1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 1-6802 LIBERTE INVESTORS (Exact name of Registrant as specified in its Charter) CREATED UNDER DECLARATION OF TRUST 75-1328153 PURSUANT TO THE LAWS OF (I.R.S. Employer THE COMMONWEALTH OF MASSACHUSETTS Identification No.) (State or other jurisdiction of incorporation or organization) 1420 VICEROY DRIVE 75235 DALLAS, TEXAS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (214) 879-5495 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X * NO ---- ---- * The registrant's confirmed plan of reorganization did not provide for a distribution of securities; however, all required documents and reports have been timely filed by the Registrant both prior to and after confirmation. APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of each of the issuer's class of securities as of May 10, 1995: Shares of Beneficial Interest, no par - 12,153,658 shares. 2 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1995 LIBERTE INVESTORS INDEX Page ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheet - March 31, 1995 and June 30, 1994 . . . . . . . . . . . . . . 3 Consolidated Statement of Operations - Quarter and Nine Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statement of Cash Flows - Nine Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 7 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 15 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET LIBERTE INVESTORS AND SUBSIDIARY March 31, June 30, 1995 1994 (Unaudited) (See Note) ------------- ------------ Assets Mortgage loans on real estate: Earning $ 8,114 $ 5,858,648 Nonearning 486,717 272,308 Note receivable - RPI 5,524,906 6,000,000 Foreclosed real estate: Nonearning 15,624,114 25,207,002 -------------- ------------- 21,643,851 37,337,958 Less: Allowance for possible losses 10,657,899 11,709,395 -------------- ------------- 10,985,952 25,628,563 Cash and cash equivalents 20,678,369 9,157,640 Restricted cash investments 559,330 623,300 Accrued interest and other receivables 133,262 324,555 Other assets 472,107 581,919 -------------- ------------- $ 32,829,020 $ 36,315,977 ============== ============= - ------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Liabilities Accrued management fees $ 16,963 $ 19,281 Accrued liabilities 1,079,562 1,382,751 -------------- ------------- 1,096,525 1,402,032 Shareholders' Equity Shares of Beneficial Interest, no par value, unlimited authorization: 12,423,208 issued and 12,153,658 outstanding (net of 269,550 shares held in treasury) at March 31, 1995 and 12,423,208 issued and outstanding at June 30, 1994 31,732,495 34,913,945 -------------- ------------- $ 32,829,020 $ 36,315,977 ============== ============= 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 Nine Months Ended March 31, March 31, ----------------------------- ------------------------------ 1995 1994 1995 1994 ---------- ------------ ----------- ------------- Income Interest on receivables $ 125,381 $ 1,514,118 $ 525,828 $ 5,412,178 Temporary investment interest 303,232 39,385 586,575 126,892 Consulting fees -- -- 587,500 -- Foreclosed real estate and other 7,110 1,232,519 20,820 3,980,057 -------------- -------------- ------------- --------------- 435,723 2,786,022 1,720,723 9,519,127 -------------- -------------- ------------- --------------- Expenses Interest -- 1,143,500 -- 7,600,318 Provision for possible losses 1,000,000 2,975,000 3,192,000 3,175,000 General and administrative 257,049 550,019 820,060 2,092,528 Management fees 26,895 544,095 155,856 1,737,524 Legal and audit 23,000 120,000 52,754 705,000 Trustees' fees and expenses 22,215 85,088 44,115 229,980 Foreclosed real estate 37,329 754,390 223,693 2,329,078 Debt restructure -- -- -- 2,132,902 -------------- -------------- ------------ --------------- 1,366,488 6,172,092 4,488,478 20,002,330 -------------- -------------- ------------ --------------- Net loss before reorganization items (930,765) (3,386,070) (2,767,755) (10,483,203) Reorganization items: Professional fees -- (4,174,211) -- (5,483,036) Interest earned on accumulated cash resulting from Chapter 11 proceedings -- 225,688 -- 271,830 -------------- -------------- ------------- --------------- -- (3,948,523) -- (5,211,206) -------------- -------------- ------------- --------------- Net loss $ (930,765) $ (7,334,593) $ (2,767,755) $ (15,694,409) ============== ============== ============= =============== Net loss per Share of Beneficial Interest Loss before reorganization items $ (.07) $ (.27) $ (.22) $ (.86) Reorganization items -- (.32) -- (.43) -------------- -------------- ------------ --------------- Net loss $ (.07) $ (.59) $ (.22) $ (1.29) ============== ============== ============ =============== Weighted average number of Shares of Beneficial Interest 12,288,433 12,423,208 12,378,939 12,155,142 Cash dividends declared per share -- -- -- -- See notes to consolidated financial statements. 