<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 MARCH 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-7614
FIRSTCITY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 751-1750
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 has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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 May 3, 1996, 4,921,422
shares of Common Stock, par value $.01 per share, were outstanding.
1
<PAGE> 2
FIRSTCITY FINANCIAL CORPORATION
TABLE OF CONTENTS TO
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
FirstCity Financial Corporation and Subsidiaries
Consolidated Balance Sheets 3
FirstCity Financial Corporation and Subsidiaries
Consolidated Statements of Income 4
FirstCity Financial Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity 5
FirstCity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows 6
FirstCity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements 7
FirstCity Liquidating Trust and Subsidiaries
Consolidated Statements of Net Assets 13
FirstCity Liquidating Trust and Subsidiaries
Consolidated Statements of Income and Changes
in Net Asset Value 13
FirstCity Liquidating Trust and Subsidiaries
Consolidated Statements of Cash Flows 14
FirstCity Liquidating Trust and Subsidiaries
Notes to Consolidated Financial Statements 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands, except per share data) 1996 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
------
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . $ 4,192 $ 8,370
Purchased asset pools, net . . . . . . . . . . . . . . . . . . 87,393 95,939
Equity investments in and advances to acquisition
partnerships . . . . . . . . . . . . . . . . . . . . . . . 39,622 26,187
Class "A" Certificate of FirstCity Liquidating Trust . . . . . 110,838 162,245
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 15,673 16,148
------------------ -----------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . $ 257,718 $ 308,889
================== =================
Liabilities, Special Preferred Stock
------------------------------------
and Shareholders' Equity
------------------------
Liabilities:
Notes payable, secured . . . . . . . . . . . . . . . . . . $ 87,448 $ 85,518
Senior subordinated notes payable . . . . . . . . . . . . . 53,345 106,690
Notes payable to others . . . . . . . . . . . . . . . . . . 6,688 8,988
Other liabilities . . . . . . . . . . . . . . . . . . . . . 5,041 5,887
------------------ -----------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . 152,522 207,083
------------------ -----------------
Commitments and contingencies . . . . . . . . . . . . . . . . . - -
Special preferred stock, including dividends of $5,814 and
$3,876, respectively (nominal stated value of $21.00 per
share; 2,500,000 shares authorized; 2,460,911 issued and
outstanding) . . . . . . . . . . . . . . . . . . . . . . . 57,493 55,555
Shareholders' equity:
Optional preferred stock (par value $.01 per share;
100,000,000 shares authorized; no shares issued or
outstanding) . . . . . . . . . . . . . . . . . . . . . . - -
Common stock (par value $.01 per share; 100,000,000 shares
authorized; 4,921,422 shares issued and outstanding) . . 49 49
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 22,916 22,916
Retained earnings . . . . . . . . . . . . . . . . . . . . . 24,738 23,286
------------------ -----------------
Total Shareholders' Equity . . . . . . . . . . . . . . . 47,703 46,251
------------------ -----------------
Total Liabilities, Special Preferred Stock and
Shareholders' Equity . . . . . . . . . . . . . . . . $ 257,718 $ 308,889
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Amounts in thousands, -----------------------------
except per share data) 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from disposition and payments received
on purchased asset pools . . . . . . . . . $ 13,995 $ 4,109
Cost of purchased asset pools . . . . . . . . . 9,331 2,692
------------- --------------
Net gain on purchased asset pools . . . . . 4,664 1,417
Other Income:
Servicing fees . . . . . . . . . . . . . . 2,518 1,656
Interest income on Class "A" Certificate . 4,312 -
Other interest income . . . . . . . . . . . 1,090 8
Rental income on purchased real estate pools 487 -
Other . . . . . . . . . . . . . . . . . . . 258 259
------------- --------------
13,329 3,340
------------- --------------
Expenses:
Interest on senior subordinated notes
payable . . . . . . . . . . . . . . . . 2,374 -
Interest on other notes payable . . . . . . 2,131 742
Salaries and benefits . . . . . . . . . . . 2,569 1,374
Amortization . . . . . . . . . . . . . . . 825 -
Other general and administrative . . . . . 2,614 413
------------- --------------
10,513 2,529
------------- --------------
Equity in earnings of acquisition partnerships . 714 628
------------- --------------
Earnings from operations before income
taxes . . . . . . . . . . . . . . . . . 3,530 1,439
Provision for income taxes . . . . . . . . . . 140 490
------------- --------------
Net earnings . . . . . . . . . . . . . . $ 3,390 $ 949
============= =============
Special preferred dividends . . . . . . . . . . 1,938 -
------------- --------------
Net earnings to common shareholders . . . . . . $ 1,452 $ 949
============= =============
Net earnings per share . . . . . . . . . . . . $ 0.30 $ 0.42
============= =============
Weighted average shares outstanding . . . . . . 4,921 2,285
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Paid in Retained Shareholders'
(Dollars in thousands) Stock Capital Earnings Equity
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, January 1, 1995 . . . . . . . . . . $ 1,574 $ 1,812 $ 17,781 $ 21,167
Common stock issued (5,935 shares) . . . . . 59 720 - 779
Common stock retired (11,080 shares) . . . . (111) (1,089) - (1,200)
Net assets spun off to Combined
Financial Corporation . . . . . . . . . . . - - (5,352) (5,352)
Merger with First City Bancorporation
of Texas, Inc. . . . . . . . . . . . . . . (1,473) 21,473 - 20,000
Net earnings for 1995 . . . . . . . . . . . . - - 14,733 14,733
Preferred stock dividends . . . . . . . . . . - - (3,876) (3,876)
--------- --------- ---------- -----------
Balances, December 31, 1995 . . . . . . . . . 49 22,916 23,286 46,251
--------- --------- ---------- -----------
Net earnings for the three months
ended March 31, 1996 . . . . . . . . . . . - - 3,390 3,390
Preferred stock dividends . . . . . . . . . . - - (1,938) (1,938)
--------- --------- ---------- -----------
Balances, March 31, 1996 . . . . . . . . . . $ 49 $ 22,916 $ 24,738 $ 47,703
========= ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . $ 3,390 $ 949
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Cost of collections . . . . . . . . . . . . . . . . . 9,331 2,692
Purchase of asset pools. . . . . . . . . . . . . . . . (1,424) -
Equity in earnings of acquisition partnerships . . . . (714) (628)
Collections on performing asset pools. . . . . . . . . 915 -
Depreciation and amortization . . . . . . . . . . . . 1,353 215
Increase in other assets . . . . . . . . . . . . . . . (2,977) (1,658)
Decrease in other liabilities . . . . . . . . . . . . (846) (2,794)
-------- -------
