Back to GetFilings.com
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
Commission File Number 1-6802
Liberte Investors Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1328153
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Crescent Court, Suite 1365, Dallas, Texas 75201
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 871-5935
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value per share New York Stock Exchange
Securities registered pursuant of Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _x_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment on this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of these shares on the New York Stock
Exchange on September 23, 1998 was $31,256,892. 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 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished to stockholders in
connection with its 1998 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, 1998
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 6
Item 3. Legal Proceedings.......................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders........................................ 6
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters..................... 7
Item 6. Selected Financial Data.................................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 9
Item 8. Financial Statements and Supplementary Data................................................ 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................ 14
PART III
Item 10. Directors and Executive Officers of the Company............................................ 15
Item 11. Executive Compensation..................................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 15
Item 13. Certain Relationships and Related Transactions............................................. 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 16
Signatures........................................................................................... 18
Index to Consolidated Financial Statements........................................................... F-1
2
PART I
Item 1. Business
Liberte Investors Inc. ("LBI" or the "Company") is a Delaware corporation
which was organized in April of 1996 in order to effect the reorganization of
Liberte Investors, a Massachusetts business trust (the "Trust") originally
created pursuant to a Declaration of Trust dated June 26, 1969, as amended.
At a special meeting of the shareholders of the Trust held on August 15,
1996, (the "Special Meeting"), the Trust's shareholders approved a plan of
reorganization whereby the Trust contributed its assets to the Company and
received all of the Company's outstanding common stock, par value $.01 per share
("Shares" or "Common Stock"). The Trust then distributed to its shareholders in
redemption of all outstanding shares of beneficial interest in the Trust (the
"Beneficial Shares") the Shares of the Company. The Company assumed all of the
Trust's assets and outstanding liabilities and obligations. Thereafter, the
Trust was terminated.
The principal business activity of the Trust was investing in notes
receivable, primarily first mortgage construction notes and first mortgage
acquisition and development notes. 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 (the
"Reorganization") whereby certain assets and liabilities, including remaining
senior indebtedness, were transferred to Resurgence Properties Inc. ("RPI"), and
RPI's common stock was distributed to the holders of the Trust's outstanding
subordinated indebtedness in full satisfaction of such holders' claims against
the Trust. After the Trust emerged from bankruptcy proceedings, it became a
virtually debt-free entity with cash and cash equivalents, real estate mortgage
notes receivable, foreclosed real estate and tax net operating loss ("NOL")
carryforwards. Although the bankruptcy plan contemplated that the Trust would
continue as a financial services company, the Board of Trustees opted to forego
further real estate mortgage lending and seek to purchase or create an operating
business in order to realize the value of the NOL carryforwards. Further, the
Board of Trustees determined that additional Beneficial Shares could be issued
to generate cash to finance an acquisition or startup company without
restricting the Trust's NOL carryforward.
On January 16, 1996, the Trust entered into a Stock Purchase Agreement (as
amended, the "Stock Purchase Agreement") with Hunter's Glen/Ford, Ltd., a Texas
limited partnership ("Hunter's Glen"), pursuant to which the Trust agreed to
sell 8,102,439 newly-issued Shares to Hunter's Glen for $23,091,951,
representing a purchase price of $2.85 per Share (the "Purchase"). The Purchase
was approved by the Trust's shareholders at a Special Stockholder's Meeting and
was consummated on August 16, 1996. Immediately prior to the sale of the Shares
pursuant to the Stock Purchase Agreement, the Trust reorganized into the
Company, and shareholders of the Trust became shareholders of the Company on a
share for share basis. Gerald J. Ford, a general partner of Hunter's Glen,
became the Chief Executive Officer and Chairman of the Board of Directors of the
Company.
Since August of 1996, the Company has been actively pursuing opportunities
to acquire one or more operating companies.
3
Portfolio Review
At June 30, 1998, the Company owned foreclosed real estate totaling $3.0
million. At June 30, 1998, there were no outstanding notes receivables and all
foreclosed real estate was classified as nonearning.
Foreclosed real estate consisted of four properties, all of which are held
for sale. The following table sets forth undeveloped land by type of property
and geographic location at June 30, 1998. See also Notes 2 and 12 of Notes to
Consolidated Financial Statements.
Texas California Total
---------- ---------- ----------
Single family lots $ -- $ 213,052 $ 213,052
Land 2,815,221 -- 2,815,221
---------- ---------- ----------
$2,815,221 $ 213,052 $3,028,273
========== ========== ==========
At June 30, 1998, the Company's notes receivable had been collected or
written-off, resulting in no outstanding notes receivable.
At June 30, 1998, 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.
Prior Management - Related Party Activity
Lomas Management, Inc., a wholly-owned subsidiary of Lomas Financial
Corporation, managed the Trust from its inception in 1969 until February 1995.
Lomas Financial Corporation was the original sponsor of the Trust. The terms of
certain management agreements in effect during that period of time often
required Lomas Financial Corporation or one of its subsidiaries to participate
in real estate loans originated by the Trust. In 1995, however, the Trust
terminated its management agreement with Lomas Management, Inc. and assumed its
own operating and accounting responsibilities. Management of assets owned at
that time were addressed in an Asset Disposition Agreement dated February 28,
1995 between the Trust and a wholly-owned subsidiary of Lomas Financial
Corporation (the "Asset Disposition Agreement").
The Asset Disposition Agreement provided for an exchange of ownership
positions in various pieces of foreclosed real estate and one earning note
receivable. No gain or loss was recognized by the Company as a result of the
exchange, and at June 30, 1995, the Trust owned 100% of its foreclosed real
estate and note receivable portfolio with the exception of one real estate asset
(which was subsequently sold) and one mortgage note receivable. The Asset
Disposition Agreement also addressed a group of shared receivables with no
carrying value that related to deficiency notes obtained through previous
foreclosure proceedings and outlined procedures to distribute future
collections, if any.
