<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 THE QUARTERLY PERIOD ENDED MARCH 31, 1995
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) 879-5495
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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X * NO
---- ----
* The registrant's confirmed plan of reorganization did not provide for a
distribution of securities; however, all required documents and reports have
been timely filed by the Registrant both prior to and after confirmation.
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's class of securities as
of May 10, 1995:
Shares of Beneficial Interest, no par - 12,153,658 shares.
<PAGE> 2
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
LIBERTE INVESTORS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheet - March 31, 1995 and June 30, 1994 . . . . . . . . . . . . . . 3
Consolidated Statement of Operations - Quarter and
Nine Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows - Nine Months Ended
March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
LIBERTE INVESTORS AND SUBSIDIARY
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
(Unaudited) (See Note)
------------- ------------
<S> <C> <C>
Assets
Mortgage loans on real estate:
Earning $ 8,114 $ 5,858,648
Nonearning 486,717 272,308
Note receivable - RPI 5,524,906 6,000,000
Foreclosed real estate:
Nonearning 15,624,114 25,207,002
-------------- -------------
21,643,851 37,337,958
Less: Allowance for possible losses 10,657,899 11,709,395
-------------- -------------
10,985,952 25,628,563
Cash and cash equivalents 20,678,369 9,157,640
Restricted cash investments 559,330 623,300
Accrued interest and other receivables 133,262 324,555
Other assets 472,107 581,919
-------------- -------------
$ 32,829,020 $ 36,315,977
============== =============
- -------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Liabilities
Accrued management fees $ 16,963 $ 19,281
Accrued liabilities 1,079,562 1,382,751
-------------- -------------
1,096,525 1,402,032
Shareholders' Equity
Shares of Beneficial Interest, no par value,
unlimited authorization:
12,423,208 issued and 12,153,658 outstanding
(net of 269,550 shares held in treasury)
at March 31, 1995 and 12,423,208 issued
and outstanding at June 30, 1994 31,732,495 34,913,945
-------------- -------------
$ 32,829,020 $ 36,315,977
============== =============
</TABLE>
NOTE: The balance sheet at June 30, 1994, has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
3
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CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
----------------------------- ------------------------------
1995 1994 1995 1994
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Income
Interest on receivables $ 125,381 $ 1,514,118 $ 525,828 $ 5,412,178
Temporary investment interest 303,232 39,385 586,575 126,892
Consulting fees -- -- 587,500 --
Foreclosed real estate and other 7,110 1,232,519 20,820 3,980,057
-------------- -------------- ------------- ---------------
435,723 2,786,022 1,720,723 9,519,127
-------------- -------------- ------------- ---------------
Expenses
Interest -- 1,143,500 -- 7,600,318
Provision for possible losses 1,000,000 2,975,000 3,192,000 3,175,000
General and administrative 257,049 550,019 820,060 2,092,528
Management fees 26,895 544,095 155,856 1,737,524
Legal and audit 23,000 120,000 52,754 705,000
Trustees' fees and expenses 22,215 85,088 44,115 229,980
Foreclosed real estate 37,329 754,390 223,693 2,329,078
Debt restructure -- -- -- 2,132,902
-------------- -------------- ------------ ---------------
1,366,488 6,172,092 4,488,478 20,002,330
-------------- -------------- ------------ ---------------
Net loss before reorganization
items (930,765) (3,386,070) (2,767,755) (10,483,203)
Reorganization items:
Professional fees -- (4,174,211) -- (5,483,036)
Interest earned on accumulated
cash resulting from
Chapter 11 proceedings -- 225,688 -- 271,830
-------------- -------------- ------------- ---------------
-- (3,948,523) -- (5,211,206)
-------------- -------------- ------------- ---------------
Net loss $ (930,765) $ (7,334,593) $ (2,767,755) $ (15,694,409)
============== ============== ============= ===============
Net loss per Share of
Beneficial Interest
Loss before reorganization
items $ (.07) $ (.27) $ (.22) $ (.86)
Reorganization items -- (.32) -- (.43)
-------------- -------------- ------------ ---------------
Net loss $ (.07) $ (.59) $ (.22) $ (1.29)
============== ============== ============ ===============
Weighted average number of
Shares of Beneficial Interest 12,288,433 12,423,208 12,378,939 12,155,142
Cash dividends declared
per share -- -- -- --
