10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2004 or

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

Commission file number 033-19694

FirstCity Financial Corporation

(Exact name of Registrant as Specified in Its Charter)

Delaware	76-0243729
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
6400 Imperial Drive,
Waco, TX	76712
(Address of Principal Executive Offices)	(Zip Code)

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

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

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

     The number of shares of common stock, par value $.01 per share, outstanding at November 9, 2004 was 11,260,687.

TABLE OF CONTENTS

PART I
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II
	Item 1. Legal Proceedings
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits
SIGNATURES
EXHIBIT INDEX
Revolving Credit Agreement
Certification of CEO pursuant to Section 302
Certification of CFO pursuant to Section 302
Certification of CEO pursuant to Section 906
Certification of CFO pursuant to Section 906

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	September 30,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Cash and cash equivalents	$	5,265		$	2,745
Portfolio Assets, net		33,631			4,525
Loans receivable from Acquisition Partnerships held for investment		19,445			17,313
Equity investments		55,868			57,479
Deferred tax asset, net		20,101			20,101
Service fees receivable from affiliates		886			1,390
Other assets, net		7,596			6,769
Net assets of discontinued mortgage operations		4,388			6,150
Consumer assets held for sale		36,773			15,667
Total Assets	$	183,953		$	132,139
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable to affiliates	$	101,641		$	72,628
Notes payable other		4,211			2,432
Preferred stock subject to mandatory redemption, including accumulated dividends in arrears of zero and $1,193 at September 30, 2004 and December 31, 2003, respectively, (par value $.01; redemption value of $21 per share; 2,000,000 shares authorized; 126,291 shares issued and outstanding)		2,652			3,846
Minority interest		1,305			841
Liabilities from discontinued consumer operations		30,096			19,132
Other liabilities		5,327			4,291
Total Liabilities		145,232			103,170
Commitments and contingencies (note 10)
Stockholders’ equity:
Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued and outstanding: 11,235,687 and 11,193,687, respectively)		112			112
Paid in capital		99,289			99,168
Accumulated deficit		(62,867	)		(73,923	)
Accumulated other comprehensive income		2,187			3,612
Total Stockholders’ Equity		38,721			28,969
Total Liabilities and Stockholders’ Equity	$	183,953		$	132,139

See accompanying notes to consolidated financial statements.

2

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenues:
Servicing fees from affiliates	$	3,328		$	3,574		$	10,076		$	11,167
Gain on resolution of Portfolio Assets		601			112			838			1,079
Equity in earnings of investments		3,656			3,162			10,470			8,609
Interest income from affiliates		674			501			1,735			2,327
Interest income — other		229			98			365			443
Other income		454			545			2,236			1,161
Total revenues		8,942			7,992			25,720			24,786
Expenses:
Interest and fees on notes payable to affiliates		1,979			1,770			5,359			5,277
Interest and fees on notes payable — other		107			20			278			134
Interest on shares subject to mandatory redemption		66			66			199			66
Salaries and benefits		3,673			3,823			11,227			11,417
Provision for loan and impairment losses		1			23			23			1
Occupancy, data processing, communication and other		2,141			2,168			5,374			5,886
Total expenses		7,967			7,870			22,460			22,781
Earnings from continuing operations before income taxes and minority interest		975			122			3,260			2,005
Benefit (provision) for income taxes		11			195			(145	)		(24	)
Earnings from continuing operations before minority interest		986			317			3,115			1,981
Minority interest		(34	)		32			(43	)		(41	)
Earnings from continuing operations		952			349			3,072			1,940
Discontinued operations
Earnings from discontinued operations		2,211			1,515			8,666			3,757
Income taxes		(255	)		(24	)		(682	)		(59	)
Net earnings from discontinued operations		1,956			1,491			7,984			3,698
Net earnings		2,908			1,840			11,056			5,638
Accumulated preferred dividends in arrears		—			—			—			(133	)
Net earnings to common stockholders	$	2,908		$	1,840		$	11,056		$	5,505
Basic earnings per common share are as follows:
Earnings from continuing operations	$	0.09		$	0.03		$	0.28		$	0.16
Discontinued operations	$	0.17		$	0.13		$	0.71		$	0.33
Net earnings to common stockholders	$	0.26		$	0.16		$	0.99		$	0.49
Weighted average common shares outstanding		11,236			11,204			11,223			11,203
Diluted earnings per common share are as follows:
Earnings from continuing operations	$	0.08		$	0.03		$	0.26		$	0.16
Discontinued operations	$	0.17		$	0.13		$	0.68		$	0.33
Net earnings to common stockholders	$	0.25		$	0.16		$	0.94		$	0.49
Weighted average common shares outstanding		11,837			11,371			11,816			11,259

See accompanying notes to consolidated financial statements.

3

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

											Accumulated
	Number of										Other			Total
	Common			Common		Paid in		Accumulated			Comprehensive			Stockholders'
	Shares			Stock		Capital		Deficit			Income			Equity
Balances, December 31, 2002		11,195,076		$	112	$	98,934	$	(82,977	)	$	2,683		$	18,752
Issuance of common stock in exchange for redeemable preferred stock		8,200			—		75		—			—			75
Issuance of shares through employee stock purchase plan		1,395			—		3		—			—			3
Exercise of common stock options		6,250			—		12		—			—			12
Refund of unconverted common stock		(17,234	)		—		144		—			—			144
Comprehensive income:
Net earnings for 2003		—			—		—		9,187			—			9,187
Foreign currency items		—			—		—		—			2,157			2,157
Unrealized net loss on securitization		—			—		—		—			(1,228	)		(1,228	)
Total comprehensive income															10,116
Preferred dividends		—			—		—		(133	)		—			(133	)
Balances, December 31, 2003		11,193,687			112		99,168		(73,923	)		3,612			28,969
Exercise of common stock options		42,000			—		121		—			—			121
Comprehensive income:
Net earnings for the first nine months of 2004		—			—		—		11,056			—			11,056
Foreign currency items		—			—		—		—			(1,425	)		(1,425	)
Total comprehensive income															9,631
Balances, September 30, 2004		11,235,687		$	112	$	99,289	$	(62,867	)	$	2,187		$	38,721

See accompanying notes to consolidated financial statements.

4

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

	Nine Months Ended
	September 30,
	2004			2003
Cash flows from operating activities:
Net earnings	$	11,056		$	5,638
Adjustments to reconcile net earnings to net cash used in operating activities:
Net earnings from discontinued operations		(7,984	)		(3,698	)
Proceeds from resolution of Portfolio Assets		3,346			6,314
Gain on resolution of Portfolio Assets		(838	)		(1,079	)
Purchase of Portfolio Assets and loans receivable, net		(38,237	)		(5,174	)
Provision for loan and impairment losses		23			1
Equity in earnings of investments		(10,470	)		(8,609	)
Proceeds from performing Portfolio Assets and loans receivable, net		5,849			3,471
Capitalized interest and costs on Portfolio Assets and loans receivable		(138	)		(172	)
Depreciation and amortization		612			658
(Increase) decrease in service fees receivable from affiliate		504			(290	)
Increase in other assets		(81	)		(2,270	)
Change in notes payable related to purchase of minority interest		(759	)		—
Increase in other liabilities		(3,232	)		(357	)
Net cash used in operating activities		(40,349	)		(5,567	)
Cash flows from investing activities:
Purchase of minority interest by consolidated subsidiary		—			(1,399	)
Property and equipment, net		(168	)		(774	)
Contributions to Acquisition Partnerships and Servicing Entities		(9,732	)		(11,367	)
Distributions from Acquisition Partnerships and Servicing Entities		22,074			20,564
Net cash provided by investing activities		12,174			7,024
Cash flows from financing activities:
Borrowings under notes payable to affiliates		57,693			18,090
Borrowing under notes payable — other		3,074			3,241
Payments of notes payable to affiliates		(28,068	)		(22,018	)
Payments of notes payable — other		(1,295	)		(2,930	)
Refund on unconverted Common Stock		—			144
Payment of dividends on preferred stock		(1,392	)		—
Payments for tender of redeemable preferred stock		—			(50	)
Proceeds from issuance of common stock		121			3
Net cash provided by (used in) financing activities		30,133			(3,520	)
Net cash provided by (used) in continuing operations		1,958			(2,063	)
Net cash provided by discontinued operations		562			998
Net increase (decrease) in cash and cash equivalents		2,520			(1,065	)
Cash and cash equivalents, beginning of period		2,745			4,118
Cash and cash equivalents, end of period	$	5,265		$	3,053
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	5,073		$	4,785
Income taxes		779			314
Non-cash financing activities:
Dividends accumulated and not paid on preferred stock		—			133

See accompanying notes to consolidated financial statements.

5

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Dollars in thousands, except per share data)

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

     FirstCity Financial Corporation (the “Company” or “FirstCity”) is a financial services company with offices throughout the United States and Mexico, with a presence in France and South America. At September 30, 2004, the Company was engaged in one principal reportable segment — portfolio asset acquisition and resolution. The portfolio asset acquisition and resolution business involves acquiring portfolios of loans, real estate and other assets or single assets (collectively referred to as “Portfolios” or “Portfolio Assets”) at a discount to face value and servicing and resolving such portfolios in an effort to maximize the present value of the ultimate cash recoveries. On September 21, 2004, FirstCity and certain of its subsidiaries entered into a Securities Purchase Agreement relating to the sale of a 31% beneficial ownership interest in Drive Financial Services LP (“Drive”) and its general partner, Drive GP LLC, to IFA Drive GP Holdings LLC (“IFA-GP”), IFA Drive LP Holdings LLC (“IFA-LP”) and Drive Management LP (“MG-LP”). As a result of the execution of the sale agreement, the consumer lending segment conducted through Drive was no longer considered a principal reportable segment and is treated as a discontinued operation.

     The unaudited consolidated financial statements of FirstCity reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity’s consolidated financial position at September 30, 2004, its results of operations for the three and nine month periods ended September 30, 2004 and 2003 and cash flows for the nine month periods ended September 30, 2004 and 2003.

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

     Basic net earnings per common share calculations are based upon the weighted average number of common shares outstanding. Earnings included in the earnings 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 earnings per common share calculations.

     At September 30, 2004, the Company has three stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As required by FASB Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the following table represents the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Net earnings to common stockholders, as reported	$	2,908		$	1,840		$	11,056		$	5,505
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(118	)		(54	)		(248	)		(152	)
Pro forma net earnings to common stockholders	$	2,790		$	1,786		$	10,808		$	5,353
Net earnings per common share:
Basic — as reported	$	0.26		$	0.16		$	0.99		$	0.49
Basic — pro forma	$	0.25		$	0.16		$	0.96		$	0.48
Diluted — as reported	$	0.25		$	0.16		$	0.94		$	0.49
Diluted — pro forma	$	0.24		$	0.16		$	0.91		$	0.48

6

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(2) Liquidity and Capital Resources

     The Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to entities formed to acquire Portfolios (“Acquisition Partnerships”), retirement of and dividends on preferred stock, and other investments. 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, borrowings from revolving lines of credit and other credit facilities, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

     At September 30, 2004, FirstCity had $95 million total debt outstanding with Bank of Scotland and BoS(USA) Inc. (the “Senior Lenders”). This debt was comprised of $53 million in term loans, $4 million under a $5 million revolving credit loan and a $38 million under a $45 million revolving portfolio acquisition loan facility. As discussed in note 4, on November 1, 2004, FirstCity completed the sale of the Company’s 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, which resulted in net proceeds of $86.8 million. A portion of the proceeds was used to pay off the $53 million in term loans and the $4 million revolving credit loan.

     On November 12, 2004, FirstCity and Bank of Scotland restructured the $5 million revolving credit loan and the $45 million revolving portfolio acquisition facility into a $96 million revolving acquisition facility that matures in November 2008. This new facility will be used to finance the senior debt and equity portion of distressed asset pool purchases and to provide for the issuance of Letters of Credit and working capital loans. The $96 million facility (i) allows loans to be made in Euros up to a maximum amount in Euros that is equivalent to $35 million U.S. dollars, (ii) allows loans to be made for acquisition of Portfolio Assets in Latin America of up to $35 million, (iii) provides for an interest rate of Libor plus 2.50% to 2.75%, (iv) provides for a commitment fee of 0.20% of the unused balance of the revolving acquisition facility, and (v) provides that the aggregate borrowings under the facility does not exceed 60% of the net present value of FirstCity’s interest in Portfolio Assets in Acquisition Partnerships pledged to secure the acquisition facility.

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

     There are currently 126,291 shares of New Preferred Stock outstanding. The issue, which matures in September 2005, has a $21.00 per share liquidation preference and $2.10 per share annual dividend rate. The Company expects to make quarterly dividend payments of $.525 per share until the shares are retired.

     The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a subsidiary of Cargill (the “Cargill Facility”). This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March 2005. At September 30, 2004, approximately $23.2 million was outstanding under this facility. On November 12, 2004, the outstanding balance on the Cargill Facility was paid down to zero out of a portion on the proceeds received on the sale of Drive.

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

(3) New Accounting Pronouncements

     In November 2003, the FASB issued Staff Position, No. 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“Staff Position 150-3”). Staff Position 150-3 defers the application of various provisions of SFAS 150 for specified mandatorily redeemable noncontrolling interests in consolidated limited-life entities. FirstCity has minority interests in various limited-life partnerships with a carrying value of $1.3 million at September 30, 2004. The estimated amount that would be paid to the minority interest holder if the instruments were to be settled at September 30, 2004 is $.7 million.

7

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

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

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

     FIN 46R requires consolidation by the majority holder of expected residual gains and losses of the activities of a variable interest entity (“VIE”). FirstCity holds significant variable interests in certain Acquisition Partnerships, which would be characterized as VIE’s. However, FirstCity is not deemed to be the primary beneficiary of any of these entities based on the criteria set forth in FIN46R. At September 30, 2004, FirstCity’s maximum exposure to loss as a result of its involvement with the VIE’s is $33 million.

(4) Discontinued Operations

     Discontinued operations are comprised of two components previously reported as the Company’s residential and commercial mortgage banking business (“Mortgage”) and the consumer lending business conducted through the Company’s minority interest investment in Drive (“Consumer”). Earnings from discontinued operations is summarized as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2004			2003		2004			2003
Mortgage	$	(950	)	$	—	$	(1,200	)	$	(420	)
Consumer		2,906			1,491		9,184			4,118
Net earnings from discontinued operations	$	1,956		$	1,491	$	7,984		$	3,698

     Mortgage

     The Company recorded a provision of $1.2 million in the first nine months of 2004 and $.4 million in the first nine months of 2003 for additional losses from discontinued mortgage operations. The provisions primarily relate to reductions in anticipated future cash flows from securitization trusts due to increased prepayment speeds and losses, and a higher projected interest cost of the underlying bonds. The net assets from discontinued mortgage operations consist of the following:

	September 30,			December 31,
	2004			2003
Estimated future gross cash receipts on residual interests in securitizations	$	4,605		$	6,399
Accrual for loss on operations and disposal of discontinued operations, net		(217	)		(249	)
Net assets of discontinued mortgage operations	$	4,388		$	6,150

     The only assets remaining from discontinued mortgage operations are the investment securities resulting from the retention of residual interests in securitization transactions. Although the liquidation or run-off of these investment securities will last longer than one year, the Company is contractually obligated to service the securitized assets. The Company has considered the estimated future gross cash receipts for such investment securities in the computation of the value of such investment securities. The cash flows are collected over a period of time and are valued using prepayment assumptions of 32% to 50% for fixed rate loans and 35% to 36% for variable rate loans. Overall loss rates are estimated from 3% to 13% of collateral.

8

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

     Consumer

     On September 21, 2004, FirstCity and certain of its subsidiaries entered into a definitive agreement to sell a 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, to IFA-GP, IFA-LP and MG-LP for a total purchase price of $108.5 million in cash, resulting in distributions and payments to FirstCity in the aggregate amount of $86.8 million in cash, from various sources. The sale was completed on November 1, 2004, and net cash proceeds from these transactions were primarily used to pay off debt.

     Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the consolidated financial statements have been reclassified for all periods presented to reflect the operations, assets and liabilities of the consumer business segment as discontinued operations. The assets and liabilities of such operations have been classified as “Consumer assets held for sale” and “Liabilities from discontinued consumer operations,” respectively on the September 30, 2004 and December 31, 2003 balance sheets and consist of the following:

	September 30,		December 31,
	2004		2003
Equity investment in Drive	$	30,502	$	15,667
Other assets		6,271		—
Total consumer assets held for sale	$	36,773	$	15,667
Notes payable — affiliate	$	16,000	$	16,000
Minority interest		6,095		3,131
Other liabilities		8,001		1
Total liabilities from discontinued consumer operations	$	30,096	$	19,132

     The net earnings from discontinued consumer operations were classified on the consolidated statements of operations for the three and nine months ended September 30, 2004 and 2003 as “Earnings from discontinued operations.” Summarized results of discontinued consumer operations are as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Equity in earnings	$	4,680		$	2,025		$	14,835		$	5,602
Interest and fees on notes payable to affiliate		(584	)		(85	)		(2,001	)		(273	)
Other expenses		—			(21	)		(4	)		(33	)
Income taxes		(255	)		(24	)		(682	)		(59	)
Minority interest		(935	)		(404	)		(2,964	)		(1,119	)
Earnings from discontinued consumer operations	$	2,906		$	1,491		$	9,184		$	4,118

     The pro forma consolidated balance sheet as of September 30, 2004 and the statements of operations for the three and nine months ended September 30, 2004 and 2003 and the year ended December 31, 2003 illustrating the effects of the Drive sale as if it has occurred as of the beginning of the periods are as follows:

9

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Pro Forma Condensed Consolidated Balance Sheet at September 30, 2004
(Dollars in thousands)
(Unaudited)

			Pro Forma Adjustments
	Historical		(A)			(B)			Other					Pro Forma
Assets
Cash and cash equivalents	$	5,265	$	86,800		$	(85,148	)	$	(177	)	(C	)	$	6,740
Portfolio Assets, net		33,631		—			—			—					33,631
Loans receivable from Acquisition Partnerships held for investment		19,445		—			—			—					19,445
Equity investments		55,868		—			—			—					55,868
Deferred tax asset, net		20,101		—			—			—					20,101
Service fees receivable from affiliates		886		—			—			—					886
Other assets, net		7,596		—			(553	)		(27	)	(C	)		7,016
Drive assets held for sale		36,773		(30,502	)		—			(6,271	)	(D	)		—
Net assets of discontinued operations		4,388		—			—			—					4,388
Total Assets	$	183,953	$	56,298		$	(85,701	)	$	(6,475	)			$	148,075
Liabilities and Stockholders’ Equity
Notes payable to affiliates	$	105,852	$	—		$	(67,798	)	$	—				$	38,054
Preferred stock subject to mandatory redemption		2,652		—			—			—					2,652
Minority interest		1,305		—			—			—					1,305
Liabilities from discontinued operations		30,096		(6,095	)		(16,001	)							8,000
Other liabilities		5,327		—			(386	)		—					4,941
Total Liabilities		145,232		(6,095	)		(84,185	)		—					54,952
Total Stockholders’ Equity		38,721		62,393			(1,516	)		(204	)	(C	)		93,123
										(6,271	)	(D	)
Total Liabilities and Stockholders’ Equity	$	183,953	$	56,298		$	(85,701	)	$	(6,475	)			$	148,075

(A)	Record proceeds of sale of FirstCity’s 31% interest in Drive.
(B)	Record $83.8 million pay down of debt and interest, payment of $1.3 million of debt fees to Bank of Scotland and write-off $1.3 million of unamortized loan fees relating to the paid off debt (net of $.7 million of new loan fees capitalized).
(C)	Record $204 thousand estimated closing costs less $27 thousand fees prepaid.
(D)	Record write-off remaining $6.3 million unamortized loan discount relating to $8.0 million accrued participation liability owed to Bank of Scotland.

10

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Pro Forma Condensed Consolidated Statements of Operations
(Dollars in thousands except per share data)
(Unaudited)

	Three Months Ended									Three Months Ended
	September 30, 2004									September 30, 2003
				Pro Forma									Pro Forma
				Adjustments									Adjustments
	Historical			(A)			Pro Forma			Historical			(A)			Pro Forma
Revenues:
Servicing fees	$	3,328		$	—		$	3,328		$	3,574		$	—		$	3,574
Gain on resolution of Portfolio Assets		601			—			601			112			—			112
Equity in earnings of investments		3,656			—			3,656			3,162			—			3,162
Interest income		903			—			903			599			—			599
Other		454			—			454			545			—			545
Total revenues		8,942			—			8,942			7,992			—			7,992
Expenses:
Interest and fees on notes payable		2,152			(1,516	)		636			1,856			(1,493	)		363
Salaries and benefits		3,673			—			3,673			3,823			—			3,823
Provision for loan and impairment losses		1			—			1			23			—			23
Occupancy, data processing, communication and other		2,141			—			2,141			2,168			—			2,168
Income taxes		(11	)		—			(11	)		(195	)		—			(195	)
Minority interest		34			—			34			(32	)		—			(32	)
Total expenses		7,990			(1,516	)		6,474			7,643			(1,493	)		6,150
Earnings from continuing operations	$	952		$	1,516		$	2,468		$	349		$	1,493		$	1,842
Earnings from continuing operations per common share
Basic	$	0.09					$	0.22		$	0.03					$	0.16
Diluted	$	0.08					$	0.21		$	0.03					$	0.16
Weighted average common shares outstanding
Basic		11,236						11,236			11,204						11,204
Diluted		11,837						11,837			11,371						11,371

(A) To eliminate additional interest and fees on notes payable that would not have been incurred if the transaction had been completed at the beginning of the period: 2004 interest savings from paydown of $67.8 million x average rate of 7.74% ÷ 4 = $1.3 million and amortization of loan fees of $.2 million; 2003 interest savings from paydown of $67.8 million x average rate of 7.50% ÷ 4 = $1.3 million and amortization of loan fees of $.2 million.

11

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Pro Forma Condensed Consolidated Statements of Operations
(Dollars in thousands except per share data)
(Unaudited)

	Nine Months Ended							Nine Months Ended
	September 30, 2004							September 30, 2003
			Pro Forma							Pro Forma
			Adjustments							Adjustments
	Historical		(A)			Pro Forma		Historical		(A)			Pro Forma
Revenues:
Servicing fees	$	10,076	$	—		$	10,076	$	11,167	$	—		$	11,167
Gain on resolution of Portfolio Assets		838		—			838		1,079		—			1,079
Equity in earnings of investments		10,470		—			10,470		8,609		—			8,609
Interest income		2,100		—			2,100		2,770		—			2,770
Other		2,236		—			2,236		1,161		—			1,161
Total revenues		25,720		—			25,720		24,786		—			24,786
Expenses:
Interest and fees on notes payable		5,836		(4,476	)		1,360		5,477		(4,494	)		983
Salaries and benefits		11,227		—			11,227		11,417		—			11,417
Provision for loan and impairment losses		23		—			23		1		—			1
Occupancy, data processing, communication and other		5,374		—			5,374		5,886		—			5,886
Income taxes		145		—			145		24		—			24
Minority interest		43		—			43		41		—			41
Total expenses		22,648		(4,476	)		18,172		22,846		(4,494	)		18,352
Earnings from continuing operations	$	3,072	$	4,476		$	7,548	$	1,940	$	4,494		$	6,434
Earnings from continuing operations per common share (B)
Basic	$	0.28				$	0.67	$	0.16				$	0.56
Diluted	$	0.26				$	0.64	$	0.16				$	0.56
Weighted average common shares outstanding
Basic		11,223					11,223		11,203					11,203
Diluted		11,816					11,816		11,259					11,259

(A)

To eliminate additional interest and fees on notes payable that would not have been incurred if the transaction had been completed at the beginning of the period: 2004 interest savings from paydown of $67.8 million x average rate of 7.62% x .75 = $3.9 million and amortization of loan fees of $.6 million; 2003 interest savings from paydown of $67.8 million x average rate of 7.60% x .75 = $3.9 million and amortization of loan fees of $.6 million.

