ITEM 1. BUSINESS
Lomas Financial Corporation was incorporated in Delaware in 1960, and its principal executive offices are located at 717 North Harwood in Dallas, Texas. Unless the context otherwise requires, the "Company," as used herein, refers to Lomas Financial Corporation ("LFC") and its subsidiaries. LFC's wholly-owned, principal subsidiary is Lomas Mortgage USA, Inc. ("LMUSA").
CHAPTER 11 PROCEEDINGS
On October 10, 1995, LFC, LMUSA and two other insignificant subsidiaries of LFC (collectively the "Debtor Corporations") filed separate voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the District of Delaware. The petitioning subsidiaries are Lomas Information Systems, Inc. ("LIS") and Lomas Administrative Services, Inc., ("LAS") both of which are inactive and have relatively minor amounts of assets and liabilities. The Chapter 11 cases are being jointly administered, with the Debtor Corporations managing their businesses in the ordinary course as debtors-in-possession subject to the control and supervision of the Federal Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
On October 23, 1995, a single creditors' committee (the "Joint Creditors' Committee") was appointed by the U.S. Trustee for the District of Delaware (the "U.S. Trustee") to represent creditors of all the Debtor Corporations. On March 15, 1996, the U.S. Trustee revoked the appointment of the Joint Creditors' Committee and appointed statutory committees of unsecured creditors of LFC (the "LFC Creditors' Committee") and of LMUSA (the "LMUSA Creditors' Committee").
The Debtor Corporations filed two separate proposed plans of reorganization with the Bankruptcy Court. LFC, LIS and LAS (the "Joint Debtors") filed their proposed joint plan of reorganization on April 8, 1996 and subsequently filed their first amended joint plan of reorganization on May 13, 1996 and their second amended joint plan of reorganization on July 3, 1996 (the "Joint Plan"). LMUSA filed its own proposed plan of reorganization on April 8, 1996 and subsequently filed its own proposed first amended plan of reorganization on May 13, 1996 and its second amended joint plan of reorganization on July 3, 1996 (the "LMUSA Plan" and together with the Joint Plan, the "Plans").
In addition, on July 3, 1996, the Joint Debtors filed with the Bankruptcy Court a proposed form of disclosure statement relating to the Joint Plan (the "Joint Disclosure Statement"), and LMUSA filed with the Bankruptcy Court a substantially similar proposed form of disclosure statement (with the same Exhibits as the Joint Disclosure Statement) relating to the LMUSA Plan (the "LMUSA Disclosure Statement" and together with the Joint Disclosure Statement, the "Disclosure Statements").
The period for solicitation of acceptances of each Plan from creditors began once the Bankruptcy Court approved the related Disclosure Statement as containing "adequate information" on July 3, 1996 and concluded on August 23, 1996.
According to the certificates of the balloting agent filed with the Bankruptcy Court on September 23, 1996, the required acceptances for each Plan have been obtained.
A hearing at which the Bankruptcy Court will consider whether to confirm the Plans had been scheduled for September 20, 1996 but has been rescheduled for October 1, 1996.
Each Plan contains the following additional conditions precedent to confirmation: (a) Bankruptcy Court approval of all relevant agreements, trustees, agents and mediators and authorization of the Debtor Corporations, the intercompany claims agent, if any, and the LFC or LMUSA litigation trustee, as the case may be, to make any contemplated transfers of property; (b) the LFC Creditors' Committee or the LMUSA Creditors' Committee, as the case may be, shall have provided the new names of the relevant reorganized Debtor Corporation and the names of the members of the Board of Directors and officers of each; and (c) receipt of any necessary no-action letters from the Securities and Exchange Commission, rulings from the Internal Revenue Service or other government approvals. In addition, under the Joint Plan, the trustee of the "rabbi trust" in which the assets of the Lomas Management Security Plan are held will have turned over or been ordered to turn over to LFC the assets held in the "rabbi trust". While certain of these conditions to confirmation have been met, there can be no assurance that all of these conditions will be met. Any and all conditions precedent to confirmation may be waived by the LFC Creditors' Committee or the LMUSA Creditors' Committee, as the case may be, other than the conditions set forth in clauses (a) and (b) above. Accordingly, it is not possible to predict whether and in what form the Plans will be confirmed or the timing of such confirmation. It is also important to note that the Joint Plan and the LMUSA Plan are independent, and each Plan can be confirmed even if the other Plan is not confirmed.
Distributions to general unsecured creditors are subject to conditions precedent set forth in each Plan which relate to certain intercompany claims. There can be no assurance as to when such conditions will be satisfied. On June 26, 1996, the LFC Creditors' Committee filed a motion seeking orders (i) authorizing it to commence an adversary proceeding on behalf of LFC against LMUSA to assert certain Intercompany Claims, (ii) either classifying LFC's Intercompany claims against LMUSA as priority claims, or classifying such Claims as LMUSA Class 3 general unsecured claims allowed for voting purposes in the amount of $217 million, and (iii) appointing an examiner to mediate the disputes between the LFC Creditors' Committee and the LMUSA Creditors' Committee with respect to Intercompany Claims. On August 5, 1996, the Bankruptcy Court appointed an arbitrator to meet with the LFC and LMUSA Creditors' Committee to review and issue a non-binding judgement related to the dispute over the intercompany claims. There are several meetings scheduled through November 1, 1996.
Reference is made to "III. Background and General Information -- E. The Chapter 11 Filings" in the Joint Disclosure Statement, a copy of which is filed as an exhibit to this report, and "Part I -- Item 3. Legal Proceedings". The principal provisions of the Plans are summarized in the Joint Disclosure Statement. That summary is qualified in its entirety by reference to the Plans, which are attached as Exhibits I and II to the Joint Disclosure Statement.
FINANCIAL INFORMATION AND NARRATIVE DESCRIPTION OF INDUSTRY SEGMENTS
Financial information regarding revenues, operating profit and total assets of the Company are included in "Item 8. Financial Statements and Supplementary Data" within this report.
MORTGAGE BANKING
During fiscal 1996, the Company entered into various agreements to sell all of its servicing portfolio and certain other assets. See "Item 8. Financial Statements and Supplementary Data - Chapter 11 Proceedings."
On October 2, 1995, the Company closed the sale to First Nationwide Mortgage Corporation ("First Nationwide") of LMUSA's GNMA servicing portfolio (approximately $7.9 billion in unpaid principal balance of mortgage loans), its investment in Lomas Mortgage Partnership and its loan production business including its mortgage loans held for sale and the payment of the related warehouse lines of credit (the "GNMA Sale"). The adjusted purchase price for the GNMA Sale was approximately $102 million (less $10 million which is being used to pay the Company's expense for transferring the servicing), subject to certain adjustments, the payment of certain warehouse indebtedness and the assumption of certain other liabilities. Cash of $35 million was paid at closing of which $18.8 million was applied to
terminate the balance of LMUSA's swaps and $12 million was escrowed with FNMA in connection with certain recourse servicing to be sold as described in the following paragraph. This escrowed fund plus interest was released and returned to the Company on February 1, 1996. The second installment (approximately $41.5 million) was received on January 30, 1996, with the final payment (net of indemnification claims made by First Nationwide and accepted by LMUSA greater than $6.1 million) due on October 2, 1996.
On January 31, 1996, LMUSA closed the sale to First Nationwide of its remaining mortgage servicing portfolio (approximately $12 billion in unpaid principal balance of mortgage loans) and certain other assets pursuant to Section 363 of the Bankruptcy Code (the "Section 363 Sale"). The adjusted gross purchase was approximately $161 million (less $10 million which is being used to pay the Company's expense for transferring the servicing). The adjusted gross purchase price will be reduced by the amount of any reserve which will be determined at the final payment date. The Company received $49.75 million in cash at closing of which $6.0 million was escrowed with a financial institution for certain mortgage servicing related commitments. This $6.0 million was returned to the Company in May 1996. The second installment was received in two payments of approximately $59.5 million and $5.1 million on May 31, 1996 and July 1, 1996, respectively. The final payment (net of indemnification claims made by First Nationwide and accepted by LMUSA) is due on February 1, 1997.
At June 30, 1996 the Company has established a reserve in the amount of $20.5 million as their best estimate of indemnification claims related to the sales discussed above. Management believes this amount is adequate.
On August 16, 1996, the Company's former headquarters and adjacent land and buildings were sold for $23.5 million pursuant to an order of the Bankruptcy Court. Additionally, substantially all of its furniture and equipment was sold by a liquidator during the period of July and August 1996.
OTHER OPERATIONS OF THE COMPANY
Insurance Agency Services. The Company provides brokerage services for a variety of insurance products related to the Company's business. The products include temporary hazard insurance, permanent fire, casualty and extended homeowner coverages and mortgage life insurance, accidental death, disability and hospital indemnity coverages. The Company sells insurance products as an agent and does not retain any underwriting risk. The insurance agency service's subsidiaries are wholly-owned subsidiaries of LMUSA. The Company is negotiating a pending asset purchase agreement to sell substantially all of the assets of the insurance agency services subsidiaries. The purchaser would also assume certain liabilities of the insurance agency services subsidiaries. As of this report date, the agreement has not been finalized. It will be subject to Bankruptcy Court approval and to higher and better offers.
Field Services. The field services operations were provided by a wholly-owned subsidiary of LMUSA. The Company monitored the condition of properties, assured property preservation and interviewed delinquent mortgagors through its field services subsidiary. In August 1995, the Company sold certain fixed assets of the field services operations at approximate net book value to First American Real Estate Services and discontinued the business.
Image Processing. Intellifile, Inc., ("Intellifile") a wholly-owned subsidiary of LFC, provided image processing services to the Company and other external parties. In August 1995, the Company sold Intellifile to a third party and recorded a net gain on the sale of $1.1 million.
Short Term Lending. The Company's short term lending operations were conducted through its wholly-owned subsidiaries ST Lending, Inc. ("STL"), Lomas Management, Inc. ("LMI"), which manages the assets of STL, and certain other real estate subsidiaries. Short term lending operations included activities of short term construction, acquisition and development lending. Substantially no new commercial loans have been originated since September, 1989.
Information Systems. In December 1994 the Company completed the sale of substantially all of the assets of its information systems subsidiary ("LIS") to Residential Information Services, Limited Partnership. ("RIS").
For more information, see "Item 8. Financial Statements and Supplementary Data."
EMPLOYEES
At June 30, 1996 the Company had 90 full-time employees. None of the Company's employees were represented by any union. During fiscal 1996, approximately 1,000 employees were terminated. As of July 1, 1996, approximately 20 of the terminated employees remain as consultants in altered capacities.
ITEM 2.
