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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM___________TO___________
COMMISSION FILE NUMBER 1-7614
FIRSTCITY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0243729
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6400 IMPERIAL DRIVE, WACO, TX 76712
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(817) 751-1750
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of Each Class
Common Stock, par value $.01
Special Preferred Stock, par value $.01
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [_]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS
AND REPORTS REQUIRED TO BE FILED BY SECTION 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 [_]
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 3, 1997 WAS
4,932,390. AS OF SUCH DATE, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD
BY NON-AFFILIATES, BASED UPON THE CLOSING PRICE OF THESE SHARES ON THE NASDAQ
NATIONAL MARKET SYSTEM, WAS APPROXIMATELY $70,239,000.
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FORWARD LOOKING INFORMATION
The statements included in this Annual Report on Form 10-K regarding
future financial performance and results and the other statements that are not
historical facts are forward-looking statements. The words "expect," "project,"
"estimate," "predict," "anticipate," "believes" and similar expressions are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions, natural disasters and
other catastrophes, and other risks and uncertainties described in this Annual
Report on Form 10-K and in FirstCity Financial Corporation's other filings with
the Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
PART I
ITEM 1. BUSINESS.
FirstCity Financial Corporation ("FirstCity" or the "Company") is a
specialty financial services company that acquires, manages, services and
resolves portfolios of performing loans, non-performing loans, other real estate
and other financial assets (collectively, "purchased asset pools"). The Company
acquires purchased asset pools, by itself and through its equity interests in
affiliated partnerships (the "acquisition partnerships"), by means of privately
negotiated transactions and competitive bidding. Such purchased asset pools are
acquired primarily from financial institutions and other traditional lenders at
substantial discounts from their legal balances, and consist principally of
commercial and consumer assets that may be performing, under performing or
non-performing. The Company manages, services and resolves all of the purchased
asset pools acquired by the Company or the acquisition partnerships, as well as
the assets owned by FirstCity Liquidating Trust (the "Trust") and certain
affiliated entities. The Company generates a significant amount of revenue from
servicing the assets of the acquisition partnerships, the Trust and affiliated
entities, and believes the experience and expertise of its servicing operations
is one of the Company's main strengths and competitive advantages. The Company
also performs a minimal amount of servicing 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.
Additionally, the Company has expanded into speciality finance markets with the
acquisition of National Auto Funding Corporation and NAF Auto Loan Trust
(collectively, "NAF") and the creation of ETAFirst Funding, Inc. ("ETA"). See
"Business Strategy" below.
Asset Acquisition and Resolution Business. The asset acquisition and
resolution business is relatively new, developing in the mid-1980s. In the early
1990s, large quantities of distressed assets were available for acquisition from
the Resolution Trust Corporation ("RTC") and the Federal Deposit Insurance
Corporation ("FDIC"). Many new competitors entered the market for the
acquisition of distressed assets during this period. Since 1993, most sellers of
distressed assets have been private sellers, rather than government agencies.
Often these sellers are healthy financial institutions which, as a result of
state and federal regulations regarding the allocation of regulatory capital,
are motivated to dispose of, rather than manage, under performing and
non-performing assets.
The evolution of the distressed asset acquisition market has resulted
in a number of significant changes in the Company's core business. The increased
experience level of competing acquirors of assets with the capabilities to both
acquire and, more significantly, manage, service and resolve such assets permits
both acquirors and sellers of such assets to more accurately value and price
such assets. The private sellers of assets, often healthy financial
institutions, which now comprise a significant majority of sellers of assets
into the market, generally have significantly better quality information
regarding the distressed assets they make available for sale than did the RTC
and FDIC. With better quality information available, a portion of the
uncertainty with respect
<PAGE>
to the ultimate resolution of pools of assets is removed, permitting sellers and
buyers to more accurately value and price portfolios. Private sellers also sell
assets more frequently in negotiated transactions rather than pursuant to bids
which the RTC and FDIC frequently utilized, thereby permitting such sellers to
negotiate with potential acquirors, like the Company, that have the proven
ability to consummate such transactions. In addition, the distressed asset
acquisition business has become significantly more competitive in the last five
years with many new entrants into the business. The effect of more competitive
pricing on economic returns to the Company, however, has been significantly
mitigated by changes in the market for financing available to purchasers of
distressed assets. Greater lender familiarity with the risks inherent in the
market, combined with increased competition as more lenders compete for
business, have resulted in purchasers of distressed assets being able to finance
greater portions of the purchase price at lower rates, enabling purchasers like
the Company to maintain levels of returns on investments.
The following table sets forth the annual dollar amount and percentage
of purchased asset pools acquired by the Company or the acquisition partnerships
from the FDIC and the RTC on a combined basis, and from private sources for the
periods indicated.
PURCHASED ASSET POOLS -- SELLER TYPE
(Dollars in thousands)
SELLER
-------------------------------------------------------------
FDIC/RTC COMBINED PRIVATE
-------------------------- --------------------------
1992 $ 66,908 81% $ 16,206 19 %
1993 104,835 46 124,091 54
1994 1,752 1 228,878 99
1995 1,882 1 211,305 99
1996 13,902 7 191,622 93
Purchased asset pools are comprised of non-homogeneous assets,
including loans of varying qualities which are secured by varying collateral
types and foreclosed properties. Some commercial loans are loans for which
resolution is tied primarily to the real estate securing the loan, while others
may be collateralized business loans the resolution of which may be based either
on business or real estate or other collateral cash flow. Consumer loans may be
secured (by real or personal property) or unsecured. Assets comprising purchased
asset pools may be performing, under-performing or non-performing. Performing
assets are those which debt service payments are being made in accordance with
the original or restructured terms of such assets. Under-performing assets are
those which debt service payments are being made, but not in accordance with the
original or restructured terms of such assets. Non-performing assets are those
which no debt service payments are being made.
The Company has substantial experience acquiring, managing, servicing
and resolving a wide variety of asset types and classes. It therefore does not
limit itself as to the types of purchased asset pools it will evaluate and
purchase. As a result, the main factors determining the Company's willingness to
acquire a purchased asset pool include the information which is available
regarding the assets within such pool, the price at which such pool can be
acquired and the expected net cash flows which might be received from the
resolution of such assets.
Asset Analysis and Servicing. The Company receives information about
opportunities to acquire purchased asset pools from a variety of sources. Prior
to purchasing any purchased asset pool, the Company performs extensive due
diligence on the assets comprising such pool. The Company generally reviews all
significant assets in a prospective purchased asset pool, including an analysis
of each such asset's projected cash flow and sources
3
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of repayment, including the availability of financial guarantees from third
parties. After an asset is acquired, the Company assigns it to an account
servicing officer either at its headquarters in Waco, Texas or in one of the
Company's other offices. The Company generally establishes servicing operations
in locations other than its headquarters with respect to purchased asset pools
comprised of assets (which are typically commercial) that are more readily
serviced locally because of such pool's significant geographic concentrations.
All such offices are temporary and are closed after the assets in the geographic
region are substantially resolved. The assigned account officer develops a
business plan and budget for each asset based upon a review of the cash flow
projections developed during the Company's investment evaluation, a physical
inspection of such asset or the collateral underlying the related loan, local
market conditions and discussions with the relevant borrower, which is
periodically reviewed and revised as necessary.
The Company manages assets it acquires directly, and generates
significant revenue from servicing assets owned by the acquisition partnerships,
the Trust and related entities. Management believes that its present computer
hardware and software systems are sufficient to manage all presently
contemplated growth plans of the Company. The Company also performs a minimal
amount of servicing for non-affiliated third parties.
Location of Purchased Asset Pools. The Company purchases all types of
performing, under performing and non-performing loans and assets, including
various types of real estate, in all geographical areas within the United
States. The Company believes that its willingness to purchase non-homogeneous
purchased asset pools in any geographical area within the United States provides
it with an advantage over certain competitors which limit themselves to either a
specific type of distressed asset or a particular geographical area. Although
the Company has no constraints on geographic locations of assets in purchased
asset pools; to date, the majority of assets acquired by the Company and the
acquisition partnerships have been located in the Northeastern and Southern
areas of the United States.
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The following table sets forth, as of the dates indicated, the
geographical location of the purchased asset pool assets owned by the Company
and the acquisition partnerships, shown as a percentage of all such assets.
PURCHASED ASSET POOLS -- ASSET LOCATIONS
As a Percentage of Total Purchased Asset Pools
AS OF
DECEMBER 31,
LOCATION 1996 1995
- -------- ---- ----
Northeast:
Connecticut..................................... 12.1% 13.7%
Massachusetts................................... 8.1 16.7
New Jersey...................................... 6.4 6.8
New York........................................ 10.6 9.8
Pennsylvania.................................... 3.7 6.3
Vermont......................................... 1.1 1.4
New Hampshire................................... 3.1 3.5
Maryland........................................ 3.0 .6
------- -------
Subtotal.................................... 48.1 58.8
South/Southeast:
Florida......................................... 9.4 7.5
Georgia......................................... 1.9 2.1
North Carolina.................................. 1.1 .6
South Carolina.................................. 5.8 1.9
Texas........................................... 17.8 11.7
Virginia........................................ 2.3 2.3
Louisiana....................................... 1.5 1.9
------- ------
Subtotal.................................... 39.8 28.0
West:
California...................................... 3.0 2.0
Midwest:
Illinois........................................ .8 1.2
Missouri........................................ .8 1.2
------ -------
Subtotal.................................... 1.6 2.4
Other............................................... 7.5 8.8
------ -------
TOTAL....................................... 100.0% 100.0%
====== =======
Structure and Financing of Asset Acquisitions. The Company acquires
purchased asset pools both directly and through its equity interests in the
acquisition partnerships. Purchased asset pools owned directly by the Company
are financed with a combination of senior debt and equity contributed by the
Company.
Each acquisition partnership is a separate legal entity, formed as a
limited partnership. The Company and an investor, such as Cargill Financial
Services Corporation ("Cargill"- see below), typically form a corporation to
serve as the corporate general partner of each acquisition partnership.
Typically, the Company and an investor each own 50% of the general partner and a
49% limited partnership interest in the acquisition partnership (the general
partner owns the other 2% limited partnership interest). The Company believes
that such legal structure insulates the Company and the other acquisition
partnerships from certain potential risks, while permitting the Company to share
in the economic benefits of each acquisition partnership.
The acquisition partnerships generally are financed by debt secured
only by the assets of such acquisition partnership and nonrecourse to the
Company, the investor and the other acquisition partnerships.
Relationship with Cargill. Cargill provides substantial debt and equity
financing to the acquisition partnerships. In addition, the Company believes its
relationship with Cargill significantly enhances the Company's competitiveness
as an acquiror of purchased asset pools, and that Cargill's prominence in the
financial services industry will help the Company as it seeks to expand the
scope of its business lines. Cargill is a
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diversified financial services company and a wholly-owned subsidiary of Cargill,
Incorporated, regarded as one of the world's largest privately-held
corporations.
Cargill began investing in acquisition partnerships in 1992. Since
1992, J-Hawk Corporation ("J-Hawk") (and since the Merger, the Company - see
below) and Cargill have been parties to a Right of First Refusal Agreement
pursuant to which Cargill has the right to participate as an equity investor in
certain purchased asset pools. Cargill also provides a $35 million dollar
revolving credit facility to the Company. Such facility expires in June 1997.
During the third quarter of 1996, thirteen partnerships refinanced the existing
senior and subordinated debt with Cargill totaling approximately $80 million.
Business Strategy. The Company's core business continues to be the
acquisition, management, servicing and resolution of purchased asset pools.
However, in order to capitalize on its substantial experience in acquiring,
managing, servicing and resolving distressed consumer assets, the Company has
made a strategic decision to expand the scope of its business lines to take
advantage of opportunities in certain additional specialty consumer and finance
markets.
Key elements in the Company's overall business strategy include:
o Increasing the Company's investments in purchased
asset pools, both separately and through the
acquisition partnerships.
o Identifying and acquiring, through non-traditional
niche sources, distressed assets that meet the
Company's investment criteria, which may involve the
utilization of special acquisition structures.
o Identifying and acquiring additional businesses in
the specialty finance markets that meet the Company's
investment criteria.
o Acquiring, managing, servicing and resolving assets
in certain international markets, both separately or
in partnership with others, including Cargill.
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
attributable to servicing rights held by Diversified and $ 4.6 million of
goodwill.
During the second and third quarters of 1996, FirstCity commenced
efforts to expand its business lines into certain sectors of the consumer
finance business with the acquisition of National Auto Funding Corporation and
NAF Auto Loan Trust (collectively, "NAF") and the creation of ETAFirst Funding,
Inc. ("ETA"). NAF underwrites and finances installment contracts generated by
third party financial institutions and automobile dealerships in several
locations in the United States. These contracts are serviced by Milco Loan
Servicing, a wholly-owned subsidiary of the Company acquired in October of 1996.
NAF targets certain borrowers with limited credit histories, lower incomes or
past credit problems. ETA purchases certain education loans originated by
various proprietary training schools, generally at substantial discounts from
face value.
On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc. ("Harbor"). FirstCity and Harbor executed the
definitive Agreement and Plan of Merger on March 26, 1997, pursuant to which
FirstCity will issue 1,581,000 shares of common stock in exchange for 100% of
Harbor's outstanding capital stock. Harbor originates and services residential
loans, home improvement loans and commercial mortgages. Harbor has approximately
$11 million in equity, assets of over $200 million and 625
6
<PAGE>
employees. The transaction is subject to the approval of both companies'
shareholders, and various regulatory approvals.
Formation of the Company. The Company was formed July 3, 1995 by the
merger (the "Merger") of J-Hawk, which was engaged in the asset acquisition,
management and resolution business, with and into FirstCity Bancorporation of
Texas, Inc. ("FCBOT"), a former bank holding company which had been engaged in a
proceeding under Chapter 11 of the Bankruptcy Code since November 1992,
following the closure of its banks by regulatory agencies.
As a result of the Merger, the former holders of common stock of J-Hawk
received, in the aggregate, approximately 49.9% of the Company's outstanding
common stock in exchange for their shares of J-Hawk common stock and
approximately 50.1% of the Company's outstanding common stock was distributed
among former security holders of FCBOT. The Company also issued, to certain
former security holders of FCBOT, senior subordinated notes (all of which have
been redeemed), special preferred stock and warrants, and all of the debt and
equity securities of FCBOT outstanding immediately prior to the consummation of
the Merger were canceled.
Pursuant to the Joint Plan of Reorganization ("Plan of
Reorganization"), substantially all of the legal and beneficial interest in the
assets of FCBOT, other than $20 million in cash, were transferred to the
newly-formed 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 FCBOT 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. Subsequent to 1996,
FirstCity and the Trust entered into an agreement terminating the Investment
Management Agreement, pursuant to which FirstCity received approximately $6.8
million.
After giving effect to certain transactions consummated by J-Hawk and
FCBOT immediately prior to the Merger, upon the Merger, the assets of the
Company substantially consisted of J-Hawk's interests in the acquisition
partnerships, all of J-Hawk's leasehold improvements and equipment, $20 million
in cash from FCBOT and the Class "A" Certificate issued by the Trust, which
acquired substantially all of FCBOT's other assets upon the Merger.
As a result of the structure of the Merger and certain related
transactions, the Company believes that at the merger date approximately $600
million of net operating loss carry forwards ("NOLs") were available to offset
future taxable earnings of the Company, although there can be no assurances that
the availability of such NOLs will not be successfully challenged by the IRS.
Prior to the Merger, the securities of FCBOT were publicly traded and
FCBOT was a reporting company under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Following the Merger, the Company continued to be
a reporting company under the Exchange Act with its securities publicly traded.
In November 1995, the common stock and special preferred stock were approved for
quotation on the Nasdaq National Market.
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<PAGE>
EMPLOYEES
FirstCity had 183 employees as of December 31, 1996. No employee is a
member of a labor union or party to a collective bargaining agreement. The
Company believes that its employee relations are generally good.
EXECUTIVE OFFICERS OF THE REGISTRANT
James R. Hawkins, 61, has been Chairman of the Board and Chief
Executive Officer of FirstCity since July 3, 1995, and of J-Hawk since 1976.
James T. Sartain, 48, has been President and Chief Operating Officer of
FirstCity since July 3, 1995, and of J-Hawk since 1988.
Rick R. Hagelstein, 50, has been Executive Vice President and Managing
Director of Asset Management of FirstCity since November 1996. Prior thereto,
Mr. Hagelstein served as Executive Vice President and Chief Credit Officer of
FirstCity since July 3, 1995, and of J-Hawk since 1990. From 1988 to 1990, Mr.
Hagelstein was Executive Vice President of ASK Corporation, a manufacturer of
solar energy devices.
Matt A. Landry, Jr., 54, has been Executive Vice President, Senior
Financial Officer and Managing Director of Mergers and Acquisitions since
November 1996. Prior thereto, Mr. Landry served as Executive Vice President and
Chief Financial Officer of FirstCity since July 3, 1995, and of J-Hawk since
1992. From 1988 to 1992, Mr. Landry was President and Chief Operating Officer
and a Director of AmWest Savings Association, a savings and loan association.
Terry R. DeWitt, 39, has been Senior Vice President responsible for Due
Diligence and Investment Evaluation of FirstCity since July 3, 1995, and of
J-Hawk since 1992. From 1991 to 1992, Mr. DeWitt was Senior Vice President of
the First National Bank of Central Texas, a national banking association, and
from 1989 to 1991, he was President of the First National Bank of Goldthwaite, a
national banking association.
Steve Fillip, 45, has been Senior Vice President and Chief Credit
Officer since November 1996 and Senior Vice President of FirstCity since July 3,
1995, and of J-Hawk since 1991. From 1989 to 1991, Mr. Fillip was Executive Vice
President and Chief Credit Officer of BancOne, Texas, N.A. (Waco), a national
banking association.
Joe S. Greak, 48, has been Senior Vice President, Tax Director and
Secretary of FirstCity since July 3, 1995, and has been the Tax Manager of FCBOT
since 1993. From 1992 to 1993, Mr. Greak was the Tax Manager of New First City -
Houston, N.A. Prior thereto, he was Senior Vice President and Tax Director of
First City, Texas - Houston, N.A.
James C. Holmes, 40, has been Senior Vice President and Manager of
Finance, Budget and Information Services of FirstCity since July 3, 1995, and of
J-Hawk since 1991. From 1988 to 1991, Mr. Holmes was a Vice President of MBank,
Waco, a national banking association.
Kathy McNair, 47, has been Senior Vice President of FirstCity since
July 3, 1995, and of J-Hawk since 1992. Ms. McNair is currently Manager of
Credit Administration of FirstCity; prior thereto, she was Credit Administration
Manager of a wholly owned subsidiary of J-Hawk. From 1990 to 1992, Ms. McNair
was a Vice President of Investors Savings Bank, a savings and loan association,
and from 1988 to 1990, Ms. McNair was a Vice President of Old Kent Bank
Southwest, a state chartered bank.
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Gary H. Miller, 37, has been Senior Vice President and Chief Financial
Officer since November 1996. Prior thereto, Mr. Miller served as Senior Vice
President and Controller of FirstCity since July 3, 1995, and of J-Hawk since
1994. From 1990 to 1994, Mr. Miller was a senior manager of Jaynes, Reitmeier,
Boyd & Therrell, P.C., an independent public accounting firm. From 1988 to 1990,
Mr. Miller was a Vice President of NCNB Texas National Bank, a national banking
association.
Jim W. Moore, 46, has been Senior Vice President and Manager of
Subsidiary Activities since November 1996. Prior thereto, Mr. Moore served as
Senior Vice President and Manager of Assets of FirstCity since July 3, 1995, and
of J-Hawk since 1992. From 1990 to 1992, Mr. Moore was a management consultant
for MBank, Waco, a national banking association, and from 1988 to 1990, Mr.
