<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
_____ EXCHANGE ACT OF 1934
FOR QUARTER ENDED DECEMBER 31, 1993
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-6802
LIBERTE INVESTORS
(Exact name of Registrant as specified in its Charter)
CREATED UNDER DECLARATION OF TRUST 75-1328153
PURSUANT TO THE LAWS OF (I.R.S. Employer
THE COMMONWEALTH OF MASSACHUSETTS Identification No.)
(State or other jurisdiction
of incorporation or organization)
1420 VICEROY DRIVE 75235
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (214) 879-5497
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
_________ _________
APPLICABLE ONLY TO CORPORATE ISSUERS:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING:
------------------- -----------------------------
Shares of Beneficial Interest 12,423,208 as of February 4, 1994
(without par value)
</TABLE>
<PAGE> 2
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1993
LIBERTE INVESTORS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheet - December 31, 1993 and June 30, 1993 . . . . . . . . . . . . . 3
Consolidated Statement of Operations - Quarter and Six Months Ended
December 31, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows - Six Months Ended
December 31, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
LIBERTE INVESTORS AND SUBSIDIARY
(Debtor-in-possession)
<TABLE>
<CAPTION>
December 31, 1993 June 30, 1993
(Unaudited) (See Note)
-------------------- ---------------
<S> <C> <C>
Assets
Mortgage loans on real estate:
Earning $ 83,849,506 $ 113,126,692
Nonearning 23,690,705 24,442,450
Foreclosed real estate:
Earning 73,852,612 73,065,058
Nonearning 86,265,965 91,351,468
--------------- ---------------
267,658,788 301,985,668
Less: Allowance for possible losses 46,826,241 53,938,817
--------------- ---------------
220,832,547 248,046,851
Cash and cash equivalents 5,212,283 2,428,902
Restricted cash investments 24,070,585 5,368,318
Accrued interest and other receivables 1,060,087 1,514,551
Other assets 911,043 4,216,111
--------------- ---------------
$ 252,086,545 $ 261,574,733
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Prepetition liabilities not subject to compromise:
Escrow deposits $ 1,038,561 $ 2,036,631
Prepetition liabilities subject to compromise:
Notes payable 83,127,839 87,725,250
Subordinated notes 100,000,000 100,000,000
Accrued management fees -- 216,814
Accrued interest and other liabilities 10,606,192 8,004,817
Postpetition liabilities:
Accrued interest and other liabilities 1,473,173 --
--------------- ---------------
196,245,765 197,983,512
Shareholders' Equity
Shares of Beneficial Interest, no par
value, unlimited authorization:
12,423,208 issued and outstanding at
December 31, 1993 and 11,773,208
issued and outstanding at June 30, 1993 55,840,780 63,591,221
--------------- ---------------
$ 252,086,545 $ 261,574,733
=============== ===============
</TABLE>
Note: The balance sheet at June 30, 1993 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
(Debtor-in-Possession)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
December 31 December 31
------------------------------- ------------------------------
1993 1992 1993 1992
------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Income
Mortgage loan interest $ 1,822,714 $ 2,892,487 $ 3,898,060 $ 5,858,320
Temporary investment interest 43,494 103,822 87,507 205,284
Foreclosed real estate and other 1,380,612 696,038 2,747,538 1,295,778
----------- ----------- ----------- ------------
3,246,820 3,692,347 6,733,105 7,359,382
----------- ----------- ----------- ------------
Expenses
Interest (contractual interest was
$3,914,677 and $8,381,818 for the
quarter and six months ended
December 31, 1993, respectively) 1,989,677 3,745,744 6,456,818 7,606,146
Provision for possible losses -- 3,100,000 200,000 5,250,000
Management fees 584,254 759,030 1,193,429 1,548,803
Legal and audit 220,000 450,000 585,000 825,000
Trustees' fees and expenses 69,499 85,657 144,892 184,424
Foreclosed real estate 796,104 806,842 1,574,688 1,715,170
Debt restructure 572,504 1,352,545 2,132,902 1,352,545
Other 657,472 444,238 1,542,509 1,009,656
----------- ----------- ----------- ------------
4,889,510 10,744,056 13,830,238 19,491,744
----------- ----------- ----------- ------------
Net loss before reorganization
items (1,642,690) (7,051,709) (7,097,133) (12,132,362)
Reorganization items:
Professional fees (1,308,825) -- (1,308,825) --
Interest earned on accumulated
cash resulting from
Chapter 11 proceedings 46,142 -- 46,142 --
(1,262,683) -- (1,262,683) --
----------- ----------- ----------- ------------
Net loss $(2,905,373) $(7,051,709) $(8,359,816) $(12,132,362)
=========== =========== =========== ============
Net loss per Share of
Beneficial Interest:
Loss before reorganization items $(.13) $(.60) $(.59) $(1.03)
Reorganization items (.11) -- (.11) --
----- ----- ----- ------
Net loss $(.24) $(.60) $(.70) $(1.03)
===== ===== ===== ======
Weighted average number of
Shares of Beneficial Interest 12,274,838 11,803,871 12,024,023 11,804,040
Cash dividends declared per share -- -- -- --
</TABLE>
See notes to financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
(Debtor-in-Possession)
<TABLE>
<CAPTION>
Six Months Ended
December 31
-----------------------------------------
1993 1992
------------- ---------------
<S> <C> <C>
Operating activities:
Net loss before reorganization items $ (7,097,133) $ (12,132,362)
Noncash expenses and revenues included
in net loss:
Provision for possible losses 200,000 5,250,000
Net change in other receivables, assets
and liabilities 6,060,698 (1,249,229)
------------- --------------
Net cash used by operating activities
before reorganization items (836,435) (8,131,591)
------------- --------------
Interest earned on accumulated cash resulting
from Chapter 11 proceedings 46,142 --
Professional fees (93,069) --
------------- --------------
Net cash used by reorganization items (46,927) --
------------- --------------
Net cash used by operating activities (883,362) (8,131,591)
------------- --------------
Investing activities:
Collections on mortgage loans 20,399,883 13,259,780
Advances on mortgage loans (260,364) (1,345,402)
Expenditures on foreclosed real estate (1,174,741) (2,065,843)
Sales and basis reductions of foreclosed real estate 8,001,643 14,096,491
Net sales (purchases) of restricted cash investments (18,702,267) 354,516
------------- --------------
Net cash provided by investing activities 8,264,154 24,299,542
Financing activities:
Decrease in notes payable (4,597,411) (21,074,248)
------------- --------------
Net cash used by financing activities (4,597,411) (21,074,248)
------------- --------------
Net increase (decrease) in unrestricted cash
and cash equivalents 2,783,381 (4,906,297)
Unrestricted cash and cash equivalents at
beginning of period 2,428,902 11,073,535
------------- --------------
Unrestricted cash and cash equivalents at
end of period $ 5,212,283 $ 6,167,238
============= ==============
Schedule of noncash investing and financing activities:
Transfer of mortgage loans to foreclosed
real estate $ 12,433,375 $ 5,876,353
Charge-offs to allowance for possible losses, net $ 7,312,576 $ 8,127,099
Sale of foreclosed real estate financed by
mortgage loans $ 3,652,480 $ 13,334,601
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
DECEMBER 31, 1993
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended December 31, 1993 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 1994. For further information, refer to the financial
statements and footnotes included in the Annual Report on Form 10-K of Liberte
Investors, for the fiscal year ended June 30, 1993.
During the quarter ended March 31, 1993, Liberte Investors capitalized, for a
nominal amount, Liberte Corp., a wholly-owned subsidiary. All intercompany
balances and transactions have been eliminated. Liberte Corp. is currently
inactive. As used herein, the "Trust" refers to Liberte Investors and its
subsidiary.
On January 24, 1994, the Trust's modified plan of reorganization was confirmed.