4 5 CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) LIBERTE INVESTORS AND SUBSIDIARY Nine Months Ended March 31, --------------------------------- 1995 1994 ------------ ------------- Operating activities: Net loss before reorganization items $ (2,767,755) $ (10,483,203) Noncash expenses and revenues included in net loss: Provision for possible losses 3,192,000 3,175,000 Net change in other receivables, assets and liabilities (83,849) 7,351,609 -------------- -------------- Net cash provided by operating activities before reorganization items 340,396 43,406 -------------- -------------- Interest earned on accumulated cash resulting from Chapter 11 proceedings -- 271,830 Professional fees -- (894,588) -------------- -------------- Net cash used by reorganization items -- (622,758) -------------- -------------- Net cash provided (used) by operating activities 340,396 (579,352) -------------- -------------- Investing activities: Collections on mortgage loans 1,343,510 26,940,224 Collections on RPI note receivable 475,094 -- Advances on mortgage loans (306,949) (314,387) Expenditures on foreclosed real estate (186,865) (2,012,645) Sales and basis reductions of foreclosed real estate 10,195,898 12,466,174 Net sales (purchases) of restricted cash investments 63,970 (28,874,372) -------------- -------------- Net cash provided by investing activities 11,584,658 8,204,994 -------------- -------------- Financing activities: Purchase of treasury stock (404,325) -- Decrease in notes payable -- (4,597,411) -------------- -------------- Net cash used by financing activities (404,325) (4,597,411) -------------- -------------- Net increase in unrestricted cash and cash equivalents 11,520,729 3,028,231 Unrestricted cash and cash equivalents at beginning of period 9,157,640 2,428,902 -------------- -------------- Unrestricted cash and cash equivalents at end of period $ 20,678,369 $ 5,457,133 ============== ============== Schedule of noncash investing and financing activities: Transfer of mortgage loans to foreclosed real estate $ 4,792,781 $ 13,729,234 Charge-offs to allowance for possible losses, net $ 4,243,496 $ 15,069,017 Sales of foreclosed real estate financed by mortgage loans $ 138,400 $ 3,888,112 See notes to consolidated financial statements. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) LIBERTE INVESTORS AND SUBSIDIARY MARCH 31, 1995 NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 1995, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 1995. For further information, refer to the financial statements and footnotes included in the Annual Report on Form 10-K of Liberte Investors for the fiscal year ended June 30, 1994, and "Item 5. Other Information" included herein. The accompanying financial statements include the accounts of Liberte Investors and Liberte Corp., a wholly-owned subsidiary which is currently inactive. All intercompany balances and transactions have been eliminated. As used herein, the "Trust" refers to Liberte Investors and its subsidiary. On October 25, 1993, the Trust filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On November 2, 1993, the Trust filed with the Bankruptcy Court a disclosure statement and related plan of reorganization. An order was entered by the Bankruptcy Court confirming a modified plan of reorganization for the Trust on January 24, 1994. On April 7, 1994, the Trust emerged from bankruptcy. Pursuant to the plan of reorganization, certain assets and liabilities were transferred to Resurgence Properties Inc. ("RPI") and RPI's common stock was distributed to the holders of the Trust's outstanding subordinated indebtedness in full satisfaction of such holders' claims against the Trust. NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Income Taxes: The Trust filed its June 30, 1994, Form 10-K and September 30, 1994, Form 10-Q as a real estate investment trust (a "REIT") as defined in the Internal Revenue Code. Disclosures were made in those filings that there was some uncertainty as to whether the Trust qualified as a REIT for its fiscal years ended June 30, 1992, 1993, and 1994. In connection with the preparation of its fiscal 1994 tax return, the Trust concluded that it no longer qualified as a REIT, effective the beginning of fiscal 1994 (July 1, 1993). Accordingly the Trust will