Net cash provided by (used in) operating activities. 9,028 (1,224)
-------- -------
Cash flows from investing activities:
Payments on advances to acquisition partnerships . . . . 177 -
Principal payment on Class "A" Certificate . . . . . . . 53,345 -
Property and equipment, net . . . . . . . . . . . . . . . (115) (32)
Contributions to acquisition partnerships . . . . . . . . (13,132) (1,338)
Distributions from acquisition partnerships . . . . . . . 234 1,214
-------- -------
Net cash provided by (used in) investing activities. . 40,509 (156)
-------- -------
Cash flows from financing activities:
Borrowings under notes . . . . . . . . . . . . . . . . . 18,974 2,700
Payments of notes payable . . . . . . . . . . . . . . . . (19,344) (3,653)
Payment of senior subordinated notes payable. . . . . . . (53,345) -
Additions to notes payable to stockholders and officers . - 1,788
Reduction of notes payable to stockholders and officers . - (1,137)
Retirement of common stock . . . . . . . . . . . . . . . - (1,200)
-------- -------
Net cash used in financing activities. . . . . . . . . (53,715) (1,502)
-------- -------
Net decrease in cash . . . . . . . . . . . . . . . . . . . (4,178) (2,882)
Cash, beginning of period . . . . . . . . . . . . . . . . . 8,370 4,150
-------- -------
Cash, end of period . . . . . . . . . . . . . . . . . . . . $ 4,192 $ 1,268
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 4,484 $ 762
======== =======
Income taxes . . . . . . . . . . . . . . . . . . . . . $ - $ -
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
As more fully discussed in Note 2, on July 3, 1995, FirstCity
Financial Corporation was formed by the merger of J-Hawk Corporation
and First City Bancorporation of Texas, Inc. Historical financial
statements prior to the merger date reflect the financial position and
results of operations of J-Hawk Corporation and are not necessarily
indicative of results expected to be achieved in the future.
The preparation of financial statements in conformity with
generally accepted accounting principles 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
asset pools used in the calculation of net gain on purchased asset
pools. Actual results could differ materially from those estimates.
The unaudited consolidated financial statements of FirstCity
Financial Corporation reflect, in the opinion of management, all
adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly FirstCity Financial Corporation's financial
position at March 31, 1996, and the results of operations and cash
flows for the three month periods ended March 31, 1996 and 1995.
(b) Description of Business
FirstCity Financial Corporation is a specialized financial
services company which evaluates, acquires, manages, services and
disposes of portfolios of performing loans, non-performing loans, other
real estate and other financial assets, (collectively, purchased asset
pools). A significant amount of loans are secured by real estate
located throughout the United States. The Company purchases these
asset pools at substantial discounts from their original legal
principal amounts from financial institutions, other lenders and
regulatory agencies of the United States. Purchased asset pools are
acquired in privately negotiated transactions, in sealed bid sales
limited to a small number of invited participants, and in public sealed
bid sales. Purchased asset pools are acquired on behalf of the Company
or its wholly-owned subsidiaries, and on behalf of legally independent
partnerships (acquisition partnerships) in which an affiliate of the
Company is the general partner and the Company and other investors are
limited partners.
The Company also services, manages and disposes of all of the
assets it, its affiliated acquisition partnerships, or other related
entities acquire. The Company services all such assets until they are
collected or sold but does not service or manage assets for
non-affiliated third parties. In the ordinary course of business, the
Company sells assets to commercial banks, investment banks, finance
companies and other investment partnerships.
7
<PAGE> 8
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(c) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of FirstCity Financial Corporation, a Delaware corporation,
and its subsidiaries (collectively referred to as "FirstCity").
Investments in 20 percent to 50 percent owned affiliates are accounted
for on the equity method. All significant intercompany transactions
and balances have been eliminated in consolidation.
(d) Purchased Asset Pools
The purchased asset pools consist of consumer loans, commercial
and industrial loans, commercial real estate loans, multi-family
residential loans, single family residential loans and various types
of other real estate, all purchased at substantial discounts from
their original legal principal amount or expected future sales price.
Loans are considered performing if debt service payments are made in
accordance with the original or restructured terms of the notes. At
the acquisition date, the aggregate cost of the purchased asset pools
is allocated to individual assets based on their relative values
within the pool. Subsequent to acquisition, the purchased asset pools
are periodically revalued and carried at the lower of cost or fair
value. Any allowance to reduce cost to fair value on purchased asset
pools is recorded as a provision for possible loss on the purchased
asset pools during the period determined. No material allowances or
provisions were required to adjust the carrying values of the
purchased asset pools for any of the periods presented.
Gross profit from dispositions and payments received on
purchased non-performing asset pools is recognized as income to the
extent that proceeds collected on the asset pool exceed a pro-rata
portion of allocated cost from the purchased asset pool. Cost
allocation is based on a proration of actual collections divided by
total estimated collections of the pool. Interest collected on loans
in the purchased non-performing asset pools is recognized as part of
the proceeds from disposition of purchased asset pools. Interest on
purchased performing asset pools is recognized when earned, including
accretion of related discounts. Servicing fees are accrued when
collections are received on serviced assets. Rental income on
purchased real estate pools is recorded when received.
(e) Foreclosed Assets
Foreclosed assets which were acquired in settlement of notes
are recorded at the lower of allocated cost or fair value. Costs
relating to the development and improvement of foreclosed assets are
capitalized, whereas those relating to holding foreclosed assets are
charged to expense.
(f) Net Earnings Per Share
Net earnings per common share calculations are based upon the
weighted average number of common shares outstanding restated to
reflect the equivalent number of FirstCity common shares which were
issued to the J-Hawk shareholders in connection with the Merger
discussed in Note 2. Earnings included in the earnings per share
calculation are reduced by special preferred stock dividends.
Potentially dilutive common stock equivalents include warrants and
stock options.
