<PAGE> 1
================================================================================
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
COMMISSION FILE NUMBER 1-6868
LOMAS FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-1043392
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
717 NORTH HARWOOD, DALLAS, TEXAS 75201
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (214) 665-6300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
COMMON STOCK, PAR VALUE $1 PER SHARE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At September 20, 1996 the aggregate market value of the registrant's
common stock held by non-affiliates: not applicable.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
----- -----
On October 10, 1995, the Registrant and Certain of its subsidiaries filed
bankruptcy proceedings under Chapter 11 of the Federal Bankruptcy Code in the
District of Delaware.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of the registrant's Common Stock, par
value $1 per share, as of September 20, 1996: Common Stock--20,149,000 shares.
================================================================================
<PAGE> 2
LOMAS FINANCIAL CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . 8
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA . . . . . . . . . . . . . . . . . . . 9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . 17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . 55
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . 56
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . 56
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . 56
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . 57
</TABLE>
-2-
<PAGE> 3
LOMAS FINANCIAL CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1996
PART I
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.
-3-
<PAGE> 4
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
-4-
<PAGE> 5
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.
-5-
<PAGE> 6
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. 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. 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".
-6-
<PAGE> 7
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.
-7-
<PAGE> 8
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-8-
<PAGE> 9
PART II
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.
<TABLE>
<CAPTION>
1996 1995 Dividends Declared
------------- --------------- ------------------
High Low High Low 1996 1995
---- ---- ---- --- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First quarter N/A N/A 6 1/4 4 3/8 -- --
Second quarter N/A N/A 4 5/8 3 -- --
Third quarter N/A N/A 3 1 3/4 -- --
Fourth quarter N/A N/A 1 3/8 1/2 -- --
</TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
See "Item 8. Financial Statements and Supplementary Data" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Effective December 31, 1991 the Company adopted fresh start
reporting in connection with the Company's reorganization. See "Item 8.
Financial Statements and Supplementary Data--Accounting Policies."
-9-
<PAGE> 10
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Year Ended June 30 Six Months Six Months
--------------------------------------------------- Ended Ended
1996 1995 1994 1993 June 30, 1992 December 31, 1991
---------- ---------- --------- ----------- ------------- -----------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from operations . . . . $ 103,347 $ 222,222 $ 281,618 $ 293,354 $ 132,613 $ 129,699
Income (loss) from operations before
reorganization items . . . . . $ (229,410)* $ (127,282) $(126,002) $ 29,557 $ 11,558 $ (2,652)
Reorganization items--net . . . $ (21,181) -- -- -- -- --
Income (loss) before loss from
discontinued operations . . . $ (250,591) $ (127,282) $(126,002) $ 29,557 $ 11,558 $ (2,652)
Loss from discontinued operations:
Loss from disposal . . . . . . $ -- $ (24,409) $ (25,000) -- -- --
Loss from operations . . . . . -- $ (2,000) $ (31,664) $ (17,263) $ (29,280) $ (20,211)
Extraordinary item . . . . . . . -- -- -- -- -- $ 932,238
Net income (loss) . . . . . . . $ (250,591) $ (153,691) $(182,666) $ 12,294 $ (17,722) $ 909,375
Earnings (loss) per share:
Income (loss) before loss from
discontinued operations . . $ (12.43) $ (6.32) $ (6.26) $ 1.47 $ .57 **
Net income (loss) . . . . . . $ (12.43) $ (7.63) $ (9.07) $ .61 $ (.88) **
Average number of shares . . . . 20,160 20,154 20,132 20,117 20,108 **
</TABLE>
*Includes loss on sale of assets of $188,691.
**Not meaningful due to different capital structure.
<TABLE>
<CAPTION>
As of June 30
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ----------- ------------ -----------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets . . . . . . . . . . . . . $ 329,932 $ 1,157,001 $ 1,148,257 $ 1,454,511 $ 1,557,515
Cash . . . . . . . . . . . . . . $ 197,800 $ 21,510 $ 10,178 $ 34,945 $ 23,426
Purchased future mortgage servicing
income rights . . . . . . . . -- $ 346,958 $ 382,009 $ 436,487 $ 418,617
First mortgage loans held for sale -- $ 345,039 $ 257,534 $ 368,266 $ 387,726
Term and senior convertible notes -- $ 518,688 523,229 532,198 $ 515,020
Liabilities subject to Chapter 11
proceedings . . . . . . . . . $ 552,863 -- -- -- --
Stockholders' equity (deficit) . . $ (262,464) $ (11,878) $ 141,435 $ 324,079 $ 309,310
Escrow, agency and fiduciary funds -- $ 641,519 $ 603,163 $ 1,082,591 $ 709,048
</TABLE>
Note: Certain amounts in fiscal 1995, 1994, 1993 and 1992 have been
reclassified to comply with the 1996 presentation format.
-10-
<PAGE> 11
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):
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Operating loss:
Mortgage banking . . . . . . . . . . . . . . . . . . . $ (34,430) $ (82,821) $(82,195)
Other . . . . . . . . . . . . . . . . . . . . . . . . 122 (21,129) (17,697)
---------- ---------- ---------
. . . . . . . . . . . . . . . . . . . . . . . . . . . (34,308) (103,950) (99,892)
Expenses:
General and administrative . . . . . . . . . . . . . . (2,675) (6,587) (9,327)
Provision for losses . . . . . . . . . . . . . . . . . (273) (162) --
Provision for restructuring . . . . . . . . . . . . . -- (2,800) (3,630)
Corporate interest . . . . . . . . . . . . . . . . . . (3,463) (13,783) (13,153)
Loss on sale or disposal of assets . . . . . . . . . . (188,691) -- --
---------- ---------- ---------
Loss from operations before reorganization items (229,410) (127,282) (126,002)
Reorganization items--net . . . . . . . . . . . . . . . . (21,181) -- --
---------- ---------- ---------
Loss before loss from discontinued operations . . (250,591) (127,282) (126,002)
Loss from discontinued operations:
Loss from disposal . . . . . . . . . . . . . . . . . . -- (24,409) (25,000)
Loss from operations . . . . . . . . . . . . . . . . . -- (2,000) (31,664)
---------- ---------- ---------
Net loss . . . . . . . . . . . . . . . . . $ (250,591) $ (153,691) $(182,666)
========== ========== =========
</TABLE>
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
-11-
<PAGE> 12
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. Financial Statements and Supplementary Data".
-12-
<PAGE> 13
RESULTS OF OPERATIONS--YEAR ENDED JUNE 30, 1995 COMPARED WITH YEAR ENDED JUNE
30, 1994
Mortgage Banking. During the years ended June 30, 1995 and 1994 the
operating results of mortgage banking were as follows (in millions):
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------
1995 1994
---------------------- -----------------------
<S> <C> <C> <C> <C>
Loan Administration
Revenues . . . . . . . . . . . . . . . . . . . . $ 123.7 $ 135.7
Expenses . . . . . . . . . . . . . . . . . . . . (51.4) (58.3)
Impairment provisions . . . . . . . . . . . . . (5.4) (80.0)
Amortization . . . . . . . . . . . . . . . . . . (52.5) $ 14.4 (67.7) $ (70.3)
--------- ----------
Master servicing
Revenues . . . . . . . . . . . . . . . . . . . . 11.8 12.1
Expenses . . . . . . . . . . . . . . . . . . . . (7.4) (8.0)
Amortization . . . . . . . . . . . . . . . . . . (1.3) 3.1 (0.6) 3.5
--------- ----------
Insurance
Agency . . . . . . . . . . . . . . . . . . . . . 9.8 8.9
Mortgage plans . . . . . . . . . . . . . . . . . 5.9 4.7
Expenses . . . . . . . . . . . . . . . . . . . . (5.6) 10.1 (4.9) 8.7
--------- ----------
Banking (including warehousing and
investment income and interest expense)
Revenues . . . . . . . . . . . . . . . . . . . . 38.7 44.8
Expenses . . . . . . . . . . . . . . . . . . . . (68.4) (29.7) (66.7) (21.9)
--------- ----------
Portfolio production
Revenues . . . . . . . . . . . . . . . . . . . . 16.1 49.5
Expenses . . . . . . . . . . . . . . . . . . . . (18.0) (1.9) (32.1) 17.4
--------- ----------
Field services
Revenues . . . . . . . . . . . . . . . . . . . . 11.2 13.6
Expenses . . . . . . . . . . . . . . . . . . . . (11.7) (0.5) (13.1) 0.5
--------- ----------
Fund and asset management
Revenues . . . . . . . . . . . . . . . . . . . . -- 8.3
Expenses . . . . . . . . . . . . . . . . . . . . -- -- (2.2) 6.1
--------- ----------
General and administrative expense . . . . . . . . (14.7) (17.1)
---------- ---------
Income (loss) before special provisions . . . (19.2) (73.1)
Special provisions for losses . . . . . . . . . . . (57.4) --
Provision for restructuring . . . . . . . . . . . . (6.2) (9.1)
---------- ---------
Income (loss) from continuing operations . . $ (82.8) $ (82.2)
========== =========
</TABLE>
-13-
<PAGE> 14
The loan administration unit generated operating income of $19.8 million
before a $5.4 million impairment provision in fiscal 1995 compared to income of
$9.7 million before an $80.0 million provision for impairment in fiscal 1994.
The operating results change reflected a significant decline in the
Company's servicing portfolio runoff rate from 33 percent during fiscal 1994 to
12.6 percent during fiscal 1995 as a result of higher mortgage interest rates
during the first nine months of fiscal 1995. Portfolio amortization expenses
declined from $67.7 million (before an $80 million impairment) in fiscal 1994
to $52.5 million (before a $5.4 million impairment) in fiscal 1995. However,
during the fourth quarter of fiscal 1995 lower mortgage interest rates had
prompted increase in prepayments and the Company recorded an impairment of $5.4
million. The annualized portfolio runoff rate for the June 1995 quarter was
12.7 percent compared to 10.3 percent in the March 1995 quarter. During the
first six months of fiscal 1994 the annualized portfolio runoff rate
accelerated to 41.5 percent, the Company booked an $80 million impairment
provision during that period. Loan administration related expenses decreased
from $58.3 million in fiscal 1994 to $51.4 million in fiscal 1995. The
decrease in expense reflected the reduction in force plans implemented by the
Company.
As a result of reduction in the Company-owned primary servicing portfolio
from $28.5 billion at June 30, 1994 to $26.6 billion at June 30, 1995,
servicing fees generated from the Company-owned portfolio declined from $129.6
million to $116.5 million. This decline is partially offset by increase in
subservicing fees. Subservicing fees increased from $6.1 million during fiscal
1994 to $7.2 million in fiscal 1995. Subservicing portfolio increased by
approximately $1.0 billion in unpaid principal balance of mortgage loans to
$6.5 billion at June 30, 1995.
Master servicing operations generated income of $3.1 million during fiscal
1995 compared to $3.5 million in fiscal 1994. Master servicing portfolio
totaled $8.1 billion and $8.4 billion at June 30, 1995 and 1994, respectively.
Insurance agency and optional mortgage insurance operations contributed
income of $10.1 million in fiscal 1995 compared to $8.7 million in 1994. The
improved results during fiscal 1995 are primarily due to an increase in the
volume of insurance policies and higher insurance premiums on mortgage
insurance.
The banking unit recorded net expenses of $29.7 million for fiscal 1995
compared to $21.9 million for fiscal 1994. Banking revenues decreased by $6.1
million from $44.8 million in fiscal 1994 to $38.7 million in fiscal 1995. The
decrease in revenues is attributable primarily to the fact that the average
amount of the first mortgage loans held in warehouse pending delivery to
permanent investors was substantially lower in fiscal 1995 ($294 million) than
in fiscal 1994 ($432 million) as a result of lower production volumes caused by
higher interest rates. In addition, banking revenues for fiscal 1994 included
a $2.3 million interest rate swap termination fee which was not accounted for
as a hedge. Banking expenses increased by $1.7 million to $68.4 million in
fiscal 1995. Paid-in-full ("PIF") interest, which is incurred when loans
securing payment of mortgage-backed securities in the Company's primary
servicing portfolio are prepaid prior to the end of a given month, totaled $5.4
million for fiscal 1995 and was $18.7 million in fiscal 1994. However, the
positive variance on PIF interest was offset by the interest rate swap program
during fiscal 1995. During fiscal 1995 the interest rate swap program incurred
total interest expense of $2.6 million. For fiscal 1994 the swap program
reduced the Company's interest expense by $11.6 million.
Portfolio production operations recorded a loss of $1.9 million in fiscal
1995 compared to income of $17.4 million in fiscal 1994. Portfolio production
through flow acquisitions added $5.9 billion principal amount of mortgages to
the Company's mortgage servicing portfolio in fiscal 1995. In fiscal 1994 the
flow acquisition was $12.2 billion. The production volumes in fiscal 1995 were
affected by higher interest rates. Portfolio production revenues for the years
ended June 30, 1995 and 1994 included $2.2 million and $24.3 million,
respectively, of gains from sales of first mortgage loans and related servicing
rights. Included in the $2.2 million gains for fiscal 1995 was a $2.1 million
loss recorded on the sale of a servicing portfolio of $2.3 billion in unpaid
principal balance of mortgage loans. From the sale, the Company received $21.9
million of cash.
-14-
<PAGE> 15
The fund and asset management unit was discontinued and transferred to
Capstead Mortgage Corporation ("Capstead") during fiscal 1994 when Capstead
became self-administered at September 30, 1994. Accordingly, the unit, which
contributed $6.1 million of income in fiscal 1994, contributed nothing in
fiscal 1995.
General and administrative expenses decreased from $17.1 million in fiscal
1994 to $14.7 million in fiscal 1995. The decrease is attributable to the
Company's cost-cutting efforts and streamlining of its operations.
Of the $57.7 million total special provisions for losses taken in fiscal
1995 for continuing operations as discussed previously, $57.4 million was
recorded by the mortgage banking operations as follows:
o provisions of $13.1 million to cover certain mortgage servicing
related receivables and other assets ($7.1 million cash charge
and $6.0 million noncash charge);
o provision of $6.6 million (cash charge) for mortgage banking
commitments and other contingencies;
o provision of $26.9 million (noncash charges) for reduction in
the carrying values of Company-owned land and buildings;
o provision of $3.4 million (noncash charges) for reduction in the
carrying values of other fixed assets (furniture and equipment);
o a $7.4 million pro rata interest rate swap loss recognition.
The loss represented the mark-to-market exposure of the unhedged
swaps at the beginning of the second quarter of fiscal 1995 when
the amount of hedged fixed rate debt dropped below the notional
amount of the swaps.
Mortgage banking operations recorded a provision for restructuring of $6.2
million under the 1995 Plan of which $3.0 million was related to the vacated
office building previously discussed and $1.6 million represented noncash
pension curtailment loss. The mortgage banking division paid termination
benefits of $1.8 million in cash. In fiscal 1994 the Company adopted two
restructuring and reduction in force plans and the mortgage banking division
recorded charges totaling $9.1 million.
Other. During fiscal 1995 as reclassified, other produced a loss of $21.1
million as compared to a loss in fiscal 1994 of $17.7 million. Losses in
fiscal 1995 of the short term lending operations were $15.6 million and $17.2
million for fiscal 1994, both of which were charged to reserves. Intellifile
lost $3.6 million in fiscal 1995 as compared to $4.9 million loss in fiscal
1994. In fiscal 1995, in connection with the settlement of an ELLCO indemnity,
the Company recorded income of $2.8 million and $3.9 million in fiscal 1994.
Also, in fiscal 1994 there was a gain on the sale of the Conseco Tranche A note
of $1.4 million.
See "Item 8. Financial Statements and Supplementary Data" for more
information.
OTHER OPERATIONS OF THE COMPANY
Outlined below are other operations of the Company which in previous
filings were carried as discontinued operations.
Short Term Lending. The Company's short term lending operations include
ST Lending ("STL") and Lomas Management ("LMI") which manages the assets of STL
and certain other real estate operations. The Company is liquidating its
portfolio 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
of 1989. The Company provided reserves totaling $0 million, $22.7 million and
$17.5 million for fiscal years ending June 30, 1996, 1995 and 1994,
respectively, to cover the expected loss on the liquidation of properties and
the future operating losses of these companies. Losses from STL and other real
estate operations charged to reserves
-15-
<PAGE> 16
were $2.2 million, $19.7 million and $17.2 million, for the year ended June 30,
1996, 1995 and 1994, respectively. The net assets of the short term lending
operations as of June 30, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Assets:
Foreclosed real estate, net of allowance for losses of $8,207 . . . . . . . . $ 14,580
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 12,045
Mortgage notes receivable, net of allowance for losses of $429 . . . . . . . . 1,185
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447
----------
28,257
Liabilities:
Accounts payable and accrued expenses-net of intercompany eliminations . . . . (35)
----------
Net assets $ 28,222
==========
</TABLE>
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 RIS's adjusted gross revenues in excess of $55 million per year
generated during the seven years ending December 31, 2001. However, in March
1995, the parent of RIS announced its intention to sell its mortgage banking
business which included RIS. In June 1995 RIS decided not to convert its
mortgage servicing portfolio to the LIS servicing system. And as a result, the
Company recorded a provision of $24.4 million in June 1995 to write off the
Company's carrying value of the contingent interest. 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 ending 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.
See "Item 8. Financial Statements and Supplementary Data" for more
information.
LIQUIDITY AND CAPITAL RESOURCES
October 10, 1995, LFC, LMUSA and two other insignificant subsidiaries of
LFC filed voluntary petitions for Chapter 11 proceedings. Liabilities subject
to Chapter 11 proceedings at June 30, 1996 were as follows (in millions):
<TABLE>
<S> <C>
Term debt of LMUSA:
o Notes due in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150.0
o Notes due in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190.0
o Mortgage note due in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 37.8
--------
377.8
Convertible notes of LFC due in 2003 . . . . . . . . . . . . . . . . . . . . . . 139.9
Accrued interest on term notes . . . . . . . . . . . . . . . . . . . . . . . . . 23.8
Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
--------
$ 552.8
========
</TABLE>
For a more detailed description of the Debtors Corporations' Chapter 11
proceeding and related distributions to creditors, 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
to "Part I--Item 1. Business--Chapter 11 Proceedings" and "Part I--Item 3.
Legal Proceedings" of this Form 10-K.
-16-
<PAGE> 17
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
-17-
<PAGE> 18
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
-18-
<PAGE> 19
CONSOLIDATED BALANCE SHEET
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30
--------------------------
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 197,800 $ 21,510
First mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . -- 345,039
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,394 282,338
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,467 88,947
Fixed assets--net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,833 52,612
Foreclosed real estate--net . . . . . . . . . . . . . . . . . . . . . . . . . . 14,580 27,802
----------- -----------
154,274 796,738
Less allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,821) (32,394)
----------- -----------
129,453 764,344
Purchased future mortgage servicing income rights--net . . . . . . . . . . . . -- 346,958
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . 2,679 24,189
----------- -----------
$ 329,932 $ 1,157,001
=========== ===========
Escrow, agency and fiduciary funds--see contra . . . . . . . . . . . . . . . . $ -- $ 641,519
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . $ 39,533 $ 59,102
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 591,089
Term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 378,770
Senior convertible notes payable . . . . . . . . . . . . . . . . . . . . . . -- 139,918
Liabilities subject to Chapter 11 proceedings . . . . . . . . . . . . . . . 552,863 --
----------- -----------
592,396 1,168,879
----------- -----------
Stockholders' equity (deficit):
Common stock--($1 par value, 20,149 and 20,146 shares issued
and outstanding, respectively) . . . . . . . . . . . . . . . . . . . . . . 20,149 20,146
Other paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,763 309,761
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . (592,376) (341,785)
----------- -----------
(262,464) (11,878)
----------- -----------
$ 329,932 $ 1,157,001
=========== ===========
Liability for escrow, agency and fiduciary funds--see contra . . . . . . . . . $ -- $ 641,519
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-19-
<PAGE> 20
STATEMENT OF CONSOLIDATED OPERATIONS
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Mortgage servicing . . . . . . . . . . . . . . . . . . . . . . $ 59,938 $ 134,349 $ 146,312
Commissions and fees . . . . . . . . . . . . . . . . . . . . . 16,040 32,246 28,288
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,933 27,439 40,877
Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 13,191 19,870 21,763
Gain on sales . . . . . . . . . . . . . . . . . . . . . . . . 214 1,512 24,474
Management fees--affiliates . . . . . . . . . . . . . . . . . -- -- 2,952
Other--affiliates . . . . . . . . . . . . . . . . . . . . . . -- -- 5,028
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,031 6,806 11,924
----------- ----------- -----------
103,347 222,222 281,618
----------- ----------- -----------
Expenses:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,563 80,951 88,851
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . 38,555 60,630 74,949
Depreciation and amortization . . . . . . . . . . . . . . . 17,358 66,998 155,466
Other operating . . . . . . . . . . . . . . . . . . . . . . 32,476 46,252 50,276
Provision for losses . . . . . . . . . . . . . . . . . . . . 31,114 85,673 22,508
Provision for restructuring . . . . . . . . . . . . . . . . -- 9,000 15,570
Loss on sale or disposal of assets . . . . . . . . . . . . . 188,691 -- --
----------- ----------- -----------
332,757 349,504 407,620
----------- ----------- -----------
Loss from operations before reorganization items . . . . . . . . (229,410) (127,282) (126,002)
Reorganization items--net . . . . . . . . . . . . . . . . . . (21,181) -- --
----------- ----------- -----------
Loss before loss from discontinued operations . . . . . . . . . . (250,591) (127,282) (126,002)
Loss from discontinued operations:
Loss from disposal . . . . . . . . . . . . . . . . . . . . . . -- (24,409) (25,000)
Loss from operations . . . . . . . . . . . . . . . . . . . . . -- (2,000) (31,664)
----------- ----------- ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (250,591) $ (153,691) $ (182,666)
=========== =========== ===========
Loss per share:
Loss before loss from discontinued operations . . . . . . . . $ (12.43) $ (6.32) $ (6.26)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (12.43) $ (7.63) $ (9.07)
Average number of shares . . . . . . . . . . . . . . . . . . . . 20,160 20,154 20,132
</TABLE>
See notes to consolidated financial statements.
-20-
<PAGE> 21
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Other Retained
Shares Common Paid-in Earnings
Outstanding Stock Capital (Deficit) Total
----------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 . . . . . . . . . . . 20,097 $ 20,097 $ 309,410 $ (5,428) $ 324,079
Net loss . . . . . . . . . . . . . . . . . . . -- -- -- (182,666) (182,666)
Issuance of stock under stock plans . . . . . . 3 3 19 -- 22
---------- --------- ---------- ----------- -----------
Balance at June 30, 1994 . . . . . . . . . . 20,100 20,100 309,429 (188,094) 141,435
Net loss . . . . . . . . . . . . . . . . . . . -- -- -- (153,691) (153,691)
Issuance of stock under stock plans . . . . . . 46 46 148 -- 194
Unfiled claims under Chapter 11 proceedings . . -- -- 184 -- 184
---------- --------- ---------- ----------- ----------
Balance at June 30, 1995 . . . . . . . . . . 20,146 20,146 309,761 (341,785) (11,878)
Net loss . . . . . . . . . . . . . . . . . . . -- -- -- (250,591) (250,591)
Issuance of stock under stock plans . . . . . . 3 3 2 -- 5
---------- --------- ---------- ----------- ----------
Balance at June 30, 1996 . . . . . . . . 20,149 $ 20,149 $ 309,763 $ (592,376) $ (262,464)
========== ========= ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE> 22
STATEMENT OF CONSOLIDATED CASH FLOWS
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (250,591) $ (153,691) $ (182,666)
Adjustments to reconcile loss from operations to cash provided
by operating activities before working capital changes:
Loss from disposal or sale of assets . . . . . . . . . . 188,691 -- --
Loss from disposal of discontinued operations . . . . . -- 24,409 25,000
Loss from operations of discontinued operations . . . . -- 2,000 31,664
Depreciation and amortization . . . . . . . . . . . . . 17,358 66,998 155,466
Provision for losses . . . . . . . . . . . . . . . . . . 31,114 85,673 22,508
Provisions for restructuring . . . . . . . . . . . . . . -- 9,000 15,570
Loss/(gain) on sales of mortgage servicing rights . . . -- 775 (4,841)
Reorganization items:
Write off of unamortized debt issuance cost . . . . . 6,571 -- --
Write off of net deferred debits on interest rate swap 9,115 -- --
----------- ---------- ----------
Cash provided by operations before working capital changes 2,258 35,164 62,701
Net change in first mortgage loans held for sale . . . . . . 345,278 (84,677) 128,812
Net change in sundry receivables, payables and other assets . (29,859) (41,731) (48,543)
Net cash used by discontinued operations . . . . . . . . . . -- (7,445) (12,835)
----------- ---------- ----------
Net cash provided (used) by operating activities . . . 317,677 (98,689) 130,135
----------- ---------- ----------
Investing activities:
Purchases of investments . . . . . . . . . . . . . . . . . . (31,417) (186,847) (15,929)
Maturities/sales of investments . . . . . . . . . . . . . . . 283,012 24,885 147,411
Net collections of mortgage notes receivable . . . . . . . . 2,214 35,015 46,264
Purchases of loans from pools . . . . . . . . . . . . . . . . (4,283) (6,941) (18,026)
Net sales of foreclosed real estate . . . . . . . . . . . . . 13,993 80,812 48,512
Net sales of/(additions to) fixed assets . . . . . . . . . . 3,708 899 (24,900)
Purchases of future mortgage servicing income rights . . . . (14,434) (60,640) (108,071)
Sales of future mortgage servicing income rights . . . . . . 12,170 39,115 17,073
Proceeds from assets sold to First Nationwide Mortgage Corp. 185,750 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 210 172
Net cash provided by discontinued operations . . . . . . . . -- -- (4,162)
----------- ---------- ----------
Net cash provided (used) by investing activities . . . 450,713 (73,492) 88,344
----------- ---------- ----------
Financing activities:
Net borrowings (repayments) of notes payable . . . . . . . . (591,089) 250,041 (174,273)
Term debt repayments . . . . . . . . . . . . . . . . . . . . (1,011) (66,528) (68,973)
----------- ---------- ----------
Net cash provided (used) by financing activities . . . (592,100) 183,513 (243,246)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . 176,290 11,332 (24,767)
Cash and cash equivalents at beginning of year . . . . . . . . 21,510 10,178 34,945
----------- ---------- ----------
Cash and cash equivalents at end of year . . . . . . . . . . . $ 197,800 $ 21,510 $ 10,178
=========== ========== ==========
Cash payments for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,727 $ 83,317 $ 90,597
Federal income tax . . . . . . . . . . . . . . . . . . . . . -- -- --
</TABLE>
See notes to consolidated financial statements.
-22-
<PAGE> 23
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.
-23-
<PAGE> 24
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
-24-
<PAGE> 25
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
-25-
<PAGE> 26
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.
-26-
<PAGE> 27
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
-27-
<PAGE> 28
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):
<TABLE>
<CAPTION>
June 30
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Restricted investments . . . . . . . . . . . . . . . . . . . . . . . $ 21,184 $ 18,890
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . 3,837 4,958
Fixed maturity securities . . . . . . . . . . . . . . . . . . . . . 3,373 3,373
Commercial paper and bank certificates of deposit . . . . . . . . . -- 251,025
Mortgage servicing partnership . . . . . . . . . . . . . . . . . . . -- 4,069
Marketable equity securities . . . . . . . . . . . . . . . . . . . . -- 23
--------- ----------
$ 28,394 $ 282,338
========= ==========
</TABLE>
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.
-28-
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECEIVABLES
Receivables consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
Receivable from First Nationwide Mortgage Corporation
("First Nationwide") . . . . . . . . . . . . . . . . . . . . . . $ 74,849 $ --
Receivable from RIS for sale of information system assets (net of
allowance for losses of $4,000 and $0) . . . . . . . . . . . . . 4,000 8,000
Other mortgage notes receivable . . . . . . . . . . . . . . . . . . 2,011 2,027
Insurance agency commissions and premiums . . . . . . . . . . . . . 1,416 308
Mortgage notes receivable of STL (net of allowance for losses of $429
and $2,175) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185 3,281
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . 927 4,534
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . 551 4,424
Receivables for servicing related advances and settlements . . . . . 528 3,855
Escrow deficiencies . . . . . . . . . . . . . . . . . . . . . . . . -- 40,726
Advances on mortgage-backed securities . . . . . . . . . . . . . . . -- 12,612
Foreclosure claims . . . . . . . . . . . . . . . . . . . . . . . . . -- 9,008
Amounts due from officers . . . . . . . . . . . . . . . . . . . . . -- 172
---------- ----------
$ 85,467 $ 88,947
========== ==========
</TABLE>
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
-29-
<PAGE> 30
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):
<EJuneU30
__1996 1995
<TABLE>
<S> <C> <C>
Land and buildings held for sale . . . . . . . . . . . . . . . . . . . $ 29,822 $ 22,474
Land and buildings in use . . . . . . . . . . . . . . . . . . . . . . -- 21,195
Furniture, equipment and leasehold improvements . . . . . . . . . . . 13,622 25,227
Capitalized computer software . . . . . . . . . . . . . . . . . . . . -- 1,838
--------- ---------
43,444 70,734
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . (17,611) (18,122)
--------- ---------
$ 25,833 $ 52,612
========= =========
</TABLE>
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 months of July and August 1996.
Based upon the subsequent sale of the land, buildings, furniture and equipment,
the carrying value of these assets was written down at June 30, 1996 to the
estimated sales price less selling costs. See "Subsequent Events" footnote.
ALLOWANCE FOR LOSSES
Activity in the allowance account was as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Beginning balance . . . . . . . . . . . . . . . . . . . . . $ 32,394 $ 10,225 $ 6,520
Provisions for losses . . . . . . . . . . . . . . . . . . . 31,114 85,673 22,508
Charge-offs or write downs . . . . . . . . . . . . . . . . . (48,884) (70,213) (21,694)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . 9,290 9,103 --
Other changes--net . . . . . . . . . . . . . . . . . . . . . 907 (2,394) 2,891
--------- -------- --------
Ending balance . . . . . . . . . . . . . . . . . . . . $ 24,821 $ 32,394 $ 10,225
========= ======== ========
</TABLE>
The allowance for losses was allocated as follows (in thousands):
<TABLE>
<CAPTION>
June 30
--------------------
1996 1995
-------- --------
<S> <C> <C>
Indemnification claims for the sale of servicing
portfolio and other assets to First Nationwide . . . . . . . . . . $ 20,510 $ --
Foreclosure claims . . . . . . . . . . . . . . . . . . . . . . . . . . -- 8,447
Servicing related receivables and other assets . . . . . . . . . . . . -- 8,651
Mortgage banking commitments and other contingencies . . . . . . . . . -- 6,788
Fixed assets (buildings, furniture and equipment) . . . . . . . . . . -- 2,602
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,311 5,906
-------- --------
$ 24,821 $ 32,394
======== ========
</TABLE>
-30-
<PAGE> 31
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):
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Reduction in the carrying value of Company-owned
land and buildings . . . . . . . . . . . . . . . . . . $ 12.6 $ 27.1 $ --
Provision for loss on swaps . . . . . . . . . . . . . . . 6.6 7.4 --
Provision for mortgage servicing related receivables,
foreclosed real estate and other assets . . . . . . . . 5.2 22.0 11.4
Reduction in the carrying values of furniture and
equipment . . . . . . . . . . . . . . . . . . . . . . . 4.9 4.5 --
Provision for the RIS note receivable . . . . . . . . . . 3.1 -- --
Mortgage banking commitments and other
contingencies . . . . . . . . . . . . . . . . . . . . . -- 6.6 --
Provision for STL foreclosed real estate and mortgage
notes receivable . . . . . . . . . . . . . . . . . . . -- 12.0 10.1
Provision for other real estate operations . . . . . . . . -- 4.1 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (1.3) 2.0 1.0
--------- -------- --------
$ 31.1 $ 85.7 $ 22.5
========= ======== ========
</TABLE>
-31-
<PAGE> 32
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):
<TABLE>
<CAPTION>
June 30
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Cost of PMSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 553,614
Capitalized excess servicing fees . . . . . . . . . . . . . . . . . -- 3,043
--------- ---------
-- 556,657
Less: Accumulated amortization . . . . . . . . . . . . . . . . . . -- (209,699)
--------- ---------
$ -- $ 346,958
========= =========
</TABLE>
Changes in PMSRs were as follows (in thousands):
<TABLE>
<CAPTION>
<EUYear>Ended June 30
----------------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Beginning balance . . . . . . . . . . . . . . . . . . . . $ 346,958 $ 382,009 $ 436,487
Additions . . . . . . . . . . . . . . . . . . . . . . . . 13,711 60,405 110,665
Sales and writeoffs . . . . . . . . . . . . . . . . . . . (346,543) (36,554) (16,896)
Amortization . . . . . . . . . . . . . . . . . . . . . . . (14,126) (53,502) (68,247)
Impairment writeoff . . . . . . . . . . . . . . . . . . . -- (5,400) (80,000)
---------- ---------- ---------
Ending balance . . . . . . . . . . . . . . . . . . . . . . $ -- $ 346,958 $ 382,009
========== ========= =========
</TABLE>
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):
<TABLE>
<CAPTION>
June 30
--------------------
1996 1995
-------- --------
<S> <C> <C>
Prepaid pension expense . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 14,803
Unamortized debt issuance cost . . . . . . . . . . . . . . . . . . . . -- 6,988
Other prepaid expenses, primarily insurance . . . . . . . . . . . . . 2,257 1,834
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422 564
-------- --------
$ 2,679 $ 24,189
======== ========
</TABLE>
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.
-32-
<PAGE> 33
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):
<TABLE>
<CAPTION>
Average Annual Average Annual
Interest Rate for Interest Rate for
Year Ended Year Ended
June 30, 1996 June 30, 1995
June 30, 1996 (%) June 30, 1995 (%)
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Notes Payable:
Warehouse lines of credit . . $ -- -- $ 164,694 4.0
Investment lines of credit . . -- -- 251,025 1.1
Repurchase agreements . . . . -- -- 123,379 6.4
Reverse repurchase agreement . -- -- 44,145 6.6
Other . . . . . . . . . . . . -- -- 7,846 2.1
----------- ----- --------- -----
$ -- -- $ 591,089 4.3
=========== ===== ========= =====
Term Notes Payable:
Notes payable due 1997 . . . . $ -- -- $ 150,000 9.8
Notes payable due 2002 . . . . -- -- 190,000 10.3
Mortgage note payable due 1996 -- -- 38,770 10.0
----------- ----- --------- -----
$ -- -- $ 378,770 10.1
=========== ===== ========= =====
Senior convertible notes due
2003 . . . . . . . . . . . $ -- -- $ 139,918 9.0
Liabilities subject to Chapter 11
proceedings . . . . . . . . $ 552,863 -- $ -- --
</TABLE>
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):
<TABLE>
<S> <C>
Term debt of LMUSA:
o Notes due in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,000
o Notes due in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000
o Mortgage note due in 1996 . . . . . . . . . . . . . . . . . . . . . . 37,759
----------
377,759
Convertible notes of LFC due in 2003 . . . . . . . . . . . . . . . . . . . . 139,918
Accrued interest on term notes . . . . . . . . . . . . . . . . . . . . . . . 23,785
Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,401
----------
$ 552,863
==========
</TABLE>
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
-33-
<PAGE> 34
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.
-34-
<PAGE> 35
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):
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Tax (benefit) applicable to:
Continuing operations . . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
Discontinued operations . . . . . . . . . . . . . . . . . . -- -- --
--------- -------- --------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ -- $ --
========= ======== ========
Utilization of tax benefits of pre-reorganization deductible
temporary differences and net operating loss carry forwards
as a direct addition to paid-in capital pursuant to fresh
start reporting . . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
========= ======== ========
</TABLE>
-35-
<PAGE> 36
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):
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C>
Tax expense (benefit) at statutory rate . . . . . . . . . . . . $ (87,707) $ (44,549) $ (44,101)
Book/tax difference in amortization of purchased future
mortgage servicing income and goodwill . . . . . . . . . . . -- (424) (2,752)
Change in beginning-of-the-year balance of valuation
allowance for deferred tax assets allocated to income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,216 52,871 70,023
Discontinued operations . . . . . . . . . . . . . . . . . . . . -- (9,243 ) (19,832)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,509) 1,345 (3,338)
------------ ---------- ----------
Actual tax expense . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
=========== =========== ==========
</TABLE>
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.
<TABLE>
<CAPTION>
June 30
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Post-reorganization net operating loss carryover . . . . . . . . . . $ 234,946 $ 105,925
Pre-reorganization net operating loss carryover . . . . . . . . . . 110,950 110,950
Loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,165 33,562
Deferred income on terminated swap agreements . . . . . . . . . . . -- 1,578
Purchased servicing writedown . . . . . . . . . . . . . . . . . . . -- 23,359
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . 2,814 3,029
Partnership income . . . . . . . . . . . . . . . . . . . . . . . . . 315 1,061
Uniform capitalization expense . . . . . . . . . . . . . . . . . . . 2,730 3,141
Miscellaneous assets . . . . . . . . . . . . . . . . . . . . . . . . 145 135
--------- ---------
Total gross deferred tax assets . . . . . . . . . . . . . . . . . 383,065 282,740
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . (358,104) (252,888)
--------- ---------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . 24,961 29,852
--------- ---------
Deferred tax liabilities:
Software development costs . . . . . . . . . . . . . . . . . . . . . -- --
Pension overfunding . . . . . . . . . . . . . . . . . . . . . . . . 4,800 4,806
Accelerated depreciation . . . . . . . . . . . . . . . . . . . . . . 18,524 17,878
Partnership loss . . . . . . . . . . . . . . . . . . . . . . . . . . 627 670
Excess mortgage servicing fees . . . . . . . . . . . . . . . . . . . -- 1,926
Miscellaneous liabilities . . . . . . . . . . . . . . . . . . . . . 1,010 4,572
--------- ---------
Total gross deferred tax liabilities . . . . . . . . . . . . . . . 24,961 29,852
--------- ---------
Net deferred tax liability . . . . . . . . . . . . . . . . . . $ -- $ --
========= =========
</TABLE>
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
-36-
<PAGE> 37
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
-37-
<PAGE> 38
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.
-38-
<PAGE> 39
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):
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
----------------------- ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents . . . . . . . . . $ 197,800 $ 197,800 $ 21,510 $ 21,510
First mortgage loans held for sale . . . . . -- -- $ 345,039 $ 344,326
Investments . . . . . . . . . . . . . . . . $ 28,394 $ 28,394 $ 282,338 $ 283,881
Notes receivable . . . . . . . . . . . . . . $ 7,196 $ 6,147 $ 13,308 $ 13,348
First Nationwide receivable . . . . . . . . $ 74,849 $ 74,849 -- --
Financial Liabilities:
Notes payable and repurchase agreements . . -- -- $ 591,089 $ 591,089
Term notes and senior convertible
notes payable . . . . . . . . . . . . . . -- -- $ 518,688 $ 301,858
Off-balance sheet items:
Reverse interest rate swaps (liability) . . -- -- -- $ (25,485)
Commitments to purchase loans (liability) . -- -- -- $ 859
Commitments to sell loans (liability) . . . -- -- -- $ (516)
</TABLE>
-39-
<PAGE> 40
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:
<TABLE>
<S> <C>
Interest earned on cash accumulated . . . . . . . . . . . . . . . . . . . . $ (8,691)
Write off of unamortized debt issuance cost . . . . . . . . . . . . . . . . 6,571
Write off of deferred interest swap debts . . . . . . . . . . . . . . . . . 9,115
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,605
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581
----------
$ 21,181
==========
</TABLE>
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):
<TABLE>
<CAPTION>
Office
Space Equipment Total
------- --------- -------
<S> <C> <C> <C>
Expense for the years ended June 30:
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 523 $ 772 $ 925
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,038 $ 1,512 $ 2,550
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,977 $ 1,054 $ 4,031
Commitments for the years ending June 30:
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321 $ -- $ 321
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 -- 118
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 -- 34
-------- ------- -------
Total minimum lease payments . . . . . . . . . . . . . . . $ 473 $ -- $ 473
======== ======= =======
</TABLE>
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.
-40-
<PAGE> 41
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):
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------
1996 1995 1994
--------- ---------- --------
<S> <C> <C> <C>
Actual return on plan assets . . . . . . . . . . . . . . . . $ (3,948) $ 867 $ 4,009
Net amortization and deferrals . . . . . . . . . . . . . . . 571 2,900 132
Service costs--benefits earned . . . . . . . . . . . . . . . 998 (1,538) (1,768)
Interest on projected benefit obligations . . . . . . . . . 1,240 (1,880) (2,259)
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . -- -- (1,260)
-------- -------- --------
Net (expense) credit recognized . . . . . . . . . . . . $ (1,139) $ 349 $ (1,146)
========= ======== ========
</TABLE>
The funded status of the Company's defined benefit plan after giving
effect to accruals and contributions was as follows (in thousands):
<TABLE>
<CAPTION>
June 30
--------------------
1996 1995
-------- --------
<S> <C> <C>
Plan assets at market value . . . . . . . . . . . . . . . . . . . . . $ 13,579 $ 29,422
Actuarial present value of projected benefit obligations . . . . . . . (12,467) (16,344)
-------- --------
Excess plan assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,112 13,078
Unrecognized excess plan assets being amortized over 15 years . . . . -- (3,026)
Unrecognized actuarial loss . . . . . . . . . . . . . . . . . . . . . -- 5,467
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . (1,112) (716)
-------- --------
Prepaid pension expense recorded in the financial statements . . . . . $ -- $ 14,803
======== ========
Actuarial present value of accumulated benefit obligations . . . . . . $ 12,467 $ 14,294
Actuarial present value of vested benefit obligations . . . . . . . . $ 12,467 $ 13,120
</TABLE>
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:
<TABLE>
<CAPTION>
June 30
-----------------------
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Discount/settlement rates . . . . . . . . . . . . . . . . . . . . . 6.8% 8.0% 7.5%
Rates of increase in compensation levels . . . . . . . . . . . . . . 7.9% 7.9% 8.1%
Expected long term rate of return on assets . . . . . . . . . . . . 9.0% 9.0% 9.0%
</TABLE>
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
-41-
<PAGE> 42
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.
-42-
<PAGE> 43
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):
<TABLE>
<CAPTION>
GNMA Section 363
Sale Sale Total
-------- ----------- ----------
<S> <C> <C> <C>
Assets sold:
First mortgage loans . . . . . . . . . . . . . $ 286,750 $ 2,608 $ 289,358
Receivables . . . . . . . . . . . . . . . . . 7,742 46,844 54,586
Foreclosed real estate . . . . . . . . . . . . -- 5,888 5,888
Investments and other assets . . . . . . . . . 4,380 6,208 10,588
Fixed assets . . . . . . . . . . . . . . . . . 251 120 371
Purchased mortgage servicing rights . . . . . 157,158 167,701 324,859
Less: allowance for losses . . . . . . . . . . (6,107) -- (6,107)
--------- ---------- ----------
450,174 229,369 679,543
--------- ---------- ----------
Liabilities assumed:
Notes payable . . . . . . . . . . . . . . . . 274,075 -- 274,075
Accounts payable . . . . . . . . . . . . . . . 1,613 319 1,932
--------- ---------- ----------
275,688 319 276,007
--------- ---------- ----------
Net assets sold . . . . . . . . . . . . . $ 174,486 $ 229,050 $ 403,536
========= ========== ==========
</TABLE>
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):
<TABLE>
<CAPTION>
GNMA Section 363
Sale Sale Total
--------- ----------- ----------
<S> <C> <C> <C>
Adjusted purchase price as of June 30, 1996 . . . . $ 101,538 $ 160,948 $ 262,486
Transfer costs . . . . . . . . . . . . . . . . . . (10,000) (10,000) (20,000)
Net book value of assets sold . . . . . . . . . . . (450,174) (229,369) (679,543)
Book value of liabilities assumed . . . . . . . . . 275,688 319 276,007
--------- ---------- ----------
Loss on sale of assets and liabilities . . . . (82,948) (78,102) (161,050)
Other costs:
Selling cost . . . . . . . . . . . . . . . . . (2,244) (2,370) (4,614)
Employee retention, severance and related cost (6,108) (10,419) (16,527)
Mortgage servicing system deconversion
penalty expense . . . . . . . . . . . . . -- (6,500) (6,500)
--------- ---------- ----------
Total loss recognized . . . . . . . $ (91,300) $ (97,391) $ (188,691)
========= ========== ==========
</TABLE>
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
-43-
<PAGE> 44
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):
<TABLE>
<CAPTION>
Year Ended June 30
------------------------------------
1996 1995 1994
----------- --------- ----------
<S> <C> <C> <C>
Loss from discontinued operations:
Loss from disposal . . . . . . . . . . . . . . . . . $ -- $ (24,409) $ (25,000)
Loss from operations:
Loss from operations--LIS . . . . . . . . . . . . -- (11,839) (23,164)
Provisions for future operating losses--LIS . . . -- (2,000) (8,500)
----------- --------- ----------
-- (13,839) (31,664)
Less charges to reserves . . . . . . . . . . . . . . -- 11,839 --
----------- --------- ----------
Loss from operations . . . . . . . . . . . . . . . -- (2,000) (31,664)
----------- --------- ----------
Loss from discontinued operations . . . . . . . . $ -- $ (26,409) $ (56,664)
=========== ========= ==========
</TABLE>
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.
-44-
<PAGE> 45
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):
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,257 $ 26,639 $ 143,223
Liabilities . . . . . . . . . . . . . . . . . . . . . . (35) (386) (65,844)
--------- -------- ---------
Net assets . . . . . . . . . . . . . . . . . . . . . . $ 28,222 $ 26,253 $ 77,379
========= ======== =========
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 1,117 $ 2,964 $ 10,560
Operating loss:
Loss--LMI . . . . . . . . . . . . . . . . . . . . . . $ (2,580) $ (1,771) $ (2,029)
Loss-- STL . . . . . . . . . . . . . . . . . . . . . . -- (1,384) (4,454)
Provision for losses-- STL . . . . . . . . . . . . . . -- (12,044) (10,069)
Loss--other real estate subsidiaries . . . . . . . . . 413 (435) (636)
--------- -------- ---------
(2,167) (15,634) (17,188)
Charges to reserves . . . . . . . . . . . . . . . . . 2,167 15,634 17,188
--------- -------- ---------
Operating loss in statement of operations . . . . . $ -0- $ -0- $ -0-
========= ======== =========
Loss recognized in discontinued operations to
record segment at the net realizable value
including provision for future operations . . . . . . $ -0- $ 22,650 $ 17,500
========= ======== =========
</TABLE>
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.
-45-
<PAGE> 46
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):
<TABLE>
<CAPTION>
Year Ended
June 30, 1994
-------------
<S> <C>
Management fee income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,952
Servicing and master servicing fee income . . . . . . . . . . . . . . $ 10,042
Sale of first mortgage loans . . . . . . . . . . . . . . . . . . . . . $ 4,516
Purchase of servicing rights . . . . . . . . . . . . . . . . . . . . . $ 3,379
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,028
</TABLE>
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
-46-
<PAGE> 47
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,
-47-
<PAGE> 48
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):
<TABLE>
<CAPTION>
Year Ended June 30, 1996
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . 55,429 29,512 14,166 4,240
Loss from operations before reorganization items . . (194,230) (13,940) (2,153) (19,087)
Reorganization items--net . . . . . . . . . . . . . -- (16,373) (1,675) (3,133)
Loss before loss from
discontinued operations . . . . . . . . . . . . . (194,230) (30,313) (3,828) (22,220)
Loss from discontinued operations:
Loss from disposal . . . . . . . . . . . . . . . . -- -- -- --
Loss from operations . . . . . . . . . . . . . . . -- -- -- --
Net loss . . . . . . . . . . . . . . . . . . . . . (194,230) (30,313) (3,828) (22,220)
Loss per common share:
Loss before loss from
discontinued operations . . . . . . . . . . . . (9.63) (1.50) (.19) (1.11)
Net loss . . . . . . . . . . . . . . . . . . . . . (9.63) (1.50) (.19) (1.11)
</TABLE>
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.
-48-
<PAGE> 49
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):
<TABLE>
<CAPTION>
Year Ended June 30, 1995
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . 55,944 57,839 52,815 55,624
Loss before loss from discontinued operations . . . (12,850) (41,209) (25,149) (48,074)
Loss from discontinued operations:
Loss from disposal . . . . . . . . . . . . . . . . -- -- -- (24,409)
Loss from operations . . . . . . . . . . . . . . . -- -- -- (2,000)
Net loss . . . . . . . . . . . . . . . . . . . . . (12,850) (41,209) (25,149) (74,483)
Loss per common share:
Loss before loss from
discontinued operations . . . . . . . . . . . . (.64) (2.04) (1.25) (2.39)
Net loss . . . . . . . . . . . . . . . . . . . . . (.64) (2.04) (1.25) (3.70)
</TABLE>
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.
-49-
<PAGE> 50
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):
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Revenues
Mortgage banking . . . . . . . . . . . . . . . . . $ 98,038 $ 209,245 $ 262,019
Other . . . . . . . . . . . . . . . . . . . . . . 6 ,699 17,805 27,063
------------ ---------- ----------
104,737 227,050 289,082
Intersegment revenues eliminated
in consolidation . . . . . . . . . . . . . . . . (1,390) (4,828) (7,464)
------------ ---------- ----------
Total revenues per statement of
consolidated operations . . . . . . . . . . . . $ 103,347 $ 222,222 $ 281,618
============ ========== ==========
Operating loss
Mortgage banking . . . . . . . . . . . . . . . . . $ (34,430) $ (82,821) $ (82,195)
Other . . . . . . . . . . . . . . . . . . . . . . 122 (21,129) (17,697)
------------ ---------- ----------
Operating loss . . . . . . . . . . . . . . . . . (34,308) (103,950) (99,892)
Expenses
General and administrative . . . . . . . . . . . . (2,675) (6,587) (9,327)
Provision for losses . . . . . . . . . . . . . . . (273) (162) --
Provision for restructuring . . . . . . . . . . . -- (2,800) (3,630)
Corporate interest expense . . . . . . . . . . . . (3,463) (13,783) (13,153)
Loss on sale of assets . . . . . . . . . . . . . . (188,691) -- --
------------ ---------- ----------
Operating loss before reorganization items . . . (229,410) (127,282) (126,002)
Reorganization items . . . . . . . . . . . . . . . (21,181) -- --
------------ ---------- ----------
Loss before loss from discontinued operations . . $ (250,591) $ (127,282) $ (126,002)
Loss from disposal . . . . . . . . . . . . . . . -- (24,409) (25,000)
Loss from operations . . . . . . . . . . . . . . -- (2,000) (31,664)
------------ ---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . $ (250,591) $ (153,691) $ (182,666)
============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30
---------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Identifiable Assets
Mortgage banking . . . . . . . . . . . . . . . . . $ 292,903 $1,136,579 $ 981,128
Other . . . . . . . . . . . . . . . . . . . . . . 37,029 20,422 167,129
------------ ---------- ----------
Total assets per consolidated balance sheet . . $ 329,932 $1,157,001 $1,148,257
============ ========== ==========
</TABLE>
-50-
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INDUSTRY SEGMENT DATA OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Depreciation and Amortization Expense
Mortgage banking . . . . . . . . . . . . $ 17,057 $ 65,426 $ 153,787
Other . . . . . . . . . . . . . . . . . . 301 1,572 1,679
----------- ---------- ----------
$ 17,358 $ 66,998 $ 155,466
=========== ========== ==========
Net Charges to Allowance for Losses
Mortgage banking . . . . . . . . . . . . $ 47,199 $ 53,420 $ 12,410
Other . . . . . . . . . . . . . . . . . . 1,685 16,793 9,284
----------- ---------- ----------
$ 48,884 $ 70,213 $ 21,694
=========== ========== ==========
Capital expenditures
Mortgage banking . . . . . . . . . . . . $ 149 $ 511 $ 24,042
Other . . . . . . . . . . . . . . . . . . -- 1,179 1,016
------------ ---------- ----------
$ 149 $ 1,690 $ 25,058
=========== ========== ==========
</TABLE>
Intersegment charges to LMUSA operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Intellifile for image processing . . . . . . $ 2,413 $ 1,020 $ 2,926
LIS for data processing and
telecommunications . . . . . . . . . . . -- 12,811 17,061
LAS for various administrative services . . -- 7,542 7,487
LAS for office space . . . . . . . . . . . . -- 2,833 6,026
LFC for management fees . . . . . . . . . . -- 1,500 1,630
LFC for interest expense (income) . . . . . -- (697) (518)
----------- ---------- ----------
$ 2,413 $ 25,009 $ 34,612
=========== ========== ==========
</TABLE>
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.
-51-
<PAGE> 52
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LOMAS FINANCIAL CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 4,594 $ 560
Receivables (including $2,134 and $991, respectively, due
from subsidiaries eliminated in consolidation) . . . . . . . 2,196 1,224
Investments (including $7,076 and $132,509, respectively,
investments in subsidiaries eliminated in consolidation) . . 16,770 136,095
Less allowance for losses . . . . . . . . . . . . . . . . . . . . (4,718) (6,903)
------------ -----------
14,248 130,416
Fixed assets, prepaid expenses and other assets . . . . . . . . . 1,824 2,236
----------- -----------
$ 20,666 $ 133,212
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued expenses (including $4,089 and
$428, respectively, due to subsidiaries eliminated
in consolidation) . . . . . . . . . . . . . . . . . . . . . $ 5,669 $ 5,172
Senior convertible notes payable . . . . . . . . . . . . . . . -- 139,918
Investments in subsidiaries (eliminated in consolidation) . . 123,080 --
Liabilities subject to Chapter 11 (including $862 and
$0, respectively, due to subsidiaries eliminated
in consolidation) . . . . . . . . . . . . . . . . . . . . . 154,381 --
----------- -----------
283,130 145,090
----------- -----------
Stockholders' equity (deficit):
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . 20,149 20,146
Other paid-in capital (including $1,300 eliminated
in consolidation) . . . . . . . . . . . . . . . . . . . . . 309,763 309,761
Retained earnings (deficit) . . . . . . . . . . . . . . . . . (592,376) (341,785)
----------- -----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . (262,464) (11,878)
----------- -----------
$ 20,666 $ 133,212
=========== ===========
</TABLE>
Note: Certain amounts in fiscal 1995 have been reclassified to comply with the
1996 presentation format.
-52-
<PAGE> 53
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
LOMAS FINANCIAL CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Investment (excluding dividends from subsidiaries) . . . . . $ 1,434 $ 802 $ 3,234
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,554 2,931 4,098
----------- ---------- -----------
2,988 3,733 7,332
----------- ---------- -----------
Expenses:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 3,463 13,888 13,260
General and administrative . . . . . . . . . . . . . . . . . 2,674 6,587 9,327
Provision for losses . . . . . . . . . . . . . . . . . . . . 273 36,593 15,809
----------- ---------- -----------
6,410 57,068 38,396
----------- ---------- -----------
Loss before reorganization items
and equity in income (loss) of subsidiaries . . . . . . . . (3,422) (53,335) (31,064)
Equity in loss of subsidiaries . . . . . . . . . . . . . . . . (243,730) (73,947) (94,938)
Reorganization items--net . . . . . . . . . . . . . . . . . . . (3,439) -- --
------------ ----------- -----------
Loss before loss from discontinued operations . . . . . . . (250,591) (127,282 ) (126,002)
Loss from discontinued operations . . . . . . . . . . . . . . . -- (26,409) (56,664)
----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (250,591) $ (153,691) $ (182,666)
=========== =========== ===========
Dividends paid by subsidiaries . . . . . . . . . . . . . . . . $ -- $ 891 $ 744
=========== =========== ===========
</TABLE>
Note: Certain amounts in fiscal 1995 have been reclassified to comply with the
1996 presentation format.
