-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, SEZEBjNmnhGU4rzwAyp40VqNlK1tu5Sqg58eds3dfUkfrpC0ihQrVwYm3U3yNZHZ CXmzKiIFdjUCR3LziE5nBg== 0000950134-95-000216.txt : 19950515 0000950134-95-000216.hdr.sgml : 19950515 ACCESSION NUMBER: 0000950134-95-000216 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTE INVESTORS/ CENTRAL INDEX KEY: 0000060153 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 751328153 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06802 FILM NUMBER: 95510616 BUSINESS ADDRESS: STREET 1: 1420 VICEROY DR CITY: DALLAS STATE: TX ZIP: 75235 BUSINESS PHONE: 2148795800 MAIL ADDRESS: STREET 1: 1600 VICEROY DR CITY: DALLAS STATE: TX ZIP: 75235 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 1-6802 LIBERTE INVESTORS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CREATED UNDER DECLARATION OF TRUST 75-1328153 PURSUANT TO THE LAWS OF (I.R.S. Employer THE COMMONWEALTH OF MASSACHUSETTS Identification No.) (State or other jurisdiction of incorporation or organization) 1420 VICEROY DRIVE 75235 DALLAS, TEXAS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (214) 879-5495 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X* NO --- --- * The registrant's confirmed plan of reorganization did not provide for a distribution of securities; however, all required documents and reports have been timely filed by the Registrant both prior to and after confirmation. APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of each of the issuer's class of securities as of February 10, 1995: Shares of Beneficial Interest, no par - 12,423,208 shares. 2 FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1994 LIBERTE INVESTORS INDEX
Page ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheet - December 31, 1994 and June 30, 1994... 3 Consolidated Statement of Operations - Quarter and Six Months Ended December 31, 1994 and 1993 ....................... 4 Consolidated Statement of Cash Flows - Six Months Ended December 31, 1994 and 1993 ................................ 5 Notes to Consolidated Financial Statements ........................ 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................... 8 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ................................................. 11 ITEM 5. OTHER INFORMATION ................................................. 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 14 SIGNATURES ........................................................................ 15 INDEX TO EXHIBITS ................................................................. 16
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET LIBERTE INVESTORS AND SUBSIDIARY
December 31 June 30 1994 1994 (Unaudited) (See Note) ----------- ----------- Assets Mortgage loans on real estate: Earning $ 831,394 $ 5,858,648 Nonearning 154,400 272,308 Note receivable - RPI 5,643,679 6,000,000 Foreclosed real estate: Nonearning 18,169,451 25,207,002 ----------- ----------- 24,798,924 37,337,958 Less: Allowance for possible losses 11,870,134 11,709,395 ----------- ----------- 12,928,790 25,628,563 Cash and cash equivalents 20,025,625 9,157,640 Restricted cash investments 566,745 623,300 Accrued interest and other receivables 267,790 324,555 Other assets 490,366 581,919 ----------- ----------- $34,279,316 $36,315,977 =========== =========== Liabilities and Shareholders' Equity Liabilities Accrued management fees $ 15,348 $ 19,281 Accrued liabilities 1,196,382 1,382,751 ----------- ----------- 1,211,730 1,402,032 Shareholders' Equity Shares of Beneficial Interest, no par value, unlimited authorization: 12,423,208 issued and outstanding at December 31, 1994 and June 30, 1994 33,067,586 34,913,945 ----------- ----------- $34,279,316 $36,315,977 =========== ===========
NOTE: The balance sheet at June 30, 1994 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. 3 4 CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) LIBERTE INVESTORS AND SUBSIDIARY
Quarter Ended Six Months Ended December 31 December 31 ---------------------------- ---------------------------- 1994 1993 1994 1993 ------------ ------------ ------------ ------------ Income Interest $ 156,119 $ 1,822,714 $ 400,447 $ 3,898,060 Temporary investment interest 168,163 43,494 283,343 87,507 Foreclosed real estate and other -- 1,380,612 13,710 2,747,538 Consulting fees 500,000 -- 587,500 -- ------------ ------------ ------------ ------------ 824,282 3,246,820 1,285,000 6,733,105 ------------ ------------ ------------ ------------ Expenses Interest -- 1,989,677 -- 6,456,818 Provision for possible losses 1,682,000 -- 2,192,000 200,000 Management fees 58,340 584,254 128,961 1,193,429 Legal and audit 8,000 220,000 29,754 585,000 Trustees' fees and expenses 8,100 69,499 21,900 144,892 Foreclosed real estate 88,354 796,104 186,364 1,574,688 Debt restructure -- 572,504 -- 2,132,902 Other 288,344 657,472 563,011 1,542,509 ------------ ------------ ------------ ------------ 2,133,138 4,889,510 3,121,990 13,830,238 ------------ ------------ ------------ ------------ Net loss before reorganization items (1,308,856) (1,642,690) (1,836,990) (7,097,133) Reorganization items: Professional fees (1,308,825) (1,308,825) Interest earned on accumulated cash resulting from Chapter 11 proceedings 46,142 46,142 ------------ ------------ ------------ ------------ -- (1,262,683) -- (1,262,683) ------------ ------------ ------------ ------------ Net loss $ (1,308,856) $ (2,905,373) $ (1,836,990) $ (8,359,816) ============ ============ ============ ============ Net loss per Share of Beneficial Interest Loss before reorganization items $(.11) $(.13) $(.15) $(.59) Reorganization items -- (.11) -- (.11) ----- ----- ----- ----- Net loss $(.11) $(.24) $(.15) $(.70) ===== ===== ===== ===== Weighted average number of Shares of Beneficial Interest 12,423,208 12,274,838 12,423,208 12,024,023 Cash dividends declared per share -- -- -- --
See notes to consolidated financial statements. 4 5 CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) LIBERTE INVESTORS AND SUBSIDIARY
Six Months Ended December 31 ----------------------------- 1994 1993 ------------ -------------- Operating activities: Net loss $ (1,836,990) $ (7,097,133) Noncash expenses and revenues included in net loss: Provision for possible losses 2,192,000 200,000 Net change in other receivables, assets and liabilities (109,422) 6,060,698 ------------ ------------ Net cash provided (used) by operating activities before reorganization items 245,588 (836,435) ------------ ------------ Interest earned on accumulated cash resulting from Chapter 11 proceedings -- 46,142 Professional fees -- (93,069) ------------ ------------ Net cash used by reorganization items -- (46,927) ------------ ------------ Net cash provided (used) by operating activities 245,588 (883,362) ------------ ------------ Investing activities: Collections on mortgage loans 550,995 20,399,883 Collections on RPI note receivable 356,321 -- Advances on mortgage loans (141,969) (260,364) Expenditures on foreclosed real estate (109,309) (1,174,741) Sales and basis reductions on foreclosed real estate 9,909,804 8,001,643 Net sales (purchases) of restricted cash investments 56,555 (18,702,267) ------------ ------------ Net cash provided by investing activities 10,622,397 8,264,154 ------------ ------------ Financing activities: Decrease in notes payable -- (4,597,411) ------------ ------------ Net cash used by financing activities -- (4,597,411) ------------ ------------ Net increase in unrestricted cash and cash equivalents 10,867,985 2,783,381 Unrestricted cash and cash equivalents at beginning of period 9,157,640 2,428,902 ------------ ------------ Unrestricted cash and cash equivalents at end of period $ 20,025,625 $ 5,212,283 ============ ============ Schedule of noncash investing and financing activities: Transfer of mortgage loans to foreclosed real estate $ 4,792,781 $ 12,433,375 Charge-offs to allowance for possible losses, net $ 2,031,261 $ 7,312,576 Sales of foreclosed real estate financed by mortgage loans $ 138,400 $ 3,652,480
See notes to consolidated financial statements. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) LIBERTE INVESTORS AND SUBSIDIARY DECEMBER 31, 1994 NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 1994 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 1995. For further information, refer to the financial statements and footnotes included in the Annual Report on Form 10-K of Liberte Investors for the fiscal year ended June 30, 1994 and "Item 5. OTHER INFORMATION" included herein. The accompanying financial statements include the accounts of Liberte Investors and Liberte Corp., a wholly-owned subsidiary which is currently inactive. All intercompany balances and transactions have been eliminated. As used herein, the "Trust" refers to Liberte Investors and its subsidiary. On October 25, 1993, the Trust filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On November 2, 1993, the Trust filed with the Bankruptcy Court a disclosure statement and related plan of reorganization. An order was entered by the Bankruptcy Court confirming a modified plan of reorganization for the Trust on January 24, 1994. On April 7, 1994, the Trust emerged from bankruptcy. Pursuant to the plan of reorganization, certain assets and liabilities were transferred to Resurgence Properties Inc. ("RPI") and RPI's common stock was distributed to the holders of the Trust's outstanding subordinated indebtedness in full satisfaction of such holders' claims against the Trust. NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Income Taxes: The Trust filed its June 30, 1994 Form 10-K and September 30, 1994 Form 10-Q as a real estate investment trust (a "REIT") as defined in the Internal Revenue Code. Disclosures were made in those filings that there was some uncertainty as to whether the Trust qualified as a REIT for its fiscal years ended June 30, 1992, 1993 and 1994. In connection with the preparation of its fiscal 1994 tax return, the Trust concluded that it no longer qualified as a REIT, effective the beginning of fiscal 1994 (July 1, 1993). Accordingly the Trust will be subject to federal income tax on its taxable income. The Trust incurred a taxable loss in fiscal 1994 and in the quarter and six months ended December 31, 1994; therefore no provision for income taxes is necessary in the financial statements for those periods. With the change in status to a taxable entity, the Trust adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). Since there was no financial impact on the year ended June 30, 1994 and the quarter ended September 30, 1994, neither an amended Form 10-K nor Form 10-Q, respectively, have been filed to reflect the adoption of SFAS 109. Reclassifications: Certain amounts in previously issued financial statements have been reclassified to conform to the December 31, 1994 presentation. 