-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hxm7wkI0tAd171vsxHxc4b1hXZ0j3q8u32OxyS6ZRsyAE9PpjJHrMe28/KVYWLud i2whnxEELap2fz5frvsU5A== 0000891554-97-000915.txt : 19971001 0000891554-97-000915.hdr.sgml : 19971001 ACCESSION NUMBER: 0000891554-97-000915 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970930 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTE INVESTORS INC CENTRAL INDEX KEY: 0001017907 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 751328153 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12117 FILM NUMBER: 97688061 BUSINESS ADDRESS: STREET 1: 600 N PEARL STREET 2: SUITE 420 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2147208950 MAIL ADDRESS: STREET 1: 600 N PEARL SUITE 420 CITY: DALLAS STATE: TX ZIP: 75201 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30,1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ______ to ______ Commission File Number 1-6802 ---------- Liberte Investors Inc. (Exact name of registrant as specified in its charter) DELAWARE 75-1328153 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Crescent Court, Suite 1365, Dallas, Texas 75201 (Address of principal executive offices) Registrant's telephone number, including area code: (214) 871-5935 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value per share New York Stock Exchange Securities registered pursuant of Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment on this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing price of these shares on the New York Stock Exchange on September 22, 1997 was $39,723,558. For the purposes of this disclosure only, the registrant has assumed that its directors, executive officers and beneficial owners of 5% or more of the registrant's common stock are the affiliates of the registrant. APPLICABLE ONLY TO REGISTRANTS 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 under Chapter 11 of the Bankruptcy Code did not provide for a distribution of securities; however, all required documents and reports have been timely filed by the registrant after confirmation of the plan. APPLICABLE ONLY TO CORPORATE ISSUERS: The registrant had 20,256,097 shares of common stock, $.01 per share par value, outstanding as of September 22, 1997. DOCUMENTS INCORPORATED BY REFERENCE: None LIBERTE INVESTORS INC. FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997 TABLE OF CONTENTS
Page ---- PART I Item 1. Business ................................................................. 3 Item 2. Properties ............................................................... 6 Item 3. Legal Proceedings ........................................................ 6 Item 4. Submission of Matters to a Vote of Security Holders ...................... 6 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters ... 7 Item 6. Selected Financial Data .................................................. 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................... 9 Item 8. Financial Statements and Supplementary Data .............................. 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................................................... 15 PART III Item 10. Directors and Executive Officers of the Company .......................... 16 Item 11. Executive Compensation ................................................... 16 Item 12. Security Ownership of Certain Beneficial Owners and Management ........... 16 Item 13. Certain Relationships and Related Transactions ........................... 16 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......... 18 Signatures ........................................................................ 21 Index to Consolidated Financial Statements ........................................ F-1
2 PART I Item 1. Business Liberte Investors Inc. ("LBI" or the "Company") is a Delaware corporation which was organized in April of 1996 in order to effect the reorganization of Liberte Investors, a Massachusetts business trust (the "Trust") originally created pursuant to a Declaration of Trust dated June 26, 1969, as amended. At a special meeting of the shareholders of the Trust held on August 15, 1996, (the "Special Meeting"), the Trust's shareholders approved a plan of reorganization whereby the Trust contributed its assets to the Company and received all of the Company's outstanding common stock, par value $.01 per share ("Shares" or "Common Stock"). The Trust then distributed to its shareholders in redemption of all outstanding shares of beneficial interest in the Trust (the "Beneficial Shares") the Shares of the Company. The Company assumed all of the Trust's assets and outstanding liabilities and obligations. Thereafter, the Trust was terminated. The principal business activity of the Trust was investing in notes receivable, primarily first mortgage construction notes and first mortgage acquisition and development notes. Over the past several years, however, the Trust progressively curtailed its lending activities and reduced the size of its portfolio of foreclosed real estate in an effort to repay indebtedness. On October 25, 1993, the Trust filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On April 7, 1994, the Trust emerged from bankruptcy pursuant to a plan of reorganization whereby certain assets and liabilities, including remaining senior indebtedness, 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. After the Trust emerged from bankruptcy proceedings, it became a virtually debt-free entity with cash and cash equivalents, real estate mortgage notes receivable, foreclosed real estate, and tax net operating loss ("NOL") carryforwards. Although the bankruptcy plan contemplated that the Trust would continue as a financial services company, the Board of Trustees opted to forego further real estate mortgage lending and purchase or create an operating business in order to realize the value of the NOL carryforwards. Further, the Board of Trustees determined that additional Beneficial Shares could be issued to generate cash to finance an acquisition or startup company without restricting the Trust's NOL carryforward. On January 16, 1996, the Trust entered into a Stock Purchase Agreement (as amended, the "Stock Purchase Agreement") with Hunter's Glen/Ford, Ltd., a Texas limited partnership ("Hunter's Glen"), pursuant to which the Trust agreed to sell 8,102,439 of newly-issued Shares to Hunter's Glen for $23,091,951, representing a purchase price of $2.85 per Share (the "Purchase"). The Purchase was approved by the Trust's shareholders at a Special Stockholder's Meeting and was consummated on August 16, 1996. Immediately prior to the sale of the Shares pursuant to the Stock Purchase Agreement, the Trust reorganized into the Company, and shareholders of the Trust became shareholders of the Company on a share for share basis. Gerald J. Ford, a general partner of Hunter's Glen, became the Chief Executive Officer and Chairman of the Board of Directors of the Company. Since August of 1996, the Company has been actively pursuing opportunities to acquire several operating companies. 3 Portfolio Review At June 30, 1997, the Company owned foreclosed real estate totaling $3.4 million and had one note receivable outstanding with a principal balance of $1,693, net of discount. At June 30, 1997, there were no additional amounts to be advanced under any notes receivable and all foreclosed real estate was classified as nonearning. Foreclosed real estate consisted of four properties, all of which are held for sale. The following table sets forth undeveloped land by type of property and geographic location at June 30, 1997. See also Note 2 of Notes to Consolidated Financial Statements. Texas California Total ---------- ---------- ---------- Single family lots $ -- $ 620,400 $ 620,400 Land 2,815,221 -- 2,815,221 ---------- ---------- ---------- $2,815,221 $ 620,400 $3,435,621 ========== ========== ========== At June 30, 1997, the Company's remaining note receivable had an outstanding balance of $1,693. The following table sets forth the detail of this receivable at June 30, 1997:
Periodic Face Carrying Principal Interest Maturity Payment Amount Amount Amount Description Rate Date Terms of Note of Note Delinquent - ------------------------------------------------------------------------------------------------ Unsecured 9.0% 12/1/98 Monthly P+I $1,786 $1,693 $319
At June 30, 1997, the Company also had impaired loans from prior foreclosure related deficiency notes and/or judgments with no carrying value. The face amounts ranged from $12,000 to $3,118,000. These receivables are unsecured, and collections are doubtful. Should any amount be collected on these receivables, the Company would recognize a gain. See also Note 3 of Notes to Consolidated Financial Statements. Prior Management - Related Party Activity The Trust was managed by Lomas Management, Inc., a wholly-owned subsidiary of Lomas Financial Corporation, from its inception in 1969 until February 1995. Lomas Financial Corporation was the original sponsor of the Trust. The terms of certain management agreements in effect during that period of time often required Lomas Financial Corporation or one of its subsidiaries to participate in real estate loans originated by the Trust. In 1995, however, the Trust terminated its management agreement with Lomas Management, Inc. and assumed its own operating and accounting responsibilities. Management of assets owned at that time were addressed in an Asset Disposition Agreement dated February 28, 1995 between the Trust and a wholly-owned subsidiary of Lomas Financial Corporation (the "Asset Disposition Agreement"). The Asset Disposition Agreement provided for an exchange of ownership positions in various pieces of foreclosed real estate and one earning note receivable. No gain or loss was recognized by the Company as a result of the exchange, and at June 30, 1995, the Trust owned 100% of its foreclosed real estate and note receivable portfolio with the exception of one real estate asset (which was subsequently sold) and one mortgage note receivable. The Asset Disposition Agreement also addressed 4 a group of shared receivables with no carrying value that related to deficiency notes obtained through previous foreclosure proceedings and outlined procedures to distribute future collections, if any. On April 24, 1996, the Trust entered into a supplement to the Asset Disposition Agreement whereby 100% of the outstanding common stock of LNC Holdings, Inc., whose sole asset is one tract of undeveloped real estate, was transferred to the Trust and the remaining mortgage note receivable not resolved in the Asset Disposition Agreement was exchanged for a comparable note receivable held by the subsidiary of Lomas Financial Corporation. In accordance with the Asset Disposition Agreement and the supplement, the subsidiary of Lomas Financial Corporation received compensation of $69,237 from the Company for the asset administration and collection services in fiscal year ended June 30, 1996. See also Note 6 of Notes to Consolidated Financial Statements. Competition In its ongoing efforts to liquidate its real estate assets, the Company competes with commercial banks, savings and loan associations, and other financial institutions that are seeking to sell their own portfolios of foreclosed real estate. The primary factors affecting competition when selling real estate are the value of the foreclosed real estate, the price at which the seller is willing to sell the asset, and the seller's ability and willingness to provide or arrange financing for the prospective buyer. With regard to efforts to identify suitable