(B)

Earnings from continuing operations per common share for the nine months ended September 30, 2003 include the effects of $133 thousand accumulated preferred dividends.

12

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Pro Forma Condensed Consolidated Statements of Operations
For the Year Ended December 31, 2003
(Dollars in thousands except per share data)
(Unaudited)

			Pro Forma
			Adjustments
	Historical		(A)			Pro Forma
Revenues:
Servicing fees	$	15,051	$	—		$	15,051
Gain on resolution of Portfolio Assets		1,380		—			1,380
Equity in earnings of investments		21,411		(7,237	)		14,174
Interest income		3,327		—			3,327
Other		1,560		—			1,560
Total revenues		42,729		(7,237	)		35,492
Expenses:
Interest and fees on notes payable		7,855		(6,353	)		1,502
Salaries and benefits		15,875		—			15,875
Provision for loan and impairment losses		98		—			98
Occupancy, data processing, communication and other		7,518		(27	)		7,491
Income taxes		240		(55	)		185
Minority interest		1,436		(1,446	)		(10	)
Total expenses		33,022		(7,881	)		25,141
Earnings from continuing operations	$	9,707	$	644		$	10,351
Earnings from continuing operations per common share (B)
Basic	$	0.86				$	0.91
Diluted	$	0.85				$	0.90
Weighted average common shares outstanding
Basic		11,200					11,200
Diluted		11,349					11,349

(A)

To eliminate the results of operations from the discontinued consumer business segment that would not have been incurred if the transaction had been completed at the beginning of the period. The elimination of $6.4 million of additional interest and fees on notes payable includes interest savings from paydown of $83.8 million x average rate of 6.66% = $5.6 million and amortization of loan fees of $.8 million.

(B)

Earnings from continuing operations per common share include the effects of $133 thousand accumulated preferred dividends in arrears.

(5) Portfolio Assets

     Portfolio Assets are summarized as follows:

	September 30,			December 31,
	2004			2003
Non-performing Portfolio Assets	$	56,219		$	27,071
Performing Portfolio Assets		24,148			2,682
Real estate Portfolios		283			283
Total Portfolio Assets		80,650			30,036
Adjusted purchase discount required to reflect Portfolio Assets at carrying value		(47,019	)		(25,511	)
Portfolio Assets, net	$	33,631		$	4,525

13

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

     Portfolio Assets are pledged to secure notes payable that are non-recourse to FirstCity or any affiliate other than the entity that incurred the debt.

(6) Loans Receivable from Acquisition Partnerships Held for Investment

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

	September 30,		December 31,
	2004		2003
Latin America	$	17,812	$	13,351
Europe		144		2,604
Domestic		1,489		1,358
	$	19,445	$	17,313

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

     Equity method losses which were recorded to reduce the loans and interest receivable from the Mexican partnerships were $.4 million and $1.8 million during the first nine months of 2004 and 2003, respectively, in compliance with EITF 98-13, Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee.

(7) Equity Investments

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

14

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Condensed Combined Balance Sheets

	September 30,		December 31,
	2004		2003
Assets	$	456,707	$	525,493
Liabilities	$	388,482	$	441,677
Net equity		68,225		83,816
	$	456,707	$	525,493
Equity investment in Acquisition Partnerships	$	51,179	$	53,098
Equity investment in servicing entities		4,689		4,381
	$	55,868	$	57,479

Condensed Combined Summary of Operations

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2004		2003			2004		2003
Proceeds from resolution of Portfolio Assets	$	72,738	$	69,506		$	198,370	$	187,699
Gain on resolution of Portfolio Assets		21,842		29,169			64,551		72,403
Interest income on performing Portfolio Assets		2,365		1,756			7,530		5,884
Net earnings (loss)	$	11,849	$	(7,880	)	$	28,704	$	(11,838	)
Equity in earnings of Acquisition Partnerships	$	3,507	$	3,007		$	9,844	$	8,135
Equity in earnings of servicing entities		149		155			626		474
	$	3,656	$	3,162		$	10,470	$	8,609

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

	September 30,		December 31,
	2004		2003
Assets:
Domestic:
WAMCO Partnerships	$	171,665	$	205,134
MinnTex Investment Partners LP		1,002		1,530
Other		10,319		10,164
Latin America		186,295		186,431
Europe		87,426		122,234
	$	456,707	$	525,493

15

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

	September 30,			December 31,
	2004			2003
Equity (deficit):
Domestic:
WAMCO Partnerships	$	79,388		$	84,589
MinnTex Investment Partners LP		909			1,418
Other		6,075			6,218
Latin America		(87,380	)		(86,412	)
Europe		69,233			78,003
	$	68,225		$	83,816
Equity investment in Acquisition Partnerships:
Domestic:
WAMCO Partnerships	$	33,734		$	33,413
MinnTex Investment Partners LP		300			514
Other		2,959			3,037
Latin America		1,257			1,021
Europe		12,929			15,113
	$	51,179		$	53,098

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenues:
Domestic:
WAMCO Partnerships	$	7,743		$	8,102		$	22,592		$	26,143
MinnTex Investment Partners LP		2,110			3,200			6,914			9,908
Other		22			59			70			97
Latin America		7,473			7,113			18,284			19,251
Europe		8,821			12,979			26,699			24,425
	$	26,169		$	31,453		$	74,559		$	79,824
Net earnings (loss):
Domestic:
WAMCO Partnerships	$	3,822		$	4,776		$	10,841		$	15,032
MinnTex Investment Partners LP		1,885			2,841			6,169			8,751
Other		(165	)		(184	)		(549	)		(414	)
Latin America		562			(24,391	)		(5,167	)		(51,126	)
Europe		5,745			9,078			17,410			15,919
	$	11,849		$	(7,880	)	$	28,704		$	(11,838	)
Equity in earnings (loss) of Acquisition
Partnerships:
Domestic:
WAMCO Partnerships	$	1,852		$	1,599		$	5,099		$	5,284
MinnTex Investment Partners LP		622			937			2,036			2,888
Other		(54	)		(56	)		(172	)		(81	)
Latin America		(70	)		(1,104	)		(849	)		(2,774	)
Europe		1,157			1,631			3,730			2,818
	$	3,507		$	3,007		$	9,844		$	8,135

16

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

     Combining statements of operations for the WAMCO Partnerships for the three and nine month periods ended September 30, 2004 and 2003 follow. FC Properties, Ltd. (“FC Properties”), WAMCO XXVIII, Ltd. (“WAMCO XXVIII”) and WAMCO XXX, Ltd. (“WAMCO XXX”) are considered to be significant subsidiaries of FirstCity.

Three Months Ended September 30, 2004

	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
Proceeds from resolution of Portfolio Assets	$	536		$	693		$	2,401		$	22,301		$	25,931
Cost of Portfolio Assets resolved		198			468			1,780			17,840			20,286
Gain on resolution of Portfolio Assets		338			225			621			4,461			5,645
Interest income on performing Portfolio Assets		—			34			—			1,463			1,497
Interest and fees expense — affiliate		—			(107	)		—			(525	)		(632	)
Interest and fees expense — other		—			(23	)		(103	)		(419	)		(545	)
Provision for loan and impairment losses		—			—			—			(667	)		(667	)
Service fees — affiliate		(16	)		(46	)		(86	)		(909	)		(1,057	)
General, administrative and operating expenses		(490	)		(58	)		(112	)		(360	)		(1,020	)
Other income, net		1			1			2			597			601
Net earnings (loss)	$	(167	)	$	26		$	322		$	3,641		$	3,822
Three Months Ended September 30, 2003
	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
Proceeds from resolution of Portfolio Assets	$	2,682		$	1,998		$	5,163		$	7,720		$	17,563
Cost of Portfolio Assets resolved		461			1,553			3,908			5,078			11,000
Gain on resolution of Portfolio Assets		2,221			445			1,255			2,642			6,563
Interest income on performing Portfolio Assets		—			262			—			1,000			1,262
Interest and fees expense — affiliate		—			(169	)		(1	)		(419	)		(589	)
Interest and fees expense — other		—			(145	)		(167	)		(82	)		(394	)
Provision for loan and impairment losses		(1	)		(32	)		—			(345	)		(378	)
Service fees — affiliate		(80	)		(99	)		(178	)		(405	)		(762	)
General, administrative and operating expenses		(432	)		(288	)		(232	)		(251	)		(1,203	)
Other income, net		—			2			3			272			277
Net earnings (loss)	$	1,708		$	(24	)	$	680		$	2,412		$	4,776

17

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Nine Months Ended September 30, 2004

	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
Proceeds from resolution of Portfolio Assets	$	3,479		$	7,265		$	8,854		$	51,794		$	71,392
Cost of Portfolio Assets resolved		1,146			5,658			6,703			40,469			53,976
Gain on resolution of Portfolio Assets		2,333			1,607			2,151			11,325			17,416
Interest income on performing Portfolio Assets		—			187			—			4,371			4,558
Interest and fees expense — affiliate		—			(335	)		—			(1,415	)		(1,750	)
Interest and fees expense — other		—			(208	)		(347	)		(1,272	)		(1,827	)
Provision for loan and impairment losses		—			(70	)		—			(1,248	)		(1,318	)
Service fees — affiliate		(104	)		(309	)		(318	)		(2,199	)		(2,930	)
General, administrative and operating expenses		(2,478	)		(14	)		(320	)		(1,114	)		(3,926	)
Other income, net		3			3			5			607			618
Net earnings (loss)	$	(246	)	$	861		$	1,171		$	9,055		$	10,841

Nine Months Ended September 30, 2003

	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
Proceeds from resolution of Portfolio Assets	$	8,654		$	11,255		$	26,719		$	17,420		$	64,048
Cost of Portfolio Assets resolved		1,954			8,467			20,021			12,749			43,191
Gain on resolution of Portfolio Assets		6,700			2,788			6,698			4,671			20,857
Interest income on performing Portfolio Assets		—			1,040			—			3,154			4,194
Interest and fees expense – affiliates		—			(495	)		(596	)		(1,018	)		(2,109	)
Interest and fees expense – other		—			(555	)		(392	)		(414	)		(1,361	)
Provision for loan losses		(1	)		(206	)		—			(697	)		(904	)
Service fees – affiliate		(259	)		(481	)		(889	)		(952	)		(2,581	)
General, administrative and operating expenses		(2,533	)		(490	)		(540	)		(593	)		(4,156	)
Other income, net		—			7			10			1,075			1,092
Net earnings	$	3,907		$	1,608		$	4,291		$	5,226		$	15,032

     Statements of operations for MinnTex Investment Partners LP for the three and nine month periods ended September 30, 2004 and 2003 follow:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Proceeds from resolution of Portfolio Assets	$	2,182		$	3,523		$	7,234		$	11,340
Cost of Portfolio Assets resolved		73			324			323			1,437
Gain on resolution of Portfolio Assets		2,109			3,199			6,911			9,903
Service fees — affiliate		(218	)		(352	)		(723	)		(1,134	)
General, administrative and operating expenses		(7	)		(7	)		(22	)		(22	)
Other income		1			1			3			4
Net earnings	$	1,885		$	2,841		$	6,169		$	8,751

(8) Segment Reporting

     The Company is engaged in one reportable segment - Portfolio Asset acquisition and resolution. The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such Portfolios in an effort to maximize the present value of the ultimate cash recoveries. The following is a summary of results of operations for the Portfolio Asset acquisition and resolution segments and reconciliation to earnings from continuing operations for the three months and the nine months ended September 30, 2004 and 2003.

18

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2004		2003			2004		2003
Portfolio Asset Acquisition and Resolution:
Revenues:
Servicing fees	$	3,328	$	3,574		$	10,076	$	11,167
Gain on resolution of Portfolio Assets		601		112			838		1,079
Equity in earnings of investments		3,656		3,162			10,470		8,609
Interest income		902		598			2,098		2,767
Other		328		405			1,767		888
Total		8,815		7,851			25,249		24,510
Expenses:
Interest and fees on notes payable		1,174		587			2,832		1,848
Salaries and benefits		2,851		2,972			8,830		9,117
Provision for loan and impairment losses		1		23			23		1
Occupancy, data processing, communication and other		1,110		1,492			3,335		4,062
Minority interest		34		(32	)		43		41
Total		5,170		5,042			15,063		15,069
Operating contribution before direct taxes	$	3,645	$	2,809		$	10,186	$	9,441
Operating contribution, net of direct taxes	$	3,638	$	3,005		$	10,127	$	9,418
Corporate Overhead:
Corporate interest expense		978		1,269			3,004		3,629
Salaries and benefits, occupancy, professional and other income and expenses, net		1,708		1,387			4,051		3,849
Earnings from continuing operations	$	952	$	349		$	3,072	$	1,940

     Revenues from the Portfolio Asset acquisition and resolution segment are attributable to domestic and foreign operations as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Domestic	$	4,686	$	4,109	$	13,035	$	13,903
Latin America		2,751		1,869		7,613		7,089
Europe		1,378		1,873		4,601		3,518
Total	$	8,815	$	7,851	$	25,249	$	24,510

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

	September 30,		December 31,
	2004		2003
Cash	$	5,265	$	2,745
Portfolio acquisition and resolution assets
Domestic		72,210		42,872
Latin America		19,198		14,468
Europe		18,490		23,088
Deferred tax asset, net		20,101		20,101
Other non-earning assets, net		7,528		7,048
Net assets of discontinued operations		4,388		6,150
Consumer assets held for sale		36,773		15,667
Total assets	$	183,953	$	132,139

19

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(9) Income Taxes

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

(10) Commitments and Contingencies

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

     In August 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, pursuant to the terms of a Securities Purchase Agreement dated as of August 18, 2000 (the “2000 Securities Purchase Agreement”), by and among FirstCity, Consumer Corp., FirstCity Funding LP (“Funding LP”), and FirstCity Funding GP Corp. (“Funding GP”), IFA-GP and IFA-LP; FirstCity, Consumer Corp., Funding LP and Funding GP made various 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 2000 Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligation under the 2000 Securities Purchase Agreement survives for a period of seven (7) years from August 25, 2000 (the “2000 Closing Date”) with respect to tax-related representations and warranties and for thirty months from the 2000 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 2000 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.

     On September 21, 2004, FirstCity, Consumer Corp., Funding LP and Funding GP entered into the a Securities Purchase Agreement to sell a 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, to IFA GP, IFA LP and MG-LP (the “2004 Securities Purchase Agreement”). In the 2004 Securities Purchase Agreement, FirstCity, Consumer Corp., Funding LP and Funding GP made various representations and warranties concerning (i) their respective organizations, (ii) their power and authority to enter into the 2004 Securities Purchase Agreement and the transactions contemplated therein, (iii) the ownership of the limited partnership interests in Drive by Funding LP, (iv) the ownership of membership interests in Drive-GP by Consumer Corp., and (iv) the capital structure of Funding LP. FirstCity, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS (USA), IFA-GP, IFA-LP and MG-LP from damages resulting from a breach of any representation or warranty contained in the 2004 Securities Purchase Agreement or otherwise made by FirstCity, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligations under the 2004 Securities Purchase Agreement survive for a maximum period of five (5) years from November 1, 2004. Neither FirstCity, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the 2004 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.

     The Company has recently discovered that it may have offered and sold unregistered plan interests to its employees through its FirstCity Financial Corporation Employees Profit Sharing and Retirement Plan. Such sales may have violated Section 5 of the Securities Act of 1933 (the “Act”), in which case the Company could be liable for rescission to such employees under Section 12(a)(1) during the one year period following the sales. The Company is currently evaluating the legal issues involved with the foregoing to determine whether any securities laws have been violated, and, if so, how it will comply with such laws.

20

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

Overview

     FirstCity is a financial services company engaged in the acquisition and resolution of portfolios of assets or single assets (collectively referred to as “Portfolio Assets”). The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such portfolios in an effort to maximize the present value of the ultimate cash recoveries.

     During the third quarter of 2004, the Company recorded earnings to common stockholders on a diluted basis of $2.9 million or $.25 per common share. The operating contribution from the Portfolio Asset acquisition and resolution segment was $3.6 million compared with $3.0 million for the same period in 2003. The Company was able to invest $27.4 million in portfolio acquisitions of $36 million during the quarter of which $27 million was purchased in the U.S. and $9 million in Mexico. This quarter’s investment activity represents the largest quarter in portfolio acquisition investments in the Company’s history.

     In the third quarter of 2004, FirstCity announced its intention to sell its 31% beneficial ownership interest in Drive. This sale was completed on November 1, 2004 and will have an estimated positive impact to the Company’s fourth quarter earnings of $54.4 million. The $86.8 million proceeds from the sale were primarily used to retire debt. Following the sale, FirstCity and Bank of Scotland restructured the existing $50 million revolving credit facility into a $96 million revolving acquisition facility that matures in November 2008.

     The effects of the sale of the ownership interest in Drive will be reflected in the fourth quarter 2004 results. However, because Drive represents the consumer lending segment, which FirstCity is exiting, the Drive earnings for the third quarter were classified as “earnings from discontinued operations”. It should be noted that the estimated impact of $54.4 million realized from the sale and the anticipated reduced interest costs, are not reflected in the third quarter. Therefore, earnings from continuing operations as reflected in the third quarter financials are not a clear indicator of what earnings will be going forward. The completion of the sale of Drive gives FirstCity a strong equity base and new liquidity with which to grow the Portfolio Asset acquisition and resolution business. The pro forma impact of this sale on historical financial statements is represented in footnote 4 of the consolidated financial statements.

     Although the Company’s primary revenues are generated by the Portfolio Asset acquisition and resolution, other items such as interest expense and the effects of discontinued mortgage operations could have an impact on net income. During the third quarter 2004, corporate interest and overhead was up slightly when compared to the third quarter 2003 and provisions from discontinued mortgage operations were $950,000 in the third quarter 2004 compared to zero in 2003. The Company received $193,000 and $1.4 million in cash flow from the residual interests during the third quarter of 2004 and 2003, respectively.

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

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

     Components of the results for the three months and nine months ended September 30, 2004 and 2003, respectively, are detailed below (dollars in thousands except per share data):

21

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Portfolio Asset Acquisition and Resolution	$	3,638		$	3,005		$	10,127		$	9,418
Corporate interest		(978	)		(1,269	)		(3,004	)		(3,629	)
Corporate overhead		(1,708	)		(1,387	)		(4,051	)		(3,849	)
Earnings from continuing operations		952			349			3,072			1,940
Accrued preferred dividends		—			—			—			(133	)
Earnings from discontinued operations		1,956			1,491			7,984			3,698
Net earnings to common stockholders	$	2,908		$	1,840		$	11,056		$	5,505
Diluted earnings per common share	$	0.25		$	0.16		$	0.94		$	0.49

Results of Operations

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

Third Quarter 2004 Compared to Third Quarter 2003

     The Company reported net earnings of $2.9 million in the third quarter of 2004 compared to earnings of $1.8 million in the third quarter of 2003. On a per share basis, diluted net earnings to common stockholders were $.25 in the third quarter of 2004 compared to earnings of $.16 in the third quarter of 2003.

Portfolio Asset Acquisition and Resolution

     The operating contribution from the Portfolio Asset acquisition and resolution segment was $3.6 million in the third quarter of 2004 compared to $3.0 million in the third quarter of 2003. FirstCity invested $27.4 in Portfolio acquisitions during the third quarter of 2004 through wholly-owned subsidiaries and Acquisition Partnerships, compared to $3.9 million in the third quarter of 2003. The quarter end investment in wholly-owned Portfolio Assets increased to $33.6 million from $4.1 million at September 30, 2004 and 2003, respectively, as a result of recent acquisitions.

     Servicing fee revenues. Servicing fee revenues decreased by 7% to $3.3 million in the third quarter of 2004 from $3.6 million in the third quarter of 2003 primarily due to decreased service fees from the Mexican partnerships related to a reduction in operating costs for Mexico. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on cost of servicing plus a profit margin.

     Gain on resolution of Portfolio Assets. The net gain on resolution of Portfolio Assets increased from $.1 million in the third quarter of 2003 to $.6 million in the third quarter of 2004 primarily due to three Portfolios generating proceeds of $2.3 million and a net gain of $.5 million during the third quarter of 2004.

     Equity in earnings of investments. Equity in earnings of Acquisition Partnerships increased 17% to $3.5 million in the third quarter of 2004 compared to $3.0 million in the third quarter of 2003. Following is a discussion of equity earnings by geographic region. See note 7 for summary of revenues and earnings of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships.

• Domestic - Equity in earnings of domestic Acquisition Partnerships was flat from period to period.

• Latin America - Equity in losses of Latin American Acquisition Partnerships were $70,000 in the third quarter of 2004 compared to equity in losses of $1.1 million in 2003. These partnerships reflected net earnings of $562,000 in the third quarter of 2004 compared to a net loss of $24.4 million in 2003. Approximately $14 million of the earnings in 2003 were due to foreign exchange gains recognized by the partnerships. In the third quarter of 2004, the partnerships recorded $2.0 million of foreign exchange losses. In addition, $3.5 million of interest expense was recorded in the third quarter of 2004 compared to $12 million in 2003. This interest is owed to the investors of these partnerships, of which FirstCity recorded $.6 million and $.4

22

million, respectively, as interest income. Excluding effects of foreign currency transactions and interest expense, these partnerships reflected adjusted net earnings of $2.0 million in the third quarter of 2004 compared to $2.1 million in 2003.

•

Europe - Equity in earnings of Acquisition Partnerships located in France decreased 29% to $1.2 million in the third quarter of 2004 from $1.6 million in 2003. This decrease is principally due to lower proceeds received on resolution of Portfolio Assets. During the third quarter of 2004, FirstCity also recorded $.3 million in foreign currency transactions gains (included in other expenses) relating to investments in France.

     Interest income. Interest income increased 53% from $.6 million in the third quarter of 2003 to $.9 million in the third quarter of 2004. This increase is primarily due to the purchase of one large performing Portfolio Asset pool and the addition of loans receivable from two new Acquisition Partnerships in 2003.

     Other income. Other income decreased 19% to $.3 million in the third quarter of 2004 from $.4 million in the third quarter of 2003 primarily as a result of reimbursements of due diligence expenses being lower this period, which will vary from period to period.

     Expenses. Operating expenses were flat period to period.

     Interest and fees on notes payable increased 100% from $.6 million in the third quarter of 2003 to $1.2 million in 2004. The average debt for the quarter increased from $27.1 million in the third quarter of 2003 to $54.3 million in the third quarter of 2004 as a result of acquisitions. The average cost of borrowing remained at 8.7% from period to period.

     Salaries and benefits decreased $.1 million or 4% to $2.9 million in the third quarter of 2004 from $3.0 million in 2003. Total personnel within the Portfolio Asset acquisition and resolution segment were 199 and 236 at September 30, 2004 and 2003, respectively.

     The provision for loan and impairment losses was minimal in the third quarter of 2004 and 2003.

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

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

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

     Occupancy, data processing, communication and other expenses decreased to $1.1 million in the third quarter of 2004 compared to $1.5 million in 2003, primarily as a result of reduced operating costs in Mexico.

     Minority interest was minimal from period to period.

Other Items Affecting Operations

23

     The following items affect the Company’s overall results of operations and are not directly related to the Portfolio Asset acquisition and resolution business discussed above.

     Corporate interest and overhead. Company level interest expense decreased by 23% to $1.0 million in the third quarter of 2004 from $1.3 million in the third quarter of 2003. Average debt declined to $40.1 million in the third quarter of 2004 from $46.5 million in 2003. Also, beginning with the third quarter of 2003, dividends on the New Preferred Stock are included in corporate interest expense. Other corporate overhead expenses increased 23% to $1.7 million in the third quarter of 2004 from $1.4 million in 2003 primarily due to increased accounting fees related to new regulatory compliance work.

