<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-20677
FIRSTCITY LIQUIDATING TRUST
(Exact name of registrant as specified in its charter)
Texas 06-6414468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 Main, Suite 250, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 651-7841
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of September 30, 1998,
2,460,911 units of Class B Beneficial Interests and 738,273 units of Class C
Beneficial Interests were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
Assets, at estimated fair value (unaudited)
-------------------------------
<S> <C> <C>
Cash and cash equivalents................................................ $ 9,634 $ 7,948
Trust assets, net........................................................ 50,660 86,015
-------------- -------------
Total assets...................................................... 60,294 93,963
-------------- -------------
Less liabilities at face or estimated amount
--------------------------------------------
Payables and accrued liabilities......................................... 2,194 2,663
-------------- -------------
Total liabilities................................................. 2,194 2,663
-------------- -------------
Commitments and contingencies............................................ - -
Trust net asset value attributable to:
--------------------------------------
Class "B" Certificate, 2,460,911 units outstanding....................... 58,100 91,300
Class "C" Certificate, 738,273 units outstanding......................... - -
-------------- -------------
Total net asset value............................................. $ 58,100 $ 91,300
============== =============
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN NET ASSET VALUE IN LIQUIDATION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Changes in fair value of trust assets............ $ 6,958 $ 3,888 $ 34,436 $ 32,157
Interest income on short-term investments........ 136 78 553 858
Interest expense................................. - - - (155)
Administrative expense........................... (1,668) (1,235) (5,436) (10,508)
----------- ---------- --------- -----------
Net income................................ 5,426 2,731 29,553 22,352
----------- ---------- --------- -----------
Net asset value, beginning of period............. 69,900 103,765 91,300 121,317
Distributions on Class "A" Certificate........... - (22,912) - (60,085)
Distributions on Class "B" Certificate........... (17,226) - (62,753) -
----------- ---------- --------- -----------
Net asset value, end of period................... $ 58,100 $ 83,584 $ 58,100 $ 83,584
=========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 29,553 $ 22,352
Adjustments to reconcile net income to net cash provided
by operating activities:
Changes in fair value of trust assets............................. (34,436) (32,157)
Collections on trust assets, net of advances ..................... 69,728 30,086
Capital improvements on trust assets.............................. - (5,609)
Decrease in payables and accrued liabilities ..................... (406) (1,542)
------------ ------------
Net cash provided by operating activities...................... 64,439 13,130
------------ ------------
Cash flows from financing activities:
Distributions on Class "A" Certificate............................... - (44,745)
Distributions on Class "B" Certificate............................... (62,753) -
------------ ------------
Net cash used in financing activities.......................... (62,753) (44,745)
------------ ------------
Net increase (decrease) in cash and cash equivalents................. $ 1,686 $ (31,615)
Cash and cash equivalents, beginning of period....................... 7,948 36,129
------------ ------------
Cash and cash equivalents, end of period............................. $ 9,634 $ 4,514
============ ============
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest....................................................... $ - $ 155
Non-cash financing activities:
Distribution of loan on Class "A" Certificate.................. $ - $ 15,340
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(A) Basis of Presentation
The unaudited consolidated financial statements of FirstCity
Liquidating Trust (the "Trust", formerly the "Debtor") reflect, in the
opinion of management, all adjustments, consisting only of normal and
recurring adjustments, necessary to present fairly the Trust's net
assets in liquidation at September 30, 1998, and its changes in net
asset value in liquidation and cash flows for the three month and nine
month periods ended September 30, 1998 and 1997.
Management of the Trust has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Certain amounts in the financial statements for prior periods have been
reclassified to conform with current financial statement presentation.
