-----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, HZOOKogcMPfhWuzLzCGnOhaFBA8P8UZt2DneRxfoh29XiuDbAC2MmJimSxkoe+4U vwI+4AICHSHs1CYLvrUCjw== 0001005477-99-004503.txt : 19991227 0001005477-99-004503.hdr.sgml : 19991227 ACCESSION NUMBER: 0001005477-99-004503 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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-K405 SEC ACT: SEC FILE NUMBER: 001-12117 FILM NUMBER: 99718396 BUSINESS ADDRESS: STREET 1: 200 CRESCENT COURT STREET 2: SUITE 1365 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2148715935 MAIL ADDRESS: STREET 1: 200 CRESCENT COURT STREET 2: SUITE 1365 CITY: DALLAS STATE: TX ZIP: 75201 10-K405 1 FORM 10-K405 UNITED STATES 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, 1999 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: Name of each exchange Title of each class 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. |X| 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 24, 1999 was $33,643,263. 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 24, 1999. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement to be furnished to stockholders in connection with its 1999 Annual Meeting of Stockholders are incorporated by reference in Part III of this Report. LIBERTE INVESTORS INC. FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1999 TABLE OF CONTENTS Page ---- PART I Item 1. Business........................................................ 3 Item 2. Properties...................................................... 4 Item 3. Legal Proceedings............................................... 4 Item 4. Submission of Matters to a Vote of Security Holders............. 4 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters.... ...................................... 5 Item 6. Selected Financial Data......................................... 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 6 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 11 Item 8. Financial Statements and Supplementary Data..................... 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 11 PART III Item 10. Directors and Executive Officers of the Company................. 12 Item 11. Executive Compensation.......................................... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 12 Item 13. Certain Relationships and Related Transactions.................. 12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................................... 13 Signatures............................................................... 15 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"), pursuant to which 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. Since August of 1996, the Company has been actively pursuing opportunities to acquire one or more operating companies. Portfolio Review At June 30, 1999, the Company owned foreclosed real estate totaling $2.8 million. At June 30, 1999, there were no outstanding notes receivables and all foreclosed real estate was classified as nonearning. Foreclosed real estate consisted of three properties, all of which are held for sale. The foreclosed real estate held by the Company at June 30, 1999 consisted of undeveloped land located in Texas. See also Note 2 of Notes to Consolidated Financial Statements. At June 30, 1999, the Company's notes receivable had been collected or written-off, resulting in no outstanding notes receivable. At June 30, 1999, the Company 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. 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 (many of which are much larger than the Company), including various investment funds, other companies in similar industries, corporate conglomerates, individual investors, etc. Economic 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. 3 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. 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". At June 30, 1999, the Company had net operating loss carryforwards for federal income tax purposes of approximately $225 million, which are available to offset future federal taxable income. These carryforwards will expire in 2005 through 2011. See also Note 5 of Notes to Consolidated Financial Statements. Personnel At June 30, 1999, 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 are located at 200 Crescent Court, Suite 1365, Dallas, Texas and are occupied by the Company under a lease agreement expiring December 31, 2000. See Note 4 of Notes to Consolidated Financial Statements. Item 3. Legal Proceedings The Company is from time to time involved in routine litigation arising in the normal course of 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 to any possible insurance or third party reimbursement. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 4 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 as reported on the NYSE Composite Transaction Tape for the periods indicated: Fiscal Year High Low ----------- ---- --- 1999 First Quarter ............................ $ 3 13/16 $ 2 5/8 Second Quarter ........................... 3 1/2 2 3/4 Third Quarter ............................ 3 5/8 3 1/16 Fourth Quarter ........................... 