     Income taxes. Benefit for income taxes was $11,000 and $195,000 in the third quarters of 2004 and 2003, respectively, and related primarily to state income taxes. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that are available to the Company. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the third quarters of 2004 and 2003.

     Discontinued Operations. The Company recorded a provision of $1.0 million in the third quarter of 2004 for additional losses from discontinued mortgage operations. No provision was required in the third quarter of 2003. The additional provision in 2004 primarily relates to a decrease in the estimated future gross cash receipts on residual interests in securitizations. These securities are in “run-off,” and the Company is contractually obligated to service these assets. The assumptions used in the valuation model consider both industry as well as the Company’s historical experience. The decrease in the estimated future gross cash receipts is partially a result of the actual losses exceeding the losses projected by the valuation model. In addition, prepayment assumptions have increased to take into consideration the lower market rates and higher than predicted actual prepayments over the past quarter. Also, the estimated bond interest rates have been increased to account for the current market trends for a rise in interest rates. 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.

     As discussed above, On November 1, 2004, FirstCity and certain of its subsidiaries completed the sale of a 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, to IFA-GP, IFA-LP and MG-LP for a total purchase price of $108.5 million in cash, which resulted in distributions and payments to FirstCity in the aggregate amount of $86.8 million in cash, from various sources. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the consolidated financial statements have been reclassified for all periods presented to reflect the operations, assets and liabilities of the consumer business segment as discontinued consumer operations. Earnings from discontinued consumer operations were $2.9 million in the third quarter of 2004 compared to $1.5 million in 2003. The increase primarily relates to equity earnings in Drive, net of minority interest, of $3.7 million and $1.6 million in the third quarter of 2004 and 2003, respectively. FirstCity also recorded $482,000 in amortization of deferred debt discount fees and $255,000 estimated federal income taxes during the third quarter of 2004.

First Nine Months of 2004 Compared to First Nine Months of 2003

     The Company reported earnings from continuing operations of $3.1 million in the first nine months of 2004. Net earnings to common stockholders were $11.1 million in the first nine months of 2004 compared to $5.5 million in the first nine months of 2003. On a per share basis, diluted net earnings to common stockholders were $.94 in the first nine months of 2004 compared to $.49 in the first nine months of 2003.

Portfolio Asset Acquisition and Resolution

     The operating contribution in the first nine months of 2004 was $10.1 million compared to $9.4 million for the same period last year. FirstCity purchased $128.2 million of Portfolio Assets during the first nine months of 2004 ($95.9 through Acquisition Partnerships), compared to $72 million in acquisitions in the first nine months of 2003. FirstCity’s investment in these acquisitions was $49 million and $15.3 million in the first nine months of 2004 and 2003, respectively. FirstCity’s quarter end investment in wholly-owned Portfolio Assets increased to $33.6 million from $4.1 million at September 30, 2004 and 2003, respectively.

     Servicing fee revenues. Servicing fee revenues decreased 10% from $11.2 million in the first nine months of 2003 to $10.1 million in 2004. Service fees from the Mexican partnerships decreased $.8 million or 11% as a result of efforts to reduce operating costs in Mexico. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. Service fees from the domestic Acquisition Partnerships decreased from $3.7 million in the first nine months of 2003 to $3.5 million in 2004.

24

     Gain on resolution of Portfolio Assets. The net gain on resolution of Portfolio Assets decreased from $1.1 million in the first nine months of 2003 to $.8 million in the first nine months of 2004 primarily due to one non-performing Portfolio generating proceeds of $2.7 million and a net gain of $.5 million during 2003.

     Equity in earnings of investments. Equity in earnings of Acquisition Partnerships increased 21% to $9.8 million in the first nine months of 2004 compared to $8.1 million in the first nine months of 2003. Following is a discussion of equity earnings by geographic region. See note 7 for summary of revenues and earnings of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships.

• Domestic - Equity in earnings of domestic Acquisition Partnerships decreased 14% to $7.0 million in the first nine months of 2004 from $8.1 million in 2003 primarily as a result of a loan sale completed during the second quarter of 2003, which resulted in $.7 million of additional equity earnings to the Company.

• Latin America - Equity in loss of Mexican Acquisition Partnerships was $.8 million in the first nine months of 2004 compared to $2.8 million in 2003. These partnerships reflected a loss of $5.2 million in the first nine months of 2004 compared to $51.1 million in 2003. The partnerships recorded foreign exchange gains of $37,000 in the first nine months of 2004 compared to losses of $20.4 million in 2003. Interest expense of $8.2 million and $37.0 million were recorded during the first nine months of 2004 and 2003, respectively. This interest is owed to the investors of these partnerships, of which FirstCity recorded $1.5 million and $2.1 million, respectively, as interest income. Excluding effects of foreign currency transactions and interest expense, these partnerships reflected adjusted net earnings of $3.1 million in the first nine months of 2004 compared to $6.3 million in 2003.

• Europe - Equity in earnings of Acquisition Partnerships located in France increased to $3.7 million in the first nine months of 2004 compared to $2.8 million in 2003. This increase is principally due to the addition of three French Partnerships, which accounted for $1.4 million in equity earnings in 2004. During the first nine months of 2004, FirstCity also recorded $.9 million in foreign currency transaction gains (included in other expenses) relating to investments in France.

     Interest income. Interest income decreased 24% from $2.8 million in the first nine months of 2003 to $2.1 million in the first nine months of 2004. This decrease is primarily due to the Acquisition Partnerships and their lenders amending three loan agreements with Acquisition Partnerships located in Mexico in the third quarter of 2003 to provide for no interest to be payable with respect to periods after the effective date of the amendments. This change had no impact on the consolidated net earnings, as the effect is offset through equity earnings in these Partnerships.

     Other income. Other income was $1.8 million in the first nine months of 2004 compared to $.9 million in 2003. In the first quarter of 2004, FirstCity reduced the estimated carrying value of loans payable to certain members of management by $.8 million. See further discussion related to these loans in note 2 of the consolidated financial statements.

     Expenses. Operating expenses were $15 million in the first nine months of 2004 compared to $15 million in 2003.

     Interest and fees on notes payable increased 53% to $2.8 million in the first nine months of 2004 from $1.8 million in 2003. The average debt for the period increased to $41.5 million in the first nine months of 2004 from $26.4 million in the first nine months of 2003.

     Salaries and benefits decreased $.3 million, or 3%. Total personnel within the Portfolio Asset acquisition and resolution segment were 199 and 236 at September 30, 2004 and 2003, respectively.

     The provision for loan and impairment losses was minimal in the first nine months of 2004. The Company recorded a net credit of $22,000 to provision for loan and impairment losses in the first nine months of 2003 due to a $61,000 recovery on one real estate Portfolio.

     Occupancy, data processing, communication and other expenses declined 18% from $4.1 million in the first nine months of 2003 to $3.3 million in 2004 primarily due to increased foreign currency gains, which are included in other expenses, recorded in 2004.

     Minority interest expense increased was minimal from period to period.

25

Other Items Affecting Operations

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

     Corporate interest and overhead. Company level interest expense decreased by 17% to $3.0 million in the first nine months of 2004 from $3.6 million in the first nine months of 2003. Average debt declined to $41.0 million in the first nine months of 2004 from $46.7 million in 2003. Also, beginning with the third quarter of 2003, dividends on the New Preferred Stock are included in corporate interest expense. Other corporate overhead expenses increased 5% to $4.1 million in the first nine months of 2004 from $3.8 million in 2003.

     Income taxes. Provision for income taxes was $145,000 in the first nine months of 2004 and related primarily to federal alternative minimum taxes. Provision for income taxes was $24,000 in the first nine months of 2003 and primarily related to state income taxes on FirstCity’s servicing operations in Minnesota, which began in April 2002. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the first nine months of 2004 and 2003.

     Discontinued Operations. The Company recorded a provision of $1.2 million in the first nine months of 2004 for additional losses from discontinued mortgage operations compared to $.4 million in 2003. The additional provisions primarily relate to a decrease in the estimated future gross cash receipts on residual interests in securitizations. These securities are in “run-off,” and the Company is contractually obligated to service these assets. The assumptions used in the valuation model consider both industry as well as the Company’s historical experience. The decrease in the estimated future gross cash receipts is partially a result of the actual losses exceeding the losses projected by the valuation model. In addition, prepayment assumptions have increased to take into consideration the lower market rates and higher than predicted actual prepayments over the past quarter. Also, the estimated bond interest rates have been increased to account for the current market trends for a rise in interest rates. 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.

     Earnings from discontinued consumer operations were $9.2 million in the first nine months of 2004 compared to $4.1 million in 2003. The increase primarily relates to equity earnings in Drive, net of minority interest, of $11.9 million and $4.5 million in the first nine months of 2004 and 2003, respectively. FirstCity also recorded $1.7 million in amortization of deferred debt discount fees and $682,000 estimated federal income taxes during the first nine months of 2004.

26

Financial Condition

     Major changes in FirstCity’s financial position resulted from the following.

     Consolidated assets of $184.0 million at September 30, 2004, were $51.8 million higher than that at December 31, 2003. During 2004, FirstCity invested $49.0 million in Portfolio Asset acquisitions through wholly-owned subsidiaries and Acquisition Partnerships. These purchases are the primary reason for the increase in Portfolio Assets ($29.1 million) and Loans receivable ($2.1 million).

     Consumer assets held for sale and liabilities from discontinued operations relate to FirstCity’s 31% beneficial ownership interest in Drive, which was sold on November 1, 2004. The net assets from discontinued consumer operations increased $10.1 million primarily due to equity earnings, net of minority interest, of $11.9 million. In addition, FirstCity recorded a $6.3 million deferred debt discount, net of $1.7 million amortization. In connection with a $16 million loan from Bank of Scotland secured by a 20% interest in Drive, FirstCity agreed to pay a contingent fee to Bank of Scotland equal to 20% of all amounts received by FirstCity upon any sale of the Company’s 20% interest in Drive or any receipt of distributions from Drive, once such payments exceed $16 million in the aggregate. An equal amount of estimated deferred debt discount and participation liability is recorded with the deferred debt discount being amortized into expense over the term of the loan. At September 30, 2004, the estimated liability for this contingent fee was $8.0 million and was included in liabilities from discontinued operations in the consolidated balance sheets.

     Consolidated liabilities of $145.2 million at September 30, 2004, were $42.1 million higher than that at December 31, 2003. Total notes payable increased by $30.8 million primarily as a result of borrowings for FirstCity’s investment in portfolio purchases. Other liabilities increased $1.0 million primarily due to the closing costs of a loan portfolio purchased on September 30, 2004.

Portfolio Asset Acquisition and Resolution

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

	Purchase		FirstCity
	Price		Investment
First nine months of 2004	$	128,176	$	48,982
Total 2003		129,192		22,944
Total 2002		171,769		16,717
Total 2001		224,927		24,319
Total 2000		394,927		22,140
Total 1999		210,799		11,203

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

27

Analysis of Selected Revenues and Expenses
Portfolio Asset Acquisition and Resolution

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Income from Portfolio Assets and Loans Receivable:
Average investment in Portfolio Assets and loans receivable:
Domestic	$	22,160		$	6,014		$	13,552		$	7,921
Latin America		18,090			15,226			16,163			15,153
Europe		609			3,486			1,391			1,394
Total	$	40,859		$	24,726		$	31,106		$	24,468
Income from Portfolio Assets and loans receivable:
Domestic	$	863		$	241		$	1,309		$	1,616
Latin America		600			414			1,513			2,147
Europe		6			47			49			64
Total	$	1,469		$	702		$	2,871		$	3,827
Average return (annualized):
Domestic		15.6	%		16.0	%		12.9	%		27.2	%
Latin America		13.3	%		10.9	%		12.5	%		18.9	%
Europe		3.9	%		5.4	%		4.7	%		6.1	%
Total		14.4	%		11.4	%		12.3	%		20.9	%
Servicing fee revenues:
Domestic partnerships:
$ Collected	$	32,282		$	24,171		$	89,720		$	88,865
Servicing fee revenue		1,192			1,121			3,453			3,703
Average servicing fee %		3.7	%		4.6	%		3.8	%		4.2	%
Latin American partnerships:
$ Collected	$	26,352		$	16,331		$	61,447		$	46,356
Servicing fee revenue		2,017			2,348			6,373			7,227
Average servicing fee %		7.7	%		14.4	%		10.4	%		15.6	%
Incentive service fees	$	119		$	105		$	250		$	237
Total Service Fees:
$ Collected	$	58,634		$	40,502		$	151,167		$	135,221
Servicing fee revenue		3,328			3,574			10,076			11,167
Average servicing fee %		5.7	%		8.8	%		6.7	%		8.3	%
Personnel:
Personnel expenses	$	2,851		$	2,972		$	8,830		$	9,117
Number of personnel (at period end):
Domestic		62			58
Mexico		137			178
Total		199			236
Interest expense:
Average debt	$	54,254		$	27,076		$	41,516		$	26,354
Interest expense		1,174			587			2,832			1,848
Average cost (annualized)		8.7	%		8.7	%		9.1	%		9.4	%

28

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

Analysis of Selected Revenues and Expenses
Acquisition Partnerships

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenues:
Gain on resolution of Portfolio Assets	$	21,842		$	29,169		$	64,551		$	72,403
Gross profit percentage on resolution of Portfolio Assets		30.03	%		41.97	%		32.54	%		38.57	%
Interest income	$	2,365		$	1,756		$	7,530		$	5,884
Other income		1,963			528			2,479			1,537
Interest expense (1):
Interest expense	$	4,916		$	13,648		$	13,119		$	42,197
Average cost (annualized)		5.64	%		15.22	%		5.00	%		14.74	%
Other expenses:
Service fees		4,207			4,719			13,005			14,160
Other operating costs		7,241			6,838			19,599			15,820
Foreign currency loss (gain)		(2,046	)		14,350			(37	)		20,440
Income taxes		3			(222	)		170			(955	)
Total other expenses (income)		9,405			25,685			32,737			49,465
Net earnings (loss)	$	11,849		$	(7,880	)	$	28,704		$	(11,838	)
Equity in earnings of Acquisition Partnerships	$	3,507		$	3,007		$	9,844		$	8,135
Equity in earnings of Servicing Entities		149			155			626			474
	$	3,656		$	3,162		$	10,470		$	8,609

(1) Interest expense includes interest on loans to the Acquisition Partnerships located in Mexico from affiliates of the investor groups. The rates on all but three of these loans range from 15% to 20%. The average cost on debt excluding the Mexican Acquisition Partnerships was 5.6% and 5.1% for the three months ended September 30, 2004 and 2003, respectively. As noted above, in the third quarter of 2003, the Acquisition Partnerships and their lenders amended three loan agreements from Mexican Acquisition Partnerships to provide for no interest to be payable with respect to periods after the effective date of the amendment. This change had no impact on the consolidated net earnings as the effect is offset through equity earnings in these Partnerships.

Provision for Income Taxes

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

Liquidity and Capital Resources

     The Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to entities formed to acquire Portfolios (“Acquisition Partnerships”), retirement of and dividends on preferred stock, and other investments by FirstCity. The potential sources of liquidity are funds generated from operations, equity

29

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

     At September 30, 2004, FirstCity had $95 million total debt outstanding with the Senior Lenders. This debt was comprised of $53 million in term loans, $4 million under a $5 million revolving credit loan and a $38 million under a $45 million revolving portfolio acquisition loan facility. As discussed in note 4, on November 1, 2004, FirstCity completed the sale of the Company’s 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, which resulted in net proceeds of $86.8 million. A portion of the proceeds were used to pay off the $53 million in term loans and the $4 million revolving credit loan.

     On November 12, 2004, FirstCity and Bank of Scotland restructured the $5 million revolving credit loan and the $45 million revolving portfolio acquisition facility into a $96 million revolving acquisition facility that matures in November 2008. This new facility will be used to finance the senior debt and equity portion of distressed asset pool purchases and to provide for the issuance of Letters of Credit and working capital loans. The $96 million facility (i) allows loans to be made in Euros up to a maximum amount in Euros that is equivalent to $35 million U.S. dollars, (ii) allows loans to be made for acquisition of Portfolio Assets originated in Latin America of up to $35 million, (iii) provides for an interest rate of Libor plus 2.50% to 2.75%, (iv) provides for a commitment fee of 0.20% of the unused balance of the revolving acquisition facility, and (v) provides that the aggregate borrowings under the facility does not exceed 60% of the net present value of FirstCity’s interest in Portfolio Assets in Acquisition Partnerships pledged to secure the acquisition facility.

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

     There are currently 126,291 shares of New Preferred Stock outstanding. The issue, which matures in September 2005, has a $21.00 per share liquidation preference and $2.10 per share annual dividend rate. The Company expects to make quarterly dividend payments of $.525 per share until the shares are retired.

     The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a subsidiary of Cargill (the “Cargill Facility”). This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March 2005. At September 30, 2004, approximately $23.2 million was outstanding under this facility. On November 12, 2004, the outstanding balance on the Cargill Facility was paid down to zero out of a portion on the proceeds received on the sale of Drive.

     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 had 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 obligations to indemnify BoS (USA) were terminated in connection with the sale of the 31% beneficial ownership interest in Drive on November 1, 2004. The Company also provided 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. The securitizations by Consumer Corp. have been terminated. Management of the Company currently does not believe it is likely that FirstCity will be required to make payments on these indemnification agreements.

     Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships, as of September 30, 2004, the Company and its subsidiaries had outstanding borrowings of $122 million. With the proceeds from the sale of FirstCity’s interest in Drive, the Company paid off approximately $80 million of the outstanding debt as of November 12, 2004.

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

     The following table summarizes the material terms of the credit facilities to which the Company, its major operating subsidiaries and the Acquisition Partnerships were parties to as of November 15, 2004 and the outstanding borrowings under such facilities as of September 30, 2004.

30

Credit Facilities

	Funded and
	Unfunded	Outstanding
	Commitment	Borrowings
	Amount as of	as of
	November 15,	September 30,
	2004	2004		Interest Rate	Other Terms and Conditions
	(Dollars in millions)
Corporate
Company Senior Facility:
Bank of Scotland revolving line of credit	Paid off	$	4	LIBOR + 2.75%	Secured by the assets of
					the Company, matures
					December 2004
BoS(USA) Tranche I (Term)	Paid off		25	Prime + 2.5%	Secured by the assets of
					the Company, matures
					December 2006
BoS(USA) Tranche II (Term)	Paid off		12	Fixed at 8.77%	Secured by the assets of
					the Company, matures
					December 2007
Portfolio Asset Acquisition and Resolution
Bank of Scotland $96 million portfolio acquisition facility	96		—	LIBOR + 2.5% - 2.75%	Acquisition facility for the investment in future
					Acquisition partnerships,
					matures November 2008
Bank of Scotland $45 million portfolio	Refinanced		38	LIBOR + 3.5%	Secured by the assets of
acquisition facility					the Company, matures
					November 2006
Cargill equity investment facility(2)	35		23	Greater of 8.5% or	Acquisition facility for
				LIBOR + 4.5%	the investment in future
					Acquisition partnerships,
					matures March 2005
Central National Bank term facility	4		4	Bank prime + 0.50%	Secured by existing Portfolio Assets, matures
					December 2004
Unsecured loans payable to	—		—	Rate based Corporate	Matures December 2011
senior management				average cost of funds
Consumer
Bank of Scotland term loan	Paid off		16	LIBOR + 1.0%	Secured by 20% equity
					interest in Drive, matures
					December 2007, non-recourse
Total	$135	$	122
Unconsolidated Acquisition Partnerships Term Facilities(1)	$90	$	90	Various rates	Secured by Portfolio Assets, various maturities non-recourse

31

(1) In addition to the term acquisition facilities of the unconsolidated Acquisition Partnerships, the Mexican Acquisition Partnerships also have term debt of approximately $231 million outstanding as of September 30, 2004 owed to affiliates of the investor groups. Of this amount, the Company has recorded approximately $17.8 million as Loans Receivable on the Consolidated Balance Sheets.

(2) As previously noted, on November 12, 2004, the outstanding balance on the Cargill Facility was paid down to zero out of a portion of the proceeds received on the Drive sale.

FirstCity Financial Corporation Employees Profit Sharing and Retirement Plan Issues

     The Company has recently discovered that it may have offered and sold unregistered plan interests to its employees through its FirstCity Financial Corporation Employees Profit Sharing and Retirement Plan. Such sales may have violated Section 5 of the Securities Act of 1933 (the “Act”), in which case the Company could be liable for rescission to such employees under Section 12(a)(1) during the one year period following the sales. The Company is currently evaluating the legal issues involved with the foregoing to determine whether any securities laws have been violated, and, if so, how it will comply with such laws.

Forward-Looking Statements

     Certain statements contained in this Quarterly Report on Form 10-Q or incorporated by reference from time to time, including, but not limited to, statements relating to the Company’s strategic objectives and future performance, which are not historical facts, may be deemed to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. There are many important factors that could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. Such factors include, but are not limited to, the performance of the Company’s subsidiaries and affiliates; the availability of Portfolio Assets; assumptions underlying Portfolio asset performance; risks associated with foreign operations; currency exchange rate fluctuations; interest rate risk; the degree to which the Company is leveraged; the Company’s continued need for financing; availability of the Company’s credit facilities; the impact of certain covenants in loan agreements of the Company and its subsidiaries; risks of declining value of loans, collateral or assets; the ability of the Company to utilize NOLs; uncertainties of any litigation that might arise from discontinued operations; general economic conditions; foreign social and economic conditions; changes (legislative and otherwise) in the asset securitization industry; fluctuations in residential and commercial real estate values; capital market conditions, including the markets for asset-backed securities; factors more fully discussed and identified in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2003 (including those discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), as well as in other Securities and Exchange Commission filings of the Company. Many of these factors are beyond the Company’s control. In addition, it should be noted that past financial and operational performance of the Company is not necessarily indicative of future financial and operational performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Form 10-Q speak only as of the date of this Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

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

     Loans receivable consist of investment loans made to Acquisition Partnerships 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 currently has investments in Europe and Latin America. In Europe, the Company’s investments are in the form of equity and represent a significant portion of the Company’s total equity investments. FirstCity also has a Euro-denominated loan receivable from a French Acquisition Partnership. As of September 30, 2004, one U.S. dollar equaled $0.81 Euros. A sharp change of the Euro relative to the U.S. dollar could materially adversely affect the consolidated financial position and results of operations of the Company. A

32

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 $.6 million and $1.2 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Euro relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations. As discussed above, the refinanced revolving acquisition facility with Bank of Scotland for $96 million allows loans to be made in Euros up to a maximum amount in Euros that is equivalent to $35 million U.S. dollars. Management of the Company feels that this amended loan agreement will help reduce the risk of adverse effects of currency changes on Euro-denominated investments.

     In Latin America, approximately 95% of the Company’s investments are made through U.S. dollar denominated loans to Acquisition Partnerships in Mexico. The remaining investment is in the form of equity in these same Acquisition Partnerships. The loans receivable are required to be repaid in U.S. dollars. Although the U.S. dollar balance of these loans will not change due to a change in the Mexican peso, the future estimated cash flows of the underlying assets in Mexico could become less valuable as a result of a change in the exchange rate for the Mexican peso, and thus could affect the overall total returns to the Company on these investments. As of September 30, 2004, one U.S. dollar equaled 11.4 Mexican pesos. A 5% and 10% incremental depreciation of the peso would result in an estimated decline in the valuation of the Company’s total investments in Mexico of approximately $.9 million and $1.7 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Mexican peso relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

Item 4. Controls and Procedures.

     An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of management’s evaluation.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

     FirstCity was not involved in any material legal proceedings as of September 30, 2004.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

     None

Item 3. Defaults Upon Senior Securities.