acquisition candidates, the Company competes with numerous prospective buyers, including various investment funds, other companies in similar industries, corporate conglomerates, individual investors, etc. Recent market conditions have resulted in substantial amounts of cash becoming available for new acquisition activity by both institutional and individual investors. Consequently, many potential acquisition candidates targeted by the Company have been pursued by numerous prospective buyers and bidding has been competitive. Certain Customers In 1994, upon emerging from bankruptcy pursuant to the plan of reorganization, the Company received a note receivable (the "Note") from Resurgence Properties, Inc. ("RPI") in the original amount of $6.0 million. The Note was collateralized by a pool of first mortgage loans and by deeds of trust on various real estate assets owned by RPI. RPI repurchased the Note from the Company on June 27, 1996 for $4.09 million representing 98.75% of the outstanding balance in a negotiated transaction. The Company charged $51,740 to the allowance for possible losses on notes receivable related to this sale. Revenue from RPI for the fiscal year ended June 30, 1997 consisted solely of dividend income totaling $33,500 on RPI stock. Revenue from RPI provided greater than 10% of the Company's total revenue for the fiscal year ended June 30, 1996, and consisted of: (i) interest income totaling $389,958 on the RPI Note receivable and (ii) dividend income totaling $21,375 on RPI preferred stock. Federal Income Tax Effective July 1, 1993, the Trust no longer qualified as a real estate investment trust as defined by the Internal Revenue Code. Subsequently, the Company was organized in 1996 as a Delaware corporation in order to effect the reorganization of the Trust by merging the Trust into the Company. 5 Accordingly, the Trust and the Company are subject to federal income taxes and adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". The Company incurred book and tax losses for the year ended June 30, 1995 and no provision for income tax was reported in the financial statements for that period. For the year ended June 30, 1996, the Company reported net income for financial reporting purposes of $835,367 and a net loss for tax purposes primarily due to differences between book and tax basis on disposition of foreclosed real estate. The Company reported net income for financial reporting purposes for the year ended June 30, 1997 of $1,308,984; however, all of this amount was offset by the change in valuation allowance of the deferred tax asset for regular tax purposes and 90 percent for alternative minimum tax purposes, respectively. At June 30, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $227 million which are available to offset future federal taxable income. These carryforwards will expire in 2005 through 2011. See also Note 7 of Notes to Consolidated Financial Statements. Personnel At June 30, 1997, the Company had two full-time employees and no part-time employees. The Company engages real estate consultants as needed with regard to real estate related matters and utilizes independent accountants and legal advisors as needed when evaluating a potential acquisition. Item 2. Properties The Company's principal executive offices were located at 600 N. Pearl, Suite 420, Dallas, Texas at June 30, 1997 under a month to month lease arrangement. On July 14, 1997, the Company relocated its executive offices to 200 Crescent Court, Suite 1365, Dallas, Texas and signed a lease agreement expiring December 31, 2000. See Note 5 of Notes to Consolidated Financial Statements. Item 3. Legal Proceedings The Company is involved in routine litigation incidental to its business which, in the opinion of management, will not result in a material adverse impact on the Company's consolidated financial condition, results of operations, or cash flows without regard for any possible insurance or third party reimbursement. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 6 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters Price Range of Common Stock The common stock of Liberte Investors Inc. is listed on the New York Stock Exchange (the "NYSE") under the symbol "LBI." The following table sets forth the high and low sales price per share for the Common Stock for the periods indicated: Fiscal Year High Low ----------- ---- --- 1997 First Quarter................................. $ 5 1/4 $ 3 3/8 Second Quarter................................ 5 4 1/8 Third Quarter................................. 4 1/2 3 3/4 Fourth Quarter................................ 4 1/2 3 5/8 1996 First Quarter................................. $ 2 1/4 $ 1 7/8 Second Quarter................................ 2 1/4 2 Third Quarter................................. 4 2 1/8 Fourth Quarter................................ 4 3 1/2 The high and low sales price per share of Common Stock on the New York Stock exchange on September 22, 1997, were $3.875 and $3.8125, respectively. At September 22, 1997, there were 1,794 registered stockholders of LBI common stock. Dividend Policy During the last two fiscal years, the Company has not paid, and the Company has no current plans to pay, cash dividends on the common stock. The Company currently intends to retain earnings for use in acquiring an operating business and therefore does not anticipate paying cash dividends in the foreseeable future. Stock Transfer Restrictions The Company's Certificate of Incorporation (the "Charter") contains prohibitions on the transfer of its common stock to avoid limitations on the use of the net operating loss carryforwards and other federal income tax attributes that the Company inherited from the Trust. The Charter generally prohibits any transfer of Common Stock, any subsequent issue of voting stock or stock that participates in the earnings or growth of the Company, and certain options with respect to such stock, if the transfer of such stock would cause any group or person to own 4.9% or more of the outstanding shares of, increase the ownership position of any person that already owns 4.9% or more (by aggregate value) of the outstanding shares, or cause any person to be treated like the owner of 4.9% or more (by aggregate value) of the outstanding shares for tax purposes. Transfers in violation of this prohibition will be void, unless the Board of Directors consents to the transfer. If void, upon demand by the Company, the purported transferee must return the shares to the Company's agent to be sold, or if already sold the purported transferee must forfeit some, or possibly, all of the sale proceeds. In addition, in connection with certain changes in the ownership of the holders of the Company's shares, the Company may 7 require the holder to dispose of some or all of such shares. For this purpose, "person" is defined broadly to mean any individual, corporation, estate, debtor, association, company, partnership, joint venture, or similar organization. Registration Rights In connection with the Purchase, Hunter's Glen and the Company entered into a Registration Rights Agreement (the "Purchaser Registration Rights Agreement"), pursuant to which Hunter's Glen and certain subsequent holders of the shares of Common Stock (the "Hunter's Glen Shares") acquired in the Purchase were granted certain registration rights with respect to such shares until (i) such shares have been sold pursuant to a resale registration statement filed with the Securities and Exchange Commission, (ii) such shares have been sold under the safe-harbor provision of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), or (iii) such shares have been otherwise transferred and the Company has issued new stock certificates representing such shares without a legend restricting further transfer. The holders of not less than 20% of the Hunter's Glen Shares may require the Company to file a shelf registration statement registering their sale of such shares. The Company will be required to maintain the effectiveness of such registration statement for two years. In addition, the holders of not less than 20% of the Hunter's Glen Shares may make two demands upon the Company to register their sale of such shares in underwritten offerings, provided that the shares to be sold have a fair market value in excess of $5.0 million. Finally, the holders of the Hunter's Glen Shares may require the Company to register the sale of their shares if the Company proposes to file a registration statement under the Securities Act for its account or the account of its securityholders, other than a registration statement concerning a business combination, an exchange of securities or an employee benefit plan. The holders of these registration rights may exercise them at any time during the period beginning on August 16, 1997 and ending when the holders of such shares own an aggregate of less than 5% of the outstanding Shares and are no longer affiliates of the Company under the United States federal securities laws. The Company will bear all of the expenses of these registrations, except any underwriters' commissions, discounts and fees, and the fees and expenses of any legal counsel to the holders of the Hunter's Glen Shares. At the closing of the Purchase, Hunter's Glen, the Company and certain other persons entered into an Agreement Clarifying Registration Rights (the "Agreement Clarifying Registration Rights"). Under this agreement, the registration rights that the Trust had previously extended to 400,000 Beneficial Shares owned by the Enloe Descendants' Trust were extended to the 759,000 Shares that the Enloe Descendants' Trust, Mr. Robert Ted Enloe, III and his wife owned upon the consummation of the Reorganization and the Purchase. The Agreement Clarifying Registration Rights also defined the relationship between these registration rights and the registration rights extended under the Purchaser Registration Rights Agreement. The Agreement Clarifying Registration Rights generally permits Hunter's Glen to require the Company to register the sale of its shares in connection with any exercise of demand registration rights by the Enloe Descendants' Trust, and permits the Enloe Descendants' Trust, Mr. Enloe and his wife to require the Company to register the sale of their shares in connection with any exercise of demand registration rights by Hunter's Glen. In addition, this Agreement provides that the Enloe Descendants' Trust, Mr. Enloe, his wife and Hunter's Glen will not publicly sell their Shares during the period beginning ten days before the filing of a registration statement in connection with certain underwritten offerings and ending ninety days after the effective date of such registration statement. Finally, the Agreement Clarifying Registration Rights provides that the registration rights with respect to the Shares held by the Enloe Descendants' Trust, Mr. Enloe and his wife will be transferable to the subsequent holders of such shares. 8 Item 6. Selected Financial Data (in thousands, except per share amount) The following table sets forth selected income statement and balance sheet data at and for the five years ended June 30, 1997. In October 1993, the Trust filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code and emerged from bankruptcy in April of 1994. As a result, information for years ended June 30, 1997, 1996, and 1995 are not comparable to prior years. This information should be read in conjunction with the Consolidated Financial Statements and related Notes thereto of the Company and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this Form 10-K.