3 3/4 3 1/8 1998 First Quarter ............................ $ 4 1/2 $ 3 11/16 Second Quarter ........................... 4 3/4 3 11/16 Third Quarter ............................ 4 1/8 3 13/16 Fourth Quarter ........................... 4 1/8 3 5/8 The high and low sales price per share of common stock as reported on the NYSE Composite Transaction Tape on September 24, 1999, were $3.00 and $2.8125, respectively. At September 24, 1999, there were approximately 1,500 record holders of LBI common stock. Dividend Policy On June 7, 1999, the Board of Directors of the Company declared a special cash dividend of $0.06 per share paid to stockholders of record on June 30, 1999. The Company also paid a special cash dividend of $0.031 per share on June 30, 1998. Although the Company has paid dividends the past two years, the Company does not anticipate paying cash dividends in the future, but intends to retain earnings for use in acquiring an operating business. 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 5 with certain changes in the ownership of the holders of the Company's shares, the Company may 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. Item 6. Selected Financial Data (in thousands, except per share amount) The following table sets forth selected statement of operations and statement of financial condition data at and for the five years ended June 30, 1999. 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, -------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (dollars in thousands, except per share data) Statement of Operations Data: Revenues $ 2,662 $ 2,778 $ 2,527 $ 2,784 $ 2,172 Provision for loan losses -- -- -- 187 3,192 Net income (loss) 1,850 1,450 1,309 835 (2,868) Basic and diluted net income (loss) per common share 0.09 0.07 0.07 0.07 (0.23) Cash dividends declared per share 0.06 0.031 -- -- -- June 30, -------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (dollars in thousands) Statement of Financial Condition Data: Total assets $ 58,216 $ 57,535 $56,445 $33,354 $32,036 Stockholders' equity 57,735 57,027 56,206 32,852 31,620
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. 6 General During the fiscal year ended June 30, 1999, Liberte Investors Inc. continued to explore the potential acquisition of a viable operating company in order to increase value 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 1999, the Company has not yet entered into any definitive acquisition agreements. 1999 compared with 1998 Net income for the year ended June 30, 1999 increased to $1,850,000 from $1,450,000 for the year ended June 30, 1998, an increase of 28%. This change in operating results is discussed below. Interest income on interest-bearing deposits in banks decreased to $2,530,000 for the year ended June 30, 1999 from $2,721,000 for the year ended June 30, 1998. This decrease is due to a decline in interest rates on the Company's interest-bearing deposits during the year ended June 30, 1999. Unrestricted cash increased from $54.0 million at June 30, 1998 to $55.3 million at June 30, 1999 primarily due to interest earned on unrestricted cash accounts, proceeds from the sale of foreclosed real estate and the liquidation of 300,000 shares of Resurgence Properties, Inc. ("RPI") preferred stock. The Company did not receive any notes receivable interest income for the year ended June 30, 1999 as compared to $41 for the year ended June 30, 1998. There were no outstanding balances on notes receivables at June 30, 1999 or 1998. There were no gains on sales of foreclosed real estate during the year ended June 30, 1998 as compared to $120,000 for the year ended June 30, 1999. The gains on sales of real estate represent proceeds received from the sale of foreclosed real estate in excess of its carrying value. The gains recognized during the year ended June 30, 1999 are from the sale of 56.6 acres in San Antonio, Texas and from the sale of 55 lots in Fontana, California. Other income decreased to $13,000 for the year ended June 30, 1999 from $57,000 for the year ended June 30, 1998. Other income for the year ended June 30, 1998 consisted primarily of dividends on RPI preferred and common stock and interest received on property tax refunds. Other income for the year ended June 30, 1999 represented primarily dividends on RPI preferred stock. Such dividend payments for the year ended June 30, 1999 decreased significantly as compared to the same period in 1998 due to the liquidation in August 1998 of the 300,000 shares of RPI preferred stock held by the Company. Insurance expense decreased to $122,000 for the year ended June 30, 1999 from $151,000 for the year ended June 30, 1998. This decrease is primarily due to decreased premiums related to directors' and officers' insurance coverage. Foreclosed real estate operations expense decreased $48,000 from $193,000 for the year ended June 30, 1998 to $145,000 for the year ended June 30, 1999. The decrease is primarily due to lower property tax expense for fiscal 1999 resulting from the sale of 56.6 acres in San Antonio, Texas and from the sale of 55 lots in Fontana, California and additional expenses incurred in fiscal 1998 to foreclose on the 55 lots in Fontana, California. 