-53-
<PAGE> 54
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
LOMAS FINANCIAL CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------
1996 1995 1994
---------- ----------- --------
<S> <C> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (250,591) $ (153,691) $(182,666)
Adjustments to reconcile loss from continuing
operations to net cash used by operating activities
before working capital changes:
Loss from discontinued operations . . . . . . . . . . . -- 26,409 56,664
Depreciation and amortization . . . . . . . . . . . . . 140 202 232
Provisions for losses and restructuring . . . . . . . . 273 36,593 15,809
Equity (income) loss of subsidiaries . . . . . . . . . . 243,730 73,947 94,938
---------- ----------- --------
Cash used by operations before working capital
changes . . . . . . . . . . . . . . . . . . . . . . (6,448) (16,540) (15,023)
Net change in receivables, payable and other assets . . . . 6,182 (8,425) (3,912)
---------- ----------- --------
Net cash used by operating activities . . . . . . (266) (24,965) (18,935)
---------- ----------- --------
Investing activities:
Purchases of investments . . . . . . . . . . . . . . . . . . (131) (3,358) (3,525)
Sales of investments . . . . . . . . . . . . . . . . . . . . 3,846 15,765 26,467
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 31
---------- ----------- --------
Net cash provided by investing activities . . . . . 3,715 12,407 22,973
---------- ----------- --------
Financing activities:
Change in receivables from (payables to) subsidiaries . . . 585 (23,290) 12,654
Net funding of subsidiaries operations . . . . . . . . . . . -- (8,935) (19,854)
---------- ----------- --------
Net cash provided (used) by financing activities . . 585 14,355 (7,200)
---------- ----------- --------
Net increase (decrease) in cash and cash equivalents . . . . . 4,034 1,797 (3,162)
Cash and cash equivalents at beginning of year . . . . . . . . 560 (1,237) 1,925
---------- ----------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . $ 4,594 $ 560 $ (1,237)
========== =========== ========
</TABLE>
-54-
<PAGE> 55
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.
-55-
<PAGE> 56
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. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-56-
<PAGE> 57
PART IV
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.
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Consolidated Balance Sheet--June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . 19
Statement of Consolidated Operations--Years Ended June 30, 1996, 1995 and 1994 . . . 20
Statement of Consolidated Stockholders' Equity (Deficit)--Years Ended
June 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Statement of Consolidated Cash Flows--Years Ended June 30, 1996, 1995 and 1994 . . . 22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 23
(ii) The following financial statement schedule is included in Item 8:
Schedule I--Condensed Financial Information of Registrant . . . . . . . . . . . . . . 52
</TABLE>
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.
-57-
<PAGE> 58
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
-58-
<PAGE> 59
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)
59
<PAGE> 60
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).
<PAGE> 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: )
) Chapter 11
LOMAS FINANCIAL CORPORATION, )
LOMAS INFORMATION SYSTEMS, ) Case Nos. 95-1235,
INC. AND LOMAS ADMINISTRATIVE ) 1237 and 1238 (PJW)
SERVICES, INC. )
) Jointly Administered
Debtors )
)
FIRST AMENDED DISCLOSURE STATEMENT PURSUANT TO
SECTION 1125 OF THE BANKRUPTCY CODE
SECOND AMENDED JOINT CHAPTER 11 PLAN OF LOMAS FINANCIAL
CORPORATION, LOMAS INFORMATION SYSTEMS, INC. AND LOMAS
ADMINISTRATIVE SERVICES, INC.
THIS IS NOT A SOLICITATION OF ACCEPTANCES OF THE PLAN.
ACCEPTANCES MAY NOT BE SOLICITED UNTIL A DISCLOSURE
STATEMENT HAS BEEN APPROVED BY THE BANKRUPTCY COURT. THIS
DISCLOSURE STATEMENT IS BEING SUBMITTED FOR APPROVAL BUT
HAS NOT BEEN APPROVED BY THE BANKRUPTCY COURT.
YOUNG, CONAWAY, STARGATT & TAYLOR
11th Floor, Rodney Square North
P.O. Box 391
Wilmington, Delaware 19899-0391
(302) 571-6600
and
DAVIS POLK & WARDWELL
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Counsel to Debtors and Debtors-in-
Possession
July 3, 1996
<PAGE> 2
THIS DISCLOSURE STATEMENT MAY NOT BE RELIED ON FOR ANY PURPOSE OTHER
THAN TO DETERMINE HOW TO VOTE ON THE JOINT CHAPTER 11 PLAN OF LOMAS FINANCIAL
CORPORATION ("LFC"), LOMAS INFORMATION SYSTEMS, INC. ("LIS") AND LOMAS
ADMINISTRATIVE SERVICES, INC. ("LAS") (COLLECTIVELY, THE "JOINT DEBTORS")
DATED MAY 13, 1996 (THE "JOINT PLAN"), AND NOTHING CONTAINED HEREIN SHALL
CONSTITUTE AN ADMISSION OF ANY FACT OR LIABILITY BY ANY PARTY, OR BE ADMISSIBLE
IN ANY PROCEEDING INVOLVING THE DEBTORS OR ANY OTHER PARTY, OR BE DEEMED
CONCLUSIVE ADVICE ON THE TAX OR OTHER LEGAL EFFECTS OF THE REORGANIZATION ON
HOLDERS OF CLAIMS.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
THE DESCRIPTION OF THE JOINT PLAN CONTAINED IN THIS DISCLOSURE
STATEMENT IS INTENDED AS A SUMMARY ONLY AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PLAN ITSELF, WHICH IS INCLUDED AS EXHIBIT I. EACH CREDITOR
SHOULD READ, CONSIDER AND CAREFULLY ANALYZE THE TERMS AND PROVISIONS OF THE
JOINT PLAN.
THE MANAGEMENT OF EACH OF THE JOINT DEBTORS BELIEVES THAT THE JOINT
PLAN IS IN THE BEST INTERESTS OF ITS CREDITORS. ALL CREDITORS OF THE JOINT
DEBTORS ARE URGED TO VOTE IN FAVOR OF THE JOINT PLAN. VOTING INSTRUCTIONS ARE
CONTAINED ON PAGES 2 AND 3 OF THIS DISCLOSURE STATEMENT. TO BE COUNTED, YOUR
BALLOT MUST BE DULY COMPLETED AND EXECUTED AND RECEIVED BY 5:00 P.M., EASTERN
DAYLIGHT TIME, ON WEDNESDAY, AUGUST 21, 1996, UNLESS EXTENDED. ANY BALLOT
RECEIVED THAT IS EXECUTED BUT DOES NOT INDICATE ACCEPTANCE OR REJECTION OF THE
PLAN WILL BE DEEMED TO CONSTITUTE AN ACCEPTANCE OF THE PLAN.
No person is authorized by any of the Joint Debtors in connection with
the Joint Plan or the solicitation of acceptances of the Joint Plan to give any
information or to make any representation other than as contained in this
Disclosure Statement and the exhibits and schedules attached hereto or
incorporated by reference or referred to herein, and if given or made, such
information or representation may not be relied upon as having been authorized
by any of the Debtors. The delivery of this Disclosure Statement will not
under any circumstances imply that the information herein is correct as of any
time subsequent to the date hereof.
EACH CREDITOR IS ENCOURAGED TO READ AND CAREFULLY CONSIDER THIS ENTIRE
DISCLOSURE STATEMENT, INCLUDING THE JOINT PLAN ATTACHED AS EXHIBIT I AND THE
MATTERS DESCRIBED IN THIS DISCLOSURE STATEMENT UNDER "CERTAIN CONSIDERATIONS"
PRIOR TO SUBMITTING A BALLOT PURSUANT TO THIS SOLICITATION.
---------------------------
IN THE EVENT THAT ANY OF THE CLASSES OF HOLDERS OF IMPAIRED CLAIMS
VOTES TO REJECT THE JOINT PLAN, (A) THE JOINT DEBTORS MAY SEEK TO SATISFY THE
REQUIREMENTS FOR CONFIRMATION OF THE JOINT PLAN UNDER THE SO-CALLED "CRAMDOWN"
PROVISIONS OF SECTION 1129(B) OF THE BANKRUPTCY CODE, 11 U.S.C. SECTION 1129,
AND, IF REQUIRED, MAY AMEND THE JOINT PLAN TO CONFORM TO SUCH REQUIREMENTS OR
(B) THE JOINT CHAPTER 11 PLAN MAY BE OTHERWISE MODIFIED OR WITHDRAWN.
---------------------------
The requirements for Confirmation, including the vote of creditors to
accept the Joint Plan and certain of the statutory findings that must be made
by the Bankruptcy Court, are set forth under the caption "Voting On and
Confirmation of the Plans."
<PAGE> 3
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. INTRODUCTION...............................................................................1
A. Voting Instructions................................................................2
1. Ballots.......................................................................2
2. Returning Ballots.............................................................3
3. Special Instructions for Holders of Securities................................3
B. Voting on the Joint Plan...........................................................3
II. SUMMARY OF CHAPTER 11 PLANS...............................................................4
A. Reorganized LFC and Reorganized LMUSA..............................................4
B. Summary Of Distributions Under the Plans...........................................4
1. Summary of Distributions Under The Joint Plan.................................6
2. Summary of Distributions Under LMUSA Plan.....................................9
III. BACKGROUND AND GENERAL INFORMATION......................................................12
A. 1989 Chapter 11 Filings...........................................................12
B. Description of Principal Business of Lomas Historically -- Mortgage Servicing.....12
C. Events Leading to the 1995 Chapter 11 Filing......................................13
1. The Impact of Declining Interest Rates on Run-Off Rates......................13
2. Loss of Various Credit Facilities............................................13
3. The Resulting Sell-off of Servicing Rights...................................14
4. Interest Rate Swaps..........................................................15
5. Lomas Information Systems Used Scarce Financial Resources....................15
D. Asset Sales Prior to Chapter 11 Filing............................................15
1. Efforts in Calendar 1994 to Sell the Company.................................15
2. Sale of Debtor LIS Assets....................................................16
3. The Efforts of Management Retained in December 1994..........................16
4. Creditor Restructuring Proposal in Spring 1995...............................17
5. Renewed Selling Efforts in Spring 1995 Resulting in Potential Sale to First
Nationwide...................................................................17
6. Financial Decline and GNMA Bankruptcy Exception Necessitated Immediate Sale
of GNMA Servicing and Loan Production Business to First Nationwide...........18
7. The GNMA Servicing Sale Agreement............................................18
8. Adoption of the Retention Incentive and Severance Plans......................19
9. The Approval of the Agencies and Subsequent Closing of the GNMA Servicing
Sale.........................................................................21
10. Proposed Section 363 Sale to First Nationwide................................21
E. The Chapter 11 Filings............................................................22
1. First Day Orders.............................................................22
2. Creditors' Committees........................................................22
3. The Section 363 Sale.........................................................23
4. Exclusive Period to File and Solicit Acceptances of Chapter 11 Plans.........24
6. Post-Petition Cost Reductions................................................25
7. Bar Date.....................................................................25
8. Claims Summary...............................................................26
9. Executory Contracts and Leases...............................................27
IV. GENERAL INFORMATION RELATING TO REORGANIZED LFC..........................................29
A. Business of Reorganized LFC.......................................................29
1. Assisted Care Business.......................................................29
2. Investment and Other Assets..................................................30
3. Cash and Cash Equivalents....................................................31
4. Other Information Regarding the Business of Reorganized LFC..................31
B. Business of LIS and LAS...........................................................31
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
C. Potential for Growth, New Investors...............................................31
D. Board of Directors and New Management of Reorganized LFC..........................32
1. Board Of Directors of Reorganized LFC........................................32
2. New Management of Reorganized LFC............................................33
E. Securities of Reorganized LFC.....................................................33
V. GENERAL INFORMATION RELATING TO REORGANIZED LMUSA.........................................34
A. Business of Reorganized LMUSA.....................................................34
1. Real Estate Business.........................................................34
2. The Lomas Campus.............................................................35
3. Other Assets.................................................................36
4. Cash and Cash Equivalents of Reorganized LMUSA...............................38
5. Insurance Business: Lomas Insurance.........................................38
6. Other Information Relating to the Business of Reorganized LMUSA..............40
B. Potential for Growth, New Investors...............................................40
C. Board of Directors and New Management of Reorganized LMUSA........................41
1. Board Of Directors of Reorganized LMUSA......................................41
2. New Management of Reorganized LMUSA..........................................41
D. Securities of Reorganized LMUSA...................................................41
VI. INTERCOMPANY CLAIMS......................................................................42
A. Intercompany Issues Generally.....................................................42
B. Retention of Price Waterhouse.....................................................42
C. Description of Transactions and Assertions of the Committees......................43
D. Title to Certain Assets...........................................................45
E. Intercompany Expense Allocations, Pricing and Possible Subsidies..................45
F. Tax-Sharing Agreement.............................................................46
G. Assertions of the Committees......................................................46
1. Position of LFC Creditors' Committee.........................................46
2. Position of LMUSA Creditors' Committee.......................................50
H. Description of Provisions of the Plans............................................51
VII. PRINCIPAL NON-INTERCOMPANY CLAIMS AGAINST THE DEBTORS...................................53
A. LFC...............................................................................53
1. Undisputed Claims Against LFC................................................53
2. Disputed and/or Contingent Claims Against LFC................................53
B. LMUSA.............................................................................53
1. Undisputed Claims Against LMUSA..............................................53
2. Disputed and/or Contingent Claims Against LMUSA..............................54
C. LIS...............................................................................56
D. LAS...............................................................................56
VIII. POTENTIAL CLAIMS OF DEBTORS AGAINST THIRD PARTIES......................................57
IX. CHAPTER 11 PLANS.........................................................................59
A. Classification of Claims and Interests............................................59
1. Administrative Claims........................................................59
2. Priority Tax Claims..........................................................59
3. Priority Non-Tax Claims......................................................59
4. Secured Claims...............................................................59
5. Unsecured Claims.............................................................59
6. Interests....................................................................60
B. Treatment of Claims and Interests.................................................60
</TABLE>
ii
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Administrative Claims........................................................60
2. Priority Tax Claims..........................................................61
3. Priority Non-Tax Claims......................................................61
4. Secured Claims...............................................................62
5. Unsecured Claims - D & O Claims..............................................63
6. Unsecured Claims.............................................................63
7. Convenience Unsecured Claims.................................................64
8. Intercompany Claims..........................................................64
9. Equity Interests.............................................................65
C. Conditions Precedent..............................................................65
1. Conditions to Confirmation...................................................65
2. Conditions to Distribution...................................................66
D. Distributions Under the Plans.....................................................66
1. Allocation of Administrative Expenses........................................66
2. Initial Distributions........................................................66
3. Subsequent Distributions on LFC Class 3 Claims and LMUSA Class 3 Claims......66
4. Subsequent Distributions on LIS Class 3 Claims and LAS Class 3 Claims........67
5. Cash Distributions...........................................................67
6. Issuance of New LFC Common Stock and New LMUSA Common Stock..................67
7. Distribution of Fractional Shares of New Common Stock........................68
8. Surrender and Cancellation of LFC Senior Convertible Notes and LMUSA Senior
Notes........................................................................68
E. Other Provisions of the Plans.....................................................68
1. Channeling Order.............................................................68
2. Assumption and Rejection of Executory Contracts and Unexpired Leases.........69
3. Setoff.......................................................................69
4. Cancellation and Release of Existing Securities, Agreements and Liens........69
5. Certain Assets to be Held in Trust...........................................69
6. LFC and LMUSA Litigation Trusts..............................................69
7. Contributions to Litigation Trusts and Intercompany Claims Reserve...........70
8. Retiree Medical Benefits.....................................................70
X. SECURITIES TO BE DISTRIBUTED PURSUANT TO THE PLANS........................................71
A. New LFC Capital Stock.............................................................71
B. Restrictions on Transfer of New LFC Common Stock..................................71
C. New LMUSA Capital Stock...........................................................72
D. Restrictions on Transfer of New LMUSA Common Stock................................72
XI. CERTAIN CONSIDERATIONS....................................................................74
A. Projections.......................................................................74
B. Disputed Claims...................................................................74
C. Intercompany Claims...............................................................74
D. Trading in New LFC Common Stock and New LMUSA Common Stock........................74
XII. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS......................................75
A. Control Persons...................................................................75
B. Syndicators.......................................................................76
C. Accumulators and Distributors.....................................................76
D. Current Information...............................................................76
E. Certain Transactions By Stockholders..............................................76
XIII. FEDERAL INCOME TAX CONSEQUENCES OF THE PLANS...........................................77
A. Tax Consequences to the Debtors...................................................77
</TABLE>
iii
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Separation of LFC and its Subsidiaries into Two Consolidated Groups..........77
2. Alternative Minimum Tax......................................................77
3. Tax Attributes of the Debtors................................................77
4. Potential Limitations on Utilization of NOLs.................................78
5. Reduction of NOLs for Discharge of Indebtedness and Certain Interest
Deductions...................................................................80
6. Resulting Tax Consequences to LFC Group......................................81
7. Resulting Tax Consequences to LMUSA Group....................................81
B. Tax Consequences to Creditors.....................................................81
1. Tax Concerns Common to All Creditors.........................................81
2. Creditors Not Receiving New LFC Common Stock or New LMUSA Common Stock.......82
3. Creditors Receiving New LFC Common Stock or New LMUSA Common Stock...........83
4. Non-Reorganization Assets of LFC, LIS and LMUSA..............................84
5. Intercompany Claims Reserve..................................................86
C. Tax Consequences to LFC Stockholders..............................................86
D. Backup Withholding................................................................86
E. Importance of Obtaining Professional Tax Assistance...............................86
XIV. VOTING ON AND CONFIRMATION OF THE PLANS.................................................87
A. Classification of Claims and Interests............................................87
B. Voting............................................................................87
1. Impaired Classes.............................................................87
2. Classes That Are Not Impaired................................................88
C. Best Interests of Creditors.......................................................88
D. Feasibility of the Plans..........................................................89
E. Confirmation Without Acceptance by All Impaired Classes...........................89
F. Alternatives to the Plans.........................................................90
XV. CONCLUSION...............................................................................91
SCHEDULE I Index of Defined Terms......................................................S-1
EXHIBIT I First Amended Joint Chapter 11 Plan Dated May 13, 1996......................I-1
EXHIBIT II First Amended LMUSA Chapter 11 Plan Dated May 13, 1996. ...................II-1
EXHIBIT III Liquidation Analysis of Debtors...........................................III-1
EXHIBIT IV Projected Financial Statements for Reorganized LFC and Reorganized LMUSA
for the Fiscal Years 1997, 1998 and 1999...................................IV-1
EXHIBIT V Names and Addresses of the Creditors' Committees and their Counsel..........V-1
EXHIBIT VI Intercompany Claims Report of Price Waterhouse LLP dated
February 27, 1996
</TABLE>
iv
<PAGE> 7
DISCLOSURE STATEMENT PURSUANT TO
SECTION 1125 OF THE BANKRUPTCY CODE
I. INTRODUCTION
Lomas Financial Corporation ("LFC"), Lomas Information Systems, Inc.
("LIS") and Lomas Administrative Services, Inc. ("LAS") (collectively, the
"Joint Debtors") have filed with the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court") their Joint Chapter 11 Plan dated
April 8, 1996 and subsequently have filed their First Amended Joint Chapter 11
Plan dated May 13, 1996 and their Second Amended Joint Chapter 11 Plan dated
July 3, 1996 (the "Joint Plan"). Lomas Mortgage USA, Inc. ("LMUSA") and its
Statutory Committee of Unsecured Creditors (the "LMUSA Creditors' Committee")
have filed with the Bankruptcy Court LMUSA's Chapter 11 Plan dated April 8,
1996 and subsequently have filed LMUSA's First Amended LMUSA Chapter 11 Plan
dated May 13, 1996 and LMUSA's Second Amended LMUSA Chapter 11 Plan dated July
3, 1996 (the "LMUSA Plan" and together with the Joint Plan, the "Plans"). LFC,
LMUSA, LIS and LAS collectively are referred to as the "Debtors." Unless the
context otherwise requires, "Lomas" and the "Company," as used herein, refer to
LFC and its subsidiaries.
The Joint Debtors jointly submit this Disclosure Statement dated July
3, 1996 pursuant to Section 1125 of the Bankruptcy Code, 11 U.S.C. Section 101,
et seq. (the "Code"), in connection with the solicitation of votes on the Joint
Plan from holders of Claims against the Joint Debtors and the hearing on
Confirmation of the Joint Plan scheduled for September 4, 1996 (the
"Confirmation Hearing"). By order of the Bankruptcy Court dated July 3, 1996,
this Disclosure Statement has been approved as containing "adequate
information" for creditors of the Joint Debtors in accordance with Section
1125(b) of the Code. Approval of this Disclosure Statement by the Bankruptcy
Court does not indicate that the Bankruptcy Court recommends either acceptance
or rejection of the Joint Plan.
A substantially similar Disclosure Statement is being filed in
connection with the solicitation by LMUSA of votes on the LMUSA Plan.
IN THE OPINION OF THE JOINT DEBTORS, THE TREATMENT OF CLAIMS UNDER THE
JOINT PLAN CONTEMPLATES GREATER RECOVERIES THAN ARE LIKELY TO BE ACHIEVED UNDER
OTHER ALTERNATIVES FOR THE REORGANIZATION OR LIQUIDATION OF THE JOINT DEBTORS.
ACCORDINGLY, THE JOINT DEBTORS BELIEVE THAT CONFIRMATION OF THE JOINT PLAN IS
IN THE BEST INTERESTS OF CREDITORS AND RECOMMEND THAT YOU VOTE TO ACCEPT THE
JOINT PLAN.
The Statutory Committee of Unsecured Creditors of LFC (the "LFC
Creditors' Committee") is not a co- proponent of the Joint Plan.
THE LFC CREDITORS' COMMITTEE HAS INFORMED THE DEBTORS THAT IT BELIEVES
THAT THE FILING OF A PLAN AND DISCLOSURE STATEMENT IS PREMATURE AND THAT THERE
IS PRESENTLY INSUFFICIENT INFORMATION TO DETERMINE WHETHER OR NOT THE JOINT
PLAN IS IN THE BEST INTEREST OF THE CREDITORS OF LFC. THE LFC CREDITORS'
COMMITTEE ALLEGES THAT BECAUSE THE LFC CREDITORS' COMMITTEE WAS NOT FORMED
UNTIL MARCH 15, 1996, IT WAS NOT GIVEN THE OPPORTUNITY TO PARTICIPATE IN
FORMULATING THE PLANS.
Capitalized terms used and not defined in this Disclosure Statement
have the meanings attributed to them in Article 1 of the Joint Plan and the
LMUSA Plan, which are included as Exhibits I and II. An index of defined terms
used in this Disclosure Statement is attached as Schedule I.
Accompanying this Disclosure Statement are copies of:
a. notices fixing (i) the time for filing of acceptances and
rejections of the Joint Plan, (ii) the date and time of the
Confirmation Hearing and (iii) the time for filing objections
to the Joint Plan (the "Confirmation Hearing Notice");
b. letters from the Joint Debtors and from the LFC Creditors'
Committee;
<PAGE> 8
c. in the case of holders of LFC Class 1, 2, 3 and 4 Claims, LIS
Class 1, 2 and 3 Claims and LAS Class 1, 2 and 3 Claims (the
"Voting Classes"), one or more ballots for acceptance or
rejection of the Joint Plan;
d. in the case of holders of LFC Class 3 Claims, a tax
questionnaire;
e. LFC's Annual Report on Form 10-K for the Fiscal Year Ended
June 30, 1995 as amended by Form 10-K/A; and
f. LFC's filing on Form 10-Q for the Quarter Ended March 31,
1996 (without exhibits).
Pursuant to the provisions of the Code, only Classes of Claims and
Interests that are "impaired" under the terms and provisions of the Joint Plan
are required to vote to accept or reject the Joint Plan. For purposes of the
Joint Plan, only the Voting Classes are impaired. ACCORDINGLY, BALLOTS FOR
ACCEPTANCE OR REJECTION OF THE JOINT PLAN ARE BEING PROVIDED ONLY TO MEMBERS OF
THE VOTING CLASSES. The holders of the LFC Class 5 Claims, LIS Class 4 Claims
and LAS Class 4 Claims, all of which are Debtors or subsidiaries of Debtors
(including LMUSA and its subsidiaries) have agreed to accept the treatment
provided in the Joint Plan and accordingly their votes are not being solicited.
Similarly, LFC is the only holder of LIS Class 5 Interests and because LFC has
proposed and approved this Joint Plan its vote is not being solicited. The
holders of LFC Class 6 Interests receive no distribution under the Joint Plan
and are deemed to have rejected the Plan.
Each holder of a Claim in a Voting Class should read this Disclosure
Statement, together with the Joint Plan and other exhibits hereto, in their
entirety. After carefully reviewing the Joint Plan and this Disclosure
Statement and its other exhibits and attachments hereto, please indicate your
vote with respect to the Joint Plan on the enclosed ballot and return it in the
envelope provided. If you have an impaired Claim in more than one Class, you
will receive a separate coded ballot for each such Claim (see "Voting
Instructions" below). PLEASE VOTE EVERY BALLOT YOU RECEIVE.
For a summary description of each Class of Claims or Interests, the
estimated amount of Allowed Claims in each Class, and the treatment of each
Class of Allowed Claims or Allowed Interests under the Joint Plan, see "Summary
of Chapter 11 Plans -- Summary of Distributions Under the Plans."
The Bankruptcy Court has scheduled the Confirmation Hearing for
Wednesday, September 4, 1996, at 9:00 a.m. at 824 Market Street, Marine
Midland Building, 6th Floor, Wilmington, Delaware 19801. The Bankruptcy Court
has directed that objections, if any, to Confirmation of the Joint Plan be
served and filed on or before August 19, 1996 in the manner described in the
Confirmation Hearing Notice accompanying this Disclosure Statement. The date
of the Confirmation Hearing may be adjourned from time to time without further
notice.
A. VOTING INSTRUCTIONS
1. Ballots
In voting for or against the Joint Plan, please use only the coded
ballot or ballots sent to you with this Disclosure Statement. If you have
Claims in more than one Class under the Joint Plan, you will receive multiple
ballots. IF YOU RECEIVE MORE THAN ONE BALLOT YOU SHOULD ASSUME THAT EACH
BALLOT IS FOR A SEPARATE CLAIM AND SHOULD COMPLETE AND RETURN ALL OF THEM.
IF YOU ARE A MEMBER OF A VOTING CLASS AND DID NOT RECEIVE A BALLOT, OR
IF YOUR BALLOT IS DAMAGED OR LOST, OR IF YOU HAVE ANY QUESTIONS CONCERNING
VOTING PROCEDURES, CALL LOGAN & COMPANY AT 201-798-1031.
2
<PAGE> 9
2. Returning Ballots
YOU SHOULD COMPLETE AND SIGN EACH ENCLOSED BALLOT AND RETURN IT IN THE
ENCLOSED PRE-PAID ENVELOPE.
IN ORDER TO BE COUNTED, BALLOTS MUST BE RECEIVED BY WEDNESDAY, AUGUST
21, 1996 AT 5:00 P.M. (EASTERN DAYLIGHT TIME).
3. Special Instructions for Holders of Securities
The record date for determining which holders of LFC's $140 million 9%
Senior Convertible Notes due October 1, 2003 ("LFC Senior Convertible Notes")
are entitled to vote on the Joint Plan is July 3, 1996. THE PRE-PETITION
INDENTURE TRUSTEE FOR LFC SENIOR CONVERTIBLE NOTES IS NOT PERMITTED TO VOTE ON
BEHALF OF THE HOLDERS OF THESE SECURITIES AND CONSEQUENTLY SUCH HOLDERS MUST
SUBMIT THEIR OWN BALLOTS. Only those holders of LFC Senior Convertible Notes
on the date on which the Clerk of the Bankruptcy Court enters on the docket the
Confirmation of the Joint Plan will be entitled to distributions under the
Joint Plan.
DO NOT RETURN THE CERTIFICATES REPRESENTING YOUR SECURITIES WITH YOUR
BALLOTS. SEE "CHAPTER 11 PLANS -- DISTRIBUTIONS UNDER THE PLANS -- SURRENDER
AND CANCELLATION OF LFC SENIOR CONVERTIBLE NOTES AND LMUSA SENIOR NOTES."
B. VOTING ON THE JOINT PLAN
As a creditor of one or more of the Joint Debtors, your vote on the
Joint Plan is most important. In order for the Joint Plan to be accepted and
thereafter confirmed by the Bankruptcy Court without resort to the "cram-down"
provisions of the Code, votes representing at least two-thirds in amount and
more than one-half in number of Claims allowed for voting purposes of each
impaired Class of Claims that are voted must be cast for the acceptance of the
Joint Plan. Any ballot that is signed but not voted for acceptance or
rejection will be treated as if voted for acceptance. The Joint Debtors are
soliciting acceptances from members of the following Classes of Claims: LFC
Classes 1, 2, 3 and 4, LIS Classes 1, 2 and 3 and LAS Classes 1, 2 and 3. The
holders of LFC Class 5 Claims, LIS Class 4 Claims, and LAS Class 4 Claims, all
of which are Debtors or subsidiaries of Debtors (including LMUSA and its
subsidiaries), have agreed to accept the treatment provided in the Joint Plan
and accordingly their votes are not being solicited. Similarly, LFC is the
only holder of LIS Class 5 Interests and because LFC has proposed and approved
this Joint Plan its vote is not being solicited. The holders of LFC Class 6
Interests receive no distribution under the Joint Plan and are deemed to have
rejected such Plan. For a more complete description of the implementation of
the "cram-down" provisions of the Code pursuant to the Plans, see "Voting on
and Confirmation of the Plans -- Confirmation Without Acceptance by All
Impaired Classes."
3
<PAGE> 10
II. SUMMARY OF CHAPTER 11 PLANS
A. REORGANIZED LFC AND REORGANIZED LMUSA
The Joint Plan contemplates the emergence from Chapter 11 of
Reorganized LFC with its primary focus in the management of an assisted care
facility. For more detailed information on Reorganized LFC, see "General
Information Relating to Reorganized LFC -- Business of Reorganized LFC."
The LMUSA Plan contemplates the emergence from Chapter 11 of
Reorganized LMUSA with its primary focus in real estate development. Its
insurance operations are being held for disposition. For more detailed
information on Reorganized LMUSA, see "General Information Relating to
Reorganized LMUSA -- Business of Reorganized LMUSA."
B. SUMMARY OF DISTRIBUTIONS UNDER THE PLANS
A summary description of each Class of Claims or Interests, the
estimated amount of Allowed Claims or Allowed Interests in each Class and a
summary of the treatment of such Claims and Interests under each of the Plans is
set forth below. The estimated distributions (or ranges) set forth in this
summary are approximate and are based on the estimated Allowed amounts of Claims
set forth in the summary and the range of possible Allowed amounts of certain
Claims described in the following paragraphs. The percentages of Common Stock
of Reorganized LFC ("New LFC Common Stock") and of Reorganized LMUSA ("New LMUSA
Common Stock") to be distributed to each such Class of Claims have been rounded
to one decimal place and may not total 100% due to such rounding. As is
discussed in more detail under "Chapter 11 Plans -- Treatment of Claims and
Interests," if the actual Allowed amounts of Claims in any Class are different
from the estimated amounts, the amounts of actual distributions under the
relevant Plan to holders of Allowed Claims will differ from the estimated
amounts of distributions set forth herein. The Debtors consider it extremely
unlikely that the Allowed amounts of LFC Class 1, 3 and 4 Claims, LIS Class 1
and 3 Claims, LAS Class 1 and 3 Claims and LMUSA Class 1, 3 and 4 Claims will
differ materially from the estimates set forth herein.
As set forth under "Intercompany Claims" below, the amounts of LFC
Class 5 Claims, LIS Class 4 Claims, LAS Class 4 Claims and LMUSA Class 5
Claims, all of which are Intercompany Claims, are subject to dispute. The
resolution of such Claims may have a material effect on the recoveries of the
holders of LFC Class 3 Claims and LMUSA Class 3 Claims, although the Debtors
believe it is highly unlikely that the resolution of such Claims will result in
the allowance of Claims against LFC in excess of $32.1 million, against LIS in
excess of $10.3 million or against LMUSA in excess of $110 million. It is not
clear to what extent, if any, any such Claim would be required to be settled by
payment in cash or property equal to 100% of such Claim. The ranges of
potential distributions were estimated based on the foregoing expectations
regarding maximum amounts (and on the unlikely assumption that all such Claims
would be required to be settled at 100% of their Allowed amounts), but there
can be no assurance that such expectations will prove to be correct.
In addition, until there is at least a partial resolution of the
Intercompany Claims or the creation of an appropriate reserve or distribution
holdback, there can be no distribution to holders of LFC Class 3 Claims, LIS
Class 3 Claims, LAS Class 3 Claims or LMUSA Class 3 Claims. See "Chapter 11
Plans -- Conditions Precedent."
Each Plan contains the following conditions precedent to Confirmation:
(a) Bankruptcy Court approval of all relevant agreements, trustees, agents and
mediators and authorization of the Debtors, 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, has provided the new names of
the relevant Reorganized Debtor 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 ("SEC"), rulings from the
Internal Revenue Service (the "IRS") 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 (the "MSP") are held will have
turned over or been ordered to turn over to LFC the assets held in the "rabbi
trust." There can be no assurance that these conditions to Confirmation 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
4
<PAGE> 11
(b) above. IT IS 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 "CHAPTER 11 PLANS -- CONDITIONS
PRECEDENT -- CONDITIONS TO DISTRIBUTION"), WHICH RELATE TO CERTAIN INTERCOMPANY
CLAIMS. THERE CAN BE NO ASSURANCE AS TO WHEN SUCH CONDITIONS WILL BE SATISFIED.
5
<PAGE> 12
1. SUMMARY OF DISTRIBUTIONS UNDER THE JOINT PLAN
<TABLE>
<CAPTION>
Class Description and Estimate of Claims and Interests Description of Distributions Under the Joint Plan
- ------------------------------------------------------ -------------------------------------------------
<S> <C>
ADMINISTRATIVE CLAIMS:
o LFC (approximately $3.2 million) Payment in full in cash: (a) at the option of the relevant Joint
Debtor (before the Effective Date) or the relevant Reorganized
o LIS (approximately $0) Debtor (on or after the Effective Date) (i) in the ordinary
course of business as such Claim matures or (ii) on the date (the
o LAS (approximately $0) "Distribution Date") that is the later of (A) the Effective Date
and (B) the date on which such Claim becomes an Allowed
Claim and all other conditions to initial distribution have been
satisfied, unless the holder of such Claim agrees or has agreed
to less favorable treatment of such Claim; or (b) on such other
date as the Bankruptcy Court may order.
PRIORITY TAX CLAIMS:
o LFC (approximately $79,000) Payment in full in cash on the Distribution Date for such
Claim, unless the holder agrees to less favorable treatment of
o LIS (approximately $0) such Claim; provided, however, that the relevant Joint Debtor,
upon the provision of notice, may elect to have any Allowed
o LAS (approximately $0) Priority Tax Claim paid in deferred cash payments over a
period not to exceed six years after the date of assessment of
such Priority Tax Claim, of a value, as of the Effective Date,
equal to the amount of such Allowed Priority Tax Claim. The
relevant Reorganized Debtor will have the right to prepay any
Allowed Priority Tax Claim, in whole or in part at any time
without penalty. The relevant Joint Debtor and relevant
Reorganized Debtor for the payment of Allowed Priority Tax
Claims against LAS will be LFC and Reorganized LFC.
PRIORITY NON-TAX CLAIMS:
o LFC Class A (approximately $0) Payment in full in cash on the Distribution Date for such Claim
or, at the option of the Reorganized Debtor, in the ordinary
o LIS Class A (approximately $0) course of business as such Claim matures, unless the holder
agrees to less favorable treatment of such Claim. The relevant
o LAS Class A (approximately $0) Reorganized Debtor for the payment of Allowed Priority Non-
Tax Claims against LAS will be Reorganized LFC.
</TABLE>
6
<PAGE> 13
<TABLE>
<CAPTION>
Class Description and Estimate of Claims and Interests Description of Distributions Under the Joint Plan
- ------------------------------------------------------ -------------------------------------------------
<S> <C>
SECURED CLAIMS:
o LFC Class 1: Secured Claims Distribution of one of the following: (a) the property of LFC in
(approximately $0) which such holder has a valid, perfected security interest; (b)
a promissory note executed by Reorganized LFC providing for
deferred cash payments satisfying the requirements of section
1129(b)(2)(A)(i)(II) of the Code secured by a lien on assets of
Reorganized LFC satisfying the requirements of section
1129(b)(2)(A)(i)(I) of the Code; or (c) cash in an amount equal
to such Allowed LFC Class 1 Claim.
o LIS Class 1: Secured Claims The property of LIS in which such holder has a valid,
(approximately $0) perfected security interest.
o LAS Class 1: Secured Claims The property of LAS in which such holder has a valid,
(approximately $0) perfected security interest.
D&O CLAIMS:
o LFC Class 2: Unsecured Claims - D & O No distribution from the Joint Debtors in respect of such
Claims; rather holder will have recourse to the insurance
o LIS Class 2: Unsecured Claims - D & O policies maintained by the Debtors for their benefit to the extent
such policies cover their Claims.
o LAS Class 2: Unsecured Claims - D & O
GENERAL UNSECURED CLAIMS:
o LFC Class 3: Unsecured Claims other than Pro rata share on the Effective Date of (a) 1,000,000 shares of
in LFC Classes 2, 4 or 5 New LFC Common Stock and (b) all cash of LFC, after any
approximately $155.7 million) payment by LFC into (i) the Intercompany Claims Reserve, if
any, (ii) appropriate reserves for Administrative Claims,
Priority Claims, Secured Claims and Convenience Unsecured
Claims, (iii) the LFC Litigation Trust and (iv) a reserve for
working capital ($3 million or another specified amount). After
the Effective Date, each holder of an Allowed LFC Class 3
Claim will be entitled to receive such holder's pro rata share of
all subsequently received cash proceeds from the disposition of,
or income on, Non-Reorganization Assets of LFC or
Reorganized LFC, and all cash subsequently distributed to
Reorganized LFC from the Intercompany Claims Reserve, if
any, or the LFC Litigation Trust.
o LIS Class 3: Unsecured Claims other than Pro rata share of cash in the amount of funds available in LIS
in LIS Class 2 or 4 after the payment by LIS into appropriate reserves for
(approximately $3.1 million) Administrative Claims, Priority Claims and Secured Claims.
o LAS Class 3: Unsecured Claims other than Pro rata share of cash in the amount of the funds available in
in LAS Class 2 or 4 LAS after the payment by LAS into appropriate reserves for
(approximately $162,000) Administrative Claims, Priority Claims and Secured Claims.
</TABLE>
7
<PAGE> 14
<TABLE>
<CAPTION>
Class Description and Estimate of Claims and Interests Description of Distributions Under the Joint Plan
- ------------------------------------------------------ -------------------------------------------------
<S> <C>
CONVENIENCE UNSECURED CLAIMS:
o LFC Class 4: Unsecured Claims (other than under 25% of the Allowed amount of such Claim in cash on the
or evidenced by the LFC Senior Distribution Date for such Claim. If the holders of LFC Class
Convertible Notes) of not greater 4 Claims are found by the Bankruptcy Court to have rejected
than $500 or with the consent of the Joint Plan, then the LFC Class 4 Claims will be reclassified
the holder (approximately $1,000) as LFC Class 3 Claims.
INTERCOMPANY CLAIMS:
o LFC Class 5: Unsecured Claims - Intercompy To the extent that any such Claim may be Allowed as an
Claims (See "Intercompany Claims") unsecured pre-petition Claim, the holder will receive
distributions of comparable value to those received in respect
o LIS Class 4: Unsecured Claims - Intercomy of LFC Class 3 Claims, LIS Class 3 Claims or LAS Class 3
Claims (See "Intercompany Claims") Claims, as the case may be; to the extent such Claim may be
Allowed as an Administrative Claim or Priority Non-Tax
o LAS Class 4: Unsecured Claims - Intercomy Claim, the holder will receive distributions of, or of a value
Claims (See "Intercompany Claims") equal)to, the Allowed amount of such Claim.
EQUITY INTERESTS:
o LFC Class 6: Common Stock Interests Cancelled; no distributions under the Joint Plan will be made.
o LIS Class 5: Common Stock Interests LFC, as the holder of all LIS Class 5 Interests will retain its
Interest, but its legal rights will be affected by adoption of LIS'
Amended and Restated Certificate of Incorporation.
o LAS Class 5: Equity Interests LAS was in liquidation under state law before the Petition Date,
will be liquidated for the benefit of its creditors, and after (i)
the payment into appropriate reserves for Administrative
Claims and Priority Claims and (ii) the distribution of any
entitlements for Secured Claims, Unsecured Claims and
Intercompany Claims, any assets remaining will be transferred
to LFC, as holder of all LAS Class 5 Interests, as a liquidating
distribution.
</TABLE>
8
<PAGE> 15
2. SUMMARY OF DISTRIBUTIONS UNDER LMUSA PLAN
<TABLE>
<CAPTION>
Class Description and Estimate of Claims and Interests Description of Distributions Under the LMUSA Plan
- ------------------------------------------------------ -------------------------------------------------
<S> <C>
ADMINISTRATIVE CLAIMS:
o LMUSA (approximately $12.4 million) Payment in full in cash: (a) at the option of LMUSA (before the
Effective Date) or Reorganized LMUSA (on or after the
Effective Date) (i) in the ordinary course of business as such
Claim matures or (ii) on the Distribution Date for such Claim,
unless the holder of such Claim agrees or has agreed to less
favorable treatment of such Claim; or (b) on such other date as
the Bankruptcy Court may order.
PRIORITY TAX CLAIMS:
o LMUSA (approximately $540,000) Payment in full in cash on the Distribution Date for such
Claim, unless the holder agrees to less favorable treatment of
such Claim; provided, however, that LMUSA upon the
provision of notice, may elect to have any Allowed Priority Tax
Claim paid in deferred cash payments over a period not to
exceed six years after the date of assessment of such Priority
Tax Claim, of a value, as of the Effective Date, equal to the
amount of such Allowed Priority Tax Claim. Reorganized
LMUSA will have the right to prepay any Allowed Priority Tax
Claim, in whole or in part at any time without penalty.
PRIORITY NON-TAX CLAIMS:
o LMUSA Class A (approximately $15,000) Payment in full in cash on the Distribution Date for such Claim
or, at the option of LMUSA, in the ordinary course of business
as such Claim matures, unless such holder agrees to less
favorable treatment of such Claim.
SECURED CLAIMS:
o LMUSA Class 1A: Secured Claims of The Provided that the closing of the sale of the properties known
Travelers Insurance as the Lomas Campus occurs in accordance with the terms of
Company ("Travelers") the Travelers Stipulation and Order, Travelers is entitled to
(at least $11.45 million) receive from the Debtor at such closing (A) approximately
$11,450,000 plus (B) 50% of the excess, if any, of the
amount actually paid at such closing over and above
$23,000,000 (which excess shall be net of up to $250,000
payable, if applicable, to Benton Properties, Inc. ("Benton
Properties") as a due diligence reimbursement fee). If the
closing of the sale of the Lomas Campus does not occur in
accordance with the provisions of the Travelers Stipulation
and Order, Travelers shall be entitled to receive on the later
to occur of the Effective Date and the date of the delivery of
the Travelers Termination Notice, the sum of $11.5 million.
If payment does not occur by January 31, 1997, the $11.5
million will bear interest until paid at 6.5% per annum.
</TABLE>
9
<PAGE> 16
<TABLE>
<CAPTION>
Class Description and Estimate of Claims and Interests Description of Distributions Under the Joint Plan
- ------------------------------------------------------ -------------------------------------------------
<S> <C>
o LMUSA Class 1B : Other Secured Claims Distribution of one of the following: (a) the property of
(approximately $0) LMUSA in which the holder has a valid, perfected security
interest; (b) a promissory note executed by Reorganized
LMUSA providing for deferred cash payments satisfying the
requirements of section 1129(b)(2)(A)(i)(II) of the Code secured
by a lien on assets of Reorganized LMUSA satisfying the
requirements of section 1129(b)(2)(A)(i)(I) of the Code; or (c)
cash in an amount equal to such Allowed LMUSA Class 1
Claim.
D&O CLAIMS:
o LMUSA Class 2: Unsecured Claims - D & O No distribution from LMUSA in respect of such Claims; rather
Claims holder will have recourse to the insurance policies maintained
by the Debtors for their benefit to the extent such policies cover
their Claims.
GENERAL UNSECURED CLAIMS:
o LMUSA Class 3: Unsecured Claims other Pro rata share on the Effective Date of (a) 3,000,000 shares of
than in LMUSA Class 4 New LMUSA Common Stock and (b) all cash of LMUSA,
or 5 (approximately $399.9 after any payment by LMUSA into (i) the Intercompany Claims
million) Reserve, if any, (ii) appropriate reserves for Administrative
Claims, Priority Claims, Secured Claims and Convenience
Unsecured Claims, (iii) the LMUSA Litigation Trust and (iv)
a reserve for working capital ($5 million or another specified
amount). After the Effective Date, each holder of an Allowed
LMUSA Class 3 Claim will be entitled to receive such holder's
Pro rata share of all subsequently received cash proceeds from
the disposition of, or income on, Non-Reorganization Assets of
LMUSA or Reorganized LMUSA, and all cash subsequently
distributed to Reorganized LMUSA from the Intercompany
Claims Reserve, if any, or the LMUSA Litigation Trust.
CONVENIENCE UNSECURED CLAIMS:
o LMUSA Class 4: Unsecured Claims (othe than 67.4% of the Allowed amount of such Claim in cash on the
under or evidenced by the Distribution Date for such Claim. If the holders of LMUSA
LMUSA Senior Notes) of less Class 4 Claims are found by the Bankruptcy Court to have
than $2,000 or with the rejected the LMUSA Plan, then the LMUSA Class 4 Claims
consent of the holder will be reclassified as LMUSA Class 3 Claims.
(approximately $66,000)
INTERCOMPANY CLAIMS:
o LMUSA Class 5: Unsecured Claims - To the extent that any such Claim may be Allowed as an
Intercompany Claims (see unsecured pre-petition Claim, the holder will receive
"Intercompany Claims") distributions of comparable value to those received in respect
of LMUSA Class 3 Claims; to the extent such Claim may be
Allowed as an Administrative Claim or Priority Non-Tax
Claim, the holder will receive distributions of, or of a value
equal to, the Allowed amount of such Claim.
EQUITY INTERESTS:
o LMUSA Class 6: Common Stock Interests Cancelled; no distributions under the LMUSA Plan will be
made.
</TABLE>
10
<PAGE> 17
For purposes of calculating distributions, it has been assumed that 80%
of the Debtors' Administrative Claims will be borne by LMUSA and 20% by LFC.
The final allocation will depend on (i) the amounts of Allowed Administrative
Claims ultimately incurred in connection with the administration of each Estate
and (ii) where an expense was incurred in the administration of more than one
of the Debtors' Estates, the allocation of such expenses as among those
Estates. The Plans provide that such allocation will be (i) based on
percentages recommended by KPMG Peat Marwick LLP ("KPMG"), or (ii) if LFC and
LMUSA or their respective creditors' committees do not agree with KPMG's
recommendation, determined by agreement, or (iii) lacking such agreement,
determined by the Bankruptcy Court.
For purposes of analyzing the value of the securities to be received
by each Allowed LFC Class 3 Claim, LFC has used an aggregate enterprise value,
after payment of Administrative Claims but before any other distributions, of
approximately $19.5 million (excluding any recovery in respect of Intercompany
Claims or on account of claims that may be brought against third parties). The
aggregate enterprise value is not intended to be dispositive of aggregate
market value of the securities to be distributed, particularly the initial
market value of the equity securities. The market value of the securities will
also depend on the financial performance following their distribution pursuant
to the Joint Plan and other factors. See "Certain Considerations." On an
enterprise value basis, the Debtors estimate that general unsecured creditors
(LFC Class 3 Claims) would receive a 9.9% to 15.1% recovery if there were no
Allowed Intercompany Claims, or a recovery of zero to 85.7% depending on the
resolution of the Intercompany Claims (assuming the Claims aggregate $155.7
million).
Distributions to holders of LIS Class 3 Claims and, as a result, to LFC
as holder of the LIS Class 5 Interests will depend on two principal variables:
the value of the $8 million note of RIS payable to LIS and the extent to which
LIS has and realizes on a claim against LMUSA for the amounts payable to the
holders of the LIS Class 3 Claims (see "Intercompany Claims -- Intercompany
Expense Allocations, Pricing and Possible Subsidies"). RIS is of questionable
solvency and the guarantor of the note is expected to deny liability.
Depending on how these variables are resolved, the distribution in respect of
LIS Class 3 Claims could vary between zero and 100% and the distribution to LFC
in respect of LIS Class 5 Interests could vary between zero and $8.0 million.
For purposes of analyzing the value of the securities to be received by
each Allowed LMUSA Class 3 Claim, LMUSA has used an aggregate enterprise value
after payment of Administrative Claims but before any other distributions of
approximately $284.5 million (excluding any recovery in respect of Intercompany
Claims or on account of claims that may be brought against third parties). The
aggregate enterprise value is not intended to be dispositive of aggregate
market value of the securities to be distributed, particularly the initial
market value of the equity securities. The market value of the securities will
also depend on the financial performance following their distribution pursuant
to the LMUSA Plan and other factors. See "Certain Considerations." On an
enterprise value basis, the Debtors estimate that general unsecured creditors
(LMUSA Class 3 Claims) would receive a 67.4% recovery if there were no allowed
Intercompany Claims, or a recovery of 39.9% to 73.3% depending on the
resolution of the Intercompany Claims (assuming the Claims aggregate $399.9
million).
The recovery for LFC Class 6 Interests and LMUSA Class 6 Interests will
be zero because such interests will be cancelled under the appropriate Plan.
11
<PAGE> 18
III. BACKGROUND AND GENERAL INFORMATION
LFC was incorporated in Delaware in 1960. The address of its principal
executive office is 1600 Viceroy Drive, Dallas, Texas 75235. Through LFC's
wholly-owned subsidiary, LMUSA, a Connecticut corporation, Lomas was one of the
nation's largest participants in the mortgage banking industry. Lomas provided
mortgage servicing and mortgage-related financial and administrative services
from 1894 until the two sales of its mortgage servicing assets to First
Nationwide Mortgage Corporation ("First Nationwide") in October 1995 and
January 1996.
A. 1989 CHAPTER 11 FILINGS
On September 24, 1989, LFC and several affiliates filed petitions for
reorganization under Chapter 11 of the Code. LMUSA did not file a bankruptcy
petition in those cases. LFC's plan of reorganization was confirmed on
December 30, 1991 and the plan was consummated on January 31, 1992. After its
emergence from Chapter 11, LFC was primarily a holding company and LMUSA was
its principal operating subsidiary.
B. DESCRIPTION OF PRINCIPAL BUSINESS OF LOMAS HISTORICALLY -- MORTGAGE
SERVICING
Historically, the principal line of business of LMUSA has been the
servicing on behalf of third-party investors of single-family residential
mortgages secured by properties located in all 50 states and the District of
Columbia. As mortgage servicer, LMUSA was paid a servicing fee out of each
mortgage payment made by a homeowner and received certain other ancillary
benefits. As of June 30, 1995, LMUSA's total combined mortgage servicing
portfolio aggregated $41.2 billion in unpaid principal amount and included
680,552 loans.
LMUSA's combined mortgage servicing portfolio consisted of three
categories: (a) "primary servicing" where LMUSA owned the servicing rights;
(b) "subservicing" where LMUSA provided mortgage servicing on a subcontract
basis for other parties who owned the servicing rights; and (c) "master
servicing" where LMUSA provided administrative services for issuers of
mortgage-backed securities and monitored the work of primary servicers.
Both primary servicing and subservicing involve collecting monthly
mortgage payments, maintaining escrow accounts for the payment of property
taxes, hazard insurance and mortgage insurance premiums on behalf of
homeowners, remitting payments of principal and interest promptly to investors
in the underlying mortgages, reporting to those investors on financial
transactions related to such mortgages and generally administering the mortgage
loans. The servicing staff also must cause properties to be inspected
periodically, determine the adequacy of insurance coverage on each property,
monitor delinquent accounts for payment, and, in cases of extreme delinquency,
institute and complete either appropriate forbearance arrangements or
foreclosure proceedings on behalf of investors.
Because mortgages have a limited term of years and can be prepaid or
refinanced, all mortgage servicing portfolios, including that of LMUSA, would
"run off" over time. Due to such constant run-off, the size of its mortgage
servicing portfolios and the related servicing fee income would have steadily
declined unless servicing rights for new mortgages were acquired or "produced"
(as described below) at the same or a higher rate.
After June 1989, LMUSA did not "originate" mortgages as depositary
institutions and many other mortgage banks do. Rather, to replenish its
mortgage servicing portfolios, LMUSA acquired servicing rights by both buying
servicing rights "in bulk" from other institutions and "producing" servicing
rights. The latter involved buying "whole" mortgages from originators and
then, through the creation and issuance of mortgage-backed securities, selling
the beneficial interest in the mortgages to investors while retaining the right
to service the mortgages on the investors' behalf.
For Lomas, buying servicing rights in bulk was generally not as
profitable as "producing" servicing rights by creating mortgage-backed
securities. Therefore, in recent years, LMUSA replenished its mortgage
servicing portfolio, in large measure, by creating and issuing mortgage-backed
securities and retaining the servicing rights on the underlying mortgages. Of
the $33.1 billion primary servicing and subservicing portfolio as of June 30,
1995, 77% comprised mortgage-backed securities. LMUSA, as issuer, obtained a
commitment from a financial institution to purchase a mortgage-backed security
from LMUSA with specified terms, including the interest rate paid, the types of
mortgages included in the "pool" relating to that security and the type of
agency guaranty (or lack thereof, in some instances) obtained with respect to
those mortgages. LMUSA acquired whole loans (by buying them from originators)
that satisfied the
12
<PAGE> 19
characteristics set forth in the commitment. Then, with respect to pools
requiring some type of agency guaranty, LMUSA entered into a "guaranty
agreement" with respect to the "pool" of mortgages it had assembled with one of
the three agencies that operate mortgage-backed securities programs under
federal law -- Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") (collectively, the "Agencies"). GNMA is a federal
governmental agency, while FNMA and FHLMC are formed pursuant to, and enjoy
certain privileges and have certain responsibilities under, federal
legislation. The securities issued for each pool of mortgages were then sold
to investors in the marketplace through the financial institution that made the
initial commitment. Investors received monthly payments of principal and
interest as set forth in the securities.