Year Ended June 30, ------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (dollars in thousands, except per share data) Income Statement Data: Revenues $ 2,527 $ 2,784 $ 2,172 $ 10,019 $ 15,115 Interest expense -- -- -- 7,673 16,295 Provision for loan losses -- 187 3,192 3,175 15,150 Net income (loss) 1,309 835 (2,868) (16,341) (34,672) Net income (loss) per common share 0.07 0.07 (0.23) (1.34) (2.94) Cash dividends declared per share -- -- -- -- --
June 30, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (dollars in thousands) Balance Sheet Data: Total assets $ 56,445 $ 33,354 $ 32,036 $ 36,316 $261,575 Stockholders' equity 56,206 32,852 31,620 34,914 63,591 Debt -- -- -- -- 187,725 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements contained in this Annual Report on Form 10-K which are not historical facts are forward-looking statements. In addition, the Company, through its senior management, from time to time makes forward-looking public statements concerning its expected future operations and performance, including its ability to acquire businesses in the future, and other developments. Such forward-looking statements are necessarily estimates reflecting the Company's best judgment based upon current information, involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, the uncertainty as to whether the Company will be able to make future business acquisitions or that any such acquisitions will be successful, the Company's ability to obtain financing for any possible acquisitions, general conditions in the economy and capital markets, and other factors which may be identified from time to time in the Company's Securities and Exchange Commission filings and other public announcements. 9 General The fiscal year ended June 30, 1997 was a transition year for Liberte Investors Inc. With the reorganization of the Trust into the Company, the additional cash provided by the issuance of stock to Hunter's Glen and the associated changes in management, the Company believes it is prepared to seek and acquire a viable operating company that will generate increased value per share to existing stockholders and provide a new focus and direction for the Company. Although substantial efforts have been made to identify quality acquisitions in fiscal 1997, the Company has not yet entered into any definitive acquisition agreements. 1997 compared with 1996 Net income for the year ended June 30, 1997 increased to $1,309,000 from $835,000 for the year ended June 30, 1996, an increase of 57%. This change in operating results is discussed below. Interest income on interest-bearing deposits in banks increased to $2,364,000 for the year ended June 30, 1997 from $1,182,000 for the year ended June 30, 1996. This increase is due to the increase in the balance of unrestricted cash and cash equivalents to $52.5 million on June 30, 1997 from $27.2 million on June 30, 1996. The increase in cash balances was primarily a result of the sale of 8,102,439 shares of newly-issued common stock to Hunter's Glen in August of 1996 for $23.1 million and the collection of $1.3 million on notes receivable during the year ended June 30, 1997. Notes receivable interest income decreased to $112,000 for the year ended June 30, 1997 from $525,000 for the year ended June 30, 1996 because the outstanding balance of notes receivable declined to $2,000 on June 30, 1997 from $1.3 million on June 30, 1996. The Company had collected all but one note receivable with a nominal balance as of June 30, 1997. Gains on sales of foreclosed real estate decreased to $11,000 for the year ended June 30, 1997 from $599,000 for the year ended June 30, 1996. The gains on sales of real estate represent proceeds received from the sale of assets in excess of carrying value. The gain recognized in 1997 resulted from the sale of single-family lots in San Antonio, Texas. The gain in 1996 was primarily due to the sale of single-family lots in Murrieta, California. Other income decreased to $39,000 for the year ended June 30, 1997 from $478,000 for the year ended June 30, 1996. Other income in 1997 represented primarily dividends on RPI preferred stock. Other income in 1996 consisted primarily of cash collections on impaired loans which had no carrying value and the RPI dividends. Insurance expense increased to $307,000 for the year ended June 30, 1997 from $216,000 for the year ended June 30, 1996. This increase is primarily due to increased premiums related to Directors' and Officers' insurance coverage as required by the Stock Purchase Agreement between the Company and Hunter's Glen. Foreclosed real estate operations expense increased $121,000 from $118,000 for the year ended June 30, 1996 to $239,000 for the year ended June 30, 1997. The increase is primarily due to an accrual in fiscal 1997 established for 1996 and 1997 for property taxes on 40 acres of land held by LNC Holdings, Inc. which is encumbered by delinquent taxes and an increase in the accrual for 1997 property taxes. 10 Legal, audit and consulting fees were $186,000 for the year ended June 30, 1997, a decrease of $393,000 from the $579,000 incurred in the year ended June 30, 1996. Fees in 1997 were primarily for real estate consulting services and legal advisory work related to potential acquisitions. Prior period activity included primarily legal and investment banking fees incurred related to potential acquisitions. Directors fees and expenses decreased from $77,000 in 1996 to $46,000 in 1997 due to a decrease in the number of meetings held by the board. In 1996, the directors held several special meetings to discuss acquisition candidates and the corporate reorganization. Franchise tax expense for the year ended June 30, 1997 totaled $65,000 and represents Delaware and Texas franchise tax expense due as a result of the reorganization of the Trust into the Company. The Trust was not subject to franchise tax expense and no such expense was recorded for years prior to 1997. Compensation and employee benefits decreased by $458,000 from $593,000 during the year ended June 30, 1996 to $135,000 for the year ended June 30, 1997. The decrease is due to the reduced compensation package for Robert Ted Enloe III, the Chief Executive Officer, during the last quarter of 1996 as well as the resignation of the Company's employees, including Mr. Enloe, in August of 1996. Since the reorganization in August of 1996, the Company has employed only two full-time employees. Under the terms of the Stock Purchase Agreement between the Company and Hunter's Glen, Mr. Ford, in his capacity as Chairman and Chief Executive Officer, does not receive compensation. General and administrative expense increased from $178,000 for the year ended June 30, 1996 to $225,000 for the year ended June 30, 1997. The increase is attributed to an increase in stockholder service expenses for costs related to the August 1996 special meeting and November 1996 annual meeting of stockholders and to the renewal of the listing privileges for the Company's common stock on the New York Stock Exchange. 1996 compared to 1995 The Trust's net income was $835,000 for the year ended June 30, 1996 compared to a loss of $2.9 million for the year ended June 30, 1995. This change resulted from the decrease in the provision for loan losses recorded in 1996 compared to 1995, and the substantial gains on disposition of real estate that were realized in 1996. Interest income on notes receivable decreased from $658,000 for the year ended June 30, 1995 to $525,000 for the year ended June 30, 1996. The decrease was the result of a significant decrease in average earning notes which was partially offset by an increase in yield. Average earning notes declined from $8 million with a yield of 8.25% in 1995 to $5.6 million with a yield of 8.54% in 1996. Nonearning notes averaged $189,000 for 1996 compared to $276,000 for 1995. At June 30, 1996, the Trust's portfolio of notes receivable and foreclosed real estate totaled $4.8 million compared to $21.2 million ($10.7 million net of reserves) at June 30, 1995. At June 30, 1996, the Trust's portfolio of notes receivable aggregated $1.3 million compared to $5.8 million at June 30, 1995. The large decrease in earning investments is mainly due to the sale of the RPI note receivable during the fourth quarter of 1996. At the time of the sale, the note had a balance of $4.14 million and was sold for 98.75% of the outstanding balance. The remaining balance of $51,740 was 11 charged to the allowance for loan losses. There were no amounts to be advanced under any notes receivable at June 30, 1996. The interest rates on the notes at June 30, 1996, ranged from 9.0% to 10.25% on the outstanding balances. At June 30, 1996 and 1995, the Trust had no notes which were more than 90 days past due as to interest but on which the Trust was continuing to accrue interest. At June 30, 1996, the Trust held foreclosed real estate of $3.5 million compared to $15.4 million ($5.1 million net of allocated reserves) at June 30, 1995. The net reduction in foreclosed real estate held for sale was primarily a result of sales totaling $1.9 million partially offset by an increase in carrying value of the single family lots located in Murrieta, California. These lots were sold during the second quarter of 1996. There was no allowance for loan losses at June 30, 1996 compared to $10.5 million at June 30, 1995. Prior to the year ended June 30, 1996, the Company provided an allowance for losses on foreclosed real estate based on the fair value of each property acquired through foreclosure or deed in lieu of foreclosure. Effective July 1, 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The statement requires that assets held for disposal be carried at the lower of their carrying amount or fair value less cost to sell and that allocated reserves be netted against foreclosed real estate. The adoption of SFAS No. 121 did not have a material effect on the Company's financial condition, results of operations or cash flows, as foreclosed real estate was previously carried at fair value less estimated cost to sell. Future changes in fair value will result in a direct write-down or write-up of the foreclosed real estate. One note was originated during the year ended June 30, 1996 which was made to facilitate the sale of foreclosed real estate. Income from cash and cash equivalents increased from $892,000 for the year ended June 30, 1995 to $1.2 million for the year ended June 30, 1996 primarily as a result of the Trust's increase in cash and cash equivalents to $27.3 million at June 30, 1996 from $20.6 million at June 30, 1995. The increase is primarily a result of the collection of notes receivable, including the sale of the RPI note, and the sale of foreclosed real estate. The gain on disposition of real estate represents proceeds from the sale of foreclosed real estate in excess of its carrying value, and the write-up of value of long lived assets to be disposed of that were previously written down. A group of developed single family lots located in San Antonio, Texas, were written up in value to more accurately reflect their fair value less cost to sell. Also included is a $439,000 gain from the sale of real estate that consisted of 97 residential lots developed for single family home construction in Murrieta, California. The Trust accepted a substantial cash down payment and a note receivable (carrying a market rate of interest) from the buyer of the lots in California. Other income decreased from $623,000 for the year ended June 30, 1995 to $478,000 for the year ended June 30, 1996. Other income in 1996 represented primarily income from impaired loans. More specifically, other income included $415,000 collected in full settlement of a deficiency note receivable with no carrying value, the face value of which was $829,000 at June 30, 1995. There was no income from impaired loans prior to 1996 because collections were recorded as recoveries and credited to the allowance for possible loan losses. Other income in 1995 consisted of consulting fee income that began in the fourth quarter of 1994 in connection with an agreement with RPI. The agreement provided that the Trust would receive $87,500 of consulting fee income per quarter until March of 1996; however, the agreement was discontinued in exchange for a payment of $500,000 in lieu of the $525,000 that would have been received over the term of the contract. 