Moore was President and a Director of Central Texas Savings and Loan, a savings
and loan association.
COMPETITION
The Company's competition varies by geographic location and type of
asset being purchased. Generally, competition within each of the markets in
which the Company competes is fragmented with national, regional and local
competitors, none of which dominates a particular market. The Company's
competitors include investment partnerships created for the primary purpose of
acquiring distressed assets, commercial banks, investment banks, public and
private financial services companies generally similar to the Company and
various other legal entities. Certain of the Company's competitors are larger,
have greater financial resources than the Company or have lower required
financial rates of return on investments than the Company.
ITEM 2. PROPERTIES.
FirstCity maintains offices in Waco, Irving, Richardson, and Houston,
TX, Irvine, CA, Philadelphia, PA, Richmond, VA, Hartford, CT, Fort Wayne, IN and
Franklin, MA. FirstCity leases all its offices, and other than its current
headquarters in Waco, Texas, considers all its offices to be temporary.
FirstCity leases its current headquarters building from a related party under a
noncancellable operating lease which expires December 2001.
All leases of the other offices of FirstCity expire prior to March, 2000.
ITEM 3. LEGAL PROCEEDINGS.
Periodically, FirstCity and the acquisition partnerships are parties to
or otherwise involved in legal proceedings arising in the normal course of
business. FirstCity does not believe that there is any proceeding threatened or
pending against it or the acquisition partnerships which, if determined
adversely, would have a material adverse effect on the financial position,
results of operations or liquidity of FirstCity or the acquisition partnerships.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
FirstCity's common (FCFC) and special preferred (FCFCP) shares were
listed on the Nasdaq National Market System effective November 3, 1995, and were
traded over the counter beginning July 3, 1995. The number of common
stockholders of record on December 31, 1996, was approximately 650.
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<PAGE>
High and low stock prices and dividends in 1996 and 1995 are displayed
in the following table:
<TABLE>
<CAPTION>
1996 1996 CASH 1995
------ ----------- -----
QUARTER ENDED MARKET PRICE DIVIDENDS MARKET PRICE
Common Stock: High Low Paid High Low
- ------------- ---- --- ---- ---- ---
<S> <C> <C> <C> <C> <C>
March 31......................... $ 22.88 $ 18.25 $ - $ - $ -
June 30.......................... 29.00 18.75 - - -
September 30(1).................. 29.50 24.63 - 18.50 12.00
December 31...................... 31.88 27.75 - 22.38 15.13
Special Preferred Stock:
March 31......................... $ 24.75 $ 23.13 $ - $ - $ -
June 30.......................... 25.75 24.13 - - -
September 30 (1)................. 26.50 25.31 - 22.38 19.75
December 31...................... 26.50 22.00 3.92 (2) 23.83 21.31
<FN>
(1) Beginning July 3, 1995, the date of the Merger.
(2) Accrued dividend from July 3, 1995 through September 30, 1996.
</FN>
</TABLE>
Prior to the Merger of J-Hawk and FCBOT on July 3, 1995, FCBOT's common
stock (FBT) was traded over the counter. High and low stock prices for 1995 are
displayed in the following table:
1995
STOCK PRICES MARKET PRICE
QUARTER ENDED High Low
- ------------- ---- ---
March 31................................................. $0.87 $0.25
June 30.................................................. 0.75 0.37
September 30 (1)......................................... 0.63 0.25
(1) Through July 3, 1995, the date of the Merger.
Certain information concerning the common stock of FirstCity is
included elsewhere herein under the heading "Management's Discussion and
Analysis - Common and Preferred Stock Data," and under Notes 2 and 7 to the
Consolidated Financial Statements, included elsewhere herein.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data is presented elsewhere herein under the heading
"Selected Financial Data" in Item 8 - Financial Statements and Supplementary
Data. The Selected Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this Report and with the related Consolidated
Financial Statements and Notes thereto under Item 8 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Net earnings for FirstCity Financial Corporation ("FirstCity" or the
"Company") were $35.4 million in 1996. After dividends on special preferred
stock, earnings attributable to common equity were $27.7 million. These results
include $14.6 million associated with the initial revaluation of tax benefits in
the second quarter of 1996. Net of tax benefits from this initial revaluation,
1996 earnings were $13.1 million, compared to $10.9 million in 1995. Per share
earnings were $5.63 ($2.66 excluding the previously mentioned deferred tax
benefit), versus $2.98 per share in 1995.
Earnings for 1996 were significantly increased by the recognition of
certain tax benefits resulting from the Company's reassessment of its valuation
allowance (reserve) related to its net operating loss carry forward
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("NOL") asset. Realization of the asset is dependent upon generating sufficient
taxable earnings to utilize the NOL. Although realization is not assured,
management believes it is more likely than not that FirstCity will generate
sufficient taxable income in future periods to utilize the tax benefit
recognized. Prior to the second quarter of 1996, the deferred tax asset
resulting from the Company's NOL was entirely offset by this valuation reserve.
In the second quarter of 1996, the valuation reserve was reduced based on
estimates of future income. The amount of tax benefits recognized will be
adjusted in future periods should the estimates of future taxable income change.
To the extent that there are changes in the estimated reserve, net earnings will
be impacted accordingly.
FirstCity's asset acquisition business remained strong in 1996 with the
Company investing in excess of $200 million in asset purchases for the fourth
consecutive year. Major acquisitions included:
- A $92 million portfolio purchased from a major banking organization.
- A $28 million portfolio of automobile finance receivables.
- A $44 million portfolio purchased in France, marking the
commencement of FirstCity's international investment activities.
- A $23 million real-estate portfolio.
In May 1996, FirstCity initiated its sub-prime auto finance lending
activity through the acquisition of National Auto Funding Corporation and NAF
Auto Loan Trust (collectively, "NAF"), Irving, Texas. NAF owned $33.6 million of
loans at year-end, including $17.6 million originated in 1996. FirstCity
augmented the allowance for loan losses associated with the NAF portfolio by
providing a $2 million provision during 1996.
The results for 1996 reflect $2 million of servicing fees which the
Company recognized in conjunction with the $75 million securitization of
acquisition partnership performing loans completed in August. The securitization
facilitated a refinancing of a majority of the debt of the acquisition
partnerships that was completed in September. This refinancing resulted in a $7
million equity distribution to FirstCity as well as a reduction in the overall
cost of funds for the acquisition partnerships.
During 1996, FirstCity redeemed all $106.7 million of senior
subordinated notes issued in conjunction with the Merger, reducing the Class A
Certificate of the FirstCity Liquidating Trust by a like amount.
On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc. ("Harbor"), a mortgage bank headquartered in
Houston, Texas. FirstCity and Harbor executed the definitive Agreement and Plan
of Merger on March 26, 1997, pursuant to which FirstCity will issue 1,581,000
shares of common stock in exchange for 100% of Harbor's outstanding capital
stock. Harbor originates and services conventional and niche residential loans,
home improvement loans and commercial mortgages. Harbor has approximately $11
million in equity, assets of over $200 million and 625 employees. The
transaction remains subject to the approval of both companies' shareholders, and
various regulatory approvals.
On July 3, 1995, 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.
11
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes FirstCity's performance since 1994.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Income:
Net gain on purchased asset pools............... $ 19,510 $ 11,984 $ 7,636
Servicing fees.................................. 12,456 10,903 8,080
Interest income on Class "A" Certificate....... 11,601 8,597 -
Other interest income........................... 7,707 1,572 69
Rental income on purchased real estate pools ... 3,033 1,277 -
Other income.................................... 1,037 1,356 921
----------- ----------- -----------
Subtotal...................... 55,344 35,689 16,706
----------- ----------- -----------
Expenses:
Interest on senior subordinated notes payable... 3,892 4,721 -
Interest on other notes payable................. 9,980 4,284 1,812
Provision for loan losses....................... 2,029 - -
Salaries and benefits........................... 10,822 8,094 7,252
Amortization.................................... 3,113 1,534 -
Travel.......................................... 1,372 797 1,007
Occupancy....................................... 2,433 1,336 1,289
Legal and accounting............................ 2,323 400 1,212
Other general and administrative expense........ 6,113 2,688 2,483
----------- ----------- -----------
Subtotal...................... 42,077 23,854 15,055
----------- ----------- -----------
Equity earnings of acquisition partnerships 6,125 3,834 7,497
----------- ----------- -----------
Earnings before income taxes.................... 19,392 15,669 9,148
----------- ----------- -----------
Provision (benefit) for income taxes............ (16,013) 936 3,121
----------- ----------- -----------
Net earnings.................................... $ 35,405 $ 14,733 $ 6,027
=========== =========== ===========
Special preferred dividends..................... 7,709 3,876 -
----------- ----------- -----------
Net earnings to common.......................... $ 27,696 $ 10,857 $ 6,027
=========== =========== ===========
Net earnings per share.......................... $ 5.63 $ 2.98 $ 2.37
=========== =========== ===========
Average shares outstanding...................... 4,923 3,642 2,544
=========== =========== ===========
Return on average equity ....................... 45.9% 34.5% 33.7%
</TABLE>
12
<PAGE>
The following table analyzes the composition of FirstCity's major
revenue sources:
<TABLE>
<CAPTION>
ANALYSIS OF REVENUE SOURCES
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
RESULTS DERIVED FROM PURCHASED OR
ORIGINATED ASSET POOLS
NON-PERFORMING ASSET POOLS:
Asset portfolios purchased................... $ 33,151 $ 111,561 $ 27,869
$ collected.................................. 70,940 44,760 18,341
Net gain on collections...................... 19,510 11,984 7,636
Profit margin on purchased asset pools....... 27.50% 26.77% 41.63%
PERFORMING ASSET POOLS:
Asset portfolios purchased................... $ 25,525 $ - $ -
Loans originated............................. 18,146 - -
Interest income.............................. 6,178 - -
SERVICE FEE REVENUES
ACQUISITION PARTNERSHIPS
$ collected.................................. $ 174,012 $ 188,934 $ 206,627
Service fee revenue.......................... 6,468 6,834 7,940
Average service fee %........................ 3.72% 3.62% 3.84%
TRUST
$ collected:
FDIC receivable........................... $ 35,316 $ 30,000 $ -
Other trust assets........................ 123,007 77,371 -
Service fee revenue.......................... 4,241 3,110 -
Average service fee %........................ 2.68% 2.90% -
OTHER AFFILIATED ENTITIES
$ collected.................................. $ 28,636 $ 18,218 $ 3,741
Service fee revenue.......................... 1,747 959 140
Average service fee %........................ 6.10% 5.26% 3.74%
TOTAL SERVICE FEES
$ collected.................................. $ 360,971 $ 314,523 $ 210,368
Service fee revenue.......................... 12,456 10,903 8,080
Average service fee %........................ 3.45% 3.47% 3.84%
EQUITY EARNINGS IN
ACQUISITION PARTNERSHIPS
Asset portfolios purchased....................... $ 146,848 $ 101,626 $ 202,761
Average FirstCity investment..................... 25,784 14,429 15,180
Equity earnings in investments................... 6,125 3,834 7,497
</TABLE>
13
<PAGE>
The following table analyzes operations of FirstCity's acquisition
partnerships:
<TABLE>
<CAPTION>
ANALYSIS OF ACQUISITION PARTNERSHIPS
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
-------------- --------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
GAINS ON DISPOSITION OF ASSET POOLS
Gross collections......................... $ 174,012 $ 188,934 $ 206,627
Cost of collections....................... 134,507 137,564 143,188
-------------- --------------- ----------------
Total gain on disposition of asset pools.. $ 39,505 $ 51,370 $ 63,439
============== =============== ================
Variance from previous year due to:.......
Collection levels................ $ (4,057) $ (5,432) $ 30,187
Gross profit margins............. (8,477) (7,258) (3,567)
Mix.............................. 669 621 (2,724)
-------------- --------------- ----------------
Total variance from previous year......... $ (11,865) $ (12,069) $ 23,896
============== =============== ================
INTEREST INCOME
Performing asset pools.................... $ 7,870 $ - $ -
Other..................................... 862 - -
COST OF BORROWING
Interest expense.......................... $ 22,065 $ 26,482 $ 22,544
Average borrowings........................ 188,231 223,028 204,863
Average rate.............................. 11.72% 11.87% 11.00%
OTHER EXPENSES
Service fee expense....................... $ 6,809 $ 6,834 $ 7,940
Legal..................................... 2,266 2,109 3,864
Property protection....................... 5,712 3,797 6,523
Other..................................... 693 2,606 3,342
Total other expenses...................... $ 15,480 $ 15,346 $ 21,669
============== =============== ================
NET INCOME......................................... $ 10,692 $ 9,542 $ 19,226
============== =============== ================
</TABLE>
1996 Compared to 1995
Net earnings for 1996 were $35.4 million, including a $14.6 million
deferred tax benefit, compared to $14.7 million in 1995. Net earnings to common
shareholders in 1996 were $27.7 million ($13.1 million excluding the tax
benefit) up $16.8 million or 155% from $10.9 million in 1995. On a per share
basis, earnings attributable to common equity were $5.63 ($2.66 excluding the
tax benefit) for 1996 compared to $2.98 per share for 1995, an 89% increase.
NET GAIN ON PURCHASED ASSET POOLS. The net gain on purchased asset
pools increased 63% to $19.5 million in 1996 from $12.0 million in 1995. The
average investment in purchased asset pools in 1996 of $104.2 million exceeded
the average investment levels for such period in 1995 of $47.0 million, with the
resulting gain on disposition of purchased asset pools higher in 1996 due to
increased levels of collections on larger asset pools. In the second quarter of
1995, gains of approximately $3 million resulted from a sale of approximately
$12 million in loans to a partnership owned by certain executive officers of
J-Hawk, as a part of the spin off
14
<PAGE>
transaction completed in conjunction with the Merger. The profit margin on
collections in 1996 was 28% as compared to 27% in 1995.
SERVICING FEES. Servicing fees grew to $12.5 million in 1996 from $10.9
million in 1995, an increase of 14%. In connection with the $75 million
securitization of performing loans from the acquisition partnerships completed
in August 1996, FirstCity recognized $2.0 million of servicing fees, which fees
represented revenues that would have been realized both historically and in the
future from liquidations of the securitized assets. Excluding fees from
collection of Trust assets, servicing fees increased $.4 million from 1995.
Subsequent to 1996, FirstCity and the Trust entered into a tentative agreement
which proposes the dissolution of the Investment Management Agreement (asset
servicing agreement between FirstCity and the Trust), whereby FirstCity will
receive approximately $6.8 million as a result of the dissolution.
INTEREST INCOME AND EXPENSE. Interest income on the Trust Class A
Certificate was recorded for only the two post merger quarters in 1995 and all
four quarters of 1996. Interest income on the Trust Class A Certificate
represents reimbursement to FirstCity (by the Trust) of interest expense of $3.9
million on the senior subordinated notes (all of which were redeemed by July,
1996) and accrual of dividends of $7.7 million on special preferred stock. The
Company realized other interest income primarily from performing loans acquired
beginning in the third quarter of 1995. Interest expense on other notes payable
rose in proportion to higher volumes of debt associated with the purchase of
asset pools and equity interest in acquisition partnerships and operating
subsidiaries.
OTHER INCOME AND EXPENSE. Rental income on purchased real estate pools
resulted from a third quarter 1995 acquisition of a pool consisting entirely of
real estate assets. On this and other real estate purchases, the net operating
income derived from such assets is recognized as other income, while gains on
sales are recognized upon disposition of the asset. FirstCity augmented the
allowance for loan losses associated with the NAF portfolio by providing a $2.0
million provision in 1996.
GENERAL AND ADMINISTRATIVE EXPENSE. Salaries and benefits, amortization
and other general and administrative expenses (including travel, legal and
accounting fees, occupancy and other expenses) increased $11.3 million,
reflecting higher costs since acquiring Diversified in 1995, increased property
expenses and amortization of goodwill and servicing rights in 1996 (such
expenses were incurred only in a portion of 1995). Also, other general and
administrative expenses in 1995 included a recovery of $.7 million of prior year
expenses related to the Merger (which expenses were reimbursed by FCBOT).
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS. Equity in earnings of
acquisition partnerships in 1996 increased $2.3 million from 1995, partially as
a result of the securitization and refinancing described above. Collections in
the acquisition partnerships decreased $14.9 million, or 7.9%, and caused a
decrease in gross profit of $4.1 million. Lower gross profit margins reduced
earnings by $8.5 million. However, this decrease was more than offset by
interest income on newly-acquired performing asset pools ($7.9 million) and a
more favorable method of income allocation and a lower cost of funding on
certain new partnerships.
INCOME TAXES. Federal income taxes are provided at a 35% rate applied
to taxable income. The Company believes NOLs are available to it after July 3,
1995, and are recognized as an offset to the provision in the period during
which the benefit is realized. A deferred tax benefit of $14.6 million was
recorded in the second quarter of 1996, and an additional $1.9 million was
recorded in the fourth quarter. Realization of the resulting net deferred tax
asset is dependent upon generating sufficient taxable income prior to expiration
of the NOLs. Although realization is not assured, management believes it is more
likely than not that all of the recorded deferred tax asset will be realized.
The amount of the deferred tax asset considered realizable, however, could be
adjusted in the future if estimates of future taxable income during the carry
forward period change.
15
<PAGE>
1995 COMPARED TO 1994
Net earnings in 1995 were $14.7 million, up 144% from $6.0 million in
1994. Net earnings to common shareholders in 1995 were $10.9 million, up 80%
from $6.0 million in 1994. On a per share basis, earnings attributable to common
equity were $2.98 for 1995 compared to $2.37 per share for 1994, a 26% increase.
NET GAIN ON PURCHASED ASSET POOLS. The net gain on purchased asset
pools increased 57% to $12.0 million in 1995 from $7.6 million in 1994. The 1995
gain includes approximately $3 million from the sale of $12 million in loans to
a partnership owned by certain executive officers of J-Hawk, as part of the spin
off transaction completed in conjunction with the merger. Even with the spin off
of $12 million in asset pools in connection with the merger in June 1995, the
average investment in purchased asset pools in 1995 of $47.0 million exceeded
the average investment levels for 1994 of $16.7 million, with the resulting gain
on disposition of purchased asset pools higher in 1995 due to increased levels
of collections on larger asset pools. The profit margin on collections in 1995
was 26.77% as compared to 41.63% in 1994.
SERVICING FEES. Servicing fees grew to $10.9 million in 1995 from $8.1
million in 1994, an increase of 35%. Excluding $3.1 million in fees from
collection of Trust assets, servicing fees were relatively flat as compared with
1994 because of similar 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 1995, representing reimbursement to
FirstCity (by the Trust) of interest expense of $4.7 million on the senior
subordinated notes and accrual of dividends of $3.9 million on special preferred
stock. Other interest income resulted primarily from 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 owned
by the Company.
OTHER INCOME. Rental income on purchased real estate pools resulted
from a 1995 acquisition of a pool consisting entirely of real estate assets. For
such assets, rental income and expenses are recognized when earned and incurred,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSE. Salaries and benefits, amortization
and other general and administrative expenses (including travel, legal and
accounting fees, occupancy and other expenses) increased 12%, reflecting higher
staffing costs since acquiring Diversified and amortization of goodwill and
servicing rights in 1995 (none in 1994).
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS. Equity earnings of
acquisition partnerships in 1995 decreased $3.7 million from 1994. Collections
in the acquisition partnerships decreased $18 million, or 9%, and caused a
reduction in gross profit of $5.4 million. The gross profit margin declined 3.5%
from 30.7% in 1994 to 27.2% in 1995 and reduced gross profit by $7.3 million.
This reduction in gross profit margin is due to collections from lower profit
margin pools that comprised a larger percentage of overall collections of
acquisition partnerships in 1995 as compared to 1994. These lower profit margin
pools are pools acquired more recently and have lower margins as a result of the
purchase of higher quality assets and increased competition for the purchases of
such pools.
