<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 JUNE 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 June 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>
JUNE 30, DECEMBER 31,
1998 1997
------- ------------
Assets, at estimated fair value (unaudited)
<S> <C> <C>
Cash and cash equivalents .................................... $22,380 $ 7,948
Trust assets, net ............................................ 49,619 86,015
------- ------------
Total assets .......................................... 71,999 93,963
------- ------------
Less liabilities at face or estimated amount
Payables and accrued liabilities ............................. 2,099 2,663
------- ------------
Total liabilities ..................................... 2,099 2,663
------- ------------
Commitments and contingencies ................................ -- --
Trust net asset value attributable to:
Class "B" Certificate, 2,460,911 units outstanding ........... 69,900 91,300
Class "C" Certificate, 738,273 units outstanding ............. -- --
------- ------------
Total net asset value ................................. $69,900 $ 91,300
======= ============
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN NET ASSET VALUE IN LIQUIDATION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Changes in fair value of trust assets ...... $ 2,712 $ 16,508 $ 27,478 $ 28,269
Interest income on short-term investments .. 232 378 417 780
Interest expense ........................... -- -- -- (155)
Administrative expense ..................... (1,843) (1,351) (3,768) (9,273)
--------- --------- --------- ---------
Net income .......................... 1,101 15,535 24,127 19,621
--------- --------- --------- ---------
Net asset value, beginning of period ....... 97,100 115,129 91,300 121,317
Distributions on Class "A" Certificate ..... -- (26,899) -- (37,173)
Distributions on Class "B" Certificate ..... (28,301) -- (45,527) --
--------- --------- --------- ---------
Net asset value, end of period ............. $ 69,900 $ 103,765 $ 69,900 $ 103,765
========= ========= ========= =========
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................................... $ 24,127 $ 19,621
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Changes in fair value of trust assets ........................................... (27,478) (28,269)
Collections on trust assets, net of advances .................................... 63,840 22,938
Capital improvements on trust assets ............................................ -- (4,503)
Decrease in payables and accrued liabilities .................................... (530) (1,595)
-------- --------
Net cash provided by operating activities .................................... 59,959 8,192
-------- --------
Cash flows from financing activities:
Distributions on Class "A" Certificate ............................................. -- (37,173)
Distributions on Class "B" Certificate ............................................. (45,527) --
-------- --------
Net cash used in financing activities ........................................ (45,527) (37,173)
-------- --------
Net increase (decrease) in cash and cash equivalents ............................... $ 14,432 $(28,981)
Cash and cash equivalents, beginning of period ..................................... 7,948 36,129
-------- --------
Cash and cash equivalents, end of period ........................................... $ 22,380 $ 7,148
======== ========
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest ..................................................................... $ -- $ 155
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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 June 30, 1998, and its changes in net asset
value in liquidation and cash flows for the three month and six month
periods ended June 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>
June 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 ................................................................ $ 20,043 $ 50,450
Nonperforming loans ............................................................. 2,425 2,993
Receivable from the FDIC ............................................................ 2,000 2,000
Real estate and other assets ........................................................ 35,176 44,203
-------- ------------
Total ........................................................................... 59,644 99,646
-------- ------------
Discount required to reflect trust assets at
estimated fair value ....................................................... (10,025) (13,631)
-------- ------------
Trust assets, net ................................................................... $ 49,619 $ 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 June
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.
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<PAGE> 5
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.
Fourth, Class B Certificate holders are entitled to distributions up to
the Pour-Over Level (as hereinafter defined). 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. In the first six months of 1998, $45.5
million, or $18.50 per certificate, was distributed to Class B
Certificate holders and a $1.5 million bonus was paid to certain former
employees of the Debtor. In July 1998, $17.2 million, or $7.00 per
certificate, was distributed to Class B Certificate holders and a
$834,000 bonus was paid to certain former employees of the Debtor.
The Pour-Over Level (approximately $97 million at June 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 up to the Pour-Over Level (approximately $39.26 per unit as of
June 30, 1998) to Class B Certificate holders. 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
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flows 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 paid.
(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 second quarter and first
six months of 1998 and 1997 are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
SECOND SIX MONTHS
QUARTER ENDED JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Changes in fair value of trust assets ...... $ 2,712 $ 16,508 $ 27,478 $ 28,269
Interest income on short-term investments .. 232 378 417 780
Interest expense ........................... -- -- -- (155)
Administrative expense ..................... (1,843) (1,351) (3,768) (9,273)
-------- -------- -------- --------
Net income .......................... $ 1,101 $ 15,535 $ 24,127 $ 19,621
======== ======== ======== ========
</TABLE>
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
The estimated fair value of the Trust's assets increased $2.7
million in the second quarter of 1998 as compared to $16.5 million in the second
quarter of 1997. The estimated fair value in the second quarter of 1997
increased due to several factors, including approximately $7 million based on
the contract sales price of a downtown Houston office building (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 second 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 decreased in the
second quarter of 1998 as compared to the second quarter of 1997 because less
excess funds were available.