On April 24, 1996, the Trust entered into a supplement to the Asset
Disposition Agreement whereby 100% of the outstanding common stock of LNC
Holdings, Inc., whose sole asset is one tract of undeveloped real estate, was
transferred to the Trust and the remaining mortgage note receivable not resolved
in the Asset Disposition Agreement was exchanged for a comparable note
receivable held by a subsidiary of Lomas Financial Corporation.
4
In accordance with the Asset Disposition Agreement and the Supplement, the
subsidiary of Lomas Financial Corporation received compensation of $69,237 from
the Company for the asset administration and collection services in fiscal year
ended June 30, 1996. See also Note 6 of Notes to Consolidated Financial
Statements.
Competition
In its ongoing efforts to liquidate its real estate assets, the Company
competes with commercial banks, savings and loan associations, and other
financial institutions that are seeking to sell their own portfolios of
foreclosed real estate. The primary factors affecting competition when selling
real estate are the value of the foreclosed real estate, the price at which the
seller is willing to sell the asset, and the seller's ability and willingness to
provide or arrange financing for the prospective buyer.
With regard to efforts to identify suitable acquisition candidates, the
Company competes with numerous prospective buyers, including various investment
funds, other companies in similar industries, corporate conglomerates,
individual investors, etc. Recent market conditions have resulted in substantial
amounts of cash becoming available for new acquisition activity by both
institutional and individual investors. Consequently, many potential acquisition
candidates targeted by the Company have been pursued by numerous prospective
buyers and bidding has been competitive.
Certain Customers
In 1994, upon emerging from bankruptcy pursuant to the plan of
reorganization, the Company received a note receivable (the "Note") from
Resurgence Properties, Inc. ("RPI") in the original amount of $6.0 million. The
Note was collateralized by a pool of first mortgage loans and by deeds of trust
on various real estate assets owned by RPI. RPI repurchased the Note from the
Company on June 27, 1996 for $4.09 million representing 98.75% of the
outstanding balance in a negotiated transaction. The Company charged $51,740 to
the allowance for possible losses on notes receivable related to this sale.
Revenue from RPI for the fiscal year ended June 30, 1998 and 1997 consisted
solely of dividend income totaling $40,100 and $33,500, respectively. Revenue
from RPI provided greater than 10% of the Company's total revenue for the fiscal
year ended June 30, 1996, and consisted of: (i) interest income totaling
$389,958 on the RPI Note receivable and (ii) dividend income totaling $21,375 on
RPI preferred stock.
Federal Income Tax
Effective July 1, 1993, the Trust no longer qualified as a real estate
investment trust as defined by the Internal Revenue Code. Subsequently, the
Company was organized in 1996 as a Delaware corporation in order to effect the
reorganization of the Trust by merging the Trust into the Company. 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, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $227 million, which are available
to offset future federal taxable income. These carryforwards will expire in 2005
through 2011. See also Note 7 of Notes to Consolidated Financial Statements.
5
Personnel
At June 30, 1998, the Company had two full-time employees and no part-time
employees. The Company engages real estate consultants as needed with regard to
real estate related matters and utilizes independent accountants and legal
advisors as needed when evaluating a potential acquisition.
Item 2. Properties
The Company's principal executive offices were located at 600 N. Pearl,
Suite 420, Dallas, Texas at June 30, 1997 under a month to month lease
arrangement. On July 14, 1997, the Company relocated its executive offices to
200 Crescent Court, Suite 1365, Dallas, Texas and is occupied by the Company
under a lease agreement expiring December 31, 2000. See Note 5 of Notes to
Consolidated Financial Statements.
Item 3. Legal Proceedings
The Company is involved in routine litigation incidental to its business
which, in the opinion of management, will not result in a material adverse
impact on the Company's consolidated financial condition, results of operations,
or cash flows without regard to any possible insurance or third party
reimbursement.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
6
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The common stock of Liberte Investors Inc. is listed on the New York Stock
Exchange (the "NYSE") under the symbol "LBI." The following table sets forth the
high and low sales price per share for the Common Stock as reported on the NYSE
Composite Transaction Tape for the periods indicated:
Fiscal Year High Low
- ----------- ---- ---
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
1997
First Quarter..................... $ 5 1/4 $ 3 3/8
Second Quarter.................... 5 4 1/8
Third Quarter..................... 4 1/2 3 3/4
Fourth Quarter.................... 4 1/2 3 5/8
The high and low sales price per share of Common Stock as reported on the
NYSE Composite Transaction Tape on September 23, 1998, was $3.00 and $2.8125,
respectively. At September 23, 1998, there were 1,581 record holders of LBI
common stock.
Dividend Policy
On June 10, 1998, the Board of Directors of the Company declared a special
cash dividend of $0.031 per share paid to stockholders of record on June 30,
1998. Other than this cash dividend, the Company has not paid cash dividends on
its Common Stock during the past two fiscal years. The Company currently 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
7
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.
Registration Rights
In connection with the Purchase, Hunter's Glen and the Company entered into
a Registration Rights Agreement (the "Purchaser Registration Rights Agreement"),
pursuant to which Hunter's Glen and certain subsequent holders of the shares of
Common Stock (the "Hunter's Glen Shares") acquired in the Purchase were granted
certain registration rights with respect to such shares until (i) such shares
have been sold pursuant to a resale registration statement filed with the
Securities and Exchange Commission, (ii) such shares have been sold under the
safe-harbor provision of Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"), or (iii) such shares have been otherwise transferred and
the Company has issued new stock certificates representing such shares without a
legend restricting further transfer. The holders of not less than 20% of the
Hunter's Glen Shares may require the Company to file a shelf registration
statement registering their sale of such shares. The Company will be required to
maintain the effectiveness of such registration statement for two years. In
addition, the holders of not less than 20% of the Hunter's Glen Shares may make
two demands upon the Company to register their sale of such shares in
underwritten offerings, provided that the shares to be sold have a fair market
value in excess of $5.0 million. Finally, the holders of the Hunter's Glen
Shares may require the Company to register the sale of their shares if the
Company proposes to file a registration statement under the Securities Act for
its account or the account of its securityholders, other than a registration
statement concerning a business combination, an exchange of securities or an
employee benefit plan. The holders of these registration rights may exercise
them at any time during the period beginning on August 16, 1997 and ending when
the holders of such shares own an aggregate of less than 5% of the outstanding
Shares and are no longer affiliates of the Company under the United States
federal securities laws. The Company will bear all of the expenses of these
registrations, except any underwriters' commissions, discounts and fees, and the
fees and expenses of any legal counsel to the holders of the Hunter's Glen
Shares.