8
<PAGE> 9
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(2) Merger and Acquisition
As more fully discussed in FirstCity's Form 10-K, the Joint Plan of
Reorganization by First City Bancorporation of Texas, Inc. (the
"Debtor"), Official Committee of Equity Security Holders, and J-Hawk
Corporation ("J-Hawk"), with the Participation of Cargill Financial
Services Corporation, Under Chapter 11 of the United States Bankruptcy
Code, Case No. 392-39474-HCA-11 (the "Plan of Reorganization"), was
confirmed by the Bankruptcy Court for the Northern District of Texas,
Dallas Division, by an order entered on May 31, 1995, and became
effective on July 3, 1995. Pursuant to the Plan of Reorganization, and
an Agreement and Plan of Merger between the Debtor and J-Hawk, on July 3,
1995, J-Hawk was merged (the "Merger") with and into First City
Bancorporation of Texas, Inc. Pursuant to the Merger, (i) the former
holders of common stock of J-Hawk received, in the aggregate,
approximately 49.9% of the outstanding common stock of the surviving
entity, in exchange for their shares of J-Hawk common stock, (ii)
approximately 50.1% of the outstanding common stock of the surviving
entity was distributed among former security holders of the Debtor
pursuant to the Plan, and (iii) the name of the corporation was changed
to FirstCity Financial Corporation. As a result of the implementation of
the Plan and the consummation of the Merger, FirstCity also issued (i) 9%
senior subordinated notes, (ii) warrants to purchase 500,000 shares of
its common stock at an exercise price of $25 per share, and (iii) special
preferred stock to certain former security holders of the Debtor.
J-Hawk contributed substantially all of its interests in its acquisition
partnerships, all of its servicing operations, substantially all of its
leasehold improvements and equipment and its entire management team to
FirstCity. All remaining assets and liabilities of J-Hawk were spun out
to Combined Financial Corporation (owned by the former J-Hawk
shareholders) in June 1995. The Debtor contributed $20 million in
cash to FirstCity. While the transaction was legally structured as a
merger, substantively, the transaction is treated for accounting purposes
as a purchase of the Debtor by J-Hawk.
Pursuant to the Plan, substantially all of the legal and beneficial
interest in the assets of the Debtor, other than the above described $20
million in cash, were transferred to the newly-formed FirstCity
Liquidating Trust (the "Trust"), or to subsidiaries of the Trust. Such
assets will be liquidated over the life of the Trust pursuant to the terms
thereof. FirstCity, as the sole holder of the Class "A" Certificate under
the Trust, will receive from the Trust amounts sufficient to pay certain
expenses and its obligations under the 9% senior subordinated notes and
the special preferred stock. Any amounts in excess of such sums shall be
paid to certain of the former security holders of the Debtor pursuant to
the terms of the Class "B" and Class "C" certificates of beneficial
interests in the Trust. The liquidation of the assets transferred to the
Trust will be managed by FirstCity pursuant to an Investment
Management Agreement between the Trust and FirstCity.
On September 21, 1995, FirstCity acquired the capital stock of Diversified
Financial Systems, Inc. and Diversified Performing Assets, Inc.
(collectively, "Diversified") for $12.9 million in cash and notes.
Diversified also specializes in the acquisition and disposition of
distressed loans and loan-related assets. The acquisition, accounted for
as a purchase, increased FirstCity's assets by approximately $79 million,
including $4.8 million assigned to servicing rights held by Diversified
and $4.6 million of goodwill.
9
<PAGE> 10
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(3) Purchased Asset Pools
The purchased asset pools are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- -----------
<S> <C> <C>
Non-performing asset pools:
Loans:
Borrowers' obligation on outstanding balance of:
Performing loans $ 37,439 $ 55,337
Non-performing loans 340,316 339,465
--------- ----------
377,755 394,802
Real estate assets 9,326 10,052
--------- ----------
387,081 404,854
Performing assets pools:
Loans:
Borrowers' obligation on outstanding balance of:
Performing loans 15,789 16,714
Non-performing loans - -
--------- ----------
15,789 16,714
Purchased real estate pool (at amortized cost) 30,641 35,179
--------- ----------
Total purchased asset pools 433,511 456,747
Discount required to reflect purchased asset pools at
unamortized cost (346,118) (360,808)
--------- ----------
Purchased asset pools, net $ 87,393 $ 95,939
========= ==========
The purchased asset pools are pledged to secure non-recourse notes payable.
</TABLE>
(4) Acquisition Partnerships
The Company has investments in partnerships and related general partners
that are accounted for on the equity method. These partnerships invest in
asset pools in a manner similar to the Company, as described in Note 1. The
combined financial position and results of operations of the acquisition
partnerships and general partners are summarized below (in thousands):
Condensed Combined Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Assets $ 316,962 $ 235,820
========== ============
Liabilities 234,888 180,659
Net equity 82,074 55,161
---------- ------------
$ 316,962 $ 235,820
========== ============
</TABLE>
10
<PAGE> 11
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ -------------
<S> <C> <C>
Company's equity in
acquisition partnerships $ 30,213 $ 16,601
============ =============
Advances to
acquisition partnerships $ 9,409 $ 9,586
============ =============
</TABLE>
Condensed Combined Statements of Income
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Collections $ 25,322 $ 40,006
Gross margin 8,186 11,302
Interest income on performing
asset pools 1,768 -
Net income 1,439 1,481
========== =========
Company's equity in net income of
acquisition partnerships $ 714 $ 628
========== =========
</TABLE>
(5) Class "A" Certificate of FirstCity Liquidating Trust
Pursuant to the terms of the Plan of Reorganization and Merger,
FirstCity is the sole holder of the Class "A" Certificate of the Trust.
Redemption by the Trust of the balance due on the Class "A" Certificate
will be used to retire the senior subordinated notes payable, which are
general obligations of FirstCity, and to redeem the special preferred
stock. On March 29, 1996, $53.3 million of the senior subordinated notes
were redeemed, reducing the "A" Certificate by a like amount. At March
31, 1996, the Trust held (through purchase) $2 million principal of senior
subordinated notes.
Under the terms of the special preferred stock, FirstCity is only
required to redeem such stock and to declare dividends thereon to the
extent it receives sufficient funds from the Trust to make such payments.
Interest income on the Class "A" Certificate consists of reimbursement to
FirstCity (by the Trust) of interest expense on senior subordinated notes
and of accrued (but not declared) dividends on special preferred stock.