(B) Trust Assets
Trust assets are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
Estimated Gross Cash Flow by Type of Asset 1998 1997
- ------------------------------------------ --------------- ----------------
(unaudited)
<S> <C> <C>
Borrowers' obligation on outstanding balance of:
Performing loans ........................... $ 16,235 $ 50,450
Nonperforming loans ........................ 592 2,993
Receivable from the FDIC ....................... 2,000 2,000
Real estate and other assets ................... 41,279 44,203
------------- -------------
Total ...................................... 60,106 99,646
------------- -------------
Discount required to reflect trust assets at
estimated fair value .................. (9,446) (13,631)
------------- -------------
Trust assets, net............................... $ 50,660 $ 86,015
============= ==============
</TABLE>
For each asset, estimates of income, expense and net cash flow on a
monthly basis through the expected final disposition date are prepared.
The individual asset budget is developed based upon factors which
include physical inspection of the asset or the collateral underlying
the related loan, local market conditions, contractual payments or
rents, and discussions with the relevant borrower. The Trust's
management and the Portfolio Committee periodically reevaluate and
revise projected monthly cash flows on an asset by asset basis. At
September 30, 1998 and December 31, 1997, the projected monthly cash
flows were discounted at 11% to reflect the Trust assets at estimated
fair value. The Trust assets are highly concentrated in Texas.
4
<PAGE> 5
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
In the first quarter of 1998, the Trust negotiated and received a
settlement of approximately $22 million from its fidelity bond
carriers. As a result of this settlement, there are no remaining claims
of this nature.
(C) Distribution Priorities
The Trust is required to apply all proceeds from liquidation and
disposition of the Trust's assets first to payment of normal operating
expenses. Second, Trust proceeds totaling $188 million were distributed
to FirstCity to retire the Class A Certificate. The third order of
distribution of Trust proceeds is payments pursuant to employment and
bonus agreements with certain former employees of the Debtor. The bonus
pool and executive long-term incentive plan provides for the payment of
$735,000 in bonuses to certain former employees of the Debtor after the
Trust distributes $14.9 million to Class B Certificate holders, the
payment of another $735,000 after approximately $30 million of
additional distributions to Class B Certificate holders, and the
payment of bonuses in the amount of 4.903% of any additional
distributions to Class B Certificate holders.
Fourth, Class B Certificate holders are entitled to distributions up to
the Pour-Over Level (as hereinafter defined). In the first nine months
of 1998, $62.8 million, or $25.50 per certificate, was distributed to
Class B Certificate holders and a $2.3 million bonus was paid to
certain former employees of the Debtor. In October 1998, $4.9 million,
or $2.00 per certificate, was distributed to Class B Certificate
holders and a $232,000 bonus was paid to certain former employees of
the Debtor.
The Pour-Over Level (approximately $81 million at September 30, 1998)
is the liquidation preference on July 3, 1995 of the Debtor's Series B
and Series E preferred stock, less the nominal stated value of
FirstCity special preferred stock and the book value of FirstCity
common stock issued to the Series B and Series E holders, plus interest
at an annual rate of 6.5% from July 3, 1995. The Pour-Over Level is
also reduced for distributions to Class B Certificate holders. Lastly,
Class C Certificate holders receive distributions, if any, after any
remaining payments to Class B Certificate holders up to the Pour-Over
Level (approximately $32.80 per unit as of September 30, 1998). No
distributions to Class C Certificate holders are anticipated.
The ultimate amounts to be distributed to the holders of the B and C
Certificates will result from the cash flow actually realized from the
liquidation of the non-cash Trust assets. The determination of the net
asset value of the Trust in the accompanying consolidated statements of
net assets in liquidation is based upon estimates of future cash flows.
The actual cash flows
5
<PAGE> 6
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
and the timing of such cash flows may vary significantly from those
estimates, thus affecting the final distributions to the Certificate
holders.
(D) Investment Management Agreement
Pursuant to the Investment Management Agreement, FirstCity managed the
liquidation of Trust assets and the Trust paid FirstCity a servicing
fee on collections. In the first quarter of 1997, the Investment
Management Agreement was terminated and, in consideration of this
termination, the Trust paid FirstCity $6.8 million (included in
administrative expense), plus interest at a rate of 10 percent per
annum from January 1, 1997 until March 1997.