At the closing of the Purchase, Hunter's Glen, the Company and certain
other persons entered into an Agreement Clarifying Registration Rights (the
"Agreement Clarifying Registration Rights"). Under this agreement, the
registration rights that the Trust had previously extended to 400,000 Beneficial
Shares owned by the Enloe Descendants' Trust were extended to the 759,000 Shares
that the Enloe Descendants' Trust, Mr. Robert Ted Enloe, III and his wife owned
upon the consummation of the Reorganization and the Purchase. The Agreement
Clarifying Registration Rights also defined the relationship between these
registration rights and the registration rights extended under the Purchaser
Registration Rights Agreement. The Agreement Clarifying Registration Rights
generally permits Hunter's Glen to require the Company to register the sale of
its shares in connection with any exercise of demand registration rights by the
Enloe Descendants' Trust, and permits the Enloe Descendants' Trust, Mr. Enloe
and his wife to require the Company to register the sale of their shares in
connection with any exercise of demand registration rights by Hunter's Glen. In
addition, this Agreement provides that the Enloe Descendants' Trust, Mr. Enloe,
his wife and Hunter's Glen will not publicly sell their Shares during the period
beginning ten days before the filing of a registration statement in connection
with certain underwritten offerings and ending ninety days after the effective
date of such registration statement. Finally, the Agreement Clarifying
Registration Rights provides that the registration rights with respect to the
Shares held by the Enloe Descendants' Trust, Mr. Enloe and his wife will be
transferable to the subsequent holders of such shares.
8
Item 6. Selected Financial Data (in thousands, except per share amount)
The following table sets forth selected statement of operations and
statement of financial condition data at and for the five years ended June 30,
1998. In October 1993, the Trust filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code and emerged from
bankruptcy in April of 1994. As a result, information for years ended June 30,
1998, 1997, 1996, and 1995 are not comparable to 1994 amounts. 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,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Statement of Operations Data:
Revenues $ 2,778 $ 2,527 $ 2,784 $ 2,172 $ 10,019
Interest expense -- -- -- -- 7,673
Provision for loan losses -- -- 187 3,192 3,175
Net income (loss) 1,450 1,309 835 (2,868) (16,341)
Basic net income (loss)
per common share 0.07 0.07 0.07 (0.23) (1.34)
Cash dividends declared per share 0.031 -- -- -- --
June 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(dollars in thousands)
Statement of Financial Condition Data:
Total assets $57,535 $56,445 $33,354 $32,036 $36,316
Stockholders' equity 57,027 56,206 32,852 31,620 34,914
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, the Company,
through its senior management, from time to time makes forward-looking public
statements concerning its expected future operations and performance, including
its ability to acquire businesses in the future, and other developments. Such
forward-looking statements are necessarily estimates reflecting the Company's
best judgment based upon current information, involve a number of risks and
uncertainties, and there can be no assurance that other factors will not affect
the accuracy of such forward-looking statements. While it is impossible to
identify all such factors, factors which could cause actual results to differ
materially from those estimated by the Company include, but are not limited to,
the uncertainty as to whether the Company will be able to make future business
acquisitions or that any such acquisitions will be successful, the Company's
ability to obtain financing for any possible acquisitions, general conditions in
the economy and capital markets, and other factors which may be identified from
time to time in the Company's Securities and Exchange Commission filings and
other public announcements.
9
General
During the fiscal year ended June 30, 1998, 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 1998, the Company has not yet entered
into any definitive acquisition agreements.
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 is 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 on Resurgence Properties, Inc. ("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 is 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 is 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
10
for 1998 was to more accurately reflect estimated sales proceeds less selling
costs of single family lots in Fontana, California. These lots were sold
subsequent to June 30, 1998.
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.
1997 compared to 1996
Net income for the year ended June 30, 1997 increased to $1,309,000 from
$835,000 for the year ended June 30, 1996, an increase of 57%. This change in
operating results is discussed below.
Interest income on interest-bearing deposits in banks increased to
$2,364,000 for the year ended June 30, 1997 from $1,182,000 for the year ended
June 30, 1996. This increase is due to the increase in the balance of
unrestricted cash and cash equivalents to $52.5 million on June 30, 1997 from
$27.2 million on June 30, 1996. The increase in cash balances was primarily a
result of the sale of 8,102,439 shares of newly-issued common stock to Hunter's
Glen in August of 1996 for $23.1 million and the collection of $1.3 million on
notes receivable during the year ended June 30, 1997.
Notes receivable interest income decreased to $112,000 for the year ended
June 30, 1997 from $525,000 for the year ended June 30, 1996 because the
outstanding balance of notes receivable declined to $2,000 on June 30, 1997 from
$1.3 million on June 30, 1996. The Company had collected all but one note
receivable with a nominal balance as of June 30, 1997.
Gains on sales of foreclosed real estate decreased to $11,000 for the year
ended June 30, 1997 from $599,000 for the year ended June 30, 1996. The gains on
sales of real estate represent proceeds received from the sale of assets in
excess of carrying value. The gain recognized in 1997 resulted from the sale of
single-family lots in San Antonio, Texas. The gain in 1996 was primarily due to
the sale of single-family lots in Murrieta, California.
Other income decreased to $39,000 for the year ended June 30, 1997 from
$478,000 for the year ended June 30, 1996. Other income in 1997 represented
primarily dividends on RPI preferred stock. Other income in 1996 consisted
primarily of cash collections on impaired loans which had no carrying value and
the RPI dividends.