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------
1995 1994
------------ -------------
<S> <C> <C>
Operating activities:
Net loss before reorganization items $ (2,767,755) $ (10,483,203)
Noncash expenses and revenues included in net loss:
Provision for possible losses 3,192,000 3,175,000
Net change in other receivables, assets and liabilities (83,849) 7,351,609
-------------- --------------
Net cash provided by operating activities
before reorganization items 340,396 43,406
-------------- --------------
Interest earned on accumulated cash resulting
from Chapter 11 proceedings -- 271,830
Professional fees -- (894,588)
-------------- --------------
Net cash used by reorganization items -- (622,758)
-------------- --------------
Net cash provided (used) by operating activities 340,396 (579,352)
-------------- --------------
Investing activities:
Collections on mortgage loans 1,343,510 26,940,224
Collections on RPI note receivable 475,094 --
Advances on mortgage loans (306,949) (314,387)
Expenditures on foreclosed real estate (186,865) (2,012,645)
Sales and basis reductions of foreclosed real estate 10,195,898 12,466,174
Net sales (purchases) of restricted cash investments 63,970 (28,874,372)
-------------- --------------
Net cash provided by investing activities 11,584,658 8,204,994
-------------- --------------
Financing activities:
Purchase of treasury stock (404,325) --
Decrease in notes payable -- (4,597,411)
-------------- --------------
Net cash used by financing activities (404,325) (4,597,411)
-------------- --------------
Net increase in unrestricted cash and cash equivalents 11,520,729 3,028,231
Unrestricted cash and cash equivalents at beginning of period 9,157,640 2,428,902
-------------- --------------
Unrestricted cash and cash equivalents at end of period $ 20,678,369 $ 5,457,133
============== ==============
Schedule of noncash investing and financing activities:
Transfer of mortgage loans to foreclosed real estate $ 4,792,781 $ 13,729,234
Charge-offs to allowance for possible losses, net $ 4,243,496 $ 15,069,017
Sales of foreclosed real estate financed by mortgage loans $ 138,400 $ 3,888,112
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
MARCH 31, 1995
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 nine months ended March 31, 1995, are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 1995. 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, 1994, and "Item 5. Other Information" included
herein.
The accompanying financial statements include the accounts of Liberte Investors
and Liberte Corp., a wholly-owned subsidiary which is currently inactive. All
intercompany balances and transactions have been eliminated. As used herein,
the "Trust" refers to Liberte Investors and its subsidiary.
On October 25, 1993, the Trust filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. On November 2, 1993,
the Trust filed with the Bankruptcy Court a disclosure statement and related
plan of reorganization. An order was entered by the Bankruptcy Court
confirming a modified plan of reorganization for the Trust on January 24, 1994.
On April 7, 1994, the Trust emerged from bankruptcy. Pursuant to the plan of
reorganization, certain assets and liabilities were transferred to Resurgence
Properties Inc. ("RPI") and RPI's common stock was distributed to the holders
of the Trust's outstanding subordinated indebtedness in full satisfaction of
such holders' claims against the Trust.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes: The Trust filed its June 30, 1994, Form 10-K and September 30,
1994, Form 10-Q as a real estate investment trust (a "REIT") as defined in the
Internal Revenue Code. Disclosures were made in those filings that there was
some uncertainty as to whether the Trust qualified as a REIT for its fiscal
years ended June 30, 1992, 1993, and 1994. In connection with the preparation
of its fiscal 1994 tax return, the Trust concluded that it no longer qualified
as a REIT, effective the beginning of fiscal 1994 (July 1, 1993). Accordingly
the Trust will be subject to federal income tax on its taxable income. The
Trust incurred a taxable loss in fiscal 1994 and in the quarter and nine months
ended March 31, 1995; therefore, no provision for income taxes is necessary in
the financial statements for those periods. With the change in status to a
taxable entity, the Trust adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" (SFAS 109). Since there was no financial
impact on the year ended June 30, 1994, and the quarters ended September 30,
1994, and December 31, 1994, neither an amended Form 10-K nor Form 10-Q,
respectively, have been filed to reflect the adoption of SFAS 109.