be subject to federal income tax on its taxable income. The Trust incurred a taxable loss in fiscal 1994 and in the quarter and nine months ended March 31, 1995; therefore, no provision for income taxes is necessary in the financial statements for those periods. With the change in status to a taxable entity, the Trust adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). Since there was no financial impact on the year ended June 30, 1994, and the quarters ended September 30, 1994, and December 31, 1994, neither an amended Form 10-K nor Form 10-Q, respectively, have been filed to reflect the adoption of SFAS 109. Reclassifications: Certain amounts in previously issued financial statements have been reclassified to conform to the March 31, 1995, presentation. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Operations resulted in a loss of $930,765 for the quarter ended March 31, 1995, compared to a loss of $7,334,593 for the same period in fiscal 1994. Operations for the nine months ended March 31, 1995, resulted in a loss of $2,767,755 compared to a loss of $15,694,409 for the same period in fiscal 1994. The substantial reduction in most income and expense accounts was primarily due to the transfer of assets and liabilities to RPI upon the Trust's emergence from bankruptcy on April 7, 1994. Interest income from mortgage loan receivables decreased from $1.5 million in the third quarter of fiscal 1994 to $12,000 in the third quarter of fiscal 1995 as a result of a decrease in average outstanding balance of earning loans. Average earning loans decreased from $79.5 million with a yield of 7.72% in the third quarter of fiscal 1994 to $387,000 in the third quarter of fiscal 1995. Interest income from mortgage loan receivables decreased from $5.4 million for the first nine months of fiscal 1994 to $186,000 for the first nine months of fiscal 1995 as a result of a decrease in the average outstanding balance of earning loans. Average earning loans decreased from $92.3 million with a yield of 7.81% for the first nine months of fiscal 1994 to $2.6 million with a yield of 9.36% for the first nine months of fiscal 1995. Also included in interest on receivables in the quarter and the nine months ended March 31, 1995, was $113,000 and $330,000, respectively, of interest income on the note receivable from RPI. The average balance of the RPI note was $5.6 million with a yield of 8.22% for the third quarter of fiscal 1995, and $5.7 million with a yield of 7.65% for the first nine months of fiscal 1995. Average nonearning loans for the third quarter of fiscal 1995 totaled $286,000 compared to $18.3 million for the comparable period in fiscal 1994. Assuming the yield on these loans would have been the same as the yield on earning loans had they been on earning status, interest income would have been $9,000 higher in the third quarter of fiscal 1995 and $353,000 higher in the third quarter of fiscal 1994. Average nonearning loans for the first nine months of fiscal 1995 totaled $218,000 compared to $25.1 million for the comparable period of fiscal 1994. Assuming that the yield on these loans would have been the same as the yield on earning loans had they been on earning status, interest income would have been $15,000 higher for the first nine months of fiscal 1995 and $1,470,000 higher for the first nine months of fiscal 1994. The Trust received a discounted payoff of $500,000 in consideration for the termination of the consulting agreement between the Trust and RPI. Although this transaction had no affect on the quarter, the results from operations for the nine months ended March 31, 1995, were significantly affected. Income on foreclosed real estate decreased in the third quarter and the first nine months of fiscal 1995 as a result of all of the Trust's earning real estate being transferred to RPI upon emergence from bankruptcy. The decrease in interest expense is due to the Trust being debt free upon its emergence from bankruptcy on April 7, 1994, and March 31, 1995. A provision for possible losses of $1,000,000 was made in the third quarter of fiscal 1995 compared to a provision of $2,975,000 in the third quarter of fiscal 1994. The allowance for possible losses was $10.7 million at March 31, 1995, compared to $11.7 million at June 30, 1994. While the Trust 7 8 believes the allowance for possible losses is adequate at March 31, 1995, management will continue to review the portfolio using current information to derive estimates and assumptions used in the determination of the allowance for loan losses and the valuation of the real estate acquired in connection