At March 31, 1996, dividends accrued but not declared totaled $5.8
million, or $2.36 a share. In the opinion of management, sufficient funds
will be available from the Trust to redeem the special preferred stock at
its stated redemption price and accrued dividends, on the redemption date
of September 30, 1998. See financial statements of the FirstCity
Liquidating Trust included elsewhere herein.
11
<PAGE> 12
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(6) Federal Income Taxes
Federal income taxes subsequent to the Merger are provided at a 35% rate.
Net operating loss carry forwards are available to FirstCity and are
recognized as an offset to the provision in the period during which the
benefit is realized.
(7) Other Related Party Transactions
In January, 1995, the Company entered into an agreement with a shareholder
to repurchase 11,080 shares of J-Hawk common stock for $1.2 million. The
Company paid the former shareholder $.4 million in cash and issued a $.8
million note, which was assumed by Combined Financial Corporation in June
1995.
The Company has contracted with FirstCity Liquidating Trust, the
acquisition partnerships and related parties as third party loan
servicer. All servicing fees and due diligence fees (included in other
income) reflected in the Consolidated Statements of Income were derived
from such affiliates.
(8) Commitments and Contingencies
FirstCity has pledged a portion of its interest in the future
distributions of certain acquisition partnerships, after FirstCity's
initial investment has been returned, to the subordinated debt lender
under a Residual Share Agreement (the Agreement). Under the Agreement,
this pledge is limited to twice FirstCity's original investment in the
respective partnership. In the opinion of management, this pledge does
not currently represent a material contingent claim on the future
distributions from the acquisition partnerships to FirstCity.
The Company is involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such
matters should not have a material adverse impact on the financial
condition of the Company.
12
<PAGE> 13
The following financial information of FirstCity Liquidating Trust and
Subsidiaries is the responsibility of FirstCity Liquidating Trust's Portfolio
Committee. This information is presented as a supplement to FirstCity
Financial Corporation's financial statements.
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
Assets, at estimated fair value 1996 1995
------------------------------- -------- ------------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . $ 9,617 $ 11,260
Receivables . . . . . . . . . . . . . . . . . . . . . . 2,089 2,000
Investment in FirstCity senior subordinated notes
payable . . . . . . . . . . . . . . . . . . . . . . . 2,000 -
Trust assets, net, pledged to secure senior notes
payable to banks . . . . . . . . . . . . . . . . . . 166,865 193,204
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . 180,571 206,464
-------- --------
Less liabilities at face or estimated amount
--------------------------------------------
Senior notes payable to banks, secured. . . . . . . . . 19,800 -
Estimated administrative claims . . . . . . . . . . . . 1,107 3,486
Payables and accrued liabilities . . . . . . . . . . . 1,296 1,197
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . 22,203 4,683
-------- --------
Commitments and contingencies . . . . . . . . . . . . . - -
Trust net asset value attributable to:
--------------------------------------
Class "A" Certificate, held by FirstCity Financial
Corporation . . . . . . . . . . . . . . . . . . . . . 110,838 162,245
Class "B" Certificate, 2,460,911 units outstanding. . . 47,530 39,536
Class "C" Certificate, 738,273 units outstanding . . . - -
-------- --------
Total net asset value . . . . . . . . . . . . . . . $158,368 $201,781
======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN NET ASSET VALUE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Inception
Ended to
March 31, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Changes in fair value of trust assets. . . . . . . . . $ 15,323 $ 33,548
Interest income on short-term investments . . . . . . 323 375
Interest expense . . . . . . . . . . . . . . . . . . . (15) (1,741)
Administrative expense . . . . . . . . . . . . . . . . (3,325) (8,552)
-------- --------
Net income . . . . . . . . . . . . . . . . . . . 12,306 23,630
-------- --------
Net asset value, beginning of period . . . . . . . . . 201,781 -
Contribution of net assets by First City
Bancorporation of Texas, Inc. . . . . . . . . . . . - 182,872
Principal distribution on Class "A" Certificate. . . . (53,345) -
Interest distribution on Class "A" Certificate . . . . (2,374) (4,721)
-------- --------
Net asset value, end of period . . . . . . . . . . . . $158,368 $201,781
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Inception to
Ended March 31, December 31,
1996 1995
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................... $ 12,306 $ 23,630
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Changes in fair value of trust assets .... (15,323) (33,548)
Collections on trust assets, net of
advances................................ 41,573 107,371
Purchase of Loss-Sharing assets........... - (205,513)
Decrease in other liabilities............. (2,280) (9,319)
------------- ------------
Net cash provided by (used in) operating
activities............................ 36,276 (117,379)
------------- ------------
Cash flows from financing activities:
Borrowings under notes payable to banks..... 19,800 73,000
Payments of notes payable to banks.......... - (73,000)
Advance from FirstCity Financial Corporation - 4,728
Repayment of advance from FirstCity
Financial Corporation .................... - (4,728)
Advance to FirstCity Financial Corporation.. - (2,000)
Repayment of advance to FirstCity Financial
Corporation .............................. 2,000 -
Purchase of FirstCity senior subordinated
notes .................................... (4,000) -
Capital contribution of First City
Bancorporation of Texas, Inc. ............ - 135,360
Interest and principal distribution on
Class "A" Certificate .................... (55,719) (4,721)
------------- ------------
Net cash provided by (used in)
financing activities ................. (37,919) 128,639
------------- ------------
Net increase (decrease) in cash................ $ (1,643) $ 11,260
Cash, beginning of period ..................... 11,260 -
------------- ------------
Cash, end of period ........................... $ 9,617 $ 11,260
============= ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................. $ - $ 1,741
============= ============
Non-cash financing activities:
Non-cash net assets contributed by First
City Bancorporation of Texas, Inc. ........ $ - $ 47,512
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996
(A) Summary of Significant Accounting Policies
The unaudited consolidated financial statements of FirstCity Liquidating Trust
reflect, in the opinion of management, all adjustments, consisting only of
normal and recurring adjustments, necessary to present fairly FirstCity
Liquidating Trust's financial position at March 31, 1996, and the results of
operations and cash flows for the three month period ended March 31, 1996.
(1) Description of Business
The Joint Plan of Reorganization by First City Bancorporation of Texas, Inc.
(the "Debtor"), Official Committee of Equity Security Holders, and J-Hawk
Corporation ("J-Hawk"), with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No.
