Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 033-19694

 

FirstCity Financial Corporation

(Exact name of registrant as specified in its charter)

 

 

(254) 761-2800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one.)

 

Large accelerated filer £	Accelerated filer x
Non-accelerated filer £ (Do not check if a smaller reporting company)	Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £     No x

 

The number of shares of common stock, par value $.01 per share, outstanding at November 3, 2008 was 9,831,937.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I
Item 1.	Financial Statements	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Operations	3
	Consolidated Statements of Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	47
PART II OTHER INFORMATION		48
		48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Submission of Matters to a Vote of Security Holders	48
Item 5.	Other Information	48
Item 6.	Exhibits	48
SIGNATURES		53
Exhibit Index

 

Table of Contents

 

PART I

 

FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

		September 30,			December 31,
		2008			2007
		(Unaudited)
ASSETS
Cash and cash equivalents		$	12,984		$	23,037
Restricted cash		1,124			509
Portfolio Assets:
Loan portfolios, net		111,586			107,169
Real estate held for sale		19,919			14,832
Real estate held for investment, net		9,648			—
Total Portfolio Assets		141,153			122,001
Loans receivable - affiliates		25,733			5,447
Loans receivable - SBA held for sale		3,193			133
Loans receivable - SBA held for investment, net		14,294			14,234
Loans receivable - other		14,307			5,995
Equity investments		93,287			87,622
Deferred tax asset, net		20,101			20,101
Service fees receivable ($904 and $785 from affiliates, respectively)		1,040			842
Servicing assets - SBA loans		752			843
Other assets, net		18,962			17,355
Total Assets		$	346,930		$	298,119
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable to banks		$	216,597		$	177,329
Note payable to affiliate		8,658			—
Minority interest		16,705			3,209
Other liabilities		12,901			10,758
Total Liabilities		254,861			191,296
Commitments and contingencies (Note 14)
Stockholders’ equity:
Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued: 11,331,937 and 11,326,937, respectively; shares outstanding: 10,168,307 and 10,746,437, respectively)		113			113
Treasury stock, at cost: 1,163,630 shares and 580,500 shares, respectively		(9,792		)	(5,978		)
Paid in capital		101,747			101,240
Retained earnings (accumulated deficit)		(2,266		)	9,602
Accumulated other comprehensive income		2,267			1,846
Total Stockholders’ Equity		92,069			106,823
Total Liabilities and Stockholders’ Equity		$	346,930		$	298,119

 

See accompanying notes to consolidated financial statements.

 

2

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Revenues:
Servicing fees ($3,530 and $2,163 from affiliates for the three month periods, respectively, and $8,178 and $7,344 from affiliates for the nine month periods, respectively)		$	3,842		$	2,426		$	8,748		$	8,008
Income from Portfolio Assets		5,229			5,743			15,786			16,463
Gain on sale of SBA loans held for sale, net		85			34			227			658
Interest income from SBA loans		368			752			1,210			1,666
Interest income from loans receivable - affiliates		875			147			1,508			413
Interest income from loans receivable - other		541			1,627			1,171			3,516
Revenue from railroad operations		810			302			2,474			302
Other income		939			601			2,558			1,598
Total revenues		12,689			11,632			33,682			32,624
Expenses:
Interest and fees on notes payable to banks		4,249			4,747			11,690			13,666
Interest and fees on notes payable to affiliate		322			—			322			—
Salaries and benefits		5,655			4,446			15,982			12,303
Provision for loan and impairment losses		1,123			(136		)	11,243			936
Property protection		1,307			781			4,661			1,950
Occupancy, data processing and other		3,774			1,438			9,025			8,590
Total expenses		16,430			11,276			52,923			37,445
Equity in earnings of investments		2,170			2,157			8,018			8,315
Gain on sale of subsidiaries and interest in equity investments		—			207			—			207
Earnings (loss) from continuing operations before income taxes and minority interest		(1,571		)	2,720			(11,223		)	3,701
Income tax benefit (expense)		44			(153		)	(245		)	(366		)
Minority interest		(224		)	87			(255		)	210
Earnings (loss) from continuing operations		(1,751		)	2,654			(11,723		)	3,545
Discontinued operations
Loss from discontinued operations		(4		)	—			(145		)	—
Net earnings (loss)		$	(1,755	)	$	2,654		$	(11,868	)	$	3,545
Basic earnings (loss) per common share are as follows:
Earnings (loss) from continuing operations		$	(0.17	)	$	0.25		$	(1.13	)	$	0.33
Discontinued operations		$	—		$	—		$	(0.01	)	$	—
Net earnings (loss) to common stockholders		$	(0.17	)	$	0.25		$	(1.14	)	$	0.33
Weighted average common shares outstanding		10,232			10,790			10,391			10,789
Diluted earnings (loss) per common share are as follows:
Earnings (loss) from continuing operations		$	(0.17	)	$	0.23		$	(1.13	)	$	0.31
Discontinued operations		$	—		$	—		$	(0.01	)	$	—
Net earnings (loss) to common stockholders		$	(0.17	)	$	0.23		$	(1.14	)	$	0.31
Weighted average common shares outstanding		10,232			11,379			10,391			11,402