     None

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

     The Company held its annual meeting of stockholders (the “Annual Meeting”) on August 5, 2004. 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 2004 annual meeting of stockholders. The number of votes cast for each nominee was as follows:

33

			Votes
Nominee	Votes For		Against		Abstained
James R. Hawkins		10,087,170		36,139		—
C. Ivan Wilson		10,026,370		96,939		—
James T. Sartain		10,030,647		97,662		—
Richard E. Bean		10,051,923		71,386		—
Dane Fulmer		10,049,562		73,747		—
Robert E. Garrison II		10,051,948		71,361		—
Jeffery D. Leu		10,021,578		101,731		—

(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 2004 was approved by the stockholders. The number of votes for the proposal: 10,106,111; votes against: 13,799; abstentions: 3,399.

Item 5. Other Information.

None

Item 6. 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	-	Securities Purchase Agreement, dated as of August 18, 2000,

34

Exhibit
Number		Description of Exhibit
		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).
10.2	-	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).
10.3	-	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).
10.4	-	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).
10.5	-	Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-K dated April 15, 2003).
10.6	-	Fifth amendment, dated March 31, 2004, to the Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.18 of the Company’s Form 10-Q dated May 14, 2004).
10.7	-	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company’s Form 10-Q dated May 14, 2004).
10.8	-	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.20 of the Company’s Form 10-Q dated May 14, 2004).
10.9	-	Securities Purchase Agreement dated as of September 21, 2004 by and among FirstCity Financial Corporation and certain affiliates of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC, Drive Management LP and certain affiliates of those persons. (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 27, 2004)
10.10	-	Letter agreements dated as of November 1, 2004, between FirstCity, Consumer Corp. and BoS-UK relating to extension of time for and waiver related to payment of any fee under Fee Letter. (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated November 5, 2004)
10.11	-	Letter agreement dated November 1, 2004 between Bank of Scotland, acting through its New York branch, and FirstCity providing for deposit of funds in cash collateral account. (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated November 5, 2004)
10.12*	-	Revolving Credit Agreement, dated November 12, 2004, among FirstCity Financial Corporation as Borrower and the Lenders named

35

Exhibit
Number		Description of Exhibit
		therein, as Lenders, and Bank of Scotland, as Agent
31.1*	-	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	-	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	-	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.
32.2*	-	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

* Filed herewith.

36

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Firstcity Financial Corporation
	By:	/s/    James T. Sartain
		James T. Sartain
		President and Chief Executive
		Officer and Director
		(Duly authorized officer of the
		Registrant)
	By:	/s/    J. Bryan Baker
		J. Bryan Baker
		Senior Vice President and Chief
		Financial Officer
		(Duly authorized officer and
		principal financial and accounting
		officer of the Registrant)
Dated: November 15, 2004

37

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	-	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).
10.2	-	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).
10.3	-	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).
10.4	-	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).
10.5	-	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

Exhibit
Number		Description of Exhibit
		of Scotland as Agent (incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-K dated April 15, 2003).
10.6	-	Fifth amendment, dated March 31, 2004, to the Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.18 of the Company’s Form 10-Q dated May 14, 2004).
10.7	-	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company’s Form 10-Q dated May 14, 2004).
10.8	-	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.20 of the Company’s Form 10-Q dated May 14, 2004).
10.9	-	Securities Purchase Agreement dated as of September 21, 2004 by and among FirstCity Financial Corporation and certain affiliates of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC, Drive Management LP and certain affiliates of those persons. (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 27, 2004)
10.10	-	Letter agreements dated as of November 1, 2004, between FirstCity, Consumer Corp. and BoS-UK relating to extension of time for and waiver related to payment of any fee under Fee Letter. (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated November 5, 2004)
10.11	-	Letter agreement dated November 1, 2004 between Bank of Scotland, acting through its New York branch, and FirstCity providing for deposit of funds in cash collateral account. (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated November 5, 2004)
10.12*	-	Revolving Credit Agreement, dated November 12, 2004, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent
31.1*	-	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	-	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	-	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.
32.2*	-	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

EX-10.12

                                                                   EXHIBIT 10.12

                                                                  EXECUTION COPY
- --------------------------------------------------------------------------------

                           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 November 12, 2004

                         -------------------------------

- --------------------------------------------------------------------------------



                           REVOLVING CREDIT AGREEMENT

      REVOLVING CREDIT AGREEMENT, dated as of November 12, 2004, among FIRSTCITY
FINANCIAL CORPORATION, a Delaware corporation ("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 Lenders (in such capacity, "Agent").

                              W I T N E S S E T H :

      WHEREAS, the parties hereto are parties to a certain Term Loan and
Revolving Credit Agreement, dated as of December 12, 2002, as amended by
Amendment No. 1 dated as of March 24, 2003, Amendment No. 2 and Consent No. 2
dated as of April 29, 2003, Amendment No. 3 and Consent No. 4 dated as of May 2,
2003, Amendment No. 4 dated as of June 30, 2003, Amendment No. 5 dated as of
March 31, 2004, and Amendment No. 6 dated as of September 29, 2004 (as so
amended, the "Existing Agreement");

      WHEREAS, pursuant to the Existing Agreement, Lenders have made certain
Term Loans and Revolving Credit Loans (each as defined in the Existing
Agreement) to Borrower, which are evidenced by certain Term Notes and Revolving
Credit Notes (each as defined in the Existing Agreement) payable to the order of
Lenders, each dated December 12, 2002, the aggregate principal amount
outstanding under which as the date hereof is $1,000,000.00 with respect to
Revolving Credit Loans (the "Existing Revolving Credit Loans") and
$36,459,155.06 with respect to Term Loans (the "Existing Term Loans"); and

      WHEREAS, Borrower has requested that Lenders amend and restate the
Existing Agreement in its entirety;

      NOW, THEREFORE, the parties hereto hereby agree that from and after the
Effective Date, the Existing Agreement is hereby amended and restated to read in
its entirety as set forth 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 to make one or more loans in Dollars or Euros to Borrower (each a "Loan",
and collectively the "Loans") in an aggregate outstanding principal amount not
in excess of its Loan Commitment; provided that, after giving effect to all
pending requests for Loans and Letters of Credit, (i) the aggregate outstanding
principal amount of Loans made in Euros by such Lender shall not exceed the
Eurosublimit of such Lender, and (ii) Total Outstandings shall not exceed the
lesser of (x) the Total Loan Commitment then in effect and (y) Borrowing Base
Availability; and provided, further, that, (A) the aggregate amount of
Acquisition Loans (as defined below) financing the acquisition of any Eligible
Asset Pool shall not exceed (i) the Applicable Portfolio Percentage, times the
Acquisition Price of the Related Asset Pool, in the event proceeds of such Loans
shall be contributed to the capital of the acquiring Portfolio Entity, or (ii)
the Acquisition Price of the Related Asset Pool, in the event proceeds of such
Loans shall be loaned to the acquiring Portfolio Entity, and (B) the aggregate
principal amount of Working Capital Loans (as defined below) outstanding, shall
not at any time exceed the Working Capital Sublimit.

            (b) The Loans shall be used by Borrower solely (i) (A) to make
advances to a Primary Obligor, the full amount of which advances are used by
such Primary Obligor (as more fully set forth in other portions of this Section
2, in Section 6B and in other Sections of this Agreement) to make, directly or
indirectly, a loan or contribution to the capital of an Eligible Portfolio
Entity to be used by such entity for the acquisition of one or more Eligible
Asset Pools, (B) to make advances to an Eligible Portfolio Entity, the full
amount of which advances are used by such entity for the acquisition of one or
more Eligible Asset Pools, or (C) if requested by Borrower in the Notice of
Borrowing for such Loans, to pay any fee (including the Utilization Fee) in
respect of such Loans (such Loans, "Acquisition Loans"); or (ii) for working
capital and other general corporate purposes (such Loans, "Working Capital
Loans").

            (c) Loans made pursuant to Section 2.1 shall be made from each
Lender pro rata, based upon the percentage that each Lender's Loan Commitment
represents of the Total Loan Commitment.

            (d) Unless otherwise provided herein, all Loans denominated in Euros
shall be made, maintained and continued as Eurocurrency Loans.

            (e) Without the consent of Agent, Borrower shall not be entitled to
borrow more than four Working Capital Loans or more than eight Loans in total in
any calendar month.

                                       2


      2.2 Notice of Borrowing.

            (a) Whenever Borrower desires to utilize the Loan Commitments for an
Acquisition Loan, it shall deliver to Agent a Borrowing Base Certificate and a
Notice of Borrowing not later than 11:00 a.m., Closing Office Time, three
Business Days prior to the date of the proposed borrowing, which Notice of
Borrowing shall, among other items, (A) specify (i) the Eligible Portfolio
Entity to whose capital Borrower or a Primary Obligor will, directly or
indirectly, contribute or loan the proceeds of the Loans; (ii) the Asset Pool or
Asset Pools to be acquired by such Portfolio Entity; (iii) the date of the
proposed borrowing (which shall be a Business Day (each, a "Borrowing Date"));
(iv) if such Borrowing Date is a Payment Date, whether such Loans shall
constitute Base Rate Loans or Eurocurrency 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 currency in which the Loan will be borrowed; (vi) the total
amount of such borrowing (which shall be in a minimum amount of 100,000 units of
the relevant currency, and in an amount the Dollar Equivalent of which is equal
to or greater than $100,000, and integral multiples of 100,000 units of relevant
currency in excess thereof); and (vii) the amount, if any, of fees (including
the Utilization Fee) requested to be borrowed; and (B) certify that (x) Borrower
delivered the Final Asset Pool Acquisition Certificate in respect of such Asset
Pool or Asset Pools not later than five Business Days before the Borrowing Date
specified in such notice and that all information set forth in such 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 Agent a Final NPV Pool Certificate in
respect of such Asset Pool.

            (b) Whenever Borrower desires to utilize the Loan Commitments for
Working Capital Loans, it shall deliver to Agent a Notice of Borrowing not later
than 11:00 a.m., Closing Office Time, three Business Days prior to the date of
the proposed borrowing, which notice shall specify (i) the date of the proposed
borrowing (which shall be a Business Day) (each, also a "Borrowing Date"), (ii)
if such Borrowing Date is a Payment Date, whether such Loans shall constitute
Base Rate Loans or Eurocurrency Loans (if not specified or if such date is not a
Payment Date, Base Rate Loans shall be deemed to have been requested), (iii) the
currency in which such Loans will be borrowed, and (iv) the total amount of such
borrowing (which shall be in a minimum amount of $250,000 and, if greater, in
integral multiples of $100,000).

            (c) Agent shall promptly notify (in writing or by telephone,
confirmed as soon as possible thereafter in writing) each of Lenders of the date
and type (i.e., Acquisition Loan or Working Capital Loan) of any 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 Eurocurrency Loans. Each
Lender will make the amount of its Loan or Loans available to Agent, at the
Closing Office, before 1:00 p.m. Closing Office Time on the date specified in
the Notice of Borrowing in same day funds. Such proceeds shall be made available
to Borrower (subject to Section 2.2(d)) by Agent, in the same type of funds
received by Agent, at the Closing Office against delivery to Agent for the
account of each Lender of such instruments, documents and papers as are provided
for herein; provided that Agent may pay on behalf of Borrower the portion of any
Utilization Fee borrowed in connection with any such Loan directly to Lenders
entitled thereto. Agent shall deliver the instruments, documents and papers
received by it for the account of each Lender to such Lender or upon its order.

                                       3


            (d) Unless 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 Agent such Lender's ratable portion of such
borrowing, Agent may assume that such Lender has made such portion available to
Agent on the date of such borrowing in accordance with Section 2.2(c) and Agent
may, in reliance upon such assumption, make available to Borrower on such date a
corresponding amount. If and to the extent such Lender shall not have made such
ratable portion available to Agent, such Lender and Borrower severally agree to
repay to Agent forthwith on demand such corresponding amount together with
interest thereon, for each day from the date such amount is made available to
Borrower until the date such amount is repaid to 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 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) Borrower's obligation to pay (x) the principal of, and interest
on, the Loans of each Lender shall be evidenced by a promissory note payable to
the order of such Lender, each substantially in the form of Exhibit A (each a
"Note", and collectively, the "Notes").

            (b) The 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 0 hereto; (iii) be payable in full on the Maturity Date
(subject to mandatory prepayment as herein provided).

            (c) The Notes shall be, and hereby are, secured by the Collateral
and the Security Documents.

      2.4 Mandatory Prepayments and Repayments of Loans.

            (a) If at any time Total Outstandings shall exceed the Total Loan
Commitment in effect at such time, Borrower shall immediately prepay the Loans
in an amount equal to or greater than the amount of such excess.

            (b) If at any time Total Outstandings shall exceed Borrowing Base
Availability at such time, Borrower shall immediately prepay the Loans in an
amount equal to or greater than the amount of such excess.

            (c) Borrower shall repay the unpaid principal amount of all Loans,
together with all unpaid interest thereon and all other fees and amounts due
with respect thereto in full on the Maturity Date.

                                       4


            (d) Unless there shall exist any Default or any Event of Default,
Borrower shall be entitled to designate whether mandatory prepayments are
applied to Working Capital Loans or Acquisition Loans.

      2.5 Voluntary Prepayments of Loans.

            (a) Borrower may, upon not less than three Business Days prior
written notice to Agent (which notice Agent shall promptly transmit to Lenders
in writing or by telephone, confirmed as soon as possible thereafter in writing)
prepay any Loans in whole at any time, or from time to time in part in amounts
of 250,000 units of the relevant currency equal to or greater than an amount the
Dollar Equivalent of which is $250,000 (and, if greater, in integral multiples
of 50,000 units of the relevant currency), without premium (subject to Section
3.8) or penalty; provided that at the time of any such prepayment, Borrower
shall pay all interest accrued on the principal amount so prepaid. Repayments
pursuant to this Section 2.5 shall be applied to such Loans as Borrower may at
the time in writing direct or, if no such direction is given, as determined by
Agent. All notices pursuant to this Section 2.5 shall be irrevocable and result
in the principal amount of Loans specified therein becoming due and payable on
the prepayment date specified therein. Subject to the terms and conditions of
this Agreement, amounts prepaid under this Section 2.5 may be reborrowed.

      2.6 Reduction of Commitments.

            (a) The Total Loan Commitment shall be reduced by $1,333,333.00
automatically on the fourth to last Business Day of March, June, September and
December in each year, commencing December 27, 2005.

            (b) Borrower shall have the right at any time and from time to time
upon at least three Business Days' prior written notice to Agent (which notice
Agent shall promptly transmit to 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 Loan Commitment.

            (c) Any reduction of the Total Loan Commitment pursuant to this
Section 2.6 shall be allocated to the Loan Commitments of Lenders, pro rata,
based upon the percentage that each Lender's Loan Commitment represents of Total
Loan Commitment. Any reduction of the Total Loan Commitment below $80,000,000
shall result in a pro rata reduction, based upon the percentage that such
reduction represents of Total Loan Commitment then in effect, to the Working
Capital Sublimit and the Eurosublimits of each Lender. Any reduction to or any
termination of the Total Loan Commitment shall be accompanied by the payment in
full of any Commitment Commission then accrued hereunder.

            (d) Borrower shall have the right at any time and from time to time
upon at least 3 Business Days' prior written notice to Agent to reduce
permanently in amounts equal to $500,000 (and if greater, in integral multiples
of $100,000) or terminate the Letter of Credit Commitment (after giving effect
to all pending Issuance Requests).

      2.7 Currency Fluctuations, etc.

                                       5


            (a) Not later than 1:00 p.m., New York City time, on each Borrowing
Date and each Payment Date, Agent shall (i) determine the Exchange Rate as of
such date if at such time there are outstanding Eurocurrency Loans denominated
in Euros and (ii) give notice thereof to Lenders and to Borrower. The Exchange
Rate so determined shall become effective on the first Business Day immediately
following the relevant Borrowing Date or Payment Date (a "Reset Date") and shall
remain effective until the next succeeding Reset Date.

            (b) Not later than 5:00 p.m., New York City time, on each Reset
Date, Agent shall (i) determine the Dollar Equivalent of the Eurocurrency Loans
in Euros then outstanding (after giving effect to any Eurocurrency Loans to be
made or repaid on such date) and (ii) notify Lenders and Borrower of the results
of such determination.

      2.8 Conversion of Existing Loans. On the Effective Date, (i) the Existing
Term Loans shall be deemed to convert to and thereafter constitute Acquisition
Loans hereunder, and (ii) the Existing Revolving Credit Loans shall be deemed to
convert to and thereafter constitute Working Capital Loans, in each case made by
Lenders hereunder pro rata, based upon the percentage that each Lender's Loan
Commitment represents of the Total Loan Commitment, and subject to all of the
terms and conditions of this Agreement and the other Loan Documents applicable
thereto.

      SECTION 2A. LETTERS OF CREDIT

      SECTION 2A.1. Requests. (a) By delivering to the Issuer (with a copy to
Agent if Bank of Scotland should at any time not be Issuer hereunder) a written
request (an "Issuance Request") on or before 10:00 a.m. Closing Office Time on a
Business Day, Borrower may request, from time to time during the Commitment
Period and on not less than 3 nor more than 10 Business Days' notice, that the
Issuer issue an irrevocable letter of credit in such form as shall be acceptable
to the Issuer (each a "Letter of Credit", and collectively, the "Letters of
Credit"), in support of such financial obligations of Borrower, any Subsidiaries
or any Eligible Portfolio Entities which are described in such Issuance Request
and are permitted by Section 2A.1(c). Each Issuance Request shall specify (i)
the proposed date of issuance (which shall be a Business Day during the
Commitment Period), (ii) the stated amount of the Letter of Credit, (iii) the
expiration date of the Letter of Credit, (iv) the name and address of the
beneficiary of the Letter of Credit, and (v) a precise description of the
documents and have attached the verbatim text of any certificate to be presented
by the beneficiary of such Letter of Credit which, if presented by such
beneficiary prior to the expiration date of the Letter of Credit, would require
the Issuer to make payment under the Letter of Credit; provided that the Issuer,
in its sole judgment, may prior to the date of issuance require changes in any
such documents and certificates; and provided, further, that (unless otherwise
consented to by the Issuer) no Letter of Credit shall require payment against a
conforming draft to be made thereunder earlier than the third Business Day after
such draft is presented.

      (b) Each Letter of Credit shall by its terms (unless otherwise consented
to by the Issuer):

      (i) be issued for the account of Borrower in a Stated Amount (in U.S.
dollars) which does not exceed (or would not exceed) the then Letter of Credit
Availability; and

                                       6


      (ii) be stated to expire on a date (its "Stated Expiry Date") no later
than the earlier of (x) one year from its date of issuance or (y) the last day
of the Commitment Period; and, if renewable by its terms, shall not be renewed
so as to expire on a date later than the last day of the Commitment Period; and

      (iii) on or prior to its Stated Expiry Date:

                  (A) terminate immediately upon notice to the Issuer thereof
            from the beneficiary thereunder that all obligations covered thereby
            have been terminated, paid, or otherwise satisfied in full,

                  (B) reduce in part immediately to the extent the beneficiary
            thereunder has notified the Issuer that the obligations covered
            thereby have been paid or otherwise satisfied in part, and

                  (C) if the Stated Expiry Date is later than 60 days from its
            date of issuance, terminate 30 Business Days after notice to the
            beneficiary thereunder from the Issuer or Agent that an Event of
            Default has occurred and is continuing.

      (c) Letters of Credit may be issued to support (i) lease obligations,
statutory obligations, performance and return-of-money bonds and other similar
ordinary course obligations (exclusive of obligations for the payment of
borrowed money) of Borrower, its Subsidiaries or any Eligible Portfolio Entity,
(ii) obligations arising in connection with the acquisition of an Eligible Asset
Pool by an Eligible Portfolio Entity in accordance with Section 2.1(b), or (iii)
any other purposes for the benefit of Borrower, any Subsidiary or any Portfolio
Entity approved by Agent, in its sole discretion.

      SECTION 2A.2. Issuances and Extensions. Subject to the terms and
conditions of this Agreement and of any applicable Continuing Letter of Credit
Agreement (but in the event of any direct and clear conflict between this
Agreement and the Continuing Letter of Credit Agreement, this Agreement shall
control), the Issuer shall issue Letters of Credit in accordance with the
Issuance Requests made therefore. The Issuer will make available to Borrower
(or, at Borrower's request, the beneficiary) the original of each Letter of
Credit which it issues in accordance with the Issuance Request therefore. The
Issuer shall not be liable to any Lender with respect to any Letter of Credit
if, at the time of such issuance, it has not received from Borrower, Agent or
any Lender notice that any condition for the issuance of such Letter of Credit
has not been satisfied.

      SECTION 2A.3. Fees and Expenses. (a) Borrower agrees to pay to Agent for
distribution to Lenders (pro rata, based upon the percentage that each Lender's
Loan Commitment represents of Total Loan Commitment or, if such commitments are
no longer in effect, their pro rata shares of the LC Outstandings as determined
in accordance with Section 2A.8) a non-refundable letter of credit fee with
respect to each Letter of Credit equal to, per annum (calculated on the basis of
a 360-day year and the actual number of days elapsed), (x) the Applicable Margin
(after giving effect to the Letter of Credit requested) in effect for
Eurocurrency Loans, times (y) the Stated Amount of such Letter of Credit, such
fee payable quarterly in advance, on the issuance date (for the period from the
issuance date until the next

                                       7


succeeding fourth to last Business Day of March, June, September or December, as
the case may be) and on each fourth to last Business Day of each March, June,
September and December thereafter (each a "Letter of Credit Fee"), and in
addition, in the case of each Letter of Credit (Acquisition), the Utilization
Fee, if any, required pursuant to Section 4.3. In addition, Borrower further
agrees to pay to the Issuer for its own account the Issuer's standard opening,
documentary and processing charges and all other administrative expenses of the
Issuer in connection with the issuance and maintenance of each Letter of Credit.

      (b) If any Regulatory Change shall at any time (i) impose, modify or deem
applicable any reserve, special deposit or similar requirement against letters
of credit issued by the Issuer or participated in by any Lender or Lender
Assignee, or (ii) subject letters of credit issued by the Issuer or
participations therein held by any Lender or Lender Assignee to any assessment
or other cost imposed by the Federal Deposit Insurance Corporation or any
successor thereto or (iii) impose on the Issuer or any Lender or Lender Assignee
any other or similar condition regarding any Letter of Credit, the commitment or
obligation of the Issuer to issue Letters of Credit hereunder or any Lender's or
Lender Assignee's participation therein and the result of any event referred to
in clause (i), (ii) or (iii) above shall be to increase the cost to the Issuer
or any Lender or Lender Assignee of agreeing to issue, issuing or maintaining
any Letter of Credit or its participation therein by an amount which the Issuer
or such Lender or Lender Assignee shall deem to be material (which increase in
cost shall be the result of the reasonable allocation by the Issuer or such
Lender or Lender Assignee of the aggregate of such cost increases resulting from
such events), then and in each case upon demand from time to time by the Issuer
or such Lender or Lender Assignee (furnished to Borrower by Agent), provided
such demand is made no later than six months after such Issuer, Lender or Lender
Assignee obtains knowledge of such Regulatory Change, Borrower shall promptly
pay to Agent (for the account of such Issuer, Lender or Lender Assignee, as the
case may be) additional amounts which shall be sufficient to compensate the
Issuer (or such Lender or Lender Assignee) for such increased cost from the date
of such change, together with interest on each such amount from the date
demanded by the Issuer (or such Lender or Lender Assignee) until payment in full
thereof (after as well as before judgment) at a rate per annum equal to the
Past-Due Rate from time to time in effect. A certificate of the Issuer (or such
Lender or Lender Assignee) submitted to Borrower as to any additional amount or
amounts (including calculations thereof, in reasonable detail) shall, in the
absence of manifest error, be conclusive and binding on Borrower. In determining
such amount or amounts, the Issuer (or such Lender or Lender Assignee) may use
any method of averaging and attribution as it (in its reasonable discretion)
shall deem applicable.