Under the agreements between the Agencies and LMUSA, LMUSA became the
servicer of the mortgages, collecting the monthly principal, interest and
escrow payments, and remitting them in accordance with the requirements of the
program. If a mortgagor fails to make a scheduled mortgage payment, the
servicer typically is required to advance funds to cover the shortfall so that
the investor is paid on time. The guaranteeing Agency steps in to make those
payments (or, in some cases, a portion thereof) only if LMUSA defaults.
Because the confidence of securities brokers and the guaranteeing Agencies is
essential to the mortgage-backed securities business, a seller/servicer cannot
continue to issue mortgage-backed securities if its financial health is
uncertain. The Agencies will shun an ailing seller/servicer out of concern
that the seller/servicer will be unable to meet its payment obligations to
investors, increasing the risk that the Agencies' guaranties will be called
upon. Brokers will refuse to enter into commitments with an ailing
seller/servicer to avoid the risk that the seller/servicer will be unable to
deliver the promised mortgage- backed security, thereby forcing the broker to
seek a new commitment at a cost that may be less favorable.
There is a well-developed market for servicing, the pricing of which is
dependent on the characteristics of the underlying mortgage and the Agency, if
any, guaranteeing such underlying mortgage (i.e., GNMA, FNMA and FHLMC).
Starting in late 1994, due to its financial decline, LMUSA began to lose the
confidence of the guaranteeing Agencies. As discussed more fully below, LMUSA
believed that it faced the very real prospect of regulatory confiscation of its
servicing assets.
C. EVENTS LEADING TO THE 1995 CHAPTER 11 FILING
1. The Impact of Declining Interest Rates on Run-Off Rates
During the period from October 1991 through August 1994, interest rates
plummeted to levels not seen in nearly 30 years. As homeowners rushed to take
advantage of this economic environment, LMUSA's run-off rate increased from an
historical annual rate of approximately 14% to an annual rate of 29%, with
monthly annualized rates as high as 49% in December 1993. Because LMUSA
acquired new mortgage servicing rights primarily by purchasing rather than
originating new mortgages, it was at a severe financial disadvantage compared
to other mortgage servicing companies which actually originated mortgage loans
and then retained the servicing rights to those mortgages. As a purchaser
rather than an originator of new mortgages, LMUSA was required to pay a
front-loaded premium for each new loan it bought. Thus, as interest rates
continued to fall, LMUSA was forced to expend increasing amounts of capital
just to keep its mortgage portfolios and its related fee income at pre-existing
levels. During the period from October 1991 through August 1994, when interest
rates finally stabilized, LMUSA's primary mortgage servicing portfolio
experienced run-off of approximately $26 billion, which LMUSA managed
substantially to replenish over that time. There were two additional
consequences. First, because servicing rights were booked as assets with
average lives of eight to twelve years, the accelerated run-off rate required
substantial write-downs of LMUSA's servicing rights assets, resulting in
serious erosion of its net worth. Second, as higher yield mortgages were
replaced with lower yield mortgages the amount of "float" managed by LMUSA as
escrow balances actually decreased from $1.1 billion at fiscal year-end 1993 to
$641 million at fiscal year-end 1995, further reducing LMUSA's interest income.
2. Loss of Various Credit Facilities
Due to its worsening financial condition, LMUSA's ability to borrow was
hindered, further hastening its financial decline. Mortgage servicing
companies are particularly dependent upon working capital facilities, most
notably because mortgage-backed securities require mortgage servicing companies
to make principal and interest ("P&I") payments to
13
<PAGE> 20
security holders even if they have not yet been collected from homeowners (and
to make up other shortfalls). Historically, LMUSA maintained a $30 million P&I
line of credit with a group of banks (including Bank One, Texas N.A. ("Bank
One") and Texas Commerce Bank National Association, Houston ("TCB")) that LMUSA
drew down each month in order to make scheduled P&I payments to investors and
repaid the line shortly thereafter as homeowners remitted payments to LMUSA.
Because LMUSA failed, as of June 30, 1995, to meet certain ratios contained in
its bank credit lines, LMUSA was forced to repay its P&I line in July 1995.
LMUSA also failed to meet certain ratios contained in its general working
capital facility of $25 million with TCB. Consequently, this working capital
facility was terminated by TCB on June 30, 1995.
In addition, LMUSA maintained "warehouse" financing lines at Bank One
and DLJ Mortgage Capital, Inc. ("DLJ"), which had allowed LMUSA to purchase
and warehouse between $300 million and $400 million a month in first mortgage
loans. Beginning in May 1995, these lines started to be adversely affected by
LMUSA's operating results. On May 31, 1995, as a result of LMUSA's
deteriorating financial condition, 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. The
facility's termination date was brought forward from November 30, 1995 to
September 30, 1995. In addition, the Bank One warehouse agreement was further
amended to increase borrowing rates and commitment fees, eliminate certain
types of whole loans and be cross-collateralized with the $30 million P&I line
of credit.
By late June 1995, LMUSA had successfully renegotiated its DLJ
warehouse facility. Due to the Bank One warehouse facility default, LMUSA was
relying solely on DLJ for incremental borrowings. 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 under its warehouse facility 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 from proceeds
received from the October 2, 1995 sale to First Nationwide (discussed below).
In mid-September 1995, First Nationwide agreed to provide a warehouse
facility (the "First Nationwide Warehouse Facility") to LMUSA. This facility
enabled LMUSA to continue funding committed loan purchases despite the
unavailability of the DLJ warehouse facility. The First Nationwide Warehouse
Facility was repaid on October 2, 1995 in connection with LMUSA's sale of
assets to First Nationwide on the same date. See "Background and General
Information -- Asset Sales Prior to the Chapter 11 Filing -- The GNMA Servicing
Sale Agreement."
3. The Resulting Sell-off of Servicing Rights
Due to a combination of (a) the increased run-off rate, (b) LMUSA being
a servicer and not an originator, (c) the resulting decline in net worth and
loss of credit facilities and (d) the $340 million term debt service burden,
LMUSA encountered substantial liquidity problems and was forced to sell
servicing rights. In fiscal 1994 and 1995, LMUSA sold servicing rights
including: the sale of servicing rights for $2.4 billion unpaid principal
amount of mortgages to CDC Servicing Inc. for $16.2 million; the sale of
servicing rights for $1.1 billion unpaid principal amount of mortgages to
Capstead Mortgage Corporation ("Capstead") for $14.3 million; the sale of
servicing rights for $694 million unpaid principal amount of mortgages to Lomas
Mortgage Partnership ("LMP") for $8.4 million; and sales of servicing rights
for a total of approximately $591 million unpaid principal amount of mortgages
to Associates National Mortgage Corp., Coastal Banc Savings Association,
Douglas County Bank & Trust Company, Franklin Mortgage Capital Corp., Jupiter
Mortgage Corp. and Pulaski Mortgage Company, among other buyers, in exchange
for a total of approximately $7.7 million.
Furthermore, LMUSA's net worth declined due to multiple asset
write-downs and operating losses while during the same period LMUSA's term debt
obligations remained constant. Moreover, as its financial condition continued
to worsen, not only did LMUSA sell assets in its servicing portfolio (as
described above) to meet LMUSA's debt servicing obligations, but it also was
forced to curtail its purchase of mortgage servicing rights to replenish the
portfolio.
14
<PAGE> 21
4. Interest Rate Swaps
Between July 1992 and November 1993, as a hedge against its long-term
debt interest expense, LMUSA entered into a series of interest rate swaps
whereby it exchanged earnings on thirty-day A1/P1 commercial paper in return
for five-year fixed rates. The swap agreements into which LMUSA entered
contained certain default and termination provisions whereby the counterparty,
Lehman Brothers ("Lehman"), could terminate the agreements prior to their
maturity, including a provision which permitted the counterparty to terminate
if, in its reasonable business judgment, there had been a material adverse
change in the business, assets, operations or financial condition of LMUSA.
The terms of the swaps also provided that Lehman could, under certain
circumstances, demand collateral from the Company to protect against
mark-to-market exposure attributable to the agreements. During this initial
period, the program was profitable with LMUSA booking profits, and receiving
cash, as a result of the early termination of various swap transactions.
Beginning in November of 1993, interest rates increased, creating a
negative mark-to-market for LMUSA in the then outstanding $800 million of
swaps, which were entered into in October and early November of 1993. The
worsening financial condition of LMUSA, including the threat of regulatory
confiscation, made the invocation of a material adverse change by Lehman a
persistent problem for LMUSA. However, Lehman chose not to exercise its rights
under the termination clauses of the swap agreement as LMUSA's financial
condition deteriorated. Instead, at Lehman's request, LMUSA pledged servicing
rights related to approximately $6.7 billion of mortgage loans as collateral.
Use of its servicing contracts as collateral for the swaps reduced LMUSA's
financial flexibility.
In June 1995, after negotiating with Lehman, LMUSA terminated $160
million notional amount of the swaps. LMUSA paid Lehman $5.0 million cash and
recorded a loss of approximately $2.2 million. In August 1995, after
negotiating with Lehman, LMUSA terminated $155 million notional amount of its
outstanding interest rate swaps. LMUSA paid Lehman $6.0 million in cash and
incurred a loss of $4.4 million of which $1.6 million was recognized
immediately and the remaining loss of $2.8 million was deferred. LMUSA
terminated the remaining $485 million notional amount of swaps on October 2,
1995 at a cost paid to Lehman of $18.8 million. LMUSA recognized a $5.2
million loss resulting from the termination at September 30, 1995. As a result
of the Chapter 11 filing on October 10, 1995, the net deferred debits of $9.1
million were written off in October 1995.
Despite the cost of termination of the swaps, the program, viewed in
its entirety, was profitable.
5. Lomas Information Systems Used Scarce Financial Resources
Another significant cash and credibility problem for Lomas until its
sale in December 1994 was the computer service bureau business managed by the
subsidiary Debtor LIS. LIS developed state-of-the-art computer software and a
service bureau for the mortgage banking industry including software for
mortgage loan servicing, loan production, secondary marketing and master
servicing. Because of LFC's poor financial condition and the concomitant
possibility of its failure, LIS had been unsuccessful in marketing the systems.
Before Lomas ultimately divested LIS' assets, principally for contingent
consideration, Lomas had contributed approximately $63 million in cash to LIS
after its emergence from Chapter 11 in 1992. During this period, LIS's losses
aggregated approximately $104 million. In addition, the development of the LIS
software took far longer than anticipated due to numerous delays and cost
substantially more than anticipated at a time when Lomas had a shortage of
funds to reinvest in its core businesses. LIS was originally a division of
LMUSA but the assets comprising the computer software and service bureau were
spun off to a separate LFC subsidiary before LFC's 1989-92 Chapter 11
proceedings. LMUSA was LIS's biggest customer.
D. ASSET SALES PRIOR TO CHAPTER 11 FILING
Early in 1994, the Company began considering available alternative
strategic options.
1. Efforts in Calendar 1994 to Sell the Company
In January 1994, the LFC Board of Directors met with and decided to
retain Salomon Brothers, Inc. ("Salomon") to sell the entire Company,
including LMUSA and its other subsidiaries. Shortly thereafter, a major
depositary institution approached Lomas directly to purchase the entire
Company. This unsolicited buyer then performed extensive due diligence, but
opted not to make an offer for the Company.
15
<PAGE> 22
Beginning in March 1994, Salomon contacted over fifty potential
acquirors concerning their possible interest in a transaction with Lomas.
Approximately 25 entities signed confidentiality agreements and received an
offering memorandum that Salomon had prepared. By the end of the Salomon
auction process in mid-May 1994, however, no formal bids had been submitted for
the purchase of the entire Company, although three bidders had expressed an
interest in buying LIS separately. Later that month, Lomas announced that it
would proceed with the marketing of LIS and would continue to evaluate the sale
of the remainder of the Company.
While no participant in the auction process made an offer, one bidder
furnished a tentative proposal, which, after negotiations, it withdrew. In the
fall of 1994, a third party initiated discussions with Lomas concerning the
possibility of a joint venture between the two companies of their mortgage
servicing business. In the course of those discussions, that company conducted
extensive due diligence regarding Lomas. No formal proposal was ever submitted
to Lomas concerning such a transaction.
2. Sale of Debtor LIS Assets
In December 1994, LFC completed the sale of substantially all of LIS'
assets to Residential Information Services, Limited Partnership ("RIS"), an
affiliate of The Prudential Insurance Company of America ("Prudential"). As
consideration for the sale, LIS received (a) $2.5 million in cash, (b) an $8.0
million note due five years after closing and accruing interest at a rate per
annum of 8% payable at maturity (adjustable based on the future financial
performance of RIS) guaranteed by Residential Services Corporation of America
("Residential Services"), a wholly- owned subsidiary of Prudential and the
parent of RIS and (c) a contingent interest equal to 35% of RIS' adjusted
gross revenues in excess of $55 million per year generated during the seven
years ending December 31, 2001. Residential Services did not convert its
mortgage servicing portfolio to the RIS servicing system and RIS has informed
the Debtors that it did not terminate its servicing contract with Computer
Power, Inc. As a result, Lomas recorded a provision of $24.4 million in June
1995 to write off Lomas' carrying value of the contingent interest described
above. During fiscal 1995 and 1994, the Company recorded total losses of $26.4
and $33.5 million, respectively, in connection with the disposal of LIS'
assets.
3. The Efforts of Management Retained in December 1994
In December 1994, the Board of LFC brought in new management. At the
Board's request, new management carried out a comprehensive review of Lomas'
operations, including all of Lomas' assets and liabilities. Based on the
results of this review, new management concluded that:
a. Only two business units at LMUSA were viable (mortgage
servicing and its insurance agency subsidiaries). However,
in order to pay its debt service, LMUSA foresaw the need to
sell portions of its servicing business every six months.
b. Millions of dollars of assets needed to be written down or
charged off and a number of operational problems needed to
be corrected.
c. Two of Lomas' business units, INTELLIFILE, Inc.
("INTELLIFILE") and Lomas Field Services, Inc. ("Lomas
Field Services"), were losing money and had no short-term
prospect of recovery. Due to its deteriorating financial
condition, Lomas was in no position to strengthen
INTELLIFILE or Lomas Field Services, or for that matter to
bolster its marginally profitable master servicing
business. In September 1995, LFC completed the sale of the
stock of INTELLIFILE to Dataplex Corporation ("Dataplex")
for approximately $4.1 million in cash and a $320,500
promissory note, subject to adjustments which reduced the
principal amount of the promissory note to $90,000 (this
amount was received in May 1996). The sale resulted in a
gain of approximately $1.1 million for LFC and a prepaid
expense in LMUSA of $2.3 million reflecting payment for
future image processing and consulting services. This
prepaid expense was subsequently written off due to (i) the
sale of the mortgage servicing business, (ii) the fact that
the contract purports to be non- assignable without
Dataplex's consent (although the Debtors believe it could
be assumed and assigned pursuant to Section 365 of the
Bankruptcy Code), and (iii) the fact that it may not be
possible to find a buyer for this asset. In August 1995,
LMUSA sold certain fixed assets of Lomas Field Services
to First American
16
<PAGE> 23
Real Estate Information Services Inc. for $600,000 in cash.
The Company realized a gain of approximately $144,000.
d. While two major cost reduction programs had been put in
place by prior management, first in January 1994 and then
in June 1994, a further cost reduction program was
required. This was implemented in January 1995 and
resulted in a staff reduction of 450 employees and
elimination of unnecessary expenses.
4. Creditor Restructuring Proposal in Spring 1995
In May 1995, a significant creditor of both LFC and LMUSA furnished
management with a restructuring proposal in respect of LMUSA's $150 million
9.75% Senior Notes due October 1, 1997 (the "LMUSA 1997 Senior Notes").
Purporting to speak on behalf of a group of creditors holding $90 million face
amount of LMUSA 1997 Senior Notes, the creditor proposed a five-year extension
of the maturity and a slight reduction in principal of the LMUSA 1997 Senior
Notes in return for an increase in the interest rate of the LMUSA 1997 Senior
Notes. Management reviewed the proposal and concluded that it could provide
the Debtors with sufficient time to sell the business of LMUSA or to find an
investor willing to infuse new capital. However, upon contacting the creditor,
management was informed that the proposal had been materially modified in a
manner which management concluded made it impracticable. Management therefore
rejected the modified proposal.
5. Renewed Selling Efforts in Spring 1995 Resulting in Potential
Sale to First Nationwide
In the May-July 1995 time period, a comprehensive financial analysis
was prepared for the 1996 fiscal year under the direction of new management.
The analysis concluded that Lomas could not make money with its then current
debt structure, cost of doing business and financial condition. Under these
circumstances, and especially because LMUSA was subject to Agency review of its
financial condition and potential Agency termination of its mortgage servicing
rights, new management and the LFC Board of Directors concluded that it was
necessary to reactivate the efforts to sell Lomas' operating businesses in
order to maximize the value of those businesses and at the same time to
consider possible debt restructuring alternatives in connection with the joint
venture and/or creditor restructuring proposal discussed above. With respect
to the restructuring alternative, management met with four investment banking
firms and invited two of them to present their qualifications and
recommendations for debt restructuring approaches. The LFC Board of Directors
authorized management to negotiate retention arrangements with one of the
firms. However, two potential bidders for the Company approached Salomon, and
the Board determined to pursue the sale rather than the debt restructuring
alternative. In the spring of 1995, Salomon again contacted twelve companies,
eight of which had indicated preliminary interest. From May through July 1995,
several of these potential acquirors conducted due diligence with respect to a
potential purchase of Lomas.
In early July, Lomas received proposals from two bidders, including
First Nationwide's parent, First Nationwide Holdings, Inc. ("First Nationwide
Holdings"). First Nationwide Holdings proposed a transaction, contemplating a
Lomas "prepackaged" bankruptcy, in which, among other things, First Nationwide
Holdings would combine Lomas' mortgage servicing business with First
Nationwide's existing mortgage servicing business. First Nationwide Holdings
proposed to purchase the LMUSA assets for $310 million. The competing proposal
also contemplated a Lomas prepackaged bankruptcy following which LMUSA would
emerge as a stand-alone mortgage servicing company. Lomas and Salomon
concluded that this proposal was worth approximately $65 million less than the
First Nationwide proposal.
On July 18, 1995, the LFC Board of Directors met with Salomon and after
listening to Salomon's assessment of both offers and, taking into account
Lomas' financial condition and its alternatives, determined that Lomas'
management should pursue negotiations toward a definitive agreement with First
Nationwide on the terms proposed. In addition to the higher price, the First
Nationwide bid had several advantages: (a) First Nationwide, unlike the
competing bidder, was a GNMA-approved mortgage servicer; (b) First Nationwide's
proposal had no financing contingency and included a willingness to consider an
interim working capital commitment and (c) First Nationwide had significant
experience in consummating comparable transactions.
17
<PAGE> 24
6. Financial Decline and GNMA Bankruptcy Exception Necessitated
Immediate Sale of GNMA Servicing and Loan Production Business to
First Nationwide
After negotiations commenced, however, Lomas' management became
concerned that the transaction proposed by First Nationwide, which contemplated
a Lomas bankruptcy filing before the transaction was consummated, posed a
significant risk that GNMA would terminate a substantial portion of LMUSA's
mortgage servicing rights immediately upon a Lomas bankruptcy filing.
Approximately 34% of LMUSA's mortgage servicing rights, accounting for
approximately $80 million in value, were subject to confiscation by GNMA.
Lomas was advised that GNMA takes the position that, under its enabling
legislation, GNMA is exempt from the strictures of the automatic stay under
Section 362 of the Code. In prior bankruptcy cases, GNMA had terminated the
GNMA mortgage servicing portfolios of the debtor mortgage companies under the
applicable guaranty agreements. Lomas determined that any risk to LMUSA's GNMA
servicing rights should be avoided in order to maximize the value of LMUSA's
assets.
Lomas management was also growing concerned that, in light of Lomas'
mounting financial difficulties, all of the Agencies, including GNMA, might be
able to declare LMUSA to be insolvent or on the verge of insolvency and to seek
to terminate LMUSA's mortgage servicing rights even without a LMUSA bankruptcy
filing. Such a termination would have been disastrous to Lomas, potentially
resulting in an immediate loss of value of the mortgage servicing portfolio.
Lomas concluded that it should sell its GNMA mortgage servicing portfolio to a
third party acceptable to GNMA as soon as possible. Therefore, Lomas and First
Nationwide began to negotiate for the sale of the GNMA mortgage servicing
rights.
For a number of reasons, Lomas also determined that an immediate sale
of its "production" business -- the gathering system by which it acquired whole
loans to be processed into mortgage-backed securities -- was also essential to
maximizing value. First, and most important, there was the risk that LMUSA
would lose its approvals as an authorized seller/servicer for the Agencies and
thus its ability to sell new mortgage loans into mortgage-backed securities. A
Lomas bankruptcy filing would have resulted in the immediate loss of all the
value of "production" and could have triggered significant LMUSA liabilities
relating to whole loans and commitments for mortgage-backed securities not yet
issued. Second, the production unit was a net user of LMUSA's declining
working capital. Third, the value of "production" was threatened even without
a Lomas bankruptcy filing because financial institutions and contracting
parties were increasingly reluctant to deal with or rely on LMUSA. LMUSA had
experienced increasing difficulty in obtaining commitments from financial
institutions to purchase its mortgage-backed securities. As early as May 1995,
Smith Barney Inc. notified LMUSA that it would no longer enter into such
commitments with LMUSA. Several other institutions followed suit over the next
few months. LMUSA was also concerned that it might not be able to continue to
acquire whole loans in sufficient volume to meet its mortgage-backed securities
commitments. Sellers of such loans had begun to refuse to sell loans to LMUSA
out of concern that LMUSA would be unable to obtain the financing necessary to
consummate purchases in accordance with their terms. Moreover, LMUSA faced
great potential liability if it could not meet its commitments. If LMUSA
failed to deliver whole loans sufficient to satisfy a particular commitment, it
would have been liable for damages to the financial institution that had
entered into such a commitment in the event that interest rates changed
unfavorably in the interim. Finally, LMUSA avoided potential severance claims
which proved to be approximately $2.9 million, when its production personnel
left Lomas to accept employment at First Nationwide.
7. The GNMA Servicing Sale Agreement
On September 5, 1995, LMUSA and First Nationwide entered into an asset
purchase agreement governing the sale of various LMUSA assets (the "GNMA
Servicing Sale").
First Nationwide agreed to acquire the following assets from LMUSA (the
"GNMA Sale Purchased Assets"):
a. the GNMA mortgage servicing rights;
b. LMUSA's "production" business;
c. the "warehouse" loans representing whole loans in the
process of being securitized as mortgage- backed
securities, other than "warehouse" loans owned by LMUSA
subject to repurchase agreements with loan originators;
18
<PAGE> 25
d. the whole loan commitments already in the LMUSA production
pipeline but not yet funded or processed into
mortgage-backed securities;
e. LMUSA's accounts receivable relating to items (a) through
(d) above;
f. 100% of the common stock of Lomas Mortgage Services, Inc.
("Lomas Mortgage Services"), the general partner and owner
of 33% of LMP, a partnership that in turn owned, among
other things, GNMA, FNMA and FHLMC servicing that was being
performed by LMUSA, as subservicer, and therefore was at
risk, because of LMP's relationship with LMUSA; and
g. certain fixed assets relating to LMUSA's "production"
business.
In exchange for those assets, First Nationwide agreed to pay LMUSA $100
million (subject to adjustment as set forth in the asset purchase agreement).
The timing of payments eventually agreed upon was as follows:
a. $10 million in cash, which was retained by First Nationwide
and is being paid to LMUSA as certain milestones are met in
the transfer of the GNMA Sale Purchased Assets;
b. $35 million, which was paid at the closing on October 2,
1995 ($18.8 million of which was paid to Lehman to
terminate the remaining swaps);
c. $41.5 million, which was paid on February 1, 1996; and
d. $13.5 million, less any adjustments to subtract any
indemnification amounts owed to First Nationwide by LMUSA,
to be paid on October 2, 1996.
In addition, First Nationwide agreed to assume LMUSA's liabilities
relating to the servicing rights, contracts, "pipeline" loans and "warehouse"
loans purchased by First Nationwide, and paid the amounts owed by LMUSA to its
warehouse lenders -- DLJ and Bank One -- on October 2, 1995 to the extent such
obligations were secured by the "warehouse" loans.
LMUSA also agreed to indemnify First Nationwide for a period of one
year following the closing for certain losses incurred by First Nationwide over
$6.1 million, up to a maximum of 15% of the excess of the final purchase price
over $101.5 million (i.e. $13.7 million if the final purchase price were to be
$101.5 million). See, "General Information Relating to Reorganized LMUSA --
Business of Reorganized LMUSA -- Other Assets -- Receivables -- GNMA Servicing
Sale Agreement Holdback."
The final adjusted purchase price relating to the GNMA Servicing Sale
is anticipated to be approximately $101.5 million. The adjustments to the
purchase price consisted of: (i) a $3.3 million increase resulting from
changes in unpaid principal amounts of mortgages in the GNMA servicing
portfolio between July 31, 1995 and November 30, 1995; (ii) a $19.0 million net
increase as a result of a reduction in warehouse debt; (iii) a $21.1 million
decrease resulting from changes in net book balance of receivables, payables
and other assets; and (iv) a $300,000 increase for marketing gains from
existing mortgage loan commitments.
In connection with the GNMA Servicing Sale, the parties entered into a
transition services agreement pursuant to which LMUSA contracted to act as
subservicer with respect to the assets to be transferred to First Nationwide
and agreed to perform certain other functions necessary to that transition.
8. Adoption of the Retention Incentive and Severance Plans
As a condition to closing the GNMA Servicing Sale, First Nationwide
required LMUSA to implement an employee retention plan relating to those LMUSA
employees necessary to effectuate the transfer of the mortgage servicing assets
over a six- to nine-month transition period (the "Transition Period"). Because
the same LMUSA employees serviced both the GNMA mortgage portfolio and the
remainder of LMUSA's servicing mortgage portfolios and because First Nationwide
had already determined that it would not hire LMUSA's servicing or
administration employees after the Transition Period
19
<PAGE> 26
(at least not in Dallas), LMUSA had to implement its own enhanced employee
retention and severance program for all of its servicing employees as a prudent
business matter and to satisfy its transaction obligations. Meanwhile, LMUSA
had already sharply reduced its corporate staff. Thus, LMUSA had already
determined that it could not afford to lose any of the remaining skeletal
corporate staff that was responsible for its legal, accounting, public
disclosure, financial, human resources and information systems functions and was
already working with KPMG, to develop an employee performance and retention
incentive plan (the "Retention Plan") and a revised severance plan (the
"Severance Plan," together with the Retention Plan, the "Compensation Plans").
The LMUSA Board of Directors approved the Compensation Plans on
September 18, 1995, to be effective immediately prior to the closing of the
GNMA Servicing Sale.
The Compensation Plans include two essential components. First, a
retention/performance bonus is to be paid to all remaining LMUSA employees,
based on a percentage of base salary, by the earlier of (i) June 30 or October
1, 1996 (depending on an employee's designated group) or (ii) the date of the
participant's termination by reason of death, retirement, disability,
involuntary termination without cause or voluntary termination for good reason,
as defined by the Retention Plan. The Retention Plan provides for lump sum
payments ranging from one-half to one full month of annual base salary for most
participants and 50 to 75% of annual base salary for certain employees
identified as "key" to the sales of assets to First Nationwide and the
restructuring process. The total amount to be paid in retention/performance
bonuses would range from $3.5 million to $6.2 million. This amount includes
$307,500 to $461,250 to Eric Booth (President and Chief Executive Officer),
$150,000 to $225,000 to Mark Feldman (Chief Restructuring Officer and Executive
Vice President), $125,000 to $187,500 to Carey Wickland (Senior Vice President)
and $524,125 to $786,188 to six other members of the senior management team,
(collectively, the "Senior Management").
Second, severance payments are to be paid to all remaining LMUSA
employees upon the earlier of (i) October 1, 1997 or (ii) the date of the
employee's involuntary termination without cause or voluntary termination for
good reason, as defined by the Severance Plan. The Severance Plan provides for
lump sum cash payments ranging from two months to eighteen months of annual
base salary depending upon job classification. The total amount to be paid
under the Severance Plan would be $10.2 million, including $922,250 to Mr.
Booth, $450,000 to Mr. Feldman, $375,000 to Mr. Wickland and $1,572,375 to
other members of Senior Management.
On October 10, 1995, the Bankruptcy Court authorized the Debtors to pay
their employees under the Compensation Plans. Since that time, LMUSA has been
making payments to its terminated employees under the Compensation Plans and
the GNMA Success Bonuses (described below). In mid-March 1996, however, the
LMUSA Creditors' Committee informed LMUSA that it opposed LMUSA's making
payments under the Compensation Plans to Senior Management. After several
meetings and discussions, LMUSA and the LMUSA Creditors' Committee reached an
agreement (the "Compensation Agreement") as to payments to be made under the
Compensation Plans to Messrs. Booth and Wickland, Robert Denton (Executive Vice
President), Joseph Dryer (Senior Vice President), Louis Gregory (Senior Vice
President, General Counsel and Secretary), Kathleen Snoble (Executive Vice
President, Director of Loan Administration), James Alleman (Senior Vice
President, Director of Human Resources) and Paul Fletcher (Senior Vice
President and Assistant Treasurer). Under the Compensation Agreement, which
has been approved by the Bankruptcy Court, in addition to the GNMA Success
Bonuses described below, Mr. Booth's payment is $834,950, Mr. Wickland's
payment is $475,000 and payments to the individuals named above are $1,773,730
in the aggregate. In addition, Ms. Snoble is entitled to receive a success
bonus of up to 50% of her current base salary, which amount ($83,500) is to be
paid based upon her meeting certain defined goals to be mutually agreed with
the LMUSA Creditors' Committee. In addition, Mr. Booth is to receive a success
bonus of up to 24.4% of his current base salary, which amount ($150,000) is to
be paid solely at the discretion of the Board of Directors of Reorganized
LMUSA. The success bonus payments to Ms. Snoble and Mr. Booth are to be paid
at the time of the final settlement of the purchase price under the sale under
Section 363 of LMUSA's mortgage servicing assets to First Nationwide. During
the second week of June 1996, the Creditors' Committees reached an agreement as
to the payment to be made under the Compensation Plans to Mr. Feldman. Under
the agreement, which has been approved by the Bankruptcy Court, in addition to
the GNMA Success Bonus described below, Mr. Feldman's payment is $325,000.
LMUSA, in the course of reviewing the funding status of, and certain
other issues relating to, The Lomas Financial Group Pension Plan (as restated
effective January 1, 1991) (the "Pension Plan") determined that the Pension
Plan was over
20
<PAGE> 27
funded. Under current law, if the Pension Plan were terminated, 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 for LMUSA's
benefit in a more tax efficient manner for both employees and the Company,
thereby providing an additional benefit to employees. Accordingly, on October
6, 1995, LMUSA amended the Pension Plan to provide additional retirement
benefits for eligible employees whose jobs are eliminated after January 1, 1996
(the "Pension Enhancement"). In addition, the Severance Plan was amended to
offset Severance Plan payments by the amount of additional retirement benefits
payable under the Pension Plan. On January 30, 1996, the IRS issued a favorable
determination letter with respect to such amendment to the Pension Plan.
In order to terminate the Pension Plan, each of following conditions
must be satisfied. The Pension Plan administrator must (i) distribute a
written "Notice of Intent to Terminate," containing certain prescribed
information, to all affected parties at least 60 (but not more than 90) days in
advance of the proposed termination date; (ii) file with the Pension Benefit
Guaranty Corporation ("PBGC") a "Standard Termination Notice" ("STN") (PBGC
Form 500) not later than 120 days after the proposed termination date and (iii)
not later than the date the STN is filed with the PBGC, issue "Notices of Plan
Benefits" to Pension Plan participants and beneficiaries. In addition, the
PBGC must not issue a "Notice of Noncompliance" within the 60 days following
the STN filing and the Pension Plan must contain assets sufficient for benefit
liabilities, determined as of the termination date. The Pension Plan
administrator presently intends to file the Notice of Intent to Terminate with
respect to the Pension Plan on or about August 1, 1996.
9. The Approval of the Agencies and Subsequent Closing of the GNMA
Servicing Sale
The GNMA Servicing Sale required GNMA not only to approve the transfer
of the servicing portfolio to First Nationwide, but also required GNMA to
approve the subservicing by LMUSA of the GNMA servicing portfolio during the
Transition Period. The sale also required certain critical approvals of the
other two Agencies -- FNMA and FHLMC. Meanwhile, LMUSA's deteriorating
financial condition had arguably put the Agencies in a position to terminate
LMUSA's mortgage servicing rights. Thus, it was essential that LMUSA obtain
the cooperation and support of all three Agencies while it determined how best
to preserve the value of its remaining mortgage servicing portfolios.
After much discussion and negotiations which continued through the eve
of the closing of the GNMA Servicing Sale, the Agencies agreed to allow the
transfer of the GNMA servicing rights owned by LMUSA, the stock of Lomas
Mortgage Services and the rights to subservice LMP loans to First Nationwide,
while at the same time revoking LMUSA's rights to create new securities or
acquire new servicing rights. The Agencies also determined to put LMUSA under
particularly close scrutiny so any deterioration in the quality of LMUSA's
servicing -- especially through the loss of its employees -- could result in
the Agencies enforcing their termination rights to the fullest extent possible.
The GNMA Servicing Sale closed on October 2, 1995 and resulted in a
loss of approximately $84 million which was recorded in the quarter ended
September 30, 1995. On the day of closing, success bonuses (the "GNMA Success
Bonuses") previously approved by the LMUSA Board of Directors on September 18,
1995 were paid to the core management team and certain critical support
employees who had worked to successfully structure, negotiate, present to the
Agencies and effectuate the GNMA Servicing Sale. Such bonuses amounted to 1.2%
of the expected sale proceeds, or approximately $1.2 million in the aggregate
and comprised $475,000 to Mr. Booth, $275,000 to Mr. Feldman and another
$488,500 to other members of Senior Management. For a discussion of the other
components of the compensation program, see "Adoption of the Retention
Incentive and Severance Plans," above.
In connection with the GNMA Servicing Sale, Salomon provided a letter
to the Boards of Directors of LFC and LMUSA to the effect that, based on and
subject to certain assumptions and conditions set forth in the letter, Salomon
was of the opinion that the consideration received by LMUSA in the GNMA
Servicing Sale was fair, from a financial point of view, to LMUSA and LFC. On
October 2, 1995, LMUSA paid Salomon $480,000 as payment for the services
provided in the GNMA Servicing Sale.
10. Proposed Section 363 Sale to First Nationwide
In October 1995, given the deterioration of LMUSA's mortgage servicing
portfolios, consequent decreases in Lomas' cash flows and difficulty in
servicing its debts (a $17.1 million payment of interest to bondholders by
LMUSA which was due on October 2, 1995 was not made and it was anticipated by
LFC that a $6.3 million interest payment due
21
<PAGE> 28
to LFC bondholders on October 31, 1995 would not be made), the Boards and
management of LFC and LMUSA decided that the best way to maximize value for
Lomas' various constituencies was (a) to sell LMUSA's remaining mortgage
servicing assets, together with its insurance agencies, to First Nationwide; (b)
thereafter to file petitions for reorganization for both LFC and LMUSA; and (c)
simultaneously with the filing of petitions to seek bankruptcy court approval of
the sale to First Nationwide (with notice to all interested parties and an
opportunity for higher and better offers to be made).
On October 9, 1995, LMUSA and First Nationwide entered into an
agreement for the sale of substantially all of the remaining servicing
portfolio and certain other assets of LMUSA (the "Proposed Section 363 Sale").
The purchase price for the Proposed Section 363 Sale was approximately $150
million (less $10 million which would be used to pay LMUSA's expenses for
transferring the servicing), subject to certain adjustments, and the assumption
of certain liabilities. The proposed transaction was subject to higher and
better offers and to approval by the Bankruptcy Court. Based on the proposed
purchase price, LMUSA recognized a loss of $78.5 million in the September 1995
quarter for the proposed sale.
E. THE CHAPTER 11 FILINGS
On October 10, 1995 (the "Petition Date"), each of the four Debtors
filed voluntary petitions for reorganization. The filings did not include
LFC's or LMUSA's other subsidiaries. Since the Petition Date, the Debtors have
conducted business as debtors-in-possession under the Code. As
debtors-in-possession, the Debtors are authorized to continue to operate their
businesses, although they may not engage in transactions outside the ordinary
course of business without first complying with the notice and hearing
provisions of the Code and obtaining Bankruptcy Court approval where necessary.
The Debtors' Chapter 11 cases have been jointly administered pursuant to an
order of the Bankruptcy Court. Certain aspects of the Chapter 11 cases are
summarized below.
1. First Day Orders
In connection with their bankruptcy filing, the Debtors sought and
received numerous "first day orders" which allowed the Debtors to make
expenditures necessary to the success of their joint reorganization, including
payments essential to their day-to-day operations. The "first day orders"
enabled the Debtors to (a) retain counsel and other professionals pursuant to
Section 327 of the Code, (b) subject to certain limitations, pay pre-petition
wages and salaries owed to employees, (c) pay pre-petition expenses related to
employees' medical, disability, retirement and other benefits, (d) maintain
their pre-petition bank accounts, custodial accounts, cash management systems
and business forms, (e) pay pre-petition state and local sales and use taxes
and recording fees, and (f) pay the pre-petition fees of professionals pursuing
foreclosure actions on behalf of, and providing other similar services to, the
Debtors. The Debtors also obtained authorization to make certain payments on
account of prepetition liabilities to critical vendors, and to make other
expenditures which were similarly essential to the Debtors' continued viability
as operating businesses.
2. Creditors' Committees
A single Creditors' Committee (the "Joint Creditors' Committee") was
appointed by the United States Trustee for the District of Delaware (the "U.S.
Trustee") on October 23, 1995 to represent creditors of all the Debtors. The
Joint Creditors' Committee consisted initially of the following seven members:
Bankers Trust Company ("Bankers Trust"), Bennett Restructuring Fund, L.P.
("Bennett"), Elliott Associates, L.P. ("Elliott"), GEM Capital Management, Inc.
("GEM"),(1) Oppenheimer Management Corp. ("Oppenheimer"), Perry Partners and
Travelers.
Shortly after the Petition Date, GEM, Oppenheimer, Orion Capital Corp.
("Orion"), and the Bond Fund for Growth, members of an unofficial steering
committee composed of holders of LFC Senior Convertible Notes, moved the
Bankruptcy Court to appoint a separate official committee of unsecured
creditors for LFC Creditors (the "LFC Creditors' Committee Motion"). The LFC
Creditors' Committee Motion was denied without prejudice by the Bankruptcy
Court by Order dated November 9, 1995.
On March 15, 1996, the U.S. Trustee revoked the appointment of the
Joint Creditors' Committee and appointed the LFC Creditors' Committee and the
LMUSA Creditors' Committee (collectively, the "Creditors' Committees"). The
- -------------------
(1) On or about November 17, 1995, GEM resigned from the Joint Creditors'
Committee.
22
<PAGE> 29
five members of the LFC Creditors' Committee are as follows: GEM, John P.
Kneafsey, Oppenheimer, Orion and TCB. The five members of the LMUSA Creditors'
Committee are: Bankers Trust, Bennett, Elliott, Perry Partners and Travelers.
Pursuant to orders of the Bankruptcy Court, the Creditors' Committees
were authorized to retain counsel and other professionals, whose fees and
expenses have been paid in part on an interim basis by the Debtors during the
proceedings and, to the extent finally allowed, will be paid by the Debtors at
the end of the proceedings. The Creditors' Committees and their respective
counsel and other advisers have consulted regularly with the Company concerning
the administration of the Chapter 11 cases, and the Company has kept the
committees informed on an ongoing basis about its operations. The names and
addresses of the members of the Creditors' Committees and their respective
professionals are set forth in Exhibit V hereto. No trustee or examiner has
been appointed in the Debtors' Chapter 11 cases.
3. The Section 363 Sale
On the Petition Date, Lomas filed a motion for approval of a sale of
all of the remaining mortgage servicing assets of LMUSA and its related
insurance agency business to First Nationwide under the Proposed Section 363
Sale contract pursuant to Section 363 of the Code. The motion detailed
procedures for the submission of competing bids for the assets to be sold and
for objections, if any, to the proposed sale.
The following assets were to be sold pursuant to the Proposed Section
363 Sale:
a. all of LMUSA's remaining mortgage servicing, subservicing
and master servicing rights (the "Servicing Rights");
b. the common stock of Lomas Insurance Services, Inc., a
subsidiary of LMUSA;
c. any residential real property owned in fee simple by LMUSA
as a result of foreclosures;
d. LMUSA's accounts receivable;
e. certain furniture, fixtures and equipment of LMUSA;
f. certain of LMUSA's contracts and unexpired leases;
g. LMUSA's records relating to the business sold;
h. LMUSA's custodial accounts and escrow funds relating to the
business sold;
i. LMUSA's trade names; and
j. LMUSA's investments and other assets relating to the
business sold.
In exchange for those assets, First Nationwide agreed to pay LMUSA $150
million, subject to adjustment in certain events. The purchase price (less $10
million, which would be paid as milestones in the process of transferring
servicing were achieved) was to be paid as follows:
a. $42 million (30%) to be paid at closing;
b. $77 million (55%) to be paid 120 days after the closing
date; and
c. the balance of $21 million (15%), less any indemnification
amounts payable by LMUSA, to be paid one year after the
closing date.
First Nationwide also agreed to assume the liabilities of LMUSA that
related to:
a. the Servicing Rights;
23
<PAGE> 30
b. certain contracts and unexpired leases; and
c. certain scheduled liabilities.
The Joint Creditors' Committee objected to the Proposed Section 363
Sale, alleging that the auction procedures provided an insufficient time to
solicit higher and better offers, that the notice of the proposed sale, the
price and other terms were inadequate and that the provision releasing First
Nationwide from any liabilities in connection with the GNMA Servicing Sale was
inappropriate. On November 29, 1995, after a three day hearing, the Bankruptcy
Court denied the Proposed Section 363 Sale sustaining an objection by the Joint
Creditors' Committee to the sale proceeding, conditional upon the Creditors'
Committee reaffirming its opposition to the Proposed Section 363 Sale. The
Joint Creditors' Committee did reaffirm such opposition, but indicated that it
had made an alternative proposal to First Nationwide and that it would review
its position each business day. Subsequent negotiations among the Debtors, the
Joint Creditors' Committee and First Nationwide resulted in an amended and
restated sale agreement dated as of January 4, 1996 (the "Section 363 Sale")
which the Bankruptcy Court authorized the Debtors to enter into on January 11,
1996.
The most significant changes to the agreement from the Proposed Section
363 Sale were the following:
a. The base purchase price was increased by $7.75 million,
from $150 million to $157.75 million, with the increase
being added to the first installment, to be paid on the
closing date, January 31, 1996 (the "Closing Date").
b. Certain changes were made in the calculation of the way
payment for the accounts receivable would be calculated and
in the maximum indemnification amount.
c. First Nationwide would not acquire LMUSA's insurance agency
subsidiaries and agreed to permit those subsidiaries to
continue to solicit property and casualty insurance for
three years from the homeowners whose loans were included
in the servicing portfolio being acquired.
In addition, the Joint Creditors' Committee's objection to the release
of First Nationwide from any liability relating to the GNMA Servicing Sale was
dropped.
In connection with the Section 363 Sale, Salomon provided a letter to
the Boards of Directors of LFC and LMUSA to the effect that, based on and
subject to certain assumptions and conditions set forth in the letter, Salomon
was of the opinion that the consideration received by LMUSA in the Section 363
Sale was fair, from a financial point of view, to LMUSA and LFC. Under its
engagement letter with LFC, which had been assumed by LMUSA in addition to LFC
and guaranteed by STL, Salomon was entitled to a fee of $731,000 upon
completion of the Section 363 Sale. However, pursuant to negotiations with the
LMUSA Creditors' Committee, Salomon agreed to accept $548,250 in cash in full
settlement of its fee. Such amount was paid on June 27, 1996 pursuant to a
stipulation approved by the Bankruptcy Court.
For a description of the known and expected adjustments to the purchase
price and an explanation of the indemnity provisions and holdback mechanisms,
see "General Information Relating to Reorganized LMUSA -- Business of
Reorganized LMUSA -- Cash and Cash Equivalents -- Holdbacks."
4. Exclusive Period to File and Solicit Acceptances of Chapter 11
Plans
As debtors-in-possession under the Code, the Debtors had the exclusive
right to file Chapter 11 plans during the first 120 days of the Chapter 11
cases. Pursuant to Section 1121(d) of the Code, the Debtors sought and
received an extension of such period from the Bankruptcy Court and maintained
the exclusive right to file plans through the date on which the Plans were
filed.
On June 26, 1996, the Bankruptcy Court granted the Debtors' motion to
extend their exclusive period to solicit acceptances for the Plans through
August 8, 1996, over the objection of the LFC Creditors' Committee.
24
<PAGE> 31
5. Certain Pending Motions
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 discussed more fully under
"Intercompany Claims" below, (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.
Neither the Debtors nor the LMUSA Creditors' Committee had responded to
these motions as of the date hereof. However, the Debtors and the LMUSA
Creditors' Committee believe (i) that the classification of the Intercompany
Claims in the Plans, and the approval of the LMUSA Plan by LFC and the approval
of the LFC Plan by LMUSA are appropriate and (ii) that LFC's and LMUSA's
Intercompany Claims against LMUSA are disputed and as such would not be
entitled to vote on the other Debtor's Plan until resolved or estimated for
voting purposes. In any event, LFC and LMUSA have each approved the other's
Plan and would vote in favor of such Plan if it were appropriate for them to
vote. However, the LFC Creditors' Committee, in addition to the foregoing
orders, is seeking to have a "responsible officer" of LFC appointed by the
Bankruptcy Court who, among other things, would be authorized to vote LFC's
Intercompany Claim against LMUSA and, in the LFC Creditors' Committee's view,
would be likely to vote against the LMUSA Plan. The Debtors and the LMUSA
Creditors' Committee intend to contest this effort.
6. Post-Petition Cost Reductions
Prior to the filing of the Chapter 11 cases, the Company engaged in an
intensive rationalization of its businesses aimed at reducing its overall
costs. After the Petition Date, this review continued and has led to a
reduction in personnel from a staff of approximately 1,000 on the Petition Date
to a staff of approximately 342 as of April 1, 1996, further reduced to 40 by
June 30, 1996, in addition to approximately 50 persons employed by the
insurance business which is being held for sale as described below. See
"General Information Relating to Reorganized LMUSA -- Business of Reorganized
LMUSA -- Insurance Business: Lomas Insurance."
7. Bar Date
Pursuant to an order entered by the Bankruptcy Court on February
16, 1996 (the "February 16 Order"), the Bankruptcy Court set April 4, 1996 (the
"Bar Date") as the date by which all pre-petition claims, except as provided
for below, had to be asserted against the Debtors or be forever barred.
Although the allowability and amount of Claims will be determined in the
Chapter 11 proceedings, bar dates allow the Debtors to accumulate data on
potential Claims and eventually to provide for allowed Claims in a Chapter 11
plan.
Notice of the Bar Date was given by mail to all known creditors and was
published in several newspapers with national circulation.
Certain categories of claimants, listed below, were not required to
assert Claims on or prior to the Bar Date:
a. claimants who had already filed Claims with the Bankruptcy
Court;
b. claimants listed in the schedules filed by the Debtors with
the Bankruptcy Court as neither "disputed," "contingent" or
"unliquidated" and who agree with their Claims as listed;
c. holders of publicly traded debt securities (except to the
extent that they have other Claims unrelated to the holding
of such securities, which they are required to assert on or
prior to the Bar Date);
d. participants in or beneficiaries of pension plans;
e. holders of Intercompany Claims;
25
<PAGE> 32
f. holders of outstanding equity securities (except to the
extent that they have other Claims unrelated to the holding
of such securities, which they are required to assert on or
prior to the Bar Date);
g. holders of Claims previously Allowed by the Bankruptcy
Court; and
h. workers' compensation claimants.
Pursuant to an order entered by the Bankruptcy Court on March 29, 1996,
the Bankruptcy Court modified the February 16 Order by (i) permitting all
subsidiaries of the Company in addition to the Debtors to not assert Claims on
or prior to the Bar Date and (ii) permitting then-current employees of LMUSA to
file proofs of claim on or before May 31, 1996 for Claims for salary, wages
and/or benefits not paid solely because of the LMUSA bankruptcy filing. The
Order, however, reaffirmed the applicability of the Bar Date for Claims (i)
relating to the "rabbi trust" created in connection with the Debtors' MSP for
retirement benefits; (ii) for any penalties and interest; or (iii) which are
subject to any pending litigation with any of the Debtors.
8. Claims Summary
a. LFC
Between the Petition Date and the Bar Date, 360 proofs of claim were
filed against LFC. The holders of such Claims have asserted Claims in the
aggregate amount of approximately $748.5 million. Of these to date:
(1) LFC has objected to 185 Claims filed in amounts
aggregating approximately $595.9 million
requesting that these Claims be reduced by
approximately $595.9 million to zero;
(2) LFC is currently preparing to object to 78
Claims filed in amounts aggregating
approximately $0.9 million requesting that these
Claims be reduced by approximately $0.9 million
to zero; and
(3) 97 Claims for approximately $151.7 million will
be Allowed as filed.
b. LMUSA
Between the Petition Date and the Bar Date, 915 proofs of claim were
filed against LMUSA. The holders of such Claims have asserted Claims in the
aggregate amount of approximately $757.2 million. Of these to date:
(1) LMUSA has objected to 301 Claims filed in
amounts of approximately $340.8 million
requesting that these Claims be reduced by
approximately $340.8 million to zero;
(2) LMUSA is currently preparing to object to 439
Claims filed in amounts aggregating
approximately $5.2 million requesting that these
claims be reduced by approximately $5.2 million
to zero; and
(3) 175 Claims for approximately $411.1 million will
be Allowed as filed.
c. LIS
Between the Petition Date and the Bar Date, 36 proofs of claim were
filed against LIS. The holders of such Claims have asserted Claims in the
aggregate amount of approximately $1.5 million. Of these to date:
(1) LIS has objected to 4 Claims filed in amounts of
approximately $0.6 million requesting that these
Claims be reduced by approximately $0.6 million
to zero;
26
<PAGE> 33
(2) LIS is currently preparing to object to 27
claims filed in amounts aggregating
approximately $0.8 million requesting that these
claims be reduced by approximately $0.8 million
to zero; and
(3) 5 Claims for approximately $18,523 will be
Allowed as filed.
d. LAS
Between the Petition Date and the Bar Date, 44 proofs of claim were
filed against LAS. The holders of such Claims have asserted Claims in the
aggregate amount of approximately $0.5 million. Of these to date:
(1) LAS has objected to 14 Claims filed in amounts
of approximately $0.3 million requesting that
these Claims be reduced by approximately $0.3
million to zero;
(2) LAS is currently preparing to object to 15
claims filed in amounts aggregating
approximately $0.2 million requesting that these
claims be reduced by approximately $0.2 million
to zero; and
(3) 15 Claims for approximately $8,200 will be
Allowed as filed.
e. Claims Filed Against Multiple Debtors
Between the Petition Date and the Bar Date, 383 proofs of claim were
received against more than one Debtor. The holders of such Claims have
asserted Claims in the aggregate amount of approximately $137.5 million.
(1) LFC has objected to 192 claims filed in amounts
of approximately $128.1 million requesting that
these Claims be reduced by approximately $128.1
million to zero; of the 192 claims objected to,
81 relate to the MSP and these 81 claims
totalling $9.4 million are being objected to in
the LMUSA, LIS and LAS Estates only; and
(2) LFC is currently preparing to object to 191
claims filed in amounts aggregating
approximately $9.4 million requesting that these
claims be reduced by approximately $9.4 million
to zero.
f. Claims Filed in which Debtor Unspecified
Between the Petition Date and the Bar Date, 132 proofs of claim were
received that did not specify a particular Debtor. The holders of such Claims
have asserted Claims in the aggregate amount of approximately $3.4 million.
LFC has objected to all of these claims.
9. Executory Contracts and Leases
A program to identify all contractual obligations was begun by Lomas'
management in the first quarter of 1995. A new policy was established that
required all obligations extending beyond 30 days to obtain an approved
purchase order prior to the execution of documentation. Additionally,
long-term agreements were discouraged and no new self- renewing contracts were
signed. The review of executory contracts began with this list of outstanding
purchase orders. After the GNMA Servicing Sale on October 2, 1995,
approximately 200 contracts were reviewed by Lomas' management. The bulk of
the contracts reviewed will be rejected without the Debtors incurring any
liability. Only those contracts deemed to be necessary and required to
maintain records, support the collection efforts related to receivables and
protect asset values will be assumed. All other executory contracts will be
rejected. Among the executory contracts to be rejected are the following:
a. a contract of LFC for telecommunication services with
potential damages Claims of approximately $3.2 million;
b. a lease of LFC for office space with potential damages
Claims of approximately $856,000;
27
<PAGE> 34
c. a data processing service bureau contract of LMUSA with RIS
with potential damages Claims of $10.3 million, although as
set forth under "Principal Claims Against the Debtors --
LMUSA," RIS has asserted an Administrative Claim of $11.4
million arising out of RIS' performance of services under
this contract and has asserted that rejection of the
contract is impermissible. LMUSA asserts, and RIS
disputes, that LMUSA is entitled to reject the RIS
Agreement. LMUSA asserts that no damages will be due as
a result of the rejection of this contract, but RIS has
reserved all rights to file a damages claim when and if
the contract is ultimately rejected;
d. a lease agreement of LMUSA for computer equipment with
potential damages Claims of approximately $354,000;
e. a contract of LMUSA for credit card marketing services with
potential damages Claims of approximately $335,000;
f. a contract of LMUSA for telecommunication services with
potential damages Claims of approximately $21,000;
g. eight contracts of LIS for telecommunication equipment and
services with potential damages Claims of approximately
$3.0 million in the aggregate;
h. a contract of LAS for furniture storage and maintenance
with potential damages Claims of approximately $92,000; and
i. four contracts of LAS for copier equipment and maintenance
with potential damages Claims of approximately $62,000 in
the aggregate.
28
<PAGE> 35
IV. GENERAL INFORMATION RELATING TO REORGANIZED LFC
The Joint Plan contemplates the emergence of Reorganized LFC from
Chapter 11 upon the effective date (the "Effective Date," which refers to the
effective date of either the Joint Plan or the LMUSA Plan, depending on the
context), which is to occur once all the conditions for effectiveness in the
Joint Plan have been met. See "Chapter 11 Plans -- Conditions Precedent."
A. BUSINESS OF REORGANIZED LFC
Reorganized LFC will have its principal office at 717 North Harwood
Street, Suite 300, Dallas, Texas 75201. Reorganized LFC's primary businesses
are (i) the management of assisted care facilities located in Denver and
Houston through its wholly-owned subsidiary Lomas Housing Management Corp. and
(ii) the management and liquidation of its portfolio of investments described
below. In addition, if LFC or a subsidiary becomes, or is found to be, the
owner of real estate assets (the "Disputed Real Estate Assets") pursuant to the
resolution of the Intercompany Claims, Reorganized LFC may engage, directly or
indirectly, in real estate development. See "Intercompany Claims" below.