6 7 NOTE C -- INCOME TAXES The Trust no longer qualifies as a REIT with the change in status to a taxable entity retroactive to July 1, 1993. The effect of adopting SFAS 109 was not material to the financial position at December 31, 1994 and June 30, 1994, or the results of operations for the quarter and six months ended December 31, 1994 and 1993, or the fiscal year ended June 30, 1994. Significant components of the Trust's deferred tax assets at July 1, 1993 consisted of net operating loss carryforwards ($133,846,000), financial statement loss reserves ($53,939,000) and other items totaling ($15,109,000), all of which were completely offset by a valuation allowance. The Trust's deferred tax assets at June 30, 1994 and December 31, 1994 are estimated to be in excess of $210 million, and are completely offset by a valuation allowance. (The Trust has no material deferred tax liabilities.) At December 31, 1994, the Trust had, for federal tax purposes, net operating loss carryforwards estimated to be in excess of $200 million, which expire at various times between the years 2005 and 2009. The Trust had no income tax expense (benefit) for the quarter and six months ended December 31, 1994 and 1993. The principal differences between the US Federal income tax rate and the Trust's effective income tax rate for all periods presented are primarily due to the tax effect of unrecognized operating losses and deductions. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Operations resulted in a loss of $1,308,856 for the quarter ended December 31, 1994, compared to a loss of $2,905,373 for the same period in fiscal 1994. Operations for the six months ended December 31, 1994 resulted in a loss of $1,836,990 compared to a loss of $8,359,816 for the same period in fiscal 1994. Contributing to the smaller loss for both the quarter and six months were decreases in substantially all expenses and increases in temporary investment interest and consulting fees, partially offset by a decrease in interest income and foreclosed real estate income and an increase in the provision for losses. The changes in income and expense accounts are primarily due to the transfer of assets and liabilities to RPI upon the Trust' emergence from bankruptcy on April 7, 1994. Interest income decreased from $1.8 million in the second quarter of fiscal 1994 to $0.2 million in the second quarter of fiscal 1995. The $1.6 million decrease was the result of a decrease in average earning loans partially offset by an increase in yield. Average earning loans decreased from $91.8 million with a yield of 7.88% in the second quarter of fiscal 1994 to $1.7 million with a yield of 9.08% in the second quarter of fiscal 1995. Interest income decreased from $3.9 million for the first six months of fiscal 1994 to $0.4 million for the first six months of fiscal 1995. The $3.5 million decrease was the result of a decrease in the average earning loans, partially offset by an increase in yield. Average earning loans decreased from $98.6 million with a yield of 7.84% for the first six months of fiscal 1994 to $3.8 million with a yield of 9.15% for the first six months of fiscal 1995. Average nonearning loans for the second quarter of fiscal 1995 totaled $103,000 compared to $29.1 million for the comparable period in fiscal 1994. Assuming the yield on these loans would have been the same as the yield on earning loans had they been on earning status, interest income would have been $2,000 higher in the second quarter of fiscal 1995 and $573,000 higher in the second quarter of fiscal 1994. Average nonearning loans for the first six months of fiscal 1995 totaled $185,000 compared to $28.5 million for the comparable period of fiscal 1994. Assuming that the yield on these loans would have been the same as the yield on earning loans had they been on earning status, interest income would have been $8,000 higher for the first six months of fiscal 1995 and $1.1 million higher for the first six months of fiscal 1994. The Trust is continuing its efforts to reduce nonearning assets and improve the operating performance of real estate assets. Also included in interest income in the second quarter and first six months of fiscal 1995 was $109,000 and $217,000, respectively, of interest income on the RPI note receivable. The average balance of the RPI loan was $5.8 million with a yield of 7.48% for the second quarter of fiscal 1995, and $5.8 million with a yield of 7.38% for the first six months of fiscal 1995. Income on foreclosed real estate decreased in both the quarter ended and six months ended December 31, 1994, as a result of all of the Trust's earning real estate being transferred to RPI upon emergence from bankruptcy. Consulting fee income for the quarter and six months ended December 31, 1994 includes a discounted payoff of $500,000 in consideration for the termination of the consulting agreement between the Trust and RPI; a regular quarterly payment of $87,500 was also received in the quarter ended September 30, 1994. 