12 There was a net provision for loan losses of $187,000 recorded for the year ended June 30, 1996 compared to a provision of $3.2 million for the year ended June 30, 1995. The Trust reversed $18,000 of unallocated allowance for loan losses in the fourth quarter of 1996 to eliminate the remaining unallocated allowance for loan losses on the Trust's portfolio of notes receivable based on management's review of the collectibility of the related notes receivable. A $1.1 million reversal to the allowance for loan losses on notes receivable occurred in 1995 as a result of the substantial reduction in the Trust's portfolio of notes receivable. The Trust's reduction in notes receivable in 1995 involved the foreclosure of a $4.8 million note secured by an operating retail shopping center which was promptly sold for cash during the second quarter of 1995. These reversals partially offset the provision for losses on the Trust's portfolio of foreclosed real estate. There was a provision for losses on foreclosed real estate of $205,000 in 1996 compared to a provision of $4.3 million in 1995. The $205,000 provision on foreclosed real estate in 1996 resulted from an adjustment of the carrying value of 55 single family lots located in Fontana, California. The trust decreased its carrying value from $15,000 per lot to $12,000 per lot during the fourth quarter of 1996. The trust decreased its carrying value of these lots by $900,000 during 1995 in order to recognize the decline in market value. The $4.3 million provision for possible losses on foreclosed real estate for the year ended June 30, 1995 resulted from increases in the estimates of losses on foreclosed real estate held for sale. During this time, a large portion of the Trust's foreclosed real estate was in the form of land which was inherently illiquid and/or in geographic locations where real estate markets for this type of property were depressed. The Trust increased the allowance for losses by approximately $2.3 million in connection with its ownership of 97 residential lots developed for single family home construction in Murrieta, California. The Trust had been unsuccessful in liquidating its position during 1995 as the California real estate markets continued to decline. Furthermore, the costs involved to acquire permits to build on these lots continued to escalate, thereby contributing to the decline in fair market value and the number of potential buyers. The Trust further increased the allowance during the second quarter of 1995 based on a contingent sales contract which failed to close and further increased its allowance in the third quarter of 1995 based on discussions held with other potential purchasers of the property. This asset was sold in November 1996 for cash and a note receivable resulting in the recognition of a $439,000 gain. Foreclosed real estate operations decreased from $275,000 for year ended June 30, 1995 to $118,000 for year ended June 30, 1996 because of the reduction in the size of the real estate portfolio. Foreclosed real estate operations include property taxes and costs to maintain the portfolio of foreclosed real estate such as mowing expenses, survey expenses, etc. Legal, audit and consulting fees increased to $579,000 for the year ended June 30, 1996 from $332,000 for the year ended June 30, 1995. This increase was caused primarily by activities during the first and second quarters of 1996 relating to potential acquisition candidates, and fees paid to a subsidiary of Lomas Financial Corporation for impaired loan collections and sales of foreclosed real estate in accordance with the Asset Disposition Agreement. Management fees were eliminated in the fourth quarter of 1995 because management services provided by Lomas were terminated in February of that year. Compensation and employee benefits expenses decreased to $593,000 for the year ended June 30, 1996 from $619,000 for the year ended June 30, 1995. In 1996, salary and related expenses included 13 $150,000 relating to bonuses that were paid to the president and executive vice president upon the consummation of the reorganization into a Delaware corporation. Excluding this $150,000 bonus accrual, salaries and related expenses were $175,000 less in 1996 than 1995 primarily as a result of a reduction in the president's base salary. Liquidity and Capital Resources The Company's principal funding requirements are operating expenses, including legal, audit and consulting expenses incurred in connection with the evaluation of potential acquisition candidates and other strategic opportunities. The Company anticipates that its primary sources of funding operating expenses are proceeds from the sale of foreclosed real estate, interest income on cash and cash equivalents, and cash on hand. As described in "Item 1. Business," the Trust entered into an agreement and subsequently consummated the sale of newly-issued Shares to Hunter's Glen. The proceeds from this sale were $23.1 million. Management believes that the additional cash will assist the Company in its efforts to expand its business through acquisitions. Hunter's Glen is an affiliate of Gerald J. Ford, who became the Chief Executive Officer and Chairman of the Board of the Company following the Trust's reorganization into the Company and the sale of the shares to Hunter's Glen. Operating activities for the year ended June 30, 1997 provided $1.4 million of cash compared to $0.2 million used in 1996 and $0.5 million used in 1995. The table below reflects cash flow from operating activities (in millions): Year Ended June 30, ----------------------------- 1997 1996 1995 ------- ------- ------- Total income $ 2.5 $ 2.8 $ 2.2 Operating expenses (1.2) (1.8) (1.8) Net change in other receivables, assets and liabilities 0.1 (1.2) (0.9) ------- ------- ------- Net cash provided (used) by operating activities $ 1.4 $ (0.2) $ (0.5) ======= ======= ======= Net cash provided by investing activities for the year ended June 30, 1997 was $1.4 million compared to $6.8 million for the year ended June 30, 1996 and $12.4 million for the year ended June 30, 1995, primarily as a result of the contraction of the Company's note receivable portfolio. The table below reflects cash flow from investing activities (in millions): Year Ended June 30, ----------------------------- 1997 1996 1995 ------- ------- ------- Collections on mortgage loans $ 1.3 $ 0.6 $ 1.4 Collections on RPI note receivable -- 5.3 0.6 Advances on mortgage loans -- -- (0.3) Sales of foreclosed real estate 0.1 0.9 10.3 Net sales of restricted cash investments -- -- 0.6 Expenditures on foreclosed real estate -- -- (0.2) ------- ------- ------- Net cash provided by investing activities $ 1.4 $ 6.8 $ 12.4 ======= ======= ======= 14 Net cash provided by financing activities totaled $22.5 million for the year ended June 30, 1997 from the issuance of new stock to Hunter's Glen, less expenses of the new issue. Total cash and cash equivalents were $52.5 million at June 30, 1997. The Company plans to finance acquisitions with its cash and cash equivalents, borrowings and private or public debt and equity financings. To avoid restricting the use of its NOL carryforwards, the Company will be effectively precluded from issuing any additional shares of common stock, any shares of any other class of voting stock or stock that participates in the earnings or growth of the Company, or certain options with respect to such stock, for three years after the sale of the Common Stock to Hunter's Glen. During this period, the Company will have to incur indebtedness to the extent that it does not use its cash and cash equivalents to make acquisitions. Item 8. Financial Statements and Supplementary Data See "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K" for a listing of the consolidated financial statements filed with this report. The response to this item is submitted in a separate section of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On November 19, 1996 the Company filed a report on Form 8-K to report the change in independent accountants of the Company from Ernst & Young LLP ("E&Y") to KPMG Peat Marwick LLP. No report of E&Y on the Company's financial statements for either of the past two fiscal years contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles. Further, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure or auditing scope of procedure, which disagreements, if not resolved to the satisfaction of E&Y, would have caused it to make reference to the subject matter of the disagreements in its reports. 15 PART III Item 10. Directors and Executive Officers of the Company The information concerning the directors and executive officers of the Company is set forth in the Proxy Statement (the "Proxy Statement") to be filed with the Commission and sent to stockholders in connection with the Company's Annual Meeting of Stockholders to be held November 7, 1997 under the heading "DIRECTOR NOMINEES AND EXECUTIVE OFFICERS," which information is incorporated herein by reference. Item 11. Executive Compensation The information concerning executive compensation is set forth in the Proxy Statement under the heading "MANAGEMENT COMPENSATION," which information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT," which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The Company was managed by Lomas Management, Inc. ("LMI") from its inception in 1969 until February 28, 1995. LMI is a wholly-owned subsidiary of Lomas Financial Corporation, the original sponsor of the Trust. On February 28, 1995, the Company terminated its management agreement with LMI and assumed all operating and accounting responsibilities. Any remaining property management responsibilities with regard to assets jointly-owned with Lomas Financial Corporation were provided for in the Asset Disposition Agreement described below. Effective February 28, 1995, the Company entered into an "Asset Disposition Agreement" with ST Lending, Inc. ("STL"), a wholly-owned subsidiary of Lomas Financial Corporation, whereby the Company and STL exchanged their respective ownership positions in a group of ten assets in order to achieve a separate and distinct ownership position. The Company exchanged its 80% ownership in six assets, whose 80% interest had a net carrying value of approximately $1.2 million (net of reserves) for STL's 20% ownership in four assets, whose 20% interest had a net carrying value of approximately $1.2 million (net of reserves). No gain or loss was recognized as a result of this transaction. In addition, a group of approximately 14 receivables, which had no carrying value and related primarily to deficiency notes, remained 80% owned by the Company and 20% owned by STL. The 14 receivables had face amounts which ranged in size from $9,875 to $2,494,118. The Asset Disposition Agreement stipulated that the Company would pay STL 10% of any gross proceeds received in addition to STL's 20% ownership, from this pool of receivables in return for STL's asset administration. Effective April 15, 1996, STL's interest in the seven remaining deficiency notes and or judgments, which had no carrying value, were transferred to the Company. 