392-39474-HCA-11 (the "Plan of Reorganization"), was confirmed by the
Bankruptcy Court for the Northern District of Texas, Dallas Division, by an
order entered on May 31, 1995, and became effective on July 3, 1995. Pursuant
to the Plan of Reorganization, and an Agreement and Plan of Merger between the
Debtor and J-Hawk, on July 3, 1995, J-Hawk was merged (the "Merger") with and
into First City Bancorporation of Texas, Inc., and the name of the corporation
was changed to FirstCity Financial Corporation ("FirstCity").
Pursuant to the Plan, substantially all of the legal and beneficial interests
in the assets of the Debtor, other than $20 million in cash contributed to
FirstCity, were transferred to FirstCity Liquidating Trust (the "Trust"), or
to subsidiaries of the Trust. Such assets will be liquidated over the life of
the Trust pursuant to the terms thereof. FirstCity, as the sole holder of the
Class "A" Certificate under the Trust, will receive from the Trust amounts
sufficient to pay certain expenses and FirstCity's obligations under its 9%
senior subordinated notes and its special preferred stock. Any amounts in
excess of such sums shall be paid to certain of the former security holders of
the Debtor pursuant to the terms of the Class B and the Class C certificates
of beneficial interests in the Trust. The Trust is administered by a
four-person portfolio committee (the "Portfolio Committee"). The liquidation
of the Trust's assets is managed by FirstCity pursuant to an Investment
Management Agreement between the Trust and FirstCity.
In connection with the sale of the Debtor's banks by the FDIC to third-party
acquirers (the "Loss-Sharing Banks"), the FDIC guaranteed certain recoveries
on loans acquired by the Loss-Sharing Banks. (These agreements are referred
to as "Loss-Sharing Agreements".) On July 12, 1995, in order to reduce the
uncertain effect of the Loss-Sharing Agreements on future distributions to
the Trust by the FDIC, the Trust purchased assets (the "Loss-Sharing
Settlement") for approximately $206 million from the Loss-Sharing Banks. With
the purchase of these assets, the Loss-Sharing Banks released the FDIC from
its future obligations under the Loss-Sharing Agreements.
(2) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
FirstCity Liquidating Trust and its subsidiaries (collectively referred to as
the "Trust"). All significant intercompany transactions and balances have
been eliminated in consolidation.
(3) Trust Assets
15
<PAGE> 16
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
The net assets of the Trust are carried at estimated fair values which are the
results of discounting, at appropriate discount rates, the currently estimated
cash flows projected to be realized from the collection, liquidation and
disposition of the non-cash assets held by the Trust. Such assets consist
principally of performing and non-performing loans, income producing real
estate and interests in real estate, and miscellaneous other assets and
receivables (principally from the FDIC) transferred to the Trust upon the
consummation of the Plan. The estimates of the future cash flows from which
the net asset value of the Trust was derived are made under the direction of
the management of the Trust based upon information available and believed to
be reliable. There can be no assurance, however, that the estimates resulting
from such reviews or the net asset values derived from such estimates will
ultimately be realized due to the highly judgmental assumptions which were
made in developing estimates of the amount and timing of future cash flows to
be realized upon the liquidation of the types of assets such as those held by
the Trust.
In addition to the assets described above, the Trust also holds certain
contingent asset claims, such as claims against the former Directors and
Officers of First City Bancorporation of Texas, Inc., claims under fidelity
bonds, and judgments and deficiencies arising from charged off loans to former
borrowers of the Debtor's banks. The estimated future cash flows from which
the net asset value of the Trust was derived include estimated future
collections which might be realized from such claims only when such amounts
are reasonably certain and estimable. As a result, there can be no assurance
that there will ever be any material collections realized from such contingent
asset claims.
Trust assets are periodically revalued and adjustments to estimated fair
values are included in operating results in the period in which they become
known. Loans are considered performing if debt service payments are made in
accordance with the original or restructured terms of the notes. Interest on
loans is recognized as part of the proceeds from disposition of trust assets.
Foreclosed assets acquired in settlement of notes are recorded at estimated
fair value. Costs relating to the development and improvement of property and
holding costs are considered in the development of estimated fair values.
(B) Trust Assets
Trust assets are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
--------------------- ---------------------
Legal Estimated Legal Estimated
Claim or Gross Claim or Gross
Assigned Cash Assigned Cash
Type of Asset Value Flow Value Flow
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Borrowers' obligation
on outstanding balance of:
Performing loans $ 135,781 $ 121,598 $ 139,705 $ 134,381
Nonperforming loans 185,661 50,020 225,921 60,454
Receivable from the FDIC 19,000 19,000 33,000 33,000
Real estate and other assets 48,022 33,224 60,734 33,305
--------- --------- --------- ---------
Total 388,464 223,842 459,360 261,140
--------- --------- --------- ---------
Discount required to reflect
trust assets at estimated fair
value (221,599) (56,977) (266,156) (67,936)
--------- --------- --------- ---------
Trust assets, net $ 166,865 $ 166,865 $ 193,204 $ 193,204
========= ========= ========= =========
</TABLE>
16
<PAGE> 17
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(C) Senior Notes Payable to Banks
The Trust had a revolving line of credit with two banks for borrowings of up to
$100 million. In connection with the Loss-Sharing Settlement, $73 million was
borrowed by the Trust and $27 million in letters of credit were issued in favor
of the Loss-Sharing Banks. Payments reduced the outstanding balance to zero in
November 1995. In the first quarter of 1996, an amendment to the line of
credit reduced the letters of credit to zero and established a term loan for
borrowings up to $61 million. The term loan expires December 31, 1996, and can
only be used for distributions on the Class A Certificate. In connection with
the early redemption of senior subordinated notes (see Note E), $19.8 million
was borrowed in March 1996 (and repaid in early May). Based on an election by
the Trust, interest, payable monthly, on a portion of the borrowings is at
prime plus 1%, and interest on the remaining balance is at one-month LIBOR (as
defined) plus 3.25%. Substantially all trust assets are pledged to secure the
loan.
(D) Estimated Claims
Estimated claims represent unpaid bankruptcy administrative claims and claims
for expense reimbursement of professionals providing services to or for the
benefit of the Debtor; all such claims are subject to approval of the
Bankruptcy Court.