Under the Joint Plan, other than (i) assets relating to the assisted
care business (and any income or proceeds relating thereto), (ii) $3 million of
working capital on the Effective Date and (iii) the Disputed Real Estate
Assets, all assets are considered "Non-Reorganization Assets" to be held in
trust pending their liquidation and/or distribution to creditors.
1. Assisted Care Business
Reorganized LFC will conduct its assisted care business in Denver,
Colorado and Houston, Texas pursuant to the management agreements described
below.
LFC manages and maintains an assisted care facility in Houston, Texas
under a management agreement into which it entered on June 27, 1977 with
Treemont of Texas, Inc. ("Treemont Texas"). LFC is entitled to receive a fee
under the agreement which, subject to a required annual priority distribution
of project net income to Treemont Texas in the amount of $341,250 and certain
adjustments and expenditures specified by the agreement, is equal to 3% of the
facility's gross receipts and 25% of the facility's net income. LFC received a
fee of approximately $633,000 in fiscal 1995 under the agreement and realized a
net cash flow of approximately $425,000 after expenses of approximately
$208,000. LFC may terminate the agreement on six months' written notice;
however, the termination date must fall on an anniversary of the date on which
the parties entered into the agreement. Treemont Texas can only terminate the
agreement for cause (bad faith or gross negligence) or if Treemont Texas fails
to receive its required annual priority distribution for two consecutive years.
LFC has the right to extend the term of the agreement from year to year in one-
year increments until June 30, 2028. Unless the agreement is terminated or its
term is extended as described above, the agreement will terminate on June 30,
2003. The Treemont Texas management agreement is not shown as an asset on the
balance sheet of Reorganized LFC because there can be no assurance that the
contract will continue in effect for an extended period.
LFC also manages and maintains an assisted care facility in Denver,
Colorado under a management agreement which it entered into on August 26, 1980
with Treemont of Denver, Ltd. ("Treemont Denver"). LFC is entitled to receive
a fee under the agreement which, subject to a required annual priority
distribution of project net income to Treemont Denver in the amount of $335,600
and certain adjustments and expenditures specified by the agreement, is equal
to 3% of the facility's gross receipts and 25% of the facility's net income.
This facility consistently fails to produce Treemont Denver's required annual
priority distribution, and LFC did not receive a fee payment under the
agreement in fiscal 1994 and 1995. Treemont Denver, however, does pay for some
of the expenses related to the employee who actually manages both the Treemont
Denver and Texas facilities. These expenses would otherwise be operating
expenses of Treemont Texas. LFC may terminate the agreement with Treemont
Denver on six months' written notice; however, the termination date must fall
on an anniversary of the date on which the parties entered into the agreement.
Treemont Denver can only terminate the agreement for cause (bad faith or gross
negligence) or in the event that Treemont Denver fails to receive its required
annual priority distribution for two consecutive years. Since Treemont Denver
has not received the full amount of such distribution for two consecutive years,
Treemont Denver can terminate the agreement at any time. Unless the agreement
is terminated as described above or its term is extended, the agreement will
terminate on December 31, 2005.
29
<PAGE> 36
Because the agreement is terminable at will and has been producing no income for
LFC, it is not shown as an asset on the balance sheet of Reorganized LFC.
2. Investment and Other Assets
In addition to conducting the assisted care business discussed above,
Reorganized LFC will own the following assets:
a. Invesco Institutional Mortgage Funds. Reorganized LFC will
hold an 8.1% limited partnership interest in Invesco Institutional Mortgage
Fund I ("Invesco I") and a 5.97% limited partnership interest in Invesco
Institutional Mortgage Fund II ("Invesco II"). Both of these private
partnerships provide participating mortgages to finance shopping centers,
warehouse facilities and office buildings. There is no public market for units
in Invesco I or Invesco II and LFC believes these investments are highly
illiquid. The general partner of Invesco I expects to liquidate the
partnership in 1996 and LFC's interest in the liquidation proceeds is expected
to be approximately $785,000. The general partner of Invesco II expects to
sell two of the five assets currently owned by the partnership, but does not
have any present plans to liquidate the partnership. The Company believes that
the approximate value of LFC's investment in Invesco II is $685,000, based on
the investment's current book value and a discount rate of 25% (determined
through discussions with brokers.)
b. Triad Ventures. Reorganized LFC will own an approximate 3%
limited partnership interest in the Triad Ventures Limited ("Triad Ventures"),
which consists of eight minority investments in various private companies,
primarily in the biotechnology area. The value of LFC's interest in Triad
Ventures depends on the performance of these companies. LFC believes its
interest in Triad Ventures is worth approximately $55,000. This is based on
LFC's $193,000 interest in the adjusted capital account of Triad Ventures.
This amount has been discounted at a rate of 58% to provide the valuation.
This discount rate reflects the discount in an offer made to purchase LFC's
interest in 1995-- the only evidence the Debtors have of the market value of
this illiquid investment.
c. Vista Common and Preferred Stock. Reorganized LFC will hold
common and cumulative preferred stock of Vista Properties, Inc. ("Vista"), a
company which emerged from a prepackaged Chapter 11 in September 1995. LFC's
equity interest in Vista consists of shares of Vista common stock which are of
nominal value and "stapled" together with 1,175.06 shares of Vista Series A
Preferred Stock. The Preferred Stock has an initial coupon rate of 10%, which
will be reset in October 1997 at a rate that an independent investment banker
believes will cause the preferred stock to sell at par (and the investment
banker must offer to purchase the shares at par). The Company believes the
preferred stock and stapled equity interest will be worth approximately $1.2
million as of June 30, 1996. Although by its terms the stock may not be sold
until October 1997, LFC believes it may have the right to sell the stock by
virtue of certain provisions of the Code, and is negotiating with the principal
owner of Vista for the sale of the stock.
d. RIS Note. LIS owns a promissory note given by RIS as partial
consideration for its purchase of all of the assets of LIS (see "Background and
General Information -- Asset Sales Prior to Chapter 11 Filing -- Sale of Debtor
LIS Assets"). The note provides that, as of any date, its principal amount is
equal to $8 million, less 60% of the cash flow cumulative loss of the business
acquired from LIS (measured from December 16, 1994 through such date) in excess
of $7 million plus interest accruing at an annual rate of 8%. The note's
maturity date is December 31, 1999. In March 1995, Prudential announced its
intention to sell its mortgage banking business, which includes RIS and certain
other assets of Residential Services. On March 25, 1996, Residential Services
announced that it had agreed to sell a substantial portion of RIS' assets to
First American Real Estate Information Services, Inc. ("First American"), which
agreed to form a new subsidiary, Excelis, Inc. to acquire such assets. On
April 1, 1996, First American and Residential Services consummated the sale of
RIS assets. Under the terms of the RIS note, a sale of a majority of the
assets of the Business of RIS, as defined in the Asset Purchase Agreement
(determined by reference to book value or revenues), is a default which would
enable LIS to accelerate the RIS note in its original face amount ($8 million)
plus accrued interest. Such a default would trigger Residential Services'
obligations under its guaranty. The Joint Debtors believe it is likely that
the sale of assets from Residential Services to First American is a default
under the RIS note and are exploring their options with regard to such event.
Prudential, has taken the position, however, that it has retained more than 51%
of the Business assets of RIS following the sale to First American, and that
there has therefore been no default under the note. LFC will recover value from
the RIS note and other assets of LIS to the extent such assets exceed RIS'
liabilities.
30
<PAGE> 37
e. Furniture, Fixtures, Art and Antiques. Reorganized LFC will own
furniture, fixtures, equipment, antiques and artwork, which are all valued at a
book value of $335,000. Reorganized LFC has engaged a professional liquidator
to dispose of these assets.
3. Cash and Cash Equivalents
In addition to these investment assets, as of June 30, 1996,
Reorganized LFC is expected to have $3 million in the form of cash and cash
equivalents.
4. Other Information Regarding the Business of Reorganized LFC
A consolidated statement of financial condition for Reorganized LFC as
of June 30, 1996, giving effect to the transactions contemplated by the Joint
Plan on a pro forma basis is set forth in Exhibit IV.
For federal income tax purposes, the Debtors estimate that Reorganized
LFC will, after the Effective Date under the Joint Plan and the transactions
contemplated thereby, have net operating loss carryovers ("NOLs") of about $230
million. This estimate does not take into account any gain or loss that may be
recognized upon any distribution of LFC's Non-Reorganization Assets deemed to
occur, for federal income tax purposes, as of the Effective Date, and is based
on the assumption that the Effective Date is after June 30, 1996. In
addition, in the event that LAS is determined to have been "liquidated" (as
defined for purposes of applying certain relevant federal income tax
provisions) at a time when it was "insolvent" (as defined for federal income
tax purposes), the amount of NOLs which LFC group would have after the
Effective Date might be reduced by up to approximately $10 million. For a
further discussion of the NOLs of Reorganized LFC and possible limitations on
the use of such attributes, see "Federal Income Tax Consequences of the Plans"
below.
It should be noted that certain assets that are on the books of LFC and
LMUSA may be placed in an Intercompany Claims Reserve or otherwise transferred
from one Debtor to another in accordance with the Plans; some or all of these
assets may eventually inure to the benefit of Reorganized LFC. See
"Intercompany Claims" below.
B. BUSINESS OF LIS AND LAS
LIS' only assets are (i) the RIS promissory note described in "Business
of Reorganized LFC -- Investment and Other Assets," (ii) an earnout certificate
received from RIS as part of the consideration for LIS' assets in 1994, which
the Joint Debtors believe has no value and (iii) Claims against other Lomas
companies for reimbursement of any Claims against LIS arising in respect of
contracts entered into on behalf of or for the benefit of such other Lomas
companies.
At the time of the bankruptcy filing in October 1995, Lomas was in the
process of liquidating LAS. LAS has no operations and no assets, except claims
against other Lomas companies for reimbursement of any Claims against LAS
arising in respect of contracts entered into on behalf of or for the benefit of
such other Lomas companies.
C. POTENTIAL FOR GROWTH, NEW INVESTORS
LFC believes Reorganized LFC has potential for growth through, among
other things, the expansion of existing businesses or the acquisition of other
businesses. Accordingly, after the Effective Date, Reorganized LFC may seek
to identify one or more individuals or entities (individually or collectively,
as the case may be, the "LFC Investors") willing to invest in Reorganized LFC
in consideration for a significant percentage of New LFC Common Stock.
Although the issuance of New LFC Common Stock to such LFC Investors could
result in a substantial dilution of the equity interest in Reorganized LFC to
be distributed to holders of Claims against LFC pursuant to the Joint Plan,
attracting such LFC Investors on acceptable terms may be in the long-term best
interest of such holders. There can be no assurance at this time that LFC
Investors will be identified or that Reorganized LFC will be able to attract
sufficient capital to expand existing businesses or embark upon an acquisition
program. In the event that Reorganized LFC were to issue more than 50% of the
New LFC Common Stock to LFC Investors, Reorganized LFC's ability to use the tax
attributes described in "Federal Income Tax Consequences of the Plans -- Tax
Consequences to the Debtors -- Resulting Tax Consequences to LFC Group" would be
limited or, in some circumstances, eliminated. The LFC Creditor's Committee
believes that the potential value of these tax attributes will be substantially
diminished if LFC and LMUSA proceed with separate Chapter 11 plans.
31
<PAGE> 38
See "Certain Considerations -- Projections." However, it is not clear that the
maximum potential value of LFC's and LMUSA's NOLs and other tax attributes would
be realized if LFC and LMUSA participated in a single Chapter 11 plan.
Historically, LFC has been engaged, either directly or indirectly
through subsidiaries, in the businesses of mortgage servicing, mortgage-related
financial and administrative services, insurance, real estate development,
managing investments, and managing assisted care facilities. As noted,
reorganized LFC plans to continue in the assisted care business. It is
possible, depending on how the intercompany claims are resolved and also on
reorganized LFC's ability to attract one or more outside investors or joint
venture partners, that reorganized LFC may engage in the investment business,
the real estate development business, or any of the other businesses that LFC
has historically engaged in. Reorganized LFC might also develop new businesses
subject to the approval of its board of directors.
Until such time as 1,200,000 shares of New LFC Common Stock have been
distributed, the Board of Directors shall have responsibility for taking all
actions on behalf of Reorganized LFC, including actions which would otherwise
require approval of the stockholders. Thereafter, until at least 2,400,000
shares of New LFC Common Stock have been distributed in accordance with the
Joint Plan, any proposed action requires the approval of a majority of the
stockholders under applicable law, and all issued but not distributed shares
will be deemed to be voted for or against the proposed action in the same
proportions as the issued and outstanding shares are so voted by the
stockholders.
If no LFC Investors are willing to invest in at least 25% of the New
LFC Common Stock by the third anniversary of the Effective Date, the
Reorganized LFC Board of Directors may consider the adoption of a plan of
liquidation for Reorganized LFC in accordance with applicable law without the
necessity of any vote by the stockholders.
For a description of certain restrictions on the transfer of New LFC
Common Stock, see "Securities to be Distributed Pursuant to the Plans --
Restrictions on Transfer of New LFC Common Stock" below.
D. BOARD OF DIRECTORS AND NEW MANAGEMENT OF REORGANIZED LFC
1. Board Of Directors of Reorganized LFC
The current members of the LFC Board of Directors are:
WILLIAM J. Anderson -- Former Executive Vice President and Director of
Operations of Paloma Partners Management Company, which has since 1993 been a
member of a group of beneficial owners of LFC common stock who together own
approximately 24% of such stock (the "Investor Group"), Chief Executive Officer
of Inverness Petroleum Ltd. since 1984, Chairman of Inverness Petroleum Ltd.
since 1988 and Chairman of Dylex Limited, Canada since 1995; also, President of
Inverness Petroleum Ltd. from 1984 to 1993; former Chairman of the Canadian
Association of Petroleum Producers (formerly Independent Petroleum Association
of Canada) and presently a member of the Canadian, Alberta and Ontario
Institutes of Chartered Accountants. Age 48. Director of LFC since 1994.
Member of the Audit Committee.
ERIC D. BOOTH -- Chief Executive Officer of the Company, President of
LFC and Chairman of the Board of Directors of LMUSA since December 1994;
President of LMUSA since September 1995; prior thereto, Chairman and Chief
Executive Officer of Independence One Mortgage Corporation (a mortgage banking
company) from 1991 to 1994; Executive Vice President and Chief Financial
Officer of Michigan National Corporation (a bank holding company) from 1985 to
1993; Senior Vice President and Chief Financial Officer of LMUSA (formerly The
Lomas & Nettleton Company) from 1983 to 1985. Age 52. Director of LFC since
December 1994. Chairman of the Executive Committee.
ROBERT LEBUHN -- Chairman of Investor International (U.S.), Inc. from
1984 to 1994, when he retired; also a director of Acceptance Insurance
Companies Inc., Cambrex Corporation, Enzon, Inc. and USAir Group, Inc.;
President and Trustee, Geraldine R. Dodge Foundation. Age 64. Director of LFC
since late 1993 and Chairman of the Board of Directors of LFC since January
1995. Member of the Executive Committee, the Compensation Committee, the Audit
Committee and the Nominating Committee.
LOUIS P. GREGORY -- Senior Vice President and General Counsel since
1994 and Secretary since 1995 of the Company; Vice President and Associate
General Counsel from 1990 to 1994. Age 40. Director of LFC since May 1996.
32
<PAGE> 39
REID NAGLE -- President of SNL Securities, L.P. (a database publisher
specializing in financial institutions) since 1987; President of Shadwell
Management, Inc. (an investment company specializing in securities of financial
institutions) since 1993. Age 44. Director of LFC since late 1993. Member of
the Compensation Committee and the Nominating Committee.
PAUL T. WALKER -- Independent Financial Consultant since 1991; prior
thereto, Executive Vice President and Senior Credit Policy Officer of The Chase
Manhattan Bank, N.A. (a national banking association) from 1985 to 1990, when
he retired; associated with The Chase Manhattan Bank, N.A. from 1957 to 1990;
trustee of The DBL Liquidating Trust (former assets of Drexel, Burnham &
Lambert) since 1992. Age 61. Director of LFC since 1992. Chairman of the
Compensation Committee and member of the Executive Committee and the Nominating
Committee.
PAUL S. WOLANSKY -- Managing Director of Paloma Partners International
Investors Corp. (manages investments in China) since 1992 and of Cold Spring
Management, Inc. (general partner of investment partnership), a member of the
Investor Group, since 1990; Partner, Battle Fowler (a law firm based in New
York) from 1987 to 1990; trustee of Aerospace Creditors Liquidating Trust
(holds and realizes upon the sale of assets formerly owned by a subsidiary of
LTV Corporation) since 1993; director of The Cathay Investment Fund, Limited
(invests in Chinese companies) since 1994. Age 40. Director of LFC since late
1993. Member of the Compensation Committee.
It is contemplated that those members of the LFC Board of Directors who
are willing to serve as directors of Reorganized LFC will serve in that
capacity until the Effective Date of the Joint Plan. Thereafter, the
Reorganized LFC Board of Directors will be comprised of five directors
designated by the LFC Creditors' Committee on or before the Confirmation Date.
It is contemplated that the first annual meeting of shareholders will
be held by Reorganized LFC within six months after the Effective Date.
For a description of the compensation paid by LFC to its directors,
reference is made to LFC's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995, a copy of which is enclosed with this Disclosure Statement.
2. New Management of Reorganized LFC
The initial officers of Reorganized LFC will be designated by the LFC
Creditors' Committee on or before the Confirmation Date.
E. SECURITIES OF REORGANIZED LFC
After the Effective Date, Reorganized LFC will have one class of
capital stock, Common Stock (par value ($.10)), which will be issued subject to
certain transfer restrictions pursuant to the Joint Plan. Reorganized LFC's
certificate of incorporation will also authorize the creation of one class of
Preferred Stock that may be issued in the future on terms to be determined by
the Board of Directors of Reorganized LFC. See "Securities to be Distributed
Pursuant to the Plans -- New LFC Capital Stock" below and the pro-forma
consolidated balance sheet of Reorganized LFC attached hereto as Exhibit IV.
33
<PAGE> 40
V. GENERAL INFORMATION RELATING TO REORGANIZED LMUSA
The LMUSA Plan contemplates the emergence of Reorganized LMUSA from
Chapter 11 upon the Effective Date, which is to occur once all the conditions
for effectiveness in the LMUSA Plan have been met. See "Chapter 11 Plans --
Conditions Precedent."
A. BUSINESS OF REORGANIZED LMUSA
Reorganized LMUSA will have its principal office at 717 North Harwood
Street, Suite 300, Dallas, Texas 75201. Reorganized LMUSA is required to adopt
fresh-start reporting as of the Effective Date. Reorganized LMUSA's primary
businesses are (i) its real estate business, (ii) the management and
liquidation of its portfolio of investments described below and (iii) its
insurance business. LMUSA is actively marketing the insurance business. The
LMUSA Creditors' Committee has been authorized by the Court to retain Chanin
Capital Partners, Inc. ("Chanin") prior to Confirmation to market LMUSA's
assets. Chanin will be retained to effectuate a possible merger, sale of
assets (with the exception of the sale of mortgage servicing rights) or similar
transaction involving the business assets or stock of LMUSA.
CERTAIN OF THE ASSETS DESCRIBED BELOW ARE SUBJECT TO DISPUTE AS SET
FORTH IN "INTERCOMPANY CLAIMS" BELOW AND POTENTIALLY COULD BE TRANSFERRED IN
WHOLE OR IN PART TO LFC OR A SUBSIDIARY OF LFC PURSUANT TO A RESOLUTION OF THE
INTERCOMPANY CLAIMS.
Under the LMUSA Plan, other than (i) assets relating to the real estate
business and, possibly the insurance agency business and (ii) $5 million of
working capital on the Effective Date, all assets are considered "Non-
Reorganization Assets" to be held in trust pending their liquidation and/or
distribution to creditors.
1. Real Estate Business
Reorganized LMUSA's real estate business is expected to have a value on
June 30, 1996 of approximately $15.5 million and historically has been
conducted through ST Lending, Inc. ("STL"), a wholly-owned subsidiary of LMUSA.
STL's real property which Reorganized LMUSA will hold is described below. It
should be noted that LMUSA's ownership of STL is presently being contested by
the LFC Creditors' Committee. See "Intercompany Claims -- Description of
Transactions and Assertions of the Committees" and "-- Assertions of the
Committees."
a. The Beaumeade Property. STL owns an office and warehouse
complex in Virginia, near Washington, D.C. (the "Beaumeade Property"). The
Beaumeade Property consists of three components. The first component includes
a 49,200 square-foot office/warehouse building a 75,800 square-foot office and
industrial building, both of which are currently fully leased.
On May 20, 1996, Network Equipment Technology, Inc. ("NET") entered
into a six-year lease for 45,600 square feet of the space in the latter
building (although the lease allows for termination after five years with nine
months' prior notice and is subject to a required repayment of any outstanding
tenant improvement costs (described below) that had been funded by STL). NET
is to pay a base rent of $4.50 per square foot, escalating at 3% per year.
However, NET is to receive nine months of free base rent in the first year of
the lease with respect to 20,000 square feet. Under the lease, STL is to
provide leasehold improvements worth $18.00 per square foot, or $821,700.
Reimbursement to STL for these improvements will be achieved by increasing the
base rent by a factor that will fully amortize STL's tenant improvement
expenditure over the six-year term of the lease, which factor will include an
interest rate of 8 1/2%. Because this factor is included in the base rent, it
will be subject to the base rent escalation of 3% per year, making the average
interest rate for the six-year term of the lease approximately 9%.
The second component of the Beaumeade Property is an adjacent 3.5 acre
"pad" suitable for another approximately 50,000 square-foot building.
34
<PAGE> 41
The third component of the Beaumeade property is an undeveloped
"expansion" land tract suitable for another approximate 175,000 square feet of
office or industrial buildings.
b. The Allen Property. STL owns approximately 150 acres of
unimproved land in Allen, Texas (the "Allen Property"). The value of the Allen
Property is dependent on the construction of Exchange Parkway, which
constitutes the southern boundary of the property and provides access to the
property from Central Expressway on the west and from Highway 5 on the east.
Funding for construction of Exchange Parkway is being obtained from the City of
Allen, the state of Texas and the federal government, with commencement of
construction expected in August or September of 1996. The only issues
remaining to be resolved before construction begins are: (i) completion of
negotiations for the construction of a necessary railroad crossing; (ii)
completion of requested changes in the Environmental Assessment necessary for
federal and state funding of Exchange Parkway prior to its acceptance by the
state of Texas; and (iii) the letting of contracts for road construction by the
state of Texas, which is expected to occur in July or August of 1996.
Application was made to the City of Allen for a re-zoning of the Allen
Property that will result in an increase in multi-family and single-family
zoning as well as expanded retail zoning for the proposed commercial tracts.
On March 7, 1996, this application was finally approved by the City Council of
the City of Allen.
It should be noted that the beneficial ownership of the Allen Property
is being contested by the LFC Creditors' Committee. See "Intercompany Claims
- -- Title to Certain Assets."
c. Other Properties. In addition to the Allen and Beaumeade
Properties, STL owns other unimproved land in Texas and California. The most
significant of these assets in terms of value are (i) unimproved land in
California consisting primarily of 93 single family residential lots (Zellner
Heritage Communities), (ii) approximately 68 acres of commercially zoned,
unimproved land in Dallas, Texas (the Folsom Property) and (iii) 39 partially
completed single family residential lots in California (Zellner-Lake Hills).
2. The Lomas Campus
In addition to conducting real estate businesses described above,
Reorganized LMUSA will own real property in Dallas, Texas (the "Lomas Campus")
on which are located office buildings occupied until June 30, 1996 by Lomas'
management and administrative and loan servicing personnel.
Of the buildings located on the Lomas Campus, the following are subject
to a mortgage held by Travelers (the "Travelers Lien"):
a. A building located at 1600 Viceroy Drive which contains
approximately 242,000 square feet of finished office space.
This building is currently occupied by LMUSA loan servicing
personnel, as well as corporate management and
administrative support services.
b. A building located at 1420 Viceroy Drive which contains
approximately 39,000 square feet of office space and is
currently vacant.
c. A building located at 1750 Viceroy Drive which contains
approximately 60,000 square feet of space, part of which is
office space and a portion of which is finished as a data
center. This building is currently leased to RIS under a
lease that terminates in December 1997. The Debtors have
recently sought Bankruptcy Court approval to assign the
lease to Excelis, Inc., provided that the lease obligation
is guaranteed by First American.
The remaining buildings located on the Lomas Campus are not subject to
the Travelers Lien and are as follows:
a. A building located at 8600 Harry Hines Boulevard which
contains approximately 285,000 square feet of space, of
which 225,000 square feet is office space and the rest is
warehouse space.
35
<PAGE> 42
b. A building located at 1526 Viceroy Drive which contains
approximately 14,000 square feet of office space and is
currently under short-term lease to First American Tax
Service.
c. Buildings located at 1510 Viceroy Drive (also known as 1502
and 1516 Viceroy Drive), which contains approximately
23,000 square feet of office space and are currently
vacant.
d. Buildings located at 1525 Viceroy Drive and 1770 Viceroy
Drive which contain, respectively, approximately 23,000 and
11,000 square feet of office space and are currently
partially leased to RIS under a lease which lease has been
assigned to and assumed by First American.
e. A 3.56-acre tract of land located at 1601 Viceroy Drive
which is used as an overflow parking lot and is opposite
1600 Viceroy Drive and 1750 Viceroy Drive.
It should be noted that beneficial ownership of 1770 Viceroy Drive,
1526 Viceroy Drive, 1510 Viceroy Drive (also known as 1502 Viceroy Drive and
1516 Viceroy Drive), 1525 Viceroy Drive and 8503 Harry Hines (vacant land) and
any proceeds of the sale thereof, all of which are owned legally by Lomas
Investment Properties, Inc. ("LIP"), an indirect subsidiary of LFC, is being
contested by the LFC Creditors' Committee. See "Intercompany Claims -- Title
to Certain Assets" below. The LFC Creditors' Committee has also objected to
the assignment of the RIS lease in respect of 1525 and 1770 Viceroy Drive.
On May 31, 1996, the Debtors and LIP entered into an agreement with
Benton Properties, providing for the sale of the Lomas Campus to Benton
Properties for $23 million, which agreement is subject to higher and better
offers through a public auction presently scheduled to be held on July 16,
1996. In the event that the Lomas Campus is sold to a different party pursuant
to the Auction, Benton Properties will be entitled to recover $250,000 in
reimbursement of its due diligence expenses. Pursuant to a stipulation and
order among Travelers, the Debtors and the LMUSA Creditors' Committee, which
established auction procedures, allocation mechanisms for the auction proceeds,
the allowance and treatment of Travelers' secured and unsecured claims, and
various waivers and releases by LMUSA of Travelers, and which was approved by
the Bankruptcy Court on May 31, 1996 (the "Travelers Stipulation and Order"),
these arrangements were confirmed and it was agreed that, subject to the
closing of the sale of the Lomas Campus, Travelers would receive, in respect
of its Secured Claim, approximately $11.45 million plus 50% of the excess, if
any, of the purchase price paid for the Lomas Campus (net of $250,000, as a
due diligence fee to Benton Properties if it is not the winning bidder) over
$23 million, and Travelers Secured Claim would be Allowed in the same amount.
The remaining sale proceeds (at least $11.55 million) will be retained by LMUSA
or (to the extent relating to properties legally owned by LIP) by LIP. The
auction and/or the closing of the sale of the Lomas Campus may occur after the
Confirmation of the LMUSA Plan.
3. Other Assets
In addition to conducting the real estate business described above and
owning the Lomas Campus, Reorganized LMUSA will also own the following assets:
a. Receivables
(1) GNMA Servicing Sale Agreement Holdback
The holdback under the GNMA Servicing Sale Agreement (the "GNMA
Agreement") is estimated to be approximately $13.7 million (excluding accrued
interest) as of June 30, 1996 and is to be applied against any indemnification
amounts owed to First Nationwide pursuant to the GNMA Agreement. Under the
GNMA Agreement, Reorganized LMUSA must indemnify First Nationwide for a period
of one year from October 2, 1995 for all losses incurred by First Nationwide
over $6,107,000, up to a maximum of 15% of the excess of the final purchase
price over $10 million (i.e. $13.7 million if the final adjusted purchase price
were to be $101.5 million, which is the minimum expected final purchase price),
as a result of (i) inaccuracies and breaches of representations, warranties and
covenants, (ii) the fact that the assets sold to First Nationwide meet or fail
to meet specified requirements and (iii) the occurrence of other contingencies
specified in the GNMA Agreement.
36
<PAGE> 43
Within ten business days after October 2, 1996, Reorganized LMUSA and
First Nationwide must effect a final settlement of the purchase price under the
GNMA Agreement. On the final settlement date, First Nationwide will pay to
LMUSA an amount equal to the final purchase price less the sum of (i) $76.5
million previously paid to LMUSA, (ii) $10 million of GNMA servicing transfer
fees to be paid to LMUSA and (iii) the aggregate amount of all losses
indemnifiable by LMUSA pursuant to the terms of the GNMA Agreement for which
First Nationwide has given notice to LMUSA prior to October 2, 1996 (up to a
maximum indemnifiable amount of 15% of the final purchase price over $10
million). The amount payable at the final settlement shall be accompanied by
interest thereon calculated at the federal funds rate plus one percent. In
addition, First Nationwide will transfer into an escrow account an amount equal
to the amount of indemnifiable losses properly notified to LMUSA with respect
to which LMUSA has disputed in writing its obligation to indemnify First
Nationwide.
It is not possible to predict the total amount (if any) of
indemnifiable losses under the GNMA Servicing Sale Agreement that will be
incurred by First Nationwide prior to October 2, 1996. Consequently, there can
be no assurance as to how much Reorganized LMUSA will realize of the $13.7
million holdback under the GNMA Agreement, although for purposes of preparing
the Liquidation Analysis and the financial statements attached as Exhibits III
and IV and of estimating the recoveries under the LMUSA Plan, it has been
assumed that the entire $13.7 million will be realized.
(2) Section 363 Sale Agreement Holdback
Under the Section 363 Sale Asset Agreement (the "Section 363
Agreement") a holdback of approximately $36.5 million as of June 30, 1996 is to
be applied against the indemnification amounts owed to First Nationwide
pursuant to the Section 363 Agreement. Under the Section 363 Agreement,
Reorganized LMUSA must indemnify First Nationwide for a period of 1 year from
January 31, 1996 for all losses incurred by First Nationwide, up to a maximum
of the sum of (x) $20.51 million plus (y) the greater of $16 million or 12% of
the difference obtained by subtracting $30.51 million from the final purchase
price, as a result of (i) inaccuracies and breaches of representations,
warranties and covenants, (ii) the fact that the assets sold to First
Nationwide meet or fail to meet specified requirements and (iii) the occurrence
of other contingencies specified in the Section 363 Agreement. The adjusted
purchase price as of May 31, 1996 was approximately $156 million, which is
subject to further adjustments for certain disputed items.
No later than ten business days following January 31, 1997, LMUSA and
First Nationwide will effect a final settlement of the purchase price under the
Section 363 Agreement. On the final settlement date, under the agreement
between the parties as amended, First Nationwide will pay to LMUSA an amount
equal to the final purchase price (i) less the sum of the first payment of
$49.75 million plus the second payment of approximately $59.5 million received
on May 31, 1996 (less any closing adjustments) and (ii) plus the aggregate
amount of all losses indemnifiable by LMUSA pursuant to the terms of the
Section 363 Agreement for which First Nationwide has given notice to LMUSA
prior to January 31, 1997 (up to the holdback amount.) The amount payable at
the final settlement will be accompanied by interest thereon calculated at the
federal funds rate plus one percent. In addition, First Nationwide will
transfer into an escrow account an amount equal to the amount of indemnifiable
losses properly notified to LMUSA and with respect to which LMUSA has disputed
in writing its obligation to indemnify First Nationwide.
It is not possible to predict the total amount (if any) of
indemnifiable losses under the Section 363 Sale Agreement that will be incurred
by First Nationwide prior to January 31, 1997. Consequently, there can be no
assurance as to how much Reorganized LMUSA will realize of the $36.5 million
holdback under the Section 363 Agreement, although for purposes of preparing
the Liquidation Analysis of the Debtors' Assets attached as Exhibit III (the
"Liquidation Analysis") and the financial statements attached as Exhibit IV and
of estimating the recoveries under the LMUSA Plan, it has been assumed that the
entire $36.5 million (other than $20.0 million, representing estimated reserves
for receivables to which a portion of the holdbacks relate) will be realized.
One of the indemnified contingencies relates to losses on loans the
servicing rights for which were acquired by LMUSA from First Eastern Mortgage
Corporation and certain of its affiliates (collectively, "First Eastern").
LMUSA has brought an action against First Eastern asserting fraud and breaches
of various representations and warranties in connection with the transfer of
servicing rights to LMUSA. LMUSA believes that its claims against First
Eastern should cover any indemnification losses for which it is responsible
under the Section 363 Sale Agreement, but there can be no
37
<PAGE> 44
assurance that LMUSA will prevail in its action against First Eastern or that
First Eastern will have sufficient funds to pay any damages eventually awarded
to LMUSA.
b. Conseco Note. Reorganized LMUSA will hold a subordinated
promissory note with a face amount of $15 million given by JNL Acquisition
Corporation, an affiliate of Conseco Capital Partners, L.P. ("Conseco") in
conjunction with its November 1990 purchase of the Lomas Life Group. Since
November 1992, the note has accrued interest at an annual rate of 10%.
Principal and accrued interest are due on November 27, 2000; however, the note
is subject to offset for certain indemnification claims of Conseco, which the
Company believes will total at least $6 million and possibly as much as $13
million.
It should be noted that the beneficial ownership of the Conseco Note is
being contested by the LFC Creditors' Committee. See "Intercompany Claims --
Title to Certain Assets."
c. Residual Interest in CMO Trust. Reorganized LMUSA will own a
residual equity interest in a trust holding $10 million of original face value
Class A-4 GNMA-Collateralized Mortgage Obligations bearing interest at 12.0%
and maturing on March 17, 2014. The Company estimates that as of June 30, 1996
this investment will be worth approximately $1.1 million.
d. Receivable from Landel Plaza Sale. Reorganized LMUSA will hold
a receivable relating to the sale of the Landel Plaza retail and office
complex, located in Vancouver, Washington, to Andresen Plaza Partnership, L.P.
on October 15, 1993. The receivable is due in October 2003 and accrues
interest at an annual rate of 9%. The receivable is secured by the property
and rents. The Company believes that as of June 30, 1996 the receivable will
be worth approximately $1.5 million to $1.8 million.
e. Furniture, Fixtures, Art and Antiques. Reorganized LMUSA will
own fixtures, equipment, furniture, antiques and artwork, which are all valued
at a book value of approximately $1.9 million. Reorganized LMUSA has engaged a
professional liquidator to dispose of these assets.
4. Cash and Cash Equivalents of Reorganized LMUSA
In addition to the assets listed above, as of June 30, 1996 Reorganized
LMUSA is expected to have $5 million in the form of cash and cash equivalents.
5. Insurance Business: Lomas Insurance
Lomas Insurance Services, Inc. ("Lomas Insurance"), which conducts
Lomas' insurance business, is a wholly- owned subsidiary of LMUSA. Even though
the Company expects that Lomas Insurance will remain profitable, in the absence
of an affiliation with a mortgage servicing company, its revenue base and
profit margin are expected to decline. The LMUSA Creditors' Committee and
management of LMUSA concur that, in order to preserve Lomas Insurance's value,
the subsidiary should be sold. Accordingly, Cohane Rafferty Securities, Inc.
("Cohane Rafferty"), mortgage banking expert and financial advisor to the
LMUSA Creditors' Committee, has been retained to conduct the marketing and sale
of these operations. However, the LMUSA Creditors' Committee (before the
Effective Date of the LMUSA Plan) and the Board of Directors of Reorganized
LMUSA (on or after the Effective Date) reserve the right to elect to retain
Lomas Insurance as an ongoing business, in which case it will constitute
Reorganization Assets of Reorganized LMUSA.
Lomas Insurance operates a national network of insurance agencies which
provide insurance coverage for primarily residential properties. Prior to the
sale of LMUSA's servicing portfolio, Lomas Insurance provided "forced- placed"
coverage for mortgaged properties for which evidence of insurance had not been
provided by the homeowner and solicited property insurance business from
homeowners whose mortgages were serviced by LMUSA. Through these programs, and
through acquisition of the books of business from other agencies, Lomas
Insurance accumulated a significant book of insurance business, consisting of
homeowners', fire, flood and other personal lines annual policies. Revenues
from renewals and new sales are projected to exceed $5 million in calendar
1996.
Lomas Insurance initially grew as a result of LMUSA's acquisitions of
other mortgage companies, which frequently included affiliated insurance
companies or agencies. Each company or agency remained independent until 1985,
when
38
<PAGE> 45
management centralized control and converted to an automated agency management
system. Historically, Lomas Insurance has had high profit margins compared to
other insurance agencies; its profit margin has generally been above 50%.
Lomas Insurance's pre-tax profit margin was 59% for fiscal 1995 but in the
absence of an affiliation with a mortgage servicing company, the margin is
projected to drop to 35% in 1996 and to continue to decline thereafter.
Lomas Insurance's agency network consists of three branch agencies
(California, Texas and Virginia) and two satellite offices (Florida and
Arizona) which provide the ability to transact insurance business in all
states. Lomas Insurance acts as agent representing numerous insurance
companies on an agency contract basis. The insurance company pays the agency a
commission on insurance sold, and the underwriting risk is assumed by the
insurance company. Ownership of "expirations" or right-to-renew policies is
held by the agencies so a change of insurance companies may be made at the
option of the agency.
LOMAS INSURANCE SERVICES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
($ Thousands)
<TABLE>
<CAPTION>
Actual Actual
12 Months Ended 6 Months Ended Projected 12 Months Ended
--------------- -------------- -------------------------
6/30/94 6/30/95 12/31/95 12/31/96 12/31/97 12/31/98
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Commissions Income 8,220 9,329 5,176 5,209 2,989 2,470
Other Income 448 452 112 134 113 90
Total Income: 8,668 9,781 5,288 5,343 3,102 2,560
Salaries & Selling Expense 2,209 2,253 1,083 1,722 1,539 1,414
Other Expenses 1,883 1,799 1,050 1,772 1,430 1,129
Total Expense: 4,092 4,052 2,133 3,494 2,969 2,543
Profit Before Taxes: 4,576 5,729 3,155 1,849 133 17
<CAPTION>
Actual as of Actual as of Projected as of
--------------- -------------- -------------------------
6/30/94 6/30/95 12/31/95 12/31/96 12/31/97 12/31/98
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash & Cash Equivalents 1,564 2,567 5,213 6,602 6,578 6,470
Other Current Assets 10,217 9,233 964 656 511 409
Net Fixed Assets 220 191 130 78 15 6
Other Assets 726 567 656 443 326 220
TOTAL ASSETS: 12,727 12,558 6,963 7,779 7,430 7,105
Accts Payable/Accrued Exp 2,255 2,964 3,227 2,194 1,712 1,369
Other Liabilities 956 13 8 8 8 8
Stockholders Equity: 9,516 9,581 3,728 5,577 5,710 5,728
TOTAL LIABILITY & STOCK- 12,727 12,558 6,963 7,779 7,430 7,105
HOLDERS EQUITY:
</TABLE>
Historically, commission income was a direct result of Lomas
Insurance's association with LMUSA. Like all mortgage servicers, and the
investors for which they service mortgages, LMUSA required its mortgagors to
insure the properties that secured their mortgages. If the mortgagor failed to
provide LMUSA with evidence of insurance on or before the insurance renewal
date, LMUSA obtained temporary insurance on the mortgagor's behalf in the form
of a 90-day binder. Generally, after 90 days, a new "forced-placement policy"
was put into effect with the premiums for that policy being paid from the
mortgagor's escrow account. Forced placement policies typically carry high
premiums and related commissions but have low retention rates.
Since the sale by LMUSA of its servicing portfolio, Lomas Insurance is
no longer affiliated with a mortgage servicer. Accordingly, no new
forced-placement insurance policies are being written. Retention of existing
policies has
39
<PAGE> 46
been estimated at 70% each year but, without the ability to write new
forced-placement policies, Lomas Insurance's revenues will diminish over time.
The line designated "Other Income" in the pro forma Projected Income
Statement above relates directly to the float earned on trust funds; as Lomas
Insurance's book of business declines, this income source will also decline.
"Other Income" also includes income earned by the agencies as contingent
payments, bonus commissions and profit sharing payments from the agency's
insurance companies. This source of revenue is also expected to decline
because it primarily reflects contingent commission income from the temporary
insurance program.
The property and casualty insurance industry is highly competitive, and
as a result, Lomas Insurance faces continuing difficulties, including
consolidations, downsizing among clients, lingering effects of natural
disasters, and fierce competition as insurance companies vie for market share.
Since 1987, the property and casualty insurance industry has been in a "soft
market," during which the underwriting capacity of insurance companies
expanded, stimulating an increase in competition and a decrease in premium
rates and related commissions and fees. Management cannot predict the timing
or extent of premium pricing changes due to market conditions or their effects
on the company's operations in the future, but believes that the "soft market"
conditions will continue into 1997.
6. Other Information Relating to the Business of Reorganized LMUSA
A consolidated statement of financial condition for Reorganized LMUSA
as of June 30, 1996, giving effect to the transactions contemplated by the
LMUSA Plan on a pro forma basis is set forth in Exhibit IV.
For federal income tax purposes, the Company estimates that Reorganized
LMUSA will, after the Effective Date under the LMUSA Plan and the transactions
contemplated thereby, have NOLs of about $343 million. This estimate does not
take into account any gain or loss that may be recognized upon any distribution
of LMUSA's Non- Reorganization Assets deemed to occur, for federal income tax
purposes, as of the Effective Date, and is based on the assumption that the
Effective Date is after June 30, 1996. For a further discussion of the NOLs of
Reorganized LMUSA and possible limitations on the use of such attributes, see
"Federal Income Tax Consequences of the Plans" below.
It should be noted that certain assets that are on the books of LMUSA
and LFC may be placed in an Intercompany Claims Reserve or otherwise
transferred from one Debtor to another in accordance with the Plans. Some of
these assets may eventually inure to the benefit of Reorganized LMUSA. See
"Intercompany Claims" below.
B. POTENTIAL FOR GROWTH, NEW INVESTORS
LMUSA believes Reorganized LMUSA has potential for growth through,
among other things, the expansion of its existing operations and acquisition of
other businesses. Accordingly, after the Effective Date, Reorganized LMUSA may
seek to identify one or more individuals or entities (individually or
collectively, as the case may be, the "LMUSA Investors") willing to invest in
Reorganized LMUSA in consideration for a significant percentage of New LMUSA
Common Stock. Although the issuance of New LMUSA Common Stock to such LMUSA
Investors could result in a substantial dilution of the equity interest in
Reorganized LMUSA to be distributed to holders of Claims of LMUSA pursuant to
the LMUSA Plan, attracting such LMUSA Investors on acceptable terms may be in
the long-term best interest of such holders. There can be no assurance at this
time that LMUSA Investors will be identified or that Reorganized LMUSA will be
able to attract sufficient capital to embark upon an acquisition program. In
the event that Reorganized LMUSA were to issue more than 50% of the New LMUSA
Common Stock to LMUSA Investors, Reorganized LMUSA's ability to use the tax
attributes described in "Federal Income Tax Consequences of the Plans -- Tax
Consequences to the Debtors -- Resulting Tax Consequences to LMUSA Group" would
be limited or, in some circumstances, eliminated.
Until such time as 4,000,000 shares of New LMUSA Common Stock have been
distributed, the Board of Directors will have responsibility for taking all
actions on behalf of Reorganized LMUSA, including actions which would otherwise
require approval of the stockholders. Thereafter, until at least 8,000,000
shares of New LMUSA Common Stock have been distributed in accordance with the
LMUSA Plan, any proposed action requires the approval of a majority of the
stockholders under applicable law, and all issued but not distributed shares
will be deemed to be voted for or against the proposed action in the same
proportions as the issued and outstanding shares are so voted by the
stockholders.
40
<PAGE> 47
If no LMUSA Investors are willing to invest in at least 25% of the New
LMUSA Common Stock by the third anniversary of the Effective Date, the
Reorganized LMUSA Board of Directors may consider the adoption a plan of
liquidation for Reorganized LMUSA in accordance with applicable law without the
necessity of any vote by the stockholders.
For a description of certain restrictions on the transfer of New LMUSA
Common Stock, see "Securities to be Distributed Pursuant to the Plans --
Restrictions on Transfer of New LMUSA Common Stock" below.
C. BOARD OF DIRECTORS AND NEW MANAGEMENT OF REORGANIZED LMUSA
1. Board Of Directors of Reorganized LMUSA
The current LMUSA Board of Directors consists of Mr. Booth and the
following two individuals who, prior to July 1995, had no involvement with any
Lomas entity and who remain completely independent of LFC:
RONALD B. DARGA -- Director of LMUSA since July 1995; Executive Vice
President of MCA Mortgage Corporation (a mortgage banking company) since 1994;
prior thereto, Executive Vice President and Chief Operation Officer of
Lambrecht Company (a mortgage banking company) from 1990 to 1994; Executive
Vice President and Chief Financial Officer of Independence One Mortgage
Corporation (a mortgage banking company) from 1977 to 1989. Age 60.
JAMES L. DEUTCHMAN -- Director of LMUSA since July 1995; Principal with
Churchill Development (a real estate development company) since 1986; prior
thereto, Chief Financial Officer of Brody Group (a real estate development
company) from 1979 to 1986; with Coopers & Lybrand (an international public
accounting firm) from 1974 to 1979. Age 47.
It is contemplated that those members of the LMUSA Board of Directors
who are willing to serve as directors of Reorganized LMUSA will serve in that
capacity, until the Effective Date of the LMUSA Plan. Thereafter, a
Reorganized LMUSA Board of Directors will be comprised of five directors
designated by the LMUSA Creditors' Committee on or before the Confirmation
Date.
It is contemplated that the first annual meeting of shareholders will
be held by Reorganized LMUSA in June 1998.
For a description of the compensation paid by LMUSA to its directors
and for a description of the employment and other compensatory agreements of
current management of LMUSA, reference is made to LFC's Annual Report on Form
10-K for the fiscal year ended June 30, 1995, a copy of which is enclosed with
this Disclosure Statement. Mr. Booth, Mr. Feldman, Mr. Wickland and the other
members of Senior Management have each released LMUSA from all prior severance
or retention pay benefits to which they were entitled under their individual
employment and other compensatory agreements. Each such release is
conditioned, however, upon the continued effectiveness of the Retention Plan
and the Severance Plan.
2. New Management of Reorganized LMUSA
The initial officers of Reorganized LMUSA will be designated by the
LMUSA Creditors' Committee on or before the Confirmation Date.
D. SECURITIES OF REORGANIZED LMUSA
After the Effective Date, Reorganized LMUSA will have one class of
capital stock, Common Stock (par value ($.10)), which will be issued subject to
certain transfer restrictions pursuant to the LMUSA Plan. Reorganized LMUSA's
certificate of incorporation will also authorize the creation of one class of
Preferred Stock ($1.00) that may be issued in the future. See "Securities to
be Distributed Pursuant to the Plans -- New LMUSA Capital Stock" below and the
pro forma consolidated balance sheet of Reorganized LMUSA attached hereto as
Exhibit IV.
41
<PAGE> 48
VI. INTERCOMPANY CLAIMS
A. INTERCOMPANY ISSUES GENERALLY
The Company is organized in a holding company structure, operating its
business through direct and indirect subsidiaries. LMUSA is a wholly-owned
subsidiary of LFC, as are LIS and LAS. Over the years, funds and assets have
been transferred among the Debtors and between one or more of the Debtors 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 Debtors was insolvent, such transactions may be
avoidable, in whole or in part, as fraudulent conveyances under Section 548 of
the Code or similar provisions of applicable law, or as preferences under
Section 547 of the Code. Additionally, other actions in law or in equity may
be commenced in respect of such transactions or in respect of those other
possible claims described below.
B. RETENTION OF PRICE WATERHOUSE
The Debtors concluded in August 1995 that if they were to file Chapter
11 petitions, intercompany transactions within the Lomas group would come under
close scrutiny by the creditors of LFC and LMUSA, who would wish to consider
whether any of such transactions were void or should be avoided.
Through their Delaware bankruptcy counsel, Young, Conaway, Stargatt &
Taylor, the Debtors engaged Price Waterhouse LLP ("Price Waterhouse"), which is
independent of, and has not performed auditing services for, the Debtors, to
conduct an analysis of intercompany activity between January 1992, when LFC
emerged from its earlier Chapter 11 proceedings, and the Petition Date. Price
Waterhouse's mandate was to identify transactions which arguably could result
in a cause of action (including an avoidance action), and to describe the
circumstances surrounding such transactions.
Price Waterhouse has informed the Debtors and the Creditors' Committees
that for the period from January 31, 1992 through September 30, 1995, LFC and
its subsidiaries' intercompany and investment account activity aggregated $3.4
billion, processed through more than 235,000 transactions. Of this activity,
approximately $1.7 billion (more than 135,000 transactions) occurred between
LFC and LMUSA. Price Waterhouse reviewed approximately $1.6 billion of
intercompany transactions between LFC and LMUSA, and approximately $1.0 billion
of transactions affecting LFC's investments in subsidiaries. Based on this
review, Price Waterhouse determined that 78 transactions required further
analysis. Of these, approximately $140.7 million related to transactions
involving STL, approximately $18.1 million could possibly give rise to
avoidance Claims by LFC against LMUSA and approximately $9.5 million could
possibly give rise to avoidance Claims by LMUSA against LFC. In addition,
changes in the intercompany account balances within the year prior to the
Petition Date may have given rise to over $3.5 million of transfers to LMUSA
that could be avoided by LFC as preferences.
Price Waterhouse presented its findings to the Debtors and to the
Creditors' Committees in a series of meetings from February through April,
1996. A copy of Price Waterhouse's draft preliminary report dated February 27,
1996 (the "Price Waterhouse Report") is attached as Exhibit VI, to which
reference is made for descriptions of the transactions which Price Waterhouse
preliminarily concluded could arguably give rise to avoidance claims. As set
forth in Exhibit VI, the work and analyses performed by Price Waterhouse are
preliminary in nature and, in any event, are not intended to, and do not,
address defenses to the potential claims or estimates as to the probability of
prevailing on any potential claims. Moreover, the Price Waterhouse Report is
summary in nature, does not reflect a complete compilation of Price
Waterhouse's work and analyses, and was prepared for use in, and solely in the
context of, the bankruptcy proceedings. Accordingly, it should not be relied
upon for purposes outside those proceedings. The Debtors are including the
Price Waterhouse Report as an exhibit to provide information about Price
Waterhouse's analyses to date of transactions between LFC and LMUSA. The Price
Waterhouse Report was based on information obtained by Price Waterhouse from
the Debtors and does not reflect any opinion or other form of assurance by
Price Waterhouse regarding the information, its accuracy, or any other matters
contained in it.
The transactions that Price Waterhouse identified do not necessarily
represent the exclusive bases for causes of action against the Debtors (see
letters from the Creditors' Committees below). Price Waterhouse's retention
also included
42
<PAGE> 49
a review of potential Claims against third parties. With the consent of the
Debtors and the Creditors' Committees, Price Waterhouse has not pursued this
aspect of its engagement.
C. DESCRIPTION OF TRANSACTIONS AND ASSERTIONS OF THE COMMITTEES
There follows a brief summary of certain transactions described in more
detail in the Price Waterhouse Report:
Transactions Involving STL
o November 1993: Transfer by LFC to LMUSA of 49% of its interest
in STL.
o May 1994 -- April 1995: Advances from STL to LFC, increasing the
intercompany payable from LFC to STL to a high of approximately
$36.7 million.
o May 1995: Elimination of LFC's 51% investment in STL; elimination
of approximately $35.6 million of LFC's intercompany payable to
STL; transfer of approximately $1.1 million of LFC's intercompany
payable to STL to LFC's intercompany account with LMUSA.
o May 1995 -- June 1995: Advances by STL to LMUSA of approximately
$8.2 million, offset by transfer of Allen Property and notes
receivable (book value approximately $7.0 million, see below) by
LMUSA to STL in June 1995.
o April 1995 -- September 1995: Reimbursements by STL to Lomas
Management, Inc. ("LMI") for approximately $854,000 of losses
related to management of STL by LMI.
Transactions Involving LLG Lands, Inc. ("LLG Lands") /Allen Property
o June 1994: Transfer by LLG Lands (through LFC) to LMUSA of 49%
of the Allen Property (referred to in the Price Waterhouse Report
as the "Tycher Properties").
o January 1995: Transfer by LMUSA to LLG (through LFC) of 49% of
the Allen Property, reversing the June 1994 transaction.
o June 1995: Transfer by LLG Lands (through LFC) of (i) the Allen
Property and (ii) notes receivable, to LMUSA, reducing LFC's
intercompany payable to LMUSA by approximately $7.0 million ($6.5
million represents the approximate net book value of the Allen
Property plus approximately $462,000 net book value of notes
receivable).
o June 1995: Transfer by LMUSA to STL of the Allen Property and
notes receivable.
Transactions Involving the Note of Conseco
o May 1995: Transfer by LFC to LMUSA of tranche B of the
subordinated promissory note of Conseco and simultaneous
reduction of LFC's intercompany payable to LMUSA.
Transactions Relating to the Dissolutions of LAS and Lomas Marketing
Services, Inc. ("Lomas Marketing")
o June 1995: Transfer by LFC to LMUSA of LAS's $310,000 prepaid
pension account.
o June 1995: Transfer by LFC to LMUSA of LAS's (and its subsidiary
Lomas Marketing's) assets ($2.6 million represents the
approximate book value) and certain liabilities (approximately
$661,000 book value).
o June 1995: Assumption by LFC of LAS's $856,000 maximum liability
on the lease for office space at Bryan Tower.
43
<PAGE> 50
Transactions Relating to Lomas New York
o June 1995: Transfer by LFC to LMUSA of LFC's net investment in
Lomas New York, Inc. (approximately $732,000) and LFC's
intercompany payable to Lomas New York, Inc. (approximately
$472,000).
Transactions Relating to INTELLIFILE
o July 1993: Transfer by LMUSA to LFC of file-imaging assets;
simultaneous increase of intercompany receivable due from LFC by
approximately $2.8 million.
o July 1993 -- December 1994: Advances by LFC to INTELLIFILE
(which had by this time been incorporated) of approximately $7.0
million.
o December 1994: Conversion by LFC of a payable of approximately
$7.0 million from INTELLIFILE into an equity investment.
o December 1994: Transfer by LFC of INTELLIFILE to LMUSA (book
value of approximately $2.8 million).
o March 1995: Transfer by LMUSA of INTELLIFILE to LFC.
o August -- September 1995: Sale by LFC of INTELLIFILE to Dataplex
Corporation for approximately $4.2 million cash, a $320,000 note
receivable and an earnout of $129,000 (written off by LFC);
payment by LFC of approximately $248,000 commission to an LFC
employee; purchase by LMUSA of approximately $3.9 million of
prepaid imaging and consulting services from Dataplex; advance of
approximately $3.9 million by LFC to LMUSA; repayment by LMUSA of
approximately $2.3 million and reduction by LMUSA of prepaid
services by approximately $1.6 million and debit of LMUSA's
intercompany account with LFC.