Therefore, the prepetition liabilities subject to compromise have been
compromised because they will not be paid in accordance with their contractual
terms in effect prior to the Trust's Chapter 11 filing.
NOTE B - RECLASSIFICATIONS
Certain June 30, 1993 balances have been reclassified to conform to December
31, 1993 presentation.
NOTE C - PRO FORMA FINANCIAL INFORMATION
On January 24, 1994, the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court") entered an order confirming a
modified plan of reorganization (the "Plan") for the Trust. Under the Plan,
most of the Trust's assets will be transferred to a subsidiary ("Newco") and
Newco's common stock will be distributed to the holders of the Trust's
outstanding subordinated indebtedness in full satisfaction of such holders'
claims against the Trust. Newco will assume all of the Trust's obligations to
its senior lenders on restructured terms. The restructured company (the
"Reorganized Trust") will emerge as an essentially debt-free entity, the shares
of which will continue to be owned by the existing holders of the Shares of
Beneficial Interest. See "Part II - Item 1. Legal Proceedings."
The following unaudited pro forma balance sheet illustrates the pro forma
effects of the transactions contemplated by the Plan on the financial condition
of the Trust and Newco as of December 31, 1993 (assuming consummation of the
Plan had occurred on that date).
Fresh-start reporting, in which the emerging entities' assets and liabilities
would have been adjusted to their fair value, was considered but deemed
inappropriate since the reorganization value of the Trust's assets immediately
before the confirmation of the Plan was not less than the total of all
post-petition liabilities and allowed claims. Thus the assets and liabilities
of the emerging entities have not been adjusted to fair value.
6
<PAGE> 7
In the opinion of management, the unaudited pro forma balance sheet reflects
all adjustments necessary to present fairly such pro forma data; however, such
a balance sheet is not necessarily indicative of what the actual financial
position would have been on December 31, 1993 had the Plan been consummated on
that date and is not necessarily indicative of future statements of financial
position. This unaudited pro forma balance sheet should be read in conjunction
with the notes thereto.
7
<PAGE> 8
PRO FORMA BALANCE SHEET (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
DECEMBER 31, 1993
(Amounts in thousands, except per-share data)
<TABLE>
<CAPTION>
Consolidated
Liberte Reorganized
Investors Adjustments Newco Trust
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Assets
Mortgage loans on real estate $ 107,540 $ -- $ 92,501 $ 15,039
Foreclosed real estate 160,119 -- 132,478 27,641
---------- ----------- ---------- --------
267,659 -- 224,979 42,680
Less: Allowance for possible losses 46,826 -- 31,934 14,892
---------- ----------- ---------- --------
220,833 -- 193,045 27,788
Cash and cash equivalents 5,212 11,903 (g) 13,576 3,539
Restricted cash and cash equivalents 24,071 (9,000) (d) -- --
-- (11,903) (g) -- --
-- (1,646) (e) 853 669
Accrued interest and other receivables 1,060 -- 867 193
Note receivable -- 6,000 (a) -- 6,000
Other assets 911 300 (b) 652 559
---------- ----------- ---------- --------
$ 252,087 $ (4,346) $ 208,993 $ 38,748
========== =========== ========== ========
Liabilities and
Shareholders' Equity
Liabilities
Senior loans $ 83,128 $ (9,000) (d) $ 74,128 $ --
Subordinated notes 100,000 (100,000) (c) -- --
Note payable -- 6,000 (a) 6,000 --
Accrued interest and other liabilities 13,118 (9,450) (c) -- --
-- (1,646) (e) -- --
-- (548) (f) 987 487
---------- ----------- ---------- --------
196,246 (114,644) 81,115 487
Shareholders' equity
Preferred stock -- 300 (b) 300 --
Shares of Beneficial Interest 55,841 109,450 (c) -- 38,261
Common stock and paid-in capital -- 548 (f) 127,578 --
---------- ----------- ---------- --------
$ 252,087 $ (4,346) $ 208,993 $ 38,748
========== =========== ========== ========
Number of shares
Shares of Beneficial Interest
(unlimited authorization)
issued and outstanding 12,423 -- -- 12,423
Common stock authorized
issued and outstanding -- -- 10,000 --
Book value per share $4.49 -- $12.76 $3.08
</TABLE>
See accompanying notes to pro forma unaudited balance sheet.
8
<PAGE> 9
LIBERTE INVESTORS AND SUBSIDIARY
NOTES TO PRO FORMA UNAUDITED BALANCE SHEET
(in thousands, except share data)
The pro forma balance sheet is based on the following assumptions:
In settlement of claims against it, the Trust will distribute assets as
follows:
Newco will receive $92,501 in mortgage loans and $132,478 of foreclosed real
estate along with related loss reserves and miscellaneous assets and
liabilities. The senior debt and related interest will be assumed by Newco.
Newco will also issue a $6,000 note to the Reorganized Trust. The $100,000 in
subordinated debt and related accrued interest will be converted into 100% of
the common stock of Newco. Newco will also issue 300,000 shares of preferred
stock to the Reorganized Trust in exchange for $300.
PRO FORMA ADJUSTING ENTRIES
(a) To reflect the note receivable issued by Newco payable to the Reorganized
Trust:
Note receivable $ 6,000
Note payable 6,000
(b) To reflect the purchase by the Reorganized Trust of 300,000 shares of
Newco preferred stock:
Investment in preferred stock $ 300
Preferred stock 300
(c) To convert the subordinated debt and related accrued interest to
shareholders' equity:
Subordinated debt $ (100,000)
Accrued interest payable (9,450)
Equity 109,450
(d) To record the cash paydown on the senior debt at consummation:
Senior debt $ (9,000)
Restricted cash and cash equivalents (9,000)
(e) To reflect payment of certain liabilities at consummation:
Accrued interest and other liabilities $ (1,646)
Restricted cash and cash equivalents (1,646)
(f) To reflect adjustments made to certain accrued liabilities at
consummation:
Accrued interest and other accrued liabilities $ (548)
Common stock and paid-in capital 548
(g) To reclassify unrestricted cash at consummation:
Cash and cash equivalents $ 11,903
Restricted cash and cash equivalents (11,903)
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On October 25, 1993 the Trust filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The Trust is managing
its business as a debtor-in-possession subject to Bankruptcy Court approval of
any actions outside the ordinary course of business that the Trust may take.
On January 24, 1994, the Bankruptcy Court entered an order confirming a
modified plan of reorganization for the Trust (the "Plan"). Consummation of
the Plan is subject to the satisfaction of certain conditions, some of which
are outside the Trust's control. On the basis of information available to it
at this time, the Trust anticipates that a modified version of such Plan will
be consummated before the end of March 1994. See "Liquidity and Capital
Resources" and "Part II - Item 1. Legal Proceedings" below.
Operations resulted in a loss of $2,905,373 for the quarter ended December 31,
1993, compared to a loss of $7,051,709 for the same period in fiscal 1993.
Contributing to the smaller loss were the following factors: an increase in
foreclosed real estate income and a decrease in the provision for possible
losses, interest expense, management fees and debt restructure expense. These
factors were partially offset by: an increase in reorganization expense and a
decrease in mortgage loan income and temporary investment interest. The Trust
cannot predict the size of the provision for possible losses in fiscal 1994,
but will continue to monitor the status of each of its assets in light of
current market conditions and to provide for possible losses in its mortgage
loan portfolio and its foreclosed real estate portfolio as necessary.
Income on mortgage loans decreased from $2.9 million in the second quarter of
fiscal 1993 to $1.8 million in the second quarter of fiscal 1994. The entire
$1.1 million decrease was the result of a decrease in average earning loans,
which more than offset a small increase in yield. Average earning loans
decreased from $151.3 million with a yield of 7.59% in the second quarter of
fiscal 1993 to $91.8 million with a yield of 7.88% in the second quarter of
fiscal 1994. The increase in yield includes the effect of accelerated
amortization of deferred financing fees due to early loan payoffs and the
collection of interest on nonaccrual loans.