(E) Distribution Priorities
Pursuant to the Senior Note Loan Agreement and the Liquidating Trust
Agreement, the Trust is required to apply all proceeds from liquidation and
disposition of trust assets first to payment of normal operating expenses,
including a servicing fee to FirstCity, and unpaid administrative claims of
the Debtor. Second, trust proceeds are remitted to the senior lenders for
payment of principal and interest (see Note C). Third, trust proceeds are
distributed to FirstCity, the sole Class A Certificate holder, for payment of
principal, due on September 30, 1997, and interest, at an annual rate of 9%,
on $53.3 million senior subordinated notes payable, an obligation of
FirstCity; and cumulative quarterly cash dividends ($5.8 million accrued and
undeclared at March 31, 1996) at the annual rate of $3.15 per share (on
2,460,911 shares) and redemption of the nominal stated value of $51.7 million
of FirstCity special preferred stock on September 30, 1998. In the first
quarter of 1996, the Trust distributed $53.3 million to FirstCity for the
early redemption of senior subordinated notes and held (through purchase)
$2 million principal of senior subordinated notes at March 31, 1996.
The fourth order of distribution is payments pursuant to employment agreements
with certain former employees of the Debtor. Fifth, Class B Certificate
holders (and, pursuant to bonus agreements, certain former employees of the
Debtor) are entitled to distributions up to the Pour-Over Level. The Pour-Over
Level (approximately $124 million at March 31,1996) 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. Lastly,
Class C Certificate holders receive distributions, if any, after all required
payments 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 A, B and C
Certificates will result from the cash flow realized from the liquidation of
the non-cash trust assets and contingent asset claims. The determination
17
<PAGE> 18
FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
of the net asset value of the Trust in the accompanying consolidated statement
of net assets is based upon estimates of future cash flows. The actual cash
flows and the timing of such cash flows may vary significantly from those
estimates, thus affecting the final distributions to the Certificate holders.
(F) Investment Management Agreement
Pursuant to an investment management agreement, FirstCity manages the
liquidation of trust assets and the Trust will pay FirstCity a 3% servicing
fee on collections (as defined) up to a specified level of collections.
Thereafter, the servicing fee percentage increases with additional levels of
collections. Administrative expenses include $1.1 million in the three months
ended March 31, 1996 and $3.1 million for the period from inception through
December 31, 1995, for servicing fees.
(G) 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 condition
of the Trust.
18
<PAGE> 19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FirstCity reported net earnings of $3.4 million for the first quarter of 1996.
After dividends accrued but not declared on the Company's special preferred
stock, earnings attributable to common equity were $1.5 million, or $.30 per
share. These results represent an annualized return on equity of 12.4 percent.
Earnings for the first quarter of 1995 were $.9 million, or $.42 per share.
During the first quarter of 1996, FirstCity prepared for a securitization of
approximately $100 million in acquisition partnership and affiliate performing
assets. Revenues and earnings from the securitization, which is expected to
close in the second quarter, will be recognized when the transaction is closed.
FirstCity will acquire the subordinated pieces of the securitization. The
securitization will enhance the net values of the underlying assets by
significantly reducing FirstCity's funding costs.
The first quarter of 1996 was a very successful quarter in terms of portfolio
acquisitions. Since year-end, FirstCity and its acquisition partnerships have
purchased in excess of $140 million in outstanding principal of assets.
Comprising the growth was:
o A $92 million portfolio purchased from a major banking organization.
o A $28 million portfolio of automobile finance receivables.
o A portfolio purchased from a state agency seeking to liquidate its
investment in economic development loans.
The Company has focused on growing and diversifying its asset base since year
end. A considerable portion of the assets purchased during the first quarter
are performing assets. The automobile receivables portfolio purchase marked
the first step toward implementing FirstCity's plan to enter the consumer
finance market. Along with the portfolio acquisition, FirstCity is actively
seeking opportunities to acquire an origination network to result in an ongoing
operating business in this sector.
Background
On July 3, 1995, FirstCity Financial Corporation ("FirstCity") was formed by
the merger of J-Hawk Corporation ("J-Hawk") and First City Bancorporation of
Texas, Inc. ("FCBOT"). For accounting purposes, the merger transaction was
treated as an acquisition of FCBOT by J-Hawk. Accordingly, financial
information prior to the merger date reflects the historical financial position
and results of operations of J-Hawk.
FirstCity is a specialized financial services company which evaluates,
acquires, manages, services, and disposes of portfolios of performing loans,
non-performing loans, other real estate and other financial assets
(collectively, "purchased asset pools"). Purchased asset pools are acquired by
FirstCity or its wholly-owned subsidiaries and through partnerships
("acquisition partnerships") in which an affiliate of FirstCity is the general
partner and FirstCity and other investors are limited partners.
In conjunction with the merger, the shareholders of J-Hawk received
approximately 49.9% of FirstCity's common stock and the shareholders of FCBOT
received approximately 50.1% of FirstCity's common stock. FirstCity also
issued $106.7 million in senior subordinated notes, $51.7 million in special
preferred stock and warrants to purchase 500,000 shares of its common stock at
an exercise price of $25 per share. See Note 2 to the Consolidated Financial
Statements of FirstCity.
In connection with the merger, substantially all of the assets of FCBOT, other
than $20 million in cash, were transferred to the newly-formed FirstCity
Liquidating Trust ("the Trust"). FirstCity, as the sole holder of the
19
<PAGE> 20
Class "A" Certificate under the Trust, will receive from the Trust amounts
sufficient to pay certain expenses, to retire the senior subordinated notes and
to redeem and pay dividends on the special preferred stock. The liquidation of
the assets transferred to the Trust will be managed by FirstCity for a
servicing fee. See financial statements of the Trust included elsewhere
herein.
J-Hawk merged substantially all of its interests in acquisition partnerships,
all of its servicing operations and its entire management team into FirstCity.
All of J-Hawk's remaining assets and liabilities, principally purchased asset
pools, related notes payable to banks, and receivables and payables to related
parties, were spun out to a company (Combined Financial Corporation) owned by
former J-Hawk shareholders in June 1995.
On September 21, 1995, FirstCity acquired the capital stock of Diversified
Financial Systems, Inc. and Diversified Performing Assets, Inc. (Diversified)
for $12.9 million in cash and notes. Diversified also specializes in the
acquisition and disposition of distressed loans and loan-related assets. The
acquisition, accounted for as a purchase, increased FirstCity's assets by
approximately $79 million, including $4.8 million attributable to servicing
rights held by Diversified and $4.6 million of goodwill.
