rates inventory, matures combined with Certain September 2003 facility fees 152 152 Bonds payable......... Fixed at 1.87% To Secured by retail 4.09% installment Contracts, various maturities Through January 2008 Subordinate capital 65 48 Facility............ Fixed at 16% Secured by all assets of Drive, matures February 2006 Term Facility......... 14 14 ---- ---- LIBOR + 1%; Secured by residual interests, matures August 2003 $531 $432 ==== ====
- --------------- (1) In addition to the term acquisition facilities of the unconsolidated Acquisition Partnerships, the Mexican Acquisition Partnerships also have term debt of approximately $258 million outstanding as of December 31, 2002 owed to affiliates of the investor groups. Of this amount, the Company has recorded approximately $16.4 million as Loans Receivable on the Consolidated Balance Sheets. FOURTH QUARTER Net earnings for the fourth quarter of 2002 were $1.7 million, including a $2.0 million loss from discontinued operations. After deducting the accrual of dividends on the New Preferred Stock, net earnings to common equity were $1.1 million, or $0.36 per basic and diluted share. Net loss for the fourth quarter of 2001 was $1.9 million. After deducting accrual of dividends on New Preferred Stock, net loss attributable to 29 common equity was $2.6 million in 2001, or $0.05 per basic and diluted share. The following table presents a summary of operations for the fourth quarters of 2002 and 2001. CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
FOURTH QUARTER ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.................................................... $11,324 $ 8,918 Expenses.................................................... 7,376 7,993 Earnings from continuing operations......................... 3,712 287 Loss from discontinued operations........................... (2,014) (2,200) ------- ------- Net earnings (loss)......................................... 1,698 (1,913) ------- ------- Preferred dividends......................................... 552 642 ------- ------- Net earnings (loss) to common shareholders.................. $ 1,146 $(2,555) ======= ======= Net earnings (loss) from continuing operations per common share -- basic and diluted................................ $ 0.36 $ (0.05)
DISCUSSION OF CRITICAL ACCOUNTING POLICIES In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's consolidated financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. REVENUE RECOGNITION: PERFORMING, NON-PERFORMING AND REAL ESTATE POOLS. In its Portfolio Asset acquisition and resolution business, Commercial Corp. acquires Portfolio Assets that are designated as non-performing, performing or real estate. Each Portfolio is accounted for as a pool and not on an individual asset basis, except for real estate Portfolios. To date, a substantial majority of the Portfolio Assets acquired by Commercial Corp. have been designated as non-performing. Once a Portfolio has been designated as either non-performing or performing, such designation is not changed regardless of the performance of the assets comprising the Portfolio. The Company recognizes revenue from Portfolio Assets and Acquisition Partnerships based on proceeds realized from the resolution of Portfolio Assets, which proceeds have historically varied significantly and likely will continue to vary significantly from period to period. Non-Performing Portfolio Assets Non-performing Portfolio Assets consist primarily of distressed loans and loan related assets, such as foreclosed upon collateral. Portfolio Assets are designated as non-performing unless substantially all of the loans in the Portfolio are being repaid in accordance with the contractual terms of the underlying loan agreements. Such Portfolios are acquired on the basis of an evaluation by the Company of the timing and amount of cash flow expected to be derived from borrower payments or other resolution of the underlying collateral securing the loan. All non-performing Portfolio Assets are purchased at substantial discounts from their outstanding legal principal amount, the total of the aggregate of expected future sales prices and the total payments to be 30 received from obligors. Subsequent to acquisition, the amortized cost of non-performing Portfolio Assets is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, which represents the net realizable value of the non-performing pool. Once it is determined that there is impairment, a valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. The Company recorded an allowance for impairment of $.1 million in 2002 and $1.6 million in 2001. No allowance was required in 2000. Net gain on resolution of non-performing Portfolio Assets is recognized as income to the extent that proceeds collected exceed a pro rata portion of allocated cost from the Portfolio. Cost allocation is based on a proration of actual proceeds divided by total estimated proceeds of the pool. No interest income is recognized separately on non-performing Portfolio Assets. All proceeds, of whatever type, are included in proceeds from resolution of Portfolio Assets in determining the gain on resolution of such assets. Accounting for Portfolios is on a pool basis as opposed to an individual asset-by-asset basis. The actual future proceeds of the pool could vary materially from the estimated proceeds of the pool due to changes in economic conditions, deterioration of collateral values, deterioration in the borrowers financial condition and other conditions described in the risk factors discussed later in this document. In the event that the actual future proceeds of the pool exceed the current estimates the reported future results of the Company could be higher than anticipated and would result in a higher net gain on resolution of non-performing Portfolio Assets. In the event that actual future proceeds of the pool are less than current estimates the reported future results of the Company could be lower than anticipated and would result in lower net gain on resolution of non-performing Portfolio Assets or possibly require the Company to recognize impairment in the value of the pool. Performing Portfolio Assets Performing Portfolio Assets consist primarily of Portfolios of consumer and commercial loans acquired at a discount from the aggregate amount of the borrowers' obligation. Portfolios are classified as performing if substantially all of the loans in the Portfolio are being repaid in accordance with the contractual terms of the underlying loan agreements. Performing Portfolio Assets are carried at the unpaid principal balance of the underlying loans, net of acquisition discounts. Interest is accrued when earned in accordance with the contractual terms of the loans. The accrual of interest is discontinued once a loan becomes past due 90 days or more. Acquisition discounts for the Portfolio as a whole are accreted as an adjustment to yield over the estimated life of the Portfolio. Accounting for these Portfolios is on a pool basis as opposed to an individual asset-by-asset basis. Gains are recognized on the performing Portfolio Assets when sufficient funds are received to fully satisfy the obligation on loans included in the pool, either from funds from the borrower or sale of the loan. The gain recognized represents the difference between the proceeds received and the allocated carrying value of the individual loan in the pool. Impairment on each performing Portfolio is measured based on the present value of the expected future cash flows in the aggregate discounted at the loans' risk adjusted rate, which approximates the effective interest rates, or the fair value of the collateral, less estimated selling costs, if any loans are collateral dependent and foreclosure is probable. The Company recorded an allowance for impairment of $.6 million in 2001. No allowance was required in either 2002 or 2001. The actual future cash flows of the pool could vary materially from the expected future cash flows of the pool due to changes in economic conditions, changes in collateral values, deterioration in the borrowers financial condition, restructure or renewal of individual loans in the pool, sale of loans within the pool and other conditions described in the risk factors discussed later in this document. In the event that the actual future cash flows of the pool exceed the current estimates, the reported future results of the Company could be higher than anticipated and would result in a higher level of interest income due to greater amounts of discount accretion being included in revenue derived from the performing Portfolio Assets as well as higher 31 gains recognized on the sale of individual loans from a pool. In the event that actual future cash flows of the pool are less than current estimates, the reported future results of the Company could be lower than anticipated and would result in a lower level of interest income and reduced gains from the sale of assets from a pool, lower levels of interest income as a result of lower amounts of discount accretion being included in revenue derived from performing Portfolio Assets or possibly require the Company to recognize impairment in the value of the pool due to a decline in the present value of the expected future cash flows. Real Estate Portfolios Real estate Portfolios consist of real estate acquired from a variety of sellers. Such Portfolios are carried at the lower of cost or fair value less estimated costs to sell. Costs relating to the development and improvement of real estate for its intended use are capitalized, whereas those relating to holding assets are charged to expense. Income or loss is recognized upon the disposal of the real estate. Rental income, net of expenses, on real estate Portfolios is recognized when received. Accounting for the Portfolios is on an individual asset-by-asset basis as opposed to a pool basis. Subsequent to acquisition, the amortized cost of real estate Portfolios is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, which represents the net realizable value of the real estate Portfolio. A valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. The Company recorded an allowance for impairment of $.2 million in 2002, $1.1 million in 2001 and $2.0 million in 2000. DEFERRED TAX ASSET As a part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company's actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax asset and liabilities. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effects of future changes in tax laws or changes in tax rates are not anticipated. The measurement of deferred tax assets, if any, is reduced by the amount of any tax benefits that, based on available evidence, are not expected to be realized. As a result of the Merger, the Company has substantial federal NOLs that 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, such as the acquisition of Harbor in the third quarter of 1997, result in substantial changes to the estimated allowance required to value the deferred tax benefits recognized in the Company's periodic consolidated financial statements. The Company's analysis resulted in no change in 2002 and 2001 and an increase to the valuation allowance of $7.0 million in 2000. Due to the evaluation of the recoverability of the deferred tax asset recognized related to the mortgage banking operations, the Company increased its valuation allowance by $5.1 million in 1999. Similar events could occur in the future, and would impact the recognition of the Company's estimate of the required valuation allowance associated with its NOLs. If there are changes in the estimated level of the required reserve, operating results will be affected accordingly. The Company has recorded a net deferred tax asset of $20 million in the consolidated balance sheet as of December 31, 2002, which is composed of a gross deferred tax asset of $203 million net of a valuation allowance of $183 million. Realization is dependent on generating sufficient taxable income in a look forward 32 period over the next four years. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the look forward period are reduced. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company may need to establish an additional valuation allowance which could materially impact its consolidated financial position and results of operations. EQUITY INVESTMENT IN DRIVE The Company has an equity investment in Drive from which it records 31% of the results of Drive using the equity method of accounting. The following discussion addresses the critical accounting policies associated with Drive. Retail Installment Contracts, Net -- Retail installment contracts, net consist of sub-prime automobile finance receivables, which are acquired from third-party dealers at a nonrefundable discount from the contractual principal amount. At December 31, 2001, all retail installment contracts at Drive were held for sale and stated at the lower of cost or fair value in the aggregate. On July 1, 2002, Drive made a decision to change the structure of its securitization transactions to treat the transactions as secured financings for accounting purposes. Therefore, retail installment contracts at Drive are classified as held to maturity and carried at amortized cost, net of credit loss reserves at December 31, 2002, and include retail installment contracts pledged under secured financings. Drive does not hedge its retail installment contracts at this time. Management of Drive does not believe that Drive is exposed to material interest rate risk during the period contracts are not securitized. Interest is accrued when earned in accordance with the contractual terms of the retail installment contract. The accrual of interest is discontinued once a retail installment contract becomes past due 60 days or more. Discounts on retail installment contracts are recognized as adjustments to the yield of the related contract. Gain on Sale of Retail Installment Contracts prior to July 2002 -- Drive accounts for sales of retail installment contracts from securitizations in accordance with 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"). In applying SFAS 140 to Drive's securitized retail installment contract sales, Drive recognizes revenue (gain on sales of retail installment contracts) and allocates the total cost of the loans sold to financial components based on their relative fair values. During the year ended December 31, 2001, Drive sold $402 million of auto retail installment contracts in securitization transactions and recognized pre-tax gains of $39 million. Drive retained servicing responsibilities and interests in the receivables in the form of residual certificates. As of December 31, 2002, Drive was servicing $260 million of auto receivables that have been sold to certain special purpose financing trusts (the "Trusts"). In connection with the sales of retail installment contracts from securitizations, Drive receives certain residual certificates associated with the securitizations as described below. Drive and certain of its subsidiaries have entered into an agreement whereby Drive receives all the economic benefits associated with the residual certificates and conversely assumes all the risks. Under the above agreement, Drive has retained unrated interests in retail installment contracts sold which are subordinate to senior investors and certificated interest only strips for the benefit of Drive which represents the present value of the right to the excess cash flows generated by the securitized contracts which represents the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors, (ii) trustee fees, (iii) third-party credit enhancement fees (if applicable), (iv) stipulated servicing fees, and (v) estimated contract portfolio credit losses. Drive's right to receive the cash flows begins after certain over-collateralization requirements have been met, which are specific to each securitization and used as a means of credit enhancement. Valuation of Residual Interests at Drive -- Fair value of the residual interests at Drive is determined by calculating the present value of the anticipated cash flows at the time each securitization transaction closes, 33 utilizing valuation assumptions appropriate for each particular transaction. The significant valuation assumptions are related to the anticipated average lives of the retail installment contracts sold, including the effect of anticipated prepayment speeds and anticipated credit losses. The residual interests are accounted for under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Because such assets can be contractually prepaid or otherwise settled in such a way that the holder would not receive all of the recorded investment, the assets are classified as available-for-sale investments and are carried at estimated fair value with any accompanying increases or decreases in estimated fair value being recorded as unrealized gains or losses in other comprehensive income (loss). The determination of fair value is based on the present value of the anticipated excess cash flows utilizing various discount rates, prepayment speeds and cumulative loss rates. Drive assesses the carrying value of its securitization related securities for impairment in accordance with the provisions of EITF 99-20 as discussed below under "-- Effect of New Accounting Standards." There can be no assurance that the estimates used to determine the fair value of the residual certificates will remain appropriate for the life of each asset and it is reasonably possible that circumstances could change in future periods which could result in a material change in the estimates used to prepare the accompanying financial statements. If actual retail installment contract prepayments or credit losses exceed the Drive's current estimates, other than temporary impairment may be required to be recognized. The implementation of EITF 99-20 required Drive to record a cumulative effect of accounting change for other-than-temporary impairments on retained beneficial interests in certain securitized assets, which had previously been recorded as unrealized losses. As a result, in the second quarter of 2001, the Company recognized a charge for the cumulative effect of a change in accounting principle of $.3 million relating to the Company's share of Drive's cumulative effect because the Company believed it to be material to the consolidated results of operations. EQUITY INVESTMENTS IN ACQUISITION PARTNERSHIPS Commercial Corp. accounts for its investments in Acquisition Partnerships using the equity method of accounting. This accounting method generally results in the pass-through of its pro rata share of earnings from the Acquisition Partnerships' activities as if it had a direct investment in the underlying Portfolio Assets held by the Acquisition Partnership. The revenues and earnings of the Acquisition Partnerships are determined on a basis consistent with the accounting methodology applied to non-performing, performing and real estate Portfolios described in the preceding paragraphs. Commercial Corp. has ownership interests in the various partnerships that range from 3% to 50%. The Company also holds investments in servicing entities that are accounted for on the equity method. Distributions of cash flow from the Acquisition Partnerships are a function of the terms and covenants of the loan agreements related to the secured borrowings of the Acquisition Partnerships. Generally, the terms of the underlying loan agreements permit some distribution of cash flow to the equity partners so long as loan to cost and loan to value relationships are in compliance with the terms and covenants of the applicable loan agreement. Once the secured borrowings of the Acquisition Partnerships are fully paid, all cash flow in excess of operating expenses is available for distribution to the equity partners. DISCONTINUED OPERATIONS The Company recorded provisions of $9.7 million in 2002, $5.2 million in 2001 and $5.0 million in 2000 for additional losses from discontinued operations. The additional provisions primarily relate to a decrease in the estimated future gross cash receipts on residual interests in securitizations. These securities are in "run-off," and the Company is contractually obligated to service these assets. The assumptions used in the valuation model consider both industry as well as the Company's historical experience. The decrease in the estimated future gross cash receipts is a result of the actual losses exceeding the losses projected by the valuation model. As the securities "run off," assumptions are reviewed in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary. Effective during the third quarter of 1999, management of the Company adopted formal plans to discontinue the operations of Harbor Financial Group, Inc. (formerly known as FirstCity Financial 34 Mortgage Corp.) and its subsidiaries (collectively referred to as "Mortgage Corp."), and FC Capital Corp. ("Capital Corp."). These entities comprise the operations that were previously reported as the Company's residential and commercial mortgage banking business. As formal termination plans were adopted and historical business operations at each entity have ceased, the results of operations for 1999 have been reflected as discontinued operations in the accompanying consolidated statements of operations. Additionally, the net assets related to the resolution of activity from the discontinued operations have been reflected in the accompanying consolidated balance sheets. Revenues from discontinued operations were zero in 2002, 2001 and 2000. The only assets remaining from discontinued operations are the investment securities resulting from the retention of residual interests in securitization transactions. These residual interests are classified as discontinued operations even though the liquidation or run-off of the securitized assets extends longer than one year because the Company is contractually obligated to service the securitized assets as master servicer. The Company has considered the estimated future gross cash receipts for such investment securities in the computation of the loss from discontinued operations. The cash flows are collected over a period of time and are valued using prepayment assumptions of 28% to 33% for fixed rate loans and 25% to 33% for variable rate loans. Overall loss rates are estimated from 3% to 10% of collateral. The Company uses modeling techniques to estimate future results from discontinued operations that consider the contractual terms of the securitization structures and using the assumptions stated above. The actual cash flows received from the residual interests in the future could differ materially positively or negatively due to factors such as economic conditions, changes in collateral values, fluctuating interest rates, differences between actual prepayments and actual losses, which differ from the assumptions used in the estimating process. ESTIMATES OF FUTURE CASH RECEIPTS The Company uses estimates to determine future cash receipts from Portfolio Assets. These estimates of future cash receipts from acquired portfolio asset pools are utilized in four primary ways: (i) to calculate the allocation of cost of sales of non-performing Portfolios; (ii) to determine the effective yield of performing Portfolios; (iii) to determine the reasonableness of settlement offers received in the liquidation of the Portfolio Assets; and (iv) to determine whether or not there is impairment in a pool of Portfolio Assets Calculation of the estimates of future cash receipts The Company uses a proprietary asset management software program to manage the Portfolio Assets it owns and services. Each asset within a pool is analyzed by an account manager who is responsible for analyzing the characteristics of each asset within a pool. The account manager projects future cash receipts and expenses related to each asset and the sum of which provides the total estimated future cash receipts related to a particular purchased asset pool. These estimates are routinely monitored by the Company to determine reasonableness of the estimates provided. Risks associated with these estimates The Company has in the past been able to establish with reasonable accuracy the estimated future cash receipts over the life of a purchased asset pool. Changes in economic conditions, fluctuations in interest rates, deterioration of collateral values, and other factors described in the risk factors section could cause the estimates of future cash flows to be materially different than actual cash receipts. The effects of an increase in the estimated future cash receipts would generally increase revenues from Portfolio Assets by increasing gross profit on a non-performing or real estate pool and increasing the effective yield on a performing Portfolio while a decrease in future cash receipts would generally have the effect of reducing revenues by reducing gross profit on a non-performing or real estate pool and decreasing the effective 35 yield on a performing Portfolio. In some cases a reduction in the total future cash receipts by collecting those cash receipts sooner than expected could have a positive impact on the Company's revenues from portfolio assets due to reduced interest expense and other carrying costs associated with the Portfolio Assets. Likewise an increase in future cash receipts, although generally a positive trend, could have a negative impact on future revenues of the Company due to higher levels of interest expense and other carrying costs of the Portfolios negating any potentially positive effects. CONSOLIDATION POLICY The accompanying consolidated financial statements include the accounts of all of the majority owned subsidiaries of the Company. All significant intercompany transactions and balances have been eliminated in consolidation. Investments in 20% to 50% owned affiliates are accounted for on the equity method since the Company has the ability to exercise significant influence over operating and financial policies of those affiliates. For domestic Acquisition Partnerships, the Company owns a limited partner interest and generally shares in a general partner interest. Regarding the foreign investments, the Company participates as a limited partner. In all cases the Company's direct and indirect equity interest never exceeds 50%. Investments in less than 20% owned affiliates are also accounted for on the equity method. These investments are partnerships formed to share in the risks and rewards in developing new markets as well as to pool resources. Also, the Company has the ability to exercise significant influence over operating and financial policies, despite its comparatively smaller equity percentage, due to its leading role in the formation of these partnerships as well as its involvement in the day-to-day management activities. RELATIONSHIP WITH CARGILL Cargill is a wholly owned subsidiary of Cargill, Incorporated, which is generally regarded as one of the world's largest privately held corporations and has offices worldwide. Cargill and its affiliates provide significant debt and equity financing to the Acquisition Partnerships. In addition, Commercial Corp. believes its relationship with Cargill significantly enhances Commercial Corp.'s credibility as a purchaser of Portfolio Assets and facilitates its ability to expand into related businesses and foreign markets. Under the Right of First Refusal Agreement, if the Company receives an invitation to bid on or otherwise obtains an opportunity to acquire interests in loans, receivables, real estate or other assets located in the United States, Canada, Latin America, or the Caribbean in which the aggregate amount to be bid exceeds $4 million, or $500 thousand for consumer assets, the Company is required to follow a prescribed notice procedure pursuant to which CFSC has the option to participate in the proposed purchase by requiring that such purchase or acquisition be effected through an Acquisition Partnership formed by the Company and Cargill (or an affiliate). The Right of First Refusal Agreement does not prohibit the Company from holding discussions with entities other than CFSC regarding potential joint purchases of interests in loans, receivables, real estate or other assets, provided that any such purchase is subject to CFSC's right to participate in the Company's share of the investment. The Right of First Refusal Agreement further provides that, subject to certain conditions, CFSC will bear 50% of the due diligence expenses incurred by the Company in connection with proposed asset purchases. The Right of First Refusal Agreement is a restatement and extension of a similar agreement entered into among the Company, certain members of the Company's management and Cargill in 1992. The Right of First Refusal Agreement has a termination date of February 1, 2006 and will renew automatically for an additional year on an annual basis thereafter unless either party gives notice to the other of its desire to discontinue the arrangement six months prior to the termination date. Future increases in the Company's investments in Portfolio Assets acquired from institutions and government agencies may be obtained through investment entities formed with Cargill, whereby Cargill shares a general partner interest, thereby capitalizing on the expertise of Cargill whose skills complement those of the Company. 36 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following tables present contractual cash obligations and commercial commitments of the Company as of December 31, 2002. See Notes 7, 9, 12 and 14 of the Notes to Consolidated Financial Statements (dollars in thousands).
PAYMENTS DUE BY PERIOD ----------------------------------------------- LESS THAN ONE TO FOUR TO TOTAL ONE YEAR THREE YEARS FIVE YEARS -------- --------- ----------- ---------- CONTRACTUAL CASH OBLIGATIONS Notes payable secured by Portfolio Assets, loans receivable and equity in Acquisition Partnerships................. $ 29,875 $5,276 $24,599 $ -- Note payable secured by equity interest in Drive.................................... 16,000 -- -- 16,000 Unsecured notes............................ 225 225 -- -- Company credit facility.................... 49,290 3,782 33,508 12,000 Operating leases........................... 966 296 515 155 New Preferred Stock(1)..................... 4,289 -- 4,289 -- -------- ------ ------- ------- $100,645 $9,579 $62,911 $28,155 ======== ====== ======= =======
AMOUNT OF COMMITMENT EXPIRATION PERIOD ---------------------------------------- UNFUNDED LESS THAN ONE TO COMMITMENTS ONE YEAR THREE YEARS ------------ ---------- ------------ COMMERCIAL COMMITMENTS............................. $ -- $ -- $ --
- --------------- (1) New Preferred Stock as shown above includes $3.7 million payable at December 31, 2002 plus $.6 million of unaccrued dividends through September 2005. CHANGES IN INTERNAL CONTROLS There have been no changes in internal controls or in other factors that significantly changed internal controls during the fiscal year ended December 31, 2002. EFFECT OF NEW ACCOUNTING STANDARDS In March 2001, the Company adopted the provisions of EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ("EITF 99-20"), which requires that other-than-temporary impairments in beneficial interests be written down to fair value with the resulting charge being included in operations. The implementation of EITF 99-20 required Drive to record a cumulative effect of accounting change for other-than-temporary impairments on retained beneficial interests in certain securitized assets, which had previously been recorded as unrealized losses. As a result, in the second quarter of 2001, the Company recognized a charge for the cumulative effect of a change in accounting principle of $.3 million relating to the Company's share of Drive's cumulative effect because the Company believed it to be material to the consolidated results of operations. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible Assets ("SFAS 142") and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with the SFAS 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of ("SFAS 121") and SFAS 144 after it 37 superceded SFAS 121. The adoption of SFAS 142 did not have a material impact on the Company's consolidated financial statements, as unamortized goodwill at December 31, 2001 was $.1 million. SFAS 144 addresses the accounting model for long-lived assets to be disposed of by sale and resulting implementation issues. This statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. It also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. Additionally, discontinued operations that are not disposed of within one year must be reclassified as assets held and used unless the discontinued segment will be (1) abandoned through the liquidation or run-off of operations because the entity is obligated by regulation or contract to provide services after it ceases accepting all new business and (2) is being reported as a discontinued operation when SFAS 144 is initially applied. The only assets remaining from discontinued operations are the investment securities resulting from the retention of residual interests in securitization transactions. Since the Company is contractually obligated to service the securitized assets, the adoption of SFAS 144 had no impact on the Company's consolidated financial statements. On April 1, 2002, the Company elected early adoption of SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. As it relates to FirstCity, SFAS 145 eliminates the extraordinary gain classification on early debt extinguishments. Instead, the gains associated with the early extinguishment of debt have been recorded in other income in the consolidated statements of operations. The result of this adoption did not modify or adjust net loss for any period and does not impact the Company's compliance with various debt covenants. The effect of SFAS 145 resulted in the extinguishment of debt of $.7 million in 2002 being included in other income in the consolidated statements of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, an Amendment of FASB Statement No. 123 ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS 123's fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income or loss and earnings (loss) per share in annual and interim consolidated financial statements. SFAS 148 does not amend SFAS 123 to require companies to account for stock-based employee compensation using the fair value method, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB Opinion No. 25. As allowed by SFAS 123, the Company has elected to continue to utilize the accounting method prescribed by APB Opinion No. 25 and has adopted the disclosure requirements of SFAS 148 as of December 31, 2002. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes that the adoption of FIN 45 will have no material impact on its consolidated financial statements and applicable disclosure requirements are included in the notes to its consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be 38 consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. FIN 46 also requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the entity will consolidate or disclose information about variable interest entities when FIN 46 becomes effective. Although management is still evaluating the impact of FIN 46, the adoption is not expected to have a material effect. Presently the Company has identified one Acquisition Partnership, which may qualify for consolidation in accordance with FIN 46. This Acquisition Partnership holds real estate that is being developed for its intended use. As of December 31, 2002, the total assets that would be consolidated into the Company's consolidated financial statements were $1.4 million. The maximum loss exposure to the Company related to this Acquisition Partnership is estimated to be $.3 million as of December 31, 2002. RISK FACTORS AVAILABILITY OF PORTFOLIO ASSETS The Portfolio Asset acquisition and resolution business is affected by long-term cycles in the general economy. The Company cannot predict its future annual acquisition volume of Portfolio Assets. Moreover, future Portfolio Asset purchases will depend on the availability of Portfolios offered for sale, the availability of capital and the Company's ability to submit successful bids to purchase Portfolio Assets. The acquisition of Portfolio Assets is highly competitive in the United States. This may require the Company to acquire Portfolio Assets at higher prices thereby lowering profit margins on the resolution of such Portfolios. To offset these changes in the domestic arena, the Company continues to develop its presence in other markets. Under certain circumstances, the Company may choose not to bid for Portfolio Assets that it believes cannot be acquired at attractive prices. As a result of all the above factors, Portfolio Asset purchases, and the revenue derived from the resolution of Portfolio Assets, may vary significantly from quarter to quarter. ASSUMPTIONS UNDERLYING PORTFOLIO ASSET PERFORMANCE The purchase price and carrying value of Portfolio Assets acquired by Commercial Corp. are determined largely by estimating expected future cash flows from such assets. Commercial Corp. develops and revises such estimates based on its historical experience and current market conditions, and based on the discount rates that the Company believes are appropriate for the assets comprising the Portfolios. In addition, many obligors on Portfolio Assets have impaired credit, with risks associated with such obligors similar to the risks described in respect of borrowers under "Credit Impaired Borrowers at Drive." If the amount and timing of actual cash flows is materially different from estimates, the Company's consolidated financial position, results of operations and business prospects could be materially adversely affected. RISK ASSOCIATED WITH FOREIGN OPERATIONS Commercial Corp. has acquired, and manages and resolves, Portfolio Assets located in France and Mexico and is actively pursuing opportunities to purchase additional pools of distressed assets in these locations as well as other areas of Western Europe, Southeast Asia and Central and South America. Foreign operations are subject to various special risks, including currency translation risks, currency exchange rate fluctuations, exchange controls and different political, social and legal environments within such foreign markets. To the extent future financing in foreign currencies is unavailable at reasonable rates, the Company would be further exposed to currency translation risks, currency exchange rate fluctuations and exchange controls. In addition, earnings of foreign operations may be subject to foreign income taxes that reduce cash flow available to meet debt service requirements and other obligations of the Company, which may be payable even if the Company has no earnings on a consolidated basis. Any or all of the foregoing could have a material adverse effect on the Company's consolidated position, results of operations and business prospects. 39 IMPACT OF CHANGING INTEREST RATES Because most of the Company's borrowings are at variable rates of interest, the Company will be impacted by fluctuations in interest rates. However, certain effects of changes in interest rates, such as increased prepayments of outstanding loans, cannot be mitigated. Fluctuations in interest rates could have a material adverse effect on the Company's consolidated financial position, results of operations and business prospects. A substantial and sustained decline in interest rates may adversely impact the amount of distressed assets available for purchase by Commercial Corp. The value of the Company's interest-earning assets and liabilities may be directly affected by the level of and fluctuations in interest rates, including the valuation of any residual interests in securitizations that would be severely impacted by increased loan prepayments resulting from declining interest rates. Conversely, a substantial and sustained increase in interest rates could adversely affect the ability of the Company to originate loans and could reduce the gains recognized by the Company upon their securitization and sale. Fluctuating interest rates also may affect the net interest income earned by the Company resulting from the difference between the yield to the Company on loans held pending sale and the interest paid by the Company for funds borrowed under the Company's warehouse credit facilities or otherwise. See "Item 7A. -- Quantitative and Qualitative Disclosures About Market Risk." CONTINUING NEED FOR FINANCING General. The successful execution of the Company's business strategy depends on its continued access to financing. In addition to the need for such financing, the Company must have access to liquidity to invest as equity or subordinated debt to meet its capital needs. Liquidity is generated by the cash flow to the Company from subsidiaries, access to the public debt and equity markets and borrowings incurred by the Company. The Company's access to the capital markets is affected by such factors as changes in interest rates, general economic conditions, and the perception in the capital markets of the Company's business, results of operations, leverage, financial position and business prospects. In addition, the Company's ability to issue and sell common equity (including securities convertible into, or exercisable or exchangeable for, common equity) is limited as a result of the tax laws relating to the preservation of the NOLs available to the Company as a result of the Merger. There can be no assurance that the Company's funding relationships with commercial banks, investment banks and financial services companies (including Cargill and the Senior Lenders) that have previously provided financing for the Company and its subsidiaries will continue past their respective current maturity dates. Some credit facilities to which the Company and its subsidiaries are parties have short-term maturities. If these credit facilities are not extended and the Company or its subsidiaries cannot find alternative funding sources on satisfactory terms, or at all, the Company's consolidated financial position, results of operations and business prospects would be materially adversely affected. See "Liquidity and Capital Resources." Each of the Company and its major operating subsidiaries has its own source of debt financing. In certain circumstances, a default by the Company or any of its major operating subsidiaries in respect of indebtedness owed to a third party constitutes a default under the Company's credit facility. Although the Company intends to segregate the debt obligations of each such subsidiary, there can be no assurance that its existing financing sources will continue to agree to such arrangements or that alternative financing sources that would accept such arrangements would be available. In the event the Company's major operating subsidiaries are compelled to accept cross-guarantees, or cross-default or cross-acceleration provisions in connection with their respective credit facilities, financial difficulties experienced by one of the Company's subsidiaries could adversely impact the Company's other subsidiaries. Dependence on Warehouse Financing at Drive. As is customary in the consumer lending businesses, Drive depends upon warehouse credit facilities with financial institutions or institutional lenders to finance the origination and purchase of loans on a short-term basis pending sale or securitization. Implementation of the Drive's business strategy requires the continued availability of warehouse credit facilities, and may require increases in the permitted borrowing levels under such facilities. There can be no assurance that such 40 financing will be available on terms satisfactory to Drive. The inability of Drive or its subsidiaries to arrange additional warehouse credit facilities, to extend or replace existing facilities when they expire or to increase the capacity of such facilities may have a material adverse effect on the Company's consolidated position, results of operations and business prospects. RISK OF DECLINING VALUE OF COLLATERAL The value of the collateral securing automobile and other consumer loans and loans acquired for resolution, as well as real estate or other acquired distressed assets, is subject to various risks, including uninsured damage, change in location or decline in value caused by use, age or market conditions. Any material decline in the value of such collateral could adversely affect the consolidated financial position, results of operations and business prospects of the Company. RISKS OF SECURITIZATION BY DRIVE Significance of Securitization. The Company continues to believe that Drive's ability to securitize sub-prime automobile loans is necessary to efficiently finance the volume of assets expected to be generated. Accordingly, adverse changes in the secondary market for such loans could impair Drive's ability to purchase and securitize on a favorable or timely basis. Any such impairment could have a material adverse effect upon Drive's consolidated position, results of operations and business prospects. Proceeds from the securitization of acquired loans are required to be used to repay borrowings under warehouse credit facilities, which makes such facilities available to finance the purchase of additional loan assets. There can be no assurance that, as Drive's volume of loans purchased increases, Drive will be able to securitize its loan production efficiently. An inability of Drive to efficiently securitize its loan production could have a material adverse effect on the Company's consolidated position, results of operations and business prospects. Securitization transactions may be affected by a number of factors, some of which are beyond Drive's control, including, among other things, the adverse financial condition of, or developments related to, some of Drive's competitors, conditions in the securities markets in general, and conditions in the asset-backed securitization market. Drive's securitizations typically utilize credit enhancements in the form of financial guaranty insurance policies in order to achieve enhanced credit ratings. Failure to obtain insurance company credit enhancement could adversely affect the timing of or ability of Drive to effect securitizations. In addition, the failure to satisfy rating agency requirements with respect to loan pools would adversely impact Drive's ability to effect securitizations. Contingent Risks. During 2002, Drive began structuring securitization transactions as secured financings and retaining the assets on the balance sheet and thus retains the credit risk on substantially all loans securitized in this manner. Drive is subject to various business risks associated with the lending business, including the risk of borrower default, the risk of foreclosure and the risk that a rapid increase in interest rates would result in a decline in the future net interest margins on future securitizations. Drive expects that the terms of its securitizations will require it to establish deposit accounts or build over-collateralization levels through retention of distributions otherwise payable to Drive who holds the subordinated interests in the securitization. Drive also expects to be required to commit to repurchase or replace loans that do not conform to the representations and warranties made by Drive at the time of securitization. Retained Risks of Securitized Loans. Drive makes various representations with respect to the loans that it securitizes. With respect to acquired loans, Drive's representations rely in part on similar representations made by the originators of such loans when Drive purchased them. In the event of a breach of its representations, Drive may be required to repurchase or replace the related loan using its own funds. While Drive may have a claim against the originator in the event of a breach of any of these representations made by the originators, the Company's ability to recover on any such claim will be dependent on the financial condition of the originator. There can be no assurance that Drive will not experience a material loss associated with any of these contingencies. Performance Assumptions. Securitizations completed by Drive for the foreseeable future will be structured as debt financings and will result in a growth of the net interest margin and grow Drive's balance 41 sheet. Prior to July 2002 Drive structured the securitizations as sales and retains subordinated interests in those securitizations. Management of Drive makes a number of assumptions in determining the estimated fair value for the subordinated interests. These assumptions include, but are not limited to, prepayment speeds, default rates and subsequent losses on the underlying loans, and the discount rates used to present value the future cash flows. All of the assumptions are subjective. Varying the assumptions can have a material effect on the present value determination in one securitization as compared to any other. Subsequent events will cause the actual occurrences of prepayments, losses and interest rates to be different from the assumptions used for such factors at the time of the recognition of the sale of the loans. The effect of the subsequently occurring events could cause a re-evaluation of the carrying values of the previously estimated values of the subordinated interests and excess spreads and such adjustment could be material. Defaults and losses on defaults increased in 2002 and 2001 due to recession related factors. Of major importance was the reduction in used car values caused by the events of September 11, 2001, when, facing significant slowdowns in travel, the car rental agencies reduced their fleets dramatically. This, compounded by the zero percent financing offered on new cars, flooded the used car market creating downward pressure on used car values. Because the subordinated interests to be retained by Drive represent claims to future cash flow that are subordinated to holders of senior interests, Drive retains a significant portion of the risk of whether the full value of the underlying loans may be realized. In addition, holders of the senior interests may have the right to receive certain additional payments on account of principal in order to reduce the balance of the senior interests in proportion to the credit enhancement requirements of any particular transaction. Such payments for the benefit of the senior interest holders will delay the payment, if any, of excess cash flow to Drive as the holder of the subordinated interests. RISK OF MINORITY INVESTMENT IN DRIVE Although the Company continues to have some influence on Drive and its operations, due to the sale of 49% of its interest, the Company now maintains a minority interest in Drive. There can be no guarantee that Drive's future operations will be consistent with the Company's goals CREDIT IMPAIRED BORROWERS AT DRIVE Drive's sub-prime borrowers generally are unable to obtain credit from traditional financial institutions due to factors such as an impaired or poor credit history, low income or other adverse credit events. Drive is subject to various risks associated with these borrowers, including, but not limited to, the risk that the borrowers will not satisfy their debt service obligations and that the realizable value of the assets securing their loans will not be sufficient to repay the borrowers' debt. While the Company believes that the underwriting criteria and collection methods Drive employs enable it to identify and control the higher risks inherent in loans made to such borrowers, and that the interest rates charged compensate Drive for the risks inherent in such loans, no assurance can be given that such criteria or methods, or such interest rates, will afford adequate protection against, or compensation for, higher than anticipated delinquencies, foreclosures or losses. The actual rate of delinquencies, foreclosures or losses could be significantly accelerated by an economic downturn or recession. Consequently, the Company's consolidated financial position, results of operations (primarily Consumer Corp.'s 31% equity earnings in Drive) and business prospects could be materially adversely affected. Retail installment contracts at Drive are held for sale and stated at the lower of cost or fair value in the aggregate. Drive does not hedge its retail installment contracts while held for sale. While management of Drive does not believe Drive is exposed to material interest rate risk during the period contracts are held for sale, there can be no assurance that future material valuation impairments will not be required. AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS The Company believes that, as a result of the Merger, approximately $596 million of NOLs were available to the Company to offset future taxable income as of December 31, 1995. Since December 31, 1995, the Company has generated an additional $134 million in tax operating losses. Accordingly, as of December 31, 2002, the Company believes that it has approximately $730 million of NOLs available to offset future taxable income. Out of the total $730 million of NOLs, the Company estimates it will be able to utilize 42 $57.4 million, which equates to a $20.1 million deferred tax asset on the Company's books and records. However, because the Company's position in respect of its $596 million NOLs resulting from the Merger is based upon factual determinations and upon legal issues with respect to which there is uncertainty and because no ruling has been obtained from the Internal Revenue Service (the "IRS") regarding the availability of the NOLs to the Company, there can be no assurance that the IRS will not challenge the availability of such NOLs and, if challenged, that the IRS will not be successful in disallowing this portion of the Company's NOLs, with the result that the Company's $20.1 million deferred tax asset would be reduced or eliminated. Some of the NOLs may be carried forward to offset future federal taxable income of the Company through the year 2022; however, the availability of some of the NOLs begins to expire beginning in 2005. The ability of the Company to utilize such NOLs will be severely limited if there is a more than 50% ownership change of the Company during a three-year testing period within the meaning of section 382 of the Internal Revenue Code of 1986, as amended (the "Tax Code"). If the Company were unable to utilize its NOLs to offset future taxable income, it would lose significant competitive advantages that it now enjoys. Such advantages include, but are not limited to, the Company's ability to offset non-cash income recognized by the Company in connection with certain securitizations, to generate capital to support its expansion plans on a tax-advantaged basis, to offset its and its consolidated subsidiaries' pretax income, and to have access to the cash flow that would otherwise be represented by payments of federal tax liabilities. ASSUMPTIONS REGARDING RECOGNITION OF DEFERRED TAX ASSET As noted above, the Company has NOLs available for federal income tax purposes to offset future federal taxable income, if any, through the year 2022. A valuation allowance is provided to reduce the deferred tax assets to a level, which, more likely than not, will be realized. Realization is determined based on management's expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income prior to expiration of the net operating loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset, net of the allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The change in valuation allowance represents a change in the estimate of the future taxable income during the carryforward period since the prior year-end and utilization of net operating loss carryforwards since the Merger. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly. See "Discussion of Critical Accounting Policies -- Deferred Tax Asset." ENVIRONMENTAL LIABILITIES The Company, through its subsidiaries and affiliates, acquires real property in its Portfolio Asset acquisition and resolution business. There is a risk that properties acquired by the Company could contain hazardous substances or waste, contaminants or pollutants. The Company may be required to remove such substances from the affected properties at its expense, and the cost of such removal may substantially exceed the value of the affected properties or the loans secured by such properties. Furthermore, the Company may not have adequate remedies against the prior owners or other responsible parties to recover its costs, either as a matter of law or regulation, or as a result of such prior owners' financial inability to pay such costs. The Company may find it difficult or impossible to sell the affected properties either prior to or following any such removal. COMPETITION All of the businesses in which the Company operates are highly competitive. Some of the Company's principal competitors are substantially larger and better capitalized than the Company. Because of their resources, these companies may be better able than the Company to obtain new customers for loan production, to acquire Portfolio Assets, to pursue new business opportunities or to survive periods of industry 43 consolidation. Access to and the cost of capital are critical to the Company's ability to compete. Many of the Company's competitors have superior access to capital sources and can arrange or obtain lower cost of capital, resulting in a competitive disadvantage to the Company with respect to such competitors. In addition, certain of the Company's competitors may have higher risk tolerances or different risk assessments, which could allow these competitors to establish lower margin requirements and pricing levels than those established by the Company. In the event a significant number of competitors establish pricing levels below those established by the Company, the Company's ability to compete would be adversely affected. GENERAL ECONOMIC CONDITIONS Periods of economic slowdown or recession, or declining demand for commercial real estate, automobile loans or other commercial or consumer loans may adversely affect the Company's business. Economic downturns may reduce the number of loan originations by the Company's consumer business and negatively impact its securitization activity and generally reduce the value of the Company's assets. In addition, periods of economic slowdown or recession, whether general, regional or industry-related, may increase the risk of default on loans and could have a material adverse effect on the Company's consolidated financial condition, results of operations and business prospects. Such periods also may be accompanied by declining values of automobiles and other property securing outstanding loans, thereby weakening collateral coverage and increasing the possibility of losses in the event of default. Due to significant increases in automobiles for sale during the recent recessionary economic period have depressed the prices at which such collateral may be sold or delayed the timing of such sales. There can be no assurance that there will be adequate markets for the sale of repossessed automobiles. Any additional deterioration of such markets could reduce recoveries from the sale of collateral. Such economic conditions could also adversely affect the resolution of Portfolio Assets, lead to a decline in prices or demand for collateral underlying Portfolio Assets, or increase the cost of capital invested by the Company and the length of time that capital is invested in a particular Portfolio. All or any one of these events could decrease the rate of return and profits to be realized from such Portfolio and materially adversely affect the Company's consolidated financial position, results of operations and business prospects. GOVERNMENT REGULATION Some aspects of the Company's business are subject to regulation, examination and licensing under various federal, state and local statutes and regulations that impose requirements and restrictions affecting, among other things, credit activities, maximum interest rates, finance and other charges, disclosures to obligors, the terms of secured transactions, collection, repossession and claims handling procedures, multiple qualification and licensing requirements for doing business in various jurisdictions, and other trade practices. The Company believes it is currently in compliance in all material respects with applicable regulations, but there can be no assurance that the Company will be able to maintain such compliance. Failure to comply with, or changes in, these laws or regulations, or the expansion of the Company's business into jurisdictions that have adopted more stringent regulatory requirements than those in which the Company currently conducts business, could have an adverse effect on the Company by, among other things, limiting the income the Company may generate on existing and additional loans, limiting the states in which the Company may operate or restricting the Company's ability to realize on the collateral securing its loans. See "Item 1 -- Business -- Government Regulation." LITIGATION On October 14, 1999, Harbor Financial Group, Inc. ("Harbor Parent"), Harbor Financial Mortgage Corporation ("Harbor") and four subsidiaries of Harbor 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. On December 14, 1999, the bankruptcy proceedings were converted to liquidation proceedings under Chapter 7 of the United States Bankruptcy Code. John H. Litzler, the Chapter 7 Trustee in the bankruptcy proceedings (the "Trustee"), initiated adversary proceedings on May 25, 2001 against 44 FirstCity and various current and former directors and officers of FirstCity and Harbor alleging breach of fiduciary duties, mismanagement, and self-dealing by FirstCity and Harbor directors and officers, and improper transfer of funds from the Harbor related entities to FirstCity. The claims also included fraudulent and preferential transfer of assets of the Harbor entities, fraud and conspiracy. The Trustee, FirstCity, the other defendants and the insurers providing Director's and Officer's Insurance coverage for FirstCity and its subsidiaries (the "Insurers") have settled the claims brought in the adversary proceedings with the approval of the Bankruptcy Court. Under the terms of the settlement agreement, the Trustee released the defendants, their affiliates and subsidiaries from any and all claims which were brought or could have been brought by the Trustee against any of the defendants, any past and present officers and directors of FirstCity or any affiliates or subsidiaries of FirstCity. Other claims could be asserted by parties alleging to be harmed by the failure of Harbor, Harbor Parent and their subsidiaries. Periodically, FirstCity, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. FirstCity does not believe that there is any proceeding threatened or pending against it, its subsidiaries, its affiliates or the Acquisition Partnerships which, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships. Industry participants in the consumer lending businesses from time to time are named as defendants in litigation involving alleged violations of federal and state consumer protection or other similar laws and regulations. A judgment against FirstCity or Drive in connection with any such litigation could have a material adverse effect on the Company's consolidated financial position, results of operations and business prospects. RELATIONSHIP WITH AND DEPENDENCE UPON CARGILL The Company's relationship with Cargill is material in a number of respects. Cargill, a subsidiary of Cargill, Incorporated, a privately held, multi-national agricultural and financial services company, provides equity and debt financings for many of the Acquisition Partnerships. Cargill owns approximately 2.7% of the Company's outstanding Common Stock, and a Cargill designee, Jeffery Leu, serves as a director of the Company. The Company believes its relationship with Cargill significantly enhances the Company's credibility as a purchaser of Portfolio Assets and facilitates its ability to expand into other businesses and foreign markets. Although management believes that the Company's relationship with Cargill is excellent, there can be no assurance that such relationship will continue in the future. Absent such relationship, the Company and the Acquisition Partnerships would be required to find alternative sources for the financing that Cargill has historically provided. There can be no assurance that such alternative financing would be available. Any termination of such relationship could have a material adverse effect on the Company's consolidated financial position, results of operations and business prospects. DEPENDENCE ON KEY PERSONNEL The Company is dependent on the efforts of its senior executive officers, particularly James R. Hawkins (Chairman of the Board) and James T. Sartain (President and Chief Executive Officer). The Company is also dependent on several of the key members of management of each of its operating subsidiaries, many of whom were instrumental in developing and implementing the business strategy for such subsidiaries. The inability or unwillingness of one or more of these individuals to continue in his present role could have a material adverse effect on the Company's consolidated condition, results of operations and business prospects. There can be no assurance that any of the foregoing individuals will continue to serve in his current capacity or for what time period such service might continue. The Company does not maintain key person life insurance for any of its senior executive officers. The borrowing facilities for the Company and Commercial Corp. each include key personnel provisions. These provisions generally provide that if certain key personnel are no longer employed and suitable replacements are not found within a defined time limit certain facilities become due and payable. 45 INFLUENCE OF CERTAIN STOCKHOLDERS The directors and executive officers of the Company collectively beneficially own 25.99% of the Common Stock. Although there are no agreements or arrangements with respect to voting such Common Stock among such persons except as described below, such persons, if acting together, may effectively be able to control any vote of stockholders of the Company and thereby exert considerable influence over the affairs of the Company. James R. Hawkins, the Chairman of the Board, is the beneficial owner of 11.41% of the Common Stock. James T. Sartain, President and Chief Executive Officer of the Company, is the beneficial owner of 4.90% of the Common Stock. ATARA I, Ltd. ("ATARA"), an entity associated with Rick R. Hagelstein, former Executive Vice President of the Company and former Chief Executive Officer of Mortgage Corp., beneficially owns 3.06% of the outstanding Common Stock. In addition, Cargill owns approximately 1.98% of the Common Stock. Mr. Hawkins, Mr. Sartain, Cargill and ATARA are parties to a shareholder voting agreement (the "Stockholder Voting Agreement"). Under the Stockholder Voting Agreement, Mr. Hawkins, Mr. Sartain and ATARA are required to vote their shares in favor of Cargill's designee for director of the Company, and Cargill is required to vote its shares in favor of one or more of the designees of Messrs. Hawkins and Sartain and ATARA. There can be no assurance that the interests of management or the other entities and individuals named above will be aligned with the Company's other stockholders. SHARES ELIGIBLE FOR FUTURE SALE The utilization of the Company's $596 million in NOLs resulting from the Merger may be limited or prohibited under the Tax Code in the event of certain ownership changes. The Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") contains provisions restricting the transfer of its securities that are designed to avoid the possibility of such changes. Such restrictions may prevent certain holders of Common Stock of the Company from transferring such stock even if such holders are permitted to sell such stock without restriction under the Securities Act of 1933, as amended, and may limit the Company's ability to sell Common Stock to certain existing holders of Common Stock at an advantageous time or at a time when capital may be required but unavailable from any other source. PERIOD TO PERIOD VARIANCES The revenue of Commercial Corp. and Acquisition Partnerships is based on proceeds realized from the resolution of the Portfolio Assets, which proceeds have historically varied significantly and likely will continue to vary significantly from period to period. Likewise, earnings from Drive are dependent on the timing of securitization transactions of Drive. Consequently, the Company's period-to-period revenue and results of operations have historically varied, and are likely to continue to vary, correspondingly. Such variances, alone or with other factors, such as conditions in the economy or the financial services industries or other developments affecting the Company, may result in significant fluctuations in the reported operations of the Company and in the trading prices of the Company's securities, particularly the Common Stock. TAX, MONETARY AND FISCAL POLICY CHANGES The Company originates and acquires financial assets, the value and income potential of which are subject to influence by various state and federal tax, monetary and fiscal policies in effect from time to time. The nature and direction of such policies are entirely outside the control of the Company, and the Company cannot predict the timing or effect of changes in such policies. Changes in such policies could have a material adverse effect on the Company's consolidated financial position, results of operations and business prospects. DEPENDENCE ON AUTOMOBILE DEALERSHIP RELATIONSHIPS The ability of the Drive to expand into new geographic markets and to maintain or increase its volume of automobile loans is dependent upon maintaining and expanding the network of franchised automobile dealerships from which it purchases contracts. Increased competition, including competition from captive finance affiliates of automobile manufacturers, could have a material adverse effect on the Drive's ability to maintain or expand its dealership network. 46 ANTI-TAKEOVER CONSIDERATIONS The Company's Certificate of Incorporation and by-laws contain a number of provisions relating to corporate governance and the rights of stockholders. Certain of these provisions may be deemed to have a potential "anti-takeover" effect to the extent they are utilized to delay, defer or prevent a change of control of the Company by deterring unsolicited tender offers or other unilateral takeover proposals and compelling negotiations with the Company's Board of Directors rather than non-negotiated takeover attempts even if such events may be in the best interests of the Company's stockholders. The Certificate of Incorporation also contains certain provisions restricting the transfer of its securities that are designed to prevent ownership changes that might limit or eliminate the ability of the Company to use its NOLs resulting from the Merger. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's operations are materially impacted by net gains on sales of loans and net interest margins. The level of gains from loan sales the Company achieves is dependent on demand for the products originated. Net interest margins are dependent on the Company ability to maintain the spread or interest differential between the interest it charges the customer for loans and the interest the Company is charged for the financing of those loans. The following describes each component of interest bearing assets held by the Company and how each could be affected by changes in interest rates. The Company invests in Portfolio Assets both directly through consolidated subsidiaries and indirectly through equity investments in Acquisition Partnerships. Portfolio Assets consist of investments in pools of non-homogenous assets that predominantly consist of loan and real estate assets. Earnings from these assets are based on the estimated future cash flows from such assets and recorded when those cash flows occur. The underlying loans within these pools bear both fixed and variable rates. Due to the non-performing nature and history of these loans, changes in prevailing benchmark rates (such as the prime rate or LIBOR) generally have a nominal effect on the ultimate future cash flow to be realized from the loan assets. Furthermore, these pools of assets are held for sale, not for investment; therefore, the disposition strategy is to liquidate these assets as quickly as possible. Loans receivable consist of investment loans made to Acquisition Partnerships located in Mexico and bear interest at predominately fixed rates. The collectibility of these loans is directly related to the underlying Portfolio Assets of those Acquisition Partnerships, which are non-performing in nature. Therefore, changes in benchmark rates would have minimal effect on the collectibility of these loans. The Company's equity investment in Drive is materially impacted by net interest margins and the ability to securitize the loans Drive originates. During 2002, Drive elected not to use gain on sale treatment when assets were securitized. Instead, Drive pursued a strategy to grow the balance sheet and record interest income from loans and interest expense on the related debt as incurred to build an earnings stream over time. Demand from potential investors in Drive's securitizations is affected by the perception of credit quality and prepayment risk associated with the loans Drive originates and securitizes. The timing and size and interest rates of the bonds issued as a part of the securitizations could also have a material effect on the net income of Drive. Interest rates offered to customers also affect prices paid for loans. These rates are determined by review of competitors' rate offerings to the public and current prices being paid to Drive for the products. Drive does not hedge these price risks. Drive's residual interests in securitizations represent the present value of the excess cash flows Drive expects to receive over the life of the underlying sub-prime automobile loans. The sub-prime automobile residual interests are affected less by prepayment speeds due to the shorter term of the underlying assets and the fact that the loans are fixed rate, generally at the highest rate allowable by law. Additionally the Company has various sources of financing which have been previously described in "Item 7 -- Management's Discussion and analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 47 In summary, the Company would be negatively impacted by rising interest rates and declining prices of its sub-prime loans. Rising interest rates would negatively impact the value of residual interests in securitizations currently held and costs of borrowings under the warehouse lines and new secured financings. Declining prices of the Company's sub-prime loans would adversely affect the levels of gains achieved in the event Drive elects to sell those loans. The Company has not entered into any instruments to minimize this market risk of adverse changes in interest rates or declining prices. The following table is a summary of the interest earning assets and interest bearing liabilities, as of December 31, 2002, segregated by asset type as described in the previous paragraphs, with expected maturity or sales dates as indicated (dollars in thousands):
WEIGHTED GREATER AVERAGE 0-3 3-6 6-9 9-12 THAN 12 RATE MONTHS MONTHS MONTHS MONTHS MONTHS TOTAL -------- ------ ------ ------ ------ ------- ------- INTEREST BEARING ASSETS Portfolio assets(1)................. N/A $2,477 $ 647 $1,491 $2,680 $ 2,525 $ 9,820 Loans receivable(2)................. 19.79% 2,264 843 1,074 1,571 11,948 17,700 Equity investments(3) Acquisition Partnerships.......... N/A 3,689 2,410 1,019 2,062 40,096 49,276 Drive............................. N/A -- -- -- -- 9,066 9,066 ------ ------ ------ ------ ------- ------- $8,430 $3,900 $3,584 $6,313 $63,635 $85,862 ====== ====== ====== ====== ======= ======= INTEREST BEARING LIABILITIES Notes payable secured by Portfolio Assets, loans receivable and equity in Acquisition Partnerships(4)................... 8.10% $4,369 $4,684 $4,542 $6,056 $11,507 $31,158 Unsecured notes..................... 6.50% 185 40 -- -- -- 225 Consumer Lending.................... 2.44% -- -- -- -- 16,000 16,000 Company credit facility............. 7.27% 3,436 1,279 1,262 2,204 41,109 49,290 ------ ------ ------ ------ ------- ------- $7,990 $6,003 $5,804 $8,260 $68,616 $96,673 ====== ====== ====== ====== ======= =======
- --------------- (1) Portfolio assets are shown based on estimated proceeds from disposition, which could occur much faster or slower than anticipated or as directed. (2) Loans receivable are shown in the table based upon the expected date of sale or repayment. (3) Equity investments are shown based on anticipated equity disbursements, which could occur much faster or slower than anticipated. (4) Notes payable mature in the periods indicated. This does not necessarily indicate when the outstanding balances would be paid. Notes payable secured by Portfolio Assets fund up to 100% of the corresponding asset class. If the asset balance declines whether through a sale or a payment from the borrower, the corresponding liability must be paid. The Company currently has investments in Mexico and France. In France, the Company's investments are in the form of equity and represent a significant portion of the Company's total equity investments. As of December 31, 2002, one U.S. dollar equaled .95 Euros. A sharp change of the Euro relative to the U.S. dollar could materially adversely affect the financial position and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in currency rates. A 5% and 10% incremental depreciation of the Euro would result in an estimated decline in the valuation of the Company's equity investments in France of approximately $.5 million and $1.0 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Euro relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company's consolidated financial position or results of operations. 48 In Mexico, approximately 95% of the Company's investments in Mexico are made through U.S. dollar denominated loans to the Partnerships located in Mexico. The remaining investment is in the form of equity in these same Partnerships. The loans receivable are required to be repaid in U.S. dollars. Although the U.S. dollar balance of these loans will not change due to a change in the Mexican peso, the future estimated cash flows of the underlying assets in Mexico could become less valuable as a result of a change in the exchange rate for the Mexican peso, and thus could affect the overall total returns to the Company on these investments. As of December 31, 2002, one U.S. dollar equaled 10.31 Mexican pesos. A 5% and 10% incremental depreciation of the peso would result in an estimated decline in the valuation of the Company's total investments in Mexico of approximately $.7 million and $1.4 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Mexican peso relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company's consolidated financial position or results of operations. 49 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and cash equivalents................................... $ 4,118 $ 5,583 Portfolio Assets, net....................................... 9,820 14,218 Loans receivable from acquisition partnerships held for investment................................................ 17,700 19,377 Equity investments.......................................... 58,342 55,652 Deferred tax benefit, net................................... 20,101 20,101 Service fees receivable from affiliates..................... 2,235 1,546 Other assets, net........................................... 6,376 5,759 Net assets of discontinued operations....................... 7,764 16,657 -------- -------- Total Assets........................................... $126,456 $138,893 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Notes payable to affiliates............................... $ 95,560 $ 83,957 Notes payable other....................................... 1,113 7,252 Deferred gain from sale of interest in subsidiary......... -- 4,000 Minority interest......................................... 4,052 5,158 Other liabilities......................................... 3,274 2,548 -------- -------- Total Liabilities...................................... 103,999 102,915 Commitments and contingencies (Notes 2, 3, 7, 9, 10, 12 and 14)....................................................... -- -- Redeemable preferred stock, including accumulated dividends in arrears of $960 and $6,420, respectively (par value $.01, redemption value of $21 per share; 2,000,000 shares authorized; shares issued and outstanding: 130,691 and 1,222,901 shares, respectively)........................... 3,705 32,101 Stockholders' equity: Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)........................................... -- -- Common stock (par value $.01 per share; 100,000,000 shares authorized; issued and outstanding: 11,195,076 and 8,376,500 shares, respectively)........................ 112 84 Paid in capital............................................. 98,934 79,645 Accumulated deficit......................................... (82,977) (76,728) Accumulated other comprehensive income...................... 2,683 876 -------- -------- Total Shareholders' Equity............................. 18,752 3,877 -------- -------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity.................................. $126,456 $138,893 ======== ========
See accompanying notes to consolidated financial statements. 50 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ---------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Servicing fees from affiliates............................ $12,665 $ 9,580 $ 11,442 Gain on resolution of Portfolio Assets.................... 1,138 1,049 3,120 Equity in earnings of investments......................... 8,680 16,694 9,592 Interest income from affiliates........................... 4,060 3,993 1,237 Interest income, other.................................... 1,068 1,892 13,857 Gain on sale of interest in equity investments............ 1,779 3,316 -- Gain on sale of automobile loans.......................... -- -- 2,836 Gain on sale of interest in subsidiary.................... 4,000 -- 8,091 Other income.............................................. 2,598 1,887 2,834 ------- ------- -------- Total revenues......................................... 35,988 38,411 53,009 Expenses: Interest and fees on notes payable to affiliates.......... 6,456 7,838 13,814 Interest and fees on notes payable, other................. 366 939 4,844 Salaries and benefits..................................... 12,609 10,606 16,329 Provision for loan and impairment losses.................. 295 3,277 4,391 Occupancy, data processing, communication and other....... 8,962 11,200 16,910 ------- ------- -------- Total expenses......................................... 28,688 33,860 56,288 ------- ------- -------- Earnings (loss) from continuing operations before income taxes, minority interest and accounting change............ 7,300 4,551 (3,279) Provision for income taxes.................................. (153) (15) (7,414) ------- ------- -------- Earnings (loss) from continuing operations before minority interest and accounting change............................ 7,147 4,536 (10,693) Minority interest........................................... (1,204) (2,061) (207) Cumulative effect of accounting change...................... -- (304) -- ------- ------- -------- Earnings (loss) from continuing operations.................. 5,943 2,171 (10,900) Loss from discontinued operations........................... (9,714) (5,200) (5,000) ------- ------- -------- Net loss.................................................... (3,771) (3,029) (15,900) Accumulated preferred dividends in arrears.................. (2,478) (2,568) (2,568) ------- ------- -------- Net loss to common stockholders............................. $(6,249) $(5,597) $(18,468) ======= ======= ======== Basic and diluted earnings (loss) per common share are as follows: Earnings (loss) from continuing operations before accounting change...................................... $ 0.40 $ (0.01) $ (1.61) Discontinued operations................................... (1.14) (0.62) (0.60) Cumulative effect of accounting change.................... -- (0.04) -- Net loss.................................................. $ (0.74) $ (0.67) $ (2.21) Weighted average common shares outstanding................ 8,500 8,374 8,351
See accompanying notes to consolidated financial statements. 51 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
ACCUMULATED OTHER NUMBER OF COMPREHENSIVE TOTAL COMMON COMMON PAID IN ACCUMULATED INCOME STOCKHOLDERS' SHARES STOCK CAPITAL DEFICIT (LOSS) EQUITY ---------- ------ ------- ----------- ------------- ------------- (DOLLARS IN THOUSANDS) 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........................ 8,156 -- 11 -- -- 11 Comprehensive loss: Net loss for 2001........... -- -- -- (3,029) -- (3,029) Foreign currency items...... -- -- -- -- (218) (218) Unrealized net gain on securitization........... -- -- -- -- 1,203 1,203 -------- Total comprehensive loss...... (2,044) -------- Preferred dividends........... -- -- -- (2,568) -- (2,568) ---------- ---- ------- -------- ------ -------- BALANCES, DECEMBER 31, 2001... 8,376,500 84 79,645 (76,728) 876 3,877 Issuance of common stock in exchange for redeemable preferred stock............. 2,417,388 24 18,891 -- -- 18,915 Issuance of common stock to acquire minority interest in subsidiary.................. 400,000 4 396 -- -- 400 Purchase of shares through employee stock purchase plan........................ 1,188 -- 2 -- -- 2 Comprehensive loss: Net loss for 2002........... -- -- -- (3,771) -- (3,771) Foreign currency items...... -- -- -- -- 1,782 1,782 Unrealized net gain on securitization........... -- -- -- -- 25 25 -------- Total comprehensive loss...... (1,964) -------- Preferred dividends........... -- -- -- (2,478) -- (2,478) ---------- ---- ------- -------- ------ -------- BALANCES, DECEMBER 31, 2002... 11,195,076 $112 $98,934 $(82,977) $2,683 $ 18,752 ========== ==== ======= ======== ====== ========
See accompanying notes to consolidated financial statements. 52 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------- 2002 2001 2000 -------- -------- --------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss.................................................. $ (3,771) $ (3,029) $ (15,900) Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operations....................... 9,714 5,200 5,000 Proceeds from resolution of Portfolio Assets............ 4,210 8,801 14,398 Gain on resolution of Portfolio Assets.................. (1,138) (1,049) (3,120) Purchase of Portfolio Assets and loans receivable, net................................................... (4,412) (10,606) (25,914) Origination of automobile receivables, net of purchase discount.............................................. -- -- (106,311) Provision for loan and impairment losses................ 295 3,277 4,391 Equity in earnings of investments....................... (8,680) (16,694) (9,592) Proceeds from performing Portfolio Assets and loans receivable, net....................................... 5,675 10,328 54,172 Capitalized interest and costs on Portfolio Assets and loans receivable...................................... (15) (509) (247) Decrease in net deferred tax asset...................... -- -- 7,000 Depreciation and amortization........................... 721 899 1,994 (Increase) decrease in service fees receivable from affiliate............................................. (689) (282) 96 (Increase) decrease in other assets..................... (2,528) 1,713 (1,070) Gain on sale of interest in equity investments or subsidiary............................................ (5,779) (3,316) (8,091) Gain on early debt extinguishment....................... (899) -- (833) Increase (decrease) in other liabilities................ 1,790 3,228 (871) -------- -------- --------- Net cash used in operating activities............... (5,506) (2,039) (84,898) -------- -------- --------- Cash flows from investing activities: Proceeds from sale of interest in equity investments or subsidiary.............................................. 3,373 7,567 15,000 Proceeds on notes receivable from sale of interest in subsidiary.............................................. -- -- 60,000 Property and equipment, net............................... (412) (983) 210 Contributions to Acquisition Partnerships and Servicing entities................................................ (14,011) (14,088) (6,715) Distributions from Acquisition Partnerships and Servicing entities................................................ 23,440 11,259 10,313 -------- -------- --------- Net cash provided by investing activities........... 12,390 3,755 78,808 -------- -------- --------- Cash flows from financing activities: Borrowings under notes payable to affiliates.............. 45,189 30,700 48,465 Borrowings under notes payable -- other................... 437 170 99,845 Payments of notes payable to affiliates................... (35,519) (27,415) (93,454) Payments of notes payable -- other........................ (5,678) (6,229) (46,741) Proceeds from issuance of common stock.................... 2 11 73 Payments for tender of redeemable preferred stock......... (10,456) -- -- Payments for closing costs of recapitalization............ (1,503) -- -- -------- -------- --------- Net cash provided by (used in) financing activities........................................ (7,528) (2,763) 8,188 -------- -------- --------- Net cash provided by (used in) continuing operations...... $ (644) $ (1,047) $ 2,098 Net cash used by discontinued operations.................. (821) (1,413) (5,318) -------- -------- --------- Net increase decrease in cash and cash equivalents.......... $ (1,465) $ (2,460) $ (3,220) Cash and cash equivalents, beginning of year................ 5,583 8,043 11,263 -------- -------- --------- Cash and cash equivalents, end of year...................... $ 4,118 $ 5,583 $ 8,043 ======== ======== ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest................................................ $ 5,580 $ 7,700 $ 15,932 ======== ======== ========= Income taxes............................................ $ 46 $ 13 $ 637 ======== ======== ========= Non-cash operating activities: Equity method losses recorded to reduce loans and interest receivable on Mexican partnerships (note 5).................................................... $ 3,025 $ 997 $ -- ======== ======== ========= 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 redeemable preferred stock....................................... $ 2,478 $ 2,568 $ 2,568 ======== ======== ========= Balance of redeemable preferred stock and associated dividends relinquished in recapitalization transaction........................................... $ 30,874 $ -- $ -- ======== ======== ========= Issuance of note payable -- affiliate to purchase minority interest in FirstCity Holdings, Inc. ........ $ 1,715 $ -- $ -- ======== ======== ========= Issuance of common stock to purchase minority interest in FirstCity Holdings, Inc at fair value.............. $ 400 $ -- $ -- ======== ======== =========
See accompanying notes to consolidated financial statements. 53 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION On July 3, 1995, FirstCity Financial Corporation (the "Company" or "FirstCity") was formed by the merger of J-Hawk Corporation and First City Bancorporation of Texas, Inc. (the "Merger"). The Company's merger with Harbor Financial Group, Inc. ("Mortgage Corp.") on July 1, 1997 was accounted for as a pooling of interests. 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, securitization trusts and for investment. Actual results could differ materially from those estimates. (b) DESCRIPTION OF BUSINESS The Company is a financial services company with offices throughout the United States and Mexico, with a presence in France. At December 31, 2002, the Company was engaged in two principal reportable segments: (i) portfolio asset acquisition and resolution and (ii) consumer lending through the Company's minority investment in Drive Financial Services LP ("Drive"). Refer to Note 8 for operational information related to each of these principal segments. Effective in the third quarter of 1999, the Company adopted formal plans to discontinue its mortgage banking operations (refer to Note 3), which had previously also been reported as a segment. Activities related to the mortgage banking operations have been reclassified in the accompanying consolidated financial statements to discontinued operations. In December 2002, FirstCity completed a recapitalization in which holders of redeemable preferred stock, par value $.01 per share ("New Preferred Stock") exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million. As a result, common equity was increased by $18.9 million. FirstCity also recorded a $4 million gain from the release of its guaranty of Drive's indebtedness to BoS(USA). BoS(USA)'s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom are Senior Vice Presidents of FirstCity by issuing 400,000 shares of common stock of the Company and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million in accordance with certain cash collections from servicing income from Portfolio asset acquisitions in Mexico. 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 BoS(USA), Inc. (formerly known as IFA Incorporated) ("BoS(USA)"), a wholly-owned subsidiary of Bank of Scotland (together with BoS(USA), the "Senior Lenders"), for a purchase price of $15 million cash pursuant to the terms of a Securities Purchase Agreement dated as of August 18, 2000 (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 (see Note 2 for further discussion). 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 54 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of accounting. Also, in relation to the sale, the Senior Lenders forgave a loan fee in the amount of $2.5 million, which resulted in accrued loan fees of $.8 million owed to the senior lender being recorded as other income in the consolidated financial statements. This amount from 2000 was originally recorded as extraordinary gain but was reclassified to other income due to the early adoption of SFAS 145 (see note 1(r)). In the portfolio asset acquisition and resolution business the Company acquires and resolves portfolios of performing and nonperforming commercial and consumer loans and other assets (collectively, "Portfolio Assets" or "Portfolios"), which are generally acquired at a discount to their legal principal balance or appraised value. Purchases may be in the form of pools of assets or single assets. The Portfolio Assets are generally aggregated, including loans of varying qualities that are secured or unsecured by diverse collateral types and foreclosed properties. Some Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based either on real estate, business assets or other collateral cash flow. Portfolio Assets are acquired on behalf of the Company or its wholly owned subsidiaries, and on behalf of legally independent domestic and foreign partnerships and other entities ("Acquisition Partnerships" or "WAMCO Partnerships") in which a partially owned affiliate of the Company is the general partner and the Company and other investors (including but not limited to Cargill) are limited partners. The Company services, manages and ultimately resolves or otherwise disposes of substantially all of the assets it, its Acquisition Partnerships, or other related entities acquire. The Company services all such assets until they are collected or sold and normally does not manage assets for non-affiliated third parties. (c) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of all majority owned subsidiaries of the Company. All significant intercompany transactions and balances have been eliminated in consolidation. Investments in 20 to 50 percent owned affiliates are accounted for on the equity method since the Company has the ability to exercise significant influence over operating and financial policies of those affiliates. For domestic Acquisition Partnerships, the Company owns a limited partner interest and generally shares in a general partner interest. Regarding the foreign investments, the Company participates as a limited partner only. In all cases, the Company's direct and indirect equity interest never exceeds 50%. The following is a listing of the 20 to 50 percent owned affiliates accounted for on the equity method and held at December 31, 2002:
PERCENTAGE AFFILIATE OWNERSHIP - --------- ---------- BIDMEX 4, LLC............................................... 20.00 BIDMEX 5, LLC............................................... 20.00 UHR Limited................................................. 20.00 Namex, LLC.................................................. 22.22 FCS Fischer, Ltd............................................ 24.70 NEVVS Limited............................................... 25.00 Drive GP LLC................................................ 31.00 Compagnie Transatlantique de Portefeuilles.................. 33.33 MinnTex Investment Partners LP.............................. 33.00 FCS Fischer GP, Corp........................................ 33.33 Drive Financial Services LP................................. 38.71 First B Realty, L.P......................................... 49.00 WAMCO III, Ltd.............................................. 49.00
55 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PERCENTAGE AFFILIATE OWNERSHIP - --------- ---------- WAMCO IX, Ltd............................................... 49.00 WAMCO XXIV, Ltd............................................. 49.00 WAMCO XXV, Ltd.............................................. 49.00 WAMCO XXVIII, Ltd........................................... 49.50 WAMCO XXX, Ltd.............................................. 49.50 FCS Creamer Ltd............................................. 49.75 FCS Wildhorse, Ltd.......................................... 49.75 FCS Wood, Ltd............................................... 49.75 WAMCO XXVI, Ltd............................................. 49.75 Calibat Fund, LLC........................................... 50.00 FCS Creamer GP, Corp........................................ 50.00 FCS Wildhorse GP Corp....................................... 50.00 FCS Wood GP, Corp........................................... 50.00 FCS Wood GP, Corp........................................... 50.00 MinnTex GP Corp. ........................................... 50.00 WAMCO III of Texas, Inc. ................................... 50.00 WAMCO V of Texas, Inc. ..................................... 50.00 WAMCO IX of Texas, Inc. .................................... 50.00 WAMCO XVII of Texas, Inc. .................................. 50.00 WAMCO XXIV of Texas, Inc. .................................. 50.00 WAMCO XXV of Texas, Inc. ................................... 50.00 WAMCO XXVI of Texas, Inc. .................................. 50.00 WAMCO XXVII of Texas, Inc. ................................. 50.00 WAMCO XXVIII of Texas, Inc. ................................ 50.00 WAMCO XXIX of Texas, Inc. .................................. 50.00 WAMCO XXX of Texas, Inc. ................................... 50.00
Investments in less than 20 percent owned partnerships are also accounted for on the equity method. FirstCity has the ability to exercise significant influence over operating and financial policies of these entities, despite its comparatively smaller equity percentage, due primarily to its active participation in the policy making process as well as its involvement in the day-to-day management activities. These partnerships are formed to share in the risks and rewards in developing new markets as well as to pool resources. Following is a 56 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) listing of the less than 20 percent owned partnerships accounted for on the equity method and held at December 31, 2002:
PERCENTAGE AFFILIATE OWNERSHIP - --------- ---------- BIDMEX, LLC................................................. 3.21 WAMCO XXVII, Ltd............................................ 4.00 BIDMEX II, LLC.............................................. 4.12 WAMCO XXIX, Ltd............................................. 4.50 BIDMEX 6, LLC............................................... 10.00 WHBE Limited................................................ 10.00 BIDMEX 3, LLC............................................... 10.02 ResMex, LLC................................................. 11.12 FC Properties, Ltd.......................................... 14.50
The Company has a ten percent ownership in a French servicing corporation, MCS et Associes, S.A., which is accounted for on the equity method. FirstCity has the ability to exercise significant influence over operating and financial policies of this entity, despite its comparatively smaller equity percentage, due primarily to its active participation in the policy making process as well as its involvement in the day-to-day management activities. During 2002, the Company sold all of its equity interest in the following entities:
PERCENTAGE AFFILIATE OWNERSHIP - --------- ---------- Credit Finance Corporation Limited.......................... 10.00 Miromesnil Limited.......................................... 33.30 Societe Immobilere Lincoln, S.A. ........................... 10.00 CATX Limited................................................ 25.00 Transalp Limited............................................ 25.00 Finin Limited............................................... 33.30 Mirom Limited............................................... 10.00
The Company also has loans receivable from certain Acquisition Partnerships (see note 1(f)). In situations where the Company is not required to advance additional funds to the Acquisition Partnership and previous losses have reduced the equity investment to zero, the Company continues to report its share of equity method losses in its consolidated statements of operations to the extent of and as an adjustment to the adjusted basis of the related loan receivable in compliance with EITF 98-13, Accounting by an Equity Method Investor for Investee losses When the Investor Has Loans to and Investments in Other Securities of the Investee ("EITF 98-13") (See Note 5). (d) CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits. (e) PORTFOLIO ASSETS Portfolio Assets are held for sale and reflected in the accompanying consolidated financial statements as non-performing Portfolio Assets, performing Portfolio Assets or real estate Portfolios. Such designation is 57 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) made at the acquisition of the pool and does not change even though the actual mix of the loans may change. The following is a description of each classification and the related accounting policy accorded to each Portfolio type: Non-Performing Portfolio Assets Non-performing Portfolio Assets consist primarily of distressed loans and loan related assets, such as foreclosed upon collateral. Portfolio Assets are designated as non-performing unless substantially all of the loans in the Portfolio are being repaid in accordance with the contractual terms of the underlying loan agreements at date of acquisition. Such Portfolios are acquired on the basis of an evaluation by the Company of the timing and amount of cash flow expected to be derived from borrower payments or other resolution of the underlying collateral securing the loan. All non-performing Portfolio Assets are purchased at substantial discounts from their outstanding legal principal amount, the total of the aggregate of expected future sales prices and the total payments to be received from obligors. Subsequent to acquisition, the amortized cost of non-performing Portfolio Assets is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, which represents the net realizable value of the non-performing pool. Once it is determined that there is impairment, a valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. The Company recorded an allowance for impairment of $.1 million and $1.6 million in 2002 and 2001, respectively. No allowance was required in 2000. Net gain on resolution of non-performing Portfolio Assets is recognized as income to the extent that proceeds collected exceed a pro rata portion of allocated cost from the pool. Cost allocation is based on a proration of actual proceeds divided by total estimated proceeds of the pool. No interest income is recognized separately on non-performing Portfolio Assets. All proceeds, of whatever type, are included in proceeds from resolution of Portfolio Assets in determining the gain on resolution of such assets. Accounting for Portfolios is on a pool basis as opposed to an individual asset-by-asset basis. Performing Portfolio Assets Performing Portfolio Assets consist primarily of Portfolios of consumer and commercial loans acquired at a discount from the aggregate amount of the borrowers' obligation. Portfolios are classified as performing if substantially all of the loans in the Portfolio are being repaid in accordance with the contractual terms of the underlying loan agreements at date of acquisition. Performing Portfolio Assets are carried at the unpaid principal balance of the underlying loans, net of acquisition discounts. Interest is accrued when earned in accordance with the contractual terms of the loans. The accrual of interest is discontinued once a loan becomes past due 90 days or more. Acquisition discounts for the Portfolio as a whole are accreted as an adjustment to yield over the estimated life of the Portfolio. Accounting for these Portfolios is on a pool basis as opposed to an individual asset-by-asset basis. Gains are recognized on the performing Portfolio Assets when sufficient funds are received to fully satisfy the obligation on loans included in the pool, either from funds from the borrower or sale of the loan. The gain recognized represents the difference between the proceeds received and the allocated carrying value of the individual loan in the pool. Impairment on each Portfolio is measured based on the present value of the expected future cash flows in the aggregate discounted at the loans' risk adjusted rates, which approximates the effective interest rates, or the fair value of the collateral, less estimated selling costs, if any loans are collateral dependent and foreclosure is probable. The Company recorded an allowance for impairment of $.6 million in 2001. No allowance was required in either 2002 or 2000. 58 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Real Estate Portfolios Real estate Portfolios consist of real estate acquired from a variety of sellers. Such Portfolios are carried at the lower of cost or fair value less estimated costs to sell. Costs relating to the development and improvement of real estate for its intended use are capitalized, whereas those relating to holding assets are charged to expense. Income or loss is recognized upon the disposal of the real estate. Rental income, net of expenses, on real estate Portfolios is recognized when received. Accounting for the Portfolios is on an individual asset-by-asset basis as opposed to a pool basis. Subsequent to acquisition, the amortized cost of a real estate Portfolio is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, which represents the net realizable value of the real estate Portfolio. A valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. The Company recorded an allowance for impairment of $.2 million in 2002, $1.1 million in 2001 and $2.0 million in 2000. (f) LOANS RECEIVABLE Loans receivable consist primarily of loans made to Acquisition Partnerships located in Mexico at fixed rates ranging between 19% and 20%, the repayment of which is generally dependent upon future cash flows and distributions made from those Acquisition Partnerships. Interest is accrued when earned in accordance with the contractual terms of the loans. If there is not sufficient cash flow to pay interest, default provisions in the loan agreement increase the interest rate to between 23% and 30% until the interest owed in arrears is paid in full. The evaluation for impairment is determined based on the review of the estimated future cash receipts of the underlying nonperforming Portfolio Assets of each related Acquisition Partnership. The Company recorded no allowance for impairment in 2002, 2001 and 2000. (g) PROPERTY AND EQUIPMENT Property and equipment are carried at cost, less accumulated depreciation and are included in other assets. Depreciation is provided using straight-line method over the estimated useful lives of the assets. (h) INTANGIBLES Intangible assets represent the excess of purchase price over fair value of assets acquired in connection with purchase transactions (goodwill) as well as the purchase price of future service fee revenues and are included in other assets. Goodwill and intangible assets with indefinite useful lives are tested for impairment in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). See note 1(r). (i) REVENUE RECOGNITION ON SERVICE FEES The Company has no capitalized servicing rights because servicing is not contractually separated from the underlying assets by sale or securitization of the assets with servicing retained or separate purchase or assumption of the servicing. The Company services all of the Portfolio Assets owned for its own account, all of the Portfolio Assets owned by the Acquisition Partnerships and, to a very limited extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United States, the Company generally earns a servicing fee, which is a percentage of gross cash collections generated rather than a management fee based on the Face Value of the asset being serviced. The rate of servicing fee charged is generally a function of the average Face Value of the assets within each pool being serviced (the larger the average Face Value of the assets in a Portfolio, the lower the fee percentage within the prescribed range), the type of assets and the level of servicing required on each assets. For the Mexican Acquisition Partnerships, the Company earns a servicing fee based on costs of servicing plus a profit margin. The Acquisition Partnerships in 59 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) France are serviced by MCS et Associes, S.A., in which the Company maintains a 10% equity interest. In all cases, service fees are recognized as they are earned in accordance with the servicing agreements. (j) REVENUE RECOGNITION ON CONTINGENT FEES The Company currently has certain servicing contracts with its Mexican investment entities whereby the Company is entitled to additional compensation for servicing once a specified return to the investors has been achieved. The Company will not recognize any revenue related to these contracts until the investors have received the required level of returns specified in the contracts and the Mexican investment entity has received cash in an amount greater than the required returns. There is no guarantee that the required level of returns to the investors will be achieved or that any additional compensation to the Company related to the contracts will be realized. The amount of these fees recognized by the Company was $604 in 2002, $409 in 2001 and $763 in 2000. The Mexican investment entities, on the other hand, record an accrued expense for these contingent fees provided that these fees are probable and reasonably estimable. (k) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), established standards for reporting and displaying comprehensive income (loss) and its components in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 also requires the accumulated balance of other comprehensive income (loss) to be displayed separately in the equity section of the consolidated balance sheet. The Company's other comprehensive income (loss) consists of foreign currency transactions and unrealized gains on securitization transactions. (l) FOREIGN CURRENCY TRANSLATIONS The Company has determined that the local currency is the functional currency for its operations outside the United States (primarily France and Mexico). Assets and liabilities denominated in foreign functional currencies are translated at the exchange rate as of the balance sheet date. Translation adjustments are recorded as a separate component of stockholders' equity in accumulated other comprehensive income (loss). Revenues, costs and expenses denominated in foreign currencies are translated at the weighted average exchange rate for the period. An analysis of the changes in the cumulative adjustments during 2002, 2001 and 2000 follows (dollars in thousands): BALANCE, DECEMBER 31, 1999.................................. $ (395) Aggregate adjustment for the period resulting from translation adjustments................................ 286 ------ BALANCE, DECEMBER 31, 2000.................................. (109) Aggregate adjustment for the period resulting from translation adjustments................................ (218) ------ BALANCE, DECEMBER 31, 2001.................................. (327) Aggregate adjustment for the period resulting from translation adjustments................................ 1,782 ------ BALANCE, DECEMBER 31, 2002.................................. $1,455 ======
Increases or decreases in expected functional currency cash flows upon settlement of a foreign currency transaction are recorded as foreign currency transaction gains or losses and included in the results of operations in the period in which the exchange rate changes. Aggregate foreign currency transaction gains (losses) included in the consolidated statements of operations for 2002, 2001 and 2000 were $143, $(331), and $(765), respectively. 60 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (m) UNREALIZED GAINS ON SECURITIZATION TRANSACTIONS The Company has equity investments in certain entities which have retained unrated interests in securitization transactions, which represent the present value of the right to the excess cash flow generated by the securitized contracts. The residual certificates are accounted for under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Because such assets can be contractually prepaid or otherwise settled in such a way that the holder would not receive all of the recorded investment, the assets are classified as available-for-sale investments and are carried at estimated fair value with any accompanying increases or decreases in estimated fair value being recorded as unrealized gains or losses in other comprehensive income (loss) in the accompanying statements of stockholders' equity and comprehensive loss. The determination of fair value is based on the present value of the anticipated excess cash flows utilizing the valuation assumptions discussed above. The carrying value of each retained certificate is assessed for impairment in accordance with the provisions of EITF 99-20 as discussed in note 1(r). There can be no assurance that the estimates used to determine the fair value of the residual certificates will remain appropriate for the life of each asset and it is reasonably possible that circumstances could change in future periods which could result in a material change in the estimates used to prepare the accompanying consolidated financial statements. If actual prepayments or credit losses exceed the current estimates, other than temporary impairment may be required to be recognized. An analysis of the changes in the unrealized net gains on securitization transactions during 2002 and 2001 follows (dollars in thousands). There were no unrealized gains or losses on securitization transactions in 2000. BALANCE, DECEMBER 31, 2000.................................. $ -- Aggregate adjustment for the period resulting from unrealized net gains on securitizations................ 1,203 ------ BALANCE, DECEMBER 31, 2001.................................. 1,203 Aggregate adjustment for the period resulting from unrealized net gains on securitizations................ 25 ------ BALANCE, DECEMBER 31, 2002.................................. $1,228 ======
(n) INCOME TAXES The Company files a consolidated federal income tax return with its 80% or greater owned subsidiaries. The Company records all of the allocated federal income tax provision of the consolidated group in the parent corporation. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effects of future changes in tax laws or changes in tax rates are not anticipated. The measurement of deferred tax assets, if any, is reduced by the amount of any tax benefits that, based on available evidence, are not expected to be realized. (o) NET LOSS PER COMMON SHARE Basic net loss per common share calculations are based upon the weighted average number of common shares outstanding. Losses included in the loss per common share calculation are reduced by minority interest and increased for preferred stock dividends. Potentially dilutive common share equivalents include warrants and stock options in the diluted loss per common share calculations. 61 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The effects of any common stock equivalents are antidilutive for 2002, 2001 and 2000 due to the net loss for the periods; therefore, diluted loss per common share is reported the same as basic loss per common share. (p) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company assesses the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell (see note 1(r)). (q) STOCK-BASED COMPENSATION At December 31, 2002, the Company has two stock-based employee compensation plans, which are described more fully in Note 9. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As required by SFAS 148 as discussed under "Effects of New Accounting Standards", the following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
YEAR ENDED DECEMBER 31, ---------------------------- 2002 2001 2000 ------- ------- -------- Net loss to common stockholders, as reported........... $(6,249) $(5,597) $(18,468) Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects................... (147) (168) (668) ------- ------- -------- Pro forma net loss to common stockholders.............. $(6,396) $(5,765) $(19,136) ======= ======= ======== Net loss per common share: Basic -- as reported................................... $ (0.74) $ (0.67) $ (2.21) ======= ======= ======== Basic -- pro forma..................................... $ (0.75) $ (0.69) $ (2.29) ======= ======= ======== Diluted -- as reported................................. $ (0.74) $ (0.67) $ (2.21) ======= ======= ======== Diluted -- pro forma................................... $ (0.75) $ (0.69) $ (2.29) ======= ======= ========
The per share weighted-average fair value of stock options granted during 2001 and 2000 was $0.99 and $1.84, respectively, on the grant date using the Black-Scholes option pricing model with the following assumptions: $0 expected dividend yield, risk-free interest rate of 6.0%, expected volatility of 30%, and an expected life of 10 years. (r) EFFECT OF NEW ACCOUNTING STANDARDS In March 2001, the Company adopted the provisions of EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ("EITF 99-20"), which requires that other-than-temporary impairments in beneficial interests be written down to fair value 62 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) with the resulting charge being included in operations. The implementation of EITF 99-20 required Drive to record a cumulative effect of accounting change for other-than-temporary impairments on retained beneficial interests in certain securitized assets, which had previously been recorded as unrealized losses. As a result, in the second quarter of 2001, the Company recognized a charge for the cumulative effect of a change in accounting principle of $.3 million relating to the Company's share of Drive's cumulative effect because the Company believed it to be material to the consolidated results of operations. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible Assets ("SFAS 142") and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with the SFAS 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of ("SFAS 121") and SFAS 144 after it superceded SFAS 121. The adoption of SFAS 142 did not have a material impact on the Company's consolidated financial statements, as unamortized goodwill at December 31, 2001 was $.1 million. SFAS 144 addresses the accounting model for long-lived assets to be disposed of by sale and resulting implementation issues. This statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. It also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. Additionally, discontinued operations that are not disposed of within one year must be reclassified as assets held and used unless the discontinued segment will be (1) abandoned through the liquidation or run-off of operations because the entity is obligated by regulation or contract to provide services after it ceases accepting all new business and (2) is being reported as a discontinued operation when SFAS 144 is initially applied. The only assets remaining from discontinued operations are the investment securities resulting from the retention of residual interests in securitization transactions. Since the Company is contractually obligated to service the securitized assets, the adoption of SFAS 144 had no impact on the Company's consolidated financial statements. On April 1, 2002, the Company elected early adoption of SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. As it relates to FirstCity, SFAS 145 eliminates the extraordinary gain classification on early debt extinguishments. Instead, the gains associated with the early extinguishment of debt have been recorded in other income in the consolidated statements of operations. The result of this adoption did not modify or adjust net loss for any period and does not impact the Company's compliance with various debt covenants. The effect of SFAS 145 resulted in the extinguishment of debt of $.7 million in 2002 being included in other income in the consolidated statements of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, an Amendment of FASB Statement No. 123 ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS 123's fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income or loss and earnings (loss) per share in annual and interim consolidated financial statements. SFAS 148 does not amend SFAS 123 to require companies to account for stock-based employee compensation using the fair value 63 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) method, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB Opinion No. 25. As allowed by SFAS 123, the Company has elected to continue to utilize the accounting method prescribed by APB Opinion No. 25 and has adopted the disclosure requirements of SFAS 148 as of December 31, 2002. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes that the adoption of FIN 45 will have no material impact on its consolidated financial statements and applicable disclosure requirements are included in note 14. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. FIN 46 also requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the entity will consolidate or disclose information about variable interest entities when FIN 46 becomes effective. Although management is still evaluating the impact of FIN 46, the adoption is not expected to have a material effect. Presently the Company has identified one Acquisition Partnership, which may qualify for consolidation in accordance with FIN 46. This Acquisition Partnership holds real estate that is being developed for its intended use. As of December 31, 2002, the total assets that would be consolidated into the Company's consolidated financial statements were $1.4 million. The maximum loss exposure to the Company related to this Acquisition Partnership is estimated to be $.3 million as of December 31, 2002. (s) RECLASSIFICATIONS Certain amounts in the financial statements for prior years have been reclassified to conform with current financial statement presentation. (2) RESTRUCTURE, LIQUIDITY AND CAPITAL RESOURCES Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to the Acquisition Partnerships, retirement of and dividends on preferred stock, and other investments by the Company. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt and dividends from the Company's subsidiaries, short-term borrowings from revolving lines of credit, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings. In December 2002, FirstCity completed a recapitalization in which holders of New Preferred Stock exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million. As a result, common equity was increased by $18.9 million. FirstCity also recorded a $4 million gain from the 64 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) release of its guaranty of Drive's indebtedness to BoS(USA). BoS(USA)'s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom are Senior Vice Presidents of FirstCity by issuing 400,000 shares of common stock of the Company and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million in accordance with certain cash collections from servicing income from Portfolio asset acquisitions in Mexico. As a part of the recapitalization, BoS(USA) provided a non-recourse loan in the amount of $16 million to FirstCity which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity's debt to the Senior Lenders. The $16 million loan is secured by a 20% interest in Drive (64.51% of FirstCity's remaining 31% interest in Drive) and other assets of Consumer Corp. to allow BoS(USA) to realize upon the 20% Drive interest in the event of default by FirstCity. In connection with the $16 million loan, FirstCity is obligated to pay an arrangement fee to BoS(USA) equal to 20% of all amounts received by FirstCity in excess of $16 million from any sale or other disposition of FirstCity's 20% interest in Drive and all dividends and other distributions paid by Drive or its general partner on FirstCity's 20% interest in Drive. In connection with the recapitalization, the Senior Lenders refinanced the remainder of the Company's debt facilities. The Senior Lenders also provided new financing to FirstCity, with a total commitment of up to $59 million, consisting of (a) a $5 million revolving credit loan and (b) an acquisition term loan in an amount up to $54 million. The aggregate amount of outstanding loans under the total commitment by the Senior Lenders for the refinancing and the new financing at any time may not exceed $77 million. On November 4, 2002, the NASDAQ Stock Market, Inc. ("Nasdaq") notified the Company that its common stock had failed to meet the listing requirements for the Nasdaq National Market because the common stock had closed below the minimum bid price of $1.00 per share for thirty (30) consecutive trading days. Accordingly, Nasdaq provided the Company ninety (90) calendar days, or until February 2, 2003, to regain compliance. On November 21, 2002, Nasdaq notified the Company that it had regained compliance with this requirement and the matter was closed. On November 21, 2002, Nasdaq notified the Company that it did not comply with the minimum $10 million stockholders' equity requirement for continued listing on the Nasdaq National Market. After the recapitalization, Nasdaq notified the Company on January 2, 2003 that it complied with this rule and the matter was closed. As stated in Note 1, in the third quarter of 2000, Consumer Corp. completed the sale of a 49% equity interest in its automobile finance operation to IFA-GP and IFA-LP. The transaction generated $75 million in cash as described below and resulted in a gain of $12.1 million ($4 million was deferred and recognized in the December 2002 recapitalization). The new entity formed to facilitate the transaction is Drive Financial Services LP ("Drive"). BoS(USA), through wholly owned subsidiaries formed for the purpose of the acquisition, purchased 49% of this newly formed entity for $15 million and BoS(USA) provided $60 million in term financing to Drive and its subsidiary, Drive ABS LP, which was used to repay indebtedness owed to FirstCity by its automobile finance operation. After taking into effect the sale of the 49% interest to IFA-GP and IFA-LP, the ownership of Drive is allocated as follows: 49% of Drive is owned (directly and indirectly) by IFA-GP and IFA-LP, 31% of Drive is owned (directly and indirectly) by Consumer Corp., and 20% of Drive is owned (directly and indirectly) by Thomas R. Brower, Scot A. Foith, Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves, Stephen H. Trent and Blake P. Bozman (the "Auto Finance Management Group"). The Auto Finance Management Group consists of officers and shareholders of Funding GP and limited partners of Funding LP who indirectly and directly owned the remaining 20% equity interest in Funding LP. The Company has reflected the Auto Finance Management Group's 20% equity interest in Funding LP as a minority interest in the consolidated financial statements. 65 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) BoS(USA) has a warrant to purchase 425,000 shares of the Company's voting Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants in connection with this existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's voting Common Stock. In the third quarter of 1999, dividends on the Company's redeemable preferred stock ("New Preferred Stock") were suspended. At December 31, 2002, accumulated dividends in arrears on New Preferred Stock totaled $1.0 million, or $7.35 per share. Since the Company failed to pay quarterly dividends for six consecutive quarters, the holders of New Preferred Stock are entitled to elect two directors to the Company's Board until cumulative dividends have been paid in full. Dividends on outstanding shares of New Preferred Stock of FirstCity will be restricted until the Tranche II term loan is paid in full. Given the continued high debt levels of the Company, and management's priority of assuring adequate levels of liquidity, the Company does not anticipate that dividends on New Preferred Stock will be paid in the foreseeable future. The Portfolio Asset acquisition and resolution group of the Company has a $35 million loan facility (increased from $30 million in August 2002) with CFSC Capital Corp. XXX, a subsidiary of Cargill. This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March, 2005. At December 31, 2002, approximately $25 million was outstanding under this facility. FirstCity receives cash from its investments in foreign Acquisition Partnerships. The Company received cash from return on investments in France in the amount of $4.3 million and $3.6 million and invested $4.6 million and $3.3 million during 2002 and 2001, respectively. The Company received cash from its investments and notes receivable in Mexico in the amount of $4.0 million and $5.4 million and invested $4.0 million and $11.1 million during 2002 and 2001, respectively. Management believes that the BoS(USA) loan facilities along with the liquidity from the Cargill Facility, the related fees generated from the servicing of assets and equity distributions from existing Acquisition Partnerships and wholly owned portfolios will allow the Company to meet its obligations as they come due during the next twelve months. (3) DISCONTINUED OPERATIONS The Company recorded provisions of $9.7 million in 2002, $5.2 million in 2001 and $5.0 million in 2000 for additional losses from discontinued operations. Effective during the third quarter of 1999, management of the Company adopted formal plans to discontinue the operations of Harbor Financial Group, Inc. (formerly known as FirstCity Financial Mortgage Corp.) and its subsidiaries (collectively referred to as "Mortgage Corp."), and FC Capital Corp. ("Capital Corp."). These entities comprise the operations that were previously reported as the Company's residential and commercial mortgage banking business. Additionally, the net assets related to the resolution of activity from the discontinued operations have been reflected in the accompanying consolidated balance sheets. The net assets from discontinued operations consist of the following:
DECEMBER 31, ----------------- 2002 2001 ------- ------- Estimated future gross cash receipts on residual interests in securitizations........................................ $ 8,764 $18,775 Accrual for loss on operations and disposal of discontinued operations................................................ (1,000) (2,118) ------- ------- Net assets of discontinued operations..................... $ 7,764 $16,657 ======= =======
The only assets remaining from discontinued operations are the investment securities resulting from the retention of residual interests in securitization transactions. Although the liquidation or run-off of these investment securities will last longer than one year, the Company is contractually obligated to service the 66 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) securitized assets. The Company has considered the estimated future gross cash receipts for such investment securities in the computation of the loss from discontinued operations. The cash flows are collected over a period of time and are valued using prepayment assumptions of 28% to 33% for fixed rate loans and 25% to 33% for variable rate loans. Overall loss rates are estimated from 3% to 10% of collateral. If the prepayment speeds were to increase by 10% and 20%, the estimated future gross cash receipts would decrease by $.8 million and $1.5 million, respectively. Additionally, if the loss rates were to increase by 10% and 20%, the estimated future gross cash receipts would decrease by $.7 million and $1.3 million, respectively. (4) PORTFOLIO ASSETS Portfolio Assets are summarized as follows:
DECEMBER 31, ------------------- 2002 2001 -------- -------- Non-performing Portfolio Assets............................. $ 39,241 $ 45,123 Performing Portfolio Assets................................. 7,761 10,227 Real estate Portfolios...................................... 1,242 1,766 -------- -------- Total Portfolio Assets.................................... 48,244 57,116 Adjusted purchase discount required to reflect Portfolio Assets at carrying value.................................. (38,424) (42,898) -------- -------- Portfolio Assets, net..................................... $ 9,820 $ 14,218 ======== ========
The Company recorded an allowance for impairment on Portfolio Assets of approximately $.3 million, $3.3 million and $2.0 million in 2002, 2001 and 2000, respectively. The Company recorded permanent valuation impairments of $.2 million in 2002 on two real estate Portfolios due to deterioration of property values and market conditions, as well as additional expected disposal costs. Minimal provisions were recorded in 2002 for performing or non-performing Portfolios as the economic conditions during the year did not negatively impact the Company's expectation of future cash flows. In 2001, provisions of $1.6 million in four non-performing Portfolios and $.6 million in two performing Portfolios were recorded as estimated future collections were reduced primarily due to the Company accepting discounted payoffs in lieu of extended payouts. Also, the Company recorded permanent valuation impairments of $1.1 million in 2001 and $2.0 million in 2000 on one real estate Portfolio due to deterioration of property values and market conditions. Portfolio Assets are pledged to secure non-recourse notes payable. (5) LOANS RECEIVABLE FROM ACQUISITION PARTNERSHIPS HELD FOR INVESTMENT Loans receivable from Acquisition Partnerships held for investment consist primarily of loans from certain partnerships located in Mexico and are summarized as follows:
DECEMBER 31, ----------------- 2002 2001 ------- ------- Mexico...................................................... $16,399 $18,221 Domestic.................................................... 1,301 1,156 ------- ------- $17,700 $19,377 ======= =======
There were no provisions recorded on these loans during 2002 and 2001. The loans receivable from the Mexican partnerships are secured by the assets/loans acquired by the Mexican partnerships with purchase money loans provided by the investors to the Mexican partnerships to purchase the asset pools held in those entities. These loans are evaluated for impairment by analyzing the expected future cash flows from the 67 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) underlying assets within each pool to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment were necessary. Equity method losses which were recorded to reduce the loans and interest receivable from the Mexican partnerships was $3.0 million and $1.0 million during 2002 and 2001, respectively, in compliance with EITF 98-13. In 2000, the Company recorded an allowance for impairment on loans receivable of approximately $.8 million relating to automobile finance receivables generated by the Company's automobile platform, which was sold to Drive in August 2000. In addition, provisions of $1.6 million during 2000 were recorded for permanent impairment of value in residual interests in automobile finance securitizations, which were also sold to Drive in August 2000. (6) EQUITY INVESTMENTS The Company has investments in Acquisition Partnerships and their general partners that are accounted for under the equity method. The Company also has investments in servicing entities that are accounted for on the equity method. The condensed combined financial position and results of operations of the Acquisition Partnerships (excluding servicing entities), which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized as follows: CONDENSED COMBINED BALANCE SHEETS
DECEMBER 31, ------------------- 2002 2001 -------- -------- Assets...................................................... $585,435 $654,883 ======== ======== Liabilities................................................. 480,713 498,361 Net equity.................................................. 104,722 156,522 -------- -------- $585,435 $654,883 ======== ======== Equity investment in Acquisition Partnerships............... $ 46,029 $ 43,657 Equity investment in servicing entities..................... 3,247 2,118 -------- -------- $ 49,276 $ 45,775 ======== ========
CONDENSED COMBINED SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- Proceeds from resolution of Portfolio Assets......... $271,929 $249,219 $163,386 Gain on resolution of Portfolio Assets............... 89,824 103,599 75,788 Interest income on performing Portfolio Assets....... 14,380 24,473 18,049 Net earnings (loss).................................. $(13,224) $ 14,172 $ 36,766 ======== ======== ======== Equity in earnings of Acquisition Partnerships....... $ 8,418 $ 9,742 $ 7,203 Equity in earnings of servicing entities............. 794 1,029 166 -------- -------- -------- $ 9,212 $ 10,771 $ 7,369 ======== ======== ========
68 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assets and equity (deficit) of the Acquisition Partnerships and equity investments in those entities are summarized by geographic region below. The WAMCO Partnerships represent domestic Texas limited partnerships and limited liability companies in which the Company has a common ownership with Cargill.
DECEMBER 31, ------------------- 2002 2001 -------- -------- Assets: Domestic: WAMCO Partnerships..................................... $189,392 $259,617 Other.................................................. 19,491 15,607 Mexico.................................................... 246,087 305,324 France.................................................... 130,465 74,335 -------- -------- $585,435 $654,883 ======== ======== Equity (deficit): Domestic: WAMCO Partnerships..................................... $ 80,059 $ 90,249 Other.................................................. 7,212 3,207 Mexico.................................................... (51,567) 2,546 France.................................................... 69,018 60,520 -------- -------- $104,722 $156,522 ======== ======== Equity investment in Acquisition Partnerships: Domestic: WAMCO Partnerships..................................... $ 29,951 $ 30,806 Other.................................................. 3,494 2,313 Mexico.................................................... 1,108 1,289 France.................................................... 11,476 9,249 -------- -------- $ 46,029 $ 43,657 ======== ========
69 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenues and earnings (loss) of the Acquisition Partnerships and equity in earnings (loss) of those entities are summarized by geographic region below.