 

See accompanying notes to consolidated financial statements.

 

3

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Dollars in thousands)

 

															Retained			Accumulated
															Earnings			Other			Total
		Common Stock					Treasury Stock					Paid in			(Accumulated			Comprehensive			Stockholders’
		Shares		Amount			Shares		Amount			Capital			Deficit)			Income			Equity
Balances, December 31, 2006		11,316,937		$	113		530,300		$	(5,571	)	$	100,562		$	7,417		$	1,372		$	103,893
Exercise of common stock options		10,000		—			—		—			35			—			—			35
Repurchase of common stock		—		—			50,200		(407		)	—			—			—			(407		)
Additional paid in capital arising from stock option compensation expense		—		—			—		—			643			—			—			643
Comprehensive income:
Net earnings for 2007		—		—			—		—			—			2,185			—			2,185
Translation adjustments		—		—			—		—			—			—			474			474
Total comprehensive income																					2,659
Balances, December 31, 2007		11,326,937		$	113		580,500		$	(5,978	)	$	101,240		$	9,602		$	1,846		$	106,823
Exercise of common stock options		5,000		—			—		—			12			—			—			12
Repurchase of common stock		—		—			583,130		(3,814		)	—			—			—			(3,814		)
Additional paid in capital arising from stock option compensation expense		—		—			—		—			495			—			—			495
Comprehensive income (loss):
Net loss for the first nine months of 2008		—		—			—		—			—			(11,868		)	—			(11,868		)
Translation adjustments		—		—			—		—			—			—			421			421
Total comprehensive loss																					(11,447		)
Balances, September 30, 2008 (unaudited)		11,331,937		$	113		1,163,630		$	(9,792	)	$	101,747		$	(2,266	)	$	2,267		$	92,069

 

See accompanying notes to consolidated financial statements.

 