ITEM 2. PROPERTIES
Effective July 1, 1996, the Company's principal executive offices are located in leased facilities at 717 North Harwood, Dallas, Texas. Prior to that, the Company's principal offices were located in buildings owned by the Company that are subject to a first mortgage note executed in favor of an insurance company. These buildings were sold on August 16, 1996, see "Item 8. Financial Statements and Supplementary Data."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On October 10, 1995, LFC, LMUSA and two other insignificant subsidiaries of LFC filed separate voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the District of Delaware. On April 8, 1996, the Debtor Corporations filed with the Bankruptcy Court two separate proposed plans of reorganization. On July 3, 1996, the Debtor Corporations subsequently filed with the Bankruptcy Court two separate proposed amended plans of reorganization. The Joint Debtors filed the Joint Plan, and LMUSA filed the LMUSA Plan. The LMUSA Creditors' Committee is a co- proponent of the LMUSA Plan.
In addition, on July 3, 1996, the Joint Debtors filed with the Bankruptcy Court the Joint Disclosure Statement in connection with the solicitation of votes on the Joint Plan from holders of claims against the Joint Debtors, and LMUSA filed with the Bankruptcy Court the LMUSA Disclosure Statement in connection with the solicitation of votes on the LMUSA Plan from holders of claims against LMUSA.
The period for solicitation of acceptances of each Plan from creditors began once the Bankruptcy Court approved the related Disclosure Statement as containing "adequate information" on July 3, 1996 and concluded on August 23, 1996.
According to the certificates of the balloting agent filed with the Bankruptcy Court on September 23, 1996, the required acceptances for each Plan have been obtained.
A hearing at which the Bankruptcy Court will consider whether to confirm the Plans had been scheduled for September 20, 1996 but has been rescheduled for October 1, 1996.
Each Plan contains the following additional conditions precedent to confirmation: (a) Bankruptcy Court approval of all relevant agreements, trustees, agents and mediators and authorization of the Debtor Corporations, the intercompany claims agent, if any, and the LFC or LMUSA litigation trustee, as the case may be, to make any contemplated transfers of property; (b) the LFC Creditors' Committee or the LMUSA Creditors' Committee, as the case may be, shall have provided the new names of the relevant reorganized Debtor Corporation and the names of the members of the Board of Directors and officers of each; and (c) receipt of any necessary no-action letters from the Securities and Exchange Commission, rulings from the Internal Revenue Service or other government approvals. In addition, under the Joint Plan, the trustee of the "rabbi trust" in which the assets of the Lomas Management Security Plan are held will have turned over or been ordered to turn over to LFC the assets held in the "rabbi trust".
While certain of these conditions to confirmation have been met, there can be no assurance that all of these conditions will be met. Any and all conditions precedent to confirmation may be waived by the LFC Creditors' Committee or the LMUSA Creditors' Committee, as the case may be, other than the conditions set forth in clauses (a) and (b) above. Accordingly, it is not possible to predict whether and in what form the Plans will be confirmed or the timing of such confirmation. It is also important to note that the Joint Plan and the LMUSA Plan are independent, and each Plan can be confirmed even if the other Plan is not confirmed.
Distributions to general unsecured creditors are subject to the additional conditions precedent set forth in each Plan (See "Section 6.3, Conditions to First Distribution" in each of the Plans, which are attached as exhibits), which relate to certain intercompany claims. There can be no assurance as to when such conditions will be satisfied.
For a more detailed description of the Debtor Corporations' Chapter 11 proceedings and material developments in connection with such proceedings, reference is made to "III. Background and General Information -- E. The Chapter 11 Filings" in the Joint Disclosure Statement, a copy of which is filed as an exhibit to this report, and "Part I -- Item 1. Chapter 11 Proceedings" of this report. The principal provisions of the Plans are summarized in the Joint Disclosure Statement. That summary is qualified in its entirely by reference to the Plans, which are attached as Exhibits I and II to the Joint Disclosure Statement.
THE CHAPTER 11 PROCEEDINGS
The discussion below sets forth various aspects of the Chapter 11 proceedings, but is not intended to be an exhaustive summary. For additional information regarding the effect on the Debtor Corporations of the Chapter 11 proceedings, reference should be made to the Bankruptcy Code.
Under Chapter 11, the Debtor Corporations, as debtors-in-possession, are authorized to continue to operate their businesses; however, they may not engage in transactions outside the ordinary course of business without first complying with the notice and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court approval where and when necessary.
Under Chapter 11, substantially all litigation and claims against the Debtor Corporations at the date of the filings have been stayed while the Debtor Corporations continue business operations as debtors-in-possession. The Bankruptcy Code prohibits creditors who are subject to the jurisdiction of the Bankruptcy Court from suing the Debtor Corporations, either by commencement or continuation of a lawsuit or otherwise, unless the Bankruptcy Court terminates or modifies the automatic stay of litigation or otherwise authorizes payments by the Debtor Corporations. Accordingly, virtually all of the actions which were pending against the Debtor Corporations were automatically stayed upon the filing of the petitions.
The U.S. Trustee, a federal official with certain administrative responsibilities in respect of bankruptcy proceedings, appointed two unsecured creditors' committee, the LFC Creditors' Committee and the LMUSA Creditor's Committee. The official committees have the right to review and object to certain business transactions and are expected to participate in the formulation of any plan or plans of reorganization. The committees are entitled to retain counsel and other professionals, in each case at the expense of the Debtor Corporations, if they are retained pursuant to an order of the Bankruptcy Court.
As debtors-in-possession, the Debtor Corporations have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject certain executory contracts and unexpired leases. In this context, "assumption" means that the Debtor Corporations agree to perform their obligations under the contract or lease, and "rejection" means that the Debtor Corporations are relieved of their obligations to perform further under the contract or lease and are subject only to a claim for damages resulting from the breach thereof. Any such damage claims are treated as general unsecured claims in the reorganization proceedings. The Debtor Corporations are studying executory contracts and unexpired leases to determine whether assumption or rejection is appropriate.
Under the Bankruptcy Code, a creditor's claim is treated as secured only to the extent of the value of such creditor's collateral, and the balance of such creditor's claim is treated as unsecured. Generally, unsecured and partially secured debt of an insolvent debtor does not accrue interest after the Chapter 11 filing.
Claims which were contingent or unliquidated at the commencement of the Chapter 11 proceedings are generally allowable against the Debtor Corporations. These claims, including, without limitation, those which arise in connection with rejection of unfavorable executory contracts and leases, could be substantial.
OTHER
In connection with its mortgage servicing and related insurance agency business, LMUSA and its insurance company subsidiaries are frequently the subject of lawsuits brought by individual homeowners on behalf of themselves or on behalf of purported classes of homeowners. Although there are currently four active cases relating to the mortgage servicing business in which plaintiffs are seeking class certification, at present no active case against LMUSA has been certified as a class action and in each such case LMUSA believes a basis exists to contest class certification. In management's opinion and on the advice of counsel, the resolution of these disputes will not have a material adverse effect on the financial position of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During fiscal 1996 the Company's common stock was delisted by the New York Stock Exchange.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
See "Item 8. Financial Statements and Supplementary Data" and "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On October 10, 1995, LFC, LMUSA and two other subsidiaries filed petitions for reorganization under Chapter 11. In the previous year, the Company's short term lending subsidiary and other real estate operations segment were classified as discontinued operations. However, due to the Chapter 11 filings, management decided to retain the operations during fiscal 1996. Consistent with Emerging Issues Task Force No. 90-16 "Accounting for Discontinued Operations Subsequently Retained" the results of operations of the segment in the prior periods were reclassified from discontinued operations to continuing operations. The Company recorded losses of $250.6 million, $153.7 million and $182.7 million for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
The operating results of the Company during the three years ended June 30, 1996, 1995 and 1994 were as follows (in thousands):
RESTRUCTURING AND REDUCTION IN FORCE
On October 10, 1995, the Bankruptcy Court authorized a compensation plan which included two components. First, a retention and performance bonus to be paid to all remaining LMUSA employees based on a percentage of base salary. The retention plan provided for lump sum payments ranging from one-half to one full month of annual base salary for most participants and 50% to 75% annual base salary for certain employees identified as "key" to the sale of the assets to First Nationwide and the restructuring process. Second, severance payments were paid to all remaining LMUSA employees. The severance plan provided for lump sum cash payments ranging from two months to eighteen months of annual base pay depending upon job classification. Approximately 1,000 employees were terminated during fiscal 1996. The Company recorded an approximate $16.5 million expense during fiscal 1996 for the severance and retention plans which has been recognized in loss from disposal or sale on the consolidated statement of operations.
In January 1995 the Company announced a restructuring and reduction-in-force plan (the "1995 Plan"). Under the plan, the Company reduced its staff by approximately 200 employees. The plan was completed by June 30, 1995. In connection with the 1995 Plan, the Company vacated one of its office buildings which was disposed of subsequent
to fiscal year 1996. The Company recorded charges of $6.0 million for the staff reduction and $3.0 million for the reduction in the carrying value of the vacated building. Of the total $6.0 million of staff reduction provision, $2.3 million was the pension plan curtailment loss (noncash charge) related to the enhanced pension benefits for involuntary retirees. The Company paid termination benefits of $3.7 million in cash generated from its operations.
In fiscal 1994 the Company adopted two restructuring plans. The plans were completed in December 1994. Under the two plans, the Company reduced its staff by approximately 400 employees and paid cash termination benefits totaling $9.5 million. Total provisions recorded by the continuing operations under these plans were $15.6 million including noncash pension curtailment loss of $1.3 million and writedowns of certain Company-owned office buildings and termination of certain lease agreements of $3.9 million.
RESULTS OF OPERATIONS--YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JUNE 30, 1995
Mortgage Banking. The Mortgage Banking division during fiscal 1996 recorded a loss of $34.4 million as compared to a loss of $82.8 million in fiscal 1995. The results of fiscal 1996 as compared to fiscal 1995 are not comparable in that the Company sold substantially all of its assets and recorded a loss on disposal of $188.7 million, which is outlined in detail separately in this document. See "Item 1. Business--Mortgage Banking."
Other. The other operations during fiscal 1996 recorded a gain of $122,000 as compared to a loss of $21.1 million in fiscal 1995, as reclassified. Losses during fiscal 1996 included the short term lending operations, consisting of STL and LMI, totaled $2.2 million and LIS with $3.1 million. The short term lending operations recorded losses of $15.6 million in fiscal 1995 and Intellifile recorded a loss of $3.6 million. LIS and the short term lending operations were carried as discontinued operations in previous filings and the losses of short term lending operations were charged to previously established reserves in both years.