7 Loss on write-down of foreclosed real estate was $407,000 for the year ended June 30, 1998. There were no write-downs of foreclosed real estate for the year ended June 30, 1999. The write-down for 1998 was made to more accurately reflect estimated sales proceeds less selling costs of single family lots in Fontana, California. Legal, audit and consulting fees were $68,000 for the year ended June 30, 1999 as compared to $73,000 incurred in the year ended June 30, 1998. Legal fees in 1999 were lower due to the Company having sold 56.6 acres in San Antonio, Texas and 55 lots in Fontana, California, with no sales contracts pending on the remaining foreclosed real estate. Franchise tax expense decreased from $96,000 in 1998 to $75,000 in 1999 because the Company did not have to pay Texas franchise taxes during the year ended June 30, 1999 and because fiscal 1998 tax expense was higher because of an adjustment to record 1997 Delaware franchise tax. Compensation and employee benefits increased by $17,000 from $90,000 during the year ended June 30, 1998 to $107,000 for the year ended June 30, 1999. Compensation expense is higher for the year ended June 30, 1999 due to the Company having just one employee for two months during the year ended June 30, 1998. General and administrative expense decreased from $253,000 for the year ended June 30, 1998 to $232,000 for the year ended June 30, 1999. The decrease is primarily due to a reduction in shareholder relations and other general and administrative expenses during the year ended June 30, 1999. 1998 compared with 1997 Net income for the year ended June 30, 1998 increased to $1,450,000 from $1,309,000 for the year ended June 30, 1997, an increase of 11%. This change in operating results is discussed below. Interest income on interest-bearing deposits in banks increased to $2,721,000 for the year ended June 30, 1998 from $2,364,000 for the year ended June 30, 1997. This increase was due to growth in the unrestricted cash balance available for interest-bearing deposits. Unrestricted cash increased from $52.5 million at June 30, 1997 to $54.0 million at June 30, 1998 primarily due to interest earned on unrestricted cash accounts. This increase in unrestricted cash resulted in a higher average daily balance of interest-bearing deposits for the year ended June 30, 1998 as compared to June 30, 1997. Notes receivable interest income decreased to $41 for the year ended June 30, 1998 from $112,000 for the year ended June 30, 1997. The $2,000 outstanding balance of notes receivable at June 30, 1997 was collected or written-off during the year ended June 30, 1998. There were no receivables outstanding at June 30, 1998. There were no gains on sales of foreclosed real estate during the year ended June 30, 1998 as compared to $11,000 for the same period in 1997. The gains on sales of real estate represent proceeds received from the sale of foreclosed real estate in excess of its carrying value. The gain recognized during the year ended June 30, 1997 resulted from the sale of single-family lots in San Antonio, Texas. Other income increased to $57,000 for the year ended June 30, 1998 from $39,000 for the year ended June 30, 1997. Other income for the year ended June 30, 1998 consisted primarily of dividends 8 on RPI preferred and common stock and interest received on property tax refunds. Other income for the year ended June 30, 1997 represented primarily dividends on RPI preferred stock. Insurance expense decreased to $151,000 for the year ended June 30, 1998 from $307,000 for the year ended June 30, 1997. This decrease was primarily due to decreased premiums related to directors' and officers' insurance coverage. Foreclosed real estate operations expense decreased $64,000 from $257,000 for the year ended June 30, 1997 to $193,000 for the year ended June 30, 1998. The decrease was primarily due to lower property tax expense for fiscal 1998 resulting from reduced appraised values on land owned in San Antonio, Texas and higher property tax expense for 1997 due to an accrual to establish 1996 and 1997 property taxes on 40 acres of land held by LNC Holdings, Inc. which is encumbered by delinquent taxes. Loss on write-down of foreclosed real estate was $407,000 for the year ended June 30, 1998. There were no write-downs of foreclosed real estate for the year ended June 30, 1997. The write-down for 1998 was made to more accurately reflect estimated sales proceeds less selling costs of single family lots in Fontana, California. Legal, audit and consulting fees were $73,000 for the year ended June 30, 1998, a decrease of $95,000 from the $168,000 incurred in the year ended June 30, 1997. Fees in 1997 were primarily for real estate consulting services, additional expenses related to the collection of deficiency notes that had been previously written-off and legal advisory work related to potential acquisitions. Directors' fees and expenses increased from $46,000 in 1997 to $64,000 in 1998. Director fees increased in 1998 due to an increase in the number of compensated directors of the Company from four in 1997 to five in 1998. Franchise tax expense increased from $65,000 in 1997 to $96,000 in 1998 due to higher Delaware franchise tax expense for 1998. Compensation and employee benefits decreased by $45,000 from $135,000 during the year ended June 30, 1997 to $90,000 for the year ended June 30, 1998. The decrease is due to a decrease in the number of employees from nine at the beginning of 1997 to two in 1998. General and administrative expense increased from $225,000 for the year ended June 30, 1997 to $253,000 for the year ended June 30, 1998. The increase is primarily due to an increase in rent expense when the Company relocated to new office space in July 1997. 