FEDERAL INCOME TAXES. Federal income taxes are provided at 35% of
taxable income in 1995. FirstCity believes net operating loss carry forwards 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.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table analyzes the components of portfolio and corporate
debt, capital positions at the Company and in the acquisition partnerships and
associated leverage ratios of FirstCity and the acquisition partnerships:
<TABLE>
<CAPTION>
ANALYSIS OF COMBINED DEBT AND EQUITY
1996 1995
-------- ------
(Dollars in thousands)
<S> <C> <C>
AVERAGE DEBT OUTSTANDING:
Borrowing by acquisition partnerships, non-recourse $ 188,231 $ 223,028
Borrowings secured by purchased asset pools, non-recourse 58,898 36,348
Borrowings secured by automobile receivables, non-recourse 14,885 -
Senior subordinated notes, with recourse 43,288 52,614
Other secured corporate borrowings, with recourse 26,773 3,851
--------------- ----------------
Total average debt outstanding $ 332,075 $ 315,841
COMBINED EQUITY AT YEAR END:
FirstCity Financial Corporation $ 74,213 $ 46,251
Minority interest in
acquisition partnerships 18,447 20,462
--------------- ----------------
Total equity $ 92,660 $ 66,713
LEVERAGE RATIOS:
Average debt to combined equity 3.58:1 4.73:1
Average debt (excluding senior
subordinated debt) to combined equity 3.12:1 3.95:1
AVERAGE COST OF FUNDS:
Borrowing by acquisition partnerships, non-recourse 11.7% 11.9%
Borrowings secured by purchased asset pools, non-recourse 10.0 10.8
Borrowings secured by automobile receivables, non-recourse 8.5 -
Senior subordinated notes, with recourse 9.0 9.0
Other secured corporate borrowings, with recourse 10.1 9.2
</TABLE>
Generally, the liquidity needs of FirstCity are for operations, payment
of debt, equity for acquisitions of purchased asset pools, investments in and
advances to acquisition partnerships and other investments by the Company. The
sources of liquidity are funds generated from operations, distributions from the
Trust to the Company as the sole holder of the Trust Class A Certificate, equity
distributions from acquisition partnerships and short term borrowings from
revolving lines of credit and other specific purpose short term borrowings.
FirstCity contributed equity to acquisition partnerships totaling $30.7
million to facilitate the purchase of $146.8 million in portfolios of assets
during 1996 and also acquired $58.7 million in purchased asset pools. In 1996,
FirstCity borrowed $35 million and repaid $21 million under a credit facility
provided by Cargill, increasing the balance under that facility to $19.4 million
at year end. Such facility matures on June 30, 1997, and is secured by
substantially all of the unencumbered equity interest in subsidiaries and
acquisition partnerships and certain other assets of the Company.
In 1996, NAF borrowed $25 million under a $50 million Warehouse Credit
Agreement with ContiTrade Services L.L.C. to purchase and originate auto loans
through NAF. As the origination of auto loans increases, NAF can borrow under
this facility and repay with the proceeds of securitizations. Increases in loan
originations may require additional equity infusions into NAF to comply with the
borrowing base terms of the Warehouse Credit Agreement.
On March 29, 1996, FirstCity redeemed early $53.3 million of its senior
subordinated notes by means of a distribution from the Trust. During the second
quarter of 1996, $1 million of notes held by the Trust were
17
<PAGE>
redeemed. On July 26, 1996, the remaining $52.3 million of notes were redeemed
via another distribution from the Trust. In the fourth quarter of 1996,
FirstCity paid (via Trust distribution) $9.6 million accrued dividends (through
September 30, 1996) on special preferred stock. On January 15, 1997, FirstCity
paid the accrued dividend of $1.9 million for the fourth quarter of 1996.
Subsequent to December 31, 1996, the Company purchased approximately $6.4
million of special preferred stock with a distribution from the Trust. Each of
these transactions resulted in a corresponding reduction in the Trust Class A
Certificate.
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. The Company believes that these and other
sources of liquidity, including refinancing the Cargill credit facility to the
extent necessary, securitizations, and funding from senior lenders providing
funding for acquisition partnership formation and direct portfolio and business
acquisitions, should prove adequate to continue to fund the Company's
contemplated investment activities. At December 31, 1996, total common equity
was $74.2 million and is considered by management adequate to support the
current capital requirements and planned growth of the Company.
COMMON AND PREFERRED STOCK DATA
FirstCity's common (FCFC) and special preferred (FCFCP) shares were
listed on the Nasdaq National Market System effective November 3, 1995, and were
traded over the counter beginning July 3, 1995. The number of common
stockholders of record on December 31, 1996, was approximately 650. High and low
stock prices and dividends in 1996 and 1995 are displayed in the following
table:
<TABLE>
<CAPTION>
1996 1996 CASH 1995
------ ----------- -----
QUARTER ENDED MARKET PRICE DIVIDENDS MARKET PRICE
- -------------
Common Stock: High Low Paid High Low
---- --- ---- ---- ---
<S> <C> <C> <C> <C> <C>
March 31......................... $ 22.88 $ 18.25 $ - $ - $ -
June 30.......................... 29.00 18.75 - - -
September 30(1).................. 29.50 24.63 - 18.50 12.00
December 31...................... 31.88 27.75 - 22.38 15.13
Special Preferred Stock:
March 31......................... $ 24.75 $ 23.13 $ - $ - $ -
June 30.......................... 25.75 24.13 - - -
September 30 (1)................. 26.50 25.31 - 22.38 19.75
December 31...................... 26.50 22.00 3.92 (2) 23.83 21.31
<FN>
(1) Beginning July 3, 1995, the date of the Merger.
(2) Accrued dividend from July 3, 1995 through September 30, 1996.
</FN>
</TABLE>
The Company believes that the best use of its available cash is
investment in purchased asset pools, acquisition partnerships or other
investment opportunities; therefore, no dividends have been paid on common stock
and none are expected to be paid in the foreseeable future. A dividend of $.7875
per share on special preferred stock for the fourth quarter of 1996 was paid on
January 15, 1997.
FOURTH QUARTER
Net earnings for the fourth quarter of 1996 were $7.0 million,
including a $1.9 million deferred tax benefit. After dividends on the Company's
special preferred stock, earnings attributable to common equity were $5.1
million, or $1.03 per share. These results represent an annualized return on
average equity of 28.3%. Earnings for the fourth quarter of 1995 were $5.6
million. After dividends on the Company's special preferred stock, earnings
attributable to common equity were $3.7 million in 1995, or $.75 per share,
representing 33.1%
18
<PAGE>
annualized return on average equity. The following table presents a summary of
operations for the fourth quarters of 1996 and 1995.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
1996 1995
Fourth Fourth
Quarter Quarter
------- -------
(Dollars in thousands, except per share data)
<S> <C> <C>
Income........................................... $ 13,644 $ 16,639
Expenses......................................... 10,656 12,694
Equity earnings of acquisition partnerships 1,872 1,665
.................................................
Earnings before income taxes..................... 4,860 5,610
Provision (benefit) for income taxes............. (2,142) -
----------- -------------
Net earnings..................................... $ 7,002 $ 5,610
=========== =============
Special preferred dividends...................... 1,937 1,938
----------- -------------
Net earnings to common........................... $ 5,065 $ 3,672
=========== =============
Net earnings per share........................... $ 1.03 $ 0.75
</TABLE>
The reductions in income and expenses from the fourth quarter of 1995
to that of 1996 were caused primarily by the absence of $2.4 million of interest
on senior subordinated notes (and corresponding interest income on Class "A"
Certificate) that were redeemed earlier in 1996. Equity in earnings of
acquisition partnerships was relatively flat. A deferred tax benefit of $1.9
million was recognized in the fourth quarter of 1996.
EFFECT OF NEW ACCOUNTING STANDARDS
Effective January 1, 1996, FirstCity adopted the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
and No. 123, "Accounting for Stock-Based Compensation". Neither of these
standards had a material impact on the financial condition or results of
operations of FirstCity.
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financialcomponents approach that focuses on control. It distinguishes transfers
of financial assets that are sales from transfers that are secured borrowings.
Management does not expect that the adoption of SFAS No. 125 will have a
material impact on the Company's consolidated financial position, results of
operations or liquidity.
RISK FACTORS
FirstCity's future results of operations are dependent upon a number of
factors: (1) differences between projected and actual cash flows of purchased
asset pools, (2) continued availability of potential asset pool acquisitions,
(3) availability of net operating loss carry forwards, (4) changes in interest
rates, (5) continuation of current business affiliation with Cargill, (6)
sources of financing and (7) general economic conditions.
DIFFERENCES BETWEEN PROJECTED AND ACTUAL CASH FLOWS OF PURCHASED ASSET
POOLS. Many of the assumptions upon which the future collections in purchased
asset pools are based are subject to significant
19
<PAGE>
uncertainties; some assumptions will inevitably be incorrect. Additionally,
unanticipated events and circumstances may occur. There will always be
differences between projected and actual results because of these unanticipated
events and circumstances.
CONTINUED AVAILABILITY OF POTENTIAL ASSET POOL ACQUISITIONS. FirstCity
believes that financial institutions and other lenders will continue to offer
asset pools as a result of their continuing consolidation and investor and
regulatory pressure to dispose of non-performing and under-performing assets.
However, changes in the regulatory environment could cause the increased asset
pool sales to decline in the future.
AVAILABILITY OF NET OPERATING LOSS CARRY FORWARDS. Although FirstCity
believes that the net operating loss carry forwards are available to offset
future taxable earnings of FirstCity, there is no authority governing many of
the tax aspects of the Merger primarily because some determinations may be
questions of fact. Additionally, no ruling has been obtained from the Internal
Revenue Service regarding the availability of the net operating loss carry
forwards to FirstCity, therefore there can be no assurances that the tax aspects
of the Merger and the availability of the net operating loss carry forwards will
not be challenged by the Internal Revenue Service.
CHANGES IN INTEREST RATES. 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.
CONTINUATION OF THE CURRENT BUSINESS AFFILIATION WITH CARGILL.
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.
SOURCES OF FINANCING. FirstCity's continued success in its distressed
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.
GENERAL ECONOMIC CONDITIONS. When FirstCity acquires an asset pool,
cash flows and sale prices are projected based upon the economic conditions then
prevailing and projected in the United States and in the economic region in
which the asset is situated. If such economic conditions substantially
deteriorate, FirstCity's earnings from its then existing asset portfolios may be
adversely affected, but additional opportunities to acquire new asset portfolios
will be expected to be available.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1996 1995
---- ----
(Dollars in thousands, except per
share data)
<S> <C> <C>
Assets
- ------
Cash and cash equivalents...................................... $ 11,441 $ 8,370
Purchased asset pools and loan receivables, net................ 107,637 95,939
Equity investments in and advances to acquisition
partnerships............................................... 21,761 26,187
Class "A" Certificate of FirstCity Liquidating Trust........... 53,617 162,245
Deferred tax benefit........................................... 16,500 -
Other assets, net.............................................. 16,257 16,148
------------------- ------------------
Total Assets........................................... $ 227,213 $ 308,889
=================== ==================
Liabilities, Special Preferred Stock and Shareholders' Equity
- -------------------------------------------------------------
Liabilities:
Notes payable, secured..................................... $ 91,924 $ 85,518
Senior subordinated notes payable.......................... - 106,690
Notes payable to others.................................... 4,747 8,988
Other liabilities.......................................... 2,712 5,887
------------------- ------------------
Total Liabilities...................................... 99,383 207,083
------------------- ------------------
Commitments and contingencies.................................. - -
Special preferred stock, including dividends of $1,938
and $3,876, respectively (nominal stated value of
$21 per share; 2,500,000 shares authorized;
2,460,911 issued and outstanding).......................... 53,617 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; issued and
outstanding: 4,932,360 and 4,921,422 shares,
respectively).......................................... 49 49
Paid in capital............................................ 23,182 22,916
Retained earnings.......................................... 50,982 23,286
------------------- ------------------
Total Shareholders' Equity............................. 74,213 46,251
------------------- ------------------
Total Liabilities, Special Preferred Stock and $ 227,213 $ 308,889
Shareholders' Equity................................
=================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Proceeds from disposition and
payments received on purchased
asset pools............................. $ 70,940 $ 44,760 $ 18,341
Cost of purchased asset pools............... 51,430 32,776 10,705
------------- ------------- -------------
Net gain on purchased asset pools....... 19,510 11,984 7,636
Other income:
Servicing fees.......................... 12,456 10,903 8,080
Interest income on Class"A"
Certificate......................... 11,601 8,597 -
Other interest income................... 7,707 1,572 69
Rental income on purchased real
estate pools........................ 3,033 1,277 -
Other................................... 1,037 1,356 921
------------- ------------- -------------
55,344 35,689 16,706
------------- ------------- -------------
Expenses:
Interest on senior subordinated
notes payable....................... 3,892 4,721 -
Interest on other notes payable......... 9,980 4,284 1,812
Provision for loan losses............... 2,029 - -
Salaries and benefits................... 10,822 8,094 7,252
Amortization............................ 3,113 1,534 -
Other general and administrative........ 12,241 5,221 5,991
------------- ------------- -------------
42,077 23,854 15,055
------------- ------------- -------------
Equity in earnings of acquisition
partnerships............................ 6,125 3,834 7,497
------------- ------------- -------------
Earnings from operations before
income taxes........................ 19,392 15,669 9,148
------------- ------------- -------------
Provision (benefit) for income taxes........ (16,013) 936 3,121
------------- ------------- -------------
Net earnings........................ $ 35,405 $ 14,733 $ 6,027
============= ============= =============
Special preferred dividends................. 7,709 3,876 -
------------- ------------- -------------
Net earnings to common shareholders......... $ 27,696 $ 10,857 $ 6,027
============= ============= =============
Net earnings per share...................... $ 5.63 $ 2.98 $ 2.37
============= ============= =============
Weighted average shares outstanding......... 4,923 3,642 2,544
============= ============= =============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Common Paid in Retained Shareholders'
Stock Capital Earnings Equity
------------ ------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balances, January 1, 1994............. $ 787 $ 1,812 $ 12,541 $ 15,140
Net earnings for 1994................. - - 6,027 6,027
Stock dividend (78,708 shares)........ 787 - (787) -
------------ ------------- -------------- --------------
Balances, December 31, 1994........... 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
Exercise of warrants, options and
employee stock purchase plan
(10,938 shares).................... - 266 - 266
Net earnings for 1996................. - - 35,405 35,405
Preferred stock dividends............. - - (7,709) (7,709)
------------ ------------- -------------- --------------
Balances, December 31, 1996........... $ 49 $ 23,182 $ 50,982 $ 74,213
============ ============= ============== ==============
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ............................................................. $ 35,405 $ 14,733 $ 6,027
Adjustments to reconcile net earnings to net cash used
in operating activities, net of effect of acquisitions:
Cost of collections ................................................. 51,430 32,776 10,705
Purchase of asset pools ............................................. (77,964) (42,727) (27,869)
Provision for loan losses ........................................... 2,029 -- --
Equity in earnings of acquisition partnerships ...................... (6,125) (3,834) (7,497)
Collections on performing asset pools ............................... 11,646 1,293 --
Deferred income tax expense (benefit) ............................... (16,500) (64) 1,481
Depreciation and amortization ....................................... 4,047 1,886 299
(Increase) decrease in other assets ................................. (9,255) (10,881) 270
Increase (decrease) in other liabilities ............................ (3,300) (25) 278
--------- --------- ---------
Net cash used in operating activities ............................... (8,587) (6,843) (16,306)
--------- --------- ---------
Cash flows from investing activities, net of effect of
acquisitions:
Advances to acquisition partnerships and affiliates ..................... (1,256) (9,755) --
Payments on advances to acquisition partnerships and
affiliates ............................................................ 9,821 169 --
Acquisition of subsidiaries ............................................. (302) (7,753) --
Principal and special preferred dividend payments on
Class "A" Certificate ................................................. 115,337 -- --
Property and equipment, net ............................................. (1,026) (1,385) (435)
Contributions to acquisition partnerships ............................... (30,704) (3,583) (4,431)
Distributions from acquisition partnerships ............................. 31,279 5,206 12,327
--------- --------- ---------
Net cash provided by (used in) investing activities ................. 123,149 (17,101) 7,461
--------- --------- ---------
Cash flows from financing activities, net of effect of
acquisitions:
Borrowings under notes payable .......................................... 103,619 49,224 23,763
Payments of notes payable ............................................... (100,039) (40,726) (11,888)
Payment of senior subordinated notes payable ............................ (105,690) -- --
Additions to notes payable to stockholders and officers ................. -- 1,930 1,695
Reduction of notes payable to stockholders and officers ............... -- (1,843) (3,456)
Capital contribution of First City Bancorporation of
Texas, Inc. ........................................................... -- 20,000 --
Proceeds from issuing common stock ...................................... 266 779 --
Dividends paid .......................................................... (9,647) -- --
Retirement of common stock .............................................. -- (1,200) --
--------- --------- ---------
Net cash provided by (used in) financing activities ................. (111,491) 28,164 10,114
--------- --------- ---------
Net increase in cash ......................................................... $ 3,071 $ 4,220 $ 1,269
Cash, beginning of year ...................................................... 8,370 4,150 2,881
--------- --------- ---------
Cash, end of year ............................................................ $ 11,441 $ 8,370 $ 4,150
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .............................................................. $ 13,822 $ 8,683 $ 1,794
========= ========= =========
Income taxes .......................................................... $ 116 $ 1,000 $ 4,690
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(Dollars in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
As more fully discussed in Note 2, on July 3, 1995, FirstCity Financial
Corporation (the "Company" or "FirstCity") was formed by the merger of J-Hawk
Corporation and First City Bancorporation of Texas, Inc. Historical financial
statements prior to the merger date reflect the financial position and results
of operations of J-Hawk Corporation.
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.
(B) DESCRIPTION OF BUSINESS
The Company 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 and does
not manage assets for non-affiliated third parties; however, minimal servicing
for non-affiliated third parties is provided. In the ordinary course of
business, the Company sells assets to commercial banks, investment banks,
finance companies and other investment partnerships. The Company has also
expanded its business lines into certain sectors of the consumer finance
business of originating and servicing niche consumer receivables.
(C) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company. 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) CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. The Company, at December
25
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
31, 1996 and periodically throughout the year, has maintained balances in
various operating and money market accounts in excess of federally insured
limits.
(E) PURCHASED ASSET POOLS AND LOAN RECEIVABLES
The purchased asset pools and loan receivables 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 and loan receivables is allocated to
individual assets based on their relative values within the pool. Subsequent to
acquisition, the purchased asset pools and loan receivables 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 and loan receivables is recorded as
a provision for possible loss on the purchased asset pools and loan receivables
during the period determined. No material allowances or provisions were required
to adjust the carrying values of the purchased asset pools and loan receivables
for any of the periods presented, other than sub-prime automobile finance
receivables discussed below.
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 and loan
receivables. 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.
The sub-prime automobile finance receivables, which are acquired from
third party dealers, are generally purchased at a non-refundable discount from
the contractual principal amount. This discount is allocated between discount
available for loan losses and discount available for accretion to interest
income. Discounts allocated to discounts available for accretion are deferred
and accreted to income using the interest method. To date all acquired discounts
have been allocated as discounts available for loan losses. To the extent the
discount is considered insufficient to absorb anticipated losses on acquired
portfolios, additions to the allowance are made through a provision for loan
losses (see Note 3). The evaluation of the discount and allowance considers
portfolio performance, historical losses, delinquency statistics, collateral
valuations and current economic conditions on a pool by pool basis.