See "Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors Lomas Financial Corporation:
We have audited the accompanying consolidated balance sheets of Lomas Financial Corporation and subsidiaries (Debtors-in-Possession as of October 10, 1995) (the "Company") as of June 30, 1996 and 1995, and the related statements of consolidated operations, stockholders' equity (deficit) and cash flows for the years then ended. In connection with our audits of the 1996 and 1995 consolidated financial statements, we have also audited the financial statement schedule, Schedule I--Condensed Financial Information of Registrant as of and for the years ended June 30, 1996 and 1995. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to report 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 report.
The accompanying 1996 and 1995 consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. The Company and its wholly owned subsidiary, Lomas Mortgage USA, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code on October 10, 1995. The reorganization plans have been filed with the Bankruptcy Court, however, the Plans have not been confirmed. Claims which were contingent at the commencement of Chapter 11 proceedings are generally allowable against debtor corporations. These claims, including, those which arise in connection with rejection of unfavorable executory contracts and leases are not determinable. As a result of the reorganization proceedings, the Company may sell assets or otherwise realize assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements or related notes. These factors raise substantial doubt about the Company's ability to continue as a going concern. The 1996 and 1995 consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of these uncertainties.
Because of the significance of the uncertainties discussed in the preceding paragraph, we are unable to express, and we do not express, an opinion on the accompanying 1996 and 1995 consolidated financial statements and financial statement schedule.
KPMG Peat Marwick LLP
Dallas, Texas September 20, 1996
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors Lomas Financial Corporation:
We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Lomas Financial Corporation and subsidiaries ("the Company") for the year ended June 30, 1994. Our audit also included the financial schedule as of and for the year ended June 30, 1994 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 schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards required 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 audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects, the consolidated results of the operations and the cash flows of Lomas Financial Corporation and subsidiaries for the year ended June 30, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended June 30, 1994, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas September 22, 1994
CONSOLIDATED BALANCE SHEET
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) (IN THOUSANDS)
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED OPERATIONS
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (IN THOUSANDS)
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED CASH FLOWS
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) (IN THOUSANDS)
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation. The consolidated financial statements include the accounts of Lomas Financial Corporation ("LFC") and its subsidiaries (collectively, the "Company"). LFC's wholly owned, principal subsidiary is Lomas Mortgage USA, Inc. ("LMUSA"). Significant intercompany balances and transactions have been eliminated.
In fiscal 1990, LFC and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11. In December 1991, the Bankruptcy Court confirmed the Company's plan of reorganization and the Company adopted fresh start reporting as of December 31, 1991. In connection therewith, the Company's assets and liabilities were restated to reflect their fair values and retained earnings (deficit) was reclassified to other paid-in capital.
On October 10, 1995, LFC, LMUSA and two other subsidiaries filed petition for reorganization under Chapter 11 (see "Chapter 11 Proceedings" footnote). In the previous year, the Company's short term lending segment was classified as discontinued operations. However, due to the Chapter 11 filings, management decided to retain the operations during fiscal 1996. Consistent with Emerging Issues Task Force No. 90-16 "Accounting for Discontinued Operations Subsequently Retained" the results of operations of the segment in the prior years were reclassified from discontinued operations to continuing operations.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and investments with original maturities of three months or less. Cash balances having restrictions as to withdrawals and usage are recorded in the balance sheet as investments (see "Investments" footnote).
First Mortgage Loans Held for Sale. First mortgage loans held for sale are carried at the lower of cost or market determined on a net aggregate basis. Adjustments to market are made by charges or credits to income.
Gains and Losses on Sale of Mortgage Loans. Gains or losses on sales of mortgage loans are recognized based upon the difference between the selling price and the carrying value of the related mortgage loans sold. Deferred origination fees and expenses, net of commitment fees paid in connection with the sale of the loans, are recognized at the time of sale in the gain or loss determination.
Investments. Investments are comprised primarily of commercial paper and bank certificates of deposit with maturities of less than 31 days and restricted escrow deposits, marketable securities, treasury notes, and certificates of deposit that are held to maturity. The impact of the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on July 1, 1994 did not have a material impact on the Company's consolidated financial statements.
Foreclosed Real Estate. Foreclosed real estate is carried at the lower of cost or fair value minus estimated selling costs.
Allowance for Losses. Possible losses are provided for based on management's evaluation of each situation, including the determination of collectibility and net realizable value of the asset or underlying collateral.
Fixed Assets. Fixed assets include land, buildings, furniture and fixtures and other equipment and are carried at amortized cost. Fixed assets that are anticipated to be disposed of are carried at estimated market value net of estimated selling costs. Depreciation is computed on the straight line method over the estimated useful lives of the related assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING POLICIES (CONTINUED)
Purchased Future Mortgage Servicing Income Rights. Purchased future mortgage servicing income rights ("PMSRs") represent the portion of the purchase price of mortgage servicing portfolios acquired from others allocated to future net servicing income to be derived from servicing such mortgages.
The Company periodically monitors its servicing portfolio to determine if adjustments should be made to its amortization schedules or carrying values of its PMSRs due to changes in interest rates, current prepayment rates, expected future prepayment rates and certain other factors. The amortization and impairment analyses are performed for individual mortgage tranches with similar economic characteristics on an undiscounted basis and adjusted as required. The Company amortizes the capitalized PMSRs in proportion to, and over the period of, the estimated net servicing income. The expected life of the estimated net servicing income is based on the expected prepayment rates of the underlying mortgages within the tranches.
Since April 1993 the Company had been using a simulation methodology to estimate the future prepayments of the Company's servicing portfolio. Effective July 1, 1994, the Company changed its estimates of prepayment speeds from this simulation methodology to using published Constant Prepayment Rates ("CPRs"). This change in estimate did not have a material effect on the consolidated financial statements of the Company.
Sales of Servicing Rights. The Company recognizes gain or loss on the sales of servicing rights when all risks and rewards have irrevocably passed to the purchasers and there are no unresolved contingencies.
Mortgage Servicing. Fees received for servicing mortgage loans owned by investors are generally based on a stipulated percentage of the outstanding monthly principal balance of such loans and are payable only out of interest collected from mortgagors. Servicing fees, late charges and miscellaneous other fees collected from mortgagors and others are recognized as income when collected. Servicing costs are charged to expense as incurred. In addition, the Company performs mortgage servicing on a subcontract basis for other parties who own the servicing rights. Subservicing fees are usually agreed to be paid on a per-loan basis calculated as an annual dollar amount paid monthly.
Reverse Repurchase Agreements. The Company, through LMUSA, entered into reverse repurchase agreements with financially responsible parties. Mortgage assets purchased under agreements to resell are carried at the amounts of the original purchase price which is calculated at a percentage of the market price. The reverse repurchase agreements generally mature within 60 days and are covered 100 percent by binding purchase commitments. The counterparty is obligated to repurchase the underlying mortgage assets at the Company's costs plus interest differential. The Company finances the reverse repurchase agreements through a third party based on a percentage of the repurchase commitments.
Reverse Interest Rate Swap Agreements. The Company, through LMUSA, entered into interest rate swap agreements as a means of managing its exposure to changes in interest rates. Interest rate swaps that reduce the exposure of the Company, as a whole, to changes in interest rates are designated as hedges of the Company's fixed rate debt and treated as hedges of the debt. Swap agreements that do not reduce the Company's exposure to changes in interest rates are not considered to be hedges. The interest differential to be paid or received on swap agreements that are treated as hedges is accrued over the life of the agreements as an adjustment to the interest expense of the related debt. Gains or losses on early termination of interest rate swap agreements designated as hedges are recognized over the remaining term of the swap agreement. Interest rate swaps that are not considered hedges, and losses where the fixed rate debt associated with the swap is reduced below the notional amount of the swap, are marked to market with the unrealized gain or loss, together with the accrued interest differential, treated as a gain or loss and included in the accompanying statement of consolidated operations. As a result of the Chapter 11 filing, the swap agreements were terminated and the deferred debits were written off during fiscal 1996.
Federal Income Taxes. Income taxes have been provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, the deferred tax assets and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING POLICIES (CONTINUED)
liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities and operating loss and tax credit carry forward and enacted tax rates that will be in effect for the years in which the differences are expected to reverse.
Escrow, Agency and Fiduciary Funds. The Company maintains certain cash balances on behalf of its servicing customers and investors as part of its servicing operations. These funds are held in trust in segregated, generally noninterest bearing, bank accounts and are excluded from the corporate assets and liabilities of the Company.
Earnings (Loss) Per Share. Primary earnings (loss) per share data for the years ended June 30, 1996, 1995 and 1994 is computed using the weighted average number of shares of common and, when dilutive, common stock equivalents outstanding during the period. Common stock equivalents include units and shares granted under the Lomas Financial Corporation 1991 Long Term Incentive Plan for Non-Employee Directors (the "Directors Plan") and the 1993 Intermediate and Long Term Incentive Plan (the "1993 Program"). Common stock equivalents also include the assumed exercise of dilutive stock options. For the years ended June 30, 1996, 1995 and 1994, assumed exercise of stock options is antidilutive and is, therefore, excluded from the computation. Fully diluted per share data is computed on the same basis as primary, but it also assumes (if dilutive) the conversion of senior convertible notes with related adjustments for interest and federal income tax expense. For the years ended June 30, 1996, 1995 and 1994, the fully diluted per share data is antidilutive.
Use of Estimates. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications have been made to prior years' financial statements to conform to the 1996 presentation.
PENDING ADOPTION OF AUTHORITATIVE STATEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long Lived Assets to be Disposed of" is required to be adopted for fiscal years beginning after December 15, 1995. The statement requires companies to determine whether recognition of an impairment loss is required on assets held and assets to be disposed of and, if so, to measure that impairment. Management plans to adopt SFAS No. 121 during the year ending June 30, 1997.
SFAS No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of SFAS Statement No. 65," is effective for financial statements issued for fiscal years beginning after December 15, 1995. This SFAS requires the Company to measure impairment of its mortgage servicing rights based on the difference between the carrying amount of the servicing rights and their fair value. Management plans to adopt SFAS No. 122 during the year ending June 30, 1997.
The impact, if any, of the implementations of SFAS No. 121 and 122 on the Company's consolidated financial statements is expected to be immaterial.