YEAR ENDED DECEMBER 31, ----------------------------- 2002 2001 2000 -------- -------- ------- Revenues: Domestic: WAMCO Partnerships............................... $ 44,158 $ 45,603 $33,778 Other............................................ 8,265 1,512 235 Mexico.............................................. 37,230 63,687 44,084 France.............................................. 16,899 20,199 17,934 -------- -------- ------- $106,552 $131,001 $96,031 ======== ======== ======= Net earnings (loss): Domestic: WAMCO Partnerships............................... $ 27,541 $ 21,128 $12,357 Other............................................ 5,208 1,190 (147) Mexico.............................................. (56,480) (21,816) 12,857 France.............................................. 10,507 13,670 11,699 -------- -------- ------- $(13,224) $ 14,172 $36,766 ======== ======== ======= Equity in earnings (loss) of Acquisition Partnerships: Domestic: WAMCO Partnerships............................... $ 8,099 $ 7,363 $ 4,667 Other............................................ 1,885 798 123 Mexico.............................................. (3,493) (1,153) 210 France.............................................. 1,927 2,734 2,203 -------- -------- ------- $ 8,418 $ 9,742 $ 7,203 ======== ======== =======
As discussed in Note 2, in the third quarter of 2000, the Company completed the sale of a 49% equity interest in its automobile finance operation to certain subsidiaries of BoS(USA). As a result of the sale, the net operations of Drive have been recorded (since August 1, 2000) as equity investments. The Company's investment in Drive is accounted for under the equity method. As of December 31, 2001, Drive's fiscal year 70 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) end changed from February 28 to December 31. The condensed consolidated financial position and results of operations of Drive are summarized below: CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, FEBRUARY 28, DECEMBER 31, 2002 2001 2001 2000 ------------ ------------ ------------ ------------ Cash........................................ $ 14,337 $ 7,303 $ 7,589 $ 10,567 Restricted cash............................. 12,124 -- -- -- Retail installment contracts, net........... 367,520 70,447 139,377 90,652 Residual interests in securitizations....... 63,202 77,407 55,739 56,190 Other assets................................ 14,494 10,321 10,158 6,799 -------- -------- -------- -------- Total assets.............................. $471,677 $165,478 $212,863 $164,208 ======== ======== ======== ======== Notes payable............................... $434,422 $126,665 $187,365 $143,923 Other liabilities........................... 14,123 13,323 17,473 10,638 -------- -------- -------- -------- Total liabilities......................... 448,545 139,988 204,838 154,561 Net equity.................................. 23,132 25,490 8,025 9,647 -------- -------- -------- -------- $471,677 $165,478 $212,863 $164,208 ======== ======== ======== ======== Equity investment in Drive.................. $ 9,066 $ 9,877 $ 3,110 $ 3,738 Minority interest......................... (1,812) (1,975) (622) (748) -------- -------- -------- -------- Net investment in Drive................ $ 7,254 $ 7,902 $ 2,488 $ 2,990 ======== ======== ======== ========
71 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
MARCH 1, AUGUST 1, AUGUST 1, 2001 2000 2000 YEAR ENDED YEAR ENDED THROUGH THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 28, DECEMBER 31, 2002 2001 2001 2001 2000 ------------ ------------ ------------ ------------ ------------ Interest income................. $101,238 $45,224 $37,506 $22,031 $14,313 Gain on sale of loans........... -- 39,033 39,033 9,434 9,434 Service fees and other.......... 12,320 12,376 10,391 4,256 2,271 -------- ------- ------- ------- ------- Revenues...................... 113,558 96,633 86,930 35,721 26,018 -------- ------- ------- ------- ------- Interest expense................ 16,366 11,744 9,329 8,165 5,750 Salaries and benefits........... 41,648 33,185 28,706 13,674 9,195 Provision for loan and impairment losses............. 32,078 12,688 10,425 4,129 1,866 Other expenses.................. 25,106 24,516 19,207 8,777 3,468 -------- ------- ------- ------- ------- Expenses...................... 115,198 82,133 67,667 34,745 20,279 -------- ------- ------- ------- ------- Net earnings (loss)............. $ (1,640) $14,500 $19,263 $ 976 $ 5,739 ======== ======= ======= ======= ======= Equity in earnings (loss) of Drive......................... $ (532) $ 5,923 $ 7,768 $ 378 $ 2,223 Cumulative effect of accounting change........................ -- (304) (304) -- -- Minority interest............... 106 (1,124) (1,493) (75) (444) -------- ------- ------- ------- ------- Net equity in earnings (loss) of Drive................... $ (426) $ 4,495 $ 5,971 $ 303 $ 1,779 ======== ======= ======= ======= =======
72 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) NOTES PAYABLE Notes payable consisted of the following:
DECEMBER 31, ----------------- 2002 2001 ------- ------- Notes payable to affiliates: Collateralized loans, secured by Portfolio Assets: LIBOR (1.4% at December 31, 2002) plus 5%, due at various dates through 2003, affiliate.......................... 4,314 7,650 Senior Credit Facility with affiliate, secured and with recourse to the Company: Prime (4.25% at December 31, 2002) plus 2.5%; fixed rate at 8.77%, due at various dates through 2007............ 49,290 -- LIBOR plus 2.5%; Prime.................................... -- 48,600 Acquisition Facility with affiliate, secured by certain equity interests of the Company, fixed rate at 8.5%, due 2005...................................................... 24,599 27,422 Term loan to affiliate, secured by equity interest in Drive, LIBOR (1.4% at December 31, 2002) plus 1.0%, due 2007..... 16,000 -- Unsecured notes payable to affiliates, fixed rate at 4.5% to 7.0%, due at various dates through 2011................... 1,357 285 ------- ------- Total notes payable to affiliates.................... $95,560 $83,957 ------- ------- Notes payable -- other: Collateralized loans, secured by Portfolio Assets: Fixed rate (10.00% at December 31, 2002), matured 2002.... $ 962 $ 7,181 Unsecured note payable, fixed rate at 6.26%, due 2003....... 151 71 ------- ------- Total notes payable -- other......................... $ 1,113 $ 7,252 ------- ------- Total notes payable.................................. $96,673 $91,209 ======= =======
Refer to Note 2 for a description of terms related to the Company's Senior Credit Facility at December 31, 2002 and other matters concerning the Company's liquidity. Under terms of certain borrowings, the Company and its subsidiaries are required to maintain certain tangible net worth levels and debt to equity and debt service coverage ratios. The terms also restrict future levels of debt. At December 31, 2002, the Company was in compliance with the aforementioned covenants. The aggregate maturities of notes payable for the five years ending December 31, 2007 are as follows: $9,283 in 2003, $12,553 in 2004, $36,599 in 2005, $8,955 in 2006 and $28,000 in 2007. 73 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) SEGMENT REPORTING The Company is engaged in two reportable segments (i) Portfolio Asset acquisition and resolution and (ii) consumer lending through the Company's minority investment in Drive. 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 two segments and reconciliation to earnings (loss) from continuing operations.
YEAR ENDED DECEMBER 31, ---------------------------- 2002 2001 2000 ------- ------- -------- PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: Servicing fees.................................... $12,665 $ 9,580 $ 7,555 Gain on resolution of Portfolio Assets............ 1,138 1,049 3,120 Gain on the sale of interest in investments....... 1,779 3,316 -- Equity in earnings of investments................. 9,212 10,771 7,369 Interest income................................... 5,122 5,847 2,143 Other............................................. 2,185 1,836 1,129 ------- ------- -------- Total........................................... 32,101 32,399 21,316 Expenses: Interest and fees on notes payable................ 2,946 4,128 3,266 Salaries and benefits............................. 9,611 7,679 5,531 Provision for loan and impairment losses.......... 295 3,277 1,971 Occupancy, data processing and other.............. 7,815 9,503 7,083 ------- ------- -------- Total........................................... 20,667 24,587 17,851 ------- ------- -------- Operating contribution before direct taxes........... $11,434 $ 7,812 $ 3,465 ======= ======= ======== Operating contribution, net of direct taxes.......... $11,214 $ 7,713 $ 3,354 ======= ======= ======== CONSUMER LENDING: Revenues: Servicing fees.................................... $ -- $ -- $ 3,887 Equity in earnings (loss) of Drive................ (532) 5,923 2,223 Gain on sale of automobile loans.................. -- -- 2,836 Interest income................................... -- 5 12,882 Gain on sale of interest in Drive................. 4,000 -- 8,091 Other............................................. 1 9 71 ------- ------- -------- Total........................................... 3,469 5,937 29,990
74 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, ---------------------------- 2002 2001 2000 ------- ------- -------- Expenses: Interest and fees on notes payable................ 18 -- 3,217 Salaries and benefits............................. -- -- 7,277 Provision for loan and impairment losses.......... -- -- 2,420 Occupancy, data processing and other (net of minority interest).............................. (93) 1,473 6,706 ------- ------- -------- Total........................................... (75) 1,473 19,620 ------- ------- -------- Operating contribution before direct taxes........... $ 3,544 $ 4,464 $ 10,370 ======= ======= ======== Operating contribution, net of direct taxes.......... $ 3,544 $ 4,448 $ 10,362 ======= ======= ======== Total operating income, net of direct taxes..... $14,758 $12,161 $ 13,716 ======= ======= ======== CORPORATE OVERHEAD: Other revenue........................................ $ 418 $ 75 $ 1,703 Corporate interest expense........................... (3,858) (4,649) (12,175) Salaries and benefits, occupancy, professional and other Expenses.................................... (5,375) (5,416) (7,144) Deferred tax valuation allowance..................... -- -- (7,000) ------- ------- -------- Earnings (loss) from continuing operations........... $ 5,943 $ 2,171 $(10,900) ======= ======= ========
Revenues from the Consumer Lending segment are all attributable to domestic operations. Revenues from the Portfolio Asset acquisition and resolution segment attributable to domestic and foreign operations are summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------- 2002 2001 2000 ------- ------- ------- Domestic................................................ $19,444 $18,978 $13,527 Mexico.................................................. 7,985 9,460 5,237 France.................................................. 4,646 3,941 2,552 Other foreign........................................... 26 20 -- ------- ------- ------- Total................................................. $32,101 $32,399 $21,316 ======= ======= =======
Total assets for each of the segments and a reconciliation to total assets is as follows:
DECEMBER 31, ------------------- 2002 2001 -------- -------- Portfolio acquisition and resolution assets................. $ 77,744 $ 79,335 Consumer assets............................................. 9,127 10,205 Deferred tax benefit, net................................... 20,101 20,101 Other assets, net........................................... 11,720 12,595 Net assets of discontinued operations....................... 7,764 16,657 -------- -------- Total assets.............................................. $126,456 $138,893 ======== ========
75 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) PREFERRED STOCK, STOCKHOLDERS' EQUITY AND LOSS PER SHARE On July 17, 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission, which allows the Company to issue up to $250 million in debt and equity securities from time to time in the future. The registration statement became effective July 28, 1998. As of December 31, 2002, there have been no securities issued under this registration statement. In connection with the recapitalization discussed in Note 2, 400,000 shares of common stock were issued to purchase a minority interest. BoS(USA) is entitled to additional warrants in connection with its existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's Common Stock. The holders of shares of Common Stock are entitled to one vote for each share on all matters submitted to a vote of common stockholders. In order to preserve certain tax benefits available to the Company, transactions involving stockholders holding or proposing to acquire more than 4.75% of outstanding common shares are prohibited unless the prior approval of the Board of Directors is obtained. The redeemable preferred stock has a redemption value of $21.00 per share and cumulative quarterly cash dividends at the annual rate of $2.10 per share through the redemption date of September 30, 2005. The Company may redeem the New Preferred Stock after September 30, 2003 for $21 per share plus accrued dividends. The New Preferred Stock carries no voting rights except in the event of non-payment of dividends, in which case, the holders of New Preferred Stock have the right to elect two directors to the Company's Board. In the third quarter of 1999, dividends on the Company's New Preferred Stock were suspended. In connection with the recapitalization discussed in Note 2, 1,092,210 shares of New Preferred Stock were exchanged for 2,417,388 shares of common stock and $10.5 million. At December 31, 2002, accumulated dividends in arrears on remaining New Preferred Stock totaled $1.0 million, or $7.35 per share. Since the Company failed to pay quarterly dividends for six consecutive quarters, the holders of New Preferred Stock are entitled to elect two directors to the Company's Board until cumulative dividends have been paid in full; the right to elect the additional directors has not been exercised by the holders of the New Preferred Stock. The Board of Directors of the Company may designate the relative rights and preferences of the optional preferred stock when and if issued. Such rights and preferences can include liquidation preferences, redemption rights, voting rights and dividends and shares can be issued in multiple series with different rights and preferences. The Company has no current plans for the issuance of an additional series of optional preferred stock. The Company has stock option and award plans for the benefit of key individuals, including its directors, officers and key employees. The plans are administered by a committee of the Board of Directors and provide for the grant of up to a total of 730,000 shares (net of shares cancelled and forfeited) of Common Stock. 76 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity during the periods indicated is as follows:
2002 2001 2000 ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------- -------- ------- -------- Outstanding at beginning of Year...................... 623,250 $ 8.07 347,750 $12.03 236,650 $22.96 Granted..................... -- -- 275,500 3.06 183,000 2.00 Exercised................... -- -- -- -- -- -- Cancelled................... -- -- -- -- (22,500) 22.00 Forfeited................... (29,000) 11.04 -- -- (49,400) 23.60 ------- ------ ------- ------ ------- ------ Outstanding at end of year...................... 594,250 $ 7.89 623,250 $ 8.07 347,750 $12.03 ======= ====== ======= ====== ======= ======
The following table summarizes stock options granted by grant date.
SHARES OUTSTANDING AT SHARES DECEMBER 31, EXERCISE DATE OF GRANT GRANTED 2002 PRICE - ------------- ------- -------------- -------- October 27, 1995..................................... 229,600 92,000 $20.00 February 27, 1997.................................... 95,200 56,250 27.25 May 21, 1998......................................... 15,000 5,000 29.69 December 1, 2000..................................... 183,000 173,000 2.00 December 20, 2001.................................... 275,500 268,000 3.06 ------- ------- 798,300 594,250 ======= =======
In December 2001, the Company granted 275,500 stock options with an exercise price of $3.06 (greater than the fair market value of the Company's common stock on the date of grant). At December 31, 2002, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $2.00 to $29.69 and 7.23 years, respectively. In addition, 439,750, 346,375 and 146,938 options were exercisable with a weighted-average exercise price of $9.73, $12.34 and $22.62 at December 31, 2002, 2001 and 2000, respectively. The Company has an employee stock purchase plan, which allows employees to acquire approximately 251,000 shares of Common Stock of the Company at 85% of the fair value at the end of each quarterly plan period. The value of the shares purchased under the plan is limited to the lesser of 10% of compensation or $25,000 per year. Under the plan, 1,188 shares were issued in 2002, 8,156 shares were issued in 2001 and 35,044 shares were issued in 2000. At December 31, 2002, approximately 77,000 shares of Common Stock are available for issuance pursuant to the plan. No effect was given to dilutive securities in the 2002, 2001 and 2000 loss per share calculations as such had an anti-dilutive effect. However, the options outstanding at December 31, 2002 could have a potentially dilutive per share calculation effect in the future. 77 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) INCOME TAXES Income tax expense from continuing operations consists of:
YEAR ENDED DECEMBER 31, ------------------------- 2002 2001 2000 ------ ----- -------- Federal and state current expense........................... $(153) $(15) $ (414) Federal deferred expense.................................... -- -- (7,000) ----- ---- ------- Total..................................................... $(153) $(15) $(7,414) ===== ==== =======
The actual income tax benefit (expense) attributable to earnings (loss) from continuing operations differs from the expected tax benefit (expense) (computed by applying the federal corporate tax rate of 35% to earnings (loss) from continuing operations before income taxes, minority interest and accounting change) as follows:
2002 2001 2000 ------- ------- ------- Computed expected tax benefit (expense)................. $(2,555) $(1,593) $ 1,148 (Increase) reduction in income taxes resulting from: Change in valuation allowance......................... 2,555 1,593 (8,148) Alternative minimum tax and state income tax.......... (153) (15) (414) ------- ------- ------- $ (153) $ (15) $(7,414) ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2002 and 2001 are as follows:
2002 2001 --------- --------- Deferred tax assets: Investments in Acquisition Partnerships, principally due to differences in basis for tax and financial reporting purposes............................................... $ 2,931 $ 4,453 Intangibles, principally due to differences in amortization........................................... 158 214 Tax basis in fixed assets less than book.................. (161) (165) Other..................................................... (2,210) (583) Federal net operating loss carryforwards.................. 202,285 201,639 --------- --------- Total gross deferred tax assets........................ 203,003 205,558 Valuation allowance....................................... (182,902) (185,457) --------- --------- Net deferred tax assets................................ $ 20,101 $ 20,101 ========= =========
The Company has net operating loss carryforwards for federal income tax purposes of approximately $578 million from continuing operations and $152 million from discontinued operations at December 31, 2002, available to offset future federal taxable income, if any, through the year 2022. A valuation allowance is provided to reduce the deferred tax assets to a level, which, more likely than not, will be realized. During 2002, 2001 and 2000, the Company adjusted the previously established valuation allowance to recognize a deferred tax benefit (expense) of $2.6 million, $1.6 million and $(8.1) million, respectively. Realization is determined based on management's expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from its continuing operations prior to expiration of the net operating loss carryforwards. The expense recognized in 2000 is attributed to a reduction in anticipated taxable income. Although realization is not assured, management believes it is more likely than not that all of the recorded 78 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deferred tax asset, net of the allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly. (11) EMPLOYEE BENEFIT PLAN The Company has a defined contribution 401(k) employee profit sharing plan pursuant to which the Company matches employee contributions at a stated percentage of employee contributions to a defined maximum. The Company's contributions to the 401(k) plan were $184 in 2002, $152 in 2001 and $263 in 2000. (12) LEASES The Company leases its current headquarters from a related party under a noncancellable operating lease. The lease calls for monthly payments of $10 through its expiration in December 2006 and includes an option to renew for an additional five-year period. Rental expense for 2002, 2001 and 2000 under this lease was $120, $90 and $90, respectively. The Company also leases office space and equipment from unrelated parties under operating leases expiring in various years through 2006. Rental expense under these leases for 2002, 2001 and 2000 was $.7 million, $.6 million and $1.7 million, respectively. As of December 31, 2002, the future minimum lease payments under all noncancellable operating leases are: $296 in 2003, $285 in 2004, $230 in 2005 and $155 in 2006. (13) OTHER RELATED PARTY TRANSACTIONS The Company has contracted with the Acquisition Partnerships and related parties as a third party loan servicer. Servicing fees totaling $12.7 million, $9.6 million and $11.4 million, for 2002, 2001 and 2000, respectively, and due diligence fees (included in other income) were derived from such affiliates. Park Central Recreation, Inc., a Texas corporation of which James R. Hawkins is a 50% shareholder, is indebted to an Acquisition Partnership under a note dated March 1, 1996, which has an outstanding principal balance of $2.1 million as of December 31, 2002. The note is secured by a first lien on real estate in Port Arthur, Texas, which is operated as a bowling alley. The note bears a fixed interest rate of 10%, matures on March 1, 2006 and requires annual payments of $289,500. During 2001, the Company sold equity investments in two domestic Acquisition Partnerships to affiliates of Cargill for $7.6 million resulting in a gain of $3.3 million. (14) COMMITMENTS AND CONTINGENCIES On October 14, 1999, Harbor Financial Group, Inc. ("Harbor Parent"), Harbor Financial Mortgage Corporation ("Harbor") and four subsidiaries of Harbor filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. On December 14, 1999, these bankruptcy proceedings were converted to liquidation proceedings under Chapter 7 of the United States Bankruptcy Code. John H. Litzler, the Chapter 7 Trustee in the bankruptcy proceedings (the "Trustee"), initiated adversary proceedings on May 25, 2001 against FirstCity and various current and former directors and officers of FirstCity and Mortgage Corp. alleging breach of fiduciary duties, mismanagement, and self-dealing by FirstCity and Harbor directors and officers, and improper transfer of funds from the Harbor related entities to FirstCity. The claims also included fraudulent and preferential transfer of assets of the Harbor entities, fraud and conspiracy. The Trustee, FirstCity, the other defendants and the insurers providing Director's and Officer's Insurance coverage for FirstCity and its subsidiaries (the "Insurers") settled the claims brought in the adversary proceedings with the approval of the Bankruptcy Court. Under the terms of the settlement agreement, the Trustee released the 79 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) defendants, their affiliates and subsidiaries from any and all claims which were brought or could have been brought by the Trustee against any of the defendants, any past and present officers and directors of FirstCity or any affiliates or subsidiaries of FirstCity. Periodically, FirstCity, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. FirstCity does not believe that there is any proceeding threatened or pending against it, its subsidiaries, its affiliates or the Acquisition Partnerships which, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships. 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 December 31, 2002, 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 BoS(USA), IFA-GP and IFA-LP from damages resulting from a breach of any representation or warranty contained in the Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligation under the Securities Purchase Agreement survives for a period of seven (7) years from August 25, 2000 (the "Closing Date") with respect to tax-related representations and warranties and for thirty months from the Closing Date with respect to all other representations and warranties. Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the Securities Purchase Agreement until the aggregate amount payable exceeds $.25 million, and then only for the amount in excess of $.25 million in the aggregate; however certain representations and warranties are not subject to this $.25 million threshold. Pursuant to the terms of the Contribution Agreements, Consumer Corp. and Funding LP have agreed to indemnify Drive from any damages resulting in a material adverse effect on Drive resulting from breaches of representations or warranties, failure to perform, pay or discharge liabilities other than the assumed liabilities, or claims, lawsuits or proceedings resulting from the transactions contemplated by the Contribution Agreements. Pursuant to the terms of the Contribution Agreements, Drive has agreed to indemnify Consumer Corp. and Funding LP for any breach of any representation or warranty by Drive, the failure of Drive to discharge any assumed liability, or any claims arising out of any failure by Drive to properly service receivables after August 1, 2000. Liability for indemnification pursuant to the terms of the Contribution Agreements will not arise until the total of all losses with respect to such matters exceeds $.25 million and then only for the amount by which such losses exceed $.25 million; however this limitation will not apply to any breach of which the party had knowledge at the time of the Closing Date or any intentional breach by a party of any covenant or obligation under the Contribution Agreements. The Company has agreed to indemnify BoS(USA) for up to 31% of losses, which might arise as a result of agreements BoS(USA) executed as a sponsor in connection with the securitizations completed by Drive. 80 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company also agreed to provide support in connection with securitizations by Consumer Corp. and Drive prior to the acquisition by BoS(USA) of the interest in Drive in August 2000. FirstCity is obligated to pay BOS(USA) an arrangement fee related to the $16 million loan equal to 20% of all proceeds and other amounts paid to FirstCity from any sale or other disposition (regardless of when such sale or other disposition occurs) of, and of all dividends and other distributions paid to FirstCity by Drive or its general partner (regardless of when such dividend or other distribution occurs) on, its 20% interest in Drive, in each case in excess of $16 million in the aggregate. As of December 31, 2002 the Company has not accrued any amount related to this contingent liability. The Company's maximum loss exposure related to this contingency is the amount of the arrangement fee that would be calculated in the event the fair value of Drive exceeds $16 million in the future. (15) FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values of its financial instruments. Fair value estimates, methods and assumptions are set forth below. (a) CASH AND CASH EQUIVALENTS The carrying amount of cash and cash equivalents approximated fair value at December 31, 2002 and 2001. (b) PORTFOLIO ASSETS AND LOANS RECEIVABLE The Portfolio Assets and loans receivable are carried at the lower of cost or estimated fair value. The estimated fair value is calculated by discounting projected cash flows on an asset-by-asset basis using estimated market discount rates that reflect the credit and interest rate risks inherent in the assets. The carrying value of the Portfolio Assets and loans receivable was $27.5 million and $33.6 million, respectively, at December 31, 2002 and 2001. The estimated fair value of the Portfolio Assets and loans receivable was approximately $29.7 million and $35.2 million, respectively, at December 31, 2002 and 2001. (c) RESIDUAL INTERESTS IN SECURITIZATIONS Residual interests in securitizations included in discontinued operations are carried at estimated future gross cash receipts. The estimated fair value is calculated using various assumptions regarding prepayment speeds and credit losses. The carrying value of the residual interests was $8.8 million and $18.8 million at December 31, 2002 and 2001, respectively. The estimated fair value of the residual interests was $5.5 million and $11.4 million at December 31, 2002 and 2001, respectively. (d) NOTES PAYABLE Management believes that the repayment terms for similar rate financial instruments with similar credit risks and the stated interest rates at December 31, 2002 and 2001 approximate the market terms for similar credit instruments. Accordingly, the carrying amount of notes payable is believed to approximate fair value. (e) REDEEMABLE PREFERRED STOCK Redeemable Preferred Stock is carried at redemption value plus accrued but unpaid dividends. Carrying values were $3.7 million and $32.1 million at December 31, 2002 and 2001, respectively. Fair market values based on quoted market rates were $1.8 million and $9.0 million at December 31, 2002 and 2001, respectively. 81 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders FirstCity Financial Corporation: We have audited the accompanying consolidated balance sheets of FirstCity Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstCity Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, in 2001 the Company changed its method of accounting for residual interests in securitized financial assets in accordance with the Financial Accounting Standards Board's EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. Also, discussed in Note 1, the Company early adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. KPMG LLP Dallas, Texas February 17, 2003 82 FIRSTCITY FINANCIAL CORPORATION SELECTED QUARTERLY FINANCIAL DATA
2002 2001 ------------------------------------- ------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Revenues.................... $ 5,486 $12,637 $ 6,541 $11,324 $9,442 $15,762 $ 4,289 $ 8,918 Expenses.................... 6,292 7,532 7,488 7,376 8,033 9,590 8,244 7,993 Earnings (loss) from continuing operations before accounting change(1)................. (834) 4,202 (1,137) 3,712 1,625 4,168 (3,605) 287 Accounting change........... -- -- -- -- -- (304) -- -- Loss from discontinued operations................ (500) (1,500) (5,700) (2,014) -- (1,000) (2,000) (2,200) Net earnings (loss)......... (1,334) 2,702 (6,837) 1,698 1,625 2,864 (5,605) (1,913) Preferred dividends......... 642 642 642 552 642 642 642 642 Net earnings (loss) to common stockholders....... $(1,976) $ 2,060 $(7,479) $ 1,146 $ 983 $ 2,222 $(6,247) $(2,555) Net earnings (loss) from continuing operations before accounting change per common share -- Basic and diluted............... $ (0.18) $ 0.43 $ (0.21) $ 0.36 $ 0.12 $ 0.43 $ (0.51) $ (0.05)
- --------------- (1) Significant losses from continuing operations in the third quarter 2002 primarily related to a decrease in equity earnings in investments during the quarter and lower earnings from Drive as a result of Drive structuring its securitizations as secured financings versus gain on sale treatment. Significant losses from continuing operations during the third quarter of 2001 related to $1.0 million in provisions for loan and impairment losses and $1.7 million in equity in loss of Drive. 83 WAMCO PARTNERSHIPS COMBINED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (WITH INDEPENDENT AUDITORS' REPORT THEREON) 84 INDEPENDENT AUDITORS' REPORT The Partners WAMCO Partnerships: We have audited the accompanying combined balance sheets of the WAMCO Partnerships as of December 31, 2002 and 2001, and the related combined statements of operations, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2002. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the WAMCO Partnerships as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Dallas, Texas February 17, 2003 85 WAMCO PARTNERSHIPS COMBINED BALANCE SHEETS DECEMBER 31, 2002 AND 2001
2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash........................................................ $ 13,035 $ 13,397 Portfolio Assets, net....................................... 147,686 218,731 Investments in partnerships................................. 2,302 2,302 Investments in trust certificates........................... 7,883 8,223 Deferred profit sharing..................................... 17,671 15,506 Other assets, net........................................... 815 1,458 -------- -------- $189,392 $259,617 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Notes payable (including $46,137 and $101,178 affiliates in 2002 and 2001, respectively).............................. $ 79,891 $140,411 Deferred compensation....................................... 21,706 20,552 Other liabilities (including $625 and $558 to affiliates in 2002 and 2001, respectively).............................. 3,392 3,800 -------- -------- Total liabilities......................................... 104,989 164,763 Commitments and contingencies (notes 7 and 11).............. -- -- Preferred equity............................................ 4,344 4,605 Partners' capital........................................... 80,059 90,249 -------- -------- $189,392 $259,617 ======== ========
See accompanying notes to combined financial statements. 86 WAMCO PARTNERSHIPS COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) Proceeds from resolution of Portfolio Assets................ $133,198 $ 69,188 $ 44,182 Cost of Portfolio Assets resolved........................... 102,170 44,916 30,115 -------- -------- -------- Gain on resolution of Portfolio Assets...................... 31,028 24,272 14,067 Interest income on performing Portfolio Assets.............. 11,280 19,543 18,049 Interest and fees on notes -- affiliate..................... (5,187) (12,104) (14,594) Interest and fees on notes payable -- other................. (1,957) (1,234) (182) Provision for loan losses................................... (904) (1,254) (58) Servicing fees -- affiliate................................. (3,779) (3,131) (2,528) General, administrative and operating expenses.............. (4,790) (6,752) (4,059) Other income, net........................................... 1,850 1,788 1,662 -------- -------- -------- Net earnings................................................ $ 27,541 $ 21,128 $ 12,357 ======== ======== ========
See accompanying notes to combined financial statements. 87 WAMCO PARTNERSHIPS COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
CLASS B CLASS A EQUITY EQUITY ------------------- -------- GENERAL LIMITED LIMITED GENERAL LIMITED PARTNERS PARTNERS PARTNERS PARTNERS PARTNERS TOTAL -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) BALANCE AT DECEMBER 31, 1999........ $129 $ 6,284 $1,424 $ 945 $ 54,237 $ 63,019 Contributions..................... 6 325 -- 60 5,742 6,133 Distributions..................... (36) (1,778) (283) (341) (17,467) (19,905) Net earnings...................... 18 884 6 206 11,243 12,357 Unrealized net gain on securitization................. -- -- -- -- -- -- ---- ------- ------ ------ -------- -------- Total comprehensive income........ 18 884 6 206 11,243 12,357 ---- ------- ------ ------ -------- -------- BALANCE AT DECEMBER 31, 2000........ 117 5,715 1,147 870 53,755 61,604 Contributions..................... -- -- -- 265 26,265 26,530 Distributions..................... (26) (1,271) (145) (311) (18,194) (19,947) Comprehensive income: Net earnings...................... 26 1,291 106 253 19,452 21,128 Unrealized net gain on securitization................. 14 667 -- 5 248 934 ---- ------- ------ ------ -------- -------- Total comprehensive income........ 40 1,958 106 258 19,700 22,062 ---- ------- ------ ------ -------- -------- BALANCE AT DECEMBER 31, 2001........ 131 6,402 1,108 1,082 81,526 90,249 Contributions..................... -- -- -- 159 15,812 15,971 Distributions..................... (43) (2,119) (126) (605) (51,305) (54,198) Comprehensive income: Net earnings...................... 28 1,376 76 300 25,761 27,541 Unrealized net gain on securitization................. 7 351 5 3 130 496 ---- ------- ------ ------ -------- -------- Total comprehensive income........ 35 1,727 81 303 25,891 28,037 ---- ------- ------ ------ -------- -------- BALANCE AT DECEMBER 31, 2002........ $123 $ 6,010 $1,063 $ 939 $ 71,924 $ 80,059 ==== ======= ====== ====== ======== ========
See accompanying notes to combined financial statements. 88 WAMCO PARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000 --------- --------- -------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net earnings............................................. $ 27,541 $ 21,128 $ 12,357 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of loan origination and commitment fees................................................ 522 768 376 Amortization of deferred profit sharing............... 720 1,228 1,117 Accretion of unrealized gain on trust certificates.... (287) -- -- Provision for loan losses............................. 904 1,254 58 Gain on resolution of Portfolio Assets................ (31,028) (24,272) (14,067) Purchase of Portfolio Assets.......................... (48,713) (118,147) (17,852) Capitalized costs on Portfolio Assets................. (4,059) (536) (1,497) Capitalized interest on Portfolio Assets.............. (897) (1,228) -- Proceeds from resolution of Portfolio Assets.......... 133,198 69,188 44,182 Proceeds from sell back of Portfolio Assets........... -- 1,594 -- Principal payments on Performing Portfolio Assets..... 21,640 34,071 27,791 Increase in deferred profit sharing................... (2,885) (560) (9,409) (Increase) decrease in other assets................... 170 (43) 595 Increase in deferred compensation..................... 2,885 560 9,409 Deferred compensation and profit sharing paid......... (1,730) (2,365) -- (Increase) decrease in other liabilities.............. (458) 258 1,260 --------- --------- -------- Net cash provided by (used in) operating activities... 97,523 (17,102) 54,320 Cash flows from investing activities: Contribution to subsidiaries............................. -- (48) (573) Change in trust certificates............................. 1,123 (381) (420) --------- --------- -------- Net cash provided by (used) in investing activities... 1,123 (429) (993) Cash flows from financing activities: Borrowing of debt -- affiliate........................... 53,143 93,569 22,057 Borrowing of debt........................................ 28,500 45,901 -- Repayment of debt -- affiliate........................... (108,184) (113,327) (61,008) Repayment of debt........................................ (33,979) (8,930) (919) Capitalized interest on preferred equity................. 150 1,049 -- Repayment of preferred equity............................ (411) -- -- Capital contributions.................................... 15,971 26,530 6,133 Capital distributions.................................... (54,198) (19,947) (19,905) --------- --------- -------- Net cash provided by (used in) financing activities... (99,008) 24,845 (53,642) --------- --------- -------- Net increase (decrease) in cash............................ (362) 7,314 (315) Cash at beginning of year.................................. 13,397 6,083 6,398 --------- --------- -------- Cash at end of year........................................ $ 13,035 $ 13,397 $ 6,083 ========= ========= ========
Supplemental disclosure of cash flow information: Cash paid for interest was approximately $6,782, $12,533, and $14,643 for 2002, 2001, and 2000, respectively. See accompanying notes to combined financial statements. 89 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001, AND 2000 (DOLLARS IN THOUSANDS) (1) ORGANIZATION AND PARTNERSHIP AGREEMENTS The combined financial statements represents domestic Texas limited partnerships and limited liability companies ("Acquisition Partnerships" or "Partnerships") and include the accounts of WAMCO III, Ltd. ("WAMCO III"); WAMCO V, Ltd. ("WAMCO V"); WAMCO IX, Ltd. ("WAMCO IX"); WAMCO XVII, Ltd. ("WAMCO XVII"); WAMCO XXIV, Ltd. ("WAMCO XXIV"); WAMCO XXV, Ltd. ("WAMCO XXV"); WAMCO XXVI Ltd.; WAMCO XXVII Ltd.; WAMCO XXVIII, Ltd. ("WAMCO XXVIII"); WAMCO XXIX, Ltd.; WAMCO XXX, Ltd. ("WAMCO XXX"); Calibat Fund, LLC; First B Realty, Ltd.; First Paradee, Ltd.; FirstStreet Investments LLC ("FirstStreet"); FC Properties; Ltd. ("FC Properties"); Imperial Fund I, Ltd.; Community Development Investment, LLC; and VOJ Partners, Ltd. FirstCity Financial Corporation or its subsidiaries, FirstCity Commercial Corporation and FirstCity Holdings Corporation (together "FirstCity"), share limited partnership interests and participate as general partners in common with Cargill Financial Services, Inc. in all of the Partnerships. FC Properties and WAMCO XXVIII are considered to be significant subsidiaries of FirstCity. The Partnerships were formed to acquire, hold and dispose of Portfolio Assets acquired from the Federal Deposit Insurance Corporation, Resolution Trust Corporation and other nongovernmental agency sellers, pursuant to certain purchase agreements or assignments of such purchase agreements. In accordance with the purchase agreements, the Partnerships retain certain rights of return regarding the assets related to defective title, past due real estate taxes, environmental contamination, structural damage and other limited legal representations and warranties. Generally, the partnership agreements of the Partnerships provide for certain preferences as to the distribution of cash flows. Proceeds from disposition of and payments received on the Portfolio Assets are allocated based on the partnership and other agreements which ordinarily provide for the payment of interest and mandatory principal installments on outstanding debt before payment of intercompany servicing fees and return of capital and restricted distributions to partners. The partnership agreement for WAMCO III provides for Class A and Class B Equity partners. The Class A Equity partners are WAMCO III of Texas, Inc., FirstCity Commercial Corporation and CFSC Capital Corp. II, and the Class B Equity partner is CFSC Capital Corp. II. The Class B Equity limited partner is allocated 20 percent net income or loss, excluding equity earnings in FirstStreet, recognized by the partnership prior to allocation of net income or loss to the Class A Equity partners. Net earnings in FirstStreet are allocated to the Class A Equity partners in proportion to their respective ownership percentages. Net income or loss is credited or charged to the Class A Equity partners' capital accounts in proportion to their respective capital account balances after the 20% allocation to the Class B Equity limited partner. Distributions are allocated using the same methodology as net income or loss. The Class B Equity limited partner is not required to make capital contributions. During June 2001, First Paradee, Ltd. was merged with and into WAMCO XXV with WAMCO XXV being the surviving entity. Also during June 2001, WAMCO IX sold, at cost, its remaining Portfolio Assets that had projected estimated remaining collections to WAMCO XXV. During November 2000, WAMCO V and WAMCO XVII were merged with and into WAMCO III, with WAMCO III being the surviving entity. The mergers of the acquisition partnerships have no effect on the comparability of the combined financial statements. The sales of assets between acquisition partnerships and all significant intercompany balances have been eliminated. 90 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PORTFOLIO ASSETS The Partnerships acquire and resolve portfolios of performing and nonperforming commercial and consumer loans and other assets (collectively, "Portfolio Assets" or "Portfolios"), which are generally acquired at a discount to their legal principal balance. Purchases may be in the form of pools of assets or single assets. The Portfolio Assets are generally non-homogeneous assets, including loans of varying qualities that are secured by diverse collateral types and foreclosed properties. Some Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based either on business or real estate or other collateral cash flow. Portfolio Assets are acquired on behalf of Acquisition Partnerships in which a corporate general partner, FirstCity and other investors are limited partners. Portfolio Assets are held for sale and reflected in the accompanying combined financial statements as non-performing Portfolio Assets, performing Portfolio Assets or real estate Portfolios. The following is a description of each classification and the related accounting policy accorded to each Portfolio type: Non-Performing Portfolio Assets Non-performing Portfolio Assets consist primarily of distressed loans and loan related assets, such as foreclosed upon collateral. Portfolio Assets are designated as non-performing unless substantially all of the loans in the Portfolio are being repaid in accordance with the contractual terms of the underlying loan agreements at date of acquisition. Such Portfolios are acquired on the basis of an evaluation by the Partnerships of the timing and amount of cash flow expected to be derived from borrower payments or other resolution of the underlying collateral securing the loan. All non-performing Portfolio Assets are purchased at substantial discounts from their outstanding legal principal amount, the total of the aggregate of expected future sales prices and the total payments to be received from obligors. Subsequent to acquisition, the amortized cost of non-performing Portfolio Assets is evaluated for impairment on a quarterly basis. A valuation allowance is established for any impairment identified through provisions charged to earnings in the period the impairment is identified. Impairments on non-performing Portfolio Assets were $97, $497, and zero for 2002, 2001 and 2000, respectively. Net gain on resolution of non-performing Portfolio Assets is recognized as income to the extent that proceeds collected exceed a pro rata portion of allocated cost from the Portfolio. Cost allocation is based on a proration of actual proceeds divided by total estimated proceeds of the pool. No interest income is recognized separately on non-performing Portfolio Assets. All proceeds, of whatever type, are included in proceeds from resolution of Portfolio Assets in determining the gain on resolution of such assets. Accounting for Portfolios is on a pool basis as opposed to an individual asset-by-asset basis. Performing Portfolio Assets Performing Portfolio Assets consist primarily of Portfolios of consumer and commercial loans acquired at a discount from the aggregate amount of the borrowers' obligation. Portfolios are classified as performing if substantially all of the loans in the Portfolio are being repaid in accordance with the contractual terms of the underlying loan agreements at date of acquisition. Performing Portfolio Assets are carried at the unpaid principal balance of the underlying loans, net of acquisition discounts. Interest is accrued when earned in accordance with the contractual terms of the loans. The accrual of interest is discontinued once a loan becomes past due 90 days or more. Acquisition discounts for the Portfolio as a whole are accreted as an adjustment to yield over the estimated life of the Portfolio. Accounting for these Portfolios is on a pool basis as opposed to an individual asset-by-asset basis. 91 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Gains are recognized on the performing Portfolio Assets when sufficient funds are received to fully satisfy the obligation on loans included in the pool, either from funds from the borrower or sale of the loan. The gain recognized represents the difference between the proceeds received and the allocated carrying value of the individual loan in the pool. Impairment on each Portfolio is measured based on the present value of the expected future cash flows in the aggregate discounted at the loans' risk adjusted rates, which approximates the effective interest rates, or the fair value of the collateral, less estimated selling costs, if any loans are collateral dependent and foreclosure is probable. Impairments on performing Portfolio Assets were $790, $757, and $58 for 2002, 2001 and 2000, respectively. Real Estate Portfolios Real estate Portfolios consist of real estate assets acquired from a variety of sellers. Such Portfolios are carried at the lower of cost or fair value less estimated costs to sell. Costs relating to the development and improvement of real estate for its intended use are capitalized, whereas those relating to holding assets are charged to expense. Income or loss is recognized upon the disposal of the real estate. Rental income, net of expenses, on real estate Portfolios is recognized when received. Accounting for the Portfolios is on an individual asset-by-asset basis as opposed to a pool basis. Subsequent to acquisition, the amortized cost of real estate Portfolios is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, which represents the net realizable value of the real estate Portfolio. A valuation allowance is established for any impairment identified through provisions charged to earnings in the period the impairment is identified. Impairments on real estate Portfolios were $17 in 2002. There were no impairments on real estate Portfolios in 2001 and 2000. Assets are foreclosed when necessary through an arrangement with an affiliated entity whereby title to the foreclosed asset is held by the affiliated entity and a note receivable from the affiliate is held by the Partnerships. For financial statement presentation, the affiliated entity note receivable created by the arrangement is included in Portfolio Assets and is recorded at the lower of allocated cost or fair value less estimated cost to sell the underlying asset. (b) INVESTMENT IN TRUST CERTIFICATES The Partnerships hold an investment in trust certificates, representing a residual interest in a REMIC created by the sale of certain Partnership assets. This residual interest is subordinate to the senior tranches of the certificate and represents the present value of the right to the excess cash flows generated by the securitized assets. The residual certificates are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. Because such assets can be contractually prepaid or otherwise settled in such a way that the holder would not receive all of the recorded investment, the assets are classified as available-for-sale investments and are carried at estimated fair value with any accompanying increases or decreases in estimated fair value being recorded as unrealized gains or losses in other comprehensive income in the accompanying combined statements of changes in partners' capital. The determination of fair value is based on the present value of the anticipated excess cash flows utilizing the certain valuation assumptions. The significant valuation assumptions include expected credit losses and timing of cash collected. The Partnerships assess the carrying value of this investment for impairment in accordance with the provisions of EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, which requires that other-than-temporary impairments in beneficial interests be written down to fair value with the resulting change being included in operations. As of December 31, 2002, no impairments have been recorded relating to the investment in trust certificate. There can be no assurance that the Partnerships' estimates used to determine the fair value of the investment in trust 92 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) certificate will remain appropriate for the life of each asset and it is reasonably possible that circumstances could change in future periods which could result in a material change in the estimates used to prepare the accompanying combined financial statements. If actual credit losses or timing of cash collected exceed the Company's current estimates, other than temporary impairment may be required to be recognized. (c) INCOME TAXES Under current Federal laws, partnerships are not subject to income taxes; therefore, no provision has been made for such taxes in the accompanying combined financial statements. For tax purposes, income or loss is included in the individual tax returns of the partners. (d) USE OF ESTIMATES The preparation of combined 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 combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (e) RECLASSIFICATIONS Certain amounts in the financial statements for prior years have been reclassified to conform with current financial statement presentation. 93 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (3) COMBINING FINANCIAL STATEMENTS FC Properties and WAMCO XXVIII are considered to be significant subsidiaries of FirstCity. The following tables summarize the combining balance sheets of the WAMCO Partnerships as of December 31, 2002 and 2001, and the related combining statements of operations, changes in partners' capital, and cash flows for each of the years' in the three-year period ended December 31, 2002. COMBINING BALANCE SHEETS DECEMBER 31, 2002
WAMCO OTHER FC PROPERTIES XXVIII PARTNERSHIPS COMBINED ------------- ------- ------------ -------- (DOLLARS IN THOUSANDS) ASSETS Cash.................................... $ 1,484 $ 2,440 $ 9,111 $ 13,035 Portfolio Assets, net................... 15,182 32,341 100,163 147,686 Investments in partnerships............. -- -- 2,302 2,302 Investments in trust certificates....... -- -- 7,883 7,883 Deferred profit sharing................. 17,671 -- -- 17,671 Other assets, net....................... 5 346 464 815 ------- ------- -------- -------- $34,342 $35,127 $119,923 $189,392 ======= ======= ======== ======== LIABILITIES AND PARTNERS' CAPITAL Notes payable........................... $ -- $18,882 $ 61,009 $ 79,891 Deferred compensation................... 21,706 -- -- 21,706 Other liabilities....................... 540 1,301 1,551 3,392 ------- ------- -------- -------- Total liabilities..................... 22,246 20,183 62,560 104,989 Preferred equity........................ -- -- 4,344 4,344 Partners' capital....................... 12,096 14,944 53,019 80,059 ------- ------- -------- -------- $34,342 $35,127 $119,923 $189,392 ======= ======= ======== ======== Notes payable owed to affiliates included in above balances............ $ -- $ -- $ 46,137 $ 46,137 Other liabilities owed to affiliates included in above balances............ 20 69 536 625
94 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) COMBINING BALANCE SHEETS DECEMBER 31, 2001
WAMCO OTHER FC PROPERTIES XXVIII PARTNERSHIPS COMBINED ------------- ------- ------------ -------- (DOLLARS IN THOUSANDS) ASSETS Cash.................................... $ 1,942 $ 3,510 $ 7,945 $ 13,397 Portfolio Assets, net................... 15,566 70,283 132,882 218,731 Investments in partnerships............. -- -- 2,302 2,302 Investments in trust certificates....... -- -- 8,223 8,223 Deferred profit sharing................. 15,506 -- -- 15,506 Other assets, net....................... 5 143 1,310 1,458 ------- ------- -------- -------- $33,019 $73,936 $152,662 $259,617 ======= ======= ======== ======== LIABILITIES AND PARTNERS' CAPITAL Notes payable........................... $ -- $47,964 $ 92,447 $140,411 Deferred compensation................... 20,552 -- -- 20,552 Other liabilities....................... 443 1,162 2,195 3,800 ------- ------- -------- -------- Total liabilities..................... 20,995 49,126 94,642 164,763 Preferred equity........................ -- -- 4,605 4,605 Partners' capital....................... 12,024 24,810 53,415 90,249 ------- ------- -------- -------- $33,019 $73,936 $152,662 $259,617 ======= ======= ======== ======== Notes payable owed to affiliates included in above balances............ $ -- $47,964 $ 53,214 $101,178 Other liabilities owed to affiliates included in above balances............ 1 95 462 558
95 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) COMBINING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2002
FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- ------- ------------ -------- (DOLLARS IN THOUSANDS) Proceeds from resolution of Portfolio Assets....... $ 6,803 $47,892 $78,503 $133,198 Cost of Portfolio Assets resolved.................. 2,000 34,418 65,752 102,170 ------- ------- ------- -------- Gain on resolution of Portfolio Assets............. 4,803 13,474 12,751 31,028 Interest income on performing Portfolio Assets..... -- 2,767 8,513 11,280 Interest and fees expense -- affiliate............. -- (1,826) (3,361) (5,187) Interest and fees expense -- other................. (9) (585) (1,363) (1,957) Provision for loan losses.......................... (17) -- (887) (904) Service fees -- affiliate.......................... (204) (1,574) (2,001) (3,779) General, administrative and operating expenses..... (1,923) (1,488) (1,379) (4,790) Other income, net.................................. 18 34 1,798 1,850 ------- ------- ------- -------- Net earnings..................................... $ 2,668 $10,802 $14,071 $ 27,541 ======= ======= ======= ========
COMBINING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001
FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- ------- ------------ -------- (DOLLARS IN THOUSANDS) Proceeds from resolution of Portfolio Assets....... $ 9,509 $32,142 $27,537 $ 69,188 Cost of Portfolio Assets resolved.................. 2,115 23,513 19,288 44,916 ------- ------- ------- -------- Gain on resolution of Portfolio Assets............. 7,394 8,629 8,249 24,272 Interest income on performing Portfolio Assets..... -- 3,047 16,496 19,543 Interest and fees expense -- affiliate............. (160) (3,507) (8,437) (12,104) Interest and fees expense -- other................. -- -- (1,234) (1,234) Provision for loan losses.......................... -- -- (1,254) (1,254) Service fees -- affiliate.......................... (285) (1,067) (1,779) (3,131) General, administrative and operating expenses..... (2,710) (1,330) (2,712) (6,752) Other income, net.................................. 32 64 1,692 1,788 ------- ------- ------- -------- Net earnings..................................... $ 4,271 $5,836 $11,021 $ 21,128 ======= ======= ======= ========
COMBINING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000
FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- ------ ------------ -------- (DOLLARS IN THOUSANDS) Proceeds from resolution of Portfolio Assets....... $ 8,500 $2,532 $ 33,150 $ 44,182 Cost of Portfolio Assets resolved.................. 4,346 1,854 23,915 30,115 ------- ------ -------- -------- Gain on resolution of Portfolio Assets............. 4,154 678 9,235 14,067 Interest income on performing Portfolio Assets..... -- 286 17,763 18,049 Interest and fees expense -- affiliate............. (580) (573) (13,441) (14,594) Interest and fees expense -- other................. -- -- (182) (182) Provision for loan losses.......................... -- -- (58) (58) Service fees -- affiliate.......................... (255) (104) (2,169) (2,528) General, administrative and operating expenses..... (2,240) (57) (1,762) (4,059) Other income, net.................................. 58 8 1,596 1,662 ------- ------ -------- -------- Net earnings..................................... $ 1,137 $ 238 $ 10,982 $ 12,357 ======= ====== ======== ========
See accompanying notes to combined financial statements. 96 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) COMBINING STATEMENTS OF CHANGES IN PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- -------- ------------ -------- (DOLLARS IN THOUSANDS) BALANCE AT DECEMBER 31, 1999...................... $ 8,005 $ -- $ 55,014 $ 63,019 Contributions................................... -- 4,421 1,712 6,133 Distributions................................... (296) (443) (19,166) (19,905) Net earnings.................................... 1,137 238 10,982 12,357 ------- -------- -------- -------- Total comprehensive income...................... 1,137 238 10,982 12,357 ------- -------- -------- -------- BALANCE AT DECEMBER 31, 2000...................... 8,846 4,216 48,542 61,604 Contributions................................... -- 18,890 7,640 26,530 Distributions................................... (1,093) (4,132) (14,722) (19,947) Net earnings.................................... 4,271 5,836 11,021 21,128 Unrealized net gain on securitization........... -- -- 934 934 ------- -------- -------- -------- Total comprehensive income...................... 4,271 5,836 11,955 22,062 ------- -------- -------- -------- BALANCE AT DECEMBER 31, 2001...................... 12,024 24,810 53,415 90,249 ------- -------- -------- -------- Contributions................................... -- 15,971 15,971 Distributions................................... (2,596) (20,668) (30,934) (54,198) Net earnings.................................... 2,668 10,802 14,071 27,541 Unrealized net gain on securitization........... -- -- 496 496 ------- -------- -------- -------- Total comprehensive income...................... 2,668 10,802 14,567 28,037 ------- -------- -------- -------- BALANCE AT DECEMBER 31, 2002...................... $12,096 $ 14,944 $ 53,019 $ 80,059 ======= ======== ======== ========
97 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) COMBINING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2002
FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- -------- ------------ --------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net earnings....................................... $ 2,668 $ 10,802 $ 14,071 $ 27,541 Adjustments to reconcile net earnings to net cash provided by operating activities: Amortization of loan origination and commitment fees.......................................... -- 87 435 522 Amortization of deferred profit sharing......... 720 -- -- 720 Accretion of unrealized gain on trust certificates.................................. -- -- (287) (287) Provision for loan losses....................... 17 -- 887 904 Gain on resolution of Portfolio Assets.......... (4,803) (13,474) (12,751) (31,028) Purchase of Portfolio Assets.................... -- -- (48,713) (48,713) Capitalized costs on Portfolio Assets........... (1,633) (2,177) (249) (4,059) Capitalized interest on Portfolio Assets........ -- (102) (795) (897) Proceeds from resolution of Portfolio Assets.... 6,803 47,892 78,503 133,198 Proceeds from sell back of Portfolio Assets..... -- -- -- -- Principal payments on Performing Portfolio Assets........................................ -- 5,803 15,837 21,640 Increase in deferred profit sharing............. (2,885) -- -- (2,885) (Increase) decrease in other assets............. -- (295) 465 170 Increase in deferred compensation............... 2,885 -- -- 2,885 Deferred compensation and profit sharing paid... (1,730) -- -- (1,730) Increase (decrease) in other liabilities........ 96 144 (698) (458) ------- -------- -------- --------- Net cash provided by operating activities..... 2,138 48,680 46,705 97,523 Cash flows from investing activities: Contribution to subsidiaries....................... -- -- -- -- Change in trust certificates....................... -- -- 1,123 1,123 ------- -------- -------- --------- Net cash provided by investing activities..... -- -- 1,123 1,123 Cash flows from financing activities: Borrowing of debt -- affiliate..................... -- -- 53,143 53,143 Borrowing of debt.................................. -- 28,500 -- 28,500 Repayment of debt -- affiliate..................... -- (47,964) (60,220) (108,184) Repayment of debt.................................. -- (9,618) (24,361) (33,979) Capitalized interest on preferred equity........... -- -- 150 150 Repayment of preferred equity...................... -- -- (411) (411) Capital contributions.............................. -- -- 15,971 15,971 Capital distributions.............................. (2,596) (20,668) (30,934) (54,198) ------- -------- -------- --------- Net cash used in financing activities......... (2,596) (49,750) (46,662) (99,008) ------- -------- -------- --------- Net increase (decrease) in cash...................... (458) (1,070) 1,166 (362) Cash at beginning of year............................ 1,942 3,510 7,945 13,397 ------- -------- -------- --------- Cash at end of year.................................. $ 1,484 $ 2,440 $ 9,111 $ 13,035 ======= ======== ======== ========= Supplemental disclosure of cash flow information Approximate cash paid for interest................. $ 9 $ 2,412 $ 4,361 $ 6,782
98 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) COMBINING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2001
FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- -------- ------------ --------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net earnings....................................... $ 4,271 $ 5,836 $ 11,021 $ 21,128 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of loan origination and commitment fees.......................................... -- -- 768 768 Amortization of deferred profit sharing......... 1,228 -- -- 1,228 Provision for loan losses....................... -- -- 1,254 1,254 Gain on resolution of Portfolio Assets.......... (7,394) (8,629) (8,249) (24,272) Purchase of Portfolio Assets.................... -- (82,951) (35,196) (118,147) Capitalized costs on Portfolio Assets........... (375) (149) (12) (536) Capitalized interest on Portfolio Assets........ -- (7) (1,221) (1,228) Proceeds from resolution of Portfolio Assets.... 9,509 32,142 27,537 69,188 Proceeds from sell back of Portfolio Assets..... -- -- 1,594 1,594 Principal payments on Performing Portfolio Assets........................................ -- 4,936 29,135 34,071 Increase in deferred profit sharing............. (560) -- -- (560) (Increase) decrease in other assets............. 157 (252) 52 (43) Increase in deferred compensation............... 560 -- -- 560 Deferred compensation and profit sharing paid... (2,365) -- -- (2,365) Increase (decrease) in other liabilities........ (142) 957 (557) 258 ------- -------- -------- --------- Net cash provided by (used in) operating activities................................. 4,889 (48,117) 26,126 (17,102) Cash flows from investing activities: Contribution to subsidiaries....................... -- -- (48) (48) Change in trust certificates....................... -- -- (381) (381) ------- -------- -------- --------- Net cash used in investing activities......... -- -- (429) (429) Cash flows from financing activities: Borrowing of debt affiliate........................ 41 64,187 29,341 93,569 Borrowing of debt.................................. -- -- 45,901 45,901 Repayment of debt affiliate........................ (3,165) (28,191) (81,971) (113,327) Repayment of debt.................................. -- -- (8,930) (8,930) Capitalized interest on preferred equity........... -- -- 1,049 1,049 Repayment of preferred equity...................... -- -- -- -- Capital contributions.............................. -- 18,890 7,640 26,530 Capital distributions.............................. (1,093) (4,132) (14,722) (19,947) ------- -------- -------- --------- Net cash provided by (used in) financing activities................................. (4,217) 50,754 (21,692) 24,845 ------- -------- -------- --------- Net increase in cash................................. 672 2,637 4,005 7,314 Cash at beginning of year............................ 1,270 873 3,940 6,083 ------- -------- -------- --------- Cash at end of year.................................. $ 1,942 $ 3,510 $ 7,945 $ 13,397 ======= ======== ======== ========= Supplemental disclosure of cash flow information: Approximate cash paid for interest................. $ 107 $ 3,365 9,061 $ 12,533
99 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) COMBINING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2000
FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- -------- ------------ -------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net earnings.................................... $ 1,137 $ 238 $ 10,982 $ 12,357 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of loan origination and commitment fees............................ -- -- 376 376 Amortization of deferred profit sharing...... 1,117 -- -- 1,117 Provision for loan losses.................... -- -- 58 58 Gain on resolution of Portfolio Assets....... (4,154) (678) (9,235) (14,067) Purchase of Portfolio Assets................. -- (17,852) -- (17,852) Capitalized costs on Portfolio Assets........ (610) (287) (600) (1,497) Capitalized interest on Portfolio Assets..... -- -- -- -- Proceeds from resolution of Portfolio Assets..................................... 8,500 2,532 33,150 44,182 Proceeds from sell back of Portfolio Assets..................................... -- -- -- -- Principal payments on Performing Loan pools...................................... -- 660 27,131 27,791 Increase in deferred profit sharing.......... (9,409) -- -- (9,409) (Increase) decrease in other assets.......... (144) (17) 756 595 Increase in deferred compensation............ 9,409 -- -- 9,409 Deferred compensation and profit sharing paid....................................... -- -- -- -- Increase (decrease) in other liabilities..... 425 331 504 1,260 ------- -------- -------- -------- Net cash provided by (used in) operating activities.............................. 6,271 (15,073) 63,122 54,320 Cash flows from investing activities: Contribution to subsidiaries.................... -- -- (573) (573) Change in trust certificates.................... -- -- (420) (420) ------- -------- -------- -------- Net cash used in investing activities...... -- -- (993) (993) Cash flows from financing activities: Borrowing of debt- affiliate.................... 171 13,265 8,621 22,057 Borrowing of debt............................... -- -- -- -- Repayment of debt-affiliate..................... (5,939) (1,297) (53,772) (61,008) Repayment of debt............................... -- -- (919) (919) Capitalized interest on preferred equity........ -- -- -- -- Repayment of preferred equity................... -- -- -- -- Capital contributions........................... -- 4,421 1,712 6,133 Capital distributions........................... (296) (443) (19,166) (19,905) ------- -------- -------- -------- Net cash provided by (used in) financing activities.............................. (6,064) 15,946 (63,524) (53,642) ------- -------- -------- -------- Net increase (decrease) in cash................. 207 873 (1,395) (315) Cash at beginning of year....................... 1,063 -- 5,335 6,398 ------- -------- -------- -------- Cash at end of year............................. $ 1,270 $ 873 $ 3,940 $ 6,083 ======= ======== ======== ======== Supplemental disclosure of cash flow information: Approximate cash paid for interest.............. $ 521 $ 511 13,611 $ 14,643
100 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (4) PORTFOLIO ASSETS Portfolio Assets are summarized as follows:
DECEMBER 31, 2002 ------------------------------------------------ FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- -------- ------------ --------- Non-performing Portfolio Assets.............. $ -- $ 60,386 $ 141,468 $ 201,854 Performing Portfolio Assets.................. -- 20,404 59,461 79,865 Real estate Portfolios....................... 15,182 -- 1,129 16,311 ------- -------- --------- --------- Total Portfolio Assets..................... 15,182 80,790 202,058 298,030 Discount required to reflect Portfolio Assets at carrying value.......................... -- (48,449) (101,895) (150,344) ------- -------- --------- --------- Portfolio Assets, net...................... $15,182 $ 32,341 $ 100,163 $ 147,686 ======= ======== ========= =========
DECEMBER 31, 2001 ------------------------------------------------ FC WAMCO OTHER PROPERTIES XXVIII PARTNERSHIPS COMBINED ---------- -------- ------------ --------- Non-performing Portfolio Assets.............. $ -- $104,735 $ 62,548 $ 167,283 Performing Portfolio Assets.................. -- 39,762 148,307 188,069 Real estate Portfolios....................... 15,566 -- 1,526 17,092 ------- -------- -------- --------- Total Portfolio Assets..................... 15,566 144,497 212,381 372,444 Discount required to reflect Portfolio Assets at carrying value.......................... -- (74,214) (79,499) (153,713) ------- -------- -------- --------- Portfolio Assets, net...................... $15,566 $ 70,283 $132,882 $ 218,731 ======= ======== ======== =========
Portfolio Assets are pledged to secure non-recourse notes payable. (5) INTEREST RELATED TO RESIDUAL INTEREST IN TRUST CERTIFICATES Residual certificates held by the Partnerships to which the Partnerships receives all the economic benefits and risks consist of retained interests in the amount of $7,883 and $8,223 at December 31, 2002 and 2001, respectively. The Partnerships recognized interest income on these certificates utilizing a yield of 20.90%, 19.63% and 20.23% for the years ended December 31, 2002, 2001 and 2000, respectively. An analysis of the changes in the unrealized net gains on securitization transactions during 2002 and 2001 follows (dollars in thousands). There were no unrealized gains or losses on securitization transactions in 2000. BALANCE, DECEMBER 31, 2000.................................. $ -- Aggregate adjustment for the period resulting from unrealized net gains on securitizations................. 934 ------ BALANCE, DECEMBER 31, 2001.................................. 934 Aggregate adjustment for the period resulting from unrealized net gains on securitizations................. 496 ------ BALANCE, DECEMBER 31, 2002.................................. $1,430 ======
SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- A Replacement of FASB Statement No. 125 requires that the effect on the fair value of the retained interests of two adverse changes in each key assumption be independently calculated. 101 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 2002 key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10% and 20% adverse changes in those assumptions are as follows: Balance sheet carrying value of retained interests -- fair value..................................................... $ 7,883 Expected credit losses...................................... Impact on fair value of 10% adverse change.................. (788) Impact on fair value of 20% adverse change.................. (1,576) Timing of cash collected.................................... Impact on fair value of 10% adverse change.................. (630) Impact on fair value of 20% adverse change.................. (1,209)
These sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increase in market interest rates may result in increased credit losses), which might magnify or counteract the sensitivities. (6) DEFERRED PROFIT SHARING AND DEFERRED COMPENSATION In connection with the formation of FC Properties, an agreement was entered into which provided for potential payments to the project manager based on a percentage of total estimated sales. An equal amount of deferred profit participation and deferred compensation is recorded based on such estimates with the deferred profit participation being amortized into expense in proportion to actual sales realized. No profit participation was paid until the limited partners recognized a 20% return on their investment. This return threshold was met in 2001. At December 31, 2002 and 2001, the estimated liability for this profit participation was $21,706 and $20,552, respectively, and was included in deferred compensation in the accompanying combined balance sheets. Additionally, amortization of $720, $1,228 and $1,117 was recognized during 2002, 2001 and 2000, respectively, and has been included in general, administrative and operating expenses in the accompanying combined statements of operations. The achievement of the 20% return on investment resulted in payments of $1,730 and $2,365 in deferred profit sharing and commissions in 2002 and 2001, respectively. (7) NOTES PAYABLE Notes payable at December 31, 2002 and 2001 consist of the following:
2002 2001 ------- -------- London Interbank Offering Rate (LIBOR) (1.38% at December 31, 2002) based: WAMCO XXVIII (LIBOR plus 2.5%)............................ $18,882 $ -- WAMCO XXVIII (LIBOR plus 2.31% to 4.0%) -- affiliate...... -- 47,964 Other Partnerships (LIBOR plus 2.5% to 5%) -- affiliate... 34,177 43,334 Other Partnerships (LIBOR plus 1.75% to 5%)............... 14,872 37,692 Other Partnerships (LIBOR plus 5%, with floor 9.0%) -- affiliate..................................... 4,061 -- ------- -------- Total LIBOR............................................ 71,992 128,990 Fixed rate: Other Partnerships (9.8% to 10.17%) -- affiliate.......... 7,899 9,880 Other Partnerships (6.5%)................................. -- 1,541 ------- -------- $79,891 $140,411 ======= ========
102 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Collateralized loans are typically payable based on proceeds from disposition of and payments received on the Portfolio Assets. Contractual maturities (excluding principal and interest payments payable from proceeds from dispositions of and payments received on the Portfolio Assets) of notes payable are as follows:
WAMCO OTHER XXVIII PARTNERSHIPS COMBINED ------- ------------ -------- YEAR ENDING DECEMBER 31: 2003.................................................. $2,382 $15,676 $18,058 2004.................................................. 16,500 34,948 51,448 2005.................................................. -- 6,385 6,385 2006.................................................. -- -- -- 2007.................................................. -- 4,000 4,000 Thereafter............................................ -- -- -- ------- ------- ------- $18,882 $61,009 $79,891 ======= ======= =======
It is anticipated that the notes payable maturing in 2003 will be renewed or refinanced into financing arrangements with terms similar to current facilities. The loan agreements and master note purchase agreements, under which notes payable were incurred, contain various covenants including limitations on other indebtedness, maintenance of service agreements and restrictions on use of proceeds from disposition of and payments received on the Portfolio Assets. As of December 31, 2002, the Partnerships were in compliance with the aforementioned covenants. In connection with notes payable, the Partnerships incurred origination and commitment fees. These fees are amortized over the stated maturity of the related notes and are included in interest and fees on notes payable. At December 31, 2002 and 2001, approximately $447 and $603, respectively, of origination and commitment fees are included in other assets, net. (8) TRANSACTIONS WITH AFFILIATES Under the terms of the various servicing agreements between the Partnerships and FirstCity, FirstCity receives a servicing fee based on proceeds from resolution of the Portfolio Assets for processing transactions on the Portfolio Assets and for conducting settlement, collection and other resolution activities. Included in general, administrative and operating expenses in the accompanying combined statements of operations is approximately $3,779, $3,131, and $2,528 in servicing fees incurred by the Partnerships in 2002, 2001 and 2000, respectively. In March 2001, FirstCity sold 35% of its equity interest in FC Properties, Ltd. to CFSC Capital Corp. II. During 2001, WAMCO IX sold its portfolio assets that had projected estimated remaining collections to WAMCO XXV. The assets were sold for their historical cost book value of $1,206. The sale resulted in no gain or goodwill being recorded. This transaction was eliminated in the combining statements of operations for 2001. During 2000, WAMCO V merged with WAMCO III, with WAMCO III being the surviving entity. As a result of the merger, WAMCO V contributed $3,370 in assets and $1,461 in liabilities to WAMCO III. The contributed assets and liabilities were recorded at historical cost on WAMCO III. The partners in WAMCO V received interests in WAMCO III reflecting the net contribution from WAMCO V to WAMCO III. 103 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) During 2000, WAMCO XVII merged with WAMCO III, with WAMCO III being the surviving entity. As a result of the merger, WAMCO XVII contributed $4,024 in assets and $2,275 in liabilities to WAMCO III. The contributed assets and liabilities were recorded at historical cost on WAMCO III. The partners in WAMCO XVII received interests in WAMCO III reflecting the net contribution from WAMCO XVII to WAMCO III. (9) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Partnerships disclose estimated fair values of their financial instruments. Fair value estimates, methods and assumptions are set forth below. (a) CASH AND OTHER LIABILITIES The carrying amount of cash and other liabilities approximates fair value at December 31, 2002 and 2001 due to the short-term nature of such accounts. (b) PORTFOLIO ASSETS Portfolio Assets are carried at the lower of cost or estimated fair value. The estimated fair value is calculated by discounting projected cash flows on an asset-by-asset basis using estimated market discount rates that reflect the credit and interest rate risk inherent in the assets. The carrying value of Portfolio Assets was $147,686 and $218,731 at December 31, 2002 and 2001, respectively. The estimated fair value of the Portfolio Assets was approximately $200,881 and $287,302 at December 31, 2002 and 2001, respectively. (c) INVESTMENTS IN TRUST CERTIFICATES Investments in trust certificates are carried at estimated fair value. The determination of fair value is based on the present value of the anticipated excess cash flows utilizing the certain valuation assumptions. The carrying value of Investments in Trust Certificates was $7,883 and $8,223 at December 31, 2002 and 2001, respectively. The estimated fair value of the Investments in Trust Certificates was approximately $7,883 and $8,223 at December 31, 2002 and 2001, respectively. (d) NOTES PAYABLE Management believes that for similar financial instruments with comparable credit risks, the stated interest rates at December 31, 2002 and 2001 approximate market rates. Accordingly, the carrying amount of notes payable is believed to approximate fair value. Additional, the majority of the partnerships' debt is at variable rates of interest. (10) PREFERRED EQUITY In 1999, CFSC Capital Corp. XXX contributed $3,556 as preferred equity in Community Development Investment, LLC. The preferred equity agreement requires interest to be paid at a rate equal to the LIBOR plus 5% (6.38% at December 31, 2002). Interest in the amount of $11 and $18 has been accrued at December 31, 2002 and 2001, respectively. Interest expense on the preferred equity totaled $311, $458 and $411 during 2002, 2001 and 2000, respectively. (11) COMMITMENTS AND CONTINGENCIES Calibat Fund, LLC has committed to make additional investments in partnerships up to $89 at December 31, 2002. 104 WAMCO PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Partnerships are involved in various legal proceedings in the ordinary course of business. In the opinion of management, the resolution of such matters will not have a material adverse impact on the combined financial position, results of operations or liquidity of the Partnerships. (12) INTEREST RATE SWAP In 2001, WAMCO XXVIII entered into an interest rate swap contract in order to manage a portion of the interest rate risk associated with WAMCO XXVIII's long-term debt. Under this swap agreement, WAMCO XXVIII pays fixed/floating rate interest and receives floating rate interest at specified periodic intervals based on an agreed upon notional amount. By using derivative financial instruments to hedge exposures to changes in interest rates, WAMCO XXVIII exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes WAMCO XXVIII, which creates credit risk for WAMCO XXVIII. When the fair value of a derivative contract is negative, WAMCO XXVIII owes the counterparty and, therefore, it does not possess credit risk. WAMCO XXVIII minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties. Income or expense associated with these periodic payments is recorded on an accrual basis. WAMCO XXVIII recorded $783 and $404 of net swap expense for the years ended December 31, 2002 and 2001, respectively, associated with these periodic payments. Net swap expense is included in interest and fees expense -- affiliate in the accompanying combined statements of operations. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, currency exchange rates, or commodity prices. The market risk associated with interest-rate, commodity-price, and foreign-exchange contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. WAMCO XXVIII has not met the criteria necessary to categorize its swap agreement as a hedging activity under the provisions of FASB No. 133, Accounting for Derivative Instruments and Hedging Activities, therefore, changes in fair value of the interest rate swap are reported in current earnings. The following table summarizes WAMCO XXVIII's interest rate swap contract, included in other liabilities, and unrealized depreciation of $216 and $840 included in general, administrative and operating expenses at December 31, 2002 and 2001, respectively:
SWAP SWAP LIABILITY AT LIABILITY AT NOTIONAL CONTACT DECEMBER 31, DECEMBER 31, AMOUNT MATURITY DATE FIXED RATE FLOATING RATE 2002 2001 - -------- ------------- ---------- ------------- ------------ ------------ $ 4,510 12/15/02 6.136% One Month LIBOR (1.38% at 12/31/02) $ -- $157 4,510 12/15/03 6.139% One Month LIBOR (1.38% at 12/31/02) 199 225 4,510 12/15/04 6.167% One Month LIBOR (1.38% at 12/31/02) 368 232 4,510 12/15/05 6.195% One Month LIBOR (1.38% at 12/31/02) 489 226 - ------- ------ ---- $18,040 $1,056 $840 ======= ====== ====
105 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 AND FEBRUARY 28, 2001 (WITH INDEPENDENT AUDITORS' REPORT THEREON) 106 INDEPENDENT AUDITORS' REPORT The Board of Directors Drive Financial Services LP: We have audited the accompanying consolidated balance sheets of Drive Financial Services LP (a Texas Limited Partnership) and subsidiaries (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of operations, partners' equity, and cash flows for the year ended December 31, 2002 and the periods March 1, 2001 through December 31, 2001 and August 1, 2000 through February 28, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Drive Financial Services LP and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the year ended December 31, 2002 and the periods March 1, 2001 through December 31, 2001 and August 1, 2000 through February 28, 2001, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 2(k) to the consolidated financial statements, the Company changed its method of accounting for residual interests in securitizations in 2001 as a result of the adoption of EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. KPMG LLP Dallas, Texas February 15, 2003, except as to notes 6 and 11, which are as of February 28, 2003 107 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND, 2001
2002 2001 -------- -------- (IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 14,337 $ 7,303 Restricted cash............................................. 12,124 -- Retail installment contracts, net........................... 367,520 70,447 Residual interests in securitizations....................... 63,202 77,407 Accrued interest receivable................................. 4,915 1,089 Furniture and equipment, net of accumulated depreciation of $5,077 in 2002 and $2,796 in 2001......................... 4,905 6,201 Other assets................................................ 4,674 3,031 -------- -------- Total assets...................................... $471,677 $165,478 ======== ======== LIABILITIES, SUBORDINATED CAPITAL NOTE, AND PARTNERS' EQUITY Notes payable, including $176,936 in 2002 and $94,665 in 2001 to affiliate......................................... $235,036 $ 94,665 Notes payable related to securitized retail installment contracts................................................. 151,386 -- Capital lease obligations................................... 268 830 Accrued interest............................................ 1,387 539 Accounts payable and accrued expenses....................... 12,468 11,954 -------- -------- Total liabilities................................. 400,545 107,988 -------- -------- Subordinated capital note................................... 48,000 32,000 Partners' equity............................................ 23,132 25,490 Commitments and contingencies (notes 10 and 11)............. -- -- -------- -------- Total liabilities, subordinated capital note, and partners' equity................................. $471,677 $165,478 ======== ========
See accompanying notes to consolidated financial statements. 108 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2002 AND THE PERIODS MARCH 1, 2001 THROUGH DECEMBER 31, 2001 AND AUGUST 1, 2000 THROUGH FEBRUARY 28, 2001
DECEMBER 31, DECEMBER 31, FEBRUARY 28, 2002 2001 2001 ------------ ------------ ------------ (IN THOUSANDS) Finance and other interest income....................... $101,238 $37,506 $22,031 Interest expense, including $13,046, $7,679 and $5,373, respectively, to an affiliate......................... 16,366 9,329 8,165 -------- ------- ------- Net interest margin.............................. 84,872 28,177 13,866 -------- ------- ------- Provision for credit losses on retail installment contracts............................................. 28,663 5,377 4,129 Impairment of residual interests in securitizations, including servicing asset............................. 3,415 5,048 -- -------- ------- ------- Net interest margin after provision for credit losses and impairments........................ 52,794 17,752 9,737 -------- ------- ------- Other revenues: Gain on sale of retail installment contracts.......... -- 39,033 9,434 Servicing income...................................... 11,115 9,952 4,083 Other income.......................................... 1,205 439 173 -------- ------- ------- Total other revenues............................. 12,320 49,424 13,690 -------- ------- ------- Costs and expenses: Salaries and benefits................................. 41,648 28,706 13,674 Servicing expense..................................... 7,980 4,434 2,211 Occupancy, data processing, communication, and other.............................................. 17,126 13,990 6,566 -------- ------- ------- Total costs and expenses......................... 66,754 47,130 22,451 -------- ------- ------- (Loss) income before cumulative effect of change in accounting principle....................... (1,640) 20,046 976 Cumulative effect of change in accounting principle -- permanent impairments of residual interests............................................. -- (783) -- -------- ------- ------- Net (loss) income................................ $ (1,640) $19,263 $ 976 ======== ======= =======
See accompanying notes to consolidated financial statements. 109 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY YEAR ENDED DECEMBER 31, 2002 AND FOR THE PERIODS MARCH 1, 2001 THROUGH DECEMBER 31, 2001 AND AUGUST 1, 2000 THROUGH FEBRUARY 28, 2001
ACCUMULATED OTHER TOTAL GENERAL LIMITED COMPREHENSIVE PARTNERS' PARTNER PARTNERS INCOME EQUITY ------- -------- ------------- --------- (IN THOUSANDS) Contribution of net assets (note 1)................. $ 3 $ 2,889 $ 1,106 $ 3,998 Comprehensive income: Net income........................................ 1 975 -- 976 Net change in unrealized gains on residual interests in securitizations................... -- -- 3,051 3,051 ------- Comprehensive income......................... 4,027 --- ------- ------- ------- Partners' equity at February 28, 2001............... 4 3,864 4,157 8,025 Comprehensive income: Net income........................................ 19 19,244 -- 19,263 Net change in unrealized losses on residual interests in securitizations................... -- -- (1,798) (1,798) ------- Comprehensive income......................... 17,465 --- ------- ------- ------- Partners' equity at December 31, 2001............... 23 23,108 2,359 25,490 Comprehensive loss: Net loss.......................................... (1) (1,639) -- (1,640) Net change in unrealized losses on residual interests in securitizations................... -- -- (718) (718) ------- Comprehensive loss........................... (2,358) --- ------- ------- ------- Partners' equity at December 31, 2002............... $22 $21,469 $ 1,641 $23,132 === ======= ======= =======
See accompanying notes to consolidated financial statements. 110 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2002 AND FOR THE PERIODS MARCH 1, 2001 THROUGH DECEMBER 31, 2001 AND AUGUST 1, 2000 THROUGH FEBRUARY 28, 2001
DECEMBER 31, DECEMBER 31, FEBRUARY 28, 2002 2001 2001 ------------ ------------ ------------ (IN THOUSANDS) Cash flows from operating activities: Net (loss) income........................................ $ (1,640) $ 19,263 $ 976 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Decrease (increase) in retail installment contracts, net of securitization activity...................... (293,279) 56,884 (56,431) Provision for credit losses on retail installment contracts........................................... 28,663 5,377 4,129 Depreciation and amortization......................... 2,281 1,951 859 Gain on sale of retail installment contracts.......... -- (39,033) (9,434) Accretion of discount and capitalized origination costs............................................... (27,093) -- -- Accretion of interest related to residual interests... (11,965) (12,020) (3,126) Impairment of residual interests in securitizations, including servicing asset........................... 3,415 5,048 -- Cumulative effect of change in accounting principle -- permanent impairment of residual interests.......... -- 783 -- Changes in assets and liabilities: Accrued interest receivable......................... (3,826) 671 (635) Other assets........................................ (1,643) 141 269 Accrued interest payable............................ 848 (564) 923 Accounts payable and accrued expenses............... 514 (3,135) 11,138 --------- -------- -------- Net cash provided by (used in) operating activities..................................... (303,725) 35,366 (51,332) --------- -------- -------- Cash flows from investing activities: Purchases of furniture and equipment..................... (985) (3,956) (1,614) Collections on residual interests in securitizations..... 16,673 29,455 10,640 --------- -------- -------- Net cash provided by investing activities........ 15,688 25,499 9,026 --------- -------- -------- Cash flows from financing activities: Net increase (decrease) in warehouse line of credit...... 153,771 (56,725) (18,879) Net change in restricted cash............................ (12,124) -- -- Proceeds from term notes payable......................... -- -- 60,000 Payments on term notes payable........................... (13,400) (15,975) (16,525) Payments on capital leases............................... (562) (451) (312) Proceeds from subordinated capital note.................. 16,000 12,000 20,000 Proceeds from notes payable related to securitized retail installment contracts, net of debt issuance costs..... 174,141 -- -- Payments on notes payable related to securitized retail installment contracts................................. (22,755) -- -- --------- -------- -------- Net cash provided by (used in) financing activities..................................... 295,071 (61,151) 44,284 --------- -------- -------- Net increase (decrease) in cash.................. 7,034 (286) 1,978 Cash at beginning of period................................ 7,303 7,589 5,611 --------- -------- -------- Cash at end of period...................................... $ 14,337 $ 7,303 $ 7,589 ========= ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest................. $ 15,518 $ 9,894 $ 7,216 ========= ======== ========
See accompanying notes to consolidated financial statements. 111 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 AND FEBRUARY 28, 2001 (DOLLARS IN THOUSANDS) (1) ORGANIZATION AND BUSINESS Drive Financial Services LP (Drive FS), a Texas Limited Partnership, was formed on August 1, 2000. Pursuant to the terms of various Contribution and Assumption Agreements, Drive FS assumed substantially all the assets and the business of the former auto finance group of FirstCity Funding and FirstCity Consumer Lending, including the origination and servicing platforms, all rights and obligations under asset-backed securities, and 100% of the stock of all special purpose entities formed to be "sellers" in securitization transactions. Drive FS contributed the assets and liabilities and business of FirstCity Servicing to Drive Servicing LLC and the asset-backed securities to Drive ABS LP both wholly owned and consolidated entities. The assets and liabilities were contributed at their historical net book value of $3,998. Drive FS is a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers. Drive FS acquires retail installment contracts principally from manufacturer-franchised dealers in connection with their sale of used and new automobiles and light duty trucks to "sub-prime" customers with limited credit histories or past credit problems. At the present, Drive FS does not extend credit directly to consumers, nor does it purchase retail installment contracts from other financial institutions. The accompanying consolidated financial statements include the accounts of Drive Financial Services LP, Drive ABS LP, Drive ABS GP, FCAR Receivables Corp. (FCAR), Drive Servicing LLC, Drive BOS GP, Drive BOS LP and Drive VFC LP (collectively referred to as the Company). Significant intercompany transactions have been eliminated in the preparation of the consolidated financial statements. The Company owns 100% of the membership interests of FCAR, Drive BOS LP, and Drive VFC LP, special purpose entities formed to acquire retail installment contracts, which are pledged as collateral on warehouse lines of credit. Drive GP LLC (Drive GP) is the sole general partner of Drive FS and owns 0.1% of the Drive FS. FirstCity Consumer Lending owns 31% of the membership interests of Drive GP. Management Group LP, a Texas limited partnership that is owned by members of management of the Company, owns 20% of the membership interests of Drive GP. IFA Drive GP Holdings LLC, a Delaware limited liability company and a wholly owned subsidiary of BoS (USA), owns the remaining 49% of the membership interests of Drive GP. BoS (USA) formerly known as IFA Incorporated is a wholly owned subsidiary of Bank of Scotland. On September 10, 2001, Bank of Scotland merged with Halifax Group plc, a personal and commercial lending institution, to form HBOS plc. As a result of the merger, the Company's fiscal year end changed from February 28 to December 31. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (a) RETAIL INSTALLMENT CONTRACTS, NET Retail installment contracts, net consist of sub-prime automobile finance receivables, which are acquired from third-party dealers at a nonrefundable discount from the contractual principal amount. At December 31, 2001, all retail installment contracts were held for sale and stated at the lower of cost or fair value in the aggregate. On July 1, 2002, the Company made a decision to change the structure of its securitization transactions to treat the transactions as secured financings for accounting purposes. Therefore, retail installment contracts are classified as held to maturity and carried at amortized cost, net of credit loss reserves at December 31, 2002, and include retail installment contracts pledged under secured financings. The Company does not hedge 112 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) its retail installment contracts at this time. Management of the Company does not believe that the Company is exposed to material interest rate risk during the period contracts are not securitized. Interest is accrued when earned in accordance with the contractual terms of the retail installment contract. The accrual of interest is discontinued once a retail installment contract becomes past due 60 days or more. Discounts on retail installment contracts are recognized as adjustments to the yield of the related contract. (b) SALES OF RETAIL INSTALLMENT CONTRACT FROM SECURITIZATION AND INTEREST RELATED TO RESIDUAL CERTIFICATES The Company accounts for sales of retail installment contracts into securitizations in accordance with the 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 No. 140). Prior to July 1, 2002, the Company securitized and sold certain auto retail installment contracts to investors with limited risk. The Company has retained the servicing rights to these retail installment contracts. In connection with the sales by FCAR, VFC LP, and Drive BOS of retail installment contracts through securitizations, Drive ABS retained certain residual certificates associated with the securitization as described below. Drive LP and Drive ABS have entered into an agreement whereby Drive LP receives all the economic benefits associated with the residual certificates and conversely assumes all the risks. Upon sale, retail installment contracts were removed from the consolidated balance sheet, and a gain on sale was recognized for the difference between the allocated carrying value of the retail installment contracts and the adjusted sales proceeds. The risk to the Company is limited to the rights on future cash flows on the residual certificates that the Company has retained. Future cash flows are based on estimates of prepayments, the impact of interest rate movements on yields of receivables and securities issued, delinquency of receivables sold, servicing fees, and other factors. Gain on sale, servicing income and the interest income on residual certificates are reported in the accompanying consolidated statements of operations. Residual certificates are accounted for under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Because such assets can be contractually prepaid or otherwise settled in such a way that the holder would not receive all of the recorded investment, the assets are classified as available-for-sale investments and are carried at estimated fair value with any accompanying increases or decreases in estimated fair value being recorded as unrealized gains or losses in accumulated other comprehensive income in the accompanying consolidated statements of partners' equity. The Company assesses the carrying value of its securitization related securities for impairment in accordance with the provisions of EITF 99-20 as discussed in note 2(k). There can be no assurance that the Company's estimates used to determine the fair value of the residual certificates will remain appropriate for the life of each asset and it is reasonably possible that circumstances could change in future periods which could result in a material change in the estimates used to prepare the accompanying consolidated financial statements. If actual retail installment contract prepayments or credit losses exceed the Company's current estimates, an other than temporary impairment may be required to be recognized. Subsequent to July 1, 2002, the Company has issued notes payable backed by auto retail installment contracts. For accounting purposes, the transactions were structured as secured financings, therefore, the retail installment contracts, and the related debt remains on the consolidated balance sheets. (c) PROVISION AND CREDIT LOSSES Provisions for credit losses are charged to operations in amounts sufficient to maintain the credit loss allowance at a level considered adequate to cover probable credit losses on retail installment contracts. 113 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Probable losses are estimated based on contractual delinquency status and historical loss experience. In addition, loss allowances are maintained to reflect the Company's judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions, such as unemployment rates, and other information in order to make the necessary judgments as to probable credit losses on retail installment contracts. Receivables are charged off against the allowance for credit losses for the full amount of the carrying value at the earlier of repossession and sale of the underlying collateral, collateral in our possession for 90 days, or the contract becoming 120 days contractually delinquent. Charge-offs may occur sooner for receivables involving a bankruptcy although the amount charged off will be limited to the bankruptcy court judgment. (d) FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from three to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the improvements. Expenditures for major renewals and betterments are capitalized. Repairs and maintenance expenditures are charged to operations as incurred. (e) CASH AND CASH EQUIVALENTS For purposes of the consolidated statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits. At December 31, 2002 and 2001, cash and cash equivalents, which consist of money market accounts and cash, were $14,337 and $7,303, respectively. (f) RESTRICTED CASH Subsequent to July 1, 2002, the Company's securitization transactions were structured as secured financings. Cash is deposited to support the securitization transactions and recorded in the Company's consolidated balance sheets as restricted cash. Excess cash flows generated by the securitization trusts (Trusts) are added to the restricted cash account, creating additional over-collateralization until the required percentage level of assets has been reached. Once the targeted percentage level of assets is reached, additional excess cash flows generated by the Trusts are released to the Company as distributions from Trusts. (g) INCOME TAXES No effect for income taxes is provided in the consolidated financial statements because the Company's results of operations are allocated to its partners. (h) INVENTORY OF REPOSSESSED VEHICLES Inventory of repossessed vehicles included in other assets represent vehicles the Company has repossessed due to the borrowers' default on the payment terms of the contracts. The Company records the vehicles at estimated fair value, net of costs to sell. (i) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. 114 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (j) ACCUMULATED OTHER COMPREHENSIVE INCOME Statement of Financial Standards No. 130 (SFAS 130), Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 also requires the accumulated balance of other comprehensive income to be displayed separately in the equity section. The Company's other comprehensive income consists of net unrealized gains on residual interests in securitizations and had accumulated balances of $1,641, $2,359 and $4,157 at December 31, 2002, 2001 and February 28, 2001, respectively. (k) RECOGNITION OF INTEREST INCOME AND IMPAIRMENT OF RESIDUAL INTERESTS The Company adopted the provisions of EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20) on April 1, 2001. EITF 99-20 established the rules (effective in the second quarter of 2001) for (1) recognizing interest income on (a) all credit-sensitive asset-backed securities and (b) certain prepayment-sensitive securities including agency interest-only strips and (2) determining when these securities must be written down to fair value due to other than temporary impairment. EITF 99-20 requires the use of the prospective method for adjusting the level yield used to recognize interest income when estimates of future cash flows on the security either increase or decrease since the date of the last evaluation. The Company adopted the use of prospective method to recognize interest income as of the adoption date of April 1, 2001. Prior to the adoption of EITF 99-20, the Company recognized interest income using the discount rate based on the carrying value of the securities. The cumulative affect of the change in accounting principle at the time of adoption of EITF 99-20 was $783. During the year ended December 31, 2002 and the period ended December 31, 2001, the Company recorded additional impairment of $3,415 and $4,017, respectively. (3) RETAIL INSTALLMENT CONTRACTS, NET Retail installment contracts are comprised of the following:
DECEMBER 31, ------------------- 2002 2001 -------- -------- Owned retail installment contracts (note 6)................. $253,208 $ 81,650 Pledged retail installment contracts (note 7)............... 165,741 -- Credit loss allowance....................................... (12,101) -- Discount.................................................... (43,207) (12,830) Capitalized origination costs............................... 3,879 1,627 -------- -------- Total retail installment contracts........................ $367,520 $ 70,447 ======== ========
As of December 31, 2001, retail installment contracts were held for sale and stated at the lower of cost or fair value in the aggregate, and therefore there was no credit loss allowance at December 31, 2001. 115 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The activity in the credit loss allowance for the year ended December 31, 2002 was as follows: Balance at beginning of period.............................. $ -- Provision for credit losses................................. 28,663 Charge-offs................................................. (16,562) -------- Balance at end of period.................................... $ 12,101 ========
Contractual maturities of total retail installment contracts at December 31, 2002 are as follows: 2003........................................................ $ 3,539 2004........................................................ 3,373 2005........................................................ 10,090 2006........................................................ 93,383 2007........................................................ 306,693 2008........................................................ 1,871 -------- $418,949 ========
The retail installment contracts are collateralized by vehicle titles, and the Company has the right to repossess the vehicle in the event the borrower defaults on the payment terms of the contract. Pledged retail installment contracts are auto receivables that have been securitized under a secured financing agreement. Borrowers on the Company's retail installment contracts are located primarily in Texas, Georgia, California, North Carolina, Florida, and Illinois. The accrual of interest income of $596 and $287 has been suspended on delinquent retail installment contracts as of December 31, 2002 and 2001, respectively. (4) INTEREST RELATED TO RESIDUAL CERTIFICATES IN SECURITIZATIONS Prior to July 1, 2002, the Company securitized retail installment contracts and recognized revenue (gain on sales of retail installment contracts) and allocated the total cost of the loans sold to financial components based on their relative fair values. During the period ended December 31, 2001, the Company sold $401,973 of auto retail installment contracts in securitization transactions and recognized gains of $39,033. For retail installment contracts securitized prior to July 1, 2002, the Company retained servicing responsibilities and interests in the receivables in the form of residual certificates. As of December 31, 2002 and 2001, the Company was servicing $260,048 and $472,381, respectively, of auto receivables that had been securitized to certain special purpose financing trusts (the Trusts). In connection with the sales by FCAR, VFC LP, and Drive BOS of retail installment contracts from securitizations, Drive ABS receives certain residual certificates associated with the securitizations as described below. Drive LP and Drive ABS have entered into an agreement whereby Drive LP receives all the economic benefits associated with the residual certificates and, conversely, assumes all the risks. Residual interests in securitizations are carried at estimated fair value. Beginning with transactions closed subsequent to July 1, 2002, the Company changed the structure of its securitization transactions to no longer meet the criteria for sale of retail installment contracts. Accordingly, following a securitization, the retail installment contracts and the related securitization debt remain on the consolidated balance sheets. The Company recognizes finance charges and fee income on the retail installment contract and interest expense on the debt issued in the securitization transaction, and records a 116 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provision for loan losses to cover probable future losses on the contracts. The Company securitized $200,001 of auto retail installment contracts under secured financings and issued notes payable related to securitized retail installment contracts of $175,000 during 2002 (note 7). In addition, residual interests in securitizations are pledged on a term loan by BoS (USA), an affiliate (note 6). This change has significantly impacted the Company's 2002 results of operations compared to the prior period because there is no gain on sale of retail installment contracts in the year ended December 31, 2002. Residual certificates held by Drive ABS to which the Company receives all the economic benefits and risks (see note 2(b)) consist of the following at:
DECEMBER 31, ----------------- 2002 2001 ------- ------- Retained interests.......................................... $63,202 $75,205 Interest only strips........................................ -- 2,202 ------- ------- $63,202 $77,407 ======= =======
The residual certificates were valued at fair value using the following key assumptions.
DECEMBER 31, ---------------------------------- 2002 2001 ---------------- --------------- Discount rates..................................... 13.5% 12% - 15% Prepayment rates................................... 11% - 20% CPR 9% - 30% CPR Cumulative loss rates.............................. 11.83% - 18.74% 10.72% - 7.10%
SFAS 140 requires that the effect on the fair value of the retained interests of two adverse changes in each key assumption be independently calculated. At December 31, 2002, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10% and 20% adverse changes in those assumptions are as follows:
2002 2001 -------- -------- Balance sheet carrying value of retained interests: Fair value................................................ $ 63,202 $ 77,407 PREPAYMENT SPEED ASSUMPTION Impact on fair value of 10% adverse change.................. (1,113) (1,250) Impact on fair value of 20% adverse change.................. (2,173) (2,471) EXPECTED CREDIT LOSSES Impact on fair value of 10% adverse change.................. (9,964) (9,486) Impact on fair value of 20% adverse change.................. (19,842) (18,922) RESIDUAL CASH FLOWS DISCOUNT RATE Impact on fair value of 10% adverse change.................. (905) (1,667) Impact on fair value of 20% adverse change.................. (1,789) (3,280)
These sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. 117 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Expected static pool credit losses are as follows:
AUTO RETAIL INSTALLMENT CONTRACTS SECURITIZED ACTUAL AND PROJECTED -------------------------------------------------------------- CREDIT LOSSES(%) 1998-3 1999-1 1999-2 F2000-1 D2000-1 2001-1 2001-2 - -------------------- ------ ------ ------ ------- ------- ------ ------ December 31, 2002: Actual date............... 10.23% 12.16% 11.21% 16.31% 13.33% 14.58% 9.53% Projected................. 10.30% 12.30% 11.83% 17.37% 15.74% 18.74% 18.34% December 31, 2001: Actual to date............ 10.20% 11.58% 9.58% 12.66% 7.31% 5.41% 0.06% Projected................. 10.72% 12.77% 11.54% 16.58% 15.21% 17.10% 16.65%
(5) ACCUMULATED OTHER COMPREHENSIVE INCOME The accumulated balance of other comprehensive income at December 31, 2002 and 2001 is as follows:
ACCUMULATED OTHER COMPREHENSIVE INCOME -- NET UNREALIZED GAINS (LOSSES) ON RESIDUAL INTEREST IN SECURITIZATIONS ------------------ Beginning balance at August 1, 2000......................... $ 1,106 Unrealized gains related to 2000 securitizations............ 1,538 Current period change....................................... 1,513 ------- Ending balance at February 28, 2001......................... 4,157 Unrealized gains related to 2001 securitizations............ 6,163 Current period change....................................... (4,727) Reclassification adjustments for unrealized losses reclassified into income due to permanent impairment...... (4,017) Reclassification adjustment for unrealized losses reclassified into income due to the cumulative effect of change in accounting principle............................ 783 ------- Ending balance at December 31, 2001......................... 2,359 Current period change....................................... 2,697 Reclassification adjustments for unrealized losses reclassified into income due to permanent impairment...... (3,415) ------- Ending balance at December 31, 2002......................... $ 1,641 =======
Accumulated other comprehensive income has not been allocated between the general and limited partners in the consolidated statements of partners' equity. (6) NOTES PAYABLE The Company has a warehouse line of credit with BoS (USA), which provides borrowings up to $200,000. The Company's obligations under this arrangement at December 31, 2002 and 2001 include $160,000 and $30,000, respectively, which bear interest at LIBOR plus 1% (2.43% and 3% at December 31, 2002 and 2001, respectively) and $2,836 and $37,165, respectively, which bear interest at Prime minus 1.5% (2.75% and 3.25% at December 31, 2002 and 2001, respectively). The debt is secured by $162,738 (note 3) of the Company's retail installment contracts and has been extended to June 30, 2003. Additionally, the note 118 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payable contains various covenants, which the Company was in compliance with at December 31, 2002 and 2001. Effective February 28, 2003, the Company's warehouse line of credit agreement with BOS (USA) was amended. The amendment increased the borrowing limits up to $250,000 and changed the maturity date to February 27, 2004. Effective September 6, 2001, the Company entered into a warehouse line of credit agreement with Variable Funding Capital Corporation, a subsidiary of Wachovia Corporation, which provided borrowings up to $100,000. The Company's obligation under the arrangement at December 31, 2002 was $58,100 and bears interest at a commercial paper rate (2.00% at December 31, 2002 plus associated fees). At December 31, 2001, the warehouse line obligation was zero. The debt is secured by $58,398 of the Company's retail installment contracts and terminates on September 5, 2003. The Company has a term loan with BOS (USA) with $14,100 outstanding at December 31, 2002. The Company's obligation under this arrangement includes $10,000, which bears interest at LIBOR plus 1% (2.47%) and $4,100, which bears interest at LIBOR plus 1% (2.42%). At December 31, 2001, the term debt with BOS (USA) was $27,500. The Company's obligation under this arrangement at December 31, 2001 includes $25,000, which bears interest at LIBOR plus 1% (3.41%) and $2,500, which bears interest at LIBOR plus 1% (2.92%). The loan matures on August 18, 2003. Residual interests in securitization transactions secure the loan. Effective February 28, 2003, the Company's term loan agreement with BOS (USA) was amended. The amended agreement changed the maturity date of the term loan to March 31, 2004. (7) NOTES PAYABLE RELATED TO SECURITIZED RETAIL INSTALLMENT CONTRACTS Notes payable related to securitized retail installment contracts structured as a secured financing with a third party were $152,245 at December 31, 2002. The principal and interest on these notes are paid using the cash flows from the underlying retail installment contracts which serve as collateral for the notes. Accordingly, the timing of the principal payments on these notes is dependent on the payments received on the underlying retail installment contracts which back the notes. The average interest rate and contractual maturity on these notes at December 31, 2002 were as follows: 1.87%; final maturity 2003.................................. $ 12,409 2.73%; final maturity 2005.................................. 58,343 3.68%; final maturity 2006.................................. 48,333 4.09%; final maturity 2008.................................. 33,160 -------- 152,245 Less unamortized debt issuance costs........................ (859) -------- Notes payable related to securitized retail installment contracts, net of unamortized debt issuance costs..... $151,386 ========
Unamortized debt issuance costs are amortized as interest expense over the terms of the related notes payable. (8) SUBORDINATED CAPITAL NOTE The Company has a note payable to BOS (USA), for $48,000 at December 31, 2002 and $32,000 at December 31, 2001, which bears interest at a predefined rate of 16% at December 31, 2002 and 14% at December 31, 2001. The note allows borrowings up to $65,000 and matures February 15, 2006. Such note is subordinate to all other obligations of the Company. At December 31, 2002, there was no required amortization of the debt. 119 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) SECURITIZATION ACTIVITY The table below summarizes the cash flows received from securitization trusts during the following periods:
DECEMBER 31, DECEMBER 31, FEBRUARY 28, 2002 2001 2001 ------------ ------------ ------------ Gross proceeds from new securitizations......... $175,000 $357,698 $ 87,400 Servicing fees received......................... 11,739 9,344 3,149 Cash flows received on interest-only strips..... -- 787 1,430 Cash flows received on subordinated holdings.... 10,357 21,059 5,670 Cash received upon release from reserve accounts...................................... 6,316 7,609 3,540 -------- -------- -------- Total cash received from securitization trusts............... $203,412 $396,497 $101,189 ======== ======== ========
Substantially all of the proceeds from new securitizations were used to reduce borrowings on the warehouse line of credit. For presentation in the consolidated statement of cash flows, these proceeds have been included in the net decrease in the warehouse line of credit with affiliate. For the periods ended December 31, 2001 and February 28, 2001, the Company recognized $39,033 and $9,434, respectively, of gains on sales of retail installment contracts. There were no transactions treated as sales in 2002. During 2002, the Company exercised early purchase options on the 1998-2 and 1999-1 securitizations. The receivables were recorded at a fair value of $9,744. Cash paid for the exercise of early purchase options was $4,797. During the period ended December 31, 2001, the Company exercised early purchase options on the 1998-1 and 1998-2 securitizations. The receivables were recorded at a fair value of $7,886. Cash paid for the exercise of early purchase options was $3,900. The table below summarizes delinquencies at December 31, 2002 and 2001, and historical losses for the year ended December 31, 2002 and the period March 1, 2001 to December 31, 2001:
PRINCIPAL AVERAGE AMOUNT OF BALANCE OF RETAIL DELINQUENT RETAIL CREDIT INSTALLMENT PRINCIPAL OVER INSTALLMENT LOSSES -- (NET CONTRACTS SIXTY DAYS CONTRACTS OF RECOVERIES) ----------- -------------- ----------- -------------- December 31, 2002: Retail installment contracts: Owned........................... $253,208 $ 4,599 $172,101 $10,769 Pledged......................... 165,741 5,719 184,497 9,214 Securitized..................... 260,048 10,995 354,284 46,349 -------- ------- -------- ------- Total managed retail installment contracts.... $678,997 $21,313 $710,882 $66,332 ======== ======= ======== =======
120 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPAL AVERAGE AMOUNT OF BALANCE OF RETAIL DELINQUENT RETAIL CREDIT INSTALLMENT PRINCIPAL OVER INSTALLMENT LOSSES -- (NET CONTRACTS SIXTY DAYS CONTRACTS OF RECOVERIES) ----------- -------------- ----------- -------------- December 31, 2001: Retail installment contracts: Owned........................... $ 81,650 $ 4,578 $133,782 $10,679 Securitized..................... 472,381 15,182 375,916 29,994 -------- ------- -------- ------- Total managed retail installment contracts.... $554,031 $19,760 $509,698 $40,673 ======== ======= ======== =======
(10) LEASES The Company has obligations under various lease agreements for computer equipment and office furniture with multiple equipment lease schedules. The leases are classified as capital leases. The total future minimum rental payments are included in the future minimum rental payments schedule below. Future minimum rental payments under capital leases together with the present value of minimum lease payments at December 31, 2002 are as follows: Year ending December 31: 2003...................................................... $326 ---- Total minimum lease payments........................... 326 ---- Less amounts representing interest.......................... 58 ---- Present value of minimum lease payments................ $268 ====
The Company has entered into various operating leases, primarily for office space and certain equipment, which expire over the next three years. Lease expense incurred during the periods ended December 31, 2002, December 31, 2001 and February 28, 2001 totaled $2,959, $840 and $842, respectively. The remaining obligations under the lease commitments are $2,504 in 2003, $2,421 in 2004, and $2,202 in 2005. (11) COMMITMENTS AND CONTINGENCIES In connection with the sale of retail installment contracts through securitizations, the Company has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold. As of December 31, 2002 and 2001, the Company had no repurchase requests outstanding. In the opinion of management, the potential exposure or other recourse obligations related to the Company's retail installment contract sales agreements will not have a material adverse effect on the consolidated financial position or results of operations of the Company. The Company has letters of credit issued by Bank of Scotland totaling $24,250 and $19,000 at December 31, 2002 and 2001, respectively, of which none has been drawn. The letters of credit are collateral for the Drive 2000-1, 2001-1, 2001-2, and 2002-1 Securitization Reserves, IBM Credit Corporation operating lease, and a CIT operating lease. The letters of credit expire at various dates through June 2003. Effective February 28, 2003, the Company's letter of credit facility agreement with Bank of Scotland was amended to increase the commitment amount to $50,000 and to extend the commitment termination date to February 27, 2004. 121 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Periodically, the Company is party to or otherwise involved in legal proceedings arising in the normal course of business. The Company does not believe that there are any proceedings threatened or pending, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations, or liquidity of the Company. (12) RELATED-PARTY TRANSACTIONS The Company has the aforementioned subordinated capital note payable to BoS (USA) totaling $48,000 and $32,000 at December 31, 2002 and 2001, respectively (see note 8). Interest costs incurred on such subordinated capital note payable totaled $6,169, $2,564 and $70 for the periods ended December 31, 2002, December 31, 2001 and February 28, 2001, respectively. Additionally, the Company has letters of credit issued by Bank of Scotland, as discussed in note 11. Fees associated with these letters totaled $997 during 2002 and $65 during 2001. Interest costs incurred in connection with other debt with BoS (USA) totaled $5,880, $5,115 and $5,303 for the periods ended December 31, 2002, December 31, 2001 and February 28, 2001, respectively (see note 6). (13) FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires that the Company disclose estimated fair values of its financial instruments. Fair value, estimates, methods, and assumptions are set forth below. (a) CASH AND CASH EQUIVALENTS The carrying amount of cash and cash equivalents approximated fair value at December 31, 2002 and 2001 due to the short maturity of these instruments. (b) RETAIL INSTALLMENT CONTRACTS Retail installment contracts are carried at amortized cost at December 31, 2002. Retail installment contracts were carried at lower of cost or market value in aggregate at December 31, 2001. The estimated fair value is calculated by using estimated fair values from securitizations of the contracts and discounting projected cash flows using estimated market discount rates that reflect the credit and interest rate risks inherent in the assets at December 31, 2002 and 2001. The carrying value of the retail installment contracts was $367,520 and $70,447 at December 31, 2002 and 2001, respectively. The estimated fair value of the retail installment contracts was $424,734 and $88,159 at December 31, 2002 and 2001, respectively. (c) NOTES PAYABLE AND SUBORDINATED CAPITAL NOTE Management believes that the repayment terms for similar rate financial instruments with similar credit risks and the stated interest rates at December 31, 2002 and 2001 approximate the market terms for similar credit instruments. Accordingly, the carrying amount of notes payable and subordinated capital note is believed to approximate fair value. The fair value of the variable rate warehouse lines of credits is equal to the carrying value as the effective variable rates are considered to be the market rate. 122 DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (d) NOTES PAYABLE RELATED TO SECURITIZED RETAIL INSTALLMENT CONTRACTS Fair value of the notes payable related to securitized retail installment contracts is estimated to be $155,000 and is calculated by using repayment terms and rates for similar financial instruments using the market interest rates at December 31, 2002. (14) EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution plan offered to substantially all salaried employees. Employees participating in the plan may contribute up to 15% of their base salary, subject to federal limitations on absolute amounts contributed. The Company will match up to 6% of their base salary, with matching contributions of 50% of employee contributions. The total amount contributed by the Company for the periods ended December 31, 2002 and 2001 and February 28, 2001 was $364, $210 and $23, respectively. (15) NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements Nos. 5, 57, and 107 and a rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's consolidated financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending December 15, 2002. The Company has disclosed its potential guarantees related to this Interpretation in note 11. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For nonpublic entities, such as the Company, with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation is applied to the enterprise no later than the end of the first annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material impact on the Company's consolidated financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The Company enters into transactions or has contractual relationships with various legal entities that are commonly referred to as special purpose entities (SPEs) or QSPEs. Certain of these entities, and where applicable, the assets sold to them by the Company, are not included in the Company's consolidated balance sheets. These nonconsolidated entities have legal standing separate from the Company, are not controlled by the Company and are typically established for a single purpose such as securitization of financial assets. The Company may have certain relationships with these entities, including sponsorship and servicer of the assets held by the entity. In addition, the Company may retain certain interests in these entities, which are recognized on the consolidated balance sheet. FIN 46 may impact the accounting treatment of the entities. SPEs and QSPEs sponsored by the Company hold assets sold to them by the Company and issue debt collateralized by the assets held in the trust. In order for the assets and liabilities of a QSPE to be excluded from the Company's consolidated balance sheet, these transactions must meet the requirements of SFAS No. 140, at the inception of the transaction and on an ongoing basis. 123 MINNTEX INVESTMENT PARTNERS LP (A TEXAS LIMITED PARTNERSHIP) FINANCIAL STATEMENTS DECEMBER 31, 2002 (WITH INDEPENDENT AUDITORS' REPORT THEREON) 124 INDEPENDENT AUDITORS' REPORT The Partners MinnTex Investment Partners LP: We have audited the accompanying balance sheet of MinnTex Investment Partners LP (a Texas limited partnership) as of December 31, 2002, and the related statements of operations, changes in partners' capital, and cash flows for the period March 11, 2002 (date of inception) through December 31, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MinnTex Investment Partners LP as of December 31, 2002, and the results of its operations and its cash flows for the period March 11, 2002 (date of inception) through December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Dallas, Texas February 17, 2003 125 MINNTEX INVESTMENT PARTNERS LP (A TEXAS LIMITED PARTNERSHIP) BALANCE SHEET DECEMBER 31, 2002
(IN THOUSANDS) ASSETS Cash........................................................ $1,603 Portfolio Asset, net (note 3)............................... 2,130 ------ $3,733 ====== LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued liabilities.................... $ 12 Service fees payable -- affiliate (note 4).................. 152 ------ Purchased loan pools, net................................. 164 Partners' capital........................................... 3,569 ------ $3,733 ======
See accompanying notes to financial statements. 126 MINNTEX INVESTMENT PARTNERS LP (A TEXAS LIMITED PARTNERSHIP) STATEMENT OF OPERATIONS THE PERIOD MARCH 11, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2002
(IN THOUSANDS) Proceeds from resolution of Portfolio Asset................. $16,655 Cost of Portfolio Asset resolved............................ 9,292 ------- Gain on resolution of Portfolio Asset..................... 7,363 Interest expense -- affiliate (note 4)...................... (201) General, administrative, and operating expenses (note 4).... (1,773) Other income................................................ 8 ------- Net income................................................ $ 5,397 =======
See accompanying notes to financial statements. 127 MINNTEX INVESTMENT PARTNERS LP (A TEXAS LIMITED PARTNERSHIP) STATEMENT OF CHANGES IN PARTNERS' CAPITAL THE PERIOD MARCH 11, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2002
GENERAL LIMITED PARTNERS PARTNER -------------------------------- -------- FIRSTCITY CFSC MINNTEX HOLDINGS OF CAPITAL LENDERS GP CORP. MINNESOTA CORP. II TRUST TOTAL -------- ----------- -------- ------- ------- (IN THOUSANDS) Inception Date March 11, 2002............... $ -- $ -- $ -- $ -- $ -- Contributions............................... 39 1,264 1,264 1,264 3,831 Distributions............................... (58) (1,867) (1,867) (1,867) (5,659) Net income.................................. 54 1,781 1,781 1,781 5,397 ---- ------- ------- ------- ------- Balance at December 31, 2002................ $ 35 $ 1,178 $ 1,178 $ 1,178 $ 3,569 ==== ======= ======= ======= =======
See accompanying notes to financial statements. 128 MINNTEX INVESTMENT PARTNERS LP (A TEXAS LIMITED PARTNERSHIP) STATEMENT OF CASH FLOWS THE PERIOD MARCH 11, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2002
(IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 5,397 Adjustments to reconcile net income to net cash provided by operating activities: Purchase of Portfolio Asset............................ (11,422) Gain on resolution of Portfolio Asset.................. (7,363) Proceeds from resolution of Portfolio Asset............ 16,655 Increase in service fees payable -- affiliate.......... 152 Increase in accounts payable and accrued liabilities... 12 -------- Net cash provided by operating activities............ 3,431 -------- Cash flows from financing activities: Borrowing on long-term debt -- affiliate.................. 8,939 Repayment of long-term debt -- affiliate.................. (8,939) Capital contributions..................................... 3,831 Capital distributions..................................... (5,659) -------- Net cash used in financing activities................ (1,828) -------- Net increase in cash................................. 1,603 Cash, beginning of period................................... -- -------- Cash, end of period......................................... $ 1,603 ======== Supplemental disclosure of cash flow information: Cash paid for interest was $201.