8 9 The trust committed to fund one new investment origination totaling $686,000 during the six months ended December 31, 1994, of which $166,000 had been advanced as of December 31, 1994. Interest expense for the second quarter of fiscal 1994 included interest on average debt outstanding of $183.1 million with an average cost of 4.31%. Interest expense for the first six months of fiscal 1994 included interest on average debt outstanding of $183.7 million with an average cost of 6.97%. Upon emergence from bankruptcy on April 7, 1994, and as of December 31, 1994, the Trust was debt-free. The provision for possible losses was $1.7 million in the second quarter of fiscal 1995 compared to no provision in the second quarter of fiscal 1994. The allowance for possible losses was $11.9 million at December 31, 1994, compared to $11.7 million at June 30, 1994 and $46.8 million at December 31, 1993. While the Trust believes the allowance for possible losses is adequate at December 31, 1994, management will continue to periodically review the portfolio using then current information to make the estimates and assumptions that are used to determine the allowance for loan losses and the valuation of the real estate acquired in connection with foreclosures or in satisfaction of loans. The estimates and assumptions are susceptible to significant changes due to changes in the market conditions upon which they are based. There was no provision for possible losses on mortgage loans in the second quarter of fiscal 1995 or 1994. The provision for possible losses on foreclosed real estate was $1.7 million in the second quarter of fiscal 1995 compared to no provision for possible losses on foreclosed real estate in the second quarter of fiscal 1994. Any loss incurred upon foreclosure of collateral underlying a loan is charged to the allowance for possible losses on mortgage loans. The allowance for possible losses on mortgage loans at December 31, 1994 includes an allocation for the note receivable from RPI. The following is a summary of transactions affecting the Trust's allowance of possible losses for the six months ended December 31, 1994, compared to the six months ended December 31, 1993.
Six Months Ended December 31, 1994 -------------------------------------------- Mortgage Foreclosed Loans Real Estate Total ------------ ------------ ------------ Balance July 1, 1994 $ 1,562,921 $ 10,146,474 $ 11,709,395 Provision for possible losses -- 510,000 510,000 Amounts charged off, net of recoveries 45,573 (1,506,316) (1,460,743) ------------ ------------ ------------ Balance September 30, 1994 1,608,494 9,150,158 10,758,652 Provision for possible losses -- 1,682,000 1,682,000 Amounts charged off, net of recoveries (417,903) (152,615) (570,518) ------------ ------------ ------------ Balance December 31, 1994 $ 1,190,591 $ 10,679,543 $ 11,870,134 ============ ============ ============
9 10
Six Months Ended December 31, 1994 -------------------------------------------- Mortgage Foreclosed Loans Real Estate Total ------------ ------------ ------------ Balance July 1, 1993 $ 17,728,367 $ 36,210,450 $ 53,938,817 Provision for possible losses 200,000 -- 200,000 Amounts charged off, net of recoveries (509,622) (461,960) (971,582) ------------ ------------ ------------ Balance September 30, 1993 17,418,745 35,748,490 53,167,235 Provision for possible losses -- -- -- Amounts charged off, net of recoveries (970,398) (5,370,596) (6,340,994) ------------ ------------ ------------ Balance December 31, 1993 $ 16,448,347 $ 30,377,894 $ 46,826,241 ============ ============ ============
Management fees were lower in the second quarter of fiscal 1995 than in the comparable period in fiscal 1994 because invested assets, upon which the management fees are based, were lower in the second quarter of fiscal 1995 compared to the second quarter of fiscal 1994. The reduction in legal fees on troubled assets and foreclosed real estate expense was a result of the transfer of a substantial amount of foreclosed real estate to RPI upon emergence from bankruptcy. No debt restructure costs were incurred in the second quarter of fiscal 1995 compared to $600,000 in the second quarter of fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES. Prior to its emergence from bankruptcy, the Trust's principal funding requirements were operating expenses, interest expense and the repayment of its indebtedness. Since emergence from bankruptcy, the Trust is debt-free