      (c) The provisions of this Section 2A.3 and Section 2A.7 shall survive any
termination of this Agreement and the payment in full of the Loans and the LC
Obligations.

      SECTION 2A.4. Disbursements. (a) The Issuer will notify Borrower and Agent
promptly of the presentment for payment of any Letter of Credit together with
notice of the date (the "Disbursement Date") such payment shall be made. Subject
to the terms and provisions of such Letter of Credit and this Agreement, the
Issuer shall make such payment to the beneficiary (or its designee) of such
Letter of Credit.

      (b) Prior to 11:00 a.m. Closing Office Time on the Disbursement Date,
Borrower will reimburse the Issuer by making payment to Agent at the Closing
Office for all amounts

                                       8


disbursed or to be disbursed by the Issuer on that day (the "Disbursement")
under such Letter of Credit (the "Reimbursement Obligation"). At Borrower's
option, but subject to the provisions of Sections 2 and 6A hereof, prior to
11:00 a.m. Closing Office Time on the Business Day before the Disbursement Date,
Borrower may request in accordance with Section 2.2 (but without regard to the
last sentence of Section 2.2(b) or the requirement that the borrowing be in a
minimum amount of $250,000 and, if greater, in integral multiples of $100,000)
that a Working Capital Loan (or an Acquisition Loan in the case of a
Reimbursement Obligation relating to a Letter of Credit (Acquisition)) in the
amount of the Reimbursement Obligation be made and that the proceeds of such
Loan be used to so reimburse the Issuer. The proceeds of any such Working
Capital Loan (or Acquisition Loan) shall be applied to so reimburse the Issuer.
To the extent the Issuer is not reimbursed in full in accordance with this
Section 2A.4(b), Borrower's Reimbursement Obligation shall accrue interest at a
rate per annum equal to the Past-Due Rate from time to time in effect, payable
on demand.

      SECTION 2A.5. Reimbursement. Borrower's Reimbursement Obligation with
respect to each Disbursement (including interest thereon) shall be absolute and
unconditional under any and all circumstances and irrespective of any setoff,
counterclaim, or defense to payment which Borrower may have or have had against
the Issuer, Lenders, Agent, any Lender Assignee or any beneficiary of any Letter
of Credit, including any defense based upon the failure of any Disbursement to
conform to the terms of the applicable Letter of Credit or any application or
misapplication by the beneficiary of the proceeds of such Disbursement, or the
legality, validity, form, regularity, or enforceability of such Letter of
Credit; provided, however, that Borrower shall not be obligated to reimburse the
Issuer for any wrongful Disbursement made by the Issuer under any Letter of
Credit as a result of acts or omissions constituting gross negligence or willful
misconduct on the part of the Issuer.

      SECTION 2A.6. Deemed Disbursements. (a) Upon the occurrence and during the
continuance of any Event of Default with respect to which Agent has exercised
any right under Section 9, an amount equal to the LC Outstandings shall, at the
option of the Issuer, without demand upon or notice to Borrower, be deemed to
have been paid or disbursed by the Issuer (each, a "Deemed Disbursement") under
all outstanding Letters of Credit (notwithstanding that such amount may not in
fact have been so paid or disbursed), and, upon notification by the Issuer to
Borrower of Borrower's obligations under this Section 2A.6, Borrower shall be
immediately obligated to reimburse the aggregate amount of the Deemed
Disbursements to the Issuer prior to 11:00 a.m. Closing Office Time on the date
of such Deemed Disbursement and any amount not so reimbursed shall accrue
interest (after as well as before judgment) at a rate per annum equal to the
Past-Due Rate from time to time in effect, payable on demand; provided however,
that if an Event of Default described in Section 9.8 shall occur with respect to
Borrower, all results which would otherwise occur under this Section 2A.6(a)
only at the option of the Issuer, or upon notification by the Issuer to
Borrower, shall occur automatically without the giving of any such notice or the
need to exercise any such option. All Deemed Disbursements reimbursed by
Borrower pursuant to this Section 2A.6(a) shall be deposited into a special
depository account (the "Deemed Disbursement Account") maintained by Borrower
with, and under the control of, the Issuer and titled appropriately so as to
identify the nature of such account. Borrower shall take all such action, if
any, as is necessary to assure that the Issuer, Agent and Lenders have a
perfected first priority security interest in said account. All of Borrower's
right, title and interest in and to all monies at any time in the Deemed
Disbursement Account (and all earnings, if any,

                                       9


thereon) are hereby irrevocably pledged by Borrower to the Issuer, Agent and
Lenders as security to secure the prompt payment to the Issuer, Agent and
Lenders of all Borrower's liabilities to the Issuer, Agent and Lenders and to
secure the performance by Borrower of its Obligations under this Agreement and
the other Loan Documents; and such amounts may be applied to such liabilities in
such order as Agent may direct without notice to, or the consent of, Borrower or
any other Loan Party. Borrower shall be entitled to receive monies from the
Deemed Disbursement Account only as permitted by Section 2A.6(b). The Issuer
shall invest the monies in the Deemed Disbursement Account in such types of
investments as are agreed to by Borrower and the Issuer.

      (b) If any such Letter of Credit shall thereafter terminate without the
Issuer being required to pay the full amount of the Deemed Disbursement with
respect to such Letter of Credit to the beneficiary thereunder, and if at the
time all Obligations of Borrower (whether of performance or payment) under this
Agreement or any of the other Loan Documents which are then required to be
performed or paid shall have been either terminated, performed or paid in full,
then the obligations of Borrower under this Section 2A.6 shall be reduced
accordingly (subject, however, to reinstatement in the event any payment in
respect of such Letters of Credit is recovered in any manner from the Issuer),
and the Issuer will return to Borrower the excess, if any, of

                  (i) the aggregate amount deposited by Borrower with the Issuer
            pursuant to this Section 2A.6 and not theretofore applied by the
            Issuer to any Reimbursement Obligation or paid by the Issuer to any
            beneficiary of any Letter of Credit or applied by Agent or any
            Lender in payment of the Notes or any other Obligation of Borrower
            under this Agreement or any of the Loan Documents

            over

                  (ii) the aggregate amount of all then-existing Reimbursement
            Obligations, LC Outstandings and other Deemed Disbursements.

At such time when all Events of Default shall have been cured or waived, the
Issuer shall return to Borrower all amounts then on deposit in the Deemed
Disbursement Account.

      SECTION 2A.7. Nature of Reimbursement Obligations. Borrower shall assume
all risks of the acts, omissions, or misuse of any Letter of Credit by the
beneficiary thereof. Neither the Issuer (except to the extent of its own gross
negligence or willful misconduct), Agent nor any Lender shall be responsible
for:

      (a) the form, validity, sufficiency, accuracy, genuineness, or legal
effect of any Letter of Credit or of any draft, demand or other document,
instrument or other paper relating to, or presented under, any Letter of Credit,
or any document submitted by any party in connection with the application for
and issuance of any Letter of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent, or forged;

      (b) the form, validity, sufficiency, accuracy, genuineness, or legal
effect of any instrument transferring or assigning or purporting to transfer or
assign any Letter of Credit or the

                                       10


rights or benefits thereunder or proceeds thereof in whole or in part, which may
prove to be invalid or ineffective for any reason;

      (c) failure of the beneficiary to comply fully with conditions required in
order to demand payment under any Letter of Credit;

      (d) errors, omissions, interruptions, or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex, telecopier or
otherwise; or

      (e) any loss or delay in the transmission or otherwise of any document or
draft required in order to make a Disbursement under any Letter of Credit or of
the proceeds thereof.

      None of the foregoing shall affect, impair, or prevent the vesting of any
of the rights or powers granted the Issuer, Agent or Lenders hereunder. In
furtherance and extension and not in limitation or derogation of any of the
foregoing, any action taken or omitted to be taken by the Issuer in good faith
shall be binding upon Borrower, Agent, Lenders and each Lender Assignee and
shall not put the Issuer (except to the extent of its own gross negligence or
willful misconduct), Agent or any Lender or Lender Assignee under any resulting
liability to Borrower nor put the Issuer under any resulting liability to Agent
or any Lender or Lender Assignee. Nothing herein shall constitute a waiver by
Borrower of any of its rights against any beneficiary of any Letter of Credit.

      2A.8 Other Lenders' Participation. Effective upon the issuance of each
Letter of Credit and without further action, each Letter of Credit shall be
deemed to be issued on behalf of all Lenders (including the Issuer), pro rata,
based upon the percentage that each Lender's Loan Commitment represents of Total
Loan Commitment (or if such commitments are no longer in effect, based upon the
percentage that each Lender's outstanding Loans and participations in Letters of
Credit represents of all Lenders' Loans and participations in Letters of
Credit), and each Lender shall be deemed to have irrevocably purchased from the
Issuer a participation in such Letter of Credit equal to such Lender's pro rata
share of the Stated Amount. Each Lender shall, to the extent of such pro rata
share, promptly reimburse the Issuer for any Reimbursement Obligation which has
not been promptly reimbursed by Borrower in accordance with Section 2A.4(b).
Borrower hereby agrees that any such reimbursements to the Issuer by Lenders
shall (notwithstanding the provisions of Sections 6A and 2.2 and notwithstanding
that Borrower may at the time be the subject of a proceeding of the type
described in Section 9.8) be treated as Working Capital Loans (or Acquisition
Loans in the case of reimbursements in connection with a Letter of Credit
(Acquisition)) made by Lenders to Borrower for all purposes of this Agreement.

      2A.9 Indemnification. To the extent the Issuer is not reimbursed or
indemnified by Borrower, Lenders will reimburse and/or indemnify the Issuer on a
pro rata basis, based upon the percentage that each Lender's Loan Commitment
represents of Total Loan Commitment (or if such commitments are no longer in
effect, based upon the percentage that each Lender's outstanding Loans and
participations in Letters of Credit represents of all Lenders' Loans and
participations in Letters of Credit), 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 Issuer, acting pursuant to
this Section 2A or pursuant to any Letter of Credit or any Continuing

                                       11

Letter of Credit Agreement, in any way relating to or arising out of any of the
foregoing, 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 Issuer's gross
negligence or willful misconduct. The obligations of Lenders under this Section
2A.9 shall survive the payment in full of the Notes, the expiration and
termination of all Letters of Credit, the payment of all Reimbursement
Obligations and any termination of this Agreement.

      Section 3. INTEREST.

      3.1 Rate of Interest.

            (a) Subject to the provisions of Section 3.3, Borrower agrees to pay
interest in respect of the unpaid principal amount of the Loans from the date
such Loans are made until maturity (whether by acceleration or otherwise) for
each period from and including each Payment Date to but excluding the
immediately following Payment Date at the following rates: (i) Eurocurrency
Loans, at a rate per annum equal LIBOR for the Eurocurrency Interest Period then
in effect, plus the Applicable Margin in effect for such period, and (ii) Base
Rate Loans, at a rate per annum equal to the sum of the Base Rate, plus the
Applicable Margin in effect for such period, such rate to change as and when the
Base Rate shall change.

            (b) Loans (provided that such Loan was made in Dollars) which are
made on a date other than a Payment Date shall constitute Base Rate Loans until
converted in accordance with Section 3.10.

      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
or prepaid); 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

                                       12


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 Agent on such Lender's behalf), 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 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 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 Agent or any Lender to
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 Determination of Rate of Borrowing. As soon as practicable after 10:00
A.M. (New York time) on each Eurocurrency Interest Determination Date, 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 Eurocurrency Loans for the next
succeeding Eurocurrency Interest Period and shall promptly give notice thereof
in writing or by telephone (confirmed in writing) to Borrower and Lenders.

      3.6 Substituted Rate of Borrowing.

            (a) In the event that on any Eurocurrency 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 Agent on the date of such determination) that:

                                       13


                  (i) by reason of any changes arising after the date of this
Agreement affecting the interbank Eurocurrency 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 Eurocurrency 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 Eurocurrency 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 effective pricing to
such Lender for U.S. dollar deposits of comparable amounts for the relevant
periods;

then, and in any such event, Lender so affected shall on such date give notice
of such determination in writing or by telephone (confirmed in writing) to
Borrower and to Agent. 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 Eurocurrency Loan for
the Eurocurrency Interest Period following such Eurocurrency Interest
Determination Date and for any succeeding Eurocurrency 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 Eurocurrency Loans, provided that in the case of any such determination
pursuant to clause (ii)(x), the written notice from such Lender to Agent and
Borrower on the relevant Eurocurrency 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 Eurocurrency 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 Borrower by such Lender through 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 (a), other than clause (ii)(x) thereof (any such Lender, together with
any Lender affected by Section 3.7(a), an "Affected Lender"), Borrower may
(subject to Section 3.8), by giving notice in writing or by telephone (confirmed
in writing) to the Affected Lender, Agent and the other Lenders on such
Eurocurrency Interest Determination Date, (x) require the Affected Lender to
convert its Eurocurrency Loan then outstanding or requested that is so affected
into a Base Rate Loan 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 Eurocurrency

                                       14


Loans, or (y) terminate the obligations of Lenders to make or maintain Loans as,
or convert Loans into, Eurocurrency Loans and in such event, on the first day of
what would have been the next Eurocurrency Interest Period, all Eurocurrency
Loans shall be outstanding as Base Rate Loans.

      3.7 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 Eurocurrency
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 Agent and Borrower of such determination. The obligation of the Affected
Lender to make or maintain its Eurocurrency Loan or Loans so affected shall be
terminated and Borrower shall forthwith and in any event no later than the
earliest of (x) the termination of the Eurocurrency Interest Period in effect at
the time any such determination pursuant to this Section 3.7(a) is made, (y) the
first day of the Eurocurrency Interest Period commencing immediately thereafter
if such determination is made in respect of a requested Eurocurrency Loan, or
(z) five Business Days after receipt of notice from an Affected Lender under
this Section 3.7(a), take one of the actions specified in Section 3.7(b). If by
the earliest of (x), (y) or (z) Borrower has not exercised one of the options
specified in Section 3.7(b), Borrower shall be deemed to have exercised the
option set forth in clause (iii) of Section 3.7(b) and to have given the notice
specified therein.

            (b) Upon receiving any notification provided in Section 3.7(a),
Borrower may (subject to Section 3.8) exercise one of the following options:

            (i) If the determination by an Affected Bank relates only to
      Eurocurrency 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 Eurocurrency Loans pursuant to a Notice of Conversion,
      Borrower may by giving notice in writing to Agent and Lenders prior to the
      date on which such Eurocurrency Loan is to be made or converted, withdraw
      such Notice of Borrowing or Notice of Conversion for all Lenders;

            (ii) Upon written notice to Lenders, Borrower may terminate the
      obligations of Lenders to make or maintain Loans as, or convert Loans
      into, Eurocurrency Loans and in such event, Borrower, shall not later than
      the time specified in subsection 3.7(a), convert all Eurocurrency Loans
      into Base Rate Loans by giving notice thereof to Agent and Lenders.

            (iii) Borrower may, by giving notice in writing to the Affected
      Lender, Agent and the other Lenders require the Affected Lender to make
      the Eurocurrency 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 Eurocurrency Loans of the
      Affected Lender and to have no effect on the obligations of the other
      Lenders to make or maintain Eurocurrency Loans.

                                       15


      3.8 Compensation. Borrower shall compensate each Lender, upon written
request by such Lender (which request shall be made through 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 Eurocurrency Loans to
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 Eurocurrency Loan does not
occur on a date specified therefor pursuant to Section 3.6, 3.7 or 3.10, or any
conversion into a Eurocurrency Loan does not occur on the date specified
therefor in Section 3.10, (ii) if for any reason any prepayment or repayment or
conversion of any of its Eurocurrency Loans occurs on a date which is not the
last day of a Eurocurrency Interest Period applicable thereto, (iii) if any
prepayment, repayment or conversion of any of its Eurocurrency Loans occurs on
such last day of the Eurocurrency Interest Period applicable thereto in any
amount in excess of the amount notified to Agent in writing not less than three
Business Days prior to such last day of such Eurocurrency Interest Period, (iv)
if any prepayment, repayment or conversion of any of its Eurocurrency Loans
occurs without at least three Business Days prior written notice thereof having
been given to Agent, (v) if any prepayment or repayment of any of its
Eurocurrency Loans is not made on any date specified in a notice thereof given
by 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.

      3.9 Eurocurrency Interest Period Determination.

            (a) Each Eurocurrency Interest Period for any Loan shall commence on
a Payment Date and expire on the succeeding Payment Date.

            (b) No Eurocurrency Interest Period in respect of any Loan shall
extend beyond its stated maturity date.

            (c) Subject to Section 3.9(e), if Agent shall not have received
written notice from Borrower on or prior to 11:00 a.m. (Closing Office time) at
least three Business Days prior to a Payment Date that Borrower has elected to
convert all or a portion of Loans outstanding as Eurocurrency Loans to Base Rate
Loans in accordance with the other provisions of this Agreement, Borrower shall
be deemed to have elected to have such Loans (or portion thereof, as the case
may be) continued as Eurocurrency Loans for a new Eurocurrency Interest Period.

            (d) Unless the Majority Lenders specifically agree in writing, no
Eurocurrency 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
Eurocurrency Loans into Base Rate Loans.

            (e) Borrower shall not be permitted to maintain as Eurocurrency
Loans any Loans if the outstanding amount of such Loans to be maintained as
Eurocurrency Loans is less than 1,000,000 units of the relevant currency, and an
amount the Dollar Equivalent of which is equal to or greater than $1,000,000, or
an integral multiple of 100,000 units of the relevant currency in excess
thereof.

                                       16


      3.10 Conversions. Borrower shall have the option to convert, on any
Payment Date, all or any portion of Loans from Base Rate Loans to Eurocurrency
Loans or (provided that such Loan was made in Dollars) from Eurocurrency Loans
to Base Rate Loans; provided that (i) after giving effect to any such conversion
the amount outstanding as a Eurocurrency Loans, if any, shall be equal to
$1,000,000 or an integral multiple of $100,000 in excess thereof, and the amount
outstanding as Base Rate Loans, if any, shall not be less than $20,000; and (ii)
unless the Majority Lenders specifically agree in writing, no conversion to
Eurocurrency Loans shall be permitted at any time that a Default or Event of
Default exists. Each such conversion shall be effected by Borrower giving 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 and whether such Loans are
Acquisition Loans or Working Capital Loans.

      Section 4. FEES.

      4.1 Facility Fee. Borrower agrees to pay to Agent, for the ratable account
of each Lender (based upon the percentage that each Lender's Loan Commitment
represents of the Total Loan Commitment) an annual facility fee (each such fee,
a "Facility Fee") in the amount of $250,000, which fee shall be fully earned by
Lenders and payable thereto on the Effective Date and on each anniversary
thereof.

      4.2 Commitment Commission. Borrower agrees to pay to Agent for the account
of each Lender a commitment commission with respect to each Lender's Loan
Commitment for the period commencing on the Effective Date, to and including the
Maturity Date, computed at a rate per annum (calculated on the basis of a
360-day year and the actual number of days elapsed) equal to .20% of the average
daily Unutilized Loan Commitment of such Lender during the period for which
payment is made. Such commission (each a "Commitment Commission") shall be due
and payable quarterly in arrears on the fourth to last Business Day of the
months of March, June, September and December, commencing with December 28, 2004
(such date to include the full period from the Effective Date until said date).

      4.3 Utilization Fee. Borrower agrees to pay to Agent, for the ratable
account of each Lender (based upon the percentage that each Lender's Loan
Commitment represents of the Total Loan Commitment) a utilization fee equal to
1% of the amount of each Acquisition Loan made and each Letter of Credit
(Acquisition) issued, such fee to be due and payable on each date on which a
Loan is made or a Letter of Credit (Acquisition) is issued (each such fee, a
"Utilization Fee"); provided, however, in no event shall the aggregate amount of
Utilization Fees payable during the term of this Agreement exceed $600,000. The
Existing Term Loans shall not be subject to the Utilization Fee.

      4.4 Upfront Fee. Borrower agrees to pay to Agent, for the ratable account
of each Lender (based upon the percentage that each Lender's Loan Commitment
represents of the Total Loan Commitment) an upfront fee (the "Upfront Fee") in
the amount of $460,000, which fee shall be due and payable in full on the
Effective Date.

                                       17


      Section 5. PAYMENTS, ETC.

      5.1 Currency of Payments. All payments of principal and interest on Loans
and under the Notes shall be made to Agent in immediately available funds in the
currency of the applicable Loan for which payment is being made.

      5.2 Payments on Non-Business Days; Calculations. Whenever any payment to
be made hereunder or under the Notes 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 Eurocurrency 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. Borrower hereby authorizes and directs Agent and each Lender
to charge any account of Borrower maintained at any office of 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 Agent nor any Lender shall be under any obligation to charge any such
account.

      5.3 Payment Date and Distribution of Funds.

            (a) Until such time as Agent has exercised control over the Cash
Flow Cash Collateral Account and the Cash Collateral Account-Servicing in
accordance with the Loan Documents, all funds in such accounts shall be
distributed by Borrower on the fourth to last Business Day of each month (each,
a "Payment Date") pursuant to the distribution statement approved in writing by
Agent (or at any other times as may be agreed upon from time to time by
Borrower, Agent and Lenders) to be paid and applied as follows:

            (i) First, to the payment to Agent, for the account of Lenders, of
      all interest on the Loans which is then due and payable;

            (ii) Second, to the payment to Agent, for the account of Lenders, of
      any Commitment Commission and any Letter of Credit Fee payable pursuant to
      Section 2A.3(a);

            (iii) Third, to the payment to Agent, for the account of Lenders, as
      a principal payment, any mandatory prepayment which is then due and
      payable pursuant to Section 2.4(a) and 2.4(b);

            (iv) Fourth, to the payment to Agent, for the account of Lenders, an
      amount equal to all of any fees, late charges and other fees and expenses
      which are then due and payable to Agent and/or Lenders under this
      Agreement or any of the other Loan Documents or which will become so due
      and payable on or before the last day of the calendar month in which the
      Payment Date in question occurs;

            (v) Fifth, to the payment to Agent, for the account of Lenders, as a
      principal payment, an amount equal to the amount (if any) of any voluntary
      prepayment which

                                       18


      Borrower elects to pay pursuant to Section 2.5 and any Commitment
      Commission payable pursuant to Section 2.6(c);

            (vi) Sixth, to the payment to Borrower of any remaining balance of
      the funds in the Cash Flow Cash Collateral Account and the Cash Collateral
      Account-Servicing.

            (b) Upon the exercise by Agent of its right to control the Cash Flow
Cash Collateral Account and the Cash Collateral Account-Servicing in accordance
with the Loan Documents, all funds in the Cash Flow Cash Collateral Account and
the Cash Collateral Account-Servicing may be applied by Agent to Obligations in
the following order of priority: (i) to any amounts not otherwise listed in this
Section 5.2 then due and payable by 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, (iii) to any interest on the Notes (pro rata according to
the aggregate amount of interest then due and payable on the Notes) then due and
payable, (iv) to any principal amount then due under the Notes and (v) to any
amounts not then due under the Notes, unless otherwise provided herein.

      5.4 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 Borrower to Agent, except as otherwise provided in Section 5.1 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 5.4 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
Borrower, Borrower shall promptly (and in no event later than 30 days
thereafter) furnish to 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 Borrower, as soon as
practicable after any written request of Borrower to such effect, any executed
form reasonably requested by 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 Borrower or under the Notes of Borrower
and each such Lender undertakes to use its best efforts promptly to notify
Borrower of any material change in any information, statement or form so
furnished to Borrower; provided, however, that any failure on the part of any
Lender to furnish any such

                                       19


information, statements or forms shall in no way affect the obligations of
Borrower or the rights of any Lender under the terms of this Agreement or of the
Notes.

