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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2003

or

For the transition period from            to           

Commission File Number 1-6802

(214) 871-5935
(Registrant’s telephone number, including area code)

(Former name, former address, and former fiscal year, if changed since last report)

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes    [  ]      No    [X]  

As of February 13, 2004, there were outstanding 20,589,430 shares of the registrant’s common stock, par value $0.01 per share.

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LIBERTÉ INVESTORS INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2003

INDEX

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LIBERTÉ INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

See accompanying notes to consolidated financial statements.

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LIBERTÉ INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

See accompanying notes to consolidated financial statements.

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LIBERTÉ INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

See accompanying notes to consolidated financial statements.

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LIBERTÉ INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)

See accompanying notes to consolidated financial statements.

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LIBERTÉ INVESTORS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to consolidated financial statements.

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LIBERTÉ INVESTORS INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(Unaudited)

Note A - Organization

Liberté Investors Inc., a Delaware corporation (the “Company”), was organized in April 1996 in order to effect the reorganization of Liberté Investors, a Massachusetts business trust (the “Trust”). At a special meeting of the shareholders of the Trust held on August 15, 1996, 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. The Trust then distributed to its shareholders, in redemption of all outstanding shares of beneficial interest in the Trust, the shares of the Company. The Company assumed all of the Trust’s assets and outstanding liabilities and obligations.

Since August 1996, the Company has been actively pursuing opportunities to acquire one or more operating companies in order to increase value to existing stockholders and provide a new focus and direction for the Company. The Company’s primary objective has been to seek long-term growth through an acquisition of a business rather than short-term earnings.

To that end, on December 15, 2003, the Company signed an agreement to acquire USAuto Holdings, Inc. (“USAuto”) for consideration consisting of $76.0 million in cash, 13,250,000 shares of the Company’s common stock that will be issued at the time of the closing of the acquisition of USAuto and up to an additional 750,000 shares of common stock that may be issued at a later date if certain financial targets are reached. The Company has filed a Registration Statement on Form S-1 containing a Joint Proxy Statement/Prospectus relating to the issuance of stock to the USAuto stockholders and the raising of capital for the USAuto acquisition pursuant to a rights offering being made to all existing Company stockholders. The Company had previously announced a record date of February 17, 2004 for the rights offering. That date will no longer be the record date for its proposed rights offering. The Company will provide adequate notice of a new record date when such information becomes known. The Company intends to file an amendment to the S-1 Registration Statement, which will contain audited financial statements for USAuto for the year ended December 31, 2003 and unaudited interim financials for the Company for the six months ended December 31, 2003. The Company expects to file that amendment prior to the end of March 2004, and intends to issue a press release establishing a new expected record date at that time.

USAuto is a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. USAuto currently writes non-standard personal automobile insurance in Georgia, Tennessee, Alabama, Mississippi, Ohio and Missouri and is licensed as an insurer in 12 additional states.

Upon consummation of the acquisition of USAuto, the Company will change its name to First Acceptance Corporation. Stephen J. Harrison, the current President and Chief Executive Officer of USAuto, will be appointed the President and Chief Executive Officer of the newly combined enterprise. Thomas M. Harrison, Jr., the current Vice President and Secretary of USAuto, will be appointed Executive Vice President of the newly combined enterprise. Donald J. Edwards, the current President and Chief Executive Officer of the Company, and Ellen V. Billings, the current Principal Accounting Officer, Secretary and Treasurer of the Company, will resign from their positions, and their employment with the Company will be terminated.

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The Company’s board of directors has designated Stephen J. Harrison and Thomas M. Harrison, Jr. as nominees for election as directors. Following the consummation of the acquisition of USAuto, it is anticipated that Mr. Edwards will remain a director of, and special advisor to, the newly combined enterprise. It is also anticipated that upon the consummation of the acquisition of USAuto, Gary Shultz and Jeremy B. Ford will resign as directors of the Company.

Note B - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes necessary for a fair presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended December 31, 2003, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004.

The accompanying unaudited consolidated financial statements include the accounts of the Company and LNC Holdings, Inc., a wholly-owned subsidiary whose sole asset is approximately 38 acres of land located in Arlington, Texas. All intercompany balances and transactions have been eliminated.

Certain reclassifications have been made to the accompanying unaudited consolidated financial statements. Such reclassifications had no impact on net income (loss) or stockholders’ equity.