Reclassifications: Certain amounts in previously issued financial statements
have been reclassified to conform to the March 31, 1995, presentation.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Operations resulted in a loss of $930,765 for the quarter ended March 31, 1995,
compared to a loss of $7,334,593 for the same period in fiscal 1994.
Operations for the nine months ended March 31, 1995, resulted in a loss of
$2,767,755 compared to a loss of $15,694,409 for the same period in fiscal
1994. The substantial reduction in most income and expense accounts was
primarily due to the transfer of assets and liabilities to RPI upon the Trust's
emergence from bankruptcy on April 7, 1994.
Interest income from mortgage loan receivables decreased from $1.5 million in
the third quarter of fiscal 1994 to $12,000 in the third quarter of fiscal 1995
as a result of a decrease in average outstanding balance of earning loans.
Average earning loans decreased from $79.5 million with a yield of 7.72% in the
third quarter of fiscal 1994 to $387,000 in the third quarter of fiscal 1995.
Interest income from mortgage loan receivables decreased from $5.4 million for
the first nine months of fiscal 1994 to $186,000 for the first nine months of
fiscal 1995 as a result of a decrease in the average outstanding balance of
earning loans. Average earning loans decreased from $92.3 million with a yield
of 7.81% for the first nine months of fiscal 1994 to $2.6 million with a yield
of 9.36% for the first nine months of fiscal 1995.
Also included in interest on receivables in the quarter and the nine months
ended March 31, 1995, was $113,000 and $330,000, respectively, of interest
income on the note receivable from RPI. The average balance of the RPI note
was $5.6 million with a yield of 8.22% for the third quarter of fiscal 1995,
and $5.7 million with a yield of 7.65% for the first nine months of fiscal
1995.
Average nonearning loans for the third quarter of fiscal 1995 totaled $286,000
compared to $18.3 million for the comparable period in fiscal 1994. Assuming
the yield on these loans would have been the same as the yield on earning loans
had they been on earning status, interest income would have been $9,000 higher
in the third quarter of fiscal 1995 and $353,000 higher in the third quarter of
fiscal 1994. Average nonearning loans for the first nine months of fiscal 1995
totaled $218,000 compared to $25.1 million for the comparable period of fiscal
1994. Assuming that the yield on these loans would have been the same as the
yield on earning loans had they been on earning status, interest income would
have been $15,000 higher for the first nine months of fiscal 1995 and
$1,470,000 higher for the first nine months of fiscal 1994.
The Trust received a discounted payoff of $500,000 in consideration for the
termination of the consulting agreement between the Trust and RPI. Although
this transaction had no affect on the quarter, the results from operations for
the nine months ended March 31, 1995, were significantly affected.
Income on foreclosed real estate decreased in the third quarter and the first
nine months of fiscal 1995 as a result of all of the Trust's earning real
estate being transferred to RPI upon emergence from bankruptcy.
The decrease in interest expense is due to the Trust being debt free upon its
emergence from bankruptcy on April 7, 1994, and March 31, 1995.
A provision for possible losses of $1,000,000 was made in the third quarter of
fiscal 1995 compared to a provision of $2,975,000 in the third quarter of
fiscal 1994. The allowance for possible losses was $10.7 million at March 31,
1995, compared to $11.7 million at June 30, 1994. While the Trust
7
<PAGE> 8
believes the allowance for possible losses is adequate at March 31, 1995,
management will continue to review the portfolio using current information to
derive estimates and assumptions used in the determination of the allowance for
loan losses and the valuation of the real estate acquired in connection with
foreclosures. These estimates and assumptions are susceptible to significant
changes in the market conditions upon which they are primarily based.
The provision for possible losses for the quarter ended March 31, 1995,
includes a reversal of $1.1 million from the reserve on the Trust's loan
portfolio which has been substantially reduced. The Trust had a similar
reversal of $1.4 million in the third quarter of fiscal 1994 in connection with
the transfer of approximately 85% of the mortgage loan portfolio to RPI upon
emergence from bankruptcy.