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. 9 Operating activities for the year ended June 30, 1999 provided $1.8 million of cash compared to $2.2 million and $1.4 million provided in 1998 and 1997, respectively. The table below reflects cash flow from operating activities (in millions): Year Ended June 30, ------------------------ 1999 1998 1997 ------ ------ ------ Total income $ 2.7 $ 2.8 $ 2.5 Operating expenses (0.8) (1.3) (1.2) Net change in other receivables, assets and liabilities (0.1) 0.7 0.1 ------ ------ ------ Net cash provided by operating activities $ 1.8 $ 2.2 $ 1.4 ====== ====== ====== Net cash provided by investing activities for the year ended June 30, 1999 was $708,000 compared to net cash used of $16,000 for the year ended June 30, 1998 and net cash provided of $1.4 million for the year ended June 30, 1997. Net cash provided for 1999 was primarily from sales of foreclosed real estate, liquidation of 300,000 shares of RPI preferred stock and liquidation of restricted cash accounts, while net cash used in 1998 was primarily for fixed asset purchases and net cash provided in 1997 was a result of collections from the Company's note receivable portfolio. The table below reflects cash flow from investing activities (in millions): Year Ended June 30, ------------------------ 1999 1998 1997 ------ ------ ------ Collections on mortgage loans $ -- $ -- $ 1.3 Liquidation of restricted cash 0.1 -- -- Liquidation of RPI preferred stock 0.3 -- -- Sales of foreclosed real estate 0.3 -- 0.1 ------ ------ ------ Net cash provided by investing activities $ 0.7 $ -- $ 1.4 ====== ====== ====== Net cash used in financing activities totaled $1.2 million for the year ended June 30, 1999 due to a cash dividend paid on June 30, 1999. Net cash used in financing activities totaled $0.6 million for the year ended June 30, 1998 due to a cash dividend paid on June 30, 1998. Net cash provided by financing activities totaled $22.5 million for the year ended June 30, 1997 primarily due to the issuance of new stock to Hunter's Glen, less expenses of the new issue. Total cash and cash equivalents were $55.3 million at June 30, 1999. The Company plans to finance acquisitions with its cash and cash equivalents, borrowings and private or public debt and equity financings. On August 17, 1999, certain restrictions on issuing additional shares of common stock expired, which allows the Company to issue additional common stock to fund an acquisition. Prior to August 17, 1999, the Company was effectively precluded from issuing any additional shares of common stock for three years after the sale of Common Stock to Hunter's Glen in order to avoid restricting the use of its NOL carryforwards. Year 2000 The Company recognizes that the arrival of the Year 2000 poses a unique challenge to the ability of computer systems to recognize the date change from December 31, 1999 to January 1, 2000. The Company presently has a general ledger account system that is compliant with Year 2000 issues. The Company's two largest vendors, who are large financial institutions, have made public disclosures stating their systems are Year 2000 compliant, although the Company can make no assurances that problems will not be encountered due to a vendor Year 2000 problem. The most likely worst case scenario is currently 10 considered by the Company to be the lack of access to funds held by the two financial institutions, although the Company believes this occurrence would be of a short duration and not have a material financial impact on the Company. Item 7A. Quantitative and Qualitative Disclosure About Market Risk The Company's financial instruments consists primarily of cash and cash equivalents. As noted in Note 8 to the Consolidated Financial Statements, the Company has approximately $55 million of its cash in interest bearing deposits in two financial institutions, which are due on demand. Fair value of these financial instruments approximates carrying value due to the liquidity and short-term nature of these instruments. The Company is subject to interest rate risk should rates fluctuate as it relates to interest income earned from these financial instruments. It is the intention of management to ultimately acquire a viable operating company in order to increase value to existing shareholders and provide a new focus and direction for the Company. These financial instruments would be used to fund such 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 Not applicable 11 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 12, 1999 under the headings "DIRECTOR NOMINEES AND EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE," 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 headings "MANAGEMENT COMPENSATION," "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" and "COMPENSATION COMMITTEE REPORT ON EXECUTIVE 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 Not applicable. 