As set forth below, some of these transactions are alleged to be
voidable either as fraudulent conveyances or preferences. A voidable
preference is a transfer by a debtor which transfer: (a) is to or for the
benefit of a creditor; (b) is for or on account of an antecedent debt; (c) is
made while the debtor was insolvent; (d) is made within 90 days before the
petition date (one year in the case of transfers among related companies); and
(e) enables the creditor to receive more than it would have received if the
transfer had not been made and the debtor had been liquidated under Chapter 7
of the Code.
A fraudulent conveyance under the Code is a transfer made by a debtor
within a year before its bankruptcy filing either (a) with "actual intent to
hinder, delay or defraud" creditors or (b) for which the debtor did not receive
"reasonably equivalent value" and which (i) was made while the debtor was (or
caused it to become) insolvent, or (ii) was engaged (or about to engage) in
business or a transaction for which its capital was unreasonably small or (iii)
intended to incur or believed it would incur debts beyond its ability to pay at
maturity. Under potentially applicable state laws, the standards are similar
but the relevant period is longer than one year and is likely to cover those
transactions identified by Price Waterhouse as requiring analysis.
If a transfer is found to be avoidable, Section 550 of the Code
provides that the debtor may recover the property transferred or, if the court
so orders, the value of such property, from the transferee or entity for whose
benefit the transfer was made. It is not clear how this applies where the
transferee (or benefitted entity) is itself in bankruptcy proceedings. The
issue is whether the right to recover property from a bankrupt estate is a
general unsecured claim entitled to participate on a basis similar to other
unsecured claims, or a right to a reconveyance of the property on the theory
that it "belongs" to the transferor. In the circumstances described above,
this translates into a question whether any avoided transfer will give rise to
a return of the transferred property (or cash or other property having a value
equal to 100% of the value of the property) or merely a claim that will
participate ratably with general unsecured creditors. There is no controlling
legal precedent on this issue and, as set forth below, the LFC Creditors'
Committee and the LMUSA Creditors' Committee are taking different positions as
to how it should be resolved.
44
<PAGE> 51
The extent, if any, to which any of these transactions are avoidable as
preferences or fraudulent conveyances will depend on whether, at the time of
the transaction, the transferor company and, in some cases, the transferee
company was "insolvent." Under the Code, a company is "insolvent" if the sum
of its debts is greater than all of its property "at a fair valuation." Under
various state fraudulent conveyance laws the formulation is slightly different,
but in each case it is the actual value of a company's assets at the relevant
time, not the value under generally accepted accounting principles, that is
determinative.
Price Waterhouse has not undertaken to assess whether, and to what
extent, LFC and LMUSA were insolvent at the times when the transactions
described above took place. This analysis is being performed for the LFC
Creditors' Committee by Houlihan Lokey Howard & Zukin and for the LMUSA
Creditors' Committee by Zolfo Cooper, LLC and Cohane Rafferty.
D. TITLE TO CERTAIN ASSETS
Legal title to certain assets that are carried on the books of
LMUSA or its subsidiary, STL, is held by direct and indirect subsidiaries of LFC
that are not subsidiaries of LMUSA. Legal title to the Allen Property, as well
as approximately $3.3 million received as proceeds of the sale in 1995 of
portions of the Allen Property, is held by LFC's subsidiary LLG Lands. In
addition, LFC is the named payee under the Conseco Note notwithstanding the
transfer of that note to LMUSA on LFC's and LMUSA's books and records in May
1995. Finally, LIP owns legal title to four buildings and a tract of vacant
land which are included in the Lomas Campus, even though these properties are
shown as assets on the books and records of LMUSA. These four buildings and the
tract of land have an aggregate estimated value of between $1.5 million and $1.8
million. See generally, "General Information Relating to Reorganized LMUSA --
Business of Reorganized LMUSA" above for descriptions of those assets. The LFC
Creditors' Committee is continuing to investigate whether there may be other
assets of the Debtors and their subsidiaries to which LFC (or a subsidiary) may
hold title.
The LFC Creditors' Committee has asserted that (i) the cash and real
estate assets owned legally in the name of LLG Lands belong beneficially to LLG
Lands, not STL, (ii) the Conseco Note was never validly transferred to LMUSA
and remains part of the LFC estate and (iii) LIP, rather than LMUSA, should be
considered to be the owner of the Lomas Campus buildings referred to above. In
contrast, the LMUSA Creditors' Committee has asserted that the beneficial
interest in such assets is held by STL (in the case of the Allen Property and
cash proceeds thereof) or LMUSA (in the case of the Conseco Note and the Lomas
Campus buildings).
E. INTERCOMPANY EXPENSE ALLOCATIONS, PRICING AND POSSIBLE SUBSIDIES
Other aspects of the pre-petition relations among the Debtors and their
subsidiaries that could have given rise to Intercompany Claims are (i)
allocation among such companies of overhead expenses not clearly attributable
to only one company, (ii) pricing for services rendered by one company to
another and (iii) undertakings by one company in support of, or related to,
transactions of another company.
At the request of the Creditors' Committees, Price Waterhouse provided
information regarding the allocation of various overhead expenses among the
companies in the Lomas group. This information was provided on April 5, 1996
and is still being reviewed by the Creditors' Committees. Price Waterhouse's
analysis of intercompany expense allocations remains incomplete, and the LFC
Creditors' Committee has requested that Price Waterhouse continue its
investigation in this area. At this time, the Debtors cannot predict the
extent to which any such allocations will be challenged or by which Creditors'
Committee or the likelihood of success of any such challenge.
The principal area where intercompany transfer pricing could be at
issue relates to the purchase by LMUSA of data processing and other services
from LIS before its assets were sold to RIS. If such services were provided at
less than arm's-length prices, LMUSA's income would have been increased and
LIS' income consequently reduced by the amount of the disparity between the
price charged and arm's-length prices for such services. Similarly, if LMUSA
paid more than arm's-length prices for data processing services, LMUSA's income
for the relevant periods would have been depressed, and LIS' increased, by the
amount of difference. The Debtors understand that the Creditors' Committees
are investigating the LMUSA/LIS pricing policies as well as other intercompany
pricing issues, but the Debtors are not aware of any challenge to such pricing
at this time and cannot predict the likelihood of success of any challenge that
may be mounted.
45
<PAGE> 52
As set forth above under "Background and General Information -- The
Chapter 11 Filings -- Executory Contracts and Leases," LFC is a party to a
contract for telecommunication services, the rejection of which pursuant to the
Joint Plan will give rise to potential damages Claims of approximately $3.2
million; LIS is a party to eight telecommunications equipment and services
contracts with potential damages Claims of approximately $3.0 million in the
aggregate. Until LMUSA sold its mortgage servicing business, LMUSA reimbursed
LFC and LIS, respectively, for substantially all of their expenses under these
contracts. Therefore, there is an issue whether LFC and LIS will have Claims
against LMUSA for any damages Claims against them caused by its rejection of
the contracts.
The LMUSA Creditors' Committee has questioned whether (i) the prices
paid by LMUSA to RIS under the data processing service bureau agreement and
(ii) more importantly, the undertaking by LMUSA to pay deconversion penalties
to RIS if LMUSA's loans on RIS' system dropped below a specified amount (see
"Background and General Information -- Asset Sales Prior to Chapter 11 Filing
- -- Sale of Debtor LIS Assets"), may have been non-arm's-length transactions
entered into by LMUSA for the benefit of LIS (or LFC as LIS' sole stockholder)
at a time when LMUSA was insolvent. In that case, and if any benefits to LMUSA
from LIS' sale of its assets to RIS were found not to constitute "reasonably
equivalent value" to LMUSA, a portion of LMUSA's payments to RIS for data
processing services, and all or a portion of its undertaking to pay
deconversion penalties, could be found to have constituted a voidable
fraudulent conveyance for the benefit of LIS and/or LFC.
The LFC Creditors' Committee has asserted that LIS supplied services to
LMUSA at less than arm's-length prices. Further, the LFC Creditors' Committee
has asserted that LIS benefitted only LMUSA and that LIS operating losses in
the amount of $130 million were paid by LFC for LMUSA's benefit.
F. TAX-SHARING AGREEMENT
As of June 30, 1992, certain corporations which are members of the
Lomas Group, including each of the Debtors, entered into an agreement in order
to set forth their understanding with regard to certain federal income tax
matters (the "Tax-Sharing Agreement"). Pursuant to the Tax-Sharing Agreement,
LMUSA and its subsidiaries are obligated in certain circumstances to make
payments, the amount of which is based on a formula set forth in the Agreement,
to LFC. Although the Debtors do not believe any amounts are owing under the
Tax-Sharing Agreement, the LFC Creditors' Committee believes that payments may
be required to be made thereunder to LFC by LMUSA and its subsidiaries.
G. ASSERTIONS OF THE COMMITTEES
At the Debtors' request, the LFC Creditors' Committee and the LMUSA
Creditors' Committee have supplied statements relating to intercompany issues
and other matters. Inclusion of such statements does not imply that the
Debtors agree with such statements.
1. Position of LFC Creditors' Committee
The LFC Creditors' Committee has supplied the following statement:
"Based solely on the preliminary investigation and reporting made
by Price Waterhouse, and assuming further investigation and
analysis confirms our expectation that LFC and/or LMUSA were
insolvent as of or before early November, 1993, there were at the
very least in excess of $113 million of transfers and
transactions made by LFC, either directly or indirectly, to LMUSA
which may constitute either preferences or fraudulent transfers.
Even assuming the insolvency of LFC and/or LMUSA did not
definitively occur until one year prior to the filing date, the
preliminary information now available indicates that there were
more than $62 million of preferential and/or fraudulent transfers
by LFC to LMUSA. Based on the preliminary investigation by Price
Waterhouse and the LFC Committee's preliminary analysis, the LFC
Committee believes that its claims against LMUSA may be as much
as $216 million or more.
"Importantly, these claims against LMUSA constitute the largest
asset in the LFC Estate and, therefore, resolution of these
intercompany claims will be critical to the confirmability of a
plan for LFC. The Disclosure Statement does not adequately
discuss and explain this all important fact.
46
<PAGE> 53
Financial and Equitable Insolvency of LMUSA
"When LFC emerged from its first bankruptcy, its reorganization
plan provided for the issuance of two tranches of debt: One at
the LMUSA level in the amount of $330 (later $340) million (the
"LMUSA tranche") and the other at the LFC level in the amount of
$140 million (the "LFC tranche"). Because LFC was highly
leveraged coming out of the first bankruptcy, LFC had
insufficient assets to support the LFC tranche. To resolve this
problem, ST Lending, Inc. ("STL") was established as a subsidiary
of LFC to provide credit support for the LFC tranche.
"In November 1993, LMUSA ran into financial trouble because of a
large runoff of its servicing rights portfolio caused by, inter
alia, an extraordinary erosion in home mortgage interest rates.
LMUSA was, in fact, close to a default under its tangible net
worth covenant contained in its secured bank credit agreement and
may, in fact, have been out of compliance with the FANNIE MAE and
GINNIE MAE regulatory capital requirements. LFC transferred its
own 49% interest in STL to LMUSA to shore up LMUSA's capital and
cure this problem.
Claims Involving STL
"Prior to November 1993, STL and LMUSA were each wholly owned
subsidiaries of LFC. On or about November 19, 1993, LFC
transferred to LMUSA 49% of its stock in STL in exchange for
which LFC received 200 newly issued shares of common stock in
LMUSA. At best, this was an illusory transaction. Given the
fact that LMUSA was wholly owned by LFC at the time of the
transaction, the granting of additional common stock in LMUSA to
LFC gave LFC nothing more than it already had. Thus, LFC did not
receive equivalent value from LMUSA in exchange for the transfer
of 49% of the stock in STL.
"It has been asserted that, notwithstanding the illusory nature
of the stock exchange, LFC received equivalent value because the
value of LMUSA was enhanced and increased by the transfer of the
STL stock. This, however, assumes that both LFC and LMUSA were,
at the time, solvent. The case of Murphy v. Avianca, Inc. (In re
Duque Rodriguez), 77 B.R. 937 (Bankr. S.D. Fla. 1987), is
directly on point. There, the parent corporation paid the
freight charges for delivery of coffee beans to its subsidiary.
When the parent and the subsidiary filed for chapter 11
protection, the trustee of the parent sought to recover the
payment made to the freight carrier as constructively fraudulent
because the parent did not receive fair consideration. The court
found that the parent had received no equivalent value in
exchange for the transfer:
"'If [the subsidiary] had not been insolvent at the time
its corporate parent paid the freight for goods delivered
to [the subsidiary] and if [the subsidiary] had not
subsequently filed for bankruptcy, I would find that its
corporate parent, ... had received an indirect benefit from
the three-sided transaction in this case, a benefit at
least equal in value to the sum it paid. But I cannot
ignore the reality that, in view of [the subsidiary]'s then
terminal insolvency, the net worth of [the parent] was
diminished by the transfer and the innocent creditors of
[the parent] were in fact harmed by the transfer.'
"77 B.R. at 938. Likewise, here, the transfer of STL stock from
LFC to LMUSA may be avoidable because, inter alia, LFC did not
receive reasonably equivalent value in exchange for the transfer.
STL was, at the time, providing credit support for LFC and LFC
was receiving the benefit of dividend payments from STL. This
benefit to LFC was lost, in whole or at least in part, as a
result of the transfer of STL stock to LMUSA.
"Moreover, the LFC Committee believes that as more information
becomes available to the LFC Committee and its professionals,
further analysis and investigation will disclose that, in fact,
LFC and LMUSA were insolvent, were not able to pay their debts as
they came due or had unreasonably small capital with which to
operate at the time of the STL stock transfer to LMUSA and that
the transfer of the STL stock to LMUSA was done for the specific
purpose of shoring up LMUSA so that it could avoid defaulting on
the covenant restrictions in its secured bank debt.
47
<PAGE> 54
"Because the transfer of STL stock was made without fair
consideration, and LMUSA was insolvent or unable to pay its debts
as they became due or had unreasonably small capital, LFC was
left insolvent and/or with inadequate capital and/or in a
position where it was, or soon would be, unable to pay its
obligations as they came due. Such results lead to the
conclusion that all subsequent transfers were also fraudulent
under Bankruptcy Code Section 548.
Lack of Consideration for Intercompany Transfers
"In July 1993, LMUSA transferred $2.8 million worth of assets to
LFC which were used to create Intellifile, Inc. as a wholly owned
subsidiary of LFC. Over the next sixteen months, LFC funded the
operations of Intellifile, during which time Intellifile
continued to provide database, communications and document
management services to LMUSA -- the same services that LMUSA had
previously been providing to itself with the assets that were
transferred to LFC to create Intellifile. Notwithstanding that
LMUSA paid for the services received from Intellifile, LFC
incurred $7.0 million of losses from the Intellifile operations.
Thus, as a result of LFC's creation of Intellifile, LMUSA was
able to gain the benefits of Intellifile's operations and
transfer the losses onto LFC in order to avoid what otherwise
might have led to a covenant default by LMUSA under its bank
obligations.
"Similarly, prior to LFC's first bankruptcy, LMUSA transferred to
LFC the assets used to create LIS and LFC funded the creation and
operation of LIS for the benefit of LMUSA. The operation of LIS
was a benefit to LMUSA because LMUSA's business activities were
dependent on the data and computer information services provided
by LIS at what the LFC Committee believes were subsidized prices.
As with Intellifile, though LMUSA paid for the services received
from LIS, between January 1992 and June 1995, LIS caused LFC
operating losses of $63 million. In or about June 1995, LFC sold
LIS to Prudential Real Estate Services for consideration that
included, inter alia, contingent payments based on the future
operating performance of LIS. However, Prudential closed down
the business of LIS shortly after the acquisition, thereby
rendering the contingent payments worthless. LFC took a
write-down of $27 million to reflect the impairment of this
"asset".
"Accordingly, LFC's LIS and Intellifile related claims against
LMUSA total approximately $7.0 million and approximately $130.0
million, respectively.
"Furthermore, following the STL transfer, LFC began to run up
large intercompany debt obligations to LMUSA and STL, largely
because it no longer had the full credit support coming from STL
and partly because significant funds were transferred to LIS. As
a result of the transfer of the 49% of stock to LMUSA, STL could
no longer "dividend" money up to LFC, but instead had to "loan"
the money to LFC. STL proceeded to write off losses on its
portfolio, which may be attributable to the fact that it was
liquidating its portfolio too fast in order to raise cash to loan
to LFC, LIS and Intellifile and to pay dividends to LMUSA. But
for the uncompensated transfer of 49% of the STL stock to LMUSA
and the subsequent cancellation of the remaining 51% of stock,
and the drain of LIS and Intellifile, LFC would have had
sufficient funds to meet the obligations under the LFC tranche
and would not have run up the intercompany account with LMUSA and
STL. Accordingly, a recast of the intercompany balances,
assuming the interests in STL had not been transferred and LFC
did not fund Intellifile and LIS operations, will show that there
is no intercompany debt due LMUSA from LFC and, therefore, LMUSA
cannot be deemed to have paid consideration for the STL transfers
or any subsequent transfers to LMUSA.
Other Claims
"Based on the preliminary investigation and reports from Price
Waterhouse, as set forth in Section VI of the Presentation to The
Creditors' Committee of LFC and LMUSA, February 27, 1996, LFC
also has avoidance claims against LMUSA including, but not
limited to, approximately $58.3 million, including transfers to
LMUSA of the Tycher properties by LLG Land, Inc.; transfer to
LMUSA of the Conseco Tranche B Note; transfer of LAS and Lomas
Marketing to LMUSA; transfer of Lomas NY to LMUSA;
transfers of investments in Trust Accounts, bank accounts, and
prepaid pension plans. In addition, about May 1, 1995,
48
<PAGE> 55
LFC cancelled the remaining 51% of the stock it owned in STL. The
immediate effect of this transaction was to confer on LMUSA 100%
ownership of STL. According to the Debtors, it also caused a
$36.7 million reduction on the books of the intercompany accounts
payable owed by LFC to STL. See Presentation to The Creditors'
Committee of LFC and LMUSA, February 27, 1996 at VI-5. In
addition, the Price Waterhouse preliminary investigation and
reports identify several debit transactions which Price
Waterhouse did not view as potential claims, but which, upon
further investigation the LFC Committee believes may be found to
be valid claims in the amount of approximately $6.4 million. See
Presentation to The Creditors' Committee of LFC and LMUSA,
February 27, 1996 at VI-6. The Price Waterhouse as well as the
LFC Committee investigations are ongoing and the claims discussed
in the Disclosure Statements do not necessarily constitute the
full scope of claims against LMUSA.
Contract Rejection Claims
"LFC is a party to a contract for telecommunication services, the
rejection of which pursuant to the Joint Plan will give rise to
potential damage claims of approximately $3.2 million. LIS is a
party to eight telecommunication equipment and service contracts,
the rejection of which pursuant to the Joint Plan will give rise
to potential damage claims of approximately $3.4 million in the
aggregate. Therefore, the LFC Committee believes LMUSA is also
liable for the rejection claims that will arise as a result of
the rejection by LFC and LIS of these contracts and LFC will have
a claim against LMUSA in the amount of approximately $6.6
million. In addition, there are at least $1.5 million of
additional rejection damage claims which have not been allocated.
Price Waterhouse is reviewing the Lomas prepetition allocation
methodology in order to determine whether the additional claims
may be asserted by LFC against LMUSA.
Preferences and Fraudulent Transfers
"The preliminary Price Waterhouse reports have indicated that
these bankruptcy proceedings involve more than 235,000
intercompany and investment transactions involving as much as
$3.1 billion. Price Waterhouse necessarily pared these down for
its initial investigation and has, to date, reviewed
approximately $1.6 billion of intercompany transactions between
LFC and LMUSA, from which it selected 78 transactions involving
roughly $199 million for further analysis, including $141 million
of transactions involving STL, and $22 million of other potential
avoidance claims that could be brought by LFC against LMUSA. To
date, the Price Waterhouse investigation, however, has included
only what Price Waterhouse describes as preference actions,
primarily occurring within one year prior to the bankruptcy
filings. There are, therefore, at least $27 million of
additional transactions identified but not yet investigated by
Price Waterhouse, that occurred outside of the one year preceding
the filing date and which remain open issues.
"These intercompany transactions constitute significant
preference and fraudulent transfer actions to be brought by LFC
against LMUSA under Bankruptcy Code Sections 547, 548 and 550 as
well as under the applicable Texas Uniform Fraudulent Transfers
Act, Tex. Bus. & Com. Code Ann. Section 24.001 et seq. (West
1987), and Bankruptcy Code Section 544. At this early stage of
these proceedings, largely because of the lack of time that the
LFC Committee and its professionals have had in which to conduct
their own due diligence and investigation, it is not possible to
specifically identify how each of these claims will be framed and
brought. To the extent there is an argument that any one or more
of these transactions involved consideration and occurred within
one year of the filing date, they will be identified as
preference actions under Bankruptcy Code Section 547. Where
consideration did not exist and the entities were insolvent --
factors which the LFC Committee and its professionals now believe
existed with respect to most if not all of these transactions --
they will be identified as fraudulent transfer actions under
either Bankruptcy Code Section 548 or the Texas UFTA and
Bankruptcy Code Section 544. In total, based upon the preliminary
information available from the Price Waterhouse report alone LFC
has approximately $110 million of fraudulent conveyance claims
against LMUSA and $60 million of potential preference claims.
The funding of Intellifile and LIS for the benefit of LMUSA and
the addition of the rejection damage claims substantially
increases LFC's overall claims.
49
<PAGE> 56
LFC is Entitled to a Priority Claim
"The LFC Committee believes that the LFC Estate will be entitled
to a priority claim with regard to the recoveries on the
above-described actions. Based on information and documentation
currently available to the LFC Committee and its professionals,
it appears that many of the transfers in question lacked
consideration or were not properly documented such that the
transfers themselves were incomplete or, in fact, nonexistent
except for book entries. By way of example, but not in
limitation, this appears to be the case with regard to the
transfers of the Allen Properties, the Conseco Note, the Dallas
Campus properties and certain other LFC assets. As a result, and
notwithstanding the book entries or the purported attempt to
transfer legal title to such assets, interests and properties
remains in LFC.
"The constructive trust doctrine, common to many states
(including Texas), assumes significant import in bankruptcy
cases because of Bankruptcy Code Section 541(d). The Code defines
"property of the estate" very broadly, encompassing most of the
property held by a debtor. See, 11 U.S.C. Section 541. However,
Section 541(d) accords the beneficiary of a constructive trust,
established under state law, the right to recover the trust
property itself from the bankruptcy estate. The LFC Committee
believes that LFC will be the trust beneficiary and will seek to
recover property and proceeds into a constructive trust from the
debtor, LMUSA."
2. Position of LMUSA Creditors' Committee
The LMUSA Creditors' Committee has supplied the following statement:
"LMUSA has additional claims against LFC, LIS and LAS, both
related and unrelated to the transfers identified by Price
Waterhouse. The LMUSA Creditors' Committee is conducting an
ongoing investigation of potential fraudulent transfer and
preference claims, well as other causes of action against the
Debtors, and, thus, LMUSA contemplates asserting additional
claims not set forth below.
"The values attributed to the assets identified by Price
Waterhouse and set forth in the previous pages are based on book
values and, thus, do not purport to represent actual values of
assets. Accordingly, LMUSA may have fraudulent transfer claims
against LFC for many of the asset transfers to the extent that it
paid cash in excess of the actual value of the assets it
purchased. Moreover, the actual value of the asset transfers
will also necessarily impact the dollar amount of claims LFC can
assert against LMUSA.
"ALL CLAIMS ARE SUBJECT TO LITIGATION, THE SUCCESS OF WHICH CANNOT
BE PREDICTED WITH CERTAINTY. THE LIST OF POTENTIAL CLAIMS AND
DEFENSES SET FORTH BELOW DOES NOT CONSTITUTE AN OPINION AS TO THE
LIKELY OUTCOMES OF ANY LITIGATION THAT ARISES OUT OF SUCH CLAIMS
OR DEFENSES.
"The LMUSA Creditors' Committee asserts the following
transactions, among others, give rise to avoidable transfer
claims against LFC or its direct subsidiaries under the
Bankruptcy Code and state law: (i) dividend payments from LMUSA
to LFC; (ii) cash advances from STL to LFC without fair
consideration, including, but not limited to, excessive
management fees, below market interest, and non- interest bearing
loans; (iii) cash advances from LMUSA to LFC to the extent that
LMUSA received less than fair consideration for such advances,
including below market interest rates or non-interest bearing
loans; (iv) reductions in LMUSA's intercompany receivable account
from LFC for less than fair consideration; (v) LMUSA's assumption
of various employment contracts with LFC; (vi) LMUSA's transfer
of file-imaging assets to LFC for less than fair consideration;
(vii) LMUSA's transfer of INTELLIFILE to LFC for less than fair
consideration; (viii) the redemption of LFC's 51% interest in
STL, which vested LMUSA with 100% ownership of STL but cancelled
all intercompany payables due from LFC to STL; (ix) the purchase
of the Allen Properties from LFC; (x) LMUSA's transfer of its 49%
interest in the Allen Properties to LLG through LFC; and (xi)
LMUSA's payment of above market servicing fees to LIS.
50
<PAGE> 57
"LMUSA also has a cause of action against LIS for breach of
warranty because the LIS system, which LFC caused LMUSA to
convert to prematurely, was wrought with deficiencies. As a
result, LMUSA was unable to reconcile its escrow accounts and
sustained substantial losses.
"With respect to the Intercompany Claims the LFC Committee has
orally indicated it may assert against LMUSA, the LMUSA
Creditors' Committee believes LMUSA has meritorious defenses to
all or part of such claims.
"LFC has asserted various transfers of assets from LFC to LMUSA,
including, but not limited to, the transfer of the Conseco
Tranche B Note, the Allen Properties, STL, Lomas New York and the
assets of LAS and Lomas Marketing, constitute fraudulent
transfers. For LFC to prevail on its fraudulent transfer claims,
LFC must prove that both LMUSA and LFC were insolvent at the date
of such transfers. The LMUSA Creditors' Committee believes LFC
should not be able to overcome all indicia of solvency as of the
relevant dates, particularly with respect to the transfer of
LFC's 49% interest in STL to LMUSA in November 1993.
"The LMUSA Creditors' Committee also believes LFC caused LMUSA to
purchase illiquid assets in return for cash. LFC purposely
manipulated the intercompany accounts to enable LMUSA to continue
to advance funds to LFC without violating its loan covenants.
Through these transfers, LFC intentionally benefitted itself and
harmed LMUSA creditors, thereby subjecting any claims LFC
actually has against LMUSA to equitable subordination and other
remedies.
"In addition to the claims against LFC and its affiliates, the
LMUSA Creditors' Committee believes LMUSA and its creditors have
claims against present and former officers, directors, employees
and professionals. All these claims may be brought in various
tribunals as the LMUSA Creditors' Committee's investigations
proceed."
H. DESCRIPTION OF PROVISIONS OF THE PLANS
The Plans provide that the making of distributions to holders of
Unsecured Claims (other than those to the holders of Convenience Unsecured
Claims) is conditioned on at least a partial resolution of the Intercompany
Claims described above. Specifically, no such distribution may be made until
either (i) the two Creditors' Committees have agreed to a settlement of the
Intercompany Claims or the creation of an Intercompany Claims Reserve to be
funded by one or more of the Debtors' transferring assets agreed on by such
parties pending the resolution of the Intercompany Claims through litigation,
mediation or settlement, or (ii) the Bankruptcy Court has entered an order,
which has become final, either determining the allowed amounts of the
Intercompany Claims or establishing the maximum amounts thereof in order to
permit establishment of an Intercompany Claims Reserve as described above or to
establish distribution holdbacks that will assure protection to holders of the
Intercompany Claims if distributions to other creditors are made.
There can be no assurance that the Intercompany Claims can be resolved,
or even partially settled to the extent necessary to permit distributions to
unsecured creditors, without litigation, and it is impossible to predict how
long such litigation could take.
Recoveries under the Plans for holders of LMUSA Class 3 Claims, LFC
Class 3 Claims and LIS Class 3 Claims will depend on the outcome of the
disputes regarding the Intercompany Claims. For purposes of estimating the
range of recoveries for these classes, the Debtors have assumed that:
a. the maximum Allowed Claim of LFC and LIS against LMUSA and
its subsidiaries will not exceed $110 million, representing
(i) the maximum amount of the transactions shown under the
heading "Transactions involving STL" on page VI-5 of the
Price Waterhouse Report that could be viewed as voidable
transfers by LFC, (ii) the total amounts shown under the
heading "LFC's potential claims against LMUSA" on the same
page, (iii) the estimated value of the Lomas Campus
properties the legal title of which is in the name of LIP
rather than LMUSA and (iv) $6.2 million, representing the
maximum amounts that could be claimed by LFC and LIS in
respect of damage claims against them arising out of
rejection of telecommunication contracts;
51
<PAGE> 58
b. the maximum Allowed Claim of LMUSA against LFC and its
subsidiaries (other than LIS) will not exceed $32.1
million, representing (i) the maximum amount of the
transactions shown under the heading "Transactions
Involving STL" on page VI-5 of the Price Waterhouse Report
that could be viewed as voidable transfers by LMUSA and
(ii) the total amount shown under the heading "LMUSA's
potential avoidance claims against LFC" on page VI-5 of the
Price Waterhouse Report;
c. the maximum Allowed Claim of LMUSA against LIS will not
exceed $10.3 million, resulting from the Claim of RIS
against LMUSA in respect of deconversion penalties that
arguably were undertaken by LMUSA for the benefit of LIS;
and
d. the foregoing Claims will be required to be paid in full
ahead of distributions to general unsecured creditors.
However, the Debtors believe it is highly unlikely that LFC and its
subsidiaries will prevail in all Intercompany Claims against LMUSA, or vice
versa, or that all Intercompany Claims that are allowed will receive
distributions in priority to general unsecured creditors.
52
<PAGE> 59
VII. PRINCIPAL NON-INTERCOMPANY CLAIMS AGAINST THE DEBTORS
A. LFC
1. Undisputed Claims Against LFC
The principal undisputed and non-contingent Unsecured Claims against
LFC are as follows:
a. $145.5 million, representing approximately $139.9 million
aggregate principal amount of LFC's Senior Convertible
Notes and approximately $5.6 million of interest accrued
thereon prior to the Petition Date;
b. $6.0 million, representing the portion acknowledged by LFC
of Claims of $8.1 million asserted by participants in the
MSP; and
c. trade payables of approximately $200,000;
2. Disputed and/or Contingent Claims Against LFC
The MSP participants have asserted that the cessation of payment under
the MSP because of the automatic stay is, in effect, a "termination" of the MSP
which is actionable against LFC, among others, as a breach of fiduciary duty.
The MSP participants have also asserted that LFC is obligated to pay the MSP
participants in full rather than as unsecured creditors. LFC disputes both of
these assertions.
On June 11, 1996, the Bankruptcy Court authorized the LFC Creditors'
Committee to commence and prosecute an action against the trustee under the
"rabbi trust" established for the benefit of the MSP participants seeking the
return of funds held in such trust. The rabbi trust was established and funded
by LFC to aid in meeting obligations to the MSP participants. LFC contends
that the funds in the rabbi trust constitute property of LFC's estate pursuant
to Section 541 of the Code. The MSP participants have contested this
assertion. The total funds in the trust were $7.5 million as of April 15,
1996. As set forth below under "Chapter 11 Plans -- Conditions Precedent," it
is a condition to Confirmation of the Joint Plan that the trustee has turned
over or been ordered to turn over the funds in the trust to LFC.
Other than Claims relating to the MSP and the rabbi trust, the
principal disputed Claims against LFC are as follows:
a. LFC's medical and pension-related obligations to certain
retirees of a life insurance company that it disposed of in
1990 of approximately $580,000; this covers 27 employees
and LFC believes that the present value of its obligation
is approximately $400,000;
b. directors' retirement plan obligations of $350,000; and
c. pension supplement of $48,000.
B. LMUSA
1. Undisputed Claims Against LMUSA
The principal undisputed and non-contingent Unsecured Claims against
LMUSA are as follows:
a. $357.9 representing $150 million aggregate principal amount
of LMUSA's 1997 Senior Notes, $190 million aggregate
principal amount of LMUSA's 10.25% Senior Notes due October
1, 2002 (together with LMUSA 1997 Senior Notes, "LMUSA
Senior Notes") and approximately $17.9 million of
pre-petition accrued interest on the LMUSA Senior Notes.
53
<PAGE> 60
b. $24.7 million, approximating the minimum unsecured
deficiency claim of Travelers. Pursuant to the Travelers
Stipulation and Order, Travelers claims have been allowed
in an amount equal to approximately $38.9 million less the
amount of any "adequate protection" payments (approximately
$677,600) made by LMUSA to Travelers since the Petition
Date. As set forth above, the Travelers claims are secured
by the Travelers Lien on three of the Lomas Campus
properties. Under the terms of the Travelers Stipulation
and Order, if the closing of the sale of the Lomas Campus
occurs in accordance with the Travelers Stipulation and
Order, the amount of the unsecured deficiency will be equal
to the $38.9 million less the sum of (i) approximately
$11.45 million, (ii) 50% of the excess, if any, of the
amount paid at such closing over $23 million (net of
$250,000 as a due diligence fee, to Benton Properties if it
is not the winning bidder) and (iii) the "adequate
protection" payments since the Petition Date (assuming a
sale price of $23 million and a closing date of July 1,
1996, Travelers unsecured deficiency would be approximately
$26.75 million). If the closing does not occur in
accordance with the Travelers Stipulation and Order, the
amount of the unsecured deficiency will be equal to $38.9
million less the sum of (i) the value of "adequate
protection" payments since the Petition Date and (ii) $13.5
million.
2. Disputed and/or Contingent Claims Against LMUSA
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 and sales taxes on those amounts allegedly due the state of
Texas. The deconversion penalties are triggered under the Excelis Service
Bureau Agreement between RIS and LMUSA (the "RIS Agreement") when LMUSA's
servicing portfolio falls below certain numbers of mortgage loans serviced.
RIS has filed a motion to have its Claim for these amounts paid as an
Administrative Claim. Pursuant to an order of the Bankruptcy Court, LMUSA has
withheld the full amount claimed in an interest-bearing account since the
second sale of mortgage servicing rights to First Nationwide pending final
resolution of RIS' Administrative Claim. RIS argues that the deconversion
penalty is a payment for services rendered in deconverting the LMUSA portfolios
from the RIS system and moving them to First Nationwide and that RIS' efforts
in that regard greatly benefited the LMUSA Estate. LMUSA's position is that
RIS 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 RIS Agreement and that 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 LMUSA
Creditors' Committee has formally moved to intervene for the purpose of
opposing the motion. LMUSA intends to reject the RIS Agreement and to
vigorously oppose RIS' motion, but there can be no assurance of success. To be
conservative, for purposes of the estimation of recoveries by the creditors of
LMUSA under the LMUSA Plan, it has been assumed that RIS will have a
pre-petition Claim for $10.3 million.
In addition, RIS has asserted a Claim for approximately $955,000 as
damages allegedly due as a result of LMUSA's sale and removal of its master
servicing portfolio from RIS' system to First Nationwide's system. LMUSA
believes there is no basis for this Claim because, among other reasons, no
penalty was specified in the agreement for removal and intends to vigorously
contest this Claim.
In addition, the MSP participants described above under "LFC --
Undisputed Claims Against LFC" have asserted that they have Claims against
LMUSA as well as LFC on the ground, among others, that LMUSA adopted the MSP
and is jointly and severally liable with LFC for any and all causes of action
they may have against LFC, at least as to those MSP participants who were
formerly employees of LMUSA. The Debtors are reviewing the positions taken by
the MSP participants. The LMUSA Creditors' Committee is opposed to the position
taken by the MSP participants.
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
five cases relating to the mortgage servicing business in which plaintiffs are
seeking class certification, at present no case against LMUSA, other than Moore
(described below), has been certified as a class action and in each such case
LMUSA believes a basis exists to contest class certification.
54
<PAGE> 61
o In Francis et al. v. LMUSA, pending in the United States District
Court for the Eastern District of Louisiana, plaintiffs had
proceeded the farthest as of the Petition Date with respect to
hearings on class certification. The plaintiffs had completed a
Chapter 13 plan and complained that the bankruptcy-related
charges imposed on payoff of their loan were excessive. While
the purported class plaintiffs seek to establish a class of
similarly situated mortgagors, LMUSA contends that the facts and
circumstances do not permit class certification because there are
few mortgagors who actually fit plaintiffs' particular fact
situation.
o The Plaintiffs in two cases are seeking class certification with
respect to force-placed insurance. The plaintiffs in Yacura v.
LMUSA and Lomas Insurance Services have filed a nationwide class
action adversary proceeding in the bankruptcy court, which is
being contested as an inappropriate proceeding for determination
of liability under the provisions of the Code. LMUSA has filed a
motion to dismiss the adversary proceeding; the LMUSA Creditors'
Committee supports LMUSA's motion. In their adversary complaint,
the Yacuras have asserted that they are entitled to damages that
would be characterized as cure payments and accordingly would be
entitled to administrative priority status. LMUSA disputes this
contention. The Yacuras have also asserted that, to the extent
they are entitled to cure payments, such payments must be made
prior to Confirmation. LMUSA disputes this contention. The
Yacuras have also filed a statewide class action in Allegheny
County, Pennsylvania, which seeks to establish liability against
Lomas Insurance with respect to force-placed policies issued at
the direction of LMUSA. In Nick v. Lomas Insurance Services, in
the District Court of Hennipen County, Minnesota, the plaintiffs
seek a class certification against Lomas Insurance, which issued
a force-placed policy at the instructions of LMUSA pursuant to
the provisions of the plaintiff's mortgage. The Debtors believe
that there are good defenses to this action and that, in any
event, the real party in interest should be LMUSA rather than
Lomas Insurance.
o Angulo v. LFC and LMUSA, in the Superior Court for the County of
San Francisco, challenges the legality of certain charges imposed
in releasing paid in full loans. The case alleges nationwide
violation of mortgage provisions as well as violation of state
law provisions in California. Service was not effected prior to
the Petition Date. While similar cases are being prosecuted by
the same counsel against other mortgage companies, no case has
developed sufficiently to determine the likelihood or amount of
liability.
o A proof of claim was filed by a California mortgagor, Bailey,
purportedly on behalf of a class of mortgagors who were allegedly
improperly charged costs incurred for inspection of properties
subject to delinquent mortgages. The mortgagors subsequently
filed a proceeding in the bankruptcy court seeking to permit the
case to be filed and heard in District Court for the District of
Delaware.
o Moore v. LMUSA and Blue v. LMUSA, pending in the United States
District Court for the Northern District of Illinois, are
residual cases remaining after settlement of class action claims
against LMUSA and numerous others mortgage bankers alleging
improper escrow practices. While it is not expected that there
will be significant liability, the cases have accrued significant
legal costs and are not susceptible to easy resolution.
In addition to the above, three individual cases have been identified
as having potential liability and legal costs in the $100,000 to $150,000
range. Collins v. LMUSA, pending in the District Court of Midland County,
Texas, involves the appeal by LMUSA of a jury finding that the plaintiffs'
insurance premium had been paid, and awarding a judgment of approximately
$90,000 against LMUSA, which had not put in place a life insurance policy based
on its determination that a premium payment had not been received. LMUSA
contends there was not sufficient evidence to support the jury's finding. The
plaintiffs in United REO v. LMUSA, pending in the District Court for Los
Angeles County, contend that they are entitled to commissions on the sale of
certain foreclosed real estate pursuant to an agreement which LMUSA contends
had been previously terminated. Lowery v. LMUSA, et al., pending in the
District Court of Cameron County, Texas, had been scheduled for jury trial
before the Petition Date. The court, in denying LMUSA's motion for summary
judgment, stated that LMUSA's payoff statement, which correctly stated the due
date of a mortgage being assumed, could have been clearer when the assumptors
accepted the mortgagor's word that the mortgage was not in fact a year
delinquent and proceeded to closing. LMUSA thereafter foreclosed on the
property and sold it for the investor which is also a defendant.
55
<PAGE> 62
Approximately ten more cases have been identified where the exposure
for liability and/or legal expense in each may total approximately $50,000. In
addition, there are approximately 110 other cases involving one or more members
of the Lomas Group, which are considered incident to conducting the mortgage
servicing business, particularly as it relates to collecting delinquent debts
or foreclosing on properties. The Debtors believe the great majority of these
involve exposures under $10,000 in liability and legal expense.
C. LIS
The largest Claim against LIS is a Claim for damages arising out of
LIS' contemplated rejection pursuant to the Joint Plan of a telecommunication
services and equipment contract, which damages could amount to approximately
$3.0 million. As set forth above under "Intercompany Claims -- Intercompany
Expenses Allocations, Pricing and Possible Subsidies," LIS may have a Claim
against LMUSA for all or a portion of such damages.
In addition, the MSP participants described above under "LFC --
Undisputed Claims Against LFC" have asserted that they have Claims against LIS
as well as LFC on the ground, among others, that LIS adopted the MSP and is
jointly and severally liable with LFC for any and all causes of action they may
have against LFC, at least as to those MSP participants who are formerly
employees of LIS. The Debtors are reviewing the positions taken by the MSP
participants.
D. LAS
The largest Claim against LAS is a Claim for damages arising out of
LAS's contemplated rejection pursuant to the Joint Plan of various service
contracts, which damages could be as high as $154,000. As set forth above
under "Intercompany Claims -- Intercompany Expenses Allocations, Pricing and
Possible Subsidies," LAS may have a Claim against LIS for all or a portion of
such damages.
In addition, the MSP participants described above under "LFC --
Undisputed Claims Against LFC" have asserted that they have Claims against LAS
as well as LFC on the ground, among others, that LAS adopted the MSP and is
jointly and severally liable with LFC for any and all causes of action they may
have against LFC, at least as to those MSP participants who are formerly
employees of LAS. The Debtors are reviewing the positions taken by the MSP
participants.
56
<PAGE> 63
VIII. POTENTIAL CLAIMS OF DEBTORS AGAINST THIRD PARTIES
The Creditors' Committees are exploring the extent to which the Debtors
have claims against third parties, whether for avoidance of prepetition
transfers as fraudulent conveyances or preferences, or otherwise.
In particular, the Creditors' Committees are investigating:
o whether the Debtors may have claims against former directors,
officers and other employees for mismanagement, negligent and/or
willful or fraudulent failure to make appropriate public
disclosures or breach of fiduciary duty.
o whether the Debtors may have claims against Ernst & Young LLP,
which for many years acted as the Company's auditors, or KPMG,
which has acted as such since 1995, for negligence, gross
negligence, willful misconduct or fraud in connection with its
auditing services and/or public disclosure filings.
o whether the Debtors may have claims against Computer Power
Incorporated ("CPI"), the dominant provider of data processing
services to the mortgage banking industry, arising out of CPI's
negative marketing campaign against Debtor LIS and other possible
unfair competition and abuse by CPI of its dominant market
position.
o whether the Debtors may have claims against Prudential or its
subsidiary, Residential Services, arising out of the purchase by
RIS of the assets of LIS primarily for securities the value of
which was dependent on Prudential's and Residential Services' use
and support of the purchased data processing system at a time
when Prudential and/or Residential Services knew or should have
known they were not going to use the system and in fact were
planning to exit the mortgage servicing business entirely. The
Debtors also may have claims for the failure of Residential
Services to convert its mortgage servicing portfolio to the RIS
servicing system. Residential Services has indicated that it
will defend any such actions, however, on the basis that the
Asset Purchase Agreement specifically preserves Residential
Services' ability to make its own business plans and marketing
strategies, and that Residential Services had no affirmative
obligation to cause its affiliate, The Prudential Home Mortgage
Company, Inc. ("PHMC"), to convert its servicing portfolio to
the RIS servicing system until the termination of PHMC's existing
servicing contract with CPI, which never occurred. In addition,
Prudential, Residential Services and/or any of their affiliates
are likely to defend such actions on the basis that RIS was not
planning to exit the mortgage servicing business at the time of
the purchase from LIS and that the Asset Purchase Agreement
specifically preserves their ability to make business decisions
and that they had no affirmative obligation to continue to
operate the systems purchased from LIS or to remain in the
mortgage servicing business for any period of time. Prudential
has indicated that it determined to exit the mortgage service
bureau business due to recurring losses on the systems that it
purchased from LIS.
In addition to the foregoing, the Creditors' Committees have asserted
that the Debtors may have claims against present officers and directors based
on various theories. The Debtors believe that any such claims have no merit,
but, in any event, any such claim will not be released under the Plans.
The Debtors have not performed a detailed analysis of whether payments
(other than those described under "Intercompany Claims") made in the 90 days
prior to the Petition Date may be avoidable as preferences under Section 547 of
the Bankruptcy Code. LFC wrote 71 checks and made five wire payments
representing payments aggregating $1.6 million during this period, and, at the
request of the LFC Creditors' Committee, is analyzing them. The LMUSA
Creditors' Committee, with respect to LMUSA, has not asked the Debtors to incur
the costs required to perform a detailed analysis.
57
<PAGE> 64
All potential causes of action of LMUSA and the Joint Debtors (other
than Intercompany Claims) will be contributed to the LMUSA Litigation Trust or
the LFC Litigation Trust, as the case may be, under the relevant Plan. The
trustees of the LMUSA Litigation Trust and the LFC Litigation Trust (the
"Litigation Trusts") will have the responsibility to maximize the value of
these assets. In order to provide resources to enable the trustees to fulfill
their responsibilities, the LMUSA Plan provides for the funding of the LMUSA
Litigation Trust with $5 million; the LFC Litigation Trust will be funded with
$2 million. Any recoveries or excess amounts remaining in one of the
Litigation Trusts after the relevant trustee has finished his responsibilities
will be transferred to LMUSA or LFC, as the case may be, for distribution to
holders of LMUSA or LFC Class 3 Claims.
LFC believes that the LFC Litigation Trust will be treated for federal
income tax purposes as a separately taxable entity. If this belief proves
correct, the LFC Litigation Trust will have to pay tax on the income it earns
and the proceeds that will be available for distribution to creditors from such
Trust will be reduced as a result.
LMUSA believes that the LMUSA Litigation Trust will be treated for
federal income tax purposes as a separately taxable entity. If this belief
proves correct, the LMUSA Litigation Trust will have to pay tax on the income
it earns and the proceeds that will be available for distribution to creditors
from such Trust will be reduced as a result.
58
<PAGE> 65
IX. CHAPTER 11 PLANS
The principal provisions of the Plans are summarized below. THIS
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLANS, WHICH ARE
ATTACHED AS EXHIBITS I & II.
A. CLASSIFICATION OF CLAIMS AND INTERESTS
Pursuant to Section 1123(a)(1) of the Code, the Plans designate Classes
of Claims and Classes of Interests. This classification of Claims and
Interests is made for the purposes of voting on the Plans and making
distributions thereunder.
The Joint Plan provides for the division of Claims against and
Interests in LFC, LIS and LAS and the LMUSA Plan provides for the division of
Claims against and Interests in LMUSA, into the following Classes:
1. Administrative Claims
All Claims entitled to priority under Section 503(b) or 507(a)(1) of
the Code ("Administrative Claims").
2. Priority Tax Claims
All Claims entitled to priority under Section 507(a)(8) of the Code
("Priority Tax Claims").
3. Priority Non-Tax Claims
All Claims entitled to priority under Section 507(a)(3), (4), (5) or
(6) of the Code are classified in the following Classes: LFC Class A Claims,
LIS Class A Claims and LAS Class A Claims under the Joint Plan and LMUSA Class
A Claims under the LMUSA Plan. Collectively these are referred to as "Priority
Non-Tax Claims."
4. Secured Claims
a. Joint Plan. All Secured Claims are classified into the Classes
described below to reflect the interests of the holders of such Claims in each
of the Joint Debtor's properties:
o "LFC Class 1" -- Secured Claims against LFC;
o "LIS Class 1" -- Secured Claims against LIS; and
o "LAS Class 1" -- Secured Claims against LAS.
b. LMUSA Plan. All Secured Claims are classified into the Classes
described below to reflect the interests of the holders of such Claims in
LMUSA's properties:
o "LMUSA Class 1A" -- Secured Claims by Travelers against
LMUSA; and
o "LMUSA Class 1B" -- Other Secured Claims.
5. Unsecured Claims
a. Joint Plan. Unsecured Claims are classified into the Classes
described below to reflect the interests of the holders of such Claims in each
of the Joint Debtor's properties:
o "LFC Class 2" -- Pre-petition Claims of present or
former officers, directors and
employees ("D & O Claims") against
LFC;
o "LFC Class 3" -- Unsecured Claims against LFC other
than those in LFC Class 4;
59
<PAGE> 66
o "LFC Class 4" -- Unsecured Claims (other than under
or evidenced by the LFC Senior
Convertible Notes) of $500 or less
against LFC;
o "LFC Class 5" -- Intercompany Claims against
LFC;
o "LIS Class 2" -- D & O Claims against LIS;
o "LIS Class 3" -- Unsecured Claims against LIS;
o "LIS Class 4" -- Intercompany Claims against
LIS;
o "LAS Class 2" -- D & O Claims against LAS;
o "LAS Class 3" -- Unsecured Claims against LAS; and
o "LAS Class 4" -- Intercompany Claims against
LAS.
b. LMUSA Plan. Unsecured Claims are classified into the Classes
described below to reflect the interests of the holders of such Claims in
LMUSA's properties:
o "LMUSA Class 2" -- D & O Claims against LMUSA;
o "LMUSA Class 3" -- Unsecured Claims against LMUSA other
than those in LMUSA Class 4;
o "LMUSA Class 4" -- Unsecured Claims (other than under
or evidenced by the LMUSA Senior
Notes) of $2,000 or less against
LMUSA; and
o "LMUSA Class 5" -- Intercompany Claims against LMUSA.
6. Interests
Equity Interests are classified into separate classes in the Joint Plan
("LFC Class 6" Interests, "LIS Class 5" Interests and "LAS Class 5" Interests)
and the LMUSA Plan ("LMUSA Class 6" Interests).
B. TREATMENT OF CLAIMS AND INTERESTS
A description of each Class of Claims and Interests and its treatment
under the Plans is set forth below. Such description and the summary
description set forth above under "Summary of Chapter 11 Plans -- Summary of
Distributions Under the Plans" are based on estimates of the Allowed amounts of
the Claims in each Class. The estimates of amounts (or ranges) of cash and
securities to be distributed to each Class of Allowed Claims are based on the
assumption that the actual Allowed amount of Claims in each Class is finally
determined by the Bankruptcy Court to be as so estimated. In addition, such
estimations (and ranges) are based on certain assumptions described under
"Intercompany Claims -- Descriptions of Provisions of the Plans" regarding the
resolution of Intercompany Claims.
1. Administrative Claims
Administrative Claims against the Debtors consist of all Claims, other
than Claims separately provided for in the Plans, entitled to priority in
accordance with Section 503(b) or 507(a)(i) of the Code. The Joint Debtors
estimate that the total amount of Allowed Administrative Claims against them,
which will consist primarily of professional fees allowed by the Bankruptcy
Court under Sections 330 and 331 of the Code, will be approximately $3.2
million. Of this amount $1.7 is an allocation of professional fees paid by
LMUSA. LMUSA estimates that the total amount of its Allowed Administrative
Claims will be approximately $12.4 million. $6.3 million of this amount was
paid prior to the date hereof.
Administrative Claims are not impaired. Each Allowed Administrative
Claim will be paid in full in cash, (a) at the option of the relevant Debtor
(before the Effective Date) or the relevant Reorganized Debtor (on or after the
Effective Date)
60
<PAGE> 67
(i) in the ordinary course of business as such Claim matures or (ii) on the
later of (A) the Effective Date and (B) the date on which such Claim becomes an
Allowed Claim and all other conditions to initial distribution have been
satisfied unless the holder of such Claim agrees or has agreed to less favorable
treatment of such Claim (including, without limitation, any treatment that may
be provided for in any documentation, statute or regulation governing such
Claim); or (b) on such other date as the Bankruptcy Court may order.
Notwithstanding the foregoing, the relevant Debtor's or relevant Reorganized
Debtor's failure to object to any Administrative Claim in the Reorganization
Case or payment of such Claim will be without prejudice to the relevant
Reorganized Debtor's right to contest, request disgorgement of or otherwise
defend against such Claim in any forum.
2. Priority Tax Claims
a. Joint Plan. Priority Tax Claims against LFC, LIS and LAS
consist of all Claims, other than Claims separately provided for in the Joint
Plan, entitled to priority in accordance with Section 507(a)(8) of the Code.
The Joint Debtors estimate that the amount of Allowed Priority Tax Claims will
not exceed the following:
o Against LFC -- approximately $79,000;
o Against LIS -- $0; and
o Against LAS -- $0.
Priority Tax Claims are not impaired. Each Allowed Priority Tax Claim
will be paid in full in cash on the Distribution Date for such Claim, unless
the holder thereof agrees to less favorable treatment of such Claim (including,
without limitation, any treatment that may be provided for in any
documentation, statute or regulation governing such Claim); provided, however,
that the relevant Debtor may elect to have any Allowed Priority Tax Claim paid
in deferred cash payments over a period not to exceed six years after the date
of assessment of such Priority Tax Claim, of a value, as of the Effective Date,
equal to the amount of such Allowed Priority Tax Claim, which option will be
exercised by written notice given to the holder of a Priority Tax Claim
delivered on or before the Distribution Date for such Claim specifying a
payment schedule, a rate of interest, and the date by which an objection to
such treatment must be filed and served. The relevant Reorganized Debtor will
have the right to prepay any Allowed Priority Tax Claim, in whole or in part at
any time without penalty. For the purposes of the preceding sentence, the
relevant Debtor and relevant Reorganized Debtor for the payment of Allowed
Priority Tax Claims against LAS will be LFC and Reorganized LFC.
b. LMUSA Plan. Priority Tax Claims against LMUSA consist of all
Claims, other than Claims separately provided for in the LMUSA Plan, entitled
to priority in accordance with Section 507(a)(8) of the Code. LMUSA estimates
that the amount of Allowed Priority Tax Claims will not exceed $540,000.
Priority Tax Claims are not impaired. Each Allowed Priority Tax Claim
will be paid in full in cash on the Distribution Date for such Claim, unless
the holder thereof agrees to less favorable treatment of such Claim (including,
without limitation, any treatment that may be provided for in any
documentation, statute or regulation governing such Claim); provided, however,
that LMUSA may elect to have any Allowed Priority Tax Claim paid in deferred
cash payments over a period not to exceed six years after the date of
assessment of such Priority Tax Claim, of a value, as of the Effective Date,
equal to the amount of such Allowed Priority Tax Claim, which option will be
exercised by written notice given to the holder of a Priority Tax Claim
delivered on or before the Distribution Date for such Claim specifying a
payment schedule, a rate of interest, and the date by which an objection to
such treatment must be filed and served. Reorganized LMUSA will have the right
to prepay any Allowed Priority Tax Claim, in whole or in part at any time
without penalty.
