10-Q 1 h98503e10vq.txt FIRSTCITY LIQUIDATING TRUST - JUNE 30, 2002 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, 2002 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, 2002, 2,454,310 units of Class B Beneficial Interests and 725,729 units of Class C Beneficial Interests were outstanding. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This Form 10-Q may include "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)

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

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

See accompanying notes to consolidated financial statements. 3 FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (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, 2002, its changes in net asset value in liquidation for the three month and six month periods ended June 30, 2002 and 2001 and cash flows for the six month periods ended June 30, 2002 and 2001. 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. (B) Trust Assets Trust assets are comprised of the following (dollars in thousands):

4 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, 2002 and December 31, 2001, the projected monthly cash flows were discounted at 7% to reflect the Trust assets at estimated fair value. The Trust assets are highly concentrated in Texas. On March 15, 2002, two subsidiaries of the Trust settled all existing litigation with UIDC Management, Inc. ("UIDC") et al. The Trust and UIDC are partners in FC Tower Property Partners, L.P., an entity which owns the First City Tower building in Houston, Texas. The dispute between the parties traces to a "right of first refusal" issue occurring in 1997. The settlement allows the Trust to market its interest in the partnership. UIDC will retain its right of first refusal and may exercise that right at a discount from the purchase price. The discount is equal to 50% of the amount by which a third party offer exceeds $31 million. The Trust's share of any sale proceeds would be $31 million plus 50% of the price in excess of $31 million. Further, if the Trust is unsuccessful in (a) obtaining a qualified offer by June 2003 and (b) executing on a sale of the interest by December 2003, its 67% interest in the partnership will be reduced to 45% and UIDC's 33% interest will increase to 55%. At June 30, 2002, the partnership interest is valued at $38 million (based on an estimated sale price of $45 million). The consolidated statements of net assets in liquidation have never reflected any value for the Class C Certificates, and it is highly unlikely that the Class C Certificates will have any value. (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. 5 FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Fourth, Class B Certificate holders are entitled to distributions up to the Pour-Over Level. The Pour-Over Level (approximately $53 million at June 30, 2002) 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. 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 $21.72 per unit as of June 30, 2002). 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 In July 2002, Gordonville Corporation, N.V., New Coronado Investment Corp., N.V. and Corona Investments, N.V., companies which claim to own approximately 46% of the 725,729 Class C Certificates (acquired in various tender offers at prices varying from approximately $1.00 to $1.50) filed a lawsuit against the Trustee and individual members of the Portfolio Committee of the Trust in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division (Gordonville Corporation, et al. vs. State Street Bank and Trust Company et al., Case No. 392-39474-HCA-11). The complaint alleges, among other things, that the Trustee and the individual members of the Portfolio Committee breached their fiduciary duties to the Class C Certificate holders in a manner which would prevent the Class C Certificate holders from realizing any value. The complaint seeks $14 million in actual damages, plus punitive damages and attorneys' fees. Management of the Trust and the members of the Portfolio Committee believe that the lawsuit is entirely without merit and intend to vigorously defend against the action. 6 FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 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 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 2002 and 2001 are summarized below (dollars in thousands):

SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001 The estimated fair value of the Trust's assets increased $.3 million in the second quarter of 2002 as compared to $.5 million in the second quarter of 2001. Factors which contributed to the enhancement of the net asset value of the Trust's assets in the second quarter of 2002 and 2001 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 2002 as compared to the second quarter of 2001 because of lower money market yields. Administrative expense totaled $.3 million in the second quarter of 2002 and 2001. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 The estimated fair value of the Trust's assets increased $.8 million in the first six months of 2002 as compared to $1.4 million in the first six months of 2001. Factors which contributed to the enhancement of the net asset value of the Trust's assets in the first six months of 2002 and 2001 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 2002 as compared to 2001 because of lower money market yields. Administrative expense totaled $.8 million in the first six months of 2002 as compared to $.9 million in the first six months of 2001. 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 8 as compared to no bonus paid to such employees in 2002. Professional fees totaled $.3 million in 2002 as compared to $.2 million in 2001. Net collections on Trust assets in the first six months of 2002 totaled $.6 million as compared to $2.3 million in 2001. In July 2002, a loan of $1.2 million was paid in full. The Class B Beneficial Interests were valued at $36.9 million at June 30, 2002. Non-cash trust assets at June 30, 2002 and December 31, 2001 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, 2002 and December 31, 2001, the projected monthly cash flows were discounted at 7% to reflect the Trust assets at estimated fair value. The Trust assets are highly concentrated in Texas. On March 15, 2002, two subsidiaries of the Trust settled all existing litigation with UIDC Management, Inc. ("UIDC") et al. The Trust and UIDC are partners in FC Tower Property Partners, L.P., an entity which owns the First City Tower building in Houston, Texas. The dispute between the parties traces to a "right of first refusal" issue occurring in 1997. The settlement allows the Trust to market its interest in the partnership. UIDC will retain its right of first refusal and may exercise that right at a discount from the purchase price. The discount is equal to 50% of the amount by which a third party offer exceeds $31 million. The Trust's share of any sale proceeds would be $31 million plus 50% of the price in excess of $31 million. Further, if the Trust is unsuccessful in (a) obtaining a qualified offer by June 2003 and (b) executing on a sale of the interest by December 2003, its 67% interest in the partnership will be reduced to 45% and UIDC's 33% interest will increase to 55%. At June 30, 2002, the partnership interest is valued at $38 million (based on an estimated sale price of $45 million). The consolidated statements of net assets in liquidation have never reflected any value for the Class C Certificates, and it is highly unlikely that the Class C Certificates will have any value. 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings. In July 2002, Gordonville Corporation, N.V., New Coronado Investment Corp., N.V. and Corona Investments, N.V., companies which claim to own approximately 46% of the 725,729 Class C Certificates (acquired in various tender offers at prices varying from approximately $1.00 to $1.50) filed a lawsuit against the Trustee and individual members of the Portfolio Committee of the Trust in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division (Gordonville Corporation, et al. vs. State Street Bank and Trust Company et al., Case No. 392-39474-HCA-11). The complaint alleges, among other things, that the Trustee and the individual members of the Portfolio Committee breached their fiduciary duties to the Class C Certificate holders in a manner which would prevent the Class C Certificate holders from realizing any value. The complaint seeks $14 million in actual damages, plus punitive damages and attorneys' fees. Management of the Trust and the members of the Portfolio Committee believe that the lawsuit is entirely without merit and intend to vigorously defend against the action. 10 Item 6. Exhibits and Reports on Form 8-K. (a) EXHIBITS

---------- (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. (5) Filed as the exhibit indicated to the Form 10-Q for the Quarter ended June 30, 2001 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, 2002. 11 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 25, 2002 /s/ Cauna Silva ------------------------------------------------- Name: Cauna Silva -------------------------------------------- Title: Vice President -------------------------------------------

FIRST CITY LIQUIDATING TRUST 10-Q