11
Insurance expense increased to $307,000 for the year ended June 30, 1997
from $216,000 for the year ended June 30, 1996. This increase is primarily due
to increased premiums related to Directors' and Officers' insurance coverage as
required by the Stock Purchase Agreement between the Company and Hunter's Glen.
Foreclosed real estate operations expense increased $139,000 from $118,000
for the year ended June 30, 1996 to $257,000 for the year ended June 30, 1997.
The increase is primarily due to an accrual in fiscal 1997 established for 1996
and 1997 property taxes on 40 acres of land held by LNC Holdings, Inc. which is
encumbered by delinquent taxes and an increase in the accrual for 1997 property
taxes.
Legal, audit and consulting fees were $168,000 for the year ended June 30,
1997, a decrease of $411,000 from the $579,000 incurred in the year ended June
30, 1996. Fees in 1997 were primarily for real estate consulting services and
legal advisory work related to potential acquisitions. Prior period activity
included legal and investment banking fees incurred related to potential
acquisitions.
Directors fees and expenses decreased from $77,000 in 1996 to $46,000 in
1997 due to a decrease in the number of meetings held by the board. In 1996, the
directors held several special meetings to discuss acquisition candidates and
the corporate reorganization.
Franchise tax expense for the year ended June 30, 1997 totaled $65,000 and
represents Delaware and Texas franchise tax expense due as a result of the
reorganization of the Trust into the Company. The Trust was not subject to
franchise tax expense and no such expense was recorded for years prior to 1997.
Compensation and employee benefits decreased by $458,000 from $593,000
during the year ended June 30, 1996 to $135,000 for the year ended June 30,
1997. The decrease is due to the reduced compensation package for Robert Ted
Enloe III, the Chief Executive Officer, during the last quarter of 1996 as well
as the resignation of the Company's employees, including Mr. Enloe, in August of
1996. Since the reorganization in August of 1996, the Company has employed only
two full-time employees. Under the terms of the Stock Purchase Agreement between
the Company and Hunter's Glen, Mr. Ford, in his capacity as Chairman and Chief
Executive Officer, does not receive compensation
General and administrative expense increased from $178,000 for the year
ended June 30, 1996 to $225,000 for the year ended June 30, 1997. The increase
is attributed to an increase in stockholder service expenses for costs related
to the August 1996 special meeting and November 1996 annual meeting of
stockholders and to the renewal of the listing privileges for the Company's
common stock on the New York Stock Exchange.
Liquidity and Capital Resources
The Company's principal funding requirements are operating expenses,
including legal, audit and consulting expenses incurred in connection with the
evaluation of potential acquisition candidates and other strategic
opportunities. The Company anticipates that its primary sources of funding
operating expenses are proceeds from the sale of foreclosed real estate,
interest income on cash and cash equivalents, and cash on hand.
As described in "Item 1. Business," the Trust entered into an agreement and
subsequently consummated the sale of newly-issued Shares to Hunter's Glen. The
proceeds from this sale were $23.1 million. Management believes that the
additional cash will assist the Company in its efforts to expand its
12
business through acquisitions. Hunter's Glen is an affiliate of Gerald J. Ford,
who became the Chief Executive Officer and Chairman of the Board of the Company
following the Trust's reorganization into the Company and the sale of the shares
to Hunter's Glen.
Operating activities for the year ended June 30, 1998 provided $2.2 million
of cash compared to $1.4 million provided in 1997 and $0.2 million used in 1996.
The table below reflects cash flow from operating activities (in millions):
Year Ended June 30,
-----------------------------
1998 1997 1996
------- ------- -------
Total income $ 2.8 $ 2.5 $ 2.8
Operating expenses (1.3) (1.2) (1.8)
Net change in other receivables,
assets and liabilities 0.7 0.1 (1.2)
------- ------- -------
Net cash provided (used) by operating activities $ 2.2 $ 1.4 $ (0.2)
======= ======= =======
Net cash used in investing activities for the year ended June 30, 1998 was
$16,000 compared to net cash provided of $1.4 million for the year ended June
30, 1997 and $6.8 million for the year ended June 30, 1996. Net cash used for
1998 was primarily for fixed asset purchases, while net cash provided in 1997
and 1996 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,
-----------------------------
1998 1997 1996
------- ------- -------
Collections on mortgage loans $ -- $ 1.3 $ 0.6
Collections on RPI note receivable -- -- 5.3
Sales of foreclosed real estate -- 0.1 0.9
------- ------- -------
Net cash provided by investing activities $ -- $ 1.4 $ 6.8
======= ======= =======
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 $54.1 million at
June 30, 1998.
The Company plans to finance acquisitions with its cash and cash
equivalents, borrowings and private or public debt and equity financings. To
avoid restricting the use of its NOL carryforwards, the Company will be
effectively precluded from issuing any additional shares of common stock, any
shares of any other class of voting stock or stock that participates in the
earnings or growth of the Company, or certain options with respect to such
stock, for three years after the sale of the Common Stock to Hunter's Glen.
During this period, the Company will have to incur indebtedness to the extent
that it does not use its cash and cash equivalents to make acquisitions.
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. An assessment of the
readiness of external entities is ongoing, but the Company does not anticipate
any compliance problems.
13
Item 8. Financial Statements and Supplementary Data
See "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K" for a listing of the consolidated financial statements filed with this
report. The response to this item is submitted in a separate section of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 19, 1996 the Company filed a report on Form 8-K to report the
change in independent accountants of the Company from Ernst & Young LLP ("E&Y")
to KPMG Peat Marwick LLP. This change was approved and recommended by the
Company's Board of Directors. No report of E&Y on the Company's financial
statements for fiscal year 1996 contained an adverse opinion or a disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. Further, there were no disagreements with E&Y on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope of procedure, which disagreements, if not resolved to the
satisfaction of E&Y, would have caused it to make reference to the subject
matter of the disagreements in its reports.
14
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 5, 1998 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.
15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Annual Report on Form 10-K.
(1) Consolidated Financial Statements: See Index to Consolidated
Financial Statements on Page F-1.
(2) Consolidated Financial Statements Schedule IV - Mortgage Loans on
Real Estate on Page F-18.