16 On April 24, 1996, the Company entered into a Supplement (the "Supplement") to the Asset Disposition Agreement. The Supplement transferred ownership of LNC Holdings, Inc., whose sole asset is approximately 40 acres of undeveloped real estate that is fully encumbered by tax liens, to the Company and set forth the terms under which STL would continue to manage the property. The Supplement further described the method of allocating the funds to be paid to the Company and STL with respect to a proposed settlement agreement for a deficiency note receivable received by the Company in June 1996 in the amount of approximately $8,000. The Company also exchanged its 50% interest, representing $212,000 of principal, in a note the Company has classified as non-earning, for STL's 20% interest, representing $269,000 of principal, in a note the Company classified as earning. The exchange of these notes resulted in the Company owning 100% of an interest-bearing note, secured by 72 lots in Murrieta, California. The difference in the exchange values resulted in the recording of $31,000 of interest income. The remaining difference of $26,000 was applied as a discount to the carrying value of the note received and was amortized into income over the life of the loan. In accordance with the Asset Disposition Agreement and the Supplement, in fiscal 1996, STL received compensation of $69,237 from the Company for its asset administration and collection services. Under the management agreement in effect prior to February 28, 1995, LMI was entitled to basic compensation at an annual rate of 1% of the daily average book value of the Company's Invested Assets (as defined in the management agreement) plus $81,000 per year for accounting services. During the fiscal year ended June 30, 1995, the Company paid LMI compensation of $157,907. Additionally, STL received $10,898 in accordance with the Asset Disposition Agreement. At June 30, 1996, the Company had a collateral assignment of a life insurance policy which was recorded as a receivable under a split-dollar agreement. On December 13, 1996, Mr. Enloe purchased the policy from the Company for $126,727, the amount of the receivable. 17 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as part of this Annual Report on Form 10-K. (1) Consolidated Financial Statements: See Index to Consolidated Financial Statements on Page F-1. (2) Consolidated Financial Statements Schedule IV - Mortgage Loans on Real Estate on Page F-18. (3) Exhibits: Exhibit Number ------ 2.1 Plan of Reorganization, dated as of April 1, 1996, between the Trust and the Company (incorporated by reference to Exhibit 2.1 of Registration Statement No. 333-07439 on Form S-4, filed by the Company, which the Securities and Exchange Commission declared effective on July 3, 1996 (the "Registration Statement"). 2.2 Stock Purchase Agreement, dated as of January 16, 1996, between the Trust and the Purchaser (incorporated by reference to Exhibit 4.1 of the Trust's Current Report on Form 8-K filed with the Commission on January 24, 1996), as amended by the Amendment to the Stock Purchase Agreement, dated as of February 27, 1996, and the Second Amendment to the Stock Purchase Agreement, dated as of March 28, 1996 (incorporated by reference to Exhibit 2.1 of the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 2.3 Letter Agreement, dated as of April 1, 1996, among the Trust, the Company, and the Purchaser. 2.4 Confidentiality and Standstill Agreement, dated as of January 16, 1996, between the Trust and the Purchaser (incorporated by reference to Exhibit 2.2 of the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 2.5 Escrow Agreement, dated as of January 19, 1996, among the Trust, the Purchaser, and Texas Commerce Bank National Association. 2.6 The Trust's First Amended Plan of Reorganization, dated December 14, 1993, as modified by the Modification to the First Amended Plan of Reorganization, dated January 19, 1994 (incorporated by reference to the Trust's Current Report on Form 8-K filed with the Commission on February 9, 1994). 18 3.1 The Company's Charter (incorporated by reference to Exhibit 3.1 of the Registration Statement). 3.2 The Company's Bylaws (incorporated by reference to Exhibit 3.2 of the Registration Statement). 3.3 The Trust's Declaration of Trust, dated June 26, 1969, restated to give effect to the First Amendment to the Declaration of Trust, dated September 19, 1969, the Second Amendment to the Declaration of Trust, dated January 24, 1986, the Third Amendment to the Declaration of Trust, dated January 19, 1989, the Fourth Amendment to the Declaration of Trust, dated December 18, 1992, the Fifth Amendment to the Declaration of Trust, dated March 31, 1995, and the Sixth Amendment to the Declaration of Trust, dated November 22, 1995 (incorporated by reference to Exhibit 3.1 of the Trust's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995. 3.4 Form of the Seventh Amendment to the Trust's Declaration of Trust (incorporated by reference to Exhibit 3.4 of the Registration Statement). 3.5 The Trust's Bylaws, restated to give effect to the First Amendment to the Bylaws (incorporated by reference to Exhibit 3.1 of the Trust's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996). 4.1 Form of Registration Rights Agreement to be entered into by the Company and the Purchaser (incorporated by reference to Exhibit 4.1 of the Registration Statement). 4.2 Stock Option Agreement, dated May 7, 1993, between the Trust and Robert Ted Enloe, III (incorporated by reference to Exhibit 10.22 of the Trust's Annual Report on Form 10-K for the year ended June 30, 1993). 4.3 Form of Agreement Clarifying Registration Rights to be entered into by the Company, the Purchaser, the Enloe Descendants' Trust, and Robert Ted Enloe, III (incorporated by reference to Exhibit 4.3 of the Registration Statement). 10.1 Exchange Agent Agreement, dated as of June 13, 1996, between the Company and KeyCorp Shareholder Services, Inc. (incorporated by reference to Exhibit 10.1 of the Registration Statement). 10.2 Form of Indemnification Agreement for the Company's directors and officers and schedule of substantially identical documents (incorporated by reference to Exhibit 10.2 of the Registration Statement). 19 10.3 Retirement Plan for Trustees of the Trust, dated October 11, 1988 (incorporated by reference to Exhibit 10.23 of the Trust's Annual Report on Form 10-K for the year ended June 30, 1993). 10.4 Promissory Note, dated October 22, 1993, from Robert Ted Enloe, III to the Trust (incorporated by reference to Exhibit 10.1 of the Trust's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993. 10.5 Stock Pledge and Security Agreement, dated October 22, 1993, between Robert Ted Enloe, III and the Trust (incorporated by reference to Exhibit 10.2 of the Trust's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993), as supplemented by a letter agreement, dated November 13, 1995, between the Enloe Descendants' Trust and the Trust (incorporated by reference to Exhibit 10.5 of the Registration Statement). 10.6 Agreement Regarding Registration Rights, Amendment of Stock Option Agreement, and Ratification of Pledge Agreement, dated as of November 13, 1995, among the Trust, Robert Ted Enloe, III, and the Enloe Descendants' Trust (incorporated by reference to Exhibit 10.6 of the Registration Statement). 10.7 Asset Disposition Agreement, dated February 28, 1995, between the Trust and ST Lending, Inc. (incorporated by reference to Exhibit 10.9 of the Trust's Annual Report on Form 10-K for the year ended June 30, 1995), as amended by the Supplement to Asset Disposition Agreement dated April 24, 1996. 16.1 Letter dated November 15, 1996 from Ernst & Young LLP regarding Company's change in independent accountants. 21.1 A list of the subsidiaries of the Company. 27.1 Financial Data Schedule (included only in the EDGAR filing). (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this annual report. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: September 29, 1997 LIBERTE INVESTORS INC. /s/ GERALD J. FORD ------------------------------------ Gerald J. Ford Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ GERALD J. FORD Chief Executive Officer and Chairman September 29, 1997 - ------------------------------ of the Board (Principal Executive Officer) Gerald J. Ford /s/ NANCY J. FOEDERER Secretary and Treasurer September 29, 1997 - ------------------------------ (Principal Financial Officer and Nancy J. Foederer Accounting Officer) /s/ GENE H. BISHOP Director September 29, 1997 - ------------------------------ Gene H. Bishop /s/ HARVEY B. CASH Director September 29, 1997 - ------------------------------ Harvey B. Cash /s/ ROBERT TED ENLOE, III Director September 29, 1997 - ------------------------------ Robert Ted Enloe, III /s/ EDWARD W. ROSE, III Director September 29, 1997 - ------------------------------ Edward W. Rose, III /s/ GARY SHULTZ Director September 29, 1997 - ------------------------------ Gary Shultz
21 Liberte Investors Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of Liberte Investors Inc. are included in response to Item 8 and Item 14 (1) and (2):
Page ---- Report of KPMG Peat Marwick LLP, Independent Auditors.................................................. F-2 Report of Ernst & Young LLP, Independent Auditors...................................................... F-3 Consolidated Statements of Financial Condition as of June 30, 1997 and June 30, 1996............................................................ F-4 Consolidated Statements of Operations for the years ended June 30, 1997, June 30, 1996, and June 30, 1995........................................................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, June 30, 1996, and June 30, 1995.................................................................. F-6 Consolidated Statements of Cash Flows for the years ended June 30, 1997, June 30, 1996, and June 30, 1995........................................................................... F-7 Notes to Consolidated Financial Statements............................................................. F-8 Schedule IV - Mortgage Loans on Real Estate............................................................ F-18