Income on mortgage loans decreased from $5.9 million for the first six months
of fiscal 1993 to $3.9 million for the first six months of fiscal 1994. The
entire $2 million decrease was the result of a decrease in the average earning
loans, which more than offset a small increase in yield. Average earning loans
decreased from $154.2 million with a yield of 7.54% for the first six months of
fiscal 1993 to $98.6 million with a yield of 7.84% for the first six months of
fiscal 1994.
Average nonearning loans for the second quarter of fiscal 1994 totaled $29.1
million compared to $22.4 million for the comparable period in fiscal 1993.
Assuming that the yield on these loans would have been the same as the yield on
earning loans had they been on earning status, income on mortgage loans would
have been $.6 million higher in the second quarter of fiscal 1994 and $.4
million higher in the second quarter of fiscal 1993. Average nonearning loans
for the first six months of fiscal 1994 totaled $28.5 million compared to $21.3
million for the comparable period of fiscal 1993. Assuming that the yield on
these loans would have been the same as the yield on earning loans had they
been on earning status, income on mortgage loans would have been $1.1 million
higher for the first six months of fiscal 1994 and $.8 million higher for the
first six months of fiscal 1993. The Trust's efforts to reduce nonearning
assets and improve the operating performance of real estate assets continues.
These efforts include: monthly analysis of project revenues and expenses and
the leasing activity of the project manager; regular visits to each project to
review projections, operating budgets, maintenance, capital expenditures and
performance of the
10
<PAGE> 11
project manager; listing of projects for sale and active monitoring of the
activities of the listing broker; advertising and mail contact with national
and regional sales prospects known to the Trust; auctions of certain selected
properties; replacement of the project manager and/or listing agent if
performance is unsatisfactory; and employing consultants to assist the Trust in
developing strategies for leasing and selling certain assets, such as retail
properties. Although the Trust has seen some general improvement in occupancy
levels and some isolated improvement in rental rates, continuing problems in
the real estate industry, including the lack of traditional bank financing for
real estate transactions and generally depressed rents, the Trust could have
increases in nonearning loans. The size of any increases in nonearning loans
will be a function of the foregoing variables, and consequently cannot be
quantified at this time.
There was no new loan production during the quarters ended December 31, 1993
and 1992. The Trust has not sought any new business in recent years and
continues to limit new loan originations in accordance with its current policy
of reducing its indebtedness and the size of its loan and foreclosed real
estate portfolio.
Interest on temporary investments decreased from $104,000 in the second quarter
of fiscal 1993 to $43,000 in the second quarter of fiscal 1994. Of the $61,000
decrease, the majority was the result of a decrease in average temporary
investments. Average temporary investments decreased from $12.9 million with a
yield of 3.20% in the second quarter of fiscal 1993 to $5.8 million with a
yield of 2.97% in the second quarter of fiscal 1994. Interest on temporary
investments decreased from $205,000 for the first six months of fiscal 1993 to
$88,000 for the comparable period in fiscal 1994. Of the $117,000 decrease,
the majority was the result of a decrease in average temporary investments.
Average temporary investments decreased from $12.2 million with a yield of
3.33% in the first six months of fiscal 1993 to $5.9 million with a yield of
2.96% for the first six months of fiscal 1994. The level of temporary
investments has decreased as funds have been paid to satisfy the Trust's
obligations to pay the principal of and interest on its debt.
Income on foreclosed real estate increased from $696,000 in the second quarter
of fiscal 1993 to $1,381,000 in the second quarter of fiscal 1994. This
increase resulted from a change in the status of several projects from
nonearning to earning status during the third quarter of fiscal 1993. This
change in status was made due to improved occupancy levels.
Interest expense decreased from $3.7 million in the second quarter of fiscal
1993 to $2.0 million in the second quarter of fiscal 1994. Of the $1.7 million
decrease, $1.1 million was the result of a decrease in the average cost of debt
and $.6 million was the result of a decrease in the average debt outstanding.
Average debt outstanding declined from $222.9 million with an average cost of
6.67% in the second quarter of fiscal 1993 to $183.1 million with an average
cost of 4.31% for the same period in fiscal 1994. The decrease in average cost
of debt includes the impact of ceasing to accrue interest on the Trust's $100
million principal amount 10 1/2% Subordinated Notes due June 1, 1993 (the
"Subordinated Notes") when the Trust filed its Chapter 11 petition on October
25, 1993. Interest expense decreased from $7.6 million for the first six
months of fiscal 1993 to $6.5 million for the first six months of fiscal 1994.
Of the $1.1 million decrease, $1.4 million was the result of a decrease in
average debt outstanding which was partially offset by an increase in interest
expense of $.3 million as a result of an increase in the average cost of debt.
Average debt outstanding declined from $226.1 million with an average cost of
6.67% for the first six months of fiscal 1993 to $183.7 million with an average
cost of 6.97% for the same period in fiscal 1994. The average cost of debt
increased in fiscal 1994 as a result of the January 31, 1993 expiration of an
interest rate swap, which had resulted in a reduction of interest expense and
the increase in the rate on the Trust's senior debt to the default rate of
prime or corporate base rate plus 200 basis points for the period beginning May
16, 1993 until the Trust filed its Chapter 11 petition on October 25, 1993.
The above factors were partially offset by the impact of ceasing to accrue
interest on the
11
<PAGE> 12
Subordinated Notes. Average cost of debt for these purposes includes bank fees
and other rate adjustments such as the net effect of the interest rate swap
referred to above. This swap produced a reduction of interest costs of
$531,000 in the second quarter of fiscal 1993 and $1,068,000 for the first six
months of fiscal 1993.
There was no provision for possible losses in the second quarter of fiscal 1994
compared to $3.1 million in the second quarter of fiscal 1993. The allowance
for possible losses was $46.8 million at December 31, 1993, compared to $53.9
million at June 30, 1993 and $56.2 million at December 31, 1992. While the
Trust believes the allowance for possible losses is adequate at December 31,
1993, management will periodically review the portfolio using then current
information to make the estimates and assumptions that are used to determine
the allowance for loan losses and the valuation of the real estate acquired in
connection with foreclosures or in satisfaction of loans. These estimates and
assumptions are susceptible to significant changes due to changes in the market
conditions upon which they are based.
No provision for possible losses on mortgage loans was recorded in the second
quarter of fiscal 1994 or 1993.
No provision for possible losses on foreclosed real estate was made in the
second quarter of fiscal 1994 compared to $3.1 million in the second quarter of
fiscal 1993. The allowance for losses on foreclosed real estate was $30.4
million at December 31, 1993, compared to $34.7 million at December 31, 1992.
At December 31, 1993, foreclosed real estate totaled $160.1 million compared to
$174.7 million at December 31, 1992. Any loss incurred upon foreclosure of
collateral underlying a loan is charged to the allowance for possible losses on
mortgage loans.
