<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 DECEMBER 31, 1994
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 February 10, 1995: Shares of Beneficial Interest, no par - 12,423,208
shares.
<PAGE> 2
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1994
LIBERTE INVESTORS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheet - December 31, 1994 and June 30, 1994... 3
Consolidated Statement of Operations - Quarter and
Six Months Ended December 31, 1994 and 1993 ....................... 4
Consolidated Statement of Cash Flows - Six Months Ended
December 31, 1994 and 1993 ................................ 5
Notes to Consolidated Financial Statements ........................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................... 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................. 11
ITEM 5. OTHER INFORMATION ................................................. 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 14
SIGNATURES ........................................................................ 15
INDEX TO EXHIBITS ................................................................. 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
LIBERTE INVESTORS AND SUBSIDIARY
<TABLE>
<CAPTION>
December 31 June 30
1994 1994
(Unaudited) (See Note)
----------- -----------
<S> <C> <C>
Assets
Mortgage loans on real estate:
Earning $ 831,394 $ 5,858,648
Nonearning 154,400 272,308
Note receivable - RPI 5,643,679 6,000,000
Foreclosed real estate:
Nonearning 18,169,451 25,207,002
----------- -----------
24,798,924 37,337,958
Less: Allowance for possible losses 11,870,134 11,709,395
----------- -----------
12,928,790 25,628,563
Cash and cash equivalents 20,025,625 9,157,640
Restricted cash investments 566,745 623,300
Accrued interest and other receivables 267,790 324,555
Other assets 490,366 581,919
----------- -----------
$34,279,316 $36,315,977
=========== ===========
Liabilities and Shareholders' Equity
Liabilities
Accrued management fees $ 15,348 $ 19,281
Accrued liabilities 1,196,382 1,382,751
----------- -----------
1,211,730 1,402,032
Shareholders' Equity
Shares of Beneficial Interest, no par value,
unlimited authorization:
12,423,208 issued and outstanding at
December 31, 1994 and June 30, 1994 33,067,586 34,913,945
----------- -----------
$34,279,316 $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
<PAGE> 4
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
December 31 December 31
---------------------------- ----------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income
Interest $ 156,119 $ 1,822,714 $ 400,447 $ 3,898,060
Temporary investment interest 168,163 43,494 283,343 87,507
Foreclosed real estate and other -- 1,380,612 13,710 2,747,538
Consulting fees 500,000 -- 587,500 --
------------ ------------ ------------ ------------
824,282 3,246,820 1,285,000 6,733,105
------------ ------------ ------------ ------------
Expenses
Interest -- 1,989,677 -- 6,456,818
Provision for possible losses 1,682,000 -- 2,192,000 200,000
Management fees 58,340 584,254 128,961 1,193,429
Legal and audit 8,000 220,000 29,754 585,000
Trustees' fees and expenses 8,100 69,499 21,900 144,892
Foreclosed real estate 88,354 796,104 186,364 1,574,688
Debt restructure -- 572,504 -- 2,132,902
Other 288,344 657,472 563,011 1,542,509
------------ ------------ ------------ ------------
2,133,138 4,889,510 3,121,990 13,830,238
------------ ------------ ------------ ------------
Net loss before reorganization
items (1,308,856) (1,642,690) (1,836,990) (7,097,133)
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 $ (1,308,856) $ (2,905,373) $ (1,836,990) $ (8,359,816)
============ ============ ============ ============
Net loss per Share of
Beneficial Interest
Loss before reorganization items $(.11) $(.13) $(.15) $(.59)
Reorganization items -- (.11) -- (.11)
----- ----- ----- -----
Net loss $(.11) $(.24) $(.15) $(.70)
===== ===== ===== =====
Weighted average number of
Shares of Beneficial Interest 12,423,208 12,274,838 12,423,208 12,024,023
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>
Six Months Ended
December 31
-----------------------------
1994 1993
------------ --------------
<S> <C> <C>
Operating activities:
Net loss $ (1,836,990) $ (7,097,133)
Noncash expenses and revenues included in net loss:
Provision for possible losses 2,192,000 200,000
Net change in other receivables, assets and
liabilities (109,422) 6,060,698
------------ ------------
Net cash provided (used) by operating activities
before reorganization items 245,588 (836,435)
------------ ------------
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 provided (used) by operating activities 245,588 (883,362)
------------ ------------
Investing activities:
Collections on mortgage loans 550,995 20,399,883
Collections on RPI note receivable 356,321 --
Advances on mortgage loans (141,969) (260,364)
Expenditures on foreclosed real estate (109,309) (1,174,741)
Sales and basis reductions on foreclosed real estate 9,909,804 8,001,643
Net sales (purchases) of restricted cash investments 56,555 (18,702,267)
------------ ------------
Net cash provided by investing activities 10,622,397 8,264,154
------------ ------------
Financing activities:
Decrease in notes payable -- (4,597,411)
------------ ------------
Net cash used by financing activities -- (4,597,411)
------------ ------------
Net increase in unrestricted cash and cash equivalents 10,867,985 2,783,381
Unrestricted cash and cash equivalents at beginning
of period 9,157,640 2,428,902
------------ ------------
Unrestricted cash and cash equivalents at end
of period $ 20,025,625 $ 5,212,283
============ ============
Schedule of noncash investing and financing activities:
Transfer of mortgage loans to foreclosed real estate $ 4,792,781 $ 12,433,375
Charge-offs to allowance for possible losses, net $ 2,031,261 $ 7,312,576
Sales of foreclosed real estate financed by
mortgage loans $ 138,400 $ 3,652,480
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
LIBERTE INVESTORS AND SUBSIDIARY
DECEMBER 31, 1994
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, 1994 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 six months
ended December 31, 1994; 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 quarter ended September 30,
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 December 31, 1994 presentation.