CHAPTER 11 PROCEEDINGS
On October 10, 1995, LFC, LMUSA and two other insignificant subsidiaries of LFC (collectively the "Debtor Corporations") filed separate voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the District of Delaware. The petitioning subsidiaries are Lomas Information Systems, Inc. ("LIS") and Lomas Administrative Services, Inc., ("LAS") both of which are inactive and have relatively minor amounts of assets and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CHAPTER 11 PROCEEDINGS (CONTINUED)
liabilities. The Chapter 11 cases are being jointly administered, with the Debtor Corporations managing their businesses in the ordinary course as debtors-in-possession subject to the control and supervision of the Federal Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
On October 23, 1995, a single creditors' committee (the "Joint Creditors' Committee") was appointed by the U.S. Trustee for the District of Delaware (the "U.S. Trustee") to represent creditors of all the Debtor Corporations. On March 15, 1996, the U.S. Trustee revoked the appointment of the Joint Creditors' Committee and appointed statutory committees of unsecured creditors of LFC (the "LFC Creditors' Committee") and of LMUSA (the "LMUSA Creditors' Committee").
The Debtor Corporations filed two separate proposed plans of reorganization with the Bankruptcy Court. LFC, LIS and LAS (the "Joint Debtors") filed their proposed joint plan of reorganization on April 8, 1996 and subsequently filed their first amended joint plan of reorganization on May 13, 1996 and their second amended joint plan of reorganization on July 3, 1996 (the "Joint Plan"). LMUSA filed its own proposed plan of reorganization on April 8, 1996 and subsequently filed its own proposed first amended plan of reorganization on May 13, 1996 and its second amended joint plan of reorganization of July 3, 1996 (the "LMUSA Plan" and together with the Joint Plan, the "Plans"). In addition, on July 3, 1996, the Joint Debtors filed with the Bankruptcy Court a proposed form of disclosure statement relating to the Joint Plan (the "Joint Disclosure Statement"), and LMUSA filed with the Bankruptcy Court a substantially similar proposed form of disclosure statement (with the same Exhibits as the Joint Disclosure Statement) relating to the LMUSA Plan (the "LMUSA Disclosure Statement" and together with the Joint Disclosure Statement, the "Disclosure Statements").
The period for solicitation of acceptances of each Plan from creditors began once the Bankruptcy Court approved the related Disclosure Statement as containing "adequate information" on July 3, 1996 and concluded on August 23, 1996.
According to the certificates of the balloting agent filed with the Bankruptcy Court on September 23, 1996, the required acceptances for each Plan have been obtained.
A hearing at which the Bankruptcy Court will consider whether to confirm the Plans had been scheduled for September 20, 1996 but has been rescheduled for October 1, 1996.
Each Plan contains the following additional conditions precedent to confirmation: (a) Bankruptcy Court approval of all relevant agreements, trustees, agents and mediators and authorization of the Debtor Corporations, the intercompany claims agent, if any, and the LFC or LMUSA litigation trustee, as the case may be, to make any contemplated transfers of property; (b) the LFC Creditors' Committee or the LMUSA Creditors' Committee, as the case may be, shall have provided the new names of the relevant reorganized Debtor Corporation and the names of the members of the Board of Directors and officers of each; and (c) receipt of any necessary no-action letters from the Securities and Exchange Commission, rulings from the Internal Revenue Service or other government approvals. In addition, under the Joint Plan, the trustee of the "rabbi trust" in which the assets of the Lomas Management Security Plan are held will have turned over or been ordered to turn over to LFC the assets held in the "rabbi trust". While certain of these conditions to confirmation have been met, there can be no assurance that all of these conditions will be met. Any and all conditions precedent to confirmation may be waived by the LFC Creditors' Committee or the LMUSA Creditors' Committee, as the case may be, other than the conditions set forth in clauses (a) and (b) above. Accordingly, it is not possible to predict whether and in what form the Plans will be confirmed or the timing of such confirmation. It is also important to note that the Joint Plan and the LMUSA Plan are independent, and each Plan can be confirmed even if the other Plan is not confirmed.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CHAPTER 11 PROCEEDINGS (CONTINUED)
Distributions to general unsecured creditors are subject to conditions precedent set forth in each Plan which relate to certain intercompany claims. There can be no assurance as to when such conditions will be satisfied. On June 26, 1996, the LFC Creditors' Committee filed a motion seeking orders (i) authorizing it to commence an adversary proceeding on behalf of LFC against LMUSA to assert certain Intercompany Claims, (ii) either classifying LFC's Intercompany claims against LMUSA as priority claims, or classifying such Claims as LMUSA Class 3 general unsecured claims allowed for voting purposes in the amount of $217 million, and (iii) appointing an examiner to mediate the disputes between the LFC Creditors' Committee and the LMUSA Creditors' Committee with respect to Intercompany Claims. On August 5, 1996 the Bankruptcy Court appointed an arbitrator to meet with the LFC and LMUSA Creditors' Committee to review and issue a non-binding judgement related to the dispute over the Intercompany Claims. There are several meetings scheduled through November 1, 1996.
As debtors-in-possession, the Debtor Corporations have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject certain executory contracts and unexpired leases. In this context, "assumption" means that the Debtor Corporations agree to perform their obligations under the contract or lease, and "rejection" means that the Debtor Corporations are relieved of their obligations to perform further under the contract or lease and are subject only to a claim for damages resulting from the breach thereof. Any such damage claims are treated as general unsecured claims in the reorganization proceedings. The Debtor Corporations are studying executory contracts and unexpired leases to determine whether assumption or rejection is appropriate. The potential damage claims for rejected executory contracts and leases could be substantial. As the ultimate settlement of these claims, if any, is very uncertain, therefore, no accrual has been made as of June 30, 1996.
As a result of the reorganization proceedings, the Company may sell additional assets or otherwise realize assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements or related notes. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. These factors raise substantial doubt about the Company's ability to continue as a going concern, see "Legal Proceedings" footnote.
REDUCTION IN FORCE AND RESTRUCTURING
Due to the cessation of the mortgage refinancing boom and decline in mortgage servicing portfolio runoff rates experienced since early 1994, the Company's mortgage production activity and revenues had precipitously declined. To offset declines in production-related revenues, to reduce its servicing-related cost and to streamline its operations, the Company adopted three reduction-in-force and restructuring plans: the December 1993 plan and the June 1994 plan (collectively the "1994 Plans") and, the January 1995 plan (the "1995 Plan").
The 1994 Plans reduced the staff by approximately 400 employees through involuntary terminations and voluntary early retirements. The Company recorded provisions in fiscal 1994 totaling $15.6 million of which $9.5 million represented termination benefits paid and $1.3 million was the pension plan curtailment loss (noncash charge) related to the enhanced benefits for voluntary early retirees.
The 1995 Plan reduced the staff by approximately 200 additional employees. The Company recorded a charge of $6.0 million, of which approximately $2.3 million was the pension plan curtailment loss (noncash charge) related to the enhanced pension benefits for involuntary retirees. In addition, the Company recorded a $3.0 million provision for the reduction in the carrying value of one of its office buildings which was vacated in connection with the 1995 Plan and was sold subsequent to fiscal year 1996.
On October 10, 1995, the Bankruptcy Court authorized a compensation plan which included two essential components. First, a retention and performance bonus to be paid to all remaining LMUSA employees based on a percentage of base salary. The retention plan provided for lump sum payments ranging from one-half to one full month
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REDUCTION IN FORCE AND RESTRUCTURING (CONTINUED)
of annual base salary for most participants and 50 to 75% of annual base salary for certain employees identified as "key" to the sale of assets to First Nationwide and the restructuring process. Second, severance payments were paid to all LMUSA employees. The severance plan provided for lump sum cash payments ranging from two months to eighteen months of annual base salary depending upon job classification. The Company recorded an approximate $16.5 million provision during fiscal year 1996 for severance related expenses which is recognized through the loss from disposal or sale on the statement of consolidated operations. During fiscal year 1996, approximately 1,000 employees were terminated. As of July 1, 1996, the Company had 90 full time employees. Of those terminated, 20 remain as consultants to the Company in altered capacities.
In the course of reviewing the funding status of The Lomas Financial Group Pension Plan ("the Plan") it was determined the Plan was over funded. Under current law, upon termination of the Plan, the excess assets would revert to LMUSA, subject to taxes of approximately 50%. Management determined that it would be possible to utilize the excess assets in a more tax efficient manner by providing an additional benefit (enhancement) to employees. Accordingly, on October 6, 1995, LMUSA amended the Pension Plan to provide additional retirement benefits for eligible employees. See "Pension Plans" footnote.
INVESTMENTS
Investments consisted of the following (in thousands):
Restricted investments at June 30, 1996 and 1995 included $8.2 million and $7.6 million, respectively, of cash and marketable securities, respectively, purchased to fund certain benefit plans ($7.6 million and $6.9 million, respectively relates to the Management Security Plan--see "Management Security Plan" footnote). Treasury notes and certificates of deposit of $0 and $5.0 million at June 30, 1996 and 1995, respectively, were pledged to secure contingent repurchase obligations. Also at June 30, 1996 and 1995, cash and certificates of deposit of $13.0 million and $5.2 million, respectively, were either held on behalf of others or pledged to provide surety for various performance and indemnifications. Included in the $13 million is an $11.2 million escrow account established pursuant to a Bankruptcy Court order for the dispute between LMUSA and Residential Information Services, Inc. ("RIS"), a data processing services provider, regarding a penalty for the deconversion of LMUSA's servicing portfolio. As of June 30, 1996, LMUSA recorded a liability of $6.5 million for the potential settlement of the deconversion penalty. See pending resolution of dispute discussed at "Subsequent Events" footnote.
Commercial paper and bank certificates of deposit are funded with proceeds from, and are pledged as collateral for, investment lines of credit. The commercial paper and bank certificates of deposit have fixed rates of interest and generally mature within 31 days, at which time the investment lines of credit are paid down. Revenue from the net interest spread on these transactions totaled approximately $9.2 million, $15.8 million and $14.2 million for the years ended June 30, 1996, 1995 and 1994, respectively. Investment income for the year ended June 30, 1994 included $2.3 million, of gains, fees and interest income received on reverse interest rate swaps which were not accounted for as hedges.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECEIVABLES
Receivables consisted of the following (in thousands):
As discussed in the "Disposal or Sale of Assets" footnote, the Company sold substantially all of its mortgage servicing portfolio and other related assets to First Nationwide during the year. The balance due consists of holdback funds of $60.7 million and transfer fees of $14.2 million. The holdback funds are due to be collected, in the amounts of $15 million and $36.5, plus accrued interest, on October 2, 1996 and February 2, 1997, respectively. However, the receipt of the holdback funds is subject to indemnification claims filed by First Nationwide on or before the due date of the funds. The transfer fees due represent an original $20 million which was withheld by First Nationwide from the sale proceeds to be paid to Lomas, based upon monthly milestones, to cover expenses for transferring the servicing. Amounts are billed to First Nationwide monthly based upon a stated rate per objective completed. Upon completion of the transferring procedures, any remaining amount of the original $20 million which has not been previously collected from First Nationwide is due.