The following is a summary of transactions affecting the Trust's allowance for
possible losses for the six months ended December 31, 1993, compared to the six
months ended December 31, 1992:
<TABLE>
<CAPTION>
Six Months Ended December 31, 1993
-------------------------------------------------
Mortgage Foreclosed
Loans Real Estate Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance July 1, 1993 $ 17,728,367 $ 36,210,450 $ 53,938,817
Provision for possible losses 200,000 -- 200,000
Amounts charged off, net of recoveries (509,622) (461,960) (971,582)
------------- ------------- -------------
Balance September 30, 1993 17,418,745 35,748,490 53,167,235
Provision for possible losses -- -- --
Amounts charged off, net of recoveries (970,398) (5,370,596) (6,340,994)
------------- ------------- -------------
Balance December 31, 1993 $ 16,448,347 $ 30,377,894 $ 46,826,241
============= ============= =============
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Six Months Ended December 31, 1992
------------------------------------------------
Mortgage Foreclosed
Loans Real Estate Total
------------- --------------- ---------------
<S> <C> <C> <C>
Balance July 1, 1992 $ 23,275,974 $ 35,765,577 $ 59,041,551
Provision for possible losses 702,000 1,448,000 2,150,000
Amounts charged off, net of recoveries (543,765) (3,156,665) (3,700,430)
------------- ------------- -------------
Balance September 30, 1992 23,434,209 34,056,912 57,491,121
Provision for possible losses -- 3,100,000 3,100,000
Amounts charged off, net of recoveries (2,007,728) (2,418,941) (4,426,669)
------------- ------------- -------------
Balance December 31, 1992 $ 21,426,481 $ 34,737,971 $ 56,164,452
============= ============= =============
</TABLE>
Management fees were lower in the second quarter of fiscal 1994 than in the
comparable period in fiscal 1993 because invested assets, upon which the
management fees are based, were lower in the second quarter of fiscal 1994
compared to the second quarter of fiscal 1993. Debt restructure expense
includes expenses incurred prior to October 25, 1993 (when the Trust filed its
Chapter 11 petition) for legal and financial advisors and consultants' fees for
the Trust and certain representatives of the Trust's subordinated noteholders
and shareholders. Reorganization expense includes accrued amounts incurred
since the filing of the Chapter 11 petition for legal and financial advisors
and consulting fees for the Trust and certain representatives of the Trust's
subordinated noteholders, senior debt holders and shareholders. The Trust has
accumulated cash during the Chapter 11 proceedings because during such
proceedings it has not been permitted to pay interest on the subordinated debt.
Interest earned on this accumulation of cash totaled $46,000 and was earned on
an average balance of $6 million for the second quarter at a yield of 3.03%.
On October 22, 1993, Ted Enloe, the President and Chief Executive Officer of
the Trust exercised options for 650,000 Shares of Beneficial Interest. The
shares were paid for with a promissory note executed by Mr. Enloe payable to
the Trust in the amount of $365,625 and cash of $121,875.
LIQUIDITY AND CAPITAL RESOURCES
For the last five fiscal years, the Trust has faced substantial liquidity
problems due to reduced cash flows from operating and investing activities, the
required substitution of bank financing for commercial paper financing and its
inability to borrow additional funds under its bank credit facilities. The
Trust expects its liquidity and earnings to continue to be adversely affected
by the weakened real estate market, which has resulted in, among other things,
substantial nonearning assets and a significant reduction in the availability
of real estate financing. The Trust has ceased investing in new mortgage
loans, except for minor investments in properties currently financed or owned,
concentrating its efforts on liquidating its mortgage loan and real estate
investments for cash and notes, and on retiring its senior indebtedness.
The Trust's principal funding requirements are operating expenses, interest
expense and the repayment of its indebtedness. The Trust anticipates that its
primary sources of funding these disbursements will be its collections on
mortgage loans, earnings on foreclosed property and proceeds from the sale of
foreclosed property.
13
<PAGE> 14
Operating activities, including reorganization items, for the first six months
of fiscal 1994 used cash of $883,000 while the first six months of fiscal 1993
used cash of $8,132,000. The table below reflects the impact of the
non-payment of accrued interest on the subordinated debt partially offset by
increased operating and other expenses on cash used by operations (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended
December 31
-----------------------------
1993 1992
-------- --------
<S> <C> <C>
Total income $ 6,733 $ 7,359
Interest expense (6,457) (7,606)
-------- --------
Net interest margin 276 (247)
Operating expenses (7,173) (6,636)
Other 6,061 (1,249)
Reorganization items (47) --
-------- --------
Net cash used by
operating activities $ (883) $ (8,132)
======== ========
</TABLE>
Net cash provided by investing activities for the first six months of fiscal
1994 was $8,264,000 compared to $24,300,000 provided in the first six months of
fiscal 1993. The table below reflects cash flow from investing activities (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended
December 31
------------------------------
1993 1992
--------- --------
<S> <C> <C>
Collections on mortgage loans $ 20,400 $ 13,260
Advances on mortgage loans (260) (1,345)
Sales and basis reductions of foreclosed
real estate 8,001 14,096
Expenditures on foreclosed real estate (1,175) (2,066)
Net sales (purchases) of restricted cash
investments (18,702) 355
--------- --------
Net cash provided by investing activities $ 8,264 $ 24,300
========= ========
</TABLE>
Debt was reduced by $4,597,000 in the first six months of fiscal 1994 compared
to $21,074,000 in the first six months of fiscal 1993.
Amounts to be advanced under existing commitments were reduced from $903,778 at
June 30, 1993 to $563,532 at December 31, 1993.
At June 30, 1993, the Trust had $87.7 million of senior indebtedness
outstanding. Due to the Trust's increasing financial difficulties, the terms
of the senior loan agreements have been amended several times since May 1990.
As most recently amended in January 1993, the senior loan agreements provide,
among other things, for the following: (i) a principal payment of $6.0 million
on March 31, 1993; (ii) a maturity date of April 1, 1993; (iii) an interest
rate margin on LIBOR-based loans equal to 2%; and (iv) that the Trust's
obligations are secured by substantially all of the Trust's interest in
mortgage loans and real estate investments. The Trust prepaid the $6.0 million
principal payment due March 31, 1993, but defaulted on the repayment of the
balance of the senior loans on April 1, 1993. In May 1993, the rate of
interest on the senior debt was increased to the
14
<PAGE> 15
default rate of prime plus 200 basis points and remained at that level until
October 25, 1993, when it was reduced to the nondefault rate. The senior loan
agreements include covenants which, among other things, require the Trust to
maintain certain financial ratios and a net worth of $70 million, restrict the
pledge of assets and the incurrence of additional borrowings by the Trust and
prohibit the Trust from declaring or paying any dividends or other
distributions to its shareholders. At December 31, 1993 and June 30, 1993, the
Trust was in default of the net worth covenant. Pursuant to the January 1993
Amendments, the Trust paid one-time bank fees of $300,000 and prepaid interest
on the senior loans in an amount equal to $3 million. The Trust also agreed to
prepay interest on a monthly basis so that such monthly prepayment, together
with the amount of interest previously prepaid but not yet applied to pay
interest on the senior loans, would equal six months' interest on the senior
loans. The Trust discontinued the prepayment of interest in August 1993.
Also outstanding at December 31, 1993 and June 30, 1993 was $100 million of 10
1/2% Subordinated Notes that matured June 1, 1993. A semi- annual installment
of interest on the Subordinated Notes was also payable on June 1, 1993. The
Trust failed to pay the principal of and accrued interest on the Subordinated
Notes when they matured on June 1, 1993. In addition, the Trust ceased
accruing interest on the Subordinated Notes when it filed its Chapter 11
petition on October 25, 1993. The Subordinated Notes are subordinate in the
right of payment to all senior indebtedness.
On October 25, 1993, the Trust filed a voluntary petition for reorganization
under Chapter 11 of the Federal Bankruptcy Code in the Bankruptcy Court. The
Trust is managing its business as a debtor-in-possession subject to Bankruptcy
Court approval of any actions outside the ordinary course of business that the
Trust may take. See "Part II - Item 1. Legal Proceedings" below.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 25, 1993, the Trust filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). The Trust is managing its business as a debtor- in-possession subject
to Bankruptcy Court approval of any actions outside the ordinary course of
business that the Trust may take.
During the pendency of the Chapter 11 case, actions by creditors to collect
claims in existence on the filing date are stayed, absent specific Bankruptcy
Court authorization for the payment of such claims. During the pendency of the
Chapter 11 case, interest and principal on the Trust's debt cannot be paid,
absent a Bankruptcy Court order to the contrary, and dividends cannot be paid
on the Trust's Shares of Beneficial Interest.