3. Priority Non-Tax Claims
a. Joint Plan. Priority Non-Tax Claims against the Debtors
consist of all Claims, other than Claims separately provided for in the Joint
Plan, entitled to priority in accordance with Section 507(a)(3),(4),(5) or (6)
of the Code. The Debtors estimate that the amount of Allowed Priority Non-Tax
Claims will not exceed the following:
61
<PAGE> 68
o LFC Class A -- $0;
o LIS Class A -- $0; and
o LAS Class A -- $0.
LFC Class A Claims, LIS Class A Claims, LAS Class A Claims are not
impaired. Each Allowed Priority Non- Tax Claim will be paid in full in cash on
the Distribution Date for such Claim or, at the option of the relevant
Reorganized Debtor, in the ordinary course of business as such Claim matures,
unless such holder agrees to less favorable treatment of such Claim (including,
without limitation, any treatment that may be provided for in any
documentation, statute or regulation governing such Claim). For the purposes
of the previous sentence, the relevant Debtor and relevant Reorganized Debtor
for the payment of Allowed Priority Non-Tax Claims against LAS will be LFC and
Reorganized LFC.
b. LMUSA Plan. Priority Non-Tax Claims against the
Debtors consist of all Claims, other than Claims separately provided for in the
LMUSA Plan, entitled to priority in accordance with Section 507(a)(3),(4),(5)
or (6) of the Code. The Debtors estimate that the total amount of Allowed
Priority Non-Tax Claims will not exceed $15,000.
LMUSA Class A Claims are not impaired. Each Allowed Priority Non-Tax
Claim will be paid in full in cash on the Distribution Date for such Claim or,
at the option of the Reorganized LMUSA, in the ordinary course of business as
such Claim matures, unless such holder agrees to less favorable treatment of
such Claim (including, without limitation, any treatment that may be provided
for in any documentation, statute or regulation governing such Claim).
4. Secured Claims
a. Joint Plan. LFC, LIS and LAS Class 1 Claims consist of all
Secured Claims against the relevant Debtor unless, for technical compliance
with the Code, any member of LFC, LIS or LAS Class 1 is entitled to be included
in a separate Class, in which case such member would be deemed to be a member
of a separate Class identified by the number 1 and the next unused alphabetical
letter. The Joint Debtors estimate that the total Allowed amount of Class 1
Claims will be as follows:
o LFC Class 1 Claims -- $0;
o LIS Class 1 Claims -- $0; and
o LAS Class 1 Claims -- $0.
LFC, LIS, LAS Class 1 Claims are impaired. Each holder of an Allowed
LFC Class 1 Claim will receive one of the following: (a) the property of LFC in
which such holder has a valid, perfected security interest; (b) a promissory
note executed by Reorganized LFC providing for deferred cash payments
satisfying the requirements of section 1129(b)(2)(A)(i)(II) of the Code secured
by a lien on assets of Reorganized LFC satisfying the requirements of section
1129(b)(2)(A)(i)(I) of the Code; or (c) cash in an amount equal to such Allowed
LFC Class 1 Claim. Each holder of an Allowed LIS Class 1 Claim or an Allowed
LAS Class 1 Claim will receive the property of LIS or LAS, as the case may be,
in which such holder has a valid, perfected security interest.
b. LMUSA Plan. LMUSA Class 1A Claims consist of the Travelers
Secured Claim; and LMUSA Class 1B Claims consist of all other Secured Claims
against LMUSA, unless, for technical compliance with the Code, any member of
this Class is entitled to be included in a separate class, in which case such
member would be deemed to be a member of a separate Class identified by the
number 1 and the next unused alphabetical letter. LMUSA estimates that the
total Allowed amount of LMUSA Class 1 Claims will be as follows:
o LMUSA Class 1A Claims -- approximately $11.45 million;
and
o LMUSA Class 1B Claims -- $0.
62
<PAGE> 69
LMUSA Class 1 Claims are impaired. Provided that the closing of the
sale of the Lomas Campus occurs in accordance with the terms of the Travelers
Stipulation and Order, Travelers is entitled to receive from the Debtor at such
closing (A) approximately $11,450,000 plus (B) 50% of the excess, if any, of
the amount actually paid at such closing over and above $23,000,000 (which
excess shall be net of up to $250,000 payable, if applicable, to Benton
Properties as a due diligence reimbursement fee). If the closing of the sale
of the Lomas Campus does not occur in accordance with the provisions of the
Travelers Stipulation and Order, Travelers shall be entitled to receive on the
later to occur of the Effective Date and the date of the delivery of the
Travelers Termination Notice, the sum of $11.5 million. If payment does not
occur by January 31, 1997, the $11.5 million will bear interest until paid at
6.5% per annum.
In accordance with the terms of the Travelers Stipulation and Order,
the LMUSA Class 1A Claim has been Allowed in an amount equal to the cash
payment described above. If the closing of the sale of the Lomas Campus and
the related payments to Travelers were completed in accordance with the
Travelers Stipulation and Order prior to the Effective Date, the LMUSA Class 1A
Claim would be deemed to have been satisfied and no further amount would be
payable in respect thereof under the Plan. If the closing of the sale of the
Lomas Campus has not occurred as of the Effective Date and Travelers has not
delivered the Travelers Termination Notice, LMUSA and the Reorganization Debtor
will establish a reserve in the amount of $11.5 million, for the payment of the
Travelers Secured Claim.
5. Unsecured Claims - D & O Claims
a. Joint Plan. LFC, LIS and LAS Class 2 Claims each consist of
all D & O Claims against the relevant Debtor. LFC, LIS and LAS Class 2 Claims
are unsecured and are impaired. Holders of such Claims will receive no
distribution from the respective Debtor in respect of such Claims but rather
will have recourse to the insurance policies maintained by the Debtors for
their benefit to the extent such policies cover their Claims.
b. LMUSA Plan. LMUSA Class 2 Claims consist of all D & O Claims
against the relevant Debtor. LMUSA Class 2 Claims are unsecured and are
impaired. Holders of LMUSA Class 2 Claims will receive no distribution from
LMUSA in respect of such Claims but rather will have recourse to the insurance
policies maintained by the Debtors for their benefit to the extent such
policies cover their Claims.
6. Unsecured Claims
a. Joint Plan. LFC, LIS and LAS Class 3 Claims each consist of
all Unsecured Claims against the appropriate Joint Debtor other than Unsecured
Claims separately provided for in the Joint Plan.
The Joint Debtors estimate that Unsecured Claims will not exceed the
following:
o LFC Class 3 Claims -- approximately $155.7 million;
o LIS Class 3 Claims -- approximately $3.1 million; and
o LAS Class 3 Claims -- approximately $162,000.
LFC, LIS and LAS Class 3 Claims are impaired. On the Effective Date,
each holder of an Allowed LFC Class 3 Claim will be entitled to receive such
holder's pro rata share of (a) 1,000,000 shares of New LFC Common Stock and (b)
all cash of LFC, after (i) any payment by LFC into the Intercompany Claims
Reserve, if any, (ii) appropriate reserves for Administrative Claims, Priority
Claims, Secured Claims and Convenience Unsecured Claims, (iii) payment of $2
million (or such other amount on the LFC Creditors' Committee will specify)
into the LFC Litigation Trust (iv) a reserve for working capital of an amount
equal to $3 million or such other amount as is specified by the LFC Creditors'
Committee in writing to the Debtors and the Bankruptcy Court at least three
days prior to the commencement of the hearing on Confirmation of the Joint
Plan. After the Effective Date, each holder of an Allowed LFC Class 3 Claim
will be entitled to receive such holder's pro rata share of all subsequently
received net cash proceeds from the disposition of, or net income on,
Non-Reorganization Assets of LFC or Reorganized LFC, and all cash subsequently
distributed to Reorganized LFC from the Intercompany Claims Reserve or the LFC
Litigation Trust. Such entitlements on and after the Effective Date are
referred to herein as "LFC Distributable Cash."
63
<PAGE> 70
Each holder of an Allowed LIS Class 3 Claim will be entitled to receive
such holder's pro rata share of cash in the amount of funds available in LIS
after the payment by LIS (i) into appropriate reserves for Administrative
Claims and Priority Claims and (ii) of any amounts owing to the holders of LIS
Class 1 Claims.
Each holder of an Allowed LAS Class 3 Claim will be entitled to receive
such holder's pro rata share of cash in the amount of the excess of funds
available in LAS after the payment by LAS (i) into appropriate reserves for
Administrative Claims and Priority Claims and (ii) of any amounts owing to the
holders of LAS Class 1 Claims.
b. LMUSA Plan. LMUSA Class 3 Claims consist of all Unsecured
Claims against LMUSA other than Unsecured Claims separately provided for in the
LMUSA Plan. LMUSA estimates that the LMUSA Class 3 Claims will not exceed
$399.9 million.
LMUSA Class 3 Claims are impaired. On the Effective Date, each holder
of an Allowed LMUSA Class 3 Claim will be entitled to receive such holder's pro
rata share of (a) 3,000,000 shares of New LMUSA Common Stock and (b) all cash
of LMUSA, after any payment by LMUSA (i) into the Intercompany Claims Reserve,
if any, (ii) into appropriate reserves for Administrative Claims, Priority
Claims, Secured Claims and Convenience Unsecured Claims, (iii) of $5 million or
such other amount as the LMUSA Creditors' Committee shall specify into the
LMUSA Litigation Trust and (iv) into a reserve for working capital of an amount
equal to $5 million or such other amount as is specified by the LMUSA
Creditors' Committee in writing to the Debtors and the Bankruptcy Court at
least three days prior to the commencement of the hearing on Confirmation of
the LMUSA Plan. After the Effective Date, each holder of an Allowed LMUSA
Class 3 Claim will be entitled to receive such holder's pro rata share of all
subsequently received net cash proceeds from the disposition of, or net income
on, Non-Reorganization Assets of LMUSA or Reorganized LMUSA, and all cash
subsequently distributed to Reorganized LMUSA from the Intercompany Claims
Reserve or the LMUSA Litigation Trust. Such entitlements on and after the
Effective Date are referred to herein as "LMUSA Distributable Cash."
7. Convenience Unsecured Claims
a. Joint Plan. LFC Class 4 Claims consist of (a) Unsecured Claims
against LFC in an amount equal to or less than $500 and (b) Unsecured Claims
that would be otherwise classified as LFC Class 4 Claims but as to which the
holder has agreed in writing to reduce such Claim to $500 and to release and to
waive any further or additional Claim. The Joint Debtors estimate that the
total Allowed amount of LFC Class 4 Claims will be approximately $1,000.
LFC Class 4 Claims are impaired. Each holder of an Allowed LFC Class 4
Claim will receive 25% of the Allowed amount of such Claim in cash on the
Distribution Date for such Claim. If the holders of LFC Class 4 Claims are
found by the Bankruptcy Court, in accordance with Section 1126(c) of the Code,
to have rejected the Joint Plan, then the LFC Class 4 Claims will become, and
will be treated for all purposes under the Joint Plan as, LFC Class 3 Claims.
b. LMUSA Plan. LMUSA Class 4 Claims consist of (a) Unsecured
Claims against LMUSA in an amount equal to or less than $2,000 and (b)
Unsecured Claims that would be otherwise classified as LMUSA Class 4 Claims but
as to which the holder has agreed in writing to reduce such Claim to $2,000 and
to release and to waive any further or additional Claim. LMUSA estimates that
the total Allowed amount of LMUSA Class 4 Claims will be approximately $66,000.
LMUSA Class 4 Claims are impaired. Each holder of an Allowed LMUSA
Class 4 Claim will receive 67.4% of the Allowed amount of such Claim in cash on
the Distribution Date for such Claim. If the holders of LMUSA Class 4 Claims
are found by the Bankruptcy Court, in accordance with Section 1126(c) of the
Code, to have rejected the LMUSA Plan, then the LMUSA Class 4 Claims will
become, and will be treated for all purposes under the LMUSA Plan as, LMUSA
Class 3 Claims.
8. Intercompany Claims
a. Joint Plan. LFC Class 5 Claims, LIS Class 4 Claims and LAS
Class 4 Intercompany Claims against LFC, LIS and LAS, as the case may be. See
"Intercompany Claims--Description of the Provisions of the Plans" for a
discussion of the nature and estimated maximum amount of such Claims.
64
<PAGE> 71
LFC Class 5 Claims, LIS Class 4 Claims and LAS Class 4 Claims are
impaired. To the extent that any LFC Class 5, LIS Class 4 or LAS Class 4 Claim
may be Allowed as an unsecured pre-petition Claim, the holder thereof will
receive distributions of comparable value to those received in respect of LFC
Class 3 Claims, LIS Class 3 Claims or LAS Class 3 Claims, as the case may be;
to the extent such Claim may be Allowed as an Administrative Claim or Priority
Non-Tax Claim, the holder thereof will receive distributions of, or of a value
equal to, the Allowed amount thereof of such Claim, subject to the availability
of funds.
b. LMUSA Plan. LMUSA Class 5 Claims, consist of the Intercompany
Claims against LMUSA. See "Intercompany Claims--Description of the Provisions
of the Plans" for a discussion of the nature and estimated maximum amount of
such Claims.
LMUSA Class 5 Claims are impaired. To the extent that any LMUSA Class
5 Claim may be Allowed as an unsecured pre-petition Claim, the holder thereof
will receive distributions of comparable value to those received in respect of
LMUSA Class 3 Claims; to the extent such Claim may be Allowed as an
Administrative Claim or Priority Non-Tax Claim, the holder thereof will receive
distributions of, or of a value equal to, the Allowed amount thereof of such
Claim subject to the availability of funds.
9. Equity Interests
a. Joint Plan. LFC Class 6 Interests, LIS Class 5 Interests and
LAS Class 5 Interests consist of the Interests of the holders of record of
LFC's or LIS' Common Stock and of LFC, as the sole stockholder of LAS, which is
in the process of liquidation. As of the Petition Date, 20,100,000 shares of
LFC Common Stock were outstanding, and 1,000 shares of LIS Common Stock all of
which were owned by LFC, were outstanding.
LFC Class 6 Interests and LIS Class 5 Interests are impaired. LAS
Class Interests are not impaired. On the Effective Date, all LFC Class 6
Interests will be cancelled and no distributions under the Joint Plan will be
made in respect thereof. LFC, as the holder of all LIS Class 5 Interests will
retain its Interest, but its legal rights will be affected by adoption of LIS'
Amended and Restated Certificate of Incorporation. LAS was in liquidation
under state law before the Petition Date and will be liquidated for the benefit
of its creditors and after the (i) payment into appropriate reserves for
Administrative Claims and Priority Claims and (ii) distribution of any
entitlements to the holders of LAS Class 2, 3 and 4 Claims, any assets
remaining will be transferred to LFC, above being transferred to LFC, as holder
of all LAS Class 5 Interests, as a liquidating distribution.
b. LMUSA Plan. LMUSA Class 6 Interests consist of the Interests
of the holders of record of LMUSA's Common Stock. As of the Petition Date,
1,000 shares of LMUSA Common Stock were outstanding, all of which were owed by
LFC.
LMUSA Class 6 Interests are impaired. On the Effective Date, all LMUSA
Class 6 Interests will be cancelled and no distributions under the LMUSA Plan
will be made in respect thereof.
C. CONDITIONS PRECEDENT
1. Conditions to Confirmation
Each Plan contains the following conditions precedent to Confirmation:
(a) Bankruptcy Court approval of all relevant agreements, trustees, agents and
mediators and authorization of the Debtors, the Intercompany Claims Agent, if
any, and the LFC or LMUSA Litigation Trustees, to make any contemplated
transfers of property; (b) the relevant Creditors' Committee shall have
provided the new names of the relevant Reorganized Debtor or Debtors and the
names of the members of the Board of Directors and officers of each; (c)
receipt of any necessary no-action letters from the SEC, rulings from the IRS
or other government approvals. In addition, under the Joint Plan, the trustee
of the "rabbi trust" in which assets of the MSP are held will have turned over
or been ordered to turn over to LFC the assets held in the "rabbi trust."
There can be no assurance that these conditions to Confirmation 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
65
<PAGE> 72
be, other than the conditions set forth in clauses (a) and (b) above. IT IS
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.
2. Conditions to Distribution.
It is a condition precedent to the first distribution to holders of
Unsecured Claims (i.e. LFC Class 3 Claims, LIS Class 3 Claims, LAS Class 3
Claims and LMUSA Class 3 Claims) that (a) the Creditors' Committees have (i)
settled the Intercompany Claims as described below, (ii) created an
Intercompany Claims Reserve to be funded by one or more Debtors transferring
assets agreed on by such parties pending the resolution of the Intercompany
Claims through litigation, mediation or settlement, or (b) the Bankruptcy
Court has entered an order, either (i) determining the Allowed amounts and
types of the Intercompany Claims against the Debtors or (ii) estimating the
Allowed amounts and types of such Intercompany Claims or the maximum Allowed
amounts thereof for the purpose of (A) creating an Intercompany Claims Reserve
described above or (B) establishing distribution holdbacks, as the Bankruptcy
Court directs. As described above, for purposes of distribution holdbacks, to
the extent that any Intercompany Claim may be Allowed as an unsecured
pre-petition Claim, the holder will receive distributions of comparable value
to those received in respect of LFC Class 3 Claims, LIS Class 3 Claims, LAS
Class 3 Claims or LMUSA Class 3 Claims, as the case may be; to the extent it
may be Allowed as an Administrative Claim or Priority Non-Tax Claim, the holder
will receive distributions of, or of a value equal to, the Allowed amount
thereof.
D. DISTRIBUTIONS UNDER THE PLANS
1. Allocation of Administrative Expenses
For purposes of calculating distributions, it has been assumed that 80%
of the Debtors' Administrative Claims will be borne by LMUSA and 20% by LFC.
The final allocation will depend on (i) the amounts of Allowed Administrative
Claims ultimately incurred in connection with the administration of each Estate
and (ii) where an expense was incurred in the administration of more than one
of the Debtors' Estates, the allocation of such expenses as among those
Estates. The Plans provide that such allocation will be (i) based on
percentages recommended by KPMG, or (ii) if LFC and LMUSA or their respective
Creditors' Committees do not agree with KPMG's recommendation, determined by
agreement, or (iii) lacking such agreement, determined by the Bankruptcy Court.
2. Initial Distributions
On or as soon as practicable after the Effective Date of the relevant
Plan, the Reorganized Debtors, will make all the distributions described above;
provided that, only for purposes of distributions in respect of LFC Class 3
Claims, LIS Class 3 Claims, LAS Class 3 Claims and LMUSA Class 3 Claims, it
will be presumed that all Disputed Claims will be Allowed at their face amount
and, regarding the LMUSA Class 3 Claim only, Travelers' LMUSA Class 1 Claim
will be $11,450,000 and Travelers' LMUSA Class 3 Claim will be calculated in
accordance with paragraph (i) of the definition of "Travelers Unsecured Claim"
in Article 1 of the LMUSA Plan, with the result that a portion of the assets
(including, without limitation, the LMUSA Distributable Cash) and New LMUSA
Common Stock available for distribution will be held until the Allowed amounts
of all Disputed Claims and the Allowed amount of Travelers' LMUSA Class 3 Claim
are determined.
3. Subsequent Distributions on LFC Class 3 Claims and LMUSA Class 3
Claims
All LFC Distributable Cash, LMUSA Distributable Cash (collectively, the
"Distributable Cash"), LFC Stock, and New LMUSA Common Stock that is not
distributed by a Reorganized Debtor on or promptly after the Effective Date
will be held by such Reorganized Debtor. Promptly after any Disputed LFC Class
3 Claim or Disputed LMUSA Class 3 Claim becomes an Allowed Claim, the
appropriate Reorganized Debtor will cause to be distributed to the holder of
such Allowed Claim (i) the LFC Distributable Cash and New LFC Common Stock or
(ii) the LMUSA Distributable Cash and New LMUSA Common Stock, as the case may
be, that such holder would have been entitled to receive if such Claim had been
Allowed on the appropriate Effective Date in the amount in which it has become
Allowed. On the 15th day of the month, starting with the first such date that
is at least 30 days after the appropriate Effective Date (the "Monthly
Distribution
66
<PAGE> 73
Date") and on which there is at least $500,000 (in the case of Reorganized LFC)
or $1 million (in the case of Reorganized LMUSA) of Distributable Cash available
to distribute, the Reorganized Debtors will make additional distributions of LFC
Distributable Cash and New LFC Common Stock and LMUSA Distributable Cash and New
LMUSA Common Stock, as the case may be, to holders of Claims that were Allowed
on the Effective Date or subsequently have become Allowed on or before the last
day of the calendar month immediately preceding such Monthly Distribution Date,
in amounts necessary to cause such holders to have received aggregate
distributions of LFC Distributable Cash and New LFC Common Stock and LMUSA
Distributable Cash and New LMUSA Common Stock, as the case may be, in respect of
such Allowed Claims equal to the distributions thereof that such holders would
have received in respect of such Allowed Claims on or promptly after the
appropriate Effective Date of the appropriate Plan if (i) such Allowed Claims
had been Allowed on such Effective Date in the amounts in which they are Allowed
on the last day of such calendar month and (ii) Claims or portions thereof that
have become disallowed (A) after such Effective Date and (B) before the last day
of such calendar month, had been disallowed on such Effective Date.
If the Effective Date or any Monthly Distribution Date occurs prior to
the closing, if any, of the sale of the Lomas Campus pursuant to the Travelers
Stipulation and Order and prior to the delivery, if any, of the Travelers
Termination Notice, then (i) solely for the purpose of making a distribution to
Travelers on the Effective Date or such Monthly Distribution Date, the
Travelers Unsecured Claim will be equal to approximately $38.9 million less the
sum of (A) the "adequate protection" payments received through the Effective
Date or such Monthly Distribution Date by Travelers and (B) $13.5 million and
(ii) a reconciliation and payment will be made as between the Travelers and
LMUSA or Reorganized LMUSA immediately following determination of the actual
amount of the Travelers Unsecured Claim in accordance with the provisions of
the LMUSA Plan so that Travelers will have received and retained the amount of
LMUSA Distributable Cash and New LMUSA Common Stock that it would have been
entitled to receive under the Plan on the Effective Date and any Monthly
Distribution Date if the amount of Travelers' LMUSA Class 3 Claim had been
known on the Effective Date.
4. Subsequent Distributions on LIS Class 3 Claims and LAS Class 3
Claims
The provisions above with respect to the distribution of LFC
Distributable Cash to holders of LFC Class 3 Claims also applies, mutatis
mutandis, with respect to the distribution to holders of LIS Class 3 Claims and
LAS Class 3 Claims of cash of LIS and LAS available for distribution to holders
of such Claims.
5. Cash Distributions
All payments of cash to be made under the Plans will be made by the
relevant Reorganized Debtor or its designee, the LFC Litigation Trustee, the
LMUSA Litigation Trustee or the Intercompany Claims Agent. Any payment of cash
may be made either by check or by wire transfer, at the option of the
Reorganized Debtor, the LFC Litigation Trustee, the LMUSA Litigation Trustee or
the Intercompany Claims Agent, as the case may be, and all payments in excess
of $250,000 to holders of Allowed Claims who timely provide wire instructions
will be by wire transfer. Notwithstanding the foregoing, (a) distributions on
account of Claims of holders of $140 million 9% Senior Convertible Notes due
October 1, 2003 ("LFC Senior Convertible Notes") will be paid to the LFC
Indenture Trustee, which will be responsible for making distributions to such
holders and (b) distributions on account of Claims of holders of LMUSA Senior
Notes will be paid to the LMUSA Indenture Trustee, which will be responsible
for making distributions to such holders. Each of the LFC Indenture Trustee
and the LMUSA Indenture Trustee will retain its lien and priorities for its
fees and expenses as set forth in the LFC Indenture and the LMUSA Indenture.
6. Issuance of New LFC Common Stock and New LMUSA Common Stock
On or as soon as practicable after the Effective Date, each of
Reorganized LFC and Reorganized LMUSA will issue shares of its New Common Stock
and will distribute them to the holders of LFC Class 3 Claims and LMUSA Class 3
Claims entitled thereto.
67
<PAGE> 74
7. Distribution of Fractional Shares of New Common Stock
The distribution of shares of New Common Stock may mathematically
entitle the holder of an Allowed LFC Class 3 Claim or LMUSA Class 3 Claim to a
fractional share of the relevant New Common Stock. Notwithstanding the
foregoing, each Reorganized Debtor will not distribute any fractional shares of
its New Common Stock; rather all such fractional shares will be aggregated into
a whole number of shares of the appropriate New Common Stock, which whole
shares of will be allocated and distributed by Reorganized LFC and Reorganized
LMUSA as follows:
a. each Reorganized Debtor will rank from largest to smallest
the fractional interests in shares of its New Common Stock
held by holders of Allowed LFC Class 3 Claims and Allowed
LMUSA Class 3 Claims, as the case may be. In the case of
ties (fractions having the same size), each Reorganized
Debtor will decide such tie by the size of Allowed Claims
(the higher ranking going to the holder of the larger
Allowed Claim). In the event the tie cannot be broken in
such manner, each Reorganized Debtor will decide such tie
by lot;
b. each Reorganized Debtor will allocate one whole share of
its New Common Stock to the holder of the Allowed LFC Class
3 Claim or Allowed LMUSA Class 3 Claim having the largest
fractional interest in a share of the relevant New Common
Stock and any additional whole shares to the holders of
Allowed LFC Class 3 Claims or Allowed LMUSA Class 3 Claims
(one per holder), as the case may be having the next
largest fractional interest in a share of the appropriate
New Common Stock, until all such whole shares have been
allocated.
c. Those shares of New Common Stock allocated in the above
manner will be distributed by the appropriate Reorganized
Debtor to the parties to whom they have been allocated.
8. Surrender and Cancellation of LFC Senior Convertible Notes and
LMUSA Senior Notes
a. No distribution will be made to or on behalf of a holder of LFC
Senior Convertible Notes and LMUSA Senior Notes ("Public Debt Securities")
unless and until such holder surrenders such Public Debt Securities to the LFC
Indenture Trustee or the LMUSA Indenture Trustee (each an "Indenture Trustee"),
as the case may be, for cancellation pursuant to written instructions to such
holders from the appropriate Reorganized Debtor. Any holder of a Public Debt
Security that has been lost, stolen, mutilated or destroyed will, in lieu of
surrendering such Public Debt Security, deliver to the LFC Indenture Trustee or
the LMUSA Indenture Trustee, as the case may be, (i) evidence satisfactory to
such Indenture Trustee of the loss, theft, mutilation or destruction of such
Public Debt Security and (ii) such security or indemnity as may reasonably be
required by the appropriate Indenture Trustee and Reorganized Debtor to hold
both the appropriate Indenture Trustee and Reorganized Debtor harmless with
respect thereto.
b. Any holder of a Public Debt Security that has not satisfied
these requirements within two years after the Effective Date will receive no
distribution on account of its LFC Class 3 Claim or LMUSA Class 3 Claim and
will be forever barred from asserting any Claim thereon. As soon as
practicable after the second anniversary of the Effective Date, the relevant
Indenture Trustee shall pay any distribution to which such holder would have
been entitled to the holders of the relevant Public Debt Security who did
satisfy these requirements within two years after the appropriate Effective
Date, in proportion to the amount of the Public Debt Securities surrendered by
such holders.
E. OTHER PROVISIONS OF THE PLANS
1. Channeling Order
Any and all postpetition Claims relating to the administration of the
Chapter 11 case against any and all of the Debtors and their directors,
officers, employees, and Professionals, or the Creditors' Committees and their
members and Professionals, may be brought only in the Bankruptcy Court. The
bar date for applications for payment of Administrative Claims (including
compensation of Professionals) incurred prior to the Effective Date will be a
date established the Bankruptcy Court not later than 45 days after the
Effective Date.
68
<PAGE> 75
2. Assumption and Rejection of Executory Contracts and Unexpired
Leases
The Plan effects the rejection of all the Debtors' executory contracts
and unexpired leases, except those that have been assumed prior to the date of
the Confirmation Order, or are then the subject of pending motions to assume.
Any Claim for damages arising by reason of the rejection of an executory
contract or unexpired lease by operation of the provisions of the Plans will
constitute a Claim only if a proof of claim therefor is (or has been) filed not
later than 30 days after the Confirmation Date. Any such Claim will be treated
as an Unsecured Claim in LFC Class 3, LIS Class 3, LAS Class 3 or LMUSA Class
3, as appropriate.
3. Setoff
Except as otherwise provided in the Plans, each Reorganized Debtor may,
but will not be required to, set off against any Claim and the distributions to
be made by it in respect of such Claim, any claims of any nature whatsoever
that such Debtor may have against the holder of such Claim, but neither the
failure to do so nor the allowance of any Claim will constitute a waiver or
release of any claim such Debtor may have against such holder.
4. Cancellation and Release of Existing Securities, Agreements and
Liens
On the Effective Date, all evidences of Claims or Interests against a
Debtor that are impaired under the Plans, including, without limitation, Common
Stock or Public Debt Securities of such Debtor (and any liens, securities,
instruments, documents or agreements created or entered into in connection
therewith), and any other liens, securities, instruments, documents and
agreements, in each case, will be deemed released, cancelled and terminated,
and the obligations of such Debtor relating to or arising under, in respect of
or in connection with such liens, securities, instruments, documents or
agreements will be cancelled, extinguished and discharged; provided, however,
that notes and other evidence of such Claims will, effective on the Effective
Date, represent the right, enforceable against the Reorganized Debtor, to
participate in distributions provided for by the Plans. In the event that the
order approving Confirmation is reversed or vacated, the status quo will be
maintained and the holders of Claims and Interests will retain their Claims and
Interests.
5. Certain Assets to be Held in Trust
Each Reorganized Debtor will be required to hold its Non-Reorganization
Assets in trust pending their dispositions and/or distribution to creditors in
accordance with the terms hereof and will not be permitted to commingle such
assets with its Reorganization Assets. This is intended to insulate these
assets from the claims of creditors of the Reorganized Debtors arising after
the Effective Date. For federal tax purposes, the Non-Reorganization assets
may be deemed to have been transferred to the creditors entitled to cash
distributions and immediately retransferred to the appropriate Reorganized
Debtor as trustee. Such creditors may be treated as grantors of the trust and
deemed owners of the trust assets. See "Federal Income Tax Consequences of the
Plans -- Tax Consequences to Creditors -- Non- Reorganization Assets of LFC,
LIS and LMUSA." Each Reorganized Debtor, as trustee, will liquidate the Non-
Reorganization Assets as promptly as possible consistent with the maximization
of the value of such assets. The LFC Creditors' Committee has the right to
change this provision up to the third Business Day prior to the commencement of
the Confirmation Hearing with respect to the LFC Plan, in which case LFC's
Non-Reorganization Assets would not be held in trust for creditors and could be
commingled with LFC's Reorganization Assets.
6. LFC and LMUSA Litigation Trusts
On the Effective Date, the Joint Debtors will be deemed to have
transferred and assigned to the LFC Litigation Trust, and LMUSA will be deemed
to have transferred and assigned to the LMUSA Litigation Trust, any and all
claims, rights, or causes of action that constitute property of the relevant
Estates or of the Joint Debtors or LMUSA, as the case may be, whether arising
under the Bankruptcy Code or under nonbankruptcy law, (including all books,
records, privileges and defenses relating thereto) including, without
limitation, all rights of setoff and rights under section 502(d) of the Code
and all avoiding power actions under sections 544, 545, 547, 548, 549, 550 and
553 of the Code or under applicable nonbankruptcy law as applied through
section 544(b) of the Bankruptcy Code, other than Intercompany Claims. On or
as soon as practicable after the Effective Date, Reorganized LFC and
Reorganized LMUSA shall transfer to the relevant
69
<PAGE> 76
Litigation Trust, $2 million (in the case of Reorganized LFC) and $5 million (in
the case of Reorganized LMUSA), or such other amount as the relevant Creditors'
Committee will specify in writing at least three (3) Business Days prior to the
commencement of the Confirmation Hearing, to fund the administration of the
relevant Litigation Trust.
The LFC Litigation Trustee and the LMUSA Litigation Trustee (each, a
"Litigation Trustee") will be responsible for pursuing the third party claims
and causes of action assigned the respective Litigation Trust through
litigation or, if appropriate, settlement and distributing any net proceeds of
such litigation of settlement, in the case of the LFC Litigation Trust to
Reorganized LFC for distribution to holders of LFC Class 3 Claims and in the
case of the LMUSA Litigation Trust to Reorganized LMUSA for distribution to
holders of LMUSA Class 3 Claims.
7. Contributions to Litigation Trusts and Intercompany Claims Reserve
On and after the Effective Date, all property transferred to either
Litigation Trust or the Intercompany Claims Reserve, if any, under the Plans
will be free and clear of all Claims, liens, encumbrances, charges, Interests
and other interests of any kind or nature of claimants and equity security
holders, the Debtors, the Reorganized Debtors, their Estates and any other
entities, except the rights with respect thereto created pursuant to, provided
for or recognized in the Plans, the LFC or LMUSA Litigation Trust Agreement,
the Intercompany Claims Agreement or the Confirmation Order.
8. Retiree Medical Benefits
On and after the Effective Date, LFC and LMUSA, under the Joint Plan
and the LMUSA Plan, respectively, will be required to continue to provide all
retiree benefits (as defined in Section 1114 of the Code) at the level
established pursuant to Section 1114(c)(1)(B) or Section 1114(g) of the Code.
70
<PAGE> 77
X. SECURITIES TO BE DISTRIBUTED PURSUANT TO THE PLANS
The following discussion summarizes certain provisions of the
securities to be distributed pursuant to the Plans. These summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, all the provisions of the instruments pursuant to which such
securities are to be issued, forms of which are attached as exhibits to the
Plans.
A. NEW LFC CAPITAL STOCK
Reorganized LFC will be authorized, pursuant to the Reorganized
LFC Charter, to have outstanding 3,000,000 shares of New LFC Common Stock.
Holders of New LFC Common Stock will be entitled to receive such dividends, if
any, as may be declared from time to time by the LFC Board of Directors in its
discretion from funds legally available therefor. In the event of any
liquidation, dissolution or winding up of the affairs of Reorganized LFC,
whether voluntary or involuntary or otherwise, the holders of New LFC Common
Stock will be entitled to share, pro rata, in any property that may be available
for distribution after satisfaction of all other Claims, including entitlements
of holders of LFC preferred stock, if any. With respect to voting rights, each
holder of New LFC Common Stock will be entitled to one vote, in person or by
proxy, for each share of stock owned.
The shares of New LFC Common Stock will have no preemptive or other
subscription rights and there will be no conversion rights or redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of New LFC Common Stock will be fully paid and non-assessable. It is
not anticipated that shares of New LFC Common Stock will qualify for listing on
any national exchange nor that trading privileges will be granted on NASDAQ.
Accordingly, it may be difficult to obtain quotations for the value of New LFC
Common Stock and holders thereof should consult their brokers for quotations.
The Reorganized LFC Charter will give the LFC Board of Directors the
power to authorize Reorganized LFC to issue up to 1,000,000 shares of preferred
stock having whatever terms the LFC Board of Directors considers appropriate.
B. RESTRICTIONS ON TRANSFER OF NEW LFC COMMON STOCK
Solely for the purpose of maximizing the likelihood that Reorganized
LFC, or one or more other members of the group of corporations which will file a
consolidated Federal income tax return together with Reorganized LFC will be
able to utilize the tax attributes to which it is or may, pursuant to the
Internal Revenue Code of 1986, as amended (the "Tax Code"), become entitled (the
"LFC Group Tax Benefits"), Article Eleventh of Reorganized LFC's Certificate of
Incorporation restricts the ability of holders of various Reorganized LFC
securities to transfer, directly or indirectly, any interest in such securities
to certain persons. Article Eleventh provides that, with certain specified
exceptions, no person other than Reorganized LFC shall transfer any Reorganized
LFC "Stock," as defined (including but not limited to New LFC Common Stock), or
"Warrants," as defined, to the extent that the transfer, if effective, would
cause the "Ownership Interest Percentage," as defined, of any person to increase
to 4.5% or above, or from 4.5% or above to a greater Ownership Interest
Percentage.
Article Eleventh further provides that the prohibition just described
does not apply to a transfer if, prior to such transfer being consummated (or,
in the case of an involuntary transfer, as soon as practicable thereafter) the
Board of Directors approves the transfer. Board approval will be given unless
the Board concludes (a) that there is a reasonable likelihood that such
transfer, if permitted, would create or increase a material risk that
limitations would be imposed on the utilization of the LFC Group Tax Benefits
pursuant to Section 382 of the Tax Code and (b) that the benefits of such
transaction to the shareholders of Reorganized LFC as a whole are not
sufficient to permit the transfer in the light of the risk or increase in risk
caused thereby.
The expiration date for Article Eleventh is the fourth anniversary of
the Effective Date of the LFC Plan. The LFC Creditors' Committee has the right
to change the provisions of Article Eleventh up to the third Business Day prior
to the commencement of the Confirmation Hearing with respect to the LFC Plan.
The LFC Committee may use this right in
71
<PAGE> 78
order to (a) shorten the period after which Article Eleventh expires and (b)
amend Article Eleventh to limit further the Board of Directors' ability to
withhold approval of transfers which otherwise would be prohibited under Article
Eleventh, and may also make other changes.
A legend in the following form will appear on certificates representing
shares of New LFC Common Stock:
THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE ARE SUBJECT
TO TRANSFER RESTRICTIONS SET FORTH IN ARTICLE ELEVENTH OF
THIS CORPORATION'S RESTATED CERTIFICATE OF INCORPORATION.
ARTICLE ELEVENTH IS INCORPORATED HEREIN BY REFERENCE AS
THOUGH FULLY SET FORTH HEREON.
C. NEW LMUSA CAPITAL STOCK
Reorganized LMUSA will be authorized, pursuant to the Reorganized LMUSA
Charter, to have outstanding 10,000,000 shares of New LMUSA Common Stock.
Holders of New LMUSA Common Stock will be entitled to receive such dividends,
if any, as may be declared from time to time by the LMUSA Board of Directors in
its discretion from funds legally available therefor. In the event of any
liquidation, dissolution or winding up of the affairs of Reorganized LMUSA,
whether voluntary or involuntary or otherwise, the holders of New LMUSA Common
Stock will be entitled to share, pro rata, in any property that may be
available for distribution after satisfaction of all other Claims, including
any entitlements of holders of LMUSA preferred stock, if any. With respect to
voting rights, each holder of New LMUSA Common Stock will be entitled to one
vote, in person or by proxy, for each share of stock owned.
The shares of New LMUSA Common Stock will have no preemptive or other
subscription rights and there will be no conversion rights or redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of New LMUSA Common Stock will be fully paid and non-assessable. It is
not anticipated that shares of New LMUSA Common Stock will qualify for listing
on any national exchange nor that trading privileges will be granted on NASDAQ.
Accordingly, it may be difficult to obtain quotations for the value of New
LMUSA Common Stock and holders thereof should consult their brokers to obtain
quotations.
The By-Laws of Reorganized LMUSA will give the LMUSA Board of Directors
the power to authorize Reorganized LMUSA to issue up to 3,000,000 shares of
preferred stock having whatever terms the LMUSA Board of Directors considers
appropriate.
D. RESTRICTIONS ON TRANSFER OF NEW LMUSA COMMON STOCK
Solely for the purpose of maximizing the likelihood that Reorganized
LMUSA, or one or more other members of the group of corporations which will
file a consolidated Federal income tax return together with Reorganized LMUSA,
will be able to utilize the tax attributes to which it is or may become
entitled pursuant to the Tax Code (the "LMUSA Group Tax Benefits"), Article X,
Section 6 of Reorganized LMUSA's By-Laws restricts the ability of holders of
various Reorganized LMUSA securities to transfer, directly or indirectly, any
interest in such securities to certain persons. Article X, Section 6 provides
that, with certain specified exceptions, no person other than Reorganized LMUSA
shall transfer any Reorganized LMUSA "Stock," as defined (including but not
limited to New LMUSA Common Stock), or "Warrants," as defined, to the extent
that the transfer, if effective, would cause the "Ownership Interest
Percentage," as defined, of any person to increase to 4.5% or above, or from
4.5% or above to a greater Ownership Interest Percentage.
Article X, Section 6 further provides that the prohibition just
described does not apply to a transfer if, prior to such transfer being
consummated (or, in the case of an involuntary transfer, as soon as practicable
thereafter) the Board of Directors approves the transfer. In the case of a
transfer for which Board approval is required, such approval will be given
unless the Board concludes (a) that there is a reasonable likelihood that such
transfer, if permitted, would create or increase a material risk that
limitations would be imposed on the utilization of the LMUSA Group Tax Benefits
pursuant to Section 382 of the Tax Code and (b) that the benefits of such
transaction to the shareholders of the Corporation as a whole are not
sufficient to permit the transfer in the light of the risk or increase in risk
caused thereby.
72
<PAGE> 79
The expiration date for Article X, Section 6 is the fourth anniversary
of the Effective Date of the LMUSA Plan.
The LMUSA Creditors' Committee has the right to change the provisions
of Article Eleventh up to the third Business Day prior to the commencement of
the Confirmation Hearing with respect to the LMUSA Plan. The LMUSA Creditors'
Committee may use this right in order to: (a) shorten the period after which
Article X, Section 6 expires and (b) amend Article X, Section 6 to limit
further the Board of Directors' ability to withhold approval of transfers which
otherwise would be prohibited under Article X, Section 6, and may also make
other changes.
A legend in the following form will appear on certificates representing
shares of New LMUSA Common Stock:
THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE ARE
SUBJECT TO TRANSFER RESTRICTIONS SET FORTH IN ARTICLE X,
SECTION 6 OF THIS CORPORATION'S BY-LAWS. ARTICLE X,
SECTION 6 IS INCORPORATED HEREIN BY REFERENCE AS THOUGH
FULLY SET FORTH HEREON.
73
<PAGE> 80
XI. CERTAIN CONSIDERATIONS
In considering whether to accept the Joint Plan or the LMUSA Plan, as
the case may be, holders of Claims should carefully consider the following
factors.
A. PROJECTIONS
The projected financial information of Reorganized LFC and Reorganized
LMUSA in Exhibit IV hereto reflects management's estimates based upon what it
believes to be reasonable assumptions of future markets for Reorganized LFC's
and Reorganized LMUSA's services and assets. Actual results will vary from the
projections for various reasons.
Because of the subjective judgments and inherent uncertainties of
projections and because the projections are based on assumptions which are
subject to significant uncertainties that are beyond the control of Reorganized
LFC and Reorganized LMUSA, there can be no assurance that the projections set
forth herein will be realized or that Reorganized LFC's and Reorganized LMUSA's
actual future results or subsequent projections will not vary significantly
from those set forth herein. The projected results also depend in part on the
timely availability of certain tax benefits, including NOLs. The Debtors have
assumed for this purpose that the Bankruptcy Exception described below in
"Federal Income Tax Consequences of The Plans -- Tax Consequences to the
Debtors -- Potential Limitations on Utilization of NOLs" will apply to preserve
a significant amount of the current NOLs and other tax attributes of LFC and
LMUSA and that such tax attributes will be available to offset income of
Reorganized LFC and Reorganized LMUSA. No assurance can be made that these tax
benefits will inure to the benefit of Reorganized LFC and Reorganized LMUSA.
To the extent that the NOLs and other tax attributes of LFC and LMUSA
will be available to offset any taxable income earned by Reorganized LFC and
Reorganized LMUSA, these tax attributes are potentially valuable to LFC and
LMUSA. The LFC Creditors' Committee believes that the potential value of LFC's
and LMUSA's tax attributes might be maximized if LFC and LMUSA participated in
a single Chapter 11 plan under which Reorganized LMUSA would be a wholly-owned
subsidiary of Reorganized LFC. The LFC Creditors' Committee further believes
that the chance that LFC Investors will be identified would be greater if LFC
and LMUSA were to participate in a single Chapter 11 plan of the kind just
described, and that the potential value of LFC's NOLs would be greater as a
result. However, it is not clear that the maximum potential value of LFC's and
LMUSA's NOLs and other tax attributes would be realized if LFC and LMUSA
participated in a single Chapter 11 plan rather than proceeding with separate
plans.
B. DISPUTED CLAIMS
The estimated distributions under the Plans are based upon LFC's and
LMUSA's estimates of the ultimate amount of Allowed Claims. To the extent that
Allowed Claims exceed these estimates, distributions will be reduced. See
"Chapter 11 Plans" above. The Reorganized Debtors can only make distributions
once the ultimate amount of Allowed Claims has been calculated. This will
require the estimation, adjudication and settlement of all Disputed Claims,
including, most significantly, the Intercompany Claims. The cost of resolving
these issues may be significant. In the event that the Disputed Claims are
calculated through an estimation, it is possible that the ultimate amount of
Allowed Claims that were formerly disputed, will exceed the estimated amounts.
Consequently, distributions would be reduced.
C. INTERCOMPANY CLAIMS
As set forth above in "Intercompany Claims -- Description of Provisions
of the Plans," the Plans provide that the making of certain distributions to
unsecured creditors is conditional on the creation of a reserve or distribution
holdback for Intercompany Claims.
There can be no assurance that the Intercompany Claims can be resolved,
or a reserve or holdback mechanism agreed upon so as to permit distributions to
unsecured creditors, without litigation, and it is impossible to predict how
long such litigation could take.
D. TRADING IN NEW LFC COMMON STOCK AND NEW LMUSA COMMON STOCK
The trading price of New LFC Common Stock and New LMUSA Common Stock
may reflect a discount to the value attributed to it under the relevant Plan as
a result of market perceptions of the reorganized entities, as former debtors
under the Code. This discount may be significant and may exist for a
considerable period of time.
74
<PAGE> 81
XII. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS
Section 1145 of the Code exempts from registration under the Securities
Act of 1933, as amended (the "Securities Act") and state securities laws the
issuance and resale (except for resales by "underwriters," as defined in
Section 1145(b)) of securities issued pursuant to a Chapter 11 plan, if three
requirements are met: (a) the securities are issued pursuant to a Chapter 11
plan; (b) the securities are issued by the debtor, an affiliate of the debtor
participating in a joint plan with the debtor, or the successor to the debtor
under the plan; and (c) the securities are issued in exchange for a claim
against, or an interest in, the debtor or for a claim for an administrative
expense in the case concerning the debtor.
The issuance of each of New LFC Common Stock and New LMUSA Common Stock
pursuant to the relevant Plan satisfies these requirements and is, therefore,
exempt from federal and state securities laws.
Resales of securities to be distributed pursuant to the Plans by
"underwriters" would not be exempt pursuant to Section 1145 of the Code from
registration under the Securities Act. Section 1145(b) of the Code defines
"underwriters" as:
a. persons who purchase a claim against, an interest in, or a
claim for administrative expense against the debtor with a view
to distributing any security received in exchange for such a
claim or interest ("accumulators");
b. persons who offer to sell securities offered under a plan for
the holders of such securities ("distributors");
c. persons who offer to buy such securities for the holders of
such securities, if the offer is (i) with a view to
distributing them or (ii) made under a distribution agreement
("syndicators"); and
d. any person who is an "issuer" with respect to the securities,
as the term "issuer" is defined in Section 2(11) of the
Securities Act.
Under Section 2(11) of the Securities Act, an "issuer" includes any
person directly or indirectly controlling or controlled by Reorganized LFC or
Reorganized LMUSA, as the case may be, or any person under direct or indirect
common control with Reorganized LFC or Reorganized LMUSA (a "control person").
Whether a person is an "issuer," and therefore an "underwriter," for
purposes of Section 1145(b) of the Code, depends on a number of factors. These
include: (a) the person's equity interest in the entity issuing the
securities; (b) the distribution and concentration of other equity interests in
the entity issuing the securities; (c) whether the person is an officer or
director of the entity issuing the securities; (d) whether the person, either
alone or acting in concert with others, has a contractual or other relationship
giving that person power over management policies and decisions of the entity
issuing the securities; and (e) whether the person actually has such power
notwithstanding the absence of formal indicia of control. An officer or
director of the entity issuing the securities may be deemed a control person,
particularly if his position is coupled with ownership of a significant
percentage of voting stock. In addition, the legislative history of Section
1145 of the Code suggests that a creditor with at least 20% of the securities
of a debtor could be deemed a control person.
LFC and LMUSA do not express any view concerning which persons may be
deemed "underwriters" with respect to the securities to be distributed pursuant
to the Plans and LFC and LMUSA make no representations concerning the right of
any person to trade in the securities to be distributed pursuant to the Plans.
LFC and LMUSA recommend that recipients of the securities to be distributed
pursuant to the Plans consult their legal counsel concerning whether they may
freely trade such securities.
A. CONTROL PERSONS
As of the date of this Disclosure Statement, LFC and LMUSA have no
reason to believe that any recipients of the securities to be distributed
pursuant to the Plans might be deemed to be control persons. It is possible,
however, that holders of sufficiently large blocks of securities to be
distributed pursuant to the Plans, either individually or by reason of acting
in concert, could be deemed to be control persons.
75
<PAGE> 82
B. SYNDICATORS
No arrangements for resale of securities to be distributed pursuant to
the Plans are known to LFC or LMUSA which would make any person a syndicator.
C. ACCUMULATORS AND DISTRIBUTORS
In connection with the Chapter 11 proceedings involving Manville
Corporation, a letter from the staff of the SEC was requested concurring in the
view of counsel that all resales of securities issued pursuant to the Chapter
11 plan in those proceedings by accumulators and distributors would be regarded
as exempt from registration under the Securities Act so long as the sales are
made in "ordinary trading transactions." In such request, it was suggested
that a transaction should be considered an "ordinary trading transaction" if it
is made on an exchange or in the over-the-counter market at a time when the
debtor is a reporting company under the Securities and Exchange Act of 1934, as
amended ("Exchange Act") (see "Current Information" below) and does not involve
any of the following factors:
a. (i) concerted action by recipients of securities issued
pursuant to the plan in connection with the sale of such
securities, or (ii) concerted action by distributors on behalf
of one or more such recipients in connection with such sales or
(iii) both;
b. informational documents concerning the offering of the
securities prepared or used to assist in the resale of such
securities other than this Disclosure Statement and any
supplements hereto and documents filed with the SEC by any of
the Debtors pursuant to the Exchange Act; or
c. special compensation to brokers and dealers in connection with
the sale of such securities designed as a special incentive to
resell such securities, other than the compensation that would
be paid pursuant to arms-length negotiations between a seller
and a broker or dealer, each acting unilaterally, not greater
than the compensation that would be paid for a routine
similar-sized sale of similar securities of a similar issuer.
The staff of the SEC on August 28, 1986 advised Manville Corporation
that it concurred in the views stated above. The views of the SEC on the
matter have not, however, been sought by LFC or LMUSA and therefore, no
assurance regarding the current position of the SEC can be given.
It is possible that resale transactions which included one or more of
the above factors could constitute "ordinary trading transactions," but that
determination would have to be carefully made on a case-by-case basis, and the
counsel to LFC and counsel to LMUSA have not sought any advice from the staff
of the SEC with respect to such transactions.
EACH RECIPIENT OF SECURITIES TO BE ISSUED PURSUANT TO THE PLANS SHOULD
SATISFY ITSELF THROUGH CONSULTATION WITH ITS LEGAL ADVISORS AS TO WHETHER OR
NOT ITS RESALES OR OTHER TRANSACTIONS IN PLAN SECURITIES ARE LAWFUL UNDER THE
SECURITIES LAWS AND WHETHER OR NOT THE VIEWS OF THE SEC SHOULD BE SOUGHT.
D. CURRENT INFORMATION
LFC is currently required, and Reorganized LFC and Reorganized LMUSA
will be required, to comply with the reporting requirements of the Exchange
Act. Under these requirements Reorganized LFC and Reorganized LMUSA will each
file with the SEC, among other things, Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and other information.
E. CERTAIN TRANSACTIONS BY STOCKHOLDERS
Under Section 1145(a)(4) of the Code stockbrokers are required to
deliver a copy of this Disclosure Statement (and supplements hereto, if any, if
ordered by the Bankruptcy Court) at or before the time of delivery of
securities issued under the Plan to their customers for the first 40 days after
the Effective Date. This requirement specifically applies to trading and other
after-market transactions in such securities.
76
<PAGE> 83
XIII. FEDERAL INCOME TAX CONSEQUENCES OF THE PLANS
THE FOLLOWING DISCUSSION IS A SUMMARY OF THE MAJOR FEDERAL INCOME TAX
CONSEQUENCES OF THE PLANS TO HOLDERS OF CLAIMS AND INTERESTS AND TO THE
DEBTORS. THESE CONSEQUENCES MAY VARY ACCORDING TO THE CIRCUMSTANCES OF EACH
HOLDER, AND SOME CONSEQUENCES OF THE PLANS ARE DIFFICULT TO EVALUATE BECAUSE OF
THE LACK OF CONTROLLING LEGAL PRECEDENT AND THE POSSIBILITY OF CHANGES IN LAW.
THE DEBTORS HAVE NOT APPLIED FOR RULINGS FROM THE IRS ON ANY OF THE TAX ASPECTS
OF THE PLANS AND NO OPINIONS OF COUNSEL HAVE BEEN OBTAINED. EACH HOLDER OF A
CLAIM OR INTEREST SHOULD CONSULT WITH SUCH HOLDER'S TAX ADVISOR REGARDING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE PLANS.
A. TAX CONSEQUENCES TO THE DEBTORS
1. Separation of LFC and its Subsidiaries into Two Consolidated Groups
Currently, all of the Debtors, along with other subsidiaries of LFC,
constitute an affiliated group (the "Lomas Group") of which LFC is the common
parent for purposes of filing a consolidated federal income tax return. The
existence of the Lomas Group means, in general, that the determination of
taxable income for federal income tax purposes is made for the Lomas Group as a
whole through the filing of consolidated tax returns, rather than on a
company-by-company basis. The Lomas Group has a taxable year ending on June
30.
As of the Effective Date of the Plans, the Lomas Group will be replaced
by two affiliated groups, one consisting of Reorganized LFC and its
consolidated subsidiaries ("LFC Group") and the other consisting of Reorganized
LMUSA and its consolidated subsidiaries ("LMUSA Group"). From that time
forward, LFC Group will file its own consolidated tax returns and, for that
purpose, will determine the consolidated taxable income of the companies which
are members of LFC Group. LMUSA Group will do the same with respect to the
companies which are members of LMUSA Group.
2. Alternative Minimum Tax
For purposes of computing a taxpayer's regular federal income tax
liability, all of the income recognized in a taxable year may be offset by
available NOLs. However, for purposes of the alternative minimum tax ("AMT"),
only 90% of a taxpayer's alternative minimum taxable income ("AMTI") may be
offset by available NOLs. Therefore, any AMTI recognized by LFC Group or LMUSA
Group will be taxable at a rate of at least 2% (10% of the 20% AMT tax rate).