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as amended
by SFAS No. 118, which requires creditors to evaluate the collectibility of both
contractual interest and principal of loans when assessing the need for a loss
accrual. Impairment is measured based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, or the fair
value of the collateral, less estimated selling costs, if the loan is collateral
dependent and foreclosure is probable. The adoption of SFAS No. 114 had no
impact on the Company.
26
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(F) FORECLOSED ASSETS
Foreclosed assets which are acquired in settlement of notes are
recorded at the lower of allocated cost or fair market value. Costs relating to
the development and improvement of foreclosed assets are capitalized, whereas
those relating to holding foreclosed assets are charged to expense.
(G) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated
depreciation. Depreciation is provided using accelerated methods over the
estimated useful lives of the assets.
(H) INTANGIBLES
Intangible assets represent the excess of cost over fair value of
assets acquired in connection with purchase transactions as well as the purchase
price of future service fee revenues. These intangible assets, goodwill and
servicing rights, are amortized over periods estimated to coincide with the
expected life of the underlying asset pool owned or serviced by the acquired
subsidiary. The Company periodically evaluates the existence of intangible asset
impairment on the basis of whether such intangibles are fully recoverable from
the projected, undiscounted net cash flows of the related assets acquired.
(I) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its
over 80% owned subsidiaries. The Company records all of the allocated federal
income tax provision of the consolidated group in the parent corporation.
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets, if any, is reduced by the
amount of any tax benefits that, based on available evidence, are not expected
to be realized.
(J) 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.
All share and per share data have been restated to give effect to a stock
dividend in 1994. Potentially dilutive common stock equivalents include warrants
and stock options.
(K) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to
27
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the Company's consolidated financial position, results of
operations or liquidity.
(L) RECLASSIFICATIONS
Certain amounts in the financial statements for prior years have been
reclassified to conform with current financial statement presentation.
(2) MERGERS AND ACQUISITIONS
A Joint Plan of Reorganization by First City Bancorporation of Texas,
Inc. ("FCBOT" or 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,
(the "Plan of Reorganization"), became effective on July 3, 1995. Pursuant to
the Plan of Reorganization and an Agreement and Plan of Merger (collectively
referred to as the "Plan") between the Debtor and J-Hawk, on July 3, 1995, JHawk
was merged (the "Merger") with and into FCBOT. 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 (all of which have been redeemed),
(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. The
net assets of J-Hawk spun out to Combined Financial Corporation were as follows:
Cash and equivalents $ 232
Purchased asset pools 12,375
Other assets 2,839
Notes payable (8,187)
Payable to stockholders and officers (1,669)
Other liabilities (238)
---------
Net assets spun out $ 5,352
=========
Pursuant to the Plan, substantially all of the legal and beneficial
interest in the assets of the Debtor, other than the $20 million in cash
contributed to FirstCity, were transferred to the newly-formed FirstCity
Liquidating Trust (the "Trust"), or to subsidiaries of the Trust. Such assets
are being 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,
received from the Trust amounts sufficient to pay certain expenses and its
obligations under the 9% senior subordinated
28
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
notes and the special preferred stock during 1996 and 1995. The Company
anticipates receiving sufficient amounts in future periods to satisfy remaining
obligations associated with 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. To date, no value has been attributed to the
Class "C" certificate. The liquidation of the assets transferred to the Trust
are managed by FirstCity pursuant to an Investment Management Agreement between
the Trust and FirstCity. Subsequent to 1996, FirstCity and the Trust entered
into a tentative agreement which proposes the dissolution of the Investment
Management Agreement, whereby FirstCity will receive approximately $6.8 million
as a result of the dissolution. Should the dissolution occur, it is anticipated
to be effective in the first half of 1997.
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. Under the
terms of the Diversified purchase agreement, there is additional contingent
consideration payable in the form of "cash flow" notes. At December 31, 1996 and
1995, the Company reflected a liability of $3.1 million and $2.8 million,
respectively, to a former shareholder related to such cash flow notes.
Additionally, the Company had a note receivable from the same shareholder in the
amount of $1 million at December 31, 1996. Subsequent to December 31, 1996, the
Company entered into a modified note agreement with the former shareholder which
provided for an amended note payable in the amount of $5.4 million. The modified
note agreement extinguishes the Company's liability for any amounts due related
to the cash flow notes and acts to off-set the note receivable from the former
shareholder. The additional net liability resulting from this modification will
be reflected as an adjustment to goodwill in the Company's 1997 consolidated
balance sheet.
Diversified specializes in the acquisition and disposition of
distressed loans and loan-related assets. The acquisition was accounted for as a
purchase.
The aggregate purchase price was allocated to the net assets of
Diversified based upon fair value at acquisition date as follows:
Purchased asset pools $ 68,834
Intangibles 9,379
Other assets 414
Notes payable (63,515)
Other liabilities (2,196)
--------------
Purchase price, net of cash received $ 12,916
==============
During the second and third quarters of 1996, FirstCity commenced
efforts to expand its business lines into certain sectors of the consumer
finance business with the acquisition of National Auto Funding Corporation and
NAF Auto Loan Trust (collectively, "NAF") and the creation of ETAFirst Funding,
Inc. ("ETA"). NAF underwrites and finances installment contracts generated by
third party financial institutions and automobile dealerships in several
locations in the United States. These contracts are serviced by Milco Loan
Servicing, a wholly-owned subsidiary of the Company acquired in October of 1996.
NAF targets certain borrowers with limited credit histories, lower incomes or
past credit problems. ETA purchases certain education loans originated by
various proprietary training schools, generally at substantial discounts from
face value. The assets acquired and liabilities assumed in connection with these
transactions were not material to the Company's consolidated financial
statements.
On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc., ("Harbor"). FirstCity and Harbor executed the
definitive Agreement and Plan of Merger on March 26, 1997,
29
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
pursuant to which FirstCity will issue 1,581,000 shares of common stock in
exchange for 100% of Harbor's outstanding capital stock. Harbor originates and
services residential loans, home improvement loans and commercial mortgages.
Harbor has approximately $11 million in equity, assets of over $200 million and
625 employees. The transaction is subject to approval of both companies'
shareholders and various regulatory approvals.
The following table presents the unaudited pro forma results of
operations of FirstCity assuming the proposed merger with Harbor, which is
expected to be accounted for as a pooling of interests, occurred on January 1,
1994. The unaudited pro forma results of operations do not purport to be
indicative of the results of operations which would have actually resulted had
the above described transaction occurred on January 1, 1994, or future results
of operations to be achieved by FirstCity, after its merger with Harbor.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1996 1995 1994
------------ ---------------- --------------
<S> <C> <C> <C>
Net revenues (including equity earnings)...... $ 99,089 $ 59,965 $ 40,865
Net earnings to common........................ 31,420 11,368 5,445
Net earnings per share........................ 4.82 2.17 1.31
</TABLE>
(3) PURCHASED ASSET POOLS AND LOAN RECEIVABLES
The purchased asset pools are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995
-------------------- ----------------
<S> <C> <C>
Non-performing asset pools:
Loans:
Borrowers' obligation on outstanding balance of:
Performing loans $ 39,416 $ 55,337
Non-performing loans 254,828 339,465
-------------------- ----------------
294,244 394,802
Real estate assets 7,995 10,052
-------------------- ----------------
302,239 404,854
Performing asset pools:
Loans:
Borrowers' obligation on outstanding balance of:
Performing loans 14,385 16,714
Non-performing loans 559 -
-------------------- ----------------
14,944 16,714
Automobile finance receivables:
Borrowers' obligation on outstanding balance of:
Performing loans 31,503 -
Non-performing loans 2,080 -
Allowance for losses (2,693) -
-------------------- ----------------
30,890 -
Purchased real estate pool (at amortized cost) 25,303 35,179
-------------------- ----------------
Total purchased asset pools 373,376 456,747
Discount required to reflect purchased asset pools
at amortized cost (265,739) (360,808)
-------------------- ----------------
Purchased asset pools, net $ 107,637 $ 95,939
==================== ================
</TABLE>
The purchased asset pools are pledged to secure non-recourse notes
payable.
30
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
The activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Balances, beginning of year $ - $ -
Provision for loan losses 2,029 -
Discounts acquired 5,989 -
Reduction in contingent liabilities 1,415 -
Charge off activity:
Principal balances charged off (7,390) -
Recoveries 650 -
-------------- ---------------
Net charge offs (6,740) -
-------------- ---------------
Balances, end of year $ 2,693 $ -
============== ===============
</TABLE>
During 1996, a note recorded at the time of original purchase of the
initial automobile finance receivables pool and contingent on the
ultimate performance of the pool was adjusted to reflect a reduction in
anticipated payments under that liability obligation. The reduction in
this recorded liability increased the amount of allowance for losses.
(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
condensed combined financial position and results of operations of the
acquisition partnerships and general partners are summarized below:
CONDENSED COMBINED BALANCE SHEETS
December 31,
----------------------------------
1996 1995
-------------- ---------------
Assets $ 196,533 $ 235,820
============== ===============
Liabilities 144,094 180,659
Net equity 52,439 55,161
-------------- ---------------
$ 196,533 $ 235,820
============== ===============
Company's equity in
acquisition partnerships $ 21,761 $ 16,601
============== ===============
Advances to acquisition
partnerships $ - $ 9,586
============== ===============
<TABLE>
<CAPTION>
CONDENSED COMBINED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Collections $ 174,012 $ 188,934 $ 206,627
Gross margin 39,505 51,370 63,439
Interest income on performing asset pools
7,870 - -
Net income 10,692 9,542 19,226
============= ============= ============
Company's equity in net income of
acquisition partnerships $ 6,125 $ 3,834 $ 7,497
============= ============= ============
</TABLE>
31
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
In the third quarter of 1996, FirstCity recognized $2.0 million in
servicing fees in connection with the sale and securitization of $75 million of
performing loans from acquisition partnerships. During the third quarter of
1996, a majority of the debt of the acquisition partnerships was refinanced,
resulting in a $7 million equity distribution to FirstCity.
(5) CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING TRUST ("TRUST")
FirstCity is the sole holder of the Class "A" Certificate of the Trust.
Redemptions by the Trust of the balance due on the Class "A" Certificate were
used to retire the senior subordinated notes payable, and will be used 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.
During the three months ended June 30, 1996, $1 million of senior subordinated
notes (purchased by the Trust) were redeemed. On July 26, 1996, the remaining
senior subordinated notes were redeemed with a corresponding reduction in the
"A" Certificate.
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 under the Class "A" Certificate to make
such payments (see Note 7). 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 dividends on the special preferred
stock. 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.
(6) NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Collateralized loans, secured by acquired asset pools:
Prime (8.25% at December 31, 1996) plus 2%, due 1997 $ 37,491 $ 53,204
LIBOR (5.5% at December 31, 1996) plus 3.25% to 5.25%,
due 1997-1998 33,276 25,580
Other - 543
Borrowings under revolving line of credit, secured and with
recourse to FirstCity 19,384 5,216
Other secured borrowings 1,773 975
-------------- ------------
Notes payable, secured $ 91,924 $ 85,518
============== ============
Prime + 2%, due to Trust $ - $ 2,000
Diversified shareholder debt 4,747 6,988
-------------- ------------
Notes payable to others $ 4,747 $ 8,988
============== ============
</TABLE>
Collateralized loans are typically payable based solely on proceeds
from disposition and payments received on the purchased asset pools. $37 million
of the collateralized loans represent borrowings under two separate master
credit facilities totaling $75 million. Such facilities can be used to finance
the purchase of new purchased loan portfolios.
FirstCity has a $35 million revolving line of credit with Cargill
Financial Services. The line bears interest at LIBOR plus 5% and expires on June
30, 1997. The line is secured by substantially all of FirstCity's unencumbered
assets.
32
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
In November 1995, the Trust advanced FirstCity $2 million under a note
payable that was repaid in February 1996.
A portion ($1.7 million) of the Diversified shareholder debt generally
bears interest, payable monthly at 6% per annum with various principal payments
due through February 1999. The remaining Diversified shareholder debt represents
the estimated net present value of the anticipated future contingent
consideration payments (see Note 2).
Under terms of certain of the above borrowings, the Company and its
subsidiaries are required to maintain certain tangible net worth levels and debt
to equity and debt service coverage ratios. The terms also restrict future
levels of debt. The Company was in compliance with these covenants at December
31, 1996. At December 31, 1996, cash restricted due to notes payable covenants
totaled $1.4 million. The aggregate maturities of notes payable for the five
years ending December 31, 2001 are as follows: $78,476 in 1997, $13,629 in 1998,
$162 in 1999, $89 in 2000 and $722 in 2001.
FirstCity redeemed the 9% senior subordinated notes payable ($106.7
million outstanding at December 31, 1995) during 1996.
(7) SPECIAL PREFERRED STOCK AND SHAREHOLDER'S EQUITY
The authorized capital stock of the Company consists of 202.5 million
shares divided into three classes as follows: (1) 2.5 million shares of special
preferred stock, par value $.01 per share, with a nominal stated value of $21.00
per share; (2) 100 million shares of optional preferred stock, par value $.01
per share; and (3) 100 million shares of common stock, par value $.01 per share.
Additionally, on July 3, 1995, under the Plan, the Company authorized the
issuance of up to 500,000 warrants to purchase common stock to certain of the
Debtor's shareholders. In connection with the Merger, 4,921,422 shares of common
stock, 2,460,911 shares of special preferred stock and 500,000 warrants were
issued.
The holders of shares of common stock are entitled to one vote for each
share on all matters submitted to a vote of common shareholders. In order to
preserve certain tax benefits available to the Company, transactions involving
shareholders holding or proposing to acquire more than 4.75% of outstanding
common shares are prohibited unless the prior approval of the Board of Directors
is obtained.
Subject to availability of funds from the Trust after payment of all
obligations senior to the special preferred stock, the holders of special
preferred stock are entitled to receive the nominal stated value on September
30, 1998, and cumulative quarterly cash dividends at the annual rate of $3.15
per share. Accrued dividends through September 30, 1996 of $9.6 million, or
$3.92 per share, were paid in 1996. At December 31, 1996, accrued dividends
totaled $1.9 million, or $.7875 per share, and were paid on January 15, 1997.
Subsequent to December 31, 1996, the Company purchased approximately $6.4
million of special preferred stock with a distribution from the Trust. The
special preferred stock carries no voting rights, except in the event of
non-payment of declared dividends.
The Board of Directors of the Company may designate the relative rights
and preferences of the optional preferred stock when and if issued. Such rights
and preferences could include liquidation preferences, redemption rights, voting
rights and dividends and shares could be issued in multiple series with
different rights and preferences. The Company has no current plans for the
issuance of any shares of optional preferred stock.
33
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
Each warrant entitles the holder to purchase one share of common stock
at an exercise price of $25.00 per share, subject to adjustment in certain
circumstances, and expires July 3, 1999. FirstCity may repurchase the warrants
for $1.00 per warrant should the quoted market price of FirstCity common stock
exceed $31.25 for any 10 out of 15 consecutive trading days. During 1996, 2,625
warrants were exercised leaving 497,375 warrants outstanding at December 31,
1996.
The Company has incentive stock option plans for the benefit of key
individuals, including its directors, officers and key employees. The plans are
administered by a committee of the Board of Directors and provide for the grant
of up to 730,000 shares of common stock.
The per share weighted-average fair value of stock options granted
during 1996 and 1995 was $13.19 and $14.28, respectively, on the grant date
using the Black-Scholes option pricing model with the following assumptions:
1996 - $0 expected dividend yield, risk-free interest rate of 5.75%, and an
expected life of 9.7 years; 1995 -$0 expected dividend yield, risk-free interest
rate of 5.75%, and an expected life of 9.8 years.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net earnings to common shareholders:
As reported................................ $ 27,696 $ 10,857
Pro forma.................................. 26,983 10,740
Net earnings per share:
As reported................................ $ 5.63 $ 2.98
Pro forma.................................. 5.48 2.95
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 229,600 $ 20.20 - $ -
Granted 18,000 30.75 229,600 20.20
Exercised (4,500) 20.00 - -
Forfeited (20,000) 20.00 - -
------------ ------------
Outstanding at end of year 223,100 21.07 229,600 20.20
============ ============
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $20.00 - $30.75 and 8.4
years, respectively.
At December 31, 1996, there were 46,605 options exercisable with a
weighted-average exercise price of $20.19. There were no options exercisable at
December 31, 1995.
34
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
The Company has an employee stock purchase plan which allows employees
to acquire common stock of the Company at 85% of the fair value at the end of
each quarter. The value of the shares purchased under this plan is limited to
the lesser of 10% of compensation or $10,000 per year. Under this plan, 3,813
shares were issued during 1996, leaving 96,187 unissued at December 31, 1996.
(8) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Federal and state current expense $ 487 $ 1,000 $ 1,640
Federal deferred expense (benefit) (16,500) (64) 1,481
------------- ------------ -------------
Total $ (16,013) $ 936 $ 3,121
============= ============ =============
</TABLE>
The actual income tax expense (benefit) attributable to earnings from
operations differs from the expected tax expense (computed by applying the U.S.
Federal corporate tax rate of 35% for 1996 and 1995 and 34% for 1994 to earnings
from operations before income taxes) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Computed expected tax expense $ 6,787 $ 5,484 $ 3,110
Increase (reduction) in income
taxes resulting from:
Tax effect of "A" Certificate (4,060) (3,009) -
Change in valuation allowance (18,776) (1,522) -
Other 36 (17) 11
----------- ---------- ----------
$ (16,013) $ 936 $ 3,121
=========== ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1996 and 1995, are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Investments in partnerships, principally due to
differences in basis for tax and financial
reporting purposes $ 403 $ 1,103
Intangibles, principally due to differences in
amortization 1,138 403
Accrued expenses not deductible for tax purposes - 437
U.S. net operating loss carry forward 207,050 208,924
Valuation allowance (192,091) (210,867)
------------ ------------
Total deferred tax assets, net $ 16,500 $ -
============ ============
</TABLE>
As a result of the Merger described in Note 2, the Company has net
operating loss carry forwards for federal income tax purposes of approximately
$592 million at December 31, 1996, available to offset future federal taxable
income, if any, through the year 2010. A valuation allowance is provided to
reduce the deferred tax assets to a level which, more likely than not, will be
realized. During the second quarter of 1996, FirstCity adjusted the previously
established valuation allowance to recognize a deferred tax benefit of $14.6
million, and recognized an additional $1.9 million in the fourth quarter. The
ultimate realization of the resulting net deferred tax asset is dependent upon
generating sufficient taxable income prior to expiration of the net operating
loss carry
35
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
forwards. Although realization is not assured, management believes it is more
likely than not that all of the recorded deferred tax asset, net of the
allowance, will be realized. The amount of the deferred tax asset considered
realizable, however, could be adjusted in the future if estimates of future
taxable income during the carry forward period change. The change in valuation
allowance represents primarily an increase in the estimate of the future taxable
income during the carry forward period since the prior year end and the
utilization of net operating loss carry forwards since the Merger. The ability
of the Company to realize the deferred tax asset is periodically reviewed and
the valuation allowance is adjusted accordingly.
(9) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) employee profit sharing
plan in which the Company matches employee contributions at a stated percentage
of employee contributions to a defined maximum. The Company's contributions to
the 401(k) plan were $196 in 1996, $77 in 1995 and $44 in 1994.
(10) LEASES
The Company leases its current headquarters from a related party under
a noncancellable operating lease. The lease calls for monthly payments of $7.5
through its expiration in December, 2001 and includes an option to renew for two
additional five-year periods. Rental expense for 1996, 1995 and 1994 under this
lease was $90 each year.
The Company also leases office space and equipment from unrelated
parties under operating leases expiring in various years through 2002. Rental
expense under these leases for 1996, 1995 and 1994 was $634, $328 and $202,
respectively. As of December 31, 1996, the future minimum lease payments under
all noncancellable operating leases are: $439 in 1997, $282 in 1998, $218 in
1999, $141 in 2000, $97 in 2001 and $2 in 2002 and beyond.