The provision for possible losses on foreclosed real estate was $2.1 million in
the third quarter of fiscal 1995 compared to $4.4 million in the third quarter
of fiscal 1994. The provision for possible losses on foreclosed real estate in
the third quarter of fiscal 1995 includes adjustments to carrying value on
assets comprised of single family lots in California and land in San Antonio,
Texas. The Trust continues to market these assets for sale and believes the
adjustments to carrying value reflect the fair market value at March 31, 1995.
8
<PAGE> 9
The following is a summary of transactions affecting the Trust's allowance for
possible losses for the nine months ended March 31, 1995, compared to the nine
months ended March 31, 1994.
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1995
---------------------------------------------------
Mortgage Foreclosed
Loans Real Estate Total
------------- -------------- -------------
<S> <C> <C> <C>
Balance July 1, 1994 $ 1,562,921 $ 10,146,474 $ 11,709,395
Provision for possible losses -- 510,000 510,000
Amounts charged off, net of recoveries 45,573 (1,506,316) (1,460,743)
-------------- -------------- -------------
Balance September 30, 1994 1,608,494 9,150,158 10,758,652
Provision for possible losses -- 1,682,000 1,682,000
Amounts charged off, net of recoveries (417,903) (152,615) (570,518)
-------------- -------------- -------------
Balance December 31, 1994 1,190,591 10,679,543 11,870,134
Provision for possible losses (1,148,960) 2,148,960 1,000,000
Amounts charged off, net of recoveries 150,630 (2,362,865) (2,212,235)
-------------- -------------- -------------
Balance March 31, 1995 $ 192,261 $ 10,465,638 $ 10,657,899
============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1994
----------------------------------------------------
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
Provision for possible losses (1,408,000) 4,383,000 2,975,000
Amounts charged off, net of recoveries (5,040,794) (2,715,647) (7,756,441)
-------------- -------------- -------------
Balance March 31, 1994 $ 9,999,553 $ 32,045,247 $ 42,044,800
============== ============== =============
</TABLE>
General and administrative expenses were substantially reduced for the quarter
and the nine months ended March 31, 1995, as compared to the same periods one
year ago. Expense reductions during fiscal 1995 are primarily a result of (i)
substantial reductions in the Trust's directors' and officers' liability
insurance premiums upon its emergence from bankruptcy on April 7, 1994, (ii)
substantial reductions in the Trust's normal cost of insurance during fiscal
1995 as compared to the cost of insurance during the period that preceded the
Trust's Chapter 11 bankruptcy, and (iii) lower employee compensation expenses
as compared to fiscal 1994.
Management fees were lower in the third quarter of fiscal 1995 than in the
comparable period in fiscal 1994 because invested assets, upon which the
management fees are based, were lower in the third quarter of fiscal 1995 (see
Item 5. Other Information). The reduction in legal fees and foreclosed real
9
<PAGE> 10
estate expenses was a result of the transfer of a substantial amount of
foreclosed real estate to RPI upon emergence from bankruptcy and continued
liquidation of loans and real estate since emerging from bankruptcy.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its emergence from bankruptcy, the Trust's principal funding
requirements were operating expenses, interest expense and the repayment of its
indebtedness. Since emergence from bankruptcy, the Trust is debt free and its
principal funding requirements are operating expenses. The Trust's primary
sources of funding operating expenses are its collection of principal and
interest on mortgage loans and the note receivable from RPI, and proceeds from
the sale of foreclosed real estate.
At March 31, 1994, the Trust had $83.1 million of senior indebtedness and $100
million of 10 1/2% subordinated notes outstanding. The $100 million of
subordinated notes was satisfied in full upon the Trust's emergence from
bankruptcy on April 7, 1994, and the Trust was released from liability on the
senior indebtedness which was assumed by RPI.
10
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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"). 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 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 a modified plan of
reorganization for the Trust (the "Plan"). On April 7, 1994, the Trust emerged
from bankruptcy. Pursuant to the Plan, certain assets and liabilities were
transferred to RPI and RPI's common stock was distributed to the holders of the
Trust's outstanding subordinated indebtedness in full satisfaction of such
holders' claims against the Trust.