(3) Exhibits:
Exhibit
Number
------
2.1 Plan of Reorganization, dated as of April 1, 1996, between
the Trust and the Company (incorporated by reference to
Exhibit 2.1 of Registration Statement No. 333-07439 on Form
S-4, filed by the Company, which the Securities and
Exchange Commission declared effective on July 3, 1996 (the
"Registration Statement").
2.2 Stock Purchase Agreement, dated as of January 16, 1996,
between the Trust and 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).
2.3 Letter Agreement, dated as of April 1, 1996, among the
Trust, the Company, and the Purchaser (incorporated by
reference to Exhibit 2.3 of the Registration Statement).
2.4 Confidentiality and Standstill Agreement, dated as of
January 16, 1996, between the Trust and the Purchaser
(incorporated by reference to Exhibit 2.2 of the Trust's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
2.5 Escrow Agreement, dated as of January 19, 1996, among the
Trust, the Purchaser, and Texas Commerce Bank National
Association (incorporated by reference to Exhibit 2.5 of
the Registration Statement).
2.6 The Trust's First Amended Plan of Reorganization, dated
December 14, 1993, as modified by the Modification to the
First Amended Plan of Reorganization, dated January 19, 1994
(incorporated by reference to the Trust's Current Report on
Form 8-K filed with the Commission on February 9, 1994).
16
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).
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).
10.4 Asset Disposition Agreement, dated February 28, 1995,
between the Trust and ST Lending, Inc. (incorporated by
reference to Exhibit 10.9 of the Trust's Annual Report on
Form 10-K for the year ended June 30, 1995), as amended by
the Supplement to Asset Disposition Agreement dated April
24, 1996.
16.1 Letter dated November 15, 1996 from Ernst & Young LLP
regarding Company's change in independent accountants
(incorporated by reference to Exhibit 16.1 of the Company's
Annual Report on Form 10-K for the year ended June 30,
1997).
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.
17
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 25, 1998 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 25, 1998
- ------------------------------------ of the Board (Principal Executive Officer)
Gerald J. Ford
/s/ SAMUEL C. PERRY Controller September 25, 1998
- ------------------------------------ (Principal Financial Officer and Principal
Samuel C. Perry Accounting Officer)
/s/ GENE H. BISHOP Director September 25, 1998
- ------------------------------------
Gene H. Bishop
/s/ HARVEY B. CASH Director September 25, 1998
- ------------------------------------
Harvey B. Cash
/s/ ROBERT TED ENLOE, III Director September 25, 1998
- ------------------------------------
Robert Ted Enloe, III
/s/ EDWARD W. ROSE, III Director September 25, 1998
- ------------------------------------
Edward W. Rose, III
/s/ GARY SHULTZ Director September 25, 1998
- ------------------------------------
Gary Shultz
18
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 Peat Marwick LLP, Independent Auditors .................. F-2
Report of Ernst & Young LLP, Independent Auditors ...................... F-3
Consolidated Statements of Financial Condition
as of June 30, 1998 and June 30, 1997 ............................ F-4
Consolidated Statements of Operations for the
years ended June 30, 1998, 1997 and 1996 ......................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1998, 1997 and 1996 ..................................... F-6
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996 ..................................... F-7
Notes to Consolidated Financial Statements ............................. F-8
Schedule IV - Mortgage Loans on Real Estate ............................ F-18
Separate financial statements relating to the Company's subsidiary are
omitted since it is wholly-owned and such separate financial statements are not
material.
All other financial statement schedules have been omitted because the
required information is not material to require submission of the schedule or
because the information required is included in the financial statements,
including the notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Liberte Investors Inc.:
We have audited the accompanying consolidated statements of financial condition
of Liberte Investors Inc. and subsidiary as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule as of and for the years ended June 30, 1998 and 1997 as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule as of and for the years ended June 30, 1998 and
1997, 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 Peat Marwick LLP
Dallas, Texas
July 23, 1998
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Trustees
Liberte Investors
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Liberte Investors for the year ended
June 30, 1996. Our audits also included the June 30, 1996 amounts in the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
amounts in the schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, Liberte Investors' consolidated
results of their operations and their cash flows for the year ended June 30,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the June 30, 1996 amounts in the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Ernst & Young LLP
Dallas, Texas
July 26, 1998
F-3
LIBERTE INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, June 30,
1998 1997
------------- -------------
Assets
Unrestricted cash $ 53,998,721 $ 52,474,290
Restricted cash and cash equivalents 64,310 61,237
------------- -------------
Total cash and cash equivalents 54,063,031 52,535,527
Foreclosed real estate held for sale 3,028,273 3,435,621
Notes receivable, net -- 1,693
Accrued interest and other receivables 4,343 4,507
Other assets 438,951 467,876
------------- -------------
Total assets $ 57,534,598 $ 56,445,224
============= =============
Liabilities and Stockholders' Equity
Liabilities-accrued and other liabilities $ 507,356 $ 239,545
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 (252,567,718) (253,389,281)
------------- -------------
Total stockholders' equity 57,027,242 56,205,679
------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 57,534,598 $ 56,445,224
============= =============
See notes to consolidated financial statements.
F-4
LIBERTE INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Income
Interest-bearing deposits in banks $ 2,721,150 $ 2,364,381 $ 1,182,179
Notes receivable interest 41 111,776 525,290
Gains on sales of foreclosed real estate -- 11,310 598,557
Other 57,012 39,145 478,307
----------- ----------- -----------
Total income 2,778,203 2,526,612 2,784,333
----------- ----------- -----------
Expenses
Insurance 151,197 307,292 216,089
Foreclosed real estate operations 193,140 257,017 118,456
Loss on write-down of foreclosed real estate 407,348 -- --
Legal, audit and consulting fees 72,847 167,895 578,791
Directors (trustees) fees and expenses 63,500 46,050 77,400
Franchise tax 96,270 65,206 --
Compensation and employee benefits 89,584 134,803 593,104
Provision for loan losses -- -- 187,058
General and administrative 253,359 225,365 178,068
----------- ----------- -----------
Total expenses 1,327,245 1,203,628 1,948,966
----------- ----------- -----------
Income before income taxes 1,450,958 1,322,984 835,367
Income tax expense 1,456 14,000 --
----------- ----------- -----------
Net Income $ 1,449,502 $ 1,308,984 $ 835,367
=========== =========== ===========
Basic net income per share of common
stock (beneficial interest in 1996) $ 0.07 $ 0.07 $ 0.07
=========== =========== ===========
Weighted average number of shares of
common stock (beneficial interest in
1996) 20,256,097 19,237,758 12,153,658
=========== =========== ===========
See notes to consolidated financial statements.