See accompanying notes to financial statements. 129 MINNTEX INVESTMENT PARTNERS LP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 (DOLLARS IN THOUSANDS) (1) ORGANIZATION AND PARTNERSHIP AGREEMENT MinnTex Investment Partners LP, a Texas limited partnership (the Partnership), was formed to acquire, hold, and dispose of the loan pool purchased from a nongovernmental agency seller, pursuant to certain purchase agreements. The Partnership began operations on March 11, 2002 and is scheduled to terminate on December 31, 2022. Net income or loss is credited or charged to the partners' capital accounts in proportion to their respective capital account balances. The partnership and other agreements governing the Partnership's affairs provide for certain preferences as to the distribution of cash flows from the Partnership. Proceeds from disposition of and payments received on the purchased loan pool are allocated in the following order, (1) to pay for tax and insurance escrow, (2) to pay fees payable under custodial and lockbox agreements, (3) to pay accrued interest on the notes payable, (4) to pay late charges, fees, and expenses, if any, on the notes payable, (5) to pay protective advances, if any, (6) to replenish an operating reserve, (7) to pay a servicing fee to FirstCity Servicing Corporation (FirstCity), an affiliate of a limited partner, (8) to pay shortfall amounts from prior month disbursements of items (1) through (7), (9) to pay principal on the notes payable, and (10) return of partners' capital. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PORTFOLIO ASSET The Partnership acquires and resolves a portfolio of performing and nonperforming loans to small businesses that are unsecured ("Portfolio Asset"). Accounting for the Portfolio Asset is on a pool basis as opposed to an individual asset-by-asset basis. At December 31, 2002, the Portfolio Asset was designated as nonperforming as described more fully below. The Partnership's Portfolio Asset is designated as nonperforming unless substantially all of the loans in the pool are being repaid in accordance with the contractual terms of the underlying loan agreements. Such designation is made at the acquisition of the pool and does not change even though the actual mix of the loans may change. The pool is acquired on the basis of an evaluation of the timing and amount of cash flow expected to be derived from borrower payments on the loans. The carrying value of the nonperforming Portfolio Asset at December 31, 2002 totaled $2,130. A nonperforming Portfolio Asset is purchased at a substantial discount from its outstanding legal principal amount, the total of the aggregate of expected future sales prices and the total payments to be received from obligors. Subsequent to acquisition, the amortized cost of the nonperforming Portfolio Asset is evaluated for impairment on a quarterly basis. A valuation allowance is established for any impairment identified through provisions charged to earnings in the period the impairment is identified. No valuation allowance was required at December 31, 2002. Gain on resolution of the nonperforming Portfolio Asset is recognized as income to the extent that proceeds collected exceed a pro rata portion of allocated cost from the pool. Cost allocation is based on a proration of actual proceeds divided by total estimated proceeds of the pool. No interest income is recognized separately on the nonperforming Portfolio Asset. All proceeds, of whatever type, are included in proceeds from resolution of Portfolio Asset in determining the gain on resolution of such assets. 130 MINNTEX INVESTMENT PARTNERS LP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (b) INCOME TAXES Under current income tax laws, partnerships are not subject to income taxes; therefore, no provision has been made for such taxes in the accompanying financial statements. For tax purposes, income or loss is included in the individual tax returns of the partners. (c) USE OF ESTIMATES 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. Actual results could differ from those estimates. (3) PORTFOLIO ASSET The Portfolio Asset (note 2) at December 31, 2002 is summarized as follows: Loans: Borrowers' obligations on outstanding balance of: Performing loans....................................... $ 21,457 Nonperforming loans.................................... 37,940 -------- 59,397 Discount required to reflect the Portfolio Asset at unamortized cost.......................................... (57,267) -------- Portfolio Asset, net.............................. $ 2,130 ========
(4) TRANSACTIONS WITH AFFILIATES During March 2002, the Partnership borrowed $8,939 from CFSC Capital Corp. XXX (an affiliate of a limited partner) on a senior collateralized promissory note payable. In August 2002, the Partnership paid off the senior collateralized promissory note payable to CFSC Capital Corp. XXX. Interest expense totaled $201 on such note during 2002. Under the terms of a servicing agreement, FirstCity receives a servicing fee based on proceeds from resolution of Portfolio Asset, for processing transactions on the Portfolio Asset and for conducting settlement and sale negotiations. Included in general, administrative, and operating expenses in the accompanying statement of operations is $1,666 in servicing fees incurred in 2002. 131 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the members of the Board of Directors of the Company.
NAME AGE POSITION - ---- --- -------- James R. Hawkins.......................... 66 Chairman of the Board C. Ivan Wilson............................ 75 Vice Chairman of the Board James T. Sartain.......................... 54 President, Chief Executive Officer and Director Richard E. Bean........................... 58 Director Dane Fulmer............................... 52 Director Robert E. Garrison II..................... 60 Director Jeffery D. Leu............................ 45 Director
Further information concerning the Board of directors, including their business experience during the past five years, appears below. James R. Hawkins has been Chairman of the Board since the consummation of the Merger, and was Chairman of the Board and Chief Executive Officer of J-Hawk from 1976 until the Merger. Mr. Hawkins was also formerly Chief Executive Officer of the Company through January 2001. C. Ivan Wilson has been Vice Chairman of the Board of the Company since the Merger. From February 1998 to June 1998, Mr. Wilson was Chairman, President and Chief Executive Officer of Mercantile Bank, N.A., Corpus Christi, Texas, a national banking organization. Mr. Wilson was Chairman of the Board and Chief Executive Officer of FCBOT from 1991 to the Merger. Prior to 1991, Mr. Wilson was the Chief Executive Officer of FirstCity, Texas -- Corpus Christi, one of FCBOT's banking subsidiaries. James T. Sartain has been President since the Merger and Chief Executive Officer since January 2001 and has served as a Director of the Company since the Merger. Prior to January 2001, Mr. Sartain was President and Chief Operating Officer. From 1988 to the Merger, Mr. Sartain was President and Chief Operating Officer of J-Hawk. Richard E. Bean has been a Director of the Company since the Merger and has been Executive Vice President and Chief Financial Officer of Pearce Industries, Inc. since 1976, which markets a variety of oil field equipment and machinery. Mr. Bean has also been a member of the Portfolio Committee of the FirstCity Liquidating Trust since the Merger. Prior to the Merger, Mr. Bean was Chairman of the FCBOT's Official Committee of Equity Security Holders. Dane Fulmer has been a Director of the Company since May 1999. Mr. Fulmer serves as Executive Vice President and director of risk management of John Taylor Financial Group, a broker/dealer and investment advisory firm that Mr. Fulmer co-founded in 1995. From July 1991 until August 1996, Mr. Fulmer served as Executive Vice President of Merchants Investment Center of Fort Smith, and as portfolio manager for Merchants National, the parent company. Robert E. Garrison II has been a Director of the Company since May 1999. Mr. Garrison is the President, Chief Executive Officer and director of Sanders Morris Harris Group, a publicly owned financial services firm. Previously, Mr. Garrison served as Executive Vice President and director of Harris Webb & Garrison and also served as Chairman, Chief Executive Officer, and director of Pinnacle Management & Trust Co. Mr. Garrison co-founded both of these companies in 1994. Both Harris Webb & Garrison and Pinnacle Management & Trust Co. are subsidiaries of Sanders Morris Harris Group. In addition, Mr. Garrison serves 132 as Chairman of the Board of BioCyte Therapeutics, a cancer diagnostic and therapeutic company focused on breast, ovarian, and prostate cancer. Mr. Garrison serves as a director of TeraForce Technology Corporation, Inc., a public defense electronics company, Somerset House Publishing, First Capital Bank, and is a member of the Finance Committee of Memorial Hermann Hospital System. He has over 36 years of experience in the securities industry. Mr. Garrison is a Chartered Financial Analyst. Jeffery D. Leu has been a Director of the Company since December 2000. Mr. Leu is President of the Value Investment Group of Cargill, a wholly owned subsidiary of Cargill Incorporated, which is regarded as one of the world's largest privately-held corporations. Mr. Leu joined Cargill in 1981 and has held various management positions in Cargill's financial businesses. RESIGNATION OF DAVID W. MACLENNAN Effective June 30, 2002, David W. MacLennan resigned as a Director of the Company. SHAREHOLDER VOTING AGREEMENT James R. Hawkins, Chairman of the Board of the Company, James T. Sartain, President and Chief Executive Officer of the Company, and ATARA I, LTD., a Texas limited partnership ("ATARA"), are parties to a Shareholder Voting Agreement (the "Shareholder Voting Agreement"), dated as of June 29, 1995, with Cargill. The sole general partner of ATARA is ATARA Corp., a Texas corporation, the Chairman of the Board and President of which is Rick R. Hagelstein (a former executive officer of the Company). Under the terms of the Shareholder Voting Agreement, Messrs. Hawkins and Sartain, and ATARA, are required to vote their shares of Common Stock to elect one designee of Cargill as a director of the Company, and Cargill is required to vote its shares of Common Stock to elect one or more of the designees of Messrs. Hawkins and Sartain, and ATARA, as directors of the Company. With respect to the Board nominees for director, (1) Messrs. Hawkins and Sartain, and ATARA, will vote their shares of Common Stock for the election of such nominees as directors, including nominee Jeffery Leu, Cargill's designee under the Shareholder Voting Agreement, and (2) Cargill will vote its shares of Common Stock for the election of such nominees as directors, which nominees are the designees of Messrs. Hawkins and Sartain, and ATARA, under the Shareholder Voting Agreement. Information pertaining to the number of shares of Common Stock owned on December 31, 2002, by each of Messrs. Hawkins and Sartain, and ATARA and Cargill, is set forth under "Item 12 -- Security Ownership of Certain Beneficial Owners and Management." 133 EXECUTIVE OFFICERS The executive officers of the Company, who are elected by the Board of Directors of the Company and serve at its discretion, are as follows:
NAME AGE POSITION - ---- --- -------- James R. Hawkins.......................... 66 Chairman of the Board James T. Sartain.......................... 54 President and Chief Executive Officer J. Bryan Baker............................ 42 Senior Vice President and Chief Financial Officer Terry R. DeWitt........................... 45 Senior Vice President and Co-President of FirstCity Commercial Corporation G. Stephen Fillip......................... 51 Senior Vice President and Co-President of FirstCity Commercial Corporation Joe S. Greak.............................. 53 Senior Vice President and Tax Director James C. Holmes........................... 45 Senior Vice President and Executive Vice President of FirstCity Commercial Corporation Jim W. Moore.............................. 52 Senior Vice President and President of FirstCity Consumer Lending Corporation Richard J. Vander Woude................... 48 Senior Vice President, General Counsel and Secretary
The business experience of Messrs. Hawkins and Sartain is set forth above. J. Bryan Baker has been Senior Vice President and Chief Financial Officer since June 2000. Previously, Mr. Baker served as Vice President and Treasurer from August 1999 to June 2000, as Vice President and Controller of the Company from November 1996 to August 1999, and as Vice President and Assistant Controller from 1995 to November 1996. From 1990 to 1995, Mr. Baker was with Jaynes, Reitmeier, Boyd & Therrell, P.C., an independent public accounting firm, involved in both auditing and consulting. From 1988 to 1990, Mr. Baker was Controller of Heights Bancshares in Harker Heights, Texas. Terry R. DeWitt has been Senior Vice President responsible for Due Diligence and Investment Evaluation of the Company since the Merger and has served as Co-President of FirstCity Commercial Corporation ("FirstCity Commercial"), a wholly-owned subsidiary of the Company, since October 1999. Mr. DeWitt served as Senior Vice President responsible for Due Diligence and Investment Evaluation of J-Hawk from 1992 to the Merger. From 1991 to 1992, Mr. DeWitt was Senior Vice President of the First National Bank of Central Texas, a national banking association, and from 1989 to 1991, he was President of the First National Bank of Goldthwaite, a national banking association. G. Stephen Fillip has been Senior Vice President since the Merger. Mr. Fillip has served as President of FirstCity Servicing Corporation, a subsidiary of the Company, since October 1999 and has served as Co-President of FirstCity Commercial since October 1999. Mr. Fillip was Senior Vice President of J-Hawk from 1991 to the Merger. From 1989 to 1991, Mr. Fillip was Executive Vice President and Chief Credit Officer of BancOne, Texas, N.A. (Waco), a national banking association. Joe S. Greak has been Senior Vice President, Tax Director and Secretary of the Company since the Merger. Mr. Greak was the Tax Manager of FCBOT since 1993. From 1992 to 1993, Mr. Greak was the Tax Manager of New First City -- Houston, N.A. Prior thereto, he was Senior Vice President and Tax Director of First City, Texas -- Houston, N.A. James C. Holmes has been Senior Vice President since the Merger. Mr. Holmes has served as Executive Vice President of FirstCity Commercial since October 1999. From the Merger to August 1999 Mr. Holmes served as Senior Vice President and Treasurer and held the same positions with J-Hawk from 1994 to the Merger. From 1988 to 1991, Mr. Holmes was a Vice President of MBank, Waco, a national banking association. 134 Jim W. Moore has been a senior officer of the Company or its predecessor since November 1992. Currently, Mr. Moore is President of FirstCity Consumer Lending Corporation, a wholly-owned subsidiary of the Company, which owns a 31% direct and indirect interest in Drive Financial Services, LP, where he has served as Executive Vice President and a member of the Board of Managers since August 2000. Richard J. Vander Woude has been General Counsel and Senior Vice President of the Company since January 1998 and has served as Secretary since June 2000. Prior thereto, Mr. Vander Woude was a director and shareholder in the law firm of Vander Woude & Istre, P.C., Waco, Texas from 1992 through 1997. From 1978 to 1992, Mr. Vander Woude was a director and shareholder of Sheehy, Lovelace & Mayfield, P.C., Waco, Texas. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10 percent of the Company's Common Stock, to file with the Securities and Exchange Commission certain reports of beneficial ownership of the Company's Common Stock. Based solely on copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all applicable Section 16(a) filing requirements were complied with by its directors, officers and 10 percent stockholders during the last fiscal year. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation for services during each of the last three years to (1) the Company's Chief Executive Officer during 2002, and (2) the Company's other four most highly compensated executive officers during 2002 serving as such at the end of 2002 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ANNUAL COMPENSATION SECURITIES --------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION(1)($) - --------------------------- ---- --------- -------- ------------ ------------------ James T. Sartain,................... 2002 300,014 -- -- 15,190 President and Chief 2001 300,014 -- 50,000 15,190 Executive Officer 2000 300,014 130,000 50,000 16,018 Terry R. DeWitt,.................... 2002 250,000 135,000 -- 4,950 Senior Vice President and 2001 250,000 -- 25,000 4,800 Co-President of FirstCity 2000 250,000 80,640 -- 5,040 Commercial Corporation G. Stephen Fillip,.................. 2002 250,000 135,000 -- 5,190 Senior Vice President and 2001 250,000 -- 25,000 5,190 Co-President of FirstCity 2000 250,000 83,400 -- 5,310 Commercial Corporation Richard J. Vander Woude,............ 2002 275,000 80,000 -- 4,950 Senior Vice President, General 2001 275,000 -- 25,000 4,950 Counsel and Secretary 2000 270,883 50,000 25,000 5,378 Jim W. Moore........................ 2002 337,096 243,750 -- 5,190 Senior Vice President and 2001 250,000 125,000 25,000 5,190 President of FirstCity 2000 206,250 130,000 -- 16,977 Consumer Lending
- --------------- (1) With respect to Messrs. Sartain, DeWitt, Fillip, Vander Woude and Moore, the total amounts indicated under "All Other Compensation" for 2002 consist of (a) amounts contributed to match a portion of such 135 employee's contributions under a 401(k) plan ("401(k) Match"), (b) excess premiums paid on supplemental life insurance policies ("Supplement Life") and (c) personal use of a business vehicle ("Auto"), and (d) amounts paid for moving expenses ("Other"). The following table details the amounts paid during 2002 for each of the categories:
401(K) SUPPLEMENT EXECUTIVE MATCH($) LIFE($) AUTO($) TOTAL($) - --------- -------- ---------- ------- -------- James T. Sartain.............................. 4,500 690 10,000 15,190 Terry R. DeWitt............................... 4,500 450 -- 4,950 G. Stephen Fillip............................. 4,500 690 -- 5,190 Richard J. Vander Woude....................... 4,500 450 -- 4,950 Jim W. Moore.................................. 4,500 690 -- 5,190
STOCK OPTION AND PURCHASE PLANS AND 401(k) PLAN In October 1995, on the recommendation of the Stock Option Subcommittee of the Compensation Committee, the Board of Directors approved the grant of 229,600 stock options under the 1995 Stock Option and Award Plan. Of these options, 173,600 were granted to the Company's executive officers. The exercise price for all such options was equal to or greater than the fair market value of the underlying the Common Stock at the date of grant. Therefore, the holders of the stock options will benefit from such options only when, and to the extent, the price of the Common Stock increases after the grant of the option. The performance of individual executive officers and other key employees was considered by the Stock Option Subcommittee in allocating such grants, taking into account the Company's performance, each individual's contributions thereto and specific accomplishments in each individual's area of responsibility. In October 1996, on the recommendation of the Stock Option Subcommittee, the Board of Directors approved the grant of 18,000 stock options under the 1996 Stock Option and Award Plan (no such shares were granted to executive officers). In February 1997, on the recommendation of the Stock Option Subcommittee, the Board of Directors approved the grant of 95,200 stock options under the 1996 Stock Option and Award Plan Of these options, 46,200 were granted to the Company's executive officers. In September 1997, on the recommendation of the Stock Option Subcommittee, the Board of Directors approved the grant of 30,000 stock options under the 1996 Stock Option and Award Plan (no such shares were granted to executive officers). At the Company's annual stockholders' meeting, held on April 24, 1996, the Company's stockholders approved (1) the 1995 Stock Option and Award Plan, which provides for the grant of up to 230,000 options to purchase the Common Stock to plan participants (229,600 of which have been granted), (2) the 1996 Stock Option and Award Plan, which provides for the grant of up to 500,000 options to purchase the Common Stock to plan participants and (3) the 1995 Employee Stock Purchase Plan, under which up to 100,000 shares of the Common Stock may be made available for purchase by plan participants. Grants of options to purchase 15,473 shares of the Common Stock have been granted to date. The 1996 Stock Option and Award Plan also provides for the grant of up to 50,000 performance shares to employees of the Company, to be awarded in the discretion of the Stock Option Subcommittee. The performance measure to be used for the purposes of granting the performance shares will be the extent to which performance goals are met, in addition to the factors of total stockholder return, return on equity, earnings per share and the ratio of operating overhead to operating revenue. Beginning January 1, 1994, the Company also initiated a defined contribution 401(k) employee profit sharing plan (the "401(k) Plan") in which the Company matches employee contributions at a stated percentage of employee contributions to a defined maximum. The Company contributed approximately $184,000, $152,000 and $263,000 in 2002, 2001 and 2000, respectively, to the 401(k) Plan. 136 OPTION GRANTS The Company did not grant any options under any Plan in 2002. OPTION EXERCISES AND YEAR-END VALUES The following table sets forth, for the Named Executive Officers, the number of shares of the Common Stock underlying both exercisable and non-exercisable stock options held by such persons as of December 31, 2002, and the year-end values for unexercised "in-the-money" options, which represent the positive spread between the exercise price of any such options and the year-end market price of the Common Stock. All such options were granted under the 1995 Stock Option and Award Plan and 1996 Stock Option and Award Plan. No options were exercised by the officers listed below during 2002. AGGREGATED 2002 OPTION EXERCISES AND YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT YEAR END AT YEAR END($)(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- James T. Sartain.............................. 87,300 37,500 -- -- Terry R. DeWitt............................... 36,450 6,250 -- -- G. Stephen Fillip............................. 36,450 6,250 -- -- Richard J. Vander Woude....................... 31,250 18,750 -- -- Jim W. Moore.................................. 36,050 6,250 -- --
- --------------- (1) Calculated using the aggregate market value (based on December 31, 2002 stock price of $1.37 per share) of the shares of the Common Stock underlying such options, less the aggregate exercise price payable. EQUITY COMPENSATION PLAN INFORMATION Information about FirstCity's compensation plans at December 31, 2002 was as follows:
NUMBER OF SHARES TO BE ISSUED WEIGHTED-AVERAGE NUMBER OF SHARES UPON EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS FOR FUTURE ISSUANCE - ------------- ------------------- ------------------- ------------------- Equity compensation plans approved by stockholders(a)........................ 594,250 $7.89 191,579(b) Equity compensation plans not approved by stockholders........................... -- -- -- ------- ----- ------- Total.................................... 594,250 $7.89 191,579 ======= ===== =======
- --------------- (a) Consists of the 1995 and 1996 Stock Option and Award Plans. (b) Includes 77,429 shares reserved for issuance under the 1995 Employee Stock Purchase Plan. DIRECTOR COMPENSATION Directors of the Company who are not employees of the Company or any of its subsidiaries receive a retainer of $3,000 per quarter for their services as directors (from January 1, 2002 through December 31, 2002, each such director received an aggregate of $12,000 for such director's services as director for such period). Such directors also receive $1,000 plus expenses for each regular and special Board meeting attended, and $1,000 plus expenses for each meeting of any committee of the Board attended, and $500 per each telephonic meeting. Directors who are employees of the Company do not receive directors' fees. 137 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Wilson (Chairman), and Garrison served as members of the Compensation Committee of the Board of Directors during 2002. Messrs. Wilson, and Garrison served as members of the Stock Option Subcommittee of the Compensation Committee during 2002. Neither of Messrs. Wilson and Garrison was an officer or employee of the Company or any of its subsidiaries during 2002 or any prior year. No interlocking relationship exists between the members of the Company's Board of Directors or Compensation Committee and the board of directors and compensation committee of any other company, nor has any such interlocking relationship existed in the past. EMPLOYMENT AGREEMENTS In 1999, the FirstCity Commercial entered into employment agreements with Messrs. Terry R. DeWitt, G. Stephen Fillip and James C. Holmes. The term of each of these contracts runs to December 31, 2004. These contracts provide for salaries of $250,000, $250,000 and $200,000, respectively. Additionally, these contracts provide for the establishment of a bonus pool based on the annual net profits of FirstCity Commercial before taxes and interest expense on the indebtedness of FirstCity Commercial to the Company exceeding certain thresholds. Messrs. DeWitt, Fillip and Holmes participate in the benefit plans of the Company. These employment agreements were terminated in December 2002 upon the completion of the recapitalization of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding the Common Stock owned on December 31, 2002 (the "Measurement Date") by (1) each person who is known by the Company to be the beneficial owner of more than five percent of the Common Stock as of such date, (2) each of the Company's directors, (3) each of the Named Executive Officers and (4) all directors and executive officers of the Company as a group. Except as otherwise indicated, all shares of the Common Stock shown in the table are held with sole voting and investment power.
SHARES BENEFICIALLY PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED OF CLASS - --------------------------------------- ------------ -------- James R. Hawkins............................................ 1,276,904(2)(10) 11.4% James T. Sartain............................................ 565,047(3)(10) 5.0% Richard E. Bean............................................. 288,208(4) 2.6% Dane Fulmer................................................. 48,225(5) * Robert E. Garrison II....................................... 62,825(5) * Jeffery Leu................................................. 2,500(6) * C. Ivan Wilson.............................................. 32,395(4) * Terry R. DeWitt............................................. 191,332(7) 1.7% G. Stephen Fillip........................................... 222,837(7) 2.0% Jim W. Moore................................................ 42,207(8) * Richard J. Vander Woude..................................... 36,685(9) * All directors and executive officers as a group (15 persons).................................................. 3,013,650 26.1%
- --------------- * Less than 1% (1) The business mailing address of each of such persons (except as otherwise indicated) is P.O. Box 8216, Waco, Texas 76714-8216. (2) Includes 250,994 shares of Common Stock held of record by J-Hawk, Ltd., the sole general partner of which is Combined Funding, Inc. Mr. Hawkins may be deemed to beneficially own such shares of Common Stock as a result of his ownership of 50% of the common stock of Combined Funding, Inc. 138 (3) Includes 24,800 and 62,500 shares that may be acquired within 60 days of the Measurement Date upon the exercise of options granted under the Company's 1995 and 1996 Stock Option and Award Plan. (4) Includes 6,375 shares that may be acquired within 60 days of the Measurement Date upon the exercise of options granted under the Company's 1996 Stock Option and Award Plan. (5) Includes 4,375 shares that may be acquired within 60 days of the Measurement Date upon the exercise of options granted under the Company's 1996 Stock Option and Award Plan. (6) Includes 2,500 shares that may be acquired within 60 days of the Measurement Date upon the exercise of options granted under the Company's 1996 Stock Option and Award Plan. Mr. Leu is an officer of certain affiliates of Cargill, which, as of the Measurement Date was the record owner of 221,683 shares of Common Stock. Mr. Leu disclaims beneficial ownership of such shares. Cargill is party to the Shareholder Voting Agreement with Messrs. Hawkins and Sartain, and ATARA, regarding the Common Stock. (7) Includes 11,500 and 24,950 shares that may be acquired within 60 days of the Measurement Date upon the exercise of options granted under the Company's 1995 and 1996 Stock Option and Award Plan, respectively. (8) Includes 10,200 and 25,850 shares that may be acquired within 60 days of the Measurement Date upon the exercise of options granted under the Company's 1995 and 1996 Stock Option and Award Plan, respectively. (9) Includes 31,250 shares that may be acquired within 60 days of the Measurement Date upon the exercise of options granted under the Company's 1996 Stock Option and Award Plan. (10) Messrs. Hawkins and Sartain and ATARA, the sole general partner of which is ATARA Corp., are parties to a Shareholder Voting Agreement with Cargill regarding the Common Stock, pursuant to which ATARA and Messrs. Hawkins and Sartain are required to vote their shares of Common Stock to elect one designee of Cargill as a director of the Company, and Cargill is required to vote its shares of Common Stock to elect one or more designees of ATARA and Messrs. Hawkins and Sartain as directors of the company. Each of Messrs. Hawkins and Sartain and ATARA disclaims beneficial ownership of the shares of Common Stock owned by Cargill. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company owns equity interests in various purchased asset portfolios through limited partnerships and limited liability companies ("Acquisition Partnerships") in which a corporate affiliate of the Company is the sole general partner or managing member, and the Company and other non-affiliated investors are limited partners or members. Certain directors and executive officers of the Company may also serve as directors and/or executive officers of the general partner or managing member, but receive no additional compensation from or on behalf of such general partner or managing member for serving in such capacity. The Company provides asset servicing to such Acquisition Partnerships pursuant to servicing agreements between the Company and such Acquisition Partnerships. Under the Right of First Refusal Agreement, if the Company receives an invitation to bid on or otherwise obtains an opportunity to acquire interests in loans, receivables, real estate or other assets located in the United States, Canada, Latin America, or the Caribbean in which the aggregate amount to be bid exceeds $4 million, or $500 thousand for consumer assets, the Company is required to follow a prescribed notice procedure pursuant to which CFSC has the option to participate in the proposed purchase by requiring that such purchase or acquisition be effected through an Acquisition Partnership formed by the Company and Cargill (or an affiliate). The Right of First Refusal Agreement does not prohibit the Company from holding discussions with entities other than CFSC regarding potential joint purchases of interests in loans, receivables, real estate or other assets, provided that any such purchase is subject to CFSC's right to participate in the Company's share of the investment. The Right of First Refusal Agreement further provides that, subject to certain conditions, CFSC will bear 50% of the due diligence expenses incurred by the Company in connection with proposed asset purchases. The Right of First Refusal Agreement is a restatement and extension of a similar agreement entered into among the Company, certain members of the Company's management and 139 Cargill in 1992. The Right of First Refusal Agreement has a termination date of February 1, 2006 and will renew automatically for an additional year on an annual basis thereafter unless either party gives notice to the other of its desire to discontinue the arrangement six months prior to the termination date. The Company has loans receivable, totaling $16.4 million at December 31, 2002, made to certain Acquisition Partnerships located in Mexico. These loans are at fixed rates ranging from 19% to 20%, with default provisions allowing for rates from 23% to 30%. The Company also has a loan receivable ($1.3 million at December 31, 2002) to a domestic Acquisition Partnership bearing interest at Prime plus 7%. Payments on these notes are dependent upon proceeds from the resolution of Portfolio Assets held by the Acquisition Partnerships. See notes 1 and 5 of the Notes to Consolidated Financial Statements. During 2002, FirstCity sold all of its equity interest in eight Acquisition Partnerships to MCS et Associes, S.A ("MCS") and an affiliate of CFSC. MCS is an equity investee of the Company and also a partner with FirstCity in various Acquisition Partnerships. Proceeds from the sale were $3.4 million resulting in a gain of $1.8 million. FirstCity has a $35 million credit facility with CFSC, which matures in March 2005. The loan bears interest based on the maximum of 8.5% or LIBOR plus 4.5% and is secured by investments in Acquisition Partnerships. As of December 31, 2002, the outstanding balance was $24.6 million. Jeffery D. Leu, a director of the Company, is an officer of certain affiliates of Cargill. The Company believes that the terms of this credit facility are generally as favorable to the Company as the terms it would receive from an independent third party. FirstCity has a term loan with CFSC, which matures in June 2003. This loan bears interest at LIBOR plus 5% and is secured by the stock of Bosque Asset Corporation and the proceeds to FirstCity from securitization certificates held by FirstStreet Investment, LLC. The outstanding balance as of December 31, 2002 was $2.5 million. The Company believes that the terms of this loan is generally as favorable to the Company as the terms it would receive from an independent third party. Pursuant to a noncancellable operating lease, the Company leases the office space for its principal executive offices in Waco, Texas from a trust created for the benefit of the children of James R. Hawkins, the Chairman of the Board of the Company. This lease expires in December of 2002 and contains an option in favor of the Company pursuant to which the Company may renew the lease for an additional five-year period, with escalating lease payments. Rental expenses under such lease for calendar year 2002 were $120,000. The Company believes that the terms of such lease are generally as favorable to the Company as the terms it would receive from an independent third party. Park Central Recreation, Inc., a Texas corporation of which James R. Hawkins is a 50% shareholder, is indebted to FirstStreet Investment, LLC, an affiliate of the Company, under a note dated March 1, 1996, which has an outstanding principal balance of $2.1 million as of December 31, 2002. The note is secured by a first lien on real estate in Port Arthur, Texas, which is operated as a bowling alley. The note bears a fixed interest rate of 10%, matures on March 1, 2006 and requires annual payments of $289,500. During 2002, Terry R. DeWitt, the Co-President of FirstCity Commercial, had indebtedness with the Company in the amount of $125,000. The principal was paid off in December 2002. The largest amount of principal outstanding at any time during 2002 was $125,000. Such indebtedness was unsecured and bore interest at the rate of 5% annually. In December 2002, FirstCity acquired the minority interest in FirstCity Holdings held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom are Senior Vice Presidents of FirstCity by issuing 400,000 shares of common stock of the Company and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million in accordance with certain cash collections from servicing income from Portfolio asset acquisitions in Mexico. 140 ITEM 14. CONTROLS AND PROCEDURES As of December 31, 2002, management of the Company performed an evaluation of disclosure controls and procedures. Based on that evaluation, management of the Company concluded that the disclosure controls and procedures of the Company were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The consolidated financial statements of FirstCity, the combined financial statements of the WAMCO Partnerships (Acquisition Partnerships), the consolidated financial statements of Drive Financial Services LP and the financial statements of MinnTex Investment Partners L.P. are incorporated herein by reference to Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. 2. Financial Statement Schedules Financial statement schedules have been omitted because the information is either not required, not applicable, or is included in Item 8, "Financial Statements and Supplementary Data." 3. Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 2.1 -- Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.2 -- Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.1 -- Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 9.1 -- Shareholder Voting Agreement, dated as of June 29, 1995, among ATARA I Ltd., James R. Hawkins, James T. Sartain and Cargill Financial Services Corporation. (incorporated herein by reference to Exhibit 9.1 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 10.1 -- Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.2 -- Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998)
141
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.3 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.4 -- Tenth Amendment to Loan Agreement, dated August 11, 1999 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.34 of the Company's Form 10-Q dated August 16, 1999, filed with the Commission on August 16, 1999). 10.5 -- Amended and Restated Loan Agreement, dated December 20, 1999, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 22, 1999, filed with the Commission on December 28, 1999). 10.6 -- Securities Purchase Agreement, dated as of August 18, 2000, by and among the Company, Consumer Corp., Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein by reference to Exhibit 10.40 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000). 10.7 -- Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000). 10.8 -- Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000). 10.9 -- Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000). 10.10 -- Receivables Financing Agreement, dated August 18, 2000, among Drive BOS LP, Drive Financial Services LP, each Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A. (incorporated herein by reference to Exhibit 10.44 of the Company's Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001). 10.11 -- Amendment to Loan Agreement and extension of Promissory Note, dated January 12, 2001, by and between FirstCity Holdings Corporation and CSFC Capital Corp. XXX (incorporated herein by reference to Exhibit 10.45 of the Company's Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001). 10.12 -- Second Amendment, dated as of February 16, 2001, to the Receivables Financing Agreement, dated as of August 18, 2000, among Drive BOS LP, Drive Financial Services LP the Lenders party thereto, IPA Incorporated and Wells Fargo Bank Minnesota, NA (incorporated herein by reference to Exhibit 10.46 of the Company's Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001). 10.13 -- Subordinate Capital Loan Agreement, dated as of February 16, 2001, among Drive Financial Services LP, DRIVE BOS LP, the financial institutions from time to time party hereto and IFA Incorporated (incorporated herein by reference to Exhibit 10.47 of the Company's Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001). 10.14 -- Amended and Restated Amendment #4 (Option and Option Warrant), dated as of December 31, 2001, between the Company and BoS(USA) Inc. (incorporated herein by reference to Exhibit 99.1 of the Company's Form 8-K dated January 18, 2002, filed with the Commission on January 18, 2002). 10.15 -- Letter Agreement, dated November 26, 2002, between FirstCity Consumer Lending Corporation and The Governor and Company of the Bank of Scotland, including Form of Promissory Note to be executed by FirstCity Consumer Lending Corporation, payable to The Governor and Company of the Bank of Scotland. (incorporated herein by reference to Exhibit 99(d)(5) of the Company's Form SC TO-I/A dated November 27, 2002, filed with the Commission on November 27, 2002).
142
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- *10.16 -- Amended and Restated Loan Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent. *10.17 -- Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent. 21.1 -- Subsidiaries of the Registrant (incorporated herein by reference to Exhibit 21.1 of the Company's Form 10-K/A for dated October 21, 2002, filed with the Commission on October 21, 2002). *23.1 -- Consent of KPMG LLP. *23.2 -- Consent of KPMG LLP. *23.3 -- Consent of KPMG LLP. *23.4 -- Consent of KPMG LLP. *99.1 -- Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Annual Report on Form 10-K for the year ended December 31, 2002. *99.2 -- Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Annual Report on Form 10-K for the year ended December 31, 2002.
- --------------- * Filed herewith. (b) Reports on Form 8-K 1. On December 16, 2002, the Company filed a report on Form 8-K relating to the expiration of the Company's offer to exchange each issued and outstanding share of its New Preferred Stock, par value $0.01 per share, and the closing of its recapitalization, as presented in a press release of December 16, 2002. 2. On November 14, 2002, the Company filed a report on Form 8-K attaching the Certifications of Period Report of its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 filed with the SEC on November 14, 2002. 3. On December 21, 2002, the Company filed a report on Form 8-K attaching the Certifications of Period Report of its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to its amended Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001, filed with the SEC on October 21, 2002. 143 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 R. HAWKINS ------------------------------------ James R. Hawkins Chairman of the Board March 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES R. HAWKINS Chairman of the Board and March 28, 2003 ------------------------------------------------ Director James R. Hawkins /s/ JAMES T. SARTAIN President, Chief Executive March 28, 2003 ------------------------------------------------ Officer and Director James T. Sartain (Principal Executive Officer) /s/ J. BRYAN BAKER Senior Vice President and March 28, 2003 ------------------------------------------------ Chief Financial Officer J. Bryan Baker (Principal financial officer) /s/ C. IVAN WILSON Vice Chairman of the Board and March 28, 2003 ------------------------------------------------ Director C. Ivan Wilson /s/ RICHARD E. BEAN Director March 28, 2003 ------------------------------------------------ Richard E. Bean /s/ ROBERT E. GARRISON Director March 28, 2003 ------------------------------------------------ Robert E. Garrison /s/ DANE FULMER Director March 28, 2003 ------------------------------------------------ Dane Fulmer /s/ JEFFERY D. LEU Director March 28, 2003 ------------------------------------------------ Jeffery D. Leu
144 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James T. Sartain, certify that: 1. I have reviewed this annual report on Form 10-K of FirstCity Financial Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ JAMES T. SARTAIN ------------------------------------ James T. Sartain Principal Executive Officer Dated: March 28, 2003 145 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, J. Bryan Baker, certify that: 1. I have reviewed this annual report on Form 10-K of FirstCity Financial Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ J. BRYAN BAKER ------------------------------------ J. Bryan Baker Principal Financial Officer Dated: March 28, 2003 146 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 2.1 -- Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 3.2 -- Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995). 4.1 -- Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 9.1 -- Shareholder Voting Agreement, dated as of June 29, 1995, among ATARA I Ltd., James R. Hawkins, James T. Sartain and Cargill Financial Services Corporation. (incorporated herein by reference to Exhibit 9.1 of the Company's Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998). 10.1 -- Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company's Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998). 10.2 -- Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998) 10.3 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998). 10.4 -- Tenth Amendment to Loan Agreement, dated August 11, 1999 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.34 of the Company's Form 10-Q dated August 16, 1999, filed with the Commission on August 16, 1999). 10.5 -- Amended and Restated Loan Agreement, dated December 20, 1999, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 22, 1999, filed with the Commission on December 28, 1999). 10.6 -- Securities Purchase Agreement, dated as of August 18, 2000, by and among the Company, Consumer Corp., Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein by reference to Exhibit 10.40 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000). 10.7 -- Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000). 10.8 -- Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000). 10.9 -- Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.10 -- Receivables Financing Agreement, dated August 18, 2000, among Drive BOS LP, Drive Financial Services LP, each Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A. (incorporated herein by reference to Exhibit 10.44 of the Company's Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001). 10.11 -- Amendment to Loan Agreement and extension of Promissory Note, dated January 12, 2001, by and between FirstCity Holdings Corporation and CSFC Capital Corp. XXX (incorporated herein by reference to Exhibit 10.45 of the Company's Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001). 10.12 -- Second Amendment, dated as of February 16, 2001, to the Receivables Financing Agreement, dated as of August 18, 2000, among Drive BOS LP, Drive Financial Services LP the Lenders party thereto, IPA Incorporated and Wells Fargo Bank Minnesota, NA (incorporated herein by reference to Exhibit 10.46 of the Company's Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001). 10.13 -- Subordinate Capital Loan Agreement, dated as of February 16, 2001, among Drive Financial Services LP, DRIVE BOS LP, the financial institutions from time to time party hereto and IFA Incorporated (incorporated herein by reference to Exhibit 10.47 of the Company's Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001). 10.14 -- Amended and Restated Amendment #4 (Option and Option Warrant), dated as of December 31, 2001, between the Company and BoS(USA) Inc. (incorporated herein by reference to Exhibit 99.1 of the Company's Form 8-K dated January 18, 2002, filed with the Commission on January 18, 2002). 10.15 -- Letter Agreement, dated November 26, 2002, between FirstCity Consumer Lending Corporation and The Governor and Company of the Bank of Scotland, including Form of Promissory Note to be executed by FirstCity Consumer Lending Corporation, payable to The Governor and Company of the Bank of Scotland. (incorporated herein by reference to Exhibit 99(d)(5) of the Company's Form SC TO-I/A dated November 27, 2002, filed with the Commission on November 27, 2002). *10.16 -- Amended and Restated Loan Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent. *10.17 -- Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent. 21.1 -- Subsidiaries of the Registrant (incorporated herein by reference to Exhibit 21.1 of the Company's Form 10-K/A for dated October 21, 2002, filed with the Commission on October 21, 2002). *23.1 -- Consent of KPMG LLP. *23.2 -- Consent of KPMG LLP. *23.3 -- Consent of KPMG LLP. *23.4 -- Consent of KPMG LLP. *99.1 -- Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Annual Report on Form 10-K for the year ended December 31, 2002. *99.2 -- Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Annual Report on Form 10-K for the year ended December 31, 2002.
- --------------- * Filed herewith. EX-10.16 3 h03364exv10w16.txt SUBORDINATE CAPITAL LOAN AGREEMENT EXHIBIT 10.16 ----------------------------------------------------------------- ------------------------------- AMENDED AND RESTATED LOAN AGREEMENT among FIRSTCITY FINANCIAL CORPORATION as Borrower and THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF as Lenders, with BANK OF SCOTLAND, acting through its New York Branch, as Agent ------------------------------- Dated as of December 12, 2002 ------------------------------- ----------------------------------------------------------------- AMENDED AND RESTATED LOAN AGREEMENT AMENDED AND RESTATED LOAN AGREEMENT, dated as of December 12, 2002 among FIRSTCITY FINANCIAL CORPORATION, a Delaware corporation (the "Borrower"), the financial institutions from time to time party hereto (each a "Lender" and collectively, the "Lenders") and BANK OF SCOTLAND, acting through its New York branch, as agent for the Lenders (in such capacity, the "Agent"). W I T N E S S E T H : WHEREAS, the Borrower, the Lenders and the Agent are party to an Amended and Restated Loan Agreement dated as of December 20, 1999, as modified by that certain consent dated as of January 22, 2000 (the "January 2000 Consent"), as amended by that certain First Amendment to Amended and Restated Loan Agreement, dated for reference purposes only as of April 5, 2000 (the "First Amendment"), as further amended by that certain Second Amendment to Amended and Restated Loan Agreement dated for reference purposes only as of August 18, 2000 (the "Second Amendment"), as further modified by that certain Waiver and Consent dated August 31, 2000 (the "August 2000 Consent"), as further amended by that certain Third Amendment to Amended and Restated Loan Agreement dated as of December 27, 2000 (the "Third Amendment"), as modified by a Consent and Partial Release dated for reference purposed only as of March 30, 2001, (the "March 30, 2001 Consent"), as modified by an Agreement and Consent dated for reference purposes only as of March 31, 2001 (the "March 31, 2001 Consent"), as amended by Fourth Amendment to Amended and Restated Loan Agreement dated as of May 24, 2001 (the "Fourth Amendment;"), as further amended by Fifth Amendment to Amended and Restated Loan Agreement dated as of July 3, 2001 (the "Fifth Amendment;"), as further amended by Sixth Amendment to Amended and Restated Loan Agreement dated as of July 27, 2001, (the "Sixth Amendment"); as modified by Waiver and Consent dated October 31, 2001 (the "October 31, 2001 Consent"), as further amended by Seventh Amendment to Amended and Restated Loan Agreement dated as of December 28, 2001 (the "Seventh Amendment") as amended by Eighth Amendment and Consent to Amended and Restated Loan Agreement dated as of December 31, 2001 (the "Eighth Amendment"), as modified by Waiver dated for reference purposes only as of March 31, 2002 (the "March 31, 2002 Waiver"), as further amended by Ninth Amendment to Amended and Restated Loan Agreement dated as of April 29, 2002 (the "Ninth Amendment"), as modified by Waiver dated for reference purposes only as of June 5, 2002 (the "June 5, 2002 Waiver") , as further modified by Waiver dated for reference purposes only as of June 27, 2002 (the "June 27, 2002 Waiver"), and as further amended by Tenth Amendment to Amended and Restated Loan Agreement (the "Tenth Amendment") dated as of July 1, 2002 (said Amended and Restated Credit Agreement as so amended and modified, the "Existing Agreement"); WHEREAS the Borrower has requested that the "Maturity Date" for certain loans outstanding under the Existing Agreement (the loans outstanding under the Existing Agreement being herein collectively referred to as "Existing Loans") be extended and, on and subject to the terms hereof, the Agent and the Lenders are willing to extend the Maturity Date for certain Existing Loans; WHEREAS, in connection with the foregoing, the Borrower, the Lenders and the Agent desire that the Existing Agreement be amended and restated as set forth herein; NOW, THEREFORE, the parties hereto hereby agree that from and after the Amendment Effective Date, the Existing Agreement is hereby amended and restated to read in its entirety as set forth herein: Section 1. DEFINITIONS. (a) Terms used in this Agreement which are defined in Annex I hereto shall have the meanings specified in such Annex I hereto (unless otherwise defined herein) and shall include in the singular number the plural and in the plural number the singular. (b) Unless otherwise specified, each reference in this Agreement or in any other Loan Document to a Loan Document shall mean such Loan Document as the same may from time to time be amended, extended, restated, supplemented or otherwise modified. (c) All references to Sections in this Agreement or in Annex I hereto shall be deemed references to Sections in this Agreement unless otherwise specified. (d) As used in this Agreement and the other Loan Documents, the terms "including" and "such as" are illustrative and not limitative. Section 2. THE LOANS. 2.1 Conversion of Existing Loans to Loans Hereunder; No Commitment for New Loans; Assignment of Loans by BOS-Edinburgh to BOS USA (a) On the Amendment Effective Date (after repayments described in Section 12.14 (c) are made), (i) Existing Loans in an aggregate principal amount of $50,400,000 will be outstanding and (ii) such outstanding Existing Loans will automatically become Loans hereunder as follows: $38,400,000 in principal amount of said Existing Loans will automatically become Tranche I Loans hereunder outstanding on the terms applicable thereto set forth herein and in the other Loan Documents, and $12,000,000 in principal amount of said Existing Loans will automatically become Tranche II Loans hereunder outstanding on the terms applicable thereto set forth herein and in the other Loan Documents. On the Amendment Effective Date, the Tranche I Loans and Tranche II Loans will be outstanding to the Lenders in the amounts set forth on Schedule 2.1 hereto. (b) Effective immediately prior to the occurrence of the Amendment Effective Date, (i) The Governor & Company of the Bank of Scotland ("BOS - -Edinburgh") assigns to BoS (USA), Inc.("BOS-USA") all of BOS -Edinburgh's Existing Loans pursuant to arrangements separately agreed between BOS - Edinburgh and BOS-USA and (ii) BOS-USA thereby becomes a lender under the Existing Agreement with all rights accruing to it in such capacity. By execution or acknowledgement of this Agreement, the Borrower, the Agent, BOS 2 Edinburgh and BOS-USA acknowledge and consent to the foregoing without the necessity of any further documentation relating to such transfer. (c) Except for the Tranche I Bosque Loans made pursuant to Section 2.5, upon and following the Amendment Effective Date, neither any Lender nor the Agent shall have any obligation to make any new Loan or otherwise extend credit under this Agreement. In furtherance and not in limitation of the foregoing, on the Amendment Effective Date all "Commitments" under the Existing Agreement and all obligations (if any) of the Lenders to extend credit thereunder shall automatically terminate. 2.2 The Notes. (a) The Borrower's obligation to pay (x) the principal of, and interest on, the Tranche I Loans of each Lender shall be evidenced by a Tranche I Note payable to the order of such Lender and (y) the principal amount of, and interest on, the Tranche II Loans of each Lender shall be evidenced by a Tranche II Note payable to the order of such Lender. (b) The Tranche I Note and Tranche II Note of each Lender shall: (i) be dated the Amendment Effective Date; (ii) be in an original principal amount, with respect to each Lender, as set forth on Schedule 2.1 hereto; (iii) be payable in full (x) in the case of the Tranche I Notes, on the Maturity Date (Tranche I) (subject to mandatory prepayment as herein provided); and (y) in the case of the Tranche II Notes, on the Maturity Date (Tranche II) (subject to mandatory prepayment as herein provided). (c) The Tranche I Notes and Tranche II Notes shall be, and hereby are, secured by the Collateral and the Security Documents. 2.3 Prepayments and Repayments of Tranche I Loans. (a) On each date set forth below or, in the case of any such date which is not a CFCCA Business Day, on the CFCCA Business Day preceding such date (each such date set forth below or (as the case may be) preceding CFCCA Business Day, a "Payment Installment Date"), the Borrower shall make a repayment of the principal amount of the Tranche I Loans in the amount set forth opposite said Payment Installment Date:
Payment Installment Date Repayment Amount - ------------------------ ---------------- December 31, 2003 $4,000,000 March 31, 2004 the Bosque Amount December 31, 2004 $10,000,000 December 31, 2005 $12,000,000 November 30, 2006 $10,000,000
(b) In addition, on the last CFCCA Business Day of each month (each such last CFCCA Business Day, a "Payment Date") commencing with December 31, 2002, the Borrower shall make a prepayment of the Tranche I Loans in an amount equal to the Tranche I Prepayment Amount (if any) in respect of such Payment Date. Each such amount repaid pursuant to this Section 2.3(b) shall be applied first to the principal amount due on the next Payment 3 Installment Date and then to the principal amounts due on succeeding Payment Installment Dates in direct order of maturity. (c) Borrower shall repay the outstanding amount of the Tranche I Loans in full on the Maturity Date (Tranche I). (d) Borrower may, upon not less than three CFCCA Business Days prior written notice to the Agent (specifying the principal amount thereof to be prepaid (which shall be in an amount equal to $1,000,000 (and, if greater, in integral multiples of $500,000) and the prepayment date (which notice the Agent shall promptly transmit to the Lenders in writing or by telephone, confirmed as soon as possible thereafter in writing) prepay the Tranche I Loans in whole at any time, or from time to time in part on the date and in the amount so specified, without premium (subject to Section 3.9) or penalty; provided that at the time of any such prepayment of the Tranche I Loans, Borrower shall pay all interest accrued on the principal amount of such prepayment. Amounts repaid pursuant to this Section 2.3(d) shall be applied first to the principal amount due on the next Payment Installment Date and then to the principal amounts due on the succeeding Payment Installment Dates in direct order of maturity. All notices pursuant to this Section 2.3(d) shall be irrevocable and result in the principal amount of Loans specified therein becoming due and payable on the prepayment date specified therein. (e) Borrower shall pay or cause to be paid to the Agent the full amount of Extraordinary Transaction Proceeds (or, in the case where such proceeds are received by FC Holdings, the amount thereof to which FC Holdings is entitled after payment of any portion thereof required to be remitted to CFSC pursuant to the Holdings CFSC Loan Agreement) on each date when such Proceeds (or any portion thereof) are received by the Borrower or any Primary Obligor or, in the case of the receipt of any such Proceeds by any Secondary Obligor, on the earlier of the day on which such Proceeds or any portion thereof are paid to Borrower or a Primary Obligor or the sixtieth day after receipt thereof by such Secondary Obligor, for application to the unpaid principal amount of the Tranche I Notes and accrued interest on such principal amount being prepaid. Amounts prepaid with Extraordinary Transaction Proceeds shall be applied first to the outstanding principal amount of the Tranche I Loans payable at final maturity of the Tranche I Loans and thereafter to installments due on the Tranche I Loans in inverse order of maturity. (f) In the event that on any Payment Date all term loans theretofore made under the Portfolio Acquisition Loan Agreement have been repaid and there are remaining amounts or new amounts constituting or which would (if any term loans thereunder remained outstanding) constitute Asset Pool Prepayment Amounts (as defined in the Portfolio Acquisition Loan Agreement-Existing), Borrower shall repay the Tranche I Loans on such date in an amount equal to the amount that would have been applied to the repayment of term loans under the Portfolio Acquisition Loan Agreement-Existing had an unlimited amount of term loans been outstanding. Amounts prepaid pursuant to this Section 2.3(f) shall be applied first to the outstanding principal amount of the Tranche I Loans payable at final maturity of the Tranche I Loans and thereafter to installments due on the Tranche I Loans in inverse order of maturity. 4 (g) If more than one Tranche I Note is outstanding, amounts applied to the repayment or prepayment of any installment of the Tranche I Loans shall be applied ratably as among such outstanding Tranche I Notes. (h) Amounts prepaid or repaid pursuant to this Section 2.3 may not be reborrowed. 2.4 Prepayments and Repayments of Tranche II Loans. (a) Borrower shall make a prepayment of the principal amount of the Tranche II Loans on each Payment Date in the amount (if any) equal to the Tranche II Prepayment Amount in respect of such Payment Date. (b) After all Tranche I Loans have been repaid in full, Borrower may, upon not less than three CFCCA Business Days prior written notice to the Agent (which notice the Agent specifying the principal amount thereof to be prepaid (which shall be in an amount equal to $1,000,000 (and, if greater, in integral multiples of $500,000) and the prepayment date (which notice the Agent shall promptly transmit to the Lenders in writing or by telephone, confirmed as soon as possible thereafter in writing) prepay the Tranche II Loans in whole at any time, or from time to time in part on the date and in the amount so specified, without premium (subject to Section 3.9) or penalty; provided that at the time of any such prepayment of the Tranche II Loans, Borrower shall pay all interest accrued on the principal amount of such prepayment. All notices pursuant to this Section 2.4(b) shall be irrevocable and result in the principal amount of Loans specified therein becoming due and payable on the prepayment date specified therein. (c) Borrower shall repay the outstanding amount of the Tranche II Loans in full on the Maturity Date (Tranche II). (d) Borrower shall pay or cause to be paid to the Agent the full amount of Extraordinary Transaction Proceeds (or, in the case when such proceeds are received by FC Holdings, the amount thereof to which FC Holdings is entitled after payment of any portion thereof required to be remitted to CFSC pursuant to the Holdings CFSC Loan Agreement) on each date when such Proceeds are received by the Borrower or any Primary Obligor or, in the case of any Secondary Obligor, on the earlier of the day on which such Proceeds are paid to Borrower or a Primary Obligor or the sixtieth day after receipt thereof by such Secondary Obligor, for application to the unpaid principal amount of the Tranche II Notes and accrued interest on such principal amount being prepaid. (e) In the event that on any Payment Date all term loans theretofore made under the Portfolio Acquisition Loan Agreement have been repaid and there are remaining amounts or new amounts constituting or which would (if any term loans thereunder remained outstanding) constitute Asset Pool Prepayment Amounts (as defined in the Portfolio Acquisition Loan Agreement-Existing), Borrower shall repay the Tranche II Loans on such date in an amount equal to the amount that would have been applied to the repayment of term loans under the Portfolio Acquisition Loan Agreement-Existing had an unlimited amount of term loans been outstanding minus , if any Tranche I Loans are outstanding on such date, the amount of Asset 5 Pool Prepayment Amounts required to be applied to the Tranche I Loans on such day (calculated on the basis that such amounts were the last amounts required to be so applied on such date). (f) If more than one Tranche II Note is outstanding, amounts applied to the Tranche II Loans pursuant to this Section 2.4 shall be applied ratably as among the outstanding Tranche II Notes (g) Amounts prepaid or repaid pursuant to this Section 2.4 may not be reborrowed. 2.5 Tranche I Bosque Loans (a) Subject to the terms and conditions set forth herein, each Lender severally agrees, at any time and from time to time during the Bosque Commitment Period, to make one or more loans to the Borrower (each a "Tranche I Bosque Loan" and collectively, the "Tranche I Bosque Loans") in an aggregate principal amount for all such Tranche I Bosque Loans not exceeding the amount of its Bosque Loan Commitment. The borrowings from the Lenders pursuant to this Section 2.5(a) shall be (1) in an aggregate principal amount which (x) is not less than $100,000 and (y) does not exceed the Total Bosque Loan Commitment then in effect and (2) made from each Lender pro rata on the basis of the Bosque Loan Commitment of such Lender. The Tranche I Bosque Loans shall constitute Tranche I Loans for all purposes. (b) Whenever the Borrower desires to utilize the Bosque Loan Commitments, it shall deliver to the Agent, not later than 11:00 a.m., Closing Office Time, on the third Business Day preceding the date of the proposed borrowing of the Tranche I Bosque Loans, a request (a "Bosque Loan Request") for Tranche I Bosque Loans in the form of Exhibit B hereto, executed by an Executive Officer. Without the written consent of the Agent, Borrower shall not be entitled to make borrowings under the Tranche I Bosque Loan Commitments more than once during any period of five Business Days. (c) The Agent shall promptly notify (in writing or by telephone, confirmed as soon as possible thereafter in writing) each of the Lenders of the date of the proposed Loans, and the amount of the Loan or Loans such Lender is being requested to make. Each Lender will make the amount of its Loan or Loans available to the Agent, at the Closing Office, before 1:00 p.m. Closing Office Time on the date specified in the notice for the proposed borrowing in same day funds. Such proceeds shall be made available to the Borrower (subject to Section 2.5(d)) by the Agent making such funds available to the Bosque Trustee, or to such other Person to which the Agent may consent, as contemplated by the Bosque Loan Request, in the same type of funds received by the Agent, at the Closing Office against delivery to the Agent for the account of each Lender of such instruments, documents and papers as are provided for herein. The Agent shall deliver the instruments, documents and papers received by it for the account of each Lender to such Lender or upon its order. (d) Unless the Agent shall have received notice from a Lender prior to 11:00 a.m., Closing Office Time, on the date of any borrowing of Tranche I Bosque Loans that such Lender will not make available to the Agent such Lender's ratable portion of such borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of 6 such borrowing in accordance with subsection (c) of this Section 2.5 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at the rate from time to time prevailing on the Tranche I Note; provided that to the extent such interest is paid by a Lender, interest shall be at the rate specified in Section 11.10 hereof. If such Lender shall pay to the Agent such corresponding amount, such amount so paid shall constitute such Lender's Loan as part of such borrowing for purposes of this Agreement. (e) The failure of any Lender to make the Loan to be made by it as part of any borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Loan on the date of such borrowing. No Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on the date of any borrowing. (f) The Borrower's obligation to pay the principal of, and interest on, the Tranche I Bosque Loans of each Lender shall be evidenced by the Tranche I Note payable to the order of such Lender delivered to Lender pursuant to Section 2.3. (g) The Borrower shall have the right at any time and from time to time upon at least three Business Days' prior written notice to the Agent (which notice the Agent shall promptly transmit to the Lenders in writing or by telephone, confirmed as soon as possible thereafter in writing) to reduce permanently in amounts equal to $1,000,000 (and if greater, in integral multiples of $500,000) or terminate the unutilized (after giving effect to all pending requests for Loans) Total Bosque Loan Commitment. Any reduction pursuant to this Section 2.5(g) shall apply proportionately to the Bosque Loan Commitment of each Lender. Section 3. INTEREST. 3.1 Rate of Interest. Subject to the provisions of Section 3.3 hereof, the Borrower agrees to pay interest in respect of the unpaid principal amount of the Loans from the Amendment Effective Date until maturity (whether by acceleration or otherwise) at the following rates of interest: (i) Tranche I Loans, at a rate per annum equal to 2.50% in excess of the Base Rate, such rate to change as and when the Base Rate shall change; and (ii) Tranche II Loans, at 8.7675% per annum. 3.2 Interest Payment Dates. Interest on and prior to maturity in respect of each Loan shall be payable in arrears (i) on each Payment Date, (ii) upon any repayment or prepayment (to the extent accrued on the principal amount so repaid) and (iii) at maturity (whether by acceleration or otherwise) and, after maturity, on demand. 3.3 Past Due Rate. Each Loan (and any overdue interest in respect of each Loan) shall bear interest for each day on which an Event of Default exists (after as well as before judgment), payable on demand, at a rate per annum (the "Past-Due Rate") equal to the greater of 5% in excess of the interest rate otherwise applicable to such Loan on such day or 4.5% in excess of the Base Rate in effect on such day. 7 3.4 Capital Adequacy. If any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted after the date hereof (it being agreed that "adopted after the date hereof" shall include compliance by a Lender or any lending office or holding company of a Lender with any Basle Law whether or not such Basle Law was in effect, applicable or phased in on or prior to or after the date hereof) pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards" or pursuant to or arising out of any report, agreement or convention of any international banking group adopted subsequent to such 1988 report (said laws, rules, regulations and guidelines pursuant to or arising out of such 1988 report or any such subsequently adopted report, agreement or convention being sometimes collectively herein referred to as "Basle Laws"), or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy (any such other law, rule, regulation or guideline being sometimes herein referred to as "Other Laws"), or any change in any of the foregoing (after the date hereof in respect of Other Laws; before or after the date hereof in respect of Basle Laws) or in the enforcement or interpretation or administration of any of the foregoing (after the date hereof in respect of Other Laws; before or after the date hereof in respect of Basle Laws) by any Government Authority, central bank or comparable agency charged with the enforcement or interpretation or administration thereof, or compliance by any Lender (or any lending office of any Lender) or any holding company of any Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of its Bosque Loan Commitment, Loans, Existing Loans, its commitments or other obligations under the Existing Agreement or any of its obligations hereunder to a level below that which such Lender or such Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then, upon demand by such Lender (or by the Agent on such Lender's behalf), the Borrower shall pay to such Lender from time to time such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered, together with interest on each such amount from the date demanded until payment in full (after as well as before judgment) thereof at the Base Rate. Each Lender shall endeavor to give the Borrower notice of its intention to require compensation under this Section 3.4 within a reasonable time after the loan officer of such Lender with responsibility for this Agreement becomes aware of its entitlement to such compensation under this Section 3.4, but no failure to give any such notice shall affect or relieve the Borrower of any of Borrower's obligations under this Section 3.4 or under any other provision of this Agreement or any other Loan Document or result in any obligation or liability of the Agent or any Lender to the Borrower or any other Person. A certificate of a Lender as to the amount required to be paid by Borrower under this Section 3.4 and showing in reasonable detail the basis for the calculation thereof shall, absent manifest error, be final and conclusive (it being understood that in no event shall any Lender be required to disclose in such certificate or otherwise any non-public information). In determining such amount or amounts, a Lender may use any method of averaging and attribution as it (in its sole and absolute discretion) shall deem applicable. 3.5 [Intentionally omitted]. 8 3.6 [Intentionally omitted]. 3.7 [Intentionally omitted]. 3.8 [Intentionally omitted]. 3.9 Compensation. Borrower shall compensate each Lender, upon written request by such Lender (which request shall be made through the Agent and shall set forth the basis for requesting such amounts), for all losses, expenses and liabilities (including, without limitation, any interest paid by such Lender to lenders of funds borrowed by it to make or carry its Tranche II Loans to the Borrower, losses sustained by such Lender in connection with the liquidation or re-employment of such funds and all other funding losses) which such Lender may sustain (x) if for any reason any Tranche II Loan or any portion thereof is prepaid (whether such prepayment is a mandatory prepayment, a voluntary prepayment or otherwise and whether or not such prepayment has been specified in any notice given by Borrower or is contemplated or required by any Waterfall Certificate); (y) if any prepayment or repayment of any of its Tranche II Loans is not made on any date specified in a notice thereof given by the Borrower or if any prepayment or repayment contemplated or required by a Waterfall Certificate is not made on the Payment Date following the date such Waterfall Certificate is delivered or (z) as a consequence of any default under this Agreement or the delivery of any Certified Error Certificate. Section 4. FEES. 4.1 Facility Fee. The Borrower shall pay to the Agent, for the ratable account (based on outstanding Loans hereunder) of each Lender party to this Agreement on the Amendment Effective Date the fee set forth in the Fee Letter on the dates set forth therein (such fee, the "Facility Fee"). 4.2 Repayment Fee. The Borrower shall pay to Agent, for the ratable account of Lenders (based on the Tranche II Loans outstanding immediately prior to such payment in full or, in the case of clause (y) below, based on outstanding Tranche II Loans on the Maturity Date (Tranche II), if sooner than the date of repayment in full), a fee in respect of the Tranche II Loans (such fee, the "Repayment Fee") in the following amount: (x) in the event that Tranche II Loans are repaid in full (whether as a result of a refinancing or otherwise) on or prior to the day which is third anniversary of the Amendment Effective Date, $1,000,000, such fee to be payable on the date such Loans are repaid in full; or (y) if the Tranche II Loans are not repaid in full by the date specified in clause (x), $1,500,000, such fee to be payable upon the date such Loans are repaid in full (whether upon maturity, pursuant to a refinancing or otherwise) or, if earlier, on the date on which the Tranche II Loans mature (whether upon scheduled maturity, or earlier acceleration, or otherwise). 4.3 Loan Consolidation Fee. Borrower shall pay to Agent, for the ratable account (based on the outstanding Loans hereunder) of each Lender party to this Agreement on the Amendment Effective Date, a fee (the "Consolidation Fee") in the amount of $200,000 payable in equal installments of $50,000 on each of the following days: the Amendment Effective Date; March 31, 2003; September 30, 2003; and March 31, 2004. 9 4.4 Application of 20% Amount. Unless the CFCCA Remedies Time shall have occurred, each 20% Amount received on any Payment Date shall be applied to the payment or prepayment of the Facility Fee, whether or not then due, until the amounts so applied plus any additional amounts paid by Borrower in respect thereof equal the full amount of the Facility Fee. Section 5. PAYMENTS, ETC. 5.1 Payments on Non-Business Days; Calculations. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest shall be payable at the applicable rate during such extension. Interest on Loans hereunder and under the Notes shall be calculated on the basis of a 365-day year and the actual number of days elapsed. If for any reason a Loan is repaid on the same day on which it is made, one day's interest (subject to the other provisions of this Agreement) shall be paid on that Loan. The Borrower hereby authorizes and directs the Agent and each Lender to charge any account of the Borrower maintained at any office of the Agent or such Lender with the amount of any principal, interest or fee when the same becomes due and payable under the terms hereof or of the Notes; provided, however, that neither the Agent nor any Lender shall be under any obligation to charge any such account. 5.2 Net Payments; Application. (a) All payments hereunder and under the Loan Documents (including, without limitation, repayments and prepayments pursuant to Section 2) shall be made by the Borrower to the Agent in freely transferable U.S. dollars and in same day funds at the Closing Office without setoff or counterclaim and in such amounts as may be necessary in order that all such payments (after (i) withholding for or on account of any present or future taxes, levies, imposts, duties or other similar charges of whatsoever nature imposed on the amounts described above by any government or any political subdivision or taxing authority thereof, other than any tax (other than such taxes referred to in clause (ii) below) imposed on a Lender pursuant to the income tax laws of the jurisdiction where such Lender's principal or lending office or offices are located (collectively, the "Taxes") and (ii) deduction of an amount equal to any taxes on or measured by the net income payable to such Lender with respect to the amount by which the payments required to be made by this Section 5.2 exceed the amount otherwise specified to be paid under this Agreement and the Notes) shall not be less than the amounts otherwise specified to be paid under this Agreement and the Notes. With respect to each such deduction or withholding imposed in respect of any payment by or on behalf of the Borrower, the Borrower shall promptly (and in no event later than 30 days thereafter) furnish to the Agent such certificates, receipts and other documents as may be required to establish any tax credit, exemption or reduction in rate to which any Lender or holder of a Note may be entitled. Each Lender, other than a Lender organized and existing under the laws of the United States of America or any political subdivision thereof, agrees to furnish the Borrower, as soon as practicable after any written request of the Borrower to such effect, any executed form reasonably requested by the Borrower such as IRS Form W-8BEN or W-8ECI, and any other applicable form as to such Lender's entitlement, if any, to exemption from, or a reduced rate of, or its subjection to, United States withholding tax on amounts payable to it hereunder by the Borrower or under the Notes of the Borrower and each such Lender undertakes to use its best 10 efforts promptly to notify the Borrower of any material change in any information, statement or form so furnished to the Borrower; provided, however, that any failure on the part of any Lender to furnish any such information, statements or forms shall in no way affect the obligations of the Borrower or the rights of any Lender under the terms of this Agreement or of the Notes. (b) (i) Unless the CFCCA Remedies Time has occurred, amounts transferred to the Agent from the CFCCA on or in respect of a Payment Date will be applied in the following order of priority: (i) to any fees (including any portion of the Facility Fee, Consolidation Fee or Repayment Fee) which have become due or will become due prior to such Payment Date, interest on overdue amounts, costs, expenses, reimbursement obligations, indemnification obligations, or other compensation obligations to the Agent or the Lenders (or any Lender); (ii) to the unpaid amount of interest on the Loans or unpaid interest on other obligations under this Agreement or any other Loan Document and to the unpaid amount of principal of any Loan which has become due or will become due prior to such Payment Date; (iii) to the amount of interest due on such Payment Date; (iv) to the amount of principal of any Loan (other than the Tranche I Prepayment Amount or the Tranche II Prepayment Amount) due on such Payment Date (first to the Tranche I Notes and then to the Tranche II Notes); (v) to the aggregate amount of the Facility Fee, Repayment Fee and Consolidation Fee due on such Payment Date; (vi) to the amount of the Facility Fee which will become due after such Payment Date equal to the 20% Amount in respect of such Payment Date; (vii) to the Tranche I Prepayment Amount in respect of such Payment Date and (viii) to the Tranche II Prepayment Amount in respect of such Payment Date, each amount applied to principal of any Loan, unless otherwise provided herein, to be applied first to amounts due at final maturity thereof and thereafter to the installments due thereon in inverse order of maturity. (ii) Unless otherwise specifically provided herein, all payments under or pursuant to, or in satisfaction of any of the Borrower's obligations under this Agreement or under the Notes (including any received in connection with the foreclosure upon or other realization on any Collateral and amounts received or applied from the CFCCA upon and following the CFCCA Remedies Time) will be applied in the following order of priority: (i) to any amounts not otherwise listed in this Section 5.2(b)(ii) then due and payable by the Borrower under this Agreement, the Notes or the Security Documents, (ii) to any fees then due and payable pursuant to Section 4 of this Agreement, pro rata according to the aggregate amount of fees then due and payable, (iv) to any interest on the Notes (unless otherwise specified by the Borrower, pro rata according to the aggregate amount of interest then due and payable on the Notes) then due and payable, (v) to any principal amount then due under the Notes (first to the Tranche I Notes and then to the Tranche II Notes), (vi) to any amounts not then due on the Tranche I Notes, unless otherwise provided herein, to be applied first to amounts due at final maturity thereof and thereafter to the installments due thereon in inverse order of maturity, and (vii) to any amounts not then due on the Tranche II Notes, unless otherwise provided herein, to be applied first to amounts due at final maturity thereof, and thereafter to the installments due thereon in inverse order of maturity. 11 5.3 Distribution by Agent. All payments received by the Agent on behalf of the Lenders on account of principal and interest under this Agreement or the Notes or on account of any fees payable for the account of the Lenders shall be promptly distributed by the Agent to the Lenders (in the type of funds received by the Agent) as follows: (a) if in respect of principal of any Loans made to the Borrower then on a pro rata basis to each of the Lenders holding the Loans in respect of which such payment is being made (payments of principal being allocated to Tranche I Loans until all Tranche I Loans have been repaid, and then to Tranche II Loans), (b) if in respect of interest paid on the Loans pursuant to Section 3 and the Borrower has designated (in accordance with applicable provisions (if any) of this Agreement relating thereto) that the payments are being made in respect of the Tranche I Loans or Tranche II Loans, then on a pro rata basis to each of the Lenders having Tranche I Loans or Tranche II Loans, as the case may be, outstanding; (d) if in respect of interest on the Notes and the Borrower has not designated and this Agreement does not otherwise specify whether such payments are being made in respect of Tranche I Loans or Tranche II Loans, then to each Lender in the proportion that the aggregate amount of such unpaid interest due on the Loans of each such Lender bears to the aggregate amount of such unpaid interest due on all such Loans; (e) if in respect of fees pursuant to Section 4, then to the Lenders in accordance with their entitlement thereto; and (f) if in respect of a payment under Section 5.2(a) hereof, to each Lender in accordance with its entitlement thereto. Section 6. CONDITIONS PRECEDENT TO TRANCHE I BOSQUE LOANS. 6.1 Conditions to Tranche I Bosque Loans. The Lenders shall not be obligated to make any Tranche I Bosque Loan unless the Amendment Effective Date shall have occurred and on or prior to the date of such Tranche I Bosque Loan the following conditions shall have been fulfilled to the satisfaction of the Agent (or waived by the Agent): (a) No Default; Representations and Warranties. On the date of such Tranche I Bosque Loan (and after giving effect to all Tranche I Bosque Loans being made on such date) (i) there shall exist no Default or Event of Default and all representations and warranties made by the Borrower and the other Loan Parties herein or in the other Loan Documents or otherwise made by the Borrower or the other Loan Parties in writing in connection herewith or therewith shall be true and correct in all material respects with the same effect as though such representations and warranties have been made at and as of such time and (ii) each of the Notes, Guaranties and Security Documents shall be in full force and effect and no party thereto shall have failed to perform in any material respect any of its obligations thereunder. (b) Certification. The Borrower shall have delivered to Lender a certificate, dated the date of such Tranche I Bosque Loans executed by an Executive Officer to the effect set forth in Section 6.1(a), (d), (f) and (g)(ii). The making of each Tranche I Bosque Loan shall constitute a representation and warranty by the Borrower to the Agent that each condition set forth in Section 6.1(a), (d), (f) and (g)(ii) are satisfied on the date of such Loan and after giving effect to all Tranche I Bosque Loans being made on such day. (c) Borrowing Request. The Borrower shall have delivered to the Agent a borrowing request in the form required by Section 2.5 on or prior to the date required by Section 2.5. 12 (d) Approvals and Consents. All orders, permissions, consents, approvals, licenses, authorizations and validations of, and filings, recordings and registrations with and exemptions by, any Government Authority, or any other Person, required to authorize or required in connection with the Tranche I Bosque Loans shall have been obtained (and if so requested, delivered to the Agent, with sufficient copies for each Lender). (e) Other Supporting Documents. There shall have been delivered to the Agent such information and copies of documents, approvals (of any) and records (certified where appropriate) of corporate and legal proceedings as the Agent or any Lender may have reasonably requested relating to the Tranche I Bosque Loans. (f) No Material Adverse Change. Since December 31, 2001, there shall have occurred , in the Agent's opinion, no change in the condition or operations, financial or otherwise, of Borrower, Bosque or any Loan Party and no other event shall have occurred, which, in the Agent's opinion, has caused or may cause a Material Adverse Change with respect to Borrower, Bosque or any Loan Party. (g) Change in Law; No Opposition. On the date of such Loan,(i) no change shall have occurred in applicable law or in applicable regulations thereunder or in the interpretations thereof by any Governmental Authority which, in the opinion of any Lender, would make it illegal for such Lender to make the Loan required to be made on such date; and (ii) no suit, action or proceeding shall be pending or threatened before or by any Governmental Authority seeking to restrain or prohibit the consummation of the making of such Loan or the consummation of the transactions relating thereto. (h) Bosque Note Documents. The Borrower shall have delivered to the Agent: (i) an executed copy of each note purchase agreement between Borrower and the registered holder of each Bosque Note to be acquired with the proceeds of such Tranche I Bosque Loans (each such Bosque Note, a "Subject Bosque Note"). (ii) an original, executed allonge or other endorsement of each Subject Bosque Note in the form of Exhibit C to this Agreement; (iii) evidence that the closing of the purchase of the Subject Bosque Notes shall be effected through (I) an escrow arrangement providing for the simultaneous (x) payment of the purchase price to the Bosque Trustee (y) presentment to the Bosque Trustee of each Subject Bosque Note for registration and transfer (along with such other documents as may be required pursuant to applicable provisions of the Bosque Note Agreement) and (z) transfer of each such note to the Borrower or (II) other arrangements satisfactory to the Agent; (iv) an estoppel certificate executed by Bosque in form and substance satisfactory to the Agent with respect to each Subject Bosque Note; (v) written acknowledgement of notice from the Bosque Trustee of pledge to the Agent of the Subject Bosque Notes; 13 (vi) letter of direction executed by Borrower directing the Bosque Trustee to deliver to the Agent the Bosque Notes issued in exchange for the purchased Subject Bosque Notes and the proceeds thereof and acknowledgement thereof by the Bosque Trustee; and (vii) such other information, documents and agreements as the Agent may require in connection with the Borrower's purchase of the Subject Bosque Notes. All of the foregoing agreements, documents, instruments and certificates shall be in form and substance satisfactory to the Agent. Section 7. AFFIRMATIVE COVENANTS. Borrower warrants and represents to and covenants to the Lenders and the Agent that, so long as this Agreement is in effect and until the Bosque Loan Commitments are terminated and all of the Loans, together with interest and all other obligations incurred hereunder are paid in full, Borrower will perform the obligations set forth in this Section 7 (unless it shall have first procured the written consent of the Majority Lenders to do otherwise), and will cause each Primary Obligor, Secondary Obligor and other Loan Party to perform the obligations set forth in this Section 7 which are applicable to such Person (unless it shall have first procured the written consent of the Majority Lenders to do otherwise). 7.1 Financial Statements. The Borrower will furnish to the Agent and each Lender: (a) As soon as available and in any event within 30 days after the close of each calendar month, as at the end of such month and for the period commencing at the end of the previous Fiscal Year and ending with the end of such month, a consolidated and consolidating balance sheet of Borrower and the other members of the Consolidated Group, and the related statement of operations for such period, all certified by the chief financial officer of the Borrower and each other member of the Consolidated Group as being prepared in accordance with GAAP and to present fairly the financial position and results of operation of such Person for such period; (b) As soon as available but not later than one hundred five (105) days after the close of each Fiscal Year of the Borrower, as at the end of and for the Fiscal Year just closed, an audited consolidated balance sheet of Borrower and the other members of the Consolidated Group, the related statement of operations (including income statement) and a reconciliation of capital for such year, all certified on an unqualified basis by a firm of independent certified public accountants selected by the Borrower and acceptable to Agent in Agent's sole and absolute discretion; (c) As soon as available but not later than one hundred five (105) days after the close of each Fiscal Year of the Borrower, as at the end of and for the Fiscal Year just closed, an unaudited consolidating balance sheet of Borrower and the other members of the Consolidated Group, the related statements of operations (including income statement) and a reconciliation of capital for such year, prepared by the chief financial officer of Borrower; 14 (d) Concurrently with the delivery of the financial statements described in subsection (b) above: (A) a certificate of the aforesaid independent certified public accountants certifying to Agent that based upon their examination of the affairs of Borrower and the other members of the Consolidated Group, performed in connection with the preparation of said financial statements, they are not aware of the occurrence or existence of any condition or event which constitutes an Event of Default or Default, or, if they are aware thereof, the nature thereof, and (B) a reliance letter executed by an authorized partner of the aforesaid independent certified public accountants, in form and substance reasonably acceptable to Agent, and acknowledging that Agent and Lenders may rely on such financial statements in connection with this Agreement notwithstanding that Agent and Lenders are not in privity with such independent certified public accountants in connection with such financial statements . (e) (i) Concurrently with delivery to its stockholders copies of all financial and other information delivered by Borrower to such Persons, including without limitation, its proxy statements and annual reports to stockholders. Within two (2) Business Days after delivery to the SEC by Borrower, which in all cases shall be on a timely basis in accordance with the applicable document and the Securities Laws, copies of all reports and other filings filed by Borrower with the SEC, including without limitation, all reports on Forms 10K, 10Q or 8K promulgated under the Securities Exchange Act of 1934, as amended, and all registration statements filed under the Securities Act of 1933, as amended. (ii) Concurrently with delivery of the financial statements required pursuant to Sections 7.1(a) and (b) hereof, a certificate executed by the President, Treasurer or Chief Financial Officer of Borrower that (A) no Event of Default or Default has occurred and is continuing under this Agreement, (B) that Borrower is in compliance with the covenants set forth in Section 8.20 and 8.34 hereof, setting forth the Borrower's calculations with respect to such compliance; and that (C) no event of default and no event or condition which, with the passage of time or the giving of notice or both, would constitute an event of default has occurred and is continuing under any other Indebtedness Instrument ("Other Indebtedness Instrument Unmatured Default") or, if an Event of Default or Default has occurred under this Agreement or an event of default or Other Indebtedness Instrument Unmatured Default has occurred under any other Indebtedness Instrument, setting forth the details of such event and the action which Borrower proposes to take with respect thereto. (f) [Intentionally omitted]. (g) Promptly upon receipt thereof, copies of all detailed financial reports and Management Letters, if any, submitted to any member of the Consolidated Group by the Auditors, in connection with each annual or interim audit of their respective books by such Auditors; (h) As soon as possible and in any event (A) within 30 days after a Loan Party, or any of its ERISA Affiliates knows that any Termination Event described in clause (i) of 15 the definition of Termination Event with respect to any Pension Plan has occurred or is expected to occur and (B) within 10 days after a Loan Party or any of its ERISA Affiliates knows that any other Termination Event with respect to any Pension Plan has occurred or is expected to occur, a statement of the CFO of the Borrower describing such Termination Event and the action, if any, which the affected Loan Party or ERISA Affiliate proposes to take with respect thereto; (i) Promptly and in any event within five Business Days after receipt thereof by a Loan Party or any of its ERISA Affiliates from the PBGC, copies of each notice received by such Person of the PBGC's intention to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan, any notice of noncompliance issued by the PBGC with respect to a proposed standard termination of a Pension Plan, and any notice issued by the PBGC with respect to a proposed distress termination of a Pension Plan; (j) Promptly and in any event within 30 days after the filing thereof with the IRS, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Pension Plan; (k) Promptly and in any event within five Business Days after receipt thereof by a Loan Party or any of its ERISA Affiliates from a Multiemployer Plan sponsor, a copy of each notice received by such Person concerning (x) the imposition or amount of withdrawal liability under Subtitle E of Title IV of ERISA or (y) any determination by a Multiemployer Plan sponsor that such Multiemployer Plan is, or is expected to be, in "reorganization" (within the meaning of Section 4241 of ERISA) or "insolvent" (within the meaning of Section 4245 of ERISA), or has incurred or is expected to incur an "accumulated funding deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the Code); (l) Upon request of the Agent made from time to time, deliver to the Agent a copy of any Pension Plan sponsored, contributed to, participated in or maintained by Borrower or any ERISA Affiliate; and (m) With reasonable promptness, such other information respecting the business, properties, operations, prospects or condition (financial or otherwise) of any member of the Consolidated Group and any other Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing or Secondary Obligor-R and, to the extent reasonably available, any other Secondary Obligor as the Agent or any Lender may from time to time in writing reasonably request provided, that Borrower shall not be required to furnish to the Agent or any Lender any such information relating to a Portfolio Entity-Post AE if (i) the Charter Documents of, or Shareholder Agreement relating to, such Person, in each case as in effect on the date of formation of such Person, prohibit such disclosure and (ii) notice of such prohibition on disclosure is provided to the Agent within five days of formation of such Person. 7.2 Other Required Notices. (a) [Intentionally omitted]. (b) Borrower shall notify Agent promptly after obtaining knowledge of: 16 (i) except as otherwise previously disclosed, any event or occurrence which Borrower has determined has caused a material loss or decline in value of the Assets of Borrower, any Primary Obligor, any Mid-Tier Company, or any Secondary Obligor other than an REO Affiliate, in any such case due to casualty or any other adverse occurrence and the estimated (or actual, if available) amount of such loss or decline; (ii) the institution of (x) any suit or administrative proceeding which, if determined adversely to Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or any other Secondary Obligor is reasonably likely to or could reasonably be expected to materially adversely affect the operations, financial condition or business of any obligor of a Pledged Note or have a Material Adverse Effect on the Borrower, any Primary Obligor, any Wholly-Owned Subsidiary other than an REO Affiliate, or any Mid-Tier Company, and (y) any other suit or administrative proceeding against Borrower, any Primary Obligor or any Mid-Tier Company in which the uninsured amount involved is $750,000 or more, such notice to be given on or prior to the end of the calendar month in which the applicable event occurs; (iii) Borrower, any Primary Obligor or any Mid-Tier Company becoming subject to any Charge, restriction, judgment, decree or order which could reasonably be expected to have a Material Adverse Effect or any Secondary Obligor becoming subject to any Charge, restriction, judgment, decree or order if the same could reasonably be expected to have a Material Adverse Effect on Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary other than an REO Affiliate; (iv) the commencement of any lockout, strike or walkout relating to any labor contract to which Borrower, any Primary Obligor or any Mid-Tier Company is a party or, if the same could reasonably be expected to have a Material Adverse Effect on Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary other than an REO Affiliate, the commencement of any lockout, strike or walkout relating to any labor contract to which any other Secondary Obligor is a party; (v) except as otherwise previously disclosed, any event or occurrence (x) in respect of Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary which could reasonably be expected to have a Material Adverse Effect, (y) in respect of any other Secondary Obligor which could reasonably be expected to have a Material Adverse Effect on the Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary other than an REO Affiliate or (z) in respect of Borrower, any Primary Obligor or any Secondary Obligor if the same could reasonably be expected to have a material adverse effect on the ability of any obligor of a Pledged Note to repay such Pledged Note; (vi) (x) the occurrence of a default by Borrower, any Primary Obligor or any Mid-Tier Company under any agreement, document or instrument to which such Person is a party which could reasonably be expected to have a Material Adverse Effect, (y) the occurrence of a default by any other Secondary Obligor under any agreement, document or instrument to which it is a party which could reasonably be expected to have a Material Adverse Effect on the Borrower, any Primary Obligor, any Mid-Tier Company 17 or any Wholly-Owned Subsidiary other than an REO Affiliate or (z) the occurrence of any default by Borrower, any Primary Obligor or any Secondary Obligor which could reasonably be expected to materially and adversely affect any such Person's ability to perform its respective obligations under the Loan Documents; (vii) the filing of a petition by or against Borrower, any Primary Obligor, Secondary Obligor, any other Pledged Entity or any other Loan Party under any section or chapter of the United States Bankruptcy Code or any similar law or regulation or any such Person shall make an assignment for the benefit of its creditors or if any case or proceeding is filed by or against any such Person for its dissolution or liquidation; (viii) the making of an application for the appointment of a receiver, trustee or custodian for any of the assets of Borrower, any Primary Obligor or any Secondary Obligor or any other Loan Party; (ix) the exercise by any holder of any option, warrant or right to purchase any Equity Interest in Borrower, any Primary Obligor or any Secondary Obligor ; (x) any breach of the covenant set forth in Section 8.11; and (xi) the issuance or sale of any Securities by Borrower, any Primary Obligor or any Secondary Obligor, whether or not permitted pursuant to the terms hereof. (c) On the 25th day of each month or, if sooner, on the fourth to last CFCCA Business Day of each month, Borrower shall deliver to the Agent (x) a Waterfall Certificate (which, as set forth in the form of such certificate attached as Exhibit E hereto, shall detail all receipts of Net Cash Flow, other receipts by Primary Obligors and Secondary Obligors, the amount of such receipts not paid to a Primary Obligor or Borrower and Borrower's proposed distribution of funds from the CFCCA) certified by an Executive Officer of Borrower; (y) a copy of each waterfall certificate being delivered pursuant to the Portfolio Acquisition Loan Agreement; and (z) notice of the amount of funds from the Cash Collateral Account-Servicing which will be excluded from transfer to the CFCCA on or prior to the next Payment Date pursuant to Section 8.29(e) with respect to the Holdings Buy Out Amount. (d) Borrower shall notify the Agent of the occurrence of any Extraordinary Transaction on or prior to the occurrence of such event and of the receipt by Borrower, any Primary Obligor or any Secondary Obligor of Extraordinary Transaction Proceeds on or prior to such receipt (or, in either case, at such earlier time (if any) as may be specified with respect thereto elsewhere in this Agreement). (e) (i) The Borrower shall give the Agent notice that a Secondary Obligor has become a Mid-Tier Company (due to the amount of assets contributed to it on the date of its formation or an increase in assets thereafter) within 30 days of such Person becoming a Mid-Tier Company. 18 (ii) The Borrower shall give the Agent notice that a Tier IV Company has ceased to constitute a Tier IV Company (due to an increase in the fair market value of its assets or such company engaging in any business) within 30 days of such Person ceasing to constitute a Tier IV Company and shall promptly deliver to Lender a revised Schedule 10.43 to reflect such change. (iii) The Borrower shall give the Agent notice that a Tier V Company has ceased to constitute a Tier V Company within 30 days of such Person ceasing to constitute a Tier V Company (f) The Borrower shall give the Agent notice that it or any Primary Obligor, Mid-Tier Company, Wholly-Owned Subsidiary or Loan Party intends to acquire Equity Interests in any Person or to form a Subsidiary prior to the making of any such acquisition or any such formation and, if requested in writing by the Agent, forthwith upon the making of such acquisition or any such formation, shall deliver to the Agent (x) an addendum to Schedule 10.23A reflecting the same and,(y) if such acquisition or formation is of an REO Affiliate, a new Schedule 10.46 reflecting the same. (g) On or before the fourth to last CFCCA Business Day of each month, Borrower shall deliver to Agent an Existing Portfolio NPV Percentage Certificate in the form of Exhibit F hereto (which, as indicated in the form of such certificate shall detail for each Secondary Obligor the Net Present Value of the assets of such Secondary Obligor and the amount of Indebtedness of or secured by such Secondary Obligor and the amount of Guaranty Equivalents issued by such Secondary Obligor), certified by an Executive Officer. (h) On or before the fourth to last CFCCA Business Day of each month, Borrower shall deliver to Agent a Portfolio Protection Expense Report in form and detail satisfactory to the Agent showing as of the close of business on the last Business Day of the preceding calendar month the aggregate amount retained by Secondary Obligors as Portfolio Protection Expenses to pay Portfolio Protection Expenses not theretofore paid (the "Aggregate PPE Amount"), the aggregate amount of Portfolio Protection Expenses theretofore paid and the aggregate amount of Portfolio Protection Expenses withheld (in the aggregate) by such Persons during the immediately preceding calendar month. In addition, such Report shall itemize each item of the Aggregate PPE Amount in excess of $50,000 (each such item, an "Itemized PPE Amount"), and Borrower shall provide to the Agent such other information with respect thereto as the Agent may request. If the Agent gives the Borrower notice that it disputes the inclusion of any Itemized PPE Amount as a Portfolio Protection Expense (whether due to the reasonableness thereof, the time such amount has been or is expected to be retained in advance of payment of the related expense or otherwise), such challenged item shall constitute a "Challenged Portfolio Protection Expense." 7.3 Payment of Charges. Other than Charges payable by First X or First B, Borrower, each Primary Obligor, each Mid-Tier Company and each Wholly-Owned Subsidiary other than any REO Affiliate shall pay promptly, when due, all Charges and Borrower, each Primary Obligor and each Mid-Tier Company and Wholly-Owned Subsidiary other than an REO Affiliate shall not permit the Charges to arise or to remain unpaid, and will promptly discharge the same. In the event Borrower, any Primary Obligor or Secondary Obligor other than an REO Affiliate 19 at any time or times hereafter, shall fail to pay the Charges or to obtain such discharges as required herein, Borrower shall so advise Agent thereof in writing. Agent may, without waiving or releasing any obligation, covenant or agreement of Borrower or any Event of Default or Default, in its sole and absolute discretion, at any time or times thereafter, make such payment, or any part thereof, or obtain such discharge and take any other action with respect thereto which Agent deems advisable. All sums so paid by Agent and any expenses relating thereto, including reasonable attorneys' fees, court costs, expenses and other charges, shall be part of the Obligations, payable by Borrower to Agent on demand. Notwithstanding the foregoing, Borrower, any Primary Obligor, any Mid-Tier Company or Wholly-Owned Subsidiary may permit or suffer the Charges to attach to its Assets and may dispute, without prior payment thereof, the Charges, on the conditions that: (i) Borrower or the applicable Primary Obligor, Mid-Tier Company or Wholly-Owned Subsidiary, in good faith, shall be contesting the same in an appropriate proceeding diligently pursued; (ii) enforcement thereof against any Assets of Borrower or the applicable Primary Obligor or Mid-Tier Company or Wholly-Owned Subsidiary shall be stayed; and (iii) appropriate reserves therefor shall have been established on the Records of Borrower or the applicable Primary Obligor or Mid-Tier Company or Wholly-Owned Subsidiary in accordance with GAAP. 7.4 Insurance. Borrower and each Primary Obligor, Mid-Tier Company, Wholly-Owned Subsidiary and each REO Affiliate at each of such respective Person's sole cost and expense, shall keep and maintain: (i) policies of insurance against all hazards and risks ordinarily insured against by other owners or users of properties in similar business or as reasonably requested in writing by Agent; and (ii) public liability insurance relating to such Person's ownership and use of its Assets. All such policies of insurance shall be in form, with insurers and in such amounts as may be satisfactory to Agent. Borrower shall deliver to Agent the original (or certified) copy of each policy of insurance, and evidence of payment of all premiums for each such policy. Such policies of insurance of the Borrower, Primary Obligors and Wholly-Owned Subsidiaries (except those of public liability) shall contain an endorsement, in form and substance acceptable to Agent, showing losses payable to Agent for the ratable benefit of Lenders. Such endorsement or an independent instrument furnished to Agent, shall provide that all insurance companies will give Agent at least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of Borrower or any other Person shall affect the right of Agent for the ratable benefit of Lenders, to recover under such policy or policies of insurance in case of loss or damage. Upon request by Agent and, whether or not such request is made, upon the occurrence of an Event of Default or Default, Borrower hereby directs all insurers under such policies of insurance (except those of public liability) to pay all proceeds payable thereunder directly to Agent. Upon request by Agent and upon the occurrence of an Event of Default or Default, Borrower, irrevocably, appoints Agent (and all officers, employees or agents designated by Agent) as Borrower's true and lawful agent and attorney-in-fact for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect to such policies of insurance. In the event Borrower, any Primary Obligor or any Mid-Tier Company or Wholly-Owned Subsidiary at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then Agent, without waiving or releasing any obligation, covenant or agreement of Borrower or any Event of Default or Default, may at any 20 time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto which Agent deems advisable. All sums so disbursed by Agent, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be part of the Obligations, payable by Borrower to Agent on demand. Agent shall also be named as an additional insured with respect to Borrower's, each Primary Obligor's and each Wholly-Owned Subsidiary's liability insurance. 7.5 Maintenance of Records. Borrower will keep, and will cause each Primary Obligor and each Wholly-Owned Subsidiary other than any REO Affiliate to keep, at all times books of record and account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs, and each such Person will provide, and will cause each such other Person to provide, adequate protection against loss or damage to such books of record and account. 7.6 Preservation of Existence. Each of Borrower, each Primary Obligor, each Mid-Tier Company, each Secondary Obligor-Existing and each other Subsidiary of Borrower other than a Tier IV Company or an REO Affiliate or a Harbor Debtor, will maintain and preserve its respective corporate, limited liability company or partnership existence, rights, privileges and franchises in its jurisdiction of organization, and qualify and remain qualified to do business in, and maintain its rights, privileges and franchises in each other jurisdiction which in the opinion of the respective board of directors, manager, general partner or other governing Person of Borrower, such Primary Obligor, Mid-Tier Company , Secondary Obligor- Existing, or other Subsidiary of Borrower continue to be advantageous to it and each such Person (including each Tier IV Company and REO Affiliate which is a Subsidiary of Borrower) shall comply in all material respects with all applicable Legal Requirements. Without limiting the generality of the foregoing, the Borrower agrees to (and to cause each such other Person to) qualify to do business as a foreign corporation in each jurisdiction where the nature of its business and the operations conducted by it therein require it to be so qualified. 7.7 Preservation of Assets. Each of Borrower and each Primary Obligor will keep its property material to the conduct of its business in good repair, working order and condition and from time to time make all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, so that the business carried on by it may be conducted at all times in accordance with prudent business management. 7.8 Inspection of Books and Assets. Borrower shall permit Agent, Lenders and each of their respective representatives reasonable access during normal business hours to its properties and personnel, and shall disclose and make available to Agent and Lenders all books, papers and records relating to the assets, stock ownership, properties, operations, obligations, and liabilities of Borrower, its Subsidiaries, each Mid-Tier Company, each Secondary Obligor-Existing and each other Secondary Obligor-R (and shall use its best efforts to cause each other Existing S Co. and Portfolio Entity-Post AE to do the same), including, but not limited to, all books of account (including the general ledger), tax records, minute books of meetings of boards of directors (and any committees thereof) and shareholders, organizational documents, bylaws, material contracts and agreements, filings with any regulatory authority, accountants' work papers (other than those that are the property of its independent outside auditors), litigation files, 21 loan files, plans affecting employees, and any other business or prospects in which the Lenders may have a reasonable interest in connection with the Loans, provided that such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations, and provided further that in the event that any of the foregoing are in the control of any third party, Borrower shall use its reasonable best efforts to cause such third party to provide access to such materials to the Agent and Lenders who shall request the same. In the event that Borrower is prohibited by law from providing any of the access referred to in the preceding sentence to the Agent and Lenders, it shall use its reasonable best efforts to obtain promptly waivers thereof so as to permit such access. Borrower shall make the directors, officers, employees and agents and authorized representatives (including counsel and independent public accountants) of Borrower, its Subsidiaries, each Mid-Tier Company and each Secondary Obligor-Existing and each other Secondary Obligor-R available (and shall use its best efforts to cause each other Existing S Co. and Portfolio Entity-Post AE to do the same) to confer with Agent and Lenders and their respective representatives, provided that (i) such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations and (ii) unless a Default or Event of Default exists, counsel to Borrower shall be permitted to be present at any meeting between Borrower's independent public accountants and the Agent or the Lenders). 7.9 Payment of Indebtedness. Each of Borrower, each Primary Obligor and, subject to the final sentence of this Section 7.9, each Wholly-Owned Subsidiary will duly and punctually pay, or cause to be paid, the principal of and the interest on all Indebtedness heretofore or hereafter incurred or assumed by such Person, when and as the same shall become due and payable, provided that neither Borrower, any Primary Obligor or any such Wholly-Owned Subsidiary shall be required to pay any Indebtedness (other than Indebtedness incurred under this Agreement or any other Loan Document) while the same is being contested by it in good faith and by appropriate proceedings so long as Borrower or such Primary Obligor or Wholly-Owned Subsidiary shall have set aside on its books appropriate reserves in accordance with GAAP with respect thereto and title to any property of Borrower or the applicable Primary Obligor or Wholly-Owned Subsidiary is not jeopardized. The provisions of this Section 7.9 do not relate to Indebtedness of FC Capital, Bosque Asset Corp. or other Wholly-Owned Subsidiaries which are REO Affiliates or Harbor Debtors. 7.10 Further Assurances. Each of Borrower, each Primary Obligor, each Subsidiary and each other Loan Party will, and will cause each of its respective Subsidiaries to, make, execute or endorse, and acknowledge and deliver or file, all such vouchers, invoices, notices, and certifications and additional agreements, undertakings, conveyances, transfers, assignments, or further assurances, and take any and all such other action, as the Agent or any Lender may, from time to time, deem necessary or proper in connection with this Agreement, the obligations of such Person hereunder or under the Notes or any of the other Loan Documents to which such Person is a party, or for the better assuring and confirming unto the Agent on behalf of the Lenders, with the Requisite Priority, all or any part of the security for the Obligations. 7.11 Notice of Default. Forthwith and in any event within five days after Borrower shall have obtained knowledge of the existence of a Default or Event of Default, Borrower will deliver to the Agent a certificate signed by an Executive Officer of Borrower setting forth the 22 details of such event, the period of existence thereof, and what action the Borrower proposes to take with respect thereto. 7.12 Reserves. Each of Borrower, each Primary Obligor and, subject to the last sentence of this Section 7.12, each Wholly-Owned Subsidiary and each Secondary Obligor-R will set up on its books from its earnings, reserves for bad debt in accordance with GAAP and in an aggregate amount deemed adequate in the judgment of such Person and accepted by the outside auditors in their annual audits and Borrower shall use its best efforts to cause each other Mid-Tier Company to do the same. The provisions of this Section 7.12 shall not apply to any Wholly-Owned Subsidiary or Secondary Obligor-R which is an REO Affiliate, a Harbor Debtor, a Tier IV Company or Tier V Company. 7.13 Representation and Warranties; Covenants as to Other Persons; Amendment of Schedules. (a) To the extent any representation or warranty contained herein refers to an event or state of facts which exists on or after the date hereof, on or after the Amendment Execution Date or on or after the Amendment Effective Date or on or after the date of any Loan, and shall exist during the term hereof or at the time of any or each Loan hereunder, to the extent not already a covenant, said representation or warranty shall be deemed to be an affirmative covenant by Borrower to take all actions, omit to take such actions or cause such actions to be taken which shall be necessary or desirable to cause such representation or warranty to be true and accurate at all times during the term hereof. To the extent any representation, warranty or covenant herein (including the covenants set forth in Section 8 and in this Section 7) relates to any other Person (including but not limited to a Primary Obligor, a Secondary Obligor, any Pledged Entity or any other Loan Party) other than Borrower, it shall be deemed to be a covenant of Borrower to cause such Person to comply with or otherwise perform such representation, warranty or covenant, whether or not Borrower has the legal, corporate or other ability to cause such compliance or performance. (b) No delivery of any new or supplemented Schedule to this Agreement (whether or not such delivery is required by this Agreement or any other Loan Document) shall waive or cure any Default or Event of Default which would occur absent such delivery (other than a Default or Event of Default arising solely from the breach of an obligation to deliver such Schedule and other than as may be set forth in writing in a consent or amendment (if any) pursuant to which any such new or supplemented Schedule is delivered). 7.14 Perform Obligations. Borrower and each Primary Obligor, Secondary Obligor and other Loan Party shall duly and punctually pay and perform each of its obligations under this Agreement and the other Loan Documents in accordance with the terms hereof and thereof. 