4

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Nine Months Ended
		September 30,
		2008			2007
Cash flows from operating activities:
Net earnings (loss)		$	(11,868	)	$	3,545
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Net loss from discontinued operations		145			—
Purchase of SBA loans held for sale		—			(18,355		)
Net principal payments (advances) on SBA loans held for sale		(7,938		)	(358		)
Proceeds from the sale of SBA loans held for sale, net		5,310			17,123
Purchases of Portfolio Assets		(50,121		)	(61,249		)
Proceeds applied to principal on Portfolio Assets		46,944			60,814
Income from Portfolio Assets		(15,786		)	(16,463		)
Capitalized interest and costs on Portfolio Assets and loans receivable		(986		)	(776		)
Provision for loan and impairment losses		11,243			936
Equity in earnings of investments		(8,018		)	(8,315		)
Gain on sale of SBA loans held for sale, net		(227		)	(658		)
Gain on sale of subsidiaries and equity investments		—			(207		)
Depreciation and amortization		2,808			1,956
Net premium amortization of loans receivable		(231		)	(427		)
Stock-based compensation expense related to stock options		495			408
Increase in restricted cash		(615		)	(172		)
Decrease (increase) in service fees receivable		(198		)	270
Increase in other assets		(1,460		)	(5,359		)
Increase in other liabilities		4,975			791
Net cash used in operating activities		(25,528		)	(26,496		)
Cash flows from investing activities:
Purchases of property and equipment, net		(1,795		)	(502		)
Proceeds from sale of subsidiaries and equity investments		—			726
Cash paid for business combination, net of cash acquired		(300		)	(5,629		)
Net principal collections (advances) on loans receivable		(28,338		)	1,837
Purchases of SBA loans held for investment		—			(17,407		)
Net principal collections (advances) on SBA loans held for investment		(156		)	2,303
Contributions to Acquisition Partnerships and Servicing and Operating Entities		(3,037		)	(22,352		)
Distributions from Acquisition Partnerships and Servicing and Operating Entities		14,762			52,291
Net cash provided by (used in) investing activities		(18,864		)	11,267
Cash flows from financing activities:
Borrowings under note payable to affiliate		8,577			—
Borrowings under notes payable to banks		107,525			142,549
Principal payments of notes payable to banks, net		(76,658		)	(110,850		)
Payments of debt issuance costs and loan fees		(1,291		)	(2,134		)
Repurchase of common stock		(3,814		)	(82		)
Proceeds from issuance of common stock		12			35
Net cash provided by financing activities		34,351			29,518
Net cash provided by (used in) continuing operations		(10,041		)	14,289
Cash flows from discontinued operations:
Net cash used in operating activities		(12		)	(24		)
Net cash used in discontinued operations		(12		)	(24		)
Net increase (decrease) in cash and cash equivalents		(10,053		)	14,265
Cash and cash equivalents, beginning of period		23,037			18,472
Cash and cash equivalents, end of period		$	12,984		$	32,737
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	9,607		$	12,012
Income taxes, net of refunds received		215			287

 

See accompanying notes to consolidated financial statements.

 

5

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

(1)  Basis of Presentation and Summary of Significant Accounting Policies

 

The Company

 

FirstCity Financial Corporation and subsidiaries (the “Company” or “FirstCity”) is a financial services company with offices throughout the United States and Mexico, and a presence in France, Germany, Brazil and Chile. At September 30, 2008, the Company was engaged in one principal reportable segment – Portfolio Asset acquisition and resolution. The portfolio asset acquisition and resolution business involves acquiring portfolios of loans, real estate and other assets or similar single-asset investments (collectively referred to as “Portfolios” or “Portfolio Assets”). The Company generally acquires Portfolio Assets at a discount to their legal principal balances or appraised values, and then services and resolves the Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. The Company also invests in special situations and restructuring arrangements such as acquiring or financing distressed debt and businesses, originating junior- and senior-bridge loans, and executing lower middle-market buyouts; and purchases, originates and services U.S. Small Business Administration loans.

 

Basis of Presentation

 

The unaudited consolidated financial statements of FirstCity reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity’s consolidated financial position at September 30, 2008, its results of operations for the three and nine month periods ended September 30, 2008 and 2007 and cash flows for the nine month periods ended September 30, 2008 and 2007. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, these financial statements should be read with the consolidated financial statements included in the Company’s 2007 Annual Report on Form 10-K, as amended. Certain amounts in the consolidated financial statements for prior years have been reclassified to conform to current consolidated financial statement presentation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. 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. Material estimates that are particularly susceptible to significant change in the near-term relate to the estimation of future cash flows on Portfolio Assets used in the calculation of income and evaluation of impairment; interest rate environments; valuation of the deferred tax asset; valuation of servicing assets and underlying assumptions; valuation of loans receivable (including loans receivable held in securitization trusts); and income tax uncertainties. Actual results could differ materially from those estimates.

 

Restricted Cash

 

Restricted cash includes monies due on loan-related remittances received by the Company and due to third parties.

 

6

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Portfolio Assets – Real Estate

 

Classification and Impairment Evaluation

 

Real estate held for sale primarily includes real estate acquired through loan foreclosure. The Company classifies a property as held for sale if (1) management commits to a plan to sell the property; (2) the Company actively markets the property in its current condition for a price that is reasonable in comparison to its fair value; and (3) management considers the sale of such property within one year of the balance sheet date to be probable. Real estate held for sale is stated at the lower of cost or fair value less estimated disposition costs. Real estate is not depreciated while it is classified as held for sale. Impairment losses are recorded if a property’s fair value less estimated disposition costs is less than its carrying amount. Impairment recoveries are recorded for any subsequent increase in the property’s fair value less estimated disposition costs up to the amount of cumulative losses previously recognized on the property.