12 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-14. (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 Hunter's Glen/Ford, Ltd. (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). 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). 4.1 Form of Registration Rights Agreement dated August 16, 1996, between the Company and the Purchaser (incorporated by reference to Exhibit 4.1 of the Registration Statement). 4.2 Form of Agreement Clarifying Registration Rights dated August 16, 1996, between 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 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). 13 10.2 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). 10.3 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). 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. 14 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 24, 1999 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 24, 1999 - ----------------------------- of the Board (Principal Executive Officer) Gerald J. Ford /s/ SAMUEL C. PERRY Controller September 24, 1999 - ----------------------------- (Principal Financial Officer and Principal Samuel C. Perry Accounting Officer) /s/ GENE H. BISHOP Director September 24, 1999 - ----------------------------- Gene H. Bishop /s/ HARVEY B. CASH Director September 24, 1999 - ----------------------------- Harvey B. Cash /s/ ROBERT TED ENLOE, III Director September 24, 1999 - ----------------------------- Robert Ted Enloe, III /s/ EDWARD W. ROSE, III Director September 24, 1999 - ----------------------------- Edward W. Rose, III /s/ GARY SHULTZ Director September 24, 1999 - ----------------------------- Gary Shultz
15 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 (a) (1) and 14 (a) (2): Page ---- Report of KPMG LLP, Independent Auditors ................................ F-2 Consolidated Statements of Financial Condition as of June 30, 1999 and June 30, 1998 ................................. F-3 Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997 .................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1999, 1998 and 1997 ......................... F-5 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 ................................... F-6 Notes to Consolidated Financial Statements .............................. F-7 Schedule IV - Mortgage Loans on Real Estate ............................. F-14 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 consolidated financial statements of Liberte Investors Inc. and subsidiary as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule 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 audits. We conducted our audits 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 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 financial position of Liberte Investors Inc. and subsidiary as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas August 6, 1999 F-2 LIBERTE INVESTORS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, June 30, 1999 1998 ------------- ------------- Assets Unrestricted cash and cash equivalents $ 55,280,342 $ 53,998,721 Restricted cash and cash equivalents -- 64,310 ------------- ------------- Total cash and cash equivalents 55,280,342 54,063,031 Foreclosed real estate held for sale 2,810,267 3,028,273 Accrued interest and other receivables 3,790 4,343 Other assets, net 121,160 438,951 ------------- ------------- Total assets $ 58,215,559 $ 57,534,598 ============= ============= Liabilities and Stockholders' Equity Liabilities-accrued and other liabilities $ 480,728 $ 507,356 Stockholders' Equity Common stock, $.01 par value, 50,000,000 shares authorized, 20,256,097 shares issued and outstanding 202,561 202,561 Additional paid-in capital 309,392,399 309,392,399 Accumulated deficit (251,860,129) (252,567,718) ------------- ------------- Total stockholders' equity 57,734,831 57,027,242 ------------- ------------- Commitments and contingencies Total liabilities and stockholders' equity $ 58,215,559 $ 57,534,598 ============= ============= See notes to consolidated financial statements. F-3 LIBERTE INVESTORS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Income Interest-bearing deposits in banks $ 2,529,537 $ 2,721,150 $ 2,364,381 Notes receivable interest -- 41 111,776 Gain on sales of foreclosed real estate 119,593 -- 11,310 Other 12,789 57,012 39,145 ----------- ----------- ----------- Total income 2,661,919 2,778,203 2,526,612 ----------- ----------- ----------- Expenses Insurance 121,828 151,197 307,292 Foreclosed real estate operations 144,591 193,140 257,017 Loss on write-down of foreclosed real estate -- 407,348 -- Legal, audit and consulting fees 68,396 72,847 167,895 Directors fees and expenses 63,000 63,500 46,050 Franchise tax 75,266 96,270 65,206 Compensation and employee benefits 107,302 89,584 134,803 General and administrative 231,940 253,359 225,365 ----------- ----------- ----------- Total expenses 812,323 1,327,245 1,203,628 ----------- ----------- ----------- Income before income taxes 1,849,596 1,450,958 1,322,984 Income tax expense -- 1,456 14,000 ----------- ----------- ----------- Net Income $ 1,849,596 $ 1,449,502 $ 1,308,984 =========== =========== =========== Basic and diluted net income per share of common stock $ 0.09 $ 0.07 $ 0.07 =========== =========== =========== Weighted average number of shares of common stock 20,256,097 20,256,097 19,237,758 =========== =========== ===========
