10-Q 1 h89333e10-q.txt FIRSTCITY LIQUIDATING TRUST - JUNE 30, 2001 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-20677 FIRSTCITY LIQUIDATING TRUST (Exact name of registrant as specified in its charter) Texas 06-6414468 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1001 Fannin, Suite 505, Houston, Texas 77002 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (713) 651-7841 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of June 30, 2001, 2,454,310 units of Class B Beneficial Interests and 725,729 units of Class C Beneficial Interests were outstanding. 2 FORWARD LOOKING INFORMATION This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The opinions, forecasts, projections, guidance or other statements other than statements of historical fact, are forward-looking statements. These statements are based upon assumptions that are subject to change and other risks. Although the Trust believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Certain risks and uncertainties inherent in the Trust's business are set forth in the filings of the Trust with the Securities and Exchange Commission. PART I - FINANCIAL INFORMATION Item 1. Financial Statements FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION (DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31, 2001 2000 ---------- ------------ Assets, at estimated fair value (Unaudited) Cash and cash equivalents................................................ $ 2,189 $ 3,556 Trust assets, net........................................................ 43,617 44,472 ------------ ------------ Total assets...................................................... 45,806 48,028 ------------ ------------ Less liabilities at face or estimated amount Payables and accrued liabilities......................................... 1,606 1,928 ------------ ------------ Total liabilities................................................. 1,606 1,928 ------------ ------------ Commitments and contingencies............................................ -- -- Trust net asset value attributable to: Class "B" Certificate, 2,454,310 units outstanding....................... 44,200 46,100 Class "C" Certificate, 725,729 units outstanding......................... -- -- ------------ ------------ Total net asset value............................................. $ 44,200 $ 46,100 ============ ============

CONSOLIDATED STATEMENTS OF INCOME AND CHANGES IN NET ASSET VALUE IN LIQUIDATION (DOLLARS IN THOUSANDS)(UNAUDITED)

See accompanying notes to consolidated financial statements. 2 3 FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)(UNAUDITED)

See accompanying notes to consolidated financial statements. 3 4 FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001 (A) Basis of Presentation The unaudited consolidated financial statements of FirstCity Liquidating Trust (the "Trust", formerly the "Debtor") reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the Trust's net assets in liquidation at June 30, 2001, and its changes in net asset value in liquidation and cash flows for the three month and six month periods ended June 30, 2001 and 2000. Management of the Trust has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. By order of the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, unsurrendered securities of the Debtor were required to be submitted for exchange into Class B Certificates or Class C Certificates by May 31, 2000. As of that date, securities representing 2,454,310 Class B Certificates and 725,729 Class C Certificates had been exchanged. Prior to May 31, 2000, Certificates outstanding were assumed equal to an exchange of all Debtor securities. Accordingly, in the second quarter of 2000, a liability for distributions on the unsurrendered Class B Certificates was reversed. Holders of the remaining unsurrendered securities of the Debtor will have no rights to receive any distributions on Trust securities. Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with current financial statement presentation. (B) Trust Assets Trust assets are comprised of the following (dollars in thousands):

4 5 FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) For each asset, estimates of income, expense and net cash flow on a monthly basis through the expected final disposition date are prepared by management of the Trust. The individual asset budget is developed based upon factors which include physical inspection of the asset or the collateral underlying the related loan, local market conditions, contractual payments or rents, and discussions with the relevant borrower. The Trust's management and the Portfolio Committee periodically reevaluate and revise projected monthly cash flows on an asset by asset basis. At June 30, 2001 and December 31, 2000, the projected monthly cash flows were discounted at 11% to reflect the Trust assets at estimated fair value. The Trust