(11) OTHER RELATED PARTY TRANSACTIONS
During 1996, the Company acquired a portfolio of sub-prime automobile
finance receivables from an acquisition partnership for approximately $23.6
million. This acquisition was at the carrying value of the portfolio in the
partnership, thus resulting in no gain or loss on the transaction to the
partnership.
In December, 1994, the Company purchased individual loans from several
of the acquisition partnerships for $9.6 million. These loans were spun off to
Combined Financial Corporation in June 1995 (see Note 2).
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 the spin
out transaction in June 1995.
In 1995, the Company sold approximately $12 million (allocated cost) of
loans to a partnership owned by certain executive officers of J-Hawk. The
Company recognized approximately $3 million in gain from the transaction.
Additionally, the Company entered into a servicing arrangement with the
partnership to service the sold assets for a fee based on collections. This
transaction was part of the overall spin out transaction completed prior to the
Merger on July 3, 1995.
36
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
The Company has contracted with FirstCity Liquidating Trust, the
acquisition partnerships and related parties as a 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.
(12) 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 Cargill, the subordinated debt lender to the
partnerships, under a Residual Share Agreement (the Agreement). Under the
Agreement, this pledge is limited to twice FirstCity's original investment in
the respective partnerships. 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
will not have a material adverse impact on the consolidated financial condition,
results of operations or liquidity of the Company.
(13) FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values of its financial instruments. Fair value estimates,
methods and assumptions are set forth below.
(A) CASH AND EQUIVALENTS AND CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING
TRUST
The carrying amount of cash and equivalents and Class "A" Certificate
of FirstCity Liquidating Trust approximates fair value at December 31, 1996 and
1995.
(B) PURCHASED ASSET POOLS
The purchased asset pools are carried at the lower of cost or estimated
fair value. The estimated fair value is calculated by discounting projected cash
flows on an asset by asset basis using estimated market discount rates that
reflect the credit and interest rate risk inherent in the assets. The carrying
value of the purchased asset pools is $107.6 million and $95.9 million,
respectively, at December 31, 1996 and 1995. The estimated fair value of the
purchased asset pools is approximately $124.3 million and $104 million,
respectively, at December 31, 1996 and 1995.
(C) NOTES PAYABLE
Management believes that the repayment terms for a similar floating
rate financial instrument with similar credit risks and the stated interest
rates at December 31, 1996 and 1995 approximate the market terms for similar
credit instruments. Accordingly, the carrying amount of notes payable is
believed to approximate fair value.
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We have audited the accompanying consolidated balance sheets of
FirstCity Financial Corporation and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the two-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstCity
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of theiroperations and their cash flows for each of the years in the
two-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Fort Worth, Texas
February 14, 1997
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of J-Hawk Corporation and subsidiaries, the
predecessor entity to FirstCity Financial Corporation and subsidiaries, for the
year ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of J-Hawk Corporation and subsidiaries, the predecesor entity to FirstCity
Financial Corporation and subsidiaries, for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
JAYNES, REITMEIER, BOYD & THERRELL, P.C.
Waco, Texas
February 8, 1995
39
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income.......................................... $55,344 $35,689 $16,706 $15,215 $17,818
Expenses........................................ 42,077 23,854 15,055 14,054 16,686
Equity in earnings of acquisition partnerships.. 6,125 3,834 7,497 8,058 4,382
Earnings from operations before income taxes.... 19,392 15,669 9,148 9,219 5,514
Net earnings (1)................................ 35,405 14,733 6,027 6,184 3,510
Special preferred dividends..................... 7,709 3,876 - - -
Net earnings to common (1)...................... 27,696 10,857 6,027 6,184 3,510
Net earnings per share (1)...................... 5.63 2.98 2.37 2.43 1.38
Dividends per common share...................... - - - - -
At year end:
Total assets........................... 227,213 308,889 52,282 35,798 27,405
Total notes payable.................... 96,671 201,196 27,098 16,985 17,370
Special preferred stock................ 53,617 55,555 - - -
Total common equity.................... 74,213 46,251 21,167 15,140 8,956
<FN>
(1) Includes $16.5 million of deferred tax benefit in 1996
</FN>
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
1996 1995
----------------------------------------- ----------------------------------------
(Dollars in thousands, except per share data)
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income......................... $13,329 $13,906 $14,465 $13,644 $3,340 $6,781 $8,929 $16,639
Expenses....................... 10,513 10,287 10,621 10,656 2,529 3,409 5,222 12,694
Equity earnings of
acquisition partnerships..... 714 916 2,623 1,872 628 731 810 1,665
Net earnings(1)................ 3,390 18,905 6,108 7,002 949 3,657 4,517 5,610
Special preferred dividends.... 1,938 1,938 1,896 1,937 - - 1,938 1,938
Net earnings to common(1)...... 1,452 16,967 4,212 5,065 949 3,657 2,579 3,672
Net earnings per share(1)...... 0.30 3.45 0.86 1.03 0.42 1.54 0.52 0.75
<FN>
- ----------------------
(1) Includes $14.6 million and $1.9 million deferred tax benefit in second
and fourth quarters, respectively, of 1996
</FN>
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION PARTNERSHIPS
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
---- ----
<S> <C> <C>
Assets:
- -------
Cash............................................................................ $ 8,812 $ 8,332
Purchased loan pools, net....................................................... 177,480 221,508
Investments in trust certificates............................................... 5,195 -
Receivable from affiliates...................................................... 234 108
Restricted cash................................................................. 795 2,751
Other assets.................................................................... 3,150 2,442
$ 195,666 $ 235,141
==================== ===================
Liabilities and Partners' Capital:
- ----------------------------------
Accounts payable (including $574 and $724 to affiliates in
1996 and 1995, respectively).................................................. $ 1,756 $ 724
Accrued liabilities............................................................. 1,738 8,550
Long-term debt (including $74,341 and $87,611 to affiliates in
1996 and 1995, respectively).................................................. 141,054 171,448
-------------------- -------------------
Total liabilities................................................. 144,548 180,722
Contingencies................................................................... - -
Partners' capital............................................................... 51,118 54,419
-------------------- -------------------
$ 195,666 $ 235,141
==================== ===================
</TABLE>
See accompanying notes to combined financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
--------------- ----------------- -------------------
<S> <C> <C> <C>
Proceeds from disposition of and payments received
on purchased loan pools................................. $ 174,012 $ 188,934 $ 204,057
Cost of purchased loan pools.................................. (134,507) (137,564) (140,779)
Net gain on purchased loan pools........................ 39,505 51,370 63,278
Interest income on performing loan pools...................... 7,870 - -
Interest expense (including $14,571, $13,333
and $10,197 to affiliates in 1996, 1995
and 1994, respectively)..................................... (22,065) (27,034) (22,544)
General, administrative and operating expenses.............. (14,777) (14,870) (20,996)
Other income (expense), net................................... 210 121 (428)
--------------- ----------------- -------------------
Net income.............................................. $ 10,743 $ 9,587 $ 19,310
=============== ================= ===================
</TABLE>
See accompanying notes to combined financial statements.
43
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION PARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
Class B
Class A Equity Equity
----------------------------- -------------
General Limited Limited General Limited
Partners Partners Partners Partners Partners Total
----------- ------------ ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993.................... $ 540 $ 26,481 $ 22,509 $ 16 $ 796 $ 50,342
Contributions............. 169 8,262 - 6 283 8,720
Distributions............. (444) (21,769) (3,974) (30) (1,453) (27,670)
Net income................ 269 13,219 2,634 64 3,124 19,310
------------ ------------- ------------- ------------ -------------- ----------------
Balance at December 31,
1994.................... 534 26,193 21,169 56 2,750 50,702
Contributions............. 82 4,027 - 60 2,946 7,115
Distributions............. (197) (9,645) (1,585) (31) (1,527) (12,985)
Net income................ 154 7,511 1,648 6 268 9,587
------------ ------------- ------------- ----------- ------------- ---------------
Balance at December 31,
1995.................... 573 28,086 21,232 91 4,437 54,419
Contributions............. 54 2,621 - 986 48,303 51,964
Distributions............. (400) (19,598) (3,082) (860) (42,068) (66,008)
Net income................ 47 2,301 556 156 7,683 10,743
----------- ------------ ------------- ----------- ------------ --------------
Balance at December 31,
1996.................... $ 274 $ 13,410 $ 18,706 $ 373 $ 18,355 $ 51,118
=========== ============ ============= =========== ============ ==============
</TABLE>
See accompanying notes to combined financial statements.
44
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,743 $ 9,587 $ 19,310
Adjustments to reconcile net income to net cash
provided by (used in) operating
activities:
Amortization of loan origination and commitment
fees 1,483 2,415 2,542
Provision for losses 585 - -
Net gain on purchased loan pools (39,505) (51,370) (63,278)
Purchase of loan pools (102,695) (101,626) (200,350)
Capitalized costs on purchased loan pools (3,330) (1,643) (99)
Proceeds from disposition and payments received
on purchased loan pools 188,002 188,934 204,057
(Increase) decrease in receivable from affiliates (126) 49 232
(Increase) decrease in restricted cash 1,956 765 (2,166)
Increase in other assets (2,191) (1,186) (3,774)
Increase (decrease) in accounts payable 1,032 (135) 281
Increase (decrease) in accrued liabilities (6,812) 1,730 5,325
-------------- ------------ ------------
Net cash provided by (used in) operating
activities 49,142 47,520 (37,920)
Cash flows from investing activities:
Purchase of trust certificates (4,224) - -
-------------- ------------ ------------
Net cash used in operating activities (4,224) - -
Cash flows from financing activities:
Borrowing on acquisition debt - 12,840 10,262
Repayment of acquisition debt (28,967) (12,840) (10,262)
Borrowing on long-term debt 263,614 112,050 251,601
Repayment of long-term debt (265,041) (154,312) (189,574)
Capital contributions 38,180 7,115 8,720
Capital distributions (52,224) (12,985) (27,670)
-------------- ------------ ------------
Net cash provided by (used in)
financing activities (44,438) (48,132) 43,077
-------------- ------------ ------------
Net increase (decrease) in cash 480 (612) 5,157
Cash at beginning of year 8,332 8,944 3,787
-------------- ------------ ------------
Cash at end of year $ 8,812 $ 8,332 $ 8,944
============== ============ ============
Supplemental disclosure of cash flow information (note 5):
Cash paid for interest was approximately $27,652, $23,074 and $19,128 and
for 1996, 1995 and 1994, respectively.
WAMCO V and WAMCO XVII contributed $1,243 and $324 of purchased
loans, respectively, in exchange for an investment in trust certificates
in 1996.
</TABLE>
See accompanying notes to combined financial statements.
45
<PAGE>
(1) ORGANIZATION AND PARTNERSHIP AGREEMENTS
The combined financial statements include the accounts of WAMCO III, Ltd.,
WAMCO V, Ltd., WAMCO IX, Ltd., WAMCO XVII, Ltd., WAMCO XXI, Ltd., WAMCO XXII,
Ltd., WAMCO XXIII, Ltd. WAMCO XXIV, Ltd., DAP City Partners, L.P., First
Paradee, L.P., Imperial Fund I, L.P., VOJ Partners, L.P. and Whitewater
Acquisition Co. One L.P., all of which are Texas limited partnerships
(Acquisition Partnerships or Partnerships). The Acquisition Partnerships were
referred to as the WAMCO Partnerships in previous reports. FirstCity Financial
Corporation (FirstCity) or its wholly owned subsidiary, J-Hawk Corporation
(J-Hawk), own limited partner interests in all of the Acquisition Partnerships.
During September 1996, WAMCO VI, Ltd., WAMCO VIII, Ltd., WAMCO XI, Ltd., WAMCO
XII, Ltd., WAMCO XIV, Ltd., WAMCO XV, Ltd., WAMCO XVI, Ltd. and WAMCO XX, Ltd.
were merged with and into WAMCO III, Ltd. Also, WAMCO XVIII, Ltd. and WAMCO XIX,
Ltd. were merged with and into WAMCO XVII, Ltd. The merger of the acquisition
partnerships has no effect on the comparability of the combined financial
statements. All significant intercompany balances have been eliminated.
The Partnerships were formed to acquire, hold and dispose of loan pools
purchased from the Federal Deposit Insurance Corporation, Resolution Trust
Corporation and other nongovernmental agency sellers, pursuant to certain
purchase agreements or assignments of such purchase agreements. In accordance
with the purchase agreements, the Partnerships retain certain rights of return
regarding the assets related to defective title, past due real estate taxes,
environmental contamination, structural damage and other limited legal
representations and warranties.
Generally, the partnership agreements of the Partnerships provide for
certain preferences as to the distribution of cash flows. Proceeds from
disposition of and payments received on the purchased loan pools are allocated
based on the partnership and other agreements which ordinarily provide for the
payment of interest and mandatory principal installments on outstanding debt
before payment of intercompany servicing fees and return of capital and
restricted distributions to partners.
Additionally, WAMCO III, Ltd., WAMCO V, Ltd., WAMCO XVII, Ltd., WAMCO XXI,
Ltd. and Whitewater Acquisition Co. One L.P. provide for Class A and Class B
Equity partners in their individual partnership agreements. The Class B Equity
limited partners are allocated 20 percent of cumulative net income recognized by
the respective partnerships prior to allocation to the Class A Equity limited
partners and the general partners.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PURCHASED LOAN POOLS
The purchased loan pools, which were purchased at discounts from the
borrowers' total legal obligations, consist primarily of performing and
nonperforming loans secured by real estate or personal property and are held for
sale. A significant amount of the loans are secured by real estate located in
the Northeastern United States. 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 loans was allocated to
individual notes based on their relative values within the pools. Subsequent to
acquisition, these loans are periodically revalued as a pool and carried at the
lower of cost or fair value. Any allowance to reduce cost to fair value would be
recorded as a provision for possible loss on the purchased loan pools during the
period determined. No such allowance or provision was required to adjust the
carrying value of the purchased loan pools at December 31, 1996, 1995 and 1994.
46
<PAGE>
ACQUISITION PARTNERSHIPS
Notes to Combined Financial Statements - (continued)
(Dollars in thousands)
Interest income on loans in the non-performing purchased loan pools is
recognized as part of proceeds from disposition and payments received on the
purchased loan pools. Interest income on loans in the performing purchased loan
pools is accrued in accordance with the terms of the individual underlying loan
agreements.
Gains from the disposition of assets in the purchased loan pools are
recognized when title has passed, payment is received and the Partnerships are
relieved of any requirements for continued involvement with the assets.
Gains on payments (partial disposition) of loans in the purchased loan
pools are recognized to the extent that proceeds collected on the loans exceed a
pro rata portion of allocated cost from the purchased loan pools. Cost allocated
is based on a proration of actual collections divided by total estimated
collections of the pools.
Assets are foreclosed through an arrangement with an affiliated entity
whereby title to the assets is held by the affiliated entity and a note
receivable from the affiliate is held by the Partnerships. Costs relating to the
development and improvement of foreclosed assets are capitalized by the
Partnerships. Costs relating to holding foreclosed assets are charged to
operating expense by the Partnerships. For financial statement presentation, the
affiliated entity note receivable created by the arrangement is included in the
purchased loan pools and is recorded at the lower of allocated cost or fair
value less estimated cost to sell.
(B) INCOME TAXES
Under current Federal laws, partnerships are not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
combined financial statements. For tax purposes, income or loss is included in
the individual tax returns of the partners.
(C) USE OF ESTIMATES
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. Actual results could differ from those estimates.
(3) PURCHASED LOAN POOLS
The purchased loan pools at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ----------------
<S> <C> <C>
Loans:
Borrowers' obligation on outstanding balance of:
Performing loans $ 106,623 $ 156,590
Non-performing loans 173,350 213,847
-------------------- ----------------
279,973 370,437
Foreclosed assets 44,367 49,822
-------------------- ----------------
324,340 420,259
Discount required to reflect purchased asset pools at
amortized cost (146,860) (198,751)
-------------------- ----------------
Purchased loan pools, net $ 177,480 $ 221,508
==================== ================
</TABLE>
47
<PAGE>
ACQUISITION PARTNERSHIPS
Notes to Combined Financial Statements - (continued)
(Dollars in thousands)
(4) NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Senior collateralized loans, secured by acquired asset pools:
Prime (8.25% at December 31, 1996) plus 1.5% to 2.5% $ 39,283 $ 27,737
LIBOR (5.5% at December 31, 1996) plus 3.25% to 6.5% 92,455 61,140
New York inter-bank offering rate (6.5% at December 31, 1996)
plus 3% 4,457 27,513
Subordinated collateralized loans, secured by acquired asset pools
Prime (8.25% at December 31, 1996) plus 2% to 7% 4,859 55,058
------------- ------------
$ 141,054 171,448
============= ============
</TABLE>
Collateralized loans are typically payable based on proceeds from
disposition and payments received on the purchased asset pools.
Contractual maturities (excluding principal and interest payments payable
from proceeds from dispositions and payments received on the purchased loan
pools) of long term debt are as follows:
Year ending December 31:
1997 $ 26,469
1998 1,855
1999 71,764
2000 -
2001 40,966
----------------
$ 141,054
================
Additionally, the loan agreements and master note purchase agreements,
under which these notes payable were incurred, contain various covenants
including limitations on other indebtedness, maintenance of service agreements
and restrictions on use of proceeds from disposition of and payments received on
the purchased loan pools. As of December 31, 1996, the Partnerships were in
compliance with the aforementioned convenants.
In connection with the long term debt, the Partnerships incurred
origination and committment fees. These fees are amortized proportionate to the
principal reductions on the related notes and are included in general,
administrative and operating expenses. At December 31, 1996 and 1995,
approximately $2,712 and $2,048, respectively, of origination and committment
fees are included in other assets.
WAMCO V paid a premium of $278 to enter into an interest rate cap
agreement with NationsBank of North Carolina, N.A. (the Bank). In the event the
London Interbank Offering Rate (the floating rate) exceeds 7.75% (the fixed
rate), the Bank will pay WAMCO V an amount equal to such excess multiplied times
a notional amount which corresponds to the outstanding balance of the
collateralized promissory note payable. Until such time as the floating rate
exceeds the fixed rate, no payments will be made between the parties and WAMCO V
will amortize the premium to general, administrative and operating expenses on a
pro rata basis corresponding to principal reductions on the collateralized
promissory note payable. At December 31, 1995 approximately $183 of the premium
is included in other assets.
48
<PAGE>
ACQUISITION PARTNERSHIPS
Notes to Combined Financial Statements - (continued)
(Dollars in thousands)
Additionally, certain loan agreements contain provisions requiring the
Partnerships to maintain minimum balances in a restricted cash account as
additional security for certain notes. Approximately $552 and $2,120 of
restricted cash was held in such accounts as of December 31, 1996 and 1995,
respectively.
(5) TRANSACTIONS WITH AFFILIATES
Under the terms of the various servicing agreements, FirstCity, a limited
partner, receives a servicing fee based on proceeds from disposition of and
payments received on the purchased loan pools for processing transactions on the
purchased loan pools and for conducting settlement and sale negotiations.
Included in general, administrative and operating expenses in the accompanying
combined statements of operations is approximately $6,468, $6,834 and $7,940 in
servicing fees incurred by the Partnerships in 1996, 1995 and 1994,
respectively.
During December 1994, WAMCO III and WAMCO V sold loans to an affiliate.
Included in proceeds from disposition of and payments received on the purchased
loan pools in the accompanying combined statements of operations for 1994 is
approximately $9,616 in proceeds received from the affiliated entity.