Separate financial statements relating to the Company's subsidiary are omitted since it is wholly-owned and such separate financial statements are not material. All other financial statement schedules have been omitted because the required information is not material to require submission of the schedule or because the information required is included in the financial statements, including the notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Liberte Investors Inc.: We have audited the accompanying consolidated statement of financial condition of Liberte Investors Inc. and subsidiary as of June 30, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule as of and for the year ended June 30, 1997 as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Liberte Investors Inc. and subsidiary as of June 30, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule as of and for the year ended June 30, 1997, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Dallas, Texas July 23, 1997 F-2 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholders and Trustees Liberte Investors We have audited the accompanying consolidated balance sheet of Liberte Investors and subsidiaries (the Company) as of June 30, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended June 30, 1996. Our audits also included the June 30, 1996 and 1995 amounts in the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and amounts in the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberte Investors and subsidiaries at June 30, 1996, and the consolidated results of their operations and their cash flows for each of the two years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the June 30, 1996 and 1995 amounts in the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Dallas, Texas July 26, 1996 F-3 LIBERTE INVESTORS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, June 30, 1997 1996 ------------- ------------- Assets Unrestricted cash $ 52,474,290 $ 27,245,594 Restricted cash and cash equivalents 61,237 58,325 ------------- ------------- Total cash and cash equivalents 52,535,527 27,303,919 Foreclosed real estate held for sale 3,435,621 3,475,790 Notes receivable, net 1,693 1,331,390 Accrued interest and other receivables 4,507 63,875 Other assets 467,876 1,179,277 ------------- ------------- Total assets $ 56,445,224 $ 33,354,251 ============= ============= Liabilities and Stockholders' Equity Liabilities-accrued and other liabilities $ 239,545 $ 502,078 Stockholders' Equity Common stock, $.01 par value, 50,000,000 shares authorized, 20,256,097 shares issued and outstanding 202,561 -- Shares of Beneficial Interest, no par value, unlimited authorization, 12,423,208 shares issued, 12,153,658 shares outstanding, net of 269,550 shares held in treasury -- 32,852,173 Additional paid-in capital 309,392,399 -- Accumulated deficit (253,389,281) -- ------------- ------------- Total stockholders' equity 56,205,679 32,852,173 ------------- ------------- Commitments and contingencies Total liabilities and stockholders' equity $ 56,445,224 $ 33,354,251 ============= ============= See notes to consolidated financial statements. F-4 LIBERTE INVESTORS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, ------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Income Interest-bearing deposits in banks $ 2,364,381 $ 1,182,179 $ 892,008 Notes receivable interest 111,776 525,290 657,511 Gains on sales of foreclosed real estate 11,310 598,557 -- Other 39,145 478,307 622,555 ------------ ------------ ------------ Total income 2,526,612 2,784,333 2,172,074 ------------ ------------ ------------ Expenses Insurance 307,292 216,089 215,572 Foreclosed real estate operations 238,854 118,456 274,546 Legal, audit and consulting fees 186,058 578,791 332,367 Directors (trustees) fees and expenses 46,050 77,400 61,215 Management fees -- -- 157,907 Franchise tax 65,206 -- -- Compensation and employee benefits 134,803 593,104 619,433 Provision for loan losses -- 187,058 3,192,000 General and administrative 225,365 178,068 186,613 ------------ ------------ ------------ Total expenses 1,203,628 1,948,966 5,039,653 ------------ ------------ ------------ Income (loss) before income taxes 1,322,984 835,367 (2,867,579) Income tax expense 14,000 -- -- ------------ ------------ ------------ Net Income (loss) $ 1,308,984 $ 835,367 $ (2,867,579) ============ ============ ============ Net income (loss) per share of common stock (beneficial interest in 1996 and 1995) $ 0.07 $ 0.07 $ (0.23) ============ ============ ============ Weighted average number of shares of common stock (beneficial interest in 1996 and 1995) 19,237,758 12,153,658 12,322,773 ============ ============ ============
See notes to consolidated financial statements. F-5 LIBERTE INVESTORS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Number of Beneficial Number of Common Paid-In Treasury Accumulated Shares Interest Shares Stock Capital Stock Deficit Total ---------- ------------- ---------- -------- ------------ -------- ------------- ----------- Balance at June 30, 1994 12,423,208 $ 287,954,763 -- $ -- $ -- $ -- $(253,040,818) $34,913,945 Deferred interest on executive stock option loan -- -- -- -- -- -- (22,227) (22,227) Purchase of treasury stock (269,550) -- -- -- -- (404,325) -- (404,325) Net loss -- -- -- -- -- -- (2,867,579) (2,867,579) ---------- ------------- ---------- -------- ------------ -------- ------------- ----------- Balance at June 30, 1995 12,153,658 287,954,763 -- -- -- (404,325) (255,930,624) $31,619,814 Repayment of executive stock option loan -- -- -- -- -- -- 396,992 396,992 Net income -- -- -- -- -- -- 835,367 835,367 ---------- ------------- ---------- -------- ------------ -------- ------------- ----------- Balance at June 30, 1996 12,153,658 287,954,763 -- -- -- (404,325) (254,698,265) 32,852,173 Exchange of shares pursuant to plan of reorganization (12,153,658) (287,954,763) 12,153,658 121,537 287,428,901 404,325 -- -- Issuance of common stock, net of stock issuance costs of $1,047,429 -- -- 8,102,439 81,024 21,963,498 -- -- 22,044,522 Net income -- -- -- - -- -- 1,308,984 1,308,984 ---------- ------------- ---------- -------- ------------ -------- ------------- ----------- Balance at June 30, 1997 -- $ -- 20,256,097 $202,561 $309,392,399 $ -- $(253,389,281) $56,205,679 ========== ============= ========== ======== ============ ======== ============= ===========
See notes to consolidated financial statements. F-6 LIBERTE INVESTORS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, ------------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 1,308,984 $ 835,367 $ (2,867,579) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses -- 187,058 3,192,000 Decrease in accrued interest and other receivables 59,368 40,012 220,667 Decrease (increase) in other assets 291,217 (678,145) (114,028) (Decrease) increase in accrued and other liabilities (262,533) 85,914 (985,868) Income from impaired loans (500) (452,903) -- Gains from sales of foreclosed real estate (11,310) (598,557) -- Collection of executive stock option loan -- 416,787 -- ------------ ------------ ------------ Net cash provided by (used in) operating activities 1,385,226 (164,467) (554,808) ------------ ------------ ------------ Cash flows from investing activities: Collections of notes receivable 1,330,197 5,937,776 1,997,003 Note receivable advances -- -- (308,299) Foreclosed real estate expenses -- -- (127,350) Proceeds from sales and basis reductions of foreclosed real estate 51,479 894,848 10,252,601 (Increase) decrease in restricted cash investments (2,912) 920 564,055 ------------ ------------ ------------ Net cash provided by investing activities 1,378,764 6,833,544 12,378,010 ------------ ------------ ------------ Cash flows from financing activities: Issuance of newly issued shares of common stock 23,091,951 -- -- Stock issuance costs (627,245) -- -- Purchase of treasury stock -- -- (404,325) ------------ ------------ ------------ Net cash provided by financing activities 22,464,706 -- (404,325) ------------ ------------ ------------ Net increase in unrestricted cash and cash equivalents 25,228,696 6,669,077 11,418,877 Unrestricted cash and cash equivalents at beginning of year 27,245,594 20,576,517 9,157,640 ------------ ------------ ------------ Unrestricted cash and cash equivalents at end of year $ 52,474,290 $ 27,245,594 $ 20,576,517 ============ ============ ============ Schedule of non-cash activities: Transfer of notes receivable to foreclosed real estate $ -- -- 4,792,782 Charge-offs to allowance for loan losses, net $ -- 10,498,922 4,402,473 Sales of foreclosed real estate financed by mortgage loans $ -- 1,076,800 138,400 Write-up of value of impaired note $ -- 71,250 -- Write-up of value of long-lived assets to be disposed $ -- 53,751 -- Increase in note receivable from asset swap $ -- 31,313 --
See notes to consolidated financial statements. F-7 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 (1) Summary of significant accounting policies (a) Organization - Liberte Investors Inc., a Delaware corporation (the "Company"), was organized in April of 1996 in order to effect the reorganization of Liberte Investors, a Massachusetts business trust (the "Trust"). At a special meeting of the shareholders of the Trust held on August 15, 1996, (the "Special Meeting"), the Trust's shareholders approved a plan of reorganization whereby the Trust contributed its assets to the Company and received all of the Company's outstanding common stock, par value $.01 per share ("Shares" or "Common Stock"). The Trust then distributed to its shareholders in redemption of all outstanding shares of beneficial interest in the Trust (the "Beneficial Shares") the Shares of the Company. The Company assumed all of the Trust's assets and outstanding liabilities and obligations. Unless otherwise indicated, the information contained in the consolidated financial statements which relates to periods prior to August 16, 1996 is information related to the Trust and information relating to periods on or after August 16, 1996 is information relating to the Company. (b) Business - The principal business activity of the Trust was investing in notes receivable, primarily first mortgage construction notes and first mortgage acquisition and development notes. Over the past several years, however, the Trust progressively curtailed its lending activities and reduced the size of its portfolio of foreclosed real estate in an effort to repay indebtedness. On October 25, 1993, the Trust filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On April 7, 1994, the Trust emerged from bankruptcy pursuant to a plan of reorganization whereby certain assets and liabilities, including remaining senior indebtedness, 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. The Trust received shares of preferred stock of RPI and a note receivable which was subsequently paid. On June 30, 1997, the court issued an Administrative Closing Order and Final Decree with regard to the bankruptcy case. After the reorganization of the Trust into the Delaware corporation in August 1996, management has been pursuing the acquisition of an operating company in order to utilize the net operating loss carryforwards available to offset future earnings. (c) Consolidation - The accompanying financial statements include the accounts of the Company and LNC Holdings, Inc., a wholly-owned subsidiary whose sole asset is approximately 40 acres of land located in Arlington, Texas. All intercompany balances have been eliminated. (d) Use of estimates - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, F-8 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) revenues and expenses at the date of the consolidated financial statements. Actual results could differ from those estimates. (e) Recognition of income - Interest income is recorded on an accrual basis. The Company discontinues the accrual of interest income when circumstances cause the collection of such interest to be doubtful. Interest income on impaired loans is recognized on a cash basis only after all principal has been collected. Collections on impaired loans with no carrying value are recognized on a cash basis and are recorded as