assets are highly concentrated in Texas. The June 30, 2001 consolidated statement of net assets in liquidation reflects a value of $45 million for a 67% interest in a partnership which owns the First City Tower, a Class A office building located in downtown Houston. UIDC Management, Inc. owns the remaining 33% of the partnership. The Trust publicly stated its intent to market its share of the partnership in the first quarter of 2000. The Trust received a letter dated February 18, 2000 from UIDC in which UIDC alleged that in 1997 it "exercised" its contractual right of first refusal to purchase the 67% partnership interest. This alleged exercise of the right of first refusal arose in connection with an unconsummated prior transaction which was itself the subject of previously settled litigation. The letter further states that UIDC "demands that the Trust tender its partnership interest". Adjusted for refinancing costs, the alleged right of first refusal would have been on a value of approximately $25 million for the partnership interest. The Trust filed a lawsuit on March 9, 2000 seeking a declaratory judgment that UIDC failed in May 1997 to properly exercise its right of first refusal under the Limited Partnership Agreement of FC Tower Property Partners, L.P. or, in the alternative, that UIDC waived and/or is estopped from asserting such right. Additionally, the Trust filed a motion for summary judgment. On February 27, 2001 a federal district judge in the U.S. District Court for the Southern District of Texas, Houston Division (the "Court") ruled that the Trust's motion for summary judgment be denied and that UIDC's motion for summary judgment be granted in part and denied in part. Specifically, the judge ruled that, as a matter of law, UIDC had properly exercised its right of first refusal to purchase the 67% interest in May of 1997. The judge further ruled that UIDC's summary judgment motion be denied as it pertains to questions of whether UIDC is prevented from enforcing that right because of alleged breaches of the resulting option agreement, or because UIDC is estopped from specific performance based upon its refusal to buy the interest when given the chance in October of 1997. Management of FirstCity Liquidating Trust strongly disagrees with this ruling. Issues remain to be tried concerning whether UIDC is nevertheless barred from enforcing its option to acquire the 67% partnership interest (a) because of alleged breaches of that agreement and (b) because UIDC declined to purchase the partnership interest when subsequently offered 5 6 FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) in October of 1997 at a price even more favorable than that offered in May of 1997. Finally, even if the Trust was not successful on either of these trial points, there will remain equitable questions pertaining to the precise terms upon which UIDC's acquisition of the partnership interest may be ordered by the court, given all the pertinent circumstances. A trial date, at the earliest in November 2001, has been set and discovery is proceeding. No adjustment has been made to the value of the partnership interest because, in the opinion of Trust management, it is not probable that the resolution of the dispute with UIDC will have a material adverse impact on the consolidated financial position, results of operations or liquidity of the Trust. FirstCity Liquidating Trust cannot predict the outcome of any such legal matters; however, the current litigation makes it unlikely that any near-term deal to sell the interest can be accomplished. (C) Distribution Priorities The Trust is required to apply all proceeds from the liquidation and disposition of the Trust's assets first to payment of normal operating expenses. Second, Trust proceeds totaling $188 million were distributed to FirstCity Financial Corporation ("FirstCity") to retire the Class A Certificate in December 1997. The third order of distribution of Trust proceeds is payments pursuant to employment and bonus agreements with certain former employees of the Debtor. The bonus pool and executive long-term incentive plan provides for the payment of bonuses equal to 4.76% of additional distributions to Class B Certificate holders and (if any) Class C Certificate holders. Fourth, Class B Certificate holders are entitled to distributions up to the Pour-Over Level. The Pour-Over Level (approximately $50 million at June 30, 2001) is the liquidation preference on July 3, 1995 of the Debtor's Series B and Series E preferred stock, less the nominal stated value of FirstCity special preferred stock and the book value of FirstCity common stock issued to the Series B and Series E holders, plus interest at an annual rate of 6.5% from July 3, 1995. The Pour-Over Level is reduced for distributions to Class B Certificate holders. In the first six months of 2001, $2.5 million, or $1.00 per Certificate, was distributed to Class B Certificate holders and a $112,000 bonus was paid to certain former employees of the Debtor. For the year ended December 31, 2000, $9.8 million, or $4.00 per Certificate, was distributed to Class B Certificate holders and a $.4 million bonus was paid to certain former employees of the Debtor. Lastly, Class C Certificate holders receive distributions, if any, after any remaining payments to Class B Certificate holders up to the Pour-Over Level (approximately $20.40 per unit as of June 30, 2001). 