 

Real estate held for investment generally includes acquired properties and is carried at cost less depreciation and amortization, as applicable. The Company classifies a property as held for investment if the property is still under development and/or management does not expect the property to be sold within one year of the balance sheet date. The Company periodically reviews its property held for investment for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability of property held for investment is measured by comparison of the carrying amount of the asset to future net cash flows expected to be generated by the property. If the property is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property exceeds the fair value of the property. Fair value is determined by discounted cash flows or market comparisons.

 

Cost Capitalization and Allocation

 

Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of cost (i.e. the underlying loan’s carrying value) or estimated fair value less disposition costs at the date of foreclosure, establishing a new cost basis. The amount, if any, by which the carrying value of the underlying loan exceeds the property’s fair value less estimated disposition costs at the foreclosure date is charged as a loss against operations. The Company capitalizes costs incurred for any subsequent expenditures that represent capital improvements and significant betterments and replacements. Expenditures for repairs, maintenance, and other holding costs are charged to operations as incurred.

 

Real estate properties acquired through a purchase transaction are initially recorded at the cost of the acquisition. The cost of acquired property includes the purchase price of the property, legal fees, and certain other acquisition costs. Subsequent to acquisition, the Company capitalizes capital improvements and expenditures related to significant betterments and replacements. Expenditures for repairs, maintenance, and other holding costs are charged to operations as incurred.

 

When acquiring real estate with an existing building through a purchase transaction, the Company generally allocates the purchase price between land, land improvements, building, tenant improvements, and intangible assets related to in-place leases based on their relative fair values in accordance with SFAS 141 and SFAS 142. The fair values of acquired land and buildings are generally determined based on an estimated discounted future cash flow model with lease-up assumptions as if the building was vacant upon acquisition, third-party valuations, and other relevant data. The fair value of in-place leases includes the value of net lease intangibles for above- and below-market rents and tenant origination costs, determined on a lease-by-lease basis. Amounts allocated to building and improvements are depreciated over their estimated remaining lives. Amounts allocated to tenant improvements, in-place lease assets and other lease-related intangibles are amortized over the remaining life of the underlying leases.

 

Disposition of Real Estate

 

Gains on disposition of real estate are recognized upon sale of the underlying property in accordance with SFAS No. 66, Accounting for Sales of Real Estate. We evaluate real estate transactions to determine if it qualifies for gain recognition under the full accrual method. If the transaction does not meet the criteria for the full accrual method of profit recognition based on our assessment, we account for the sale based on an appropriate deferral method determined by the nature and extent of the buyer’s investment and our continuing involvement.

 

7

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Reclassifications

 

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to current consolidated financial statement presentation as follows:

 

·                  In all reporting periods prior to December 31, 2007, FirstCity reported payments of debt issuance costs and loan fees in “Cash flows from operating activities” on the Consolidated Statements of Cash Flows. The Company now reports these amounts in “Cash flows from financing activities.” The total amount reclassified was $2.1 million for the nine month period ended September 30, 2007.

·                  For the nine month period ended September 30, 2007, FirstCity reported cash received on loan-related remittances and due to third parties as “Cash and cash equivalents” on the Consolidated Balance Sheets. The Company now reports this amount as “Restricted cash” on the Consolidated Balance Sheets and “Cash flows from operating activities” on the Consolidated Statements of Cash Flows. The total amount reclassified was $509,000 at December 31, 2007 on the Consolidated Balance Sheets, and $172,000 for the nine month period ended September 30, 2007 on the Consolidated Statements of Cash Flows.

·                  For the nine month period ended September 30, 2007, FirstCity reported certain capitalized interest amounts as principal payments on notes payable. The Company reclassified $743,000 from “Cash flows from operating activities” to “Cash flows from financing activities” on the Consolidated Statements of Cash Flows for the nine month period ended September 30, 2007.