7.15 New Debt and Equity Interests. (a) Borrower shall ensure that at the time that Borrower, any Primary Obligor, any other Loan Party or any Wholly-Owned Subsidiary other than a Wholly-Owned Subsidiary which is not a US Person, acquires an Equity Interest in any Person other than, in the case of a Secondary Obligor, an REO Affiliate of such Secondary Obligor, such new Equity Interest is 23 subject to a perfected security interest of the Requisite Priority in favor of the Agent and the Lenders and, in connection therewith, shall take such action and execute and deliver such pledge agreements or amendments to pledge agreement and such other instruments and agreements, including, without limitation, delivery of notices of lien to the Pledged Entity, acknowledgement of such notice from the Pledged Entity, delivery of the original certificates of certificated securities to Collateral Agent, together with an assignment separate from certificate therefor, in each case in form and substance satisfactory to the Collateral Agent, as the Collateral Agent may require. If requested in writing by Agent, Borrower shall also deliver to the Agent a supplement to Schedule 10.5(b) hereto to reflect the acquisition of such new Equity Interest. The provisions of this Section 7.15(a) are in addition to, and not in limitation of, other provisions of this Agreement limiting the investments, the acquisition of Equity Interests and the acquisition of other assets by Borrower, Primary Obligors, Secondary Obligors or other Persons. Notwithstanding the foregoing, no Primary Obligor or Wholly-Owned Subsidiary shall be required to pledge to the Agent (x) shares of stock, partnership interests, membership interests or other similar equity interests consisting of more than 66.66% of the shares of stock, partnership interests, membership interests or other similar equity interests in any Person which is not a US Person or (y) any Equity Interest issued by an REO Affiliate. (b) Borrower shall ensure that at the time that Borrower or any Primary Obligor makes any loan or acquires any rights to any other indebtedness or acquires any note, bond or other indebtedness instrument (any such note, bond or other instrument, a "Subject Debt Instrument"), all rights of the Borrower or such Primary Obligor with respect to such loan, other indebtedness and Subject Debt Instrument are subject to a perfected security interest of the Requisite Priority in favor of the Agent and the Lenders and, in connection therewith, shall take such action and execute and deliver such pledge agreements or amendments to pledge agreement and such other instruments and agreements, including, without limitation, delivery of notices of pledge to the issuer of such indebtedness, acknowledgement of such notice from such issuer, delivery of the Subject Debt Instruments and each other original note evidencing such indebtedness to Collateral Agent, together with an assignment separate from certificate such note or Subject Debt Instrument or allonge thereto, and estoppel certificates from the issuer thereof, in each case in form and substance satisfactory to the Collateral Agent, as the Collateral Agent may require. The provisions of this Section 7.15(b) are in addition to, and not in limitation of, other provisions of this Agreement limiting the investments, the acquisition of Equity Interests and the acquisition of other assets by Borrower, Primary Obligors, Secondary Obligors or other Persons. 7.16 Cooperation. At the Agent's request, Borrower will meet from time to time with (and provide then available financial information to) other financial institutions to which any Lender may wish to grant participations in the Loans, including potential Lender Assignees and potential Purchasing Lenders. 7.17 Approvals and Consents. In the event that any approval, consent or non-objection need be obtained by Borrower, any Primary Obligor and/or any Secondary Obligor or other Loan Party from, or a notice or other filing need be filed by Borrower or any such other Person, with, any Governmental Authority in connection with the execution, delivery and performance of this Agreement or any Loan Document by Borrower or any such other Person, the Borrower shall take and cause such other Person (as applicable) to take, all actions reasonably necessary to 24 obtain any such approval, consent or non-objection or file such notice or other filing as promptly as practicable, and the Lenders agree to cooperate with Borrower in obtaining or filing the same. 7.18 Obligations Under Amendments to Existing Agreement. (a) Borrower shall cause FC Mexico to continue to own not less than 90% of the equity interests of each Mexican Investment Entity and to maintain all power and authority to manage the affairs of each Mexican Investment Entity which it manages on the Amendment Effective Date (including but not limited to the right to sell assets and borrow money, provided that the right to sell assets, right to acquire additional assets and the obligation to make additional capital contributions may be subject to the approval of all partners of such Entity). (b) Borrower shall cause FC Holdings to continue to own not less than 90% of the equity interests of each Mexican Investment Entity and to maintain all power and authority to manage the affairs of each Mexican Lending Entity that it manages on the Amendment Effective Date (including but not limited to the right to sell assets and borrow money, provided that the right to sell assets, right to acquire additional assets and the obligation to make additional capital contributions may be subject to the approval of all partners of such Entity). (c) Not less than ten (10) days prior to forming any additional entity to make investments in Mexico or to make loans to any such entity making investments in Mexico, Borrower shall deliver, or cause to be delivered to Agent, notice of the formation of such entity, which notice shall include information relating to the assets to be acquired by the Mexican Acquisition Entity, the purchase price to be paid for such assets, the structure and ownership of the entity which will make such investments and the entity (if any) that will make loans to such investing entity and, if such assets are to be acquired other than by a PFAL Portfolio Entity and by an entity which necessitates a consent thereunder, a copy of the CFSC's consent to such transactions, if required pursuant to the Holdings/CFSC Loan Agreement. 7.19 Payment of Dividends from Primary Obligors and Subsidiaries. In furtherance and not in limitation of other provisions hereof (including Section 8.29) regarding required distributions, to the extent necessary to enable it to make payments of the Obligations in accordance with the terms hereof, unless prohibited by applicable law Borrower shall cause dividends to be paid to it by each Primary Obligor and each other Subsidiary of the Borrower (whether in existence as of the date hereof or hereafter formed or acquired) in amounts which are sufficient to enable Borrower to satisfy its payment obligations under the terms hereof. 7.20 Stay, Extension and Usury Laws. Borrower covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive it from paying all or any portion of the principal of, premium, if any, or interest on the Notes, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of its obligations under the Notes, and Borrower (to the extent it may lawfully do so) hereby expressly waives all benefits or advantages of any such law. 7.21 Compliance with Laws. Borrower shall comply with, and shall cause each Primary Obligor, each Secondary Obligor and each other Loan Party to comply with, all laws, 25 rules, regulations and governmental orders (federal, state and local), including all Environmental Laws, having applicability to it or to the business or businesses at any time conducted by it, where the failure to so comply would have, or could reasonably be expected to have, a Material Adverse Effect on Borrower, any Primary Obligor or any Mid-Tier Company, or on any Wholly-Owned Subsidiary other than an REO Affiliate. Section 8. NEGATIVE COVENANTS. Borrower warrants and represents to and covenants to the Lenders and the Agent that, so long as this Agreement is in effect and until the Bosque Loan Commitments are terminated and all of the Loans, together with interest and all other obligations incurred hereunder are paid in full, Borrower will perform the obligations set forth in this Section 8 (unless it shall have first procured the written consent of the Majority Lenders to do otherwise), and will cause each Primary Obligor, Secondary Obligor and other Loan Party to perform the obligations set forth in this Section 8 which are applicable to such Person (unless it shall have first procured the written consent of the Majority Lenders to do otherwise). 8.1 Amend Charter Documents; Engage in Same Type of Business. (a) None of Borrower, any Primary Obligor, any Mid-Tier Company or any Secondary Obligor-R or other Loan Party shall (i) make or consent to any change in its Charter Documents, in any Shareholder Agreement or in its capital structure; or (ii) make any change in any of its business objectives, purposes and operations, including by undertaking additional business activities or (iii) waive any material right under its Charter Documents or any Shareholder Agreement. None of Borrower, any Primary Obligor, any Mid-Tier Company or any Secondary Obligor-R shall engage in any business not of the same general type as those conducted by it on the Amendment Execution Date or, in the case of a newly formed entity, any business not of the same general type as those conducted by the Primary Obligors or the Secondary Obligors (as the case may be) on the Amendment Execution Date. (b) None of Borrower, any Primary Obligor, any Mid-Tier Company or any Secondary Obligor-R shall enter into any Shareholder Agreement after the Amendment Execution Date other than, in the case of a Primary Obligor, a Permitted Shareholder Agreement. 8.2 Liens. None of Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary, any Existing S Co. (other than MCS, any Mexican Acquisition Entity or any French Acquisition Entity), any REO Affiliate of an Existing S Co. or of a Mid-Tier Company, or any other Loan Party will grant, contract, create, incur, assume or suffer or permit to exist any Lien upon or with respect to, or by transfer or otherwise subject to the prior payment of any indebtedness (other than the Loans), any of its Assets, whether now owned or hereafter acquired, except Permitted Liens or, in the case of an REO Affiliate of an Existing S Co. or of a Mid-Tier Company, Liens in favor of such Existing S Co. or such Mid-Tier Company and non-consensual Liens. 8.3 Other Indebtedness. None of Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or any Existing S Co. (other than MCS, any Mexican Acquisition Entity or any French Acquisition Entity, or any REO Affiliate which is not any REO 26 Affiliate of an Existing S Co. or of a Mid-Tier Company), any REO Affiliate of an Existing S. Co. or of a Mid-Tier Company, or any other Loan Party will contract, create, incur, assume or suffer to exist any Indebtedness; except (i) the Loans; (ii) Indebtedness of the Borrower under the Portfolio Acquisition Loan Agreement not in excess of the PA Indebtedness Limit and Permitted Liens relating thereto and Indebtedness of FC Commercial under the PFAL FC Commercial Pledged Note; (iii) other Indebtedness existing on the Amendment Effective Date listed on Schedule 10.19 to this Agreement; (iv) Indebtedness of any PFAL Portfolio Entity under Approved Portfolio Leverage Arrangements pursuant to Section 8.3(iv) of the Portfolio Acquisition Loan Agreement-Existing; (v) Indebtedness of any Mid-Tier Company-Post AE which is not a PFAL Portfolio Entity; (vi) Indebtedness of FC Holdings under the FC Holdings Line of Credit; (vii) Indebtedness of FC Consumer Lending under the FC Consumer Note and Permitted Liens relating thereto; (viii) unsecured trade payables incurred in the ordinary course of business; (ix) Indebtedness described on Schedule 8.3 to this Agreement, not to exceed the amounts set forth under "Cargill Senior Debt Leverage" on such Schedule, provided that such Indebtedness is incurred on or prior to June 1, 2003 under and pursuant to the Wamco XXX Loan Agreement and solely for the purposes described on said Schedule 8.3; (x) Indebtedness of Borrower to FC Consumer Lending under the Borrower-FCL Note; (xi) in the case of an REO Affiliate of an Existing S Co. or of a Mid-Tier Company, Indebtedness owed to such Existing S Co. or such Mid-Tier Company and trade payables incurred in the ordinary course of business and, to the extent constituting Indebtedness, Charges incurred by such REO Affiliate; (xii) Indebtedness under Pledged Notes to the extent permitted by Section 8.13 (a) (i)-(iv). (xiii) Indebtedness of Secondary Obligors in respect of loans permitted to be made by FC Servicing pursuant to Section 8.13(a)(vii); 27 (xiv) Indebtedness of Secondary Obligors in respect of loans permitted to be made by ASDM pursuant to Section 8.13(a)(viii); (xv) Indebtedness of Secondary Obligors in respect of loans permitted to be made by MCS pursuant to Section 8.13 up to an aggregate principal amount of such Indebtedness at any one time outstanding not exceeding $1,000,000; and (xvi) up to $1,000,000 in aggregate principal amount of Indebtedness incurred by FC Properties, Ltd., FCS Creamer, Ltd., FCS Wood Ltd., and FCS Wildhorse Ltd. or other REO Affiliates to finance developmental expenses of with respect to real property owned by such entities. and (xvii) Indebtedness of Mexican Acquisition Entities-Post AE in respect of loans permitted to be made by FC Holdings or Mexican Lending Entities-Post AE pursuant to Section 8.13(a)(x); 8.4 Sell Assets. None of Borrower, any Primary Obligor, any Mid-Tier Company. any Existing S Co. or any Wholly-Owned Subsidiary shall assign, sell or transfer any of its Assets to any Person other than in the ordinary course of business (and, in the case of Assets constituting Equity Interests only to the extent permitted by Section 8.8(a))(it being acknowledged by Borrower that no assignment, sale or transfer of assets by Borrower, any Primary Obligor, any Mid-Tier Company, any Subsidiary of Borrower or any Existing S Co. to any Affiliate or Associate or Subsidiary of Borrower (whether or not wholly owned) or of any Mid-Tier Company or Existing S Co. or to any other Secondary Obligor or any Affiliate or Associate thereof shall be deemed to constitute a transaction in the ordinary course of business); provided that the foregoing shall not restrict (i) an REO Affiliate from transferring its assets to the Person which owns all of its equity interests or to any other Person which is not a Subsidiary or Affiliate of the Borrower or such REO Affiliate or (ii) any Person which owns all of the equity interests in an REO Affiliate from transferring distressed notes secured by real estate (and such real estate security) to such REO Affiliate. 8.5 Attachment. None of Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary, other than an REO Affiliate, or, if the same would have a Material Adverse Effect on the Borrower, any Primary Obligor or any Mid-Tier Company, no other Secondary Obligor or REO Affiliate, shall permit or suffer any levy, attachment, seizure, or restraint to be made of, upon or affecting any of its Assets or permit any of its Assets to be subject to a writ of distress. 8.6 Receiver. None of Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary, other than an REO Affiliate, or, if the same would have a Material Adverse Effect on the Borrower, any Primary Obligor or any Mid-Tier Company, no other Secondary Obligor or Affiliate, shall permit or suffer any receiver, trustee or assignee for the benefit of creditors, or any other custodian to be appointed to take possession of all or any of its Assets, or for all or any of its Assets to come within the possession of any receiver, trustee, assignee for the benefit of creditors or custodian, other than a custodian pursuant to a Non-Default Voluntary Custodial Arrangement. 28 8.7 Mergers and Acquisitions. None of Borrower, any Primary Obligor, any other Loan Party, or any Mid-Tier Company or Wholly-Owned Subsidiary other than an REO Affiliate shall wind up, liquidate or dissolve its affairs or merge or consolidate with any Person (or agree to do any of the foregoing at any future time) or fail to maintain its corporate, partnership or limited liability company or other formal existence. 8.8 Stock Transfers. (a) Except as permitted pursuant to Section 8.8(b), none of Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or any other Pledged Entity shall (i) except for options, warrants or other rights to purchase Equity Interests in the Borrower pursuant to plans or instruments described in Schedule 10.5(c) as amended from time to time with Majority Lenders' written consent and for Equity Interests in the Borrower issued upon exercise thereof, (x) grant any option, warrant or other right to purchase any Equity Interest in Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or any other Pledged Entity or (y) issue any other Equity Interests other than, in the case of a Secondary Obligor, (subject to Section 7.15) upon its formation, or (ii) transfer any Equity Interests (whether its own or Equity Interests issued by any Person other than itself) without, in each case, the prior written consent of Majority Lenders. (b) Notwithstanding anything to the contrary contained herein, Borrower shall have the right to register on Form S-3, and publicly offer and sell equity Securities of Borrower under the following terms and conditions: (w) Borrower shall deliver notice to Agent, within twenty-four (24) hours of the filing with the SEC; (x) Borrower shall fully and timely comply with all Securities Laws and with all terms and provisions of the underwriting agreement pursuant to which such Securities are offered for sale; (y) the prospectus and all other selling materials used by Borrower in such offering shall not contain any misstatement of material fact or omit to state any fact which would render the statements contained therein false or misleading, and (z) Borrower shall pay the proceeds of such offering to Agent, in accordance with the terms hereof. 8.9 Adverse Transactions. None of Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or other Loan Party shall enter into any transaction which materially and adversely affects its ability to perform its obligations under the Loan Documents or to pay any other Indebtedness. 8.10 Investments. (a) Subject to the further limitations set forth in Sections 8.10(b), (c) and (d), after the date hereof, neither Borrower, any Primary Obligor, any Mid-Tier Company nor any Secondary Obligor other than a PFAL Portfolio Entity shall make any investment in Equity Interests of any Person or any note, bond, other debt instruments or obligations of or issued by any Person or any other assets, except (subject to the succeeding sentence and subject to compliance in each case with Section 7.15 and, in the case of any investment consisting of the making of a loan, only if the making of such loan is permitted by Section 8.13) for investments by any such Person, other than an Existing S Co. (other than MCS, any Mexican Acquisition Entity, any French Acquisition Entity or an REO Affiliate), in the ordinary course of business (it 29 being agreed that no Existing S Co. (other than MCS, any Mexican Acquisition Entity or any French Acquisition Entity, or an REO Affiliate) shall make any investment or acquire any assets whatsoever; provided that (i) Wamco XXX shall be permitted to make the investments described on Schedule 8.3 and (ii) an Existing S Co. shall be permitted to restructure the terms of distressed loans owned by such Existing S Co. if such restructuring is in the ordinary course of business and is reasonably deemed necessary by the servicer of such loans in order to maximize collections on such distressed loans). In furtherance and not in limitation of the foregoing, under no circumstances shall Borrower, any Primary Obligor, MCS, any Mexican Acquisition Entity or any French Acquisition Entity acquire any assets other than, in the case of the Borrower and any Primary Obligor, loan advance receivables evidenced by Pledged Notes (to the extent otherwise permitted by this Agreement) and assets acquired with Capital Expenditures made pursuant to Section 8.32 and, (v) in the case of Borrower, Equity Interests in Primary Obligors, (w) in the case of Primary Obligors, Equity Interests in Subsidiaries of such Primary Obligors and in other Secondary Obligors engaged in the business engaged in by the Consolidated Group on the date hereof, (x) in the case of FC Servicing, assets acquired in the ordinary course of its servicing business, (y) in the case of any Mexican Acquisition Entity, Equity Interests in other Mexican entities engaged in the business engaged in by the Consolidated Group on the date hereof and in the case of MCS or any French Acquisition Entity, Equity Interests in French entities engaged in the business engaged in by the Consolidated Group on the date hereof, in each case, to the extent the same arises in the ordinary course of business and (z) in the case of MCS, French Acquisition Entities or Mexican Acquisition Entities, assets acquired in the ordinary course of business. (b) As used in Sections 8.10 (a),(c) and (d) "invest" shall include, but not be limited to (x) contributions to the capital of a Person, (y) the acquisition of Securities or other assets and (z) making loans or other financial accommodations (including without limitation, payment of a Person's debts or other obligations and any other expenditure of funds or credit for the benefit or on behalf of a Person) to a Person. (c) In furtherance and not in limitation of the other restrictions herein and in the other Loan Documents under no circumstances shall any of Borrower, any Primary Obligor, any Secondary Obligor or other Affiliate of the Borrower at any time invest in any of the Harbor Debtors. (d) In furtherance and not in limitation of other restrictions herein and in the other Loan Documents on such contributions, loans, gifts, investments and Guaranty Equivalents set forth, none of Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party shall make capital contributions, loans or gifts to, investments in or enter into or issue any Guaranty Equivalent with respect to the obligations of any entity identified on Schedule 10.43 or any other Tier IV Company at any time during the term hereof. 8.11 Dividends; Payment of Fees, etc. (a) Borrower will not and will not permit any Primary Obligor, Secondary Obligor or other Subsidiary to authorize, declare, or pay any dividends or return any capital to its stockholders as such or authorize or make any other distribution, payments or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration any shares of any class of its capital stock now or 30 hereafter outstanding or any options, warrants or other securities (now or hereafter outstanding) convertible into or exercisable for any equity or other securities of the Borrower, any Primary Obligor, any Secondary Obligor or any other Subsidiary or set aside funds for any of the foregoing and Borrower will not permit any Primary Obligor, Secondary Obligor or other Subsidiary to purchase any Equity Interests of Borrower or any other Primary Obligor, Secondary Obligor or other Subsidiary or set aside funds for any of the foregoing (any such authorization, declaration, payment, dividend, return of capital, distribution, delivery, redemption, retirement, purchase, acquisition or setting aside of funds, a "Dividend"), provided, that (i) any Subsidiary, Primary Obligor or Secondary Obligor may declare or pay Dividends to the Borrower or any Wholly-Owned Subsidiary and (ii) any Subsidiary, Primary Obligor or Secondary Obligor may pay cash Dividends to holders of its shares of stock, partnership interests, limited liability company interests or similar equity interests generally so long as the Borrower or its respective Subsidiaries which own such equity interests in the Person paying such Dividends receives at least its proportionate share thereof (based on its relative holdings of such equity interests in the Person paying such Dividends). Notwithstanding the foregoing, Borrower shall be permitted to consummate the Exchange Offer as described in Section 12.14(b) and FC Commercial shall be permitted to consummate the purchase of 20% of Holdings as described in Section 12.14(u). (b) Neither Borrower, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-R or any Wholly-Owned Subsidiary shall pay any director's fees or, unless such shareholder or director is directly and actively employed by Borrower or such Primary Obligor, Mid-Tier Subsidiary, or Secondary Obligor-R, any salaries to any director or shareholder; provided that Borrower may pay outside directors of Borrower, Primary Obligors, and other Subsidiaries director fees in an amount not to exceed $25,000 per director per calendar year minus the aggregate amount of director fees paid to such director by any Primary Obligors and/or Secondary Obligors, and provided further that Primary Obligors and Secondary Obligors may pay outside directors fees in an aggregate amount not to exceed $10,000 per director per annum. 8.12 [Intentionally omitted] 8.13 Loan; Guaranty Debt. (a) None of Borrower, any Primary Obligor, Mid-Tier Company, Wholly-Owned Subsidiary or Existing S Co. shall make any loan to any Person, except (subject to compliance with Section 7.15), (i) for loans made by Borrower to FC Commercial pursuant to the Portfolio Acquisition Loan Agreement (and not in excess of the aggregate amount thereof contemplated by the Portfolio Acquisition Loan Agreement -Existing) which are evidenced by the PFAL FC Commercial Pledged Note; (ii) for loans made by Borrower to FC Commercial with cash from the Operating Account which are on loaned by FC Commercial to FC Servicing for use by FC Servicing to pay operating expenses, which loans to FC Commercial are evidenced by the FC Commercial Pledged Note-Existing and which loans by FC Commercial to FC Servicing are evidenced by the FC Servicing Pledged Note; (iii) for loans made by Borrower to FC Capital to fund the litigation expenses and servicing expenses to the extent permitted by Section 8.26(b) (in amounts not exceeding the amounts permitted by such Section), which loans are evidenced by the FC Capital Pledged Note; (iv) for loans which are permitted by Section 31 8.10 made by FC Commercial to PFAL Portfolio Entities with the proceeds of the loans referred to in clause (i) above, to the extent permitted by Portfolio Acquisition Loan Agreement, which loans are evidenced by Pledged Notes; (v) the accepting by a Secondary Obligor of a note from its 100% owned REO Affiliate evidencing the deferred purchase price of a mortgage note sold to such REO Affiliate by such Secondary Obligor; (vi) the accepting by an REO Affiliate, MCS, a Mexican Acquisition Entity or a French Acquisition Entity of a note from the transferee of real property sold by such REO Affiliate, MCS, such Mexican Acquisition Entity or such French Acquisition Entity (as the case may be) in the ordinary course of business evidencing a portion of the deferred purchase price of such property; (vii) in the case of FC Servicing, short term servicer advances in the ordinary course of business with respect to portfolios which it is servicing in aggregate principal amount at any one time outstanding not in excess of $1,000,000; (viii) in the case of ASDM, short term servicer advances in the ordinary course of business with respect to portfolios which it is servicing in aggregate principal amount at any one time outstanding not in excess of $1,000,000; (ix) in the case of MCS short term servicer advances in the ordinary course of business with respect to portfolios which it is servicing; (x) for loans made by FC Holdings or a Mexican Lending Entity- Post AE to a Mexican Acquisition Entity-Post AE for the acquisition by such Mexican Acquisition Entity-Post AE of assets from a Mexican financial institution or a Mexican governmental entity acting as a receiver of a Mexican financial institution; or (xi) for loans required to be made by Wamco XXX or by any Portfolio Entity-Post AE (other than, except to the extent permitted by the Portfolio Acquisition Agreement-Existing, any PFAL Portfolio Entity) pursuant to Obligor Funding Obligations acquired by such Person as part of the purchase by such Person of a portfolio of loans which were made by Persons, none of whom are Affiliates or Associates of the Borrower or WAMCO XXX or such Portfolio Entity-Post AE, which portfolio was acquired in a transaction of the sort which is in the ordinary course of business for Secondary Obligors which constitutes an investment permitted to be made by such Person pursuant to Section 8.10 hereof; provided that the aggregate principal amount of Obligor Funding Obligations of all Secondary Obligors at any one time shall not exceed $5,000,000. Without limiting the foregoing, under no circumstances shall Borrower, any Primary Obligor, Mid-Tier Company, Wholly Owned Subsidiary, other Subsidiary, Existing S Co. or other Secondary Obligor make any loan to FC Holdings. The foregoing provisions of this Section 8.13 shall not prohibit Wamco XXX or a Portfolio Entity-Post AE from acquiring assets consisting of loans made by Persons who are not Affiliates or Associates of the Borrower or of WAMCO XXX or such Portfolio Entity-Post AE which are included in a portfolio of assets purchased by such Secondary Obligor to the extent that such acquisition of such assets is permitted to be made by such Person pursuant to Section 8.10 hereof and is of the sort which is in the ordinary course of business for Secondary Obligors. (b) Except as set forth on Schedule 8.13B, none of Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or any Existing S Co. shall enter into or issue any Guaranty Equivalents; provided that FC Holdings and/or FC Commercial shall be permitted to guaranty Indebtedness of FC Properties, Ltd., FCS Creamer, Ltd., FCS Wood Ltd., FCS Wildhorse Ltd. and/or any other REO Affiliate incurred to finance developmental expenses with respect to real property owned by such entities provided that the sum of the principal amount of Indebtedness guaranteed pursuant to such guaranties does not exceed $1,000,000. 32 8.14 Pay Indebtedness. None of Borrower, any Primary Obligor, any Mid-Tier Company, or any Secondary Obligor-R other than an REO Affiliate, shall defease, prepay, purchase, redeem or otherwise acquire or repay any of its Indebtedness for borrowed money, except for prepayments and repayments thereof when due. 8.15 Issue Power of Attorney. Except pursuant to the other provisions of this Agreement or the Security Documents to which the Agent is a party, none of Borrower, any Primary Obligor, any Wholly-Owned Subsidiary or any Mid-Tier Company shall issue any power of attorney or other contract or agreement giving any Person power or control over the day-to-day operations of any such Person's business ; provided that, FC International, FC Holdings, FC Commercial, FC Mexico, Asset Servicing de Mexico and Servicios Efectivos de Recuperacion, S.A. de C.V. shall have the right to grant powers of attorney necessary to consummate asset acquisitions outside the United States which are undertaken in the ordinary course of such respective company's business. 8.16 Amendment of Credit Agreements. None of Borrower, any Primary Obligor, any Mid-Tier Company. any Secondary Obligor-Existing or any Wholly-Owned Subsidiary shall amend, modify or extend (or agree to amend, modify or extend or give any notice of any sort the result of which would amend, modify or extend (whether or not, without limitation, any such extension would occur pursuant to a renewal or extension option contained therein or any other term thereof)) any note, credit agreement, security agreement or other document, instrument or agreement evidencing or securing Indebtedness of such entity; provided that (i) Borrower, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing or any Wholly-Owned Subsidiary may extend the term of existing credit facilities (other than (x) this Agreement or (y) the Holdings/CFSC Loan Agreement or any other Holdings CFSC Loan Document) under financial terms no more onerous than those provided for in the applicable existing credit facility, including interest rate, costs, and fees payable to the provider of such facility and (ii) the foregoing shall not restrict the Borrower from entering into any agreement (with the other applicable parties thereto) which amends, modifies or extends the term of the Portfolio Acquisition Loan Agreement or any PFAL Loan Document or of the FC Consumer Note or any FC Consumer Loan Document; provided that the same does not increase the principal amount of any loan or of the loans available under either said credit facilities or increase the rate of interest or any fee or other financial obligation thereunder. 8.17 Use of Proceeds. The proceeds of Existing Loans were and shall be used only for the purposes set forth in the Existing Agreement (including in the amendments and consents thereto listed in the introductory paragraph of this Agreement). The proceeds of the Tranche I Bosque Loans shall be used solely to acquire Bosque Notes identified in the related Bosque Loan Request. 8.18 Payments for Consent. None of the Borrower or any Primary Obligor or Secondary Obligor shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest fee or otherwise, to any Lender as an inducement to any consent, waiver or amendment of any of the terms or provisions of any Loan Document unless such consideration is paid to all Lenders. 33 8.19 Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries. Borrower shall not, and shall not permit any Primary Obligor, any of its other Subsidiaries, any Mid-Tier Company (in each case, whether in existence as of the date of initial issuance of the Notes or thereafter formed or acquired), or any Existing S Co. to, create, assume or otherwise cause or suffer to exist or to become effective any consensual encumbrance or restriction on the ability of any such Person to: (i) pay any dividends or make any other distribution on its Stock or other Equity Interests to Borrower, any of its Subsidiaries or any Secondary Obligor; (ii) make payments on or in respect to any Indebtedness owed to Borrower or any other Subsidiary of Borrower or any Secondary Obligor; or (iii) make loans or advances to Borrower or any of its Subsidiaries or to guarantee Indebtedness of Borrower or any other Subsidiary of Borrower; other than, in the case of (i), (ii) and (iii), (1) Permitted Restrictions on payment of dividends by FC Holdings existing under agreements listed on Schedule 8.19 ; (2) restrictions with respect to a Subsidiary or Secondary Obligor imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all the assets (which term may include the capital stock) of such Subsidiary or Secondary Obligor provided that such restrictions terminate upon the closing of such sale or disposition or termination of such agreement ; (3) to the extent the same result in restrictions of non-cash in-kind distributions of such assets, restrictions on the transfer by any Secondary Obligor of non-cash assets which are subject to Permitted Liens; (4) restrictions existing under any agreement which refinances or replaces any of the agreements containing the restrictions in clauses (1) or (5), provided that the terms and conditions of any such restrictions are not materially less favorable to the Lenders or materially more burdensome to the applicable Person bound thereby than those under the agreement evidencing or relating to the Indebtedness refinanced; (5) Permitted Restrictions on payment of dividends by an Existing S Co. under a loan agreement listed on Schedule 10.19 to which such Existing S Co. is a party; 34 (6) in the case of any PFAL Portfolio Entity, restrictions thereon on the payment of dividends permitted by the Portfolio Acquisition Loan Agreement-Existing; (7) Permitted Restrictions on the payment of dividends by a Portfolio Entity Post- AE other than a PFAL Portfolio Entity under credit agreements under which such Portfolio Entity Post-AE is a borrower; and (8) restrictions under this Agreement. 8.20 Financial Covenants. (a) Borrower and all other members of the Consolidated Group, on a consolidated basis, shall, at all times during the term hereof, measured quarterly: (i) maintain a ratio of Indebtedness to Tangible Net Worth equal to or less than the ratio set forth below as at the end of each quarter ending during the applicable period set forth below: 12/31/02 through 9/30/03: 5.5: 1; 12/31/03 through 9/30/04: 4.5:1; 12/31/04 and each quarter ending thereafter: 3.0:1;
(ii) maintain a Tangible Net Worth equal to or greater than the amount set forth below as at the end of each quarter ending during the applicable period set forth below: 12/31/02 through 9/30/03: $18,000,000 12/31/03 through 9/30/04: $24,000,000 12/31/04 through 9/30/05: $45,000,000 12/31/05 and each quarter ending thereafter: $75,000,000
(iii) maintain a ratio of EBITDA to Interest Coverage no less than: (i) 1.75 to 1 for as at the quarter ending December 31, 2002; (ii) 1.20 to 1 for the quarter ending March 31, 2003, (iii) 1.40 to one for the quarters ending June 30 and September 30, 2003; and (iv) 2.5 to one for the quarter ending December 31, 2003 and each quarter ending thereafter. The foregoing ratios shall be measured on a trailing three month basis. (b) All covenants set forth herein shall be measured quarterly, upon receipt of the Financial Statements delivered to Agent pursuant to Section 7.1(a), and also upon receipt of the annual consolidated Financial Statements delivered in accordance with Section 7.1(b). (c) In the event that any Financial Statement required to be delivered pursuant to Section 7.1(a) or (b) or any certificate required to be delivered pursuant to Section 7.1(e)(ii) hereof (in the case of any such certificate required in connection with monthly financial 35 statements, at the end of any month which is also a fiscal quarter end date) is not delivered within 10 days after the date required therefor pursuant to said clause, the Borrower shall be deemed to be in default of this Section 8.20 for purposes of Section 9.3 hereof. 8.21 Payment of Bosque Notes and Extraordinary Proceeds; Form of Proceeds, Payments and Distributions (a) The Borrower shall cause 100% of all amounts collected (net of fees payable to Borrower or an Affiliate of Borrower in accordance with its servicing agreement with Bosque dated June 6, 1997) from the Bosque Notes to be paid directly to the Cash Flow Cash Collateral Account by the Bosque Trustee as and when received. (b) Except as set forth in Section 2.3(e) and 2.4(d), all Extraordinary Transaction Proceeds shall be paid on the date of the closing of the applicable transaction or, if earlier, on the date when received or payable, directly to the Agent. Borrower shall cause the applicable purchaser and/or lender and/or other payor of Extraordinary Transaction Proceeds to make payment thereof by wire transfer of immediately available funds directly to Agent. (c) Borrower shall not permit any portion of the consideration paid in respect of an Extraordinary Transaction or constituting Extraordinary Transaction Proceeds to be in any form other than immediately available cash funds. (d) Borrower shall not permit any Primary Obligor or Secondary Obligor to consent to (and shall not itself consent to) any payment, dividend or distribution being made to such Primary Obligor, Secondary Obligor or the Borrower in any form other than immediately available cash. 8.22 Accounting Changes. None of the Borrower, any Primary Obligor or any other Subsidiary of Borrower will make any significant change in (x) accounting treatment and reporting practices except as permitted or required by GAAP or Legal Requirements or (y) unless Agent consents thereto in writing (which consent shall not be unreasonably withheld), its Fiscal Year; provided that in any such case, if any such change would affect any computation required by Section 8.20 hereof or any amount required to be paid by Section 2.3 or 2.4 hereof, appropriate amendment shall have been made to this Agreement with respect thereto (or, in the case of change required at such time by a Legal Requirement, appropriate amendment is made to this Agreement contemporaneous with such change and, and if such amendment is not made, Borrower shall be deemed in default under Section 8.20). 8.23 Related Transactions. Borrower has not and shall not and shall not permit any Primary Obligor, Mid-Tier Company or any Subsidiary of Borrower to enter into any transactions with any Affiliate or Associate, including, without limitation, agreements for the purchase, sale or exchange of property or the rendering of any services to or by any Affiliate or Associate of Borrower or any Parent, or enter into, assume or suffer to exist any employment, management, administration, advisory or consulting contract with any Affiliate or Associate of Borrower or any Parent or, in each of the foregoing cases, with any officer, director or partner of any Affiliate or Associate of Borrower or any Parent or modify any Fee Agreement unless, in any such case, such transaction (a) is otherwise not in violation of this Agreement or any other 36 Loan Document and (b) is in the ordinary course of its business and is upon fair and reasonable terms no less favorable to Borrower, such Primary Obligor, Mid-Tier Company or Subsidiary (as the case may be) than Borrower, such Primary Obligor, Mid-Tier Company or Subsidiary (as the case may be) would obtain in a comparable arm's-length transaction with a Person not an Affiliate or Associate; provided. that the foregoing shall not restrict a Subsidiary which is a Secondary Obligor from entering into a transaction contemplated by the definition of "REO Affiliate" to sell real estate (or distressed notes secured by real estate) to its wholly owned REO Affiliate. 8.24 Leasebacks. None of Borrower, any Primary Obligor or any Secondary Obligor will enter into any arrangement with any bank, insurance company or other lender or investor providing for the leasing to any of the foregoing Persons of real property (i) which at the time has been or is to be sold or transferred by any of the foregoing Persons to such lender or investor, or (ii) which has been or is being acquired from another Person by such lender or investor or on which one or more buildings or facilities have been or are to be constructed by such lender or investor for the purpose of leasing such property to Borrower, any Primary Obligor or Secondary Obligor. 8.25 Compliance with ERISA. None of Borrower, any Primary Obligor, any Mid Tier Company or Subsidiary of Borrower or any other Loan Party (each, an "Applicable Person") will (i) terminate, or permit any of its Subsidiaries to terminate, any Pension Plan so as to result in any material (in the opinion of the Agent or the Majority Lenders) liability of any such Person or Subsidiary to the PBGC, (ii) permit to exist the occurrence of any Reportable Event (as defined in Section 4043 of ERISA), or any other event or condition, which presents a material (in the opinion of the Agent or the Majority Lenders) risk of such a termination by the PBGC of any Pension Plan, (iii) allow, or permit any of its Subsidiaries to allow, the aggregate amount of "benefit liabilities" (within the meaning of Section 4001(a)(16) of ERISA) under all Pension Plans of which any Applicable Person or any ERISA Affiliate is a "contributing sponsor" (within the meaning of Section 4001(a)(13) of ERISA) to exceed $100,000, (iv) allow, or permit any of its Subsidiaries to allow, any Plan to incur an "accumulated funding deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, (v) engage, or permit any of its Subsidiaries or any Plan to engage, in any "prohibited transaction" (within the meaning of Section 406 of ERISA or Section 4975 of the Code) resulting in any material (in the opinion of the Agent or the Majority Lenders and considered by itself or together with all other such liabilities of the Borrower and all ERISA Affiliates) liability to any Applicable Person or any ERISA Affiliate, (vi) allow, or permit any of its Subsidiary to allow, any Plan to fail to comply with the applicable provisions of ERISA and the Code in any material respect, (vii) fail, or permit any of its Subsidiaries to fail, to make any required contribution to any Multiemployer Plan, or (viii) completely or partially withdraw, or permit any of its Subsidiaries to completely or partially withdraw, from a Multiemployer Plan, if such complete or partial withdrawal will result in any material (in the opinion of the Agent or the Majority Lenders) withdrawal liability under Title IV of ERISA. 8.26 Liquidation of FC Capital (a) Borrower shall not permit FC Capital to engage in any new transaction or business or to invest in any new assets; 37 (b) Borrower shall not use, or permit any Primary Obligor, Secondary Obligor or any Affiliate to use, any loan proceeds, funds, distributions, dividends, contributions or any other monies obtained, earned or acquired from any other source whatsoever to make any loans, capital contributions, gifts or other payments to or for the benefit of FC Capital provided that subject to the further proviso set forth below (i) the Borrower shall be permitted to pay (or transfer funds to FC Capital for the payment of) litigation expenses not in excess of $250,000 in 2003; and, $200,000 per calendar year thereafter, and (ii) the Borrower shall be permitted to advance to FC Capital up to $200,000 per year, not exceeding $400,000 in aggregate principal amount, for FC Capital to use (and only if FC Capital so uses such advances) to pay expenses incurred by it as servicer under the Sale and Servicing Agreements under the Sale and Servicing Agreements under the FirstCity Capital Home Equity Loan Trust 1998-1 and the FirstCity Capital Home Equity Loan Trust 1998-2 securitizations and to make the compensating interest payments required to be made by it in such capacity thereunder; provided that the payments and transfers referred to in clause (i) and the advances referred to in clause (ii) constitute advances under, and are evidenced by, the FC Capital Pledged Note. 8.27 FC Holdings Line of Credit. (a) Borrower shall not permit the outstanding principal balance under the Holdings/CFSC Loan Agreement to exceed $35,000,000. (b) Borrower shall not permit the amendment, modification, supplement, waiver, forbearance, restatement or replacement of any Holdings/CFSC Loan Document (including without limitation, any waiver or modification of the borrowing base, advance rate, or purpose for which funds are being disbursed). (c) Borrower shall not permit FC Holdings, any Primary Obligor or any Secondary Obligor or any other Person to grant a Lien on any property to secure payment and performance of any obligation or liability under the Holdings/CFSC Loan Documents, except as expressly set forth on Schedule 10.37(c). (d) From time to time after the date hereof, if any additional collateral is pledged to CFCS in accordance with the Holdings/CFCS Loan Documents, Borrower shall not fail to execute and deliver, or cause the applicable affiliated entity to execute and deliver, to Agent, for the ratable benefit of Lenders, such documents, instruments and agreements as shall be necessary or desirable to create and perfect a security interest with the Requisite Priority in any such collateral in favor of Agent for the ratable benefit of the Lenders. (e) From time to time after the date hereof, Borrower shall not fail to deliver to Agent, upon request, such information as Agent shall request relating to the Holdings/CFSC Loan Agreement or the Holdings/CFSC Loan Documents, the amounts outstanding thereunder, the use of the proceeds thereof, or the collateral pledged therefor. 8.28 PFAL Cash Collateral. Borrower shall not and shall not permit any Primary Obligor or PFAL Portfolio Entity or other Secondary Obligor to enter into any cash collateral agreement for the benefit of any lenders party to the Portfolio Acquisition Loan Agreement 38 unless such agreement also secures the obligations hereunder and is in form and substance satisfactory to the Agent. 8.29 Distributions to Primary Obligors and the Borrower. (a) Subject to Section 8.21(b) in the case of Extraordinary Transaction Proceeds, the Borrower shall (i) cause each Secondary Obligor which is a Wholly-Owned Subsidiary to distribute, on or prior to the 25th day of each calendar month (or, if earlier, on the fourth to last CFCCA Business Day of such month), all Net Receipts (other than (x) Net Receipts received by a PFAL Portfolio Entity when obligations in respect of term loans under the Portfolio Acquisition Loan Agreement are outstanding and would remain outstanding after giving effect to the ultimate disposition of such Net Receipts pursuant to the Portfolio Acquisition Loan Agreement-Existing, (y) to the extent that such the receipt of such Net Receipts causes a prepayment obligation to arise under the FC Consumer Note as in effect on the Amendment Effective Date and only if the same are applied to satisfy such prepayment obligation, such Net Receipts in an amount not exceeding the prepayment obligation so arising and (z) Net Receipts described in clause (ii) below) received by such Secondary Obligor during the preceding calendar month by paying or prepaying any Pledged Note(s) of which it is the maker and distributing any remaining Net Receipts as a Dividend to owners of its equity interests in accordance with Section 8.11(a) and (ii) cause each direct and indirect recipient of any such payment or Dividend (if other than the Borrower) to distribute or pay, upon receipt, each portion of each such payment or Dividend directly or indirectly received by it by paying or prepaying any Pledged Note(s) of which such Person is maker and distributing any remaining direct or indirect portion of such Net Receipts as a Dividend to owners of its equity interests in accordance with Section 8.11(a) until all such amounts have been remitted to the Borrower in accordance with Section 8.29(d). (b) Subject to Section 8.21(b) in the case of Extraordinary Transaction Proceeds, the Borrower shall (i) use its best efforts to cause, and shall cause each Primary Obligor and each other Subsidiary (whether a direct or indirect Subsidiary) to use its best efforts to cause, each Secondary Obligor which is not a Wholly-Owned Subsidiary to distribute on or prior to the 25th day of each calendar month (or, if earlier, on the fourth to last CFCCA Business Day of such month), all Net Receipts (other than (x) Net Receipts received by a PFAL Portfolio Entity when obligations in respect of term loans under the Portfolio Acquisition Loan Agreement are outstanding and would remain outstanding after giving effect to the ultimate disposition of such Net Receipts pursuant to the Portfolio Acquisition Loan Agreement-Existing, (y) to the extent that such the receipt of such Net Receipts causes a prepayment obligation to arise under the FC Consumer Note as in effect on the Amendment Effective Date and only if the same are applied to satisfy such prepayment obligation, such Net Receipts in an amount not exceeding the prepayment obligation so arising and (z) Net Receipts described in clause (ii) below) received by such Secondary Obligor during the preceding calendar month by paying or prepaying any Pledged Note(s) of which it is the maker and distributing the remaining Net Receipts as a Dividend to owners of its equity interests in accordance with Section 8.11(a) and (ii) cause each direct and indirect recipient of any such payment or Dividend (if other than the Borrower) to distribute or pay, upon receipt, each portion of each such payment or Dividend directly or indirectly received by it by paying or prepaying any Pledged Note(s) of which such Person is maker and distributing any remaining direct or indirect portion of such Net Receipts as a 39 Dividend to owners of its equity interests in accordance with Section 8.11(a) until all such amounts have been remitted to the Borrower in accordance with Section 8.29(d). (c) Subject to Section 8.21(b) in the case of amounts constituting Extraordinary Transaction Proceeds and to Section 8.29(e) in the case of amounts constituting the Holdings Buy Out Portion, to the extent that any Primary Obligor receives any amount, other than amounts received pursuant to Section 8.29(a) or (b) above (which Borrower shall cause to be distributed in accordance with such Sections) and other than an amount not constituting an Applicable Cash Flow Payment (provided that such amount is applied in accordance with the Portfolio Acquisition Loan Agreement-Existing or the FC Consumer Note as in effect on the Amendment Effective Date, as the case may be), the Borrower shall cause such Primary Obligor to distribute to Borrower all such amounts (other than, in the case of FC Servicing, (x) subject to Section 8.29(e), funds deposited to the Cash Collateral Account-Servicing pursuant to Section 8.33 and (y) Servicing Restricted Funds) upon receipt thereof, by paying or prepaying any Pledged Note of which it is maker and distributing all remaining amounts to the owner of its equity interests as a Dividend pursuant to Section 8.11(a) and by causing each direct and indirect recipient of any such payment or Dividend (if other than Borrower) to distribute or pay, upon receipt, each portion of each such payment or Dividend directly or indirectly received by it by paying or prepaying any Pledged Note(s) of which such Person is maker and distributing any remaining direct or indirect portion of such Net Receipts as a Dividend to the owners of its equity interests in accordance with Section 8.11(a) until all such amounts have been remitted to the Borrower in accordance with Section 8.29(d). (d) The Borrower shall cause each amount required to be distributed or paid to Borrower pursuant to this Section 8.29 which constitutes (or which, if distributed or paid would constitute) an Applicable Cash Flow Payment and all other amounts received by Borrower (other than amounts arising from PFAL Portfolio Entities which (x) are required to be deposited to the CFCCA-P or (y) are not required to be applied to any Obligations hereunder) to be distributed or paid to Borrower by deposit or wire transfer directly to the Cash Flow Cash Collateral Account. In furtherance (and not in limitation) of the foregoing, each Primary Obligor and each Secondary Obligor which is a payee (or when such payment is made, would be a payee) of any Applicable Cash Flow Payment shall, and as to any other amount payable to Borrower, Borrower shall, direct the payor thereof to pay to such payee the amount payable to such payee by remitting such amount directly to the Cash Flow Cash Collateral Account; provided. that the foregoing shall not (x) require any Secondary Obligor to remit to the CFCCA more than the FC Percentage in respect of such Secondary Obligor of any amount received by such Secondary Obligor which is distributed by such Secondary Obligor as a Dividend or (y) require the Borrower to remit to the CFCCA any amounts released to Borrower pursuant to a Waterfall Certificate (provided that Borrower shall be required to remit or cause to be remitted to the CFCCA any amount or portion thereof so released to Borrower to the extent that such amount or portion is not used for the purpose for which released or is returned in any manner to the Borrower or any Primary Obligor after being used for the purpose for which it was released). (e) Unless the Agent has exercised its remedies under the Cash Collateral Agreement-Servicing to prevent such transfer or the CFCCA Remedies Time has otherwise occurred, Borrower shall cause to be transferred to the CFCCA on the 25th day of each month (or if earlier, the fourth to last CFCCA Business Day of each month, each such 25th day or earlier 40 CFCCA Business Day, a "Transfer Date") all amounts credited to the Cash Collateral Account - Servicing, excluding, prior to the time the Agent exercises its remedies with respect to such Account or, if earlier, the occurrence of the CFCCA Remedies Time thereunder or under the Cash Collateral Agreement-Existing, the amount equal to the amount of Holdings Buy Out Portion on the Transfer Date; provided that the aggregate of the amounts so excluded from transfer to the CFCCA shall not exceed $2,775,000. 8.30 Use of CFCCA Proceeds. (a) Borrower shall use the full amount of funds released to Borrower from the CFCCA for the making of Capital Expenditures to make Capital Expenditures within 30 days of such release and, if such funds are not so used within 30 days of such release, shall return such funds to the CFCCA. (b) Borrower shall (i) subject to Section 3.9, submit a revised Waterfall Certificate to Lender prior to any Payment Date if for any reason any application of funds specified in such instruction has changed or if any statement set forth therein is untrue and (ii) give immediate notice to the Agent after any Payment Date if any funds released from the CFCCA have for any reason not been used as set forth in the related Waterfall Certificate (it being understood that any such notice shall not cure any Default or Event of Default arising on account of an such change in application of funds, untrue statement having been made or use of funds for reasons other than as set forth). 8.31 Operating Account. Borrower shall disburse funds from the Operating Account only for selling, general and administrative expenses of the Borrower and the Primary Obligors incurred in the ordinary course of business. 8.32 Capital Expenditures. Borrower will not make any Capital Expenditures and will not permit any of its Subsidiaries to make any Capital Expenditures, except that the Borrower and its Subsidiaries may make Capital Expenditures in an aggregate amount (excluding the capitalization of insurance premiums) not exceeding (x) $150,000 during the one- year period ending December 31, 2003 or (y) $50,000 during the one year periods ending on December 31, 2004, December 31, 2005, December 31, 2006 and December 31, 2007. 8.33 Servicing (a) Borrower shall ensure that FC Servicing or Minn Servicing is the servicer for each Secondary Obligor which is a US Person. (b) Borrower shall (i) cause FC Servicing to deposit all fee income and all other funds received by it not constituting Servicing Restricted Funds to the Cash Collateral Account- Servicing upon receipt of each such amount and (ii) cause Minn Servicing to distribute to FC Servicing all fee income and all other funds received by it not constituting Servicing Restricted Funds by wiring all such amounts directly to the Cash Collateral Account-Servicing upon receipt of each such amount. 8.34 Maximum Existing Portfolio NPV Percentage. The Borrower will not permit the Existing Portfolio NPV Percentage to exceed 80% as at the end of any calendar month. 41 Section 9. EVENTS OF DEFAULT. Upon the occurrence of any of the following specified events (each an "Event of Default"): 9.1 Principal and Interest. The Borrower shall default in the due and punctual payment of any principal, interest or other amount due hereunder or under any Note or any other Loan Document; provided, that the failure to make any interest payment when due shall not constitute an Event of Default if such interest payment is made within three days of the date when due and the Borrower has not been late in making any other interest payment on any Note more than once in the preceding 12 months; or 9.2 Representations and Warranties. Any representation, warranty, statement, report or certificate made or delivered by Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party or any officer, director, manager or authorized employee or agent thereof herein or in any other Loan Document or otherwise in writing by such Person in connection with any of the foregoing or the Existing Loans or in any certificate, report or other statement furnished pursuant to or in connection with any of the foregoing, shall be breached or shall prove to be untrue in any material respect; or 9.3 Negative and Certain Other Covenants. Borrower shall fail to perform or observe, or shall fail to cause any Primary Obligor, Secondary Obligor or any other Loan Party or other Person covered thereby to perform or observe, any term, covenant or agreement to be performed or observed by Borrower or such Primary Obligor, Secondary Obligor, Loan Party or other Person, as the case may be, pursuant to Section 7.2, 7.4, 7.11, 7.19, Section 8 or Section 14; or 9.4 Other Covenants. Borrower shall fail to perform or observe, or shall fail to cause Primary Obligor, Secondary Obligor, other Loan Party or other Person covered thereby to perform or observe, any term, covenant or agreement to be performed or observed by Borrower or such Primary Obligor, Secondary Obligor, other Loan Party or other Person, as the case may be, pursuant to any of the provisions of this Agreement (other than those referred to in Sections 9.1, 9.2 or 9.3) or any other Loan Document and such default (which shall be capable of cure) shall continue unremedied for a period of fifteen days, after the earlier of the date on which (x) the Agent or any Lender gives the Borrower notice thereof, or (y) Borrower obtains knowledge of such default; or 9.5 Other Indebtedness of Borrower . Any Applicable Indebtedness of Borrower (i) shall be declared to be or shall become due and payable prior to the stated maturity thereof or (ii) shall not be paid as and when the same becomes due and payable; or any other event of default (however denominated) shall occur under the Portfolio Acquisition Loan Agreement or any other Indebtedness Instrument (other than a Loan Document) relating to any Indebtedness of Borrower; or any other event the effect of which is to permit the holder or holders of the Indebtedness evidenced thereby (or any trustee, agent or other representative on behalf of such holder or holders) to cause such Indebtedness to become due prior to its stated maturity, shall occur under any other Indebtedness Instrument (other than a Loan Document) relating to any Indebtedness of Borrower; or 42 9.6 Other Indebtedness of other Loan Parties. (a) Any Applicable Indebtedness of any Primary Obligor, Mid-Tier Company or other Subsidiary of Borrower (other than (x) any Indebtedness under the Bosque Notes; (y) any Indebtedness of any one or more of the Harbor Debtors; or (x) any Indebtedness of an REO Affiliate), or any other Loan Party (i) shall be declared to be or shall become due and payable prior to the stated maturity thereof or (ii) shall not be paid as and when the same becomes due and payable; or any other default or event of default (however denominated) shall occur under any Indebtedness Instrument relating to any Indebtedness of any such Person (other than any Loan Document) and such default or event of default is not cured within 10 days after the occurrence thereof (or such shorter period applicable thereto under any other Section of this Article 9); provided that such cure period shall not apply if: (i) a default occurs by such Primary Obligor, Mid-Tier Company, other Subsidiary or other Loan Party under the terms of any other Indebtedness Instrument securing or evidencing a different borrowing, or (ii) if any other Primary Obligor, Mid-Tier Company, other Subsidiary or other Loan Party defaults under the terms of any Indebtedness Instrument during such ten (10) day cure period or (iii) if the Indebtedness evidenced by any such Indebtedness instrument is accelerated or has otherwise become due or (iv) such event is described in Section 9.16. (Notwithstanding the foregoing, if any two or more such Persons are obligated for the same Indebtedness and a default occurs thereunder, it shall be deemed to be a default by a single Person for the purposes of this Section 9.6); or (b) Any default shall occur under any Holdings /CFSC Loan Document and, if under the Holdings/CFSC Loan Agreement a cure period is applicable to such default, such default is not cured before the earlier of (x) 15 days after such default occurs and (y) the cure period applicable thereto under the Holdings/CFSC Loan Agreement; or 9.7 Trigger Events, etc. If any servicer default, servicing termination event, amortization event or similar event or condition occurs under any agreement relating to any securitization of assets of any Primary Obligor, Secondary Obligor or securitization entity established by any Primary Obligor or Secondary Obligor relating to a securitization transaction entered into after the Amendment Execution Date; or 9.8 Undistributed Amounts. The amount of Aggregate Undistributed Secondary Obligor Funds at any time exceeds $2,000,000; or 9.9 Insolvency. (i) Borrower, any Primary Obligor, any Secondary Obligor (other than any REO Affiliate) or any other Pledged Entity or Loan Party (Borrower and each of the other foregoing Persons being a "Section 9.9 Entity") shall make an assignment for the benefit of creditors or a composition with creditors; or (ii) any Section 9.9 Entity shall admit in writing its inability to pay its debts as they mature, shall file a petition in bankruptcy, shall be adjudicated insolvent or bankrupt, shall petition or apply to any tribunal for the appointment of any receiver, liquidator, trustee or custodian of or for it or any of its assets; or (iii) any application is made by any other Person for the appointment of any receiver, liquidator, trustee or custodian for any Section 9.9 Entity or for any of the assets of any Section 9.9 Entity; or (iv) any Section 9.9 Entity shall commence any proceedings relating to it under any bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution or liquidation law or statute of any 43 jurisdiction, whether now or hereafter in effect; or (v) there shall be commenced against any Section 9.9 Entity any such proceeding which shall remain undismissed for a period of 60 days or more, or any order, judgment or decree approving the petition in any such proceeding shall be entered; or (vi) any Section 9.9 Entity shall by any act or failure to act indicate its consent to, approval of or acquiescence in, any such proceeding or in the appointment of any receiver, liquidator, trustee or custodian (other than a custodian under Non-Default Voluntary Custodial Arrangements) of or for it or any of its assets, or shall suffer any such appointment to exist; or (vii) any Section 9.9 Entity shall take any action for the purpose of effecting any of the foregoing; or any court of competent jurisdiction shall assume jurisdiction with respect to any such proceeding or a receiver or trustee or other officer or representative of a court or of creditors, or any court, governmental officer or agency, shall under color of legal authority, take and hold possession of any substantial part of the property or assets of any Section 9.9 Entity; or (viii) any Section 9.9 Entity shall become insolvent (howsoever such insolvency may be evidenced) or shall be unable to pay its debts as they mature (except that the occurrence of any condition set forth in this clause (viii) with respect to FC Capital, Bosque Asset Corp. or, so long as such companies are paying their debts as they mature, FC Mexico or any Mexican Acquisition Entity which is an Existing S Co., shall not constitute an Event of Default under this Section 9.9 unless the occurrence of any such condition with respect to any such Person is an Event of Default under any other clause of this Section 9.9); or 9.10 Security Documents. The breach by Borrower or any other Loan Party of any term or provision of, or the occurrence of any default under, any Security Document or other Loan Document (other than this Agreement) or other agreement, instrument or document delivered in connection therewith to which such Person is a party, which breach or default is in the opinion of the Agent, material, or any other such breach or default (other than such a material breach or default) occurs and is not cured within the time, if any, specified therefor therein or fifteen days thereafter, if no such time is specified or such time is less than 15 days; or if any such Security Document or Loan Document is at any time not in full force and effect; or any of the Security Documents shall fail to grant to the Agent on behalf of the Lenders the Liens (if any) intended to be created thereby; or if any Loan Party shall assert that it is not liable with respect to any Security Document to which it is a party; or any Guarantor shall assert that it is not liable as a guarantor the Guaranty to which it is party; or 9.11 Notice of Charge. Except as expressly permitted pursuant to Section 7.3, if a notice of any Charge is filed of record with respect to all or any of the Assets of Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary; or 9.12 Judgments. (a) Any final non-appealable judgment for the payment of money in excess of $300,000 (after giving effect to any amount covered by insurance as to which the insurer shall not have denied or questioned its obligation to pay) shall be rendered against Borrower, any Primary Obligor or any Secondary Obligor other than an REO Affiliate; or (b) Final judgment for the payment of money in excess of $300,000 shall be rendered against Borrower, any Primary Obligor or any Secondary Obligor other than an REO 44 Affiliate, and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed or diligently contested in good faith by appropriate proceedings; or 9.13 Stock Issuance or Transfer. Except as expressly permitted pursuant to the terms hereof, if Borrower, any Primary Obligor or any Secondary Obligor or any other Pledged Entity issues to (except upon formation of a Person permitted by this Agreement) or transfers to any Person any Stock or other Equity Interest issued by Borrower, any Primary Obligor, any Secondary Obligor or any other Pledged Entity; or 9.14 ERISA. Any ERISA Affiliate of Borrower or of any other Applicable Person under Section 8.25 which is not a Subsidiary of Borrower or such Applicable Person shall fail in the performance or observance of any term, provision or agreement with respect to a Plan or Multiemployer Plan set forth in Section 8.25 as if such ERISA Affiliate were a Subsidiary of Borrower or an Applicable Person; or 9.15 Material Effect Defaults. To the extent that the same does not constitute an Event of Default under any other provision of this Section 9, a default by Borrower, any Primary Obligor or any Secondary Obligor shall occur under any agreement, document or instrument (other than this Agreement or any of the other Loan Documents) now or hereafter existing, to which Borrower, any Primary Obligor or any Secondary Obligor is a party and the effect of such default could reasonably be expected to have a material adverse effect on the financial conditions or business operations of Borrower, any Primary Obligor or any Mid-Tier Company; or 9.16 Other Acceleration. To the extent not otherwise constituting an Event of Default, if any lender to Borrower, any Primary Obligor, any Secondary Obligor or any Subsidiary thereof terminates any agreement to forbear or waive any default by a Harbor Debtor or any other event of default arising under the terms of any Indebtedness Instrument (other than any Bosque Note constituting an Indebtedness Instrument) of Borrower, any Primary Obligor any Mid-Tier Company, or any other Subsidiary of Borrower other than any such other Subsidiary which is a Harbor Debtor or REO Affiliate; or 9.17 Asserted Claims. If any proceeding is commenced against Borrower in which the amount claimed is greater than $1,000,000 and such proceeding is not dismissed with prejudice with no judgment having been entered against or other relief granted against Borrower within thirty (30) days after the filing date thereof; or 9.18 Change in Control. A Change in Control shall occur (for purposes hereof, a Change in Control shall mean the occurrence of any of the following events after the date hereof: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")), is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly, or indirectly, of more than fifty percent (50%) of the aggregate voting power of all classes of Capital Stock of Borrower entitled to vote generally in an election of directors; (ii) Borrower is merged with or into another corporation or another corporation is merged with or into Borrower with the effect that immediately after such transaction the stockholders of Borrower immediately prior to such transaction hold less than a majority in interest of the total voting power entitled to vote in the election of directors, managers or trustees of the entity surviving the transaction; (iii) to the 45 extent not otherwise then constituting an Event of Default, all or substantially all of the assets of Borrower or a Primary Obligor, or any other Wholly Owned Subsidiary other than a Wholly-Owned Subsidiary described on Schedule 9.18, are sold to any person or persons (as an entirety in one transaction or a series of related transactions); or (iv) the voluntary or involuntary dissolution, liquidation or winding up of Borrower. For purposes of this Section 9.18, "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents in the equity (however designated) of such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to acquire an equity interest in such Person); or 9.19 Management. If James Sartain ceases to be employed full-time with Borrower and responsible for the day to day management of Borrower. Such occurrence shall be an Event of Default without notice or cure period, unless Borrower employs a replacement officer of the Borrower having the duties of Mr. Sartain acceptable to Lenders in their reasonable discretion within ninety (90) days after Mr. Sartain ceases to be employed; or 9.20 Court Orders. To the extent not otherwise constituting an Event of Default, if Borrower, any other Loan Party, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing or any Wholly-Owned Subsidiary other than a Tier IV Company, or any other Loan Party is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business or affairs and such Person consents (by action, inaction or otherwise) to such order or such order remains in effect for a period of 30 days; or 9.21 Dissolution. Borrower, any Primary Obligor, any Mid-Tier Company or any Loan Party shall dissolve, liquidate or suspend or discontinue its business, then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Agent may (and shall, if instructed in writing by the Majority Lenders) by written notice to the Borrower: (i) declare the principal of and accrued interest on the Loans of the Borrower to be, whereupon the same shall forthwith become, due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and/or (ii) declare the Bosque Loan Commitments of the Lenders terminated, whereupon such Commitments shall forthwith terminate immediately; provided that if any Event of Default described in Section 9.9 shall occur with respect to the Borrower, the result which would otherwise occur only upon the giving of written notice by the Agent to the Borrower as herein described shall occur automatically, without the giving of any such notice. Section 10. GENERAL REPRESENTATIONS AND WARRANTIES AND RELATED COVENANTS. In order to induce the Lenders to enter into this Agreement and to maintain the Loans provided for herein, each Loan Party party hereto makes the following representations, covenants and warranties, both as of the Amendment Execution Date and (after giving effect to the transactions contemplated hereby to occur on the Amendment Effective Date) as of the Amendment Effective Date (unless otherwise specified), which representations, covenants and warranties shall survive the execution and delivery of this Agreement and the other documents and instruments referred to herein: 46 10.1 Organization. (a) Borrower is and at all times hereafter shall be a corporation, duly organized and validly existing and in good standing under the laws of the State of Delaware and qualified or licensed to do business and in good standing in all states in which the laws thereof require Borrower to be so qualified and/or licensed and in which the failure to so qualify could have a Material Adverse Effect, including, without limitation, the State of Texas. Schedule 10.1(a) identifies each jurisdiction in which Borrower has qualified or been licensed to do business and describes the nature and current status of any such qualification or license. (b) Each Primary Obligor and each Secondary Obligor and each other Loan Party is a corporation or limited liability company or a limited partnership, duly organized and validly existing and in good standing under the laws of the state of its organization and each Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and other Loan Party and, if the failure to do so could reasonably be expected to have Material Adverse Effect on Borrower, any Primary Obligor, any Mid-Tier Company, Secondary Obligor-Existing or other Loan Party, each other Secondary Obligor, is and at all times hereafter shall be qualified or licensed to do business and in good standing in all states in which the laws thereof require such Primary Obligor, Secondary Obligor and other Loan Party to be so qualified and/or licensed and in which the failure to so qualify could have a Material Adverse Effect on the Borrower, any Primary Obligor or any Mid-Tier Company. Schedule 10.1(b) identifies each jurisdiction in which each Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and each other Loan Party has qualified or been licensed to do business and describes the nature and current status of any such qualification or license. (c) Schedule 10.1(c) lists all Shareholder Agreements to which Borrower, any other holder of any Equity Interest in any Primary Obligor or any holder of any Equity Interest in any Mid-Tier Company, Secondary Obligor-Existing or Secondary Obligor-R or other Pledged Entity is a party. 10.2 Entity Power. (a) Borrower has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and the other Loan Documents to which it is a party. (b) Each Primary Obligor and each Secondary Obligor and each other Loan Party has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform those Loan Documents to which it is a party. 10.3 Violation of Charter Documents. (a) The execution, delivery and/or performance by Borrower of this Agreement and the other Loan Documents to which it is a party and the consummation of the transactions contemplated hereunder have been duly authorized by all necessary corporate and shareholder action and none of such execution, delivery, performance or consummation shall, by the lapse of time, the giving of notice or otherwise, constitute a violation of any Legal Requirement or a breach of any provision contained in the Charter Documents of Borrower, or 47 contained in any agreement, instrument or document to which Borrower is now or hereafter a party or by which it or any of its Assets is or may become bound, other than agreements, instruments or documents that are immaterial to Borrower the breach of which could not have a Material Adverse Effect on Borrower. (b) The execution, delivery and/or performance by each Primary Obligor, Secondary Obligor and other Loan Party of each Loan Document to which it is a party and the consummation of each such Person of the transactions contemplated hereunder have been duly authorized by all necessary corporate, partnership or limited liability company action (as the case may be) and other action by the holders of the Equity Interests thereof and none of such execution, delivery, performance or consummation shall, by the lapse of time, the giving of notice or otherwise, constitute a violation of any Legal Requirement or a breach of any provision contained in the Charter Documents of such Primary Obligor or such Secondary Obligor or other Loan Party, or contained in any agreement, instrument or document to which such Primary Obligor or such Secondary Obligor or other Loan Party is now or hereafter a party or by which it or any of its Assets is or may become bound, other than agreements, instruments or documents that are immaterial to such Primary Obligor, Secondary Obligor and other Loan Party the breach of which could not have a Material Adverse Effect on Borrower or any such Primary Obligor, or any Mid-Tier Company , Secondary Obligor-Existing or other Loan Party. 10.4 Enforceability. (a) This Agreement and the other Loan Documents to which the Borrower is a party are and will be the legal, valid and binding agreements of Borrower, enforceable in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); and (b) Those other Loan Documents to which each other Loan Party is a party are and will be the legal, valid and binding agreements of such Loan Party, enforceable in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). 10.5 Ownership. (a) Schedule 10.5(a) sets forth all classes of stock of Borrower, the shareholders thereof (other than members of the general public), addresses of each shareholder, number of shares owned and how the shares are held; (b) Schedule 10.5(b) sets forth all classes of stock and/or other Equity Interests (other than options, warrants and rights to acquire Stock or other Equity Interests) issued by each Primary Obligor and each Secondary Obligor, the shareholders and other equity holders thereof, and the addresses, number of shares and/or partnership interests owned and how the shares are held. 48 (c) Schedule 10.5(c) sets forth all options, warrants and other rights to acquire Stock or other Equity Interests of Borrower, any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing, Secondary Obligor-R and any other Pledged Entity, the nature of such option, warrant or right and the conditions for the exercise thereof. Lenders hereby expressly consent to the transfer, issuance or conveyance of Stock and/or other Equity Interests of Borrower in accordance with such options, warrants and rights, provided that the same does not result in a Change of Control. (d) All Equity Interests of Borrower, each Primary Obligor, each Secondary Obligor and each other Loan Party have been duly and validly issued, are fully paid and are non-assessable. 10.6 Fictitious Names. (a) Each of the fictitious names, if any, used by Borrower during the five (5) year period preceding the Amendment Execution Date is set forth on Schedule 10.6 attached hereto (as amended from time to time) and none of such fictitious names are registered trademarks or tradenames with the U.S. Patent and Trademark Office, except as set forth in Schedule 10.6; (b) Each of the fictitious names, if any, used by each Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and any other Loan Party, during the five (5) year period preceding the Amendment Execution Date is set forth on Schedule 10.6 attached hereto (as amended from time to time), and none of such fictitious names are registered trademarks or tradenames with the U.S. Patent and Trademark Office; provided that, variations on the corporate name of any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and Secondary Obligor-R in states where used solely for qualifying to do business therein shall and have been excluded from such schedule, with Lender's consent and approval. 10.7 Title. (a) Schedule 10.7 is a true, accurate and complete list of all Liens relating to the Pledged Property on the Amendment Execution Date and on the Amendment Effective Date. (b) First X and First B shall at all times own fee title to its real estate subject to no liens other than the Permitted Liens. (c) Borrower and each Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and other Loan Party shall at all times have good, indefeasible and merchantable title to and ownership of all of its Assets. 10.8 Financial Warranty. Except as set forth on Schedule 10.8, on the Amendment Effective Date Borrower and at all times thereafter (including, without limitation, at the time of and after giving effect to each Tranche I Bosque Loan) (i) is and shall be paying its debts as they mature, (ii) owns and shall own, property which, at a fair valuation, is greater than the sum of its debt, and (iii) has and shall have, capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage. Except as set forth on Schedule 10.8, on the Amendment Effective Date and at all times thereafter (including, without limitation, 49 at the time of and after giving effect to each Tranche I Bosque Loan) each Primary Obligor, Mid-Tier Company and Secondary Obligor-Existing : (i) is and shall be paying its respective debts as they mature, (ii) owns and shall own, property which, at a fair valuation, is greater than the sum of its debt and (iii) has and shall have capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage. 10.9 Proceedings. Except as set forth on Schedule 10.9, there are no actions or proceedings which are pending or threatened against Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party which could reasonably be expected to have a Material Adverse Effect on Borrower, any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing. None of the actions or proceedings referred to on Schedule 10.9 could have a Material Adverse Effect on Borrower, any Primary Obligor other than FC Capital or any Secondary Obligor. 10.10 Government Contracts. Except as set forth on Schedule 10.10, neither Borrower, nor any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing or other Loan Party has any government contracts. 10.11 Adequate Licenses. Borrower, and each Primary Obligor, Secondary Obligor and other Loan Party possesses adequate Assets, licenses, patents, copyrights, trademarks and tradenames to continue to conduct its business as previously conducted by it and as contemplated in the foreseeable future except such licenses, patents, copyrights, trademarks and trade names the failure of which to obtain could not be reasonably expected to have a Material Adverse Effect on Borrower, any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing. 10.12 Government Permits; Approvals and Consents. (a) Except for matters which could not result in a Material Adverse Change with respect to Borrower, any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing or any other Loan Party, Borrower and each Primary Obligor, each Secondary Obligor and each other Loan Party has been and is in good standing with respect to all governmental permits, certificates, consents and franchises necessary to continue to conduct its business as previously conducted prior to the date hereof and prior to the Amendment Execution Date and to own or lease and operate its properties as now owned or leased by it. None of said permits, certificates, consents or franchises contain any term, provision, condition or limitation more burdensome than such as are generally applicable to Persons engaged in the same or similar business as the applicable Person. (b) Except for those consents and other items set forth on Schedule 10.12, neither Borrower, nor any Primary Obligor, Secondary Obligor or other Loan Party requires the approval, consent, waiver, order, permission, license, authorization, registration or validation of, or filing with or exemption by, any Government Authority or any other Person (including but not limited to shareholders, partners, members, equity owners, holders of Indebtedness Instruments, or any owner of any lien upon the Assets of any one or more of them or their Affiliates) for the execution and delivery of, and the consummation of the transactions contemplated by, this Agreement and the other Loan Documents, including but not limited to the borrowing of the Tranche I Bosque Loans, the pledge of the Pledged Property, and the payment and performance 50 of all Obligations. Borrower and each other Primary Obligor, Secondary Obligor and other Loan Party have received the consents and other items described on Schedule 10.12 and has delivered a copy thereof to Agent, which consents are in full force and effect, unmodified and unamended on the date hereof and on the Amendment Execution Date. 10.13 Charge; Restrictions. (a) On the Amendment Execution Date and on the Amendment Effective Date, neither Borrower, nor any Primary Obligor nor any Secondary Obligor or any other Loan Party is a party to (nor are any of such Person's Assets otherwise subject to) any contract or agreement or restriction, judgment, decree or order that could have a Material Adverse Effect on Borrower, any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing or that materially and adversely affects the business, property, assets, operations or condition, financial or otherwise of Borrower, any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing . At no time after the Amendment Effective Date will the Borrower, any Primary Obligor, any Mid-Tier Company, Secondary Obligor-Existing or any Wholly-Owned Subsidiary be a party to (or permit any of its Assets to be subject to) any contract or agreement or restriction, judgment, decree or order materially and adversely affecting its business, property, assets, operations or condition, financial or otherwise. (b) On the Amendment Execution Date and on the Amendment Effective Date, none of Borrower, any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing, any Secondary Obligor-R other than an REO Affiliate, or any other Loan Party is subject to (nor are any such Person's Assets otherwise subject to) any Charge (other than Charges owed by First B or First X). At no time after the Amendment Effective Date will the Borrower, any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing, Secondary Obligor-R other than an REO Affiliate, or any other Loan Party or any Wholly-Owned Subsidiary (other than an REO Affiliate) be a party to (or permit any of its Assets to be subject to) any Charge. 10.14 Compliance with Laws. Except for matters which could not result in a Material Adverse Change with respect to Borrower, any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing or any other Loan Party, neither Borrower, nor any Primary Obligor nor any Secondary Obligor nor any other Loan Party is, or will be during the term hereof, in violation of any applicable statute, regulation, order or ordinance of the United States of America, of any state, city, town, municipality, county or of any other jurisdiction, or of any agency thereof, including the Federal Reserve Board, in any respect. 10.15 Compliance with Indebtedness Instruments. Other than those defaults set forth on Schedule 10.15 , Borrower is not and at no time during the term hereof shall be in default under any Indebtedness Instrument or any other material agreement to which it is a party. Other than those defaults set forth on Schedule 10.15, no Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing, Secondary Obligor-R or any other Loan Party is, on the date hereof or will be on the Amendment Execution Date or Amendment Effective Date, in default under any Indebtedness Instrument. 10.16 Financials. The Financial Statements delivered by Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party to Agent, fairly and accurately present 51 the Assets, liabilities and financial conditions and results of operations of Borrower, and such other Persons described therein as of and for the periods ending on such dates and have been prepared in accordance with GAAP and such principles have been applied on a basis consistently followed in all material respects throughout the periods involved. 10.17 Tax Returns. Borrower and each other member of the Consolidated Group has filed or caused to be filed all tax returns which are required to be filed, and has paid all Charges shown to be due and payable on said returns or on any assessments made against it or any of its property and all other Charges imposed on it or any of its properties by any Governmental Authority except, for Charges arising at any time after the Amendment Effective Date which Borrower is disputing in accordance with the final sentence of Section 7.3. 10.18 No Material Adverse Change. Except as set forth in Schedule 10.18, since December 31, 2001, no event or circumstance has occurred that had, has or could reasonably be expected to have a Material Adverse Effect. 10.19 No Indebtedness. None of Borrower, any Primary Obligor, Mid-Tier Company, Wholly-Owned Subsidiary or Secondary Obligor or other Loan Party (i) has any Indebtedness except for Indebtedness described in Schedule 10.19, Schedule 10.21 and Schedule 8.13B and except for Indebtedness permitted by this Agreement which (other than in the case of MCS, any Mexican Acquisition Entity or any French Acquisition Entity) is reflected in the most recent Financial Statements delivered pursuant to Section 7.1(a) or (b) (except for any such Indebtedness permitted by this Agreement (x) incurred since such most recent Financial Statements were delivered or (y) constituting unsecured trade payables arising in the ordinary course of business since the dates reflected in the September 30, 2002 Financial Statements that is not Indebtedness for borrowed money or Indebtedness of any REO Affiliate to its REO Owner evidenced by a note payable to such REO Owner, in each case, to the extent, if any, not required by GAAP to be reflected in Financial Statements) or (ii) has guaranteed any indebtedness or entered into or issued any Guaranty Equivalent (other than as a result of the endorsement of any instrument of items of payment for deposit or collection in the ordinary course of business or as otherwise expressly permitted pursuant to the terms hereof) in respect of the obligations of any Person. 10.20 Compliance with Existing Agreement. (a) Except as to matters consented to in writing by the Lenders under the Existing Agreement and those matters set forth on Schedule 10.20 hereof, at all times prior to the Amendment Execution Date, on the Amendment Execution Date and immediately prior to the Amendment Effective Date, (i) Borrower is and was in full compliance with each of its covenants and other agreements set forth in the Existing Agreement,(ii) Borrower and each other party thereto is and was in full compliance with each of their respective covenants and other agreements under each of the other Existing Loan Documents and (iii) each representation and warranty made by Borrower and each other Loan Party (as defined in the Existing Agreement) is and will be true and correct in all respects with the same effect as though such representation and warranty were made as of the Amendment Execution Date and immediately prior to the Amendment Effective Date . 52 (b) Without limiting the foregoing, as of the Amendment Execution Date and immediately prior to the Amendment Effective Date, except as set forth on Schedule 10.20 hereto no "Unmatured Default" or "Event of Default" under the Existing Agreement has occurred and is continuing on the Amendment Execution Date or will have occurred and be continuing on the Amendment Effective Date. 10.21 Affiliate Notes. Attached hereto as Schedule 10.21 is a true, accurate and complete schedule of all promissory notes made by any Affiliate payable to the order of a Borrower, a Primary Obligor or a Secondary Obligor, other than the Pledged Notes and the Excluded Notes. In furtherance and not in limitation of any restriction thereon set forth herein or in the other Loan Documents, if at any time after the Amendment Effective Date, any Affiliate borrows money or otherwise incurs Indebtedness from Borrower or a Primary Obligor or a Secondary Obligor, (i) unless such borrowing is under and pursuant to the terms of a Pledged Note, Borrower shall give Agent notice thereof and deliver a copy of the note evidencing such Indebtedness to Agent, (ii) if such Indebtedness is permitted pursuant to the terms hereof or consented to by the Majority Lenders and if requested in writing by the Agent, Borrower shall prepare a Schedule 10.21A setting forth the maker and holder of such note, the principal amount thereof and the payment terms thereof, and (iii) Borrower shall take the action required by Section 7.15(b). 10.22 No Liability on Lenders or Agent. None of the execution, delivery and performance by Borrower or any other Loan Party of this Agreement and/or the other Loan Documents will impose on or subject any of the Lenders or the Agent to any liability, whether fixed or contingent, in respect of any Environmental Law, whether relating to the operation of Borrower's business or otherwise. None of the Lenders' or the Agent's exercise of any of the rights or remedies described in this Agreement or in any of the other Loan Documents shall constitute a breach of any provision contained in any agreement, instrument or document concerning the assignment or license of, or the payment of royalties for, any patents, patent rights, tradenames, trademarks, trade secrets, know-how, copyrights or any other form of intellectual property now or at any time or times hereafter protected as such by any applicable law. 10.23 Affiliates. Schedule 10.23 attached hereto is a true, accurate and complete schedule of Borrower's Affiliates (including each Secondary Obligor) as of the Amendment Effective Date, together with a description of Borrower's relationship to each such Affiliate. Attached as Schedule 10.23(B) is a true, accurate and complete schedule of each Secondary Obligor - Existing . Attached as Schedule 10.23(C) is a true, accurate and complete schedule of each Existing S Co. 10.24 Real Property; Environmental Issues. Except as set forth on Schedule 10.24, neither Borrower, any Primary Obligor or any Secondary Obligor other than First X, First B, FCS Creamer, Ltd., FCS Wood Ltd., and FCS Wildhorse Ltd, FCS Fischer Ltd. , any REO Affiliate, any Mexican Acquisition Entity or French Acquisition Entity now owns or, in the case of US Persons, leases or at any time in the five (5) years preceding the Amendment Execution Date has owned or leased any real property. Neither Borrower, any Primary Obligor, any Secondary Obligor, any Tier IV Company, any Tier V Company, any Harbor Debtor or any other Loan Party has received a summons, citation, notice, or directive from the Environmental 53 Protection Agency or any other Governmental Authority concerning any action or omission resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment with respect to any real property. 10.25 Investment Company Act and Public Utility Holding Company Act. Neither Borrower nor any Primary Obligor nor any other Loan Party or the entering into of any Loan Documents, nor the issuance of the Notes is subject to any of the provisions of the Investment Company Act of 1940, as amended. Neither Borrower, nor any Primary Obligor or any Secondary Obligor or any other Loan Party is a "holding company" as defined in the Public Utility Holding Company Act of 1935, as amended, or subject to any other federal or state statute or regulation limiting its ability to incur Indebtedness for money borrowed. 10.26 Disclosure. Neither this Agreement nor any other Loan Document nor any statement, list, certificate or other document or information, nor any schedules to this Agreement or any other Loan Document, delivered or to be delivered to Lenders or Agent, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make statements contained herein or therein, in light of the circumstances in which they are made, not misleading. Copies of all documents delivered to Lenders and/or Agent pursuant to this Section 10 or any other provision of this Agreement are true, correct and complete copies thereof and include all amendments, restatements, supplements and other modifications thereto and thereof. 10.27 Qualification. (a) Solely by reason of (and without regard to any other activities of Lenders and/or Agent in any state in which Assets of the Borrower, any Primary Obligor, Secondary Obligor or other Loan Party are located) the entering into, performance and enforcement of this Agreement, the Notes, the other Loan Documents and the documents, instruments and agreements delivered in connection therewith by Lenders and/or Agent will not constitute doing business by Lenders and/or Agent in any of such states or result in any liability of Lenders and/or Agent for taxes or other governmental charges; and qualification by Lenders and/or Agent to do business in such jurisdiction is not necessary in connection with, and the failure to so qualify will not affect, the enforcement of, or exercise of any rights or remedies under, any of such documents. (b) No "business activity," "doing business" or similar report or notice is required to be filed by the Lenders and/or Agent in any such jurisdiction in connection with the Loans or the transactions contemplated by this Agreement or any other Loan Document, and the failure to file any such report or notice will not affect the enforcement of, or the exercise of any rights or remedies under, this Agreement or any of the other Loan Documents. 10.28 SEC Filings. The Borrower has filed and made available to the Agent and Lenders each form, registration statement, schedule, report, proxy statement and document required to be filed by Borrower with the SEC since January 1, 1995 (collectively, the "SEC REPORTS"). Except as set forth on Schedule 10.28, the SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Laws and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of 54 this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in the SEC Reports or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Borrower is the only Loan Party required to file pursuant to the Exchange Act. Since January 1, 1995, Borrower has made all filings with the SEC in a timely manner (except as set forth on Schedule 10.28, each of which filing deficiencies was subsequently cured in a manner that brought Borrower into full compliance with law) as required by law and no event has occurred that requires an additional filing or any amendment to a prior filing, which has not been made or filed. 10.29 [Intentionally Omitted]. 10.30 Federal Reserve Margin Regulations; Use of Proceeds (a) Neither Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party or member of the Consolidated Group or Subsidiary of any of the foregoing is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System). No part of the proceeds of any Loan will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. (b) Neither the Loans nor the use of proceeds therefrom will result in a violation of any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B. Chapter V, as amended), or any ruling issued thereunder or any enabling legislation or Presidential Executive Order in connection therewith. (c) The proceeds of the Tranche I Bosque Loans shall be used solely to acquire Bosque Notes identified in the related Bosque Loan Request. 10.31 Intellectual Property. All patents, trademarks, registered copyrights and trade names of Borrower, each Primary Obligor, each Mid-Tier Company, each Secondary Obligor-Existing, and each other Loan Party are listed in Schedule 10.31A to this Agreement; all of those so listed are in full force and effect. If any member of the Consolidated Group at any time acquires, establishes, invents or develops any patent, trademark, copyright or trade name that is or becomes material to such Person's business or operations, it will promptly notify the Agent of same and take such action as the Agent shall request to grant to the Agent on behalf of the Lenders a perfected, first priority security interest in same. 10.32 Compliance with ERISA. Schedule 10.32 describes the Pension Plans to which Borrower or any ERISA Affiliates may have obligations. Each Loan Party and each ERISA Affiliate and each Plan and the trusts maintained pursuant to such plans are in compliance in all material respects with the presently applicable provisions of Sections 401 through and including 417 of the Code, and of ERISA and (i) no event which constitutes a Reportable Event as defined in Section 4043 of ERISA has occurred and is continuing with respect to any Plan which is or was covered by Title IV of ERISA, (ii) no Plan which is subject to Part 3 of Subtitle B of Title 1 of ERISA has incurred any "accumulated funding deficiency" (within the meaning of Section 55 302 of ERISA or Section 412 of the Code) whether or not waived, and (iii) no written notice of liability has been received with respect to any Loan Party or any Subsidiary for any "prohibited transaction" (within the meaning of Section 4975 of the Code or Section 406 of ERISA), nor has any such prohibited transaction resulting in liability to any Loan Party or ERISA Affiliate occurred. Neither any Loan Party nor any ERISA Affiliate (i) has incurred any liability to the PBGC (or any successor thereto under ERISA), or to any trustee of a trust established under Section 4049 of ERISA, in connection with any Plan (other than liability for premiums under Section 4007 or ERISA), (ii) has incurred any withdrawal liability under Subtitle E of Title IV of ERISA in connection with any Plan which is a Multiemployer Plan, nor (iii) has contributed or has been obligated to contribute on or after September 26, 1980, to any "multiemployer plan" (within the meaning of Section 3(37) of ERISA) which is subject to Title IV of ERISA. The consummation of the transactions contemplated by this Agreement (i) will not give rise to any liability on behalf of any Loan Party or any ERISA Affiliate under Title IV of ERISA to the PBGC (other than ordinary and usual PBGC premium liability), to the trustee of a trust established pursuant to Section 4049 of ERISA, or to any Multiemployer Plan, and (ii) will not constitute a "prohibited transaction" under Section 406 of ERISA or Section 4975 of the Code. 10.33 The Security Documents. (a) Each Security Document heretofore delivered grants, and each Security Document hereafter delivered when delivered will grant a Lien in the properties or rights intended to be covered thereby (the "Collateral") which (i) will constitute a valid and enforceable security interest under the Uniform Commercial Code of the State (x) in which the Collateral is located and (y) by which any Security Document is governed (as applicable, the "UCC"), (ii) will be entitled to all of the rights, benefits and priorities provided by the UCC, and (iii) when such Security Documents or financing statements with respect thereto are filed and recorded as required by the UCC, will be superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, pledge, lien, security interest, encumbrance or otherwise, except for Permitted Liens, and will provide the Agent and Lenders the Requisite Priority. All such action as is necessary in law has been taken, or prior to the Amendment Effective Date will have been taken, to establish and perfect the security interest of the Agent and the Lenders in the Collateral and to entitle the Lenders or the Agent on behalf of the Lenders to exercise the rights and remedies provided in each of the Security Documents and the UCC, as applicable, and no filing, recording, registration or giving of notice or other action is required in connection therewith except such as has been made or given or will have been made or given prior to such dates. All filing and other fees and all recording or other tax payable with respect to the recording of any of the Security Documents and UCC financing statements have been paid or provided for. (b) Schedule 10.33(b) sets forth all guaranties, note pledge agreements, stock (and other equity interest) pledge agreements and security agreements delivered under or in respect of the obligations under the Existing Agreement. 56 (c) In furtherance (and not in limitation) of Section 10.33(a), after giving effect to the Pledge Agreements and Security Agreements listed on Schedule 10.33(c), (i) each of Borrower and each Primary Obligor will have granted the Agent a Lien on (x) each Pledged Note and on each other note, instrument or other evidence of indebtedness, other than any Excluded Note, in which it has any right, title or interest; and (y) each Equity Interest, other than Equity Interests in Excluded Entities, in which it has any right, title or interest. 10.34 Other Loan Documents. All representations and warranties contained in the other Loan Documents are true and correct. 10.35 Exclusion of Harbor Debtors. No representation, warranty or covenant set forth in this Section 10 shall be deemed to be a representation, warranty or covenant with respect to or by a Harbor Debtor. 10.36 FC Capital Liquidation . It is Borrower's intent to cause FC Capital to cease doing business and liquidate the assets of FC Capital. 10.37 FC Holdings Line of Credit. (a) FC Holdings has entered into that certain Loan Agreement dated as of April 6, 2000 by and between FC Holdings and CFSC (said agreement as in effect on such date and as amended with the written consent of the Majority Lenders, the "Holdings/CFSC Loan Agreement") pursuant to which FC Holdings obtained the FC Holdings Line of Credit. In addition, Agent (on behalf of Lenders), certain subordinated lenders (whose indebtedness was subsequently repaid) and CFSC have entered into two separate subordination agreements dated as of April 6, 2000 (as from time to time amended, restated, supplemented or otherwise modified), one relating to their respective rights to the Shared Collateral and one (as from time to time amended, restated, supplemented or otherwise modified, the "CFSC Guaranty Subordination Agreement") relating to their respective rights relating to payments which may be made by FC Commercial pursuant to guarantees to CFSC or the Lenders (collectively, the "CFSC Intercreditor Agreement"). (b) Attached hereto as Schedule 10.37(b) is a true, complete and accurate schedule of all material documents, instruments and agreements executed, delivered or caused to be delivered by FC Holdings or any other Person to CFSC to evidence, guaranty or secure the FC Holdings Line of Credit (the "Holdings/CFSC Loan Documents"). (c) Attached hereto as Schedule 10.37(c) is a true, accurate and complete schedule of all property (including but not limited to all equipment, partnership interests, stock, membership interests, general intangibles, instruments, bank accounts, accounts, accounts receivable, contract rights) (the "Shared Collateral") in which a Lien has been or will be granted to secure payment or performance of any obligation or liability of Borrower, FC Holdings, any Primary Obligor, any Secondary Obligor, any Pledged Entity or any other Person to CFSC under the Holdings/CFSC Loan Documents. (d) Borrower has caused FC Holdings to deliver to Agent a true, accurate and complete copy of the Holdings/CFSC Loan Agreement and all Holdings/CFSC Loan Documents. 57 (e) Neither the Holdings/CFSC Loan Agreement nor any other Holdings/CFSC Loan Document has been amended, extended, restated, supplemented or otherwise modified, nor have any of the provisions thereof been waived. (f) The Holdings/CFSC Loan Agreement has been duly executed and delivered by FC Holdings and is in full force and effect. (g) [Intentionally omitted.] (h) All representations, warranties and covenants in the Holdings/CFSC Loan Documents of FC Holdings, the other Primary Obligors party thereto and the Secondary Obligors party thereto, are legal, valid and binding obligations of such Persons, enforceable in accordance with the terms thereof. All obligations of CFSC under the CFSC Guaranty Subordination Agreement are the legal, valid and binding obligations of CFSC, enforceable against CFSC in accordance with its terms. (i) With respect to that FC Commercial Guaranty in favor of CFSC (as identified on Schedule 10.37(i)) Borrower acknowledges that said guaranty is subordinate in right of payment to the obligations of FC Commercial under that certain Amended and Restated Guaranty Agreement executed by FC Commercial in favor of Lenders and Agent and that certain Guaranty Agreement executed by FC Commercial in favor of the lenders and the agent under the Portfolio Acquisition Loan Agreement and Borrower shall not permit any payment to be made by FC Commercial with respect to such guaranty in favor of CFSC at any time prior to indefeasible payment in full of all Obligations and the termination of this Agreement and all obligations of Lenders hereunder. (j) Borrower hereby represents and warrants that it has pledged or caused to be pledged to Agent, for the benefit of Lenders, a subordinated security interest in all Shared Collateral, except a security interest in a promissory note in the amount of $268,345.11 payable by Cartera en Administration Y Cobranza, SA de CV to FC Holdings, in which promissory note Lenders have elected not to take a security interest. 10.38 FCS Fisher, Ltd. Transactions. (a) FC Holdings borrowed approximately $1,000,000 under the FC Holdings Line of Credit which it used to make a capital contribution to FCS Fisher, Ltd. in the amount of $24,666.67 and a loan to FCS Fisher, Ltd. in the amount of $898,012, secured by a deed of trust dated March 31, 2000, as amended which is a lien against a 183 acre tract of land located in Bexar County, Texas (the "Fischer Property"). (b) Borrower has (i) caused FC Holdings to pledge to Lender the note by FCS Fisher, Ltd. to FC Holdings and all collateral pledged to secure payment thereof (ii) delivered said note, together with an endorsement thereof to Agent, for the benefit of Lenders; and (iii) pledged to Agent, for the benefit of Lenders, all of its right, title and interest in FCS Fisher, Ltd. and FCS Fischer, G.P., Corp. 58 (c) FCS Fischer, Ltd. is the fee title holder of the Fischer Property, subject to no liens or encumbrances other than that certain Deed of Trust in favor of CFSC, as agent dated March 31, 2000. (d) FC Holdings owns an aggregate 25% interest in equity of FCS Fischer Ltd. and its general partner, free and clear of all liens and encumbrances, except those in favor of Agent (on behalf of Lenders). 10.39 Bosque Notes. (a) Bosque is a wholly owned subsidiary of Borrower. Bosque has issued $93,900,000 in 7.66% Asset Backed Notes (the "Bosque Notes") due June 5, 2002 pursuant to a Note Agreement dated as of June 6, 1997 (as amended from time to time, the "Bosque Note Agreement") by and among Bosque, Realty Companies (identified therein) and Bankers Trust Company of California, N.A., as Trustee; (ii) Deutsche Bank is the successor in interest to the trustee under the Bosque Note Agreement ("Bosque Trustee"); (iii) the unpaid principal balance of the Bosque Notes as of December 5, 2002 is $4,573,603.49 and as of such date there was no accrued but unpaid interest thereon. (b) UCC financing statements in favor of Lenders have been filed against Borrower and Bosque with respect to the Bosque Notes, along with an acknowledgement of notice by Trustee of the security interest described in the UCC financing statements. 10.40 Fee Agreements. Attached hereto as Schedule 10.40 is a true, accurate and complete schedule, as of the Amendment Effective Date, of all Fee Agreements to which Borrower or any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing is a party. 10.41 Securitization Agreements. Attached hereto as Schedule 10.41 is a true, accurate and complete schedule as of the Amendment Execution Date of all sales and servicing agreements and similar agreements relating to securitizations to which Borrower, any Primary Obligor or any other Subsidiary of Borrower is a party. 10.42 Incorporation by Reference. The provisions of Sections 4.7 and 4.9 of the FC Consumer Note, in each case as in effect on the Amendment Execution Date and as amended with the consent of the Majority Lenders from time to time, are incorporated herein by reference as fully as if set forth herein in their entirety, except that references therein (or in any related definition) to: (i) "Guarantor" or "Borrower" shall be deemed references to Borrower hereunder; (ii) "Lender" shall be deemed references to Majority Lenders; (iii) references to "Agreement" or "this Agreement" shall be deemed references to this Agreement; (iv) "Loan Documents" shall be deemed references to the Loan Documents hereunder ; (v)delivery of any material to the "Lender" thereunder pursuant to any of the foregoing provisions of such agreement shall be deemed delivery also to the Lenders for purposes of this Section. 10.43 Tier IV Companies. Schedule 10.43 lists each Subsidiary of Borrower and each other Secondary Obligor with Assets with a fair market value of less than $100,000. The aggregate fair market value of Assets of all entities listed on Schedule 10.43 does not exceed $1,500,000. No Person listed on Schedule 10.43 engages in any business. 59 10.44 Wildhorse Transaction. FCS Wildhorse Ltd used the proceeds of the $962,000 loan made to it in 2001 by International Bank of Commerce to pay expenses or reimburse funds expended in connection with construction of a water line to property it owned and obtained an $850,000 refund from the City of San Antonio, Texas in connection therewith which it used to repay (in part) said loan. 10.45 Wholly Owned Subsidiary Interests. Attached as Schedule 10.45 hereto is a true and complete list, as of the Amendment Effective Date, of each Wholly-Owned Subsidiary which owns Equity Interests issued by any other Person other than an REO Affiliate of such Wholly-Owned Subsidiary, 10.46 REO Affiliates. Attached as Schedule 10.46 hereto is a true and complete list, as of the Amendment Effective Date, of each REO Affiliate. 10.47 Large Net Asset Value. Attached hereto as Schedule 10.47 is a true and complete list, as of the Amendment Effective Date, of each Secondary Obligor with a Net Asset Value in excess of $2,000,000. Section 11. AGENT. 11.1 Appointment. The Lenders hereby irrevocably appoint Bank of Scotland, acting through its New York branch, to act as Agent hereunder and as Agent or Collateral Agent or "Assignee" or "Secured Party" (or in any other similar representative capacity designated in any Security Document) under the Security Documents (in such capacity, the "Agent"). Each Lender hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Agent to take such action on its behalf under the provisions of this Agreement, the Notes, the Security Documents, the other Loan Documents and any other instruments and agreements referred to therein and to exercise such powers thereunder as are specifically delegated to or required of it by the terms thereof and such other powers as are reasonably incidental thereto; provided that the Agent shall not take any action to realize upon any security interest in any of the Collateral, or release any substantial portion of the Collateral, without the consent of the Majority Lenders. The Agent may perform any of its duties under any of the Loan Documents by or through its agents or employees. 11.2 Nature of Duties. The Agent shall have no duties or responsibilities except those expressly set forth in the Loan Documents. Neither the Agent nor any of its officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted by it under any of the Loan Documents, or in connection therewith unless caused by its or their gross negligence or willful misconduct. Nothing in the Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of the Loan Documents except as expressly set forth therein. The duties of the Agent under the Loan Documents shall be mechanical and administrative in nature and the Agent shall not have by reason of its duties under the Loan Documents a fiduciary relationship in respect of any Lender. The Agent agrees to deliver promptly to each Lender (i) copies of notices received by it pursuant to Sections 7.1, 7.2 and 7.11 of this Agreement, and (ii) copies of all documents required to be delivered hereunder by the Borrower to the Lenders directly but that are not so delivered to any 60 Lender (but were delivered to the Agent) if such Lender notifies the Agent that it has not received such document or documents, specifying same. 11.3 Lack of Reliance. Independently and without reliance on the Agent, each Lender to the extent it deems appropriate has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Loan Parties in connection with the making and the continuance of the Loans and its commitments hereunder and the taking or not taking of any action in connection herewith, (ii) its own appraisal of the creditworthiness of the Loan Parties and (iii) its own independent investigation and appraisal of the Collateral; and, except as expressly provided in the Loan Documents, the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the date hereof or at any time or times thereafter. The Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties herein or in any certificate or other document delivered in connection herewith or for the authorization, execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, or sufficiency of any of the Loan Documents, the financial condition of the Loan Parties or the condition of any of the Collateral, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of any of the Loan Documents, the financial condition of the Loan Parties or the existence or possible existence of any Event of Default or Default. 11.4 Certain Rights. If the Agent requests instructions from the Lenders or Majority Lenders with respect to any interpretation, act or action (including failure to act in connection with this Agreement or any of the other Loan Documents) the Agent shall be entitled to refrain from such act or taking such actions unless and until it shall have received instructions from the Lenders or the Majority Lenders, as the case may be; and the Agent shall not incur liability to any Person by so refraining. Without limiting the foregoing, no Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any of the other Loan Documents in accordance with the instructions of the Majority Lenders (as to matters requiring the consent of the Majority Lenders) or all the Lenders (as to matters requiring the consent of all the Lenders). The Agent shall be fully justified in failing or refusing to take any action under any Loan Document unless, if it requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking, continuing to take or not taking any such action. 11.5 Reliance. The Agent shall be entitled to rely upon any written notice or any telephone message believed by it to be genuine or correct and to have been signed, sent or made by the proper Person, and, with respect to all legal matters pertaining to the Loan Documents and its duties thereunder, upon advice of counsel selected by it. 11.6 Indemnification. TO THE EXTENT THE AGENT IS NOT REIMBURSED OR INDEMNIFIED BY THE BORROWER, THE LENDERS WILL REIMBURSE AND/OR INDEMNIFY THE AGENT, IN PROPORTION TO THE AGGREGATE AMOUNT OF THEIR RESPECTIVE LOANS AND BOSQUE LOAN COMMITMENTS (TO THE EXTENT NOT FUNDED) UNDER THIS AGREEMENT, FOR AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED OR SUSTAINED BY OR ASSERTED AGAINST THE AGENT, ACTING PURSUANT HERETO OR ANY OF THE OTHER LOAN DOCUMENTS IN ITS 61 CAPACITY PROVIDED FOR IN THIS SECTION 11, IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, THE EXISTING AGREEMENT OR ANY EXISTING LOAN DOCUMENT; PROVIDED, HOWEVER, THAT NO LENDER SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM THE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. THE OBLIGATIONS OF THE LENDERS UNDER THIS SECTION 11.6 SHALL SURVIVE THE REPAYMENT OF THE NOTES AND THE LOANS AND THE TERMINATION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 11.7 Agent, Individually. With respect to its Bosque Loan Commitment, the Loans made by it and any Note issued to or held by it, the Agent shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender or holder of a Note. The terms "Lender", "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, not exclude the Agent in its individual capacity as a Lender or holder of a Note. The Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with the Loan Parties and their Subsidiaries as if it were not acting pursuant hereto, and may accept fees and other consideration from the Loan Parties and their Subsidiaries for services as the Agent in connection with this Agreement and the other Loan Documents and for services otherwise than as the Agent without having to account for the same to the Lenders. 11.8 Holders of Notes. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been received by the Agent. Any request, authority or consent of any Person, who at the time of making such request or of giving such authority or consent is the payee of any Note, shall be conclusive and binding on any subsequent holder, transferee, assignee or payee of such Note or of any Note or Notes issued in exchange therefor. 11.9 Resignation. The Agent may resign at any time from the performance of all its functions and duties hereunder and under the other Loan Documents by giving 30 days prior written notice to the Borrower and each Lender. Such resignation shall take effect upon the expiration of such 30-day period or upon the earlier appointment of a successor. Notwithstanding any such resignation, the provisions of Sections 11.6 and 12.3 shall inure also to the benefit of each Agent who has so resigned with respect to the period it served as Agent. In case of the resignation of the Agent, the Majority Lenders, with the prior consent of the Borrower, which consent may not be unreasonably withheld, may appoint a successor by a written instrument signed by the Majority Lenders. Any successor shall execute and deliver to the Agent an instrument accepting such appointment, and thereupon such successor, without further act, shall become vested with all the estates, properties, rights, powers, duties and trusts of the Agent hereunder and with like effect as if originally named as "Agent" herein and therein, and upon request, the predecessor Agent shall take all actions and execute all documents necessary to give effect to the foregoing. In the event the Agent's resignation becomes effective at a time when no successor has been named, all notices, other communications and payments hereunder required to be given by or to the Agent shall be sufficiently given if given by the Majority Lenders (or all Lenders, if the consent of all Lenders is required therefor hereunder) or to each Lender, as the case may be. In such event, all powers specifically delegated to the Agent may be exercised by the Majority Lenders and the Majority Lenders shall be entitled to all rights of the Agent hereunder. 