6 7 FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The ultimate amounts to be distributed to the holders of the B and C Certificates will result from the cash flow actually realized from the liquidation of the non-cash Trust assets (principally the partnership interest discussed in Note B). The determination of the net asset value of the Trust in the accompanying consolidated statements of net assets in liquidation is based upon estimates of future cash flows. The actual cash flows and the timing of such cash flows may vary significantly from those estimates, thus affecting the final distributions to the Certificate holders. (D) Commitments and Contingencies The Trust is involved in various other legal proceedings in the ordinary course of business. In the opinion of management of the Trust, the resolution of such matters will not have a material adverse impact on the consolidated financial position, results of operations or liquidity of the Trust. In 1996 the FDIC closed the receiverships of the Debtor's banks and distributed the remaining surplus of those receiverships to the Trust. In accordance with a conveyance and indemnification agreement, the Trust is required, among other things, to provide indemnity to the FDIC against any known or unknown liabilities, obligations or actual expenses associated with the receiverships, in an aggregate amount up to $10 million until the termination of the Trust. Management of the Trust does not believe that, to the extent the Trust is obligated to pay certain claims or expenses associated with the past obligations of the Debtor's banks, such payments will have a material adverse impact on the consolidated financial position, results of operations or liquidity of the Trust. 7 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The operations of the Trust for the second quarter and first six months of 2001 and 2000 are summarized below (dollars in thousands):

SECOND QUARTER 2001 COMPARED TO SECOND QUARTER 2000 The estimated fair value of the Trust's assets increased $.5 million in the second quarter of 2001 as compared to $1.4 million in the second quarter of 2000. Factors which contributed to the enhancement of the net asset value of the Trust's assets in the second quarter of 2001 and 2000 include (i) the appreciation in value of certain assets attributable to a favorable interest rate environment and the effect of such favorable interest rates on the marketability of real estate and (ii) the increase in the estimated market value of the Trust's assets that naturally occurs as the remaining life of the Trust (and concomitantly the discount factor applied in calculating net asset value) decreases. Interest income on short-term investments decreased in the second quarter of 2001 as compared to the second quarter of 2000 because less excess funds were available. Administrative expense totaled $.3 million in the second quarter of 2001 as compared to $.6 million in the second quarter of 2000. A $113,000 bonus, based on distributions to Class B Certificate holders, was paid to certain former employees of the Debtor in the second quarter of 2000 as compared to no bonus paid to such employees in 2001. Professional fees totaled $.1 million in 2001 as compared to $.2 million in 2000. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 The estimated fair value of the Trust's assets increased $1.4 million in the first six months of 2001 as compared to $3.2 million in the first six months of 2000. Factors which contributed to the enhancement of the net asset value of the Trust's assets in the first six months of 2001 and 2000 include (i) the appreciation in value of certain assets attributable to a favorable interest rate environment and the effect of such favorable interest rates on the marketability of real estate and (ii) the increase in the estimated market value of the Trust's assets that naturally occurs as the remaining life of the Trust (and concomitantly the discount factor applied in calculating net asset value) decreases. 8 9 Interest income on short-term investments decreased in 2001 as compared to 2000 because less excess funds were available. Administrative expense totaled $.9 million in the first six months of 2001 as compared to $1.2 million in the first six months of 2000. A $112,000 bonus, based on distributions to Class B Certificate holders, was paid to certain former employees of the Debtor in the first six months of 2001 as compared to a $.2 million bonus paid to such employees in 2000. Professional fees totaled $.2 million in 2001 as compared to $.3 million in 2000. In the first six months of 2001, the Trust distributed $2.5 million, or $1.00 per Certificate, to Class B Certificate holders. This distribution was made possible principally by $2.3 million in net collections on Trust assets in 2001 and cash held at December 31, 2000. The Class B Beneficial Interests were valued at $44.2 million at June 30, 2001. Non-cash trust assets at June 30, 2001 and December 31, 2000 were comprised of the following (dollars in thousands):