      5.5 Distribution by Agent. All payments received by Agent on behalf of
Lenders on account of principal and interest under this Agreement or the Notes
or on account of any fees payable for the account of Lenders shall be promptly
distributed by Agent to Lenders (in the type of funds received by Agent) as
follows: (i) if in respect of principal of any Loans made to Borrower then on a
pro rata basis to each of Lenders holding the Loans in respect of which such
payment is being made; (ii) if in respect of interest on the 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; (iii) if in respect of fees, then to Lenders in
accordance with their entitlement thereto (based on each Lender's share of the
Total Loan Commitment, in the case of the Facility Fee, the Upfront Fee and the
Commitment Commission, and based on each Lender's share of the applicable
Acquisition Loans or Letter of Credit (Acquisition) described in Section 4.3, in
the case of the Utilization Fee); and (iv) if in respect of a payment under
Section 3 other than an interest payment 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 Agent (or waived by Agent). If the Effective Date shall not
have occurred by the close of business (New York time) on November 12, 2004 (or
such later date as is agreed to by 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. Agent shall have received for each of Lenders the Notes, each
duly executed and completed by Borrower.

      6.3 Supporting Documents of Borrower. There shall have been delivered to
Agent (with sufficient copies for each of 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 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.

      6.4 Officer's Certificate. There shall have been delivered to Agent (with
sufficient copies for each of Lenders) a certificate of an Executive Officer of
Borrower certifying, as of the Effective Date, compliance with the conditions of
Section 6.1 and also the absence of any Material Adverse Changes of the type
referred to in Section 6.8.

                                       20


      6.5 Certifications; Financial Statements. Borrower shall have delivered to
Agent such financial statements and certifications of financial statements as
Agent may have requested, which statements shall include, in any event, month
end financial statements of the type required by Section 7.1(a) and certified by
the CFO as of the most recent month ending 30 days prior to the Effective Date,
the annual financial statements required by Section 7.1(b) and 7.1(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 7.1(d).

      6.6 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 any Loan Party shall have been obtained (and, if so requested,
furnished to Agent, with sufficient copies for Lenders).

      6.7 Legal Opinions. Agent shall have received legal opinions (in
sufficient counterparts for each of Lenders) dated the Effective Date from
Haynes and Boone, LLP, counsel to Borrower and each other Loan Party, in form
and substance satisfactory to Agent.

      6.8 Adverse Change. There shall have been, in Agent's opinion, no Material
Adverse Change since June 30, 2004. Neither Agent nor any Loan Party shall have
become aware of any previously undisclosed information with respect to any Loan
Party which, in Agent's opinion, would have a Material Adverse Effect

      6.9 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.

      6.10 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 Agent, and Agent and each Lender shall
have received all such information and copies of all documents which 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.

      6.11 Fees and Expenses. The fees referred to in Section 4.1 and Section
4.4, the legal fees and expenses of 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.

                                       21


      Section 6A. CONDITIONS PRECEDENT TO ALL LOANS.

      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 prior Loan shall have been corrected to
the satisfaction of Agent, (b) all of the conditions specified in Sections 6.1,
6.6, 6.8, 6.9 and 6.10 (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 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.

      6A.2 Subsequent Opinions of Counsel. If reasonably requested by Agent or
Majority Lenders, Agent shall have received from any or all of the counsel
referred to in 6.7 (or other counsel satisfactory to Agent) such favorable
supplemental legal opinions addressed to Agent and Lenders and dated the date of
such Loan and covering such matters incidental to the transactions contemplated
by this Agreement as Agent or the Majority Lenders shall reasonably request,
each of which opinions shall be in form and substance satisfactory to Agent and
Lender requesting same.

      6A.3 Officer's Certificate.

            (a) If requested by Agent, Agent shall have received a certificate
of an Executive Officer of 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 date such Loans is
being made) 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 Borrower to 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 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.

                                       22


      6A.4 Fees and Expenses. To the extent demand therefor shall have been
made, all legal fees and expenses of 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 ACQUISITION LOANS

      Lenders shall not be obligated to make any Acquisition Loans unless, at
the time of making of such Loans, the following conditions (unless waived in
writing by the Majority Lenders), in addition to the conditions set forth in
Section 6A (unless waived in writing by the Majority Lenders), have been
satisfied:

      6B.1 Eligible Portfolio Entity. (i) The Portfolio Entity (the "Subject
Portfolio Entity") identified in the related Asset Pool Acquisition Certificate
as the entity which will acquire the Asset Pool specified therein with a loan
from Borrower or a loan and/or contribution to its capital, directly or
indirectly, from a Primary Obligor (together with any 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 Portfolio 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 Loans are being requested in respect of an Asset Pool other than the
first Asset Pool acquired by such Subject Portfolio 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 Agent; (iii) such Charter Documents and Shareholder Agreement shall be the
sole agreements with respect to equity ownership arrangements with respect to
such Subject Portfolio Entity and such Charter Documents and Shareholder
Agreement shall evidence Permitted Shareholder Arrangements with respect to such
Subject Portfolio Entity; and (iv) all action contemplated by Section 7.15 and
Section 6B.11 in connection with such Subject Portfolio Entity, including,
without limitation, the amendment of Section 2 to the Subsidiary Collateral
Assignment or Subsidiary Pledge Agreement (as applicable) to specify such
Subject Portfolio Entity, and the delivery of any promissory notes, stock
certificates or other certificates or instruments issued by such Subject
Portfolio Entity and of an acknowledgement of lien by such Subject Portfolio
Entity, all in form and substance satisfactory to Agent, shall have been taken
and completed.

      6B.2 Capital Structure.

            (a) No Third Party Investor shall have greater rights with respect
to such Subject Portfolio Entity than Borrower or any Affiliate thereof (except
to the extent that, if such Third Party Investor has acquired more Equity
Interests in such Subject Portfolio Entity than Borrower or such Affiliate
thereof (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).

            (b) No Third Party Investor shall have acquired equity interests or
voting rights in such Subject Portfolio Entity on a basis more favorable to such
Person than the

                                       23


arrangements pursuant to which Borrower or relevant Primary Obligor directly or
indirectly acquired its equity interests in such Subject Portfolio 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
Borrower or such Primary Obligor) and no Third Party Investor acquiring any
Equity Interests in such Subject Portfolio 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
Agent evidence satisfactory to 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
Portfolio 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 Loan were
loaned or contributed by Borrower to the Subject Portfolio Entity or a Primary
Obligor which directly or indirectly loaned or contributed such funds to the
Subject Portfolio 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 Portfolio Entity were contributed, and the
proceeds of all Indebtedness incurred by such Subject Portfolio Entity were
received by such Subject Portfolio Entity, at the same time as or before such
Primary Obligor's contribution or loan, and that such Subject Portfolio Entity
used all such loans or capital contributions together with 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 Agent not less than 5 Business Days prior to the Borrowing Date of
such Loans; provided that additional written revisions to the applicable Asset
Pool Acquisition Certificate may be delivered to 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 Eurocurrency 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
in the Final Asset Pool Acquisition Certificate delivered on or prior to the
fifth Business Day preceding such Borrowing Date.

            (b) A Notice of Borrowing, Borrowing Base Certificate and Final NPV
Pool Certificate in respect of the related Asset Pool shall have been delivered
to Agent, each in accordance with Section 2.2.

            (c) Agent shall have been provided with such other information as to
the Asset Pool as it shall have reasonably requested.

      6B.5 Asset Pool. The Asset Pool shall be an Eligible Asset Pool.

      6B.6 Officer's Certificate.

                                       24


            (a) Borrower shall have delivered to Agent a certificate of an
Executive Officer certifying compliance with Sections 6B.1, 6B.2, 6B.3, 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 such Loan
shall constitute a representation and warranty by Borrower to Agent that, at the
time of said Loan (and after giving effect thereto) all conditions specified
Sections 6B.1, 6B.2, 6B.3, 6B.5 and 6B.10 are satisfied at such time.

      6B.7 Opinion of Counsel. If requested by Agent, in the case of a Subject
Portfolio Entity which is a US Person, Haynes and Boone LLP or other counsel to
Borrower satisfactory to Agent and, in the case of any other Subject Portfolio
Entity, counsel satisfactory to Agent, shall have delivered to Agent an opinion
of counsel as to matters relating to the Subject Portfolio Entity or such other
matters as Agent may reasonably request.

      6B.8 Utilization Fee. The Utilization Fee in respect of such Loans shall
have been paid in full to Agent.

      6B.9 Leverage Arrangements. Not less than five Business Days prior to the
proposed Borrowing Date for such Loans (or such lesser period of time (if any)
to which Agent consents in writing) Borrower shall have delivered to 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 Portfolio
Entity as Approved Portfolio Leverage Arrangements, or a certificate from an
Executive Officer that such Subject Portfolio 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 Loans are
requested.

      6B.10 Adverse Waterfall Event. No Adverse Waterfall Event shall have
occurred at any time during the preceding six months with respect to any Asset
Pool owned by the Subject Portfolio Entity.

      6B.11 Pledged Shares and Notes.

            (a) Each Primary Obligor shall have executed and delivered to
Borrower a revolving credit note payable to order of Borrower in a principal
amount equal to the Total Commitment, or if less the aggregate amount of Loans
which may from time to time be advanced by Borrower to such Primary Obligor, and
Borrower shall have delivered such notes to Agent in accordance with Section
7.15(b)

            (b) In the event the proceeds of such Loans will be loaned by
Borrower to the Subject Portfolio Entity, no later than 90 days following the
related Funding Date, the Subject Portfolio Entity shall have executed and
delivered to Borrower a note payable to order of Borrower in principal amount
equal to the amount of the Loans, and Borrower shall have delivered such note to
Agent in accordance with Section 7.15(b). In the event the proceeds of such
Loans shall be advanced by Borrower to a Primary Obligor and loaned directly or
indirectly by such Primary Obligor to the Subject Portfolio Entity, no later
than 90 days following the related Funding Date, such Subject Portfolio Entity
shall have executed and delivered, directly or

                                       25


indirectly, to such Primary Obligor, a promissory note payable to the order of
such Primary Obligor in a principal amount equal to the amount of such Loans,
and such Primary Obligor shall have delivered such note to Agent in accordance
with Section 7.15(b). In the event the proceeds of such Loans shall be advanced
by Borrower to a Primary Obligor and directly or indirectly contributed by such
Primary Obligor to the capital of the Subject Portfolio Entity, no later than 90
days following the related Funding Date, such Subject Portfolio Entity shall
have issued and delivered to such Primary Obligor, directly or indirectly,
shares of its stock, partnership interests, membership interests or similar
equity interests evidencing such capital contribution, and such Primary Obligor
shall have delivered such shares of stock, partnership interests, membership
interests or similar equity interests to Agent to the extent required pursuant
to Section 7.15(a).

      6B.12 Minimum Portfolio Leverage. After giving effect to such Loans, the
sum of the Net Present Equity Values of all Portfolio Entities which have an FC
Percentage of 100% and which do not have an Approved Portfolio Leverage
Arrangement shall not be greater than 50% of the Aggregate Net Present Equity
Value.

      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
Agent and shall be delivered (with sufficient copies for each of Lenders) to
Agent at its Closing Office or as Agent may otherwise direct.

      Section 6C. ADDITIONAL CONDITIONS

      Notwithstanding any provision herein to the contrary no Lender shall be
obligated to make any Loans on or after the Effective Date unless the following
conditions (unless waived in writing by the Majority Lenders) have been
satisfied:

      6C.1. Checklist Documents. The documentation set forth on the Closing
Checklist (Schedule 6C.1), including, without limitation, the Guaranties, Pledge
Agreements and Security Agreements listed thereon, satisfactory to Agent in form
and substance, shall have been delivered to Agent, and such other actions
referred to on such Schedule and in such documentation shall have been taken.

      6C.2. Legal Opinions. Agent shall have received a legal opinion (in
sufficient counterparts for each of Lenders) from Haynes and Boone, LLP, counsel
to Borrower and each other Loan Party, in form and substance satisfactory to
Agent.

      6C.3. Intercompany Security Agreements. Each Primary Obligor shall have
delivered (i) intercompany security agreements in form and substance
satisfactory to 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 (ii) if requested by Agent, legal opinions,
as Agent may reasonably request.

      6C.4. Schedules. All schedules to this Loan Agreement not attached hereto
on the Effective Date shall have been complete in a manner satisfactory to
Agent.

      6C.5. UCC Statements. Lien search results confirming the absence of any
perfected Liens prior to Lenders' and of any other Liens other than Liens
permitted hereunder shall have

                                       26


been delivered to Agent and all actions with respect to the Liens created by the
Security Documents as are necessary or appropriate to perfect such Liens shall
have been taken.

      Section 7. AFFIRMATIVE COVENANTS.

      Borrower warrants and represents to and covenants to the Lenders and 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 (including Deemed Disbursements and Reimbursement Obligations and
fees and disbursements in connection therewith) are paid in full, Borrower will
(unless it shall have first procured the written consent of the Majority Lenders
to do otherwise) (i) perform the obligations set forth in this Section 7, (ii)
cause each Primary Obligor, Wholly-Owned Subsidiary and other Loan Party to
perform the obligations set forth in this Section 7 which are applicable to such
Person and (iii) exercise commercially reasonable efforts to cause each Material
Portfolio Entity to perform the obligations set forth in this Section 7 which
are applicable to such Person.

      7.1 Financial Statements. Borrower will furnish to 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 CFO of 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 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 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 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 CFO of Borrower;

            (d) Concurrently with the delivery of the financial statements
described in subsection (b) above, 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, Borrower is in compliance with the covenants set forth in Section
8.18 hereof, or, if Borrower is not in compliance, the nature of the
noncompliance therewith;

                                       27


            (e) 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;

            (f) Concurrently with delivery of the financial statements required
pursuant to Section 7.1(a) and (b) hereof, a certificate executed by the
President, Treasurer or CFO of Borrower that (A) no Event of Default or Default
has occurred and is continuing under this Agreement, (B) Borrower is in
compliance with the covenants set forth in Section 8.18 hereof, setting forth
Borrower's calculations with respect to such compliance; and (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;

            (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 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;

                                       28


            (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 Agent made from time to time, 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
and, to the extent reasonably available, any other Related Entity as Agent or
any Lender may from time to time in writing reasonably request provided, that
Borrower shall not be required to furnish to Agent or any Lender any such
information relating to a 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 Agent within five days of
formation of such Person (any such restriction, a "Disclosure Restriction").

      7.2 Other Required Notices.

            (a) Borrower shall notify Agent promptly after obtaining knowledge
      of:

            (i) except as otherwise previously disclosed, any event or
      occurrence which Borrower has determined could have a Material Adverse
      Effect as a result of a loss or decline in value of the Assets of
      Borrower, any Primary Obligor, any Portfolio Entity or any Related Entity
      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
      Portfolio Entity or any Related Entity is reasonably likely to or could
      reasonably be expected to result in a Material Adverse Effect, and (y) any
      other suit or administrative proceeding against Borrower, any Primary
      Obligor or any Portfolio Entity 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 Material Portfolio Entity
      becoming subject to any Charge, restriction, judgment, decree or order
      which could reasonably be expected to materially adversely affect the
      operations, financial conditions or business of such Person, or any other
      Portfolio Entity or any Related Entity becoming subject to any Charge,
      restriction, judgment, decree or order if the same could reasonably be
      expected to

                                       29


      materially adversely affect the operations, financial conditions or
      business of Borrower, any Primary Obligor, or any Material Portfolio
      Entity;

            (iv) the commencement of any lockout, strike or walkout relating to
      any labor contract to which Borrower, any Primary Obligor, any Portfolio
      Entity or any Related Entity is a party, if the same could reasonably be
      expected to have a Material Adverse Effect;

            (v) except as otherwise previously disclosed, any event or
      occurrence in respect of Borrower, any Primary Obligor, any Portfolio
      Entity or any Related Entity which could reasonably be expected to have a
      Material Adverse Effect;

            (vi) (x) the occurrence of a default by Borrower, any Primary
      Obligor, any Portfolio Entity, any Related Entity or any other Loan Party
      under any agreement, document or instrument to which such Person is a
      party which could reasonably be expected to have a Material Adverse
      Effect, or (y) the occurrence of any default by Borrower, any Primary
      Obligor or any other Loan Party 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, any Portfolio Entity, any Related Entity or any other Loan Party
      under any section or chapter of the United States Bankruptcy Code or any
      similar law or regulation or if 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, any Material Portfolio Entity, any Related Entity or any
      other Loan Party, other than a Non-Default Voluntary Custodial
      Arrangement;

            (ix) the exercise by any holder of any option, warrant or right to
      purchase any Equity Interest in Borrower, any Primary Obligor or any
      Material Portfolio Entity;

            (x) the issuance or sale of any Securities by Borrower, any Primary
      Obligor or any Portfolio Entity, whether or not permitted pursuant to the
      terms hereof; and

            (xi) the occurrence of the REO Post - 25% Time.

            (b) On the 25th day of each month or, if sooner, on the fourth to
last Business Day of each month, Borrower shall deliver to Agent (i) Waterfall
Certificates in respect of each Asset Pool and Portfolio Entity, certified by an
Executive Officer of Borrower; and (ii) a Summary Waterfall Certificate in
respect of all Asset Pools; and (iii) a report in the form attached hereto as
Exhibit B setting forth the computation of the Aggregate Undistributed Funds of
all Portfolio Entities.

            (c) Borrower shall notify Agent of the occurrence of any
Extraordinary Transaction no later than 10 days prior to the occurrence of such
event.

                                       30


            (d) (i) Borrower shall give Agent notice that a Portfolio Entity has
      become a Material Portfolio Entity (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 Material Portfolio
      Entity.

            (i) Borrower shall give Agent notice that an Immaterial Entity has
      ceased to constitute an Immaterial Entity (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 an Immaterial Entity
      and shall promptly deliver to Lender a revised Schedule 10.37 to reflect
      such change.

            (ii) Borrower shall give Agent notice of the dissolution or full
      liquidation of, or the suspension or discontinuation of business by, any
      Portfolio Entity, not less than 30 days prior to such dissolution,
      liquidation, suspension or discontinuation.

            (e) Borrower shall give Agent notice within 45 days after it or any
Primary Obligor, Material Portfolio Entity, Wholly-Owned Subsidiary or other
Loan Party acquires Equity Interests in any Person or forms a Subsidiary and, if
requested in writing by Agent, forthwith upon receipt of such request, shall
deliver to Agent an addendum to Schedule 10.22 reflecting the same and, if such
acquisition or formation is of an REO Affiliate, a new Schedule 10.40 reflecting
the same.

            (f) On or before the fourth to last Business Day of each month,
Borrower shall deliver to Agent a Portfolio Protection Expense Report in form
and detail satisfactory to Agent showing as of the close of business on the last
Business Day of the preceding calendar month the aggregate amount retained by
Portfolio Entities as Portfolio Protection Expenses to pay Portfolio Protection
Expenses not theretofore paid, 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. Borrower shall provide to the Agent such other
information with respect thereto as Agent may reasonably request.

            (g) On or before the fourth to last Business Day of each month,
Borrower shall deliver to Agent a Borrowing Base Certificate.

            (h) Borrower shall give Agent notice of the transfer of any property
by a Portfolio Entity to one of its REO Affiliates within 30 days of any such
transfer and such other information as Agent may request with respect thereto
promptly following such request.

            (i) Borrower shall give Agent notice of the occurrence of an Adverse
Waterfall Event within thirty days of such occurrence.

            (j) Borrower shall give Agent notice if the amount of Aggregate
Undistributed Funds at any time exceeds $5,000,000.

            (k) If Borrower at any time has knowledge of any servicer default,
servicing termination event, amortization event or similar event or condition
occurring or existing under any agreement relating to the securitization of
Assets of any Primary Obligor or other Loan Party

                                       31


or securitization entity established by any Primary Obligor or other Loan Party,
Borrower shall immediately notify Agent thereof.

      7.3 Payment of Charges.

            (a) Other than Charges payable by First X or First B, Borrower, each
Primary Obligor, each Material Portfolio Entity, and each Wholly-Owned
Subsidiary other than any REO Affiliate shall pay promptly when due and
discharge all Charges. In the event Borrower, any Primary Obligor, any Material
Portfolio Entity or any Wholly-Owned Subsidiary other than 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 Material Portfolio Entity or any Wholly-Owned Subsidiary may permit or
suffer the Charges to attach to its Assets on the conditions that: (i) Borrower
or the applicable Primary Obligor, Material Portfolio Entity 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 any applicable Material Portfolio Entity 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,
Material Portfolio Entity or Wholly-Owned Subsidiary in accordance with GAAP.

      7.4 Insurance. Borrower, each Primary Obligor, each Portfolio Entity
(other than any Foreign Portfolio Entity), each REO 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 reasonably requested in writing by Agent; and (ii) public
liability insurance relating to such Person's ownership and use of its Assets;
provided, however, no such Person shall be required to maintain the insurance
referred to in clause (i) as to any Asset if the Net Present Value of the Asset
is less than $50,000. 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 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 (excluding any losses payable to the lenders under any Approved
Portfolio Leverage Arrangement). 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 (excluding any losses payable to the lenders under any
Approved Portfolio Leverage Arrangement). Upon request by Agent and, whether or
not such request is made, upon the

                                       32


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 (excluding any losses
payable to the lenders under any Approved Portfolio Leverage Arrangement). 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, any Portfolio Entity, any
REO Affiliate or any 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 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. Borrower, each Primary Obligor, each
Material Portfolio Entity, and each Subsidiary of Borrower other than an
Immaterial Entity, 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 thereof continue to be advantageous to it and shall comply in all
material respects with all applicable Legal Requirements. Without limiting the
generality of the foregoing, 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. 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.

                                       33


      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 and its Subsidiaries (and shall use commercially reasonable efforts to
cause each other Portfolio Entity 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 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 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
Agent and Lenders, it shall use its commercially reasonable efforts to obtain
waivers thereof promptly 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 and its
Subsidiaries (and shall use its commercially reasonable efforts to cause each
other Portfolio Entity 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 Agent or Lenders.

      7.9 Payment of Indebtedness. Each of Borrower, each Primary Obligor, each
Material Portfolio Entity 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, nor any Primary Obligor, any
Wholly-Owned Subsidiary or any Material 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 Material 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 Material Portfolio Entity is not
jeopardized. The provisions of this Section 7.9 do not relate to Indebtedness of
FC Capital or other Wholly-Owned Subsidiaries which are REO Affiliates.

      7.10 Further Assurances. Each of Borrower, each Primary Obligor, each
Wholly-Owned 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

                                       34


action, as 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 Agent on behalf of
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 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 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, will set up on
its books of 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
commercially reasonable efforts to cause each other Material Portfolio Entity to
do the same. The provisions of this Section 7.12 shall not apply to any
Wholly-Owned Subsidiary which is an REO Affiliate, or any Immaterial Entity.

      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 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 Primary Obligor,
other Subsidiary or any other Loan Party, it shall be deemed to be a covenant of
Borrower to cause such Person to comply with or otherwise perform such
representation, warranty or covenant, whether or not Borrower has the legal,
corporate or other ability to cause such compliance or performance. 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 Person other than a
Primary Obligor, other Subsidiary or any other Loan Party it shall be deemed to
be a covenant of Borrower to exercise commercially reasonable efforts 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

                                       35


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 other Loan Party shall duly
and punctually pay and perform each of its obligations under the Loan Documents
to which it is a party, 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 or any Wholly-Owned Subsidiary acquires an Equity Interest in
any Person other than Asset Servicing De Mexico, S.A. de C.V. and Servicios
Efectivos De Recuperacion, S.A. De C.V., or, in the case of a Wholly-Owned
Subsidiary, an REO Affiliate of such Wholly-Owned Subsidiary, such new Equity
Interest is subject to a perfected security interest of the Requisite Priority
in favor of Agent and Lenders and, in connection therewith, shall take such
action and execute and deliver such pledge agreements or amendments to pledge
agreements 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 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,
any Primary Obligor, any Wholly-Owned Subsidiary or any other Loan Party.
Notwithstanding the foregoing, no Primary Obligor, Wholly-Owned Subsidiary or
other Loan Party shall be required to pledge to 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, any
Primary Obligor or any Wholly-Owned Subsidiary other than a Portfolio Entity or
an REO Affiliate 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 Borrower, such
Primary Obligor or suchWholly-Owned Subsidiary 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 Agent and Lenders and, in
connection therewith, shall take such action and execute and deliver such pledge
agreements or amendments to pledge agreements 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 to Collateral Agent, together with an
assignment separate from such Subject Debt Instrument or an 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, and Wholly-

                                       36


Owned Subsidiaries. If requested by Agent in writing, Borrower shall prepare a
Schedule 10.20A setting forth the maker and holder of such Subject Debt
Instrument, the principal amount thereof and the payment terms thereof.