loan income. (f) Allowance for loan losses - notes receivable - Prior to the fiscal year ended June 30, 1996, the Company provided an allowance for possible losses on notes receivable based on an evaluation of each note considering the financial strength of the borrower, any third party guarantors and the value of any underlying collateral. Effective July 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" and began to determine an allowance based on either (i) the present value of expected future cash flows discounted at the note's effective interest rate, or (ii) the fair value of the collateral if the repayment of the loan is expected to be provided solely by the collateral. The adoption of SFAS No. 114 and SFAS No. 118 did not have a material effect on the Company's financial condition or results of operations, as the Company's note receivable had been previously written down to the amounts in accordance with these new statements. (g) Allowance for losses - foreclosed real estate - Prior to the fiscal year ended June 30, 1996, the Company provided an allowance for losses on foreclosed real estate based on the fair value of each property acquired through foreclosure or deed in lieu of foreclosure. Effective July 1, 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The statement requires that assets held for disposal be carried at the lower of their carrying amount or fair value less cost to sell and that allocated reserves be netted against foreclosed real estate. The adoption of SFAS No. 121 did not have a material effect on the Company's consolidated financial condition or results of operations, as foreclosed real estate was previously carried at fair value less estimated cost to sell. Future changes in fair value will result in a direct write-down or write-up of the foreclosed real estate. (h) Foreclosed real estate - Foreclosed real estate is recorded at the lower of cost or fair value less estimated costs to sell. Cost is the note amount at the time of foreclosure net of any allowances. The Company periodically reviews its portfolio of foreclosed real estate held for sale using current information including (i) independent appraisals, (ii) general economic factors affecting the area where the property is located, (iii) recent sales activity and asking prices for comparable properties and (iv) costs to sell and/or develop that would serve to lower the expected proceeds from the disposal of the real estate. Gains (losses) realized on liquidation are recorded directly to income. (i) Income taxes - Income taxes are maintained in accordance with SFAS No. 109, "Accounting for Income Taxes," whereby deferred income tax assets and liabilities result from temporary differences. Temporary differences are differences between the tax bases of assets and F-9 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) liabilities and operating loss and tax credit carryforwards and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. (j) Income (loss) per share - Net income (loss) per share is based on the weighted average number of shares outstanding during the year. (k) Cash and cash equivalents - Cash and cash equivalents include highly liquid investments with original maturities of three months or less. (l) Reclassifications - Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. (2) Foreclosed Real Estate The following is a summary of the Company's activity in foreclosed real estate for the years ended June 30, 1997, 1996 and 1995:
1997 1996 1995 ------------ ------------ ------------ Balance at beginning of year $ 3,475,790 $ 15,385,214 $ 25,207,002 Foreclosures -- -- 4,840,782 Write-up in value -- 492,730 -- Expenditures -- -- 127,350 Reclassification of allowance for losses upon adoption of SFAS No. 121 -- (10,331,733) -- Write-down in value -- (204,600) -- Cost of real estate sold (40,169) (1,865,821) (14,789,920) ------------ ------------ ------------ Balance at end of year $ 3,435,621 $ 3,475,790 $ 15,385,214 ============ ============ ============
The following table sets forth the Company's portion of foreclosed real estate by type of property and geographic location: June 30, ------------------------------ 1997 1996 ---------- ---------- Type of Property: Single-family lots $ 620,400 $ 660,569 Land 2,815,221 2,815,221 ---------- ---------- $3,435,621 $3,475,790 ========== ========== Geographic Location: Texas $2,815,221 $2,855,390 California 620,400 620,400 ---------- ---------- $3,435,621 $3,475,790 ========== ========== The Company has substantively repossessed or obtained control of a certain property collateralizing a note receivable with an outstanding principal balance of $2,188,583 at June 30, 1997 F-10 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and 1996. The note was recorded as foreclosed real estate in October of 1993 and has subsequently been written down to $620,400 as of June 30, 1997 and 1996. (3) Notes Receivable The following is a summary of notes receivable activity for the years ended June 30, 1997, 1996 and 1995:
1997 1996 1995 ------------ ------------ ------------ Balance at beginning of year $ 1,331,390 $ 5,807,372 $ 12,130,956 Advances and other additions to notes receivable -- 106,782 341,714 Sales of foreclosed real estate financed by notes receivable -- 1,076,800 138,400 Principal collections (1,329,317) (5,561,473) (1,997,003) Foreclosures -- -- (4,792,782) Write-off of principal (380) (98,091) (13,913) ------------ ------------ ------------ Balance at end of year $ 1,693 $ 1,331,390 $ 5,807,372 ============ ============ ============
At June 30, 1997 and 1996, the Company had impaired loans from prior foreclosure related deficiency notes and/or judgments, with no carrying value. During fiscal 1997 and 1996, in addition to the collections shown in the table above, the Company recognized $500 and $452,903, respectively, of loan income from impaired loans which had no carrying value at the time of collection. The collections primarily consist of settlements on deficiency notes or judgments related to deficiency notes and generally represent a small fraction of the face amount of such notes or judgments. F-11 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (4) Allowance for Possible Losses A summary of transactions affecting the Company's allowance for loan losses for the three-year period ended June 30, 1997, is as follows:
Notes Foreclosed Receivable Real Estate Total ------------ ------------ ------------ Balance at June 30, 1994 $ 1,562,921 $ 10,146,474 $ 11,709,395 Provision for loan losses (1,148,960) 4,340,960 3,192,000 Amounts charged off, net of recoveries (284,060) (4,118,413) (4,402,473) ------------ ------------ ------------ Balance at June 30, 1995 129,901 10,369,021 10,498,922 Reclassifications - SFAS No. 121 -- (10,331,733) (10,331,733) Provision for loan losses (17,542) 204,600 187,058 Amounts charged off, net of recoveries (112,359) (241,888) (354,247) ------------ ------------ ------------ Balance at June 30, 1996 -- -- -- Provision for loan losses -- -- -- Amounts charged off, net of recoveries -- -- -- ------------ ------------ ------------ Balance at June 30, 1997 $ -- $ -- $ -- ============ ============ ============
(5) Commitments and Contingencies The Company's wholly-owned subsidiary, LNC Holdings Inc., owns approximately 40 acres of land located in Arlington, Texas which is encumbered by property tax liens totaling $930,000 including penalties and interest. On April 16, 1997, LNC Holdings Inc. received a notice of final judgment from the City of Arlington with regard to the delinquent taxes. On May 27, 1997 LNC Holdings Inc. notified the City of Arlington that it would execute a deed without warranty to allow the taxing units to obtain title to the property. No response has been received. LNC Holdings Inc. has accrued property taxes for calendar year 1996 and for the six month period ended June 30, 1997 totalling $67,000. Management believes that resolution of the delinquent tax issue with the taxing authorities will not result in a material adverse impact on the consolidated financial statements. Cash and cash equivalents at June 30, 1997 and 1996, included restricted cash of $61,000 and $58,000, respectively, for claims due to bankruptcy. On June 30, 1997, the court issued an Administrative Closing Order and Final Decree with regard to the bankruptcy case. The claims F-12 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) remaining represent unclaimed dividend checks dated May 20, 1994. Any check not claimed will be voided after five years. The Company entered into an operating lease dated May 16, 1997 to relocate its principal executive offices. The lease expires December 31, 2000, contains a renewal option and requires the Company to pay a proportionate share of operating expenses of the building. On May 19, 1997, the Company entered into an operating lease for telephone equipment which also expires on December 31, 2000. Future minimum lease payments under these leases are as follows: Fiscal Year Ending June 30, Amount ------------------ ---------------- 1998 $ 77,856 1999 77,856 2000 77,856 ---------------- Total future minimum rentals $ 233,568 ================ The Company is involved in routine litigation incidental to its business, which, in the opinion of management, will not result in a material adverse impact on the Company's consolidated financial condition, results of operations, or cash flows, without regard for possible insurance or third party reimbursement. (6) Related Party Transactions The Company was managed by Lomas Management, Inc. ("LMI") from its inception in 1969 until February 28, 1995. LMI is a wholly-owned subsidiary of Lomas Financial Corporation, the original sponsor of the Trust. On February 28, 1995, the Company terminated its management agreement with LMI and assumed all operating and accounting responsibilities. Any remaining property management responsibilities with regard to assets jointly-owned with Lomas Financial Corporation were provided for in the Asset Disposition Agreement described below. Effective February 28, 1995, the Company entered into an "Asset Disposition Agreement" with ST Lending, Inc. ("STL"), a wholly-owned subsidiary of Lomas Financial Corporation, whereby the Company and STL exchanged their respective ownership positions in a group of ten assets in order to achieve a separate and distinct ownership position. The Company exchanged its 80% ownership in six assets, whose 80% interest had a net carrying value of approximately $1.2 million (net of reserves) for STL's 20% ownership in four assets, whose 20% interest had a net carrying value of approximately $1.2 million (net of reserves). No gain or loss was recognized as a result of this transaction. In addition, a group of approximately 14 receivables, which had no carrying value and related primarily to deficiency notes, remained 80% owned by the Company and 20% owned by STL. The 14 receivables had face amounts which ranged in size from $9,875 to $2,494,118. The Asset Disposition Agreement stipulated that the Company would pay STL 10% of any gross proceeds received in addition to STL's 20% ownership, from this pool of receivables in return for STL's asset administration. Effective April 15, F-13 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1996, STL's interest in the seven remaining deficiency notes and/or judgments, which had no carrying value, were transferred to the Company. On April 24, 1996, the Company entered into a Supplement (the "Supplement") to the Asset