The following table summarizes FirstCity's performance for the first quarter of
1996 and 1995.
CONSOLIDATED SUMMARY OF OPERATIONS
===============================================================================
<TABLE>
<CAPTION>
Three months ended
(Amounts in thousands, except per share data) March 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Income:
Net gain on purchased asset pools $ 4,664 $ 1,417
Servicing fees 2,518 1,656
Interest income on Class A Certificate 4,312 -
Other interest income 1,090 8
Rental income on purchased real estate pools 487 -
Other income 258 259
------- -------
Subtotal 13,329 3,340
------- -------
Expenses:
Interest on senior subordinated notes payable 2,374 -
Interest on other notes payable 2,131 742
Salaries and benefits 2,569 1,374
Amortization 825 -
Other general and administrative expense 2,614 413
======= ======
Subtotal 10,513 2,529
------- -------
Equity earnings of acquisition partnerships 714 628
------- -------
Earnings before income taxes 3,530 1,439
------- -------
Provision for income taxes 140 490
------- -------
Net earnings $ 3,390 $ 949
======= =======
Special preferred dividends 1,938 -
------- -------
Net earnings to common $ 1,452 $ 949
======= =======
Net earnings per share $ 0.30 $ 0.42
Average shares outstanding 4,921 2,285
Return on average equity (annualized) 12.4% 18.0%
</TABLE>
20
<PAGE> 21
The following table analyzes the composition of FirstCity's major revenue
resources:
<TABLE>
<CAPTION>
ANALYSIS OF REVENUE SOURCES
===========================================================================
Three months ended
March 31,
------------------
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
SERVICE FEE REVENUES
--------------------
ACQUISITION PARTNERSHIPS
$ collected $ 25,322 40,006
Service fee revenue 941 1,647
Average service fee % 3.72% 4.12%
TRUST
$ collected
FDIC receivable $ 17,698 -
Other trust assets 23,875 -
Service fee revenue 1,136 -
Average service fee % 2.73% -
OTHER AFFILIATE ENTITIES
$ collected $ 5,070 1,088
Service fee revenue 441 9
Average service fee % 8.70% 0.83%
TOTAL SERVICE FEES
$ collected $ 71,965 41,094
Service fee revenue 2,518 1,656
Average service fee % 3.50% 4.03%
EQUITY EARNINGS IN
ACQUISITION PARTNERSHIPS
------------------------
Asset portfolios purchased $ 98,436 46,634
Average FirstCity investment 19,886 14,457
Equity earnings in investments 714 628
GAINS ON PURCHASED ASSET POOLS
------------------------------
Asset portfolios purchased $ 1,741 -
$ collected 13,995 14,109
Net gain on collections 4,664 1,417
Profit margin on purchased asset pools 33.33% 34.49%
===========================================================================
</TABLE>
21
<PAGE> 22
The following table analyzes operations of acquisition partnerships:
<TABLE>
<CAPTION>
ANALYSIS OF ACQUISITION PARTNERSHIPS
=========================================================
Three months ended
March 31,
-------------------
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
GAINS ON DISPOSITION OF ASSET POOLS
Total gain on disposition of asset
pools $ 8,186 $ 11,302
Variance from previous year due to:
Collection levels (4,148) (1,523)
Gross profit margins 1,631 2,770
Mix (599) (404)
-------- --------
Total variance from previous year (3,116) 843
INTEREST INCOME ON PERFORMING ASSET
POOLS $ 1,768 $ -
COST OF BORROWINGS
Interest expense $ 5,774 $ 7,227
Average borrowings 177,590 232,199
Weighted average rate 13.01% 12.45%
OTHER EXPENSES
Service fee expense $ 966 $ 1,647
Legal 546 519
Property protection 889 (52)
Other 340 480
-------- --------
Total other expenses 2,741 2,594
=========================================================
</TABLE>
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
Net earnings in the first quarter 1996 were $3.4 million, up from $.9 million
in the first quarter 1995. Net earnings to common in the 1996 period were $
1.5 million, up 53% from $.9 million in the 1995 period. On a per share
basis, earnings attributable to common equity were $0.30 for the 1996 period
compared to $0.42 per share for the 1995 period. Results for periods prior to
July 3, 1995 reflect the historical net earnings of J-Hawk. The related
earnings per share are restated to reflect the equivalent number of FirstCity
common shares issued to the J-Hawk shareholders in connection with the merger
of J- Hawk and FCBOT.
NET GAIN ON PURCHASED ASSET POOLS
The net gain on purchased asset pools increased to $4.7 million in the first
quarter 1996 from $1.4 million in such period for 1995. The average investment
in purchased asset pools in the first quarter 1996 of $91.4 million exceeded
the average investment levels for such period in 1995 of $29.0 million, with
the resulting gain on disposition of purchased asset pools higher in the 1996
period due to increased levels of collections and larger asset pools.
The profit margin on collections in 1996 was 33% as compared to 34% in 1995.
Many of the assumptions upon which the future collections from purchased asset
pools are based, and therefore the gross profits recognized upon collections,
are subject to significant uncertainties such as timing and levels of
collections and the cost of maintaining and protecting such assets within the
pools. Additionally,
22
<PAGE> 23
unanticipated events and circumstances may occur. Consequently, there may
be differences between current recognized gross profit rates and actual results
achieved over the life of a portfolio. FirstCity believes that financial
institutions and other lenders will continue to offer asset pools as a result
of their consolidation and investor and regulatory pressure to dispose of
non-performing and under-performing assets. However, changes in the regulatory
environment could cause the asset pool sales to decline in the future. When
FirstCity acquires asset pools, cash flows and sale prices are projected based
upon economic conditions then prevailing and projected in the United States and
in the economic region in which the assets are situated. If such economic
conditions deteriorate, FirstCity's earnings from its then existing asset
portfolios may be adversely affected.
SERVICING FEES
Servicing fees grew to $2.5 million in the first quarter 1996 from $1.7 million
for such period in 1995, an increase of 52%. Excluding $1.1 million in fees
from collection of Trust assets, servicing fees declined $.3 million from 1995
because of lower collection levels achieved in the remaining serviced asset
pools.