As partial consideration from RIS for the sale of substantially all of the assets of the Company's information systems subsidiary, a note in the amount of $8 million was received. The Company provided additional reserves in fiscal 1996 and reduced the net basis in the note to $4.0 million.
Escrow deficiencies and advances on mortgage-backed securities represent the advances the Company makes in connection with its loan servicing activities. The Company makes certain payments for property taxes and insurance premiums in advance of collecting them from specific mortgagors. Also, in connection with servicing mortgage-backed securities guaranteed by GNMA or FNMA, the Company advances certain principal and interest payments to security holders prior to collection from mortgagors.
FIXED ASSETS
During fiscal 1996 the Company recorded provisions totaling $17.5 million for the writedown of the carrying value of its office buildings and fixed assets, including $12.6 million for the writedown of the land and office buildings which were held for sale at June 30, 1996.
During fiscal 1995 the Company recorded provisions totaling $34.6 million for the writedown of the carrying value of certain of its office buildings and fixed assets. Included in the $34.6 million provision, $3.0 million was related to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIXED ASSETS (CONTINUED)
an office building which was vacated and sold in connection with the Company's restructuring plan, and therefore, was included in provisions for restructuring.
Fixed assets consisted of the following (in thousands): NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROVISIONS FOR LOSSES
Provisions for losses, excluding restructuring charges and provisions for discontinued operations, consisted of the following (in millions):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PURCHASED FUTURE MORTGAGE SERVICING INCOME RIGHTS
The purchased future mortgage servicing rights recorded by the Company were written off during fiscal year 1996 due to the sale of the underlying servicing rights primarily to First Nationwide. The write off is primarily reflected through the loss on disposal or sale on the statement of consolidated operations.
During the years ended June 30, 1996, 1995, and 1994 the Company established provisions of $0 million, $5.4 million, and $80 million, respectively, related to impairment in the carrying value of PMSRs.
PMSRs consisted of the following (in thousands):
Changes in PMSRs were as follows (in thousands):
At June 30, 1996, 1995 and 1994 the Company serviced 0, 540,325, and 565,531 loans, respectively. The aggregate unpaid principal balance of the Company's servicing portfolio was $0 billion, $33.1 billion and $34 billion at June 30, 1996, 1995 and 1994, respectively.
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consisted of the following (in thousands):
As discussed in the "Reduction in Force and Restructuring" footnote, the pension plan was overfunded at the end of the prior fiscal year. In order to effectively utilize the excess assets, LFC provided an additional benefit to the employees by utilizing the prepaid pension amount as an "enhancement" to the pension plan which the employees received at termination in proportion to their original pension benefits. The expense is reflected through the loss on disposal or sale on the statement of consolidated operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREPAID EXPENSES AND OTHER ASSETS (CONTINUED)
Upon filing bankruptcy, the Company's unamortized debt issuance costs of $6.6 million were written off. The expense is reflected in the reorganization items--net on the statement of consolidated operations.
DEBT
Outstanding balances and average interest rates were as follows (dollars in thousands):
All prepetition liabilities have been segregated on the consolidated balance sheet as liabilities subject to Chapter 11 Proceedings. The balance at June 30, 1996 consists of the following (in thousands):
Upon filing bankruptcy, the Company ceased accruing interest on the notes. The above accrued amount represents the unpaid interest on the notes through October 9, 1995.
Warehouse lines of credit are used to support warehouse fundings and are principally fee-based arrangements that are calculated as a percentage of the total commitments and/or a percentage of the outstanding balance. Substantially all first mortgage loans held for sale are pledged as collateral. The Company also entered into investment lines of credit arrangements with several financial institutions. Borrowings under these lines of credit were invested in and secured by commercial paper and bank certificates of deposit. Escrow, agency and fiduciary funds maintained in trust accounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEBT (CONTINUED)
normally served as compensating balances under the warehouse and investment lines of credit arrangements, and the Company incurred a reduced interest rate on borrowings as a result of these compensating balances. LMUSA maintained "warehouse" financing lines at Bank One and DLJ Mortgage Capital, Inc. ("DLJ"). In May 1995, LMUSA was no longer in compliance with certain of its financial covenants. In response, the Bank One warehouse facility was amended to eliminate any new borrowings after July 31, 1995 and the termination date was brought forward to September 30, 1995. At the end of August 1995, LMUSA was unable to comply with the financial requirements in the DLJ facility and was in "default" under that facility. By mid-September, DLJ refused to commit any additional borrowings and requested that LMUSA accelerate the liquidation of collateral to repay the facility. In September 1995, the Company sold to Pacific Southwest Bank certain first mortgage loans underlying the warehousing line for approximately $43.2 million and paid DLJ $43.4 million of the $119.2 million owed to retire the warehouse financing associated with those loans. The $75.8 million balance of the DLJ facility was repaid from the combination of $16.4 million of loan settlements made in the ordinary course of business and $59.4 million in conjunction with the October 2, 1995 sale to First Nationwide (see "Disposal or Sale of Assets" footnote).
Mortgage-backed securities held for sale to investors were financed from time to time through repurchase agreements with securities dealers in the business of providing such financing. These repurchase agreements, which generally mature in 60 days or less, conform to the standard form of agreement utilized by the Public Securities Association. The terms and conditions of these repurchase agreements, including interest rate, were negotiated on a transaction-by-transaction basis.
During the fourth quarter of fiscal 1995, a repurchase agreement was established with FNMA. Borrowings under this credit agreement were secured by FNMA mortgage-backed securities. In connection with the sale to First Nationwide, First Nationwide repaid this repurchase agreement.
At June 30, 1995 the Company was also in default on certain covenants contained in the reverse repurchase credit agreements with a financial institution. In September 1995, the Company sold to a bank the first mortgage loans underlying the reverse repurchase agreement and paid off the outstanding balance of this credit line.
Other notes payable represented the Company's borrowings under the servicing principal and interest payments agreement (the "P&I Line"). The P&I Line was secured by certain mortgage pools. Because the Company failed to meet certain ratios contained in its bank credit lines at June 30, 1995, the Company repaid the P&I Line in July 1995. On October 1, 1992 the Company, through LMUSA, issued $340 million principal amount of unsecured notes. The notes were issued in two tranches: $150 million of 9.75% notes due 1997 and $190 million of 10.25% notes due 2002. The blended interest cost on these notes is 10.03%. The net proceeds of this offering were used to retire $330 million of increasing rate term notes due 1999 which LMUSA issued pursuant to LFC's plan of reorganization. LMUSA announced on October 2, 1995, that it did not make the approximately $17 million of scheduled interest payments on its 9.75% term notes payable due October 1, 1997 and its 10.25% term notes payable due October 1, 2001. In conjunction with the Chapter 11 filing, the debt has been converted to an unsecured claim and will be subject to compromise through the Bankruptcy Court's distribution process.
The senior convertible notes due 2003 bear interest at 9% and are convertible into approximately 8,000,000 shares of LFC's common stock at a conversion price of $17.50 per share. The notes may be redeemed in whole or in part at the option of the Company on or after October 31, 1994 at prices ranging from 107.2% decreasing to 100% on or after October 31, 2001. Beginning in 1997 the Company would have been required to provide sinking fund payments of $10 million principal each year until 2002. Dividends have been restricted to 50% of LFC's accumulated consolidated net income, as defined in the indenture, since January 1, 1992. However, due to the Chapter 11 filing, the notes have been converted to an unsecured claim which will be subject to compromise through the Bankruptcy Court's distribution process.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEBT (CONTINUED)
The mortgage note payable to Travelers Insurance Company ("Travelers") was payable in monthly installments with a final lump-sum payment due March 1, 1996. The note was secured by three of the Company's owned facilities. In connection with the Chapter 11 filing, the Company's headquarter buildings were sold at public auction in accordance with a Bankruptcy Court order between Travelers, the Debtors and the LMUSA Creditors' Committee. The buildings collateralizing the note, along with others, were sold on July 16, 1996 for $23.5 million. Traveler's received approximately $11.43 million cash in respect of its secured claim and the remaining balance will be subject to compromise through the Bankruptcy Court's distribution process. See "Subsequent Events" footnote.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. All companies included in the consolidated federal income tax return are jointly and severally liable for any tax assessments based on such consolidated return.
Fresh start reporting requires the Company to report federal income tax expense when in a taxable position before utilization of 1991 pre-reorganization net operating loss carry forwards and recognition of the benefit of pre- reorganization deductible temporary differences. Benefits realized in the consolidated tax return from utilization of pre-reorganization net operating loss carry forwards and recognition of pre-reorganization deductible temporary differences existing at confirmation of LFC's plan of reorganization but for which a net deferred tax asset was not recorded are reported as direct additions to paid-in capital under fresh start reporting.
The federal income tax equivalent provision (benefit) is reflected in the statement of consolidated operations as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES (CONTINUED)
The difference between actual tax expense (benefit) on continuing operations and the amount computed by applying the statutory rate to income (loss) from continuing operations consisted of the following components (in thousands):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 1996 and 1995 are presented below.
The Company and its subsidiaries have a total deferred tax liability of approximately $25 million as of June 30, 1996. Gross deferred tax assets totaled approximately $383 million as of June 30, 1996 subject to a valuation allowance of approximately $358 million. Of this valuation allowance, approximately $110.9 million relates to 1991 pre- reorganization tax attributes. Future utilization of these tax attributes on a consolidated basis will result in adjustments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES (CONTINUED)
to paid-in capital. The net change in the valuation allowance for the fiscal year ended June 30, 1996 and 1995 was an increase of approximately $105 million and $53 million, respectively.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Tax benefits subsequently recognized related to the valuation allowance for deferred tax assets as of June 30, 1996, will be allocated to paid-in-capital, for 1991 pre-reorganization tax attributes, and to income tax benefits that would be reported in the statement of consolidated operations, for post- reorganization tax attributes.
The Company had a consolidated tax net operating loss carry forward at June 30, 1996 totaling approximately $988 million. Of this total, $317 million arose prior to the 1991 reorganization and will be subject to the limitations of Internal Revenue Code Section 382. These expire in the years 2003 through 2009.
STOCKHOLDERS' EQUITY (DEFICIT)
At June 30, 1996 LFC had 100,000,000 shares of $1 par value common stock (the "Common Stock") authorized and 20,149,000 shares issued and outstanding. The Common Stock has no preemptive or other subscription rights and there are no conversion rights, redemption or sinking fund provisions with respect to such shares.
LFC issued warrants to its 1991 pre-reorganization equity holders to purchase an aggregate of 7,000,000 shares of Common Stock at a price equal to $29.75 per share. The warrants expire October 31, 2001.