In a Chapter 11 case, the United States Trustee responsible for the case is
required to appoint an official committee of unsecured creditors and may
appoint other official committees. On November 5, 1993, the United States
Trustee for the Southern District of New York (the "U.S. Trustee") appointed
an Official Committee of Unsecured Creditors consisting of six holders of the
Trust's Subordinated Notes and the trustee under the indenture governing such
notes. On November 8, 1993, the U.S. Trustee appointed an Official Committee
of Equity Security Holders consisting of five holders of the Trust's Shares of
Beneficial Interest. The official committees are parties in interest in the
Chapter 11 case and have participated in negotiations concerning the plan of
reorganization of the Trust.
Under the United States Bankruptcy Code, the Trust must obtain either the
consent of its senior lenders or Bankruptcy Court approval to use the cash
proceeds of the assets pledged to the senior lenders to the extent such lenders
have a valid, perfected security interest in such cash. The senior lenders
have consented to the Trust's use of such cash collateral until the amount of
accrued and unpaid interest on the senior loans exceeds the undisbursed portion
of the interest that the Trust prepaid pursuant to the January 1993 Amendments.
This consent is expected to expire on February 24, 1994, at which time the
Trust will have to obtain either an extension of the senior lenders' consent or
Bankruptcy Court approval in order to continue to use the Trust's cash (whether
or not such use is in the ordinary course of the Trust's business). A hearing
before the Bankruptcy Court is scheduled for February 22, 1994 to consider (i)
the Trust's application to use its cash without making current payments of
principal and interest on the senior loans and (ii) the senior lenders' motion
to require the Trust to make certain principal payments on the senior loans and
to pay interest thereon at the non-default rate.
On November 2, 1993, the Trust filed with the Bankruptcy Court a disclosure
statement (the "Disclosure Statement") and related Chapter 11 plan of
reorganization (the "Original Plan"). The basis for the Original Plan is a
joint proposal the Trust received in June 1993 from certain holders of its
Subordinated Notes and Shares of Beneficial Interest. The Original Plan
provides for the transfer of most of the Trust's assets to a subsidiary
("Newco") and the distribution of all Newco's common stock to the holders of
Subordinated Notes in full satisfaction of the Trust's obligations in respect
thereof. Newco would assume all of the Trust's obligations to its senior
lenders on restructured terms. The senior loans would be secured by
substantially all of the assets transferred to Newco. The restructured company
(the "Reorganized Trust") would emerge as an essentially debt-free entity and
its assets would be released from the senior lenders' existing liens. The
shares of the Reorganized Trust would continue to be owned by the existing
holders of the Shares of
16
<PAGE> 17
Beneficial Interest. In addition, Newco would issue 300,000 shares of
preferred stock to the Reorganized Trust in exchange for $300,000.
The Disclosure Statement was approved by the Bankruptcy Court on December 16,
1993, and was subsequently circulated to all holders of the Trust's senior
indebtedness, Subordinated Notes and Shares of Beneficial Interest, together
with ballots to accept or reject the Original Plan. The Trust obtained the
requisite consents to the Original Plan in January 1994, and on January 24,
1994, the Bankruptcy Court entered an order confirming the Original Plan, as
modified by a Modification dated January 19, 1994 (as so modified, the "Plan").
The Plan is substantially the same as the Original Plan except that (i) the
interest rate on the senior loan to Newco was increased, (ii) the average
maturity of such loan was reduced and (iii) the Reorganized Trust will receive
$6 million principal amount of such senior loan in lieu of $6 million of cash
that it was to have retained under the Original Plan. The period during which
an interested party may appeal the order confirming the Plan has expired, and
no interested party has filed a notice of appeal thereof. Consummation of the
Plan is subject to the satisfaction of certain conditions, some of which are
outside the Trust's control.
As currently modified, the Plan contemplates that the Trust will transfer a
portion of its mortgage loans and all of its foreclosed real estate to a
wholly-owned subsidiary. The Trust intends to seek Bankruptcy Court approval
to permit the Reorganized Trust to retain the assets that would otherwise be
transferred to this subsidiary. On the basis of information available to it at
this time, the Trust anticipates that this modification of the Plan will be
approved and that the Plan, as so modified, will be consummated before the end
of March 1994.
17
<PAGE> 18
ITEM 5. OTHER INFORMATION
REIT STATUS
The Trust believes that it has operated, and expects that it will continue to
operate, in such manner as to qualify for taxation as a real estate investment
trust (a "REIT") under the Internal Revenue Code (the "Code"), but no assurance
can be given that it will at all times so qualify. To qualify as a REIT, the
Trust must satisfy various requirements under the Code, including requirements
concerning the nature and composition of its income and assets. Generally, an
entity can qualify as a REIT only if 95 percent of its gross income constitutes
"qualifying income" as defined in Section 856 of the Code (the "95% Test").
Because more than 5% of the Trust's gross income during the taxable years
ending June 30, 1992 (the "1992 Year") and June 30, 1993 (the "1993 Year"),
consisted of income from an interest rate swap and because it is uncertain
whether income derived from such interest rate swaps constitutes qualifying
income, it is unclear whether the Trust satisfied the 95% Test for the 1992
Year and the 1993 Year. The Trust believes that such income should be treated
as qualifying income for purposes of the 95% Test and has filed a request for a
ruling from the Internal Revenue Service (the "IRS") to confirm that such
treatment is appropriate. No assurance can be given, however, that the IRS
will issue a favorable ruling.
In addition, in order to qualify as a REIT, the Trust must distribute at least
95% of its REIT taxable income. Under the Trust's senior credit agreements,
the Trust is prohibited from declaring or paying any distributions or dividends
to its shareholders. In addition, the Trust cannot pay dividends to its
shareholders during its Chapter 11 proceedings without Bankruptcy Court
approval. Accordingly, if it were to have taxable income for any year prior to
the later of the termination of its senior credit agreements or the Trust's
emergence from Chapter 11, the Trust would be subject to corporate income tax
unless appropriate waivers of the prohibition were provided by the Trust's
senior lenders. However, since the Trust does not expect to have taxable
income while this prohibition is in effect, it does not expect to incur such a
tax.
So long as the Trust qualifies as a REIT and satisfies the 95% distribution
requirement, the Trust will generally be taxable only on its undistributed
taxable income. Distributions out of current or accumulated earnings and
profits will be taxed to shareholders as ordinary income or capital gain, as
the case may be. Distributions in excess of the Trust's accumulated and current
earnings and profits will constitute a nontaxable return of capital to the
shareholders (except insofar as such distributions exceed the cost basis of the
Shares of Beneficial Interest), but will result in a corresponding reduction in
the cost basis of the Shares of Beneficial Interest. The Trust will notify each
shareholder of the proportion of distributions made during the taxable year
which constitutes ordinary income, capital gain or a return of capital.
Distributions by the Trust will normally not be eligible for the dividends
received deduction for corporations. Should the Trust incur losses,
shareholders will not be entitled to include such losses in their individual
income tax returns.
If the Trust does not qualify as a REIT in any taxable year, it will be taxed
as a corporation pursuant to Subchapter C of the Code. In determining its
potential liability for tax as a corporation, the Trust believes, assuming it
does not undergo an ownership change that would limit the use of net operating
loss carryovers under Section 382 of the Code, that it would be able to utilize
its net operating loss carryovers and other tax benefits to shelter itself from
regular federal income taxation and, in substantial part, from alternative
minimum taxation. However, if the Trust were to undergo an ownership change
(other than an ownership change pursuant to a bankruptcy plan that meets the
requirements of Section 382(l)(5) of the Code), the ability of the Trust to use
its net operating loss carryforwards to offset income earned by the Trust after
the ownership change would be severely limited, as would the Trust's ability to
deduct losses recognized on certain sales of assets occurring after the
ownership change. Accordingly, the Trust believes that, if it ceased to
18
<PAGE> 19
qualify as a REIT and became taxable as a regular corporation, it could incur
substantial liability for federal income taxes in the event of an ownership
change not meeting the requirements of Section 382(l)(5) of the Code.