Under the terms of the Partnership Agreement of Whitewater, the Class B
Equity limited partners are to receive interest on their Class B equity interest
at prime plus 7% (15.25% at December 31, 1996) calculated on a monthly basis.
Whitewater has accrued $0, $6,235 and $2,748 in 1996, 1995 and 1994,
respectively, included in accrued liabilities and expensed $3,435, $3,486 and
$2,619 in 1996, 1995 and 1994, respectively, included in interest expense in the
accompanying combined financial statements, under this partnership agreement.
The interest will be paid to the Class B Equity limited partners upon final
disposition of the purchased loan pools or in accordance with the Master Note
Purchase Agreement.
Under the terms of a Master Note Purchase Agreement with Varde, Varde II-A
and OPCO, Varde, Varde II-A and OPCO are to receive 5 percent, 5 percent and 10
percent, respectively, of cumulative income before recognition of profit
participation expense recognized by VOJ. VOJ has accrued $103, $85 and $17 in
1996, 1995 and 1994, respectively, included in receivable from affiliates and
recognized $18, $68 and $17 in 1996, 1995 and 1994, respectively, included in
other income (expense), net, in the accompanying combined financial statements,
under this profit participation agreement. The profit participation will be paid
to Varde, Varde II-A and OPCO upon final disposition of the purchased loan pool
or in accordance with the Master Note Purchase Agreement.
Under the terms of a Master Note Purchase Agreement with Cargill and
Peoria, Cargill and Peoria are to each receive 10 percent of cumulative income
before recognition of profit participation expense recognized by Imperial.
Imperial has accrued $236, $371 and $646 in 1996, 1995 and 1994, respectively,
included in accounts payable and expensed $40, $114 and $813 in 1996, 1995 and
1994, respectively, included in other income (expense), net, in the accompanying
combined financial statements, under this profit participation agreement. The
profit participation will be paid to Cargill and Peoria upon final disposition
of the purchased loan pool or in accordance with the Master Note Purchase
Agreement.
During 1996 in conjunction with a refinancing transaction, WAMCO XXII
transferred $42,047 in assets and $28,967 in liabilities to First Paradee in
return for a partnership interest in First Paradee. Subsequent to the transfer,
WAMCO XXII distributed its interest in First Paradee to its partners.
During 1996, WAMCO III distributed $704 in assets to its partners which
was subsequently contributed to WAMCO IX.
49
<PAGE>
ACQUISITION PARTNERSHIPS
Notes to Combined Financial Statements - (continued)
(Dollars in thousands)
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Partnerships disclose
estimated fair values of their financial instruments. Fair value estimates,
methods and assumptions are set forth below.
(A) CASH, RESTRICTED CASH, RECEIVABLE FROM AFFILIATES, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
The carrying amount of cash, restricted cash, receivable from affiliates,
accounts payable and accrued liabilities approximates fair value at December 31,
1996 and 1995 due to the short-term nature of such accounts.
(B) PURCHASED LOAN POOLS
The purchased loan pools are carried at the lower of cost or estimated
fair value. The estimated fair value is calculated by discounting projected cash
flows on a loan by loan basis using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loans. The carrying value of
the purchased loan pools is $177,480 and $221,508 at December 31, 1996 and 1995,
respectively. The estimated fair value of the purchased loan pools is
approximately $221,352 and $282,091 at December 31, 1996 and 1995, respectively.
(C) INVESTMENTS
Investments in trust certificates are carried at the lower of cost or
estimated fair value. Management estimates that the cost of the investments
approximate fair value at December 31, 1996.
(D) LONG-TERM DEBT
Management believes that for similar floating rate financial instruments
with similar credit risk, that the stated interest rates at December 31, 1996
and 1995 approximates market rates. Accordingly, the carrying amount of
long-term debt is believed to approximate fair value.
(7) CONTINGENCIES
The Partnerships are involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the combined financial condition,
results of operations or liquidity.
50
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Acquisition Partnerships:
We have audited the accompanying combined balance sheets of Acquisition
Partnerships as of December 31, 1996 and 1995, and the related combined
statements of operations, changes in partners' capital, and cash flows for each
of the years in the three-year period ended December 31, 1996. These combined
financial statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of Acquisition
Partnerships as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Fort Worth, Texas
February 14, 1997
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 27, 1995, FirstCity engaged KPMG Peat Marwick LLP ("KPMG")
to serve as its independent accountants, such engagement to be effective as of
and for the year ending December 31, 1995. The engagement of KPMG was
recommended by the Audit Committee of FirstCity's Board of Directors and was
approved by such Board on October 27, 1995. Shareholders approved a proposal to
appoint KPMG as independent accountants for 1996.
During the Debtor's two most recent fiscal years prior to the Merger,
no audited financial statements of the Debtor were prepared, and therefore no
report on such financial statements was prepared. Prior thereto, Arthur Andersen
& Co. LLP served as the Debtor's independent accountants.
Prior to the Merger, Jaynes, Reitmeier, Boyd & Therrell, P.C. ("Jaynes
Reitmeier") served as J-Hawk's independent accountants. Jaynes Reitmeier's
accountants' report with respect to the annual financial statements for 1994 did
not contain an adverse opinion, disclaimer or qualification. During such period,
Jaynes Reitmeier and J-Hawk had no disagreements regarding any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure of the type referred to in items 304(a)(1)(iv) of Regulation
S-K, and no reportable event described in Item 304(a)(1)(v) of Regulation S-K
occurred.
In connection with the Merger, representatives of J-Hawk consulted with
KPMG regarding the appropriate financial statements and accounting disclosures
with respect to the Merger and for FirstCity following the Merger. After
discussions with KPMG and the Securities and Exchange Commission, FirstCity
determined that its historical financial statements prior to the date of the
Merger should reflect the financial position and results of operations of
J-Hawk.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the Company's executive officers is set
forth in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant."
The Company's current Board of Directors consists of ten members, each
of whom initially became a director of FirstCity on July 3, 1995. Further
information concerning the Board members, including their business experience
during the past five years, appears below.
James R. Hawkins, 61, has been Chairman of the Board and Chief
Executive Officer of FirstCity since July 3, 1995, and was Chairman of the Board
and Chief Executive Officer of J-Hawk from 1976 until the Merger.
C. Ivan Wilson, 69, has been Vice Chairman of FirstCity since July 3,
1995, and is currently Chairman, President and Chief Executive Officer of
Mercantile Bank, N.A., Corpus Christi, Texas, a national baking organization.
Mr. Wilson was Chairman of the Board and Chief Executive Officer of FCBOT from
1991 to July 3, 1995. Prior to 1991, Mr. Wilson was the Chief Executive Officer
of FirstCity, Texas -- Corpus Christi, one of FCBOT's banking subsidiaries.
James T. Sartain, 48, has been President and Chief Operating Officer of
FirstCity since July 3, 1995, and was President and Chief Operating Officer of
J-Hawk from 1988 until the Merger.
52
<PAGE>
Rick R. Hagelstein, 50, has been Executive Vice President and Managing
Director of Asset Management of FirstCity since November 1996. From July 3, 1995
until November 1996 Mr. Hagelstein was Executive Vice President and Chief Credit
Officer of FirstCity, and was Executive Vice President and Chief Credit Officer
of J-Hawk from 1990 until the Merger. From 1988 to 1990, Mr. Hagelstein was
Executive Vice President of ASK Corporation, a manufacturer of solar energy
devices. Mr. Hagelstein has also been a member of the Portfolio Committee of the
Trust since July 3, 1995, which committee administers the Trust.
Matt A. Landry, Jr., 54, has been Executive Vice President and Senior
Financial Officer and Managing Director of Mergers and Acquisitions since
November 1996 and was Executive Vice President and Chief Financial Officer of
FirstCity from July 3, 1995 until November 1996. Mr. Landry was Executive Vice
President and Chief Financial Officer of J-Hawk from 1992 until the Merger. From
1988 to 1992, Mr. Landry was President and Chief Operating Officer and a
director of AmWest Savings Association, a savings and loan association (and a
predecessor to First American Bank, S.S.B., a state savings bank). From 1989 to
1992, Mr. Landry was also a director of First American Bank, a state chartered
commercial bank.
Richard E. Bean, 53, has been Executive Vice President and Chief
Financial Officer of Pearce Industries, Inc. since 1976, which company, through
its subsidiaries, markets a variety of oilfield equipment and machinery. Mr.
Bean has also been a member of the Portfolio Committee of the Trust since July
3, 1995 which committee administers the Trust. Prior to July 3, 1995, Mr. Bean
was Chairman of the FCBOT's Official Committee of Equity Security Holders. Mr.
Bean is a director of TransAmerican Waste Industries, Inc.
Bart A. Brown, Jr., 65, has been President and Chief Executive Officer
of Main Street and Main Incorporated since December of 1996. Main Street is the
largest franchise of T.G.I. Friday's restaurant chain with 47 locations. From
April of 1996 until December of 1996, Mr. Brown was a consultant with Investcorp
International, N.A. From August of 1995 until joining Investcorp, Mr. Brown was
Chairman and Chief Executive Officer of Color Tile, Inc., an Investcorp-owned
company. Prior to joining Color Tile, Mr. Brown was Chief Executive Officer of
The Circle K Corporation from 1991 to 1993, and served as Chairman of that
company from June of 1990 until August of 1995. Mr. Brown is a director of
Factory Card Outlet Corp., Edison Brothers Stores, Inc. and Main Street and Main
Incorporated.
Donald J. Douglass, 65, has been Chairman and Chief Executive Officer
of Alamo Group, Inc. since 1969, which company, through its subsidiaries,
designs and markets a variety of mowing equipment, replacement parts and other
products. Prior to July 3, 1995, Mr. Douglass was a member of FCBOT's Official
Committee of Equity Security Holders.
David W. MacLennan, 37, has been with subsidiaries of Cargill,
Incorporated, regarded as one of the world's largest, privately-held
corporations, since 1991. From 1993 to February 1996, Mr. MacLennan was a Vice
President of Cargill Financial Services Corporation, a wholly-owned subsidiary
of Cargill, Incorporated engaged primarily in the investment of proprietary
funds and in the proprietary trading of financial instruments and assets. Since
February 1996, Mr. MacLennan has been Managing Director of Cargill Financial
Markets, PLC in London.
David Palmer, 54, has been a private investor for the past 25 years.
Mr. Palmer has been a member of the Portfolio Committee of the Trust since July
3, 1995 which committee administers the Trust. Prior to July 3, 1995, Mr. Palmer
was a member of FCBOT's Official Committee of Equity Security Holders. From 1970
to 1995, Mr. Palmer was a Professor of Philosophy at the State University of New
York -- Fredonia, New York.
James R. Hawkins, Chairman of the Board and Chief Executive Officer of
FirstCity, James T. Sartain, President and Chief Operating Officer of FirstCity,
and ATARA are parties to a Shareholder Voting Agreement (the "Shareholder Voting
Agreement"), dated as of June 29, 1995, with Cargill Financial Services
Corporation, a Delaware corporation ("Cargill"). The sole general partner of
ATARA is ATARA Corp., a Texas corporation, the Chairman of the Board and
President of which is Rick R. Hagelstein, the Executive Vice President and
Managing Director of Asset Management of FirstCity. Under the terms of the
Shareholder Voting Agreement, Messrs. Hawkins and Sartain, and ATARA, are
required to vote their shares of FirstCity common stockto elect one
53
<PAGE>
designee of Cargill as a director of FirstCity, and Cargill is required to vote
its shares of FirstCity common stock to elect one or more of the designees of
Messrs. Hawkins and Sartain, and ATARA, as directors of FirstCity. Information
pertaining to the number of shares of the common stock of FirstCity owned on
February 28, 1997 by each of Messrs. Hawkins and Sartain, and ATARA and Cargill,
is set forth under Item 12 - "Security Ownership of Certain Beneficial Owners
and Management."
Section 16(a) of the Exchange Act requires FirstCity's directors and
executive officers, and persons who own more than 10 percent of the FirstCity
common stock , to file with the Securities and Exchange Commission certain
reports of beneficial ownership of the FirstCity common stock . Based solely on
copies of such reports furnished to FirstCity and written representations that
no other reports were required, FirstCity believes that all applicable such
Section 16(a) filing requirements were complied with by its directors, officers
and 10 percent stockholders during the last fiscal year.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Directors of FirstCity who are not employees of FirstCity or any of its
subsidiaries receive a retainer of $3,000 per quarter for their services as
directors (from January 1, 1996 through December 31, 1996, each such director
received an aggregate of $12,000 for such director's services as director for
such period). Such directors also receive $1,000 plus expenses for each regular
and special Board meeting attended, and $1,000 plus expenses for each meeting of
any committee of the Board attended, in each case other than telephonic
meetings. Directors who are employees of FirstCity do not receive directors'
fees.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation for services during each of the last three years to (1) FirstCity's
Chief Executive Officer during 1996, (2) FirstCity's other four most highly
compensated executive officers during 1996 serving as such at the end of 1996
and (3) one additional executive officer of FirstCity during 1996 who would have
been one of such four most highly compensated executive officers but who was not
serving as an executive officer at the end of 1996:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION (1) AWARDS ALL OTHER
---------------------------------------- ----------------- COMPENSA-
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (5)(#) TION (6)($)
- ------------------------------- -------------- --------------- ------------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
James R. Hawkins,.............. 1996 300,000 82,500 (2) 2,845 (7) 11,374
Chairman of the Board and 1995:
Chief Executive Officer 07/03-12/31 155,769 225,000 22,500 3,086
01/01-07/02 150,000 -- -- 3,086
Total 1995 305,769 225,000 22,500 6,172
1994 245,000 580,000 -- 7,202
C. Ivan Wilson,................ 1996 103,962 452,422 (3) -- 5,941
Vice Chairman of the Board 1995:
07/03-12/31 125,000 -- 13,000 14,984
01/01-07/02 125,000 500,000 (4) -- 19,169
Total 1995 250,000 500,000 (4) 13,000 34,153
1994 250,000 -- -- 31,372
James T. Sartain,.............. 1996 300,000 82,500 (2) 2,845 (7) 7,927
President and Chief 1995:
Operating Officer 07/03-12/31 155,769 225,000 24,800 2,529
01/01-07/02 150,000 -- -- 2,529
Total 1995 305,769 225,000 24,800 5,058
1994 245,000 531,000 -- 5,491
Rick R. Hagelstein,............ 1996 300,000 82,500 (2) 2,845 (7) 9,913
Executive Vice President 1995:
and Managing Director of 07/03-12/31 155,769 225,000 24,800 2,991
Asset Management 01/01-07/02 150,000 -- -- 2,991
Total 1995 305,769 225,000 24,800 5,982
1994 245,000 420,000 -- 5,491
Matt A. Landry, Jr.,........... 1996 250,000 82,500 (2) 2,845 (7) 7,899
Executive Vice President, 1995:
Senior Financial Officer 07/03-12/31 129,808 185,000 21,300 3,003
and Managing Director of 01/01-07/02 125,000 -- -- 3,003
Mergers and Acquisitions Total 1995 254,808 185,000 21,300 6,006
1994 119,231 225,000 -- 5,929
G. Stephen Fillip.............. 1996 135,000 38,500 (2) 1,328 (7) 6,402
Senior Vice President 1995:
07/03-12/31 70,096 75,000 21,300 1,442
01/01-07/02 67,500 -- -- 1,443
Total 1995 137,596 75,000 11,500 2,885
1994 74,616 133,500 -- 867
55
<PAGE>
<FN>
- -----------------------------
(1) With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and Fillip,
all amounts shown for (a) the year 1996, and the period July 3, 1995
through December 31, 1995, were for services in all capacities to FirstCity
and its subsidiaries, (b) the period January 1, 1995 through July 2, 1995,
and the year 1994, were for services in all capacities to J-Hawk and its
subsidiaries. With respect to Mr. Wilson, all amounts shown for (a) the
year 1996, and the period July 3, 1995 through December 31, 1995, were for
services in all capacities to FirstCity and its subsidiaries (unless
otherwise indicated, with respect to Mr. Wilson, 50 percent of which
amounts were paid by FirstCity and 50 percent of which were paid by the
Trust pursuant to the terms of the employment agreement as described below
under the caption "Employment Agreements and Severance and
Change-in-Control Arrangements") and (b) the period January 1, 1995 through
July 2, 1995, and the year 1994, were for services in all capacities to
FCBOT and its subsidiaries.
(2) Such bonus amount was awarded under FirstCity's 1996 Performance Bonus Plan.
(3) See "Employment Agreements and Severance and Change-in-Control
Arrangements."
(4) Such bonus was paid on July 3, 1995 pursuant to the Plan of Reorganization
from funds of FCBOT.
(5) Expressed in terms of the numbers of shares of FirstCity's Common Stock
underlying options and awards granted during the year indicated. All such
options granted in 1995 were granted under the 1995 Stock Option and Award
Plan. All such awards granted in 1996 were granted under FirstCity's 1996
Performance Bonus Plan.
(6) With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and Fillip,
the total amounts indicated under "All Other Compensation" for 1996 consist
of (a) amounts contributed to match a portion of such employee's
contributions under the 401(k) Plan ("401(k) Match"), (b) excess premiums
paid on supplemental life insurance policies ("Supplement Life"), (c)
premiums paid on long term disability insurance policies ("LTD Premiums")
and (d) personal use of a business vehicle ("Auto"). The following table
details the amounts paid during 1996 for each of the categories:
401(K) SUPPLEMENT LTD
EXECUTIVE MATCH LIFE PREMIUMS AUTO TOTAL
- --------------------------------------- ------------- --------------- -------------- ------------- -------------
James R. Hawkins....................... $ 4,500 $ 4,353 $ 1,830 $ 691 $ 11,374
James T. Sartain....................... 4,500 1,079 1,830 518 7,927
Rick R. Hagelstein..................... 4,500 1,786 1,830 1,797 9,913
Matt A. Landry, Jr..................... 4,500 1,511 1,525 363 7,899
G. Stephen Fillip...................... 4,500 1,079 823 - 6,402
(7) These awards are contingent upon meeting certain performance targets in
1997 and 1998, with one-half vesting based on 1997 earnings, and one-half
vesting based on 1998 earnings. See "Bonuses."
</FN>
</TABLE>
STOCK OPTION PLANS AND 401(K) PLAN
At FirstCity's annual shareholders' meeting, held on April 24, 1996,
FirstCity's shareholders approved (1) the Company's 1995 Stock Option and Award
Plan (the "1995 Stock Option and Award Plan"), which provides for the grant of
up to 230,000 options to purchase FirstCity Common Stock to plan participants
(229,600 of which have been granted), (2) the Company's 1996 Stock Option and
Award Plan (the "1996 Stock Option and Award Plan"), which provides for the
grant of up to 500,000 options to purchase FirstCity Common Stock to plan
participants (18,000 of which were granted during 1996), and (3) the Company's
1995 Employee Stock Purchase Plan (the "1995 Employee Stock Purchase Plan"),
under which up to 100,000 shares of FirstCity Common Stock may be made available
for purchase by plan participants. During 1996, 3,813 shares were issued under
the 1995 Employee Stock Purchase Plan. The 1996 Stock Option and Award Plan also
provides for the grant of up to 50,000 performance shares to employees of
FirstCity, to be awarded in the discretion of the Stock Option Subcommittee of
the Compensation Committee of the Company's Board of Directors. The performance
measure to be used for the purposes of granting the performance shares will be
the extent to which performance goals are met, in addition to the factors of
total shareholder return, return on equity, earnings per share and the ratio of
operating overhead to operating revenue.
Beginning January 1, 1994, FirstCity also initiated a defined contribution
401(k) employee profit sharing plan (the "401(k) Plan") in which FirstCity
matches employee contributions at a stated percentage of employee contributions
to a defined maximum. FirstCity contributed $196,440 in 1996, $76,866 in 1995,
and $44,498 in 1994 to the 401(k) Plan.