Note C - Foreclosed Real Estate Held For Sale

At December 31, 2003, the Company held foreclosed real estate for sale in the form of undeveloped land. The December 31, 2003 carrying amount of these assets was approximately $1,265,000. The foreclosed real estate for sale consists of land totaling approximately 324 acres in San Antonio, Texas and approximately 38 acres in Arlington, Texas.

In September 2002, the Company sold 51.57 acres of land in San Antonio, Texas to a discount department store chain for a price of $538,907, less associated selling costs of $13,928. A gain of approximately $234,000 was recorded as a result of this transaction.

In September 2002, the Company recorded a write-down on the book values of three parcels of land in San Antonio, Texas for an aggregate of approximately $124,000. The write-down was recorded to adjust for decreased market values on the properties due to a softening of the local real estate market.

In November 2002, the Company sold 7.0 acres of land in San Antonio, Texas to a retail store owner for a price of $155,000, less associated selling costs of $7,000. A loss of approximately $1,000 was recorded as a result of this transaction.

In December 2002, the Company recorded a write-down on the book values of two parcels of land in San Antonio, Texas for an aggregate of approximately $17,000. The write-down was recorded to adjust for decreased market values on the properties due to a softening of the local real estate market.

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In July 2003, the Company sold 3.7 acres of land in San Antonio, Texas to an individual for a price of $75,000 less associated selling costs of $3,867. A gain of approximately $18,000 was recorded as a result of this transaction.

Also in July 2003, the Company sold 1.6 acres of land in San Antonio, Texas to a discount department store chain for a price of $336,000 less associated selling costs of $20,550. A gain of approximately $285,000 was recorded as a result of this transaction.

In July 2003, the Company sold 2.0 acres of land in San Antonio, Texas to an individual for a price of $1,054,000 less associated selling costs of $57,546. A gain of approximately $984,000 was recorded as a result of this transaction.

In September 2003, the Company sold 4.9 acres of land in San Antonio, Texas to a church for a price of $130,000, less associated selling costs of $11,077. A gain of approximately $23,000 was recorded as a result of this transaction.

In October 2003, the Company sold 1.47 acres of land in San Antonio, Texas to an individual for a price of $90,000 less associated selling costs of $7,609. A gain of approximately $24,800 was recorded as a result of this transaction.

Also, in October 2003, the Company sold 3.08 acres of land in San Antonio, Texas to an individual for a price of $125,000 less associated selling costs of $9,646. A gain of approximately $74,400 was recorded as a result of this transaction.

In addition to the sales subsequent to December 31, 2003, as discussed in Note J, the Company is currently a party to contracts of sale on a total of approximately 5.6 acres as of December 31, 2003, which, if they are consummated, would result in the Company recognizing a gain of approximately $1.0 million. The Company is also currently active in negotiations for the sale of an additional total of approximately 3.7 acres.

Note D - Commitments and Contingencies

The Company’s wholly-owned subsidiary, LNC Holdings Inc., owns approximately 38 acres of land located in Arlington, Texas which is encumbered by property tax liens totaling approximately $1.7 million including penalties and interest. The property has no carrying value due to the encumbrances.

On April 16, 1997, LNC Holdings Inc. received a notice of judgment from the City of Arlington with regard to the delinquent taxes through that date. On June 28, 2001, LNC Holdings Inc. received an additional notice of judgment from the City of Arlington with regard to the delinquent taxes from 1997 through that date. 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 and related penalties and interest for calendar years 1996 through 2003 totaling $398,000. 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.

Note E - Federal Income Taxes

Although the Company had taxable income for the six-month period ended December 31, 2003, no tax liability was recognized due to a reduction in the valuation allowance related to its net operating loss

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carryforwards. 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.

Note F - Concentrations of Credit Risk

At December 31, 2003, the Company had certain concentrations of credit risk with three financial institutions in the form of cash, which amounted to approximately $57 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.

Note G - Earnings (Loss) Per Share

Statement of Financial Accounting Standard (“SFAS”) No. 128 “Earnings Per Share” (“EPS”) specifies the computation, presentation and disclosure requirements for earnings per share. Basic EPS excludes all dilution while diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. The following table presents the basic and diluted EPS data for the three- and six-month periods ended December 31, 2003 and 2002.

Diluted weighted average shares for the three months ended December 31, 2003 excludes incremental shares from assumed conversion of stock options of 621,652 under the Company’s 2002 Long Term Incentive Plan due to the net loss for the period.

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Diluted weighted average shares for the three months ended December 31, 2002 excludes incremental shares from assumed conversion of stock options of 575,778 under the Company’s 2002 Long Term Incentive Plan and available shares of 27,778 under the stock purchase rights granted to the officer due to the net loss for the period.