with foreclosures. These estimates and assumptions are susceptible to significant changes in the market conditions upon which they are primarily based. The provision for possible losses for the quarter ended March 31, 1995, includes a reversal of $1.1 million from the reserve on the Trust's loan portfolio which has been substantially reduced. The Trust had a similar reversal of $1.4 million in the third quarter of fiscal 1994 in connection with the transfer of approximately 85% of the mortgage loan portfolio to RPI upon emergence from bankruptcy. The provision for possible losses on foreclosed real estate was $2.1 million in the third quarter of fiscal 1995 compared to $4.4 million in the third quarter of fiscal 1994. The provision for possible losses on foreclosed real estate in the third quarter of fiscal 1995 includes adjustments to carrying value on assets comprised of single family lots in California and land in San Antonio, Texas. The Trust continues to market these assets for sale and believes the adjustments to carrying value reflect the fair market value at March 31, 1995. 8 9 The following is a summary of transactions affecting the Trust's allowance for possible losses for the nine months ended March 31, 1995, compared to the nine months ended March 31, 1994. Nine Months Ended March 31, 1995 --------------------------------------------------- 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 Provision for possible losses (1,148,960) 2,148,960 1,000,000 Amounts charged off, net of recoveries 150,630 (2,362,865) (2,212,235) -------------- -------------- ------------- Balance March 31, 1995 $ 192,261 $ 10,465,638 $ 10,657,899 ============== ============== ============= Nine Months Ended March 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 Provision for possible losses (1,408,000) 4,383,000 2,975,000 Amounts charged off, net of recoveries (5,040,794) (2,715,647) (7,756,441) -------------- -------------- ------------- Balance March 31, 1994 $ 9,999,553 $ 32,045,247 $ 42,044,800 ============== ============== ============= General and administrative expenses were substantially reduced for the quarter and the nine months ended March 31, 1995, as compared to the same periods one year ago. Expense reductions during fiscal 1995 are primarily a result of (i) substantial reductions in the Trust's directors' and officers' liability insurance premiums upon its emergence from bankruptcy on April 7, 1994, (ii) substantial reductions in the Trust's normal cost of insurance during fiscal 1995 as compared to the cost of insurance during the period that preceded the Trust's Chapter 11 bankruptcy, and (iii) lower employee compensation expenses as compared to fiscal 1994. Management fees were lower in the third quarter of fiscal 1995 than in the comparable period in fiscal 1994 because invested assets, upon which the management fees are based, were lower in the third quarter of fiscal 1995 (see Item 5. Other Information). The reduction in legal fees and foreclosed real 9 10 estate expenses was a result of the transfer of a substantial amount of foreclosed real estate to RPI upon emergence from bankruptcy and continued liquidation of loans and real estate since emerging from bankruptcy. LIQUIDITY AND CAPITAL RESOURCES Prior to its emergence from bankruptcy, the Trust's principal funding requirements were operating expenses, interest expense and the repayment of its indebtedness. Since emergence from bankruptcy, the Trust is debt free and its principal funding requirements are operating expenses. The Trust's primary sources of funding operating expenses are its collection of principal and interest on mortgage loans and the note receivable from RPI, and proceeds from the sale of foreclosed real estate. At March 31, 1994, the Trust had $83.1 million of senior indebtedness and $100 million of 10 1/2% subordinated notes outstanding. The $100 million of subordinated notes was satisfied in full upon the Trust's emergence from bankruptcy on April 7, 1994, and the Trust was released from liability on the senior indebtedness which was assumed by RPI. 10 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 nine months ended March 31, 1995; therefore, no provision for income taxes is necessary in the financial statements for those periods. In addition, the Trust has net operating loss carryforwards for federal income tax purposes at March 31, 1995, which are available to offset future taxable income of the Trust. However, if the Trust were to undergo a 50 percentage point ownership change as described in Section 382 of the Code, the ability of the Trust to