62 11.10 Reimbursement. Without limiting the provisions of Section 11.6, the Lenders and the Agent hereby agree that the Agent shall not be obligated to make available to any Person any sum which the Agent is expecting to receive for the account of that Person until the Agent has determined that it has received that sum. The Agent may, however, disburse funds prior to determining that the sums which the Agent expects to receive have been finally and unconditionally paid to the Agent, if the Agent wishes to do so. If and to the extent that the Agent does disburse funds and it later becomes apparent that the Agent did not then receive a payment in an amount equal to the sum paid out, then any Person to whom the Agent made the funds available shall, on demand from the Agent: (a) refund the Agent the sum paid to that Person; and (b) reimburse the Agent for the additional amount certified by the Agent as being necessary to indemnify the Agent against any funding or other cost, loss, expense or liability sustained or incurred by the Agent as a result of paying out the sums before receiving it; provided, however, that if such funds were made available to any Lender, such additional amount shall be limited to interest on the sum to be repaid, for each day from the date such amount was disbursed until the date repaid to the Agent, at (for the first three days) the customary rate set by the Agent for correction of errors among banks, and thereafter at the Base Rate (or, if greater and in respect of a Loan, the rate from time to time prevailing on such Loan). Section 12. MISCELLANEOUS. 12.1 Calculations and Financial Data. Calculations hereunder (including, without limitation, calculations used in determining, or in any certificate of any Loan Party delivered reflecting compliance by any Loan Party with the provisions of this Agreement) shall be made and financial data required hereby shall be prepared both as to classification of items and as to amount in accordance with GAAP, consistent with the audited Financial Statements described in Section 10.16; provided that for purposes of Section 8.20 no effect shall be given to any change in GAAP from those in effect on December 31, 2001. 12.2 Amendment and Waiver. Except as otherwise provided, no provision of any of the Loan Documents may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the Majority Lenders (or the Agent on their behalf) and, if the Borrower is a party thereto, the Borrower, except that waivers of provisions relating to a Loan Party's performance or non-performance of its obligations hereunder or thereunder need not be signed by such Loan Party or any other Loan Party; provided however that the written consent of the Agent shall also be required to change, waive, discharge or terminate provisions of Section 11; and provided further that without the consent of all of the Lenders (or the Agent on their behalf) no change, waiver, discharge or termination may be made that would increase the amount of any Lender's Bosque Loan Commitment, decrease the principal of any Loan; decrease the interest rate payable on any Loan; decrease the amount of any fee; extend the final maturity date of any Loan; change the definition of "Majority Lenders" or modify this Section 12.2. Any such change, waiver, discharge or termination shall be effective only in the specific instance and for the specific purposes for which made or given. 63 12.3 Expenses; Indemnification. (a) Whether or not the transactions hereby contemplated shall be consummated, the Borrower shall pay all out-of-pocket costs and expenses of (x) the Agent incurred in connection with the preparation, execution, delivery, administration, filing and recording of, and (y) the Agent and the Lenders incurred in connection with the amendment (including any waiver or consent) or modification of (including any amendment, waiver, consent or modification at any time requested by the Borrower, whether or not same is finalized or executed), any failure of Borrower to perform or observe any provision of, and enforcement of or preservation of any rights under, this Agreement, the other Loan Documents, the making and repayment of the Loans, and the payment of all interest and fees, including, without limitation, (A) the fees and expenses of Sullivan & Worcester LLP, counsel for the Agent, and any special or local counsel retained by the Agent or the Lenders, and with respect to enforcement, the reasonable fees and expenses of counsel for the Agent or any Lender, (B) the reasonable fees and expenses of accountants, other consultants, appraisers and other professionals retained by the Agent in connection with the transactions contemplated hereunder, and (C) printing, travel, title insurance, mortgage recording, filing, communication and signing taxes and costs. (b) THE BORROWER AGREES TO PAY, AND TO SAVE THE AGENT AND THE LENDERS HARMLESS FROM (x) ALL PRESENT AND FUTURE STAMP, FILING AND OTHER SIMILAR TAXES, FEES OR CHARGES (INCLUDING INTEREST AND PENALTIES, IF ANY), WHICH MAY BE PAYABLE IN CONNECTION WITH THE LOAN DOCUMENTS OR THE ISSUANCE OF THE NOTES OR ANY MODIFICATION OF ANY OF THE FOREGOING OR ANY EXISTING LOAN DOCUMENT, AND (y) ALL FINDER'S AND BROKER'S FEES IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE EXISTING LOAN DOCUMENTS. (c) THE BORROWER AGREES TO INDEMNIFY, PAY AND HOLD HARMLESS THE AGENT, EACH LENDER, ANY LENDER ASSIGNEE AND EACH HOLDER OF A NOTE AND THEIR RESPECTIVE PRESENT AND FUTURE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS (COLLECTIVELY, THE "INDEMNIFIED PARTIES") FROM AND AGAINST ALL LIABILITY, LOSSES, DAMAGES AND EXPENSES (INCLUDING, WITHOUT LIMITATION, LEGAL FEES AND EXPENSES) ARISING OUT OF, OR IN ANY WAY CONNECTED WITH, OR AS A RESULT OF (I) THE EXECUTION AND DELIVERY OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE EXISTING AGREEMENT, EXISTING LOAN DOCUMENTS OR THE DOCUMENTS OR TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY OR THE PERFORMANCE BY THE PARTIES HERETO OR THERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER AND THEREUNDER OR RELATING THERETO; OR (II) ANY CLAIM, ACTION, SUIT, INVESTIGATION OR PROCEEDING (IN EACH CASE, REGARDLESS OF WHETHER OR NOT THE INDEMNIFIED PARTY IS A PARTY THERETO OR TARGET THEREOF) IN ANY WAY RELATING TO THE BORROWER, ANY PRIMARY OBLIGOR, ANY SECONDARY OBLIGOR OR SUBSIDIARY OF ANY THEREOF OR ANY COLLATERAL OR ANY AFFILIATE OF THE BORROWER OR ANY SUBSIDIARY OF ANY SUCH AFFILIATE OR IN ANY WAY RELATING TO ANY OF THE FOREGOING PERSONS OR ANY OTHER LOAN PARTY OR ANY AFFILIATE OF ANY OF THE FOREGOING IN RESPECT OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENTS, ANY EXISTING LOAN DOCUMENTS OR ANY OTHER DOCUMENT OR TRANSACTION IN CONNECTION HEREWITH OR THEREWITH OR RELATING HERETO OR THERETO; OR (III) ANY ACTUAL OR ALLEGED VIOLATION BY THE BORROWER, ANY PRIMARY OBLIGOR, SECONDARY OBLIGOR, ANY LOAN PARTY, ANY AFFILIATE OF ANY OF THE FOREGOING PERSONS OR ANY SUBSIDIARY OF ANY OF THE FOREGOING PERSONS (OR ANY PREDECESSOR IN INTEREST OF ANY OF THEM) OF ANY ENVIRONMENTAL LAW; PROVIDED THAT THE BORROWER SHALL NOT BE LIABLE TO AN INDEMNIFIED PARTY FOR ANY PORTION OF SUCH LIABILITIES, 64 LOSSES, DAMAGES AND EXPENSES SUSTAINED OR INCURRED AS A DIRECT RESULT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE AGENT, ANY LENDER OR SUCH INDEMNIFIED PARTY IF SUCH GROSS NEGLIGENCE OR WILLFUL MISCONDUCT IS DETERMINED TO HAVE OCCURRED BY A FINAL AND NON-APPEALABLE DECISION OF A COURT OF COMPETENT JURISDICTION. EACH LENDER SHALL ENDEAVOR TO GIVE THE BORROWER NOTICE OF ANY MATERIAL CLAIM, ACTION, SUIT OR PROCEEDING (IF NOT RESTRICTED BY APPLICABLE LAW, REGULATION OR GOVERNMENT AUTHORITY FROM SO DOING OR UNLESS THE SAME WOULD BE INCONSISTENT WITH A REQUEST FROM A GOVERNMENT AUTHORITY) REFERRED TO IN CLAUSE (II) WHICH HAS BEEN FILED AGAINST SUCH LENDER WITHIN A REASONABLE TIME AFTER THE LOAN OFFICER OF SUCH LENDER WITH RESPONSIBILITY FOR THIS AGREEMENT BECOMES AWARE OF THE SAME, BUT NO FAILURE TO GIVE ANY SUCH NOTICE SHALL AFFECT, OR RELIEVE THE BORROWER OF, ANY OF BORROWER'S OBLIGATIONS UNDER THIS SECTION 12.3 OR UNDER ANY OTHER PROVISION OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR RESULT IN ANY OBLIGATION OR LIABILITY OF THE AGENT OR ANY LENDER TO THE BORROWER OR ANY OTHER PERSON (d) All obligations provided for in this Section 12.3 and Sections 3.4, 3.9, 4.1, 4.2, 4.3, 5.2 and 11.6 shall survive any termination of this Agreement and the Bosque Loan Commitments and the payment in full of the Obligations. 12.4 Benefits of Agreement; Descriptive Headings. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns, and, in particular, shall inure to the benefit of the holders from time to time of the Notes; provided, however, that no Loan Party party hereto may assign or transfer any of its rights or obligations hereunder without the prior written consent of the Agent and the Lenders and any such purported assignment or transfer shall be void. In furtherance of the foregoing, each Lender shall be entitled at any time to grant participations in the whole or any part of its rights and/or obligations under this Agreement, the Loan Documents or any Loan or Note to any Person; provided, however, that no Lender Assignee shall be permitted by the terms of its participation agreement with the relevant Lender to require such Lender to take or omit to take any action hereunder except to the extent that if the Lender Assignee were a Lender hereunder, its consent to taking or omitting to take such action would be required by the terms of the second proviso of Section 12.2 hereto. No such participation pursuant to this Section 12.4(a) shall relieve any Lender from its obligations hereunder and the Borrower need deal solely with the Agent and the Lenders with respect to waivers, modifications and consents to this Agreement, the Loan Documents or the Notes. Any such participant is referred to in this Agreement as a "Lender Assignee". The Borrower agrees that the provisions of Sections 3.4, 3.7, 3.9, 5.2 and 12.3 shall run to the benefit of each Lender Assignee and its participations or interests herein, and any Lender may enforce such provisions on behalf of any such Lender Assignee; provided, however, that if any Lender grants a participation in the whole or any part of its rights and/or obligations pursuant to this Section 12.4(a), then the amounts that the Borrower is required to pay pursuant to this Agreement (including, without limitation, additional amounts made pursuant to Section 5.2) shall not exceed the amounts that the Borrower would have been required to pay to such Lender pursuant to this Agreement had such Lender not granted such participation. The Borrower hereby further agrees that any such Lender Assignee may, to the fullest extent permitted by applicable law, exercise the right of setoff with respect to such participation (and in an amount up to the amount of such participation) as fully as if such Lender Assignee were the direct 65 creditor of the Borrower. Upon a participation in accordance with the foregoing, the Borrower shall execute such documents and do such acts as any Lender may reasonably request to effect such assignment. Any Lender may furnish any information concerning the Loan Parties in its possession from time to time to Lender Assignees (including prospective Lender Assignees) and prospective Purchasing Lenders. Each Lender shall notify Borrower of any participation granted by it pursuant to this Section 12.4(a) but neither the approval of the Borrower nor that of any other Loan Party shall be required for any such participation. The Borrower shall not be responsible for any due diligence costs or legal expenses of such Lender Assignees in connection with their entering into such participation. (b) The descriptive headings of the various provisions of this Agreement and the other Loan Documents are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. (c) Any Lender may at any time assign to any other Lender or any affiliate of any Lender, or (subject to obtaining the prior written consent of the Borrower (but no other Loan Party), such consent not to be unreasonably withheld) to one or more additional banks or financial institutions ("Purchasing Lenders"), all or any part of its Bosque Loan Commitment (and corresponding Tranche I Note), or all or any part of its other Loans and any Note pursuant to a Transfer Supplement ("Transfer Supplement"), in form and substance satisfactory to the Agent; provided, however, that each such assignment shall be for an amount not less than the lesser of a minimum amount of $1,000,000 (or, if less, the then-outstanding principal amount of such Lender's Loans or, in the case of a transfer of the Bosque Loan Commitment its then remaining unfunded Bosque Loan Commitment, as the case may be) and integral multiples of $500,000 above such amount. Upon (i) such execution of such Transfer Supplement, (ii) delivery of an executed copy thereof to the Borrower and the Agent, (iii) payment by such Purchasing Lender to such transferor Lender of an amount equal to the purchase price agreed between such transferor Lender and such Purchasing Lender, (iv) payment by the Purchasing Lender to the Agent of a $3,000 processing fee, and (v) any consent of the Borrower required by the first sentence of this Section 12.4(c), such Purchasing Lender shall for all purposes be a Lender party to this Agreement and shall have all the rights and obligations of a Lender under this Agreement to the same extent as if it were an original party hereto and thereto with the percentage share of the Bosque Loan Commitment set forth in Schedule I to such Transfer Supplement, and no further consent or action by the Borrower, any other Loan Party, the Lenders or the Agent shall be required. Such Transfer Supplement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of the percentage of the Bosque Loan Commitment, Notes and Loans (and related rights and obligations) held by the transferor Lender and the Purchasing Lender arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender pursuant to the Transfer Supplement. Upon the consummation of any transfer to a Purchasing Lender pursuant to this Section 12.4(c), the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that, if required, a replacement Note or Notes (dated the same date as the Note or Notes being replaced) is issued to such transferor Lender and a new Note or Notes (dated the same date as the Note or Notes being replaced) or, as appropriate, a replacement Note or Notes (dated the same date as the Note or Notes being replaced) is issued to such Purchasing Lender, in each case in principal amounts reflecting their 66 outstanding Loans and (if applicable) Bosque Loan Commitment, as adjusted pursuant to such Transfer Supplement. (d) Notwithstanding anything to the contrary contained herein or in any of the Loan Documents, unless the Agent, the Borrower or a Lender otherwise request with respect to any specific exhibit, exhibits to this Agreement shall not be required to be attached to the execution or any other copy of this Agreement, and any references in this Agreement or the other Loan Documents to such exhibits as "Exhibits hereto," "Exhibits to this Agreement" or words of similar effect shall be deemed to refer to such document as executed by the parties thereto and delivered on the Amendment Effective Date. 12.5 Notices, Requests, Demands, etc. Except as otherwise expressly provided herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been duly given or made when delivered if sent by Federal Express or other similar overnight delivery service, or three Business Days after mailing (when mailed, postage prepaid, by registered or certified mail, return receipt requested) or (in the case of telex, telegraphic, telecopier or cable notice) when delivered to the telex, telegraph, telecopier or cable company, or (in the case of telex or telecopier notice sent over a telex or telecopier owned or operated by a party hereto) when sent; in each case addressed as follows, except that notices and communications to the Agent pursuant to Sections 2 and 9 shall not be effective until received by the Agent: (i) if to the Agent, at the Closing Office, (ii) if to a Lender, at the address specified with its signature below or (if a Purchasing Lender) on the applicable Transfer Supplement, and (iii) if to a Loan Party, at its address specified with its signature below (Attention: President), or to such other addresses as any of the parties hereto may hereafter specify to the others in writing, provided that communications with respect to a change of address shall be deemed to be effective when actually received. 12.6 Governing Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION, except (as to any other Loan Document) to the extent specifically set forth otherwise in that Loan Document. 12.7 Counterparts; Telecopies. This Agreement and the other Loan Documents may be executed in any number of counterparts, and by the different parties hereto and thereto on the same or separate counterparts, each of which when so executed and delivered shall be deemed to be an original; all the counterparts for each such Loan Document shall together constitute one and the same agreement. Telecopied signatures hereto and to the other Loan Documents shall be of the same force and effect as an original of a manually signed copy. 12.8 Waiver; Remedies Cumulative; Payment of Claims; Full Recourse. (a) No failure or delay on the part of the Agent or any Lender in exercising any right, power or privilege under this Agreement or any other Loan Document, and no course of dealing between Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party or any Subsidiary thereof and the Agent or any Lender shall operate as a waiver thereof; 67 nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.. No notice to or demand on Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party in any case shall entitle such Loan Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of the Agent or any Lender to any other or further action in any circumstances without notice or demand. (b) The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Agent or any Lender would otherwise have pursuant to such documents or at law or equity. (c) In furtherance and not in limitation of the other rights and remedies of the Agent and the Lenders, upon the occurrence of an Event of Default or Default, Agent, in its sole and absolute discretion, without waiving or releasing any covenant, agreement or other obligation of Borrower or any Default or Event of Default, may at any time or times hereafter, but shall be under no obligation to, pay, acquire and/or accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person against the Assets of Borrower, or any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing or any Wholly-Owned Subsidiary. All sums paid by Agent in respect thereof and all reasonable costs and expenses (including, without limitation, fees and expenses of counsel to the Agent) relating thereto incurred by Agent or for which Agent becomes obligated on account thereof shall be part of the Obligations payable by a Borrower to Agent on demand and any amount not paid on demand shall bear interest at the Past Due Rate. (d) The Borrower's obligations to pay principal, interest, fees and other amounts when due under this Agreement and the other Loan Documents is absolute and unconditional and a full recourse obligation of Borrower, notwithstanding any fact or circumstance and, without limiting the generality of the foregoing, whether or not there are funds available in the Cash Flow Cash Collateral Account for application to any such obligation. 12.9 Recoveries; Pro Rata Sharing. (a) Any Recoveries (after deduction and payment of all expenses and costs permitted by this Agreement, the Security Documents or applicable law) shall be applied against the Loans held by the Lenders until satisfaction in full of all amounts due thereunder. (b) The Lenders agree among themselves that, with respect to all sums received by the Lenders applicable to the payment of the principal of or interest on the Notes (except as otherwise provided in Section 3.4, 5.2 or 5.3), equitable adjustment will be made between the Lenders so that, in effect, all such sums shall be shared ratably by each of the Lenders (in accordance with the outstanding principal amount of their respective applicable Loans) whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or cross-action or by the enforcement of any or all of the Notes or otherwise. If any Lender receives any payment on its Notes of a sum or sums in excess of its pro rata portion (except as otherwise provided in Section 3.4, 5.2 or 5.3), then such Lender receiving such excess payment shall purchase for cash from the other Lenders with outstanding Loans to the Borrower an interest in their Note or Notes in such amount as shall 68 result in a ratable participation by all of the Lenders in the aggregate unpaid amount of applicable Notes then outstanding; provided, however, that if all or any portion of such excess payment is thereafter recovered by such Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. The Borrower hereby agree that any Lender so purchasing a participation from another Lender pursuant to this Section 12.9(b) may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. 12.10 Jurisdiction. THE BORROWER HEREBY AGREES THAT ANY LEGAL ACTION OR PROCEEDING AGAINST IT WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS OR THE DOCUMENTS DELIVERED IN CONNECTION HEREWITH OR THEREWITH MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AS THE AGENT OR ANY LENDER MAY ELECT, AND, BY EXECUTION AND DELIVERY HEREOF, THE BORROWER ACCEPTS AND CONSENTS FOR ITSELF AND IN RESPECT TO ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, UNLESS WAIVED BY THE AGENT AND THE MAJORITY LENDERS IN WRITING, WITH RESPECT TO ANY ACTION OR PROCEEDING BROUGHT BY IT AGAINST THE AGENT OR ANY LENDER AND ANY QUESTIONS RELATING TO USURY. THE BORROWER AGREES THAT SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK SHALL APPLY TO THE LOAN DOCUMENTS AND WAIVES ANY RIGHT TO STAY OR TO DISMISS ANY ACTION OR PROCEEDING BROUGHT BEFORE SAID COURTS ON THE BASIS OF FORUM NON CONVENIENS. BORROWER HEREBY IRREVOCABLY CONSENTS THAT ALL PROCESS SERVED OR BROUGHT AGAINST BORROWER WITH RESPECT TO ANY SUCH PROCEEDING IN ANY SUCH COURT IN NEW YORK SHALL BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT IF SENT BY REGISTERED MAIL, OR (IF PERMITTED BY LAW) BY FEDERAL EXPRESS OR OTHER SIMILAR OVERNIGHT COURIER SERVICE, TO SUCH LOAN PARTY AT ITS ADDRESS SET FORTH ALONGSIDE ITS SIGNATURE BELOW (OR SUCH OTHER ADDRESS AS THE AGENT IS NOTIFIED OF IN ACCORDANCE WITH THE PROVISIONS OF SECTION 12.5). NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR THE LENDERS TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST ANY LOAN PARTY IN THE COURTS OF ANY OTHER JURISDICTION. 12.11 Severability. If any provision of this agreement shall be held or deemed to be or shall, in fact, be illegal, inoperative or unenforceable, the same shall not affect any other provision or provisions herein contained or render the same invalid, inoperative or unenforceable to any extent whatever. 12.12 Right of Set-off. In addition to any rights now or hereafter granted under applicable law or otherwise and not by way of limitation of any such rights, upon the occurrence of an Event of Default each of the Lenders is hereby authorized at any time or from time to time, 69 without notice to any Loan Party or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and apply any and all deposits (general or special, time or demand, provisional or final) and any other indebtedness at any time held or owing by such Lender to or for the credit or the account of such Loan Party against and on account of the obligations and liabilities of such Loan Party now or hereafter existing under any of the Loan Documents irrespective of whether or not any demand shall have been made thereunder and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured. The Lender or Lenders exercising any rights granted under this Section 12.12 shall thereafter notify the affected Loan Party and the Agent of such action; provided that the failure to give such notice shall not affect the validity of such set-off and application. 12.13 No Third Party Beneficiaries. This Agreement is solely for the benefit of the Agent and the Lenders and the Borrower and the respective successors and assigns of the Agent and the Lenders and nothing contained herein shall be deemed to confer upon anyone other than the Borrower any right to insist on or to enforce the performance or observance of any of the obligations of the Agent or the Lenders contained herein. All conditions to the obligations of the Lenders to make Loans hereunder are imposed solely and exclusively for the benefit of the Lenders and their respective successors and assigns and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms and no other Person shall under any circumstances be deemed to be beneficiary of such conditions. 12.14 Effectiveness. This Agreement shall become effective when and as of the date (the "Amendment Effective Date") that each of the following conditions have been satisfied to the satisfaction of the Agent (or waived by the Agent).. If the Amendment Effective Date shall not have occurred by the close of business (New York time) on December 31, 2002 (or such later date as is agreed to by the Agent in writing), the amendment and restatement of the Existing Agreement to be effectuated by this Agreement shall be deemed rescinded, null and void. (a) Signed Copies. The Borrower and the Lenders and each other signatory hereto shall have executed a copy hereof (whether the same or different counterparts) and delivered the same to the Agent at 565 Fifth Avenue, New York, New York 10017. Telecopied signatures hereto shall be of the same force and effect as an original of a manually signed copy. (b) Exchange Offer. (i) Holders of no fewer than 80% of the outstanding shares of New Preferred Stock (this, and other capitalized terms used in this Section 14.2(b) but not defined herein, having the meaning ascribed thereto in the FC Consumer Note) shall have accepted the Exchange Offer, irrevocably tendered their shares to the Exchange Agent for exchange in accordance with the terms thereof and not withdrawn their shares. The Agent shall have received a certificate from the Exchange Agent, in form and substance satisfactory to Agent, on the Amendment Effective Date to that effect. (ii) The Registration Statement shall have become effective and not be the subject of any "stop order." No Legal Action shall be pending or threatened before or by any Government Authority seeking to withdraw any shares tendered pursuant to the Exchange Offer if the result of such Legal Action (if adversely determined) would cause 70 the aggregate number of outstanding shares tendered and not withdrawn or sought to be withdrawn to be fewer than 80% of the outstanding shares of New Preferred Stock. (iii) The opinions of counsel delivered to any Loan Party by counsel for such Loan Party in connection with the Exchange Offer or any matter related to the Exchange Offer, shall have been delivered to Lender, together with a letter from each such counsel stating that Lender may rely upon such opinions with the same effect as if said opinions were addressed to them. (c) Repayment of Loans. Borrower shall have repaid such amount of principal of the Existing Loans so that not more than $50,400,000 principal amount of Existing Loans remains outstanding. (d) Notes. Each of the Lenders shall have returned to the Borrower the promissory notes that were issued to the them pursuant to the Existing Agreement and received in exchange therefor an appropriately completed, substitute Tranche I Note (substantially in the form of Exhibit A-1 hereto) and an appropriately completed Tranche II Note substantially in the form of Exhibit A-2 hereto), each dated the Closing Date (or such other date agreed to by the Agent and the Borrower) and duly executed by the Borrower. (e) [Intentionally Omitted] (f) Interest; LIBOR Breakage Fee Borrower shall have paid to the Agent an amount equal to all accrued interest on Existing Loans as of the Amendment Effective Date plus the amount which the Agent specifies in writing to the Borrower as the amount that would be payable as the LIBOR Breakage Fee under the Existing Agreement in if all Eurodollar Advances under the Existing Agreement then outstanding were repaid on the Amendment Effective Date. (g) Legal Opinions. The Agent shall have received legal opinions (in sufficient counterparts for each of the Lenders) dated the Amendment Effective Date from Haynes & Boone, LLP, counsel to Borrower and each other Loan Party, in form and substance satisfactory to the Agent. (h) All Proceedings to be Satisfactory. All corporate, partnership, limited liability company and legal proceedings and all instruments, documents and papers in connection with the transactions contemplated by this Agreement and the other Loan Documents and the other documents referred to herein to occur on or prior to the Amendment Effective Date and the other documents referred to in this Section 12.14 shall be satisfactory in form and substance to the Agent, and the Agent and any Lender shall have received all such information and copies of all documents which the Agent or such Lender may reasonably have requested in connection herewith, such documents where appropriate to be certified by proper corporate officials or governmental authorities. (i) Fees and Expenses. The legal fees and expenses of the Agent's counsel in connection with the Existing Agreement and this Agreement shall have been paid in full by the Borrower. 71 (j) Accrued Fees. Borrower shall have paid to the Agent the full amount of all fees under the Existing Agreement accrued through the Amendment Effective Date (whether or not otherwise then due and payable), including, without limitation, all accrued commitment fees. (k) New Fees. (i) Borrower shall have paid to Agent the Consolidation Fee payable on the Amendment Effective Date pursuant to Section 4.3. (ii) Borrower shall have paid to the Agent the amount (if any) of any interest payable on the Amendment Effective Date pursuant to the Rate Fix Letter. (l) Default, etc. There shall exist no Default or Event of Default and all representations and warranties made by the Loan Parties herein or in the other Loan Documents otherwise by the Loan Parties in writing in connection herewith or therewith shall be true and correct in all material respects with the same effect as though such representations and warranties have been made at and as of such time. (m) Officer's Certificate. The Agent shall have received a certificate of an authorized officer of the Borrower certifying, as of the Amendment Effective Date and as to compliance with the provisions of Section 12.14 (b),(l), (n),(o), (r), (q) and (u) (n) Representations. On the Amendment Effective Date (both before and after giving effect to the amendment and restatement of the Existing Agreement),all representations and warranties contained herein or in the other Loan Documents or otherwise made by Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party in connection herewith or therewith are true and correct in all material respects with the same effect as though such representations and warranties were being made at and as of such time. (o) Approvals and Consents. All orders, permissions, consents, approvals, licenses, authorizations and validations of, and filings, recordings and registrations with, and exemptions by, any Government Authority, or any other Person, required to authorize or required in connection with the execution, delivery and performance of this Agreement or the other Loan Documents and the transactions contemplated hereby and thereby by an Loan Party shall have been obtained (and, if so requested, furnished to the Agent, with sufficient copies for the Lenders). (p) Other Supporting Documents. There shall have been delivered to the Agent such information and copies of documents, approvals (if any) and records (certified, where appropriate) of corporate and legal proceedings as the Agent or any Lender may have reasonably requested relating to this Agreement. (q) Adverse Change. There shall have been, in the Agent's opinion, no Material Adverse Change with respect to Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party since December 31, 2001. None of the Agent nor any Loan Party shall have become aware of any previously undisclosed information with respect to any Loan Party which, in the Agent's opinion, would have a Material Adverse Effect. 72 (r) Change in Law; No Opposition. (i) No change shall have occurred in applicable law, or in applicable regulations thereunder or in interpretations thereof by any Government Authority which, in the opinion of any Lender, would make it illegal for such Lender to convert the Existing Loans into the Loans hereunder. (ii) No suit, action or proceeding shall be pending or threatened before or by any Government Authority seeking to restrain or prohibit the consummation of the transactions contemplated by this Agreement. (s) UCC Statements. Evidence satisfactory to the Agent of all filings of financing statements (and assignments thereof) under the applicable Uniform Commercial Code, satisfactory Lien search requests on Form UCC-11 and analogous forms confirming the absence of any perfected Liens prior to the Lenders' and of any other Liens other than Liens permitted hereunder shall have been delivered to the Agent and all other actions with respect to the Liens created by the Security Documents as are necessary or appropriate to perfect such Liens shall have been taken. (t) Checklist Documents. The documentation set forth on the Closing Checklist (Schedule 12.14(t)), including, without limitation, the Guaranties, Pledge Agreements and Security Agreements, satisfactory to the Agent in form and substance, shall have been delivered to the Agent , and such other actions referred to on such Schedule and in such documentation shall have been taken. (u) FC Holdings Purchase. Agent shall have received evidence satisfactory to it that FC Commercial shall have purchased the 20% ownership in FC Holdings held by management on terms satisfactory to all parties thereto and to the Agent. (v) FC Consumer Loan . FC Consumer Lending shall have borrowed $16 million in accordance with the FC Consumer Loan Documents. (w) PFAL The Effective Date shall have occurred under the Portfolio Acquisition Loan Agreement. All documents, agreements, certificates, financial statements, legal opinions, analyses, reports and other papers required to be delivered by this Section and papers required by the foregoing provisions of this Section 12.14 shall be in form and substance satisfactory to the Agent and shall be delivered to the Agent at its Closing Office or as the Agent may otherwise direct. 12.15 Survival; Integration. (a) Each of the representations, warranties, terms, covenants, agreements and conditions contained in this Agreement shall specifically survive the execution and delivery of this Agreement and the other Loan Documents and the making of the Loans and shall, unless otherwise expressly provided, continue in full force and effect until the Bosque Loan Commitments have been terminated and the Loans together with interest thereon, the fees and 73 compensation of the Agent, and all other sums payable hereunder or thereunder have been indefeasibly paid in full. (b) This Agreement, together with the other Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and thereof and supersedes all prior agreements, written or oral, on the subject matter hereof and thereof. In the event of any direct conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; provided that the inclusion of supplemental rights or remedies in favor of the Agent or the Lenders in any other Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 12.16 Domicile of Loans. Any Lender may make, maintain or transfer any of its Loans hereunder to, or for the account of, any branch office, subsidiary or affiliate of such Lender. 12.17 No Usury. It is expressly stipulated and agreed to be the intent of the Agent, the Lenders and the Borrower to comply at all times with applicable usury laws. If at any time such laws would ever render usurious any amount called for under any of the Loan Documents, then it is the express intention of the parties hereto that such excess amount be immediately credited on the applicable Notes, or if the applicable Notes have been fully paid, refunded by the Lenders (pro rata in accordance with their respective principal amount of the affected Loans), to the Borrower (and the Borrower shall accept such refund) and the provisions hereof and thereof be immediately deemed to be reformed to comply with the then applicable laws, without the necessity of the execution of any further documents, but so as to permit the recovery to the fullest amount otherwise called for hereunder and thereunder. Any such crediting or refunding shall not cure or waive any default by the Borrower under the Loan Documents. If at any time following any such reduction to the interest rate payable by the Borrower there remains unpaid any principal amounts under the Notes and the maximum interest rate permitted by applicable law is increased or eliminated, then the interest rate payable to the Lenders shall be readjusted, to the full extent permitted by applicable law, so that the total amount of interest thereunder payable by the Borrower to the Lenders shall be equal to the amount of interest which would have been paid by the Borrower without giving effect to applicable usury laws. The Borrower agree, however, that in determining whether or not any interest payable under the Notes or any of the other Loan Documents exceeds the highest rate permitted by law, any non-principal payment (except payments specifically stated in the Notes or such other Loan Documents to be "interest"), including fees and commissions and all other sums payable hereunder or thereunder or in connection herewith or therewith, shall be deemed, to the full extent permitted by law, to be an expense, fee, premium or penalty rather than interest. 12.18 Waiver of Jury Trial. THE BORROWER, THE AGENT AND EACH LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE BORROWER, ANY PARTNER THEREOF, ANY OTHER LOAN 74 PARTY, THE AGENT OR THE LENDERS. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 12.19 Waiver by Borrower. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT OR REQUIRED BY LAW, BORROWER WAIVES (A) PRESENTMENT, DEMAND AND PROTEST, NOTICE OF PROTEST, NOTICE OF PRESENTMENT, DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY ANY OF THE LENDERS AND/OR THE AGENT ON WHICH BORROWER MAY IN ANY WAY BE LIABLE; (B) ALL RIGHTS TO NOTICE AND A HEARING PRIOR TO AGENT'S TAKING POSSESSION OR CONTROL OF, OR TO REPLEVY, ATTACHMENT OR LEVY UPON THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING ANY OF THE LENDERS AND/OR THE AGENT TO EXERCISE ANY OF ITS RESPECTIVE REMEDIES; AND (C) THE BENEFIT OF ALL VALUATION, APPRAISEMENT, EXTENSION AND EXEMPTION LAWS. 12.20 Waiver of Marshaling. All rights of marshaling of assets of Borrower, including any such right with respect to the Pledged Property, are hereby waived by Borrower. 12.21 Waiver of Claims. (a) Borrower releases Lenders and the Agent from any and all causes of action or claims which Borrower may now or hereafter have for any asserted loss or damage to Borrower claimed to be caused by or arising from any act or omission to act on the part of any Lenders and/or the Agent, their respective officers, agents or employees, except, in the case of any Lender or the Agent, willful misconduct or gross negligence of such Lender or the Agent (as the case may be). (b) Borrower hereby acknowledges, agrees and affirms, as of the Amendment Effective Date, that it possesses no claims, defenses, offsets, recoupment or counterclaims of any kind or nature against or with respect to the enforcement of the Existing Agreement, this Agreement or any other Loan Document or any amendments thereto (collectively, the "Claims"), nor does Borrower now have knowledge of any facts that would or might give rise to any Claims. If facts now exist which would or could give rise to any Claim against or with respect to the enforcement of the Existing Agreement, this Agreement or any other Loan Document, as may have been amended by the amendments thereto, Borrower hereby unconditionally, irrevocably and unequivocally waives and fully releases any and all such Claims as if such Claims were the subject of a lawsuit, adjudicated to final judgment from which no appeal could be taken and therein dismissed with prejudice. 12.22 Confidentiality. The Agent and each Lender, severally and with respect to itself only, covenants and agrees that any information obtained by the Agent or such Lender pursuant to this Agreement shall be held in confidence (it being understood that documents provided to the Agent hereunder may in all cases be distributed by the Agent to the Lenders) except that the 75 Agent or such Lender may disclose such information (i) to its officers, directors, employees, agents, counsel, accountants, auditors, advisors or representatives, (ii) to the extent such information has become available to the public other than as a result of a disclosure by or through the Agent or such Lender, (iii) to the extent such information was available to the Agent or such Lender in a capacity other than Agent or Lender hereunder or on a nonconfidential basis prior to its disclosure to the Agent or such Lender hereunder, (iv) with the consent of Borrower, (v) to actual or prospective Lender Assignees or Purchasing Lenders or (vi) to the extent the Agent or such Lender should be (A) required in connection with any legal or regulatory proceeding or (B) requested by any Government Authority to disclose such information. Section 13. TEXAS LANGUAGE. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE MATTERS COVERED HEREBY AND THEREBY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Section 14. CONDITIONS SUBSEQUENT 14.1 Foreign Perfection. On or before June 1, 2003 (or such later date (if any) specified in writing by the Agent), the Borrower will and will cause each applicable Primary Obligor and Secondary Obligor to take such action as is reasonably requested by the Agent to ensure that the perfection and priority of its Liens on Equity Interests issued by Non-US Entities is recognized in the jurisdiction of organization of such issuers and, if requested by the Agent, will deliver to the Agent an opinion of counsel from foreign counsel acceptable to the Agent in form and substance satisfactory to the Agent, with respect to such perfection. 14.2 Intercompany Security Agreements. On or before April 10, 2003 (or such later date (if any) specified in writing by the Agent), or, if earlier, the first Borrowing Date hereunder, the Borrower will (i) cause each Primary Obligor to deliver intercompany security agreements in form and substance satisfactory to the Agent securing each such Person's obligations under its Pledged Note together with such other documents and instruments relating thereto and records of company proceedings and (if requested by Agent), legal opinions, as Agent may reasonably request and (ii) cause each maker of a Pledged Note to deliver to the Agent an amended and restated Pledged Note in form and substance satisfactory to the Agent. 14.3 Other Post Closing Items. The Borrower shall deliver to the Agent (unless any of the same is waived in writing by the Agent) such documents, instruments, search results and other items as are set forth in the agreement entitled "Post-Closing-A&R" between the Borrower and the Agent dated on or about the Amendment Effective Date, at the applicable time for such item set forth in such letter (as any such time may be extended in writing by the Agent). [remainder of page intentionally left blank] 76 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the date first above written. FIRSTCITY FINANCIAL CORPORATION a Delaware corporation By: --------------------------------- Title: ------------------------------ BANK OF SCOTLAND, acting through its New York branch, as Agent By: --------------------------------- Title: ------------------------------ BOS (USA) INC., as a Lender By: --------------------------------- Title: ------------------------------ ACKNOWLEDGED (as to Section 2.1(b)): THE GOVERNOR & COMPANY OF THE BANK OF SCOTLAND By: --------------------------------- Title: ------------------------------ TABLE OF CONTENTS EXHIBITS(1) Annex I Definitions Exhibit - -------- (1) Certain exhibits may not be attached to this Agreement. See Section 12.4(d). LIST OF SCHEDULES ANNEX I DEFINITIONS As used in the Amended and Restated Loan Agreement to which this Annex I is annexed, the following terms shall have the meanings herein specified or as specified in the Section of such Loan Agreement or in such other document herein referenced: "Affiliate" shall mean any Person (i) in which Borrower and/or any Parent, individually, jointly and/or severally, now or at any time or times hereafter, has or have an equity or other ownership interest equal to or in excess of twenty-five percent (25%) of the total equity of or other ownership interest in such Person; and/or (ii) which directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with Borrower; and/or (iii) any officer or director of Borrower or any Primary Obligor. For purposes of this definition, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Stock, by contract or otherwise, and in any case shall include direct or indirect ownership (beneficially or of record) of, or direct or indirect power to vote, 25% or more of the outstanding shares of any class of capital stock of such Person (or in the case of a Person that is not a corporation, 25% or more of any class of equity interest). Notwithstanding the foregoing, none of the Harbor Debtors shall be deemed to be an Affiliate for the purposes of this Agreement other than Section 8.23. "Agent" - introductory paragraph. "Aggregate Net FC Equity Value" at any time shall mean (A) the sum of the FC Equity Value of each Existing S Co. plus the sum of the FC Equity Value of each Mid-Tier Company Post AE which is not a PFAL Portfolio Entity (each Mid-Tier Company-Post AE which is not a PFAL Portfolio Entity being referred to as an "Applicable Mid-Tier Company") minus (B) the sum of (i) for each Primary Obligor having a direct or indirect interest in any such Existing S Co. or Applicable Mid-Tier Company, the outstanding principal amount of Indebtedness of such Primary Obligor plus the outstanding principal amount of obligations in respect of which such Primary Obligor has issued any Guaranty Equivalent plus (ii) the FC Percentage of the outstanding principal amount of Indebtedness of each other Secondary Obligor (if any) having any direct or indirect interest in any Existing S Co. or Applicable Mid-Tier Company included in Clause (A) plus the outstanding principal amount of obligations in respect of which such other Secondary Obligor has issued any Guaranty Equivalent (up to the amount of the FC Equity Value of any such Existing S Co. if less than the full amount of such Indebtedness and amounts covered by Guaranty Equivalents issued by any such other Secondary Obligor) plus (iii) the outstanding principal amount of all Indebtedness of Borrower other than Indebtedness hereunder or under the Portfolio Acquisition Loan Agreement plus the outstanding principal amount of obligations in respect of which Borrower has issued any Guaranty Equivalent. (Notwithstanding the foregoing, (x) if an amount of Indebtedness deducted pursuant to the foregoing provisions of this definition is guaranteed, no deduction will be taken for a Guaranty Equivalent in respect of the amount of Indebtedness for which a deduction was separately taken pursuant to the foregoing provisions and (y) if any Indebtedness of an Existing S Co. or Applicable Mid-Tier Company which is deducted pursuant to clause (B) (y) of the definition of FC Equity Value is guaranteed pursuant to a Guaranty Equivalent described above, no deduction will be taken for such Guaranty Equivalent to the extent of the amount of the FC Percentage of such Indebtedness for which a deduction was taken under said clause (B)(y)). "Aggregate Undistributed Secondary Obligor Funds" at any time shall mean the aggregate amount of (x) the FC Percentage with respect to each Secondary Obligor which is not a PFAL Portfolio Entity of the aggregate amount of the funds held by each such Secondary Obligor, which funds are (i) not held for payment by such Secondary Obligor, within the next 30 days, of indebtedness to a Permitted Portfolio Company Creditor of such Secondary Obligor which is permitted by the terms of this Agreement to be so repaid or (ii) not retained by such Secondary Obligor to satisfy a leverage covenant (a "Usage Leverage Covenant") imposed on such Secondary Obligor by the Permitted Portfolio Company Creditor of such Secondary Obligor pursuant to a covenant under a loan agreement between such creditor and such Secondary Obligor as in effect on the Amendment Execution Date of which the Agent has been given written notice or (iii) do not constitute Portfolio Protection Expenses plus (y) the Excess Portfolio Protection Expense Amount plus (z) all amounts constituting Challenged Portfolio Protection Expenses. Without limiting the foregoing, funds held by a Secondary Obligor (other than a PFAL Portfolio Entity) for the payment of operating expenses shall be included in the computation of "Aggregate Undistributed Secondary Obligor Funds" regardless of whether (without limitation) such funds are excluded from the computation of "Net Receipts". "Agreement" or "Loan Agreement" shall mean this Amended and Restated Loan Agreement, as amended and restated on and as of the Amendment Effective Date and as it may from time to time be amended, extended, restated, supplemented or otherwise modified. "Amendment Effective Date" - Section 12.14. "Amendment Execution Date" shall mean the date on which all parties to this Agreement shall have signed a copy this Agreement (whether the same or different copies) and shall have delivered the same to the Agent. -2- "Applicable Cash Flow Payment" shall mean (x) each payment or distribution which is made by a Primary Obligor other than (i) the portion (if any) thereof made with the proceeds of a distribution or payment by a PFAL Portfolio Entity at any time (any such time, the "PFAL Only Time") when there are outstanding obligations in respect of term loans under the Portfolio Acquisition Loan Agreement if after giving effect to the ultimate disposition of such payment or distribution pursuant to the Portfolio Acquisition Loan Agreement-Existing, obligations thereunder in respect of term loans would remain outstanding, or (ii) the portion, if any thereof, which is required by the FC Consumer Note as in effect on the Amendment Effective Date to be applied to prepay such note (and is so applied), (y) each payment or distribution which is made by an Existing S Co. or a Portfolio Entity Post-AE which is not a PFAL Portfolio Entity or by a PFAL Entity other than at a PFAL Only Time and (z) each payment or distribution which is made by any Secondary Obligor or Primary Obligor (regardless of the source of such payment) after the PFAL Termination Date has occurred; provided that no amount constituting Extraordinary Transaction Proceeds shall constitute an Applicable Cash Flow Payment. "Applicable Indebtedness" of any Person shall mean all Indebtedness of such Person other than trade payables incurred in the ordinary course of business which are not evidenced by an Indebtedness Instrument. "Approved Portfolio Leverage Arrangement" shall mean any arrangement permitted by the Portfolio Acquisition Loan Agreement-Existing or otherwise consented to in writing by the Majority Lenders hereunder pursuant to which a Secondary Obligor is permitted to incur indebtedness from a third party and pay to such third party all or a portion of payments other distributions received by such Secondary Obligor in repayment of such indebtedness. "ASDM" shall mean Asset Servicing de Mexico S.A. de C.V. "Assets" shall mean any and all real, personal and intangible property of a Person, including, without limitation, accounts, chattel paper, contract rights, letters of credit, instruments and documents, equipment , general intangibles, inventory, leases, options, licenses, real property, and Equity Interests issued by any other Person whether now existing or hereafter acquired or arising. "Associate", when used to indicate a relationship with a Person, shall mean (i) another Person (other than a Loan Party or a Subsidiary thereof) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person or an immediate member of his family serves as trustee or in a similar capacity, and (iii) any relative or spouse of such Person or any relative of such spouse. "Auditors" shall mean KPMG LLP or other independent certified public accountants of recognized standing selected by Borrower and satisfactory to the Agent. -3- "Available Waterfall Capital Expenditure Amount" with respect to any Payment Date shall mean the amount determined by subtracting (x) all Capital Expenditures made by the Borrower and its Subsidiaries during the one year period ending on December 31 of the year in which such Payment Date occurs (the "Capex Cut Off Date") from (y) the maximum amount of Capital Expenditures permitted to be made during the one year period ending on the Capex Cut Off Date. "Base Rate" shall mean, for any day, the higher of (x) the fluctuating interest rate per annum, in effect from time to time, established by Bank of Scotland in New York as its base, prime or reference rate for U.S. domestic commercial loans in Dollars, or (y) the Federal Funds Rate in effect on such day plus 0.5%. Any change in the interest rate resulting from a change in the Base Rate shall be effective as of the opening of business on the day on which such change becomes effective; it is understood and agreed that the aforesaid rates and the Base Rate are reference rates only and do not necessarily represent the lowest or best rate actually charged to any customer. "Base Rate Loan" shall mean any Loan during any period that it bears interest determined by reference to the Base Rate. "Basle Laws" - Section 3.4. "Borrower" - introductory paragraph. "Borrower-FCL Note " shall mean the Promissory Note dated December 16, 2002 in the stated principal amount of $16,000,000 payable by Borrower to FC Consumer Lending. "Borrower Pledge Agreement" shall mean the Amended and Restated Pledge Agreement (Stock and Debt) made by Borrower in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 12.14 and each other pledge agreement with respect to shares of stock or affiliate indebtedness from time to time hereafter delivered by Borrower in respect of the Obligations., as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Borrower Security Agreement" shall mean the Amended and Restated Security Agreement made by the Borrower in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 12.14 and each other security agreement from time to time hereafter delivered by Borrower in respect of the Obligations., as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified (including, without limitation, by the addition of additional parties thereto). "Bosque" shall mean Bosque Asset Corp., a Texas corporation. -4- "Bosque Amount" at any time shall mean $2,400,000 plus the aggregate amount of Tranche I Bosque Loans (and Tranche E Loans under the Existing Agreement if prior to the Amendment Effective Date) which have been made during the period commencing December 10, 2002 and ending at such time. "Bosque Commitment Period" shall mean the period from the Amendment Effective Date until the Bosque Commitment Maturity Date. "Bosque Loan Commitment" shall mean, as to each Lender, the amount set forth opposite its name on Schedule 2.1 under the heading "Bosque Loan Commitment" as such amount may be modified by the provisions of any Transfer Supplement from time to time entered into and as the same may from time to time be reduced or terminated pursuant to Section 2.5, Section 9 or any other Section of the Agreement. "Bosque Commitment Maturity Date" shall mean the earlier of (x) March 31, 2003 and (y) such earlier date as the Bosque Loan Commitments shall terminate in full as provided in the Agreement. "Bosque Loan Request" - Section 2.5(b). "Bosque Note Agreement" - Section 10.39(a). "Bosque Notes" - Section 10.39(a). "Bosque Trustee" - Section 10.39(a). "Business Day" shall mean any day that is not a Saturday, Sunday or legal holiday in the State of New York or the State of Texas or a day on which banking institutions chartered by the State of New York, the State of Texas or the United States are legally required or authorized to close. "Calculation Date" shall mean the 25th day of each calendar month or, if sooner, the fourth to last CFCCA Business Day of any such month. "Capital Expenditures" shall mean, with respect to any Person, all expenditures by such Person which should be capitalized in accordance with GAAP, including all such expenditures with respect to fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which should be capitalized in accordance with GAAP) and the amount of obligations under Capitalized Leases incurred by such Person. -5- "Capitalized Lease" shall mean any lease which is, or is required under GAAP to be, capitalized on the balance sheet of the lessee at such time, and "Capitalized Lease Obligation" of any Person at any time shall mean the aggregate amount of rental expenses which is, or is required under GAAP to be, capitalized on the books of such Person under Capitalized Leases. "Cash Collateral Account-PFAL" shall mean each account specified in the Cash Collateral Agreement-PFAL as subject to that Agreement. "Cash Collateral Account - Servicing" shall mean shall mean the account at the Depositary specified in the Cash Collateral Agreement-Servicing and in the letter agreement between the Collateral Agent and the Depositary relating thereto or such other account, if any, which is specified in a cash collateral agreement (in form and substance satisfactory to Agent) between FC Servicing and Collateral Agent and letter agreement (in form and substance satisfactory to the Collateral Agent) between the Collateral Agent and the depositary bank with respect to such other account. "Cash Collateral Agreement-Existing" shall mean the Collateral Assignment of Account (Cash Flow Cash Collateral Account) dated as of the date hereof made by Borrower in favor of the Collateral Agent as such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Cash Collateral Agreement-PFAL" shall mean the Collateral Assignment of Account (Cash Flow Cash Collateral Account- PFAL) made by Borrower in favor of the Collateral Agent pursuant to the Portfolio Acquisition Loan Agreement, as such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified "Cash Collateral Agreement- Servicing "shall mean the Collateral Assignment of Account (FC Servicing) dated as of the date hereof made by Borrower in favor of the Collateral Agent as such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified "Cash Flow Cash Collateral Account" and "CFCCA" shall mean the account at the Depositary specified by account number in the Cash Collateral Agreement-Existing and in the letter agreement between the Collateral Agent and the Depositary relating thereto or such other account, if any, which is specified by account number in a cash collateral agreement (in form and substance satisfactory to Agent) between Borrower and Collateral Agent and letter agreement (in form and substance satisfactory to the Collateral Agent) between the Collateral Agent and the depositary bank with respect to such other account. -6- "Certified Error Certificate" shall have the meaning set forth in the form of Waterfall Certificate attached as Exhibit E (as the same may be from time to time amended, supplemented, restated or otherwise modified). "CFCCA Business Day" shall mean any Business Day that is not a day on which banking institutions in the state ( which is Connecticut and, for these purposes will remain such state until 30 days after written notice of a change of such location is delivered by Borrower to the Agent) where the CFCCA is maintained are legally required or authorized to close which is also a day on which deposits in Dollars may be dealt in on the London interbank market. "CFCCA-P" shall have the meaning ascribed to such term in the Portfolio Acquisition Loan Agreement. "CFCCA Remedies Time" shall have the meaning ascribed thereto in the Cash Collateral Agreement- Existing. "CFO", as to any Loan Party shall mean such Loan Party's chief financial officer. "CFSC" shall mean CFSC Capital Corp. XXX, a Delaware corporation. "CFSC Guaranty Subordination Agreement" - Section 10.37(a). "CFSC Intercreditor Agreement" - Section 10.37(a). "Challenged Portfolio Protection Expense" - Section 7.2(h) "Charges" shall mean all national, Federal, state, county, city, municipal and/or other governmental (or any instrumentality, division, agency, body or department thereof, including without limitation the PBGC) taxes, levies, assessments, charges, liens, claims or encumbrances upon and/or relating to the Obligations, a Person's Assets, a Person's business, a Person's ownership and/or use of any of its Assets, a Person's income and/or gross receipts and/or a Person's ownership and/or use of any of its Assets. "Charter Document" shall mean (i) with respect to a corporation: its certificate or articles of incorporation or association and its by-laws or comparable documents under non-US laws; (ii) with respect to a partnership: its partnership agreement, certificate of partnership (if a limited partnership) and its certificate of doing business under an assumed name (if a general partnership); (iii) with respect to a trust, its trust agreement or declaration of trust; and (iv) with respect to a limited liability company, its certificate of formation and operating agreement or -7- analogous documents; in each case, with such other similar documents as the Agent shall request or specify. "Closing Office" shall mean the office of the Agent at 565 Fifth Avenue, New York, New York 10017 or such other office as may be designated in writing to the Borrowers by the Agent. "Closing Office Time" shall mean the local time in effect at the Closing Office. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Collateral" - Section 10.33. Without limiting the generality of the foregoing, the term "Collateral" also includes all other real and personal property and interests therein granted or purported to be granted as security to the Agent on behalf of the Lenders pursuant to any Security Document, whether before, on or after the Amendment Effective Date. "Collateral Agent" shall mean the Agent in its capacity as agent under one or more of the Security Documents and its successor and assigns (the Agent, in such capacity, being sometimes referred to herein and in other Loan Documents as the "Collateral Agent" and sometimes as the "Agent"). "Consolidated Group" shall mean the Borrower and its consolidated Subsidiaries, other than the Harbor Debtors. "Consolidation Fee" - Section 4.3. "Default" shall mean any event which with notice or lapse of time, or both, would become an Event of Default. "Depositary" shall mean Fleet National Bank. "Dividend"- Section 8.11(a). "Dollars", "U.S. $", "$" and "U.S. dollars" shall mean the lawful currency of the United States of America. -8- "Drive Collateral Assignment" shall mean the Collateral Assignment of Partnership and LLC Interests made by FC Consumer Lending and FirstCity Funding, L.P. dated as of the date hereof and each other collateral assignment from time to time hereafter delivered by FC Consumer Lending and FirstCity Funding, L.P. in respect of the Obligations, as such agreements may be from time to time amended, extended, restated, supplemented or otherwise modified. "Drive LP" shall mean Drive Financial Services LP. "EBITDA" for any period, shall mean net income (excluding extraordinary and non-recurring items, including those which are non-cash in nature) for such period plus (i) all interest expense, plus (ii) income tax expenses, plus (iii) depreciation and amortization (including amortization of any goodwill or other intangibles), minus or plus (iv) without duplication, gains and losses attributable to any sale of assets not in the ordinary course of business, plus or minus (v) any other non-cash charges or gains which have been subtracted or added in calculating such net income other than gains on asset-securitizations and loan loss provision charges. "Environmental Laws" shall mean all laws, common law, statutes, rules and regulations, and all judgments, decrees, franchises, orders or permits, issued, promulgated, approved or entered thereunder by any Government Authority relating to pollution or protection of the environment or occupational health and safety, including, without limitation, those relating to emissions, discharges, releases or threatened releases of any waste, pollutant, chemical, hazardous material, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of any such pollutant material, substance or waste, into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any waste, pollutant, chemical, hazardous material, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste. "Equity Interests" shall mean any equity interests issued by any Person, including, without limitation, Stock (including, without limitation, common stock and preferred stock), partnership interests or limited liability company interests, any other securities convertible into, or exercisable for, any of the foregoing or other securities of such Person, and options and warrants or other rights to acquire any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any Person which is from time to time a member of a controlled group or a group under common control with any Loan Party within the meaning of Sections 414(b), 414(c), 414(m) or 414(o) of the Code or Section 4001(a)(14) of ERISA. -9- "Event of Default" shall mean each of the Events of Default defined in Section 9. "Excess Portfolio Protection Expense Amount" at any time shall mean the amount (if any) by which (A) the aggregate amount (for all Secondary Obligors) of Portfolio Protection Expenses (which term, for purposes of this definition, shall include (in addition to all amounts included as "Portfolio Protection Expenses" in the definition of such term) (x) all amounts that would constitute Portfolio Protection Expenses except that prior written notice thereof was not given to the Agent and (y) all other amounts expended by Secondary Obligors in respect of their assets (other than (for purposes of this clause (y)), amounts expended to acquire portfolios of loan receivables) and/or retained by Secondary Obligors) at such time exceeds (B) $20,000,000. "Excluded Notes" shall mean those notes listed on Schedule I-(EN). "Excluded Entity" shall mean each Person listed on Schedule I-(EE). "Excluded Initial Foreign MT" shall mean each of the following companies, but only for the period of time when the respective Net Asset Value of such company is less than $3,000,000: Adminstracion de Carteras Empresariales, S. de R. L. de C.V.; Cobranza Nacional de Carteras, S. de R.L. de C.V.; and Recuperacion de Carteras Mexican, S. de R. L. de C.V. "Executive Officer" shall mean the President of Borrower, the CFO of Borrower or any Senior Vice President of Borrower. "Existing Agreement" - first recital paragraph "Existing Loan Documents" shall mean the all agreements(other than the Existing Agreement), documents, and other instruments constituting "Loan Documents" under the Existing Agreement, other than any agreement, document or other instrument constituting a "Loan Document" hereunder. "Existing Loans"- second recital paragraph. "Existing Portfolio NPV Percentage", at any time, shall mean the decimal (expressed as a percentage) obtained by dividing (x) the aggregate outstanding principal amount of the Loans by (y) the Aggregate Net FC Equity Value. "Existing S Co." shall mean each Secondary Obligor in existence immediately prior to the Amendment Effective Date (whether or not such Person also constitutes a Secondary Obligor under the Existing Agreement). -10- "Extraordinary Transaction": shall mean (i) a sale, conveyance, lease, or other transfer by Borrower, any Primary Obligor or any Secondary Obligor of any of its Assets, not in the ordinary course of its business; (ii) a sale, conveyance, or other transfer of any previously issued Equity Interests in any Affiliate (x) by any Primary Obligor or any Secondary Obligor unless such sale, conveyance or other transfer is the functional equivalent of a sale, conveyance, lease or other transfer by such Affiliate of Assets in the ordinary course of business or (y) by Borrower; (iii) any sale, conveyance or other transfer of any Indebtedness by a Secondary Obligor unless such Indebtedness is owed to such Secondary Obligor by a Person which is not Borrower, a Primary Obligor or any Affiliate of such Secondary Obligor, and any sale, conveyance or other transfer of Indebtedness (regardless of by whom owed) by Borrower or any Primary Obligor; (iv) the issuance of any Equity Interests by Borrower, any Primary Obligor or any Secondary Obligor other than the issuance of Equity Interests by a Secondary Obligor upon formation thereof where the capital raised by such issuance is used for the acquisition of portfolio assets; (v) any transaction identified on Schedule I -(ET), (vi) receipt of any proceeds by Borrower or any Subsidiary of Borrower in respect of any sale of any Equity Interests in Drive LP or its general partner or any Subsidiary of either thereof excluding any portion of such proceeds paid to the payee of the FC Consumer Note pursuant to the FC Consumer Loan Documents, pursuant to the terms thereof as in effect on the Amendment Execution Date as amended by Permitted FC Consumer Amendments; (vii) receipt of proceeds by a Secondary Obligor of settlement or payments received from litigation other than from a collection proceeding of such Secondary Obligor in the ordinary course of business and receipt of proceeds by Borrower or any Primary Obligor of settlement or payments received from litigation , excluding (x) any such proceeds or payments payable to FC Servicing and/or its Subsidiaries in its capacity as servicer and collector of debt portfolios and (y) receipt of proceeds by FC Capital of settlement or payments received from any litigation listed on Schedule I-(LIT); or (viii) the incurrence by Borrower, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing or any Wholly-Owned Subsidiary of any Indebtedness (other than Indebtedness of an REO Affiliate to its REO Owner evidencing the purchase price of property purchased by such REO Affiliate from such REO Owner) or the receipt by any such Person of the proceeds thereof (it being understood that the inclusion for purposes of this definition of any item or transaction which is restricted or prohibited by this Agreement or any other Loan Document shall not be construed to modify or eliminate such restriction or prohibition, but is in furtherance (and not in limitation) of such restriction or prohibition) except for: (A) indebtedness incurred by any Portfolio Entity-Post AE other than a PFAL Portfolio Entity (provided that recourse for any such indebtedness is limited to such borrowing Portfolio Entity- Post AE) in connection with purchase money financing extended to such borrowing entity for the acquisition of portfolio assets in the ordinary course of business (whether secured or unsecured), (B) Indebtedness incurred under existing facilities identified on Schedule 10.20, incurred in the ordinary course of business; (C) the FC Holdings Line of Credit; -11- (D) indebtedness of the Borrower under the Portfolio Acquisition Loan Agreement up to the PA Indebtedness Limit, indebtedness of FC Commercial under the PFAL FC Commercial Pledged Note, permitted indebtedness of other Primary Obligors evidenced by Pledged Notes and indebtedness of a PFAL Portfolio Entity under Approved Portfolio Leverage Arrangements; (E) up to $16 million in indebtedness under the FC Consumer Note; or (F) Tranche I Bosque Loans. "Extraordinary Transaction Proceeds" shall mean the consideration paid with respect to any Extraordinary Transaction or the proceeds of any loan received from any Extraordinary Transaction, minus (without duplication) (w) such portion of such consideration or proceeds which, pursuant to the Intercreditor Agreement, is to be applied to obligations under a different credit arrangement, (x) such portion of such consideration required to be paid by an Existing S Co. to a Permitted Portfolio Company Creditor of an Existing S Co.; (y) if such consideration is payable to any Secondary Obligor, such portion of such consideration which exceeds the percentage thereof equal to the FC Percentage in such Secondary Obligor and (z) such other amounts for necessary and commercially reasonable expenses incurred with respect to such Extraordinary Transaction and approved by Lenders, which approval shall not be unreasonably withheld, which may include attorney's fees and payment of any indebtedness secured to by assets being conveyed payable to any independent third party lender to secure a release of a lien or security interest on such assets being conveyed. "Facility Fee" - Section 4.1. "FC Capital" shall mean FC Capital Corp., a New York corporation. "FC Capital Pledged Note" shall mean the Pledged Note dated December 12, 2002 in the stated principal amount of $2,000,000 payable by FC Capital to Borrower, as the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent. "FC Commercial" shall mean FirstCity Commercial Corporation, a Texas corporation. "FC Commercial Holdings Buy Out Notes" shall mean, collectively, the promissory note dated as of December 12, 2002 made by FC Commercial to G. Stephen Fillip, , the promissory note dated as of December 12, 2002 made by FC Commercial to Terry R. DeWitt; and , the promissory note dated as of December 12, 2002 made by FC Commercial to James C. Holmes each of which notes refers to the other such notes as "Cash Collection Notes" in each case, in the -12- form of the certified copies thereof delivered to the Agent on December 16, 2002, without giving effect to any amendment, supplement or other modification thereto. "FC Commercial Pledged Note-Existing" shall mean the Pledged Note dated May 31, 2002 in the stated principal amount of $60,000,000 payable by FC Commercial to Borrower, as the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent. "FC Consumer Collateral" shall mean the collateral securing the obligations under the FC Consumer Note pledged pursuant to the Security Documents (as defined in the FC Consumer Note) as in effect on the Amendment Execution Date. "FC Consumer Lending" shall mean FirstCity Consumer Lending Corporation, a Texas corporation. "FC Consumer Loan Documents" shall mean the "Loan Documents" as defined in the FC Consumer Note. "FC Consumer Note" shall mean that certain Promissory Note in the principal amount of $16,000,000 dated December 16, 2002 made by FC Consumer Lending to the order of The Governor & Company of the Bank of Scotland. "FC Equity Value" of any Existing S Co. or Mid Tier Company Post-AE which is not a PFAL Portfolio Entity (any such Mid-Tier Company, an "Applicable Mid-Tier Company") shall mean the amount determined by multiplying (A) the FC Percentage in such Existing S Co. or Applicable Mid-Tier Company by (B) the amount by which (x) the Net Present Value of the assets of such Existing S Co. or Applicable Mid-Tier Company (other than assets consisting of Equity Interests issued by any other Secondary Obligor) exceeds (y) the sum of outstanding principal amount of Indebtedness of such Existing S Co. or Applicable Mid-Tier Company (as the case may be) plus (without duplication) the outstanding principal amount of all obligations in respect of which such Existing S Co. or Applicable Mid-Tier Company (as the case may be) has issued any Guaranty Equivalent. "FCHM Collateral Assignments" shall mean the Partnership Interest and Limited Liability Company Interest Collateral Assignment Agreement made by FirstCity Holdings Corporation of Minnesota ("FCHM") dated as of the date hereof and each other collateral assignment from time to time hereafter delivered by FCHM in respect of the Obligations, as such agreements may be from time to time amended, extended, restated, supplemented or otherwise modified. -13- "FCHM Pledge Amount" shall mean the Pledge Agreement (Stock and Debt) made by FCHM dated as of the date hereof and each other pledge agreement from time to time delivered hereafter by FCHM in respect of the Obligations, as such agreements may be from time to time amended, extended, restated, supplemented or otherwise modified "FC Holdings" shall mean FirstCity Holdings Corporation, a Texas corporation. "FC Holdings Line of Credit" shall mean, subject to Section 8.27, the loans made by CFSC to FC Holdings pursuant to the Holdings/CFSC Loan Agreement. "FC International" shall mean FirstCity International Corporation, a Texas corporation. "FC Mexico" shall mean FirstCity Mexico, Inc., a Texas corporation. "FC Percentage" with respect to any Secondary Obligor shall mean the percentage of outstanding shares of stock, limited liability company interests or partnership interests (or, in the case of a non-US entity, similar equity interests) of such Secondary Obligor owned directly or indirectly by the Borrower. "FC Servicing" shall mean FirstCity Servicing, Inc., a Texas corporation. "FC Servicing Pledged Note" shall mean the Pledged Note dated December 12, 2002 in the stated principal amount of $2,000,000 payable by FC Servicing to FC Commercial, as the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent. "Federal Funds Rate" shall mean the rate of interest charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. "Fee Agreements" shall mean any partnership agreement, management agreement, consulting agreement, or other agreement pursuant to which Borrower, any Primary Obligor or any Secondary Obligor is to be paid fees, distributions, allocations, expense reimbursements, consideration, salary or other compensation in consideration for providing management, personnel or services, in any form whatsoever, from any Affiliate or from any other Person. Services to be rendered under Fee Agreements may include, but not be limited to consulting, collecting revenues, paying operating expenses not paid directly by others, and providing clerical and bookkeeping services. -14- "Fee Agreement-Existing" shall mean each Fee Agreement in existence on the Amendment Effective Date, each agreement in full or partial substitution or replacement thereof, and each other Fee Agreement relating to any Existing S Co. or any assets thereof. "Fee Letter" shall mean the letter dated December 16, 2002 from Borrower to the Agent regarding the facility fee in respect of this Agreement. "Financial Statements" shall mean, with respect to any Person, the statement of financial position (balance sheet) and the statement of earnings, cash flow, and stockholders' (or partners' or members) equity of such Person. "First B" shall mean First B Realty L.P., a Texas limited partnership. "First X" shall mean First X Realty L.P., a Texas limited partnership. "Fiscal Year" shall mean each January 1 to December 31 period. "Fiscal Year" followed by a year means the Fiscal Year with its Fiscal Year-End in such calendar year. "French Acquisition Entity" shall mean a European entity formed for the purpose of acquiring, owning and managing assets acquired from one or more French financial institutions. "GAAP" shall mean generally accepted accounting principles (as promulgated by the Financial Accounting Standards Board or any successor entity) in the United States provided, that when with respect to a Person which is not a US Person, GAAP shall mean the equivalent in such Person's jurisdiction of organization. "Government Authority" shall mean any nation or government, any state or political subdivision thereof, any agency, authority, regulatory body, bureau, central bank, commission, department or instrumentality of any of the foregoing or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor" shall mean any Person which is a guarantor under any Guaranty. "Guaranty" shall mean any one or more of the guaranties or amended and restated guaranties delivered pursuant to Section 12.14 and each other guaranty agreement delivered in respect of the Obligations., as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. -15- "Guaranty Equivalent" shall mean any agreement, document or instrument pursuant to which a Person directly or indirectly guarantees, becomes surety for, endorses, assumes, agrees to indemnify the obligee of any other Person against, or otherwise agrees, becomes or remains liable (contingently or otherwise) for, such obligation, other than by endorsements of instruments in the ordinary course of business. Without limitation, a Guaranty Equivalent shall be deemed to exist if a Person agrees, becomes or remains liable (contingently or otherwise), directly or indirectly: (i) to purchase or assume, or to supply funds for the payment, purchase or satisfaction of, an obligation; (ii) to make any loan, advance, capital contribution or other investment in, or a purchase or lease of any property or services from, a Person; (iii) to maintain the solvency of such Person; (iv) to enable such Person to meet any other financial condition; (v) to enable such Person to satisfy any obligation or to make any payment; (vi) to assure the holder of an obligation against loss; (vii) to purchase or lease property or services from such Person regardless of the non-delivery of or failure to furnish of such property or services; or (viii) in respect of any other transaction the effect of which is to assure the payment or performance (or payment of damages or other remedy in the event of nonpayment or nonperformance) of any obligation. "Harbor Debtors" shall mean, collectively, (i) Harbor Financial Mortgage Corp., (ii) NAF, Inc. (f/k/a New America Financial, Inc.), (iii) Hamilton Financial Services Corp., (iv) Community National Mortgage Corp., (v) CalCap, Inc., and (vi) Harbor Financial Group, Inc., and any Subsidiary of such Person. "Harbor Proceedings" shall mean the jointly administered Chapter 11 bankruptcy cases, bearing Case No. 99-37255-SAF-11, styled as In Re Harbor Financial Group, Inc., et al., pending in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, as converted to a Chapter 7 proceeding on December 14, 1999, under which the Harbor Debtors are operating as debtors-in-possession. "Holdings Buy Out Portion" shall mean, (x) on any Transfer Date on which the full amount required under Section 8.29(e) to be transferred from the Cash Collateral Account- Servicing to the CFCCA is so transferred, (i) 20% (or such lesser percentage thereof as may then be required to be paid under the FC Commercial Holdings Buy Out Notes) of the total amount of incentive servicing fees or consulting fees under any consulting agreement entered into by FC Servicing in connection with its Mexican operations which have been received by FC Servicing and deposited in the Cash Collateral Account-Servicing during the period from and excluding the Transfer Date immediately preceding the Transfer Date (the "Current Transfer Date") in respect of which the Holdings Buy-Out Portion is being calculated (or, in the case of the Transfer Date occurring in December, 2002, from and excluding December 16, 2002) to and including the Current Transfer Date (excluding any amounts received on the Current Transfer Date after any transfer is made from the Cash Collateral Account-Servicing to the CFCCA on such day) or, if less (ii) the aggregate amount required to be paid on such Transfer Date under the FC Commercial Holdings Buy Out Notes and (y) on any other Transfer Date, zero. "Holdings/CFSC Loan Agreement":- Section 10.37(a). -16- "Holdings/CFSC Loan Documents": Section 10.37(b). "Incidental Equity Interests" shall mean Equity Interests in a Person acquired by a Secondary Obligor in settlement of collection of an asset in the portfolio of such Secondary Obligor if such Equity Interests so acquired (i) constitute Equity Interests in a Person engaged in a business unrelated to the business of the Consolidated Group and such Person is not Borrower or an Affiliate of Borrower or a Person in which or in an Affiliate of which any other Equity Interest is owned by Borrower, any Primary Obligor or any Secondary Obligor at the time such Equity Interest is so acquired; (ii) which Equity Interests have a value of less than $500,000; and (iii) which Equity Interests constitute less than 50.1% of the class of Equity Interests in the issuer thereof of which such Equity Interests are a part or such lower percentage of any such class of equity interests which results in control of such Person. "Indebtedness" shall mean, with respect to any Person (without duplication): (i) all obligations on account of money borrowed by, or credit extended to or on behalf of, or for or on account of deposits with or advances to, such Person; (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (iii) all obligations of such Person for the deferred purchase price of property or services other than trade payables incurred in the ordinary course of business and on terms customary in the trade and not more than sixty (60) days past due; (iv) all obligations secured by a Lien on property owned by such Person (whether or not assumed); and all obligations of such Person under Capitalized Leases (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such Capitalized Lease to repossession or sale of such property); (v) the face amount of all letters of credit issued for the account of such Person and, without duplication, the unreimbursed amount of all drafts drawn thereunder, and all other obligations of such Person associated with such letters of credit or draws thereon; (vi) all obligations of such Person in respect of acceptances or similar obligations issued for the account of such Person; (vii) all obligations of such Person under a project financing or similar arrangement; (viii) all obligations of such Person under any interest rate or currency protection agreement, interest rate or currency future, interest rate or currency option, interest rate or currency swap or cap or other interest rate or currency hedge agreement; and (ix) all obligations and liabilities with respect to unfunded vested benefits under any "employee benefit plan" or with respect to withdrawal liabilities incurred under ERISA by Borrower or any ERISA Affiliate to a "multiemployer plan", as such terms are defined under the Employee Retirement Income Security Act of 1974. "Indebtedness Instrument" shall mean any note, mortgage, indenture, chattel mortgage, deed of trust, loan agreement, hypothecation agreement, Guaranty Equivalent, pledge agreement, security agreement, financing statement or other document, instrument or agreement evidencing or securing the payment of or otherwise relating to the borrowing of monies. Indebtedness Instruments shall include, but not be limited to the Loan Documents. "Indemnified Party" - Section 12.3. -17- "Intercreditor Agreement" shall mean the Intercreditor Agreement dated as of December 16, 2002 among the Agent, the PFAL Agent and the initial payee of the FC Consumer Note, as such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Interest Coverage" shall mean, for any period, total interest expense (including that attributable to Capital Leases under GAAP) of the Consolidated Group on a consolidated basis determined in accordance with GAAP. "IRS" shall mean the Internal Revenue Service of the United States. "Itemized PPE Amount" - Section 7.2(h). "Legal Requirements" shall mean, with respect to any Person, all laws, common law, statutes, rules and regulations of any Government Authority to which such Person or any of its assets is subject or any judgment, decree, franchise, order or permit of any Government Authority applicable to such Person or any of its assets. "Lender Assignee" - Section 12.4(a). "Lenders" - introductory paragraph. "Lien" shall mean any mortgage, deed of trust, security deed, pledge, security interest, encumbrance, lien or other charge of any kind or any other agreement or arrangement having the effect of conferring security (including any agreement to give any of the foregoing, any assignment or lease in the nature thereof, and any conditional sale or other title retention agreement), any lien arising by operation of law, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction (or any similar or comparable law of any jurisdiction that has not enacted the Uniform Commercial Code). "Loan(s)" shall mean, individually and collectively, each or all, as the context may indicate, of the Tranche I Loans and the Tranche II Loans. "Loan Agreement" shall mean this Amended and Restated Loan Agreement, as amended and restated on and as of the Amendment Effective Date and as it may from time to time be amended, extended, restated, supplemented or otherwise modified. "Loan Documents" shall mean, individually and collectively, this Agreement, the Notes, the Fee Letter, the Rate Fix Letter, the Guaranties, the Pledge Agreements, the Security -18- Agreements, the other Security Documents and all other instruments and agreements heretofore or from time to time hereafter executed by or on behalf of Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party in connection herewith or therewith, in each case as amended, extended, restated, supplemented or otherwise modified from time to time. Without limiting the generality of the foregoing, each amendment to (or constituting part of) this Agreement or any other Loan Document and each instrument and agreement (including, without limitation, consents or waivers, but excluding any amendment, consent or waiver executed prior to the Amendment Effective Date) executed in connection with any Loan Document shall be deemed to be a Loan Document for all purposes of the Agreement and the other Loan Documents. "Loan Party" shall mean, individually and collectively, the Borrower, each Primary Obligor and each other party to any Loan Document (other than the Agent, any Lender or any Harbor Debtor and other than (x) a Person which has executed a Loan Document solely to consent to or acknowledge the same (and not as a party thereto) and has not executed that or any other Loan Document in any other capacity or for any other purpose) or (y) a Person which has delivered a certificate certifying as to the accuracy and completeness of a Charter Document and has not executed any other Loan Document). For avoidance of doubt, in addition to the Borrower and each Primary Obligor, each Person which has executed any Security Document as a pledgor or grantor of collateral thereunder and each person executing any guaranty of all or any part of the Obligations shall constitute a Loan Party. "Majority Lenders" as of a particular date shall mean the holders of at least 51% of the aggregate unpaid principal amount of all Loans at the particular time outstanding or, if no Loans are then outstanding, Banks whose Bosque Loan Commitments aggregate at least 51% of the Total Bosque Loan Commitment. "Management Letter" shall mean any correspondence or report submitted by the Auditors to a Loan Party's chief executive officer, its Board of Directors or any committee thereof containing comments and suggestions concerning a Loan Party's accounting procedures and systems based upon the work done by the Auditors during their annual or other audit. "Material Adverse Change" shall mean a material adverse change in (i) the business, properties, operations, prospects or condition (financial or otherwise) of the Borrower and/or any of its Subsidiaries, any Primary Obligor or any Secondary Obligor or (ii) the ability of the Borrower or any other Loan Party to perform, or of the Agent to enforce, any of the Obligations. "Material Adverse Effect" shall mean an effect that would result in a Material Adverse Change. "Maturity Date (Tranche I )" shall mean November 30, 2006. -19- "Maturity Date (Tranche II)" shall mean December 17, 2007. "MCS" shall mean MCS et Associes S.A. "Mexican Investment Entity" shall mean one or more corporations or limited partnerships existing on the Amendment Effective Date organized under the laws of the State of Texas formed for the sole purpose of investing in one or more limited liability companies formed by FC Holdings or such Mexican Investment Entity and one or more of Cargill Financial Services International, Inc., Cerberus Capital Management Inc., Promecap S.C. and Ficen S.A. de C.V. "Mexican Acquisition Entity" shall mean a Mexican entity formed for the purpose of acquiring, owning and managing assets acquired from one or more Mexican financial institutions. "Mexican Acquisition Entity-Post AE" shall mean a Mexican entity, other than a PFAL Portfolio Entity, which is formed after the Amendment Effective Date for the purpose of acquiring, owning and managing assets acquired from one or more Mexican financial institutions. "Mexican Lending Entity" shall mean one or more corporations or limited partnerships existing on the Amendment Effective Date organized under the laws of the State of Texas for the sole purpose of making loans to a Mexican Acquisition Entity. "Mexican Lending Entity-Post AE" shall mean a corporation or limited partnership, other than a PFAL Portfolio Entity, organized under the laws of the State of Texas after the Amendment Effective Date for the sole purpose of making loans to a Mexican Acquisition Entity. "Mid-Tier Company" shall mean each Person listed on Schedule I-(MT) (each such Person, a "Listed MT") and each other Secondary Obligor (other than an Excluded Initial Foreign MT and any other Person (if any) specified by the Agent in writing as not constituting a Mid-Tier Company ) with a Net Asset Value of $2,000,000 or more and each general partner or manager or member (or foreign equivalent) of any of the foregoing Persons (other than any such partner, manager, member or equivalent which is the Borrower or a Primary Obligor) and each other Secondary Obligor directly or indirectly owning any Equity Interests in any of the foregoing Persons (each such general partner, manager, member or other owner of Equity -20- Interests, an "MT Owner"), each Listed MT and MT Owner thereof to continue at all times to constitute a Mid-Tier Company (regardless of such Listed MT's Net Asset Value or the Net Asset Value of any MT Owner thereof). Any Person, other than a Listed MT or any MT Owner thereof, which at any time so constitutes a Mid-Tier Company shall continue to constitute a Mid-Tier Company until the time (if any) when the Borrower sends to the Agent written notice (a "Redesignation Notice") executed by an Executive Officer of Borrower certifying, as to such Person that the Net Asset Value of such Person (the "Subject MT") and its MT Owners is below $2,000,000 and has been below $2,000,000 for the preceding period of 90 consecutive day or more, and requesting that such Subject MT and, if specified, its MT Owners no longer constitute Mid-Tier Companies. Provided that the Borrower provides such additional information, if any, that the Agent may request with respect to such Subject MT and its MT Owners and that the Agent has not given the Borrower notice that it disputes such redesignation of such Subject MT and, if so specified by Borrower, MT Owners, within 30 days after receiving such Redesignation Notice or, if later, within 30 days after the Agent received additional information (if any) requested by it with respect to such requested redesignation, the Subject MT and such specified MT Owners (in each case, provided that no such Subject MT or MT Owner is a Listed MT or MT Owner thereof or MT Owner of any other Mid-Tier Company) shall cease to constitute a Mid-Tier Company (until, the time, if any, that such Subject MT (and/or any MT Owner thereof) again satisfies the criteria applicable to Mid-Tier Companies). For avoidance of doubt, the foregoing redesignation procedures shall not apply to any Listed MT or to any Secondary Obligor directly or indirectly owning any Equity Interests in any Listed MT "Mid-Tier Company Post AE" shall mean a Mid-Tier Company formed after the Amendment Effective Date. "Minn Servicing" shall mean FirstCity Serving of Minnesota, Inc. "Multiemployer Plan" shall mean any employee benefit plan which is a "multiemployer plan" within the meaning of Section 3(37) of ERISA and to which any Loan Party or any ERISA Affiliate of either Borrower contributes or has been obligated to contribute. "Net Asset Value" shall mean, with respect to any Person, the amount determined by multiplying (x) the FC Percentage in respect of such Person and (y) the Net Present Value of the assets of such Person. "NCF Extra" shall mean each amount constituting Collections of an Asset Pool under the Portfolio Acquisition Loan Agreement received at a time when no term loans are outstanding under such agreement or when any portion of 75% of the FC Percentage of such Collections would not be required to be used to repay term loans thereunder. "Net Cash Flow" shall mean all of the following (without duplication): -21- (i) all payments received by the Borrower and all payments received by any Primary Obligor on any Pledged Note or any other note or indebtedness other than, if such payment is received during a PFAL Only Time, a payment the source of which is a PFAL Portfolio Entity; (ii) each dividend or other distribution received by Borrower or any Primary Obligor from any Existing S Co. or, unless the same is specifically excluded from the definition of Applicable Cash Flow, any other Secondary Obligor; (iii) all funds released or otherwise paid to FC Holdings pursuant to the Holdings/CFSC Loan Agreement; (iv) all payments received by Borrower or any Primary Obligor from any Fee Agreement; and (v) all other amounts received by Borrower, any Primary Obligor (other than FC Servicing, to the extent constituting Servicing Restricted Funds), each other direct Subsidiary of Borrower and any Wholly-Owned Subsidiary with no Permitted Portfolio Company Creditor other than (i) any such amount constituting Extraordinary Transaction Proceeds; (ii) any such amount constituting Collections of an Asset Pool under the Portfolio Acquisition Loan Agreement -Existing (other than any such amount constituting NCF-Extra hereunder); (iii) any distribution made by Drive LP required by the Agreement Among Members (Drive General Partner) dated as August 18, 2000, as amended, among IFA Drive GP Holdings LLC, FC Consumer Lending and Drive Management LP to be reloaned to Drive LP; and (iv) any payments received by FC Capital used to repay outstanding accounts payable of FC Capital which are listed on Schedule I-FC hereto. "Net Present Value" of any property shall mean the value thereof as discounted pursuant to the criteria set forth in Exhibit 1-D to the Portfolio Acquisition Loan Agreement-Existing. "Net Receipts" shall mean (x) the gross amount (the "Gross Amount") of all payments, dividends and other amounts received by a Secondary Obligor minus (y) the sum of (i) any portion of the Gross Amount required to be paid to a Permitted Portfolio Company Creditor of such Secondary Obligor within 30 days of receipt thereof, (ii) any portion of the Gross Amount required to be held by such Secondary Obligor pursuant to a Usage Leverage Covenant; (iii) a reasonable amount for operating expenses of such Secondary Obligor; (iv) any portion of the Gross Amount constituting Extraordinary Transaction Proceeds; (v) Portfolio Protection Expenses which are not included in the computation of Aggregate Undistributed Secondary Obligor Funds under clause (x) of the definition thereof as a result of clause (x) (iii) thereof and (vi) in the case of Minn Servicing, any portion of the Gross Amount constituting Servicing Restricted Income plus (z) any portion of any amount previously subtracted from the Gross Amount (1) to pay a Permitted Portfolio Company Creditor which was not so paid to such -22- Person; (2) to satisfy a Usage Leverage Covenant which is no longer required to satisfy such covenant; (3) to pay operating expenses which have not been paid and are no longer reasonably necessary or (4) to fund any obligation which had constituted but no longer constitutes an Obligor Funding Obligation. "Non-Default Voluntary Custodial Arrangement" shall mean an arrangement to perfect a lien in favor of the Agent or the holder of a different Permitted Lien, in each case, on certain specified Assets of a Person entered into voluntarily by a Secondary Obligor at a time when no Default or Event of Default has occurred and is continuing. "Notes" shall mean the Tranche I and Tranche II Notes. "Obligations" shall mean (x) with respect to each Loan Party other than the Borrower, all obligations of such Loan Party with respect to the repayment or performance of any obligations (monetary or otherwise) of the Borrower arising under or in connection with this Agreement, the Notes or any other Loan Document, and (y) with respect to the Borrower, all obligations of Borrower with respect to the repayment or performance of obligations (monetary or otherwise) arising under or in connection with this Agreement, the Notes or any other Loan Document. "Obligor Funding Obligations" shall mean obligations (whether pending, contingent or otherwise) of a Secondary Obligor to make one or more advances to a Person which is the obligor of one or more outstanding loans the rights to which were acquired by such Secondary Obligor pursuant to a purchase by such Secondary Obligor of a portfolio of loans made by one or more Persons who are not Affiliates or Associates of the Borrower or of such Secondary Obligor; provided that such obligation to make an advance was not at any prior time an obligation of an Affiliate or Associate of the Borrower or such Secondary Obligor. "Operating Account" shall mean account no. 7300044156 at Bank of America (which Borrower represents and warrants is its operating account on the Amendment Execution Date) and such other accounts that Borrower may from time to time maintain as operating accounts of which the Borrower shall give the Agent written notice (which shall include the account number and depositary institution and location of such account). "Original Closing Date" shall mean December 20, 1999. "Other Laws" - Section 3.4. "PA Indebtedness Limit" shall mean $54 million of term loans and $5 million of revolving loans incurred by Borrower under the Portfolio Acquisition Loan Agreement. -23- "PA Lenders" shall mean the financial institutions from time to time party, as lenders, to the Portfolio Acquisition Loan Agreement. "Parent" shall mean any Person now or at any time hereafter owning or controlling (alone or with Borrower, any Subsidiary and/or any other Person) at least a majority of the issued and outstanding Stock or other ownership interest of Borrower or any Subsidiary. For purposes of this definition, "control" shall have the same meaning ascribed to such term in the definition of "Affiliate". Notwithstanding the forgoing, no Person shall be a Parent which is not a Parent of Borrower or a 51% or more owned subsidiary, directly or indirectly, of Borrower. "Past-Due Rate" - Section 3.3. "Payment Date" - Section 2.3(b). "Payment Installment Date" - Section 2.3(a). "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA. "Pension Plan" shall mean any employee pension benefit plan subject to Title IV of ERISA and maintained by any Loan Party or any ERISA Affiliate of any Loan Party or any such plan to which any Loan Party or any ERISA Affiliate is or has been required to contribute on behalf of any of its employees, other than a Multiemployer Plan. "Permitted FC Consumer Amendments" shall mean any amendment, supplement or other modification to the FC Consumer Note which (i) is consented to in writing by the Majority Lenders or (ii) does not increase the principal amount of loans under the FC Consumer Loan Documents or increase the interest rate or increase or impose any fee or other payment obligation on the FC Consumer Lending. "Permitted Liens" shall mean (i) any liens created pursuant to the Loan Documents in favor of Agent for the benefit of Lenders and Agent to secure the Obligations; (ii) liens for Charges which are not yet due and payable, or claims and unfunded liabilities under ERISA not yet due and payable or which are being contested in good faith by appropriate proceedings diligently pursued; (iii) liens arising in connection with worker's compensation, unemployment insurance, old age pensions and social security benefits which are not overdue or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest any proceedings commenced for the enforcement of such lien shall have been duly suspended and such provision for the payment of such lien has been made on the books of the Borrower (or the applicable Affiliate) as may be required by GAAP; (iv) liens incurred in the ordinary course of business to secure the performance of statutory obligations -24- arising in connection with progress payments or advance payments due under contracts with the United States Government or any agency thereof entered into in the ordinary course of business; (v) any liens securing Indebtedness of Borrower (or any Affiliate) to any Persons in an aggregate amount less than $200,000; (vi) Charges relating to Assets of First B and First X; (vii) as to any Affiliate, other than Borrower, a Primary Obligor or Existing S Co, purchase money liens securing permitted indebtedness incurred in connection with the acquisition of Assets and other indebtedness incurred under the credit agreement under which such permitted indebtedness to acquire such assets was incurred so long as such liens encumber only the Assets acquired, (viii) as to any Affiliate, other than Borrower or a Primary Obligor or an Existing S Co, liens relating to permitted Indebtedness incurred in connection with the warehousing of assets or the securitization of Assets, so long as such liens encumber only the Assets warehoused or securitized; (ix) those liens disclosed on Schedule I-(PL) (x) those liens granted to CFSC in the Shared Collateral pursuant to the Holdings/CFSC Loan Documents (as in effect on the date of the execution and delivery of the Holdings/CFSC Loan Documents); (xi) liens on assets of a PFAL Portfolio Entity in favor of the Person providing financing under an Approved Portfolio Leverage Arrangement in respect of the acquisition of assets acquired pursuant to such Approved Portfolio Leverage Arrangement to the extent such liens are required by, and secure only obligations under, such Approved Portfolio Leverage Arrangement; and (xii) liens on the FC Consumer Collateral securing the obligations under the FC Consumer Note as in effect on the Amendment Effective Date and as amended, supplemented or otherwise modified by Permitted FC Consumer Amendments. "Permitted Portfolio Company Creditor" shall mean (i) with respect to an Existing S Co., those creditors listed on Schedule I-(PFC) alongside the details of the related credit arrangement, (ii) with respect to a PFAL Portfolio Entity, those creditors of such entity which are permitted by the Portfolio Acquisition Loan Agreement-Existing in respect of permitted credit arrangements thereunder and (iii) with respect to any other Portfolio Entity-Post AE, any other creditor of such entity which has provided permitted indebtedness to such entity but only in respect of and to the extent of such permitted indebtedness. "Permitted Restrictions" on the payment of dividends by a Person shall mean provisions of a loan agreement, as in effect when first entered into, to which such Person is a party as borrower which prohibit such Person from paying dividends for either of the following reasons: (x) the funds restricted from being distributed are required to satisfy a leverage or required reserve amount covenant (but only if such covenant would not reasonably be expected to significantly impair such Person's ability to pay dividends if anticipated cash flows are received as and when anticipated and in approximately the amounts anticipated); and (y) such dividends are restricted when there exists an event of default of a customary type to be found in such agreements and that also permits the relevant lender to accelerate the maturity of indebtedness outstanding under such agreement. -25- "Permitted Shareholder Agreement" shall mean a Shareholder Agreement entered into after the Amendment Execution Date with terms permitted by Exhibit 1-C of the Portfolio Acquisition Loan Agreement-Existing (with any reference therein to FC Commercial being deemed, for purposes of this definition, to refer to the applicable Primary Obligor). "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, a trust, an unincorporated association, a joint venture or other entity or a government or an agency or political subdivision thereof. "PFAL Agent" shall mean the "Agent" under the Portfolio Acquisition Loan Agreement. "PFAL FC Commercial Pledged Note" shall mean each "Pledged Note" (as defined in the Portfolio Acquisition Loan Agreement-Existing) delivered to the Collateral Agent to evidence advances made by Borrower to FC Commercial pursuant to the Portfolio Acquisition Loan Agreement, as the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent. "PFAL Lenders" shall mean the financial institutions from time to time party to the Portfolio Acquisition Loan Agreement as "Lenders" thereunder. "PFAL Only Time" shall have the meaning ascribed to such term in the definition of "Applicable Cash Flow". "PFAL Portfolio Entity" shall mean any Portfolio Entity-Post AE in respect of the acquisition by which of any assets loans were requested and made to Borrower under the Portfolio Acquisition Loan Agreement. "PFAL Loan Document" shall mean a "Loan Document" as defined in the Portfolio Acquisition Loan Agreement. "PFAL Note" shall mean a "Note" as defined in the Portfolio Acquisition Loan Agreement. "PFAL Revolver" shall mean the revolving credit facility included in the Portfolio Acquisition Loan Agreement. -26- "PFAL Termination Date" shall mean the date on which all obligations to the lenders under the Portfolio Acquisition Loan Agreement have been paid and all commitments of the lenders thereunder terminated. "Plan" shall mean any "employee benefit plan" (within the meaning of Section 3(3) of ERISA) maintained by any Loan Party or any ERISA Affiliate or any such plan to which any Loan Party or any ERISA Affiliate is or has been required to contribute on behalf of any of its employees, other than a Multiemployer Plan. "Pledge Agreement" means each of (or, as the context requires, any of) the Borrower Pledge Agreement, Subsidiary Pledge Agreement, Subsidiary Collateral Assignment, the FCHM Pledge Agreement, FCHM Collateral Assignment and the Drive Collateral Assignment and any other pledge agreement made for the benefit of the Lenders (and, if therein specified, the PFAL Lenders). "Pledged Entities" shall mean those entities any Equity Interest in which has been pledged to the Agent to secure the Obligations. "Pledged Notes" shall mean those certain promissory notes listed on Schedule I-PN which have been delivered to the Agent and in which the Collateral Agent holds a perfected security interest of the Requisite Priority pursuant to a Pledge Agreement to which the Collateral Agent is a party. "Pledged Note-Existing" shall mean a Pledged Note (other than a Bosque Note) which was executed prior to the Amendment Effective Date and each note (other than a Bosque Note) which is delivered with the consent of the Agent in full or partial substitution for or replacement of any other Pledged Note-Existing, as the any of the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent. "Pledged Property" shall mean any and all property (real, personal or intangible) pledged by Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party to secure payment and performance of the Obligations, including but not limited to: (i) any and all Collateral under any Security Agreement; and (ii) any and all property pledged under any Pledge Agreement. "Portfolio Acquisition Loan Agreement" shall mean the Term Loan and Revolving Credit Agreement dated as of the date hereof among the Borrower, Bank of Scotland, acting through its New York branch, as agent and the lenders from time to time party thereto, as from time to time amended, extended, restated, supplemented or otherwise modified. -27- "Portfolio Acquisition Loan Agreement - Existing" shall mean the Portfolio Acquisition Loan Agreement as in effect on the Amendment Effective Date as amended, supplemented, or otherwise modified with the written consent of the Majority Lenders, without giving effect to any amendment, supplement or other modification thereto not consented to in writing by the Agent or the Majority Lenders (references herein to actions and conditions permitted by the Portfolio Acquisition Loan Agreement- Existing being construed to mean, unless the same has been approved in writing by the Majority Lenders, permitted thereby without the obtaining of, or the requirement to obtain, any consent or waiver of the PFAL Agent, any lenders party to that Agreement or any other Person). "Portfolio Entity-Post AE" shall mean any Secondary Obligor, other than an REO Affiliate, formed or in which Borrower first acquired a direct or indirect interest on or after the Amendment Effective Date. "Portfolio Protection Expenses" with respect to a Secondary Obligor shall mean expenses or other amounts of which the Agent has been given prior written notice which (w) such Secondary Obligor has reasonably determined are necessary to advance to one of its REO Affiliates for reasonable and necessary expenses to preserve or protect real property owned by such REO Affiliate or (x) constitute reasonable and customary, necessary leasing commissions, reasonable and necessary tenant improvement costs paid by such Secondary Obligor or REO Affiliate pursuant to a written lease or capital improvements to such property required in order for the property to be so leased or (y) such Secondary Obligor has reasonably determined are necessary to protect other assets securing indebtedness owed to such Secondary Obligor, or (z) constitute Obligor Funding Obligations, such expenses or other amounts to constitute Portfolio Protection Expenses when amounts therefor are retained by such Secondary Obligor or REO Affiliate or, if earlier, when such expenses or other amounts are paid, but shall cease to constitute Portfolio Protection Expenses other than for purposes of the Portfolio Protection Expense Report if such expenses or other amounts remain unexpended but the purpose for which the same were originally retained is no longer applicable and such expenses or other amounts are not being retained for a different purpose set forth above of which the Agent has been given prior written notice. "Portfolio Protection Expense Report"- Section 7.2(h). "Primary Obligors" shall mean, collectively, (i) FC Commercial; (ii) FC Capital; (iii) FC Consumer Lending; (iv) FC Servicing: (v) FC Holdings; (vi) FC International; and (vii) FC Mexico. "Purchasing Lenders" - Section 12.4(c). "Rate Fix Letter" shall mean the letter dated December 15, 2002 from Borrower to the Agent regarding the fixing of the interest rate for the Tranche II Loans -28- "Rate of Borrowing" - Section 3.6. "Records" shall mean all books, records, computer records, computer software, ledger cards, programs and other computer materials, customer and supplier lists, invoices, orders and other property and general intangibles at any time evidencing or relating to Assets. "Recoveries" shall mean any funds, or substitution of receipts or collateral, received by the Lenders or the Agent (a) from the sale, collection or other disposition of Collateral pursuant to the Security Documents, or (b) from any distribution to any of the Lenders or the Agent, or abandonment to any of them, or substitute Liens or payment given to any of them pursuant to events or proceedings of the nature referred to in Section 9.9 of the Agreement, or otherwise, which distribution or abandonment pertains to the Collateral. "Regulatory Change" means, relative to any Lender or the Agent, any change after January 1, 2002 in any (or the adoption after January 1, 2000 of any new): (a) United States Federal, state or local law or foreign law applicable to the Agent or such Lender; or (b) regulation, interpretation, directive, or request (whether or not having the force of law) applying to the Agent or any Lender of any Government Authority charged with the interpretation or administration of any law referred to in clause (a) or of any fiscal, monetary, central bank or other authority having jurisdiction over the Agent or such Lender. "REO Affiliate" shall mean a Person, other than Borrower, a Primary Obligor or a Mid-Tier Company, which is a corporation, limited liability company or partnership 100% of the Equity Interests in which are owned by a Secondary Obligor (the "REO Owner") (or, in the case of such an entity which is a limited partnership, 100% of the limited partnership interest of which is owned by the REO Owner and 100% of the interest in the general partner is owned by the REO Owner), which Person has been established solely to acquire from the REO Owner title to (and owns no assets other than) parcels of real property (or distressed notes secured by real property for purposes of obtaining title to real property securing such loans) in exchange for, with respect to each such parcel, a promissory note in a principal amount no less than 96% of the value (as reasonably determined by the REO Owner and the REO Affiliate) of the property provided that no Person shall constitute or continue to constitute an REO Affiliate if (A) such Person acquires property from any Person other than (x) the REO Owner, (y) in the case where it has acquired a note from the REO Owner solely for purposes of acquiring title to the real property securing such note, the obligor of such note; or (z) except in the case of an REO Affiliate which is an Existing S Co. or an REO Affiliate of an Existing S Co., any other seller of real property securing distressed notes or (B) engages in any business other than business incidental to owning and selling the parcels of real property so acquired by such REO Affiliate. -29- "Repayment Fee" - Section 4.2. "Reportable Event" shall mean a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder. "Requisite Priority" shall mean (x) except with respect to the Shared Collateral and except as set forth in the Intercreditor Agreement, first priority and (y) with respect to Shared Collateral second priority, subject only to the liens of CFSC to which the Agent and the Lenders are subordinate pursuant to the CFSC Intercreditor Agreement. "SEC" shall mean the Securities and Exchange Commission. "Secondary Obligor" shall mean each entity identified on Schedule I-(SO), as well as, subject to the final sentence of this definition, any other entity, other than a Primary Obligor, any Equity Interest (other than Equity Interests constituting Incidental Equity Interests) of or in which is owned by Borrower, any Primary Obligor or any other Secondary Obligor. Notwithstanding the foregoing, no Tier IV Company or Tier V Company or any Harbor Debtor shall constitute a Secondary Obligor. "Secondary Obligor-R" shall mean any Secondary Obligor 50% or more of the voting interests or any class of other Equity Interests of which are owned directly or indirectly by Borrower. "Secondary Obligor-Existing" means each entity identified on Schedule I-(SOX) and each successor thereof. "Securities" shall have the meaning ascribed to that term in the Securities Act of 1934. "Securities Laws" shall mean all applicable Federal and state securities laws and regulations promulgated pursuant thereto. "Security Agreements" shall mean any one or more of the security agreements or amended and restated security agreements delivered pursuant to Section 12.14 and each other security agreement or amended and restated security agreement heretofore or from time to time hereafter delivered in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Security Documents" shall be the collective reference to (x) each of the agreements referred to in Section 12.14 (or on the document checklist referred to therein) pursuant to which -30- Collateral is or was granted or is or was intended to be granted, directly or indirectly, to the Agent on behalf of the Lenders, (y) each agreement entered into after the Amendment Execution Date pursuant to which any collateral is or was granted or is or was intended to be granted, directly or indirectly, to the Agent on behalf of the Lenders and any other Person (if any) sharing an interest in such collateral, and (z) all amendments, supplements or other modifications to such agreements or replacements thereof. Without limiting the generality of the foregoing, each Security Agreement, each Pledge Agreement, each cash collateral agreement securing any Obligation, each depositary bank acknowledgement relating to any bank account of any Loan Party, the CFSC Guaranty Subordination Agreement, each other agreement pursuant to which any obligations are subordinated to any of the Obligations (whether pursuant to a subordination agreement, subordination provisions in any other agreement or instrument or otherwise), each Pledged Note, and each security agreement securing the obligations under any Pledged Note shall constitute Security Documents . However, as to a Loan Party, the term "Security Document" shall not include any such document as to which such Loan Party is released from all its obligations thereunder by the Agent or the Lenders in accordance with the terms hereof or thereof. "Servicing Restricted Funds" means funds received by FC Servicing or Minn Servicing in the ordinary course of such company's servicing business for the account of Persons other than FC Servicing, Minn Servicing, the Borrower or any other Subsidiary of the Borrower. "Shared Collateral" - Section 10.37(c). "Shareholder Agreement" shall mean any agreement (other than a certificate of incorporation, customary by-laws, a limited liability company formation certificate or a partnership formation certificate) among any holders of Equity Interests issued by Borrower, any Primary Obligor or any Secondary Obligor and any resolutions of any such holders of Equity Interests relating to the management of any such Person or any of the rights or privileges of any holders of Equity Interests of any such Person. "Stock" shall mean all shares and other Equity Interests issued by a corporation, whether voting or non-voting, including but not limited to, common stock, warrants, preferred stock, convertible debentures, and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing. "Subject Bosque Note" - Section 6.1(h). "Subsidiary" of any Person (the "First Person") shall mean any other Person more than 50% of the indicia of equity rights (whether capital stock or otherwise) of which is at the time owned, directly or indirectly by the First Person and/or by one or more of such First Person's Subsidiaries. Unless otherwise indicated, references to Subsidiaries shall refer to Subsidiaries of the Borrower. -31- "Subsidiary Collateral Assignment" shall mean the Amended and Restated Partnership Interest and Limited Liability Company Interest Collateral Assignment Agreement made by certain Primary Obligors in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 12.14 and each other collateral assignment from time to time hereafter delivered by one or more Primary Obligors or Secondary Obligors in respect of the Obligations., as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified "Subsidiary Pledge Agreement" shall mean the Amended and Restated Pledge Agreement (Stock and Debt) made by certain Primary Obligors in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 12.14 and each other pledge agreement from time to time hereafter delivered by one or more Primary Obligors or Secondary Obligors in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified (including, without limitation, by the addition of additional parties thereto). "Subsidiary Security Agreement" shall mean the Amended and Restated Security Agreement made by the Primary Obligors in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 12.14 and each other security agreement from time to time hereafter delivered by one or more Primary Obligors or Secondary Obligors in respect of the Obligations., as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified (including, without limitation, by the addition of additional parties thereto). "Tangible Net Worth", at any time, shall mean the total of shareholders' equity (including capital (both common and preferred) stock, additional paid-in capital and retained earnings after deducting treasury stock of a Person, less the sum of the total amount of any intangible assets, which, for purposes of this definition, shall include, without limitation, general intangibles and, if applicable, all accounts receivable not incurred in the ordinary course of business from any Affiliate of such Person or any loans to directors or officers of any Affiliate of such Person, unamortized deferred charges and good will, all as determined in accordance with GAAP. "Taxes" - Section 5.2. "Termination Event" shall mean (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), or (ii) the withdrawal of any Loan Party or any of its ERISA Affiliates from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the issuance of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (iv) receipt by any Loan Party or any ERISA Affiliate of notice of the PBGC's intention to terminate any Pension Plan or to have a trustee or the PBGC appointed to administer any Pension Plan or (v) any other event or condition which -32- might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan. "Tier IV Company" shall mean each Person listed on Schedule 10.43; provided, that if any such Person engages in business or has assets with an aggregate fair market value of $100,000 or more, such Person shall cease to constitute a Tier IV Company. "Tier V Company" shall mean each Person listed on Schedule I-TV; provided that if any such Person engages in a business other than a business engaged in by it on the Amendment Execution Date, such Person shall cease to constitute a Tier V Company. "Total Bosque Loan Commitment" shall mean the sum of the Bosque Loan Commitments of all of the Lenders. "Tranche I Bosque Loans"-Section 2.5. "Tranche I Loans" shall mean, collectively, the Loans which are Tranche I Loans as set forth in Section 2.1(a) and the Tranche I Bosque Loans (if any). "Tranche I Note" shall mean a promissory note of Borrower substantially in the form of Exhibit A-1 to this Agreement or otherwise identified on the Amendment Effective Date as the Tranche I Note, as such note may from time to time be amended, extended, restated, supplemented or otherwise modified. "Tranche I Prepayment Amount" in respect of any Payment Date shall mean the amount on deposit in the CFCCA on the immediately preceding Calculation Date after giving effect to the transfer thereto required to be made thereto on such date from the Cash Collateral Account- Servicing pursuant to Section 8.29(e) minus, unless on or prior to the Payment Date the Agent has given the Borrower telephonic or written notice that it disputes any amount specified on Exhibit A to the Waterfall Certificate with respect to disbursements on such Payment Date, all amounts specified on such Exhibit A other than the Principal Prepayment Amount set forth thereon. "Tranche II Loans" - Section 2.1. "Tranche II Note" shall mean a promissory note of Borrower substantially in the form of Exhibit A-2 to this Agreement or otherwise identified on the Amendment Effective Date as the Tranche II Note, as such note may from time to time be amended, extended, restated, supplemented or otherwise modified. -33- Tranche II Prepayment Amount in respect of any Payment Date shall mean (w) until the Payment Date on which Tranche I Loans are paid in full, zero, (x) on the date on which the Tranche I Loans are paid in full, the Tranche I Prepayment Amount as determined for such day minus the amount of such Tranche I Prepayment Amount applied to repay the remaining principal amount of the Tranche I Loans and (y) on each Payment Date after the Tranche I Loans have been paid in full, the amount on deposit in the CFCCA on the immediately preceding Calculation Date after giving effect to the transfer thereto required to be made thereto on such date from the Cash Collateral Account- Servicing pursuant to Section 8.29(e) minus unless on or prior to the Payment Date the Agent has given the Borrower telephonic or written notice that it disputes any amount specified on Exhibit A to the Waterfall Certificate with respect to disbursements on such Payment Date, all amounts specified on such Exhibit A other than the Principal Prepayment Amount set forth thereon. "Transfer" shall mean any sale, conveyance, lease or other disposition (and "Transferred", "Transferring" and other variations thereof shall have correlative meanings). "Transfer Date"- Section 8.29(e). "Transfer Supplement" - Section 12.4(c). "20% Amount" with respect to any Payment Date, shall mean the amount identified as such in the Waterfall Certificate relating to such Payment Date. "UCC" - Section 10.33. "United States," "US" or "U.S." shall mean the United States of America. "US Person" shall mean a Person formed under the laws of the United States, any of the 50 states or the District of Columbia [or any territory of the United States]. "Usage Leverage Covenant" shall have the meaning ascribed to such term in the definition of "Aggregate Undistributed Secondary Obligor Funds". "Wamco XXX" shall mean Wamco XXX Ltd., a Texas limited partnership. "Wamco XXX Loan Agreement" shall mean the Loan Agreement between Wamco XXX and CFSC Capital Corp. XXX dated as of June 5, 2002, in the form delivered by Borrower to Lender. -34- "Waterfall Certificate" in respect of any Payment Date shall mean a completed certificate substantially in the form of Exhibit E delivered in respect of such Payment Date, to which completed exhibits thereto are attached (and, in the case of required exhibits thereto the form of which is not attached to Exhibit E hereto, such other exhibits provide information in form and detail satisfactory to the Agent). "Wholly-Owned Subsidiary" shall mean any Subsidiary of Borrower of which all of the outstanding shares of stock, limited liability company interests or partnership interests (as the case may be) are owned by the Borrower and/or one or more wholly owned direct or indirect Subsidiaries of the Borrower. "Written," "in writing" and other variations thereof shall mean any form of written communication or a communication by means of telex, telecopier, telegraph or cable. -35- EX-10.17 4 h03364exv10w17.txt AMENDMENT NO.4 TO OPTION AND OPTION WARRANT EXHIBIT 10.17 ----------------------------------------------------------------- TERM LOAN AND REVOLVING CREDIT AGREEMENT among FIRSTCITY FINANCIAL CORPORATION as Borrower and THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF as Lenders, with BANK OF SCOTLAND, acting through its New York Branch, as Agent ------------------------------- Dated as of December 12, 2002 ------------------------------- ----------------------------------------------------------------- TERM LOAN AND REVOLVING CREDIT AGREEMENT TERM LOAN AND REVOLVING CREDIT AGREEMENT, dated as of December 12, 2002 among FIRSTCITY FINANCIAL CORPORATION, a Delaware corporation (the "Borrower"), the financial institutions from time to time party hereto (each a "Lender" and collectively, the "Lenders") and BANK OF SCOTLAND, acting through its New York branch, as agent for the Lenders (in such capacity, the "Agent"). W I T N E S S E T H : WHEREAS, on and subject to the terms hereof, the Lenders are willing to make available to the Borrower the credit facilities provided for herein; NOW, THEREFORE, it is agreed: Section 1. DEFINITIONS. (a) Terms used in this Agreement which are defined in Annex I hereto shall have the meanings specified in such Annex I hereto (unless otherwise defined herein) and shall include in the singular number the plural and in the plural number the singular. (b) Unless otherwise specified, each reference in this Agreement or in any other Loan Document to a Loan Document shall mean such Loan Document as the same may from time to time be amended, extended, restated, supplemented or otherwise modified. (c) All references to Sections in this Agreement or in Annex I hereto shall be deemed references to Sections in this Agreement unless otherwise specified. (d) As used in this Agreement and the other Loan Documents, the terms "including" and "such as" are illustrative and not limitative. Section 2. THE LOANS. 