Disposition Agreement. The Supplement transferred ownership of LNC Holdings, Inc., whose sole asset is approximately 40 acres of undeveloped real estate that is fully encumbered by tax liens, to the Company and set forth the terms under which STL would continue to manage the property. The Supplement further described the method of allocating the funds to be paid to the Company and STL with respect to a proposed settlement agreement for a deficiency note receivable received by the Company in June 1996 in the amount of approximately $8,000. The Company also exchanged its 50% interest, representing $212,000 of principal, in a note the Company has classified as non-earning, for STL's 20% interest, representing $269,000 of principal, in a note the Company classified as earning. The exchange of these notes resulted in the Company owning 100% of an interest-bearing note, secured by 72 lots in Murrieta, California. The difference in the exchange values resulted in the recording of $31,000 of interest income. The remaining difference of $26,000 was applied as a discount to the carrying value of the note received and was amortized into income over the life of the loan. In accordance with the Asset Disposition Agreement and the Supplement, in fiscal 1996, STL received compensation of $69,237 from the Company for its asset administration and collection services. Under the management agreement in effect prior to February 28, 1995, LMI was entitled to basic compensation at an annual rate of 1% of the daily average book value of the Company's Invested Assets (as defined in the management agreement) plus $81,000 per year for accounting services. During the fiscal year ended June 30, 1995, the Company paid LMI compensation of $157,907. Additionally, STL received $10,898 in accordance with the Asset Disposition Agreement. At June 30, 1996, the Company had a collateral assignment of a life insurance policy on Robert Ted Enloe, III which was recorded as a receivable under a split-dollar agreement. On December 13, 1996, Mr. Enloe purchased the policy from the Company for $126,727, the amount of the receivable. F-14 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) Federal Income Taxes Effective July 1, 1993, the Trust no longer qualified as a real estate investment trust as defined by the Internal Revenue Code. Subsequently, the Company was organized in 1996 as a Delaware corporation in order to effect the reorganization of the Trust into the Company. Accordingly, the Trust and the Company are subject to federal income taxes. Income tax expense attributable to income (loss) before income taxes consists of: June 30, 1997 1996 1995 ------------------ ------------------- ------------------ Federal Current $ 14,000 $ -- $ -- Deferred -- -- $ -- ------------------ ------------------- ------------------ $ 14,000 $ -- $ -- ================== =================== ================== The income tax expense for the years ended June 30, 1997, 1996 and 1995 differs from the amounts computed by applying the U.S. Federal corporate tax rate of 34% to income (loss) before income taxes:
June 30, ------------------------------------- 1997 1996 1995 --------- --------- --------- Computed "expected" income tax expense (benefit) $ 449,815 $ 284,025 $(974,976) Increase (decrease) in taxes resulting from: Adjustment to deferred tax asset (466,250) -- -- Other -- (26,025) -- Change in the beginning of the year balance of the valuation allowance for deferred tax assets allocated to income taxes 30,435 (258,000) 974,976 --------- --------- --------- $ 14,000 $ -- $ -- ========= ========= =========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at June 30, 1997 and 1996 are presented below: June 30, ------------------------------ 1997 1996 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 77,196,311 $ 76,870,000 Basis differences of foreclosed real estate 2,454,676 2,748,000 Capital loss carryforward 1,630,006 1,630,006 Other 1,908,442 1,910,994 ------------ ------------ Total gross deferred tax assets 83,189,435 83,159,000 Less: valuation allowance (83,189,435) (83,159,000) ------------ ------------ Net deferred tax assets $ -- $ -- ============ ============ F-15 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The net change in the valuation allowance for the years ended June 30, 1997 and 1996 was an increase of $30,000 and a decrease of $258,000, respectively. Based on current business activity, management believes it is more likely than not that the Company will not realize the benefits of the loss carryforwards. Therefore, a full valuation allowance has been established. In the event the Company expands its business operations through an acquisition, the ability to use the loss carryforwards may change. At June 30, 1997, the Company had net operating loss carryforwards for federal income tax purposes of $227,048,000 which are available to offset future federal taxable income. The carryforwards will expire in 2005 through 2011. The Company also has capital loss carryforwards of $4,794,000 which are available to offset future capital gains, if any, through 2001. In addition, the Company has alternative minimum tax credit carryforwards of $14,000 which are available to reduce future federal income taxes, if any, over an indefinite period. (8) Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair value of cash and cash equivalents approximates their carrying value because of the liquidity and short-term maturities of these instruments. The fair value of notes receivable - mortgage loans is estimated by discounting cash flows at interest rates currently being offered for notes with similar terms to borrowers of similar credit quality. The Company believes that its deficiency notes receivable which have no carrying value at June 30, 1997, may have some fair value, but such value cannot be estimated and any potential collections are not measurable as to timing or amount. The Company does not believe that it is exposed to any significant credit risk on its cash and cash equivalents. The estimated fair values of the Company's financial instruments at June 30, 1997 and 1996, are as follows:
June 30, 1997 June 30, 1996 ------------------------------ -------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------- ------------- -------------- -------------- Financial Assets: Cash and cash equivalents $ 52,535,527 52,535,527 $ 27,303,919 27,303,919 Notes receivable - mortgage loans 1,693 1,693 1,331,390 1,331,390 ============== ============= ============== ==============
F-16 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (9) Certain Customers In 1994, the Company received a note receivable (the "Note") from Resurgence Properties, Inc. ("RPI") in the original amount of $6.0 million upon emerging from bankruptcy pursuant to the plan of reorganization. The Note was collateralized by a pool of first mortgage loans and by deeds of trust on various real estate assets owned by RPI. RPI repurchased the Note from the Company on June 27, 1996 for $4.09 million representing 98.75% of the then outstanding balance in a negotiated transaction. The Company charged $51,740 to the allowance for possible losses on notes receivable related to this sale. Revenue from RPI for the year ended June 30, 1997 consisted solely of dividend income totaling $33,500 on RPI stock. Revenue from RPI provided greater than 10% of the Company's total revenue for the fiscal year ended June 30, 1996, and consisted of: (i) interest income totaling $389,958 on the RPI Note receivable and (ii) dividend income totaling $21,375 on RPI preferred stock. (10) Concentrations of Credit Risk At June 30, 1997, the Company had certain concentrations of credit risk with three financial institutions in the form of cash which amounted to $52,535,527. For purposes of evaluating credit risk, the stability of financial institutions conducting business with the Company is periodically reviewed. If the financial institutions failed to completely perform under the terms of the financial instruments, the exposure for credit loss would be the amount of the financial instruments less amounts covered by regulatory insurance. (11) Stockholders' Equity On August 15, 1996, the Trust, pursuant to the plan of reorganization, exchanged all Beneficial Shares for shares of Common Stock of the Company. Further, 8,102,439 of newly-issued shares of the Company were purchased by Hunter's Glen/Ford, Ltd., a Texas limited partnership ("Hunter's Glen"), for $23,091,951 ($2.85 per share). Gerald J. Ford, partner of Hunter's Glen, is Chief Executive Officer and Chairman of the Board of Directors of the Company. In fiscal year ended June 30, 1996, Stockholders' Equity included a deduction for a promissory note payable to the Company from Robert Ted Enloe, III in the amount of $365,625 plus deferred interest thereon. On June 18, 1996 Mr. Enloe repaid the outstanding principal and interest balance on this note. At the time of repayment, the principal and accrued but unpaid interest due under the note was $416,787, net of deferred interest of $19,795. On February 15, 1995, the Trust repurchased 269,550 Shares of Beneficial Interest from Lomas Financial Corporation at a price which approximated market value on that date. F-17 Liberte Investors Inc. and Subsidiary SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE June 30, 1997
Periodic Face Carrying Principal Interest Maturity Payment Amount Amount Amount Description Rate Date Terms of Note of Note Delinquent - ------------------------------------------------------------------------------------------------------------------ Unsecured 9.0% 12/1/98 Monthly P+I $1,786 $1,693 $319
(1) For income tax purposes the cost of notes is the carrying amount as shown on the schedule. (2) Reconciliation of "Mortgage Loans on Real Estate" (in thousands): Year Ended June 30, ------------------------------- 1997 1996 1995 ------- ------- ------- Balance at beginning of year $ 1,331 $ 5,807 $12,131 Additions during year: Write-up in value of impaired loans -- 71 -- Net addition from asset swap -- 35 -- New mortgage loans and advances on existing loans and other -- 1,077 480 ------- ------- ------- 1,331 6,990 12,611 Deductions during year: Collections of principal 1,329 5,561 1,997 Foreclosures -- -- 4,793 Write-off of principal -- 98 14 ------- ------- ------- Balance at end of year $ 2 $ 1,331 $ 5,807 ======= ======= ======= F-18 EX-16.1 2 LETTER RE: CHANGE OF CERTIFYING ACCOUNTANT EXHIBIT 16.1 [LETTERHEAD OF ERNST & YOUNG LLP] November 15, 1996 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Gentlemen: We have read Item 4 of Form 8-K dated October 14, 1996, of Liberte Investors, Inc. and are in agreement with the statements contained in the second paragraph of Item 4 on page 2 therein. We have no basis to agree or disagree with other statements of the registrant contained therein. /s/ Ernst & Young LLP ERNST & YOUNG LLP EX-21.1 3 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY LNC Holdings, Inc. A Nevada Corporation EX-27 4 FDS
5 This summary contains summary financial information extracted from the Company's audited financial statements dated as of June 30, 1997 and is qualified in its entirety by reference to such financial statements. YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 52,535,527 0 474,076 0 3,435,621 0 0 0 56,445,224 239,545 0 0 0 202,561 56,003,118 56,445,224 11,310 2,526,612 0 0 1,203,628 0 0 1,322,984 14,000 1,308,984 0 0 0 1,308,984 .07 0
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