3. Tax Attributes of the Debtors
As of the beginning of its 1995 taxable year, the Lomas Group had
approximately $620 million of NOLs, almost all of which expire beginning in
2003 through 2010, and other tax attributes, including approximately $21.2
million of business credit carryovers expiring in 1999 through 2005. LFC and
LMUSA estimate that the Lomas Group will incur an NOL of approximately $250
million in its 1995 taxable year. LFC and LMUSA thus expect that the Lomas
Group will have approximately $870 million of NOLs at the close of its 1995
taxable year. This amount includes approximately $10 million of NOLs
attributable to LAS. In the event that LAS is determined to have been
"liquidated" (as defined for purposes of applying Sections 332 and 381 of the
Tax Code) at a time when it was "insolvent" (as defined for federal income tax
purposes), the Lomas Group's NOLs might be reduced by all or part of the $10
million of NOLs attributable to LAS.
Upon the distribution of New LFC Common Stock and New LMUSA Common
Stock pursuant to the Plans, the NOLs and other tax attributes of the Lomas
Group will be allocated between LFC Group and LMUSA Group in accordance with
applicable regulations.
Based on certain assumptions regarding the identity and status of
creditors who will receive New LFC Common Stock pursuant to the Joint Plan, LFC
expects that the Bankruptcy Exception described below will apply to permit the
77
<PAGE> 84
NOLs and other tax attributes allocated to LFC Group, as reduced for discharge
of indebtedness and certain interest deductions as described below in "Federal
Income Tax Consequences of the Plans -- Tax Consequences to the Debtors --
Reduction of NOLs for Discharge of Indebtedness and Certain Interest
Deductions," to survive after the Effective Date of the Joint Plan. Similarly,
based on certain assumptions regarding the identity and status of creditors who
will receive New LMUSA Common Stock pursuant to the LMUSA Plan, LMUSA expects
that the Bankruptcy Exception will apply to permit the NOLs and other tax
attributes allocated to LMUSA Group, as reduced for discharge of indebtedness
and certain interest deductions as described below in "Federal Income Tax
Consequences of the Plans -- Tax Consequences to the Debtors -- Reduction of
NOLs for Discharge of Indebtedness and Certain Interest Deductions," to survive
after the Effective Date of the LMUSA Plan. LFC's and LMUSA's assumptions
regarding the identity and status of their respective creditors will not be
verified prior to the Effective Date of the Plans. Subject to the limits
discussed below in "Federal Income Tax Consequences of the Plans -- Tax
Consequences to the Debtors -- Potential Limitations on Utilization of NOLs"
and "Federal Income Tax Consequences of the Plans -- Tax Consequences to the
Debtors -- Reduction of NOLs for Discharge of Indebtedness and Certain Interest
Deductions," NOLs and other tax attributes surviving after the Effective Date
of the Plans may be available to offset the future taxable income of LFC Group
and LMUSA Group. However, the use of any NOL or other tax attribute is
dependent on the future taxable income of LFC Group and LMUSA Group. Moreover,
NOLs and other tax attributes are subject to review and possible disallowance
by the IRS on the audit of any year to which they are carried forward.
4. Potential Limitations on Utilization of NOLs
a. "Ownership Change" under Tax Code Section 382. Section 382 of
the Tax Code provides in general that, following an "ownership change" with
respect to the stock of a corporation, the corporation's ability to utilize its
existing NOLs and other tax attributes is subject to limitations unless the
so-called "Bankruptcy Exception" under Section 382(1)(5) (discussed below) is
available.
Very generally, an ownership change within the meaning of Tax Code
Section 382 occurs when the percentage of stock (determined on the basis of
value) owned by one or more holders of at least 5% of such stock has increased
by more than 50 percentage points (in relationship to the corporation's total
stock considered to be outstanding for this purpose) from the lowest percentage
of stock that was owned by such 5% shareholders at any time during the
applicable "testing period." The testing period is ordinarily the shorter of
(i) the three-year period preceding the date of testing or (ii) the period of
time since the most recent ownership change of the corporation. In general,
for purposes of determining stock ownership and the aggregate amount of stock
outstanding, special rules apply for options and rights that are similar to
options, and broad constructive ownership and attribution rules apply. Also,
subject to segregation rules contained in temporary regulations under Section
382, all persons holding less than 5% by value of the corporation's stock
generally are treated as a single 5% shareholder. An ownership change can
occur as a result of, among other things, the purchase or sale of stock or
options by or to a 5% shareholder, an issuance of stock or options by the
corporation (whether or not any particular shareholder holds 5% of the value of
the corporation's stock), or the redemption of stock or options by the
corporation.
LFC believes that an ownership change within the meaning of Section 382
will occur with respect to LFC as a result of the Joint Plan. In addition,
LMUSA believes that an ownership change will occur with respect to LMUSA as a
result of the LMUSA Plan.
b. Effect of Tax Code Section 382. Unless the Bankruptcy
Exception applies, a corporation may use pre- ownership change NOLs in any
taxable year following an ownership change only up to an amount equal to its
"Section 382 limitation" (described below) for that taxable year. The Section
382 limitation for a taxable year equals, in general and subject to
adjustments, the product of (i) the long-term tax-exempt bond rate as
determined at the time of the ownership change and (ii) the value of the
corporation immediately before the ownership change. In general, in the case
of a corporation undergoing an ownership change in a bankruptcy proceeding, the
value of the corporation is increased to reflect the increase (if any) in its
value resulting from any surrender or cancellation of creditors' claims in the
transaction. If the Section 382 limitation applies with respect to an
ownership change, and the corporation does not continue its "historic business"
(as defined in the Tax Code) during the two year period following the date of
such ownership change, the NOLs are effectively eliminated in their entirety.
78
<PAGE> 85
If the corporation's taxable income in a given year exceeds the Section
382 limitation, the excess is subject to federal income tax (except to the
extent such taxable income is attributable to certain "built-in gains" of the
corporation). NOLs not utilized in a given year because of the Section 382
limitation remain available for use in future years until their normal
expiration dates. To the extent that a corporation's Section 382 limitation in
a given year exceeds its taxable income for such year, that excess will
increase the Section 382 limitation in future taxable years.
The Section 382 limitation also applies in the case of a corporation
that has net unrealized built-in losses (i.e., if the aggregate adjusted basis
of the corporation's assets at the time of the ownership change exceeds the
fair market value of such assets) in excess of a de minimis threshold amount,
so as to limit the corporation's utilization of such built-in losses that are
recognized during the five-year period after the ownership change. This rule
also applies to deductions that have accrued economically prior to the
ownership change but are recognized for tax purposes after the ownership
change. Rules similar to those under Section 382 apply under Tax Code Section
383 to restrict a corporation's utilization of business credit carryovers and
other tax attributes after an ownership change.
As a result of the ownership changes with respect to LFC and LMUSA
pursuant to the Plans, unless the Bankruptcy Exception is available, Sections
382 and 383 will severely restrict or altogether prevent the utilization of
existing NOLs and other tax attributes by LFC Group and LMUSA Group in any
taxable year ending after the Effective Date.
c. The Bankruptcy Exception under Tax Code Section 382(1)(5).
Section 382(l)(5) of the Tax Code (the "Bankruptcy Exception") provides that
the Section 382 limitation does not apply if a corporation that is otherwise
subject to Section 382 is under the jurisdiction of a court in a case under the
Code, 11 U.S.C. Section 101 et seq., and the shareholders and "qualified
creditors" of the corporation together own 50% or more of the value and voting
power of the reorganized corporation after the ownership change as a result of
being shareholders or creditors immediately before the ownership change.
"Qualified creditors" include (i) persons who were creditors at least 18 months
before the date the Chapter 11 petition was filed and (ii) holders of claims
which arose in the ordinary course of business ("trade claims") who have at all
times held the beneficial interest in such trade claims. If this exception
applies, the use of the corporation's NOLs is not subject to the Section 382
limitation, but the NOLs are reduced by the amounts described in "Federal
Income Tax Consequences of the Plans -- Tax Consequences to the Debtors --
Reduction of NOLs for Discharge of Indebtedness and Certain Interest
Deductions." However, under the Bankruptcy Exception, if there were a second
ownership change during the two-year period following the Effective Date of the
plan, the NOLs and other tax attributes of the loss corporation would be
subject to a Section 382 limitation of zero for all taxable years ending after
the date of the second ownership change (thereby, in effect, eliminating
entirely the corporation's ability thereafter to utilize such NOLs and other
tax attributes).
The Bankruptcy Exception automatically applies if its requirements are
satisfied. A debtor, however, has the option of filing an election not to have
the Bankruptcy Exception apply when the debtor files its tax return for the
year of the ownership change. If the election is made, the Section 382
limitation will apply. Assuming that the Bankruptcy Exception is available, no
Debtor or other corporation which is a member of Lomas Group and will be a
member of LFC Group or LMUSA Group intends to make such an election.
Regulations under Tax Code Section 382 (the "Section 382 Regulations")
provide that, for purposes of determining whether the Bankruptcy Exception is
available, a corporation generally may treat indebtedness as having always been
owned by the same beneficial owner if, immediately after an ownership change
pursuant to a Chapter 11 plan, the beneficial owner is neither a 5% shareholder
nor an entity through which a 5% shareholder owns an indirect interest in the
corporation (a "5% entity"). This treatment is not available, however, if such
a beneficial owner's participation in the formulation of the corporation's
reorganization plan makes it evident to the corporation that the beneficial
owner has not owned the indebtedness in question for the required period. The
Section 382 Regulations include extensive rules regarding the manner in which a
corporation may determine whether, following an ownership change, the
beneficial owner of indebtedness would be either a 5% shareholder or a 5%
entity.
Based on the Section 382 Regulations and certain assumptions of fact
and law, LFC expects that the Bankruptcy Exception will apply to the ownership
change occurring with respect to LFC, in which case the Section 382 limitation
would not apply with respect to the NOLs and other tax attributes allocated to
LFC Group. Similarly, LMUSA expects that the Bankruptcy Exception will apply to
the ownership change occurring with respect to LMUSA, in which case the
79
<PAGE> 86
Section 382 limitation would not apply with respect to the NOLs and other tax
attributes allocated to LMUSA Group. However, no assurance can be given that the
Bankruptcy Exception will be available because of uncertainties regarding the
assumptions on which LFC's and LMUSA's expectations are based, including certain
assumptions with respect to (i) the aggregate amount of LFC Class 3 and LMUSA
Class 3 Claims that will become Allowed Claims and that are held by "qualified
creditors," as that term is defined by Section 382 and the Section 382
Regulations, (ii) the level of trading in Claims in LFC Class 3 and LMUSA Class
3, (iii) the feasibility of complying with the requirements in the Section 382
Regulations regarding proof of beneficial ownership, and (iv) the ultimate
resolution of certain technical and substantive legal issues arising in the
application of the relevant provisions of the Tax Code and the regulations
thereunder (including the Section 382 Regulations) to the Plans and the
transactions contemplated and interests created thereby, any of which issues may
eventually be resolved in an adverse manner through regulations, IRS
pronouncements or actions or judicial determinations.
d. Subsequent Ownership Changes. As discussed above, if the
Bankruptcy Exception applies when a corporation undergoes an ownership change
pursuant to a Chapter 11 plan, and if the corporation undergoes a second
ownership change during the two-year period following such ownership change,
the Section 382 limitation would be zero for all taxable years ending after the
date of the second ownership change, thereby eliminating, in effect, the
ability of the corporation thereafter to utilize NOLs and tax credit
carryovers.
In order to minimize the likelihood that an ownership change will occur
with respect to either Reorganized LFC or Reorganized LMUSA within two years
after the Effective Date, the Plans incorporate certain restrictions on the
transferability of New LFC Common Stock and New LMUSA Common Stock. (See
"Securities to be Distributed Pursuant to the Plans -- Restrictions on Transfer
of New LFC Common Stock" and "Securities to be Distributed Pursuant to the
Plans -- Restrictions on Transfer of New LMUSA Common Stock" above.) There can
be no assurance, however, that these restrictions will in fact prevent an
ownership change that could adversely affect the shareholders of Reorganized
LFC or Reorganized LMUSA.
e. Tax Code Section 269. Notwithstanding a corporation's
compliance with the rules described above, the IRS is authorized under Tax Code
Section 269 to disallow any deduction, credit or other allowance (including the
use of NOLs and other tax attributes) if control of a corporation was acquired
principally for tax avoidance purposes. Under Section 269, "control" is
regarded as the ownership of stock possessing at least 50% of the total
combined voting power or value of all classes of stock. The existence of a
principal tax avoidance motive by persons acquiring control of LMUSA and LFC
would be primarily a question of fact. Regulations under Tax Code Section 269
provide that, absent strong evidence to the contrary, the acquisition of
control by the creditors of a corporation pursuant to the Bankruptcy Exception
of Tax Code Section 382 is considered to be made for a principal tax avoidance
purpose unless the debtor carries on more than an insignificant amount of an
active trade or business during and subsequent to the bankruptcy proceeding.
Under these regulations, the determination of whether a corporation carries on
more than an insignificant amount of an active trade or business is based on
all the facts and circumstances, including the amount of business assets that
continue to be used, and the number of employees in the work force who continue
employment, in an active trade or business. In light of the inherently factual
nature of this inquiry and the broad power granted to the IRS in this area,
there can be no assurance that the IRS will not challenge the utilization by
LFC Group or LMUSA Group of their respective tax attributes on the basis of Tax
Code Section 269, or that such a challenge, if asserted, will not be sustained.
5. Reduction of NOLs for Discharge of Indebtedness and Certain
Interest Deductions
Under the Tax Code, a debtor generally must include in gross income the
amount of any indebtedness cancelled without consideration (such income being
referred to as "C.O.D. income"). However, Section 108 of the Tax Code provides
that, where indebtedness is discharged pursuant to a Chapter 11 reorganization
plan, no C.O.D. income is recognized. Instead, the amount that otherwise would
have been includible as C.O.D. income is applied to reduce, among other things,
the corporation's NOLs and other tax attributes.
Under Section 382(l)(5) of the Tax Code, if a corporation undergoes an
ownership change within the meaning of Section 382, and if the Bankruptcy
Exception applies, the corporation's NOLs and other tax attributes must be
reduced not only by the amount that would have been includible as C.O.D. income,
but also by the amount of interest relating to any indebtedness that is
converted into stock pursuant to a Chapter 11 plan and for which interest the
corporation claimed
80
<PAGE> 87
a deduction during the three-year period preceding the taxable year of ownership
change plus the portion of the year of the ownership change prior to the
effective date of the Chapter 11 plan.
6. Resulting Tax Consequences to LFC Group
If the Bankruptcy Exception applies to LFC Group, and if the Effective
Date is after June 30, 1996, it is estimated that LFC Group will have
approximately $230 million of NOLs, as well as approximately $21.2 million of
business credit carryovers (after taking into account the required reduction of
tax attributes pursuant to Sections 382(l)(5) and 108, as well as projected
NOLs of approximately $3 million for the taxable year ending June 30, 1996
which are allocable to LFC Group), that will not be subject to a new Section
382 limitation (or to a corresponding restriction under Section 383),
immediately after the Effective Date. However, approximately $40.5 million of
LFC Group's NOLs will continue to be subject to an annual limitation of
approximately $16.3 million as a result of a previous ownership change in 1992.
In addition, in the event that LAS is determined to have been "liquidated" (as
defined for purposes of applying Sections 332 and 381 of the Tax Code) at a
time when it was "insolvent" (as defined for federal income tax purposes), the
amount of NOLs which LFC group would have after the Effective Date might be
reduced by up to approximately $10 million.
The amounts set forth in the previous paragraph do not take into
account any gain or loss which will be recognized by LFC upon the distribution
of its Non-Reorganization Assets. LFC believes this distribution will, for
federal income tax purposes, be deemed to occur as of the Effective Date. See
"Federal Income Tax Consequences of the Plans -- Tax Consequences to Creditors
- -- Non-Reorganization Assets of LFC, LIS and LMUSA -- Non- Reorganization
Assets of LFC and LIS." Recognition of any gain or loss by LFC upon such a
distribution will result in an increase (if a loss is recognized) or decrease
(if a gain is recognized) in the amount of NOLs which LFC Group will have
immediately after the Effective Date.
7. Resulting Tax Consequences to LMUSA Group
If the Bankruptcy Exception applies to LMUSA Group, and if the
Effective Date is after June 30, 1996, it is estimated that LMUSA Group will
have approximately $338 million of NOLs (after taking into account the required
reduction of tax attributes pursuant to Sections 382(l)(5) and 108, as well as
projected NOLs of approximately $248 million for the taxable year ending June
30, 1996 which are allocable to LMUSA Group), that will not be subject to a
Section 382 limitation (or to a corresponding restriction under Section 383)
immediately after the Effective Date.
The amounts set forth in the previous paragraph do not take into
account any gain or loss which will be recognized by LMUSA upon the
distribution of its Non-Reorganization Assets. LMUSA believes this
distribution will, for federal income tax purposes, be deemed to occur as of
the Effective Date. See "Federal Income Tax Consequences of the Plans -- Tax
Consequences to Creditors -- Non-Reorganization Assets of LFC, LIS and LMUSA --
Non- Reorganization Assets of LMUSA." Recognition of any gain or loss by LMUSA
upon such a distribution will result in an increase (if a loss is recognized)
or decrease (if a gain is recognized) in the amount of NOLs which LMUSA Group
will have immediately after the Effective Date.
B. TAX CONSEQUENCES TO CREDITORS
1. Tax Concerns Common to All Creditors
a. Securities. The tax consequences to a creditor discussed below
may depend in part upon whether such creditor's Claim is based upon a
"security" of LFC or LMUSA for federal income tax purposes. "Security" status
depends upon the facts and circumstances surrounding the origin and nature of
the Claim. For example, obligations arising out of the extension of trade
credit have been held not to be securities, while corporate debt obligations
evidenced by written instruments with original maturities of seven years or
more have been held to be securities. The Debtors believe that the LFC Senior
Convertible Notes and the LMUSA Senior Notes constitute "securities" for
federal income tax purposes.
b. Capital Gain and Ordinary Income. Subject to the discussions
of accrued interest and market discount below, gain or loss recognized by a
holder of an Allowed Claim upon the exchange of its Claim for the consideration
81
<PAGE> 88
described in the Plans will generally be characterized as capital gain or loss
if the Claim constitutes a capital asset in the holder's hands. Such gain or
loss will be long-term capital gain or loss with respect to those Claims for
which the holder's holding period is more than one year and short-term capital
gain or loss with respect to those Claims for which the holder's holding period
is one year or less.
Under current law, the excess of net long-term capital gains over net
short-term capital losses is taxed at a lower rate than ordinary income for
certain noncorporate taxpayers. Under the Tax Code, a corporation's deduction
of capital losses is limited to the amount of capital gains recognized in the
same year, and an individual's deduction of capital losses is limited to the
amount of capital gains recognized in the same year plus $3,000. Presently,
unused capital losses of corporations can be carried back three years and
forward five years. Unused capital losses of individuals cannot be carried
back but can be carried forward indefinitely.
c. Market Discount. Generally, a debt instrument will have
"market discount" for federal income tax purposes if it is acquired after its
original issuance for less than the issue price of such instrument plus the
aggregate amount, if any, of original issue discount includible in the income
of all holders of such instrument prior to such acquisition. A holder of a
Claim with market discount must treat any gain recognized with respect to the
principal amount of such Claim on the satisfaction of such Claim pursuant to
the Plans as ordinary income to the extent of the Claim's accrued market
discount.
d. Consideration Allocable to Interest or Original Issue Discount.
Part of the consideration received under the Plans in exchange for a Claim may
be allocable to interest (including original issue discount) accrued while such
holder held the Claim. If the consideration received with respect to an
Allowed Claim is less than the amount of such Claim, there is some doubt as to
how the consideration should be allocated between principal and such accrued
interest. The legislative history of Section 354(a)(2)(B) suggests that, where
a Chapter 11 plan provides for an allocation of such consideration between
principal and unpaid interest, both the debtor and the holder of an Allowed
Claim ordinarily must use that allocation for federal income tax purposes. The
Joint Plan provides that consideration given in exchange for an Allowed Claim
will be allocated first to principal and then, to the extent that such
consideration exceeds the principal amount of such Claim, to accrued but unpaid
interest. The LMUSA Plan contains a similar provision. Reorganized LFC and
Reorganized LMUSA intend to file their federal income tax and information
returns in accordance with the allocation provisions contained in the Plans.
A holder of a Claim will be required to recognize ordinary income to
the extent the consideration received that is allocable to accrued interest
exceeds the amount of interest previously included in income, and will
recognize a loss to the extent that the amount of interest previously included
in income exceeds the consideration that is allocated to such interest. It is
unclear whether such a loss is capital or ordinary.
2. Creditors Not Receiving New LFC Common Stock or New LMUSA Common
Stock
Under the Plans, creditors in LFC Class 1, LFC Class 2, LFC Class 4,
LIS Class 1, LIS Class 2, LIS Class 3, LAS Class 1, LAS Class 2, LAS Class 3,
LMUSA Class 1, LMUSA Class 2 and LMUSA Class 4 who hold Allowed Claims will not
receive any New LFC Common Stock or New LMUSA Common Stock in satisfaction of
such Claims. Instead, Allowed Claims in these Classes will be satisfied with
consideration described in the Plans and in "Chapter 11 Plans -- Treatment of
Claims and Interests" above.
The satisfaction of an Allowed Claim in one of the Classes listed in
the preceding paragraph with the consideration described in the Plans will be a
fully taxable exchange. A creditor holding such an Allowed Claim will
recognize ordinary interest income to the extent that the value of the
consideration received by such creditor is allocable to interest (including
original issue discount) accruing during such creditor's holding period but not
previously taken into income. Such creditor will recognize a loss to the
extent that the amount of such interest previously included in income by such
creditor exceeds the value of the consideration received that is attributable
to such interest. In addition, such creditor will recognize gain or loss on
the exchange equal to the difference between the creditor's basis in the
Allowed Claim (excluding any portion of such basis attributable to interest
accruing during such creditor's holding period) and the amount of cash or
property received that is not allocable to interest accruing during such
creditor's holding period. The character of any recognized
82
<PAGE> 89
gain or loss will depend on the status of the creditor, the nature of the Claim
in such creditor's hands, and the applicability of the market discount rules
discussed above.
3. Creditors Receiving New LFC Common Stock or New LMUSA Common Stock
As described more fully in the Plans and in "Chapter 11 Plans --
Treatment of Claims and Interests," a creditor in LFC Class 3 holding an
Allowed Claim will receive consideration consisting of New LFC Common Stock,
cash and property in satisfaction of such Claim, and a creditor in LMUSA Class
3 holding an Allowed Claim will receive consideration consisting of New LMUSA
Common Stock, cash and property in satisfaction of such Claim. The federal
income tax consequences of the Plans to creditors in these classes are
described below.
a. Non-Securityholders. The satisfaction of an Allowed Claim not
based on an instrument that is a "security" for federal income tax purposes
will be a fully taxable exchange, with the same tax consequences as are
described in "Federal Income Tax Consequences of the Plans -- Tax Consequences
to Creditors -- Creditors Not Receiving New LFC Common Stock or New LMUSA
Common Stock." Any creditor holding such an Allowed Claim and receiving
distributions of New LFC Common Stock or New LMUSA Common Stock subsequent to
the Effective Date in satisfaction of such creditor's Allowed Claim may be
subject to installment sale tax treatment (which could result in a deferral of
loss recognition), and should consult such creditor's tax advisor regarding the
proper tax treatment of such distributions and whether to elect out of
installment sale treatment.
b. LFC Securityholders. Pursuant to the Joint Plan, creditors in
LFC Class 3 holding Allowed Claims based on the LFC Senior Convertible Notes or
any other securities of LFC ("LFC Securityholders") will exchange their Allowed
Claims for New LFC Common Stock, cash, and property. LFC believes that
satisfaction of the Allowed Claims of LFC Securityholders with New LFC Common
Stock will constitute a "recapitalization" under Section 368(a)(1)(E) of the
Tax Code. If this belief is correct, then LFC Securityholders will not
recognize income or loss upon the satisfaction of the Claims held by them
except as stated in the following paragraph.
An LFC Securityholder will recognize ordinary income to the extent that
the value of the consideration received that is attributable to interest
accruing during the LFC Securityholder's holding period exceeds the amount of
such interest previously taken into income by the LFC Securityholder. An LFC
Securityholder will have a loss to the extent that the amount of such interest
previously included in income by the LFC Securityholder exceeds the value of
the consideration received that is attributable to such interest.
An LFC Securityholder will recognize gain, if any, to the extent of the
cash and the value of the property received (excluding any portion thereof
treated as received in satisfaction of a Claim for interest accruing during
such LFC Securityholder's holding period). The measure of gain potentially
subject to recognition will be the excess of the value of all consideration
received by such LFC Securityholder (except to the extent attributable to
interest accruing during such LFC Securityholder's holding period) over such
LFC Securityholder's basis in such security (except to the extent attributable
to interest accruing during such Securityholder's holding period).
New LFC Common Stock received by an LFC Securityholder in satisfaction
of interest accruing during the LFC Securityholder's holding period generally
will have a basis equal to the fair market value of such Stock at the time of
its distribution. The basis of the remainder of the New LFC Common Stock
received by an LFC Securityholder generally will equal the basis of the
security in question, excluding any portion of such basis that is attributable
to interest accruing during the LFC Securityholder's holding period, minus the
fair market value of any other property received (other than with respect to
interest accruing during such LFC Securityholder's holding period), plus the
amount of any gain recognized. The basis of any other property received in the
exchange will be equal to its fair market value.
Where an LFC Securityholder receives New LFC Common Stock, gain on a
subsequent disposition of such New LFC Common Stock will be ordinary income to
the extent of (i) any accrued market discount on the security at the time of
the exchange by such Securityholder under the Joint Plan for New LFC Common
Stock that is not recognized at the time of such exchange, and (ii) the
aggregate deductions allowed to such LFC Securityholder for worthlessness or
partial worthlessness of such security and as ordinary loss on the exchange of
such security for New LFC Common Stock.
83
<PAGE> 90
c. LMUSA Securityholders Receiving New LMUSA Common Stock.
Pursuant to the LMUSA Plan, Creditors in LMUSA Class 3 holding Allowed Claims
based on the LMUSA Senior Notes or any other securities of LMUSA ("LMUSA
Securityholders") will exchange their Allowed Claims for New LMUSA Common Stock,
cash and property. LMUSA believes that the satisfaction of the Allowed Claims
of the LMUSA Securityholders with New LMUSA Common Stock will constitute a
"recapitalization" under Section 368(a)(1)(E) of the Tax Code. If this belief
is correct, then the tax treatment of LMUSA Securityholders will correspond to
the tax treatment of LFC Securityholders described in "Federal Income Tax
Consequences of the Plans -- Tax Consequences to Creditors -- Creditors
Receiving New LFC Common Stock or New LMUSA Common Stock -- LFC
Securityholders."
4. Non-Reorganization Assets of LFC, LIS and LMUSA
a. Non-Reorganization Assets of LFC and LIS. The Joint Plan
provides that, unless the LFC Creditors' Committee elects otherwise by the
third Business Day prior to the commencement of the Confirmation Hearing with
respect to the LFC Plan, the Non-Reorganization Assets of LFC, including the
right to receive any proceeds attributable to causes of action that will be
prosecuted or settled by the LFC Litigation Trustee, will be held in trust (the
"LFC Creditors' Trust") by LFC for creditors in LFC Class 3 holding Allowed
Claims. The Joint Plan provides that LFC's Non-Reorganization Assets will be
valued consistently by Reorganized LFC and by LFC Class 3 creditors, and also
requires that these valuations be used by Reorganized LFC and these creditors
for purposes of filing any federal income tax and information returns. The LFC
Creditor's Trust will terminate on the fifth anniversary of the Effective Date,
unless the term of such Trust is extended for a finite period of time and the
Bankruptcy Court enters an order approving the extension within six months of
the beginning of the extended term. LFC intends to treat the LFC Creditors'
Trust as a grantor trust of which the creditors in LFC Class 3 are the grantors
and owners. As described below, however, the proper treatment of arrangements
such as the LFC Creditors' Trust for federal income tax purposes is uncertain,
and it is possible that all or a portion of such Trust could be treated as a
separate taxable entity. In addition, if the LFC Creditors' Trust is treated
as a grantor trust, then the creditors in LFC Class 3 holding Allowed Claims
will be deemed to be the beneficiaries of the LFC Litigation Trust, which LFC
believes will be treated for tax purposes as a separate entity rather than a
grantor trust.
To the extent that the LFC Creditors' Trust is respected as a grantor
trust, creditors in LFC Class 3 holding Allowed Claims will be deemed for
federal income tax purposes to have received on the Effective Date a
distribution from LFC of its Non-Reorganization Assets, and immediately
thereafter to have contributed those assets to the LFC Creditors' Trust. In
addition, to the extent that the LFC Creditors' Trust is respected as a grantor
trust, such creditors will be subject to tax on their pro rata share of the
taxable income of such Trust, but the LFC Creditors' Trust will not be subject
to Federal income tax.
Assuming that LFC will be deemed to have distributed the
Non-Reorganization Assets either to the creditors in LFC Class 3 or (to the
extent it is treated as a separate taxable entity) to the LFC Creditors' Trust,
LFC will recognize gain or loss on such distribution equal to the difference
between LFC's basis in each such asset and the asset's fair market value. Any
gain recognized by LFC on a deemed distribution of its Non-Reorganization
Assets to its creditors or to the LFC Creditors' Trust will reduce the amount
of NOLs available for use after the Effective Date by Reorganized LFC.
The Joint Plan provides that the Non-Reorganization Assets of LIS will
be held in trust (the "LIS Creditors' Trust") by LIS for creditors in LIS Class
3 holding Allowed Claims. The terms of the LIS Creditors' Trust correspond to
those of the LFC Creditors' Trust, and it is expected that the LIS Creditors'
Trust will be treated in the same manner for federal income tax purposes as
will the LFC Creditors' Trust.
b. Non-Reorganization Assets of LMUSA. The LMUSA Plan provides
that the Non-Reorganization Assets of LMUSA, including the right to receive any
proceeds attributable to causes of action that will be prosecuted by the LMUSA
Litigation Trustee, will be held in trust (the "LMUSA Creditors' Trust") by
LMUSA for creditors in LMUSA Class 3 holding Allowed Claims. The LMUSA Plan
provides that LMUSA's Non-Reorganization Assets will be valued consistently by
Reorganized LMUSA and by LMUSA Class 3 creditors, and also requires that these
valuations be used by Reorganized LMUSA and these creditors for purposes of
filing any federal income tax and information returns. The LMUSA Creditors'
Trust will terminate on the fifth anniversary of the Effective Date, unless the
term of such Trust is extended for a finite period of time and the Bankruptcy
Court enters an order approving the extension within six months
84
<PAGE> 91
of the beginning of the extended term. LMUSA intends to treat the LMUSA
Creditors' Trust as a grantor trust of which the LMUSA Class 3 creditors are the
grantors and owners. As described below, however, the proper treatment of
arrangements such as the LMUSA Creditors' Trust for federal income tax purposes
is uncertain, and it is possible that all or a portion of such Trust could be
treated as a separate taxable entity. In addition, if the LMUSA Creditors'
Trust is treated as a grantor trust, then the creditors in LMUSA Class 3 holding
Allowed Claims will be deemed to be the beneficiaries of the LMUSA Litigation
Trust, which LMUSA believes will be treated for tax purposes as a separate
entity rather than a grantor trust.
To the extent that the LMUSA Creditors' Trust is respected as a
grantor trust, creditors in LMUSA Class 3 holding Allowed Claims will be deemed
for federal income tax purposes to have received a distribution from LMUSA of
its Non-Reorganization Assets on the Effective Date, and immediately thereafter
to have contributed those assets to the LMUSA Creditors' Trust. In addition,
to the extent that the LMUSA Creditors' Trust is respected as a grantor trust,
such creditors will be subject to tax on their pro rata share of the taxable
income of such Trust, but the LMUSA Creditors' Trust will not be subject to
Federal income tax.
Assuming that LMUSA will be deemed to have distributed the
Non-Reorganization Assets either to the creditors in LMUSA Class 3 or (to the
extent it is treated as a separate taxable entity) to the LMUSA Creditors'
Trust, LMUSA will recognize gain or loss on such distribution equal to the
difference between LMUSA's basis in each such asset and the asset's fair market
value. Any gain recognized by LMUSA on a deemed distribution of its
Non-Reorganization Assets to its creditors or to the LMUSA Creditors' Trust
will reduce the amount of NOLs available for use after the Effective Date by
Reorganized LMUSA.
c. Uncertainty Associated with Taxation of the LFC Creditors'
Trust, the LIS Creditors' Trust and the LMUSA Creditors' Trust. The proper
federal income tax treatment of arrangements whereby assets of a corporation in
bankruptcy are held for the benefit of the corporation's creditors, such as the
LFC Creditors' Trust, the LIS Creditors' Trust and the LMUSA Creditors' Trust
(together, the "Creditors' Trusts"), is uncertain, particularly where a portion
of the assets of the trust must be retained in reserve for disputed claims.
The Tax Code generally requires, however, that income attributable to any such
arrangement be subject to current tax. No rulings have been sought on the issue
of the proper classification of the Creditors' Trusts as grantor trusts, and it
is possible that such Trusts, or portions thereof, will be treated as separate
taxable entities, as complex trusts or otherwise. Any portion of the LFC
Creditors' Trust, the LIS Creditors' Trust or the LMUSA Creditors' Trust that
is treated as a separate taxable entity will bear federal income taxes at a
rate that may exceed the rate of tax that would be payable if the creditors
bore the tax directly, and the payment of such taxes may reduce the amount
otherwise available for distribution to creditors. The tax attributes of LFC
or LMUSA will not be available to shelter the income of any such separate
taxable entity. It is possible that all or a portion of the LFC Creditors'
Trust, the LIS Creditors' Trust or the LMUSA Creditors' Trust may be taxed as a
complex trust. To the extent that all or any portion of the LFC Creditors'
Trust, the LIS Creditors' Trust or the LMUSA Creditors' Trust is treated as a
complex trust, income earned with respect to the assets of such Trust would
generally be taxed to the trust at a maximum rate of 39.6% for federal income
tax purposes. A complex trust is generally entitled to deduct distributions by
it to its beneficiaries to the extent of the trust's distributable net income
("DNI") for the taxable year. Distributions of DNI to creditor beneficiaries
of a complex trust generally would be taxable to them, as would distributions
of income accumulated in years prior to the year of distribution. Creditor
beneficiaries may be entitled to claim a credit for taxes previously paid by
the complex trust in certain circumstances. In addition, it is possible that
all or a portion of the LFC Creditors' Trust, the LIS Creditors' Trust or the
LMUSA Creditors' Trust will be taxed as a "qualified settlement fund" within
the meaning of the regulations under Tax Code Section 468B. To the extent that
all or any portion of the LFC Creditors' Trust, the LIS Creditors' trust or the
LMUSA Creditors' Trust is treated as a qualified settlement fund, income earned
with respect to the assets of such Trust would generally be taxed to the trust
at a rate of 39.6% for federal income tax purposes. A qualified settlement
fund is not entitled to deductions with respect to distributions by it to its
beneficiaries. Amounts received from a qualified settlement fund are generally
taxed in the same manner as if the amounts were received directly from the
transferor to the fund in satisfaction of the underlying claim. Although the
qualified settlement fund rules are not by their terms applicable to trusts
established for the benefit of creditors in a bankruptcy case, it is
conceivable that similar rules could be applied as an alternative method of
ensuring current taxation of all of the income of such a trust without the
administrative burdens associated with a complex trust. The overall federal
income tax burden associated with
85
<PAGE> 92
such a method, however, may exceed the federal income taxes that would be paid
with respect to an arrangement properly taxed as a complex trust and thereby
reduce amounts otherwise available for distribution to creditors.
5. Intercompany Claims Reserve
The structure of the Intercompany Claims Reserve will be determined in
the manner described in "Intercompany Claims -- Description of Provisions of
the Plans." Depending on the way in which the Intercompany Claims Reserve is
structured, such Reserve, or a portion thereof, may be treated as a separate
taxable entity, a complex trust or otherwise for federal income tax purposes.
Any portion of the Intercompany Claims Reserve which is treated as a separate
taxable entity will bear federal income taxes at a rate that may exceed the
rate of tax that would be payable if the creditors bore the tax directly, and
the payment of such taxes may reduce the amount otherwise available for
distribution to creditors.
C. TAX CONSEQUENCES TO LFC STOCKHOLDERS
Holders of stock of LFC generally will recognize a loss on the
Effective Date equal to their adjusted basis in such stock. Such loss will be
a capital loss if the stock was a capital asset in the hands of the holder.
Such holders should consult their tax advisors as to whether they may be
entitled to a worthless securities deduction under Section 165(g) of the Tax
Code in an earlier taxable year.
D. BACKUP WITHHOLDING
Under current federal income tax law, a 31% backup withholding tax is
applied to certain dividend, interest, original issue discount, and principal
payments made to certain persons if such persons fail to supply taxpayer
identification numbers and other information. Holders of Allowed Claims and
Interests may be required to fill out a Form W-8 or a Form W-9 in order to
ensure that distributions received pursuant to the Plans are not subject to
backup withholding.
E. IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE
The foregoing is intended to be a summary of the more important federal
income tax consequences of the Plans. The federal, state and local tax
consequences of the Plans are complex and, in some cases, uncertain. Such
consequences may also vary based upon the individual circumstances of each
holder of a Claim or Interest. In particular, different rules than those set
out in this Section may apply in the case of foreign holders. Each holder of
a Claim or Interest is strongly urged to consult with such holder's tax advisor
regarding the federal, state, local and foreign tax (if any) consequences of
the Plans.
86
<PAGE> 93
XIV. VOTING ON AND CONFIRMATION OF THE PLANS
In order to confirm each of the Joint Plan and the LMUSA Plan, the Code
requires that the Bankruptcy Court make a series of determinations concerning
each Plan, including that (a) each Plan has classified Claims and Interests in
a permissible manner, (b) each Plan complies with the technical requirements of
Chapter 11 of the Code, (c) the relevant Debtors have proposed each Plan in
good faith and (d) the relevant Debtors' disclosures as required by Chapter 11
of the Code have been adequate and have included information concerning all
payments made or promised by the Debtors in connection with each Plan. The
Debtors believe that all of these requirements will have been met by the dates
set for hearings on Confirmation of each Plan and will seek rulings of the
Bankruptcy Court to such effect at those hearings.
The Code also requires: (a) that each Plan has been accepted by the
requisite votes of creditors and stockholders (except to the extent that
"cram-down" is available under Section 1129(b) of the Code, as described at
"Confirmation Without Acceptance By All Impaired Classes" below); (b) that each
Plan is feasible (that is, that Confirmation is not likely to be followed by
the liquidation or the need for further financial reorganization of the
relevant Debtor or any successor, unless such liquidation or reorganization is
proposed in the Plan); and (c) that each Plan is in the "best interests" of all
impaired creditors and equity security holders (that is, that creditors and
equity security holders will receive pursuant to such Plan value at least equal
to the value they would receive in a Chapter 7 liquidation). To confirm either
of the Plans, the Bankruptcy Court must find that all of these requirements are
met. Thus, even if the creditors and equity security-holders of the Debtors
accept each of the Plans by the requisite votes, the Bankruptcy Court must make
independent findings respecting such Plan's feasibility and whether it is in
the best interests of the Debtors' creditors and equity security holders before
it may confirm such Plan. These statutory conditions to Confirmation are
discussed below.
A. CLASSIFICATION OF CLAIMS AND INTERESTS
The Code requires that a Chapter 11 plan place each creditor's Claim
and each equity security holder's Interest in a class with other Claims and
Interests that are "substantially similar." For the rationale for the
classification of Claims and Interests used in the Plan see "Chapter 11 Plans
- -- Classification of Claims and Interests." The Debtors believe that each of
the Plans meets the classification requirements of the Code.
B. VOTING
1. Impaired Classes
As a condition to Confirmation, the Code requires that each impaired
Class of Claims accept the relevant Plan. A Class is "impaired" if the legal,
equitable or contractual right attaching to the Claims of that Class are
modified, other than by curing defaults and reinstating maturity. LFC Class 1,
2, 3, 4 and 5 Claims, LFC Class 6 Interests, LIS Class 1, 2, 3 and 4 Claims,
LIS Class 5 Interests and LAS Class 1, 2, 3 and 4 Claims are impaired under the
Joint Plan. LMUSA Class 1A, 1B, 2, 3, 4 and 5 Claims and LMUSA Class 6
Interests are impaired under the LMUSA Plan. The Code defines acceptance of a
plan by an impaired class of Claims as acceptance by holders of at least
two-thirds in dollar amount and more than one-half in number of Claims allowed
for voting purposes of that class, but for that purpose counts only those who
actually vote to accept or to reject the plan. Holders of Claims who fail to
vote are not counted as either accepting or rejecting the plan. Each holder of
a security issued under an indenture is entitled to vote with respect to such
security; the Indenture Trustees cannot vote on the Plan on behalf of such
holders. The holders of the LFC Class 5 Claims, LIS Class 4 Claims and LAS
Class 4 Claims, all of which are Debtors or subsidiaries of Debtors (including
LMUSA and its subsidiaries) have agreed to accept the treatment provided in the
Joint Plan and accordingly their votes are not being solicited. Similarly, LFC
is the only holder of LIS Class 5 Interests and because LFC has proposed and
approved this Joint Plan its vote is not being solicited. The holders of LFC
Class 6 Interests and LMUSA Class 6 Interests are deemed to have rejected the
relevant Plan.
The LFC Creditors' Committee has asserted that it was improper for LFC
to approve the LMUSA Plan without a formal vote because this "disenfranchises"
LFC. The Debtors disagree and LFC would in any event vote to approve the
LMUSA Plan if a formal vote were required.
87
<PAGE> 94
Some Claims are contingent in nature and unliquidated in amount at this
time. Accordingly, for purposes of determining whether the holders of such
Claims have accepted or rejected the relevant Plan, the Debtors expect to seek,
in connection with the hearing on Confirmation of each Plan, a ruling of the
Bankruptcy Court determining either (a) that holders of such Claims are not
entitled to vote in connection with acceptance or rejection of the relevant
Plan or (b) that even if every holder of such a Claim had voted against the
relevant Plan, taking into account the number and amount of such Claims (as
estimated by the Bankruptcy Court) and the other votes cast, the Class in which
such Claims are entitled to vote would have accepted such Plan.
2. Classes That Are Not Impaired
Classes of Claims that are not "impaired" under each Plan are deemed to
have accepted such Plan. Administrative Claims, Priority Tax Claims, LFC Class
A Claims, LIS Class A Claims, LAS Class A Claims and LAS Class 5 Interests are
not impaired under the Joint Plan. Administrative Claims, Priority Tax Claims
and LMUSA Class A Claims are not impaired under the LMUSA Plan.
C. BEST INTERESTS OF CREDITORS
Notwithstanding acceptance of both Plans, as provided for in the Code,
by creditors and equity security holders of each Class, in order to confirm
each Plan, the Bankruptcy Court must independently determine that such Plan is
in the best interests of all Classes of creditors and equity security holders
impaired by such Plan. The "best interests" test requires that the Bankruptcy
Court find that the relevant Plan provides to each member of each impaired
Class of Claims and Interests a recovery that has a value at least equal to the
value of the distribution that each such person would receive if the Debtors
were liquidated under Chapter 7 of the Code.
To estimate the amount members of each impaired Class of unsecured
creditors and equity security holders would receive if the Debtors were
liquidated, the Bankruptcy Court must first determine the aggregate amount of
cash that would be generated from the Debtors' assets if the Chapter 11 cases
were converted to Chapter 7 cases under the Code and the assets were liquidated
by a trustee in bankruptcy (the "Liquidation Value" of such assets). The
Liquidation Value would consist of the net proceeds from the disposition of the
assets of the Debtors, augmented by the cash held by the Debtors.
The Liquidation Value available to general creditors would be reduced
by (a) the Claims of secured creditors to the extent of the value of their
collateral and (b) by the costs and expenses of the liquidation, as well as
other administrative expenses of the Debtors' estates. The Debtors' costs of
liquidation under Chapter 7 would include: (a) the compensation of a trustee or
trustees, as well as counsel and other professionals retained by the trustee;
(b) disposition expenses; (c) all unpaid expenses incurred by the Debtors
during their Chapter 11 reorganization proceedings (such as compensation for
attorneys, financial advisors and accountants) are allowed in the Chapter 7
proceedings; (d) litigation costs; and (e) Claims arising from the operation of
the Debtors during the pendency of the Chapter 11 reorganization and Chapter 7
liquidation proceedings. These Priority Claims would be paid in full out of
the liquidation proceeds before the balance would be made available to pay
general Claims or to make any distribution in respect of equity interests.
Once the percentage recoveries in liquidation of secured creditors,
priority claimants, general creditors and equity security holders are
ascertained, the value of the distributions available for each Class of Claims
or Interests from the Liquidation Value is compared with the value of the
property offered to such Class under the relevant Plan to determine if such
Plan is in the best interests of each such Class.
Annexed as Exhibit III is the Liquidation Analysis of the Debtors'
assets. The estimates of liquidation values of the operating businesses and
applicable discounts set forth in the Liquidation Analysis are based primarily
on valuation analyses prepared by the Debtors. Reference is made to the
Liquidation Analysis for a description of the procedures followed, the factors
considered and the assumptions and qualifications made by the Debtors in
connection with their valuations.
In the absence of a contrary determination by the Bankruptcy Court, all
pre-Chapter 11 Unsecured Claims which have the same rights upon liquidation
would be treated as one Class for purposes of determining the potential
distribution of the liquidation proceeds resulting from the Company's Chapter 7
case. The distributions from the liquidation proceeds
88
<PAGE> 95
would be calculated ratably according to the amount of the Claim held by each
creditor. The Debtors believe that, after considering the foregoing, the result
in a case under Chapter 7 of the Code would be that (a) the holders of Claims in
LFC Classes 1, 2, 3, 4 and 5, LIS Classes 1, 2, 3 and 4 and LAS Classes 1, 2, 3
and 4 would receive less than they would receive under the Joint Plan, (b) the
holders of Claims in LMUSA Classes 1A, 1B, 2, 3, 4 and 5 would receive less than
they would receive under the LMUSA Plan and (c) the holders of Interests in LFC
Class 6 and LMUSA Class 6 would receive no distributions of property as would
occur under their respective Plans.
Due to the numerous uncertainties and time delays associated with
liquidation, it is not possible to predict the outcome of liquidation of the
Debtors or the timing of any distribution to creditors. The Debtors have,
however, concluded that a complete liquidation of the Debtors would, as
demonstrated in the Liquidation Analysis, result in a lesser distribution to
creditors than that provided for in the Plans and no distribution to LFC's and
LMUSA's equity security holders.
Pursuant to Section 6.3 of each Chapter 11 Plan, the mechanism and
requirements for the establishment of an Intercompany Claims Reserve have been
set forth. Section 6.3 establishes that there must be either an agreement
between the Committees or a Court determined estimate of the amounts and types
of Intercompany Claims, prior to any distributions to creditors pursuant to the
Chapter 11 plan.
In its financial presentation contained in Exhibits III and IV of the
Disclosure Statement, the Debtor has made no estimates of the amounts or types
of Intercompany Claims which may ultimately be allowed. By not making such
estimates, the Debtors' financial projections have been prepared allowing all
available cash, not otherwise directed to Litigation Trusts or working capital
accounts, to flow through as distribution to creditors. While ultimately the
Debtors believe either a settlement or court determination of Intercompany
Claims will occur, the Debtors have no ability to predict such outcome at this
time.
As such, the Debtors recognize that the cash payments to creditors may
ultimately differ from that which has been presented.
D. FEASIBILITY OF THE PLANS
LFC believes that Reorganized LFC will be able to perform its
obligations under the Joint Plan and continue to operate its business without
further financial reorganization or liquidation. Similarly, LMUSA believes
that the Reorganized LMUSA will be able to perform its obligations under the
LMUSA Plan and continue to operate its business without further financial
reorganization or liquidation. The feasibility of each Plan is demonstrated by
the projected financial statements for the fiscal years 1997, 1998 and 1999 set
forth in Exhibit IV. Such projected financial statements represent the best
estimate of the management of LFC and the management of LMUSA as to the items
set forth therein. They are believed by management to be based upon
assumptions which, when considered on an overall basis for the projection
period, are reasonable. Furthermore, using assumptions that management
believes are reasonable and extrapolating the financial projections set forth
in Exhibit IV hereto, the Debtors believe the Plans to be feasible beyond
fiscal year 1999 into the foreseeable future.
The LFC Creditor's Committee has asserted that one or both of the Plans
may not be feasible if large enough reserves are required to be established in
order to satisfy disputed intercompany claims. The feasibility of either Plan
could, in fact, be called into question if the relevant Debtor is required to
reserve on a priority basis (ahead of general unsecured creditors) an amount
that leaves it insufficient funds to operate. These issues may be required to
be addressed by the Bankruptcy Court at the Confirmation Hearing.
E. CONFIRMATION WITHOUT ACCEPTANCE BY ALL IMPAIRED CLASSES
The Code contains provisions for confirmation of a plan even if the
plan is not accepted by all impaired classes, as long as at least one impaired
Class of Claims has accepted it. These "cram-down" provisions of the Code are
set forth in Section 1129(b) of the Code.
A plan may be confirmed under the cram-down provisions if, in addition
to satisfying the other requirements of Section 1129 of the Code, the plan (a)
"does not discriminate unfairly" and (b) is "fair and equitable" with respect
to each
89
<PAGE> 96
class of claims or interests that is impaired under, and has not accepted, the
plan. As used by the Code, the phrases "discriminate unfairly" and "fair and
equitable" have narrow and specific meanings unique to bankruptcy law.
The requirement that each Plan not "discriminate unfairly" means that a
dissenting Class must be treated equally with respect to other Classes of the
same rank. The Debtors believe that each Plan does not "discriminate unfairly"
with respect to any Class of Claims or Interests because no Class is afforded
treatment which is disproportionate to the treatment afforded other Classes of
equal rank.
The "fair and equitable" standard, also known as the "absolute priority
rule," requires that a dissenting Class receive full compensation for its
allowed Claims or Interests before any junior Class receives any distribution.
Each Plan may not be confirmed in the event that any impaired Class of Claims
votes to reject such Plan. In the event that any impaired Class of Interests
votes to reject the Joint Plan or the LMUSA Plan, as the case may be, the
relevant Plan may be confirmed under Section 1129(b) of the Code if holders of
Interests junior to those of the rejecting Class do not receive any
consideration under such Plan.
F. ALTERNATIVES TO THE PLANS
The Debtors believe that each Plan provides the respective creditors
with the greatest possible value that could be realized on their respective
Claims. The alternatives to Confirmation of each Plan are (a) confirmation of
an alternative Chapter 11 plan or plans submitted by the Debtors or by another
party in interest or (b) liquidation of the relevant Debtor or Debtors under
Chapter 7 of the Code. Since the Petition Date, the Debtors have been engaged
in extensive negotiations with numerous parties having interests in the Chapter
11 reorganization proceedings. Based on such negotiations, the Debtors believe
that each Plan is responsive to the concerns raised by these parties and the
LMUSA Creditors' Committee has agreed to be a co-proponent of the LMUSA Plan.
Under Section 1121 of the Code, a debtor has the exclusive right to
file a Chapter 11 plan during the first 120 days after the commencement of its
Chapter 11 case and to obtain acceptances thereof during the period of sixty
days thereafter. On February 20, 1996, the Bankruptcy Court entered an order
extending the Debtors' exclusive right to file any Chapter 11 plan until April
8, 1996 and their exclusive right to obtain acceptances of such plans for a
period through and including June 7, 1996. On April 25, 1996, the Bankruptcy
Court entered an order requiring that the Debtors not file this Disclosure
Statement before May 13, 1996. On June 26, 1996, the Bankruptcy Court entered
an order extending the Debtors' exclusive right to obtain acceptances of the
Plans for a period through August 8, 1996. Plans cannot be accepted within
this period and the Debtors propose to seek an extension of the periods during
which they have the exclusive right to solicit acceptances of the Plans. If
the Joint Plan or the LMUSA Plan is not accepted and the period is not extended
further, other parties in interest may have an opportunity to file one or more
Chapter 11 plans in place of such Plan. A plan filed by other parties in
interest could be confirmed even though not accepted by every impaired class as
long as it meets the Code's "cram-down" standards (described above in
"Confirmation Without Acceptance by All Impaired Classes"). The Debtors
believe that any such plan filed by other parties in interest could only be
confirmed by "cram-down," which would in turn be likely to engender costly and
time-consuming litigation and result in a diminution of the value of the assets
of the Debtors' estates.
Alternatively, a liquidation of the Debtors could be carried out, with
the results described above under "Best Interests of Creditors." For the
reasons described above, the Debtors believe that the distribution to each
impaired Class of creditors under each of the Plans will be greater and
earlier than distributions which might be received after liquidation of the
Debtors.
The Debtors believe that Confirmation of each of the Plans is
preferable to the alternatives described above because each Plan provides for
an equitable, early distribution to all Classes of the Debtors' creditors and
preserves value for creditors; any alternative to Confirmation of each Plan
would result in significant delays in and probable diminution of recoveries.
90
<PAGE> 97
XV. CONCLUSION
This Disclosure Statement was approved by the Bankruptcy Court after
notice and a hearing. The Bankruptcy Court has determined that this Disclosure
Statement is adequate and contains information sufficient for holders of Claims
to make an informed judgment about the Joint Plan. However, such approval does
not mean that the Bankruptcy Court recommends either acceptance or rejection of
the Joint Plan.
Dated: July 3, 1996
LOMAS FINANCIAL CORPORATION
By: /s/ Eric Booth
-----------------------------------
Title: Chief Executive Officer
of Lomas Financial
Corporation
LOMAS INFORMATION SYSTEMS, INC.
By: /s/ Eric Booth
-----------------------------------
Title: Chief Executive Officer
of Lomas Financial
Corporation
LOMAS ADMINISTRATIVE SERVICES, INC.