If the Trust ceases to qualify as a REIT, funds available for distribution to
shareholders would be reduced by the amount of any tax liability payable by the
Trust to federal tax authorities. Such distributions, if any, would not be
deductible by the Trust in computing its taxable income but would be eligible
for the dividends received deduction for corporate shareholders to the extent
paid out of the Trust's current and cumulative earnings and profits. In
addition, unless entitled to relief under specific statutory provisions, the
Trust would be ineligible for REIT status for the succeeding four taxable
years.
The foregoing description is general in character. For a complete description,
reference should be made to the pertinent Code sections and the Regulations
issued thereunder.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(10.1) Promissory Note dated October 22, 1993 between Registrant
and Robert Ted Enloe III.
(10.2) Stock Pledge and Security Agreement dated October 22, 1993
between Registrant and Robert Ted Enloe III.
(10.3) First Amended Plan of Reorganization of the Registrant
dated December 14, 1993 (incorporated by reference from the
Registrant's report on Form 8-K dated February 9, 1994).
(10.4) Modification dated January 19, 1994 of the First Amended
Plan of Reorganization of the Registrant (incorporated by
reference from the Registrant's report on Form 8-K dated
February 9, 1994).
(b) Reports on Form 8-K:
The Registrant filed a report on Form 8-K dated January 7, 1994 to
report that the Registrant, certain of the Registrant's senior secured
lenders, the members of the Official Unsecured Creditors and the
Official Committee of Equity Securities Holders executed a Stipulation
and Agreement Suspending Plan Litigation setting forth an agreement in
principle which would resolve certain potential disputes regarding the
treatment of the senior secured lenders under the plan of
reorganization of the Registrant.
The Registrant filed a report on Form 8-K dated February 9, 1994, to
report that on January 24, 1994, the Bankruptcy Court entered an order
confirming a plan of reorganization for the Registrant.
20
<PAGE> 21
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 thereunder duly authorized.
LIBERTE INVESTORS
Date: February 10, 1994 By: /s/ TED ENLOE
------------------------------------
Ted Enloe
President and Chief Executive Officer
Date: February 10, 1994 By: /s/ B. A. BREEDING
------------------------------------
B. A. Breeding
Senior Vice President - Control
21
<PAGE> 22
LIBERTE INVESTORS
INDEX TO EXHIBITS
Sequentially
Exhibit No. Numbered Pages
----------- --------------
(10.1) Promissory Note dated October 22, 1993 between
Registrant and Robert Ted Enloe III.
(10.2) Stock Pledge and Security Agreement dated
October 22, 1993 between Registrant and
Robert Ted Enloe III.
(10.3) First Amended Plan of Reorganization of the
Registrant dated December 14, 1993 (incorporated
by reference from the Registrant's report on
Form 8-K dated February 9, 1994).
(10.4) Modification dated January 19, 1994 of the
First Amended Plan of Reorganization of the
Registrant (incorporated by reference from the
Registrant's report on Form 8-K dated
February 9, 1994).
22
<PAGE> 1
EXHIBIT 10.1
PROMISSORY NOTE
$365,625.00 Dallas, Texas October 22, 1993
FOR VALUE RECEIVED, the undersigned promises to pay to the order
of Liberte Investors, a Massachusetts business trust (the "Lender"), at 1420
Viceroy Drive, Dallas, Texas 75265, the principal sum of three hundred sixty
five thousand six hundred and twenty-five dollars ($365,625.00) with interest
on the principal balance from time to time remaining unpaid prior to maturity,
at a rate of five percent (5%) per annum, which interest shall be calculated
semi-annually, and the amount so calculated shall be added to the principal
amount due hereunder semi-annually; the principal balance of the indebtedness
represented by this Note and any accrued interest thereon shall become due and
payable in full five and one-half (5-1/2) years from the date of this Note.
The undersigned certifies that he has used the proceeds of the loan
evidenced by this Note to purchase 650,000 shares of Beneficial Interest (the
"Shares") of the Lender upon the undersigned's exercise of certain stock
options for Shares granted to him by the Lender. The undersigned acknowledges
that the Lender's principal reason for making the loan evidenced by this Note
is to enable the undersigned, as a key employee, to exercise his options to
acquire the Shares and thereby participate in the growth of the Lender through
ownership of the Shares and their potential appreciation.
The principal hereof may be prepaid, in whole or in part, together
with accrued interest on the amount prepaid, at any time, without premium or
penalty.
At the option of the Lender hereof, the unpaid principal balance
hereof, and all accrued and unpaid interest hereon, shall at once become due
and payable, without notice or demand, upon a default in the payment of the
principal hereof or interest hereon or upon a default in the performance of any
other provisions herein or in the Pledge Agreement (hereinafter defined), and
said default continues for 15 calendar days after written notice thereof by the
Lender to the undersigned.
All past due principal hereof and interest hereon, if permitted by
applicable law, shall bear interest at the rate of 10% per annum.
Except as otherwise expressly provided herein, the undersigned waives
demand, presentment, notice of intention to accelerate the indebtedness
evidenced hereby, notice of dishonor, notice of acceleration, diligence in
collecting, grace, notice and protest, and consents to all extensions which,
from time to time, may be granted by the Lender and to all partial payments
hereon, whether before or after maturity.
<PAGE> 2
If this Note is not paid when due, whether at maturity or by
acceleration, or if this Note is collected through a bankruptcy, probate or
other court, whether before or after maturity, the undersigned agrees to pay
all costs of collection, including, but not limited to, reasonable attorneys'
fees and expenses, incurred by the Lender.
All agreements between the undersigned and Lender hereof, whether now
existing or hereafter arising, and whether written or oral, are expressly
limited so that in no contingency or event whatsoever shall the amount paid, or
agreed to be paid, to the Lender for the use, forbearance or detention of the
money to be loaned hereunder or otherwise, or for the performance or payment of
any covenant or obligation contained herein, exceed the maximum amount
permissible under applicable laws of the State of Texas or the laws of the
United States of America, whichever laws allow the higher rate of interest. If
from any circumstance whatsoever fulfillment of any provision hereof at the
time performance of such provision shall be due shall involve transcending the
limit of validity prescribed by law, then ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity, and if from any such
circumstance the Lender hereof shall ever receive anything of value deemed
interest under applicable law that would exceed interest at the highest lawful
rate, such amount that would be excessive interest shall be applied to the
reduction of the principal amount owing hereunder and not to the payment of
interest or if such excessive interest exceeds the unpaid balance of principal
hereunder and such other indebtedness, such excess shall be refunded to the
undersigned. Without limiting the foregoing, all calculations of the rate of
interest contracted for, charged, taken, reserved or received in connection
herewith which are made for the purpose of determining whether such rate
exceeds the highest lawful rate shall be made to the extent permitted by such
applicable laws by amortizing, prorating, allocating and spreading during the
period of the full term of this Note, including all prior and subsequent
renewals and extensions, all interest at any time contracted for, charged,
taken, reserved or received. The terms and provisions of this paragraph shall
control all agreements between the undersigned and the Lender.
Payment of the indebtedness evidenced by this Note is secured by and
this Note is entitled to the benefits and security afforded by a Stock Pledge
and Security Agreement of even date herewith (herein, the "Pledge Agreement")
by and between the undersigned and the Lender encumbering certain Collateral,
including, without limitation, the undersigned's Shares as described therein.