      7.16 Cooperation. At 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 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, 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 Lenders agree to cooperate with Borrower in
obtaining or filing the same.

      7.18 Payment of Dividends from Primary Obligors and Subsidiaries. In
furtherance and not in limitation of other provisions hereof (including Section
8.24) 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 Wholly-Owned Subsidiary of 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.

      7.19 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.

      7.20 Compliance with Laws. Borrower shall comply with, and shall cause
each Primary Obligor, each other Subsidiary and each other Loan Party to comply
with, and shall exercise commercially reasonable efforts to cause each Portfolio
Entity 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.

      7.21 Payment of Extraordinary Proceeds. If any Extraordinary Transaction
otherwise permitted hereunder would cause Total Outstandings to exceed the
Borrowing Base, Borrower shall pay the amount of such excess to Agent by wire
transfer of immediately available funds on the date of the closing of the
applicable transaction, to be applied by Agent upon receipt toward the
prepayment obligation under Section 2.4(b).

                                       37


      Section 8. NEGATIVE COVENANTS.

      Borrower warrants and represents to and covenants to Lenders and 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, Subsidiary, and other Loan Party to, and will use commercially
reasonable efforts to cause each Portfolio Entity-50% and other Material
Portfolio Entity 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 Subsidiary or any Portfolio Entity-50%
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 Subsidiary
or any Portfolio Entity-50% 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
Borrower, any Portfolio Entity-50% or any other Subsidiary (as the case may be)
on the Execution Date. Without limiting the foregoing, no Subsidiary which is a
Portfolio Entity and no Portfolio Entity-50% 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 8.26.

            (b) None of Borrower, any Subsidiary or any Portfolio Entity-50%
shall enter into any Shareholder Agreement after the Execution Date other than a
Permitted Shareholder Agreement.

      8.2 Liens. None of Borrower, any Subsidiary (other than an REO Affiliate)
or any Portfolio Entity-50%, 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 Affiliate, Liens in favor of its
REO Owner and non-consensual Charges.

      8.3 Other Indebtedness. None of Borrower, any Subsidiary or any Portfolio
Entity-50% will contract, create, incur, assume or suffer to exist any
Indebtedness, except:

            (i) the Loans and the obligations of Borrower in respect of the LC
      Obligations;

            (ii) other Indebtedness existing on the Effective Date listed on
      Schedule 10.19 to this Agreement;

                                       38


            (iii) Indebtedness of any Portfolio Entity incurred under Approved
      Portfolio Leverage Arrangements;

            (iv) Indebtedness of any Portfolio Entity to which no proceeds of
      any Loans were, directly or indirectly, advanced or contributed;

            (v) Indebtedness of FC Holdings under the FC Holdings Line of
      Credit;

            (vi) unsecured trade payables incurred in the ordinary course of
      business;

            (vii) 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;

            (viii) Indebtedness to the extent permitted by Section
      8.12(a)(i)-(iii);

            (ix) Indebtedness of Portfolio Entities in respect of loans
      permitted to be made by FC Servicing and ASDM pursuant to Section
      8.12(a)(iv);

            (x) Up to $5,000,000 in aggregate principal Indebtedness incurred by
      FCS Creamer, Ltd., FCS Wood Ltd. and FCS Wildhorse Ltd. or other REO
      Affiliates to finance developmental expenses of real property owned by
      such entities;

            (xi) Indebtedness of any Subsidiary or Portfolio Entity-50% payable
      to Borrower or a Wholly-Owned Subsidiary; and

            (xii) Guaranty Equivalents to the extent permitted under Section
      8.12(b).

      8.4 Sell Assets. None of Borrower, any Subsidiary or any Portfolio
Entity-50% shall assign, sell or transfer any of its Assets to any Person, other
than in the ordinary course of business and for fair and adequate consideration
(and, in the case of Assets constituting Equity Interests, only to the extent
permitted by Section 8.8(a)); 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 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 Subsidiary or any Portfolio
Entity-50% 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, if the same would have a Material Adverse
Effect.

      8.6 Receiver. None of Borrower, any Subsidiary or any Portfolio Entity-50%
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

                                       39


or custodian, other than a custodian pursuant to a Non-Default Voluntary
Custodial Arrangement, if the same would have a Material Adverse Effect.

      8.7 Mergers and Acquisitions. None of Borrower, any Primary Obligor or any
Material Portfolio Entity shall wind up, liquidate or dissolve its affairs or
merge or consolidate with any Person other than Borrower or a Primary Obligor
(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 Subsidiary or any Portfolio Entity-50% shall (i) except for
options, warrants or other rights to purchase Equity Interests in 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
Borrower issued upon exercise thereof, (x) grant any option, warrant or other
right to purchase any Equity Interest in Borrower, any Subsidiary or any
Portfolio Entity-50% or (y) issue any other Equity Interests other than (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 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 any 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; and (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.

            8.9 Adverse Transactions. None of Borrower, any Subsidiary or any
Portfolio Entity-50% 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 Execution Date, neither Borrower, any Subsidiary
or any Portfolio Entity-50% shall make any investment in Equity Interests of any
Person, except for (i) in connection with the acquisition by a Portfolio Entity
of an Asset Pool in accordance with the other terms hereof on the Funding Date
of the Acquisition 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 not otherwise prohibited
hereunder), (ii) direct or indirect contributions by Primary Obligors to capital
of Portfolio Entities to be used by such entities (a) to pay development
expenses related to real estate or (b) to pay Portfolio Protection Expenses, and
(iii) investments by any such Person (other than by a Portfolio Entity) in the
ordinary course of business.

                                       40


            (b) As used in Sections 8.10(a),(c) and (d) "invest" shall include,
but not be limited to contributions to the capital of a Person.

            (c) In furtherance and not in limitation of the other restrictions
herein and in the other Loan Documents under no circumstances shall Borrower,
any Subsidiary or any Portfolio Entity-50% 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 Subsidiary
or any Portfolio Entity-50% 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 10.37 or any other
Immaterial Entity at any time during the term hereof.

      8.11 Dividends. Borrower will not and will not permit any Subsidiary or
any Portfolio Entity-50% 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 Borrower, any Subsidiary or any Portfolio Entity-50% or set aside
funds for any of the foregoing and Borrower will not permit any Subsidiary or
any Portfolio Entity-50% to purchase any Equity Interests of Borrower, 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 or Portfolio Entity-50% may declare or pay
Dividends to Borrower or any Wholly-Owned Subsidiary and (ii) any Subsidiary or
Portfolio Entity-50% 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 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).

      8.12 Loan; Guaranty Debt.

            (a) Except as set forth on Schedule 8.12(a), none of Borrower, any
Subsidiary or any Portfolio Entity-50% shall make any loan to any Person, or
otherwise invest in or acquire any note, bond, other debt instruments or
obligations of or issued by any Person except (subject to compliance with
Section 7.15) (i) for loans made by Borrower to any Primary Obligors which are
evidenced by a Pledged Note; (ii) for loans made by Borrower, any Subsidiary or
any Portfolio Entity-50% to any Portfolio Entity in the ordinary course of
business, which loans are evidenced by a Pledged Note in the case of a loan by
the Borrower or any Subsidiary or a note in the case of a loan by a Portfolio
Entity-50%, or an inter-company receivable; (iii) the accepting by a Subsidiary
or a Portfolio Entity-50% 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 Subsidiary or Portfolio Entity-50% or a portion of the purchase price for
the real property in the event that the REO Affiliate acquires the real property
at a foreclosure sale or otherwise by

                                       41


purchase from the Subsidiary or Portfolio Entity-50%; (iv) the accepting by an
REO Affiliate, a Latin American Acquisition Entity or a European Acquisition
Entity of a note from the transferee of real property sold by such REO
Affiliate, Latin American Acquisition Entity or European Acquisition Entity (as
the case may be) in the ordinary course of business evidencing a portion of the
deferred purchase price of such property; (v) in the case of FC Servicing and
ASDM, short term servicer advances in the ordinary course of business with
respect to portfolios which they are servicing in aggregate principal amount at
any one time outstanding not in excess of $5,000,000, on a combined basis; (vi)
for loans made by a Primary Obligor or other Wholly-Owned Subsidiary to Sergio
Madrazo, MICSA Gestion Inmobiliaria , S.A., or Jean de Mailly Nesle for the
purpose of allowing such Persons or an affiliate of such Person to invest with a
Wholly-Owned Subsidiary in an entity that will make an investment directly or
indirectly in a Portfolio Entity to be secured by the ownership interest of such
Person in the joint investment entity, which loans are evidenced by a Pledged
Note and shall not exceed $4,500,000.00; (vii) direct of indirect loans by
Primary Obligors to a Portfolio Entity for the acquisition of an Asset Pool in
accordance with the other terms hereof on the Funding Date of the Acquisition
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 not otherwise prohibited hereunder); (viii) direct or
indirect loans by Primary Obligors to Portfolio Entities to be used by such
entities (a) to pay development expenses related to real estate or (b) to pay
Portfolio Protection Expenses.

            (b) Except as set forth on Schedule 8.12(b), none of Borrower, any
Subsidiary or any Portfolio Entity-50% shall enter into or issue any Guaranty
Equivalents; provided that any Primary Obligor shall be permitted to guaranty
Indebtedness of any other Primary Obligor, any Related Entity or any Portfolio
Entity provided that the outstanding balance of Indebtedness guaranteed pursuant
to such guaranties does not exceed $10,000,000.

      8.13 Issue Power of Attorney. Except pursuant to the other provisions of
this Agreement or the Security Documents to which Agent is a party, none of
Borrower, any Subsidiary or any Portfolio Entity-50% 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, any
Primary Obligor, any Portfolio Entity, FirstCity do Brazil, Ltda., FirstCity
Argentina Corporation, First South America LLC, FirstCity Recovery S.A., 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 conduct business outside
the United States, to pursue or consummate asset acquisitions outside the United
States and to collect or liquidate Assets or pursue litigation related Assets
outside the United States, which are undertaken in the ordinary course of such
respective company's business.

      8.14 Amendment of Credit Agreements. None of Borrower, any Subsidiary or
any Portfolio Entity-50% 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 Borrower, any Subsidiary or any Portfolio Entity-50% may extend
the term of any

                                       42


credit facilities or loans permitted under the terms of this Agreement (other
than 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 or then-existing market credit terms.

      8.15 Use of Proceeds. The proceeds of Acquisition Loans shall be used by
Borrower solely to make advances evidenced by Pledged Notes in the amount of
such advance (minus any portion thereof utilized to pay any Utilization Fee) to
a Primary Obligor for such Primary Obligor, directly or indirectly, to loan to,
or contribute to the capital of, the Portfolio Entity identified in the Notice
of Borrowing, the full amount of which loan or contribution to capital is used
by such Portfolio Entity to pay all or 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 Agent and Lenders pursuant to the terms
hereof. The proceeds of Working Capital Loans shall be used solely for working
capital purposes of Borrower.

      8.16 Payments for Consent. None of Borrower or any Subsidiary or any
Portfolio Entity-50% 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.

      8.17 Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. Borrower shall not, and shall not permit any Subsidiary, or any
Portfolio Entity-50% 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;

            (ii) make payments on or in respect to any Indebtedness owed to
      Borrower, any Subsidiary; or

            (iii) make loans or advances to Borrower or any of its Subsidiaries
      or to guarantee Indebtedness of Borrower or any of its Subsidiaries;

            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 8.17;

                        (2) restrictions with respect to a Subsidiary other than
                  a Portfolio Entity, a Primary Obligor or an REO 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;

                                       43


                        (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 Subsidiary other than a Portfolio Entity,
                  a Primary Obligor or an REO 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 or replaced;

                        (5) Permitted Restrictions on payment of dividends by a
                  Subsidiary of Borrower under a loan agreement listed on
                  Schedule 10.19 to which such Subsidiary 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-50% under credit agreements under which
                  such Portfolio Entity-50% is a borrower.

            and other than in the case of (iii), a consensual encumbrance or
            restriction on the ability of any Subsidiary other than a
            Wholly-Owned Subsidiary or any Portfolio Entity-50% to make a loan
            or advance to or guarantee Indebtedness of Borrower or any of its
            Subsidiaries.

            8.18 Financial Covenants.

            (a) Borrower and all other members of the Consolidated Group, on a
consolidated basis, shall, at the end of each fiscal quarter:

            (i) maintain a ratio of Indebtedness to Tangible Net Worth equal to
      or less than 2.00 to 1.00 for the last day of the fiscal quarter then
      ended;

            (ii) maintain a ratio of EBITDA to Interest Coverage not less than
      2.50 to 1.00 for the four fiscal quarters then ended; and

            (iii) maintain a Tangible Net Worth equal to or greater than
      $75,000,000 for the last day of the fiscal quarter then ended;

            (b) All covenants set forth in this Section 8.18 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).

                                       44


            (c) In the event that any Financial Statement required to be
delivered pursuant to Section 7.1(a) or Section 7.1(b) or any certificate
required to be delivered pursuant to Section 7.1(f) 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 such section,
Borrower shall be deemed to be in default of this Section 8.18 for purposes of
Section 9.3 hereof.

      8.19 Accounting Changes. None of Borrower, any Subsidiary or any Portfolio
Entity-50% 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 8.18
hereof or any amount required to be paid by Section 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
8.18).

      8.20 Related Transactions. Borrower has not and shall not, and shall not
permit any Subsidiary or any Portfolio Entity-50% 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 Subsidiary or such Portfolio Entity-50% (as
the case may be) than such Person 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 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.

      8.21 Leasebacks. None of Borrower, any Subsidiary or any Portfolio
Entity-50% 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 Subsidiary or any Portfolio Entity-50%.

      8.22 Compliance with ERISA. Neither Borrower nor any Subsidiary (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
Agent or the Majority Lenders) liability of any such Person or Subsidiary to the
PBGC, (ii) permit to exist the occurrence of any

                                       45


Reportable Event (as defined in Section 4043 of ERISA), or any other event or
condition, which presents a material (in the opinion of 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 Agent or the Majority Lenders
and considered by itself or together with all other such liabilities of 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 Agent or the Majority Lenders)
withdrawal liability under Title IV of ERISA. No Loan Party or Subsidiary, other
than Borrower and Subsidiaries that are not Portfolio Entities has or shall at
any time have any employees.

      8.23 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, and shall not permit any Subsidiary, FC
Holdings 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 10.33(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 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

                                       46


Loan Documents, the amounts outstanding thereunder, the use of the proceeds
thereof, or the collateral pledged therefor.

      8.24 Distributions to Primary Obligors and Borrower.

            (a) Borrower shall each calendar month (i) cause each Portfolio
Entity and each REO Affiliate to distribute to a Primary Obligor, on or prior
the Payment Date occurring in such month, the Portfolio Entity Proceeds, and
(ii) cause each such Primary Obligor to pay to Borrower, upon receipt, each such
Dividend received by such Primary Obligor under clause (i) above by prepaying
the applicable Pledged Note or intercompany receivable and, if no amount then
remains outstanding thereunder, by distributing any remaining portion of such
distribution as a Dividend (in accordance with Section 8.11) to Borrower.

            (b) Borrower shall cause each amount required to be distributed or
paid to Borrower or any Primary Obligor pursuant to this Section 8.24 to be
distributed or paid to Borrower or such Primary Obligor by deposit or wire
transfer directly to the Cash Flow Cash Collateral Account.

      8.25 Capital Expenditures. Borrower will not make any Capital Expenditures
and will not permit any of its Subsidiaries to make any Capital Expenditures,
except that Borrower and its Subsidiaries may make Capital Expenditures in an
aggregate amount (excluding the capitalization of insurance premiums) not in
excess of $1,000,000 during each fiscal year.

      8.26 Servicing.

            (a) Borrower shall ensure that FC Servicing or Minn Servicing is the
servicer for each Subsidiary and Portfolio Entity-50% 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.

      8.27 Portfolio Entity Ownership. In furtherance and not in limitation of
Section 8.8(a), Borrower shall ensure (x) that there is no change in the
percentage of Equity Interests issued by any Portfolio Entity and owned by any
Subsidiary from that reflected on Schedule 10.5(b) and (y) that with respect to
any Portfolio Entity formed after the Effective Date, there is no change in the
percentage of Equity Interest issued by such Portfolio Entity and owned by any
Subsidiary from that set forth in the Final Asset Pool Acquisition Certificate
with respect to the acquisition of the initial Asset Pool by such Portfolio
Entity (as revised up to the time of the giving of the Notice of Borrowing in
respect of such Asset Pool), in each case unless otherwise consented to in
writing by Agent.

      8.28 Activities of Portfolio Entity.

                                       47


            (a) In furtherance and not in limitation of the other restrictions
set forth in this Agreement, Borrower shall ensure that (i) no Subsidiary which
is a Portfolio Entity and no Portfolio Entity-50% engages in any activity other
than owning Asset Pools and shall have no Assets other than such Asset Pools,
collections thereon and interests in REO Affiliates of which it is the REO
Owner, or the ownership of Incidental Equity Interests, provided, that (i) a
Subsidiary or a Portfolio Entity-50% doing business outside the United States
may own the type of assets an REO Affiliate would own (if it had an REO
Affiliate of which it were the REO Owner); and (ii) each REO Affiliate shall be
formed in respect of a specific REO Owner and shall not hold assets other than
from such REO Owner and (ii) WAMCO III, Ltd. and WAMCO IX, Ltd. may continue to
own Equity Interests in FirstStreet Investment LLC.

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. 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 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 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 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 (or as to a Portfolio Entity-50% use its
commercially reasonable efforts to cause) any Subsidiary, Portfolio Entity-50%
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
Subsidiary, Portfolio Entity-50%, Loan Party or other Person, as the case may
be, pursuant to Section 7.11 or Section 8; or

      9.4 Other Covenants. Borrower shall fail to perform or observe, or shall
fail to cause Subsidiary, Portfolio Entity, 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 Subsidiary, Portfolio Entity, 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 thirty days, after the earlier
of the date on which (x) Agent or any Lender gives Borrower notice thereof, or
(y) Borrower obtains knowledge of such default; or

                                       48


      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 shall occur and be
continuing under any other Indebtedness Instrument (other than a Loan Document)
relating to any Indebtedness of Borrower in excess of $15,000,000 and, if a cure
period is applicable thereto, such default shall not be cured within 15 days
after the occurrence thereof; or

      9.6 Other Indebtedness of other Loan Parties.

            (a) Any Applicable Indebtedness of any Primary Obligor or 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 event of default shall occur and be continuing
under any other Indebtedness Instrument (other than a Loan Document) relating to
any Indebtedness of such Person in excess of $15,000,000 and, if a cure period
is applicable thereto, such default shall not be cured within 15 days after the
occurrence thereof; or

            (b) Any event of default shall occur and be continuing 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 [Reserved.]

      9.8 Insolvency. (i) Borrower, any Primary Obligor or any other Loan Party
(Borrower and each of the other foregoing Persons being a "Section 9.8 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 9.8 Entity or for any of the Assets of any Section 9.8 Entity; or (iv)
any Section 9.8 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 9.8
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 9.8 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 9.8 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

                                       49


color of legal authority, take and hold possession of any substantial part of
the property or Assets of any Section 9.8 Entity; or (viii) any Section 9.8
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 Mexico, so long
as FC Mexico is paying its debts as they mature, shall not constitute an Event
of Default under this Section 9.8 unless the occurrence of any such condition
with respect to FC Mexico is an Event of Default under any other clause of this
Section 9.8); or

      9.9 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 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
Agent on behalf of 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 Primary Obligor shall assert
that it is not liable as a guarantor under the Guaranty to which it is party; or

      9.10 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 Material Portfolio Entity or
any Wholly-Owned Subsidiary (other than any REO Affiliate); or

      9.11 Judgments.

            (a) Any final non-appealable judgment for the payment of money in
excess of $1,000,000 (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 or any Primary Obligor; or

            (b) Final judgment for the payment of money in excess of $1,000,000
shall be rendered against Borrower or any Primary Obligor, 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

            (c) If for the purpose of obtaining judgment in any court it is
necessary to convert a sum due from Borrower in the currency expressed to be
payable herein (the "specified currency") into another currency, the parties
hereto agree, to the fullest extent that they may effectively do so, that the
rate of exchange used shall be that at which in accordance with normal banking
procedures Agent could purchase the specified currency with other such currency
at Agent's New York branch on the Business Day that is on or immediately
following the day on which final judgment is given. The obligations of Borrower
in respect of any sum due to any Lender or Agent hereunder shall,
notwithstanding any judgment in a currency other than the specified currency, be
discharged only to the extent that on the Business Day following receipt

                                       50


by such Lender or Agent, as the case may be, of any sum adjudged to be so due in
such other currency such Lender or Agent as the case may be, may in accordance
with normal banking procedures purchase the specified currency with such other
currency. If the amount of the specified currency so purchased is less than the
sum originally due to such Lender or Agent, as the case may be, in the specified
currency, Borrower agrees, to the fullest extent it may effectively do so, as a
separate obligation and notwithstanding any such judgment, to indemnify such
Lender or Agent, as the case may be, against such loss, and if the amount of the
specified currency so purchased exceeds the sum originally due to any Lender or
Agent, as the case may be, in the specified currency, such Lender or Agent, as
the case may be, agrees to remit such excess to the appropriate Borrower; or

      9.12 Stock Issuance or Transfer. Except as expressly permitted pursuant to
the terms hereof, if any Subsidiary or Portfolio Entity-50% issues to (except
upon formation of a Person permitted by this Agreement) or transfers to any
Person any Stock or other Equity Interests; or

      9.13 ERISA. Any ERISA Affiliate of Borrower or of any other Applicable
Person under Section 8.22 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 8.22 as if such ERISA Affiliate were a Subsidiary of Borrower or an
Applicable Person; or

      9.14 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 or any Primary 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 or any Primary Obligor
is a party and the effect of such default could reasonably be expected to have a
Material Adverse Effect; or

      9.15 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; or (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 are sold to any person or persons (as an entirety
in one transaction or a series of related transactions). For purposes of this
Section 9.15, "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

                                       51


      9.16 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 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

      9.17 Court Orders. To the extent not otherwise constituting an Event of
Default, if Borrower, any Primary Obligor 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

      9.18 Dissolution. Borrower, any Primary Obligor or any other Loan Party
shall dissolve, fully liquidate or suspend or discontinue its business; or

then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, Agent may (and shall, if instructed in writing by the
Majority Lenders) by written notice to Borrower: (i) declare the principal of
and accrued interest on the Loans of 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 Borrower; and/or (ii)
declare the Commitments of Lenders terminated, whereupon such Commitments shall
forthwith terminate immediately; provided that if any Event of Default described
in Section 9.8 shall occur with respect to Borrower, the result which would
otherwise occur only upon the giving of written notice by Agent to 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 Lenders to enter into this Agreement and to maintain
the Loans, and to issue the Letters of Credit, 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.