F-5
LIBERTE INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Number of Beneficial Number of Common Paid-In Treasury Accumulated
Shares Interest Shares Stock Capital Stock Deficit Total
---------- ------------- ---------- -------- ------------ --------- ------------- -----------
Balance at June 30, 1995 12,153,658 $ 287,954,763 -- $ -- $ -- $(404,325) $(255,930,624) $31,619,814
Repayment of executive
stock option loan -- -- -- -- -- -- 396,992 396,992
Net income -- -- -- -- -- -- 835,367 835,367
---------- ------------- ---------- -------- ------------ --------- ------------- -----------
Balance at June 30, 1996 12,153,658 287,954,763 -- -- -- (404,325) (254,698,265) $32,852,173
Exchange of shares
pursuant to plan
of reorganization 12,153,658) (287,954,763) 12,153,658 121,537 287,428,901 404,325 -- --
Issuance of
common stock,
net of stock
issuance costs
of $1,047,429 -- -- 8,102,439 81,024 21,963,498 -- -- 22,044,522
Net income -- -- -- -- -- -- 1,308,984 1,308,984
---------- ------------- ---------- -------- ------------ --------- ------------- -----------
Balance at June 30, 1997 -- -- 20,256,097 202,561 309,392,399 -- (253,389,281) 56,205,679
Dividends paid
($0.031 per share) -- -- -- -- -- -- (627,939) (627,939)
Net income -- -- -- -- -- -- 1,449,502 1,449,502
---------- ------------- ---------- -------- ------------ --------- ------------- -----------
Balance at June 30, 1998 -- $ -- 20,256,097 $202,561 $309,392,399 $ -- $(252,567,718) $57,027,242
========== ============= ========== ======== ============ ========= ============= ===========
See notes to consolidated financial statements.
F-6
LIBERTE INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 1,449,502 $ 1,308,984 $ 835,367
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation and amortization 17,715 14,009 14,639
Provision for loan losses -- -- 187,058
Loss on write-down of foreclosed real estate 407,348 -- --
Decrease in accrued interest and other receivables 164 59,368 40,012
Decrease (increase) in other assets 25,842 277,208 (692,784)
Increase (decrease) in accrued and other liabilities 267,811 (262,533) 85,914
Income from impaired loans -- (500) (452,903)
Gains from sales of foreclosed real estate -- (11,310) (598,557)
Collection of executive stock option loan -- -- 416,787
------------ ------------ ------------
Net cash provided by (used in) operating
activities 2,168,382 1,385,226 (164,467)
------------ ------------ ------------
Cash flows from investing activities:
Collections of notes receivable 1,693 1,330,197 5,937,776
Additions to fixed assets (14,632) -- --
Proceeds from sales and basis reductions of
foreclosed real estate -- 51,479 894,848
(Increase) decrease in restricted cash investments (3,073) (2,912) 920
------------ ------------ ------------
Net cash (used in) provided by investing activities (16,012) 1,378,764 6,833,544
------------ ------------ ------------
Cash flows from financing activities:
Issuance of newly issued shares of common
stock -- 23,091,951 --
Stock issuance costs -- (627,245) --
Dividends paid (627,939) -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities (627,939) 22,464,706 --
------------ ------------ ------------
Net increase in unrestricted cash and cash equivalents 1,524,431 25,228,696 6,669,077
Unrestricted cash and cash equivalents at beginning
of year 52,474,290 27,245,594 20,576,517
------------ ------------ ------------
Unrestricted cash and cash equivalents at end of year $ 53,998,721 $ 52,474,290 $ 27,245,594
============ ============ ============
Schedule of non-cash activities:
Charge-offs to allowance for loan losses, net $ -- -- 10,498,922
Sales of foreclosed real estate financed by
mortgage loans $ -- -- 1,076,800
Write-up of value of impaired note $ -- -- 71,250
Write-up of value of long-lived assets to be
disposed $ -- -- 53,751
Increase in note receivable from asset swap $ -- -- 31,313
See notes to consolidated financial statements.
F-7
Liberte Investors Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997, and 1996
(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-8
Liberte Investors Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
revenues and expenses at the date of the consolidated financial statements.
Actual results could differ from those estimates.
(e) Recognition of income - Interest income is recorded on an accrual
basis. The Company discontinues the accrual of interest income when
circumstances cause the collection of such interest to be doubtful. Interest
income on impaired loans is recognized on a cash basis only after all principal
has been collected. Collections on impaired loans with no carrying value are
recognized on a cash basis and are recorded as loan income.
(f) 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 bases 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 net income (loss) per share - Basic net income (loss) 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.
(j) Reclassifications - Certain amounts in prior years' financial
statements have been reclassified to conform to the current year's presentation.
F-9
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, 1998, 1997, and 1996:
1998 1997 1996
----------- ----------- ------------
Balance at beginning of year $ 3,435,621 $ 3,475,790 $ 15,385,214
Write-up in value -- -- 492,730
Reclassification of allowance for losses
upon adoption of SFAS No. 121 -- -- (10,331,733)
Write-down in value (407,348) -- (204,600)
Cost of real estate sold -- (40,169) (1,865,821)
----------- ----------- ------------
Balance at end of year $ 3,028,273 $ 3,435,621 $ 3,475,790
=========== =========== ============
The following table sets forth the Company's portion of foreclosed real
estate by type of property and geographic location:
June 30,
------------------------------
1998 1997
---------- ----------
Type of Property:
Single-family lots $ 213,052 $ 620,400
Land 2,815,221 2,815,221
---------- ----------
$3,028,273 $3,435,621
========== ==========
Geographic Location:
Texas $2,815,221 $2,815,221
California 213,052 620,400
---------- ----------
$3,028,273 $3,435,621
========== ==========
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 and has subsequently been written down to $213,052 and $620,400 as of June
30, 1998 and 1997, respectively.