use its net operating loss carryforwards to offset income earned by the Trust after the ownership change would be severely limited, as would the Trust's ability to deduct losses recognized on certain sales of assets occurring after the ownership change. Accordingly, the Trust believes that it could incur substantial liability for federal income taxes in the event of an ownership change. In addition, generally an entity can qualify as a REIT only if 95% of its gross income constitutes "qualifying income" as defined in Section 856 of the Code (the "95% Test"). Because more than 5% of the Trust's gross income during the taxable years ended June 30, 1992 (the "1992 Year"), and June 30, 1993 (the "1993 Year"), consisted of income from an interest rate swap and because it is uncertain whether income derived from such interest rate swaps constitutes qualifying income, it is unclear whether the Trust satisfied the 95% Test for the 1992 Year and the 1993 Year. The Trust believes that such income should be treated as qualifying income for purposes of the 95% Test. Since the Trust incurred a taxable loss in the 1992 Year and 1993 Year, it will not have a tax liability for those years if it is subsequently determined that it did not qualify as a REIT in those years. Commencing July 1, 1993, funds available for distribution to shareholders will be reduced by the amount of any tax liability payable by the Trust to federal tax authorities. Such distributions, if any, will not be deductible by the Trust in computing its taxable income but will be eligible for the dividends received deduction for corporate shareholders to the extent paid out of the Trust's current and cumulative earnings and profits. (No distributions were paid in fiscal 1994 or in the nine months ended March 31, 1995.) In addition, unless entitled to relief under specific statutory provisions, the Trust will be ineligible for REIT status for the succeeding four taxable years. The foregoing description is general in character. For a complete description, reference should be made to the pertinent Code sections and the Regulations issued thereunder. TRANSFER RESTRICTIONS In order to preserve the Trust's ability to qualify for REIT status under the Code, there are certain restrictions on the transfer of Shares of Beneficial Interest of the Trust (the "Shares"), with such exceptions and pursuant to such procedures as are described in the Declaration of Trust. For the Trust to qualify as a REIT, not more than 50% in value of its outstanding Shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year. The Shares must be beneficially owned by 100 or more persons during at least 335 12 13 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year, and certain other requirements as to assets, distributions and percentages of the Trust's gross income from particular activities must be met. The Declaration of Trust contains provisions prohibiting the ownership, directly or indirectly, by five or fewer individuals of more than 50% in value of the outstanding Shares during the last half of the Trust's taxable year. The Trust intends to maintain these restrictions so that it could requalify as a REIT after its tax year ended June 30, 1998. In order to avoid limitations on the use of the Trust's tax attributes, the Declaration of Trust generally prohibits the transfer of Shares to any Person who is a holder of 5% or more of the Shares or to any Person who would become a holder of 5% or more of the Shares after giving effect to the transfer, directly or by attribution. "Person" for this purpose is defined broadly to mean any individual, corporation, estate, debtor, association, company, partnership, joint venture or similar organization. If a transfer violates this prohibition, either (i) the Shares that were purported to be transferred in excess of the 5% limit will be deemed to remain the property of the initial transferor, or (ii) upon election by the Trust, such Shares shall be transferred to an agent designated by the Trust, who will sell them in an arm's-length transaction, the proceeds of such sale to be allocated to the purported transferee up to (x) the amount paid by such transferee for such Shares and (y) where the purported transfer was by gift inheritance or any similar transfer, the fair market value of such Shares at the time of the purported transfer. If the purported transferee has resold the Shares to an unrelated party in an arm's-length transaction, the purported transferee will be deemed to have sold the Shares as agent for the initial transferor, and will be required to transfer the proceeds