 

Management believes that the changes to the Consolidated Statements of Cash Flows and Consolidated Balance Sheets as described above are not material relative to the consolidated financial statements taken as a whole. These reclassifications have the following impact on the consolidated financial statements:

 

 

8

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

 

(2)  Recently Issued and Recently Adopted Accounting Standards

 

Recently Issued Accounting Standards

 

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”), which is intended to improve financial reporting by identifying a consistent framework or hierarchy for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following the Securities and Exchange Commission’s (the “SEC”) approval of the Public Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect the adoption of SFAS 162 will have a material impact on its consolidated financial statements or financial statement disclosures.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), an amendment to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS No. 133 and related interpretations. SFAS 161 will be effective for the Company’s interim and annual financial statements for periods beginning after November 15, 2008, with early adoption permitted. SFAS 161 expands the disclosure requirements for derivatives and hedged items and has no impact on the Company’s accounts for any such instruments. The Company is currently evaluating the impact of adopting SFAS 161 on its financial statement footnote disclosures.

 

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment to ARB No. 51 (“SFAS 160”). SFAS 141R and SFAS 160 require most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require non-controlling interests (previously referred to as “minority interests”) to be reported as a component of equity, which changes the accounting for transactions with non-controlling interest holders. Both SFAS 141R and SFAS 160 are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141R will be applied to business combinations occurring after the effective date. SFAS 160 will be applied prospectively to all non-controlling interests, including any that arose before the effective date. The Company is currently evaluating the impact of adopting SFAS 141R and SFAS 160 on its financial condition, results of operations and future business acquisitions.

 

In February 2007, the FASB issued SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 provides entities an opportunity to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Adoption of SFAS 159 is optional and, if adopted, would be effective for the Company’s 2008 fiscal year. The Company elected not to adopt SFAS 159. As such, SFAS 159 did not impact the Company’s consolidated financial statements or financial statement footnote disclosures.

 

9

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

Recently Adopted Accounting Standards

 

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The adoption of SFAS 157 did not have any effect on our financial statements at the date of adoption. For additional information, refer to Note 13 of the Consolidated Financial Statements.

 

In February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities that are not required or permitted to be measured at fair value on a recurring basis. The Company will be required to apply SFAS 157, effective January 1, 2009, to non-financial assets and liabilities that qualified for the deferral.

 

In October 2008, the FASB issued FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP 157-3”). FSP 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements under SFAS 157, and clarifies the application of SFAS 157 in a market that is not active. FSP 157-3 states that an entity should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be acceptable. FSP 157-3 is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. Accordingly, we adopted FSP 157-3 prospectively, beginning July 1, 2008. The adoption of FSP 157-3 did not have a material impact on our financial results or fair value determinations.

 

(3)  Business Acquisitions

 

Step Acquisition – UBN, SA

 

On September 8, 2008, the Company, through a wholly-owned subsidiary, acquired an additional 7.75% ownership interest in UBN, SA (formerly P.R.L. Developpement, SAS) for $1.5 million. As a result of the additional equity purchase, the Company’s ownership interest in UBN, SA (“UBN”) increased to 53.5%, resulting in UBN becoming a consolidated subsidiary of the Company. The transaction was accounted for as a step acquisition in accordance with SFAS 141, and resultantly, UBN’s assets and liabilities of $23.8 million (including $1.2 million in cash) and $1.6 million, respectively, were included in the Company’s consolidated balance sheet at the date of the step acquisition. The Company previously accounted for its investment in UBN under the equity method of accounting, and the carrying amount of the Company’s 45.75% equity interest in UBN at the time of the step acquisition approximated $10.2 million. UBN’s results of operations since September 8, 2008, approximately $38,000, are included in the Company’s consolidated statements of operations.

 

Property Acquisition

 

In June 2008, the Company, through a majority-owned subsidiary, acquired an 80% interest in 122-132 West Pierpont Avenue in Salt Lake City, Utah for an aggregate purchase price of approximately $10.3 million, including the assumption of $7.6 million in debt. The property consists of office and retail buildings aggregating approximately 53,000 net rentable square feet. The Company is in the process of obtaining valuations of certain tangible and intangible assets; thus, the allocation of the purchase price is subject to refinement.

 

10

Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

 

(4)  Discontinued Operations

 

Discontinued operations are comprised of two components previously reported as the Company’s residential and commercia