F-10
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, 1998, 1997 and 1996:
1998 1997 1996
------- ----------- -----------
Balance at beginning of year $ 1,693 $ 1,331,390 $ 5,807,372
Advances and other additions to notes
receivable -- -- 106,782
Sales of foreclosed real estate
financed by notes receivable -- -- 1,076,800
Principal collections (1,323) (1,329,317) (5,561,473)
Write-off of principal (370) (380) (98,091)
------- ----------- -----------
Balance at end of year $ -- $ 1,693 $ 1,331,390
======= =========== ===========
At June 30, 1998, 1997 and 1996, 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.
F-11
Liberte Investors Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Allowance for Loan Losses
A summary of transactions affecting the Company's allowance for loan losses
for the three-year period ended June 30, 1998, is as follows:
Notes Foreclosed
Receivable Real Estate Total
------------ ------------ ------------
Balance at June 30, 1995 $ 129,901 $ 10,369,021 $ 10,498,922
Reclassifications - SFAS No. 121 -- (10,331,733) (10,331,733)
Provision for loan losses (17,542) 204,600 187,058
Amounts charged off, net
of recoveries (112,359) (241,888) (354,247)
------------ ------------ ------------
Balance at June 30, 1996 -- -- --
Provision for loan losses -- -- --
Amounts charged off, net
of recoveries -- -- --
------------ ------------ ------------
Balance at June 30, 1997 $ -- -- --
------------ ------------ ------------
Provision for loan losses -- -- --
Amounts charged off, net
of recoveries -- -- --
------------ ------------ ------------
Balance at June 30, 1998 $ -- -- --
============ ============ ============
(5) Commitments and Contingencies
The Company's wholly-owned subsidiary, LNC Holdings Inc., owns
approximately 40 acres of land located in Arlington, Texas which is encumbered
by property tax liens totaling approximately $1,090,000 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 and for the six month period ended June 30, 1998
totaling $125,000. 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 and 1997, included restricted
cash of approximately $64,000 and $61,000, respectively, for claims due to
bankruptcy. On June 30, 1997, the court issued an Administrative Closing Order
and Final Decree with regard to the bankruptcy case. The claims
F-12
Liberte Investors Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
remaining represent unclaimed dividend checks dated May 20, 1994. Any check not
claimed will be voided after five years.
The Company entered into an operating lease dated May 16, 1997 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. On May 19, 1997, the Company entered into an
operating lease for telephone equipment which also expires on December 31, 2000.
Rental expense for fiscal 1998 and 1997 under these leases was approximately
$72,000 and $26,000, respectively. Future minimum lease payments under these
leases are as follows:
Fiscal Year Ending
June 30, Amount
-------- ------
1999 $ 77,856
2000 77,856
----------
Total future minimum rentals $ 155,712
==========
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.
(6) Related Party Transactions
Effective February 28, 1995, the Company entered into an "Asset Disposition
Agreement" with ST Lending, Inc. ("STL"), a wholly-owned subsidiary of Lomas
Financial Corporation, the original sponsor of the Trust, whereby the Company
and STL exchanged their respective ownership positions in a group of ten assets
in order to achieve a separate and distinct ownership position. The Company
exchanged its 80% ownership in six assets, whose 80% interest had a net carrying
value of approximately $1.2 million (net of reserves) for STL's 20% ownership in
four assets, whose 20% interest had a net carrying value of approximately $1.2
million (net of reserves). No gain or loss was recognized as a result of this
transaction. In addition, a group of approximately 14 receivables, which had no
carrying value and related primarily to deficiency notes, remained 80% owned by
the Company and 20% owned by STL. The 14 receivables had face amounts which
ranged in size from $9,875 to $2,494,118. The Asset Disposition Agreement
stipulated that the Company would pay STL 10% of any gross proceeds received in
addition to STL's 20% ownership, from this pool of receivables in return for
STL's asset administration. Effective April 15, 1996, STL's interest in the
seven remaining deficiency notes and/or judgments, which had no carrying value,
were transferred to the Company.
On April 24, 1996, the Company entered into a Supplement (the "Supplement")
to the Asset Disposition Agreement. The Supplement transferred ownership of LNC
Holdings, Inc., whose sole asset is approximately 40 acres of undeveloped real
estate that is fully encumbered by tax liens, to the Company and set forth the
terms under which STL would continue to manage the property. The Supplement
further
F-13
Liberte Investors Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
described the method of allocating the funds to be paid to the Company and STL
with respect to a proposed settlement agreement for a deficiency note receivable
received by the Company in June 1996 in the amount of approximately $8,000. The
Company also exchanged its 50% interest, representing $212,000 of principal, in
a note the Company has classified as non-earning, for STL's 20% interest,
representing $269,000 of principal, in a note the Company classified as earning.
The exchange of these notes resulted in the Company owning 100% of an
interest-bearing note, secured by 72 lots in Murrieta, California. The
difference in the exchange values resulted in the recording of $31,000 of
interest income. The remaining difference of $26,000 was applied as a discount
to the carrying value of the note received and was amortized into income over
the life of the loan.
In accordance with the Asset Disposition Agreement and the Supplement, in
fiscal 1996, STL received compensation of $69,237 from the Company for its asset
administration and collection services. There was no such compensation paid to
STL in fiscal 1997 or 1998.
At June 30, 1996, the Company had a collateral assignment of a life
insurance policy on Robert Ted Enloe, III which was recorded as a receivable
under a split-dollar agreement. On December 13, 1996, Mr. Enloe purchased the
policy from the Company for $126,727, the amount of the receivable.