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<PAGE> 12
ITEM 5. OTHER INFORMATION
REIT STATUS
Since its inception the Trust has filed its reports as if it qualified for
taxation as a real estate investment trust (a "REIT") under the Internal
Revenue Code (the "Code"). 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. In its June 30, 1994, and
September 30, 1994, filings, the Trust disclosed that there was some
uncertainty as to whether it qualified as a REIT for its fiscal years ended
June 30, 1992, 1993, and 1994. In connection with the preparation of its
fiscal 1994 tax return, the Trust concluded that, at June 30, 1994, it did not
pass the asset test required under the Code. As a result, the Trust no longer
qualified as a REIT for federal income tax purposes effective the beginning of
fiscal 1994 (July 1, 1993), and it will be subject to federal income tax on its
taxable income. The Trust incurred a taxable loss in fiscal 1994 and in the
quarter and nine months ended March 31, 1995; therefore, no provision for
income taxes is necessary in the financial statements for those periods. In
addition, the Trust has net operating loss carryforwards for federal income tax
purposes at March 31, 1995, which are available to offset future taxable income
of the Trust. However, if the Trust were to undergo a 50 percentage point
ownership change as described in Section 382 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 it
could incur substantial liability for federal income taxes in the event of an
ownership change.
In addition, generally an entity can qualify as a REIT only if 95% 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 ended 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. Since the Trust
incurred a taxable loss in the 1992 Year and 1993 Year, it will not have a tax
liability for those years if it is subsequently determined that it did not
qualify as a REIT in those years.
Commencing July 1, 1993, funds available for distribution to shareholders will
be reduced by the amount of any tax liability payable by the Trust to federal
tax authorities. Such distributions, if any, will not be deductible by the
Trust in computing its taxable income but will 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. (No distributions were
paid in fiscal 1994 or in the nine months ended March 31, 1995.) In addition,
unless entitled to relief under specific statutory provisions, the Trust will
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.
TRANSFER RESTRICTIONS
In order to preserve the Trust's ability to qualify for REIT status under the
Code, there are certain restrictions on the transfer of Shares of Beneficial
Interest of the Trust (the "Shares"), with such exceptions and pursuant to such
procedures as are described in the Declaration of Trust. For the Trust to
qualify as a REIT, not more than 50% in value of its outstanding Shares may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a taxable year. The
Shares must be beneficially owned by 100 or more persons during at least 335
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<PAGE> 13
days of a taxable year of 12 months or during a proportionate part of a shorter
taxable year, and certain other requirements as to assets, distributions and
percentages of the Trust's gross income from particular activities must be met.
The Declaration of Trust contains provisions prohibiting the ownership,
directly or indirectly, by five or fewer individuals of more than 50% in value
of the outstanding Shares during the last half of the Trust's taxable year.
The Trust intends to maintain these restrictions so that it could requalify as
a REIT after its tax year ended June 30, 1998.
In order to avoid limitations on the use of the Trust's tax attributes, the
Declaration of Trust generally prohibits the transfer of Shares to any Person
who is a holder of 5% or more of the Shares or to any Person who would become a
holder of 5% or more of the Shares after giving effect to the transfer,
directly or by attribution. "Person" for this purpose is defined broadly to
mean any individual, corporation, estate, debtor, association, company,
partnership, joint venture or similar organization.
If a transfer violates this prohibition, either (i) the Shares that were
purported to be transferred in excess of the 5% limit will be deemed to remain
the property of the initial transferor, or (ii) upon election by the Trust,
such Shares shall be transferred to an agent designated by the Trust, who will
sell them in an arm's-length transaction, the proceeds of such sale to be
allocated to the purported transferee up to (x) the amount paid by such
transferee for such Shares and (y) where the purported transfer was by gift
inheritance or any similar transfer, the fair market value of such Shares at
the time of the purported transfer.
If the purported transferee has resold the Shares to an unrelated party in an
arm's-length transaction, the purported transferee will be deemed to have sold
the Shares as agent for the initial transferor, and will be required to
transfer the proceeds of such sale to the agent designated by the Trust, except
to the extent that the agent grants written permission to the purported
transferee to retain a portion of the proceeds up to the amount that would have
been payable to such transferee had the Shares been sold by the agent rather
than by the purported transferee.