For each asset, estimates of income, expense and net cash flow on a monthly basis through the expected final disposition date are prepared by management of the Trust. The individual asset budget is developed based upon factors which include physical inspection of the asset or the collateral underlying the related loan, local market conditions, contractual payments or rents, and discussions with the relevant borrower. The Trust's management and the Portfolio Committee periodically reevaluate and revise projected monthly cash flows on an asset by asset basis. At June 30, 2001 and December 31, 2000, the projected monthly cash flows were discounted at 11% to reflect the Trust assets at estimated fair value. The Trust assets are highly concentrated in Texas. The June 30, 2001 consolidated statement of net assets in liquidation reflects a value of $45 million for a 67% interest in a partnership which owns the First City Tower, a Class A office building located in downtown Houston. UIDC Management, Inc. owns the remaining 33% of the partnership. The Trust publicly stated its intent to market its share of the partnership in the first quarter of 2000. The Trust received a letter dated February 18, 2000 from UIDC in which UIDC alleged that in 1997 it "exercised" its contractual right of first refusal to purchase the 67% partnership interest. This alleged exercise of the right of first refusal arose in connection with an unconsummated prior transaction which was itself the subject of previously settled litigation. The letter further states that 9 10 UIDC "demands that the Trust tender its partnership interest". Adjusted for refinancing costs, the alleged right of first refusal would have been on a value of approximately $25 million for the partnership interest. The Trust filed a lawsuit on March 9, 2000 seeking a declaratory judgment that UIDC failed in May 1997 to properly exercise its right of first refusal under the Limited Partnership Agreement of FC Tower Property Partners, L.P. or, in the alternative, that UIDC waived and/or is estopped from asserting such right. Additionally, the Trust filed a motion for summary judgment. On February 27, 2001 a federal district judge in the U.S. District Court for the Southern District of Texas, Houston Division (the "Court") ruled that the Trust's motion for summary judgment be denied and that UIDC's motion for summary judgment be granted in part and denied in part. Specifically, the judge ruled that, as a matter of law, UIDC had properly exercised its right of first refusal to purchase the 67% interest in May of 1997. The judge further ruled that UIDC's summary judgment motion be denied as it pertains to questions of whether UIDC is prevented from enforcing that right because of alleged breaches of the resulting option agreement, or because UIDC is estopped from specific performance based upon its refusal to buy the interest when given the chance in October of 1997. Management of FirstCity Liquidating Trust strongly disagrees with this ruling. Issues remain to be tried concerning whether UIDC is nevertheless barred from enforcing its option to acquire the 67% partnership interest (a) because of alleged breaches of that agreement and (b) because UIDC declined to purchase the partnership interest when subsequently offered in October of 1997 at a price even more favorable than that offered in May of 1997. Finally, even if the Trust was not successful on either of these trial points, there will remain equitable questions pertaining to the precise terms upon which UIDC's acquisition of the partnership interest may be ordered by the court, given all the pertinent circumstances. A trial date, at the earliest in November 2001, has been set and discovery is proceeding. No adjustment has been made to the value of the partnership interest because, in the opinion of Trust management, it is not probable that the resolution of the dispute with UIDC will have a material adverse impact on the consolidated financial position, results of operations or liquidity of the Trust. FirstCity Liquidating Trust cannot predict the outcome of any such legal matters; however, the current litigation makes it