(7) Federal Income Taxes
Income tax expense attributable to income before income taxes consists of:
June 30,
---------------------------------------------
1998 1997 1996
------- ------------ ------------
Federal
Current $ 1,456 $ 14,000 $ --
Deferred -- -- --
------- ------------ ------------
$ 1,456 $ 14,000 $ --
======= ============ ============
The income tax expense for the years ended June 30, 1998, 1997 and 1996
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,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Computed "expected" income tax expense $ 493,326 $ 449,815 $ 284,025
Increase (decrease) in taxes resulting from:
Adjustment to deferred tax asset (231,233) (466,250) --
Other -- -- (26,025)
Change in the beginning of the year
balance of the valuation allowance
for deferred tax assets allocated
to income taxes (260,637) 30,435 (258,000)
--------- --------- ---------
$ 1,456 $ 14,000 $ --
========= ========= =========
F-14
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, 1998 and 1997 are presented
below:
June 30,
----------------------------
1998 1997
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 77,056,215 $ 77,196,311
Basis differences of foreclosed real estate 2,331,370 2,454,676
Capital loss carryforward 1,630,006 1,630,006
Other 1,911,207 1,908,442
------------ ------------
Total gross deferred tax assets 82,928,798 83,189,435
Less: valuation allowance (82,928,798) (83,189,435)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The net change in the valuation allowance for the years ended June 30, 1998
and 1997 was a decrease of $260,637 and an increase of $30,435, 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, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of $226,636,000, which are available to offset
future federal taxable income. The carryforwards will expire in 2005 through
2011. The Company also has capital loss carryforwards of $4,794,000 which are
available to offset future capital gains, if any, through 2001. In addition, the
Company has alternative minimum tax credit carryforwards of $15,100 which are
available to reduce future federal income taxes, if any, over an indefinite
period.
(8) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The fair value of cash and cash equivalents approximates their carrying
value because of the liquidity and short-term maturities of these instruments.
The fair value of notes receivable - mortgage loans is estimated by discounting
cash flows at interest rates currently being offered for notes with similar
terms to borrowers of similar credit quality. The Company believes that its
deficiency notes
F-15
Liberte Investors Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
receivable, which have no carrying value at June 30, 1998, may have some fair
value, but such value cannot be estimated and any potential collections are not
measurable as to timing or amount. The Company does not believe that it is
exposed to any significant credit risk on its cash and cash equivalents.
The estimated fair values of the Company's financial instruments at June
30, 1998 and 1997, are as follows:
June 30, 1998 June 30, 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- ----------
Financial Assets:
Cash and cash equivalents $54,063,031 54,063,031 $52,535,527 52,535,527
Notes receivable - mortgage loans -- -- 1,693 1,693
(9) Certain Customers
In 1994, the Company received a note receivable (the "Note") from
Resurgence Properties, Inc. ("RPI") in the original amount of $6.0 million upon
emerging from bankruptcy pursuant to the plan of reorganization. The Note was
collateralized by a pool of first mortgage loans and by deeds of trust on
various real estate assets owned by RPI. RPI repurchased the Note from the
Company on June 27, 1996 for $4.09 million representing 98.75% of the then
outstanding balance in a negotiated transaction. The Company charged $51,740 to
the allowance for possible losses on notes receivable related to this sale.
Revenue from RPI for the years ended June 30, 1998 and 1997 consisted
solely of dividend income totaling $40,100 and $33,500, respectively. Revenue
from RPI provided greater than 10% of the Company's total revenue for the fiscal
year ended June 30, 1996, and consisted of: (i) interest income totaling
$389,958 on the RPI note receivable and (ii) dividend income totaling $21,375 on
RPI preferred stock.
(10) Concentrations of Credit Risk
At June 30, 1998, the Company had certain concentrations of credit risk
with three financial institutions in the form of cash which amounted to
approximately $54 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.
F-16
Liberte Investors Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Stockholders' Equity
On August 15, 1996, the Trust, pursuant to the plan of reorganization,
exchanged all Beneficial Shares for shares of Common Stock of the Company.
Further, 8,102,439 of newly-issued shares of the Company were purchased by
Hunter's Glen/Ford, Ltd., a Texas limited partnership ("Hunter's Glen"), for
$23,091,951 ($2.85 per share). Gerald J. Ford, partner of Hunter's Glen, is
Chief Executive Officer and Chairman of the Board of Directors of the Company.
In fiscal year ended June 30, 1996, Stockholders' Equity included a
deduction for a promissory note payable to the Company from Robert Ted Enloe,
III in the amount of $365,625 plus deferred interest thereon. On June 18, 1996
Mr. Enloe repaid the outstanding principal and interest balance on this note. At
the time of repayment, the principal and accrued but unpaid interest due under
the note was $416,787, net of deferred interest of $19,795.
(12) Subsequent Events
In August 1998 the Company received $303,514 from the liquidation of
300,000 shares of RPI preferred stock and accrued dividends.
In August 1998 the Company sold 56.6 acres of land in San Antonio, Texas
for a price of $339,600. A gain of approximately $200,000 was recorded as a
result of this transaction subsequent to June 30, 1998.
In September 1998 the Company sold 55 lots in Fontana, California for a
price of $229,002. A loss of $407,348 was recorded as a result of this
transaction. The related assets were written down at June 30, 1998 to estimated
sales proceeds less selling costs.
F-17
Liberte Investors Inc. and Subsidiary
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
June 30, 1998
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,
------------------------------
1998 1997 1996
------ ------ ------
Balance at beginning of year $ 2 $1,331 $5,807
Additions during year:
Write-up in value of impaired loans -- -- 71
Net addition from asset swap -- -- 35
New mortgage loans and advances
on existing loans and other -- -- 1,077
------ ------ ------
2 1,331 6,990
Deductions during year:
Collections of principal 2 1,329 5,561
Foreclosures -- -- --
Write-off of principal -- -- 98
------ ------ ------
Balance at end of year $ -- $ 2 $1,331
====== ====== ======
F-18