At June 30, 1996 there were 17,300,000 shares reserved for future issuance for the conversion of senior convertible notes, the warrants and stock plans (see "Stock Plans" below).
If the reorganization plan is confirmed, all of LFC's common stock, warrants and stock options will be canceled and no distributions under the Joint Plan will be made.
STOCK PLANS
The Company has two stock incentive plans, the Directors Plan and the 1993 Program.
Directors Plan. Directors of the Company who are not employees participate in the Directors Plan. On November 2, 1994 each participating director was granted 500 units under the Directors Plan and an additional 500 units were granted to each participating director at the 1995 and 1994 Annual Stockholders Meeting. Each unit represents the right of the holder thereof to be paid one share of Common Stock at the earlier of (i) the date such holder terminates service as a director of the Company and (ii) the tenth anniversary of the date of the award. The number of shares of Common Stock that may be granted under the Directors Plan is 100,000, and at June 30, 1996 there were 9,000 units outstanding.
1993 Program. The 1993 Program provides for the grant of any or all of the following types of awards: (1) stock options, including incentive stock options and non-qualified stock options; (2) stock appreciation rights, either in tandem with stock options or freestanding; (3) restricted stock awards; (4) performance shares; (5) performance units; (6) dividend equivalents; and (7) other stock-based awards to key personnel and executives based on each such individual's present and potential contribution to the success of the Company. The 1993 Program authorizes the issuance of Common
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK PLANS (CONTINUED)
Stock (or with respect to which awards may be granted) up to a maximum of 1,800,000 shares; provided, no more than 300,000 shares may be granted in any one fiscal year.
If the reorganization plan is confirmed, all of LFC's common stock, warrants and stock options will be canceled and no distributions under the Joint Plan will be made.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
Reverse Interest Rate Swaps. The Company, through LMUSA, entered into reverse interest rate swap agreements since July 1992. Under the terms of the swap agreements, the Company received an annual fixed rate of interest and paid a floating rate of interest based on the 30-day average A1/P1 commercial paper rate. In June 1995, LMUSA terminated $160 million notional amount of the swaps. LMUSA paid $5.0 million cash and recorded a loss of approximately $2.2 million. During the fiscal year 1996, the remaining $640 million notional amount of outstanding interest rate swaps was terminated. LMUSA paid $24.8 million cash and recorded a loss of approximately $6.6 million. As a result of the Chapter 11 filing, the net deferred debits of $9.1 million were written off in October 1995. During fiscal 1996, 1995 and 1994 the Company incurred net interest expense (income) of $1.4 million, $2.5 million and ($13.9) million respectively, from the swaps. Gains of $2.3 million were recognized in fiscal year 1994 on the termination of swaps that were accounted for as speculative.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for those that it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and the relevant market information. Where available quoted market prices are used, and in other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates and the resulting fair values. The derived fair value estimates cannot be substantiated by comparison to independent markets and could not be realized in an immediate sale of the instruments.
Under SFAS 107 fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The aggregate fair value amounts presented do not represent the underlying market value of the Company.
Described below are the methods and assumptions used by the Company in estimating fair values.
Cash and Cash Equivalents. The carrying amounts reported in the consolidated balance sheet approximate the fair values as maturities are less than three months.
First Mortgage Loans Held For Sale. The carrying amounts approximate fair values for first mortgage loans that are committed for sale to third parties at the Company's cost. Fair value of first mortgage loans that are not committed for sale at the reporting date is estimated using the current value of similar types of loans.
Investments. Commercial paper and bank certificates of deposit generally mature within 31 days; therefore, the carrying amounts reported in the consolidated balance sheet are the approximate fair value. Restricted cash balances approximate the fair value. Fair value on fixed-maturity debt securities are based on quoted market prices.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
First Nationwide Receivable. The receivables carrying amount approximates fair value as it earns a market rate of interest.
Notes Receivable. Notes receivables' fair value is estimated by discounting cash flows at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Notes Payable and Repurchase Agreements. The carrying amounts approximate fair values due to the short term maturity of these instruments.
Term Notes and Senior Convertible Notes Payable. Fair value is based on the quoted market prices.
Reverse Interest Rate Swaps. Fair values are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreements at the reporting date.
Commitments to Purchase and to Sell Loans. The fair value of commitments to purchase loans is based upon the difference between the current value of similar loans and the price at which the Company has committed to purchase the loans. The fair value of commitments to sell loans is the estimated amount that the Company would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments.
Liabilities Subject to Chapter 11 Proceedings. These represent liabilities incurred and unpaid by the Company as of October 10, 1995. As the payment of the liabilities is subject to compromise through the Bankruptcy Court's distribution process, the ultimate settlement amount of these items can not be determined as of the reporting date. As such, these amounts have been excluded from the following table.
The estimated fair values of the Company's on-balance sheet and off-balance sheet financial instruments are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REORGANIZATION ITEMS--NET
The Bankruptcy Code requires the separate classification of revenues and expenses that are a direct result of the Chapter 11 filing. As such, these items have been segregated on the consolidated statement of operations and include the following for the year ended June 30, 1996:
LEASES
The Company's continuing operations incurred rental expense and had future minimum rental commitments at June 30, 1996 for noncancelable leases as follows (in thousands):
PENSION PLANS
Defined Benefit Plan. The Company's pension plan, the Lomas Financial Group Pension Plan ("the Plan"), is sponsored by LMUSA. The Plan is a noncontributory plan which covers substantially all employees of the Company. Benefits are based on the employee's years of service and compensation. Pension plan assets consist principally of listed stocks and bonds and United States government securities. The Company makes contributions to the Plan which equal or exceed the minimum amounts required by the Employee Retirement Income Security Act of 1974.
In the course of reviewing the funding status of the Plan, it was determined to be over funded. Under current law, upon termination of the Plan, the excess assets would revert to LMUSA, subject to taxes of approximately 50%. Management determined that it would be possible to utilize the excess assets to improve employee benefits by providing an additional benefit (enhancement) to employees. Accordingly, on October 6, 1995, LMUSA amended the Pension Plan to provide additional retirement benefits for eligible employees. On January 30, 1996, the IRS issued a favorable determination letter with respect to such an amendment to the Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PENSION PLANS (CONTINUED)
Expense (credits to expense) related to the defined benefit plan included the following components (in thousands):
The funded status of the Company's defined benefit plan after giving effect to accruals and contributions was as follows (in thousands):
The Company terminated approximately 1,000 employees during 1996 and 90 full-time employees remained after July 1, 1996. The Company is in the process of terminating the Plan and either purchasing annuities or making lump sum payments to all participants. The Company expensed the prepaid pension in connection with the termination of employees. The expense is reflected through the loss on disposal or sale on the Company's statement of consolidated operations.
Assumptions used in the accounting were:
Defined Contribution Plan. The Company established a 401(k) savings plan effective April 1, 1994. Substantially all employees of the Company were eligible to participate in the plan. Eligible employees were entitled to contribute up to 12% of salary, and the Company matched up to 35% of an employee's contributions up to 6% of salary. The total amount of contributions made by the Company during fiscal 1996, 1995 and 1994 were $213,000, $254,000 and $445,000, respectively. The plan was terminated by the Company effective June 30, 1996. Assets will continue to be held in trust until a determination letter is received from the IRS, after which, all account balances will be distributed.
MANAGEMENT SECURITY PLAN
The Company had a Management Security Plan ("MSP") for certain of its employees. Key employees of the Company who participate in MSP will be paid in the event of retirement or death a portion of the employee's salary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT SECURITY PLAN (CONTINUED)
which such employee chooses as the basis for computation of retirement or death benefits. The Company ceased new enrollments in 1985. Funds contributed to the plan are held in a trust. The assets of the trust were included in investments on the consolidated balance sheet and totaled $7.6 million at June 30, 1996. At June 30, 1996 the assets consisted solely of cash. Income and expenses of the trust are included in the Company's statement of consolidated operations. The trust is irrevocable and subject only to the claims of creditors in the event of the insolvency of the Company.
Because of the bankruptcy filings by LFC and LMUSA, no contributions, payments or actuarial evaluation have been made to the MSP. On June 11, 1996, the Bankruptcy Court authorized the LFC Creditors' Committee to commence and prosecute an action against the trustee seeking the return of funds held in such trust. LFC contends that the funds in the trust constitute property of the Company's estate. However, the trustee, Bankers Trust, has asserted that the trustee is obligated to hold the assets for the sole benefit of the plan participants claiming that the trust should now be governed by ERISA.
DISPOSAL OR SALE OF ASSETS
Mortgage Banking. On October 2, 1995, the Company closed the sale to First Nationwide Mortgage Corporation ("First Nationwide") of LMUSA's GNMA servicing portfolio (approximately $7.9 billion in unpaid principal balance of mortgage loans), its investment in LMUSA Partnership and its loan production business including its mortgage loans held for sale and the payment of the related warehouse lines of credit (the "GNMA Sale"). The adjusted purchase price for the GNMA Sale was approximately $102 million (less $10 million which is being used to pay the Company's expense for transferring the servicing), subject to certain adjustments, the payment of certain warehouse indebtedness and the assumption of certain other liabilities. Cash of $35 million was paid at closing of which $18.8 million was applied to terminate the balance of LMUSA's swaps and $12 million was escrowed with FNMA in connection with certain recourse servicing to be sold as described in the following paragraph. These escrowed funds plus interest was released and returned to the Company on February 1, 1996. The second installment (approximately $41.5 million) was paid on January 30, 1996, with the final payment (net of indemnification claims made by First Nationwide and accepted by LMUSA greater than $6.1 million) due on October 2, 1996.
On January 31, 1996, LMUSA closed the sale to First Nationwide of its remaining mortgage servicing portfolio (approximately $12 billion in unpaid principal balance of mortgage loans) and certain other assets pursuant to Section 363 of the Bankruptcy Code (the "Section 363 Sale"). The adjusted gross purchase price was approximately $161 million (less $10 million which is being used to pay the Company's expense for transferring the servicing). The adjusted gross purchase price will be reduced by the amount of any reserve which will be determined at the final payment date. The Company received $49.75 million in cash at closing of which $6.0 million was escrowed with a financial institution for certain mortgage servicing related commitments. This $6.0 million was returned to the Company in May 1996. The second installment was received in two payments of approximately $59.5 million and $5.1 million on May 31, 1996 and July 1, 1996, respectively. The final payment of the balance (net of indemnification claims made by First Nationwide and accepted by LMUSA) is due on February 1, 1997.
