Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(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 February 28, 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 $71,615,000.
DOCUMENTS INCORPORATED BY REFERENCE Part of
Form 10-K
Notice of Annual Meeting and Proxy Statement for the 1997 Annual
Meeting of Shareholders...................................................III
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
2
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 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.
3
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 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.
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.
4
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
5
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 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
6
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 proposes to issue up to 1,600,000
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 the
execution of a definitive merger agreement, 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 First City 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, 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 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.
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
7
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.
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 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, 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
8
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.
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
9
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. High and low stock prices
and dividends in 1996 and 1995 are displayed in the following table:
1996 1996 Cash 1995
Quarter Ended Market Price Dividends Market Price
---------------------- --------------------
Common Stock: High Low Paid High Low
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
- ---------------------------------------------------------------------------------------------
(1) Beginning July 3, 1995, the date of the Merger.
(2) Accrued dividend from July 3, 1995 through September 30, 1996.
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
----
Market Price
Stock Prices ------------
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
10
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 ("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.
11
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 proposes to issue up to 1,600,000 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 is subject to the execution
of a definitive merger agreement, 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.
RESULTS OF OPERATIONS
The following table summarizes FirstCity's performance since 1994.
CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
==============================================================================================================================
Year ended December 31,
--------------------------------------------------------
(Amounts in thousands, except per share data) 1996 1995 1994
--------------- --------------- ---------------
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
--------------- --------------- ---------------
12
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%
==============================================================================================================================
13
The following table analyzes the composition of FirstCity's major revenue
sources:
ANALYSIS OF REVENUE SOURCES
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------
(Dollars in thousands) 1996 1995 1994
-------------- ------------- ---------------
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
- -----------------------------------------------------------------------------------------------------------------
14
The following table analyzes operations of FirstCity's acquisition partnerships:
ANALYSIS OF ACQUISITION PARTNERSHIPS
- --------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------------
(Dollars in thousands) 1996 1995 1994
--------------- -------------- --------------
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
=============== ============== ==============
- --------------------------------------------------------------------------------------------------------------
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
15
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 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
16
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.
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.
17
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.
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:
ANALYSIS OF COMBINED DEBT AND EQUITY
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
---- ----
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
18
ANALYSIS OF COMBINED DEBT AND EQUITY
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
---- ----
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
- ---------------------------------------------------------------------------------------------------------
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 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
19
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:
- --------------------------------------------------------------------------------------------------------------------
1996 1996 Cash 1995
Quarter Ended Market Price Dividends Market Price
--------------------------- ------------------------
Common Stock: High Low Paid High Low
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
- --------------------------------------------------------------------------------------------------------------------
(1) Beginning July 3, 1995, the date of the Merger.
(2) Accrued dividend from July 3, 1995 through September 30, 1996.
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% annualized
return on average equity. The following table presents a summary of operations
for the fourth quarters of 1996 and 1995.
20
- --------------------------------------------------------------------------------
Condensed Consolidated Summary of Operations
- --------------------------------------------------------------------------------
1996 1995
Fourth Fourth
(Dollars in thousands, except per share data) Quarter Quarter
------- -------
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
- --------------------------------------------------------------------------------
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
financial-components 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 uncertainties; some assumptions will
inevitably be incorrect. Additionally, unanticipated
21
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.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
(Dollars in thousands, except per share data) 1996 1995
- ----------------------------------------------------------------------------------------------------------
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
Shareholders' Equity................................. $ 227,213 $ 308,889
============= ===========
See accompanying notes to consolidated financial statements.
23
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-------------------------------------------------
(Amounts in thousands,
except per share data) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
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
========= ============ ============
See accompanying notes to consolidated financial statements.
24
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Common Paid in Retained Shareholders'
(Dollars in thousands) Stock Capital Earnings Equity
- -------------------------------------------------------------------------------------------------------
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
========== =========== ========= ==========
See accompanying notes to consolidated financial statements.
25
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------- ------------------------------------------------
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
=========== ======== ===========
See accompanying notes to consolidated financial statements.
26
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.
27
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(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 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
28
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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.
(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.
29
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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 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.
30
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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, J-Hawk 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 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
31
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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 proposes to issue
up to 1,600,000 shares of common stock in exchange for 100% of Harbor's
outstanding capital stock. Harbor originates and services residential
loans,
32
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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 the execution of a
definitive merger agreement, 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.
Year ended December 31,
--------------------------------
1996 1995 1994
----------- ---------- --------
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
(3) Purchased Asset Pools and Loan Receivables
The purchased asset pools are summarized as follows:
December 31,
---------------------
1996 1995
--------- --------
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 -
33
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
December 31,
-----------------------------
1996 1995
-------------- -------------
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
============== ============
The purchased asset pools are pledged to secure non-recourse notes
payable.
The activity in the allowance for loan losses is summarized as follows:
Year ended December 31,
------------------------------
1996 1995
--------- ----------
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 $ -
========= ==========
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:
34
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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
==================== ====================
Condensed Combined Statements of Income
Year Ended December 31,
----------------------------------------
1996 1995 1994
---------- --------- -----------
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
========== ========= ===========
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.
35
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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.
36
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(6) Notes Payable
Notes payable at December 31, 1996 and 1995 consist of the following:
1996 1995
---- ----
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
======= =======
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.