56
<PAGE>
OPTION GRANTS
No stock options were granted during or in respect of 1996 to any executive
officers of FirstCity.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth, for FirstCity's Chief Executive Officer and
each of the other executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation," the number of
shares of FirstCity Common Stock underlying both exercisable and non-exercisable
stock options held by such persons as of December 31, 1996, and the year-end
values for unexercised "in-the-money" options, which represent the positive
spread between the exercise price of any such options and the year-end market
price of the FirstCity common stock. All such options were granted under the
1995 Stock Option and Award Plan.
<TABLE>
<CAPTION>
AGGREGATED 1996 OPTION EXERCISES
AND YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1996 DECEMBER 31, 1996 ($)(1)
---------------------------------------- -------------------------------------
NAME(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ------------------ -------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
James R. Hawkins................... 4,500 18,000 31,500 126,000
James T. Sartain................... 6,200 18,600 55,800 167,400
Rick R. Hagelstein................. 6,200 18,600 55,800 167,400
Matt A. Landry, Jr................. 5,325 15,975 47,925 143,775
George S. Fillip................... 2,875 8,625 25,875 77,625
<FN>
(1) Aggregate market value (based on December 31, 1996 stock price of $29 per
share of the shares of FirstCity common stock underlying such options, less
the aggregate exercise price payable.
(2) All stock options held by C. Ivan Wilson were cancelled in connection with
the settlement of his employment agreement. See "Employment Agreements and
Severance and Change-in-Control Arrangements."
</FN>
</TABLE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following report concerning the specific factors, criteria and
goals underlying decisions on payments and awards of compensation to each of the
executive officers of FirstCity for fiscal year 1996 is provided by the
Compensation Committee of FirstCity's Board of Directors.
GENERAL
Recommendations regarding compensation of FirstCity's executive
officers are prepared by the Compensation Committee of the Board of Directors
and are subject to the review, modification and approval of the Board, except
that (1) the Chief Executive Officer does not participate in the preparation of
recommendations, or the review, modification or approval thereof, with respect
to his compensation, and (2) all such recommendations, reviews, modifications
and approvals with respect to awards under the 1996 Stock Option and Award Plan
are made solely by the Stock Option Subcommittee of the Compensation Committee.
FirstCity's compensation program is designed to enable FirstCity to
attract, motivate and retain high-quality senior management by providing a
competitive total compensation opportunity based on performance. Toward this
end, FirstCity provides for competitive base salaries, annual variable
performance incentives payable in cash for the achievement of financial
performance goals, and long-term, stock-based incentives which strengthen the
mutuality of interests between senior management and FirstCity's stockholders.
57
<PAGE>
Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986,
as amended (the "Code"), provides that no deduction for federal income tax
purposes shall be allowed to a publicly held corporation for applicable employee
remuneration with respect to any covered employee of the corporation to the
extent that the amount of such remuneration for the taxable year with respect to
such employee exceeds $1.0 million. For purposes of this limitation, the term
"covered employee" generally includes the chief executive officer of the
corporation and the four highest compensated officers of the corporation (other
than the chief executive officer). The term "applicable employee remuneration"
generally means, with respect to any covered taxable year for remuneration for
services performed by such employee (whether or not during the taxable year);
provided, however, that applicable employee remuneration does not include, among
other items, certain remuneration payable solely on account of the attainment of
one or more performance goals ("performance-based compensation"). It is
FirstCity's general intention that the remuneration paid to its covered
employees not exceed the deductibility limitation established by Section 162(m).
Nevertheless, due to the fact that not all remuneration paid to covered
employees may qualify as performance-based compensation, it is possible that
FirstCity's deduction for remuneration paid to any covered employee during a
taxable year may be limited by Section 162(m).
SALARIES
Salaries for the year 1996 for each of FirstCity's executive officers,
including its Chief Executive Officer, were determined based upon such officer's
level of responsibility, time with FirstCity, contribution to FirstCity and
individual performance. The evaluation of these factors was subjective, and no
fixed, relative weights were assigned thereto.
BONUSES
Under FirstCity's 1996 Performance Bonus Plan ("1996 Performance Bonus
Plan"), all executive officers who were employed by FirstCity or its
subsidiaries during calendar year 1996 and who remained so employed on March 18,
1997 received, as a bonus, for services rendered to FirstCity or such subsidiary
during 1996, a prescribed portion of $1,100,000 (which is an amount equal to
fifty percent of FirstCity's net profits after a twenty-five percent return on
stockholders' equity (after payment or accrual of preferred dividends) for
1996). Each of the executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation" received such a
bonus for the year 1996 pursuant to the 1996 Performance Bonus Plan.
Bonuses earned pursuant to FirstCity's 1996 Performance Bonus Plan are
paid one-half in cash in the year the bonus is granted and the remainder in
shares of FirstCity common stock having a fair market value at the time the
bonus is granted equal to half of the respective bonus. One-half of the shares
of FirstCity common stock granted as part of a bonus vest, contingent upon
meeting certain performance bonus targets, in the first year succeeding the year
in which the bonus was granted. The other half of such shares vest, contingent
upon meeting certain performance bonus targets, in the second year succeeding
the year in which the bonus was granted.
STOCK OPTIONS
The Stock Option Subcommittee of the Compensation Committee believes
that stock options are critical in motivating and rewarding the creation of
long-term shareholder value, and the subcommittee has established a policy of
awarding stock options each year based on the continuing progress of FirstCity
as well as on individual performance.
In 1996, the Stock Option Subcommittee recommended, and the Board of
Directors approved, the grant of stock options for 18,000 shares of FirstCity
common stock under the 1996 Stock Option and Award Plan (none of which were
granted to FirstCity's executive officers). The exercise price with respect to
all such grants was equal to or greater than the fair market value of the
underlying FirstCity common stock at the date of grant so that the holders of
such options will benefit from such options only when, and to the extent, the
price of the
58
<PAGE>
FirstCity common stock increases after such grant. The performance of key
employees was considered by the Stock Option Subcommittee in allocating such
grants, taking into account FirstCity's performance, each individual's
contributions thereto and specific accomplishments in each individual's area of
responsibility.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Recommendations regarding compensation of FirstCity's Chief Executive
Officer are prepared by those members of the Compensation Committee, and are
subject to the review, modification and approval of those members of the Board,
other than the Chief Executive Officer. Such recommendations, reviews,
modifications and approvals for 1996 were based on the Chief Executive Officer's
level of responsibility, time with FirstCity, individual performance and
significant contributions to the successful implementation of several important
decisions that are expected to benefit FirstCity in future years, including the
acquisition of various purchased asset portfolios.
THE COMPENSATION COMMITTEE
James R. Hawkins, Chairman
David W. MacLennan
Bart A. Brown, Jr.
CUMULATIVE TOTAL SHAREHOLDER RETURN
The following performance graph (the "Performance Graph")
compares the cumulative total shareholder return on FirstCity's Common Stock,
based on the market price thereof, with the cumulative total return of the CRSP
Total Return Index for the Nasdaq Stock Market (US) prepared for Nasdaq by the
Center for Research in Security Prices ("CRSP," and such index, the "Nasdaq
Market Index") and the CRSP Financial Stocks Index prepared for Nasdaq by CRSP
(the "Nasdaq Industry Index") for the period beginning on July 3, 1995 (the date
FirstCity's Common Stock commenced trading on Nasdaq) and ending on December 31,
1996. Cumulative total shareholder return is based on an annual total return,
which assumes the reinvestment of all dividends for the period shown and assumes
that $100 was invested on July 3, 1995 in each of FirstCity's Common Stock, the
Nasdaq Market Index and the Nasdaq Industry Index. FirstCity has not declared
any dividends during the period covered by the Performance Graph. The results
shown in the Performance Graph are not necessarily indicative of future
performance.
[PURSUANT TO RULE 304 OF REGULATION S-T, THE PERFORMANCE GRAPH IS DESCRIBED
IN TABULAR DATA FORM BELOW]
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION
TOTAL RETURN PERFORMANCE CALCULATION
07/03/95 07/31/95 08/31/95 09/29/95 10/31/95 11/30/95 12/29/95 01/31/96 02/29/96 03/29/96
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NASDAQ MARKET 100 107.2795 109.4537 111.9705 111.3309 113.943 113.3365 113.8968 118.2376 118.6307
NASDAQ FINANCIAL STOCKS 100 104.7506 110.1941 113.9217 114.4259 119.0101 122.2146 122.8014 124.6018 127.1491
FIRSTCITY FINANCIAL 100 133.3333 141.6667 133.3333 166.6667 176.0417 171.875 190.625 165.625 167.7083
<CAPTION>
04/30/96 05/31/96 06/28/96 07/31/96 08/30/96 09/30/96 10/31/96 11/29/96 12/31/96
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NASDAQ MARKET 128.4706 134.3693 128.3139 116.8863 123.4357 132.8832 131.427 139.572 139.4133
NASDAQ FINANCIAL STOCKS 127.5291 129.8958 130.1639 126.824 135.0816 141.189 145.6519 154.9834 156.6915
FIRSTCITY FINANCIAL 193.75 206.25 231.25 227.0833 230.2083 237.5 260.4167 231.25 243.75
</TABLE>
59
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hawkins (Chairman), MacLennan and Bart A. Brown, Jr. served as
members of the Compensation Committee of the Board of Directors during 1996.
Messrs. MacLennan and Brown served as members of the Stock Option Subcommittee
of the Compensation Committee during 1996. Mr. Hawkins was Chairman of the Board
and Chief Executive Officer of FirstCity, and Chairman of the Board and Chief
Executive Officer of each of the corporate general partners of each of the
affiliated acquisition partnerships through which FirstCity acquires interests
in various financial asset pools, during 1996. See Item 13 - "Certain
Relationships and Related Transactions." Neither of Messrs. MacLennan or Brown
was an officer or employee of FirstCity or any of its subsidiaries during 1996
or any prior year. FirstCity leases the office space for its principal executive
offices from a trust created for the benefit of the children of Mr. Hawkins. See
Item 13 - "Certain Relationships and Related Transactions."
EMPLOYMENT AGREEMENTS AND SEVERANCE AND CHANGE-IN-CONTROL ARRANGEMENTS
FirstCity entered into an employment agreement with C. Ivan Wilson in
connection with the consummation of the Plan of Reorganization. Under the terms
of such agreement, Mr. Wilson was to serve as Vice-Chairman of FirstCity's Board
of Directors for a term of three years, beginning on July 3, 1995. Under such
terms, Mr. Wilson (1) was paid $500,000 on July 3, 1995 (from funds of FCBOT),
(2) was to be paid an annual salary of $250,000 (50 percent of which was to be
paid by FirstCity and 50 percent of which was to be paid by the Trust so as to
reflect Mr. Wilson's obligations thereunder to assist in the administration of
the Trust assets) and (3) if certain conditions with respect to the payment of
certain claims and interests under the Plan of Reorganization (as prescribed by
such agreement) were satisfied, such determination to be made by the Portfolio
Committee of the Trust (which committee administers the Trust), was to be paid
additional, separate conditional bonuses in an aggregate amount up to $500,000
plus 1.67 percent of specified additional payments made to the holders of the
Trust's Class B and Class C Certificates.
During the second quarter of 1996, Mr. Wilson advised the Board of his
desire to retire from an active management role in FirstCity and the Trust.
Under the terms of Mr. Wilson's employment contract as approved in the Plan of
Reorganization, Mr. Wilson was to receive his annual salary and any bonus as
described above. In response to Mr. Wilson's request to be considered for
retirement, the Board of FirstCity and the management of the Trust jointly
determined that a fair settlement of Mr. Wilson's contract would be to discount
the total amount of future payments to be received as salary. The resulting
amount totaling approximately $445,000 was paid one-half by the Trust and
one-half by FirstCity. Additionally, if there are any bonus payments accrued
under the provisions of subpart (3) of the preceding paragraph, Mr. Wilson will
receive such payments when, as, and if accrued. Such payments are the obligation
of the Trust and not FirstCity. Subsequent to his retirement, Mr. Wilson
received $8,000 in directors fees from FirstCity.
60
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
FirstCity Common Stock owned on February 28, 1997 by: (1) each person who is
known by FirstCity to be the beneficial owner of more than 5 percent of the
FirstCity Common Stock as of such date, (2) each of FirstCity's directors named
herein, (3) each of the executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation" and (4) all
directors and executive officers of FirstCity as a group. Except as otherwise
indicated, all shares of FirstCity Common Stock shown in the table are held with
sole voting and investment power. The "Percent of Class" column represents the
percentage that the named person or group would beneficially own if such person
or group, and only such person or group, exercised all currently exercisable
warrants to purchase FirstCity Common Stock held by such person or group.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED CLASS
- ---------------------------------------- ------------- -------------
<S> <C> <C>
James R. Hawkins.......................................................... 974,500 (2) 17.8
C. Ivan Wilson............................................................ 2,664 (3) *
James T. Sartain.......................................................... 377,360 (2) 6.9
Rick R. Hagelstein........................................................ 377,360 (4) 6.9
Matt A. Landry, Jr........................................................ 57,685 (5) 1.1
Richard E. Bean........................................................... 78,633 (6) 1.4
Bart A. Brown, Jr......................................................... -- --
Donald J. Douglass........................................................ 19,130 (7) 0.3
David W. MacLennan........................................................ -- (8) --
David Palmer.............................................................. 99,677 1.8
All directors and executive officers as a group (17 persons).............. 2,344,663 42.8
ATARA I, LTD.............................................................. 372,400 (2) 6.8
P.O. Box 8216
Waco, Texas 76714
ATARA Corp................................................................ 372,400 (9) 6.8
P.O. Box 8216
Waco, Texas 76714
<FN>
- -----------------------------
* Less than 1%
(1) The business mailing address of each of such persons (except for ATARA
I, LTD. and ATARA Corp.) is 6400 Imperial Drive, Waco, Texas 76712.
(2) Includes 506 shares that may be acquired within sixty days of February
28, 1997 through the exercise of warrants of FirstCity to purchase
FirstCity Common Stock . Each of Messrs. Hawkins and Sartain, and ATARA
I, LTD., a Texas limited partnership ("ATARA"), acquired warrants to
purchase 506 shares of FirstCity Common Stock pursuant to the exchange
under the Plan of Reorganization of shares of Common Stock of FCBOT
owned by such persons. Messrs. Hawkins and Sartain, and ATARA, are
parties to a Shareholder Voting Agreement with Cargill regarding the
FirstCity Common Stock. Each of Messrs. Hawkins and Sartain, and ATARA,
disclaims beneficial ownership of the shares of FirstCity Common Stock
owned by Cargill. With regard to Messrs. Hawkins and Sartain, 4,500 and
4,960, respectively, of such shares are subject to options granted on
October 27, 1995 pursuant to FirstCity's 1995 Stock Option and Award
Plan, which are vested but unexercised.
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<PAGE>
(3) Includes 676 shares that may be acquired within sixty days of February
28, 1997 through the exercise of warrants of FirstCity to purchase
FirstCity Common Stock (which warrants were acquired pursuant to the
exchange under the Plan of Reorganization of shares of common stock of
FCBOT owned by Mr.
Wilson).
(4) 371,894 of such shares of FirstCity Common Stock are held of record by
ATARA. 506 of such shares are subject to warrants of FirstCity to
purchase FirstCity Common Stock held of record by ATARA. See note (2)
to this table. ATARA is principally engaged in the investment in
FirstCity's Common Stock. The sole general partner of ATARA is ATARA
Corp., a Texas corporation ("ATARA Corp."), which is also principally
engaged in the investment in FirstCity's Common Stock. Mr. Hagelstein
may be deemed to beneficially own all such 372,400 shares by virtue of
being the Chairman of the Board and President of ATARA Corp., and by
reason of the fact that his wife is the only other officer or director
of ATARA Corp. and owns 33.33 percent of the outstanding shares of
common stock of ATARA Corp. 4,960 of such shares are subject to options
granted on October 27, 1995 pursuant to FirstCity's 1995 Stock Option
and Award Plan, which are vested but unexercised.
(5) 53,065 of such shares of FirstCity Common Stock are held of record by
Enovest Associates, Ltd., a Texas limited partnership ("Associates"),
which is principally engaged in the business of investments, including
its investment in FirstCity's Common Stock. The sole general partner of
Associates is Enovest Investments, Inc., a Texas corporation
("Investments"). Mr. Landry may be deemed to beneficially own all such
53,065 shares by virtue of being a Vice President of Investments and a
limited partner of Associates. 4,620 of such shares are subject to
options granted on October 27, 1995 to Mr. Landry pursuant to
FirstCity's 1995 Stock Option and Award Plan, which are vested but
unexercised.
(6) Includes 9,964 shares that may be acquired within sixty days of
February 28, 1997 through the exercise of warrants of FirstCity to
purchase FirstCity Common Stock (which warrants were acquired pursuant
to the exchange under the Plan of Reorganization of shares of common
stock of FCBOT owned by Mr.
Bean).
(7) Includes 2,424 shares that may be acquired within sixty days of
February 28, 1997 through the exercise of warrants of FirstCity to
purchase FirstCity Common Stock (which warrants were acquired pursuant
to the exchange under the Plan of Reorganization of shares of common
stock of FCBOT owned by Mr.
Douglass).
(8) Mr. MacLennan is an officer of certain affiliates of Cargill, which, as
of February 28, 1997, was the record owner of 241,137 shares of
FirstCity Common Stock. Mr. MacLennan disclaims beneficial ownership of
such shares; however, the shares are included in the total shares for
the percentage of class calculation. Cargill is party to a Shareholder
Voting Agreement with Messrs. Hawkins and Sartain, and ATARA, regarding
the FirstCity Common Stock.
(9) 371,894 of such shares of FirstCity Common Stock are held of record by
ATARA. 506 of such shares are subject to warrants of FirstCity to
purchase FirstCity Common Stock held of record by ATARA. See note (2)
to this table. ATARA Corp. may be deemed to beneficially own all such
372,400 shares by virtue of being the sole general partner of ATARA.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
FirstCity owns equity interests in various purchased asset portfolios
through the acquisition partnerships in which a corporate affiliate of FirstCity
is the sole general partner and FirstCity and other nonaffiliated investors are
limited partners. Certain directors and executive officers of FirstCity may also
serve as directors and/or executive officers of such general partners, but
receive no additional compensation from or on behalf of such general partners
for serving in such capacities. FirstCity provides asset servicing to such
acquisition partnerships pursuant to servicing agreements between FirstCity and
such Acquisition Partnerships.
FirstCity has entered into certain agreements with Cargill under which
Cargill provides FirstCity a fixed monthly payment to defray overhead expenses
and to reimburse one-half of all approved due diligence expenses incurred by
FirstCity in connection with evaluating prospective acquisitions of purchased
asset portfolios. Under such agreements, Cargill has the right to participate as
an equity investor in such acquisitions. Cargill also provides FirstCity with a
$35 million revolving credit facility, expiring on June 30, 1997, to fund
FirstCity's
62
<PAGE>
purchased asset portfolio acquisitions and for certain other working capital
purposes. Borrowings under such facility bear interest at LIBOR plus 5% and are
secured by substantially all of FirstCity's unencumbered assets. As of March 21,
1997, outstanding borrowings under such facility were $23.9 million. David W.
MacLennan, a director of FirstCity, is an officer of certain affiliates of
Cargill.
Pursuant to a noncancellable operating lease, FirstCity leases the
office space for its principal executive offices in Waco, Texas from a trust
created for the benefit of the children of James R. Hawkins, the Chairman of the
Board and Chief Executive Officer of FirstCity. Such lease expires in December
of 2001 and contains an option in favor of FirstCity pursuant to which FirstCity
may renew such lease for two additional five-year periods, with escalating lease
payments. Rental expenses under such lease for calendar year 1996 were $90,000.