and its principal funding requirements are operating expenses. The Trust's primary sources of funding operating expenses are its collection of principal and interest on mortgage loans and the note receivable from RPI, and proceeds from the sale of foreclosed real estate. Amounts to be advanced under existing commitments totaled $520,593 at December 31, 1994. Debt was reduced by $4,597,000 in the first six months of fiscal 1994. At December 31, 1993, the Trust had $83.1 million of senior indebtedness and $100 million of 10 1/2% subordinated notes outstanding. The $100 million of subordinated notes was satisfied in full upon the Trust's emergence from bankruptcy on April 7, 1994 and the Trust was released from liability on the senior indebtedness assumed by RPI. 10 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 25, 1993, the Trust filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). On November 2, 1993, the Trust filed with the Bankruptcy Court a disclosure statement (the "Disclosure Statement") and related Chapter 11 plan of reorganization (the "Original Plan"). The Disclosure Statement was approved by the Bankruptcy Court on December 16, 1993, and was subsequently circulated to all holders of the Trust's senior indebtedness, Subordinated Notes and Shares of Beneficial Interest, together with ballots to accept or reject the Original Plan. The Trust obtained the requisite consents to the Original Plan in January 1994, and on January 24, 1994, the Bankruptcy Court entered an order confirming a modified plan of reorganization for the Trust (the "Plan"). On April 7, 1994, the Trust emerged from bankruptcy. Pursuant to the Plan, certain assets and liabilities were transferred to RPI and RPI's common stock was distributed to the holders of the Trust's outstanding subordinated indebtedness in full satisfaction of such holders' claims against the Trust. 11 12 ITEM 5. OTHER INFORMATION REIT STATUS Since its inception the Trust has filed its reports as if it qualified for taxation as a real estate investment trust (a "REIT") under the Internal Revenue Code (the "Code"). To qualify as a REIT, the Trust must satisfy various requirements under the Code, including requirements concerning the nature and composition of its income and assets. In its June 30, 1994 and September 30, 1994 filings, the Trust disclosed that there was some uncertainty as to whether it qualified as a REIT for its fiscal years ended June 30, 1992, 1993 and 1994. In connection with the preparation of its fiscal 1994 tax return, the Trust concluded that, at June 30, 1994, it did not pass the asset test required under the Code. As a result, the Trust no longer qualified as a REIT for federal income tax purposes effective the beginning of fiscal 1994 (July 1, 1993), and it will be subject to federal income tax on its taxable income. The Trust incurred a taxable loss in fiscal 1994 and in the quarter and six months ended December 31, 1994; therefore no provision for income taxes is necessary in the financial statements for those periods. In addition, the Trust has net operating loss carryforwards for federal income tax purposes at December 31, 1994 which are available to offset future taxable income of the Trust. However, if the Trust were to undergo a 50 percentage point ownership change as described in Section 382 of the Code, the ability of the Trust to use its net operating loss carryforwards to offset income earned by the Trust after the ownership change would be severely limited, as would the Trust's ability to deduct losses recognized on certain sales of assets occurring after the ownership change. Accordingly, the Trust believes that it could incur substantial liability for federal income taxes in the event of an ownership change. In addition, generally an entity can qualify as a REIT only if 95% of its gross income constitutes "qualifying income" as defined in Section 856 of the Code (the "95% Test"). Because more than 5% of the Trust's gross income during the taxable years ended June 30, 1992 (the "1992 Year") and June 30, 1993 (the "1993 Year"), consisted of income from an interest rate swap and because it is uncertain whether income derived from such interest rate swaps constitutes qualifying income, it is unclear whether the Trust satisfied the 95% Test for the 1992 Year and the 1993 Year. The Trust believes that such income should be treated as qualifying income for purposes of the 95% Test. Since the Trust incurred a taxable loss in the 1992 Year and 1993 Year, it will not have a tax liability for those years if it is subsequently determined that it did not qualify as a REIT in those years. Commencing July 1, 1993, funds available for distribution to shareholders will be reduced by the amount of any tax liability payable by the Trust to federal tax authorities. Such distributions, if any, will not be deductible by the Trust in computing its taxable income but will be eligible for the dividends received deduction for corporate shareholders to the extent paid out of the Trust's current and cumulative earnings and profits. (No distributions were paid in fiscal 1994 or in the six months ended December 31, 1994.) In addition, unless entitled to relief under specific statutory provisions, the Trust will be ineligible for REIT status for the succeeding four taxable years. The foregoing description is general in character. For a complete description, reference should be made to the pertinent Code sections and the Regulations issued thereunder. 