See notes to consolidated financial statements F-4 LIBERTE INVESTORS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Number of Beneficial Number of Common Paid-In Shares Interest Shares Stock Capital ------ -------- ------ ----- ------- Balance at June 30, 1996 12,153,658 $ 287,954,763 -- $ -- $ -- Exchange of shares pursuant to plan of reorganization (12,153,658) (287,954,763) 12,153,658 121,537 287,428,901 Issuance of common stock, net of stock issuance costs of $1,047,429 -- -- 8,102,439 81,024 21,963,498 Net income -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- Balance at June 30, 1997 -- -- 20,256,097 202,561 309,392,399 Dividends paid ($0.031 per share) -- -- -- -- -- Net income -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- Balance at June 30, 1998 -- -- 20,256,097 202,561 309,392,399 Dividends paid ($0.06 per share) -- -- -- -- -- Unclaimed dividends from bankruptcy reorganization -- -- -- -- -- Net income -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- Balance at June 30, 1999 -- $ -- 20,256,097 $ 202,561 $ 309,392,399 ============= ============= ============= ============= ============= Treasury Accumulated Stock Deficit Total ----- ------- ----- Balance at June 30, 1996 $ (404,325) $(254,698,265) $ 32,852,173 Exchange of shares pursuant to plan of reorganization 404,325 -- -- Issuance of common stock, net of stock issuance costs of $1,047,429 -- -- 22,044,522 Net income -- 1,308,984 1,308,984 ------------- ------------- ------------- Balance at June 30, 1997 -- (253,389,281) 56,205,679 Dividends paid ($0.031 per share) -- (627,939) (627,939) Net income -- 1,449,502 1,449,502 ------------- ------------- ------------- Balance at June 30, 1998 -- (252,567,718) 57,027,242 Dividends paid ($0.06 per share) -- (1,215,366) (1,215,366) Unclaimed dividends from bankruptcy reorganization -- 73,359 73,359 Net income -- 1,849,596 1,849,596 ------------- ------------- ------------- Balance at June 30, 1999 $ -- $(251,860,129) $ 57,734,831 ============= ============= =============
See notes to consolidated financial statements. F-5 LIBERTE INVESTORS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 1,849,596 $ 1,449,502 $ 1,308,984 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,448 17,715 14,009 Gain from sales of foreclosed real estate (119,593) -- (11,310) Loss on write-down of foreclosed real estate -- 407,348 -- Decrease in accrued interest and other receivables 553 164 59,368 (Increase) decrease in other assets (374) 25,842 277,208 Increase (decrease) in accrued and other liabilities 41,670 267,811 (262,533) Income from impaired loans -- -- (500) ------------ ------------ ------------ Net cash provided by operating activities 1,789,300 2,168,382 1,385,226 ------------ ------------ ------------ Cash flows from investing activities: Collections of notes receivable -- 1,693 1,330,197 Additions to fixed assets (758) (14,632) -- Proceeds from sales and basis reductions of foreclosed real estate 331,154 -- 51,479 Proceeds from sale of fixed assets 1,475 -- -- Proceeds from liquidation of other assets 300,000 -- -- Decrease (increase) in restricted cash investments 75,816 (3,073) (2,912) ------------ ------------ ------------ Net cash provided by (used in) investing activities 707,687 (16,012) 1,378,764 ------------ ------------ ------------ Cash flows from financing activities: Issuance of newly issued shares of common stock -- -- 23,091,951 Stock issuance costs -- -- (627,245) Dividends paid (1,215,366) (627,939) -- ------------ ------------ ------------ Net cash (used in) provided by financing activities (1,215,366) (627,939) 22,464,706 ------------ ------------ ------------ Net increase in unrestricted cash and cash equivalents 1,281,621 1,524,431 25,228,696 Unrestricted cash and cash equivalents at beginning of year 53,998,721 52,474,290 27,245,594 ------------ ------------ ------------ Unrestricted cash and cash equivalents at end of year $ 55,280,342 $ 53,998,721 $ 52,474,290 ============ ============ ============