The Declaration of Trust further provides that the Trust may require, as a
condition to the registration of the transfer of any Shares, that the proposed
transferee furnish to the Trust all information reasonably requested by the
Trust with respect to the proposed transferee's direct or indirect ownership
interests in Shares.
The Board of Trustees of the Trust will have the power to preapprove transfers
that would otherwise be prohibited under the foregoing provisions.
All certificates evidencing ownership of Shares will bear a conspicuous legend
referencing the transfer restrictions.
TERMINATION OF MANAGEMENT AGREEMENT
The Trust terminated its management agreement with Lomas Management, Inc.
("LMI") at February 28, 1995, and is in the process of transferring all
operating and accounting responsibilities to the Trust's employees. Any
remaining property management requirements on assets owned with ST Lending,
Inc. ("STL") are provided for in the asset disposition agreement described
below.
Effective February 28, 1995, the Trust entered into an "asset disposition
agreement" with STL whereby the Trust and STL exchanged partial ownership
positions in a pool of assets. As a result, at March 31, 1995, the Trust owned
100% of its foreclosed real estate with the exception of one asset that remains
80% owned by the Trust.
13
<PAGE> 14
The Trust also owns approximately 50% of a mortgage loan originated to
construct houses in California. The Trust had no further funding obligation
under this note at March 31, 1995, and expects to receive sale proceeds from
the completed houses in sufficient amounts to retire this note during the next
several months.
A group of approximately 18 receivables remains 80% owned by the Trust and 20%
owned by STL. The asset disposition agreement stipulates that the Trust will
pay STL 10% of the gross proceeds received from this pool of loans for one year
in return for STL's asset administration, at which time STL will transfer its
20% ownership in any remaining assets to the Trust.
UNSOLICITED ACQUISITION PROPOSAL
As the Trust has previously announced, it has received an unsolicited proposal
pursuant to which the parties making the proposal would, subject to due
diligence review on their behalf, tender to purchase up to 45% of the currently
outstanding Shares at a price of $2.30 per share, obtain the right to nominate
a majority of the members of the Board of Trustees, appoint a new Chief
Executive Office of the Trust, and acquire working control of the Trust with
the intention of having the Trust purchase operating companies and distressed
undervalued assets. Pursuant to the Trust's Declaration of Trust, the
acquisition of more than 5% of its Shares pursuant to the proposed tender offer
would require approval of its Board of Trustees. The Board has formed a
Special Committee of the Board of Trustees to consider the proposal and other
alternatives. The Special Committee has engaged an investment banking firm to
act as financial advisor to the Special Committee and has retained special
legal counsel to the Special Committee.
Under the Plan and business plan approved by the shareholders of the Trust and
the United States Bankruptcy Court, the Trust was to resume mortgage lending as
it liquidated its portfolio of real estate investments. The Trust has received
a commitment from a commercial bank for a senior secured line of credit in the
amount of $40,000,000 to be used in its mortgage lending activity which
commitment provides for a potential increase of up to $60,000,000 through
syndication to other banks.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedules (submitted to the SEC for its
information).
(b) Reports on Form 8-K:
None.
15
<PAGE> 16
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: May 15, 1995 By: /s/ TED ENLOE
------------------ --------------------------------------
Ted Enloe
President and Chief Executive Officer
Date: May 15, 1995 By: /s/ BRADLEY S. BUTTERMORE
------------------ --------------------------------------
Bradley S. Buttermore
Senior Vice President and Treasurer
16
<PAGE> 17
LIBERTE INVESTORS
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Numbered Pages
- ----------- --------------
<S> <C> <C>
(27) Financial Data Schedules (submitted to the SEC for
its information)
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 21,237,699
<SECURITIES> 0
<RECEIVABLES> 6,625,106
<ALLOWANCES> (10,657,899)
<INVENTORY> 15,624,114
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,829,020
<CURRENT-LIABILITIES> 1,045,525
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 31,732,495
<TOTAL-LIABILITY-AND-EQUITY> 32,829,020
<SALES> 0
<TOTAL-REVENUES> 435,723
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 366,488
<LOSS-PROVISION> 1,000,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (930,765)
<INCOME-TAX> 0
<INCOME-CONTINUING> (930,765)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (930,765)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