INTEREST INCOME AND EXPENSE
As a result of the merger, interest income on the Class A Certificate was
recorded in the first quarter 1996, representing reimbursement to FirstCity (by
the Trust) of interest expense of $2.4 million on the senior subordinated notes
and accrual of dividends of $1.9 million on special preferred stock. Other
interest income resulted primarily from performing loans acquired in the
Diversified transaction. Interest expense on other notes payable rose in
proportion to higher volumes of debt associated with purchased asset pools.
OTHER INCOME
Rental income on purchased real estate pools resulted from a third quarter 1995
acquisition of a pool consisting entirely of real estate assets. On such
purchases, the net operating income derived from such assets is recognized as
other income with gains on sales recognized upon disposition of the asset.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses increased $4.2 million, reflecting higher
costs since acquiring Diversified, increased property expenses and amortization
of goodwill and servicing rights in the first quarter 1996 (none in the first
quarter of 1995). Also, general and administrative expenses in 1995 include a
recovery of $.7 million of prior year expenses related to the merger with FCBOT
(these expenses were reimbursed by FCBOT).
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS
Equity earnings of acquisition partnerships in the first quarter 1996 increased
marginally from such period in 1995. Collections in the acquisition
partnerships decreased $14.7 million, or 37%, and caused a decrease in gross
profit of $4.1 million. However, this reduction was more than offset by a
higher gross profit margin ($1.6 million), interest income on newly-acquired
performing asset pools ($1.8 million) and an increased ownership percentage by
FirstCity in the new partnerships.
Most of the indebtedness incurred by FirstCity and its acquisition partnerships
is floating rate debt, the rates of which change when certain short term
benchmark rates increase. If these benchmark rates increase beyond what
FirstCity had originally projected, the profitability of FirstCity and the
acquisition partnerships will be adversely affected.
FEDERAL INCOME TAXES
Federal income taxes are provided at 35% of taxable income. The Company
believes net operating loss carryforwards are available to FirstCity after July
3, 1995, and are recognized as an offset to the provision in the period during
which the benefit is realized.
LIQUIDITY AND CAPITAL RESOURCES
23
<PAGE> 24
Generally, the liquidity needs of FirstCity are for operations, payment of debt
and acquisitions of asset portfolios, investments in and advances to
acquisition partnerships and other investments by the company. The sources of
liquidity come from funds generated from operations, distributions from the "A"
Certificate of the Trust (FirstCity, as the sole holder of the Class "A"
Certificate under the Trust, will receive from the Trust amounts sufficient to
pay certain expenses, to retire the senior subordinated notes and to redeem and
pay dividends on the special preferred stock), the $20 million in equity as a
result of the merger with FCBOT, equity distributions from acquisition
partnerships and short term borrowings from lines of credit and other specific
purpose short term borrowings.
FirstCity contributed equity to acquisition partnerships totaling $13.1 million
to facilitate the purchase of $98.4 million in portfolios of assets during the
first quarter of 1996. During the quarter, FirstCity borrowed $18.8 million
under a credit facility with Cargill Financial Services, increasing the balance
under that facility to $24.0 million at quarter end. Cargill has agreed in
principle to increase the facility from $25 million to $35 million.
On March 29, 1996, FirstCity redeemed early $53.3 million of senior
subordinated notes via a distribution from the Trust. The Class "A"
Certificate was reduced by a like amount. Also, at March 31, 1996, the Trust
held (through purchase) $2 million principal of senior subordinated notes.
In the future, FirstCity anticipates being able to raise capital through public
debt or equity offerings, thus enhancing the investment and growth
opportunities of the Company. FirstCity believes liquidity from these sources
should be sufficient for continued growth in partnership formation and direct
investment activities. Other sources of liquidity, including the Cargill
credit facility, potential public offerings, and funding from senior lenders
providing funding for acquisition partnership formation and direct portfolio
acquisitions, should prove adequate to continue to fund the company's other
contemplated investment activities. At March 31, 1996, total common equity was
$47.7 million and is considered by management adequate to support the current
capital requirements and planned growth of the Company.
FirstCity attributes a significant portion of its recent financial success to
its affiliation with Cargill. Participation by Cargill in a transaction
provides assurances to any potential seller of a portfolio of distressed assets
that FirstCity will have the financial ability to consummate the targeted
portfolio acquisition. In addition, FirstCity believes that Cargill's general
reputation in the financial markets provides FirstCity with more opportunities
to acquire portfolios than FirstCity would otherwise have acting alone.
Discontinuation of this arrangement with Cargill could have a negative economic
impact upon the continued results of operations of FirstCity.
FirstCity's continued success in its asset acquisition business is dependent
upon the availability of senior debt financing for the acquisition
partnerships. Although FirstCity continues to enjoy good relationships with
its current lenders and to develop new sources of senior debt financing, there
can be no assurances that these and other sources of senior debt financing will
be available in the future.
24
<PAGE> 25
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule. (Exhibit 27.1 is being submitted as an
exhibit only in the electronic format of this Quarterly Report
on Form 10-Q being submitted to the Securities and Exchange
Commission. Exhibit 27.1 shall not be deemed filed for purposes
of Section 11 of the Securities Act of 1933, as amended,
Section 18 of the Securities Exchange Act of 1934, as amended,
or Section 323 of the Trust Indenture Act of 1939, as amended,
or otherwise be subject to the liabilities of such sections,
nor shall it be deemed a part of any registration statement
to which it relates.)
(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 March 31, 1996.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FIRSTCITY FINANCIAL CORPORATION
/s/ Gary H. Miller
-------------------------------
Name: Gary H. Miller
Title: Senior Vice President
and Controller
(Duly authorized officer and chief
accounting officer of the Registrant)
Dated: May 10, 1996
26
<PAGE> 27
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,192
<SECURITIES> 110,838
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 87,393
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 257,718
<CURRENT-LIABILITIES> 0
<BONDS> 147,481
57,493
0
<COMMON> 49
<OTHER-SE> 47,654
<TOTAL-LIABILITY-AND-EQUITY> 257,718
<SALES> 13,995
<TOTAL-REVENUES> 28,038
<CGS> 9,331
<TOTAL-COSTS> 9,331
<OTHER-EXPENSES> 6,008
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,505
<INCOME-PRETAX> 3,530
<INCOME-TAX> 140
<INCOME-CONTINUING> 3,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,452
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