See notes to consolidated financial statements. F-6 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999, 1998, and 1997 (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. Beginning in fiscal 1988, 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-7 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) 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. (g) 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 basis of assets and 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. (h) Basic and diluted net income per share - Basic and diluted net income per share is based on the weighted average number of shares outstanding during the year. (i) Cash and cash equivalents - Cash and cash equivalents include highly liquid investments with original maturities of three months or less. F-8 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Foreclosed Real Estate The following is a summary of the Company's activity in foreclosed real estate for the years ended June 30, 1999, 1998, and 1997: 1999 1998 1997 ----------- ----------- ----------- Balance at beginning of year $ 3,028,273 $ 3,435,621 $ 3,475,790 Write-down in value -- (407,348) -- Cost of real estate sold (218,006) -- (40,169) ----------- ----------- ----------- Balance at end of year $ 2,810,267 $ 3,028,273 $ 3,435,621 =========== =========== =========== The following table sets forth the Company's portion of foreclosed real estate by type of property and geographic location: June 30, ------------------------------ 1999 1998 ---------- ---------- Type of Property: Single-family lots $ -- $ 213,052 Land 2,810,267 2,815,221 ---------- ---------- $2,810,267 $3,028,273 ========== ========== Geographic Location: Texas $2,810,267 $2,815,221 California -- 213,052 ---------- ---------- $2,810,267 $3,028,273 ========== ========== 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. On January 20, 1998, foreclosure of the property was completed, and all right, title, and interest in the property were conveyed to the Company. The note was recorded as foreclosed real estate in October of 1993 . This property, which consisted of 55 lots in Fontana, California, was sold in September 1998 to a single-family homebuilder for $229,020, less associated selling costs of $17,020. The 55 lots were written-down by approximately $407,000 at June 30, 1998 to more accurately reflect the value of the lots based upon the selling price less costs to complete. A gain of approximately $2,000 was recognized as a result of this transaction for the year ended June 30, 1999. The proceeds from the sale of the 55 lots was reduced by $3,689 for property taxes paid by the purchaser, which is treated as a non-cash item in the statements of cash flows. In August 1998, the Company sold 56.6 acres of land in San Antonio, Texas to a single-family homebuilder for $339,700, less associated selling costs of $34,126. A gain of approximately $117,000 was recognized as a result of this transaction for the year ended June 30, 1999. The buyer also has an option to purchase two additional tracts totaling 109 acres of land adjacent to the 56.6 acres and has made a $50,000 deposit to the Company for this option to purchase. The proceeds from the sale of the 56.6 acres were reduced by $186,420 to be used by the buyer to extend a road into the property and by $2,756 in property taxes paid by the purchaser. If the option to purchase the second tract is exercised, the aggregate sales price of the second tract of land will be increased by $186,420. These amounts are treated as non-cash transactions in the statements of cash flows. F-9 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) Notes Receivable The following is a summary of notes receivable activity for the years ended June 30, 1999, 1998 and 1997: 1999 1998 1997 --------------- ----------- ----------- Balance at beginning of year $ -- $ 1,693 $ 1,331,390 Principal collections -- (1,323) (1,329,317) Write-off of principal -- (370) (380) --------------- ----------- ----------- Balance at end of year $ -- $ -- $ 1,693 =============== =========== =========== At June 30, 1999, 1998 and 1997, the Company had impaired loans from prior foreclosure related deficiency notes and/or judgments, with no carrying value. During fiscal 1997, in addition to the collections shown in the table above, the Company recognized $500 of loan income from impaired loans which had no carrying value at the time of collection. No collections were made during fiscal 1998 or 1999. (4) 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 approximately $1,116,000 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, 1997, 1998 and for the six month period ended June 30, 1999 totaling $149,000. 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, 1998 included restricted cash of approximately $64,000 for claims due to bankruptcy. The claims represented unclaimed dividends from May 1994. Any amount not claimed was voidable after five years. During May 1999, dividend checks totaling $11,506 had not been claimed, and all the outstanding dividend checks were voided. In addition, a liability of $61,853 associated with unpaid dividend amounts was reversed. The restricted cash accounts were closed and transferred into unrestricted cash accounts. These amounts were credited to accumulated deficit since the amounts were previously charged as a dividend to the accumulated deficit and are treated as a non-cash transaction in the statements of cash flows. F-10 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company entered into an operating lease dated May 16, 1997 relating to 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. In addition, the Company has entered into other operating leases for office equipment. Rental expense for fiscal 1999, 1998 and 1997 under these leases was approximately $88,000, $72,000 and $26,000, respectively. Future minimum lease payments under these leases are as follows: Fiscal Year Ending June 30, Amount ------- ------ 2000 $ 77,856 2001 38,790 -------- Total future minimum rentals $116,646 ======== 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 to possible insurance or third party reimbursement. (5) Federal Income Taxes Income tax expense attributable to income before income taxes consists of:
June 30, ----------------------------------- 1999 1998 1997 --------- --------- --------- Federal Current $ -- $ 1,456 $ 14,000 Deferred -- -- -- --------- --------- --------- $ -- $ 1,456 $ 14,000 ========= ========= =========
The income tax expense for the years ended June 30, 1999, 1998 and 1997 differs from the amounts computed by applying the U.S. Federal corporate tax rate of 34% to income before income taxes as follows:
June 30, ----------------------------------- 1999 1998 1997 --------- --------- --------- Computed "expected" income tax expense $ 628,863 $ 493,326 $ 449,815 Increase (decrease) in taxes resulting from: Adjustment to deferred tax asset and permanent tax items 1,208 (231,233) (466,250) Change in the beginning of the year balance of the valuation allowance for deferred tax assets allocated to income taxes (630,071) (260,637) 30,435 --------- --------- --------- $ -- $ 1,456 $ 14,000 ========= ========= =========
F-11 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at June 30, 1999 and 1998 are presented below: June 30, ---------------------------- 1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 76,652,292 $ 77,056,215 Basis differences of foreclosed real estate 2,103,969 2,331,370 Capital loss carryforward 1,629,812 1,630,006 Other 1,912,654 1,911,207 ------------ ------------ Total gross deferred tax assets 82,298,727 82,928,798 Less: valuation allowance (82,298,727) (82,928,798) ------------ ------------ Net deferred tax assets $ -- $ -- ============ ============ The net change in the valuation allowance for the years ended June 30, 1999 and 1998 was a decrease of $630,071 and $260,637, 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, 1999, the Company had net operating loss carryforwards for federal income tax purposes of approximately $225,448,000, 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 approximately $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 $15,100 which are available to reduce future federal income taxes, if any, over an indefinite period. (6) 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. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts 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 Company believes that its deficiency notes receivable, which have no carrying value at June 30, 1999 and 1998, may have some fair value, but such value cannot be estimated and any potential collections are not measurable as to timing or amount. F-12 Liberte Investors Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) Other Assets In August 1998, the Company received $300,000 from the liquidation of 300,000 shares of RPI preferred stock as well as $3,514 in accrued dividends. No gain or loss was recorded as a result of the liquidation. (8) Concentrations of Credit Risk At June 30, 1999, the Company had certain concentrations of credit risk with two financial institutions in the form of cash which amounted to approximately $55 million. 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. (9) 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. F-13 Liberte Investors Inc. and Subsidiary SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE June 30, 1999 Periodic Face Carrying Principal Interest Maturity Payment Amount Amount Amount Description Rate Date Terms of Note of Note Delinquent - -------------------------------------------------------------------------------- NONE (1) Reconciliation of "Mortgage Loans on Real Estate" (in thousands): Year Ended June 30, ------------------------------ 1999 1998 1997 ------ ------ ------ Balance at beginning of year $ -- $ 2 $1,331 Additions during year: Write-up in value of impaired loans -- -- -- Net addition from asset swap -- -- -- New mortgage loans and advances on existing loans and other -- -- -- ------ ------ ------ -- 2 1,331 Deductions during year: Collections of principal -- 2 1,329 Foreclosures -- -- -- Write-off of principal -- -- -- ------ ------ ------ Balance at end of year $ -- $ -- $ 2 ====== ====== ====== F-14 EX-21.1 2 LIST OF SUBSIDIARIES Subsidiaries Of The Company LNC Holdings, Inc. A Nevada Corporation EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S AUDITED FINANCIAL STATEMENTS DATED AS OF JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUN-30-1999 JUL-01-1998 JUN-30-1999 55,280,342 0 124,950 0 2,810,267 0 0 0 58,215,559 480,728 0 0 0 202,561 57,532,270 58,215,559 0 2,661,919 0 0 812,323 0 0 1,849,596 0 1,849,596 0 0 0 1,849,596 .09 .09
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