Notwithstanding anything herein contained to the contrary, in the
event of any default in the payment of this Note or default in the performance
of the Pledge Agreement, the undersigned, his principals, their heirs, legal
representatives and any permitted successors and assigns, shall be liable for
the payment of not more
2
<PAGE> 3
than fifty-three thousand three hundred and four dollars ($53,304.00) of the
sums due hereunder or under the liens securing payment hereof (including, but
not limited to, reasonable attorneys' fees), any amounts outstanding and owing
on this Note in excess of fifty-three thousand three hundred and four dollars
($53,304.00) may be satisfied only out of the Collateral (as defined in the
Pledge Agreement) securing the payment of this Note. Accordingly, the Lender
shall have as its sole recourse and remedy for the repayment of any such
amounts owing over fifty-three thousand three hundred and four dollars
($53,304.00), the right to foreclose the liens on the Collateral securing the
payment hereof pursuant to the Pledge Agreement or otherwise to satisfy the
payment of any and all such amounts, then or thereafter owing hereon or upon
the liens on the Collateral securing the payment hereof, and the Lender shall
have no right to seek and/or obtain a judgment against the undersigned, his
principals, their heirs, legal representatives and any permitted successors or
assigns, for a deficiency, if any, in excess of fifty-three thousand three
hundred and four dollars ($53,304.00). This paragraph shall not in any manner
limit or restrict the rights of the Lender to foreclose against the Collateral
under the Pledge Agreement in the event of failure to make any payments as set
forth herein or upon any other default under this Note or under the Pledge
Agreement.
__________________________
Robert Ted Enloe III
3
<PAGE> 1
EXHIBIT 10.2
STOCK PLEDGE AND SECURITY AGREEMENT
THIS STOCK PLEDGE AND SECURITY AGREEMENT is entered into as of the
22nd day of October, 1993 between Robert Ted Enloe III, whose address is 8823
Briarwood Lane, Dallas, Texas 75209 (the "Borrower"),and Liberte Investors, a
Massachusetts business trust, whose address is 1420 Viceroy Drive, Dallas,
Texas 75265 ("Lender").
W I T N E S S E T H:
WHEREAS, of even date herewith, the Borrower has executed that certain
Promissory Note (the "Note"), which evidences certain indebtedness owing from
the Borrower to the Lender in connection with the Lender's agreement to finance
a portion of the exercise price of options granted to the Borrower ("Stock
Options") to purchase 650,000 Shares of Beneficial Interest of the Lender; and
WHEREAS, the Lender has conditioned its obligations under the Note
upon the execution and delivery by the Borrower of this Stock Pledge and
Security Agreement, and Borrower has agreed to enter into this Stock Pledge and
Security Agreement to secure the payment of the indebtedness to the Lender
represented by the Note;
NOW, THEREFORE, in order to comply with the terms and conditions of
the Note, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower hereby agrees with
Lender as follows:
ARTICLE I
GENERAL TERMS
1.1 Note.
(a) "Collateral" will mean the 650,000 Shares of Beneficial Interest
of the Lender (the "Securities") and the certificates representing the
Securities, and all dividends, cash, instruments and other property from time
to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Securities acquired by and issued to Borrower
upon his exercise of the Stock Options; provided, however, that the Lender
shall have no right to receive or apply to the Obligations (as hereinafter
defined) any dividends with respect to the Securities paid or payable in cash
during any period in which an Event of Default shall not have occurred and be
continuing; and
(b) "Obligations" will mean all obligations and indebtedness of
Borrower to the Lender under this Stock Pledge and Security Agreement, the Note
and any and all renewals, extensions for any period, rearrangements or
modifications thereof, whether evidenced by any note or other instrument or
agreement.
1
<PAGE> 2
1.2 The Borrower. The term "Borrower", as used throughout this Stock
Pledge and Security Agreement, shall mean the Borrower, and shall include any
permitted successors and assigns of the Borrower.
ARTICLE II
SECURITY INTEREST
2.1 Grant of Security Interest in Collateral. In order to secure the
payment of the Obligations, and to induce the Lender to provide financing for a
portion of the exercise price of the Stock Options and the acquisition of the
Securities, the Borrower, for value received, the receipt and sufficiency of
which are hereby acknowledged, hereby pledges the Securities to the Lender and
hereby grants to the Lender a first lien on and a security interest in and to
the Collateral.
2.2 Indebtedness Secured. The security interest created in Section 2.1
above is granted to the Lender by the Borrower to secure the Obligations,
including, without limitation, the Note.
2.3 Delivery of Securities. All certificates or instruments representing
or evidencing the Securities shall be delivered to and held by the Lender for
the sole purpose of possession of the Collateral or any portion thereof,
pursuant to this Stock Pledge and Security Agreement, and shall be in suitable
form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to the Lender. The Lender shall at all times have actual
possession of the Securities and shall be deemed to have possession of any of
the Collateral in transit to it or set apart for it.
2.4 Power of Attorney. The Borrower hereby irrevocably constitutes and
appoints the Lender and any authorized agent thereof, with full power of
substitution, as his true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of the Borrower and in the name of
the Borrower or in its own name, from time to time and in the Lender's
discretion, for the purpose of carrying out the terms of this Stock Pledge and
Security Agreement and, without notice to the Borrower, to take any and all
appropriate actions and to execute any and all documents and instruments that
may be necessary or desirable to accomplish the purposes of this Stock Pledge
and Security Agreement, including, without limitation, the following:
(a) upon the occurrence and continuance of any Event of Default (as
hereinafter defined), to transfer to or register any or all of the Collateral
in the name of the Lender or any of its nominees; or
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(b) upon the occurrence and continuance of any Event of Default, to
receive payment of and receipt for any and all moneys, claims and other amounts
due and to become due at any time in respect of or arising out of any of the
Collateral, (ii) to commence and prosecute any suits, actions or proceedings at
law or in equity in any court of competent jurisdiction to collect the
Collateral or any part thereof and to enforce any other right in respect of any
Collateral, (iii) to defend any suit, action or proceeding brought against the
Borrower or with respect to any Collateral, (iv) to settle, compromise or
adjust any suit, action or proceeding described above and, in connection
therewith, to give such discharges or releases as the Lender may deem
appropriate and (v) to complete any blanks contained in any instruments of
transfer or assignment appended to or delivered with the certificates
representing the Securities;
all without notice and without liability except to account for any property
actually received by the Lender.
The Borrower hereby ratifies all that said attorney shall lawfully do or cause
to be done within the scope of the power of attorney granted hereunder. This
power of attorney is a power coupled with an interest and shall be irrevocable.
The powers conferred on the Lender hereunder are solely to protect its
interests in the Collateral and shall not impose any duty upon it to exercise
any such powers.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Valid Issuance, etc. The Borrower and the Lender each represent,
warrant and agree that the Securities have been duly authorized, validly issued
and are validly outstanding, and were not issued in violation of the preemptive
rights of any person or entity or of any agreement or any federal or state law
by which the Borrower or the Lender is bound.
3.2 No Material Misstatements. No information, exhibit or report furnished
by the Borrower to the Lender in connection with the Note or this Stock Pledge
and Security Agreement contained or contains any material misstatement of fact
or omitted to state a material fact or any fact necessary to make the
statements contained therein or herein not misleading.
3.3 Ownership and Liens. The Borrower represents, warrants and agrees
that, except for the security interest of the Lender, he owns (and at the time
of transfer or delivery of the Collateral to the Lender owned or will own) good
and indefeasible title to the Collateral free and clear of any other security
interests, liens, adverse claims or options; the Borrower has (and at the time
of transfer or delivery of the Collateral to the Lender had or will
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have) full right, power and authority to convey, assign, transfer and deliver
the Collateral to the Lender in the manner provided herein.