6
<PAGE> 7
NOTE C -- INCOME TAXES
The Trust no longer qualifies as a REIT with the change in status to a taxable
entity retroactive to July 1, 1993. The effect of adopting SFAS 109 was not
material to the financial position at December 31, 1994 and June 30, 1994, or
the results of operations for the quarter and six months ended December 31,
1994 and 1993, or the fiscal year ended June 30, 1994.
Significant components of the Trust's deferred tax assets at July 1, 1993
consisted of net operating loss carryforwards ($133,846,000), financial
statement loss reserves ($53,939,000) and other items totaling ($15,109,000),
all of which were completely offset by a valuation allowance. The Trust's
deferred tax assets at June 30, 1994 and December 31, 1994 are estimated to be
in excess of $210 million, and are completely offset by a valuation allowance.
(The Trust has no material deferred tax liabilities.) At December 31, 1994,
the Trust had, for federal tax purposes, net operating loss carryforwards
estimated to be in excess of $200 million, which expire at various times
between the years 2005 and 2009.
The Trust had no income tax expense (benefit) for the quarter and six months
ended December 31, 1994 and 1993. The principal differences between the US
Federal income tax rate and the Trust's effective income tax rate for all
periods presented are primarily due to the tax effect of unrecognized
operating losses and deductions.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operations resulted in a loss of $1,308,856 for the quarter ended December 31,
1994, compared to a loss of $2,905,373 for the same period in fiscal 1994.
Operations for the six months ended December 31, 1994 resulted in a loss of
$1,836,990 compared to a loss of $8,359,816 for the same period in fiscal 1994.
Contributing to the smaller loss for both the quarter and six months were
decreases in substantially all expenses and increases in temporary investment
interest and consulting fees, partially offset by a decrease in interest income
and foreclosed real estate income and an increase in the provision for losses.
The changes in income and expense accounts are primarily due to the transfer of
assets and liabilities to RPI upon the Trust' emergence from bankruptcy on
April 7, 1994.
Interest income decreased from $1.8 million in the second quarter of fiscal
1994 to $0.2 million in the second quarter of fiscal 1995. The $1.6 million
decrease was the result of a decrease in average earning loans partially offset
by an increase in yield. Average earning loans decreased from $91.8 million
with a yield of 7.88% in the second quarter of fiscal 1994 to $1.7 million with
a yield of 9.08% in the second quarter of fiscal 1995.
Interest income decreased from $3.9 million for the first six months of fiscal
1994 to $0.4 million for the first six months of fiscal 1995. The $3.5 million
decrease was the result of a decrease in the average earning loans, partially
offset by an increase in yield. Average earning loans decreased from $98.6
million with a yield of 7.84% for the first six months of fiscal 1994 to $3.8
million with a yield of 9.15% for the first six months of fiscal 1995.
Average nonearning loans for the second quarter of fiscal 1995 totaled $103,000
compared to $29.1 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 $2,000 higher
in the second quarter of fiscal 1995 and $573,000 higher in the second quarter
of fiscal 1994. Average nonearning loans for the first six months of fiscal
1995 totaled $185,000 compared to $28.5 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 $8,000 higher for the first six months of fiscal 1995 and $1.1
million higher for the first six months of fiscal 1994. The Trust is
continuing its efforts to reduce nonearning assets and improve the operating
performance of real estate assets.
Also included in interest income in the second quarter and first six months of
fiscal 1995 was $109,000 and $217,000, respectively, of interest income on the
RPI note receivable. The average balance of the RPI loan was $5.8 million with
a yield of 7.48% for the second quarter of fiscal 1995, and $5.8 million with a
yield of 7.38% for the first six months of fiscal 1995.
Income on foreclosed real estate decreased in both the quarter ended and six
months ended December 31, 1994, as a result of all of the Trust's earning real
estate being transferred to RPI upon emergence from bankruptcy. Consulting fee
income for the quarter and six months ended December 31, 1994 includes a
discounted payoff of $500,000 in consideration for the termination of the
consulting agreement between the Trust and RPI; a regular quarterly payment of
$87,500 was also received in the quarter ended September 30, 1994.