(E) Contingencies
The Trust is involved in various legal proceedings in the ordinary
course of business. In the opinion of management of the Trust, the
resolution of such matters should not have a material adverse impact on
the financial position, results of operations or liquidity of the
Trust.
In 1996, the FDIC closed the receiverships of the Debtor's banks and
distributed the remaining surplus of those receiverships to the Trust.
In accordance with a conveyance and indemnification agreement, the
Trust will be required, among other things, to provide indemnity until
March 31, 1999 to the FDIC against any known or unknown liabilities,
obligations or actual expenses associated with the receiverships, in an
aggregate amount up to $12 million. Management of the Trust does not
believe that, to the extent the Trust is obligated to pay certain
claims or expenses associated with the past obligations of the Debtor's
banks, such payments will have a material adverse impact on the
financial position, results of operations or liquidity of the Trust.
6
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The operations of the Trust for the third quarter and first
nine months of 1998 and 1997 are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
THIRD NINE MONTHS
QUARTER ENDED SEPTEMBER 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Changes in fair value of trust assets............ $ 6,958 $ 3,888 $ 34,436 $ 32,157
Interest income on short-term investments........ 136 78 553 858
Interest expense................................. - - - (155)
Administrative expense........................... (1,668) (1,235) (5,436) (10,508)
----------- ----------- ----------- -----------
Net income................................ $ 5,426 $ 2,731 $ 29,553 $ 22,352
=========== =========== =========== ===========
</TABLE>
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
The estimated fair value of the Trust's assets increased $7.0
million in the third quarter of 1998 as compared to $3.9 million in the third
quarter of 1997, an increase attributable to several factors, including $5
million related to a 67% interest in a partnership that owns a downtown Houston
office building. Other factors which contributed to the enhancement of the net
asset value of the Trust's assets in the third quarter of 1998 and 1997 include
(i) the appreciation in value of certain assets attributable to a favorable
interest rate environment and the effect of such favorable interest rates on the
marketability of real estate and (ii) the increase in the estimated market value
of the Trust's assets that naturally occurs as the remaining life of the Trust
(and concomitantly the discount factor applied in calculating net asset value)
decreases.
Interest income on short-term investments increased in the
third quarter of 1998 as compared to the third quarter of 1997 because more
excess funds were available.
Administrative expense totaled $1.7 million in the third
quarter of 1998 as compared to $1.2 million in the third quarter of 1997. An
$834,000 bonus, based on distributions to Class B Certificate holders, was paid
in the third quarter of 1998 (there was no bonus in 1997). Professional fees
totaled $.2 million in the third quarter of 1998 as compared to $.4 million in
the third quarter of 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
The estimated fair value of the Trust's assets increased $34.4
million in the first nine months of 1998 as compared to $32.2 million in the
first nine months of 1997, an increase attributable to several factors,
including a settlement of approximately $22 million from the Trust's fidelity
bond carriers and $5 million related to the 67% interest discussed above. The
estimated fair value in the first nine months of 1997 increased, in part due to
the elimination of servicing fees to FirstCity (which were netted against future
cash flows) because the Investment Management Agreement was terminated and an
increase of $7 million based on the contract sales price of a downtown Houston
7
<PAGE> 8
office building (the sale closed in the fourth quarter of 1997). Other factors
which contributed to the enhancement of the net asset value of the Trust's
assets in the first nine months of 1998 and 1997 include (i) the appreciation in
value of certain assets attributable to a favorable interest rate environment
and the effect of such favorable interest rates on the marketability of real
estate and (ii) the increase in the estimated market value of the Trust's assets
that naturally occurs as the remaining life of the Trust (and concomitantly the
discount factor applied in calculating net asset value) decreases.
Interest income on short-term investments decreased in 1998 as
compared to 1997 because less excess funds were available. Interest expense in
the first nine months of 1997 resulted from the termination of the Investment
Management Agreement, as discussed below.