12 13 TRANSFER RESTRICTIONS In order to preserve the Trust's ability to qualify for REIT status under the Code, there are certain restrictions on the transfer of Shares of Beneficial Interest, with such exceptions and pursuant to such procedures as are described in the Declaration of Trust. For the Trust to qualify as a REIT, not more than 50% in value of its outstanding Shares of Beneficial Interest may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year. The Shares of Beneficial Interest must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year, and certain other requirements as to assets, distributions and percentages of the Trust's gross income from particular activities must be met. The Declaration of Trust contains provisions prohibiting the ownership, directly or indirectly, by five or fewer individuals of more than 50% in value of the outstanding Shares of Beneficial Interest during the last half of the Trust's taxable year. The trust intends to maintain these restrictions so that it could requalify as a REIT after its tax year ended June 30, 1998. In order to avoid limitations on the use of the Trust's tax attributes, the Declaration of Trust generally prohibits the transfer of Shares of Beneficial Interest to any Person who is a holder of 5% or more of the Shares of Beneficial Interest or to any Person who would become a holder of 5% or more of the Shares of Beneficial Interest after giving effect to the transfer, directly or by attribution. "Person" for this purpose is defined broadly to mean any individual, corporation, estate, debtor, association, company, partnership, joint venture or similar organization. If a transfer violates this prohibition, either (i) the Shares of Beneficial Interest that were purported to be transferred in excess of the 5% limit will be deemed to remain the property of the initial transferor, or (ii) upon election by the Trust, such Shares of Beneficial Interest shall be transferred to an agent designated by the Trust, who will sell them in an arm's-length transaction, the proceeds of such sale to be allocated to the purported transferee up to (x) the amount paid by such transferee for such Shares of Beneficial Interest and (y) where the purported transfer was by gift inheritance or any similar transfer, the fair market value of such Shares of Beneficial Interest at the time of the purported transfer. If the purported transferee has resold the Shares of Beneficial Interest to an unrelated party in an arm's-length transaction, the purported transferee will be deemed to have sold the Shares of Beneficial Interest as agent for the initial transferor, and will be required to transfer the proceeds of such sale to the agent designated by the Trust, except to the extent that the agent grants written permission to the purported transferee to retain a portion of the proceeds up to the amount that would have been payable to such transferee had the Shares of Beneficial Interest been sold by the agent rather than by the purported transferee. The Declaration of Trust further provides that the Trust may require, as a condition to the registration of the transfer of any Shares of Beneficial Interest, that the proposed transferee furnish to the Trust all information reasonably requested by the Trust with respect to the proposed transferee's direct or indirect ownership interests in Shares of Beneficial Interest. The Board of Trustees of the Trust will have the power to preapprove transfers that would otherwise be prohibited under the foregoing provisions. All certificates evidencing ownership of Shares of Beneficial Interest will bear a conspicuous legend referencing the transfer restrictions. 13 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: (27) Financial Data Schedules (submitted to the SEC for its information). (b) Reports on Form 8-K: None. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. LIBERTE INVESTORS Date: By: /s/ TED ENLOE ----------------- ------------------------------------------ President and Chief Executive Officer Date: By: /s/ BRADLEY S. BUTTERMORE ----------------- ------------------------------------------- Senior Vice President and Treasurer 15 16 LIBERTE INVESTORS INDEX TO EXHIBITS Sequentially Exhibit No. Numbered Pages - ----------- -------------- (27) Financial Data Schedules (submitted to the SEC for its information) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS JUN-30-1995 OCT-01-1994 DEC-31-1994 20,592,370 0 7,387,629 (11,870,134) 18,169,451 0 0 0 34,279,316 0 0 0 0 0 33,067,586 34,279,316 0 824,282 0 0 451,138 1,682,000 0 (1,308,856) 0 (1,308,856) 0 0 0 (1,308,856) (.11) 0
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