As of December 31, 1996, the future minimum lease payments for each of the next
four years under such lease are $90,000 per year. FirstCity believes that the
terms of such lease are generally as favorable to FirstCity as the terms it
would receive from an independent third party.
Pursuant to the Plan of Reorganization, substantially all of FCBOT's
assets were transferred to the Trust or subsidiaries of the Trust, to be
liquidated pursuant to a liquidating trust agreement. Under the terms of such
agreement, FirstCity, as the sole holder of the Trust's Class A Certificate,
will receive certain amounts from the Trust. Additionally pursuant to the Plan
of Reorganization , the liquidation of FCBOT's assets transferred to the Trust
is serviced by FirstCity pursuant to an Investment Management Agreement between
the Trust and FirstCity (the "Investment Management Agreement"). Under the terms
thereof, FirstCity will receive an incentive fee equal to (1) three percent of
all cash proceeds derived from the assets owned by the Trust and its
subsidiaries (including assets acquired pursuant to a loss-sharing settlement in
connection with the Plan of Reorganization) ("Net Cash Proceeds") plus (2) five
percent of the Net Cash Proceeds (excluding net proceeds realized from certain
contingent asset claims under the Plan of Reorganization) realized above
$248,600,000 (the "Estimated Threshold Collection Amount") up to an amount equal
to $25 million in excess of the Estimated Threshold Collection Amount; ten
percent of the Net Cash Proceeds (excluding net proceeds realized from such
contingent asset claims) realized above $25 million in excess of the Estimated
Threshold Collection Amount up to an amount equal to $50 million in excess of
the Estimated Threshold Collection Amount; and fifteen percent of the Net Cash
Proceeds (excluding net proceeds realized from such contingent asset claims)
realized above $50 million in excess of the Estimated Threshold Collection
Amount. Under an agreement executed March 24, 1997, the Investment Management
Agreement was mutually terminated by FirstCity and the Trust, provided that
those provisions thereof specifically relating to indemnification between the
parties survive such termination. The termination was negotiated between the
parties on an arm's length basis with the proposal being unanimously approved by
the Board of FirstCity, with the members of the Portfolio Committee who also
serve as Board Members abstaining from the vote. Such termination requires the
Trust to pay, and the Trust has paid, $6,800,000 as a final servicing fee to
FirstCity, representing the present value of the servicing fees stemming from
all currently estimated collections to be derived from the trust's assets.
In connection with the consummation of the Plan of Reorganization ,
J-Hawk formed a new corporation, Combined Financial Corporation, a Texas
corporation ("CFC"), and, prior to the Merger, transferred certain of its assets
and indebtedness to CFC (which assumed such indebtedness) (such transfer and
assumption, the "Spin-off"), the stockholders of J-Hawk receiving the same
proportionate common stock interests in CFC as they had in J-Hawk. As a result
of the Spin-off, certain directors and executive officers of J-Hawk, who are
also directors and executive officers of FirstCity, became directors and/or
executive officers of CFC, as well as stockholders of CFC. FirstCity has entered
into a servicing agreement with CFC under which FirstCity provides asset
servicing to CFC for a fee based on a percentage of assets serviced. The fee
paid by CFC to FirstCity in 1996 was approximately $168,000.
In connection with the Spin-off, J-Hawk sold approximately $12 million
(allocated cost) of loans to a limited partnership owned by James R. Hawkins,
James T. Sartain and Rick R. Hagelstein, respectively the Chairman of the Board
and Chief Executive Officer, the President and Chief Operating Officer and a
director, and the Executive Vice President and Chief Credit Officer and a
director, of FirstCity. FirstCity recognized approximately $3 million in gain
from such sale. FirstCity has entered into a servicing agreement with such
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<PAGE>
partnership under which FirstCity provides asset servicing to such partnership
for a fee based on a percentage of collection of assets serviced. The servicing
fee paid by such partnership to FirstCity in 1996 was approximately $82,000.
In addition to the partnership agreements governing the acquisition
partnerships in which FirstCity and Cargill or their respective affiliates are
limited partners, FirstCity and Cargill or their respective affiliates are
parties to certain other agreements. FirstCity has a $35.0 million revolving
credit facility with Cargill which expires June 30, 1997. At March 21, 1997 the
principal balance outstanding under such facility was $23.9 million. Such
facility is secured by substantially all of the unencumbered equity interests in
subsidiaries and Acquisition Partnerships held by FirstCity and by certain other
assets of FirstCity.
Under a Right of First Refusal Agreement dated June 9, 1994, as amended
by letter agreement dated March 11, 1996 (the "Right of First Refusal
Agreement"), between FirstCity, James R. Hawkins (FirstCity's Chairman of the
Board and Chief Executive Officer), James T. Sartain (FirstCity's President and
Chief Operating Officer) and Rick R. Hagelstein (FirstCity's Executive Vice
President and Managing Director of Asset Management), Cargill and CFSC Capital
Corp II, a Delaware corporation, if FirstCity or its senior officers receives an
invitation to bid on or otherwise obtains an opportunity to acquire interests in
loans and receivables with respect to which the aggregate amount to be bid
exceeds $3 million, FirstCity or such senior officers, as the case may be, must
follow a prescribed notice procedure pursuant to which Cargill has the option to
participate in the proposed purchase by requiring that such purchase or
acquisition be effected through a business entity (such as the Affiliated
Partnerships) formed by FirstCity and Cargill or an affiliate thereof. In
connection with the Right of First Refusal Agreement, FirstCity and Cargill are
parties to a Due Diligence Expense Reimbursement Agreement dated June 9, 1994,
as amended by letter agreement dated March 11, 1996 (the "Due Diligence Expense
Reimbursement Agreement"), pursuant to which Cargill provides FirstCity a fixed
monthly payment to defray overhead expenses and to reimburse one-half of all
approved due diligence expenses incurred by FirstCity in connection with
evaluating prospective acquisitions of purchased asset pools. Both the Right of
First Refusal Agreement and the Due Diligence Expense Reimbursement Agreement
terminated on March 31, 1997. FirstCity and Cargill currently are negotiating
the terms of an extension and modification to such agreements but there can be
no assurance that an agreement with respect thereto will be reached or with
respect to the terms thereof.
FirstCity (as successor by merger to J-Hawk) and Cargill are party to a
Residual Share Allocation Agreement dated May 12, 1994, as amended by the First
Amendment thereto dated June 28, 1994 (as so amended, the "Residual Share
Allocation Agreement"). The Residual Share Allocation Agreement requires
FirstCity to pay Cargill a prescribed portion of amounts (which may be all such
amounts) FirstCity receives or becomes entitled to receive that constitute a
return on (and not of) its cash contributions (such amounts, "Residual Equity
Distributions") to any Acquisition Partnership subject to such agreement or a
general partner thereof in any period (a "Deficiency Period") during which an
event of default has occurred and is continuing under any loan or partnership
agreement subject to such Residual Share Allocation Agreement (such agreements,
"Collateral Agreements"), or during which FirstCity has notified Cargill or
Cargill has notified FirstCity that the purchased assets securing certain of the
obligations under any Collateral Agreement to Cargill or certain affiliates
thereof may not be sufficient to pay and perform all such obligations. Such
amounts to be paid to Cargill are based upon amounts reasonably determined by
Cargill to represent the difference between (1) the total obligations owed by
any borrower under any Collateral Agreement as to which a Deficiency Period
exists less (2) the amounts reasonably believed by Cargill to be recoverable
from the purchased assets securing such obligations. The Acquisition Partnership
borrowers and related Collateral Agreements as to which the Residual Share
Allocation Agreement applies are WAMCO III (Amended and Restated Limited
Partnership Agreement of WAMCO III), WAMCO V (Master Note Purchase Agreement
between Clearwater Portfolio L.P. and WAMCO V), WAMCO VI (Master Note Purchase
Agreement between Cargill and WAMCO VI), WAMCO VIII (Master Note Purchase
Agreement between Cargill and WAMCO VIII), WAMCO XI (Master Note Purchase
Agreement between Cargill and WAMCO XI), Imperial Fund (Master Note Purchase
Agreement between Cargill and Peoria Mortgage Acquisition Corporation, as
Lenders, Peoria Mortgage Acquisition Corporation, as Agent, and Imperial Fund),
and Whitewater Acquisition (Amended and Restated Limited Partnership Agreement
of Whitewater Acquisition).
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James R. Hawkins, Chairman of the Board and Chief Executive Officer of
FirstCity, James T. Sartain, President and Chief Operating Officer of FirstCity,
and ATARA are parties to a Shareholder Voting Agreement (the "Shareholder Voting
Agreement"), dated as of June 29, 1995, with Cargill. The sole general partner
of ATARA is ATARA Corp., the Chairman of the Board and President of which is
Rick R. Hagelstein, the Executive Vice President and Chief Credit Officer of
FirstCity. Under the terms of the Shareholder Voting Agreement, Messrs. Hawkins
and Sartain, and ATARA, are required to vote their shares of FirstCity common
stock to elect one designee of Cargill as a director of FirstCity, and Cargill
is required to vote its shares of FirstCity common stock to elect one or more of
the designees of Messrs. Hawkins and Sartain, and ATARA, as directors of
FirstCity. David W. MacLennan, a director of FirstCity and Cargill's designee,
is also an officer of certain affiliates of Cargill.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The consolidated financial statements of FirstCity and combined
financial statements of Acquisition Partnerships are incorporated
herein by reference to Item 8 "Financial Statements and
Supplementary Data" of this Report.
2. Financial Statement Schedules
Financial statement schedules have been omitted because the
information is either not required, not applicable, or is included
in Item 8 "Financial Statements and Supplementary Data."
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1 Joint Plan of Reorganization by First City Bancorporation of
Texas, Inc., Official Committee of Equity Security Holders and
J-Hawk Corporation, with the Participation of Cargill Financial
Services Corporation, Under Chapter 11 of the United States
Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated
herein by reference to Exhibit 2.1 of the Registrant's Form 8-K
dated July 3, 1995 filed with the Commission on July 18, 1995).
2.2 Agreement and Plan of Merger, dated as of July 3, 1995, by and
between First City Bancorporation of Texas, Inc. and J-Hawk
Corporation (incorporated herein by reference to Exhibit 2.2 of
the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
2.3 Agreement and Plan of Merger, dated as of March 26, 1997, by
and among FirstCity Financial Corporation, HFGI Acquisition
Corp. and Harbor Financial Group, Inc. (incorporated herein by
reference to Exhibit 2.1 of the Registrant's Form 8-K dated
March 26, 1997 filed with the Commission on April 2, 1997).
65
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 3.1 of the
Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
3.2 Bylaws of the Registrant (incorporated herein by reference to
Exhibit 3.2 of the Registrant's Form 8-K dated July 3, 1995 filed
with the Commission on July 18, 1995).
4.1 Indenture, dated July 3, 1995, by and between the Registrant and
Shawmut Bank, N.A., as Trustee (incorporated herein by
reference to Exhibit 4.1 of the Registrant's Form 8-K dated
July 3, 1995 filed with the Commission on July 18, 1995).
4.2 Warrant Agreement, dated July 3, 1995, by and between the
Registrant and American Stock Transfer & Trust Company, as
Warrant Agent (incorporated herein by reference to Exhibit 4.2
of the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
10.1 Trust Agreement of FirstCity Liquidating Trust, dated July 3,
1995 (incorporated herein by reference to Exhibit 10.1 of the
Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
10.2 Investment Management Agreement, dated July 3, 1995, between
the Registrant and FirstCity Liquidating Trust (incorporated
herein by reference to Exhibit 10.2 of the Registrant's Form 8-K
dated July 3, 1995 filed with the Commission on July 18, 1995).
10.3 Lock-Box Agreement dated July 11, 1995 among the Registrant,
NationsBank of Texas, N.A., as lock-box agent, FirstCity
Liquidating Trust, FCLT Loans, L.P., and the other Trust-
Owned Affiliates signatory thereto, and each of NationsBank of
Texas, N.A. and Fleet National Bank, as co-lenders
(incorporated herein by reference to Exhibit 10.3 of the
Registrant's Form 8-A/A dated August 25, 1995 filed with the
Commission on August 25, 1995).
10.4 Custodial Agreement dated July 11, 1995 among Fleet National
Bank, as custodian, Fleet National Bank, as agent, FCLT Loans,
L.P., FirstCity Liquidating Trust, and the Registrant
(incorporated herein by reference to Exhibit 10.4 of the
Registrant's Form 8-A/A dated August 25, 1995 filed with the
Commission on August 25, 1995).
10.5 Tier 3 Custodial Agreement dated July 11, 1995 among the
Registrant, as custodian, Fleet National Bank, as agent, FCLT
Loans, L.P., FirstCity Liquidating Trust, and the Registrant, as
servicer (incorporated herein by reference to Exhibit 10.5 of the
Registrant's Form 8-A/A dated August 25, 1995 filed with the
Commission on August 25, 1995).
66
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of KPMG Peat Marwick LLP.*
23.3 Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.*
27.1 Financial Data Schedule. (Exhibit 27.1 has been
previously submitted as an exhibit only in the electronic
format of this Annual Report on Form 10-K 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, Section 18 of the Securities
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.)**
* Filed herewith
**Previously filed
</TABLE>
(b) Registrant did not file a Report on Form 8-K during, or dated during,
the fourth quarter of 1996.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRSTCITY FINANCIAL CORPORATION
By /s/ JAMES R. HAWKINS
----------------------
James R. Hawkins
Chairman of the Board
April 28, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Date Title
--------- ---- -----
<S> <C> <C>
Chairman of the Board, Chief
Executive Officer and Director
/s/ James R. Hawkins April 28, 1997 (Principle Executive Officer)
- --------------------------------------------------
James R. Hawkins
/s/ C. Ivan Wilson April 28, 1997 Vice Chairman and Director
- --------------------------------------------------
C. Ivan Wilson
President, Chief Operating Officer and
/s/ James T. Sartain April 28, 1997 Director
- --------------------------------------------------
James T. Sartain
Executive Vice President, Senior
Financial Officer, Managing Director -
Mergers and Acquisitions and Director
/s/ Matt A. Landry, Jr. April 28, 1997 (Principal Financial Officer)
- --------------------------------------------------
Matt A. Landry, Jr.
Executive Vice President, Managing
/s/ Rick R. Hagelstein April 28, 1997 Director and Director
- -------------------------------------------------
Rick R. Hagelstein
Senior Vice President, Chief Financial
/s/ Gary H. Miller April 28, 1997 Officer (Principal Accounting Officer)
- --------------------------------------------------
Gary H. Miller
/s/ Richard E. Bean April 28, 1997 Director
- --------------------------------------------------
Richard E. Bean
68
<PAGE>
/s/ Bart A. Brown, Jr. April 28, 1997 Director
- --------------------------------------------------
Bart A. Brown, Jr.
/s/ Donald J. Douglass April 28, 1997 Director
- --------------------------------------------------
Donald J. Douglass
/s/ David Palmer April 28, 1997 Director
- --------------------------------------------------
David Palmer
</TABLE>
69
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 Joint Plan of Reorganization by First City Bancorporation of Texas,
Inc., Official Committee of Equity Security Holders and J-Hawk
Corporation, with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code,
Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit
2.1 of the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
2.2 Agreement and Plan of Merger, dated as of July 3, 1995, by and between
First City Bancorporation of Texas, Inc. and J-Hawk Corporation
(incorporated herein by reference to Exhibit 2.2 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
2.3 Agreement and Plan of Merger, dated as of March 26, 1997, by and among
FirstCity Financial Corporation, HFGI Acquisition Corp. and Harbor
Financial Group, Inc. (incorporated herein by reference to the
Registrant's Form 8-K dated March 26, 1997 filed with the Commission on
April 2, 1997.
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
3.2 Bylaws of the Registrant (incorporated herein by reference to Exhibit
3.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
4.1 Indenture, dated July 3, 1995, by and between the Registrant and
Shawmut Bank, N.A., as Trustee (incorporated herein by reference to
Exhibit 4.1 of the Registrant's Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995).
4.2 Warrant Agreement, dated July 3, 1995, by and between the Registrant
and American Stock Transfer & Trust Company, as Warrant Agent
(incorporated herein by reference to Exhibit 4.2 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
10.1 Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995
(incorporated herein by reference to Exhibit 10.1 of the Form 8-K dated
July 3, 1995 filed with the Commission on Registrant's July 18, 1995).
10.2 Investment Management Agreement, dated July 3, 1995, between the
Registrant and FirstCity Liquidating Trust (incorporated herein by
reference to Exhibit 10.2 of the Registrant's Form 8-K dated July 3,
1995 filed with the Commission on July 18, 1995).
10.3 Lock-Box Agreement dated July 11, 1995 among the Registrant,
NationsBank of Texas, N.A., as Lock-box agent, FirstCity Liquidating
Trust, FCLT Loans, L.P., and the other Trust-Owned
70
<PAGE>
Affiliates signatory thereto, and each of NationsBank of Texas, N.A.
and Fleet National Bank, as co-Lenders (incorporated herein by
reference to Exhibit 10.3 of the Registrant's Form 8-A/A dated August
25, 1995 filed with the Commission on August 25, 1995).
10.4 Custodial Agreement dated July 11, 1995 among Fleet National Bank, as
custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity
Liquidating Trust, and the Registrant (incorporated herein by reference
to Exhibit 10.4 of the Registrant's Form 8-A/A dated August 25, 1995
filed with the Commission on August 25, 1995).
10.5 Tier 3 Custodial Agreement dated July 11, 1995 among the Registrant, as
custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity
Liquidating Trust, and the Registrant, as servicer (incorporated herein
by reference to Exhibit 10.5 of the Registrant's Form 8-A/A dated
August 25, 1995 filed with the Commission on August 25, 1995).
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of KPMG Peat Marwick LLP.*
23.3 Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.*
27.1 Financial Data Schedule. (Exhibit 27.1 has been previously submitted as
an exhibit only in the electronic format of this Annual Report on Form
10-K 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, Section 18 of the Securities 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.)**
_____________
*Filed herewith
**Previously filed
71
HOFS02...:\92\54892\0006\188\Fcfc10k.004
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
FirstCity Financial Corporation:
We consent to incorporation by reference in the registration
statements on Form S-8 and S-3 of FirstCity Financial Corporation of our report
dated February 14, 1997, relating to the consolidated balance sheets of
FirstCity Financial Corporation and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the two-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form 10-
K/A No. 1 of FirstCity Financial Corporation.
KPMG Peat Marwick LLP
Fort Worth, Texas
April 28, 1997
EXHIBIT 23.2
Independent Auditors' Consent
The Partners
Acquisition Partnerships:
We consent to incorporation by reference in the registration
statements on Form S-8 and S-3 of FirstCity Financial Corporation of our report
dated February 14, 1997, relating to the combined balance sheets of Acquisition
Partnerships as of December 31, 1996 and 1995, and the related combined
statements of operations, changes in partners' capital and cash flows for each
of the years in the three-year period ended December 31, 1996, which report
appears in the December 31, 1996 annual report on Form 10-K/A No. 1 of
FirstCity Financial Corporation.
KPMG Peat Marwick LLP
Fort Worth, Texas
April 28, 1997
EXHIBIT 23.3
Independent Auditors' Consent
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We consent to incorporation by reference in the registration
statement on Form S-8 of First City Financial Corporation and subsidiaries of
our report dated February 8, 1995, relating to the consolidated statements of
income, stockholders' equity, and cash flows of J-Hawk Corporation and
subsidiaries, the predecessor entity of FirstCity Financial Corporation, for the
year ended December 31, 1994, which report appears in the December 31, 1996
annual report on Form 10-K/A No. 1 of FirstCity Finncial Corporation and
subsidiaries.
JAYNES, REITMEIER, BOYD & THERRELL, P.C.
Waco, Texas
April 28, 1997