8
<PAGE> 9
The trust committed to fund one new investment origination totaling $686,000
during the six months ended December 31, 1994, of which $166,000 had been
advanced as of December 31, 1994.
Interest expense for the second quarter of fiscal 1994 included interest on
average debt outstanding of $183.1 million with an average cost of 4.31%.
Interest expense for the first six months of fiscal 1994 included interest on
average debt outstanding of $183.7 million with an average cost of 6.97%. Upon
emergence from bankruptcy on April 7, 1994, and as of December 31, 1994, the
Trust was debt-free.
The provision for possible losses was $1.7 million in the second quarter of
fiscal 1995 compared to no provision in the second quarter of fiscal 1994. The
allowance for possible losses was $11.9 million at December 31, 1994, compared
to $11.7 million at June 30, 1994 and $46.8 million at December 31, 1993.
While the Trust believes the allowance for possible losses is adequate at
December 31, 1994, management will continue to 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. The estimates and assumptions are susceptible to significant changes
due to changes in the market conditions upon which they are based.
There was no provision for possible losses on mortgage loans in the second
quarter of fiscal 1995 or 1994. The provision for possible losses on
foreclosed real estate was $1.7 million in the second quarter of fiscal 1995
compared to no provision for possible losses on foreclosed real estate in the
second quarter of fiscal 1994. Any loss incurred upon foreclosure of
collateral underlying a loan is charged to the allowance for possible losses on
mortgage loans. The allowance for possible losses on mortgage loans at
December 31, 1994 includes an allocation for the note receivable from RPI.
The following is a summary of transactions affecting the Trust's allowance of
possible losses for the six months ended December 31, 1994, compared to the six
months ended December 31, 1993.
<TABLE>
<CAPTION>
Six Months Ended December 31, 1994
--------------------------------------------
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
============ ============ ============
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Six Months Ended December 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
============ ============ ============
</TABLE>
Management fees were lower in the second 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 second quarter of fiscal 1995
compared to the second quarter of fiscal 1994. The reduction in legal fees on
troubled assets and foreclosed real estate expense was a result of the transfer
of a substantial amount of foreclosed real estate to RPI upon emergence from
bankruptcy. No debt restructure costs were incurred in the second quarter of
fiscal 1995 compared to $600,000 in the second quarter of fiscal 1994.
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.
Amounts to be advanced under existing commitments totaled $520,593 at December
31, 1994.
Debt was reduced by $4,597,000 in the first six months of fiscal 1994. At
December 31, 1993, 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 assumed by RPI.
10
<PAGE> 11
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.
11
<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 six months ended December 31, 1994; 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 December 31, 1994 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 six months ended December 31, 1994.) 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.
12
<PAGE> 13
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, 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 of Beneficial Interest 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
of Beneficial Interest must be beneficially owned by 100 or more persons during
at least 335 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 of Beneficial Interest
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 of Beneficial
Interest to any Person who is a holder of 5% or more of the Shares of
Beneficial Interest or to any Person who would become a holder of 5% or more of
the Shares of Beneficial Interest 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 of Beneficial
Interest 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 of Beneficial Interest 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 of
Beneficial Interest and (y) where the purported transfer was by gift
inheritance or any similar transfer, the fair market value of such Shares of
Beneficial Interest at the time of the purported transfer.
If the purported transferee has resold the Shares of Beneficial Interest to an
unrelated party in an arm's-length transaction, the purported transferee will
be deemed to have sold the Shares of Beneficial Interest 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 of Beneficial Interest 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 of Beneficial
Interest, 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 of Beneficial Interest.
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 of Beneficial Interest will
bear a conspicuous legend referencing the transfer restrictions.
13
<PAGE> 14
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.
14
<PAGE> 15
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: By: /s/ TED ENLOE
----------------- ------------------------------------------
President and Chief Executive Officer
Date: By: /s/ BRADLEY S. BUTTERMORE
----------------- -------------------------------------------
Senior Vice President and Treasurer
15
<PAGE> 16
LIBERTE INVESTORS
INDEX TO EXHIBITS
Sequentially
Exhibit No. Numbered Pages
- ----------- --------------
(27) Financial Data Schedules (submitted to the SEC for
its information)
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 20,592,370
<SECURITIES> 0
<RECEIVABLES> 7,387,629
<ALLOWANCES> (11,870,134)
<INVENTORY> 18,169,451
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,279,316
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 33,067,586
<TOTAL-LIABILITY-AND-EQUITY> 34,279,316
<SALES> 0
<TOTAL-REVENUES> 824,282
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 451,138
<LOSS-PROVISION> 1,682,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,308,856)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,308,856)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,308,856)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
</TABLE>