At June 30, 1996 the Company has established a reserve in the amount of $20.5 million as their its estimate of indemnification claims related to the sales discussed above. Management believes this amount is adequate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DISPOSAL OR SALE OF ASSETS (CONTINUED)
The net book value of assets sold to and liabilities assumed by First Nationwide at cost were as follows (in thousands):
The loss recorded on the GNMA sale and the Section 363 sale, and reported on the Company's statement of consolidated operations as a loss from disposal or sale, was calculated as follows (in thousands):
DISCONTINUED OPERATIONS
Information Systems. In December 1994 the Company completed the sale of substantially all of the assets of its information systems subsidiary ("LIS") to RIS. As consideration for the sale, the Company received $2.5 million in cash; an $8.0 million note due five years after closing and accruing interest at a rate per annum of 8 percent payable at maturity (adjusted based on the future financial performance of RIS, and a contingent interest equal to 35 percent of the RIS's adjusted gross revenues in excess of $55 million per year generated during the seven years ending December 31, 2001. In March 1995, the parent of the RIS announced its intention to sell its mortgage banking business which included the RIS. In June 1995 the RIS decided not to convert its mortgage servicing portfolio to the LIS servicing system. As a result, the Company recorded a provision of $24.4 million in June 1995 to write off the Company's
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DISCONTINUED OPERATIONS (CONTINUED)
carrying value of the such asset. During fiscal 1995 and 1994, the Company recorded loss from disposal of $24.4 million and $25.0 million, respectively. The Company also had loss from discontinued operations of $2.0 million and $8.5 million for the years ended June 30, 1995 and 1994, respectively. In June 1996, the Company provided reserves of $3.1 million which reduced the net basis in the note to $4.0 million.
During the year ended June 30, 1996, LMUSA established a $11.2 million escrow account pursuant to a Bankruptcy Court order for the dispute between LMUSA and the Purchaser regarding a penalty for the deconversion of LMUSA's servicing portfolio. LMUSA's position is that the Purchaser was paid in full on an administrative claim basis for all of its deconversion services when and as performed according to the schedule of fees and charges appended to the purchase agreement and the deconversion penalties are unenforceable penalties or, at most, give rise to a pre-petition claim for liquidated damages that are not entitled to administrative priority. The escrowed fund, with a balance of $11.4 million as of June 30, 1996, is included in Investments in the Company's consolidated balance sheet. Subsequent to year end, a settlement was negotiated between LMUSA and the Purchaser for payment related to the deconversion penalties. See further discussion on the terms of the settlement under the "Subsequent Events" footnote.
Loss from discontinued operations as reported in the Company's consolidated statement of operations, for the years ended June 30, 1996, 1995 and 1994, were as follows (in thousands):
SHORT TERM LENDING
The Company's short term lending operations include ST Lending, Inc. ("STL"), Lomas Management, Inc. ("LMI"), which manages the assets of STL, and certain other real estate operations. The short term lending's portfolio consists of construction, acquisition and development loans, and foreclosed real estate. Substantially no new commercial loans and only a limited number of residential single-family construction loans have been originated since June 1989. The financial statements were reclassified to present short term lending and other real estate operations as continuing operations. See "Accounting Policies" footnote.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHORT TERM LENDING (CONTINUED)
The net assets and results of operations (net of intercompany eliminations) of the previously discontinued real estate operations as of and for the years ended June 30, 1996, 1995 and 1994, were as follows (in thousands):
TRANSACTIONS WITH AFFILIATES
The Company, through LMUSA, was a partner and manager of LMUSA Partnership (the "Partnership") until October 2, 1995 when the Company sold, among other assets, its investment in the Partnership to First Nationwide (see "Disposal or Sale of Assets" footnote). The Partnership was engaged primarily in acquiring mortgage servicing and servicing single- family mortgages. The Company subserviced all mortgages in the Partnership's mortgage servicing portfolio for its usual subservicing fees. During fiscal 1995 the Company acquired from the Partnership approximately $787.3 million in unpaid principal balance of mortgage servicing rights for approximately $13.0 million of cash. This transaction resulted in a gain of $4.9 million for the Partnership. This mortgage servicing portfolio was originally sold to the Partnership by the Company in fiscal 1994 at a loss of $1.3 million. During the years ended June 30, 1996, 1995 and 1994 the Company received subservicing fees of approximately $1.7 million, $4.5 million and $3.9 million from the Partnership, respectively.
During fiscal 1994 the management contract between LMUSA and Capstead Mortgage Corporation ("Capstead"), a real estate investment trust, was amended and terminated. Capstead became entirely self-managed on September 30, 1993. LMUSA continued to service Capstead's mortgage servicing portfolio existing at the termination of the management agreement which had an unpaid principal balance of $2.6 billion at June 30, 1995. During fiscal year 1994 the Company recognized total income of $6 million from the amended management agreement and the non-compete agreement. The company entered into the non-compete agreement in fiscal 1993 as a part of the amendment to the management agreement. The Company agreed that for a period of one year after the termination of the agreement not to compete, organize or provide management services to any real estate investment trust.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Company's contractual relationship with Capstead during fiscal 1994 resulted in the following (in thousands):
Operating costs related to the Capstead management fee income were approximately $2.1 million year ended June 1994.
The Company, through a wholly-owned subsidiary, was a manager of Liberte Investors ("Liberte"), a real estate investment trust. In October 1993, Liberte filed for a pre-packaged bankruptcy and emerged from the bankruptcy proceedings in April 1994. A substantial portion of Liberte's real estate portfolio was spun off to its creditors and the management agreement was terminated in April 1995. For the years ended June 30, 1995 and 1994 the Company received management fees of $0.2 million and $1.9 million, respectively, under the management agreement.
LEGAL PROCEEDINGS
On October 10, 1995, LFC, LMUSA and two other insignificant subsidiaries of LFC filed separate voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the District of Delaware. On April 8, 1996, the Debtor Corporations filed with the Bankruptcy Court two separate proposed plans of reorganization. On July 3, 1996, the Debtor Corporations subsequently filed with the Bankruptcy Court two separate proposed amended plans of reorganization. The Joint Debtors filed the Joint Plan, and LMUSA filed the LMUSA Plan. The LMUSA Creditors' Committee is a co- proponent of the LMUSA Plan.
The period for solicitation of acceptances of each Plan from creditors began once the Bankruptcy Court approved the related Disclosure Statement as containing "adequate information" on July 3, 1996 and concluded on August 23, 1996.
According to the certificates of the balloting agent filed with the Bankruptcy Court on September 23, 1996, the required acceptances for each Plan have been obtained.
A hearing at which the Bankruptcy Court will consider whether to confirm the Plans had been scheduled for September 20, 1996 but has been rescheduled for October 1, 1996.
Each Plan contains the following additional conditions precedent to confirmation: (a) Bankruptcy Court approval of all relevant agreements, trustees, agents and mediators and authorization of the Debtor Corporations, the intercompany claims agent, if any, and the LFC or LMUSA litigation trustee, as the case may be, to make any contemplated transfers of property; (b) the LFC Creditors' Committee or the LMUSA Creditors' Committee, as the case may be, shall have provided the new names of the relevant reorganized Debtor Corporation and the names of the members of the Board of Directors and officers of each; and (c) receipt of any necessary no-action letters from the Securities and Exchange Commission, rulings from the Internal Revenue Service or other government approvals. In addition, under the Joint Plan, the trustee of the "rabbi trust" in which the assets of the Lomas Management Security Plan are held will have turned over or been ordered to turn over to LFC the assets held in the "rabbi trust". While certain of these conditions to confirmation have been met, there can be no assurance that all of these conditions will be met. Any and all conditions precedent to confirmation may be waived by the LFC Creditors' Committee or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEGAL PROCEEDINGS (CONTINUED)
the LMUSA Creditors' Committee, as the case may be, other than the conditions set forth in clauses (a) and (b) above. Accordingly, it is not possible to predict whether and in what form the Plans will be confirmed or the timing of such confirmation. It is also important to note that the Joint Plan and the LMUSA Plan are independent, and each Plan can be confirmed even if the other Plan is not confirmed.
In connection with its mortgage servicing and related insurance agency business, LMUSA and its insurance company subsidiaries are frequently the subject of lawsuits brought by individual homeowners on behalf of themselves or on behalf of purported classes of homeowners. Although there are currently four active cases relating to the mortgage servicing business in which plaintiffs are seeking class certification, at present no active case against LMUSA has been certified as a class action and in each such case LMUSA believes a basis exists to contest class certification. In management's opinion and on the advice of counsel, the resolution of these disputes will not have a material adverse effect on the financial position of the Company.
SUBSEQUENT EVENTS
Over the years, funds and assets have been transferred between LFC, LMUSA and other companies in the corporate group. These transfers occurred not only in the ordinary course of business but also as capital contributions and intercompany loans. To the extent that certain of these transfers occurred at a time when one or more of the companies was insolvent, such transactions may be considered voidable, in whole or in part, as fraudulent conveyances under the Bankruptcy Code or applicable state laws. LMUSA and LFC ("the Debtors") concluded in August 1995 that if they were to file Chapter 11 petitions, intercompany transactions would come under close scrutiny by the creditors of the Debtors. As such, the Debtors engaged an independent public accounting firm ("the Firm") to conduct an analysis of intercompany activity between January 1992, when LFC emerged from its earlier Chapter 11 proceedings and the Petition Date. The Firm was to identify transactions which arguably could result in a cause of action and to describe the circumstances surrounding such transactions. The findings were presented to the Debtors' and to the Creditors' Committees. Some of the transactions reported are alleged to be voidable either as fraudulent conveyances or preference transfers. The LFC Creditors' Committee and the LMUSA Creditors' Committee are taking opposing positions as to the resolution of the issue. As no resolution was reached between the committees, the Bankruptcy Court ordered, on September 5, 1996, the retention of a claims mediator to pursue a settlement between the committees. The Court further ordered that neither committee could commence litigation to prosecute any Intercompany Claims until November 6, 1996. Based upon facts obtained through the mediation process, the mediator will issue a nonbinding recommendation for settlement.
On May 31, 1996, the Company entered into an agreement to sell the Lomas Campus buildings for $23 million which was subject to higher and better offers through a public auction which was held July 16, 1996. The Campus buildings were sold for $23.5 million effective August 16, 1996. Pursuant to a stipulation and order among Travelers Insurance Company ("Travelers"), the Debtors' and the LMUSA Creditors' Committee, Travelers received approximately $11.43 million of the proceeds. In addition, subsequent to fiscal year end, substantially all of the furniture and equipment was sold by a liquidator. The sales price of the Campus buildings and the furniture and equipment approximated the carrying value of the assets reflected on the June 30, 1996 consolidated balance sheet.