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.
37
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(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.
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
38
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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:
1996 1995
---- ----
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
Stock option activity during the periods indicated is as follows:
1996 1995
------------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- -------- ----------
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
========== ==========
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.
39
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:
1996 1995 1994
-------- --------- ----------
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
======== ====== ==========
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:
1996 1995 1994
---------- ---------- --------
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
========== ======== ========
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:
1996 1995
----- -----
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 $ -
========== ==========
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,
40
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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 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).
41
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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.
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 First
City 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
42
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
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.
43
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 their operations 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
44
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 predecessor 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
45
FIRSTCITY FINANCIAL CORPORATION
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data
(Dollars in thousands, except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
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
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes $16.5 million of deferred tax benefit in 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Quarterly Financial Data
(Dollars in thousands, except per
share data)
1996 1995
--------------------------------------------- ----------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
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
- --------------------------------------------------------------------------------------------------------------------------------
(1) Includes $14.6 million and $1.9 million deferred tax benefit in second and
fourth quarters, respectively, of 1996
46
ACQUISITION PARTNERSHIPS
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
Assets 1996 1995
------ ---- ----
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
================= ===============
See accompanying notes to combined financial statements.
47
ACQUISITION PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
--------------- ---------------- -------------
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
=============== ================ =============
See accompanying notes to combined financial statements.
48
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
-------------- ---------------- ------------- ------------- -------------- ------------
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
====== ========== =========== ============ ============= ============
See accompanying notes to combined financial statements.
49
ACQUISITION PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
-------- -------- --------
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.
See accompanying notes to combined financial statements.
50
ACQUISITION PARTNERSHIPS
Notes to Combined Financial Statements
December 31, 1996, 1995 and 1994
(Dollars in thousands)
(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.
51
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:
1996 1995
---------- ---------
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
========== =========
52
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:
1996 1995
---- ----
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
======== ========
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 commitment 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 include 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
53
ACQUISITION PARTNERSHIPS
Notes to Combined Financial Statements - (continued)
(Dollars in thousands)
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.
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.
54
ACQUISITION PARTNERSHIPS
Notes to Combined Financial Statements - (continued)
(Dollars in thousands)
During 1996, WAMCO III distributed $704 in assets to its partners which
was subsequently contributed to WAMCO IX.
(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.
55
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 respon sibility 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
56
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.
The information called for by this item with respect to the Company's directors
and with respect to reporting persons under Section 16 of the Securities
Exchange Act of 1934, as amended, is incorporated by reference from the
Company's definitive proxy statement pertaining to the 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A. 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."
Item 11. Executive Compensation.
The information called for by this item is incorporated by reference from the
Company's definitive proxy statement pertaining to the 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this item is incorporated by reference from the
Company's definitive proxy statement pertaining to the 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions.
The information called for by this item is incorporated by reference from the
Company's definitive proxy statement pertaining to the 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
57
(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
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).
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
Registant's July 18, 1995).
58
EXHIBIT
NUMBER DESCRIPTION
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).
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.*
27.1 Financial Data Schedule.* (Exhibit 27.1 is being
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
(b) Registrant did not file a Report on Form 8-K during, or dated during,
the fourth quarter of 1996.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRSTCITY FINANCIAL CORPORATION
By /s/ James R. Hawkins
------------------------
James R. Hawkins
Chairman of the Board
March 11, 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.
Signature Date Title
--------- ---- -----
Chairman of the Board, Chief
Executive Officer and Director
/s/ James R. Hawkins March 11, 1997 (Principle Executive Officer)
- --------------------------------------------------
James R. Hawkins
/s/ C. Ivan Wilson March 11, 1997 Vice Chairman and Director
- --------------------------------------------------
C. Ivan Wilson
President, Chief Operating Officer and
/s/ James T. Sartain March 11, 1997 Director
- --------------------------------------------------
James T. Sartain
Executive Vice President, Senior
Financial Officer, Managing Director -
Mergers and Acquisitions and Director
/s/ Matt A. Landry, Jr. March 11, 1997 (Principal Financial Officer)
- --------------------------------------------------
Matt A. Landry, Jr.
Executive Vice President, Managing
/s/ Rick R. Hagelstein March 11, 1997 Director and Director
- -------------------------------------------------
Rick R. Hagelstein
Senior Vice President, Chief Financial
/s/ Gary H. Miller March 11, 1997 Officer (Principal Accounting Officer)
- --------------------------------------------------
Gary H. Miller
/s/ Richard E. Bean March 11, 1997 Director
- --------------------------------------------------
Richard E. Bean
/s/ Bart A. Brown, Jr. March 11, 1997 Director
- --------------------------------------------------
Bart A. Brown, Jr.
/s/ Donald J. Douglass March 11, 1997 Director
- --------------------------------------------------
Donald J. Douglass
/s/ David W. MacLennan March 11, 1997 Director
- --------------------------------------------------
David W. MacLennan
/s/ David Palmer March 11, 1997 Director
- --------------------------------------------------
David Palmer
60
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).
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
Registant's July 18, 1995).
61
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).
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.*
27.1 Financial Data Schedule.* (Exhibit 27.1 is being
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
62