Administrative expense totaled $1.8 million in the second
quarter of 1998 as compared to $1.4 million in the second quarter of 1997. A
$763,000 bonus, based on distributions to Class B Certificate holders, was paid
in the second quarter of 1998 (there was no bonus in 1997). Professional fees
totaled $.4 million in the second quarter of 1998 as compared to $.6 million in
the second quarter of 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The estimated fair value of the Trust's assets increased $27.5
million in the first six months of 1998 as compared to $28.3 million in the
first six months of 1997, an increase attributable to several factors, including
a settlement of approximately $22 million from the Trust's fidelity bond
carriers. The estimated fair value in the first six 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 $7 million related to a contract sales price (discussed above).
Other factors which contributed to the enhancement of the net asset value of the
Trust's assets in the first six months of 1998 and 1997 include (i) the
appreciation in value of certain
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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 six months of 1997 resulted from the termination of the Investment
Management Agreement, as discussed below.
Administrative expense totaled $3.8 million in the first six
months of 1998 as compared to $9.3 million in the first six 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 paid (resulting in no servicing fees in 1998). A $1.5 million bonus, based
on distributions to Class B Certificate holders, was paid in the first six
months of 1998 (there was no bonus in 1997). Professional fees totaled $.6
million in the first six months of 1998 as compared to $1.0 million in the first
six months of 1997.
In the first six months of 1998, the Trust distributed $45.5
million, or $18.50 per certificate, to Class B Certificate holders. This
distribution was made possible principally by $63.8 million in net collections
on Trust assets in 1998. The Class B Beneficial Interests were valued at $69.9
million at June 30, 1998. In July 1998, the Trust distributed an additional
$17.2 million, or $7.00 per certificate, to Class B Certificate holders.
Non-cash trust assets at June 30, 1998 and December 31, 1997
were comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
Estimated Gross Cash Flow by Type of Asset 1998 1997
-------- ------------
<S> <C> <C>
Borrowers' obligation on outstanding balance of:
Performing loans .............................. $ 20,043 $ 50,450
Nonperforming loans ........................... 2,425 2,993
Receivable from the FDIC .......................... 2,000 2,000
Real estate and other assets ...................... 35,176 44,203
-------- ------------
Total ......................................... 59,644 99,646
-------- ------------
Discount required to reflect trust assets at
estimated fair value ..................... (10,025) (13,631)
-------- ------------
Trust assets, net ................................. $ 49,619 $ 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 its projected monthly cash flows on an
asset by asset basis. At June 30, 1998 and December 31, 1997, the projected
monthly cash flows were discounted at 11% to reflect the Trust assets at
estimated fair value.
8
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One of the most significant assets of the Trust is a 67%
interest in a partnership which owns a downtown Houston office building. The 67%
interest was under contract for sale to one party for a price of $18.5 million.
A second party (the 33% partnership interest owner) had certain rights of first
refusal and consent to transfer which may or may not have been properly
exercised, and prevented closing with the first party under the original
contract which expired on October 14, 1997. The original buyer has sued the
Trust and the 33% partnership interest owner for specific performance. Although
neither party is quarreling with the Trust about the sales price, the matter is
now in litigation and may lead to considerable delays in disposition of the
asset. After a favorable refinancing of debt of the office building, which
included additional investment by the Trust, and based on current appraisals,
cash flow and profitability, the partnership interest was valued at $21 million
on June 30, 1998.
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.
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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 June
30, 1998.
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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: July 28, 1998 /s/ Susan T. Keller
--------------------------------------
Name: Susan T. Keller
--------------------------------
Title: Vice President
-------------------------------
11
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Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------------------------------------------------------------------
<S> <C>
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.
</TABLE>
- ----------------
(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 JUNE 30, 1998 FORM 10-Q FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FIRSTCITY LIQUIDATING TRUST JUNE
30, 1998 FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,380
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 49,619
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 71,999
<CURRENT-LIABILITIES> 2,099
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 69,900
<TOTAL-LIABILITY-AND-EQUITY> 71,999
<SALES> 27,478
<TOTAL-REVENUES> 27,895
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,768
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,127
<INCOME-TAX> 0
<INCOME-CONTINUING> 24,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,127
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