Administrative expense totaled $5.4 million in the first nine
months of 1998 as compared to $10.5 million in the first nine months of 1997. In
the first quarter of 1997, the Investment Management Agreement was terminated
and, in consideration of this termination, the Trust paid FirstCity $6.8
million, plus interest at a rate of 10 percent per annum from January 1, 1997
until March 1997 (resulting in no servicing fees in 1998). A $2.3 million bonus,
based on distributions to Class B Certificate holders, was paid in the first
nine months of 1998 (there was no bonus in 1997). Professional fees totaled $.9
million in the first nine months of 1998 as compared to $1.4 million in the
first nine months of 1997.
In the first nine months of 1998, the Trust distributed $62.8
million, or $25.50 per certificate, to Class B Certificate holders. This
distribution was made possible principally by $69.7 million in net collections
on Trust assets in 1998. The Class B Beneficial Interests were valued at $58.1
million at September 30, 1998. In October 1998, the Trust distributed an
additional $4.9 million, or $2.00 per certificate, to Class B Certificate
holders.
Non-cash trust assets at September 30, 1998 and December 31,
1997 were comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
Estimated Gross Cash Flow by Type of Asset 1998 1997
- ------------------------------------------ ------------- -------------
<S> <C> <C>
Borrowers' obligation on outstanding balance of:
Performing loans ........................... $ 16,235 $ 50,450
Nonperforming loans ........................ 592 2,993
Receivable from the FDIC ....................... 2,000 2,000
Real estate and other assets ................... 41,279 44,203
------------- -------------
Total ...................................... 60,106 99,646
------------- -------------
Discount required to reflect trust assets at
estimated fair value .................. (9,446) (13,631)
------------- -------------
Trust assets, net .............................. $ 50,660 $ 86,015
============= =============
</TABLE>
For each asset, estimates of income, expense and net cash flow
on a monthly basis through the expected final disposition date are prepared by
management of the Trust. The individual asset budget is developed based upon
factors which include physical inspection of the asset or the collateral
underlying the related loan, local market conditions, contractual payments or
rents, and discussions with the relevant borrower. The Trust's management
periodically reevaluates and revises
8
<PAGE> 9
its projected monthly cash flows on an asset by asset basis. At September 30,
1998 and December 31, 1997, the projected monthly cash flows were discounted at
11% to reflect the Trust assets at estimated fair value.
One of the most significant assets of the Trust is a 67%
interest in a partnership which owns a downtown Houston office building and that
was subject to litigation concerning the sale of that interest. In the third
quarter of 1998, summary judgment was rendered in favor of the Trust,
effectively terminating the litigation involving the sale of the 67% interest.
In the first quarter of 1998, the Trust negotiated and
received a settlement of approximately $22 million from its fidelity bond
carriers. As a result of this settlement, there are no remaining claims of this
nature.
In June 1998, the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division, extended the life of the Trust from
December 31, 1998 to January 3, 2000. The extension allows the Trust more time
to settle some ongoing litigation and indemnity issues as well as to bring
additional value to certain assets as a result of holding such assets for a
longer period of time. Also, Rick R. Hagelstein resigned as a member of the
Portfolio Committee. Joe S. Greak, Senior Vice President, Tax Director and
Secretary of FirstCity Financial Corporation, has been appointed to replace Mr.
Hagelstein.
9
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
------- -------------------------------------------------------------
2.1(1) Joint Plan of Reorganization for First City Bancorporation of
Texas, Inc., as modified, under Chapter 11 of the United
States Bankruptcy Code, as confirmed by the U.S. Bankruptcy
Court for the Northern District of Texas, Dallas Division on
May 31, 1995.
3.1(1) The Liquidating Trust Agreement, dated as of July 3, 1995, by
and between First City Bancorporation of Texas, Inc. and
Shawmut Bank Connecticut, National Association (subsequently
Fleet National Bank, now State Street Bank and Trust Company),
as Trustee.