2.1 The Loans. (a) Subject to the terms and conditions set forth herein, each Lender severally agrees, at any time and from time to time during the Commitment Period (Term) to make one or more loans to the Borrower (each a "Term Loan" and collectively, the "Term Loans") in an aggregate principal amount for all such Term Loans not exceeding the amount of its Term Loan Commitment. The borrowings from the Lenders pursuant to this Section 2.1(a) shall be (1) in an aggregate principal amount (aggregating Term Loans then being requested with Term Loans previously made) not to exceed the Total Term Loan Commitment then in effect; (2) made from each Lender pro rata on the basis of the Term Loan Commitment of such Lender; provided, that in no event shall the aggregate principal amount of Term Loans made in respect of the acquisition by a PFAL Portfolio Entity of any Asset Pool exceed the lowest of (x) the Total Term 1 Loan Commitment then in effect minus the aggregate amount of Term Loans theretofore made; (y) the Applicable Borrowing Percentage of the Acquisition Price for such Asset Pool and (z) $7,500,000; and (3) used by Borrower solely (x) to make advances to FC Commercial evidenced by the FC Commercial (PFAL) Pledged Note, the full amount of which advances are used by FC Commercial (as more fully set forth in other portions of this Section 2, in Section 6B and in other Sections of this Agreement) to make a contribution to the capital of a PFAL Portfolio Entity in connection with such PFAL Portfolio Entity's acquisition of an Asset Pool and (y) if requested by Borrower in the Notice of Borrowing for such Term Loans, to pay the Utilization Fee in respect of the Term Loans made pursuant to clause (x) (the Term Loans included in each such borrowing by Borrower in respect of an Asset Pool, together with any borrowing of the Utilization Fee in respect thereof, being referred to herein as a "Tranche" of Term Loans, each borrowing of Term Loans in respect of an Asset Pool (and related Utilization Fee) constituting a different Tranche of Term Loans distinct from each other Tranche (or borrowing) of Term Loans (and any related Utilization Fee) borrowed in respect of any other Asset Pool) and provided further that (i) in no event shall the aggregate principal amount of Term Loans made during the one year period commencing on (and including) the Effective Date exceed $25,000,000; (ii) in no event shall the aggregate principal amount of Term Loans made under this Agreement (after giving effect to all pending requests for Loans, and whether or not all or any portion of the Term Loans theretofore made remain outstanding in whole or in part) exceed the amount by which $77 million exceeds the aggregate principal amount of loans outstanding under the Amended and Restated Agreement; (iii) in no event shall the aggregate amount (after giving effect to all pending requests for Term Loans) of Term Loans made in respect of Asset Pools-NL exceed 25% of the Total Term Loan Commitment at such time; and (iv) in no event shall the aggregate amount of Term Loans made in respect of Asset Pools acquired from Non-US Sellers exceed 50% of the amount of all Term Loans theretofore made (including the Term Loans then being requested). (b) Subject to the terms and conditions set forth herein, each Lender severally agrees at any time and from time to time during the Commitment Period (Revolving) to make loans to the Borrower (each a "Revolving Credit Loan" and collectively, the "Revolving Credit Loans") up to its Revolving Credit Loan Commitment; provided that in no event shall the aggregate principal amount of Revolving Credit Loans outstanding at any time exceed the Total Revolving Credit Loan Commitment then in effect. During the Commitment Period (Revolving), the Borrower may utilize the Revolving Credit Loan Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part without premium or penalty, and reborrowing, all in accordance with the terms and conditions hereof. Revolving Credit Loans shall be made from each Lender pro rata on the basis of the Revolving Credit Loan Commitment of such Lender. 2 2.2 Notice of Borrowing. (a) Whenever the Borrower desires to utilize the Term Loan Commitments hereunder, it shall deliver to the Agent a Notice of Borrowing not later than 11:00 a.m., Closing Office Time, on the third Business Day preceding the date of the proposed borrowing of Term Loans, which Notice of Borrowing shall, among other items, (A) specify (i) the Portfolio Entity-Post AE to whose capital FC Commercial will contribute the proceeds of the Loans; (ii) the Asset Pool to be acquired by such PFAL Portfolio Entity; (iii) the date of the proposed borrowing (which shall be a Business Day during the Commitment Period (Term) (each, a "Borrowing Date"); (iv) if such Borrowing Date is a Payment Date, whether such Loans shall constitute Base Rate Loans or Eurodollar Loans (if not specified or if such date is not a Payment Date, Base Rate Loans shall be deemed to have been requested); (v) the total amount of such borrowing (which shall be in a minimum amount of $100,000 and integral multiples of $100,000 in excess thereof and shall not exceed the Applicable Borrowing Percentage of the Acquisition Price for the related Asset Pool (rounded downward to the nearest $100,000); and (vi) the amount, if any, of the Utilization Fee in respect of such Borrowing requested to be borrowed, and (B) certify that (x) the Borrower delivered the Final Asset Pool Acquisition Certificate in respect of such Asset Pool not later than ten Business Days before the Borrowing Date specified in such notice and that all information set forth in Asset Pool Acquisition Certificate (as revised through the Final Asset Pool Acquisition Certificate and as further revised to the extent permitted by Section 6B.4) remains true and correct and (y) on or prior to the date of such Notice of Borrowing, Borrower has delivered to the Agent a Final NPV Pool Certificate in respect of such Asset Pool, Without the consent of the Agent, Borrower shall not be entitled to make borrowings under the Term Loan Commitments more than twice in any calendar month and not more than once during any ten Business Day period. (b) Whenever the Borrower desires to utilize the Revolving Credit Loan Commitments hereunder, it shall deliver to the Agent a Notice of Borrowing not later than 11:00 a.m., Closing Office Time, on the third Business Day preceding the date of the proposed borrowing of Revolving Credit Loans, which notice shall specify (i) the date of the proposed borrowing (which shall be a Business Day during the Commitment Period) (each, also a "Borrowing Date"), (ii) if such Borrowing Date is a Payment Date, whether such Loans shall constitute Base Rate Loans or Eurodollar Loans (if not specified or if such date is not a Payment Date, Base Rate Loans shall be deemed to have been requested) and (iii) the total amount of such borrowing (which shall be in a minimum amount of $250,000 plus, if greater, in integral multiples of $100,000). Without the consent of the Agent, Borrower shall not be entitled to make borrowings under the Revolving Credit Loan Commitments more than twice in any calendar month. (c) The Agent shall promptly notify (in writing or by telephone, confirmed as soon as possible thereafter in writing) each of the Lenders of the date and type (i.e., Term Loan or Revolving Credit Loan) of the proposed Loans, the amount of the Loan or Loans such Lender is being requested to make and whether such Loans shall constitute Base Rate Loans or Eurodollar Loans. Each Lender will make the amount of its Loan or Loans available to the Agent, at the Closing Office, before 1:00 p.m. Closing Office Time on the date specified in the notice for the proposed borrowing in same day funds. Such proceeds shall be made available to the Borrower (subject to Section 2.2(d)) by the Agent, in the same type of funds received by the 3 Agent, at the Closing Office against delivery to the Agent for the account of each Lender of such instruments, documents and papers as are provided for herein; provided that the Agent may pay the portion of any Utilization Fee borrowed in connection with any such borrowing directly to the Lenders entitled thereto. The Agent shall deliver the instruments, documents and papers received by it for the account of each Lender to such Lender or upon its order. (d) Unless the Agent shall have received notice from a Lender prior to 11:00 a.m., Closing Office Time, on the date of any borrowing that such Lender will not make available to the Agent such Lender's ratable portion of such borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such borrowing in accordance with Section 2.2(c) and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at the rate from time to time prevailing on the applicable Note; provided that to the extent such interest is paid by a Lender, interest shall be at the rate specified in Section 11.10 hereof. If such Lender shall pay to the Agent such corresponding amount, such amount so paid shall constitute such Lender's Loan as part of such borrowing for purposes of this Agreement. (e) The failure of any Lender to make the Loan to be made by it as part of any borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Loan on the date of such borrowing. No Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on the date of any borrowing. 2.3 The Notes. (a) The Borrower's obligation to pay (x) the principal of, and interest on, the Term Loans of each Lender shall be evidenced by a Term Note payable to the order of such Lender and (y) the principal amount of, and interest on, the Revolving Credit Loans of each Lender shall be evidenced by a Revolving Credit Note payable to the order of such Lender. (b) The Term Note and Revolving Credit Note of each Lender shall: (i) be dated the Effective Date; (ii) be in an original principal amount, with respect to each Lender, as set forth on Schedule 2.1(a) hereto; (iii) be payable in full (x) in the case of the Term Notes, on the Maturity Date (Term) (subject to mandatory prepayment as herein provided); and (y) in the case of the Revolving Credit Notes, on the Final Maturity Date (Revolving) (subject to mandatory prepayment as herein provided). (c) The Term Notes and Revolving Credit Notes shall be, and hereby are, secured by the Collateral and the Security Documents. 2.4 Mandatory Prepayments of Term Loans. (a) In addition to the other prepayments required by this Section 2.4, on the last CFCCA-P Business Day of each month (each such last CFCCA-P Business Day, a "Payment Date") commencing with December 31, 2002, the Borrower shall make a prepayment of the 4 Term Loans (and, to the extent indicated in Section 2.4(e) or (f), of the Revolving Credit Loans) in an amount equal to the sum of the Asset Pool Prepayment Amounts in respect of such Payment Date as determined for each Asset Pool. Each such prepayment shall be applied (x) until the Tranche of Term Loans made in respect of such Asset Pool has been paid in full, to such Tranche of Term Loans (ratably as among Lenders to which such Loans are outstanding) and shall be applied first to the principal amount of such Tranche which would be due under Section 2.4(c) on the next Annual Payment Date with respect to such Asset Pool (or on such Annual Payment Date, if such Payment Date falls on such Annual Payment Date), and then to amounts that would be due on succeeding Annual Payment Dates of Asset Pool, in direct order of maturity and (y) thereafter, as set forth in Section 2.4(e). (b) In addition to the other prepayments required by this Section 2.4, not later than the Payment Date following the occurrence of an NPV Deficiency in respect of any Asset Pool, the Borrower shall make a prepayment of the Term Loans in an amount sufficient so that after giving effect to such payment, the NPV Deficiency will no longer exist. Each such prepayment shall be applied to the Tranche of Term Loans made in respect of such Asset Pool (ratably as among Lenders to which such Loans are outstanding) and shall be applied first to the principal amount of such Tranche which would be due under Section 2.4(c) on the last Annual Payment Date with respect to such Asset Pool, and then to the amounts of such Tranche that would be due on earlier Annual Payment Dates with respect to such Asset Pool, in inverse order of maturity. (c) In addition to the other prepayments required by this Section 2.4, on each Payment Date occurring in the month in which the anniversary (whether first, second, third or fourth) of the acquisition of an Asset Pool occurs (each said anniversary month Payment Date with respect to an Asset Pool, an "Annual Payment Date" for such Asset Pool), Borrower shall make a prepayment of the principal amount of the Term Loans equal to the sum of the Annual Term Loan Prepayment Amounts as determined for each Asset Pool for which such Payment Date constitutes an Annual Payment Date after giving effect to the application of other prepayments made pursuant to other subsections of this Section 2.4 (to the extent that pursuant to such other subsections, such other prepayments are applied to such Annual Term Loan Prepayment Amount). Each such prepayment shall be applied to the Term Loan Tranche relating to the Asset Pool in respect of which such payment is made or, if the Agent determines that the appropriate application as among Asset Pools is not free from doubt, to such Tranches of Term Loans as the Agent shall determine (in each case, ratably as among Lenders to which such Loans are outstanding). (d) (i) In addition to the other prepayments required by this Section 2.4, Borrower shall pay or cause to be paid to the Agent the full amount of Extraordinary Transaction Proceeds (or, in the case where such proceeds are received by FC Holdings and do not relate directly or indirectly to any PFAL Portfolio Entity, the amount thereof to which FC Holdings is entitled, after payment of any portion thereof required to be remitted to CFSC pursuant to the Holdings CFSC Loan Agreement) on each date when such Proceeds or any portion thereof are received by Borrower or any Primary Obligor or, in the case of the receipt of any such proceeds by any Secondary Obligor, on the 5 earlier of (x) of the day on which such Proceeds or any portion thereof are paid to Borrower or a Primary Obligor and (y) the sixtieth day after receipt thereof by such Secondary Obligor, for application to the unpaid principal amount of the Term Notes and accrued interest on such principal amount being prepaid (and to the extent indicated in Section 2.4(f), to the Revolving Credit Loans). If Borrower delivers to the Agent evidence satisfactory to the Agent that such amounts were received in respect of one or more specified Asset Pools, or if the Agent otherwise determines that there is a reasonable basis for allocating such prepayment to one or more particular Asset Pools, such prepayment shall be applied to the outstanding Tranche(s) of Term Loans made in respect of such Asset Pool(s) (if applied to more than one Tranche, ratably as among different Tranches or in such other proportions as the Agent may determine, and ratably as among Lenders to which such Loans are outstanding) and, after any such Tranche is repaid in full, the remaining amount of such prepayment (if any) which would have been applied to such Tranche shall be applied ratably to all other outstanding Tranches of Term Loans (or in such other proportions as the Agent may determine, and ratably as among Lenders to which such Tranches of Term Loans are outstanding). Otherwise, such prepayment shall be applied in accordance with clause (iii) below. All amounts applied to a particular Tranche of Loans shall be applied first to the principal amount of such Tranche which would be due under Section 2.4(c) on the final Annual Payment Date of such Tranche, and then to the amounts of such Tranche that would be due on earlier Annual Payment Dates of such Tranche, in inverse order of maturity. (ii) In addition to the other prepayments required by this Section 2.4 (but without duplication of any such prepayment), in the event that FC Commercial makes any voluntary prepayment of principal of the FC Commercial (PFAL) Pledged Note, Borrower shall prepay the Term Loans in an amount equal to the amount of such voluntary prepayment of principal on the day on which such prepayment is received by Borrower. If Borrower delivers to the Agent evidence satisfactory to the Agent that such amount represents proceeds of payments received in respect of one or more specified Asset Pools or if the Agent otherwise determines that there is a reasonable basis for allocating such amount to one or more particular Asset Pools, such prepayment shall be applied to the outstanding Tranche(s) of Term Loans made in respect of such Asset Pool(s) (if applied to more than one Tranche, ratably as among different Tranches or in such other proportions as the Agent may determine, and ratably as among Lenders to which Loans of such Tranche(s) are outstanding) and, after any such Tranche is repaid in full, the remaining amount of such prepayment (if any) which would have been applied to such Tranche shall be applied ratably to all other outstanding Tranches of Term Loans (or in such other proportions as the Agent may determine, and ratably as among Lenders to which such Tranches of Term Loans are outstanding). Otherwise, such prepayment shall be applied in accordance with clause (iii) below. All amounts applied to a particular Tranche of Loans shall be applied first to the principal amount of such Tranche which would be due under Section 2.4(c) on the final Annual Payment Date of such Tranche, and then to the amounts of such Tranche that would be due on earlier Annual Payment Dates of such Tranche, in inverse order of maturity. (iii) If the Agent determines that any amount of Extraordinary Transaction Proceeds received pursuant to clause (i) or any prepayment of the FC Commercial 6 (PFAL) Pledged Note received pursuant to clause (ii) arises from payments received in respect of one or more PFAL Portfolio Entities but in the Agent's opinion the proper allocation of such Proceeds among Asset Pools of any such PFAL Portfolio Entity is not clear, the portion of such Proceeds which the Agent determines is allocable to such PFAL Portfolio Entity shall be applied to such Tranches of Term Loans made in respect of Asset Pools of such PFAL Portfolio Entity as the Agent may determine (if applied to more than one Tranche, ratably as among different Tranches or in such other proportions as the Agent may determine, and ratably as among Lenders to which Loans of such Tranche(s) are outstanding) and, after any such Tranche is repaid in full, the remaining amount of such prepayment (if any) which would have been applied to such Tranche shall be applied ratably to all other outstanding Tranches of Term Loans of such PFAL Portfolio Entity (or in such other proportions as the Agent may determine) or, if there remain no other such outstanding Tranches, ratably to all other outstanding Tranches of Term Loans (or in such other proportions as the Agent may determine, in each case ratably as among Lenders to which such Tranches of Term Loans are outstanding). If the Agent determines that any such Extraordinary Transaction Proceeds or prepayment are not received by or in respect of one or more particular Asset Pools or PFAL Portfolio Entities or that there is not a reasonable basis for allocating such Proceeds as among certain different Asset Pools or PFAL Portfolio Entities, then such amounts shall be applied to such outstanding Tranches of Term Loans as the Agent may determine (ratably as among Lenders to which such Tranches are outstanding). In making application determinations pursuant to this Section 2(d), the Agent may use any method (including, without limitation, relative Asset Pool sizes, relative amounts of outstanding Tranches of Loans made in respect of different Asset Pools, relative Asset Pool NPV Percentages or otherwise, or determine to make application ratably as among PFAL Portfolio Entities and/or Asset Pools or in any other proportion as among PFAL Portfolio Entities or Asset Pools or otherwise) as the Agent in its discretion deems appropriate. (e) If on any Payment Date (x) there is any Asset Pool Prepayment Amount in respect of an Asset Pool in respect of which the related Tranche of Term Loans has been paid in full (either on that date or previously) or (y) there is any Existing PF Amount, such amount shall be applied to prepay the Term Loans ratably as among the different outstanding Term Loan Tranches (and ratably as among Lenders to which such Loans are outstanding) and, with respect to a particular Tranche of Term Loans to which such amount is so applied, first to the principal amount of any Tranche of Term Loans which would be due in respect of the related Asset Pool under Section 2.4(c) on the final Annual Payment Date of such Asset Pool, and then to the amounts of such Tranche that would be due on earlier Annual Payment Dates of such Asset Pool, in inverse order of maturity. If any Existing PF Amount remains or arises after all Term Loans have been paid in full, such amount shall be applied to repay the Revolving Credit Loans. (f) If the Term Loans shall have been paid in full, at any time when any amount would be required to be applied to repayment of the Term Loans pursuant to Section 2.4 if any Term Loans were outstanding and all Tranche I Loans and Tranche II Loans outstanding or permitted to be outstanding under the Amended and Restated Agreement as in effect on the date hereof have been repaid, such amount that would otherwise have been applied to the Term Loans (had any been outstanding) shall be applied to repay outstanding Revolving Credit Loans (ratably as among Lenders to which such Loans are outstanding). 7 (g) Borrower shall repay the outstanding amount of the Term Loans in full on the Maturity Date (Term). (h) Amounts prepaid or repaid pursuant to this Section 2.4 may not be reborrowed. (i) Amounts which are to be applied ratably to or as among different Tranches of Term Loans pursuant to this Section shall be applied ratably on the basis of the outstanding principal amount of such Tranches of Term Loans. 2.5 Mandatory Prepayments of Revolving Credit Loans. The Borrower shall immediately prepay the Revolving Credit Notes held by the Lenders to the extent that the aggregate outstanding principal amount thereof on any day shall exceed the amount of the Total Revolving Credit Loan Commitment in effect on such day; provided that if the Total Revolving Credit Loan Commitment is terminated in full, then the Borrower shall immediately prepay in full the aggregate outstanding principal amount of all Revolving Credit Notes. Amounts so repaid may not be reborrowed. 2.6 Voluntary Prepayments of Term Loans. Borrower may, upon not less than three CFCCA-P Business Days prior written notice to the Agent (which notice the Agent shall promptly transmit to the Lenders in writing or by telephone, confirmed as soon as possible thereafter in writing) prepay the Term Loans in whole at any time, or from time to time in part in amounts equal to $250,000 (and, if greater, in integral multiples of $50,000), and without premium (subject to Section 3.9) or penalty; provided that at the time of any such prepayment of the Term Loans, Borrower shall pay all interest accrued on the principal amount of such prepayment. Amounts prepaid pursuant to this Section 2.6 may not be reborrowed. Prepayments pursuant to this Section 2.6 shall be applied (ratably as among Lenders holding the Loans to which applied) to such Tranches of Term Loans and in such order as the Borrower may at the time in writing direct or, if no such direction is given, as determined by the Agent. Amounts prepaid pursuant to this Section 2.6 may not be reborrowed. All notices pursuant to this Section 2.6 and Section 2.7 shall be irrevocable and result in the principal amount of Loans specified therein becoming due and payable on the prepayment date specified therein. 2.7 Voluntary Repayment of Revolving Credit Loans. The Borrower may, at any time and from time to time, upon not less than three Business Day's prior notice to the Agent (which notice the Agent shall promptly transmit to the Lenders in writing or by telephone, confirmed as soon as possible thereafter in writing) prepay the Revolving Credit Loans in whole, or in part in amounts equal to $250,000 (and, if greater, in integral multiples of $50,000) and without premium or penalty, provided that at the time of any such prepayment of the Revolving Credit Loans in full and if the Total Revolving Credit Loan Commitment is no longer in effect), the Borrower shall pay all interest accrued on the amount of such prepayment. Subject to the terms and conditions of this Agreement, amounts prepaid under this Section 2.7 may be reborrowed. 8 2.8 Reduction of Commitments. (a) The Borrower shall have the right at any time and from time to time upon at least three Business Days' prior written notice to the Agent (which notice the Agent shall promptly transmit to the Lenders in writing or by telephone, confirmed as soon as possible thereafter in writing) to reduce permanently in amounts equal to $500,000 (and if greater, in integral multiples of $100,000) or terminate the unutilized (after giving effect to all pending requests for Loans) Total Revolving Credit Loan Commitment. Any reduction pursuant to this Section 2.8(a) shall apply proportionately to the Revolving Credit Loan Commitment of each Lender. Any reduction or termination of a Commitment pursuant to this Section 2.8(a) shall be accompanied by the payment in full of any Revolving Credit Loan Commitment commission then accrued hereunder. (b) The Borrower shall have the right at any time and from time to time upon at least three Business Days' prior written notice to the Agent (which notice the Agent shall promptly transmit to the Lenders in writing or by telephone, confirmed as soon as possible thereafter in writing) to reduce permanently in amounts equal to $500,000 (and if greater, in integral multiples of $100,000) or terminate the unutilized (after giving effect to all pending requests for Loans) Total Term Loan Commitment. Any reduction pursuant to this Section 2.8(b) shall apply proportionately to the Term Loan Commitment of each Lender. Any reduction or termination of a Commitment pursuant to this Section 2.8(b) shall be accompanied by the payment in full of any Term Loan Commitment commission then accrued hereunder. 2.9 Extension of Final Maturity Date (Revolving). No more than 60 and no less than 30 days prior to the then Final Maturity Date (Revolving), the Borrower may request, through the Agent, that each Lender extend the Final Maturity Date (Revolving) for a 364-day period as herein provided, which decision will be made by each Lender in its sole discretion. Upon receipt of any such request, the Agent shall promptly notify each Lender thereof. Each Lender shall notify the Agent and the Borrower of its willingness or refusal to consent to such extension of the Final Maturity Date (Revolving) as soon as practical after receiving such notice, and in any event by the 15th day preceding the then current Final Maturity Date (Revolving) (the "Response Date"). If any Lender does not expressly notify the Agent that it is willing to extend the Final Maturity Date (Revolving) prior to the Response Date such Lender shall be deemed to be to have refused to extend the Final Maturity Date (Revolving) and the Borrower's request to extend the Final Maturity Date (Revolving) then in effect shall be deemed denied. If (i) all Lenders have agreed by the Response Date to extend the Final Maturity Date (Revolving) and (ii) as of the Final Maturity Date (Revolving) then in effect, no Event of Default shall have occurred and be continuing, such Final Maturity Date (Revolving) shall be extended to the date which is 364 days following such Final Maturity Date (Revolving) or, if such day is not a Business Day, the next preceding Business Day. Section 3. INTEREST. 3.1 Rate of Interest. (a) Subject to the provisions of Section 3.3 hereof, the Borrower agrees to pay interest in respect of the unpaid principal amount of the Loans from the date such Loans are 9 made until maturity (whether by acceleration or otherwise) at the following rates of interest: (i) Eurodollar Loans, at a rate per annum equal to 2.75% in excess of LIBOR for the Eurodollar Interests Period then in effect and (ii) Base Rate Loans, the Base Rate, such rate to change as and when the Base Rate shall change. (b) Loans which are made on a date other than a Payment Date shall constitute Base Rate Loans until converted in accordance with Section 3.11. 3.2 Interest Payment Dates. Interest on and prior to maturity in respect of each Loan shall be payable in arrears (i) on each Payment Date; (ii) upon any repayment or prepayment (to the extent accrued on the principal amount so repaid); and (iii) at maturity (whether by acceleration or otherwise) and, after maturity, on demand. 3.3 Past Due Rate. Each Loan (and any overdue interest in respect of each Loan) shall bear interest for each day on which an Event of Default exists (after as well as before judgment), payable on demand, at a rate per annum (the "Past-Due Rate") equal to the greater of 5% in excess of the interest rate otherwise applicable to such Loan on such day or 4.5% in excess of the Base Rate in effect on such day. 3.4 Capital Adequacy. If any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted after the date hereof (it being agreed that "adopted after the date hereof" shall include compliance by a Lender or any lending office or holding company of a Lender with any Basle Law whether or not such Basle Law was in effect, applicable or phased in on or prior to or after the date hereof pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards" or pursuant to or arising out of any report, agreement or convention of any international banking group adopted subsequent to such 1988 report (said laws, rules, regulations and guidelines pursuant to or arising out of such 1988 report or any such subsequently adopted report, agreement or convention being sometimes collectively herein referred to as "Basle Laws"), or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy (any such other law, rule, regulation or guideline being sometimes herein referred to as "Other Laws"), or any change in any of the foregoing (after the date hereof in respect of Other Laws; before or after the date hereof in respect of Basle Laws) or in the enforcement or interpretation or administration of any of the foregoing (after the date hereof in respect of Other Laws; before or after the date hereof in respect of Basle Laws) by any Government Authority, central bank or comparable agency charged with the enforcement or interpretation or administration thereof, or compliance by any Lender (or any lending office of any Lender) or any holding company of any Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of its Commitments, Loans or any of its obligations hereunder to a level below that which such Lender or such Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then, upon demand by such Lender (or by the Agent on such Lender's behalf), the Borrower shall pay to such Lender from time to time such 10 additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered, together with interest on each such amount from the date demanded until payment in full (after as well as before judgment) thereof at the Base Rate. Each Lender shall endeavor to give the Borrower notice of its intention to require compensation under this Section 3.4 within a reasonable time after the loan officer of such Lender with responsibility for this Agreement becomes aware of its entitlement to such compensation under this Section 3.4, but no failure to give any such notice shall affect or relieve the Borrower of any of Borrower's obligations under this Section 3.4 or under any other provision of this Agreement or any other Loan Document or result in any obligation or liability of the Agent or any Lender to the Borrower or any other Person. A certificate of a Lender as to the amount required to be paid by Borrower under this Section 3.4 and showing in reasonable detail the basis for the calculation thereof shall, absent manifest error, be final and conclusive (it being understood that in no event shall any Lender be required to disclose in such certificate or otherwise any non-public information). In determining such amount or amounts, a Lender may use any method of averaging and attribution as it (in its sole and absolute discretion) shall deem applicable. 3.5 [Intentionally omitted.] 3.6 Determination of Rate of Borrowing. As soon as practicable after 10:00 A.M. (New York time) on each Eurodollar Interest Determination Date, the Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the rate of interest (the "Rate of Borrowing") which shall be applicable to the Eurodollar Loans for the next succeeding Eurodollar Interest Period and shall promptly give notice thereof in writing or by telephone (confirmed in writing) to the Borrower and the Lenders. 3.7 Substituted Rate of Borrowing. (a) In the event that on any Eurodollar Interest Determination Date any Lender shall have reasonably determined (which determination shall be final and conclusive and binding upon all parties but, with respect to the following clauses (i), (ii)(y) and (ii)(z), shall be made only after consultation with the Agent on the date of such determination) that: (i) by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market or affecting the position of such Lender in such market, adequate and fair means do not exist for ascertaining the applicable Rate of Borrowing by reference to LIBOR with respect to the Eurodollar Loans as to which an interest rate determination is then being made; or (ii) by reason of (x) the requirements of Regulation D, (y) any change after the date hereof in any other applicable law or governmental rule, regulation or order (or any interpretation thereof and including the enactment of any new law or governmental rule, regulation or order) or (z) other circumstances affecting such Lender or the interbank Eurodollar market or the position of such Lender in such market (such as for example but not limited to a change in official reserve requirements or increased capital reserves required or imposed by any regulatory authority or entity (domestic or foreign) having jurisdiction over or with respect to such Lender to the extent not provided for in clause (ii)(x) above), LIBOR shall not represent the 11 effective pricing to such Lender for U.S. dollar deposits of comparable amounts for the relevant periods; then, and in any such event, the Lender so affected shall on such date give notice in writing or by telephone (confirmed in writing) to the Borrower and to the Agent of such determination. Thereafter, Borrower shall pay to such Lender, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its reasonable discretion shall determine) as shall be required to cause such Lender to receive interest with respect to its Eurodollar Loan for the Eurodollar Interest Period following such Eurodollar Interest Determination Date and for any preceding Eurodollar Interest Period with respect to which such changes or requirements apply (each such period, an "Affected Interest Period") at a rate per annum equal to 2.75% in excess of the effective pricing to such Lender for U.S. dollar deposits to make or maintain its Eurodollar Loans, provided that in the case of any such determination pursuant to clause (ii)(x), the written notice from such Lender to the Agent and the Borrower on the relevant Eurodollar Interest Determination Date shall specify (x) any such amount on account thereof theretofore incurred, and such amount shall be paid at such time and (y) the additional amount required to be paid with respect to the relevant Affected Interest Period (with such amount so stated to be final with respect to the relevant Affected Interest Period) and such additional amount shall be paid at the same time, and together with, the interest otherwise payable in respect of such Eurodollar Loans for such Affected Interest Period. A certificate as to additional amounts owed any such Lender, showing in reasonable detail the basis for the calculation thereof, submitted to the Borrower by such Lender through the Agent shall, absent manifest error, be final and conclusive and binding upon all of the parties hereto. (b) In lieu of paying additional moneys to any Lender affected by Section 3.7(a), other than clause (ii)(x) thereof (any such Lender, together with any Lender affected by subsection 3.8(a), an "Affected Lender"), Borrower may (subject to Section 3.9), by giving notice in writing or by telephone (confirmed in writing) to the Affected Lender, the Agent and the other Lenders on such Eurodollar Interest Determination Date, (x) require the Affected Lender to convert its Eurodollar Loan then outstanding or requested that is so affected into a Base Rate Loan (bearing interest at a rate equal to the Base Rate as in effect from time to time) on the first day of the Affected Interest Period, such notice to pertain only to the Loans of the Affected Lender and to have no effect on the obligations of the other Lenders to maintain Eurodollar Loans, or (y) terminate the obligations of the Lenders to make or maintain Loans as, or convert Loans into, Eurodollar Loans and in such event, on the first day of what would have been the next Eurodollar Interest Period, all Eurodollar Loans shall be outstanding as Base Rate Loans. 3.8 Required Termination and Prepayment. (a) In the event that at any time any Affected Lender shall have reasonably determined (which determination shall be final and conclusive and binding upon all parties) that the making or continuation of its Eurodollar Loans has become unlawful by compliance by such Lender in good faith with any law, governmental rule, regulation, guideline or order, the Affected Lender shall on such date give notice in writing or by telephone (confirmed in writing) to the Agent and the Borrower of such determination. The obligation of the Affected Lender to 12 make or maintain its Eurodollar Loan or Loans so affected shall be terminated and the Borrower shall forthwith and in any event no later than the earliest of (x) the termination of the Eurodollar Interest Period in effect at the time any such determination pursuant to this Section 3.8(a) is made, (y) the first day of the Eurodollar Interest Period commencing immediately thereafter if such determination is made in respect of a requested Eurodollar Loan, or (z) five Business Days after receipt of notice from an Affected Lender under this Section 3.8(a), take one of the actions specified in Section 3.8(b). If by the earliest of (x). (y) or (z). Borrower has not exercised one of the options specified in Section 3.8(b). Borrower shall be deemed to have exercised the option set forth in clause (iii) of Section 3.8(b) and to have given the notice specified therein. (b) Upon receiving any notification provided in Section 3.8(a). the Borrower may (subject to Section 3.9) exercise one of the following options: (i) If the determination by an Affected Bank relates only to Eurodollar Loans then being requested by Borrower pursuant to a Notice of Borrowing or to Base Rate Loans then being requested by Borrower to be converted to Eurodollar Loans pursuant to a Notice of Conversion, the Borrower may by giving notice in writing to the Agent and the Lenders prior to the date on which such Eurodollar Loan is to be made or converted, withdraw such Notice of Borrowing or Notice of Conversion for all Lenders; (ii) Upon written notice to the Lenders, the Borrower may terminate the obligations of the Lenders to make or maintain Loans as, or convert Loans into, Eurodollar Loans and in such event, the Borrower, shall not later than the time specified in subsection 3.8(b), convert all Eurodollar Loans into Base Rate Loans by giving notice thereof to the Agent and the Lenders. (iii) The Borrower may, by giving notice in writing to the Affected Lender, the Agent and the other Lenders require the Affected Lender to make the Eurodollar Loan then being requested as a Base Rate Loan (or to keep outstanding as a Base Rate Loan the Base Rate Loan then being converted), such notice to pertain only to the affected Eurodollar Loans of the Affected Lender and to have no effect on the obligations of the other Lenders to make or maintain Eurodollar Loans. 3.9 Compensation. The Borrower shall compensate each Lender, upon written request by such Lender (which request shall be made through the Agent and shall set forth the basis for requesting such amounts), for all losses, expenses and liabilities (including, without limitation, any interest paid by such Lender to lenders of funds borrowed by it to make or carry its Eurodollar Loans to the Borrower, losses sustained by such Lender in connection with the liquidation or re-employment of such funds and all other funding losses) which such Lender may sustain: (i) if for any reason a conversion of any Eurodollar Loan does not occur on a date specified therefor pursuant to Section 3.7, 3.8 or 3.11, or any conversion into a Eurodollar Loan does not occur on the date specified therefor in Section 3.11, (ii) if for any reason any prepayment or repayment or conversion of any of its Eurodollar Loans occurs on a date which is not the last day of a Eurodollar Interest Period applicable thereto, (iii) if any prepayment, repayment or conversion of any of its Eurodollar Loans occurs on such last day of the Eurodollar Interest Period applicable thereto in any amount in excess of the amount notified to the Agent in writing not less than three Business Days prior to such last day of such Eurodollar Interest 13 Period, (iv) if any prepayment, repayment or conversion of any of its Eurodollar Loans occurs without at least three Business Days prior written notice thereof having been given to the Agent (v) if any prepayment or repayment of any of its Eurodollar Loans is not made on any date specified in a notice thereof given by the Borrower or if any prepayment or repayment contemplated or required by a Waterfall Certificate is not made on the Payment Date following the date such Waterfall Certificate is delivered, or (vi) as a consequence of any default under this Agreement or the delivery of any Certified Error Certificate. 3.10 Eurodollar Interest Period Determination. (a) Each Eurodollar Interest Period for any Loan shall commence on a Payment Date and expire on the succeeding Payment Date. (b) No Eurodollar Interest Period in respect of any Loan shall extend beyond its stated maturity date. (c) Each Tranche of Term Loans (or portion thereof) outstanding as Eurodollar Loans shall constitute a distinct group of Eurodollar Loans and, although the Eurodollar Interest Period for such Tranche (or portion thereof) shall be identical to the Eurodollar Interest Period for each other Tranche of Term Loans and for Revolving Credit Loans, the Eurodollar Interest Period for each Tranche of Term Loans shall be deemed separate and distinct. (d) Subject to Section 3.10(e), if the Agent shall not have received written notice from the Borrower on or prior to 11:00 a.m. (Closing Office time) at least three Business Days prior to a Payment Date that the Borrower has elected to convert all or a portion of a Tranche of Term Loans outstanding as Eurodollar Loans to Base Rate Loans in accordance with the other provisions of this Agreement, the Borrower shall be deemed to have elected to have such Tranche of Term Loans (or portion thereof, as the case may be) continued as Eurodollar Loans for a new Eurodollar Interest Period. (e) Unless the Majority Lenders specifically agree in writing, no Eurodollar Interest Period may be selected at any time that a Default or Event of Default exists and Borrower shall be deemed to have elected to convert such Eurodollar Loans into Base Rate Loans. (f) The Borrower shall not be permitted to maintain as Eurodollar Loans any Tranche of Loans or for Revolving Credit Loans if the outstanding amount of such Tranche or of the Revolving Credit Loans to be maintained as Eurodollar Loans is less than $1,000,000 or an integral multiple of $100,000 in excess thereof. 3.11 Conversions. Borrower shall have the option to convert, on any Payment Date, all or any portion of a Tranche of Term Loans from Base Rate Loans to Eurodollar Loans or from Eurodollar Loans to Base Rate Loans; provided that (i) after giving effect to any such conversion the amount of such Tranche outstanding as a Eurodollar Loans shall be an amount equal to $1,000,000 or an integral multiple of $100,000 in excess thereof and the amount thereof outstanding as Base Rate Loans shall be an amount equal to not less than $20,000; and (ii) unless the Majority Lenders specifically agree in writing, no conversion to Eurodollar Loans shall be 14 permitted at any time that a Default or Event of Default exists. Each such conversion shall be effected by Borrower giving the Agent written notice thereof (a "Notice of Conversion") on or prior to 11:00 a.m. (Closing Office time) at least three Business Days prior to a Payment Date, specifying the amount of Loans to be converted, whether the Loans to be converted are Term Loans or Revolving Credit Loans and, if Term Loans, the Tranche of Loans to which such conversion relates. Section 4. FEES. 4.1 Facility Fee. The Borrower agrees to pay to the Agent, for the ratable account (based on the Commitments of each Lender) of each Lender party to this Agreement on the Effective Date the fee set forth in the Fee Letter on the dates set forth therein (such fee, the "Facility Fee"). 4.2 Commitment Commission. (a) The Borrower agrees to pay to the Agent for the account of each Lender Commitment commission with respect to their respective Revolving Credit Loan Commitments for the period commencing on the Effective Date, to and including the Final Maturity Date (Revolving), computed at a rate per annum equal to 1/4 of 1% on the average daily Unutilized Revolving Credit Loan Commitment of such Lender during the period for which payment is made. Such Commitment commission shall be payable quarterly in arrears on each Payment Date, commencing with the Payment Date scheduled to occur on March 31, 2003 (the first such Payment Date to include the full period from the Effective Date until said first Payment Date). (b) The Borrower agrees to pay to the Agent for the account of each Lender Commitment commission with respect to their respective Term Loan Commitments for the period commencing on the Effective Date, to and including the last day of the Commitment Period (Term), computed at a rate per annum equal to 1/4 of 1% on the average daily Unutilized Available Commitment of such Lender during the period for which payment is made. Such Commitment commission shall be payable quarterly in arrears on each Payment Date, commencing with the Payment Date scheduled to occur on March 31, 2003 (the first such Payment Date to include the full period from the Effective Date until said first Payment Date). (c) The Borrower agrees to pay to the Agent for the account of each Lender Commitment commission with respect to their respective Term Loan Commitments for the period commencing on the day which is one year after the Effective Date to and including the last day of the Commitment Period (Term), computed at a rate per annum equal to 1/8 of 1% on the average daily Unutilized Term Loan Commitment of such Bank during the period for which payment is made. Such Commitment commission shall be payable quarterly in arrears on each Payment Date, commencing with the Payment Date scheduled to occur on March 31, 2004, and on the Maturity Date (Term) (the first such Payment Date to include the full period from the first anniversary of the Effective Date until said first Payment Date). 4.3 Utilization Fee. The Borrower agrees to pay to the Agent, for the ratable account each Lender with a Term Loan Commitment a Utilization Fee equal to 1% of the amount of each 15 Term Loan made by such Lender such fee to be paid on each date on which Term Loans are made (each such fee, a "Utilization Fee"). Section 5. PAYMENTS, ETC. 5.1 Payments on Non-Business Days; Calculations. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest shall be payable at the applicable rate during such extension. Interest on Base Rate Loans hereunder and under the Notes shall be calculated on the basis of a 365-day year and the actual number of days elapsed and interest on Eurodollar Loans hereunder and under the Notes shall be calculated on the basis of a 360-day year and the actual number of days elapsed. If for any reason a Loan is repaid on the same day on which it is made, one day's interest (subject to the other provisions of this Agreement) shall be paid on that Loan. The Borrower hereby authorizes and directs the Agent and each Lender to charge any account of the Borrower maintained at any office of the Agent or such Lender with the amount of any principal, interest or fee when the same becomes due and payable under the terms hereof or of the Notes; provided, however, that neither the Agent nor any Lender shall be under any obligation to charge any such account. 5.2 Net Payments; Application. (a) All payments hereunder and under the Loan Documents (including, without limitation, repayments and prepayments pursuant to Section 2) shall be made by the Borrower to the Agent in freely transferable U.S. dollars and in same day funds at the Closing Office without setoff or counterclaim and in such amounts as may be necessary in order that all such payments (after (i) withholding for or on account of any present or future taxes, levies, imposts, duties or other similar charges of whatsoever nature imposed on the amounts described above by any government or any political subdivision or taxing authority thereof, other than any tax (other than such taxes referred to in clause (ii) below) imposed on a Lender pursuant to the income tax laws of the jurisdiction where such Lender's principal or lending office or offices are located (collectively, the "Taxes") and (ii) deduction of an amount equal to any taxes on or measured by the net income payable to such Lender with respect to the amount by which the payments required to be made by this Section 5.2 exceed the amount otherwise specified to be paid under this Agreement and the Notes) shall not be less than the amounts otherwise specified to be paid under this Agreement and the Notes. With respect to each such deduction or withholding imposed in respect of any payment by or on behalf of the Borrower, the Borrower shall promptly (and in no event later than 30 days thereafter) furnish to the Agent such certificates, receipts and other documents as may be required to establish any tax credit, exemption or reduction in rate to which any Lender or holder of a Note may be entitled. Each Lender, other than a Lender organized and existing under the laws of the United States of America or any political subdivision thereof, agrees to furnish the Borrower, as soon as practicable after any written request of the Borrower to such effect, any executed form reasonably requested by the Borrower such as IRS Form W-8BEN or W-8ECI, and any other applicable form as to such Lender's entitlement, if any, to exemption from, or a reduced rate of, or its subjection to, United States withholding tax on amounts payable to it hereunder by the Borrower or under the Notes of the Borrower and each such Lender undertakes to use its best efforts promptly to notify the Borrower of any material change in any information, statement or 16 form so furnished to the Borrower; provided, however, that any failure on the part of any Lender to furnish any such information, statements or forms shall in no way affect the obligations of the Borrower or the rights of any Lender under the terms of this Agreement or of the Notes. (b) Unless otherwise specifically provided herein, all payments under or pursuant to, or in satisfaction of any of the Borrower's obligations under this Agreement or under the Notes (including any received in connection with the foreclosure upon or other realization on any Collateral) will be applied in the following order of priority: (i) to any amounts not otherwise listed in this Section 5.2(b) then due and payable by the Borrower under this Agreement, the Notes or the Security Documents, (ii) to any fees then due and payable pursuant to Section 4 of this Agreement, pro rata according to the aggregate amount of fees then due and payable, (iv) to any interest on the Notes (unless otherwise specified by the Borrower, pro rata according to the aggregate amount of interest then due and payable on the Notes) then due and payable, (v) to any principal amount then due under the Notes (first to the Term Notes and then to the Revolving Credit Notes), (vi) to any amounts not then due on the Term Notes, unless otherwise provided herein, to be applied first to amounts due at final maturity thereof and thereafter to the installments due thereon in inverse order of maturity (each such amount being applied ratably (based on outstanding amounts) to the different Tranches of Term Loans), and (vii) to reduce the unpaid principal amount of the Revolving Credit Loans. 5.3 Distribution by Agent. All payments received by the Agent on behalf of the Lenders on account of principal and interest under this Agreement or the Notes or on account of any fees payable for the account of the Lenders shall be promptly distributed by the Agent to the Lenders (in the type of funds received by the Agent) as follows: (a) if in respect of principal of any Loans made to the Borrower then on a pro rata basis to each of the Lenders holding the Loans in respect of which such payment is being made (b) if in respect of interest paid on the Loans pursuant to Section 3 and the Borrower has designated (in accordance with applicable provisions (if any) of this Agreement relating thereto) that the payments are being made in respect of the Term Loans or Revolving Credit Loans, then on a pro rata basis to each of the Lenders having Term Loans or Revolving Credit Loans, as the case may be, outstanding; (d) if in respect of interest on the Notes and the Borrower has not designated and this Agreement does not otherwise specify whether such payments are being made in respect of Term Loans or Revolving Credit Loans, then to each Lender in the proportion that the aggregate amount of such unpaid interest due on the Loans of each such Lender bears to the aggregate amount of such unpaid interest due on all such Loans; (e) if in respect of fees, then to the Lenders in accordance with their entitlement thereto (based on each Lender's share of the Total Commitment, in the case of the Facility Fee, based on each Lender's share of the Total Revolving Credit Loan Commitment, in the case of the fee described in Section 4.2(a), based on each Lender's share of the Total Term Loan Commitment, in the case of the fees described in Sections 4.2(b) and 4.2(c) and based on each Lender's share of the applicable Term Loans described in Section 4.3, in the case of the Utilization Fee); and (f) if in respect of a payment under Section 5.2(a) hereof, to each Lender in accordance with its entitlement thereto. Section 6. CONDITIONS PRECEDENT TO EFFECTIVENESS This Agreement shall become effective when and as of the date (the "Effective Date") that] each of the following conditions have been satisfied to the satisfaction of the Agent (or 17 waived by the Agent). If the Effective Date shall not have occurred by the close of business (New York time) on December 31, 2002 (or such later date as is agreed to by the Agent in writing), this Agreement shall not become effective and shall be deemed rescinded, null and void. 6.1 Default, etc. On the Effective Date (both before and after giving effect to the occurrence of the Effective Date) there shall exist no Default or Event of Default and all representations and warranties made by the Loan Parties herein or in the other Loan Documents or otherwise by the Loan Parties in writing in connection herewith or therewith shall be true and correct in all material respects with the same effect as though such representations and warranties have been made at and as of such time. 6.2 Notes. The Agent shall have received for each of the Lenders the Term Notes and Revolving Credit Notes, each duly executed and completed by the Borrower. 6.3 Checklist Documents. The documentation set forth on the Closing Checklist (Schedule 6.3), including, without limitation, the Guaranties, Pledge Agreements and Security Agreements listed thereon, satisfactory to the Agent in form and substance, shall have been delivered to the Agent, and such other actions referred to on such Schedule and in such documentation shall have been taken. 6.4 Supporting Documents of the Borrower. There shall have been delivered to the Agent (with sufficient copies for each of the Lenders) such information and copies of documents (if any), approvals (if any) and records (certified where appropriate) of corporate and legal proceedings (if any) in addition to those listed on the Closing Checklist as the Agent or any Lender may have reasonably requested relating to the Loan Parties' entering into and performance of the Loan Documents or any other agreements or documents related thereto. 6.5 Officer's Certificate. There shall have been delivered to the Agent (with sufficient copies for each of the Lenders) a certificate of an Executive Officer of the Borrower certifying, as of the date of the Loan, compliance with the conditions of Sections 6.1, 6.14, 6.16, 6.17, 6.18 and 6.19 and also the absence of any Material Adverse Changes of the type referred to in Section 6.10. 6.6 UCC Statements. Evidence satisfactory to the Agent of all filings of financing statements (and assignments thereof) under the applicable Uniform Commercial Code, satisfactory Lien search requests on Form UCC-11 and analogous forms confirming the absence of any perfected Liens prior to the Lenders' and of any other Liens other than Liens permitted hereunder shall have been delivered to the Agent and all other actions with respect to the Liens created by the Security Documents as are necessary or appropriate to perfect such Liens shall have been taken. 6.7 Certifications; Financial Statements. The Borrower shall have delivered to the Agent such financial statements and certifications of financial statements as the Agent may have requested, which statements shall include, in any event, month end financial statements of the type required by Section 7.02(a) and certified by the CFO as of the most recent month ending 30 days prior to the date of such Loan, the annual financial statements required by Section 7.2(b) 18 and (c) for the Fiscal Year most recently ended (or the prior Fiscal Year, if less than 105 days have passed since the end of a Fiscal Year) accompanied by the certifications required by Section 7.2(d). 6.8 Approvals and Consents. All orders, permissions, consents, approvals, licenses, authorizations and validations of, and filings, recordings and registrations with, and exemptions by (all of the foregoing, "Requisite Consents", any Government Authority, or any other Person, required to authorize or required in connection with the execution, delivery and performance of this Agreement or the other Loan Documents and the transactions contemplated hereby and thereby by an Loan Party shall have been obtained (and, if so requested, furnished to the Agent, with sufficient copies for the Lenders). 6.9 Legal Opinions. The Agent shall have received legal opinions (in sufficient counterparts for each of the Lenders) dated the Effective Date from Haynes and Boone, LLP, counsel to Borrower and each other Loan Party, in form and substance satisfactory to the Agent. 6.10 Adverse Change. There shall have been, in the Agent's opinion, no Material Adverse Change with respect to Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party since December 31, 2001. None of the Agent nor any Loan Party shall have become aware of any previously undisclosed information with respect to any Loan Party which, in the Agent's opinion, would have a Material Adverse Effect 6.11 Change in Law; No Opposition.(i) No change shall have occurred in applicable law or in applicable regulations thereunder or in the interpretations thereof by any Governmental Authority which, in the opinion of any Lender, would make it illegal for such Lender to make one or more Loans hereunder; and (ii) no suit, action or proceeding shall be pending or threatened before or by any Governmental Authority seeking to restrain or prohibit the making of any Loan or the consummation of the transactions contemplated hereby. 6.12 All Proceedings to be Satisfactory. All corporate, partnership, limited liability company and legal proceedings and all instruments, documents and papers in connection with the transactions contemplated by this Agreement and the other Loan Documents and the other documents referred to herein shall be satisfactory in form and substance to the Agent, and the Agent and any Lender shall have received all such information and copies of all documents which the Agent or such Lender may reasonably have requested in connection herewith, such documents where appropriate to be certified by proper corporate officials or governmental authorities. 6.13 Fees and Expenses. The fee referred to in Section 4.1 and the legal fees and expenses of the Agent's New York counsel and (if any) local or special counsel in connection with the transactions contemplated by this Agreement shall (to the extent demand for payment thereof shall have been made) have been paid in full. 6.14 FC Holdings Purchase. Agent shall have received evidence satisfactory to it that FC Commercial shall have purchased the 20% ownership in FC Holdings held by management on terms satisfactory to all parties thereto and the Agent. 6.15 [Intentionally omitted.] 19 6.16 FC Consumer Note. FC Consumer Lending shall have borrowed $16 million in accordance with the FC Consumer Note. 6.17 Amended and Restated Agreement The Amendment Effective Date shall have occurred under the Amended and Restated Agreement. 6.18 Exchange Offer. (a) Holders of no fewer than 80% of the outstanding shares of New Preferred Stock shall have accepted the Exchange Offer, irrevocably tendered their shares to the Exchange Agent for exchange in accordance with the terms thereof and not withdrawn their shares. The Agent shall have received a certificate from the Exchange Agent, in form and substance satisfactory to Agent, on the Effective Date to that effect. (b) The Registration Statement shall have become effective and not be the subject of any "stop order." No Legal Action shall be pending or threatened before or by any Government Authority seeking to withdraw any shares tendered pursuant to the Exchange Offer if the result of such Legal Action (if adversely determined) would cause the aggregate number of outstanding shares tendered and not withdrawn or sought to be withdrawn to be fewer than 80% of the outstanding shares of New Preferred Stock. (c) The opinions of counsel delivered to any Loan Party by counsel for such Loan Party in connection with the Exchange Offer or any matter related to the Exchange Offer, shall have been delivered to Lender, together with a letter from each such counsel stating that Lender may rely upon such opinions with the same effect as if said opinions were addressed to them. 6.19 Repayment of Loans. No Existing Loans shall be outstanding and the aggregate principal amount of Loans (as defined in the Amended and Restated Agreement) outstanding under the Amended and Restated Agreement shall not exceed $50,400,000. 6.20 Copies of Other Loan Agreements. The Borrower shall have delivered to the Agent certified copies of the Amended and Restated Agreement and of the FC Consumer Note. All documents, agreements, instruments, certificates, financial statements, legal opinions, analyses, reports and other papers required to be delivered by this Section 6 shall be in form and substance satisfactory to the Agent and shall be delivered (with sufficient copies for each of the Lenders) to the Agent at its Closing Office or as the Agent may otherwise direct. Section 6A. CONDITIONS PRECEDENT TO ALL LOANS. The Lenders shall not be obligated to make any Loans on or after the Effective Date unless, at the time of the making of such Loan (except as hereinafter indicated) the following conditions (unless waived in writing by the Majority Lenders) have been satisfied: 6A.1 Certain Conditions. At the time of the making of such Loan, and immediately after giving effect thereto, (a) all deficiencies, if any, with respect to conditions precedent to any 20 prior Loan shall have been corrected to the satisfaction of the Agent, (b) all of the conditions specified in Sections 6.1, 6.8, 6.10, 6.11 and 6.12 (with any reference in any such Section to the Effective Date being deemed to be a reference to the date of such Loans) shall be satisfied to the satisfaction of the Agent, (c) each of the Notes, the Guaranties and the Security Documents shall be in full force and effect and no party thereto shall have failed to perform in any material respect any of its obligations thereunder, (d) no issuer of any legal opinion issued in connection with any Loan Document or the making of any Loan shall have rescinded or qualified any such legal opinion, (e) no issuer thereof shall have rescinded or qualified any of the financial statements, certificates, letters, reports, analyses, Requisite Consents or other opinions referred to in Section 6, and (f) there shall have been, in the Majority Lenders' opinion, no Material Adverse Change since the Effective Date with respect to Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary. 6A.2 Subsequent Opinions of Counsel. If reasonably requested by the Agent or Majority Lenders, the Agent shall have received from any or all of the counsel referred to in Section 6.9 (or other counsel satisfactory to the Agent) such favorable supplemental legal opinions addressed to the Agent and the Lenders and dated the date of such Loan and covering such matters incidental to the transactions contemplated by this Agreement as the Agent or the Majority Lenders shall reasonably request, each of which opinions shall be in form and substance satisfactory to the Agent and the Lender requesting same. 6A.3 Officer's Certificate. (a) If requested by the Agent, the Agent shall have received a certificate of an Executive Officer of the Borrower certifying, as of the date of the Loan then being made, compliance with the provisions of Section 6.1 (with the reference therein to the Effective Date being deemed a reference to the Loans being made on the date of said certificate) and further to the effect that the conditions specified in Section 6A.1 are satisfied at such time. (b) The making of each Loan subsequent to the Effective Date shall constitute a representation and warranty by the Borrower to the Agent that, at the time of said subsequent Loan (and after giving effect thereto), (i) all representations and warranties contained herein or in the other Loan Documents or otherwise made by the Borrower or any other Loan Party in connection herewith or therewith are true and correct in all material respects with the same effect as though such representations and warranties were being made at and as of such time, (ii) no Default or Event of Default exists and (iii) the conditions specified in Section 6A.1 are satisfied at such time. 6A.4 Fees and Expenses. To the extent demand therefor shall have been made, all legal fees and expenses of the Agent's New York counsel and (if any) local or special counsel in connection with the transactions contemplated by this Agreement shall have been paid in full. Section 6B. ADDITIONAL CONDITIONS PRECEDENT TO TERM LOANS The Lenders shall not be obligated to make any Term Loans unless, at the time of making of such Loans, the following conditions (unless waived in writing by the Majority Lenders), in 21 addition to the conditions set forth in Section 6A (unless waived in writing by the Majority Lenders), have been satisfied: 6B.1 Eligible PFAL Portfolio Entity. (i) The PFAL Portfolio Entity (the "Subject PFAL Entity") identified in the related Asset Pool Acquisition Certificate as the entity which will acquire the Asset Pool specified therein with a contribution to its capital made by FC Commercial with the proceeds of such Loans which are advanced to FC Commercial by the Borrower in accordance with the terms hereof (together with other equity contributions made by the Person holding other Equity Interests pursuant to Section 6B.2(a) and the proceeds of Indebtedness (if any) incurred pursuant to Approved Portfolio Leverage Arrangements) shall be an Eligible PFAL Entity; (ii) there shall have been no change to the Charter Documents of such Person or to any Shareholder Agreement relating to such Person from the Charter Documents and Shareholder Agreement provided with such Asset Pool Acquisition Certificate (or, if the Term Loans are being requested in respect of an Asset Pool other than the first Asset Pool acquired by such Subject PFAL Entity, since the Charter Documents and Shareholder Agreement delivered in connection with the acquisition of such first Asset Pool, except for any such changes consented to in writing by the Agent), such Charter Documents and Shareholder Agreement shall be the sole agreements with respect to equity ownership arrangements with respect to such Subject PFAL Entity and such Charter Documents and Shareholder Agreement shall evidence Permitted Shareholder Arrangements with respect to such Subject PFAL Entity; and (iii) all action contemplated by Section 7.15 in connection with such Subject PFAL Entity, including, without limitation, the amendment of Section 2 to the Subsidiary Collateral Assignment or Subsidiary Pledge Agreement (as applicable) to specify such Subject PFAL Entity, and the delivery of any stock certificates or other certificates or instruments issued by such Subject PFAL Entity and of an acknowledgement of lien by such Subject PFAL Entity, all in form and substance satisfactory to the Agent, shall have been taken and completed. 6B.2 Capital Structure. (a) A Person (such Person, a "Third Party Investor") other than FC Commercial or an Affiliate of FC Commercial shall have made a cash contribution to the Subject PFAL Entity's capital of not less than 25% and not more than 50% of the total equity of such Subject PFAL Entity; provided that the foregoing condition shall apply only if after giving effect to such Term Loans an aggregate amount of Term Loans in excess of 25% of the Total Term Loan Commitment shall have been made in respect of PFAL Portfolio Entities which at the time of the making of such Loans had received cash capital contributions of less than 25% or more than 50% of their total equity from Third Party Investors. (b) No Third Party Investor shall have greater rights with respect to such Subject PFAL Entity than FC Commercial (except to the extent that, if such Third Party Investor has acquired more Equity Interests in such Subject PFAL Entity than FC Commercial (and was permitted to do so pursuant to the terms hereof), such greater rights are commensurate with and derive solely from, such larger holding of Equity Interests. (c) No Third Party Investor shall have acquired equity interests or voting rights in such Subject PFAL Entity on a basis more favorable to such Person than the arrangements pursuant to which FC Commercial acquired its equity interests in such Subject 22 PFAL Entity (and without limiting the foregoing, no Third Party Investor shall have acquired its Equity Interests at a cash cost per unit or interest lower than that paid by FC Commercial) and no Third Party Investor acquiring any Equity Interests in such Subject PFAL Entity shall have been given any consideration (other than issuance of such Equity Interests) for making its equity contribution. 6B.3 Consummation of Asset Acquisition. There shall have been delivered to the Agent evidence satisfactory to the Agent that the acquisition of the Asset Pool described in the related Asset Pool Acquisition Certificate shall have been consummated in accordance with the terms of the applicable asset purchase agreement (without any waiver of any material provision thereof by the Subject PFAL Entity) and the Asset Pool conforms to the description thereof contained in the Asset Pool Acquisition Certificate as modified by revisions permitted by Section 6B.4, that the entire amount of proceeds of such Loans were loaned to FC Commercial under the FC Commercial (PFAL) Pledged Note and contributed by FC Commercial to the capital of the Subject PFAL Entity simultaneously with the closing of such acquisition, that the entire amount of the capital contribution by other holders of the Equity Interests in such Subject PFAL Entity were contributed, and the proceeds of all Indebtedness incurred by such Subject PFAL Entity were received by such Subject PFAL Entity, at the same time as or before such FC Commercial contribution, and that such Subject PFAL Entity used all such capital contributions together all such proceeds of Indebtedness to acquire such Asset Pool. 6B.4 Notices. (a) The Final Asset Pool Acquisition Certificate in respect of the Asset Pool in respect of which such Loans are requested shall have been delivered to the Agent not less than 10 Business Days prior to the Borrowing Date of such Term Loans; provided that additional written revisions to the applicable Asset Pool Acquisition Certificate may be delivered to the Agent until 11:00 a.m. (Closing Office time) on the day which is two Business Days preceding the Borrowing Date for such Loans if such revisions relate only to the Acquisition Price, the amount of Loans being requested (three Business Days notice being required if such Loans are to be Eurodollar Loans) or provide additional details as to the related Asset Pool which do not result in the Asset Pool as so described being different in any material respect from the Asset Pool as most recently described on prior to the tenth Business Day preceding such Borrowing Date. (b) A Notice of Borrowing and Final NPV Pool Certificate in respect of the related Asset Pool, each in accordance with Section 2.2, shall have been delivered to the Agent. (c) The Agent shall have been provided with such other information as to the Asset Pool as it shall have reasonably requested. 6B.5 Asset Pool. (a) The Asset Pool shall be an Eligible Asset Pool. (b) The sellers of the Asset Pool shall be Eligible Sellers. 6B.6 Officer's Certificate. 23 (a) Borrower shall have delivered to the Agent a certificate of an Executive Officer certifying compliance with Sections 6B.1, 6B.2, 6B.3 and 6B.5 and 6B.10. (b) In addition to the representations and warranties applicable to the making of such Loan set forth in Section 6A.3, the making of each Term Loan shall constitute a representation and warranty by the Borrower to the Agent that, at the time of said Term Loan (and after giving effect thereto) all conditions specified Sections 6B.1, 6B.2, 6B.3 and 6B.5 and 6B.10 are satisfied at such time. 6B.7 Opinion of Counsel. If requested by the Agent, in the case of a Subject PFAL Entity which is a US Person, Haynes and Boone LLP or other counsel to the Borrower satisfactory to the Agent and, in the case of any other Subject PFAL Entity, counsel satisfactory to the Bank, shall have delivered to the Agent an opinion of counsel as to matters relating to the Subject PFAL Entity or such other matters as the Agent may reasonably request. 6B.8 Utilization Fee. The Utilization Fee in respect of such Term Loans shall have been paid in full to the Agent. 6B.9 Leverage Arrangements. Not less than five Business Days prior to the proposed Borrowing Date for such Term Loans (or such lesser period of time (if any) to which the Agent consents in writing) the Borrower shall have delivered to the Agent copies, certified by an Executive Officer as complete and correct of each instrument, agreement and other document evidencing any of the arrangements with respect to Indebtedness incurred and to be incurred by the Subject PFAL Entity and as constituting Approved Portfolio Leverage Arrangements, or a certificate from an Executive Officer that such Subject PFAL Entity has not incurred any Indebtedness with respect to any other Asset Pool and will not incur any Indebtedness with respect to the Asset Pool in respect of which such Term Loans are requested. 6B.10 Adverse Waterfall Event. No Adverse Waterfall Event shall have occurred for six months with respect to any Asset Pool owned by the Subject PFAL Entity. 6B.11 Effective Date. The Effective Date shall have occurred. 6B.12 Deficiency Letter. The Borrower shall have satisfied its obligations under the Agreement entitled "Post-Closing-PFAL" dated on or about the Effective Date, as the same be from time to time amended, supplemented or otherwise modified. 6B.13 Pledged Note. The Borrower shall have delivered to the Agent a promissory note in the principal amount of $54,000,000 payable by FC Commercial to the order of the Borrower, duly endorsed in blank (the "FC Commercial (PFAL) Pledged Note"). All documents, agreements, instruments, certificates, financial statements, legal opinions, analyses, reports and other papers required to be delivered by this Section 6B shall be in form and substance satisfactory to the Agent and shall be delivered (with sufficient copies for each of the Lenders) to the Agent at its Closing Office or as the Agent may otherwise direct 24 Section 7. AFFIRMATIVE COVENANTS. Borrower warrants and represents to and covenants to the Lenders and the Agent that, so long as this Agreement is in effect and until the Commitments are terminated and all of the Loans, together with interest and all other obligations incurred hereunder are paid in full, Borrower will perform the obligations set forth in this Section 7 (unless it shall have first procured the written consent of the Majority Lenders to do otherwise), and will cause each Primary Obligor, Secondary Obligor and other Loan Party to perform the obligations set forth in this Section 7 which are applicable to such Person (unless it shall have first procured the written consent of the Majority Lenders to do otherwise). 7.1 Financial Statements. The Borrower will furnish to the Agent and each Lender: (a) As soon as available and in any event within 30 days after the close of each calendar month, as at the end of such month and for the period commencing at the end of the previous Fiscal Year and ending with the end of such month, a consolidated and consolidating balance sheet of Borrower and the other members of the Consolidated Group, and the related statement of operations for such period, all certified by the chief financial officer of the Borrower and each other member of the Consolidated Group as being prepared in accordance with GAAP and to present fairly the financial position and results of operation of such Person for such period; (b) As soon as available but not later than one hundred five (105) days after the close of each Fiscal Year of the Borrower, as at the end of and for the Fiscal Year just closed, an audited consolidated balance sheet of Borrower and the other members of the Consolidated Group, the related statement of operations (including income statement) and a reconciliation of capital for such year, all certified on an unqualified basis by a firm of independent certified public accountants selected by the Borrower and acceptable to Agent in Agent's sole and absolute discretion; (c) As soon as available but not later than one hundred five (105) days after the close of each Fiscal Year of the Borrower, as at the end of and for the Fiscal Year just closed, an unaudited consolidating balance sheet of Borrower and the other members of the Consolidated Group, the related statements of operations (including income statement) and a reconciliation of capital for such year, prepared by the chief financial officer of Borrower; (d) Concurrently with the delivery of the financial statements described in subsection (b) above: (A) a certificate of the aforesaid independent certified public accountants certifying to Agent that based upon their examination of the affairs of Borrower and the other members of the Consolidated Group, performed in connection with the preparation of said financial statements, they are not aware of the occurrence or existence of any condition or event which constitutes an Event of Default or Default, or, if they are aware thereof, the nature thereof, and (B) a reliance letter executed by an authorized partner of the aforesaid independent certified public accountants, in form and substance reasonably acceptable to Agent, and acknowledging that Agent and Lenders may rely on such financial statements in connection with this Agreement notwithstanding that Agent and Lenders are not in privity with such independent certified public accountants in connection with such financial statements. 25 (e) (i) Concurrently with delivery to its stockholders copies of all financial and other information delivered by Borrower to such Persons, including without limitation, its proxy statements and annual reports to stockholders. Within two (2) Business Days after delivery to the SEC by Borrower, which in all cases shall be on a timely basis in accordance with the applicable document and the Securities Laws, copies of all reports and other filings filed by Borrower with the SEC, including without limitation, all reports on Forms 10K, 10Q or 8K promulgated under the Securities Exchange Act of 1934, as amended, and all registration statements filed under the Securities Act of 1933, as amended. (ii) Concurrently with delivery of the financial statements required pursuant to Sections 7.1(a) and (b) hereof, a certificate executed by the President, Treasurer or Chief Financial Officer of Borrower that (A) no Event of Default or Default has occurred and is continuing under this Agreement, (B) that Borrower is in compliance with the covenants set forth in Section 8.20 hereof, setting forth the Borrower's calculations with respect to such compliance; and that (C) no event of default and no event or condition which, with the passage of time or the giving of notice or both, would constitute an event of default has occurred and is continuing under any other Indebtedness Instrument ("Other Indebtedness Instrument Unmatured Default") or, if an Event of Default or Default has occurred under this Agreement or an event of default or Other Indebtedness Instrument Unmatured Default has occurred under any other Indebtedness Instrument, setting forth the details of such event and the action which Borrower proposes to take with respect thereto. (f) [Intentionally omitted]. (g) Promptly upon receipt thereof, copies of all detailed financial reports and Management Letters, if any, submitted to any member of the Consolidated Group by the Auditors, in connection with each annual or interim audit of their respective books by such Auditors; (h) As soon as possible and in any event (A) within 30 days after a Loan Party, or any of the respective ERISA Affiliates of any Loan Party, knows that any Termination Event described in clause (i) of the definition of Termination Event with respect to any Pension Plan has occurred or is expected to occur and (B) within 10 days after a Loan Party or any of its ERISA Affiliates knows that any other Termination Event with respect to any Pension Plan has occurred or is expected to occur, a statement of the CFO of the Borrower describing such Termination Event and the action, if any, which the affected Loan Party or ERISA Affiliate proposes to take with respect thereto; (i) Promptly and in any event within five Business Days after receipt thereof by a Loan Party or any of its ERISA Affiliates from the PBGC, copies of each notice received by such Person of the PBGC's intention to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan, any notice of noncompliance issued by the PBGC with respect to a proposed standard termination of a Pension Plan, and any notice issued by the PBGC with respect to a proposed distress termination of a Pension Plan; 26 (j) Promptly and in any event within 30 days after the filing thereof with the IRS, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Pension Plan; (k) Promptly and in any event within five Business Days after receipt thereof by a Loan Party or any of its ERISA Affiliates from a Multiemployer Plan sponsor, a copy of each notice received by such Person concerning (x) the imposition or amount of withdrawal liability under Subtitle E of Title IV of ERISA or (y) any determination by a Multiemployer Plan sponsor that such Multiemployer Plan is, or is expected to be, in "reorganization" (within the meaning of Section 4241 of ERISA) or "insolvent" (within the meaning of Section 4245 of ERISA), or has incurred or is expected to incur an "accumulated funding deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the Code); (l) Upon request of the Agent made from time to time, deliver to the Agent a copy of any Pension Plan sponsored, contributed to, participated in or maintained by Borrower or any ERISA Affiliate; and (m) With reasonable promptness, such other information respecting the business, properties, operations, prospects or condition (financial or otherwise) of any member of the Consolidated Group and any other Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing or Secondary Obligor-R and, to the extent reasonably available, any other Secondary Obligor as the Agent or any Lender may from time to time in writing reasonably request provided, that Borrower shall not be required to furnish to the Agent or any Lender any such information relating to a Portfolio Entity-Post AE which is not a PFAL Portfolio Entity if (i) the Charter Documents of, or Shareholder Agreement relating to, such Person, in each case as in effect on the date of formation of such Person, prohibit such disclosure and (ii) notice of such prohibition on disclosure is provided to the Agent within five days of formation of such Person (any such restriction, a "Disclosure Restriction"). 7.2 Other Required Notices. (a) [Intentionally omitted]. (b) Borrower shall notify Agent promptly after obtaining knowledge of: (i) except as otherwise previously disclosed, any event or occurrence which Borrower has determined has caused a material loss or decline in value of the Assets of Borrower, any Primary Obligor, any Mid-Tier Company or any Secondary Obligor other than, prior to the REO Post-25% Time, an REO Affiliate, due to casualty or any other adverse occurrence and the estimated (or actual, if available) amount of such loss or decline; (ii) the institution of (x) any suit or administrative proceeding which, if determined adversely to Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or any other Secondary Obligor is reasonably likely to or could reasonably be expected to materially adversely affect the operations, financial condition or business of any obligor of a Pledged Note or have a Material Adverse Effect on the Borrower, any Primary Obligor, any Mid-Tier Company, after the REO Post-25% 27 Time, an REO-PFAL Affiliate, or any Wholly-Owned Subsidiary other than (except as set forth with respect to an REO-PFAL Affiliate) an REO Affiliate, and (y) any other such suit or administrative proceeding against Borrower, any Primary Obligor or any Mid-Tier Company in which the uninsured amount involved is $750,000 or more, such notice to be given on or prior to the end of the calendar month in which the applicable event occurs; (iii) Borrower, any Primary Obligor or any Mid-Tier Company becoming subject to any Charge, restriction, judgment, decree or order which could reasonably be expected to have a Material Adverse Effect or any Secondary Obligor becoming subject to any Charge, restriction, judgment, decree or order if the same could reasonably be expected to have a Material Adverse Effect on Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary other than an REO Affiliate; (iv) the commencement of any lockout, strike or walkout relating to any labor contract to which Borrower, any Primary Obligor, or any Mid-Tier Company is a party, or, if the same could reasonably be expected to have a Material Adverse Effect on Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary other than an REO Affiliate, the commencement of any lockout, strike or walkout relating to any labor contract to which any other Secondary Obligor is a party; (v) except as otherwise previously disclosed, any event or occurrence (x) in respect of Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary which could reasonably be expected to have a Material Adverse Effect, (y) in respect of any other Secondary Obligor which could reasonably be expected to have a Material Adverse Effect on the Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary other than an REO Affiliate or (z) in respect of Borrower, any Primary Obligor or any Secondary Obligor if the same could reasonably be expected to have a material adverse effect on the ability of any obligor of a Pledged Note to repay such Pledged Note; (vi) (x) the occurrence of a default by Borrower, any Primary Obligor or any Mid-Tier Company under any agreement, document or instrument to which such Person is a party which could reasonably be expected to have a Material Adverse Effect, (y) the occurrence of a default by any other Secondary Obligor under any agreement, document or instrument to which it is a party which could reasonably be expected to have a Material Adverse Effect on the Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary other than an REO Affiliate or (z) the occurrence of any default by Borrower, any Primary Obligor or any Secondary Obligor which could reasonably be expected to materially and adversely affect any such Person's ability to perform its respective obligations under the Loan Documents; (vii) the filing of a petition by or against Borrower, any Primary Obligor, Secondary Obligor, any other Pledged Entity or any other Loan Party under any section or chapter of the United States Bankruptcy Code or any similar law or regulation or any such Person shall make an assignment for the benefit of its creditors or if any case or proceeding is filed by or against any such Person for its dissolution or liquidation; 28 (viii) the making of an application for the appointment of a receiver, trustee or custodian for any of the assets of Borrower, any Primary Obligor or any Secondary Obligor or any other Loan Party; (ix) the exercise by any holder of any option, warrant or right to purchase any Equity Interest in Borrower, any Primary Obligor or any Secondary Obligor; (x) any breach of the covenant set forth in Section 8.11; (xi) the issuance or sale of any Securities by Borrower, any Primary Obligor or any Secondary Obligor, whether or not permitted pursuant to the terms hereof; and (xii) the occurrence of the REO Post -25% Time. (c) On the 25th day of each month or, if sooner, on the fourth to last CFCCA-P Business Day of each month, Borrower shall deliver to the Agent (i) Waterfall Certificates in respect of each Asset Pool and PFAL Portfolio Entity, certified by an Executive Officer of Borrower; (ii) a Summary Waterfall Certificate in respect of all Asset Pools; and (iii) a copy of each certificate and notice delivered pursuant to Section 7.2 (other than Section 7.2(b)) of the Amended and Restated Agreement as in effect on the date hereof (or, if such Agreement is terminated, each such certificate and notice that it would have been required to have so delivered had such Agreement not been terminated); (d) Borrower shall notify the Agent of the occurrence of any Extraordinary Transaction on or prior to the occurrence of such event and of the receipt by Borrower, any Primary Obligor or any Secondary Obligor of Extraordinary Transaction Proceeds on or prior to such receipt (or, in either case, at such earlier time (if any) as may be specified with respect thereto elsewhere in this Agreement). (e) (i) The Borrower shall give the Agent notice that a Secondary Obligor has become a Mid-Tier Company (due to the amount of assets contributed to it on the date of its formation or an increase in assets thereafter) within 30 days of such Person becoming a Mid-Tier Company. (ii) The Borrower shall give the Agent notice that a Tier IV Company has ceased to constitute a Tier IV Company (due to an increase in the fair market value of its assets or such company engaging in any business) within 30 days of such Person ceasing to constitute a Tier IV Company and shall promptly deliver to Lender a revised Schedule 10.43 to reflect such change. (iii) The Borrower shall give the Agent notice that a Tier V Company has ceased to constitute a Tier V Company within 30 days of such Person ceasing to constitute a Tier V Company. (f) The Borrower shall give the Agent notice that it or any Primary Obligor, Mid-Tier Company, Wholly-Owned Subsidiary or Loan Party intends to acquire Equity Interests in any Person or to form a Subsidiary prior to the making of any such acquisition or any such formation and, if requested in writing by the Agent, forthwith upon the making of such 29 acquisition or any such formation, shall deliver to the Agent an addendum to Schedule 10.23 reflecting the same and, if such acquisition or formation is of an REO Affiliate, a new Schedule 10.46 reflecting the same. (g) On or before the fourth to last CFCCA-P Business Day of each month, Borrower shall deliver to the Agent a Portfolio Protection Expense Report in form and detail satisfactory to the Agent showing as of the close of business on the last Business Day of the preceding calendar month the aggregate amount retained by Secondary Obligors as Portfolio Protection Expenses to pay Portfolio Protection Expenses not theretofore paid (the "Aggregate PPE Amount"), the aggregate amount of Portfolio Protection Expenses theretofore paid and the aggregate amount of Portfolio Protection Expenses withheld (in the aggregate) by such Persons during the immediately preceding calendar month. In addition, such Report shall itemize each item of the Aggregate PPE Amount in excess of $25,000 (each such item, an "Itemized PPE Amount"), and Borrower shall provide to the Agent such other information with respect thereto as the Agent may request. If the Agent gives the Borrower notice that it disputes the inclusion of any Itemized PPE Amount as a Portfolio Protection Expense (whether due to the reasonableness thereof, the time such amount has been or is expected to be retained in advance of payment of the related expense or otherwise), such challenged item shall constitute a "Challenged Portfolio Protection Expense." (h) On or before the fourth to last CFCCA-P Business Day of each month, Borrower shall deliver to Agent an Asset Pool NPV Percentage Certificate with respect to each Asset Pool (which shall detail for each Asset Pool the Net Present Value of the assets of such Asset Pool and the amount of Indebtedness relating to such Asset Pool and the amount of Guaranty Equivalents issued by PFAL Portfolio Entity which owns such Asset Pool) certified by an Executive Officer. (i) The Borrower shall deliver to the Agent an Asset Pool Acquisition Certificate in respect of each Asset Pool in respect of which it desires that Term Loans be made not less than ten Business Days prior to the AP Funding Date for such Asset Pool. (j) The Borrower shall give the Agent notice that any PFAL Portfolio Entity has formed an REO- PFAL Affiliate within five days after such formation and such other information as the Agent may request with respect thereto promptly following such request. (k) The Borrower shall give the Agent notice of the transfer of any property by a PFAL Portfolio Entity to one of its REO-PFAL Affiliates within five days of any such transfer and such other information as the Agent may request with respect thereto promptly following such request. (l) If at any time the Net Present Value of Assets of REO-PFAL Affiliates exceeds 15% of the Net Present Value of the Assets of all PFAL Portfolio Entities, the Borrower shall give the Agent written notice thereof and shall thereafter, on or prior to fourth to last Business Day of each month, report to Agent such percentage and provide such other information as to REO-PFAL Affiliates as the Agent may reasonably request. 30 (m) The Borrower shall give the Agent notice of the occurrence of an Adverse Waterfall Event within three days of such occurrence. 7.3 Payment of Charges. (a) Other than Charges payable by First X or First B, Borrower, each Primary Obligor, each Mid-Tier Company, each Wholly-Owned Subsidiary other than (subject to Section 7.3(b)) any REO Affiliate shall pay promptly, when due, all Charges and Borrower, each Primary Obligor and each Mid-Tier Company and each such Wholly-Owned Subsidiary shall not permit Charges to arise or to remain unpaid and will promptly discharge the same. In the event Borrower, any Primary Obligor or Secondary Obligor other than (subject to Section 7.3(b)) an REO Affiliate, at any time or times hereafter, shall fail to pay the Charges or to obtain such discharges as required herein, Borrower shall so advise Agent thereof in writing. Agent may, without waiving or releasing any obligation, covenant or agreement of Borrower or any Event of Default or Default, in its sole and absolute discretion, at any time or times thereafter, make such payment, or any part thereof, or obtain such discharge and take any other action with respect thereto which Agent deems advisable. All sums so paid by Agent and any expenses relating thereto, including reasonable attorneys' fees, court costs, expenses and other charges, shall be part of the Obligations, payable by Borrower to Agent on demand. Notwithstanding the foregoing, Borrower, any Primary Obligor, any Mid-Tier Company or Wholly-Owned Subsidiary may permit or suffer the Charges to attach to its Assets and may dispute, without prior payment thereof, the Charges, on the conditions that: (i) Borrower or the applicable Primary Obligor, Mid-Tier Company or Wholly-Owned Subsidiary, in good faith, shall be contesting the same in an appropriate proceeding diligently pursued; (ii) enforcement thereof against any Assets of Borrower or the applicable Primary Obligor or Mid-Tier Company or Wholly-Owned Subsidiary shall be stayed; and (iii) appropriate reserves therefor shall have been established on the Records of Borrower or the applicable Primary Obligor or Mid-Tier Company or Wholly-Owned Subsidiary in accordance with GAAP. (b) Borrower shall ensure that each REO-PFAL pays promptly, when due, all Charges to the extent necessary to ensure that the Net Present Value of REO-PFAL Affiliates (based on the Net Present Value of their respective assets) which have not so paid their Charges does not exceed 25% of the Net Present Value of all REO-PFAL Affiliates (based on the Net Present Value of their respective assets), unless the Net Present Value of REO-PFAL Affiliates (as so determined) not paying Charges does not exceed $1,000,000. In the event an REO-PFAL Affiliate, at any time or times hereafter, shall fail to pay any Charges, Agent may, without waiving or releasing any obligation, covenant or agreement of Borrower or any Event of Default or Default, in its sole and absolute discretion, at any time or times thereafter, make such payment, or any part thereof, or obtain discharge of such Charge and take any other action with respect thereto which Agent deems advisable. All sums so paid by Agent and any expenses relating thereto, including reasonable attorneys' fees, court costs, expenses and other charges, shall be part of the Obligations, payable by Borrower to Agent on demand. 7.4 Insurance. Borrower and each Primary Obligor, Mid-Tier Company, each REO-PFAL Affiliate and each Wholly-Owned Subsidiary at each of such respective Person's sole cost and expense, shall keep and maintain: (i) policies of insurance against all hazards and risks ordinarily insured against by other owners or users of properties in similar business or as 31 reasonably requested in writing by Agent; and (ii) public liability insurance relating to such Person's ownership and use of its Assets. All such policies of insurance shall be in form, with insurers and in such amounts as may be satisfactory to Agent. Borrower shall deliver to Agent the original (or certified) copy of each policy of insurance, and evidence of payment of all premiums for each such policy. Such policies of insurance of the Borrower, Primary Obligors and Wholly-Owned Subsidiaries (except those of public liability) shall contain an endorsement, in form and substance acceptable to Agent, showing losses payable to Agent for the ratable benefit of Lenders. Such endorsement or an independent instrument furnished to Agent, shall provide that all insurance companies will give Agent at least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of Borrower or any other Person shall affect the right of Agent for the ratable benefit of Lenders, to recover under such policy or policies of insurance in case of loss or damage. Upon request by Agent and, whether or not such request is made, upon the occurrence of an Event of Default or Default, Borrower hereby directs all insurers under such policies of insurance (except those of public liability) to pay all proceeds payable thereunder directly to Agent. Upon request by Agent and upon the occurrence of an Event of Default or Default, Borrower, irrevocably, appoints Agent (and all officers, employees or agents designated by Agent) as Borrower's true and lawful agent and attorney-in-fact for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect to such policies of insurance. In the event Borrower, any Primary Obligor or any Mid-Tier Company or Wholly-Owned Subsidiary at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then Agent, without waiving or releasing any obligation, covenant or agreement of Borrower or any Event of Default or Default, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto which Agent deems advisable. All sums so disbursed by Agent, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be part of the Obligations, payable by Borrower to Agent on demand. Agent shall also be named as an additional insured with respect to Borrower's, each Primary Obligor's and each Wholly-Owned Subsidiary's liability insurance. 7.5 Maintenance of Records. Borrower will keep, and will cause each Primary Obligor and each Wholly-Owned Subsidiary other than REO Affiliates which are not REO-PFAL Affiliates to keep, at all times books of record and account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs, and each such Person will provide, and will cause each such other Person to provide, adequate protection against loss or damage to such books of record and account. 7.6 Preservation of Existence. Each of Borrower, each Primary Obligor, each Mid-Tier Company, each Secondary Obligor-Existing, after the REO Post 25% Time, each REO PFAL Affiliate and each Subsidiary of Borrower other than a Tier IV Company or (except as provided) an REO Affiliate or a Harbor Debtor, and , will maintain and preserve its respective corporate, limited liability company or partnership existence, rights, privileges and franchises in its jurisdiction of organization, and qualify and remain qualified to do business in, and maintain its rights, privileges and franchises in each other jurisdiction which in the opinion of the 32 respective board of directors, manager, general partner or other governing Person of Borrower, such Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing, other Subsidiary of Borrower or REO PFAL Affiliate continue to be advantageous to it and each such Person (including each Tier IV Company and REO Affiliate which is a Subsidiary of Borrower) shall comply in all material respects with all applicable Legal Requirements. Without limiting the generality of the foregoing, the Borrower agrees to (and to cause each such other Person to) qualify to do business as a foreign corporation in each jurisdiction where the nature of its business and the operations conducted by it therein require it to be so qualified. 7.7 Preservation of Assets. Each of Borrower and each Primary Obligor will keep its property material to the conduct of its business in good repair, working order and condition and from time to time make all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, so that the business carried on by it may be conducted at all times in accordance with prudent business management. 7.8 Inspection of Books and Assets. Borrower shall permit Agent, Lenders and each of their respective representatives reasonable access during normal business hours to its properties and personnel, and shall disclose and make available to Agent and Lenders all books, papers and records relating to the assets, stock ownership, properties, operations, obligations, and liabilities of Borrower, its Subsidiaries, each Mid-Tier Company, each Secondary Obligor-Existing, each other Secondary Obligor-R and each PFAL Portfolio Entity (and shall use its best efforts to cause each other Existing S Co. and each other Portfolio Entity-Post AE to do the same), including, but not limited to, all books of account (including the general ledger), tax records, minute books of meetings of boards of directors (and any committees thereof) and shareholders, organizational documents, bylaws, material contracts and agreements, filings with any regulatory authority, accountants' work papers (other than those that are the property of its independent outside auditors), litigation files, loan files, plans affecting employees, and any other business or prospects in which the Lenders may have a reasonable interest in connection with the Loans, provided that such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations, and provided further that in the event that any of the foregoing are in the control of any third party, Borrower shall use its reasonable best efforts to cause such third party to provide access to such materials to the Agent and Lenders who shall request the same. In the event that Borrower is prohibited by law from providing any of the access referred to in the preceding sentence to the Agent and Lenders, it shall use its reasonable best efforts to obtain promptly waivers thereof so as to permit such access. Borrower shall make the directors, officers, employees and agents and authorized representatives (including counsel and independent public accountants) of Borrower, its Subsidiaries, each Mid-Tier Company, each Secondary Obligor-Existing and each other Secondary Obligor-R available (and shall use its best efforts to cause each other Existing S Co. and Portfolio Entity-Post AE to do the same) to confer with Agent and Lenders and their respective representatives, provided that (i) such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations and (ii) unless a Default or Event of Default exists, counsel to Borrower shall be permitted to be present at any meeting between Borrower's independent public accountants and the Agent or the Lenders). 7.9 Payment of Indebtedness. Each of Borrower, each Primary Obligor, each Mid-Tier Company and, subject to the final sentence of this Section 7.9, each Wholly-Owned 33 Subsidiary will duly and punctually pay, or cause to be paid, the principal of and the interest on all Indebtedness heretofore or hereafter incurred or assumed by such Person, when and as the same shall become due and payable, provided that neither Borrower, nor any Primary Obligor, any Wholly-Owned Subsidiary or PFAL Portfolio Entity shall be required to pay any Indebtedness (other than Indebtedness incurred under this Agreement or any other Loan Document) while the same is being contested by it in good faith and by appropriate proceedings so long as Borrower or such Primary Obligor or Wholly-Owned Subsidiary or PFAL Portfolio Entity (as the case may be) shall have set aside on its books appropriate reserves in accordance with GAAP with respect thereto and title to any property of Borrower or the applicable Primary Obligor or Wholly-Owned Subsidiary or PFAL Portfolio Entity is not jeopardized. The provisions of this Section 7.9 do not relate to Indebtedness of FC Capital, Bosque Asset Corp. or other Wholly-Owned Subsidiaries which are REO Affiliates or Harbor Debtors. 7.10 Further Assurances. Each of Borrower, each Primary Obligor, each Subsidiary and each other Loan Party will, and will cause each of its respective Subsidiaries to, make, execute or endorse, and acknowledge and deliver or file, all such vouchers, invoices, notices, and certifications and additional agreements, undertakings, conveyances, transfers, assignments, or further assurances, and take any and all such other action, as the Agent or any Lender may, from time to time, deem necessary or proper in connection with this Agreement, the obligations of such Person hereunder or under the Notes or any of the other Loan Documents to which such Person is a party, or for the better assuring and confirming unto the Agent on behalf of the Lenders, with the Requisite Priority, all or any part of the security for the Obligations. 7.11 Notice of Default. Forthwith and in any event within five days after Borrower shall have obtained knowledge of the existence of a Default or Event of Default, Borrower will deliver to the Agent a certificate signed by an Executive Officer of Borrower setting forth the details of such event, the period of existence thereof, and what action the Borrower proposes to take with respect thereto. 7.12 Reserves. Each of Borrower, each Primary Obligor, each PFAL Portfolio Entity and, subject to the last sentence of this Section 7.12, each Wholly-Owned Subsidiary and each Secondary Obligor-R will set up on its books from its earnings, reserves for bad debt in accordance with GAAP and in an aggregate amount deemed adequate in the judgment of such Person and accepted by the outside auditors in their annual audits and Borrower shall use its best efforts to cause each other Mid-Tier Company to do the same. The provisions of this Section 7.12 shall not apply to any Wholly-Owned Subsidiary or Secondary Obligor-R which is an REO Affiliate, a Harbor Debtor, a Tier IV Company or Tier V Company. 7.13 Representation and Warranties; Covenants as to Other Persons, Amendment of Schedules. (a) To the extent any representation or warranty contained herein refers to an event or state of facts which exists on or after the date hereof, on or after the Execution Date or on or after the Effective Date or on or after the date of any Loan and shall exist during the term hereof or at the time of any or each Loan hereunder, to the extent not already a covenant, said representation or warranty shall be deemed to be an affirmative covenant by Borrower to take all actions, omit to take such actions or cause such actions to be taken which shall be necessary or 34 desirable to cause such representation or warranty to be true and accurate at all times during the term hereof. To the extent any representation, warranty or covenant herein (including the covenants set forth in Section 8 and in this Section 7) relates to any other Person (including but not limited to a Primary Obligor, a Secondary Obligor, any Pledged Entity or any other Loan Party) other than Borrower, it shall be deemed to be a covenant of Borrower to cause such Person to comply with or otherwise perform such representation, warranty or covenant, whether or not Borrower has the legal, corporate or other ability to cause such compliance or performance. (b) No delivery of any new or supplemented Schedule to this Agreement (whether or not such delivery is required by this Agreement or any other Loan Document) shall waive or cure any Default or Event of Default which would occur absent such delivery (other than a Default or Event of Default arising solely from the breach of an obligation to deliver such Schedule and other than as may be set forth in writing in a consent or amendment (if any) pursuant to which any such new or supplemented Schedule is delivered). 7.14 Perform Obligations. Borrower and each Primary Obligor, Secondary Obligor and other Loan Party shall duly and punctually pay and perform each of its obligations under this Agreement and the other Loan Documents in accordance with the terms hereof and thereof. 7.15 New Debt and Equity Interests. (a) Borrower shall ensure that at the time that Borrower, any Primary Obligor, any other Loan Party, any PFAL Portfolio Entity or any Wholly-Owned Subsidiary other than any PFAL Portfolio Entity or Wholly-Owned Subsidiary which is not a US Person, acquires an Equity Interest in any Person other than, in the case of a Secondary Obligor, an REO Affiliate of such Secondary Obligor, such new Equity Interest is subject to a perfected security interest of the Requisite Priority in favor of the Agent and the Lenders and, in connection therewith, shall take such action and execute and deliver such pledge agreements or amendments to pledge agreement and such other instruments and agreements, including, without limitation, delivery of notices of lien to the Pledged Entity, acknowledgement of such notice from the Pledged Entity, delivery of the original certificates of certificated securities to Collateral Agent, together with an assignment separate from certificate therefor, in each case in form and substance satisfactory to the Collateral Agent, as the Collateral Agent may require. If requested in writing by the Agent, Borrower shall also deliver to the Agent a supplement to Schedule 10.5(b) hereto to reflect the acquisition of such new Equity Interest. The provisions of this Section 7.15(a) are in addition to, and not in limitation of, other provisions of this Agreement limiting the investments, the acquisition of Equity Interests and the acquisition of other assets by Borrower, Primary Obligors, Secondary Obligors or other Persons. Notwithstanding the foregoing, no Primary Obligor, PFAL Portfolio Entity or Wholly-Owned Subsidiary shall be required to pledge to the Agent (x) shares of stock, partnership interests, membership interests or other similar equity interests consisting of more than 66.66% of the shares of stock, partnership interests, membership interests or other similar equity interests in any Person which is not a US Person or (y) any Equity Interest issued by an REO Affiliate. (b) Borrower shall ensure that at the time that Borrower or any Primary Obligor makes any loan or acquires any rights to any other indebtedness or acquires any note, 35 bond or other indebtedness instrument (any such note, bond or other instrument, a "Subject Debt Instrument"), all rights of the Borrower or such Primary Obligor with respect to such loan, other indebtedness and Subject Debt Instrument are subject to a perfected security interest of the Requisite Priority in favor of the Agent and the Lenders and, in connection therewith, shall take such action and execute and deliver such pledge agreements or amendments to pledge agreement and such other instruments and agreements, including, without limitation, delivery of notices of pledge to the issuer of such indebtedness, acknowledgement of such notice from such issuer, delivery of the Subject Debt Instruments and each other original note evidencing such indebtedness to Collateral Agent, together with an assignment separate from certificate such note or Subject Debt Instrument or allonge thereto, and estoppel certificates from the issuer thereof, in each case in form and substance satisfactory to the Collateral Agent, as the Collateral Agent may require. The provisions of this Section 7.15(b) are in addition to, and not in limitation of, other provisions of this Agreement limiting the investments, the acquisition of Equity Interests and the acquisition of other assets by Borrower, Primary Obligors, Secondary Obligors or other Persons. 