                                       52


            (b) Each Primary Obligor and each Portfolio Entity 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 or foreign jurisdiction of its organization.

            (c) Each Primary Obligor and other Loan Party 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, and other
Loan Party to be so qualified and/or licensed.

            (d) Each Portfolio Entity 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 Portfolio Entity to be so qualified and/or
licensed and in which the failure to so qualify could have a Material Adverse
Effect. Schedule 10.1(d) identifies each jurisdiction in which each Primary
Obligor, Portfolio Entity, Related Entity 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.

            (e) Schedule 10.1(e) lists all Shareholder Agreements to which
Borrower, any Subsidiary, any Portfolio Entity-50% or any other holder of any
Equity Interest in a 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 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.

            (b) The execution, delivery and/or performance by each Primary
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

                                       53


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 other Loan Party, or contained in any agreement,
instrument or document to which such Primary Obligor or such 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 and other Loan Party the breach of which could not have a
Material Adverse Effect.

      10.4 Enforceability.

            (a) This Agreement and the other Loan Documents to which Borrower is
a party are and will be the legal, valid and binding agreements of Borrower,
enforceable in accordance with their respective terms, except as enforcement
thereof may be subject to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and to general principles of equity (regardless of whether such
enforcement is sought in a proceeding in equity or at law); and

            (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, as
of December 31, 2003, the shareholders thereof (other than members of the
general public), addresses of each shareholder, and number of shares owned as of
such date;

            (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, each Portfolio Entity
and each Related Entity, the shareholders and other equity holders thereof, and
the addresses, number of shares and/or partnership interests owned.

            (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 Portfolio Entity, any Related Entity 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
Portfolio Entity, each Related Entity and each other Loan Party have been duly
and validly issued, are fully paid and are non-assessable.

                                       54


      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 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, Material Portfolio Entity 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,
Portfolio Entity or any other Loan Party 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 Collateral 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, each Primary Obligor, Portfolio Entity and other Loan
Party shall at all times have indefeasible and merchantable title to and
ownership of all of its Assets except to the extent the failure to do so could
not reasonably be expected to have a Material Adverse Effect.

      10.8 Financial Warranty. Except as set forth on Schedule 10.8, Borrower
(i) is paying its debts as they mature, (ii) owns property which, at a fair
valuation, is greater than the sum of its debt, and (iii) has 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, each Primary
Obligor and each Material Portfolio Entity: (i) is paying its respective debts
as they mature, (ii) owns property which, at a fair valuation, is greater than
the sum of its debt and (iii) has 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 Material Portfolio Entity or any other Loan Party which
could reasonably be expected to have a Material Adverse Effect. None of the
actions or proceedings referred to on Schedule 10.9 could have a Material
Adverse Effect.

      10.10 Government Contracts. Except as set forth on Schedule 10.10, neither
Borrower, nor any Primary Obligor, Material Portfolio Entity or other Loan Party
has any government contracts.

                                       55


      10.11 Adequate Licenses. Borrower, and each Primary Obligor, Portfolio
Entity 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.

      10.12 Government Permits; Approvals and Consents.

            (a) Except for matters which could not result in a Material Adverse
Effect, Borrower and each Primary Obligor, each Portfolio Entity 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, Material Portfolio Entity 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 Collateral, and the payment and performance of all Obligations.
Borrower and each other Primary Obligor, Material Portfolio Entity 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 Portfolio Entity 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.

            (b) On the Execution Date and on the Effective Date, none of
Borrower, nor any Primary Obligor, Material Portfolio Entity , 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).

      10.14 Compliance with Laws. Except for matters which could not result in a
Material Adverse Effect, neither Borrower, nor any Primary Obligor nor any
Portfolio Entity nor any other Loan Party is in violation of any applicable
statute, regulation, order or ordinance of the

                                       56


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 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, Material
Portfolio Entity, or any other Loan Party is in default under any Indebtedness
Instrument.

      10.16 Financials. The Financial Statements delivered by Borrower, any
Primary Obligor, Material Portfolio Entity 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 June 30, 2004, 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, Portfolio
Entity, Wholly-Owned Subsidiary or other Loan Party (i) has any Indebtedness
except for Indebtedness described in Schedule 10.19, Schedule 10.20 and Schedule
8.12(a) and except for Indebtedness permitted by this Agreement which (other
than in the case of MCS, any Latin American Acquisition Entity or any European
Acquisition Entity ) is reflected in the most recent Financial Statements
delivered pursuant to 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 June 30, 2004 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 Affiliate Notes. Attached hereto as Schedule 10.20 is a true,
accurate and complete schedule of all promissory notes made by any Affiliate
payable to the order of a Borrower, a Wholly-Owned Subsidiary, a Portfolio
Entity or a Related Entity, other than the Pledged Notes and the Excluded Notes.

                                       57


      10.21 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.

      10.22 Affiliates. Schedule 10.22 attached hereto is a true, accurate and
complete schedule of Borrower's Affiliates as of the Effective Date, together
with a description of Borrower's relationship to each such Affiliate.

      10.23 Real Property; Environmental Issues. Except as set forth on Schedule
10.23, neither Borrower, any Primary Obligor, any Portfolio Entity or any
Related Entity other than First X, First B, FCS Creamer, Ltd., FCS Wood Ltd.,
and FCS Wildhorse Ltd., FCS Fischer Ltd., any REO Affiliate, any Latin American
Acquisition Entity or European 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 Portfolio Entity, any Related Entity, any Immaterial Entity, 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.

      10.24 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 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.

      10.25 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.

                                       58


      10.26 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, any Portfolio Entity, any Related Entity or other Loan Party
are located) the entering into and performance 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.

            (c) 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 10.26, 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 10.26, 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.

      10.27 Federal Reserve Margin Regulations; Use of Proceeds

            (a) Neither Borrower, any Primary Obligor, any Portfolio Entity, any
Related Entity 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

                                       59


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.

      10.28 Intellectual Property. All patents, trademarks, registered
copyrights and trade names of Borrower, each Primary Obligor, each Material
Portfolio Entity and each other Loan Party are listed in Schedule 10.28 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 Agent of same and
take such action as Agent shall request to grant to Agent on behalf of Lenders a
perfected, first priority security interest in same.

      10.29 Compliance with ERISA. No Loan Party or Subsidiary, other than
Borrower and Subsidiaries that are not Portfolio Entities has or shall at any
time have any employees. Schedule 10.29 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.

      10.30 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

                                       60


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
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 Agent and Lenders in the
Collateral and to entitle Lenders or Agent on behalf of 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 10.30(a), after
giving effect to the Pledge Agreements and Security Agreements listed on
Schedule 10.30(b), each Borrower and each Primary Obligor will have granted
Agent a Lien of the Requisite Priority 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, including, without limitation, each Equity Interest
issued to it by any Portfolio Entity acquiring any Asset Pool.

      10.31 Other Loan Documents. All representations and warranties contained
in the other Loan Documents are true and correct.

      10.32 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.

      10.33 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 Lenders (collectively, the "CFSC Intercreditor
Agreement").

                                       61


            (b) Attached hereto as Schedule 10.33(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 10.33(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 Portfolio Entity, any Related Entity, any Pledged
Entity or any other Person to CFSC under the Holdings/CFSC Loan Documents.
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.

            (d) 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.

            (e) The Holdings/CFSC Loan Agreement has been duly executed and
delivered by FC Holdings and is in full force and effect.

            (f) 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.

            (g) All representations, warranties and covenants in the
Holdings/CFSC Loan Documents of FC Holdings and the other Primary 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.

            (h) With respect to that FC Commercial Guaranty in favor of CFSC (as
identified on Schedule 10.33) 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 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.

            (i) 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.

                                       62


      10.34 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).

      10.35 Fee Agreements. Attached hereto as Schedule 10.35 is a true,
accurate and complete schedule, as of the Effective Date, of all Fee Agreements
to which Borrower or any Primary Obligor, or Material Portfolio Entity is a
party.

      10.36 Securitization Agreements. Attached hereto as Schedule 10.36 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.

      10.37 Immaterial Entities. Schedule 10.37 lists each Affiliate of Borrower
that does not engage in any business and that has assets of with a fair market
value of less than $100,000. The aggregate fair market value of Assets of all
entities listed on Schedule 10.37 does not exceed $1,500,000.

      10.38 Waterfall Restrictions. No loan agreement or other borrowing
arrangement of any 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 Portfolio Entity or to a different loan
agreement or other borrowing arrangement of such Portfolio Entity or (y) which
would in any way restrict, reduce or prohibit distributions by a Portfolio
Entity on account of any event or condition with respect to any Affiliate of
such Portfolio Entity or with respect to that Portfolio Entity under any other
borrowing or credit arrangement.

      10.39 Wholly Owned Subsidiary Interests. Attached as Schedule 10.39 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,

                                       63


      10.40 REO Affiliates. Attached as Schedule 10.40 hereto is a true and
complete list, as of the Effective Date, of each REO Affiliate.

      10.41 Material Portfolio Entities. Attached hereto as Schedule 10.41 is a
true and complete list, as of the Effective Date, of each Material Portfolio
Entity.

      Section 11. AGENT.

      11.1 Appointment. 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, 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 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. 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. Agent shall have no duties or responsibilities
except those expressly set forth in the Loan Documents. Neither 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 Agent any obligations in respect of
the Loan Documents except as expressly set forth therein. The duties of Agent
under the Loan Documents shall be mechanical and administrative in nature and
Agent shall not have by reason of its duties under the Loan Documents a
fiduciary relationship in respect of any Lender. 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 Borrower to Lenders directly but that are
not so delivered to any Lender (but were delivered to Agent) if such Lender
notifies Agent that it has not received such document or documents, specifying
same.

      11.3 Lack of Reliance. Independently and without reliance on 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, 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. Agent shall not be responsible to any Lender for any recitals,

                                       64


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 Agent requests instructions from 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) Agent shall be entitled to refrain from such act or taking such
actions unless and until it shall have received instructions from Lenders or the
Majority Lenders, as the case may be; and 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 Agent as a result of 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 Lenders (as to matters
requiring the consent of all Lenders). 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 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. 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 AGENT IS NOT REIMBURSED OR INDEMNIFIED
BY BORROWER, LENDERS WILL REIMBURSE AND/OR INDEMNIFY 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 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
AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. THE OBLIGATIONS OF 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, 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

                                       65


exclude Agent in its individual capacity as a Lender or holder of a Note. 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 Agent
in connection with this Agreement and the other Loan Documents and for services
otherwise than as Agent without having to account for the same to Lenders.

      11.8 Holders of Notes. 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 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. 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 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 Agent, the Majority Lenders, with the prior consent of 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 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 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 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 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 Agent may be
exercised by the Majority Lenders and the Majority Lenders shall be entitled to
all rights of Agent hereunder.

      11.10 Reimbursement. Without limiting the provisions of Section 11.6,
Lenders and Agent hereby agree that Agent shall not be obligated to make
available to any Person any sum which Agent is expecting to receive for the
account of that Person until Agent has determined that it has received that sum.
Agent may, however, disburse funds prior to determining that the sums which
Agent expects to receive have been finally and unconditionally paid to Agent, if
Agent wishes to do so. If and to the extent that Agent does disburse funds and
it later becomes apparent that Agent did not then receive a payment in an amount
equal to the sum paid out, then any Person to whom Agent made the funds
available shall, on demand from Agent:

            (a) refund Agent the sum paid to that Person; and

            (b) reimburse Agent for the additional amount certified by Agent as
being necessary to indemnify Agent against any funding or other cost, loss,
expense or liability

                                       66


sustained or incurred by 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 Agent, at (for the first three days) the customary rate set by 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 8.18 no effect shall be
given to any change in GAAP from those in effect on December 31, 2003.

      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
Agent on their behalf) and, if Borrower is a party thereto, 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 Agent shall also be required to change, waive, discharge or terminate
provisions of Section 11 and the written consent of the Issuing Bank shall also
be required to change, waive, discharge or terminate provisions of Section 2A;
and provided further that without the consent of all of Lenders (or 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 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, Borrower shall pay all out-of-pocket costs and expenses of (x)
Agent incurred in connection with the preparation, execution, delivery,
administration, filing and recording of, and (y) Agent and 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 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 Agent, and any special or local counsel retained by Agent or
Lenders, and with respect to enforcement, the reasonable fees and expenses

                                       67


of counsel for Agent or any Lender, (B) the reasonable fees and expenses of
accountants, other consultants, appraisers and other professionals retained by
Agent in connection with the transactions contemplated hereunder, and (C)
printing, travel, title insurance, mortgage recording, filing, communication and
signing taxes and costs.

            (b) BORROWER AGREES TO PAY, AND TO SAVE AGENT AND 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) BORROWER AGREES TO INDEMNIFY, PAY AND HOLD HARMLESS 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 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 BORROWER, ANY PRIMARY OBLIGOR,
ANY PORTFOLIO ENTITY, ANY RELATED ENTITY OR SUBSIDIARY OF ANY THEREOF OR ANY
COLLATERAL OR ANY AFFILIATE OF 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 BORROWER, ANY PRIMARY OBLIGOR, ANY PORTFOLIO ENTITY, ANY RELATED
ENTITY, 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 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 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 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 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 AGENT OR ANY LENDER TO BORROWER OR ANY OTHER PERSON.

                                       68


            (d) All obligations provided for in this Section 12.3 and Sections
3.4, 3.8, 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 that is party hereto
may assign or transfer any of its rights or obligations hereunder without the
prior written consent of Agent and 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 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
Borrower need deal solely with Agent and 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".
Borrower agrees that the provisions of Sections 3.4, 3.6, 3.8, 5.4 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 Borrower is required to pay
pursuant to this Agreement (including, without limitation, additional amounts
made pursuant to Section 5.4) shall not exceed the amounts that Borrower would
have been required to pay to such Lender pursuant to this Agreement had such
Lender not granted such participation. 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 Borrower. Upon a participation in
accordance with the foregoing, 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 Borrower nor that of any other Loan Party shall be required for any
such participation. 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.

                                       69


            (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
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 Agent; provided, however, that each such assignment
shall be for an amount not less than $1,000,000 (or, if Lender's Loan or
Commitment at the time is less, such amount) and integral multiples of $500,000
above such amount, or such other amount or multiple to which Agent may consent.
Upon (i) such execution of such Transfer Supplement, (ii) delivery of an
executed copy thereof to Borrower and 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 Agent of a $3,000 processing fee, and (v) any consent of
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 Borrower, any other Loan Party, Lenders or
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 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, Agent and 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 Agent, 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

                                       70


operated by a party hereto) when sent; in each case addressed as follows, except
that notices and communications to Agent pursuant to Section 2 and Section 9
shall not be effective until received by Agent: (i) if to 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 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
Portfolio Entity, any Related Entity or any other Loan Party or any Subsidiary
thereof and 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
Portfolio Entity, any Related Entity or any other Loan Party or any Subsidiary
thereof in any case shall entitle such Person to any other or further notice or
demand in similar or other circumstances or constitute a waiver of the right of
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 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 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

                                       71


any Primary Obligor, 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 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) 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 Lenders until satisfaction in full of
all amounts due thereunder.

            (b) Lenders agree among themselves that, with respect to all sums
received by Lenders applicable to the payment of the principal of or interest on
the Notes (except as otherwise provided in Section 3.4, 5.4 or 5.5), equitable
adjustment will be made between Lenders so that, in effect, all such sums shall
be shared ratably by each of 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, 5.4 or 5.5), then such Lender receiving such
excess payment shall purchase for cash from the other Lenders with outstanding
Loans to Borrower an interest in their Note or Notes in such amount as shall
result in a ratable participation by all of 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. 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 Borrower in the amount of such
participation.

      12.10 Jurisdiction. 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 AGENT OR ANY LENDER
MAY ELECT, AND, BY EXECUTION AND DELIVERY HEREOF, BORROWER ACCEPTS AND CONSENTS
FOR ITSELF AND IN RESPECT TO ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
JURISDICTION OF THE AFORESAID COURTS AND

                                       72


AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, UNLESS WAIVED BY AGENT AND THE
MAJORITY LENDERS IN WRITING, WITH RESPECT TO ANY ACTION OR PROCEEDING BROUGHT BY
IT AGAINST AGENT OR ANY LENDER AND ANY QUESTIONS RELATING TO USURY. 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 AGENT IS NOTIFIED OF IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 12.5). NOTHING HEREIN SHALL AFFECT THE
RIGHT OF AGENT OR 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 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. Lender
or Lenders exercising any rights granted under this Section 12.12 shall
thereafter notify the affected Loan Party and 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 Agent and Lenders and Borrower and the respective successors and
assigns of Agent and Lenders and nothing contained herein shall be deemed to
confer upon anyone other than Borrower any right to insist on or to enforce the
performance or observance of any of the obligations of Agent or Lenders
contained herein. All conditions to the obligations of Lenders to make Loans
hereunder are imposed solely and exclusively for the benefit of Lenders and
their respective successors and assigns and no other Person shall have standing
to require satisfaction of such conditions in

                                       73


accordance with their terms and no other Person shall under any circumstances be
deemed to be beneficiary of such conditions.

      12.14 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 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 Agent or 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.

      12.15 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.

      12.16 No Usury. It is expressly stipulated and agreed to be the intent of
Agent, Lenders and 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 Lenders (pro rata
in accordance with their respective principal amount of the affected Loans), to
Borrower (and 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 Borrower under the Loan Documents. If at any time following any such
reduction to the interest rate payable by 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
Lenders shall be readjusted, to the full extent permitted by applicable law, so
that the total amount of interest thereunder payable by Borrower to Lenders
shall be equal to the amount of interest which would have been paid by Borrower
without giving effect to applicable usury laws. 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

                                       74


therewith, shall be deemed, to the full extent permitted by law, to be an
expense, fee, premium or penalty rather than interest.

      12.17 Waiver of Jury Trial. BORROWER, 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 BORROWER, ANY PARTNER THEREOF, ANY OTHER LOAN PARTY, AGENT OR
LENDERS. THIS PROVISION IS A MATERIAL INDUCEMENT FOR AGENT AND LENDERS ENTERING
INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

      12.18 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 LENDERS AND/OR 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 LENDERS AND/OR AGENT TO EXERCISE ANY OF ITS RESPECTIVE
REMEDIES; AND (C) THE BENEFIT OF ALL VALUATION, APPRAISEMENT, EXTENSION AND
EXEMPTION LAWS.

      12.19 Waiver of Marshaling. All rights of marshaling of Assets of
Borrower, including any such right with respect to the Collateral, are hereby
waived by Borrower.

      12.20 Waiver of Claims; Release by Borrower.

            (a) Borrower releases Lenders and 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 Agent, their respective
officers, agents or employees, except, in the case of any Lender or Agent, the
willful misconduct or gross negligence of such Lender or 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

                                       75


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.

      12.21 Confidentiality. Agent and each Lender, severally and with respect
to itself only, covenants and agrees that any information obtained by Agent or
such Lender pursuant to this Agreement shall be held in confidence (it being
understood that documents provided to Agent hereunder may in all cases be
distributed by Agent to Lenders) except that 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 Agent or such Lender, (iii) to the extent such
information was available to Agent or such Lender in a capacity other than Agent
or Lender hereunder or on a nonconfidential basis prior to its disclosure to
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
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.

                  [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:__________________________________________

                                6400 Imperial Drive (delivery only)
                                Waco, Texas 76710

                                P.O. Box 8216 (mail)
                                Waco, Texas 76714-8216

                                254-761-2953 (telecopier)

                                BANK OF SCOTLAND, acting through its New York
                                branch, individually and as Agent

                                By:_____________________________________________

                                Title:__________________________________________

                 [signature page to Revolving Credit Agreement]



TABLE OF CONTENTS

                                       1


                                  EXHIBITS(1)

Annex I              Definitions

Exhibit A - Promissory Note
Exhibit B - Report Setting Forth the Computation of the Aggregate Undistributed
            Funds of all Portfolio Entities.
Exhibit C - Form of Asset Pool Acquisition Certificate
Exhibit D - Eligible Asset Pool
Exhibit E - Permitted Shareholder Agreements/Arrangements
Exhibit F - Net Present Value
Exhibit G - Borrowing Base Certificate
Exhibit H - Notice of Borrowing
Exhibit I - Eligible Portfolio Entity

- -----------------
     (1)    Certain exhibits may not be attached to this Agreement. See Section
            12.4(d).



                                LIST OF SCHEDULES

Schedule 2.1 - Original Principal Amount

Schedule 6.3 - Closing Checklist

Schedule 8.3 - Liens

Schedule 8.13 - Loan; Guaranty Debt

Schedule 8.13(b) - Guaranty Equivalents

Schedule 8.18 - Limitations on Dividends and Other Payment Restrictions
                Affecting Subsidiaries

Schedule 8.19 - Financial Covenants

Schedule 10.1(a) - Organization of Borrower

Schedule 10.1(d) - Organization of Each Primary Obligor, Portfolio Entity,
                   Related Entity and Each Other Loan Party

Schedule 10.1(e) - Shareholder Agreements

Schedule 10.5(a) - Classes of Stock of Borrower

Schedule 10.5(b) - Classes of Stock and/or Other Equity Interests Issued by Each
                   Primary
                   Obligor, Each Portfolio Entity and Each Related Entity, the
                   Shareholders and
                   Other Equity Holders

Schedule 10.5(c) - Equity Interests in Borrower

Schedule 10.6 - Fictitious Names

Schedule 10.7 - Liens Relating to the Collateral

Schedule 10.8 - Financial Warranty

Schedule 10.9 - Proceedings

Schedule 10.10 - Government Contracts

Schedule 10.12 - Government Permits;  Approvals and Consents

Schedule 10.15 - Defaults under any Indebtedness Instrument

Schedule 10.18 - Material Adverse Change

Schedule 10.19 - Indebtedness Existing on the Effective Date

Schedule 10.20 - Affiliate Notes

Schedule 10.22 - Affiliates

Schedule 10.23 - Real Property; Environmental Issues

Schedule 10.26 - SEC Filings

Schedule 10.28 - Intellectual Property

Schedule 10.29 - Compliance with ERISA

Schedule 10.30(b) - Pledge Agreements and Security Agreements

Schedule 10.33 - FC Commercial Guaranty in Favor of CFSC

Schedule 10.33(b) - FC Holdings Line of Credit Material Documents

Schedule 10.33(c) - Shared Collateral

Schedule 10.35 - Fee Agreements

Schedule 10.36 - Securitization Agreements

Schedule 10.37 - Immaterial Entity

Schedule 10.39 - Wholly Owned Subsidiary Interests

Schedule 10.40 - REO Affiliates

Schedule 10.41 - Material Portfolio Entities

Schedule I - (EE) - Excluded Entities



Schedule I - (EN) - Excluded Notes

Schedule I - (MPE) - Material Portfolio Entity

Schedule I - (PN) - Pledged Notes

Schedule (PL) - Permitted Liens

Schedule I - (RE) - Related Entity

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, James T. Sartain, certify that:

(1)	I have reviewed this quarterly report on Form 10-Q of FirstCity Financial Corporation;
(2)	Based on my knowledge, this 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 report;
(3)	Based on my knowledge, the financial statements, and other financial information included in this 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 report;
(4)	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 15, 2004

/s/ James T. Sartain James T. Sartain
Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, J. Bryan Baker, certify that:

(1)	I have reviewed this quarterly report on Form 10-Q of FirstCity Financial Corporation;
(2)	Based on my knowledge, this 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 report;
(3)	Based on my knowledge, the financial statements, and other financial information included in this 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 report;
(4)	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 15, 2004

/s/ J. Bryan Baker J. Bryan Baker
Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of FirstCity Financial Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

     The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

Date: November 15, 2004	/s/ James T. Sartain
	James T. Sartain
	Chief Executive Officer

     The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of FirstCity Financial Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

     The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

Date: November 15, 2004	/s/ J. Bryan Baker
	J. Bryan Baker
	Chief Financial Officer

     The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.