unlikely that any near-term deal to sell the interest can be accomplished. In June 2001 the Bankruptcy Court extended the life of the Trust from January 3, 2002 to January 3, 2004. The extension allows the Trust more time to settle ongoing litigation and indemnity issues as well as bring additional value to certain assets as a result of holding such assets for a longer period of time. 10 11 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description ----- --------------------------------------------------------------- 2.1(1) Joint Plan of Reorganization for First City Bancorporation of Texas, Inc., as modified, under Chapter 11 of the United States Bankruptcy Code, as confirmed by the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, on May 31, 1995. 2.2 Order To Extend Term of FirstCity Liquidating Trust, dated June 11, 2001. 3.1(1) The Liquidating Trust Agreement, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and Shawmut Bank Connecticut, National Association (subsequently Fleet National Bank, now State Street Bank and Trust Company), as Trustee. 10.1(3) Employment Agreement, effective as of July 3, 1995, by and between FCLT Loans Asset Corp. and Robert W. Brown, as amended May 1, 1996. 10.2(2) Settlement Agreement, dated as of June 22, 1994, as amended as of January 30, 1995, by and among FDIC-Corporate, the FDIC-Receivers and the First City Parties. 10.3(3) Conveyance and Indemnification Agreement, dated December 23, 1996, between FDIC-Corporate, the FDIC-Receivers, FCLT Loans, L.P. and the Trust. 10.4(4) Extension of Conveyance and Indemnification Agreement, dated in April 1999, between FDIC-Corporate, the FDIC-Receivers, FCLT Loans, L.P. and the Trust. ---------------------------- (1) Filed as the exhibit indicated to the Registration Statement on Form 10 filed with the Securities and Exchange Commission on May 1, 1996 and incorporated herein by reference. (2) Filed as the exhibit indicated to the Registration Statement on Form 10/A filed with the Securities and Exchange Commission on July 10, 1996 and incorporated herein by reference. (3) Filed as the exhibit indicated to the Form 10-K for the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission and incorporated herein by reference. (4) Filed as the exhibit indicated to the Form 10-Q for the quarter ended March 31, 1999 filed with the Securities and Exchange Commission and incorporated herein by reference. (b) Reports on Form 8-K. No report on Form 8-K was filed by the Registrant with the Commission during the quarterly period ended June 30, 2001. 11 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STATE STREET BANK AND TRUST COMPANY, as Trustee Date: July 27, 2001 /s/ Cauna Silva ------------------------------------ Name: Cauna Silva ------------------------------- Title: Assistant Vice President ------------------------------ 13 EXHIBIT INDEX Exhibit No. Description ------- ---------------------------------------------------------------- 2.1(1) Joint Plan of Reorganization for First City Bancorporation of Texas, Inc., as modified, under Chapter 11 of the United States Bankruptcy Code, as confirmed by the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, on May 31, 1995. 2.2 Order To Extend Term of FirstCity Liquidating Trust, dated June 11, 2001. 3.1(1) The Liquidating Trust Agreement, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and Shawmut Bank Connecticut, National Association (subsequently Fleet National Bank, now State Street Bank and Trust Company), as Trustee. 10.1(3) Employment Agreement, effective as of July 3, 1995, by and between FCLT Loans Asset Corp. and Robert W. Brown, as amended May 1, 1996. 10.2(2) Settlement Agreement, dated as of June 22, 1994, as amended as of January 30, 1995, by and among FDIC-Corporate, the FDIC-Receivers and the First City Parties. 10.3(3) Conveyance and Indemnification Agreement, dated December 23, 1996, between FDIC-Corporate, the FDIC-Receivers, FCLT Loans, L.P. and the Trust. 10.4(4) Extension of Conveyance and Indemnification Agreement, dated in April 1999, between FDIC-Corporate, the FDIC-Receivers, FCLT Loans, L.P. and the Trust. ---------------------------- (1) Filed as the exhibit indicated to the Registration Statement on Form 10 filed with the Securities and Exchange Commission on May 1, 1996 and incorporated herein by reference. (2) Filed as the exhibit indicated to the Registration Statement on Form 10/A filed with the Securities and Exchange Commission on July 10, 1996 and incorporated herein by reference. (3) Filed as the exhibit indicated to the Form 10-K for the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission and incorporated herein by reference. (4) Filed as the exhibit indicated to the Form 10-Q for the quarter ended March 31, 1999 filed with the Securities and Exchange Commission and incorporated herein by reference.

FIRST CITY LIQUIDATING TRUST 10-Q