7.16 Cooperation. At the Agent's request, Borrower will meet from time to time with (and provide then available financial information to) other financial institutions to which any Lender may wish to grant participations in the Loans, including potential Lender Assignees and potential Purchasing Lenders. 7.17 Approvals and Consents. In the event that any approval, consent or non-objection need be obtained by Borrower, any Primary Obligor and/or any Secondary Obligor or other Loan Party from, or a notice or other filing need be filed by Borrower or any such other Person, with, any Governmental Authority in connection with the execution, delivery and performance of this Agreement or any Loan Document by Borrower or any such other Person, the Borrower shall take and cause such other Person (as applicable) to take, all actions reasonably necessary to obtain any such approval, consent or non-objection or file such notice or other filing as promptly as practicable, and the Lenders agree to cooperate with Borrower in obtaining or filing the same. 7.18 [Intentionally Omitted.] 7.19 Payment of Dividends from Primary Obligors and Subsidiaries. In furtherance and not in limitation of other provisions hereof (including Section 8.29) regarding required distributions, to the extent necessary to enable it to make payments of the Obligations in accordance with the terms hereof, unless prohibited by applicable law Borrower shall cause dividends to be paid to it by each Primary Obligor and each other Subsidiary of the Borrower (whether in existence as of the date hereof or hereafter formed or acquired) in amounts which are sufficient to enable Borrower to satisfy its payment obligations under the terms hereof. 7.20 Stay, Extension and Usury Laws. Borrower covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive it from paying all or any portion of the principal of, premium, if any, or interest on the Notes, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of its obligations under the Notes, and Borrower (to the extent it may lawfully do so) hereby expressly waives all benefits or advantages of any such law. 36 7.21 Compliance with Laws. Borrower shall comply with, and shall cause each Primary Obligor, each Secondary Obligor and each other Loan Party to comply with, all laws, rules, regulations and governmental orders (federal, state and local), including all Environmental Laws, having applicability to it or to the business or businesses at any time conducted by it, where the failure to so comply would have, or could reasonably be expected to have, a Material Adverse Effect on Borrower, any Primary Obligor or any Mid-Tier Company, or on any Wholly-Owned Subsidiary other than an REO Affiliate. Section 8. NEGATIVE COVENANTS. Borrower warrants and represents to and covenants to the Lenders and the Agent that, so long as this Agreement is in effect and until the Commitments are terminated and all of the Loans, together with interest and all other obligations incurred hereunder are paid in full, Borrower will perform the obligations set forth in this Section 8 (unless it shall have first procured the written consent of the Majority Lenders to do otherwise), and will cause each Primary Obligor, Secondary Obligor and other Loan Party to perform the obligations set forth in this Section 8 which are applicable to such Person (unless it shall have first procured the written consent of the Majority Lenders to do otherwise). 8.1 Amend Charter Documents; Engage in Same Type of Business. (a) None of Borrower, any Primary Obligor, Secondary Obligor-Existing, Mid-Tier Company or any Secondary Obligor-R or other Loan Party shall (i) make or consent to any change: (i) in its Charter Documents, in any Shareholder Agreement or in its capital structure or (ii) make any change in any of its business objectives, purposes and operations, including by undertaking additional business activities or (iii) waive any material right under its Charter Documents or any Shareholder Agreement. None of Borrower, any Primary Obligor, Mid-Tier Company or any Secondary Obligor-R shall engage in any business not of the same general type as those conducted by it on the Execution Date or, in the case of a newly formed entity, any business not of the same general type as those conducted by the Primary Obligors or the Secondary Obligors (as the case may be) on the Execution Date. Without limiting the foregoing, no PFAL Portfolio Entity shall engage in any business other than purchasing Asset Pools in accordance with the terms hereof and causing such Asset Pools to be serviced in accordance with Section 8.32. (b) None of Borrower, any Primary Obligor, any Mid-Tier Company or Secondary Obligor-R or Secondary Obligor-Existing shall enter into any Shareholder Agreement after the Execution Date other than a Permitted Shareholder Agreement. 8.2 Liens. None of Borrower, any Primary Obligor, any Mid-Tier Company (other than MCS and other than, unless constituting a PFAL Portfolio Entity, any Mexican Acquisition Entity or any French Acquisition Entity), any REO-PFAL Affiliate, any Wholly-Owned Subsidiary (other than a Harbor Debtor or an REO Affiliate which is not an REO-PFAL Affiliate) or any other Loan Party will grant, contract, create, incur, assume or suffer or permit to exist any Lien upon or with respect to, or by transfer or otherwise subject to the prior payment of any indebtedness (other than the Loans), any of its Assets, whether now owned or hereafter acquired, except (i) Permitted Liens or (ii) in the case of an REO-PFAL Affiliate, Liens in favor 37 of its REO Owner, and to the extent not resulting in a default under Section 7.3(b), non-consensual Charges. 8.3 Other Indebtedness. None of Borrower, any Primary Obligor, any Mid-Tier Company (other than MCS and other than, unless constituting a PFAL Portfolio Entity, any Mexican Acquisition Entity or any French Acquisition Entity), any REO-PFAL Affiliate, any Wholly-Owned Subsidiary or any other Loan Party will contract, create, incur, assume or suffer to exist any Indebtedness; except (i) the Loans; (ii) Indebtedness of the Borrower under the Amended and Restated Agreement not in excess of the amount outstanding on the date hereof plus additional Tranche I Bosque Loans thereunder in an amount not to exceed the Bosque Loan Commitment thereunder as in effect on the Effective Date and Permitted Liens relating thereto; (iii) other Indebtedness existing on the Effective Date listed on Schedule 10.19 to this Agreement; (iv) Indebtedness of a PFAL Portfolio Entity, incurred under Approved Portfolio Leverage Arrangements on the day that such PFAL Portfolio Entity acquires an Asset Pool, in a principal amount not in excess of (x) 75% (or, such higher percentage, if any, approved by the Agent in writing with respect to a particular Asset Pool) of the lower of (i) the Acquisition Price of such Asset Pool and (ii) the Net Present Value of such Asset Pool, or (y) such principal amount which, when added to the principal amount of the Tranche of Term Loans made in respect of the acquisition of such Asset Pool (less any Utilization Fee amount included therein) plus the full amount then or thereafter contributed to the capital of such PFAL Portfolio Entity by any holder of Equity Interests therein other than FC Commercial (and other than any such amount thereafter contributed to the capital of such PFAL Portfolio Entity in respect of the subsequent acquisition of a different Asset Pool), would not result in the sum of such principal amount of Indebtedness of such PFAL Portfolio Entity plus the principal amount of such Tranche of Term Loans and the amount of such contributions to capital exceeding the lower of (i) the Acquisition Price of such Asset Pool and (ii) the Net Present Value of such Asset Pool (it being agreed that a PFAL Portfolio Entity shall not contract, create, incur, assume or suffer to exist any Indebtedness other than Indebtedness under Approved Portfolio Leverage Arrangements incurred in respect of the acquisition by it of any Asset Pool on the AP Funding Date for such Asset Pool in accordance with the above provisions of this clause (iv)); (v) Indebtedness of any Portfolio Entity Post-AE which is not a PFAL Portfolio Entity; (vi) Indebtedness of FC Holdings under the FC Holdings Line of Credit; (vii) Indebtedness of FC Consumer Lending under the FC Consumer Note and Permitted Liens relating thereto; 38 (viii) unsecured trade payables incurred in the ordinary course of business; (ix) Indebtedness of Secondary Obligors in respect of loans permitted to be made by MCS pursuant to Section 8.13 up to an aggregate principal amount of such Indebtedness at any one time outstanding not exceeding $1,000,000; (x) in the case of any REO Affiliates, Indebtedness owed to its REO Owner and trade payables incurred in the ordinary course of business and, to the extent constituting Indebtedness, Charges incurred by such REO Affiliate; (xi) Indebtedness described on Schedule 8.3 to this Agreement, not to exceed the amounts set forth under "Cargill Senior Debt Leverage" on such Schedule, provided that such Indebtedness is incurred on or prior to June 1, 2003 and under and pursuant to the Wamco XXX Loan Agreement and solely for the purposes described on said Schedule 8.3; (xii) Indebtedness of Borrower to FC Consumer Lending under the Borrower-FCL Note; (xiii)Indebtedness under Pledged Notes to the extent permitted by Section 8.13(a)(i)-(iii); (xiv) Indebtedness of Secondary Obligors in respect of loans permitted to be made by FC Servicing pursuant to Section 8.13(a)(vii); and (xv) Indebtedness of Secondary Obligors in respect of loans permitted to be made by ASDM pursuant to Section 8.13(a)(viii); (xvi) up to $1,000,000 in aggregate principal amount of Indebtedness incurred by FC Properties, Ltd., FCS Creamer, Ltd., FCS Wood Ltd. and FCS Wildhorse Ltd. or other REO Affiliates to finance developmental expenses of with respect to real property owned by such entities. 8.4 Sell Assets. None of Borrower, any Primary Obligor, any Mid-Tier Company, or any Wholly-Owned Subsidiary or after the REO Post 25% Time, any REO-PFAL Affiliate shall assign, sell or transfer any of its Assets to any Person, other than in the ordinary course of business (and, in the case of Assets constituting Equity Interests, only to the extent permitted by Section 8.8(a)) (it being acknowledged by Borrower that no assignment, sale or transfer of assets by Borrower, any Primary Obligor, any Mid-Tier Company, any Subsidiary of Borrower or any REO-PFAL Affiliate to any Affiliate or Associate or Subsidiary of Borrower (whether or not wholly owned) or of any Mid-Tier Company or to any other Secondary Obligor or any Affiliate or Associate thereof shall be deemed to constitute a transaction in the ordinary course of business); provided that the foregoing shall not restrict (i) an REO Affiliate from transferring its assets to the Person which owns all of its equity interests or to any other Person which is not a Subsidiary or Affiliate of the Borrower or such REO Affiliate or (ii) any Person which owns all of the equity interests in an REO Affiliate from transferring distressed notes secured by real estate (and such real estate security) to such REO Affiliate. 39 8.5 Attachment. None of Borrower, any Primary Obligor, any Mid-Tier Company, after the REO Post 25% Time, any REO PFAL Affiliate, or any Wholly-Owned Subsidiary other than (except as set forth) an REO Affiliate or , or, if the same would have a Material Adverse Effect on the Borrower, any Primary Obligor or any Mid-Tier Company, no other Secondary Obligor or REO Affiliate, shall permit or suffer any levy, attachment, seizure, or restraint to be made of, upon or affecting any of its Assets or permit any of its Assets to be subject to a writ of distress. 8.6 Receiver. None of Borrower, any Primary Obligor, any Mid-Tier Company, after the REO Post 25% Time, any REO PFAL Affiliate, or any Wholly-Owned Subsidiary, other than (except as set forth) an REO Affiliate, or, if the same would have a Material Adverse Effect on the Borrower, any Primary Obligor or any Mid-Tier Company, no other Secondary Obligor or REO Affiliate, shall permit or suffer any receiver, trustee or assignee for the benefit of creditors, or any other custodian to be appointed to take possession of all or any of its Assets, or for all or any of its Assets to come within the possession of any receiver, trustee, assignee for the benefit of creditors or custodian, other than a custodian pursuant to a Non-Default Voluntary Custodial Arrangement. 8.7 Mergers and Acquisitions. None of Borrower, any Primary Obligor, any other Loan Party, any Mid-Tier Company, after the REO Post 25% Time, any REO PFAL Affiliate, or any Wholly-Owned Subsidiary other than (except as set forth) an REO Affiliate shall wind up, liquidate or dissolve its affairs or merge or consolidate with any Person (or agree to do any of the foregoing at any future time) or fail to maintain its corporate, partnership or limited liability company or other formal existence. 8.8 Stock Transfers. (a) Except as permitted pursuant to Section 8.8(b), none of Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary, any REO-PFAL Affiliate or any other Pledged Entity shall (i) except for options, warrants or other rights to purchase Equity Interests in the Borrower pursuant to plans or instruments described in Schedule 10.5(c) as amended from time to time with Majority Lenders' written consent and for Equity Interests in the Borrower issued upon exercise thereof, (x) grant any option, warrant or other right to purchase any Equity Interest in Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or any other Pledged Entity or (y) issue any other Equity Interests other than, in the case of a Secondary Obligor, (subject to Section 7.15) upon its formation, or (ii) transfer any Equity Interests (whether its own or Equity Interests issued by any Person other than itself) without, in each case, the prior written consent of Majority Lenders. (b) Notwithstanding anything to the contrary contained herein, Borrower shall have the right to register on Form S-3, and publicly offer and sell equity Securities of Borrower under the following terms and conditions: (w) Borrower shall deliver notice to Agent, within twenty-four (24) hours of the filing with the SEC; (x) Borrower shall fully and timely comply with all Securities Laws and with all terms and provisions of the underwriting agreement pursuant to which such Securities are offered for sale; (y) the prospectus and all other selling materials used by Borrower in such offering shall not contain any misstatement of material fact or omit to state any fact which would render the statements contained therein false or misleading, 40 and (z) Borrower shall pay the proceeds of such offering to Agent, in accordance with the terms hereof. 8.9 Adverse Transactions. None of Borrower, any Primary Obligor, any Mid-Tier Company, any Wholly-Owned Subsidiary or other Loan Party shall enter into any transaction which materially and adversely affects its ability to perform its obligations under the Loan Documents or to pay any other Indebtedness. 8.10 Investments. (a) Subject to the further limitations set forth in Sections 8.10(b), (c) and (d), after the date hereof, neither Borrower, any Primary Obligor, any Mid-Tier Company, any PFAL Portfolio Entity nor any Secondary Obligor shall make any investment in Equity Interests of any Person or any note, bond, other debt instruments or obligations of or issued by any Person or any other assets, except (subject to compliance in each case with Section 7.15 and, in the case of any investment consisting of the making of a loan, only if the making of such loan is permitted by Section 8.13) for (i) the acquisition by a PFAL Portfolio Entity of an Asset Pool in accordance with the other terms hereof on the funding date of the Tranche of Term Loans relating thereto in accordance with the Asset Pool Acquisition Certificate relating thereto (or of any other asset pool in respect of which no Loans have been requested if such acquisition is in the ordinary course of business for the Consolidated Group and is otherwise permitted hereunder) and (ii) investments by any such Person, other than by a PFAL Portfolio Entity or, except as permitted by the immediately succeeding sentence, by Borrower or FC Commercial, in the ordinary course of business. In furtherance and not in limitation of the foregoing, under no circumstances shall Borrower or any Primary Obligor other than FC Servicing acquire any assets other than (v) in the case of the Borrower or any Primary Obligor, loan advance receivables evidenced by Pledged Notes (to the extent otherwise permitted by the Agreement) and assets acquired with Capital Expenditures made pursuant to Section 8.31, (w) in the case of Borrower, Equity Interests in Primary Obligors, (x) in the case of Primary Obligors other than FC Commercial, Equity Interests in Subsidiaries of such Primary Obligors and in other Secondary Obligors engaged in the business engaged in by the Consolidated Group on the date hereof, (y) in the case of FC Commercial, Equity Interests acquired in a PFAL Portfolio Entity in accordance with the terms hereof on the date of the making of the Tranche of Term Loans relating to such PFAL Portfolio Entity upon purchase of its first Asset Pool (and, to the extent constituting the acquisition of additional assets and subject to compliance with Section 8.33 hereof, Equity Interests issued by such PFAL Portfolio Entity to FC Commercial in respect of additional capital contributions made by FC Commercial in connection with the acquisition by such PFAL Portfolio Entity of subsequent Asset Pools; and (z) in the case of FC Servicing, assets acquired in the ordinary course of its servicing business. (b) As used in Sections 8.10 (a),(c) and (d) "invest" shall include, but not be limited to (x) contributions to the capital of a Person, (y) the acquisition of Securities of other assets and (z) making loans or other financial accommodations (including without limitation, payment of a Person's debts or other obligations and any other expenditure of funds or credit for the benefit or on behalf of a Person) to a Person. 41 (c) In furtherance and not in limitation of the other restrictions herein and in the other Loan Documents under no circumstances shall any of Borrower, any Primary Obligor, any Secondary Obligor or other Affiliate of the Borrower at any time invest in any of the Harbor Debtors. (d) In furtherance and not in limitation of other restrictions herein and in the other Loan Documents on such contributions, loans, gifts, investments and Guaranty Equivalents set forth, none of Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party shall make capital contributions, loans or gifts to, investments in or enter into or issue any Guaranty Equivalent with respect to the obligations of any entity identified on Schedule 10.43 or any other Tier IV Company at any time during the term hereof. 8.11 Dividends; Payment of Fees, etc. (a) Borrower will not and will not permit any Primary Obligor, Secondary Obligor or other Subsidiary to authorize, declare, or pay any dividends or return any capital to its stockholders as such or authorize or make any other distribution, payments or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration any shares of any class of its capital stock now or hereafter outstanding or any options, warrants or other securities (now or hereafter outstanding) convertible into or exercisable for any equity or other securities of the Borrower, any Primary Obligor, any Secondary Obligor or any other Subsidiary or set aside funds for any of the foregoing and Borrower will not permit any Primary Obligor, Secondary Obligor or other Subsidiary to purchase any Equity Interests of Borrower or any other Primary Obligor, Secondary Obligor or other Subsidiary or set aside funds for any of the foregoing (any such authorization, declaration, payment, dividend, return of capital, distribution, delivery, redemption, retirement, purchase, acquisition or setting aside of funds, a "Dividend"), provided, that (i) any Subsidiary, Primary Obligor or Secondary Obligor may declare or pay Dividends to the Borrower or any Wholly-Owned Subsidiary and (ii) any Subsidiary, Primary Obligor or Secondary Obligor may pay cash Dividends to holders of its shares of stock, partnership interests, limited liability company interests or similar equity interests generally so long as the Borrower or its respective Subsidiaries which own such equity interests in the Person paying such Dividends receives at least its proportionate share thereof (based on its relative holdings of such equity interests in the Person paying such Dividends). Notwithstanding the foregoing, Borrower shall be permitted to consummate the Exchange Offer as described in Section 6.18 and FC Commercial shall be permitted to consummate the purchase of 20% of Holdings as described in Section 6.14. (b) Neither Borrower, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-R or any Wholly-Owned Subsidiary shall pay any director's fees or, unless such shareholder or director is directly and actively employed by Borrower or such Primary Obligor, Mid-Tier Subsidiary, or Secondary Obligor-R, any salaries to any director or shareholder; provided that Borrower may pay outside directors of Borrower, Primary Obligors, and other Subsidiaries director fees in an amount not to exceed $25,000 per director per calendar year minus the aggregate amount of director fees paid to such director by any Primary Obligors and/or Secondary Obligors, and provided further that Primary Obligors and Secondary Obligors, 42 other than any PFAL Portfolio Entity or REO PFAL Affiliate, may pay outside directors fees in an aggregate amount not to exceed $10,000 per director per annum. 8.12 [Intentionally Omitted]. 8.13 Loan; Guaranty Debt. (a) None of Borrower, any Primary Obligor, Mid-Tier Company or Wholly-Owned Subsidiary or REO-PFAL Affiliate shall make any loan to any Person, except (subject to compliance with Section 7.15) (i) for loans made by Borrower to FC Commercial pursuant to the terms of this Agreement which are evidenced by the FC Commercial (PFAL) Pledged Note; (ii) for loans made by Borrower to FC Commercial with cash from the Operating Account which are on loaned by FC Commercial to FC Servicing for use by FC Servicing to pay operating expenses, which loans to FC Commercial are evidenced by the FC Commercial Pledged Note-Existing and which loans by FC Commercial to FC Servicing are evidenced by the FC Servicing Pledged Note or (iii) for loans made by Borrower to FC Capital to fund the litigation expenses and servicing expenses to the extent permitted by Section 8.26(b) (in amounts not exceeding the amounts permitted by such Section), which loans are evidenced by the FC Capital Pledged Note; (iv) the accepting by a Secondary Obligor of a note from its 100% owned REO Affiliate evidencing the deferred purchase price of a mortgage note sold to such REO Affiliate by such Secondary Obligor; (v) the accepting by an REO Affiliate, MCS, a Mexican Acquisition Entity which is not a PFAL Portfolio Entity or a French Acquisition Entity which is not a PFAL Portfolio Entity of a note from the transferee of real property sold by such REO Affiliate, MCS, such Mexican Acquisition Entity or such French Acquisition Entity (as the case may be) in the ordinary course of business evidencing a portion of the deferred purchase price of such property; (vi) in the case of FC Servicing, short term servicer advances in the ordinary course of business with respect to portfolios which it is servicing in aggregate principal amount at any one time outstanding not in excess of $1,000,000; (vii) in the case of ASDM, short term servicer advances in the ordinary course of business with respect to portfolios which it is servicing in aggregate principal amount at any one time outstanding not in excess of $1,000,000; (viii) in the case of MCS short term servicer advances in the ordinary course of business with respect to portfolios which it is servicing; (ix) for loans made by FC Holdings or a Mexican Lending Entity- Post AE to a Mexican Acquisition Entity-Post AE for the acquisition by such Mexican Acquisition Entity-Post AE of assets from a Mexican financial institution or a Mexican governmental entity acting as a receiver of a Mexican financial institution; or (x) for loans required to be made by WAMCO XXX or by any Portfolio Entity-Post AE pursuant to Obligor Funding Obligations acquired by such Person as part of the purchase by such Person of a portfolio of loans which were made by Persons, none of whom who are Affiliates or Associates of the Borrower or WAMCO XXX or such Portfolio Entity-Post AE, which portfolio was acquired in a transaction of the sort which is in the ordinary course of business for Secondary Obligors which was permitted to be made by such Person pursuant to Section 8.10 hereof; provided that the aggregate principal amount of Obligor Funding Obligations of all Secondary Obligors at any one time shall not exceed $5,000,000. Without limiting the foregoing, under no circumstances shall Borrower, any Primary Obligor, Mid-Tier Company, Wholly Owned Subsidiary, other Subsidiary, Existing S Co. or other Secondary Obligor make any loan to FC Holdings. The foregoing provisions of this Section 8.13 shall not prohibit Wamco XXX or a Portfolio Entity-Post AE other than any PFAL Portfolio Entities, from acquiring assets 43 consisting of loans made by Persons who are not Affiliates or Associates of the Borrower or of Wamco XXX or such Portfolio Entity-Post AE which are included in a portfolio of assets purchased by such Secondary Obligor to the extent that such acquisition of assets is permitted to be made by such Person pursuant to Section 8.10 and is of the sort which is in the ordinary course of business for Secondary Obligors, or prohibit any PFAL Portfolio Entity from acquiring assets consisting of loans made by Persons which are not Affiliates or Associates of the Borrower or of such PFAL Portfolio Entity which are included in any Asset Pool purchased by such PFAL Portfolio Entity to the extent that such Asset Pool acquisition is permitted to be made by such PFAL Portfolio Entity pursuant to the other terms of this Agreement. (b) Except as set forth on Schedule 8.13B, none of Borrower, any Primary Obligor, any Mid-Tier Company, any REO-PFAL Affiliate or any Wholly-Owned Subsidiary shall enter into or issue any Guaranty Equivalents; provided that FC Holdings and/or FC Commercial shall be permitted to guaranty Indebtedness of FC Properties, Ltd., FCS Creamer, Ltd., FCS Wood Ltd., FCS Wildhorse Ltd. and/or any other REO Affiliate incurred to finance developmental expenses with respect to real property owned by such entities provided that the sum of the principal amount of Indebtedness guaranteed pursuant to such guaranties does not exceed $1,000,000. 8.14 Pay Indebtedness. None of Borrower, any Primary Obligor, any Mid-Tier Company, or any Secondary Obligor-R other than an REO Affiliate, shall defease, prepay, purchase, redeem or otherwise acquire or repay any of its Indebtedness for borrowed money, except for prepayments and repayments thereof when due. 8.15 Issue Power of Attorney. Except pursuant to the other provisions of this Agreement or the Security Documents to which the Agent is a party, none of Borrower, any Primary Obligor, any Wholly-Owned Subsidiary or any Mid-Tier Company shall issue any power of attorney or other contract or agreement giving any Person power or control over the day-to-day operations of any such Person's business ; provided that, FC International, FC Holdings, FC Mexico, FC Commercial Asset Servicing de Mexico and Servicios Efectivos de Recuperacion, S.A. de C.V. shall have the right to grant powers of attorney necessary to consummate asset acquisitions outside the United States which are undertaken in the ordinary course of such respective company's business. 8.16 Amendment of Credit Agreements. None of Borrower, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing or any Wholly-Owned Subsidiary shall amend, modify or extend (or agree to amend, modify or extend or give any notice of any sort the result of which would amend, modify or extend (whether or not, without limitation, any such extension would occur pursuant to a renewal or extension option contained therein or any other term thereof)) any note, credit agreement, security agreement or other document, instrument or agreement evidencing or securing Indebtedness of such entity; provided that (i) Borrower, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing or any Wholly-Owned Subsidiary may extend the term of existing credit facilities (other than (x) this Agreement, (y) any Approved Portfolio Leverage Arrangement or (z) the Holdings/CFSC Loan Agreement or any other Holdings CFSC Loan Document) under financial terms no more onerous than those provided for in the applicable existing credit facility, including interest rate, costs, and fees payable to the provider of such facility and (ii) the foregoing shall not restrict the Borrower 44 from entering into any agreement (with the other applicable parties thereto) which amends, modifies or extends the term of the Amended and Restated Agreement or any A&R Loan Document or of the FC Consumer Note or any FC Consumer Loan Document; provided that the same does not increase the principal amount of any loan or of the loans available under either said credit facilities or increase the rate of interest or any fee or other financial obligation thereunder. 8.17 Use of Proceeds. The proceeds of each Tranche of Term Loans shall be used by the Borrower solely to make an advance evidenced by the FC Commercial (PFAL) Pledged Note in the same amount to FC Commercial for FC Commercial to contribute (minus any portion thereof utilized to pay any utilization fee pursuant to the FC Commercial (PFAL) Pledged Note) to the capital of the PFAL Portfolio Entity identified in the Notice of Borrowing, the full amount of which contribution to capital is used by such Entity to pay a portion of the Acquisition Price of the Asset Pool identified in the related Notice of Borrowing to the seller of such asset pool previously identified to the Agent and Lenders pursuant to the terms hereof. The Borrower shall so on-lend 100% of the proceeds of each such Tranche of Term Loans and shall ensure that FC Commercial so contributes an amount equal to 100% of such loans (less the portion relating to the utilization fee, as set forth above) to the capital of the PFAL Portfolio Entity identified in the Notice of Borrowing and that such contribution to capital is so used to pay a portion of the Acquisition Price for such Asset Pool. The proceeds of the Revolving Credit Loans shall be used solely for working capital purposes of the Borrower. 8.18 Payments for Consent. None of the Borrower or any Primary Obligor or Secondary Obligor shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest fee or otherwise, to any Lender as an inducement to any consent, waiver or amendment of any of the terms or provisions of any Loan Document unless such consideration is paid to all Lenders. 8.19 Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries. Borrower shall not, and shall not permit any Primary Obligor, any other Subsidiary, any Mid-Tier Company ( in each case, whether in existence as of the date of initial issuance of the Notes or thereafter formed or acquired) or any REO-PFAL Affiliate to, create, assume or otherwise cause or suffer to exist or to become effective any consensual encumbrance or restriction on the ability of any such Person to: (i) pay any dividends or make any other distribution on its Stock or other Equity Interests to Borrower or any of its Subsidiaries or any Secondary Obligor; (ii) make payments on or in respect to any Indebtedness owed to Borrower or any other Subsidiary of Borrower or any Secondary Obligor; or (iii) make loans or advances to Borrower or any of its Subsidiaries or to guarantee Indebtedness of Borrower or any other Subsidiary of Borrower; other than, in the case of (i), (ii) and (iii), (1) Permitted Restrictions on payment of dividends by FC Holdings existing under agreements listed on Schedule 8.19; 45 (2) restrictions with respect to a Subsidiary other than a PFAL Portfolio Entity or an REO-PFAL Affiliate imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all the assets (which term may include the capital stock) of such Subsidiary provided that such restrictions terminate upon the closing of such sale or disposition or termination of such agreement; (3) to the extent the same result in a restriction of non-cash in-kind distributions of such assets, restrictions on the transfer by any Secondary Obligor other than a PFAL Portfolio Entity or an REO-PFAL Affiliate of non-cash assets which are subject to Permitted Liens; (4) restrictions existing under any agreement which refinances or replaces any of the agreements containing the restrictions in clauses (1) or (5), provided that the terms and conditions of any such restrictions are not materially less favorable to the Lenders or materially more burdensome to the applicable Person bound thereby than those under the agreement evidencing or relating to the Indebtedness refinanced; (5) Permitted Restrictions on payment of dividends by a Mid-Tier Company or Subsidiary of Borrower under a loan agreement listed on Schedule 10.19 to which such Mid-Tier Company or Subsidiary of Borrower is a party; (6) restrictions under this Agreement; (7) Permitted Restrictions imposed under Approved Portfolio Leverage Arrangements; and (8) Permitted Restrictions on the payment of dividends by a Portfolio Entity Post-AE other than a PFAL Portfolio Entity under credit agreements under which such Portfolio Entity Post-AE is a borrower. 8.20 Financial Covenants. (a) Borrower and all other members of the Consolidated Group, on a consolidated basis, shall, at all times during the term hereof, measured quarterly: (i) maintain a ratio of Indebtedness to Tangible Net Worth equal to or less than the ratio set forth below as at the end of each quarter ending during the applicable period set forth below: 12/31/02 through 9/30/03: 5.5:1; 12/31/03 through 9/30/04: 4.5:1; 12/31/04 and each quarter ending thereafter: 3.0:1;
46 (ii) maintain a Tangible Net Worth equal to or greater than the amount set forth below as at the end of each quarter ending during the applicable period set forth below:
12/31/02 through 9/30/03: $18,000,000 12/31/03 through 9/30/04: $24,000,000 12/31/04 through 9/30/05: $45,000,000 12/31/05 and each quarter ending thereafter: $75,000,000
(iii) maintain a ratio of EBITDA to Interest Coverage no less than: (i) 1.75 to 1 for as at the quarter ending December 31, 2002; (ii) 1.20 to 1 for the quarter ending March 31, 2003; (iii) 1.40 to one for the quarters ending June 30 and September 30, 2003; and (iv) 2.5 to one for the quarter ending December 31, 2003 and each quarter ending thereafter. The foregoing ratios shall be measured on a trailing three month basis. (b) All covenants set forth herein shall be measured quarterly, upon receipt of the Financial Statements delivered to Agent pursuant to Section 7.1(a), and also upon receipt of the annual consolidated Financial Statements delivered in accordance with Section 7.1(b). (c) In the event that any Financial Statement required to be delivered pursuant to Section 7.1(a) or (b) or any certificate required to be delivered pursuant to Section 7.1(e)(ii) hereof (in the case of any such certificate required in connection with monthly financial statements, at the end of any month which is also a fiscal quarter end date) is not delivered within 10 days after the date required therefor pursuant to said clause, the Borrower shall be deemed to be in default of this Section 8.20 for purposes of Section 9.3 hereof. 8.21 Payment of Extraordinary Proceeds; Form of Proceeds, Payments and Distributions. (a) [Intentionally omitted]. (b) Except as set forth in Section 2.4(d)(i), all Extraordinary Transaction Proceeds shall be paid on the date of the closing of the applicable transaction or, if earlier, on the date when received or payable, directly to the Agent. Borrower shall cause the applicable purchaser and/or lender and/or other payor of Extraordinary Transaction Proceeds to make payment thereof by wire transfer of immediately available funds directly to Agent. (c) Borrower shall not permit any portion of the consideration paid in respect of an Extraordinary Transaction or constituting Extraordinary Transaction Proceeds to be in any form other than immediately available cash funds. (d) Borrower shall not permit any Primary Obligor or Secondary Obligor to consent to (and shall not itself consent to) any payment, dividend or distribution being made to such Primary Obligor, Secondary Obligor or the Borrower in any form other than immediately available cash. 47 8.22 Accounting Changes. None of the Borrower, any Primary Obligor, any PFAL Portfolio Entity or REO-PFAL Affiliate or any Subsidiary of Borrower will make any significant change in (x) accounting treatment and reporting practices except as permitted or required by GAAP or Legal Requirements or (y) unless Agent consents thereto in writing (which consent shall not be unreasonably withheld), its Fiscal Year; provided that in any such case, if any such change would affect any computation required by Section 8.20 hereof or any amount required to be paid by Section 2.4 or 2.5 hereof, appropriate amendment shall have been made to this Agreement with respect thereto (or, in the case of change required at such time by a Legal Requirement, appropriate amendment is made to this Agreement contemporaneous with such change and, and if such amendment is not made, Borrower shall be deemed in default under Section 8.20). 8.23 Related Transactions. Borrower has not and shall not, and shall not permit any Primary Obligor, Mid-Tier Company, REO-PFAL Affiliate or any Subsidiary of Borrower to, enter into any transactions with any Affiliate or Associate, including, without limitation, agreements for the purchase, sale or exchange of property or the rendering of any services to or by any Affiliate or Associate of Borrower or any Parent, or enter into, assume or suffer to exist any employment, management, administration, advisory or consulting contract with any Affiliate or Associate of Borrower or any Parent or, in each of the foregoing cases, with any officer, director or partner of any Affiliate or Associate of Borrower or any Parent or modify any Fee Agreement unless, in any such case, such transaction (a) is otherwise not in violation of this Agreement or any other Loan Document and (b) is in the ordinary course of its business and is upon fair and reasonable terms no less favorable to Borrower, such Primary Obligor, Mid-Tier Company, REO-PFAL Affiliate or Subsidiary (as the case may be) than Borrower, such Primary Obligor, Mid-Tier Company, REO-PFAL Affiliate or Subsidiary (as the case may be) would obtain in a comparable arm's-length transaction with a Person not an Affiliate or Associate; provided, that the foregoing shall not restrict a Subsidiary which is a Secondary Obligor from entering into a transaction contemplated by the definition of "REO Affiliate" to sell real estate (or distressed notes secured by real estate) to its wholly owned REO Affiliate. 8.24 Leasebacks. None of Borrower, any Primary Obligor or any Secondary Obligor will enter into any arrangement with any bank, insurance company or other lender or investor providing for the leasing to any of the foregoing Persons of real property (i) which at the time has been or is to be sold or transferred by any of the foregoing Persons to such lender or investor, or (ii) which has been or is being acquired from another Person by such lender or investor or on which one or more buildings or facilities have been or are to be constructed by such lender or investor for the purpose of leasing such property to Borrower, any Primary Obligor or Secondary Obligor. 8.25 Compliance with ERISA. None of Borrower, any Primary Obligor, any Mid Tier Company, any REO-PFAL Affiliate or Subsidiary of Borrower or any other Loan Party (each, an "Applicable Person") will (i) terminate, or permit any of its Subsidiaries to terminate, any Pension Plan so as to result in any material (in the opinion of the Agent or the Majority Lenders) liability of any such Person or Subsidiary to the PBGC, (ii) permit to exist the occurrence of any Reportable Event (as defined in Section 4043 of ERISA), or any other event or condition, which presents a material (in the opinion of the Agent or the Majority Lenders) risk of such a termination by the PBGC of any Pension Plan, (iii) allow, or permit any of its Subsidiaries to 48 allow, the aggregate amount of "benefit liabilities" (within the meaning of Section 4001(a)(16) of ERISA) under all Pension Plans of which any Applicable Person or any ERISA Affiliate is a "contributing sponsor" (within the meaning of Section 4001(a)(13) of ERISA) to exceed $100,000, (iv) allow, or permit any of its Subsidiaries to allow, any Plan to incur an "accumulated funding deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, (v) engage, or permit any of its Subsidiaries or any Plan to engage, in any "prohibited transaction" (within the meaning of Section 406 of ERISA or Section 4975 of the Code) resulting in any material (in the opinion of the Agent or the Majority Lenders and considered by itself or together with all other such liabilities of the Borrower and all ERISA Affiliates) liability to any Applicable Person or any ERISA Affiliate, (vi) allow, or permit any of its Subsidiary to allow, any Plan to fail to comply with the applicable provisions of ERISA and the Code in any material respect, (vii) fail, or permit any of its Subsidiaries to fail, to make any required contribution to any Multiemployer Plan, or (viii) completely or partially withdraw, or permit any of its Subsidiaries to completely or partially withdraw, from a Multiemployer Plan, if such complete or partial withdrawal will result in any material (in the opinion of the Agent or the Majority Lenders) withdrawal liability under Title IV of ERISA. 8.26 Liquidation of FC Capital. (a) Borrower shall not permit FC Capital to engage in any new transaction or business or to invest in any new assets; (b) Borrower shall not use, or permit any Primary Obligor, Secondary Obligor or any Affiliate to use, any loan proceeds, funds, distributions, dividends, contributions or any other monies obtained, earned or acquired from any other source whatsoever to make any loans, capital contributions, gifts or other payments to or for the benefit of FC Capital provided that subject to the further proviso set forth below (i) the Borrower shall be permitted to pay (or transfer funds to FC Capital for the payment of) litigation expenses not in excess of $250,000 in 2003; and, $200,000 per calendar year thereafter, and (ii) the Borrower shall be permitted to advance to FC Capital up to $200,000 per year, not exceeding $400,000 in aggregate principal amount, for FC Capital to use (and only if FC Capital so uses such advances) to pay expenses incurred by it as servicer under the Sale and Servicing Agreements under the FirstCity Capital Home Equity Loan Trust 1998-1 and the FirstCity Capital Home Equity Loan Trust 1998-2 securitizations and to make the compensating interest payments required to be made by it in such capacity thereunder; provided that the payments and transfers referred to in clause (i) and the advances referred to in clause (ii) constitute advances under, and are evidenced by, the FC Capital Pledged Note. 8.27 FC Holdings Line of Credit. (a) Borrower shall not permit the outstanding principal balance under the Holdings/CFSC Loan Agreement to exceed $35,000,000. (b) Borrower shall not permit the amendment, modification, supplement, waiver, forbearance, restatement or replacement of any Holdings/CFSC Loan Document (including without limitation, any waiver or modification of the borrowing base, advance rate, or purpose for which funds are being disbursed). 49 (c) Borrower shall not permit FC Holdings, any Primary Obligor or any Secondary Obligor or any other Person to grant a Lien on any property to secure payment and performance of any obligation or liability under the Holdings/CFSC Loan Documents, except as expressly set forth on Schedule 10.37(c). (d) From time to time after the date hereof, if any additional collateral is pledged to CFCS in accordance with the Holdings/CFCS Loan Documents, Borrower shall not fail to execute and deliver, or cause the applicable affiliated entity to execute and deliver, to Agent, for the ratable benefit of Lenders, such documents, instruments and agreements as shall be necessary or desirable to create and perfect a security interest with the Requisite Priority in any such collateral in favor of Agent for the ratable benefit of the Lenders. (e) From time to time after the date hereof, Borrower shall not fail to deliver to Agent, upon request, such information as Agent shall request relating to the Holdings/CFSC Loan Agreement or the Holdings/CFSC Loan Documents, the amounts outstanding thereunder, the use of the proceeds thereof, or the collateral pledged therefor. 8.28 Cash Collateral-Existing. Borrower shall not and shall not permit any Primary Obligor or Secondary Obligor to enter into any cash collateral agreement for the benefit of any lenders party to the Amended and Restated Agreement unless such agreement also secures the obligations hereunder and is in form and substance satisfactory to the Agent. 8.29 Distributions to Primary Obligors and the Borrower. (a) Subject to Section 8.21(b) in the case of Extraordinary Transaction Proceeds, the Borrower shall each calendar month (i) cause each PFAL Portfolio Entity and each REO-PFAL Affiliate to distribute to FC Commercial (as a Dividend in accordance with Section 8.11(a)) on or prior to the 25th day of such calendar month (or, if earlier, on the fourth to last CFCCA-P Business Day of such month, each such 25th day or earlier day, a Calculation Date") an amount equal to (I) the sum of (x) the Asset Pool Prepayment Amount in respect of the Payment Date occurring on the last Business Day of such month plus (y) interest on all Term Loans payable on such next Payment Date or, if greater, (II) the sum of (x) 75% of the FC Percentage in respect of each such PFAL Portfolio Entity of all Collections of each Asset Pool owned by such PFAL Portfolio Entity and of all amounts received by such REO PFAL Affiliate since the preceding Calculation Date (or, in the case of the Calculation Date occurring after the first Term Loans are made hereunder, since the date such Loans were made) and (y) the amount calculated pursuant to clause (II) of the definition of "Asset Pool Prepayment Amount" and (ii) cause FC Commercial to pay to Borrower, upon receipt, each such Dividend received by FC Commercial under clause (i) above by prepaying the FC Commercial (PFAL) Pledged Note and, if no amount then remains outstanding thereunder, by prepaying any other outstanding Pledged Note from FC Commercial to Borrower and distributing any remaining portion of such Dividend as a Dividend (in accordance with Section 8.11(a)) to the Borrower. (b) The Borrower shall comply, and shall cause each Primary Obligor, Subsidiary and other Person referred to therein to comply, with each covenant set forth in Section 8.29 of the Amended and Restated Agreement as in effect on the Effective Date (without 50 giving effect to any modification thereof not consented to in writing by the Majority Lenders or termination of the Amended and Restated Agreement). (c) The Borrower and FC Commercial shall cause each amount required to be distributed or paid to Borrower or FC Commercial pursuant to this Section 8.29 to be distributed or paid to Borrower by deposit or wire transfer directly to the Cash Flow Cash Collateral Account. 8.30 Operating Account. Borrower shall disburse funds from the Operating Account only for selling, general and administrative expenses of the Borrower and the Primary Obligors incurred in the ordinary course of business. 8.31 Capital Expenditures. Borrower will not make any Capital Expenditures and will not permit any of its Subsidiaries to make any Capital Expenditures, except that the Borrower and its Subsidiaries may make Capital Expenditures in an aggregate amount (excluding the capitalization of insurance premiums) not exceeding (x) $150,000 during the one- year period ending December 31, 2003 or (y) $50,000 during the one year periods ending on December 31, 2004, December 31, 2005 and December 31, 2006. 8.32 Servicing. (a) Borrower shall ensure that FC Servicing or Minn Servicing is the servicer for each Secondary Obligor which is a US Person. (b) Borrower shall (i) cause FC Servicing to deposit all fee income and all other funds received by it not constituting Servicing Restricted Funds to the Cash Collateral Account-Servicing upon receipt of each such amount and (ii) cause Minn Servicing to distribute to FC Servicing all fee income and all other funds received by it not constituting Servicing Restricted Funds by wiring all such amounts directly to the Cash Collateral Account-Servicing upon receipt of each such amount. 8.33 PFAL Entity Ownership. In furtherance and not in limitation of Section 8.8(a), Borrower shall ensure that (x) there is no change after the AP Funding Date in respect of the first Asset Pool acquired by a PFAL Portfolio Entity in the percentage ownership by FC Commercial of any class of Equity Interests issued by such PFAL Portfolio Entity or in the percentage ownership by FC Commercial of all Equity Interests issued by such PFAL Portfolio Entity ; (y) unless otherwise consented to in writing by the Agent, the percentage ownership by FC Commercial of any class of Equity Interests issued by a PFAL Portfolio Entity and of all Equity Interests issued by such PFAL Portfolio Entity, in each case, on the AP Funding Date in respect of such PFAL Portfolio Entity and the initial Asset Pool of such PFAL Portfolio Entity is the same as set forth in the Final Asset Pool Acquisition Certificate with respect to the acquisition of the initial Asset Pool of such PFAL Portfolio Entity (as revised up to the time of the giving of the Notice of Borrowing in respect of such Asset Pool); and (z) no Affiliate of FC Commercial owns any Equity Interests issued by a PFAL Portfolio Entity. 8.34 Activities of PFAL Entity. 51 (a) In furtherance and not in limitation of the other restrictions set forth in this Agreement, the Borrower shall ensure that (i) no PFAL Portfolio Entity engages in any activity other than owning asset pools consisting of receivables and shall have no assets other than such asset pools, collections thereon and interests in REO Affiliates of which it is the REO Owner; and (ii) each REO-PFAL Affiliate shall be formed in respect of a specific asset pool of its REO Owner and shall not hold assets other than from such asset pool (and, without limiting the foregoing) in no event shall hold any Assets acquired in respect of more than one Asset Pool or any other asset pool). (b) No non-cash collections on any Asset Pool shall be property which, if included in the Asset Pool on the AP Funding Date for such Asset Pool would have resulted in such Asset Pool not constituting an Eligible Asset Pool on such AP Funding Date. 8.35 Foreign Perfection. On or before June 1, 2003 (or such later date (if any) specified in writing by the Agent), the Borrower will and will cause each applicable Primary Obligor and Secondary Obligor to take such action as is reasonably requested by the Agent to ensure that the perfection and priority of its Liens on Equity Interests issued by Non-US Entities is recognized in the jurisdiction of organization of such issuers and, if requested by the Agent, will deliver to the Agent an opinion of counsel from foreign counsel acceptable to the Agent in form and substance satisfactory to the Agent, with respect to such perfection. 8.36 Intercompany Security Agreements. On or before April 10, 2003 (or such later date (if any) specified in writing by the Agent), or, if earlier, the first Borrowing Date hereunder, the Borrower will (i) cause each Primary Obligor to deliver intercompany security agreements in form and substance satisfactory to the Agent securing each such Person's obligations under its Pledged Note together with such other documents and instruments relating thereto and records of company proceedings and (if requested by Agent), legal opinions, as Agent may reasonably request and (ii) cause each maker of a Pledged Note to deliver to the Agent an amended and restated Pledged Note in form and substance satisfactory to the Agent. Section 9. EVENTS OF DEFAULT. Upon the occurrence of any of the following specified events (each an "Event of Default"): 9.1 Principal and Interest. The Borrower shall default in the due and punctual payment of any principal, interest or other amount due hereunder or under any Note or any other Loan Document; provided, that the failure to make any interest payment when due shall not constitute an Event of Default if such interest payment is made within three days of the date when due and the Borrower has not been late in making any other interest payment on any Note more than once in the preceding 12 months; or 9.2 Representations and Warranties. Any representation, warranty, statement, report or certificate made or delivered by Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party or any officer, director, manager or authorized employee or agent thereof herein or in any other Loan Document or otherwise in writing by such Person in connection with any of the foregoing or in any certificate, report or other statement furnished pursuant to or in 52 connection with any of the foregoing, shall be breached or shall prove to be untrue in any material respect; or 9.3 Negative and Certain Other Covenants. Borrower shall fail to perform or observe, or shall fail to cause any Primary Obligor, Secondary Obligor or any other Loan Party or other Person covered thereby to perform or observe, any term, covenant or agreement to be performed or observed by Borrower or such Primary Obligor, Secondary Obligor, Loan Party or other Person, as the case may be, pursuant to Section 7.2, 7.4, 7.11, 7.19, Section 8 or Section 14; or 9.4 Other Covenants. Borrower shall fail to perform or observe, or shall fail to cause Primary Obligor, Secondary Obligor, other Loan Party or other Person covered thereby to perform or observe, any term, covenant or agreement to be performed or observed by Borrower or such Primary Obligor, Secondary Obligor, other Loan Party or other Person, as the case may be, pursuant to any of the provisions of this Agreement (other than those referred to in Sections 9.1, 9.2 or 9.3) or any other Loan Document and such default (which shall be capable of cure) shall continue unremedied for a period of fifteen days, after the earlier of the date on which (x) the Agent or any Lender gives the Borrower notice thereof, or (y) Borrower obtains knowledge of such default; or 9.5 Other Indebtedness of Borrower. Any Applicable Indebtedness of Borrower (i) shall be declared to be or shall become due and payable prior to the stated maturity thereof or (ii) shall not be paid as and when the same becomes due and payable; or any other event of default (however denominated) shall occur under the Amended and Restated Agreement or any other Indebtedness Instrument (other than a Loan Document) relating to any Indebtedness of Borrower; or any other event the effect of which is to permit the holder or holders of the Indebtedness evidenced thereby (or any trustee, agent or other representative on behalf of such holder or holders) to cause such Indebtedness to become due prior to its stated maturity, shall occur under any other Indebtedness Instrument (other than a Loan Document) relating to any Indebtedness of Borrower; or 9.6 Other Indebtedness of other Loan Parties. (a) Any Applicable Indebtedness of any Primary Obligor, other Subsidiary of Borrower, Mid-Tier Company, REO PFAL Affiliate or any other Loan Party (other than (x) any Indebtedness under the Bosque Notes; (y) any Indebtedness of any one or more of the Harbor Debtors; or (x) any Indebtedness of an REO Affiliate owed to its REO Owner) (i) shall be declared to be or shall become due and payable prior to the stated maturity thereof or (ii) shall not be paid as and when the same becomes due and payable; or any other default or event of default (however denominated) shall occur under any Indebtedness Instrument relating to any Indebtedness of any such Person (other than any Loan Document) and such default or event of default is not cured within 10 days after the occurrence thereof (or such shorter period applicable thereto under any other Section of this Article 9); provided that such cure period shall not apply if: (i) a default occurs by such Primary Obligor, other Subsidiary, Mid-Tier Company or other Loan Party under the terms of any other Indebtedness Instrument securing or evidencing a different borrowing, or (ii) if any other Primary Obligor, other Subsidiary, Mid-Tier Company or other Loan Party defaults under the terms of any Indebtedness Instrument during such ten (10) day cure period or (iii) if the Indebtedness evidenced by any such Indebtedness instrument is 53 accelerated or has otherwise become due or (iv) such event is described in Section 9.16. (Notwithstanding the foregoing, if any two or more such Persons are obligated for the same Indebtedness and a default occurs thereunder, it shall be deemed to be a default by a single Person for the purposes of this Section 9.6); or (b) Any default shall occur under any Holdings /CFSC Loan Document and, if under the Holdings/CFSC Loan Agreement a cure period is applicable to such default, such default is not cured before the earlier of (x) 15 days after such default occurs and (y) the cure period applicable thereto under the Holdings/CFSC Loan Agreement; or 9.7 Trigger Events, etc. If any servicer default, servicing termination event, amortization event or similar event or condition occurs under any agreement relating to any securitization of assets of any Primary Obligor, Secondary Obligor or securitization entity established by any Primary Obligor or Secondary Obligor relating to a securitization transaction entered into after the Execution Date; or 9.8 Undistributed Amounts. The amount of Aggregate Undistributed Secondary Obligor Funds at any time exceeds $2,000,000; or 9.9 Insolvency. (i) Borrower, any Primary Obligor, any Secondary Obligor (other than, prior to the REO Post-25% Time, an REO Affiliate) or any other Pledged Entity or Loan Party (Borrower and each of the other foregoing Persons being a "Section 9.9 Entity") shall make an assignment for the benefit of creditors or a composition with creditors; or (ii) any Section 9.9 Entity shall admit in writing its inability to pay its debts as they mature, shall file a petition in bankruptcy, shall be adjudicated insolvent or bankrupt, shall petition or apply to any tribunal for the appointment of any receiver, liquidator, trustee or custodian of or for it or any of its assets; or (iii) any application is made by any other Person for the appointment of any receiver, liquidator, trustee or custodian for any Section 9.9 Entity or for any of the assets of any Section 9.9 Entity, or (iv) any Section 9.9 Entity shall commence any proceedings relating to it under any bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (v) there shall be commenced against any Section 9.9 Entity any such proceeding which shall remain undismissed for a period of 60 days or more, or any order, judgment or decree approving the petition in any such proceeding shall be entered; or (vi) any Section 9.9 Entity shall by any act or failure to act indicate its consent to, approval of or acquiescence in, any such proceeding or in the appointment of any receiver, liquidator, trustee or custodian (other than a custodian under Non-Default Voluntary Custodial Arrangements) of or for it or any of its assets, or shall suffer any such appointment to exist; or (vii) any Section 9.9 Entity shall take any action for the purpose of effecting any of the foregoing; or any court of competent jurisdiction shall assume jurisdiction with respect to any such proceeding or a receiver or trustee or other officer or representative of a court or of creditors, or any court, governmental officer or agency, shall under color of legal authority, take and hold possession of any substantial part of the property or assets of any Section 9.9 Entity; or (viii) any Section 9.9 Entity shall become insolvent (howsoever such insolvency may be evidenced) or shall be unable to pay its debts as they mature (except that the occurrence of any condition set forth in this clause (viii) with respect to FC Capital, Bosque Asset Corp. or, so long as such companies are paying their debts as they mature, FC Mexico or any Mexican Acquisition Entity which is an Existing S Co. shall not constitute an Event of 54 Default under this Section 9.9 unless the occurrence of any such condition with respect to any such Person is an Event of Default under any other clause of this Section 9.9); or 9.10 Security Documents. The breach by Borrower or any other Loan Party of any term or provision of, or the occurrence of any default under, any Security Document or other Loan Document (other than this Agreement) or other agreement, instrument or document delivered in connection therewith to which such Person is a party, which breach or default is in the opinion of the Agent, material, or any other such breach or default (other than such a material breach or default) occurs and is not cured within the time, if any, specified therefor therein or fifteen days thereafter, if no such time is specified or such time is less than 15 days; or if any such Security Document or Loan Document is at any time not in full force and effect; or any of the Security Documents shall fail to grant to the Agent on behalf of the Lenders the Liens (if any) intended to be created thereby; or if any Loan Party shall assert that it is not liable with respect to any Security Document to which it is a party; or any Guarantor shall assert that it is not liable as a guarantor the Guaranty to which it is party; or 9.11 Notice of Charge. Except as expressly permitted pursuant to Section 7.3, if a notice of any Charge is filed of record with respect to all or any of the Assets of Borrower, any Primary Obligor, any Mid-Tier Company or any Wholly-Owned Subsidiary or, if prohibited by Section 7.3, REO-PFAL Affiliate; or 9.12 Judgments. (a) Any final non-appealable judgment for the payment of money in excess of $300,000 (after giving effect to any amount covered by insurance as to which the insurer shall not have denied or questioned its obligation to pay) shall be rendered against Borrower, any Primary Obligor or any Secondary Obligor other than an REO Affiliate; or (b) Final judgment for the payment of money in excess of $300,000 shall be rendered against Borrower, any Primary Obligor or any Secondary Obligor other than an REO Affiliate, and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed or diligently contested in good faith by appropriate proceedings; or 9.13 Stock Issuance or Transfer. Except as expressly permitted pursuant to the terms hereof, if Borrower, any Primary Obligor or any Secondary Obligor or any other Pledged Entity issues to (except upon formation of a Person permitted by this Agreement) or transfers to any Person any Stock or other Equity Interest issued by Borrower, any Primary Obligor, any Secondary Obligor or any other Pledged Entity; or 9.14 ERISA. Any ERISA Affiliate of Borrower or of any other Applicable Person under Section 8.25 which is not a Subsidiary of Borrower or such Applicable Person shall fail in the performance or observance of any term, provision or agreement with respect to a Plan or Multiemployer Plan set forth in Section 8.25 as if such ERISA Affiliate were a Subsidiary of Borrower or an Applicable Person; or 9.15 Material Effect Defaults. To the extent that the same does not constitute an Event of Default under any other provision of this Section 9, a default by Borrower, any Primary Obligor or any Secondary Obligor shall occur under any agreement, document or instrument 55 (other than this Agreement or any of the other Loan Documents) now or hereafter existing, to which Borrower, any Primary Obligor or any Secondary Obligor is a party and the effect of such default could reasonably be expected to have a material adverse effect on the financial conditions or business operations of Borrower, any Primary Obligor or any Mid-Tier Company; or 9.16 Other Acceleration. To the extent not otherwise constituting an Event of Default, if any lender to Borrower, any Primary Obligor, any Secondary Obligor or any Subsidiary thereof terminates any agreement to forbear or waive any default by a Harbor Debtor or any other event of default arising under the terms of any Indebtedness Instrument (other than any Bosque Note constituting an Indebtedness Instrument) of Borrower, any Primary Obligor any Mid-Tier Company, or any other Subsidiary of Borrower other than any such other Subsidiary which is a Harbor Debtor or REO Affiliate; or 9.17 Asserted Claims. If any proceeding is commenced against Borrower in which the amount claimed is greater than $1,000,000 and such proceeding is not dismissed with prejudice with no judgment having been entered against or other relief granted against Borrower within thirty (30) days after the filing date thereof; or 9.18 Change in Control. A Change in Control shall occur (for purposes hereof, a Change in Control shall mean the occurrence of any of the following events after the date hereof: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")), is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly, or indirectly, of more than fifty percent (50%) of the aggregate voting power of all classes of Capital Stock of Borrower entitled to vote generally in an election of directors; (ii) Borrower is merged with or into another corporation or another corporation is merged with or into Borrower with the effect that immediately after such transaction the stockholders of Borrower immediately prior to such transaction hold less than a majority in interest of the total voting power entitled to vote in the election of directors, managers or trustees of the entity surviving the transaction; (iii) to the extent not otherwise then constituting an Event of Default, all or substantially all of the assets of Borrower or a Primary Obligor or a Mid-Tier Company or any other Wholly Owned Subsidiary other than a Wholly-Owned Subsidiary described on Schedule 9.18 are sold to any person or persons (as an entirety in one transaction or a series of related transactions); or (iv) the voluntary or involuntary dissolution, liquidation or winding up of Borrower. For purposes of this Section 9.18, "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents in the equity (however designated) of such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to acquire an equity interest in such Person); or 9.19 Management. If James Sartain ceases to be employed full-time with Borrower and responsible for the day to day management of Borrower. Such occurrence shall be an Event of Default without notice or cure period, unless Borrower employs a replacement officer of the Borrower having the duties of Mr. Sartain acceptable to Lenders in their reasonable discretion within ninety (90) days after Mr. Sartain ceases to be employed; or 9.20 Court Orders. To the extent not otherwise constituting an Event of Default, if Borrower, any other Loan Party, any Primary Obligor, any Mid-Tier Company, any Secondary 56 Obligor-Existing or any Wholly-Owned Subsidiary other than a Tier IV Company, or any other Loan Party is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business or affairs and such Person consents (by action, inaction or otherwise) to such order or such order remains in effect for a period of 30 days; or 9.21 Dissolution. Borrower, any Primary Obligor, any Mid-Tier Company or any Loan Party shall dissolve, liquidate or suspend or discontinue its business, then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Agent may (and shall, if instructed in writing by the Majority Lenders) by written notice to the Borrower: (i) declare the principal of and accrued interest on the Loans of the Borrower to be, whereupon the same shall forthwith become, due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and/or (ii) declare the Commitments of the Lenders to make Loans terminated, whereupon such Commitments shall forthwith terminate immediately; provided that if any Event of Default described in Section 9.9 shall occur with respect to the Borrower, the result which would otherwise occur only upon the giving of written notice by the Agent to the Borrower as herein described shall occur automatically, without the giving of any such notice. Section 10. GENERAL REPRESENTATIONS AND WARRANTIES AND RELATED COVENANTS. In order to induce the Lenders to enter into this Agreement and to maintain the Loans provided for herein, each Loan Party party hereto makes the following representations, covenants and warranties, both as of the Execution Date and (after giving effect to the transactions contemplated hereby to occur on the Effective Date) as of the Effective Date (unless otherwise specified), which representations, covenants and warranties shall survive the execution and delivery of this Agreement and the other documents and instruments referred to herein: 10.1 Organization. (a) Borrower is and at all times hereafter shall be a corporation, duly organized and validly existing and in good standing under the laws of the State of Delaware and qualified or licensed to do business and in good standing in all states in which the laws thereof require Borrower to be so qualified and/or licensed and in which the failure to so qualify could have a Material Adverse Effect, including, without limitation, the State of Texas. Schedule 10.1(a) identifies each jurisdiction in which Borrower has qualified or been licensed to do business and describes the nature and current status of any such qualification or license. (b) Each Primary Obligor and each Secondary Obligor and each other Loan Party is a corporation or limited liability company or a limited partnership, duly organized and validly existing and in good standing under the laws of the state of its organization and each Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and other Loan Party and, if the failure to do so could reasonably be expected to have Material Adverse Effect on Borrower, any Primary Obligor, any Mid-Tier Company, Secondary Obligor-Existing or other Loan Party, each other Secondary Obligor, is and at all times hereafter shall be qualified or licensed to do business and in good standing in all states in which the laws thereof require such Primary 57 Obligor, Secondary Obligor and other Loan Party to be so qualified and/or licensed and in which the failure to so qualify could have a Material Adverse Effect on the Borrower, any Primary Obligor or any Mid-Tier Company. Schedule 10.1(b) identifies each jurisdiction in which each Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and each other Loan Party has qualified or been licensed to do business and describes the nature and current status of any such qualification or license. (c) Schedule 10.1(c) lists all Shareholder Agreements to which Borrower, any other holder of any Equity Interest in any Primary Obligor or any holder of any Equity Interest in any Mid-Tier Company, Secondary Obligor-Existing or Secondary Obligor-R or other Pledged Entity is a party. 10.2 Entity Power. (a) Borrower has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and the other Loan Documents to which it is a party. (b) Each Primary Obligor and each Secondary Obligor and each other Loan Party has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform those Loan Documents to which it is a party. 10.3 Violation of Charter Documents. (a) The execution, delivery and/or performance by Borrower of this Agreement and the other Loan Documents to which it is a party and the consummation of the transactions contemplated hereunder have been duly authorized by all necessary corporate and shareholder action and none of such execution, delivery, performance or consummation shall, by the lapse of time, the giving of notice or otherwise, constitute a violation of any Legal Requirement or a breach of any provision contained in the Charter Documents of Borrower, or contained in any agreement, instrument or document to which Borrower is now or hereafter a party or by which it or any of its Assets is or may become bound, other than agreements, instruments or documents that are immaterial to Borrower the breach of which could not have a Material Adverse Effect on Borrower. (b) The execution, delivery and/or performance by each Primary Obligor, Secondary Obligor and other Loan Party of each Loan Document to which it is a party and the consummation of each such Person of the transactions contemplated hereunder have been duly authorized by all necessary corporate, partnership or limited liability company action (as the case may be) and other action by the holders of the Equity Interests thereof and none of such execution, delivery, performance or consummation shall, by the lapse of time, the giving of notice or otherwise, constitute a violation of any Legal Requirement or a breach of any provision contained in the Charter Documents of such Primary Obligor or such Secondary Obligor or other Loan Party, or contained in any agreement, instrument or document to which such Primary Obligor or such Secondary Obligor or other Loan Party is now or hereafter a party or by which it or any of its Assets is or may become bound, other than agreements, instruments or documents that are immaterial to such Primary Obligor, Secondary Obligor and other Loan Party the breach 58 of which could not have a Material Adverse Effect on Borrower or any such Primary Obligor or any Mid-Tier Company, Secondary Obligor-Existing or other Loan Party. 10.4 Enforceability. (a) This Agreement and the other Loan Documents to which the Borrower is a party are and will be the legal, valid and binding agreements of Borrower, enforceable in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); and (b) Those other Loan Documents to which each other Loan Party is a party are and will be the legal, valid and binding agreements of such Loan Party, enforceable in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). 10.5 Ownership. (a) Schedule 10.5(a) sets forth all classes of stock of Borrower, the shareholders thereof (other than members of the general public), addresses of each shareholder, number of shares owned and how the shares are held; (b) Schedule 10.5(b) sets forth all classes of stock and/or other Equity Interests (other than options, warrants and rights to acquire Stock or other Equity Interests) issued by each Primary Obligor and each Secondary Obligor, the shareholders and other equity holders thereof, and the addresses, number of shares and/or partnership interests owned and how the shares are held. (c) Schedule 10.5(c) sets forth all options, warrants and other rights to acquire Stock or other Equity Interests of Borrower, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing, Secondary Obligor-R and any other Pledged Entity, the nature of such option, warrant or right and the conditions for the exercise thereof. Lenders hereby expressly consent to the transfer, issuance or conveyance of Stock and/or other Equity Interests of Borrower in accordance with such options, warrants and rights; provided that the same does not result in a Change of Control. (d) All Equity Interests of Borrower, each Primary Obligor, each Secondary Obligor and each other Loan Party have been duly and validly issued, are fully paid and are non-assessable. 10.6 Fictitious Names. (a) Each of the fictitious names, if any, used by Borrower during the five (5) year period preceding the Execution Date is set forth on Schedule 10.6 attached hereto (as 59 amended from time to time) and none of such fictitious names are registered trademarks or tradenames with the U.S. Patent and Trademark Office, except as set forth in Schedule 10.6; (b) Each of the fictitious names, if any, used by each Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and any other Loan Party, during the five (5) year period preceding the Execution Date is set forth on Schedule 10.6 attached hereto (as amended from time to time), and none of such fictitious names are registered trademarks or tradenames with the U.S. Patent and Trademark Office; provided that, variations on the corporate name of any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and Secondary Obligor-R in states where used solely for qualifying to do business therein shall and have been excluded from such schedule, with Lender's consent and approval. 10.7 Title. (a) Schedule 10.7 is a true, accurate and complete list of all Liens relating to the Pledged Property on the Execution Date and Effective Date. (b) First X and First B shall at all times own fee title to its real estate subject to no liens other than the Permitted Liens. (c) Borrower and each Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing and other Loan Party shall at all times have good, indefeasible and merchantable title to and ownership of all of its Assets. 10.8 Financial Warranty. Except as set forth on Schedule 10.8, on the Effective Date Borrower and at all times thereafter (including, without limitation, at the time of and after giving effect to each Loan) (i) is and shall be paying its debts as they mature, (ii) owns and shall own, property which, at a fair valuation, is greater than the sum of its debt, and (iii) has and shall have, capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage. Except as set forth on Schedule 10.8, on the Effective Date and at all times thereafter (including, without limitation, at the time of and after giving effect to each Loan) each Primary Obligor, Mid-Tier Company and Secondary Obligor-Existing: (i) is and shall be paying its respective debts as they mature, (ii) owns and shall own, property which, at a fair valuation, is greater than the sum of its debt and (iii) has and shall have capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage. 10.9 Proceedings. Except as set forth on Schedule 10.9, there are no actions or proceedings which are pending or threatened against Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party which could reasonably be expected to have a Material Adverse Effect on Borrower, any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing. None of the actions or proceedings referred to on Schedule 10.9 could have a Material Adverse Effect on Borrower, any Primary Obligor other than FC Capital or any Secondary Obligor. 10.10 Government Contracts. Except as set forth on Schedule 10.10, neither Borrower, nor any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing or other Loan Party has any government contracts. 60 10.11 Adequate Licenses. Borrower, and each Primary Obligor, Secondary Obligor and other Loan Party possesses adequate Assets, licenses, patents, copyrights, trademarks and tradenames to continue to conduct its business as previously conducted by it and as contemplated in the foreseeable future except such licenses, patents, copyrights, trademarks and trade names the failure of which to obtain could not be reasonably expected to have a Material Adverse Effect on Borrower, any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing. 10.12 Government Permits; Approvals and Consents. (a) Except for matters which could not result in a Material Adverse Change with respect to Borrower, any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing or any other Loan Party, Borrower and each Primary Obligor, each Secondary Obligor and each other Loan Party has been and is in good standing with respect to all governmental permits, certificates, consents and franchises necessary to continue to conduct its business as previously conducted prior to the date hereof and prior to the Execution Date and to own or lease and operate its properties as now owned or leased by it. None of said permits, certificates, consents or franchises contain any term, provision, condition or limitation more burdensome than such as are generally applicable to Persons engaged in the same or similar business as the applicable Person. (b) Except for those consents and other items set forth on Schedule 10.12, neither Borrower, nor any Primary Obligor, Secondary Obligor or other Loan Party requires the approval, consent, waiver, order, permission, license, authorization, registration or validation of, or filing with or exemption by, any Government Authority or any other Person (including but not limited to shareholders, partners, members, equity owners, holders of Indebtedness Instruments, or any owner of any lien upon the Assets of any one or more of them or their Affiliates) for the execution and delivery of, and the consummation of the transactions contemplated by, this Agreement and the other Loan Documents, including but not limited to the borrowing of any Loans, the pledge of the Pledged Property, and the payment and performance of all Obligations. Borrower and each other Primary Obligor, Secondary Obligor and other Loan Party have received the consents and other items described on Schedule 10.12 and has delivered a copy thereof to Agent, which consents are in full force and effect, unmodified and unamended on the date hereof and on the Execution Date. 10.13 Charge; Restrictions. (a) On the Execution Date and on the Effective Date, neither Borrower, nor any Primary Obligor nor any Secondary Obligor or any other Loan Party is a party to (nor are any of such Person's Assets otherwise subject to) any contract or agreement or restriction, judgment, decree or order that could have a Material Adverse Effect on Borrower, any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing or that materially and adversely affects the business, property, assets, operations or condition, financial or otherwise of Borrower, any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing. At no time after the Execution Date will the Borrower, any Primary Obligor, any Mid-Tier Company, any PFAL Portfolio Entity or any Wholly-Owned Subsidiary be a party to (or permit any of its Assets to be subject to) any contract or agreement or restriction, judgment, decree or order materially and 61 adversely affecting, or which could materially and adversely affect, its business, property, assets, operations or condition, financial or otherwise. (b) On the Execution Date and on the Effective Date, none of Borrower, nor any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing, any Secondary Obligor-R other than an REO Affiliate, or any other Loan Party is subject to (nor are any such Person's Assets otherwise subject to) any Charge (other than Charges owed by First B or First X). At no time after the Effective Date will the Borrower, any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing, Secondary Obligor-R, other than, except as set forth below, an REO Affiliate, or any other Loan Party or any Wholly-Owned Subsidiary (other than, except as set forth below, an REO Affiliate) or, except to the extent permitted in Section 7.3, any REO-PFAL Affiliate, be a party to (or permit any of its Assets to be subject to) any Charge. 10.14 Compliance with Laws. Except for matters which could not result in a Material Adverse Change with respect to Borrower, any Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing or any other Loan Party, neither Borrower, nor any Primary Obligor nor any Secondary Obligor nor any other Loan Party is, or will be during the term hereof, in violation of any applicable statute, regulation, order or ordinance of the United States of America, of any state, city, town, municipality, county or of any other jurisdiction, or of any agency thereof, including the Federal Reserve Board, in any respect. 10.15 Compliance with Indebtedness Instruments. Other than those defaults set forth on Schedule 10.15, Borrower is not and at no time during the term hereof shall be in default under any Indebtedness Instrument or any other material agreement to which it is a party. Other than those defaults set forth on Schedule 10.15, no Primary Obligor, Mid-Tier Company, Secondary Obligor-Existing, Secondary Obligor-R or any other Loan Party is, on the date hereof, or will be on the Effective Date, in default under any Indebtedness Instrument. 10.16 Financials. The Financial Statements delivered by Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party to Agent, fairly and accurately present the Assets, liabilities and financial conditions and results of operations of Borrower, and such other Persons described therein as of and for the periods ending on such dates and have been prepared in accordance with GAAP and such principles have been applied on a basis consistently followed in all material respects throughout the periods involved. 10.17 Tax Returns. Borrower and each other member of the Consolidated Group has filed or caused to be filed all tax returns which are required to be filed, and has paid all Charges shown to be due and payable on said returns or on any assessments made against it or any of its property, and all other Charges imposed on it or any of its properties by any Governmental Authority, except for Charges arising at any time after the Effective Date, which Borrower is disputing in accordance with the final sentence of Section 7.3. 10.18 No Material Adverse Change. Except as set forth in Schedule 10.18, since December 31, 2001, no event or circumstance has occurred that had, has or could reasonably be expected to have a Material Adverse Effect. 62 10.19 No Indebtedness. None of Borrower, any Primary Obligor, Mid-Tier Company, Wholly-Owned Subsidiary or Secondary Obligor or other Loan Party (i) has any Indebtedness except for Indebtedness described in Schedule 10.19, Schedule 10.21 and Schedule 8.13B and except for Indebtedness permitted by this Agreement which (other than in the case of MCS, any Mexican Acquisition Entity or any French Acquisition Entity) is reflected in the most recent Financial Statements delivered pursuant to Section 7.1(a) or (b) (except for any such Indebtedness permitted by this Agreement (x) incurred since such most recent Financial Statements were delivered, or (y) constituting unsecured trade payables arising in the ordinary course of business since the dates reflected in the September 30, 2002 Financial Statements that is not Indebtedness for borrowed money or Indebtedness of any REO Affiliate to its REO Parent evidenced by a note payable to such REO Parent, in each case, to the extent, if any, not required by GAAP to be reflected in Financial Statements) or (ii) has guaranteed any indebtedness or entered into or issued any Guaranty Equivalent (other than as a result of the endorsement of any instrument of items of payment for deposit or collection in the ordinary course of business or as otherwise expressly permitted pursuant to the terms hereof) in respect of the obligations of any Person. 10.20 [Intentionally omitted] 10.21 Affiliate Notes. Attached hereto as Schedule 10.21 is a true, accurate and complete schedule of all promissory notes made by any Affiliate payable to the order of a Borrower, a Primary Obligor or a Secondary Obligor, other than the Pledged Notes and the Excluded Notes. In furtherance and not in limitation of any restriction thereon set forth herein or in the other Loan Documents, if at any time after the Effective Date, any Affiliate borrows money or otherwise incurs Indebtedness from Borrower or a Primary Obligor or a Secondary Obligor (i) unless such borrowing is under and pursuant to the terms of a Pledged Note, Borrower shall immediately give Agent notice thereof and deliver a copy of the note evidencing such Indebtedness to Agent, (ii) if such Indebtedness is permitted pursuant to the terms hereof or consented to by the Majority Lenders and if requested in writing by the Agent, Borrower shall prepare a Schedule 10.21A setting forth the maker and holder of such note, the principal amount thereof and the payment terms thereof, and (iii) Borrower shall take the action required by Section 7.15(b). 10.22 No Liability on Lenders or Agent. None of the execution, delivery and performance by Borrower or any other Loan Party of this Agreement and/or the other Loan Documents will impose on or subject any of the Lenders or the Agent to any liability, whether fixed or contingent, in respect of any Environmental Law, whether relating to the operation of Borrower's business or otherwise. None of the Lenders' or the Agent's exercise of any of the rights or remedies described in this Agreement or in any of the other Loan Documents shall constitute a breach of any provision contained in any agreement, instrument or document concerning the assignment or license of, or the payment of royalties for, any patents, patent rights, tradenames, trademarks, trade secrets, know-how, copyrights or any other form of intellectual property now or at any time or times hereafter protected as such by any applicable law. 10.23 Affiliates. Schedule 10.23 attached hereto is a true, accurate and complete schedule of Borrower's Affiliates (including each Secondary Obligor) as of the Effective Date, 63 together with a description of Borrower's relationship to each such Affiliate. Attached as Schedule 10.23(B) is a true, accurate and complete schedule of each Secondary Obligor - Existing . Attached as Schedule 10.23(C) is a true, accurate and complete schedule of each Existing S Co. 10.24 Real Property; Environmental Issues. Except as set forth on Schedule 10.24, neither Borrower, any Primary Obligor or any Secondary Obligor other than First X, First B, FCS Creamer, Ltd., FCS Wood Ltd., and FCS Wildhorse Ltd., FCS Fischer Ltd. , any REO Affiliate, any Mexican Acquisition Entity or French Acquisition Entity now owns or, in the case of US Persons, leases or at any time in the five (5) years preceding the Execution Date has owned or leased any real property. Neither Borrower, any Primary Obligor, any Secondary Obligor, any Tier IV Company, any Tier V Company, any Harbor Debtor or any other Loan Party has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other Governmental Authority concerning any action or omission resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment with respect to any real property. 10.25 Investment Company Act and Public Utility Holding Company Act. Neither Borrower nor any Primary Obligor or any PFAL Portfolio Entity nor any other Loan Party or the entering into of any Loan Documents, nor the issuance of the Notes is subject to any of the provisions of the Investment Company Act of 1940, as amended. Neither Borrower, nor any Primary Obligor or any Secondary Obligor or any PFAL Portfolio Entity or any other Loan Party is a "holding company" as defined in the Public Utility Holding Company Act of 1935, as amended, or subject to any other federal or state statute or regulation limiting its ability to incur Indebtedness for money borrowed. 10.26 Disclosure. Neither this Agreement nor any other Loan Document nor any statement, list, certificate or other document or information, nor any schedules to this Agreement or any other Loan Document, delivered or to be delivered to Lenders or Agent, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make statements contained herein or therein, in light of the circumstances in which they are made, not misleading. Copies of all documents delivered to Lenders and/or Agent pursuant to this Section 10 or any other provision of this Agreement are true, correct and complete copies thereof and include all amendments, restatements, supplements and other modifications thereto and thereof. 10.27 Qualification. (a) Solely by reason of (and without regard to any other activities of Lenders and/or Agent in any state in which Assets of the Borrower, any Primary Obligor, Secondary Obligor or other Loan Party are located) the entering into, performance and enforcement of this Agreement, the Notes, the other Loan Documents and the documents, instruments and agreements delivered in connection therewith by Lenders and/or Agent will not constitute doing business by Lenders and/or Agent in any of such states or result in any liability of Lenders and/or Agent for taxes or other governmental charges; and qualification by Lenders and/or Agent to do business in such jurisdiction is not necessary in connection with, and the failure to so qualify will 64 not affect, the enforcement of, or exercise of any rights or remedies under, any of such documents. (b) No "business activity," "doing business" or similar report or notice is required to be filed by the Lenders and/or Agent in any such jurisdiction in connection with the Loans or the transactions contemplated by this Agreement or any other Loan Document, and the failure to file any such report or notice will not affect the enforcement of, or the exercise of any rights or remedies under, this Agreement or any of the other Loan Documents. 10.28 SEC Filings. The Borrower has filed and made available to the Agent and Lenders each form, registration statement, schedule, report, proxy statement and document required to be filed by Borrower with the SEC since January 1, 1995 (collectively, the "SEC REPORTS"). Except as set forth on Schedule 10.28, the SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Laws and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in the SEC Reports or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Borrower is the only Loan Party required to file pursuant to the Exchange Act. Since January 1, 1995, Borrower has made all filings with the SEC in a timely manner (except as set forth on Schedule 10.28, each of which filing deficiencies was subsequently cured in a manner that brought Borrower into full compliance with law) as required by law and no event has occurred that requires an additional filing or any amendment to a prior filing, which has not been made or filed. 10.29 [Intentionally omitted.] 10.30 Federal Reserve Margin Regulations; Use of Proceeds (a) Neither Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party or member of the Consolidated Group or Subsidiary of any of the foregoing is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System). No part of the proceeds of any Loan will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. (b) Neither the Loans nor the use of proceeds therefrom will result in a violation of any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended), or any ruling issued thereunder or any enabling legislation or Presidential Executive Order in connection therewith. 10.31 Intellectual Property. All patents, trademarks, registered copyrights and trade names of Borrower, each Primary Obligor, each Mid-Tier Company, each Secondary Obligor-Existing and each other Loan Party are listed in Schedule 10.31A to this Agreement; all of those so listed are in full force and effect. If any member of the Consolidated Group at any time acquires, establishes, invents or develops any patent, trademark, copyright or trade name that is 65 or becomes material to such Person's business or operations, it will promptly notify the Agent of same and take such action as the Agent shall request to grant to the Agent on behalf of the Lenders a perfected, first priority security interest in same. 10.32 Compliance with ERISA. Schedule 10.32 describes the Pension Plans to which Borrower or any ERISA Affiliates may have obligations. Each Loan Party and each ERISA Affiliate and each Plan and the trusts maintained pursuant to such plans are in compliance in all material respects with the presently applicable provisions of Sections 401 through and including 417 of the Code, and of ERISA and (i) no event which constitutes a Reportable Event as defined in Section 4043 of ERISA has occurred and is continuing with respect to any Plan which is or was covered by Title IV of ERISA, (ii) no Plan which is subject to Part 3 of Subtitle B of Title 1 of ERISA has incurred any "accumulated funding deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the Code) whether or not waived, and (iii) no written notice of liability has been received with respect to any Loan Party or any Subsidiary for any "prohibited transaction" (within the meaning of Section 4975 of the Code or Section 406 of ERISA), nor has any such prohibited transaction resulting in liability to any Loan Party or ERISA Affiliate occurred. Neither any Loan Party nor any ERISA Affiliate (i) has incurred any liability to the PBGC (or any successor thereto under ERISA), or to any trustee of a trust established under Section 4049 of ERISA, in connection with any Plan (other than liability for premiums under Section 4007 or ERISA), (ii) has incurred any withdrawal liability under Subtitle E of Title IV of ERISA in connection with any Plan which is a Multiemployer Plan, nor (iii) has contributed or has been obligated to contribute on or after September 26, 1980, to any "multiemployer plan" (within the meaning of Section 3(37) of ERISA) which is subject to Title IV of ERISA. The consummation of the transactions contemplated by this Agreement (i) will not give rise to any liability on behalf of any Loan Party or any ERISA Affiliate under Title IV of ERISA to the PBGC (other than ordinary and usual PBGC premium liability), to the trustee of a trust established pursuant to Section 4049 of ERISA, or to any Multiemployer Plan, and (ii) will not constitute a "prohibited transaction" under Section 406 of ERISA or Section 4975 of the Code. 10.33 The Security Documents. (a) Each Security Document heretofore delivered grants, and each Security Document hereafter delivered when delivered will grant a Lien in the properties or rights intended to be covered thereby (the "Collateral") which (i) will constitute a valid and enforceable security interest under the Uniform Commercial Code of the State (x) in which the Collateral is located and (y) by which any Security Document is governed (as applicable, the "UCC"), (ii) will be entitled to all of the rights, benefits and priorities provided by the UCC, and (iii) when such Security Documents or financing statements with respect thereto are filed and recorded as required by the UCC, will be superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, pledge, lien, security interest, encumbrance or otherwise, except for Permitted Liens, and will provide the Agent and Lenders the Requisite Priority. All such action as is necessary in law has been taken, or prior to the Effective Date will have been taken, to establish and perfect the security interest of the Agent and the Lenders in the 66 Collateral and to entitle the Lenders or the Agent on behalf of the Lenders to exercise the rights and remedies provided in each of the Security Documents and the UCC, as applicable, and no filing, recording, registration or giving of notice or other action is required in connection therewith except such as has been made or given or will have been made or given prior to such dates. All filing and other fees and all recording or other tax payable with respect to the recording of any of the Security Documents and UCC financing statements have been paid or provided for. (b) In furtherance (and not in limitation) of Section 10.33(a), after giving effect to the Pledge Agreements and Security Agreements listed on Schedule 10.33(c), (i) each of Borrower and each Primary Obligor will have granted the Agent a Lien on (x) each Pledged Note and on each other note, instrument or other evidence of indebtedness, other than any Excluded Note, in which it has any right, title or interest; and (y) each Equity Interest, other than Equity Interests in Excluded Entities, in which it has any right, title or interest. (c) In furtherance (and not in limitation) of the foregoing, on each AP Funding Date, FC Commercial will have granted to the Agent pursuant to the Pledge Agreements to which it is a party a perfected Lien on each Equity Interest issued to it by the PFAL Portfolio Entity acquiring an Asset Pool on such day which will be superior and prior to the rights of all third Parties now existing or hereafter arising. 10.34 Other Loan Documents. All representations and warranties contained in the other Loan Documents are true and correct. 10.35 Exclusion of Harbor Debtors. No representation, warranty or covenant set forth in this Section 10 shall be deemed to be a representation, warranty or covenant with respect to or by a Harbor Debtor. 10.36 FC Capital Liquidation. It is Borrower's intent to cause FC Capital to cease doing business and liquidate the assets of FC Capital. 10.37 FC Holdings Line of Credit. (a) FC Holdings has entered into that certain Loan Agreement dated as of April 6, 2000 by and between FC Holdings and CFSC (said agreement as in effect on such date and as amended with the written consent of the Majority Lenders, the "Holdings/CFSC Loan Agreement") pursuant to which FC Holdings obtained the FC Holdings Line of Credit. In addition, Agent (on behalf of Lenders), certain subordinated lenders (whose indebtedness was subsequently repaid) and CFSC have entered into two separate subordination agreements dated as of April 6, 2000 (as from time to time amended, restated, supplemented or otherwise modified), one relating to their respective rights to the Shared Collateral and one (as from time to time amended, restated, supplemented or otherwise modified, the "CFSC Guaranty Subordination Agreement") relating to their respective rights relating to payments which may be made by FC Commercial pursuant to guarantees to CFSC or the Lenders (collectively, the "CFSC Intercreditor Agreement"). (b) Attached hereto as Schedule 10.37(b) is a true, complete and accurate schedule of all material documents, instruments and agreements executed, delivered or caused to 67 be delivered by FC Holdings or any other Person to CFSC to evidence, guaranty or secure the FC Holdings Line of Credit (the "Holdings/CFSC Loan Documents"). (c) Attached hereto as Schedule 10.37(c) is a true, accurate and complete schedule of all property (including but not limited to all equipment, partnership interests, stock, membership interests, general intangibles, instruments, bank accounts, accounts, accounts receivable, contract rights) (the "Shared Collateral") in which a Lien has been or will be granted to secure payment or performance of any obligation or liability of Borrower, FC Holdings, any Primary Obligor, any Secondary Obligor, any Pledged Entity or any other Person to CFSC under the Holdings/CFSC Loan Documents. (d) Borrower has caused FC Holdings to deliver to Agent a true, accurate and complete copy of the Holdings/CFSC Loan Agreement and all Holdings/CFSC Loan Documents. (e) Neither the Holdings/CFSC Loan Agreement nor any other Holdings/CFSC Loan Document has been amended, extended, restated, supplemented or otherwise modified, nor have any of the provisions thereof been waived. (f) The Holdings/CFSC Loan Agreement has been duly executed and delivered by FC Holdings and is in full force and effect. (g) [Intentionally omitted.] (h) All representations, warranties and covenants in the Holdings/CFSC Loan Documents of FC Holdings, the other Primary Obligors party thereto and the Secondary Obligors party thereto, are legal, valid and binding obligations of such Persons, enforceable in accordance with the terms thereof. All obligations of CFSC under the CFSC Guaranty Subordination Agreement are the legal, valid and binding obligations of CFSC, enforceable against CFSC in accordance with its terms. (i) With respect to that FC Commercial Guaranty in favor of CFSC (as identified on Schedule 10.37(i)) Borrower acknowledges that said guaranty is subordinate in right of payment to the obligations of FC Commercial under that certain Guaranty Agreement executed by FC Commercial in favor of Lenders and Agent and that certain Amended and Restated Guaranty Agreement executed by FC Commercial in favor of agent and the lenders under the Amended and Restated Agreement and that Borrower shall not permit any payment to be made by FC Commercial with respect to such guaranty in favor of CFSC at any time prior to indefeasible payment in full of all Obligations and the termination of this Agreement and all obligations of Lenders hereunder. (j) Borrower hereby represents and warrants that it has pledged or caused to be pledged to Agent, for the benefit of Lenders, a subordinated security interest in all Shared Collateral, except a security interest in a promissory note in the amount of $268,345.11 payable by Cartera en Administration Y Cobranza, SA de CV to FC Holdings, in which promissory note Lenders have elected not to take a security interest. 68 10.38 FCS Fisher, Ltd. Transactions. (a) FC Holdings borrowed approximately $1,000,000 under the FC Holdings Line of Credit which it used to make a capital contribution to FCS Fisher, Ltd. in the amount of $24,666.67 and a loan to FCS Fisher, Ltd. in the amount of $898,012, secured by a deed of trust dated March 31, 2000, as amended which is a lien against a 183 acre tract of land located in Bexar County, Texas (the "Fischer Property"). (b) Borrower has (i) caused FC Holdings to pledge to Lender the note by FCS Fisher, Ltd. to FC Holdings and all collateral pledged to secure payment thereof; (ii) delivered said note, together with an endorsement thereof to Agent, for the benefit of Lenders; and (iii) pledged to Agent, for the benefit of Lenders, all of its right, title and interest in FCS Fisher, Ltd. and FCS Fischer, G.P., Corp. (c) FCS Fischer, Ltd. is the fee title holder of the Fischer Property, subject to no liens or encumbrances other than that certain Deed of Trust in favor of CFSC, as agent dated March 31, 2000. (d) FC Holdings owns an aggregate 25% interest in equity of FCS Fischer Ltd. and its general partner, free and clear of all liens and encumbrances, except those in favor of Agent (on behalf of Lenders). 10.39 Bosque Notes. (a) Bosque is a wholly owned subsidiary of Borrower. Bosque has issued $93,900,000 in 7.66% Asset Backed Notes (the "Bosque Notes") due June 5, 2002 pursuant to a Note Agreement dated as of June 6, 1997 (as amended from time to time, the "Bosque Note Agreement") by and among Bosque, Realty Companies (identified therein) and Bankers Trust Company of California, N.A., as Trustee; (ii) Deutsche Bank is the successor in interest to the trustee under the Bosque Note Agreement ("Bosque Trustee"); (iii) the unpaid principal balance of the Bosque Notes as of December 5, 2002 is $4,573,603.49 and as of such date there was no accrued but unpaid interest thereon. (b) UCC financing statements in favor of Lenders have been filed against Borrower and Bosque with respect to the Bosque Notes, along with an acknowledgement of notice by Trustee of the security interest described in the UCC financing statements. 10.40 Fee Agreements. Attached hereto as Schedule 10.40 is a true, accurate and complete schedule, as of the Effective Date, of all Fee Agreements to which Borrower or any Primary Obligor, Mid-Tier Company or Secondary Obligor-Existing is a party. 10.41 Securitization Agreements. Attached hereto as Schedule 10.41 is a true, accurate and complete schedule as of the Execution Date of all sales and servicing agreements and similar agreements relating to securitizations to which Borrower, any Primary Obligor or any other Subsidiary of Borrower is a party. 10.42 Incorporation by Reference. The provisions of Sections 4.7 and 4.9 of the FC Consumer Note, in each case as in effect on the Execution Date and as amended with the consent 69 of the Majority Lenders from time to time, are incorporated herein by reference as fully as if set forth herein in their entirety, except that references therein (or in any related definition) to: (i) "Guarantor" or "Borrower" shall be deemed references to Borrower hereunder; (ii) "Lender" shall be deemed references to Majority Lenders; (iii) references to "Agreement" or "this Agreement" shall be deemed references to this Agreement; (iv) "Loan Documents" shall be deemed references to the Loan Documents hereunder ; (v)delivery of any material to the "Lender" thereunder pursuant to any of the foregoing provisions of such agreement shall be deemed delivery also to the Lenders for purposes of this Section. 10.43 Tier IV Companies. Schedule 10.43 lists each Subsidiary of Borrower and each other Secondary Obligor with Assets with a fair market value of less than $100,000. The aggregate fair market value of Assets of all entities listed on Schedule 10.43 does not exceed $1,500,000. No Person listed on Schedule 10.43 engages in any business. 10.44 Waterfall Restrictions. No loan agreement or other borrowing arrangement of any PFAL Portfolio Entity contains any provision (x) pursuant to which such agreement or arrangement would cross-default to a loan agreement or other borrowing arrangement of any other PFAL Portfolio Entity or to a different loan agreement or other borrowing arrangement of such PFAL Portfolio Entity or (y) which would in any way restrict, reduce or prohibit distributions by a PFAL Portfolio Entity on account of any event or condition with respect to any Affiliate of such PFAL Portfolio Entity or with respect to that PFAL Portfolio Entity under any other borrowing or credit arrangement. 10.45 Wholly Owned Subsidiary Interests. Attached as Schedule 10.45 hereto is a true and complete list, as of the Effective Date, of each Wholly-Owned Subsidiary which owns Equity Interests issued by any other Person other than an REO Affiliate of such Wholly-Owned Subsidiary, 10.46 REO Affiliates. Attached as Schedule 10.46 hereto is a true and complete list, as of the Effective Date, of each REO Affiliate. 10.47 Large Net Asset Value. Attached hereto as Schedule 10.47 is a true and complete list, as of the Effective Date, of each Secondary Obligor with a Net Asset Value in excess of $2,000,000. Section 11. AGENT. 11.1 Appointment. The Lenders hereby irrevocably appoint Bank of Scotland, acting through its New York branch, to act as Agent hereunder and as Agent or Collateral Agent or "Assignee" or "Secured Party" (or in any other similar representative capacity designated in any Security Document) under the Security Documents (in such capacity, the "Agent"). Each Lender hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Agent to take such action on its behalf under the provisions of this Agreement, the Notes, the Security Documents, the other Loan Documents and any other instruments and agreements referred to therein and to exercise such powers thereunder as are specifically delegated to or required of it by the terms thereof and such other powers as are reasonably incidental thereto; provided that the Agent shall not take any action to realize upon 70 any security interest in any of the Collateral, or release any substantial portion of the Collateral, without the consent of the Majority Lenders. The Agent may perform any of its duties under any of the Loan Documents by or through its agents or employees. 11.2 Nature of Duties. The Agent shall have no duties or responsibilities except those expressly set forth in the Loan Documents. Neither the Agent nor any of its officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted by it under any of the Loan Documents, or in connection therewith unless caused by its or their gross negligence or willful misconduct. Nothing in the Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of the Loan Documents except as expressly set forth therein. The duties of the Agent under the Loan Documents shall be mechanical and administrative in nature and the Agent shall not have by reason of its duties under the Loan Documents a fiduciary relationship in respect of any Lender. The Agent agrees to deliver promptly to each Lender (i) copies of notices received by it pursuant to Sections 7.1, 7.2 and 7.11 of this Agreement, and (ii) copies of all documents required to be delivered hereunder by the Borrower to the Lenders directly but that are not so delivered to any Lender (but were delivered to the Agent) if such Lender notifies the Agent that it has not received such document or documents, specifying same. 11.3 Lack of Reliance. Independently and without reliance on the Agent, each Lender to the extent it deems appropriate has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Loan Parties in connection with the making and the continuance of the Loans and its Commitments hereunder and the taking or not taking of any action in connection herewith, (ii) its own appraisal of the creditworthiness of the Loan Parties and (iii) its own independent investigation and appraisal of the Collateral; and, except as expressly provided in the Loan Documents, the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the date hereof or at any time or times thereafter. The Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties herein or in any certificate or other document delivered in connection herewith or for the authorization, execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, or sufficiency of any of the Loan Documents, the financial condition of the Loan Parties or the condition of any of the Collateral, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of any of the Loan Documents, the financial condition of the Loan Parties or the existence or possible existence of any Event of Default or Default. 11.4 Certain Rights. If the Agent requests instructions from the Lenders or Majority Lenders with respect to any interpretation, act or action (including failure to act in connection with this Agreement or any of the other Loan Documents) the Agent shall be entitled to refrain from such act or taking such actions unless and until it shall have received instructions from the Lenders or the Majority Lenders, as the case may be; and the Agent shall not incur liability to any Person by so refraining. Without limiting the foregoing, no Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any of the other Loan Documents in accordance with the instructions of the Majority Lenders (as to matters requiring the consent of the Majority Lenders) or all the Lenders (as to matters requiring the consent of all the Lenders). The Agent shall be fully justified in 71 failing or refusing to take any action under any Loan Document unless, if it requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking, continuing to take or not taking any such action. 11.5 Reliance. The Agent shall be entitled to rely upon any written notice or any telephone message believed by it to be genuine or correct and to have been signed, sent or made by the proper Person, and, with respect to all legal matters pertaining to the Loan Documents and its duties thereunder, upon advice of counsel selected by it. 11.6 Indemnification. TO THE EXTENT THE AGENT IS NOT REIMBURSED OR INDEMNIFIED BY THE BORROWER, THE LENDERS WILL REIMBURSE AND/OR INDEMNIFY THE AGENT, IN PROPORTION TO THE AGGREGATE AMOUNT OF THEIR RESPECTIVE COMMITMENTS (OR, IF COMMITMENTS ARE TERMINATED, LOANS OUTSTANDING) UNDER THIS AGREEMENT, FOR AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED OR SUSTAINED BY OR ASSERTED AGAINST THE AGENT, ACTING PURSUANT HERETO OR ANY OF THE OTHER LOAN DOCUMENTS IN ITS CAPACITY PROVIDED FOR IN THIS SECTION 11, IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT, OR ANY OF THE OTHER LOAN DOCUMENTS, PROVIDED, HOWEVER, THAT NO LENDER SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM THE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. THE OBLIGATIONS OF THE LENDERS UNDER THIS SECTION 11.6 SHALL SURVIVE THE REPAYMENT OF THE NOTES AND THE LOANS AND THE TERMINATION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 11.7 Agent, Individually. With respect to its Commitments under this Agreement, the Loans made by it and any Note issued to or held by it, the Agent shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender or holder of a Note. The terms "Lender", "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, not exclude the Agent in its individual capacity as a Lender or holder of a Note. The Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with the Loan Parties and their Subsidiaries as if it were not acting pursuant hereto, and may accept fees and other consideration from the Loan Parties and their Subsidiaries for services as the Agent in connection with this Agreement and the other Loan Documents and for services otherwise than as the Agent without having to account for the same to the Lenders. 11.8 Holders of Notes. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been received by the Agent. Any request, authority or consent of any Person, who at the time of making such request or of giving such authority or consent is the payee of any Note, shall be conclusive and binding on any subsequent holder, transferee, assignee or payee of such Note or of any Note or Notes issued in exchange therefor. 11.9 Resignation. The Agent may resign at any time from the performance of all its functions and duties hereunder and under the other Loan Documents by giving 30 days prior written notice to the Borrower and each Lender. Such resignation shall take effect upon the expiration of such 30-day period or upon the earlier appointment of a successor. 72 Notwithstanding any such resignation, the provisions of Sections 11.6 and 12.3 shall inure also to the benefit of each Agent who has so resigned with respect to the period it served as Agent. In case of the resignation of the Agent, the Majority Lenders, with the prior consent of the Borrower, which consent may not be unreasonably withheld, may appoint a successor by a written instrument signed by the Majority Lenders. Any successor shall execute and deliver to the Agent an instrument accepting such appointment, and thereupon such successor, without further act, shall become vested with all the estates, properties, rights, powers, duties and trusts of the Agent hereunder and with like effect as if originally named as "Agent" herein and therein, and upon request, the predecessor Agent shall take all actions and execute all documents necessary to give effect to the foregoing. In the event the Agent's resignation becomes effective at a time when no successor has been named, all notices, other communications and payments hereunder required to be given by or to the Agent shall be sufficiently given if given by the Majority Lenders (or all Lenders, if the consent of all Lenders is required therefor hereunder) or to each Lender, as the case may be. In such event, all powers specifically delegated to the Agent may be exercised by the Majority Lenders and the Majority Lenders shall be entitled to all rights of the Agent hereunder. 11.10 Reimbursement. Without limiting the provisions of Section 11.6, the Lenders and the Agent hereby agree that the Agent shall not be obligated to make available to any Person any sum which the Agent is expecting to receive for the account of that Person until the Agent has determined that it has received that sum. The Agent may, however, disburse funds prior to determining that the sums which the Agent expects to receive have been finally and unconditionally paid to the Agent, if the Agent wishes to do so. If and to the extent that the Agent does disburse funds and it later becomes apparent that the Agent did not then receive a payment in an amount equal to the sum paid out, then any Person to whom the Agent made the funds available shall, on demand from the Agent: (a) refund the Agent the sum paid to that Person; and (b) reimburse the Agent for the additional amount certified by the Agent as being necessary to indemnify the Agent against any funding or other cost, loss, expense or liability sustained or incurred by the Agent as a result of paying out the sums before receiving it; provided, however, that if such funds were made available to any Lender, such additional amount shall be limited to interest on the sum to be repaid, for each day from the date such amount was disbursed until the date repaid to the Agent, at (for the first three days) the customary rate set by the Agent for correction of errors among banks, and thereafter at the Base Rate (or, if greater and in respect of a Loan, the rate from time to time prevailing on such Loan). Section 12. MISCELLANEOUS. 12.1 Calculations and Financial Data. Calculations hereunder (including, without limitation, calculations used in determining, or in any certificate of any Loan Party delivered reflecting compliance by any Loan Party with the provisions of this Agreement) shall be made and financial data required hereby shall be prepared both as to classification of items and as to amount in accordance with GAAP, consistent with the audited Financial Statements described in Section 10.16; provided that for purposes of Section 8.20 no effect shall be given to any change in GAAP from those in effect on December 31, 2001. 73 12.2 Amendment and Waiver. Except as otherwise provided, no provision of any of the Loan Documents may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the Majority Lenders (or the Agent on their behalf) and, if the Borrower is a party thereto, the Borrower, except that waivers of provisions relating to a Loan Party's performance or non-performance of its obligations hereunder or thereunder need not be signed by such Loan Party or any other Loan Party; provided however that the written consent of the Agent shall also be required to change, waive, discharge or terminate provisions of Section 11; and provided further that without the consent of all of the Lenders (or the Agent on their behalf) no change, waiver, discharge or termination may be made that would increase the amount of any Commitment of any Lender, decrease the principal of any Loan; decrease the interest rate payable on any Loan; decrease the amount of any fee or Commitment commission; extend the final maturity date of any Loan; change the definition of "Majority Lenders" or modify this Section 12.2. Any such change, waiver, discharge or termination shall be effective only in the specific instance and for the specific purposes for which made or given. 