ARTICLE IV
COVENANTS AND AGREEMENTS
4.1 Further Assurances. The Borrower covenants and agrees that he will
sign, execute, deliver and file, alone or with the Lender, any financing
statement, security agreements or other documents or procure any document as
may be reasonably requested by the Lender, from time to time, to confirm,
perfect and preserve the security interest in the Collateral created and
intended to be created hereby. The Borrower will do all such additional and
further acts, things, deeds, give such assurances and execute such instruments
as the Lender reasonably requires to vest more completely in and assure to the
Lender its rights in and to the Collateral under this Stock Pledge and Security
Agreement.
4.2 Prohibited Liens and Filings. The Borrower covenants and agrees that
he will not pledge, mortgage or otherwise encumber, create or suffer a security
interest to exist in any of the Collateral other than in favor of the Lender
and that he will not file or permit to be filed any financing statement or
other security instrument to exist in any of the Collateral other than in favor
of the Lender.
ARTICLE V
RIGHTS AND REMEDIES
5.1 Events of Default. The term "Event of Default" shall mean the
occurrence of any of the following events:
(a) The failure of the Borrower to pay the indebtedness evidenced
by the Note or any of the Obligations in accordance with its or their
respective terms;
(b) The Borrower's default in punctual performance of any of the
Obligations, or any of the covenants, agreements, terms or provisions contained
herein or in the Note hereby secured;
(c) Any warranty, covenant or representation made herein by the
Borrower moves to be false in any material respect when so made;
(d) Consent by the Borrower to the appointment of a receiver or
liquidator for himself or for a substantial portion of his assets; or
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(e) The assumption of jurisdiction, custody or control of any
assets of the Borrower under the provision of any law, rule or regulation
pertaining to bankruptcy, insolvency, reorganization, or other provision
pertaining to the protection or enforcement of creditors' rights, if the
Borrower has not been fully restored to control of such assets within thirty
(30) days following such assumption.
5.2 Remedies Upon Default. At the option of the Lender and without
necessity of demand or notice, including, without limitation, notice of intent
to accelerate and notice of acceleration, all or any part of the Obligations
shall immediately become due and payable and/or any Obligation of the Lender
for further financial accommodation shall terminate upon the occurrence of an
Event of Default. If all or any part of the Obligations shall become due and
payable, the Lender may then, or at any time thereafter, apply, set-off,
collect, sell in one or more sales or otherwise dispose of, that portion of the
Collateral that has a fair market value (as determined by the closing price per
share of such Collateral on the New York Stock Exchange on the date of the
Event of Default) equal to the amount of indebtedness the Borrower has failed
to pay, in accordance with the terms of the Obligations and in its then
existing form or condition or following any commercially reasonable preparation
or processing, in such order as the Lender may elect. All demands, notices and
advertisements, and the presentment of property at sale, are hereby waived. If,
notwithstanding the foregoing provisions, any applicable provision of the
Uniform Commercial Code or other law requires the Lender to give reasonable
notice of any such sale or disposition or other action, ten (10) days' prior
written notice shall constitute reasonable notice.
5.3 Voting Rights, Dividends, Etc.
(a) The Borrower shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Collateral or any part thereof for
any purpose not inconsistent with the terms of this Stock Pledge and Security
Agreement.
(b) Subject to the provisions of Section 1.1(a) of this Stock Pledge
and Security Agreement, the Borrower shall be entitled to receive and retain
any and all dividends paid in respect of the Collateral.
(c) The Lender shall execute and deliver (or cause to be executed and
delivered) to the Borrower all such notices, proxies and other instruments as
he may reasonably request for the purpose of enabling the exercise of the
voting and other rights that he is entitled to exercise pursuant to Subsection
(a) above, and to receive the dividends which he is authorized to receive and
retain pursuant to Subsection (b) above.
5.4 Release of Collateral.
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(a) Full Release. Upon the payment in full of all amounts owing
from the Borrower to the Lender pursuant to the Obligations, either at the
Note's maturity or otherwise, the Lender shall immediately release and
discharge the Borrower from the Note and any other Obligation and shall release
the lien on and security interest in all of the Collateral. Thereafter, any of
the Collateral previously delivered to the Lender for its possession shall be
delivered and transferred to the Borrower's possession, and the Lender shall
make any and all such filings, including, without limitation, any releases of
financing statements, and shall execute any and all such instruments as
necessary or appropriate to effectuate any such release and discharge of the
Borrower.
(b) Partial Release Prior to Maturity. Upon the partial
prepayment by the Borrower of any indebtedness evidenced by the Note, only that
portion of the Securities that is equal to the proportion of the principal
amount of the Note being paid shall be released and transferred and delivered
to the Borrower as described in Subsection (a) above of this Section 5.4.
5.5 Limited Recourse Liability.
Notwithstanding anything contained herein or in the Note to the
contrary, in the event of any default in the payment of the Note or default in
the performance of this stock Pledge and Security Agreement, the Borrower, his
principals, their heirs, legal representatives and any permitted successors and
assigns, shall only be liable for the payment of not more than fifty-three
thousand three hundred and four dollars ($53,304.00) of the sums due under the
Note or under the liens securing payment hereof (including, but not limited to,
reasonable attorneys' fees), any amounts outstanding and owing on the Note in
excess of fifty-three thousand three hundred and four dollars ($53,304.00) may
be satisfied only out of the Collateral. Accordingly, the Lender shall have as
its sole recourse and remedy for the repayment of any such amounts owing over
fifty-three thousand three hundred and four dollars ($53,304.00), the right to
foreclose the liens on the Collateral pursuant to this Stock Pledge and
Security Agreement or otherwise to satisfy the payment of any and all such
amounts, then or thereafter owing hereon or upon the liens on the Collateral
securing the payment hereof, and the Lender shall have no right to seek and/or
obtain a judgment against the Borrower, his principals, their heirs, legal
representatives and any permitted successors or assigns, for a deficiency, if
any, in excess of fifty-three thousand three hundred and four dollars
($53,304.00). This Section 5.5 paragraph shall not in any manner limit or
restrict the rights of the Lender to foreclose against the Collateral under
this Stock Pledge and Security Agreement in the event of failure to make any
payments as set forth or upon any other default under the Note or under this
Stock Pledge and Security Agreement.
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ARTICLE VI
MISCELLANEOUS
6.1 Notices. Any notice or demand to the Borrower under this Stock Pledge
and Security Agreement or in connection with this Stock Pledge and Security
Agreement may be given, and shall conclusively be deemed and considered to have
been given, and received if delivered to the addresses set forth in this Stock
Pledge and Security Agreement or to such other addresses as the parties hereto
may specify to the other parties in writing.
6.2 CHOICE OF LAW. THIS AGREEMENT IS EXECUTED, DELIVERED AND PERFORMABLE
IN THE STATE OF TEXAS, THE LAWS OF WHICH SHALL GOVERN THIS STOCK PLEDGE AND
SECURITY AGREEMENT.
6.3 Amendment and Waiver. This Stock Pledge and Security Agreement may not
be amended nor may any of its terms be waived except in writing duly signed by
the party against whom enforcement of the amendment or waiver is sought.
6.4 Invalidity. If any provision of this Stock Pledge and Security
Agreement is rendered or declared illegal, invalid or unenforceable by reason
of any existing or subsequently enacted legislation or by a judicial decision
that has become final, the Borrower and the Lender shall promptly meet and
negotiate substitute provisions for those rendered illegal, invalid or
unenforceable, but all of the remaining provisions shall remain in full force
and effect, regardless of whether the Borrower and the Lender shall so meet.
6.5 Successors and Assigns. The covenants, representations, warranties and
agreements herein set forth shall be binding upon the Borrower and its
successors and permitted assigns and shall insure to the benefit of the Lender
and its successors and assigns.
EXECUTED as of the date first written hereinabove.
"BORROWER"
______________________________
ROBERT TED ENLOE III
"LENDER"
LIBERTE INVESTORS
By:___________________________
Name: Dr. William S. Banowsky
Title: Chairman of the Board of Trustees
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