of such sale to the agent designated by the Trust, except to the extent that the agent grants written permission to the purported transferee to retain a portion of the proceeds up to the amount that would have been payable to such transferee had the Shares been sold by the agent rather than by the purported transferee. The Declaration of Trust further provides that the Trust may require, as a condition to the registration of the transfer of any Shares, that the proposed transferee furnish to the Trust all information reasonably requested by the Trust with respect to the proposed transferee's direct or indirect ownership interests in Shares. The Board of Trustees of the Trust will have the power to preapprove transfers that would otherwise be prohibited under the foregoing provisions. All certificates evidencing ownership of Shares will bear a conspicuous legend referencing the transfer restrictions. TERMINATION OF MANAGEMENT AGREEMENT The Trust terminated its management agreement with Lomas Management, Inc. ("LMI") at February 28, 1995, and is in the process of transferring all operating and accounting responsibilities to the Trust's employees. Any remaining property management requirements on assets owned with ST Lending, Inc. ("STL") are provided for in the asset disposition agreement described below. Effective February 28, 1995, the Trust entered into an "asset disposition agreement" with STL whereby the Trust and STL exchanged partial ownership positions in a pool of assets. As a result, at March 31, 1995, the Trust owned 100% of its foreclosed real estate with the exception of one asset that remains 80% owned by the Trust. 13 14 The Trust also owns approximately 50% of a mortgage loan originated to construct houses in California. The Trust had no further funding obligation under this note at March 31, 1995, and expects to receive sale proceeds from the completed houses in sufficient amounts to retire this note during the next several months. A group of approximately 18 receivables remains 80% owned by the Trust and 20% owned by STL. The asset disposition agreement stipulates that the Trust will pay STL 10% of the gross proceeds received from this pool of loans for one year in return for STL's asset administration, at which time STL will transfer its 20% ownership in any remaining assets to the Trust. UNSOLICITED ACQUISITION PROPOSAL As the Trust has previously announced, it has received an unsolicited proposal pursuant to which the parties making the proposal would, subject to due diligence review on their behalf, tender to purchase up to 45% of the currently outstanding Shares at a price of $2.30 per share, obtain the right to nominate a majority of the members of the Board of Trustees, appoint a new Chief Executive Office of the Trust, and acquire working control of the Trust with the intention of having the Trust purchase operating companies and distressed undervalued assets. Pursuant to the Trust's Declaration of Trust, the acquisition of more than 5% of its Shares pursuant to the proposed tender offer would require approval of its Board of Trustees. The Board has formed a Special Committee of the Board of Trustees to consider the proposal and other alternatives. The Special Committee has engaged an investment banking firm to act as financial advisor to the Special Committee and has retained special legal counsel to the Special Committee. Under the Plan and business plan approved by the shareholders of the Trust and the United States Bankruptcy Court, the Trust was to resume mortgage lending as it liquidated its portfolio of real estate investments. The Trust has received a commitment from a commercial bank for a senior secured line of credit in the amount of $40,000,000 to be used in its mortgage lending activity which commitment provides for a potential increase of up to $60,000,000 through syndication to other banks. 14 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: (27) Financial Data Schedules (submitted to the SEC for its information). (b) Reports on Form 8-K: None. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. LIBERTE INVESTORS Date: May 15, 1995 By: /s/ TED ENLOE ------------------ -------------------------------------- Ted Enloe President and Chief Executive Officer Date: May 15, 1995 By: /s/ BRADLEY S. BUTTERMORE ------------------ -------------------------------------- Bradley S. Buttermore Senior Vice President and Treasurer 16 17 LIBERTE INVESTORS INDEX TO EXHIBITS Sequentially Exhibit No. Numbered Pages - ----------- -------------- (27) Financial Data Schedules (submitted to the SEC for its information) 17