12.3 Expenses; Indemnification. (a) Whether or not the transactions hereby contemplated shall be consummated, the Borrower shall pay all out-of-pocket costs and expenses of (x) the Agent incurred in connection with the preparation, execution, delivery, administration, filing and recording of, and (y) the Agent and the Lenders incurred in connection with the amendment (including any waiver or consent) or modification of (including any amendment, waiver, consent or modification at any time requested by the Borrower, whether or not same is finalized or executed), any failure of Borrower to perform or observe any provision of, and enforcement of or preservation of any rights under, this Agreement, the other Loan Documents, the making and repayment of the Loans, and the payment of all interest and fees, including, without limitation, (A) the fees and expenses of Sullivan & Worcester LLP, counsel for the Agent, and any special or local counsel retained by the Agent or the Lenders, and with respect to enforcement, the reasonable fees and expenses of counsel for the Agent or any Lender, (B) the reasonable fees and expenses of accountants, other consultants, appraisers and other professionals retained by the Agent in connection with the transactions contemplated hereunder, and (C) printing, travel, title insurance, mortgage recording, filing, communication and signing taxes and costs. (b) THE BORROWER AGREES TO PAY, AND TO SAVE THE AGENT AND THE LENDERS HARMLESS FROM (x) ALL PRESENT AND FUTURE STAMP, FILING AND OTHER SIMILAR TAXES, FEES OR CHARGES (INCLUDING INTEREST AND PENALTIES, IF ANY), WHICH MAY BE PAYABLE IN CONNECTION WITH THE LOAN DOCUMENTS OR THE ISSUANCE OF THE NOTES OR ANY MODIFICATION OF ANY OF THE FOREGOING, AND (y) ALL FINDER'S AND BROKER'S FEES IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS. (c) THE BORROWER AGREES TO INDEMNIFY, PAY AND HOLD HARMLESS THE AGENT, EACH LENDER, ANY LENDER ASSIGNEE AND EACH HOLDER OF A NOTE AND THEIR RESPECTIVE PRESENT AND FUTURE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS (COLLECTIVELY, THE "INDEMNIFIED PARTIES") FROM AND AGAINST ALL LIABILITY, LOSSES, DAMAGES AND EXPENSES (INCLUDING, WITHOUT LIMITATION, LEGAL FEES AND EXPENSES) ARISING OUT OF, OR IN ANY WAY CONNECTED WITH, OR AS A RESULT OF (I) THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE DOCUMENTS OR TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY OR THE PERFORMANCE BY THE 74 PARTIES HERETO OR THERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER AND THEREUNDER OR RELATING THERETO; OR (II) ANY CLAIM, ACTION, SUIT, INVESTIGATION OR PROCEEDING (IN EACH CASE, REGARDLESS OF WHETHER OR NOT THE INDEMNIFIED PARTY IS A PARTY THERETO OR TARGET THEREOF) IN ANY WAY RELATING TO THE BORROWER, ANY PRIMARY OBLIGOR, ANY SECONDARY OBLIGOR OR SUBSIDIARY OF ANY THEREOF OR ANY COLLATERAL OR ANY AFFILIATE OF THE BORROWER OR ANY SUBSIDIARY OF ANY SUCH AFFILIATE OR IN ANY WAY RELATING TO ANY OF THE FOREGOING PERSONS OR ANY OTHER LOAN PARTY, OR ANY AFFILIATE OF ANY OF THE FOREGOING IN RESPECT OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENTS OR ANY OTHER DOCUMENT OR TRANSACTION IN CONNECTION HEREWITH OR THEREWITH OR RELATING HERETO OR THERETO; OR (III) ANY ACTUAL OR ALLEGED VIOLATION BY THE BORROWER, ANY PRIMARY OBLIGOR, SECONDARY OBLIGOR, ANY LOAN PARTY, ANY AFFILIATE OF ANY OF THE FOREGOING PERSONS OR ANY SUBSIDIARY OF ANY OF THE FOREGOING PERSONS (OR ANY PREDECESSOR IN INTEREST OF ANY OF THEM) OF ANY ENVIRONMENTAL LAW; PROVIDED THAT THE BORROWER SHALL NOT BE LIABLE TO AN INDEMNIFIED PARTY FOR ANY PORTION OF SUCH LIABILITIES, LOSSES, DAMAGES AND EXPENSES SUSTAINED OR INCURRED AS A DIRECT RESULT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE AGENT, ANY LENDER OR SUCH INDEMNIFIED PARTY IF SUCH GROSS NEGLIGENCE OR WILLFUL MISCONDUCT IS DETERMINED TO HAVE OCCURRED BY A FINAL AND NON-APPEALABLE DECISION OF A COURT OF COMPETENT JURISDICTION. EACH LENDER SHALL ENDEAVOR TO GIVE THE BORROWER NOTICE OF ANY MATERIAL CLAIM, ACTION, SUIT OR PROCEEDING (IF NOT RESTRICTED BY APPLICABLE LAW, REGULATION OR GOVERNMENT AUTHORITY FROM SO DOING OR UNLESS THE SAME WOULD BE INCONSISTENT WITH A REQUEST FROM A GOVERNMENT AUTHORITY) REFERRED TO IN CLAUSE (II) WHICH HAS BEEN FILED AGAINST SUCH LENDER WITHIN A REASONABLE TIME AFTER THE LOAN OFFICER OF SUCH LENDER WITH RESPONSIBILITY FOR THIS AGREEMENT BECOMES AWARE OF THE SAME, BUT NO FAILURE TO GIVE ANY SUCH NOTICE SHALL AFFECT, OR RELIEVE THE BORROWER OF, ANY OF BORROWER'S OBLIGATIONS UNDER THIS SECTION 12.3 OR UNDER ANY OTHER PROVISION OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR RESULT IN ANY OBLIGATION OR LIABILITY OF THE AGENT OR ANY LENDER TO THE BORROWER OR ANY OTHER PERSON. (d) All obligations provided for in this Section 12.3 and Sections 3.4, 3.9, 4.1, 4.2, 4.3, 5.2 and 11.6 shall survive any termination of this Agreement and the Commitments and the payment in full of the Obligations. 12.4 Benefits of Agreement; Descriptive Headings. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns, and, in particular, shall inure to the benefit of the holders from time to time of the Notes; provided, however, that no Loan Party party hereto may assign or transfer any of its rights or obligations hereunder without the prior written consent of the Agent and the Lenders and any such purported assignment or transfer shall be void. In furtherance of the foregoing, each Lender shall be entitled at any time to grant participations in the whole or any part of its rights and/or obligations under this Agreement, the Loan Documents or any Loan or Note to any Person; provided, however, that no Lender Assignee shall be permitted by the terms of its participation agreement with the relevant Lender to require such Lender to take or omit to take any action hereunder except to the extent that if the Lender Assignee were a Lender hereunder, its consent to taking or omitting to take such action would be required by the terms of the second proviso of Section 12.2 hereto. No such participation pursuant to this Section 12.4(a) shall relieve any Lender from its obligations hereunder and the Borrower need deal solely with the Agent and the Lenders with 75 respect to waivers, modifications and consents to this Agreement, the Loan Documents or the Notes. Any such participant is referred to in this Agreement as a "Lender Assignee". The Borrower agrees that the provisions of Sections 3.4, 3.7, 3.9, 5.2 and 12.3 shall run to the benefit of each Lender Assignee and its participations or interests herein, and any Lender may enforce such provisions on behalf of any such Lender Assignee; provided, however, that if any Lender grants a participation in the whole or any part of its rights and/or obligations pursuant to this Section 12.4(a), then the amounts that the Borrower is required to pay pursuant to this Agreement (including, without limitation, additional amounts made pursuant to Section 5.2) shall not exceed the amounts that the Borrower would have been required to pay to such Lender pursuant to this Agreement had such Lender not granted such participation. The Borrower hereby further agrees that any such Lender Assignee may, to the fullest extent permitted by applicable law, exercise the right of setoff with respect to such participation (and in an amount up to the amount of such participation) as fully as if such Lender Assignee were the direct creditor of the Borrower. Upon a participation in accordance with the foregoing, the Borrower shall execute such documents and do such acts as any Lender may reasonably request to effect such assignment. Any Lender may furnish any information concerning the Loan Parties in its possession from time to time to Lender Assignees (including prospective Lender Assignees) and prospective Purchasing Lenders. Each Lender shall notify Borrower of any participation granted by it pursuant to this Section 12.4(a) but neither the approval of the Borrower nor that of any other Loan Party shall be required for any such participation. The Borrower shall not be responsible for any due diligence costs or legal expenses of such Lender Assignees in connection with their entering into such participation. (b) The descriptive headings of the various provisions of this Agreement and the other Loan Documents are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. (c) Any Lender may at any time assign to any other Lender or any affiliate of any Lender, or (subject to obtaining the prior written consent of the Borrower (but no other Loan Party), such consent not to be unreasonably withheld) to one or more additional banks or financial institutions ("Purchasing Lenders"), all or any part of its Commitments (and corresponding Loans and Note) pursuant to a Transfer Supplement ("Transfer Supplement"), the form and substance satisfactory to the Agent; provided, however, that each such assignment shall be for an amount not less than $1,000,000 (or, if the Lender's Term Loan or Revolving Credit Loan Commitment (as applicable) at the time is less, such amount) and integral multiples of $500,000 above such amount, or such other amount or multiple to which the Agent may consent. Upon (i) such execution of such Transfer Supplement, (ii) delivery of an executed copy thereof to the Borrower and the Agent, (iii) payment by such Purchasing Lender to such transferor Lender of an amount equal to the purchase price agreed between such transferor Lender and such Purchasing Lender, (iv) payment by the Purchasing Lender to the Agent of a $3,000 processing fee, and (v) any consent of the Borrower required by the first sentence of this Section 12.4(c), such Purchasing Lender shall for all purposes be a Lender party to this Agreement and shall have all the rights and obligations of a Lender under this Agreement to the same extent as if it were an original party hereto and thereto with the percentage share of the Commitment(s) set forth in Schedule I to such Transfer Supplement, and no further consent or action by the Borrower, any other Loan Party, the Lenders or the Agent shall be required. Such Transfer Supplement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the 76 addition of such Purchasing Lender and the resulting adjustment of the percentage of the Commitment(s), Notes and Loans (and related rights and obligations) held by the transferor Lender and the Purchasing Lender arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender pursuant to the Transfer Supplement. Upon the consummation of any transfer to a Purchasing Lender pursuant to this Section 12.4(c), the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that, if required, a replacement Note or Notes (dated the same date as the Note or Notes being replaced) is issued to such transferor Lender and a new Note or Notes (dated the same date as the Note or Notes being replaced) or, as appropriate, a replacement Note or Notes (dated the same date as the Note or Notes being replaced) is issued to such Purchasing Lender, in each case in principal amounts reflecting their outstanding Loans and Commitment(s), as adjusted pursuant to such Transfer Supplement. (d) Notwithstanding anything to the contrary contained herein or in any of the Loan Documents, unless the Agent, the Borrower or a Lender otherwise request with respect to any specific exhibit, exhibits to this Agreement shall not be required to be attached to the execution or any other copy of this Agreement, and any references in this Agreement or the other Loan Documents to such exhibits as "Exhibits hereto," "Exhibits to this Agreement" or words of similar effect shall be deemed to refer to such document as executed by the parties thereto and delivered on the Effective Date. 12.5 Notices, Requests, Demands, etc. Except as otherwise expressly provided herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been duly given or made when delivered if sent by Federal Express or other similar overnight delivery service, or three Business Days after mailing (when mailed, postage prepaid, by registered or certified mail, return receipt requested) or (in the case of telex, telegraphic, telecopier or cable notice) when delivered to the telex, telegraph, telecopier or cable company, or (in the case of telex or telecopier notice sent over a telex or telecopier owned or operated by a party hereto) when sent; in each case addressed as follows, except that notices and communications to the Agent pursuant to Sections 2 and 9 shall not be effective until received by the Agent: (i) if to the Agent, at the Closing Office, (ii) if to a Lender, at the address specified with its signature below or (if a Purchasing Lender) on the applicable Transfer Supplement, and (iii) if to a Loan Party, at its address specified with its signature below (Attention: President), or to such other addresses as any of the parties hereto may hereafter specify to the others in writing, provided that communications with respect to a change of address shall be deemed to be effective when actually received. 12.6 Governing Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION, except (as to any other Loan Document) to the extent specifically set forth otherwise in that Loan Document. 12.7 Counterparts; Telecopies. This Agreement and the other Loan Documents may be executed in any number of counterparts, and by the different parties hereto and thereto on the same or separate counterparts, each of which when so executed and delivered shall be deemed to 77 be an original; all the counterparts for each such Loan Document shall together constitute one and the same agreement. Telecopied signatures hereto and to the other Loan Documents shall be of the same force and effect as an original of a manually signed copy. 12.8 Waiver; Remedies Cumulative; Payment of Claims; Full Recourse. (a) No failure or delay on the part of the Agent or any Lender in exercising any right, power or privilege under this Agreement or any other Loan Document, and no course of dealing between Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party or any Subsidiary thereof and the Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.. No notice to or demand on Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party in any case shall entitle such Loan Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of the Agent or any Lender to any other or further action in any circumstances without notice or demand. (b) The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Agent or any Lender would otherwise have pursuant to such documents or at law or equity. (c) In furtherance and not in limitation of the other rights and remedies of the Agent and the Lenders, upon the occurrence of an Event of Default or Default, Agent, in its sole and absolute discretion, without waiving or releasing any covenant, agreement or other obligation of Borrower or any Default or Event of Default, may at any time or times hereafter, but shall be under no obligation to, pay, acquire and/or accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person against the Assets of Borrower, or any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing or any Wholly-Owned Subsidiary. All sums paid by Agent in respect thereof and all reasonable costs and expenses (including, without limitation, fees and expenses of counsel to the Agent) relating thereto incurred by Agent or for which Agent becomes obligated on account thereof shall be part of the Obligations payable by a Borrower to Agent on demand and any amount not paid on demand shall bear interest at the Past Due Rate. (d) The Borrower's obligations to pay principal, interest, fees and other amounts when due under this Agreement and the other Loan Documents is absolute and unconditional and a full recourse obligation of Borrower, notwithstanding any fact or circumstance and, without limiting the generality of the foregoing, whether or not there are funds available in the Cash Flow Cash Collateral Account for application to any such obligation. 12.9 Recoveries; Pro Rata Sharing. (a) Any Recoveries (after deduction and payment of all expenses and costs permitted by this Agreement, the Security Documents or applicable law) shall be applied against the Loans held by the Lenders until satisfaction in full of all amounts due thereunder. (b) The Lenders agree among themselves that, with respect to all sums received by the Lenders applicable to the payment of the principal of or interest on the Notes 78 (except as otherwise provided in Section 3.4, 5.2 or 5.3), equitable adjustment will be made between the Lenders so that, in effect, all such sums shall be shared ratably by each of the Lenders (in accordance with the outstanding principal amount of their respective applicable Loans) whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or cross-action or by the enforcement of any or all of the Notes or otherwise. If any Lender receives any payment on its Notes of a sum or sums in excess of its pro rata portion (except as otherwise provided in Section 3.4, 5.2 or 5.3), then such Lender receiving such excess payment shall purchase for cash from the other Lenders with outstanding Loans to the Borrower an interest in their Note or Notes in such amount as shall result in a ratable participation by all of the Lenders in the aggregate unpaid amount of applicable Notes then outstanding; provided, however, that if all or any portion of such excess payment is thereafter recovered by such Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. The Borrower hereby agree that any Lender so purchasing a participation from another Lender pursuant to this Section 12.9(b) may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. 12.10 Jurisdiction. THE BORROWER HEREBY AGREES THAT ANY LEGAL ACTION OR PROCEEDING AGAINST IT WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS OR THE DOCUMENTS DELIVERED IN CONNECTION HEREWITH OR THEREWITH MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AS THE AGENT OR ANY LENDER MAY ELECT, AND, BY EXECUTION AND DELIVERY HEREOF, THE BORROWER ACCEPTS AND CONSENTS FOR ITSELF AND IN RESPECT TO ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, UNLESS WAIVED BY THE AGENT AND THE MAJORITY LENDERS IN WRITING, WITH RESPECT TO ANY ACTION OR PROCEEDING BROUGHT BY IT AGAINST THE AGENT OR ANY LENDER AND ANY QUESTIONS RELATING TO USURY. THE BORROWER AGREES THAT SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK SHALL APPLY TO THE LOAN DOCUMENTS AND WAIVES ANY RIGHT TO STAY OR TO DISMISS ANY ACTION OR PROCEEDING BROUGHT BEFORE SAID COURTS ON THE BASIS OF FORUM NON CONVENIENS. BORROWER HEREBY IRREVOCABLY CONSENTS THAT ALL PROCESS SERVED OR BROUGHT AGAINST BORROWER WITH RESPECT TO ANY SUCH PROCEEDING IN ANY SUCH COURT IN NEW YORK SHALL BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT IF SENT BY REGISTERED MAIL, OR (IF PERMITTED BY LAW) BY FEDERAL EXPRESS OR OTHER SIMILAR OVERNIGHT COURIER SERVICE, TO SUCH LOAN PARTY AT ITS ADDRESS SET FORTH ALONGSIDE ITS SIGNATURE BELOW (OR SUCH OTHER ADDRESS AS THE AGENT IS NOTIFIED OF IN ACCORDANCE WITH THE PROVISIONS OF SECTION 12.5). NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR THE LENDERS TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST ANY LOAN PARTY IN THE COURTS OF ANY OTHER JURISDICTION. 79 12.11 Severability. If any provision of this agreement shall be held or deemed to be or shall, in fact, be illegal, inoperative or unenforceable, the same shall not affect any other provision or provisions herein contained or render the same invalid, inoperative or unenforceable to any extent whatever. 12.12 Right of Set-off. In addition to any rights now or hereafter granted under applicable law or otherwise and not by way of limitation of any such rights, upon the occurrence of an Event of Default each of the Lenders is hereby authorized at any time or from time to time, without notice to any Loan Party or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and apply any and all deposits (general or special, time or demand, provisional or final) and any other indebtedness at any time held or owing by such Lender to or for the credit or the account of such Loan Party against and on account of the obligations and liabilities of such Loan Party now or hereafter existing under any of the Loan Documents irrespective of whether or not any demand shall have been made thereunder and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured. The Lender or Lenders exercising any rights granted under this Section 12.12 shall thereafter notify the affected Loan Party and the Agent of such action; provided that the failure to give such notice shall not affect the validity of such set-off and application. 12.13 No Third Party Beneficiaries. This Agreement is solely for the benefit of the Agent and the Lenders and the Borrower and the respective successors and assigns of the Agent and the Lenders and nothing contained herein shall be deemed to confer upon anyone other than the Borrower any right to insist on or to enforce the performance or observance of any of the obligations of the Agent or the Lenders contained herein. All conditions to the obligations of the Lenders to make Loans hereunder are imposed solely and exclusively for the benefit of the Lenders and their respective successors and assigns and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms and no other Person shall under any circumstances be deemed to be beneficiary of such conditions. 12.14 [Intentionally Omitted] 12.15 Survival; Integration. (a) Each of the representations, warranties, terms, covenants, agreements and conditions contained in this Agreement shall specifically survive the execution and delivery of this Agreement and the other Loan Documents and the making of the Loans and shall, unless otherwise expressly provided, continue in full force and effect until the Commitments have been terminated and the Loans together with interest thereon, the Commitment commissions, the fees and compensation of the Agent, and all other sums payable hereunder or thereunder have been indefeasibly paid in full. (b) This Agreement, together with the other Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and thereof and supersedes all prior agreements, written or oral, on the subject matter hereof and thereof. In the event of any direct conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; provided that the inclusion of supplemental rights or remedies in favor of the Agent or the Lenders in any other 80 Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 12.16 Domicile of Loans. Any Lender may make, maintain or transfer any of its Loans hereunder to, or for the account of, any branch office, subsidiary or affiliate of such Lender. 12.17 No Usury. It is expressly stipulated and agreed to be the intent of the Agent, the Lenders and the Borrower to comply at all times with applicable usury laws. If at any time such laws would ever render usurious any amount called for under any of the Loan Documents, then it is the express intention of the parties hereto that such excess amount be immediately credited on the applicable Notes, or if the applicable Notes have been fully paid, refunded by the Lenders (pro rata in accordance with their respective principal amount of the affected Loans), to the Borrower (and the Borrower shall accept such refund) and the provisions hereof and thereof be immediately deemed to be reformed to comply with the then applicable laws, without the necessity of the execution of any further documents, but so as to permit the recovery to the fullest amount otherwise called for hereunder and thereunder. Any such crediting or refunding shall not cure or waive any default by the Borrower under the Loan Documents. If at any time following any such reduction to the interest rate payable by the Borrower there remains unpaid any principal amounts under the Notes and the maximum interest rate permitted by applicable law is increased or eliminated, then the interest rate payable to the Lenders shall be readjusted, to the full extent permitted by applicable law, so that the total amount of interest thereunder payable by the Borrower to the Lenders shall be equal to the amount of interest which would have been paid by the Borrower without giving effect to applicable usury laws. The Borrower agree, however, that in determining whether or not any interest payable under the Notes or any of the other Loan Documents exceeds the highest rate permitted by law, any non-principal payment (except payments specifically stated in the Notes or such other Loan Documents to be "interest"), including fees and commissions and all other sums payable hereunder or thereunder or in connection herewith or therewith, shall be deemed, to the full extent permitted by law, to be an expense, fee, premium or penalty rather than interest. 12.18 Waiver of Jury Trial. THE BORROWER, THE AGENT AND EACH LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE BORROWER, ANY PARTNER THEREOF, ANY OTHER LOAN PARTY, THE AGENT OR THE LENDERS. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 12.19 Waiver by Borrower. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT OR REQUIRED BY LAW, BORROWER WAIVES (A) PRESENTMENT, DEMAND AND PROTEST, NOTICE OF PROTEST, NOTICE OF PRESENTMENT, DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, 81 CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY ANY OF THE LENDERS AND/OR THE AGENT ON WHICH BORROWER MAY IN ANY WAY BE LIABLE; (B) ALL RIGHTS TO NOTICE AND A HEARING PRIOR TO AGENT'S TAKING POSSESSION OR CONTROL OF, OR TO REPLEVY, ATTACHMENT OR LEVY UPON THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING ANY OF THE LENDERS AND/OR THE AGENT TO EXERCISE ANY OF ITS RESPECTIVE REMEDIES; AND (C) THE BENEFIT OF ALL VALUATION, APPRAISEMENT, EXTENSION AND EXEMPTION LAWS. 12.20 Waiver of Marshaling. All rights of marshaling of assets of Borrower, including any such right with respect to the Pledged Property, are hereby waived by Borrower. 12.21 Waiver of Claims; Release by Borrower. (a) Borrower releases Lenders and the Agent from any and all causes of action or claims which Borrower may now or hereafter have for any asserted loss or damage to Borrower claimed to be caused by or arising from any act or omission to act on the part of any Lenders and/or the Agent, their respective officers, agents or employees, except, in the case of any Lender or the Agent, the willful misconduct or gross negligence of such Lender or the Agent (as the case may be). (b) Borrower hereby acknowledges, agrees and affirms, as of the Execution Date and as of the Effective Date, that it possesses no claims, defenses, offsets, recoupment or counterclaims of any kind or nature against or with respect to the enforcement of this Agreement or any other Loan Document or any amendments thereto (collectively, the "CLAIMS"), nor does Borrower now have knowledge of any facts that would or might give rise to any Claims. If facts now exist which would or could give rise to any Claim against or with respect to the enforcement of this Agreement or any other Loan Document, as may have been amended by the amendments thereto, Borrower hereby unconditionally, irrevocably and unequivocally waives and fully releases any and all such Claims as if such Claims were the subject of a lawsuit, adjudicated to final judgment from which no appeal could be taken and therein dismissed with prejudice. 12.22 Confidentiality. The Agent and each Lender, severally and with respect to itself only, covenants and agrees that any information obtained by the Agent or such Lender pursuant to this Agreement shall be held in confidence (it being understood that documents provided to the Agent hereunder may in all cases be distributed by the Agent to the Lenders) except that the Agent or such Lender may disclose such information (i) to its officers, directors, employees, agents, counsel, accountants, auditors, advisors or representatives, (ii) to the extent such information has become available to the public other than as a result of a disclosure by or through the Agent or such Lender, (iii) to the extent such information was available to the Agent or such Lender in a capacity other than Agent or Lender hereunder or on a nonconfidential basis prior to its disclosure to the Agent or such Lender hereunder, (iv) with the consent of Borrower, (v) to actual or prospective Lender Assignees or Purchasing Lenders or (vi) to the extent the Agent or such Lender should be (A) required in connection with any legal or regulatory proceeding or (B) requested by any Government Authority to disclose such information. 82 Section 13. TEXAS LANGUAGE. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE MATTERS COVERED HEREBY AND THEREBY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [remainder of page intentionally left blank] 83 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the date first above written. FIRSTCITY FINANCIAL CORPORATION a Delaware corporation By: ------------------------------------- Title: ---------------------------------- BANK OF SCOTLAND, acting through its New York branch, individually and as Agent By: ------------------------------------- Title: ---------------------------------- 84 TABLE OF CONTENTS 85 EXHIBITS(1) Annex I Definitions - -------- (1) Certain exhibits may not be attached to this Agreement. See Section 12.4(d). LIST OF SCHEDULES ANNEX I DEFINITIONS As used in the Term Loan and Revolving Credit Agreement to which this Annex I is annexed, the following terms shall have the meanings herein specified or as specified in the Section of such Loan Agreement or in such other document herein referenced: "A&R Agent " shall mean the "Agent" under the Amended and Restated Agreement. "A&R Note" shall mean a "Note" as defined in the Amended and Restated Agreement. "A&R Loan Document" shall mean a "Loan Document" as defined in the Amended and Restated Agreement. "A&R Termination Date" shall mean the date on which all obligations to the lenders under the Amended and Restated Agreement have been paid and all commitments of the lenders thereunder terminated. "Acquisition Price" with respect to any Asset Pool means the purchase price to be paid to the seller of the Asset Pool by the PFAL Portfolio Entity acquiring such Asset Pool for the acquisition of all rights to all property included in such Asset Pool plus transaction costs relating to the acquisition of such Asset Pool of up to 2% of the purchase price of such pool. Unless otherwise set forth in a written consent from the Agent, unless the full purchase price for an Asset Pool is cash and a certification to such effect is set forth in the related Asset Pool Acquisition Certificate, the Acquisition Price for such Asset Pool shall be deemed to be zero. "Adverse Waterfall Event" shall mean with respect to any PFAL Portfolio Entity owning more than one Asset Pool or assets in addition to those contained in its initial Asset Pool, that any lender to such PFAL Portfolio Entity has for any reason diverted (whether to make up for a shortfall with respect to any other pool or asset or otherwise) any portion of collections from any Asset Pool of such PFAL Portfolio Entity to a different asset or asset pool (or waterfall with respect thereto) of such PFAL Portfolio Entity or otherwise subsidized any other such asset or asset pool with collections from any Asset Pool or otherwise restricted distributions from, or reduced waterfall amounts arising from, collections of any Asset Pool on account of any condition or occurrence other than a condition or occurrence arising directly from such Asset Pool. "Affected Lender" - Section 3.7(b). "Affected Interest Period"- Section 3.7(a) "Affiliate" shall mean any Person (i) in which Borrower and/or any Parent, individually, jointly and/or severally, now or at any time or times hereafter, has or have an equity or other ownership interest equal to or in excess of twenty-five percent (25%) of the total equity of or other ownership interest in such Person; and/or (ii) which directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with Borrower; and/or (iii) any officer or director of Borrower or any Primary Obligor. For purposes of this definition, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Stock, by contract or otherwise, and in any case shall include direct or indirect ownership (beneficially or of record) of, or direct or indirect power to vote, 25% or more of the outstanding shares of any class of capital stock of such Person (or in the case of a Person that is not a corporation, 25% or more of any class of equity interest). Notwithstanding the foregoing, none of the Harbor Debtors shall be deemed to be an Affiliate for the purposes of this Agreement other than Section 8.23. "Agent" - introductory paragraph. "Aggregate Undistributed Secondary Obligor Funds" at any time shall mean the aggregate amount of (x) the FC Percentage with respect to each Secondary Obligor which is not a PFAL Portfolio Entity of the aggregate amount of the funds held by each such Secondary Obligor, which funds are (i) not held for payment by such Secondary Obligor, within the next 30 days, of indebtedness to a Permitted Portfolio Company Creditor of such Secondary Obligor which is permitted by the terms of this Agreement to be so repaid or (ii) not retained by such Secondary Obligor to satisfy a leverage covenant (a "Usage Leverage Covenant") imposed on such Secondary Obligor by the Permitted Portfolio Company Creditor of such Secondary Obligor pursuant to a covenant under a loan agreement between such creditor and such Secondary Obligor as in effect on the Execution Date of which the Agent has been given written notice or (iii) do not constitute Portfolio Protection Expenses plus (y) the Excess Portfolio Protection Expense Amount plus (x) all amounts constituting Challenged Portfolio Protection Expenses. Without limiting the foregoing, funds held by a Secondary Obligor (other than a PFAL Portfolio Entity) for the payment of operating expenses shall be included in the computation of "Aggregate Undistributed Secondary Obligor Funds" regardless of whether (without limitation) such funds are excluded from the computation of "Net Receipts". "Agreement" or "Loan Agreement" shall mean this Term Loan and Revolving Credit Agreement, as it may from time to time be amended, extended, restated, supplemented or otherwise modified. "Amended and Restated Agreement" shall mean the Amended and Restated Loan Agreement dated as of the date hereof among the Borrower, Bank of Scotland acting through its New York branch, as agent, and the lenders from time to time party thereto as it may from time to time be amended, extended, restated, supplemented or otherwise modified. "Annual Payment Date"-Section 2.4(c). -2- "Annual Term Loan Prepayment Amount" shall mean for each Annual Payment Date for any Asset Pool, (x) (i)for the first Annual Payment Date for such Asset Pool, the amount equal to 10% of the Tranche of Term Loans made in respect of the acquisition of such Asset Pool and (ii) for each subsequent Annual Payment Date for such Asset Pool, the amount equal to 10% of the principal amount of such Tranche of Term Loans outstanding as of close of business on immediately preceding Annual Payment Date. "AP Funding Date" with respect to any PFAL Portfolio Entity and any Asset Pool acquired by such PFAL Portfolio Entity shall mean the date on which the Tranche of Term Loans in respect of the PFAL Portfolio Entity's acquisition of such Asset Pool was made. "Applicable Borrowing Percentage" shall mean, with respect to the Acquisition Price of any Asset Pool the amount determined by multiplying (A) the percentage of outstanding shares of stock, membership interests, or partnership interests (as the case may be) or, in the case of a non-U.S. entity, similar equity interests, issued to FC Commercial by the PFAL Portfolio Entity acquiring such Asset Pool, and (B) (x) 100% until June 30, 2004; (y) 85% from July 1, 2004 until June 30, 2005 and (z) 75% from and after July 1, 2005 "Applicable Indebtedness" of any Person shall mean all Indebtedness of such Person other than trade payables incurred in the ordinary course of business which are not evidenced by an Indebtedness Instrument. "Approved Portfolio Leverage Arrangement" shall mean a borrowing arrangement between a PFAL Portfolio Entity and a financial institution on terms and conditions reasonably satisfactory to the Agent (as indicated in writing by the Agent) pursuant to which a loan is made to a PFAL Portfolio Entity on or prior to the date such PFAL Portfolio Entity acquires an Asset Pool, all of the proceeds of which loan are used to pay a portion of the Acquisition Price of such Asset Pool. Without limiting the scope of the Agent's discretion pursuant to the preceding sentence, (i) no borrowing arrangement shall be deemed an Approved Portfolio Leverage Arrangement if such arrangement cross-defaults to a credit arrangement of any other PFAL Portfolio Entity or contains any provisions which would in any way restrict, reduce or prohibit distributions by a PFAL Portfolio Entity on account of any event or condition with respect to any Affiliate of such PFAL Portfolio Entity; and (ii) references herein to an Approved Portfolio Leverage Arrangement shall be limited to such borrowing arrangements governed by the terms of the loan agreement and other documents in the form delivered to the Agent at the time such arrangements were approved by the Agent, as amended, supplemented or otherwise modified with the written consent of the Agent. "ASDM" shall mean Asset Servicing de Mexico S.A. de C.V. "Asset Pool" shall mean (x) prior to the acquisition thereof by a PFAL Portfolio Entity, a portfolio of loans described in an Asset Pool Acquisition Certificate, and (y) if acquired by a PFAL Portfolio Entity in whole or in part with the indirect proceeds of a Tranche of Term Loans, a portfolio of loans so acquired. Any portfolio of loans in which any Secondary Obligor has any interest which is not acquired in whole or in part with the indirect proceeds of a Tranche of Term Loans shall not constitute an Asset Pool. -3- "Asset Pool Acquisition Certificate" shall mean a certificate from an Executive Officer of Borrower in the form of Exhibit I-A to the Agreement, to which is attached (as contemplated by the form of such certificate), (i) the asset purchase agreement relating to the assets proposed to be purchased, (ii) the Charter Documents for the PFAL Portfolio Entity and (iii) any Shareholders Agreement entered into or proposed to be entered into by the holders of the Equity Interests of such PFAL Portfolio Entity. "Asset Pool-NL" shall mean an Asset Pool acquired at a time when the acquiring PFAL Portfolio Entity had (x) received proceeds of Indebtedness for the acquisition of such Asset Pool from a Person other than FC Commercial or an Affiliate thereof (it being understood that the foregoing reference to proceeds of Indebtedness from FC Commercial or an Affiliate shall not be construed to affect or modify any prohibition or other limitation on any such advances contained herein or in any other Loan Document) such amounting to less than 25% of the Acquisition Price of such Asset Pool or (y) received no proceeds of Indebtedness for the acquisition of such Asset Pool from a Person other than FC Commercial or an Affiliate thereof. "Asset Pool NPV Percentage" of a Tranche of Term Loans at any time, shall mean the decimal (expressed as a percentage) obtained by dividing (x) the aggregate outstanding principal amount of such Tranche of Term Loans by (y) the FC Equity Value of the Related Asset Pool of such Tranche. "Asset Pool NPV Percentage Certificate" shall mean a certificate in a form approved by the Agent prior to the first Borrowing Date of Term Loans under this Agreement which requires details as to the Asset Pool NPV Percentage and such other related information as the Agent may require. "Asset Pool Prepayment Amount" for any Asset Pool in respect of any Payment Date shall mean the sum of (I) 75% of the FC Percentage of the amount by which (A) Collections in respect of that Asset Pool (including amounts received in respect of any asset that constituted part of such Asset Pool which was sold to an REO Affiliate) during the most recently ended Waterfall Certificate Period exceeds (B) the amount of Permitted Portfolio Expenses in respect of such Asset Pool which during such period were expended or retained (excluding any such Permitted Portfolio Expenses expended or retained during any previous Waterfall Certificate Period) and, in the case of Leveraged Asset Pool, excluding any such Permitted Portfolio Expenses which were excluded from the computation, in clause (y) of the definition of "Collections", of the gross aggregate amount received during such period by such Asset Pool, plus (II) to the extent not constituting Extraordinary Transaction Proceeds, any proceeds of transfer of any Equity Interests issued by the PFAL Portfolio Entity owning such Asset Pool to FC Commercial and the FC Percentage of any proceeds of transfer of any Equity Interests issued by any REO Affiliate thereof formed in respect of such Asset Pool or otherwise holding any assets which at any time were part of such Asset Pool or collateral for any such assets (it being understood that no reference to any transfer of Equity Interests issued by any PFAL Portfolio Entity or REO Affiliate shall be construed to affect or modify any prohibition thereof or requirement for the obtaining of any consent relating thereto) or, in the case of the sale of any Equity Interests issued to FC Commercial by any PFAL Portfolio Entity with more than one Asset Pool, the share of such proceeds of the sale of such Equity Interests allocable to such Asset Pool (such share as among different Asset Pools as determined by the Agent in its discretion, -4- whether on the basis of the relative sizes of different Asset Pools, the relative amounts of Tranches of Term Loans made in respect of different Asset Pools, the relative Asset Pool NPV Percentages of different Asset Pools or otherwise ); plus (III) to the extent not constituting Extraordinary Transaction Proceeds, 75% of any other amounts received by or on behalf of such PFAL Portfolio Entity or any REO Affiliate thereof or, if such PFAL Portfolio Entity owns more than one Asset Pool, such portion of such other amounts which the Agent determines is allocable to such Asset Pool (such share as among different Asset Pools as determined by the Agent in its discretion, whether on the basis of the relative sizes of different Asset Pools, the relative amounts of Tranches of Term Loans made in respect of different Asset Pools, the relative Asset Pool NPV Percentages or otherwise). "Assets" shall mean any and all real, personal and intangible property of a Person, including, without limitation, accounts, chattel paper, contract rights, letters of credit, instruments and documents, equipment , general intangibles, inventory, leases, options, licenses, real property, and Equity Interests issued by any other Person whether now existing or hereafter acquired or arising. "Associate", when used to indicate a relationship with a Person, shall mean (i) another Person (other than a Loan Party or a Subsidiary thereof) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person or an immediate member of his family serves as trustee or in a similar capacity, and (iii) any relative or spouse of such Person or any relative of such spouse. "Auditors" shall mean KPMG LLP or other independent certified public accountants of recognized standing selected by Borrower and satisfactory to the Agent. "Base Rate" shall mean, for any day, the higher of (x) the fluctuating interest rate per annum, in effect from time to time, established by Bank of Scotland in New York as its base, prime or reference rate for U.S. domestic commercial loans in Dollars, or (y) the Federal Funds Rate in effect on such day plus 0.5%. Any change in the interest rate resulting from a change in the Base Rate shall be effective as of the opening of business on the day on which such change becomes effective; it is understood and agreed that the aforesaid rates and the Base Rate are reference rates only and do not necessarily represent the lowest or best rate actually charged to any customer. "Base Rate Loan" shall mean any Loan during any period that it bears interest determined by reference to the Base Rate. "Basle Laws" - Section 3.4. "Borrower" - introductory paragraph. "Borrower-FCL Note " shall mean the Promissory Note dated December 16, 2002 in the stated principal amount of $16,000,000 payable by Borrower to FC Consumer Lending. -5- "Borrower Pledge Agreement" shall mean the Amended and Restated Pledge Agreement (Stock and Debt) made by Borrower in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 6 and each other pledge agreement with respect to shares of stock or affiliate indebtedness from time to time hereafter delivered by Borrower in respect of the Obligations., as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Borrower Security Agreement" shall mean the Amended and Restated Security Agreement made by the Borrower in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 6 and each other security agreement from time to time hereafter delivered by Borrower in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified (including, without limitation, by the addition of additional parties thereto). "Borrowing Date"- Section 2.2. "Bosque" shall mean Bosque Asset Corp., a Texas corporation. "Bosque Note Agreement" - Section 10.39(a). "Bosque Notes" - Section 10.39(a). "Bosque Trustee" - Section 10.39(a). "Business Day" shall mean any day that is not a Saturday, Sunday or legal holiday in the State of New York or the State of Texas or a day on which banking institutions chartered by the State of New York, the State of Texas or the United States are legally required or authorized to close, and, when used in connection with LIBOR, means any such Business Day which is also a day on which deposits in Dollars may be dealt in on the London interbank market. "Calculation Date" - Section 8.29(a). "Capital Expenditures" shall mean, with respect to any Person, all expenditures by such Person which should be capitalized in accordance with GAAP, including all such expenditures with respect to fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which should be capitalized in accordance with GAAP) and the amount of obligations under Capitalized Leases incurred by such Person. "Capitalized Lease" shall mean any lease which is, or is required under GAAP to be, capitalized on the balance sheet of the lessee at such time, and "Capitalized Lease Obligation" of any Person at any time shall mean the aggregate amount of rental expenses which is, or is required under GAAP to be, capitalized on the books of such Person under Capitalized Leases. "Cash Collateral Account-A&R" shall mean each account specified in the Cash Collateral Agreement-A&R as subject to that Agreement. "Cash Collateral Account - Servicing" shall mean shall mean the account at the Depositary specified in the Cash Collateral Agreement-Servicing and in the letter agreement -6- between the Collateral Agent and the Depositary relating thereto or such other account, if any, which is specified in a cash collateral agreement (in form and substance satisfactory to Agent) between FC Servicing and Collateral Agent and letter agreement (in form and substance satisfactory to the Collateral Agent) between the Collateral Agent and the depositary bank with respect to such other account. "Cash Collateral Agreement-A&R" shall mean the Collateral Assignment of Account (Cash Flow Cash Collateral Account) made by the Borrower in favor of the Collateral Agent pursuant to the Amended and Restated Agreement, as such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Cash Collateral Agreement-P" shall mean the Collateral Assignment of Account (Cash Flow Cash Collateral Account-PFAL) dated as of the date hereof made by Borrower in favor of the Collateral Agent as such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Cash Collateral Agreement- Servicing "shall mean the Collateral Assignment of Account (FC Servicing) dated as of the date hereof made by Borrower in favor of the Collateral Agent as such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified "Cash Flow Cash Collateral Account" and "CFCCA-P" shall mean the account at the Depositary specified by account number in the Cash Collateral Agreement-P and in the letter agreement between the Collateral Agent and the Depositary relating thereto or such other account, if any, which is specified by account number in a cash collateral agreement (in form and substance satisfactory to Agent) between Borrower and Collateral Agent and letter agreement (in form and substance satisfactory to the Collateral Agent) between the Collateral Agent and the depositary bank with respect to such other account. "Certified Error Certificate" shall have the meaning set forth in the form of Waterfall Certificate approved by the Agent prior to the first Borrowing Date of Term Loans under this Agreement (as the form of certificate constituting the "Waterfall Certificate" for the purposes of this Agreement may be from time to time amended, supplemented, restated or otherwise modified). "CFCCA-P Business Day" shall mean any Business Day that is not a day on which banking institutions in the state (which is Connecticut and, for these purposes will remain such state until 30 days after written notice of a change of such location is delivered by Borrower to the Agent) where the CFCCA-P is maintained are legally required or authorized to close which is also a day on which deposits in Dollars may be dealt in on the London interbank market. "CFO", as to any Loan Party shall mean such Loan Party's chief financial officer. "CFSC" shall mean CFSC Capital Corp. XXX, a Delaware corporation. "CFSC Guaranty Subordination Agreement" - Section 10.37(a). "CFSC Intercreditor Agreement" - Section 10.37(a). -7- "Challenged Portfolio Protection Expense" - Section 7.2(g) "Charges" shall mean all national, Federal, state, county, city, municipal and/or other governmental (or any instrumentality, division, agency, body or department thereof, including without limitation the PBGC) taxes, levies, assessments, charges, liens, claims or encumbrances upon and/or relating to the Obligations, a Person's Assets, a Person's business, a Person's ownership and/or use of any of its Assets, a Person's income and/or gross receipts and/or a Person's ownership and/or use of any of its Assets. "Charter Document" shall mean (i) with respect to a corporation: its certificate or articles of incorporation or association and its by-laws or comparable documents under non-US laws; (ii) with respect to a partnership: its partnership agreement, certificate of partnership (if a limited partnership) and its certificate of doing business under an assumed name (if a general partnership); (iii) with respect to a trust, its trust agreement or declaration of trust; and (iv) with respect to a limited liability company, its certificate of formation and operating agreement or analogous documents; in each case, with such other similar documents as the Agent shall request or specify. "Closing Checklist" shall mean the Closing Checklist in the form of Schedule 6.3 to the Agreement. "Closing Office" shall mean the office of the Agent at 565 Fifth Avenue, New York, New York 10017 or such other office as may be designated in writing to the Borrowers by the Agent. "Closing Office Time" shall mean the local time in effect at the Closing Office. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Collateral" - Section 10.33. Without limiting the generality of the foregoing, the term "Collateral" also includes all other real and personal property and interests therein granted or purported to be granted as security to the Agent on behalf of the Lenders pursuant to any Security Document, whether before, on or after the Effective Date. "Collateral Agent" shall mean the Agent in its capacity as agent under one or more of the Security Documents and its successor and assigns (the Agent, in such capacity, being sometimes referred to herein and in other Loan Documents as the "Collateral Agent" and sometimes as the "Agent"). "Collection Period", with respect to a Payment Date, shall mean the period from and including the preceding Payment Date (or, in the case of the first Collection Period with respect to any Asset Pool, the period from and including the AP Funding Date for such Asset Pool) to and excluding such Payment Date. "Collections" of an Asset Pool for any applicable period shall mean (x) in the case of an Asset Pool other than a Leveraged Asset Pool, the gross aggregate amount received during such period on account of such Asset Pool by or on behalf of the PFAL Portfolio Entity owning such -8- Asset Pool (including, in addition, amounts received by any REO Affiliate of such PFAL Portfolio Entity formed in respect of such Asset Pool and any amounts otherwise received by any REO Affiliate of such PFAL Portfolio Entity on account of assets which at any time were part of such Asset Pool or collateral therefor ) and (y) in the case of a Leveraged Asset Pool, the gross aggregate amount received during such period on account of such Asset Pool by or on behalf of the PFAL Portfolio Entity owning such Asset Pool (including, in addition, amounts received by any REO Affiliate of such PFAL Portfolio Entity formed in respect of such Asset Pool and any amounts otherwise received by any REO Affiliate of such PFAL Portfolio Entity on account of assets which at any time were part of such Asset Pool or collateral therefor, and including amounts received on account of such Asset Pool prior to the commencement of such period which were released to or for the benefit of such PFAL Portfolio Entity during the current Waterfall Certificate Period), excluding (in the case of this clause (y)) amounts which were paid directly to the Permitted Portfolio Company Creditor of such PFAL Portfolio Entity under an Approved Portfolio Leverage Arrangement with respect to such Asset Pool or amounts which were remitted to such Creditor, in either case pursuant to the requirements of such Approved Portfolio Leverage Arrangement, which, in any such case, have not been released by such Creditor to (or for the benefit of) such PFAL Portfolio Entity (and/or any REO-PFAL Affiliate thereof), plus such additional amount (if any) which was available to be released to or for the benefit of such PFAL Portfolio Entity (and/or REO-PFAL Affiliate thereof) during such period under such arrangements (whether or not such additional amount was in fact so released) minus, in each case, the amounts received during such period by or on behalf of such PFAL Portfolio Entity constituting Extraordinary Transaction Proceeds allocable to such Asset Pool (as reasonably determined by Agent based on information provided by Borrower or, if the Agent determines that no such allocation would be supported by such information, as reasonably allocated (whether on a ratable basis or otherwise) by the Agent). "Commitment Period (Revolving)" shall mean the period from the Effective Date to and including the Final Maturity Date (Revolving). "Commitment Period (Term)" shall mean the period from the Effective Date to and including June 1, 2006, or such earlier date as the Term Loan Commitments may terminate in full as provided in the Agreement. "Commitments" shall mean the Term Loan Commitments and the Revolving Credit Loan Commitments. "Consolidated Group" shall mean the Borrower and its consolidated Subsidiaries, other than the Harbor Debtors. "Default" shall mean any event which with notice or lapse of time, or both, would become an Event of Default. "Depositary" shall mean Fleet National Bank. "Disclosure Restriction" - Section 7.1 (m). "Dividend"- Section 8.11(a). -9- "Dollars", "U.S. $", "$" and "U.S. dollars" shall mean the lawful currency of the United States of America. "Drive Collateral Assignment" shall mean the Collateral Assignment of Partnership and LLC Interests made by FC Consumer Lending and FirstCity Funding, L.P. dated as of the date hereof and each other collateral assignment from time to time hereafter delivered by FC Consumer Lending and FirstCity Funding, L.P. in respect of the Obligations, as such agreements may be from time to time amended, extended, restated, supplemented or otherwise modified. "Drive LP" shall mean Drive Financial Services LP. "EBITDA" for any period, shall mean net income (excluding extraordinary and non-recurring items, including those which are non-cash in nature) for such period plus (i) all interest expense, plus (ii) income tax expenses, plus (iii) depreciation and amortization (including amortization of any goodwill or other intangibles), minus or plus (iv) without duplication, gains and losses attributable to any sale of assets not in the ordinary course of business, plus or minus (v) any other non-cash charges or gains which have been subtracted or added in calculating such net income other than gains on asset-securitizations and loan loss provision charges. "Effective Date" - Section 6. "Eligible Asset Pool" shall mean an Asset Pool to be acquired by a PFAL Portfolio Entity for an all cash purchase price which (unless Agent in its discretion otherwise consents in writing) conforms in every respect with the requirements of Exhibit I-B to the Agreement. "Eligible PFAL Entity" shall mean a partnership, corporation or limited liability company or, if not formed in the United States, a similar foreign organized entity which is a Portfolio Entity-Post AE formed after the Effective Date (i) of which, unless the condition set forth in Section 6B.2(a) would be inapplicable to Loans to be made to such Entity (because the 25% basket set forth therein had then not been exceeded), not less than 50% nor more than 75% of each class of Equity Interests is owned directly by FC Commercial; (ii) no Equity Interests in which are owned by any Affiliate of FC Commercial , (iii) the Charter Documents and Shareholder Agreement of which provide FC Commercial with the rights set forth on Exhibit I-C to the Agreement or greater rights, (iv) which Charter Documents and Shareholder Agreements result in Permitted Shareholder Arrangements, (v) which has no Indebtedness other than Indebtedness pursuant to Approved Portfolio Leverage Arrangements incurred pursuant to Section 8.3(iv) and (vi) in respect of which no Disclosure Restriction exists. "Eligible Seller" shall mean (i) a seller of an Asset Pool which has its principal place of business and is selling the Asset Pool in the United States or (ii) a Non-US Seller which has its principal place of business and is selling an Asset Pool in France, Mexico, Germany, Italy or the United Kingdom. "Environmental Laws" shall mean all laws, common law, statutes, rules and regulations, and all judgments, decrees, franchises, orders or permits, issued, promulgated, approved or entered thereunder by any Government Authority relating to pollution or protection of the environment or occupational health and safety, including, without limitation, those relating to -10- emissions, discharges, releases or threatened releases of any waste, pollutant, chemical, hazardous material, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of any such pollutant material, substance or waste, into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any waste, pollutant, chemical, hazardous material, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste. "Equity Interests" shall mean any equity interests issued by any Person, including, without limitation, Stock (including, without limitation, common stock and preferred stock), partnership interests or limited liability company interests, any other securities convertible into, or exercisable for, any of the foregoing or other securities of such Person, and options and warrants or other rights to acquire any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any Person which is from time to time a member of a controlled group or a group under common control with any Loan Party within the meaning of Sections 414(b), 414(c), 414(m) or 414(o) of the Code or Section 4001(a)(14) of ERISA. "Eurodollar Interest Determination Date" shall mean the date as of which LIBOR is determined, which shall be two Business Days prior to the commencement of a Eurodollar Interest Period. "Eurodollar Interest Period" shall mean, with respect to each Eurodollar Loan, the interest period applicable pursuant to Section 3.10 hereof. "Eurodollar Loan" shall mean a Loan during any period that it bears interest determined by reference to LIBOR. "Event of Default" shall mean each of the Events of Default defined in Section 9. "Excess Portfolio Protection Expense Amount" at any time shall mean the amount (if any) by which (A) the aggregate amount (for all Secondary Obligors) of Portfolio Protection Expenses (which term, for purposes of this definition, shall include (in addition to all amounts included as "Portfolio Protection Expenses" in the definition of such term) (x) all amounts that would constitute Portfolio Protection Expenses except that prior written notice thereof was not given to the Agent and (y) all other amounts expended by Secondary Obligors in respect of their assets (other than (for purposes of this clause (y)) amounts expended to acquire portfolios of loan receivables) and/or retained by Secondary Obligors) at such time exceeds (B) $20,000,000. "Excluded Notes" shall mean those notes listed on Schedule I-(EN). "Excluded Entity" shall mean each Person listed on Schedule I-(EE). -11- "Excluded Initial Foreign MT" shall mean each of the following companies, but only for the period of time when the respective Net Asset Value of such company is less than $3,000,000: Adminstracion de Carteras Empresariales, S. de R. L. de C.V.; Cobranza Nacional de Carteras, S. de R.L. de C.V.; and Recuperacion de Carteras Mexican, S. de R. L. de C.V. "Executive Officer" shall mean the President of Borrower, the CFO of Borrower or any Senior Vice President of Borrower. "Execution Date" shall mean the date on which all parties to this Agreement shall have signed a copy this Agreement (whether the same or different copies) and shall have delivered the same to the Agent. "Existing Loans"- shall have the meaning ascribed thereto in the Amended and Restated Agreement. "Existing PF Amount" shall mean the amount on deposit in the Cash Collateral Account-AR on any day on or after the A&R Termination Date. "Existing S Co." shall mean each Secondary Obligor in existence immediately prior to the Effective Date. "Extraordinary Transaction": shall mean (i) a sale, conveyance, lease, or other transfer by Borrower, any Primary Obligor or any Secondary Obligor of any of its Assets, not in the ordinary course of its business; (ii) a sale, conveyance, or other transfer of any previously issued Equity Interests in any Affiliate (x) by any Primary Obligor or any Secondary Obligor unless such sale, conveyance or other transfer is the functional equivalent of a sale, conveyance, lease or other transfer by such Affiliate of Assets in the ordinary course of business or (y) by Borrower; (iii) any sale, conveyance or other transfer of any Indebtedness by a Secondary Obligor unless such Indebtedness is owed to such Secondary Obligor by a Person which is not Borrower, a Primary Obligor or any Affiliate of such Secondary Obligor, and any sale, conveyance or other transfer of Indebtedness (regardless of by whom owed) by Borrower or any Primary Obligor; (iv) the issuance of any Equity Interests by Borrower, any Primary Obligor or any Secondary Obligor other than the issuance of Equity Interests by a Secondary Obligor upon formation thereof where the capital raised by such issuance is used for the acquisition of portfolio assets; (v) any transaction identified on Schedule I -(ET), (vi) receipt of any proceeds by Borrower or any Subsidiary of Borrower in respect of any sale of any Equity Interests in Drive LP or its general partner or any Subsidiary of either thereof excluding any portion of such proceeds paid to the payee of the FC Consumer Note pursuant to the FC Consumer Loan Documents , pursuant to the terms thereof as in effect on the Execution Date as amended by Permitted FC Consumer Amendments ; (vii) receipt of proceeds by a Secondary Obligor of settlement or payments received from litigation other than from a collection proceeding of such Secondary Obligor in the ordinary course of business and receipt of proceeds by Borrower or any Primary Obligor of settlement or payments received from litigation , excluding (x) any such proceeds or payments payable to FC Servicing and/or its Subsidiaries in its capacity as servicer and collector of debt portfolios and (y) receipt of proceeds by FC Capital of settlement or payments received from any litigation listed on Schedule I-(LIT); or (viii) the incurrence by Borrower, any Primary Obligor, any Mid-Tier Company, any Secondary Obligor-Existing or any -12- Wholly-Owned Subsidiary of any Indebtedness (other than Indebtedness of an REO Affiliate to its REO Owner evidencing the purchase price of property purchased by such REO Affiliate from such REO Owner) or the receipt by any such Person of the proceeds thereof (it being understood that the inclusion for purposes of this definition of any item or transaction which is restricted or prohibited by this Agreement or any other Loan Document shall not be construed to modify or eliminate such restriction or prohibition, but is in furtherance (and not in limitation) of such restriction or prohibition) except for: (A) indebtedness incurred by any Portfolio Entity-Post AE other than a PFAL Portfolio Entity (provided that recourse for any such indebtedness is limited to such borrowing Portfolio Entity- Post AE) in connection with purchase money financing extended to such borrowing entity for the acquisition of portfolio assets in the ordinary course of business (whether secured or unsecured), (B) Indebtedness incurred under existing facilities identified on Schedule 10.20, incurred in the ordinary course of business; (C) the FC Holdings Line of Credit; (D) indebtedness of the Borrower under this Agreement, indebtedness of FC Commercial under the FC Commercial (PFAL) Pledged Note, permitted indebtedness of other Primary Obligors evidenced by Pledged Notes and indebtedness of a PFAL Portfolio Entity under Approved Portfolio Leverage Arrangements; (E) up to $16 million in indebtedness under the FC Consumer Note; or (F) Indebtedness outstanding under the Amended and Restated Agreement on the Execution Date and Tranche I Bosque Loans in an aggregate principal amount not to exceed $1,165,000 thereunder. "Extraordinary Transaction Proceeds" shall mean the consideration paid with respect to any Extraordinary Transaction or the proceeds of any loan received from any Extraordinary Transaction, minus, without duplication, (w) such portion of such consideration or proceeds which, pursuant to the Intercreditor Agreement, is to be applied to obligations under a different credit arrangement, (x) such portion of such consideration required to be paid by a PFAL Portfolio Entity to a Permitted Portfolio Company Creditor of such PFAL Portfolio Entity; (y) if such consideration is payable to any Secondary Obligor, such portion of such consideration which exceeds the percentage thereof equal to the FC Percentage in such Secondary Obligor and (z) such other amounts for necessary and commercially reasonable expenses incurred with respect to such Extraordinary Transaction and approved by Lenders, which approval shall not be unreasonably withheld, which may include attorney's fees and payment of any indebtedness secured to by assets being conveyed payable to any independent third party lender to secure a release of a lien or security interest on such assets being conveyed. "Facility Fee" - Section 4.1. -13- "FC Capital" shall mean FC Capital Corp., a New York corporation. "FC Capital Pledged Note" shall mean the Pledged Note dated December 12, 2002 in the stated principal amount of $2,000,000 payable by FC Capital to Borrower, as the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent.. "FC Commercial" shall mean FirstCity Commercial Corporation, a Texas corporation. "FC Commercial (PFAL) Pledged Note" shall mean the promissory note delivered pursuant to Section 6B.13, , as the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent. "FC Commercial Pledged Note-Existing" shall mean the Pledged Note dated May 31, 2002 in the stated principal amount of $60,000,000 payable by FC Commercial to Borrower, as the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent. "FC Consumer Collateral" shall mean the collateral securing the obligations under the FC Consumer Note pledged pursuant to the Security Documents (as defined in the FC Consumer Note) as in effect on the Execution Date. "FC Consumer Lending" shall mean FirstCity Consumer Lending Corporation, a Texas corporation. "FC Consumer Loan Documents" shall mean the "Loan Documents" as defined in the FC Consumer Note. "FC Consumer Note" shall mean that certain Promissory Note in the principal amount of $16,000,000 dated December 16, 2002 made by FC Consumer Lending to the order of The Governor & Company of the Bank of Scotland. "FC Equity Value" of any Asset Pool shall mean the amount determined by multiplying (A) the FC Percentage in the PFAL Portfolio Entity which owns such Asset Pool by (B) the amount by which (x) the Net Present Value of the assets of such Asset Pool exceeds (y) the sum of outstanding principal amount of Indebtedness of the PFAL Portfolio Entity incurred with respect to the acquisition of such Asset Pool plus the proportional amount (determined on the basis of the Net Present Value of such Asset Pool relative to the Net Present Value of all Asset Pools) of other Indebtedness (if any) of such PFAL Portfolio Entity other than any such Indebtedness incurred to finance the acquisition of a different Asset Pool of such PFAL Portfolio Entity plus the proportional amount (determined on the basis of the Net Present Value of such Asset Pool relative to the Net Present Value of all Asset Pools) of the outstanding amount of all other obligations in respect of which such PFAL Portfolio Entity has issued any Guaranty Equivalent (if any). "FCHM Collateral Assignments" shall mean the Partnership Interest and Limited Liability Company Interest Collateral Assignment Agreement made by FirstCity Holdings Corporation of Minnesota ("FCHM") dated as of the date hereof and each other collateral assignment from time to time hereafter delivered by FCHM in respect of the Obligations, as such -14- agreements may be from time to time amended, extended, restated, supplemented or otherwise modified. "FCHM Pledge Amount" shall mean the Pledge Agreement (Stock and Debt) made by FCHM dated as of the date hereof and each other pledge agreement from time to time delivered hereafter by FCHM in respect of the Obligations, as such agreements may be from time to time amended, extended, restated, supplemented or otherwise modified "FC Holdings" shall mean FirstCity Holdings Corporation, a Texas corporation. "FC Holdings Line of Credit" shall mean, subject to Section 8.27, the loans made by CFSC to FC Holdings pursuant to the Holdings/CFSC Loan Agreement. "FC International" shall mean FirstCity International Corporation, a Texas corporation. "FC Mexico" shall mean FirstCity Mexico, Inc., a Texas corporation. "FC Percentage" (x) with respect to any PFAL Portfolio Entity or any other Secondary Obligor shall mean the percentage of outstanding shares of stock, limited liability company interests or partnership interests (or, in the case of a non-US entity, similar equity interests) of such PFAL Portfolio Entity or Secondary Obligor owned directly or indirectly by the Borrower and (y) with respect to any Asset Pool owned by any PFAL Portfolio Entity or REO-PFAL Affiliate or any related assets, the FC Percentage with respect to such PFAL Portfolio Entity and REO-PFAL Affiliate. "FC Servicing" shall mean FirstCity Servicing, Inc., a Texas corporation. "FC Servicing Pledged Note" shall mean the Pledged Note dated December 12, 2002 2001 in the stated principal amount of $2,000,000 payable by FC Servicing to FC Commercial, as the same may be amended, restated, supplemented or otherwise modified with the consent of the Agent. "Federal Funds Rate" shall mean the rate of interest charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. "Fee Agreements" shall mean any partnership agreement, management agreement, consulting agreement, or other agreement pursuant to which Borrower, any Primary Obligor or any Secondary Obligor is to be paid fees, distributions, allocations, expense reimbursements, consideration, salary or other compensation in consideration for providing management, personnel or services, in any form whatsoever, from any Affiliate or from any other Person. Services to be rendered under Fee Agreements may include, but not be limited to consulting, collecting revenues, paying operating expenses not paid directly by others, and providing clerical and bookkeeping services. "Fee Agreement-Existing" shall mean each Fee Agreement in existence on the Effective Date, each agreement in full or partial substitution or replacement thereof, and each other Fee Agreement relating to any Existing S Co. or any assets thereof. -15- "Fee Letter" shall mean the letter dated December 16, 2002 from Borrower to the Agent regarding the facility fee in respect of this Agreement. "Final Asset Pool Acquisition Certificate" with respect to an Asset Pool at any time, shall mean the Asset Pool Acquisition Certificate with respect to such Asset Pool or, if such Asset Pool Acquisition Certificate has been supplemented or revised, the last supplement or revision of such Certificate. "Final Maturity Date (Revolving)" shall mean the day which is 364 days after the Execution Date or, if such date is extended in accordance with Section 2.9 of the Agreement, such date as so extended or, in any case, such earlier date as the Revolving Credit Loan Commitments may terminate in full as provided in the Agreement. "Final NPV Pool Certificate" with respect to any Asset Pool shall mean a certificate in a form approved by the Agent prior to the first Borrowing Date of Term Loans under this Agreement which sets forth the anticipated cash flows and Net Present Value of each asset included in such Asset Pool and lists each item of collateral for any asset in such Asset Pool. "Financial Statements" shall mean, with respect to any Person, the statement of financial position (balance sheet) and the statement of earnings, cash flow, and stockholders' (or partners' or members) equity of such Person. "First B" shall mean First B Realty L.P., a Texas limited partnership. "First X" shall mean First X Realty L.P., a Texas limited partnership. "Fiscal Year" shall mean each January 1 to December 31 period. "Fiscal Year" followed by a year means the Fiscal Year with its Fiscal Year-End in such calendar year. "French Acquisition Entity" shall mean a European entity formed for the purpose of acquiring, owning and managing assets acquired from one or more French financial institutions. "GAAP" shall mean generally accepted accounting principles (as promulgated by the Financial Accounting Standards Board or any successor entity) in the United States provided, that when with respect to a Person which is not a US Person, GAAP shall mean the equivalent in such Person's jurisdiction of organization. "Government Authority" shall mean any nation or government, any state or political subdivision thereof, any agency, authority, regulatory body, bureau, central bank, commission, department or instrumentality of any of the foregoing or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor" shall mean any Person which is a guarantor under any Guaranty. "Guaranty" shall mean any one or more of the guaranties or amended and restated guaranties delivered pursuant to Section 6 and each other guaranty agreement delivered in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. -16- "Guaranty Equivalent" shall mean any agreement, document or instrument pursuant to which a Person directly or indirectly guarantees, becomes surety for, endorses, assumes, agrees to indemnify the obligee of any other Person against, or otherwise agrees, becomes or remains liable (contingently or otherwise) for, such obligation, other than by endorsements of instruments in the ordinary course of business. Without limitation, a Guaranty Equivalent shall be deemed to exist if a Person agrees, becomes or remains liable (contingently or otherwise), directly or indirectly: (i) to purchase or assume, or to supply funds for the payment, purchase or satisfaction of, an obligation; (ii) to make any loan, advance, capital contribution or other investment in, or a purchase or lease of any property or services from, a Person; (iii) to maintain the solvency of such Person; (iv) to enable such Person to meet any other financial condition; (v) to enable such Person to satisfy any obligation or to make any payment; (vi) to assure the holder of an obligation against loss; (vii) to purchase or lease property or services from such Person regardless of the non-delivery of or failure to furnish of such property or services; or (viii) in respect of any other transaction the effect of which is to assure the payment or performance (or payment of damages or other remedy in the event of nonpayment or nonperformance) of any obligation. "Harbor Debtors" shall mean, collectively, (i) Harbor Financial Mortgage Corp., (ii) NAF, Inc. (f/k/a New America Financial, Inc.), (iii) Hamilton Financial Services Corp., (iv) Community National Mortgage Corp., (v) CalCap, Inc. and (vi) Harbor Financial Group, Inc, and any Subsidiary of such Person. "Harbor Proceedings" shall mean the jointly administered Chapter 11 bankruptcy cases, bearing Case No. 99-37255-SAF-11, styled as In Re Harbor Financial Group, Inc., et al., pending in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, as converted to a Chapter 7 proceeding on December 14, 1999, under which the Harbor Debtors are operating as debtors-in-possession. "Holdings/CFSC Loan Agreement":- Section 10.37(a). "Holdings/CFSC Loan Documents": Section 10.37(b). "Incidental Equity Interests" shall mean Equity Interests in a Person acquired by a Secondary Obligor in settlement of collection of an asset in the portfolio of such Secondary Obligor if such Equity Interests so acquired (i) constitute Equity Interests in a Person engaged in a business unrelated to the business of the Consolidated Group and such Person is not Borrower or an Affiliate of Borrower or a Person in which or in an Affiliate of which any other Equity Interest is owned by Borrower, any Primary Obligor or any Secondary Obligor at the time such Equity Interest is so acquired; (ii) which Equity Interests have a value of less than $500,000; and (iii) which Equity Interests constitute less than 50.1% of the class of Equity Interests in the issuer thereof of which such Equity Interests are a part or such lower percentage of any such class of equity interests which results in control of such Person. "Indebtedness" shall mean, with respect to any Person (without duplication): (i) all obligations on account of money borrowed by, or credit extended to or on behalf of, or for or on account of deposits with or advances to, such Person; (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (iii) all obligations of such Person -17- for the deferred purchase price of property or services other than trade payables incurred in the ordinary course of business and on terms customary in the trade and not more than sixty (60) days past due; (iv) all obligations secured by a Lien on property owned by such Person (whether or not assumed); and all obligations of such Person under Capitalized Leases (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such Capitalized Lease to repossession or sale of such property); (v) the face amount of all letters of credit issued for the account of such Person and, without duplication, the unreimbursed amount of all drafts drawn thereunder, and all other obligations of such Person associated with such letters of credit or draws thereon; (vi) all obligations of such Person in respect of acceptances or similar obligations issued for the account of such Person; (vii) all obligations of such Person under a project financing or similar arrangement; (viii) all obligations of such Person under any interest rate or currency protection agreement, interest rate or currency future, interest rate or currency option, interest rate or currency swap or cap or other interest rate or currency hedge agreement; and (ix) all obligations and liabilities with respect to unfunded vested benefits under any "employee benefit plan" or with respect to withdrawal liabilities incurred under ERISA by Borrower or any ERISA Affiliate to a "multiemployer plan", as such terms are defined under the Employee Retirement Income Security Act of 1974. "Indebtedness Instrument" shall mean any note, mortgage, indenture, chattel mortgage, deed of trust, loan agreement, hypothecation agreement, Guaranty Equivalent, pledge agreement, security agreement, financing statement or other document, instrument or agreement evidencing or securing the payment of or otherwise relating to the borrowing of monies. Indebtedness Instruments shall include, but not be limited to the Loan Documents. "Indemnified Party" - Section 12.3. "Intercreditor Agreement" shall mean the Intercreditor Agreement dated as of December 16, 2002 among the Agent, the PFAL Agent and the initial payee of the FC Consumer Note, as such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Interest Coverage" shall mean, for any period, total interest expense (including that attributable to Capital Leases under GAAP) of the Consolidated Group on a consolidated basis determined in accordance with GAAP. "IRS" shall mean the Internal Revenue Service of the United States. Itemized PPE Amount" - Section 7.2(g). "Legal Requirements" shall mean, with respect to any Person, all laws, common law, statutes, rules and regulations of any Government Authority to which such Person or any of its assets is subject or any judgment, decree, franchise, order or permit of any Government Authority applicable to such Person or any of its assets. "Lender Assignee" - Section 12.4(a). "Lenders" - introductory paragraph. -18- "Leveraged Asset Pool" shall mean an Asset Pool in respect of the acquisition of which the PFAL Portfolio Entity which acquired such Asset Pool incurred Indebtedness pursuant to Approved Portfolio Leverage Arrangements. "LIBOR" shall mean, for each Eurodollar Interest Period, (x) the per annum rate of interest at which U.S. Dollar deposits in the amount of the outstanding principal balance of the Loan are or would be offered for such Eurodollar Interest Period in the London interbank market at 11:00 A.M. London time two Business Days prior to the start of such Eurodollar Interest Period by the Bank of Scotland to prime banks and, in case of variations in rates, the arithmetic average thereof rounded upward if necessary to the nearest 1/16th of 1% calculated by the Agent, divided (and rounded upward to the nearest 1/16 of 1%) by (y) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including without limitation any marginal, emergency, supplemental, special or other reserves required by applicable law) applicable to any member bank of the Federal Reserve System in the United States in respect of Eurocurrency funding or liabilities. "Lien" shall mean any mortgage, deed of trust, security deed, pledge, security interest, encumbrance, lien or other charge of any kind or any other agreement or arrangement having the effect of conferring security (including any agreement to give any of the foregoing, any assignment or lease in the nature thereof, and any conditional sale or other title retention agreement), any lien arising by operation of law, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction (or any similar or comparable law of any jurisdiction that has not enacted the Uniform Commercial Code). "Loan(s)" shall mean, individually and collectively, each or all, as the context may indicate, of the Term Loans and the Revolving Credit Loans. "Loan Documents" shall mean, individually and collectively, this Agreement, the Notes, the Fee Letter, the Guaranties, the Pledge Agreements, the Security Agreements, the other Security Documents and all other instruments and agreements heretofore or from time to time hereafter executed by or on behalf of Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party in connection herewith or therewith, in each case as amended, extended, restated, supplemented or otherwise modified from time to time. Without limiting the generality of the foregoing, each amendment to (or constituting part of) this Agreement or any other Loan Document and each instrument and agreement (including, without limitation, consents or waivers, but excluding any amendment, consent or waiver executed prior to the Effective Date) executed in connection with any Loan Document shall be deemed to be a Loan Document for all purposes of the Agreement and the other Loan Documents. "Loan Party" shall mean, individually and collectively, the Borrower, each Primary Obligor and each other party to any Loan Document (other than the Agent, any Lender or any Harbor Debtor and other than a Person which has executed a Loan Document solely to consent to or acknowledge the same (and not as a party thereto) and has not executed that or any other Loan Document in any other capacity or for any other purpose) or (y) a Person which has delivered a certificate certifying as to the accuracy and completeness of a Charter Document and has not executed any other Loan Document). For avoidance of doubt, in addition to the Borrower and each Primary Obligor, each Person which has executed any Security Document as a pledgor or -19- grantor of collateral thereunder and each person executing any guaranty of all or any part of the Obligations shall constitute a Loan Party. Notwithstanding the foregoing, for purposes of Sections 7.1(h), (i) and (k), 8.25 and 10.32, and for purposes of the definitions of the terms "Pension Plan", Multiemployer Plan" and "Plan", each PFAL Portfolio Entity shall be deemed a Loan Party and ERISA Affiliate. "Majority Lenders" as of a particular date shall mean the holders of at least 51% of the aggregate unpaid principal amount of all Loans at the particular time outstanding or, if no Loans are then outstanding, Banks whose Commitments aggregate at least 51% of the Total Commitment. "Management Letter" shall mean any correspondence or report submitted by the Auditors to a Loan Party's chief executive officer, its Board of Directors or any committee thereof containing comments and suggestions concerning a Loan Party's accounting procedures and systems based upon the work done by the Auditors during their annual or other audit. "Material Adverse Change" shall mean a material adverse change in (i) the business, properties, operations, prospects or condition (financial or otherwise) of the Borrower and/or any of its Subsidiaries, any Primary Obligor or any Secondary Obligor or (ii) the ability of the Borrower or any other Loan Party to perform, or of the Agent to enforce, any of the Obligations. "Material Adverse Effect" shall mean an effect that would result in a Material Adverse Change. "Maturity Date (Term)" shall mean November 30, 2006. "MCS" shall mean MCS et Associes S.A. "Mexican Acquisition Entity" shall mean a Mexican entity formed for the purpose of acquiring, owning and managing assets acquired from one or more Mexican financial institutions. "Mid-Tier Company" shall mean each PFAL Portfolio Entity, each Person listed on Schedule I-(MT) (each Person listed on such Schedule, a "Listed MT") and each other Secondary Obligor (other than an Excluded Initial Foreign MT and any other Person (if any) specified by the Agent in writing as not constituting a Mid-Tier Company) with a Net Asset Value of $2,000,000 or more and each general partner or manager or member (or foreign equivalent) of any of the foregoing Persons (other than any such partner, manager, member or equivalent which is the Borrower or a Primary Obligor) and each other Secondary Obligor directly or indirectly owning any Equity Interests in any of the foregoing Persons (each such general partner, manager, member or other owner of Equity Interests, an "MT Owner"), each PFAL Portfolio Entity, Listed MT and MT Owner thereof to continue at all times to constitute a Mid-Tier Company (regardless of the Net Asset Value of any PFAL Portfolio Entity or Listed MT or of any such MT Owner). Any Person, other than a PFAL Portfolio Entity, Listed MT or any MT Owner thereof, which at any time so constitutes a Mid-Tier Company shall continue to constitute a Mid-Tier Company until the time (if any) when the Borrower sends to the Agent written notice (a "Redesignation Notice") executed by an Executive Officer of Borrower -20- certifying, as to such Person that the Net Asset Value of such Person (the "Subject MT") and its MT Owners is below $2,000,000 and has been below $2,000,000 for the preceding period of 90 consecutive day or more, and requesting that such Subject MT and, if specified, its MT Owners no longer constitute Mid-Tier Companies . Provided that the Borrower provides such additional information, if any, that the Agent may request with respect to such Subject MT and its MT Owners and that the Agent has not given the Borrower notice that it disputes such redesignation of such Subject MT and, if so specified by Borrower, MT Owners, within 30 days after receiving such Redesignation Notice or, if later, within 30 days after the Agent received additional information (if any) requested by it with respect to such requested redesignation, the Subject MT and such specified MT Owners (in each case, provided that no such Subject MT or MT Owner is a Listed MT or MT Owner thereof or MT Owner of any other Mid-Tier Company) shall cease to constitute a Mid-Tier Company (until, the time, if any, that such Subject MT (and/or any MT Owner thereof) again satisfies the criteria applicable to Mid-Tier Companies). For avoidance of doubt, the foregoing redesignation procedures shall not apply to any PFAL Portfolio Entity, to any Listed MT or to any Secondary Obligor directly or indirectly owning any Equity Interests in any PFAL Portfolio Entity or Listed MT. "Mid-Tier Company Post AE" shall mean a Mid-Tier Company formed after the Effective Date. "Minn Servicing" shall mean FirstCity Serving of Minnesota, Inc. "Multiemployer Plan" shall mean any employee benefit plan which is a "multiemployer plan" within the meaning of Section 3(37) of ERISA and to which any Loan Party or any ERISA Affiliate of either Borrower contributes or has been obligated to contribute. "Net Asset Value" shall mean, with respect to any Person, the amount determined by multiplying (x) the FC Percentage in respect of such Person and (y) the Net Present Value of the assets of such Person. "Net Present Value" with respect to an Asset Pool, shall mean the value of such Asset Pool discounted pursuant to the criteria set forth on Exhibit I-D to the Agreement. "Non-Default Voluntary Custodial Arrangement" shall mean an arrangement to perfect a lien in favor of the Agent or the holder of a different Permitted Lien, in each case, on certain specified Assets of a Person entered into voluntarily by a Secondary Obligor at a time when no Default or Event of Default has occurred and is continuing. "Non-US Seller" shall mean a Person selling or proposing to sell an Asset Pool to a PFAL Portfolio Entity which Person is domiciled in or has its principal place of business in a country other than the United States or which acquired a significant portion of the assets contained in the Asset Pool outside the United States. "Notes" shall mean the Term Notes and Revolving Credit Notes. "Notice of Borrowing" shall mean notice of borrowing in a form approved by the Agent prior to the first Borrowing Date under this Agreement which requires the information described in Section 2.2 and such other information as the Agent shall require. -21- "NPV Deficiency" with respect to any Asset Pool shall mean that the Asset Pool NPV Percentage with respect of the Tranche of Term Loans made in respect of such Asset Pool (x) exceeds 100% at any time prior to the end of the 18th month after the AP Funding Date in respect of such Asset Pool, (y) exceeds 85% at any time during the period from the end of such 18th month to the end of the 30th month after such the AP Funding Date, or (z) exceeds 70% at any time after the end of such 30th month (for purposes of foregoing computations, the month in which the Loans were made shall be counted as the first of the applicable 18 and 30 months). "Obligations" shall mean (x) with respect to each Loan Party other than the Borrower, all obligations of such Loan Party with respect to the repayment or performance of any obligations (monetary or otherwise) of the Borrower arising under or in connection with this Agreement, the Notes or any other Loan Document, and (y) with respect to the Borrower, all obligations of Borrower with respect to the repayment or performance of obligations (monetary or otherwise) arising under or in connection with this Agreement, the Notes or any other Loan Document. "Obligor Funding Obligations" shall mean obligations (whether pending, contingent or otherwise) of a Secondary Obligor to make one or more advances to a Person which is the obligor of one or more outstanding loans the rights to which were acquired by such Secondary Obligor pursuant to a purchase by such Secondary Obligor of a portfolio of loans made by one or more Persons who are not Affiliates or Associates of the Borrower or of such Secondary Obligor; provided that such obligation to make an advance was not any prior time an obligation of an Affiliate or Associate of the Borrower or such Secondary Obligor. "Operating Account" shall mean account no. 7300044156 at Bank of America (which Borrower represents and warrants is its operating account on the Execution Date) and such other accounts that Borrower may from time to time maintain as operating accounts of which the Borrower shall give the Agent written notice (which shall include the account number and depositary institution and location of such account). "Original A&R Closing Date" shall mean December 20, 1999. "Other Laws" - Section 3.4. "Parent" shall mean any Person now or at any time hereafter owning or controlling (alone or with Borrower, any Subsidiary and/or any other Person) at least a majority of the issued and outstanding Stock or other ownership interest of Borrower or any Subsidiary. For purposes of this definition, "control" shall have the same meaning ascribed to such term in the definition of "Affiliate". Notwithstanding the forgoing, no Person shall be a Parent which is not a Parent of Borrower or a 51% or more owned subsidiary, directly or indirectly, of Borrower. "Past-Due Rate" - Section 3.3. "Payment Date" - Section 2.4(a). "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA. -22- "Pension Plan" shall mean any employee pension benefit plan subject to Title IV of ERISA and maintained by any Loan Party or any ERISA Affiliate of any Loan Party or any such plan to which any Loan Party or any ERISA Affiliate is or has been required to contribute on behalf of any of its employees, other than a Multiemployer Plan. "Permitted FC Consumer Amendments" shall mean any amendment, supplement or other modification to the FC Consumer Note which (i) is consented to in writing by the Majority Lenders or (ii) does not increase the principal amount of loans under the FC Consumer Loan Documents or increase the interest rate or increase or impose any fee or other payment obligation on the FC Consumer Lending. "Permitted Liens" shall mean (i) any liens created pursuant to the Loan Documents in favor of Agent for the benefit of Lenders and Agent to secure the Obligations; (ii) liens for Charges which are not yet due and payable, or claims and unfunded liabilities under ERISA not yet due and payable or which are being contested in good faith by appropriate proceedings diligently pursued; (iii) liens arising in connection with worker's compensation, unemployment insurance, old age pensions and social security benefits which are not overdue or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest any proceedings commenced for the enforcement of such lien shall have been duly suspended and such provision for the payment of such lien has been made on the books of the Borrower (or the applicable Affiliate) as may be required by GAAP; (iv) liens incurred in the ordinary course of business to secure the performance of statutory obligations arising in connection with progress payments or advance payments due under contracts with the United States Government or any agency thereof entered into in the ordinary course of business; (v) any liens securing Indebtedness of Borrower (or any Affiliate) to any Persons in an aggregate amount less than $200,000; (vi) Charges relating to Assets of First B and First X; (vii) as to any Affiliate, other than Borrower, a Primary Obligor or a PFAL Portfolio Entity, purchase money liens securing permitted indebtedness incurred in connection with the acquisition of Assets and other indebtedness incurred under the credit agreement under which such permitted indebtedness to acquire such assets was incurred so long as such liens encumber only the Assets acquired, (viii) as to any Affiliate, other than Borrower or a Primary Obligor or a PFAL Portfolio Entity, liens relating to permitted Indebtedness incurred in connection with the warehousing of assets or the securitization of Assets, so long as such liens encumber only the Assets warehoused or securitized; (ix) those liens disclosed on Schedule (PL) (x) those liens granted to CFSC in the Shared Collateral pursuant to the Holdings/CFSC Loan Documents (as in effect on the date of the execution and delivery of the Holdings/CFSC Loan Documents); (xi) liens on assets of a PFAL Portfolio Entity in favor of the Person providing financing under an Approved Portfolio Leverage Arrangement in respect of the acquisition of assets acquired pursuant to such Approved Portfolio Leverage Arrangement to the extent such liens are required by, and secure only obligations under, such Approved Portfolio Leverage Arrangement; and (xii) Liens on the FC Consumer Collateral securing the obligations under the FC Consumer Note as in effect on the Execution Date and as amended, supplemented or otherwise modified by Permitted FC Consumer Amendments. "Permitted Portfolio Company Creditor" shall mean (i) with respect to an Existing S Co., those creditors listed on Schedule I-(PFC) alongside the details of the related credit arrangement, (ii) with respect to a PFAL Portfolio Entity, those creditors of such Entity which have provided -23- loans pursuant to Approved Portfolio Leveraged Arrangements, but only in respect of and to the extent of such loans so provided and (iii) with respect to any other Portfolio Entity-Post AE, any other creditor of such entity which has provided permitted indebtedness to such entity but only in respect of and to the extent of such permitted indebtedness. "Permitted Portfolio Expenses" with respect to an Asset Pool during any Waterfall Certificate Period or Collection Period shall mean the Portfolio Protection Expenses which are currently budgeted (pursuant to a budget previously provided to the Agent) for such Asset Pool and described in the most recently delivered Portfolio Protection Expense Report to the extent that such Portfolio Protection Expenses do not constitute Challenged Portfolio Protection Expenses and only if such Portfolio Protection Expenses do not constitute Excess Portfolio Protection Expenses and there are no other Excess Portfolio Protection Expenses. "Permitted Restrictions" on the payment of dividends by a Person shall mean provisions of a loan agreement, as in effect when first entered into, to which such Person is a party as borrower which prohibit such Person from paying dividends for either of the following reasons: (x) the funds restricted from being distributed are required to satisfy a leverage or required reserve amount covenant (but only if such covenant would not reasonably be expected to significantly impair such Person's ability to pay dividends if anticipated cash flows are received as and when anticipated and in approximately the amounts anticipated); and (y) such dividends are restricted when there exists an event of default of a customary type to be found in such agreements and that also permits the relevant lender to accelerate the maturity of indebtedness outstanding under such agreement. "Permitted Shareholder Agreement" shall mean a Shareholder Agreement entered into after the Execution Date with terms permitted by Exhibit I-C. "Permitted Shareholder Arrangements" shall mean arrangements which would arise from a Permitted Shareholder Agreement. "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, a trust, an unincorporated association, a joint venture or other entity or a government or an agency or political subdivision thereof. "PFAL Portfolio Entity" shall mean any Portfolio Entity-Post AE formed after the Effective Date for the purpose of investing in notes, bonds or other evidences of indebtedness and in connection with the acquisition by which of an Asset Pool Term Loans have been made to Borrower or requested to be made to Borrower. "Plan" shall mean any "employee benefit plan" (within the meaning of Section 3(3) of ERISA) maintained by any Loan Party or any ERISA Affiliate or any such plan to which any Loan Party or any ERISA Affiliate is or has been required to contribute on behalf of any of its employees, other than a Multiemployer Plan. -24- "Pledge Agreement" means each of (or, as the context requires, any of) the Borrower Pledge Agreement, Subsidiary Pledge Agreement, Subsidiary Collateral Assignment, the FCHM Pledge Agreement, FCHM Collateral Assignment and the Drive Collateral Assignment and any other pledge agreement made for the benefit of the Lenders (and, if therein specified, the lenders under the Amended and Restated Agreement). "Pledged Entities" shall mean those entities any Equity Interest in which has been pledged to the Agent to secure the Obligations. "Pledged Notes" shall mean those certain promissory notes listed on Schedule I-(PN) which have been delivered to the Agent and in which the Collateral Agent holds a perfected security interest of the Requisite Priority pursuant to a Pledge Agreement to which the Collateral Agent is party. "Pledged Property" shall mean any and all property (real, personal or intangible) pledged by Borrower, any Primary Obligor, any Secondary Obligor or any other Loan Party to secure payment and performance of the Obligations, including but not limited to: (i) any and all Collateral under any Security Agreement; and (ii) any and all property pledged under any Pledge Agreement. "Portfolio Entity-Post AE" shall mean any Secondary Obligor, other than an REO Affiliate, formed or in which Borrower first acquired a direct or indirect interest on or after the Amendment Effective Date. "Portfolio Protection Expense Report"- Section 7.2(g). "Portfolio Protection Expenses" with respect to a Secondary Obligor shall mean expenses or other amounts of which the Agent has been given prior written notice which (w) such Secondary Obligor has reasonably determined are necessary to advance to one of its REO Affiliates for reasonable and necessary expenses to preserve or protect real property owned by such REO Affiliate or (x) constitute reasonable and customary, necessary leasing commissions, reasonable and necessary tenant improvement costs paid by such Secondary Obligor or REO Affiliate pursuant to a written lease or capital improvements to such property required in order for the property to be so leased or (y) such Secondary Obligor has reasonably determined are necessary to protect other assets securing indebtedness owed to such Secondary Obligor, or (z) constitute Obligor Funding Obligations, such expenses or other amounts to constitute Portfolio Protection Expenses when amounts therefor are retained by such Secondary Obligor or REO Affiliate or, if earlier, when such expenses or other amounts are paid, but shall cease to constitute Portfolio Protection Expenses other than for purposes of the Portfolio Protection Expense Report if such expenses or other amounts remain unexpended but the purpose for which the same were originally retained is no longer applicable and such expenses or other amounts are not being retained for a different purpose set forth above of which the Agent has been given prior written notice. "Primary Obligors" shall mean, collectively, (i) FC Commercial; (ii) FC Capital; (iii) FC Consumer Lending; (iv) FC Servicing: (v) FC Holdings; (vi) FC International; and (vii) FC Mexico. -25- "Purchasing Lenders" - Section 12.4(c). "Rate of Borrowing" - Section 3.6. "Records" shall mean all books, records, computer records, computer software, ledger cards, programs and other computer materials, customer and supplier lists, invoices, orders and other property and general intangibles at any time evidencing or relating to Assets. "Recoveries" shall mean any funds, or substitution of receipts or collateral, received by the Lenders or the Agent (a) from the sale, collection or other disposition of Collateral pursuant to the Security Documents, or (b) from any distribution to any of the Lenders or the Agent, or abandonment to any of them, or substitute Liens or payment given to any of them pursuant to events or proceedings of the nature referred to in Section 9.9 of the Agreement, or otherwise, which distribution or abandonment pertains to the Collateral. "Regulatory Change" means, relative to any Lender or the Agent, any change after January 1, 2002 in any (or the adoption after January 1, 2000 of any new): (a) United States Federal, state or local law or foreign law applicable to the Agent or such Lender; or (b) regulation, interpretation, directive, or request (whether or not having the force of law) applying to the Agent or any Lender of any Government Authority charged with the interpretation or administration of any law referred to in clause (a) or of any fiscal, monetary, central bank or other authority having jurisdiction over the Agent or such Lender. "Related Asset Pool" with respect to any Tranche of Term Loans shall mean the Asset Pool specified in the Notice of Borrowing with respect to such Tranche. "REO Affiliate" shall mean a Person, other than Borrower, a Primary Obligor or a Mid-Tier Company, which is a corporation, limited liability company or partnership 100% of the Equity Interests in which are owned by a Secondary Obligor (the "REO Owner") (or, in the case of such an entity which is a limited partnership, 100% of the limited partnership interest of which is owned by the REO Owner and 100% of the interest in the general partner is owned by the REO Owner), which Person has been established solely to acquire from the REO Owner title to (and owns no assets other than) parcels of real property (or distressed notes secured by real property for purposes of obtaining title to real property securing such loans) in exchange for, with respect to each such parcel, a promissory note in a principal amount no less than 96% of the value (as reasonably determined by the REO Owner and the REO Affiliate) of the property; provided that no Person shall constitute or continue to constitute an REO Affiliate if (A) such Person acquires property from any Person other than (x) the REO Owner, (y) in the case where it has acquired a note from the REO Owner solely for purposes of acquiring title to the real property securing such note, the obligor of such note; or (z) except in the case of an REO-PFAL Affiliate, any other seller of real property securing distressed notes or (B) engages in any business other than business incidental to owning and selling the parcels of real property so acquired by such REO Affiliate. -26- "REO-PFAL Affiliate" shall mean an REO Affiliate of a PFAL Entity. "REO Post-25% Time" shall mean any time on or after the aggregate Net Present Value of Assets of REO-PFAL Affiliates exceeds the greater of (x) 25% of the aggregate Net Present Value of Assets of all PFAL Portfolio Entities and their REO Affiliates and (y) $1,000,000, until two Business Days after Borrower gives the Agent written notice along with evidence satisfactory to the Agent that such Net Present Value of Assets of REO-PFAL Affiliates no longer so exceeds 25 % of such value of such assets of all PFAL Portfolio Entities. "Repayment Fee" - Section 4.2. "Reportable Event" shall mean a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder. "Requisite Consents"- Section 6.8. "Requisite Priority" shall mean (x) except with respect to the Shared Collateral and except as set forth in the Intercreditor Agreement, first priority and (y) with respect to Shared Collateral second priority, subject only to the liens of CFSC to which the Agent and the Lenders are subordinate pursuant to the CFSC Intercreditor Agreement. Revolving Credit Note" shall mean a promissory note of Borrower substantially in the form of Exhibit A-2 to this Agreement or otherwise identified on the Effective Date as the Revolving Credit Note, as such note may from time to time be amended, extended, restated, supplemented or otherwise modified. "Revolving Credit Loan"- Section 2.1(b). "Revolving Credit Loan Commitment" shall mean, as to each Lender, the amount set forth opposite its name on Schedule 2.1 under the heading "Revolving Credit Loan Commitment" as such amount may be modified by the provisions of any Transfer Supplement from time to time entered into and as the same may from time to time be reduced or terminated pursuant to Section 2.8(a), Section 9 or any other Section of the Agreement. "SEC" shall mean the Securities and Exchange Commission. "Secondary Obligor" shall mean each entity identified on Schedule I-(SO), as well as, subject to the final sentence of this definition, any other entity, other than a Primary Obligor, any Equity Interest (other than Equity Interests constituting Incidental Equity Interests) of or in which is owned by Borrower, any Primary Obligor or any other Secondary Obligor. Notwithstanding the foregoing, no Tier IV Company or Tier V Company or any Harbor Debtor shall constitute a Secondary Obligor. "Secondary Obligor-Existing" means each entity identified on Schedule I-SOX) and each successor thereof. -27- "Secondary Obligor-R" shall mean any Secondary Obligor 50% or more of the voting interests or any class of other Equity Interests of which are owned directly or indirectly by Borrower. "Securities" shall have the meaning ascribed to that term in the Securities Act of 1934. "Securities Laws" shall mean all applicable Federal and state securities laws and regulations promulgated pursuant thereto. "Security Agreements" shall mean any one or more of the security agreements or amended and restated security agreements delivered pursuant to Section 6 and each other security agreement or amended and restated security agreement heretofore or from time to time hereafter delivered in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Security Documents" shall be the collective reference to (x) each of the agreements referred to in Section 6 (or on the document checklist referred to therein) pursuant to which Collateral is or was granted or is or was intended to be granted, directly or indirectly, to the Agent on behalf of the Lenders, (y) each agreement entered into after the Execution Date pursuant to which any collateral is or was granted or is or was intended to be granted, directly or indirectly, to the Agent on behalf of the Lenders and any other Person (if any) sharing an interest in such collateral, and (z) all amendments, supplements or other modifications to such agreements or replacements thereof. Without limiting the generality of the foregoing, each Security Agreement, each Pledge Agreement, each cash collateral agreement securing any Obligation, each depositary bank acknowledgement relating to any bank account of any Loan Party, the CFSC Guaranty Subordination Agreement, each other agreement pursuant to which any obligations are subordinated to any of the Obligations (whether pursuant to a subordination agreement, subordination provisions in any other agreement or instrument or otherwise), each Pledged Note, and each security agreement securing the obligations under any Pledged Note shall constitute Security Documents . However, as to a Loan Party, the term "Security Document" shall not include any such document as to which such Loan Party is released from all its obligations thereunder by the Agent or the Lenders in accordance with the terms hereof or thereof. "Servicing Restricted Funds" means funds received by FC Servicing or Minn Servicing in the ordinary course of such company's servicing business for the account of Persons other than FC Servicing, Minn Servicing, the Borrower or any other Subsidiary of the Borrower. "Shared Collateral" - Section 10.37(c). "Shareholder Agreement" shall mean any agreement (other than a certificate of incorporation, customary by-laws, a limited liability company formation certificate or a partnership formation certificate but including resolutions of any Person owning any Equity Interests in such Person) among any holders of Equity Interests issued by Borrower, any Primary Obligor or any Secondary Obligor relating to the management of any such Person or any of the rights or privileges of any holders of Equity Interests of any such Person. -28- "Stock" shall mean all shares and other Equity Interests issued by a corporation, whether voting or non-voting, including but not limited to, common stock, warrants, preferred stock, convertible debentures, and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing. "Subject PFAL Entity" - Section 6B.1. "Subsidiary" of any Person (the "First Person") shall mean any other Person more than 50% of the indicia of equity rights (whether capital stock or otherwise) of which is at the time owned, directly or indirectly by the First Person and/or by one or more of such First Person's Subsidiaries. Unless otherwise indicated, references to Subsidiaries shall refer to Subsidiaries of the Borrower. "Subsidiary Collateral Assignment" shall mean the Amended and Restated Partnership Interest and Limited Liability Company Interest Collateral Assignment Agreement made by certain Primary Obligors in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 6 and each other collateral assignment from time to time hereafter delivered by one or more Primary Obligors or Secondary Obligors in respect of the Obligations., as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified. "Subsidiary Pledge Agreement" shall mean the Amended and Restated Pledge Agreement (Stock and Debt) made by certain Primary Obligors in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 6 and each other pledge agreement from time to time hereafter delivered by one or more Primary Obligors or Secondary Obligors in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified (including, without limitation, by the addition of additional parties thereto). "Subsidiary Security Agreement" shall mean the Amended and Restated Security Agreement made by the Primary Obligors in favor of the Collateral Agent dated as of the date hereof delivered pursuant to Section 6 and each other security agreement from time to time hereafter delivered by one or more Primary Obligors or Secondary Obligors in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified (including, without limitation, by the addition of additional parties thereto). "Summary Waterfall Certificate" shall mean a certificate in a form approved by the Agent prior to the first Borrowing Date of Term Loans under this Agreement which sets forth summary information as to all Waterfall Certificates being delivered on or about the same day as such certificate "Tangible Net Worth", at any time, shall mean the total of shareholders' equity (including capital (both common and preferred) stock, additional paid-in capital and retained earnings after deducting treasury stock of a Person, less the sum of the total amount of any intangible assets, which, for purposes of this definition, shall include, without limitation, general intangibles and, if applicable, all accounts receivable not incurred in the ordinary course of -29- business from any Affiliate of such Person or any loans to directors or officers of any Affiliate of such Person, unamortized deferred charges and good will, all as determined in accordance with GAAP. "Taxes" - Section 5.2. "Termination Event" shall mean (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), or (ii) the withdrawal of any Loan Party or any of its ERISA Affiliates from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the issuance of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (iv) receipt by any Loan Party or any ERISA Affiliate of notice of the PBGC's intention to terminate any Pension Plan or to have a trustee or the PBGC appointed to administer any Pension Plan or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan. "Term Loan"- Section 2.1(a). "Term Loan Commitment" shall mean, as to each Lender, the amount set forth opposite its name on Schedule 2.1 under the heading "Term Loan Commitment" as such amount may be modified by the provisions of any Transfer Supplement from time to time entered into and as the same may from time to time be reduced or terminated pursuant to Section 2.8(b) , Section 9 or any other Section of the Agreement. "Term Note" shall mean a promissory note of Borrower substantially in the form of Exhibit A-1 to this Agreement or otherwise identified on the Effective Date as the Term Note, as such note may from time to time be amended, extended, restated, supplemented or otherwise modified. "Tier IV Company" shall mean each Person listed on Schedule 10.43; provided, that if any such Person engages in business or has assets with an aggregate fair market value of $100,000 or more, such Person shall cease to constitute a Tier IV Company. "Tier V Company" shall mean each Person listed on Schedule I-TV; provided that if any such Person engages in a business other than a business engaged in by it on the Execution Date, such Person shall cease to constitute a Tier V Company. "Total Commitment" shall mean the sum of the Total Revolving Credit Loan Commitment and the Total Term Loan Commitment. "Total Revolving Credit Loan Commitment" shall mean the sum of the Revolving Credit Loan Commitments of all of the Lenders. "Total Term Loan Commitment" shall mean the sum of the Term Loan Commitments of all of the Lenders. -30- "Tranche " - Section 2.1(a). "Transfer" shall mean any sale, conveyance, lease or other disposition (and "Transferred", "Transferring" and other variations thereof shall have correlative meanings). "Transfer Supplement" - Section 12.4(c). "UCC" - Section 10.33. "United States," "US" or "U.S." shall mean the United States of America. "Unutilized Available Commitment" at any time shall mean (i) for the period from and including the Effective Date to and excluding the day which is one year after the Effective Date, the amount by which $25,000,000 exceeds the principal amount of Term Loans which have been made, and (ii) from (and including) the day which is one year after the Effective Date, the amount by which (A) $25,000,000 plus the lesser of (x) $29,000,000 and (y) the aggregate principal amount of Tranche I Loans and Tranche II Loans under the Amended and Restated Agreement which has been repaid after the Effective Date exceeds (B) the principal amount of Term Loans which have been made and, as to each Lender at any time means such Lender's proportionate share (based on the aggregate amount of such Lender's Term Loan Commitments relative to the Total Term Loan Commitment) of the amount determined pursuant to the foregoing provisions of this definition. "Unutilized Revolving Credit Loan Commitment" shall mean, as to each Lender, the amount by which the Revolving Credit Loan Commitment of such Lender on any day exceeds the aggregate principal amount of Revolving Credit Loans theretofore made by such Lender. "Unutilized Term Loan Commitment" at any time shall mean the amount by which the Total Term Loan Commitment exceeds the sum of (x) the principal amount of Term Loans which have been made plus (y) the amount of the Unutilized Available Commitment at such time (and, if such amount as so determined would be less than zero, it shall be deemed to be zero). "US Person" shall mean a Person formed under the laws of the United States, any of the 50 states or the District of Columbia [or any territory of the United States]. "Usage Leverage Covenant" shall have the meaning ascribed to such term in the definition of "Aggregate Undistributed Secondary Obligor Funds". "Utilization Fee" Section 4.3. "Waterfall Certificate" in respect of any Payment Date shall mean a completed certificate in a form approved by the Agent prior to the first Borrowing Date of Term Loans under this Agreement which sets forth information with respect to Collections of an Asset Pool during the preceding period to which such certificate is applicable and such other information as the Agent shall require. "Waterfall Certificate Period" in respect of any Asset Pool and any Payment Date shall mean the period from and excluding the date of the Waterfall Certificate delivered in the -31- calendar month immediately preceding such Payment Date (or, in the case of the first Waterfall Certificate Period for any Asset Pool, from and including the AP Funding Date for such Asset Pool) to and including the date that the Waterfall Certificate with respect to the such Payment Date is delivered. "Wholly-Owned Subsidiary" shall mean any Subsidiary of Borrower of which all of the outstanding shares of stock, limited liability company interests or partnership interests (as the case may be) are owned by the Borrower and/or one or more wholly owned direct or indirect Subsidiaries of the Borrower. "Written," "in writing" and other variations thereof shall mean any form of written communication or a communication by means of telex, telecopier, telegraph or cable. -32- EX-23.1 5 h03364exv23w1.txt CONSENT OF KPMG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors FirstCity Financial Corporation: We consent to incorporation by reference in the registration statements (Numbers 333-10345, 333-48671, 333-59333, 333-00623 and 33-09485) on Forms S-3 and S-8 of FirstCity Financial Corporation, of our report dated February 17, 2003, with respect to the consolidated balance sheets of FirstCity Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of FirstCity Financial Corporation. Our report refers to a change in the classification of gains associated with the early extinguishment of debt in 2002 and a change in the method of accounting for residual interests in securitized financial assets in 2001. KPMG LLP Dallas, Texas April 15, 2003 EX-23.2 6 h03364exv23w2.txt CONSENT OF KPMG LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Partners WAMCO Partnerships: We consent to incorporation by reference in the registration statements (Numbers 333-10345, 333-48671, 333-59333, 333-00623 and 33-09485) on Forms S-3 and S-8 of FirstCity Financial Corporation, of our report dated February 17, 2003, with respect to the combined balance sheets of the WAMCO Partnerships as of December 31, 2002 and 2001, and the related combined statements of operations, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of FirstCity Financial Corporation. KPMG LLP Dallas, Texas April 15, 2003 EX-23.3 7 h03364exv23w3.txt CONSENT OF KPMG LLP EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Drive Financial Services LP: We consent to incorporation by reference in the registration statements (Numbers 333-10345, 333-48671, 333-59333, 333-00623 and 33-09485) on Forms S-3 and S-8 of FirstCity Financial Corporation, of our report dated February 15, 2003, except as to notes 6 and 11, which are as of February 28, 2003, with respect to the consolidated balance sheets of Drive Financial Services LP and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, partners' equity, and cash flows for the year ended December 31, 2002 and the periods March 1, 2001 through December 31, 2001 and August 1, 2000 through February 28, 2001, which report appears in the December 31, 2002 annual report on Form 10-K of FirstCity Financial Corporation. Our report refers to a change in the method of accounting for residual interests in securitized financial assets in 2001. KPMG LLP Dallas, Texas April 15, 2003 EX-23.4 8 h03364exv23w4.txt CONSENT OF KPMG LLP EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS The Partners MinnTex Investment Partners LP: We consent to incorporation by reference in the registration statements (Numbers 333-10345, 333-48671, 333-59333, 333-00623 and 33-09485) on Forms S-3 and S-8 of FirstCity Financial Corporation, of our report dated February 17, 2003, with respect to the balance sheet of MinnTex Investment Partners LP as of December 31, 2002, and the related statements of operations, changes in partners' capital, and cash flows for the period March 11, 2002 (date of inception) through December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of FirstCity Financial Corporation. KPMG LLP Dallas, Texas April 15, 2003 EX-99.1 9 h03364exv99w1.txt CERTIFICATION OF JAMES T. SARTAIN, CEO - SEC. 906 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTEDPURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the annual report on Form 10-K (the "Form 10-K") for the fiscal year ended December 31, 2002 of FirstCity Financial Corporation (the "Company"). I, James T. Sartain, the Chief Executive Officer of the Company, certify that, to my knowledge,: (i) the Form 10-K fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the issuer at the dates and for the periods indicated. By: /s/ JAMES T. SARTAIN ------------------------------------ James T. Sartain Principal Executive Officer Dated: March 28, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 10 h03364exv99w2.txt CERTIFICATION OF J. BRYAN BAKER, CFO - SECTION 906 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTEDPURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the annual report on Form 10-K (the "Form 10-K") for the fiscal year ended December 31, 2002 of FirstCity Financial Corporation (the "Company"). I, J. Bryan Baker, the Chief Financial Officer of the Company, certify that, to my knowledge,: (i) the Form 10-K fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the issuer at the dates and for the periods indicated. By: /s/ J. BRYAN BAKER ----------------------------------------- J. Bryan Baker Principal Financial Officer Dated: March 28, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----