As discussed in the "Investments" footnote, RIS has asserted a right to an Administrative Claim in the amount of approximately $11.4 million, representing the total amount of "deconversion" penalties resulting from the sales of LMUSA's mortgage servicing rights to First Nationwide. The Company entered into a proposed settlement "release" agreement with the RIS which is subject to the Bankruptcy Court's approval at the confirmation hearing. The agreement allows the RIS to choose from two alternatives on or before the date set for the confirmation of the Plan (currently scheduled for October 1). The first option allows the RIS a general unsecured claim for the face amount of the deconversion charge ($10.56 million--subject to compromise through the Bankruptcy Court's distribution process) and to be paid an administrative expense priority claim of $250,000 on or before November 15, 1996. In the alternative,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUBSEQUENT EVENTS (CONTINUED)
the RIS can receive an administrative expense priority claim in the amount of $6.5 million to be paid on or before November 16, 1996. If the Company should fail to make the payment on or before this date, the RIS has the option, exercisable November 25, 1996, and if such failure by LMUSA continues, each sixty days thereafter, to continue its election to receive such payment in cash or select the option granted for payment in the first option. At June 30, 1996, an accrual for this penalty has been established in the amount of $6.5 million which represents the minimal accrual necessary as required by FASB Statement No. 5, "Accounting for Contingencies", and is reflected in the accounts payable and accrued expenses in the consolidated balance sheet.
The Company is negotiating a pending asset purchase agreement to sell substantially all of the assets of the insurance agency services subsidiaries of LMUSA. The purchaser would also assume certain liabilities of the insurance agency services subsidiaries. As of this report date, the agreement has not been finalized. It will be subject to Bankruptcy Court approval and to higher and better offers.
QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the year ended June 30, 1996 (in thousands of dollars, except per share amounts):
In the first quarter of fiscal 1996, the Company recorded a loss on the sale of assets to First Nationwide of $162.2 million. The Company incurred additional losses during the second, third and fourth quarters of fiscal 1996 of $18.4 million, $2.3 million and $5.9 million, respectively, as the result of the prepayment of the mortgage servicing portfolio and other adjustments. See "Disposal or Sale of Assets" footnote.
After the Chapter 11 filings (see "Chapter 11 Proceedings" footnote), the Company recorded reorganization expenses (net of interest earned in cash accumulated) of $16.3 million, $1.7 million and $3.1 million during the second, third and fourth quarters of fiscal 1996. See "Reorganization Items--Net" footnote.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTERLY RESULTS (UNAUDITED) (CONTINUED)
The following is a summary of the unaudited quarterly results of operations for the year ended June 30, 1995 (in thousands of dollars, except per share amounts):
During the second quarter of fiscal 1995, the Company established provisions of $29.6 million for mortgage servicing related receivables, mortgage banking commitments and contingencies, pro rata interest rate swap loss and reduction in carrying value of certain fixed assets.
The third quarter of fiscal 1995 operating results operations included a $9.0 million provision for the Company's 1995 reduction in force and restructurings.
During the fourth quarter of fiscal 1995, the included provisions totaling $30.2 million for additional losses related to the mortgage servicing and loan production operations and writedown of certain buildings and other fixed assets.
Loss from disposal or sale for the fourth quarter of fiscal 1995 included a provision of $24.4 million to write off the Company's contingent amount interest in the future revenues of the information system business.
For information concerning the Company's fiscal 1995 reduction in force and restructuring plan, see "Reduction in Force and Restructurings" footnote.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INDUSTRY SEGMENT DATA OF OPERATIONS
The following summarizes the Company's industry segment data of operations as of June 30, 1996, 1995 and 1994 and for the years then ended (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INDUSTRY SEGMENT DATA OF OPERATIONS (CONTINUED)
Intersegment charges to LMUSA operations are as follows (in thousands):
After LIS assets were sold in fiscal 1995 (see "Disposal or Sale of Assets" footnote) data processing and telecommunication charges were no longer provided by a related entity. Additionally, LAS was dissolved effective July 1, 1996 and Intellifile was sold as of August 31, 1996. Intercompany claims for fiscal 1996, however, are being discussed in connection with the Chapter 11 filings (see "Chapter 11 Proceedings" footnote).
Beginning fiscal 1994 LAS changed its method of allocating office space costs. Prior to fiscal 1994 LMUSA received credit for depreciation and interest expense related to the office space occupied by other affiliates and unallocated office space totaling approximately $4.2 million. These costs were absorbed by LMUSA since fiscal 1994.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LOMAS FINANCIAL CORPORATION (DEBTOR-IN-POSSESSION) CONDENSED BALANCE SHEET (IN THOUSANDS)
Note: Certain amounts in fiscal 1995 have been reclassified to comply with the 1996 presentation format.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
LOMAS FINANCIAL CORPORATION (DEBTOR-IN-POSSESSION) CONDENSED STATEMENT OF OPERATIONS (IN THOUSANDS)
Note: Certain amounts in fiscal 1995 have been reclassified to comply with the 1996 presentation format.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
LOMAS FINANCIAL CORPORATION (DEBTOR-IN-POSSESSION) CONDENSED STATEMENT OF CASH FLOWS (IN THOUSANDS)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
(a) 1. Ernst & Young LLP was dismissed effective as of January 24, 1995 as the Registrant's independent auditors. The Registrant was satisfied with the accounting and audit services performed by Ernst & Young LLP. The decision to change auditors was based on economic considerations as part of the Registrant's ongoing cost reduction efforts. In order to reach this decision, between November 1, 1994 and January 24, 1995 management obtained proposals for accounting and audit services from several accounting firms, including Ernst & Young LLP. These firms were allowed to review the Registrant's financial statements and accounting policies and principles.
2. The Ernst & Young LLP report dated September 22, 1994 on the Registrant's statements of consolidated operations, stockholders' equity and cash flows for the fiscal year ended June 30, 1994, did not contain an adverse opinion or a disclaimer of opinion, nor was any such report qualified or modified as to uncertainty, audit scope, or accounting principles.
3. On January 24, 1995, the decision to change independent auditors was recommended by the Audit Committee of the Registrant's Board of Directors to the Registrant's Board of Directors and approved by the Registrant's Board of Directors.
4. During the fiscal year ended June 30, 1994, and through the date of dismissal of Ernst & Young LLP, there were no disagreements between the Registrant and Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreement(s), if not resolved to the satisfaction of Ernst & Young LLP, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its report.
5. No reportable event described in paragraph (a) (1) (v) of Item 304 of Regulation S-K has occurred during the Registrant's fiscal year ended June 30, 1994, and through the date of dismissal of Ernst & Young LLP.
(b) On January 30, 1995, the Registrant engaged KPMG Peat Marwick LLP as its independent auditors.
During the Registrant's fiscal year ended June 30, 1994 and the fiscal quarter ended September 30, 1994, and through the date of engagement of KPMG Peat Marwick LLP, neither the Registrant (nor someone on its behalf) consulted with KPMG Peat Marwick LLP regarding any of the matters specified in Item 304 (a) (2) of Regulation S-K.
PART III
The information required by the items listed below of Part III are incorporated herein by reference (see "Exhibit 10.1") or by an amendment, if necessary, to this Form 10-K as permitted by General Instruction G to Form 10-K.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(i) The following consolidated financial statements are included in Item 8.
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes.
Financial statements (and summarized financial information) of unconsolidated subsidiaries and 50-Percent-or- Less-Owned Persons accounted for by the equity method are not presented because they do not, individually or in aggregate, constitute a significant subsidiary.
(b) Exhibits:
Exhibit Number
(10.1) Disclosure Statement of LFC, LIS and LAS dated July 3, 1996 (the "Joint Disclosure Statement") with Schedule I (Index of Defined Terms), Exhibit I (First Amended Joint Chapter 11 Plan of LFC, LIS and LAS dated May 13, 1996), Exhibit II (First Amended LMUSA Chapter 11 Plan dated May 13, 1996), Exhibit III (Liquidation Analysis of Debtors), Exhibit IV (Projected Financial Statements for Reorganized LFC and Reorganized LMUSA for the Fiscal Years 1997, 1998 and 1999), Exhibit V (Names and Addresses of the Creditors' Committees and their Professionals) and Exhibit VI (Price Waterhouse LLP's Draft Preliminary Report dated February 27, 1996).
(11) Computation of Earnings (Loss) Per Share
(21) List of subsidiaries of Registrant.
(27) Financial Data Schedules (submitted to the Securities and Exchange Commission for its information).
(c) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LOMAS FINANCIAL CORPORATION Registrant
Date: September 20, 1996 /S/ GARY WHITE --------------------------------------- Gary White Senior Vice President and Chief Financial Officer
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.
Date: September 23, 1996 /S/ ERIC D. BOOTH --------------------------------------- Eric D. Booth President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934 and in response to General Instruction D to Form 10-K, this report has been signed below on behalf of the registrant by the following directors on the dates indicated.
Date: September 23, 1996 By /S/ WILLIAM ANDERSON ------------------------------------ (William Anderson)
Date: September 23, 1996 By /S/ ERIC D. BOOTH ------------------------------------ (Eric D. Booth)
Date: September 23, 1996 By /S/ LOUIS P. GREGORY ------------------------------------ (Louis P. Gregory)
Date: September 25, 1996 By /S/ ROBERT LEBUHN ------------------------------------ (Robert LeBuhn)
Date: September 25, 1996 By /S/ REID NAGLE ------------------------------------ (Reid Nagle)
Date: September 25, 1996 By /S/ PAUL T. WALKER ------------------------------------ (Paul T. Walker)
Date: September 24, 1996 By /S/ PAUL S. WOLANSKY ------------------------------------ (Paul S. Wolansky)
INDEX TO EXHIBITS
Exhibit Number Description ------- -----------
(10.1) Disclosure Statement of LFC, LIS and LAS dated July 3, 1996 (the "Joint Disclosure Statement") with Schedule I (Index of Defined Terms), Exhibit I (First Amended Joint Chapter 11 Plan of LFC, LIS and LAS dated May 13, 1996), Exhibit II (First Amended LMUSA Chapter 11 Plan dated May 13, 1996), Exhibit III (Liquidation Analysis of Debtors), Exhibit IV (Projected Financial Statements for Reorganized LFC and Reorganized LMUSA for the Fiscal Years 1997, 1998 and 1999), Exhibit V (Names and Addresses of the Creditors' Committees and their Professionals) and Exhibit VI (Price Waterhouse LLP's Draft Preliminary Report dated February 27, 1996).
(11) Computation of Earnings (Loss) Per Share
(21) List of subsidiaries of Registrant.
(27) Financial Data Schedules (submitted to the Securities and Exchange Commission for its information).