10.1(3) Employment Agreement, effective as of July 3, 1995, by and
between FCLT Loans Asset Corp. and Robert W. Brown, as amended
May 1, 1996.
10.2(2) Settlement Agreement, dated as of June 22, 1994, as amended as
of January 30, 1995, by and among FDIC-Corporate, the
FDIC-Receivers and the First City Parties.
10.3(3) Conveyance and Indemnification Agreement, dated December 23,
1996, between FDIC-Corporate, the FDIC-Receivers, FCLT Loans,
L.P. and the Trust.
27.1 Financial Data Schedule.
- -----------------------------------------
(1) Filed as the exhibit indicated to the Registration Statement on
Form 10 filed with the Securities and Exchange Commission on May 1,
1996 and incorporated herein by reference.
(2) Filed as the exhibit indicated to the Registration Statement on
Form 10/A filed with the Securities and Exchange Commission on July 10,
1996 and incorporated herein by reference.
(3) Filed as the exhibit indicated to the Form 10-K for the fiscal year
ended December 31, 1996 filed with the Securities and Exchange
Commission and incorporated herein by reference.
(b) Reports on Form 8-K. No report on Form 8-K was filed by the
Registrant with the Commission during the quarterly period ended
September 30, 1998.
10
<PAGE> 11
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.
STATE STREET BANK AND TRUST
COMPANY, as Trustee
Date: October 23, 1998 /s/ Susan T. Keller
-----------------------------------
Name: Susan T. Keller
------------------------------
Title: Vice President
-----------------------------
<PAGE> 12
INDEX TO EXHIBITS
Exhibit
No. Description
------- -------------------------------------------------------------
2.1(1) Joint Plan of Reorganization for First City Bancorporation of
Texas, Inc., as modified, under Chapter 11 of the United
States Bankruptcy Code, as confirmed by the U.S. Bankruptcy
Court for the Northern District of Texas, Dallas Division on
May 31, 1995.
3.1(1) The Liquidating Trust Agreement, dated as of July 3, 1995, by
and between First City Bancorporation of Texas, Inc. and
Shawmut Bank Connecticut, National Association (subsequently
Fleet National Bank, now State Street Bank and Trust Company),
as Trustee.
10.1(3) Employment Agreement, effective as of July 3, 1995, by and
between FCLT Loans Asset Corp. and Robert W. Brown, as amended
May 1, 1996.
10.2(2) Settlement Agreement, dated as of June 22, 1994, as amended as
of January 30, 1995, by and among FDIC-Corporate, the
FDIC-Receivers and the First City Parties.
10.3(3) Conveyance and Indemnification Agreement, dated December 23,
1996, between FDIC-Corporate, the FDIC-Receivers, FCLT Loans,
L.P. and the Trust.
27.1 Financial Data Schedule.
- -----------------------------------------
(1) Filed as the exhibit indicated to the Registration Statement on
Form 10 filed with the Securities and Exchange Commission on May 1,
1996 and incorporated herein by reference.
(2) Filed as the exhibit indicated to the Registration Statement on
Form 10/A filed with the Securities and Exchange Commission on July 10,
1996 and incorporated herein by reference.
(3) Filed as the exhibit indicated to the Form 10-K for the fiscal year
ended December 31, 1996 filed with the Securities and Exchange
Commission and incorporated herein by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FIRSTCITY LIQUIDATING TRUST SEPTEMBER 30, 1998 FORM 10-Q FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FIRSTCITY LIQUIDATING
TRUST SEPTEMBER 30, 1998 FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,634
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 50,660
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,294
<CURRENT-LIABILITIES> 2,194
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 58,100
<TOTAL-LIABILITY-AND-EQUITY> 60,294
<SALES> 34,436
<TOTAL-REVENUES> 34,989
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,436
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,553
<INCOME-TAX> 0
<INCOME-CONTINUING> 29,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,553
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