By: /s/ Eric Booth
-----------------------------------
Title: Chief Executive Officer
of Lomas Financial
Corporation
91
<PAGE> 98
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page(1)
-------
<S> <C>
5% entity................................................................................................79
accumulators.............................................................................................75
Administrative Claims....................................................................................59
Agencies.................................................................................................13
Allen Property...........................................................................................35
Allowed...........................................................................................Article 1
AMT......................................................................................................77
AMTI.....................................................................................................77
Bank One.................................................................................................14
Bankers Trust............................................................................................22
Bankruptcy Court..........................................................................................1
Bankruptcy Exception.....................................................................................79
Bar Date.................................................................................................25
Beaumeade Property.......................................................................................34
Bennett..................................................................................................22
Benton Properties.........................................................................................9
Capstead.................................................................................................14
Chanin...................................................................................................34
Claim.............................................................................................Article 1
Class.............................................................................................Article 1
Closing...........................................................................................Article 1
Closing Date.............................................................................................24
C.O.D. income............................................................................................80
Code......................................................................................................1
Cohane Rafferty..........................................................................................38
Company...................................................................................................1
Compensation Agreement...................................................................................20
Compensation Plans.......................................................................................20
Confirmation......................................................................................Article 1
Confirmation Date.................................................................................Article 1
Confirmation Hearing......................................................................................1
Confirmation Hearing Notice...............................................................................1
Convenience Unsecured Claim.......................................................................Article 1
Conseco..................................................................................................38
control person...........................................................................................75
CPI......................................................................................................57
Creditors' Committees....................................................................................22
Creditors' Trusts........................................................................................85
D & O Claims.............................................................................................59
Dataplex.................................................................................................16
Debtors...................................................................................................1
Disputed Real Estate Assets..............................................................................29
Distributable Cash.......................................................................................66
Distribution Date.........................................................................................6
distributors.............................................................................................75
</TABLE>
- ----------------
(1) Any reference to "Article 1" means Article 1 of the appropriate Chapter
11 Plan.
S-1
<PAGE> 99
<TABLE>
<CAPTION>
Page(1)
-------
<S> <C>
DLJ......................................................................................................14
DNI......................................................................................................85
Effective Date...........................................................................................29
Elliott..................................................................................................22
Estate............................................................................................Article 1
Exchange Act.............................................................................................76
February 16 Order........................................................................................25
FHLMC....................................................................................................13
First American...........................................................................................30
First Eastern............................................................................................37
First Nationwide.........................................................................................12
First Nationwide Holdings................................................................................17
First Nationwide Warehouse Facility......................................................................14
FNMA.....................................................................................................13
GEM......................................................................................................22
GNMA.....................................................................................................13
GNMA Agreement...........................................................................................36
GNMA Sale Purchased Assets...............................................................................18
GNMA Servicing Sale......................................................................................18
GNMA Success Bonuses.....................................................................................21
Indenture Trustee........................................................................................68
INTELLIFILE..............................................................................................16
Intercompany Claims...............................................................................Article 1
Intercompany Claims Agent.........................................................................Article 1
Intercompany Claims Reserve.......................................................................Article 1
Interests.........................................................................................Article 1
Invesco I................................................................................................30
Invesco II...............................................................................................30
Investor Group...........................................................................................32
IRS.......................................................................................................4
Joint Creditors' Committee...............................................................................22
Joint Debtors.............................................................................................1
Joint Plan................................................................................................1
KPMG.....................................................................................................11
LAS.......................................................................................................1
LAS Class 1 .............................................................................................59
LAS Class 2 .............................................................................................60
LAS Class 3 .............................................................................................60
LAS Class 4 .............................................................................................60
LAS Class 5 .............................................................................................60
Lehman...................................................................................................15
LFC.......................................................................................................1
LFC Class A..............................................................................................59
LFC Class 1..............................................................................................59
LFC Class 2..............................................................................................59
LFC Class 3..............................................................................................59
</TABLE>
- ----------------
(1) Any reference to "Article 1" means Article 1 of the appropriate Chapter
11 Plan.
S-2
<PAGE> 100
<TABLE>
<CAPTION>
Page(1)
-------
<S> <C>
LFC Class 4..............................................................................................60
LFC Class 5..............................................................................................60
LFC Class 6 ..............................................................................................2
LFC Committee Motion.....................................................................................22
LFC Creditors' Committee..................................................................................1
LFC Creditors' Trust.....................................................................................84
LFC Distributable Cash...................................................................................63
LFC Group................................................................................................77
LFC Group Tax Benefits...................................................................................71
LFC Investors............................................................................................31
LFC Litigation Trust..............................................................................Article 1
LFC Litigation Trustee............................................................................Article 1
LFC Securityholders......................................................................................83
LFC Senior Convertible Notes.............................................................................67
LIP......................................................................................................36
Liquidation Analysis.....................................................................................37
Liquidation Value........................................................................................88
LIS.......................................................................................................1
LIS Class 1..............................................................................................59
LIS Class 2..............................................................................................60
LIS Class 3..............................................................................................60
LIS Class 4..............................................................................................60
LIS Class 5..............................................................................................60
LIS Creditors' Trust.....................................................................................84
Litigation Trustee.......................................................................................70
Litigation Trusts........................................................................................58
LLG Lands................................................................................................43
LMI......................................................................................................43
LMP......................................................................................................14
LMUSA.....................................................................................................1
LMUSA 1997 Senior Notes..................................................................................17
LMUSA Class A............................................................................................9
LMUSA Class 1A...........................................................................................59
LMUSA Class 1B...........................................................................................59
LMUSA Class 2............................................................................................60
LMUSA Class 3............................................................................................60
LMUSA Class 4............................................................................................60
LMUSA Class 5............................................................................................60
LMUSA Class 6............................................................................................60
LMUSA Creditors' Committee................................................................................1
LMUSA Creditors' Trust...................................................................................84
LMUSA Distributable Cash.................................................................................64
LMUSA Group..............................................................................................77
LMUSA Group Tax Benefits.................................................................................72
LMUSA Investors..........................................................................................40
LMUSA Litigation Trust............................................................................Article 1
</TABLE>
- ----------------
(1) Any reference to "Article 1" means Article 1 of the appropriate Chapter
11 Plan.
S-3
<PAGE> 101
<TABLE>
<CAPTION>
Page(1)
-------
<S> <C>
LMUSA Litigation Trustee..........................................................................Article 1
LMUSA Plan................................................................................................1
LMUSA Securityholders....................................................................................83
LMUSA Senior Notes.......................................................................................53
Lomas.....................................................................................................1
Lomas Campus.............................................................................................35
Lomas Field Services.....................................................................................16
Lomas Group..............................................................................................77
Lomas Insurance..........................................................................................38
Lomas Marketing..........................................................................................43
Lomas Mortgage Services..................................................................................19
master servicing.........................................................................................12
Monthly Distribution Date............................................................................66, 67
MSP.......................................................................................................4
NET......................................................................................................34
New LFC Common Stock......................................................................................4
New LMUSA Common Stock....................................................................................4
NOLs.....................................................................................................31
Non-Reorganization Assets................................................................................29
Oppenheimer..............................................................................................22
Orion....................................................................................................22
Ownership Change.........................................................................................78
PBGC.....................................................................................................21
P&I......................................................................................................13
Petition Date............................................................................................22
Pension Enhancement......................................................................................21
Pension Plan.............................................................................................20
PHMC.....................................................................................................57
Plans.....................................................................................................1
Price Waterhouse.........................................................................................42
Price Waterhouse Report..................................................................................42
primary servicing........................................................................................12
Priority Non-Tax Claim...................................................................................59
Priority Tax Claims......................................................................................59
Proposed Section 363 Sale................................................................................22
Prudential...............................................................................................16
Public Debt Securities...................................................................................68
qualified creditors......................................................................................79
qualified settlement fund................................................................................85
recapitalization.........................................................................................83
Reorganized Debtor................................................................................Article 1
Reorganized LFC...................................................................................Article 1
Reorganized LMUSA.................................................................................Article 1
Residential Services.....................................................................................16
Retention Plan...........................................................................................20
RIS......................................................................................................16
</TABLE>
- ----------------
(1) Any reference to "Article 1" means Article 1 of the appropriate Chapter
11 Plan.
S-4
<PAGE> 102
<TABLE>
<CAPTION>
Page(1)
-------
<S> <C>
RIS Agreement............................................................................................54
Salomon..................................................................................................15
SEC.......................................................................................................4
Section 363 Agreement....................................................................................37
Section 363 Sale.........................................................................................24
Section 382 limitation...................................................................................78
Section 382 Regulations..................................................................................79
Secured Claim.....................................................................................Article 1
Securities Act...........................................................................................75
Senior Management........................................................................................20
Servicing Rights.........................................................................................23
Severance Plan...........................................................................................20
STL......................................................................................................34
STN......................................................................................................21
subservicing.............................................................................................12
syndicators..............................................................................................75
Tax Code.................................................................................................71
TCB......................................................................................................14
trade claims.............................................................................................79
Transition Period........................................................................................19
Travelers.................................................................................................9
Travelers Lien...........................................................................................35
Travelers Stipulation and Order..........................................................................36
Travelers Termination Notice......................................................................Article 1
Treemont Denver..........................................................................................29
Treemont Texas...........................................................................................29
Triad Ventures...........................................................................................30
Tycher Properties........................................................................................43
Unsecured Claim...................................................................................Article 1
U.S. Trustee.............................................................................................22
Vista....................................................................................................30
Voting Classes............................................................................................2
</TABLE>
- ----------------
(1) Any reference to "Article 1" means Article 1 of the appropriate Chapter
11 Plan.
S-5
<PAGE> 103
EXHIBIT I
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
LOMAS FINANCIAL CORPORATION, ) Case Nos. 95-1235, 1237 and
LOMAS INFORMATION SYSTEMS, INC. ) 1238 (PJW)
and LOMAS ADMINISTRATIVE )
SERVICES, INC., ) Jointly Administered
Debtors. )
FIRST AMENDED JOINT CHAPTER 11 PLAN
OF LOMAS FINANCIAL CORPORATION,
LOMAS INFORMATION SYSTEMS, INC. AND
LOMAS ADMINISTRATIVE SERVICES, INC.
YOUNG, CONAWAY, STARGATT & TAYLOR
James L. Patton, Jr. (No. 2202)
Robert S. Brady (No. 2847)
Brendan Linehan Shannon (No. 3136)
11th Floor, Rodney Square North
P.O. Box 391
Wilmington, Delaware 19899-0391
(302) 571-6600
- and -
DAVIS POLK & WARDWELL
Robert J. Levine
Laureen F. Bedell
Richard C. Potok
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Co-Counsel to Debtors and Debtors-in-Possession
EXHIBIT I TO DISCLOSURE STATEMENT
<PAGE> 104
<PAGE> 105
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1
DEFINITIONS
<S> <C>
1.1 Rules of Interpretation............................................... 1
1.2 Definitions........................................................... 1
<CAPTION>
ARTICLE 2
TREATMENT OF ADMINISTRATIVE CLAIMS
AND PRIORITY TAX CLAIMS; CLASSIFICATION AND TREATMENT
OF PRIORITY NON-TAX CLAIMS
<S> <C>
2.1 Administrative Claims................................................. 10
2.2 Priority Tax Claims................................................... 10
2.3 Priority Non-Tax Claims............................................... 11
<CAPTION>
ARTICLE 3
CLASSIFICATION OF OTHER CLAIMS AND INTERESTS
3.1 General Rules of Classification....................................... 11
3.2 LFC Class 1 Claims.................................................... 11
3.3 LFC Class 2 Claims.................................................... 12
3.4 LFC Class 3 Claims.................................................... 12
3.5 LFC Class 4 Claims.................................................... 12
3.6 LFC Class 5 Claims.................................................... 12
3.7 LFC Class 6 Interests................................................. 12
3.8 LIS Class 1 Claims.................................................... 12
3.9 LIS Class 2 Claims.................................................... 12
3.10 LIS Class 3 Claims.................................................... 12
3.11 LIS Class 4 Claims.................................................... 12
3.12 LIS Class 5 Interests................................................. 12
3.13 LAS Class 1 Claims.................................................... 12
3.14 LAS Class 2 Claims.................................................... 12
3.15 LAS Class 3 Claims.................................................... 13
</TABLE>
EXHIBIT I TO DISCLOSURE STATEMENT
<PAGE> 106
<TABLE>
<S> <C>
3.16 LAS Class 4 Claims.................................................... 13
3.17 LAS Class 5 Interests................................................. 13
<CAPTION>
ARTICLE 4
TREATMENT OF CLAIMS AND INTERESTS
<S> <C>
4.1 LFC Class 1 (Secured Claims).......................................... 13
4.2 LFC Class 2 (D & O Claims)............................................ 13
4.3 LFC Class 3 (Unsecured Claims)........................................ 13
4.4 LFC Class 4 (Convenience Unsecured Claims)............................ 13
4.5 LFC Class 5 (Intercompany Claims)..................................... 13
4.6 LFC Class 6 (LFC Interests)........................................... 14
4.7 LIS Class 1 (Secured Claims).......................................... 14
4.8 LIS Class 2 (D & O Claims)............................................ 14
4.9 LIS Class 3 (Unsecured Claims)........................................ 14
4.10 LIS Class 4 (Intercompany Claims)..................................... 14
4.11 LIS Class 5 (LIS Interests)........................................... 14
4.12 LAS Class 1 (Secured Claims).......................................... 14
4.13 LAS Class 2 (D & O Claims)............................................ 14
4.14 LAS Class 3 (Unsecured Claims)........................................ 14
4.15 LAS Class 4 (Intercompany Claims)..................................... 15
4.16 LAS Class 5 (LAS Interests)........................................... 15
<CAPTION>
ARTICLE 5
IMPAIRMENT OF CLAIMS AND INTERESTS; VOTING
<S> <C>
5.1 Classes Entitled to Vote.............................................. 15
5.2 Classes Not Entitled to Vote.......................................... 15
</TABLE>
EXHIBIT I TO DISCLOSURE STATEMENT
ii
<PAGE> 107
<TABLE>
<CAPTION>
ARTICLE 6
CONDITIONS PRECEDENT TO CONFIRMATION
AND EFFECTIVE DATE
<S> <C>
6.1 Conditions to Confirmation............................................ 16
6.2 Waiver of Conditions.................................................. 16
6.3 Conditions to First Distribution...................................... 16
<CAPTION>
ARTICLE 7
MEANS OF IMPLEMENTING THE PLAN
<S> <C>
7.1 Change of Names....................................................... 17
7.2 Amended and Restated Certificates of Incorporation.................... 17
7.3 Corporate Action...................................................... 17
7.4 Effectiveness of Securities, Instruments and Agreements............... 18
7.5 Distributions Pursuant to the Plan.................................... 18
7.6 Distribution of Fractional Shares of New LFC Common Stock............. 19
7.7 Transfer By the Debtors of Certain Property to the Intercompany
Claims Reserve........................................................ 20
7.8 Actions by the Intercompany Claims Agent.............................. 20
7.9 Management of the Reorganized Debtors................................. 20
7.10 Liquidation of Non-Reorganization Assets.............................. 20
7.11 Cash Distributions.................................................... 21
7.12 Resolution of Disputed Claims......................................... 21
7.13 LFC Litigation Trust.................................................. 21
7.14 Setoff................................................................ 22
7.15 Surrender and Cancellation of Public Debt Securities.................. 22
7.16 Certain Assets to be Held in Trust.................................... 22
7.17 Allocation of Consideration Between Interest and Principal............ 23
7.18 NOL Reattribution Election............................................ 23
<CAPTION>
ARTICLE 8
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
<S> <C>
8.1 Assumption and Rejection of Executory Contracts and Unexpired
Leases................................................................ 24
8.2 Claims Under Rejected Contracts and Leases............................ 24
</TABLE>
EXHIBIT I TO DISCLOSURE STATEMENT
iii
<PAGE> 108
<TABLE>
<CAPTION>
ARTICLE 9
EFFECTS OF PLAN CONFIRMATION
<S> <C>
9.1 Discharge and Injunction.............................................. 24
9.2 Revesting............................................................. 25
9.3 Contributions to LFC Litigation Trust and Intercompany Claims
Reserve............................................................... 25
9.4 Cancellation and Release of Existing Securities, Agreements and
Liens................................................................. 25
9.5 Retiree Medical Benefits.............................................. 26
9.6 Retention of Jurisdiction............................................. 26
9.7 Failure of Bankruptcy Court to Exercise Jurisdiction.................. 26
9.8 Statutory Committee................................................... 27
<CAPTION>
ARTICLE 10
MISCELLANEOUS PROVISIONS
<S> <C>
10.1 Payment of Statutory Fees............................................. 27
10.2 Procedure for Determining Certain Claims.............................. 27
10.3 Cramdown.............................................................. 27
10.4 Modification of The Plan.............................................. 28
10.5 Withdrawal of Plan.................................................... 28
10.6 Substantial Effective of Plan......................................... 28
10.7 Reservation of Rights................................................. 28
10.8 Section 1145 Exemption................................................ 28
10.9 Unclaimed Property.................................................... 28
10.10 Section 1146 Exemption................................................ 29
10.11 Record Date for Distribution.......................................... 29
10.12 Notices and Distributions............................................. 29
10.13 Saturday, Sunday or Legal Holiday..................................... 29
10.14 Time.................................................................. 29
10.15 Severability of Provisions............................................ 29
10.16 Binding Effect........................................................ 30
10.17 Governing Law......................................................... 30
10.18 Interpretation of Plan and Related Documents.......................... 30
10.19 Filing of Additional Documents........................................ 30
10.20 Further Assurances.................................................... 30
10.21 Withholding and Reporting Requirements................................ 31
</TABLE>
Exhibit A-1 Restated Certificate of Incorporation and Bylaws of Reorganized
LFC
Exhibit A-2 Amendment to Certificate of Incorporation of Reorganized LIS
EXHIBIT I TO DISCLOSURE STATEMENT
iv
<PAGE> 109
Exhibit B Form of LFC Litigation Trust Agreement
EXHIBIT I TO DISCLOSURE STATEMENT
v
<PAGE> 110
JOINT CHAPTER 11 PLAN
Lomas Financial Corporation, Lomas Information Systems, Inc. and Lomas
Administrative Services, Inc. hereby propose the following joint Chapter 11 Plan
pursuant to Chapter 11 of the Bankruptcy Code.
ARTICLE 1
DEFINITIONS
1.1 Rules of Interpretation. As used herein, the following terms have the
respective meanings specified below, and such meanings shall be equally
applicable to both the singular and plural, and masculine and feminine, forms of
the terms defined. The words "herein," "hereof," "hereto," "hereunder" and other
words of similar import refer to this Plan as a whole and not to any particular
section, subsection or clause contained herein. Captions and headings to
articles, sections, schedules and exhibits are inserted for convenience of
reference only and are not intended to be part of or to affect the
interpretation of this Plan. The rules of construction set forth in section 102
of the Bankruptcy Code shall apply.
1.2 Definitions. Any term used herein that is not defined herein but is
defined in the Bankruptcy Code shall have the meaning ascribed to such term in
the Bankruptcy Code. In addition to such other terms as are defined in other
sections of this Plan, the following terms (which appear herein as capitalized
terms) have the following meanings as used in this Plan:
"ADMINISTRATIVE CLAIM" means, with respect to a Debtor, a Claim against such
Debtor to the extent that it is of the kind described in section 503(b) of the
Bankruptcy Code and is entitled to priority under section 507(a)(1) of the
Bankruptcy Code, including, without limitation, (a) any actual and necessary
expenses of preserving such Debtor's Estate, (b) any actual and necessary
expenses of operating the business of such Debtor, (c) any actual indebtedness
or obligations incurred or assumed by such Debtor as debtor-in-possession during
the pendency of its Reorganization Case in connection with the conduct of its
business, (d) any actual expenses of such Debtor necessary or appropriate to
facilitate or effectuate this Plan, (e) any amount required to be paid by such
Debtor under section 365(b)(1) of the Bankruptcy Code in connection with the
assumption of executory contracts or unexpired leases, (f) all allowances of
compensation
EXHIBIT I TO DISCLOSURE STATEMENT
<PAGE> 111
or reimbursement of expenses to the extent allowed by the Bankruptcy Court under
sections 330(a), 331 or 503(b)(2), (3), (4) or (5) of the Bankruptcy Code and
(g) any Reclamation Claims. To the extent that any item described in clauses (a)
- - (f) of the preceding sentence are allocable in part to more than one Debtor
and/or to LMUSA, only the LFC Allocation or the LIS Allocation, as the case may
be, shall be an Administrative Claim against LFC or LIS.
"ALLOWED" means: (a) with respect to an Administrative Claim of the kind
described in section 503(b)(2), (3), (4) or (5) of the Bankruptcy Code, an
Administrative Claim that has been allowed by a Final Order, to the extent so
allowed; (b) with respect to any other Administrative Claim, an Administrative
Claim with respect to which a request for payment has been timely filed pursuant
to SECTION 10.2 or with respect to which no such filing is necessary, and to
which no objection has been timely filed; (c) with respect to a Disputed Claim,
a claim that has been allowed by a Final Order, to the extent so allowed; or (d)
with respect to any other Claim, a Claim with respect to which a proof of claim
has been timely filed by the Bar Date and to which no objection has been timely
filed, or if no proof of claim was so filed, which was or hereafter is listed on
the Schedules as liquidated in amount and not disputed or contingent.
"AMENDED AND RESTATED CERTIFICATE OF INCORPORATION" means, with respect to
LFC and LIS, the certificate of incorporation of Reorganized LFC or Reorganized
LIS as amended or amended and restated, substantially in the forms attached
hereto as EXHIBIT A-1 or A-2, as the case may be, provided that the LFC
Creditors' Committee shall have the right to change Article Eleventh thereof up
to the third Business Day prior to the commencement of the Confirmation Hearing.
"BALLOT" means the ballot and/or master ballot, as is appropriate in the
circumstances, distributed to a holder of an LFC Class 1, 2, 3 or 4 Claim, an
LIS Class 1,2 or 3 Claim or an LAS Class 1,2 or 3 Claim for the purpose of,
among other things, voting on this Plan.
"BANKRUPTCY CODE" means the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq., as amended by the Bankruptcy Reform Act of 1994, and as
amended from time to time, to the extent applicable to the Reorganization Cases.
"BANKRUPTCY COURT" means the United States Bankruptcy Court for the District
of Delaware or such other court as may hereafter exercise original jurisdiction
over the Reorganization Cases or any proceeding therein.
"BANKRUPTCY RULES" means the Bankruptcy Rules promulgated under 28 U.S.C.
Section 2075 and the local rules and standing orders of the Bankruptcy Court, as
amended from time to time, to the extent applicable to the Reorganization Cases.
EXHIBIT I TO DISCLOSURE STATEMENT
2
<PAGE> 112
"BAR DATE" means the dates by which the Bankruptcy Court has ordered that
proof of certain Claims must be filed.
"BUSINESS DAY" means any day other than a Saturday, Sunday or federal
holiday.
"CLAIM" means, with respect to a Debtor, a "claim" as defined in section
101(5) of the Bankruptcy Code against such Debtor, property of such Debtor or
property of the Estate, arising before the Confirmation Date.
"CLASS" means a category or group of Claims or Interests classified together
in a class as designated pursuant to ARTICLE 3 of this Plan.
"CONFIRMATION" means entry of the Confirmation Order.
"CONFIRMATION DATE" means the date on which the Confirmation Order is
entered on the docket by the Clerk of the Bankruptcy Court.
"CONFIRMATION HEARING" means the hearing with respect to this Plan required
by section 1128(a) of the Bankruptcy Code.
"CONFIRMATION ORDER" means the order of the Bankruptcy Court, in form and
substance reasonably satisfactory to the Debtors, confirming this Plan pursuant
to section 1129 of the Bankruptcy Code.
"CONVENIENCE UNSECURED CLAIM" means any Unsecured Claim (other than any
Unsecured Claim under or evidenced by the LFC Senior Convertible Notes) against
LFC in an amount not greater than $500 or as to which the holder has agreed in
writing to reduce such Claim to such amount and to release and to waive any
further or additional claim against LFC or the Estate of LFC.
"D & O CLAIM" means a pre-petition claim of a present or former officer,
director or employee of one of the Debtors or LMUSA, or any of their respective
subsidiaries, against a Debtor in respect of indemnification and/or contribution
for defense costs or liabilities pursuant to the certificate of incorporation or
by-laws of such Debtor, an employment agreement with such Debtor, or applicable
law, in each case relating to actual or alleged conduct or events occurring
prior to the Petition Date.
"DEBTOR" means LFC, LIS or LAS, as debtor and debtor-in-possession in a
Reorganization Case.
"DISCLOSURE STATEMENT" means the Disclosure Statement pertaining to this
Plan in the form approved for distribution by the Bankruptcy Court, together
with any exhibits,
EXHIBIT I TO DISCLOSURE STATEMENT
3
<PAGE> 113
schedules, appendices or documents attached thereto or otherwise incorporated by
reference therein, as the same may be amended, modified, restated or
supplemented from time to time.
"DISPUTED CLAIM" means a Claim (a) that a Debtor or a Reorganized Debtor has
scheduled as unliquidated, disputed, contingent or subject to offset and which
has not been allowed by a Final Order or (b) as to which an objection or motion
to estimate for purposes of allowance in a Reorganization Case has been filed,
but has not been withdrawn or resolved by a Final Order.
"DISTRIBUTION DATE" means, with respect to an Allowed Claim, the later of
(a) the Effective Date and (b) the date on which such Claim becomes an Allowed
Claim and all other conditions to the initial distribution with respect to such
Claim shall have been satisfied.
"EFFECTIVE DATE" means the Confirmation Date unless by written notice to the
Debtors and the Bankruptcy Court prior to the conclusion of the Confirmation
Hearing, the LFC Creditors' Committee in respect of a Debtor has elected to
require that the "Effective Date" shall be deferred until the occurrence of
events specified in the notice.
"ESTATE" means, with respect to a Debtor, the estate of such Debtor, created
in a Reorganization Case pursuant to section 541 of the Bankruptcy Code.
"FINAL ORDER" means an order or judgment of the Bankruptcy Court or any
other court exercising jurisdiction over the subject matter and the parties,
that has not been reversed, stayed, modified, amended or vacated and as to which
(a) no appeal, petition for certiorari, or request for reargument or other
review or rehearing has been requested or is pending, (b) any right to appeal,
petition for certiorari or seek reargument, other review or rehearing has been
fully and effectively waived in writing or (c) if an appeal, reargument, writ of
certiorari, review or rehearing thereof has been sought, the order or judgment
has been affirmed by the highest court to which the order was appealed or from
which the reargument, review or rehearing was sought, or by which the petition
for writ of certiorari has been denied, and, in each of the above cases, the
time to take any further appeal or to seek certiorari or further reargument,
review or rehearing has expired.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
political subdivision thereof, any federal or state court or any other agency or
authority exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
EXHIBIT I TO DISCLOSURE STATEMENT
4
<PAGE> 114
"INTERCOMPANY CLAIM" means a Claim by any Debtor, LMUSA or any of their
respective subsidiaries against any Debtor or LMUSA, including without
limitation a Claim that any transfer to or for the benefit of, or other
transaction with or for the benefit of, such second Debtor or LMUSA was void or
should be avoided pursuant to section 544, 547, 548 or 549 of the Bankruptcy
Code and/or offset pursuant to section 553 of the Bankruptcy Code.
"INTERCOMPANY CLAIMS AGENT" means the trustee or escrow agent under the
Intercompany Claims Agreement, if any, appointed by the LFC Creditors' Committee
and the LMUSA Creditors' Committee in accordance with section 1123(b)(3)(B) of
the Bankruptcy Code by order of the Bankruptcy Court as the Person responsible
for (a) ensuring the allocation and distribution of the assets in the
Intercompany Claims Reserve to the appropriate party or parties and (b) such
other duties as may be specified in the Intercompany Claims Agreement or by the
Bankruptcy Court, and such Person's successors in such capacity.
"INTERCOMPANY CLAIMS AGREEMENT" means a trust or escrow agreement among LFC,
LMUSA, the LFC Creditors' Committee, the LMUSA Creditors' Committee and the
Intercompany Claims Agent agreed upon among the parties thereto and approved by
the Bankruptcy Court.
"INTERCOMPANY CLAIMS RESERVE" means a trust or escrow arrangement that may
be established pursuant to SECTION 6.3.
"INTEREST" means, (a) with respect to LFC, any right arising from the
ownership, beneficial or otherwise, of Old LFC Common Stock and any outstanding
rights to acquire Old LFC Common Stock, including, without limitation, options
and warrants and rights to receive or acquire options or warrants, stock
appreciation or similar rights the value of which is determined by reference to
the value of Old LFC Common Stock and all Claims arising from rescission of a
purchase or sale of such stock or right to acquire such stock or for damages
arising from such purchase or sale, (b) with respect to LIS, any right arising
from the ownership, beneficial or otherwise, of LIS Common Stock and (c) with
respect to LAS, any right arising from the ownership, beneficial or otherwise,
of the equity of LAS.
"KPMG" means KPMG Peat Marwick LLP.
"LAS" means Lomas Administrative Services, Inc., a Nevada corporation that
was in dissolution proceedings at the Petition Date and was a wholly-owned
subsidiary of LFC and a Debtor in a Reorganization Case.
EXHIBIT I TO DISCLOSURE STATEMENT
5
<PAGE> 115
"LFC" means Lomas Financial Corporation, a Delaware corporation and a Debtor
in a Reorganization Case.
"LFC ALLOCATION" means, with respect to claims of the type described in
clauses (a) - (f) of the definition of "Administrative Claim" that are
attributable only in part to LFC, such percentage of those administrative claims
as is recommended by KPMG, if LFC and LMUSA or their respective creditors'
committees do not agree with KPMG's recommendation, as determined by agreement,
or, failing such agreement, by the Bankruptcy Court.
"LFC CREDITORS' COMMITTEE" means the statutory creditors' committee of LFC,
consisting of representatives of holders of debt obligations of LFC, which was
appointed by the United States Trustee for the District of Delaware on March 15,
1996.
"LFC DISTRIBUTABLE CASH" means (a) on the Effective Date, all cash of LFC,
after giving effect to (i) a payment, if any, or other transfer, if any, by LFC
into the Intercompany Claims Reserve, if any, (ii) appropriate reserves for
Administrative Claims, Priority Claims, Second Claims and Convenience Unsecured
Claims, (iii) the amount placed in the LFC Litigation Trust pursuant to SECTION
7.13 and (iv) a reserve for working capital equal to $3,000,000 or such other
amount as shall be specified by the LFC Creditors' Committee in writing to the
Debtors and the Bankruptcy Court at least three (3) Business Days prior to the
commencement of the Confirmation Hearing and (ii) after the Effective Date, all
subsequently received net cash proceeds from the disposition of, or net income
on, Non-Reorganization Assets of LFC or Reorganized LFC, and all cash
subsequently distributed to Reorganized LFC from the Intercompany Claims Reserve
or the LFC Litigation Trust.
"LFC INDENTURE" means the indenture dated as of November 1, 1991 between LFC
and Texas Commerce Bank National Association, pursuant to which the LFC Senior
Convertible Notes were issued.
"LFC INDENTURE TRUSTEE" means the trustee under the LFC Indenture.
"LFC LITIGATION TRUST" means the trust established pursuant to SECTION 7.13.
"LFC LITIGATION TRUSTEE" means the Person designated by the LFC Creditors'
Committee on or before the Confirmation Date to act as trustee of the LFC
Litigation Trust.
"LFC LITIGATION TRUST AGREEMENT" means a trust agreement substantially in
the form of EXHIBIT B.
EXHIBIT I TO DISCLOSURE STATEMENT
6
<PAGE> 116
"LFC SENIOR CONVERTIBLE NOTES" means LFC's $140 million 9% Senior
Convertible Notes due October 1, 2003.
"LHMC" means Lomas Housing Management Corp., a Texas corporation and a
wholly-owned subsidiary of LFC.
"LIS" means Lomas Information Systems, Inc., a Nevada corporation and a
wholly-owned subsidiary of LFC and a Debtor in a Reorganization Case.
"LIS ALLOCATION" means, with respect to claims of the type described in
clauses (a) - (f) of the definition of "Administrative Claim" that are
attributable only in part to LIS, such percentage of those administrative claims
as is recommended by KPMG, if LIS, LFC and LMUSA or the LFC Creditors' Committee
and the LMUSA Creditors' Committees do not agree with KPMG's recommendation, as
determined by agreement, or, failing such agreement, by the Bankruptcy Court.
"LLG LANDS" means LLG Lands, Inc., an Arkansas corporation and a
wholly-owned subsidiary of LFC.
"LMUSA" means Lomas Mortgage USA, Inc., a Connecticut corporation and a
wholly-owned subsidiary of LFC and a debtor in a reorganization case under
Chapter 11 of the Bankruptcy Code.
"LMUSA CREDITORS' COMMITTEE" means the official committee of unsecured
creditors of LMUSA, consisting of representatives of holders of debt obligations
of LMUSA, which was appointed by the United States Trustee for the District of
Delaware on March 15, 1996.
"MONTHLY DISTRIBUTION DATE" means the 15th of each month, starting with the
first such date that is at least 30 days after the Effective Date.
"MSP" means the Management Security Plan Lomas & Nettleton Financial
Corporation and Subsidiary and Affiliated Companies as Restated Effective June
1, 1992, as amended, including the related trust, dated April 2, 1993, as
amended.
"NEW LFC COMMON STOCK" means the common stock, par value $0.10 per share, of
Reorganized LFC, which class of common stock shall have the rights, powers and
preferences set forth in the Amended and Restated Certificate of Incorporation.
"NON-REORGANIZATION ASSETS" means all tangible and intangible assets of the
Estate other than such Reorganized Debtor's Reorganization Assets.
EXHIBIT I TO DISCLOSURE STATEMENT
7
<PAGE> 117
"OLD COMMON STOCK" means Old LFC Common Stock and Old LIS Common Stock.
"OLD LFC COMMON STOCK" means the shares of common stock, par value $1.00 per
share, of LFC outstanding on the Petition Date.
"OLD LIS COMMON STOCK" means the shares of common stock, par value $1.00 per
share, of LIS outstanding on the Petition Date.
"PENSION PLAN" means the Lomas Financial Group Pension Plan as restated
effective January 1, 1991, as amended.
"PERSON" means any individual, corporation, partnership, association, trust
or any other entity or organization of any kind or character, including a
Governmental Authority.
"PETITION DATE" means the date on which the petitions for relief commencing
the Reorganization Cases were filed, namely October 10, 1995.
"PLAN" means this Chapter 11 Plan, and any exhibits and schedules attached
hereto (that are hereby incorporated by reference), in each case as the same may
be amended, modified or supplemented from time to time in accordance with the
provisions set forth herein, the Bankruptcy Code and the Bankruptcy Rules. This
Chapter 11 Plan will be referred to herein as "the Plan" or "this Plan".
"PRIORITY CLAIM" means a Priority Tax Claim or a Priority Non-Tax claim.
"PRIORITY NON-TAX CLAIM" means any Claim to the extent entitled to priority
in payment under section 507(a)(3),(4),(5) or (6) of the Bankruptcy Code.
"PRIORITY TAX CLAIM" means any Claim to the extent entitled to priority in
payment under section 507(a)(8) of the Bankruptcy Code.
"PROFESSIONALS" means those persons retained at the expense of the Estates
of the Debtors in the Reorganization Cases pursuant to an order of the
Bankruptcy Court in accordance with sections 327, 328 or 1103 of the Bankruptcy
Code.
"PRO RATA" means bearing the same proportion that the amount of an Allowed
Claim in a particular Class bears to the total aggregate amount of Allowed
Claims in such Class.
EXHIBIT I TO DISCLOSURE STATEMENT
8
<PAGE> 118
"PUBLIC DEBT SECURITIES" means the LFC Senior Convertible Notes.
"RECORD DATE" means, for purposes of voting, the date on which the
Bankruptcy Court approves the Disclosure Statement, and for purposes of
distribution, the Confirmation Date.
"RECLAMATION CLAIM" means, with respect to a Debtor, a Claim against such
Debtor that is entitled to priority status under sections 546(c) and 507(a)(1)
of the Bankruptcy Code on the basis of a seller's statutory or common law right
to reclaim goods sold to such Debtor in the ordinary course of such seller's
business.
"RELATED DOCUMENT" means each instrument, agreement and document to be
issued or executed in connection with this Plan.
"REORGANIZATION ASSETS" means direct or indirect right, title and interest
of LFC in and to (a) the stock and assets of STL and LLG Lands, and any other
real estate assets that are determined by the LFC Creditors' Committee (before
the Effective Date) or the Reorganized Board of LFC (on or after the Effective
Date) to be appropriate to hold for longer term development and/or sale, (b)
the stock and assets of LHMC (c) the working capital reserve retained by any
Reorganized Debtor on the Effective Date, and (d) the income derived from, and
proceeds of any disposition of, the foregoing.
"REORGANIZATION CASE" means, with respect to a Debtor, the case under
chapter 11 of the Bankruptcy Code commenced by such Debtor.
"REORGANIZED BOARD" means the board of directors of Reorganized LFC or
Reorganized LIS on and after the Effective Date.
"REORGANIZED DEBTOR" means Reorganized LFC or Reorganized LIS.
"REORGANIZED LFC" means LFC on and after the Effective Date.
"REORGANIZED LIS" means LIS on and after the Effective Date.
"SCHEDULES" means the Debtors' Schedules of Assets and Liabilities, that
have been filed with the Clerk of the Bankruptcy Court pursuant to Bankruptcy
Rule 1007 as the same may be amended from time to time.
"SECURED CLAIM" means a Claim that constitutes a secured claim under section
506(a) or 1111(b) of the Bankruptcy Code.
EXHIBIT I TO DISCLOSURE STATEMENT
9
<PAGE> 119
"STL" means ST Lending, Inc., a Delaware corporation and a wholly-owned
subsidiary of LMUSA.
"UNSECURED CLAIM" means a Claim that is not a Secured Claim, an
Administrative Claim, a Priority Claim, an Intercompany Claim or a D & O Claim.
"VOTING DEADLINE" means the date by which the Ballots for acceptance or
rejection of this Plan must be received by the tabulating agent to be counted.
ARTICLE 2
TREATMENT OF ADMINISTRATIVE CLAIMS
AND PRIORITY TAX CLAIMS; CLASSIFICATION AND TREATMENT
OF PRIORITY NON-TAX CLAIMS
2.1 Administrative Claims. Each Allowed Administrative Claim shall be paid
in full in cash (a) at the option of the relevant Debtor (before the Effective
Date) or the relevant Reorganized Debtor (on or after the Effective Date) (i) in
the ordinary course of business as such Claim matures or (ii) on the
Distribution Date for such Claim unless the holder thereof agrees or has agreed
to less favorable treatment of such Claim (including, without limitation, any
treatment that may be provided for in any documentation, statute or regulation
governing such Claim) or (b) on such other date as the Bankruptcy Court may
order. Notwithstanding the foregoing, the relevant Debtor's or relevant
Reorganized Debtor's failure to object to any Administrative Claim in the
Reorganization Case or payment of such Claim shall be without prejudice to the
relevant Reorganized Debtor's right to contest, request disgorgement of or
otherwise defend against such Claim in any forum.
2.2 Priority Tax Claims. Each Allowed Priority Tax Claim shall be paid in
full in cash on the Distribution Date for such Claim, unless the holder thereof
agrees to less favorable treatment of such Claim (including, without limitation,
any treatment that may be provided for in any documentation, statute or
regulation governing such Claim); provided, however, that the relevant Debtor
may elect to have any Allowed Priority Tax Claim paid in deferred cash payments
over a period not to exceed six (6) years after the date of assessment of such
Priority Tax Claim, of a value, as of the Effective Date, equal to the amount of
such Allowed Priority Tax Claim, which option shall be exercised by written
notice given to the holder of a Priority Tax Claim delivered on or before the
Distribution Date specifying a payment schedule, a rate of interest, and the
date by which an objection to such treatment must be filed and served. The
relevant Reorganized
EXHIBIT I TO DISCLOSURE STATEMENT
10
<PAGE> 120
Debtor shall have the right to prepay any Allowed Priority Tax Claim, in whole
or in part at any time without penalty.
For the purposes of this SECTION 2.2, the relevant Debtor and relevant
Reorganized Debtor for the payment of Allowed Priority Tax Claims against LAS
shall be LFC and Reorganized LFC.
2.3 Priority Non-Tax Claims. (a) Classification. LFC Class A, LIS Class A
and LAS Class A shall consist, respectively, of all Priority Non-Tax Claims
against LFC, LIS and LAS.
(b) Treatment. LFC Class A Claims, LIS Class A claims and LAS Class A
Claims are not impaired. Each Allowed Priority Non-Tax Claim shall be paid in
full in cash on the Distribution Date for such Claim or, at the option of the
relevant Reorganized Debtor, in the ordinary course of business as such Claim
matures, unless such holder agrees to less favorable treatment of such Claim
(including, without limitation, any treatment that may be provided for in any
documentation, statute or regulation governing such Claim).
For the purposes of this SECTION 2.3(b), the relevant Reorganized Debtor for
the payment of Allowed Priority Non-Tax Claims against LAS shall be LFC and
Reorganized LFC.
ARTICLE 3
CLASSIFICATION OF OTHER CLAIMS AND INTERESTS
3.1 General Rules of Classification. Unless otherwise provided in this Plan,
a Claim or Interest that is properly included in more than one Class is in a
Class to the extent that it qualifies within the description of such Class and
is in a different Class to the extent that it qualifies within the description
of such different Class, but the same portion of a Claim or Interest may not be
in more than one Class.
3.2 LFC Class 1 Claims. LFC Class 1 shall consist of all Secured Claims
against LFC. If and to the extent that, for purposes of technical compliance
with the Bankruptcy Code, any member of this Class is entitled to be included in
a separate Class, such member automatically shall be deemed to be a member of a
separate Class to be identified by the number of this Class and next unused
alphabetical letter, starting with the letter "A."
EXHIBIT I TO DISCLOSURE STATEMENT
11
<PAGE> 121
3.3 LFC Class 2 Claims. LFC Class 2 shall consist of all D & O Claims
against LFC.
3.4 LFC Class 3 Claims. LFC Class 3 shall consist of all Unsecured Claims
against LFC and, in addition, all Convenience Unsecured Claims against LFC if
they have been reclassified pursuant to SECTION 5.1.
3.5 LFC Class 4 Claims. LFC Class 4 shall consist of all Convenience
Unsecured Claims against LFC.
3.6 LFC Class 5 Claims. LFC Class 5 shall consist of all Intercompany Claims
against LFC.
3.7 LFC Class 6 Interests. LFC Class 6 shall consist of all Interests in
LFC.
3.8 LIS Class 1 Claims. LIS Class 1 shall consist of all Secured Claims
against LIS. If and to the extent that, for purposes of technical compliance
with the Bankruptcy Code, any member of this Class is entitled to be included in
a separate class, such member automatically shall be deemed to be a member of a
separate class to be identified by the number of this class and next unused
alphabetical letter, starting with the letter "A."
3.9 LIS Class 2 Claims. LIS Class 2 shall consist of all D & O Claims
against LIS.
3.10 LIS Class 3 Claims. LIS Class 3 shall consist of all Unsecured Claims
against LIS.
3.11 LIS Class 4 Claims. LIS Class 4 shall consist of all Intercompany
Claims against LIS.
3.12 LIS Class 5 Interests. LIS Class 5 shall consist of all Interests in
LIS.
3.13 LAS Class 1 Claims. LAS Class 1 shall consist of all Secured Claims
against LAS. If and to the extent that, for purposes of technical compliance
with the Bankruptcy Code, any member of this Class is entitled to be included in
a separate class, such member automatically shall be deemed to be a member of a
separate class to be identified by the number of this class and next unused
alphabetical letter, starting with the letter "A."
3.14 LAS Class 2 Claims. LAS Class 2 shall consist of all Claims against
LAS.
EXHIBIT I TO DISCLOSURE STATEMENT
12
<PAGE> 122
3.15 LAS Class 3 Claims. LAS Class 3 shall consist of all Unsecured Claims
against LAS.
3.16 LAS Class 4 Claims. LAS Class 4 shall consist of all Intercompany
Claims against LAS.
3.17 LAS Class 5 Interests. LAS Class 5 shall consist of all Interests of
the holders of Old LAS Common Stock.
ARTICLE 4
TREATMENT OF CLAIMS AND INTERESTS
4.1 LFC Class 1 (Secured Claims). LFC Class 1 Claims are impaired. Each
holder of an Allowed LFC Class 1 Claim shall receive one of the following: (a)
the property of LFC in which such holder has a valid, perfected security
interest,(b) a promissory note executed by Reorganized LFC providing for
deferred cash payments satisfying the requirements of section
1129(b)(2)(A)(i)(II) of the Bankruptcy Code secured by a lien on assets of
Reorganized LFC satisfying the requirements of section 1129(b)(2)(A)(i)(I) of
the Bankruptcy Code or (c) cash in an amount equal to such Allowed LFC Class 1
Claim.
4.2 LFC Class 2 (D & O Claims). LFC Class 2 Claims are impaired. Holders of
Allowed LFC Class 2 Claims shall receive no distribution from LFC in respect of
such Claims but rather shall have recourse to the insurance policies maintained
by LFC and/or LMUSA to the extent such policies cover their claims.
4.3 LFC Class 3 (Unsecured Claims). LFC Class 3 Claims are impaired. Each
holder of an Allowed LFC Class 3 Claim shall be entitled to receive such
holder's Pro Rata share of (a) 1,000,000 shares of New LFC Common Stock and (b)
LFC Distributable Cash.
4.4 LFC Class 4 (Convenience Unsecured Claims). LFC Class 4 Claims are
impaired. Each holder of an Allowed LFC Class 4 Claim shall receive twenty-five
percent (25%) of the Allowed amount of such Claim in cash on the Distribution
Date for such Claim.
4.5 LFC Class 5 (Intercompany Claims). LFC Class 5 Claims are impaired.
Distributions in respect of the Allowed amounts of such Claims will be made in
accordance with the provisions of SECTION 6.3.
EXHIBIT I TO DISCLOSURE STATEMENT
13
<PAGE> 123
4.6 LFC Class 6 (LFC Interests). LFC Class 6 Interests are not impaired. On
the Effective Date, all LFC Interests will be cancelled and no distributions
under this Plan will be made in respect thereof.
4.7 LIS Class 1 (Secured Claims). LIS Class 1 Claims are impaired. Each
holder of an Allowed LIS Class 1 Claim shall receive the property of LIS in
which such holder has a valid, perfected security interest.
4.8 LIS Class 2 (D & O Claims). LIS Class 2 Claims are impaired. Holders of
Allowed LIS Class 2 Claims shall receive no distribution from LIS in respect of
such Claims but rather shall have recourse to the insurance policies maintained
by LMUSA and/or LFC for their benefit.
4.9 LIS Class 3 (Unsecured Claims). LIS Class 3 Claims are impaired. Each
holder of an Allowed LIS Class 3 Claim shall be entitled to receive such
holder's Pro Rata share of cash in the amount of the excess of funds available
in LIS after distributions pursuant to ARTICLE 2 and SECTION 4.7.
4.10 LIS Class 4 (Intercompany Claims). LIS Class 4 Claims are impaired.
Distributions in respect of the Allowed amounts of such Claims will be made in
accordance with the provisions of SECTION 6.2.
4.11 LIS Class 5 (LIS Interests). LIS Class 5 Interests are impaired. The
holders for such Interests will retain their Interests, but their legal rights
will be affected by adoption of LIS' Amended and Restated Certificate of
Incorporation.
4.12 LAS Class 1 (Secured Claims). LAS Class 1 Claims are impaired. Each
holder of an Allowed LAS Class 1 Claim shall receive the property of LAS in
which such holder has a valid, perfected security interest.
4.13 LAS Class 2 (D & O Claims). LAS Class 2 Claims are impaired. Holders of
Allowed LAS Class 2 Claims shall receive no distribution from LAS in respect of
such Claims but rather shall have recourse to the insurance policies maintained
by LMUSA and/or LFC for their benefit.
4.14 LAS Class 3 (Unsecured Claims). LAS Class 3 Claims are impaired. Each
holder of an Allowed LAS Class 2 Claim shall be entitled to receive such
holder's Pro Rata share of cash in the amount of the excess of funds available
in LAS after distributions pursuant to ARTICLE 2 and SECTION 4.12.
EXHIBIT I TO DISCLOSURE STATEMENT
14
<PAGE> 124
4.15 LAS Class 4 (Intercompany Claims). LAS Class 4 Claims are impaired.
Distributions in respect of the Allowed amounts of such claims will be made in
accordance with the provisions of SECTION 6.2.
4.16 LAS Class 5 (LAS Interests). LAS Class 5 Interests are unimpaired. LAS
was in liquidation under state law before the Petition Date, and will be
liquidated for the benefit of its creditors, with any assets remaining after the
distributions pursuant to SECTIONS 4.12, 4.14 AND 4.15 being transferred to the
holders of LAS Class 5 Interests as a liquidating distribution.
ARTICLE 5
IMPAIRMENT OF CLAIMS AND INTERESTS; VOTING
5.1 Classes Entitled to Vote. Holders of record of Allowed Claims as of the
Record Date for voting in LFC Classes 1, 2, 3 and 4, LIS Classes 1, 2 and 3 and
LAS Classes 1, 2 and 3 are impaired hereunder and are entitled to vote to accept
or reject this Plan. By voting to accept this Plan, a holder of a Claim
expressly waives any right it or its successors or assigns may have to change or
withdraw its acceptance after the Voting Deadline unless the Bankruptcy Court
determines that (a) the disclosure received by such holder was not adequate as
required by section 1126(b) of the Bankruptcy Code or (b) this Plan has been
modified in a manner that materially and adversely changes the treatment of the
holder's Claim or Interest. If the majority of holders of LFC Class 4 Claims
vote against the Plan, then the LFC Class 4 Claims will be reclassified as LFC
Class 3 Claims.
5.2 Classes Not Entitled to Vote. (a) LFC Class 5 Claims, LIS Class 4 Claims
and LAS Class 4 Claims, are all Intercompany Claims held by the Debtors and/or
their subsidiaries (including LMUSA and its subsidiaries), all of which have
approved this Plan; consequently, their votes on this Plan will not be
solicited.
(b) Holders of LFC Class 6 Interests are impaired, will receive no
distributions hereunder and are deemed to reject this Plan pursuant to section
1126(g) of the Bankruptcy Code; consequently, their votes on this Plan have not
been and will not be solicited.
(c) LFC is the only holder of LIS Class 5 Interests and LAS Class 5
Interests. LFC has proposed and has approved this Plan; consequently, its vote
on this Plan will not be solicited.
EXHIBIT I TO DISCLOSURE STATEMENT
15
<PAGE> 125
ARTICLE 6
CONDITIONS PRECEDENT TO CONFIRMATION
AND EFFECTIVE DATE
6.1 Conditions to Confirmation. There shall be conditions precedent to
Confirmation of this Plan that:
(a) the Bankruptcy Court shall have entered an order or orders approving
all relevant agreements, trustees, agents and mediators and authorizing LFC,
the Intercompany Claims Agent, if any, and the LFC Litigation Trustee to
make the transfers of property contemplated to be made by such parties
pursuant to this Plan;
(b) the LFC Creditors' Committee shall have (i) furnished the names of
the individuals who will serve as the members of the Reorganized Board and
as the principal executive officers of Reorganized LFC, and (ii) new names
for Reorganized LFC and its subsidiaries as required by SECTION 7.1;
(c) the trustee of the MSP shall have turned over or been ordered to
turn over to LFC the assets held in the MSP; and
(d) any no-action letters from the Securities and Exchange Commission,
rulings from the Internal Revenue Service or other government approvals or
interpretations required in connection with the transaction contemplated by
this Plan shall have been obtained.
6.2 Waiver of Conditions. Any and all conditions precedent to confirmation
may be waived by the LFC Creditors' Committee, other than the conditions set
forth in SECTIONS 6.1(a) and 6.1(b).
6.3 Conditions to First Distribution. There shall be conditions precedent to
the first distribution to holders of LFC Class 3 Claims, LIS Class 3 Claims or
LAS Class 3 Claims that:
(a) the LFC Creditors' Committee and the LMUSA Creditors' Committee
shall have agreed to (i) a settlement of the Intercompany Claims or (ii) the
creation of an Intercompany Claims Reserve to be funded by one or more
Debtors and/or LMUSA transferring assets agreed on by such parties pending
the resolution of the Intercompany Claims through litigation, mediation or
settlement; or
EXHIBIT I TO DISCLOSURE STATEMENT
16
<PAGE> 126
(b) the Bankruptcy Court shall have entered an order, either (i)
determining the Allowed amounts and types of the Intercompany Claims against
the Debtors or (ii) estimating the Allowed amounts and types of such
Intercompany Claims or the maximum Allowed amounts thereof for the purpose
of (A) creating an Intercompany Claims Reserve serving the purpose described
in SECTION 6.3(a)(ii) above or (B) establishing distribution holdbacks, as
the Bankruptcy Court shall direct. For purposes of distribution holdbacks,
to the extent that any Intercompany Claim may be Allowed as an unsecured
pre-petition Claim, the holder shall receive distributions of comparable
value to those received in respect of LFC Class 3 Claims, LIS Class 3 Claims
or LAS Class 3 Claims, as the case may be; to the extent it may be Allowed
as an Administrative Claim or Priority Non-Tax Claim, the holder shall
receive distributions of, or of a value equal to, the Allowed amount
thereof.
ARTICLE 7
MEANS OF IMPLEMENTING THE PLAN
7.1 Change of Names. On and after the Effective Date, the names of the
Debtors shall be changed to names provided by the LFC Creditors' Committee on or
before the Confirmation Date, with no further act or action under applicable
law, regulation, order or rule. Each Debtor and each subsidiary of a Debtor
(other than LMUSA and its subsidiaries, the names of which will be changed, if
necessary, pursuant to LMUSA's plan of reorganization) that has the word "Lomas"
or "L & N" in its name shall change its name to remove any reference to the word
"Lomas" or "L & N" in it on the Effective Date.
7.2 Amended and Restated Certificates of Incorporation. Each of the
Reorganized Debtors shall be deemed to have adopted its Amended and Restated
Certificate of Incorporation on the Effective Date and shall promptly thereafter
cause the same to be filed with the appropriate authority in its respective
jurisdiction of incorporation. After the Effective Date, each of the Reorganized
Debtors may amend its certificate of incorporation or articles of incorporation
(as the case may be) and may amend its by-laws, in accordance with its
applicable certificate of incorporation or articles of incorporation, by-laws
and state law.
7.3 Corporate Action. On the Effective Date, all actions contemplated hereby
shall be authorized and approved in all respects (subject to the provisions of
this Plan). All matters provided for herein involving the corporate structure of
the Debtors or the Reorganized Debtors in connection with this Plan shall be
deemed to have occurred and
EXHIBIT I TO DISCLOSURE STATEMENT
17
<PAGE> 127
shall be in effect, without any requirement of further action by the equity
security holders or directors of the Debtors or the Reorganized Debtors. On or
as soon as practicable after the Effective Date, the appropriate officers of
each Reorganized Debtor and members of the Reorganized Board of such Reorganized
Debtor are authorized to issue, execute and deliver the agreements, documents,
securities and instruments contemplated hereby in the name and on behalf of such
Reorganized Debtor.
7.4 Effectiveness of Securities, Instruments and Agreements. On the
Effective Date, all securities, instruments, documents and agreements
authorized, issued or entered into pursuant to this Plan, including, without
limitation, the New LFC Common Stock, the LFC Litigation Trust and the
Intercompany Claims Agreement, if any, shall become effective, legally binding
and enforceable on the parties thereto in accordance with their respective terms
and conditions without the requirement of any further action by the equity
security holders or directors of the Debtors or the Reorganized Debtors, and
shall be deemed to become effective simultaneously.
7.5 Distributions Pursuant to the Plan. (a) Initial Distributions. On or as
soon as practicable after the Effective Date, the Reorganized Debtors, subject
to the conditions set forth in SECTION 6.3, shall make all the distributions
required by ARTICLE 4; provided that only for purposes of distributions in
respect of LFC Class 3 Claims, LIS Class 3 Claims and LAS Class 3 Claims, it
shall be presumed that all Disputed Claims will be Allowed at their face amount,
with the result that a portion of the assets and, in the case of LFC Class 3
Claims, New LFC Common Stock, available for distribution will be held until the
Allowed amounts of all Disputed Claims are determined.
(b) Issuance of New LFC Common Stock. On or as soon as practicable after
the Effective Date, Reorganized LFC shall issue shares of New LFC Common Stock,
that shall be distributed to the holders of LFC Class 3 Claims entitled thereto
in accordance with this SECTION 7.5(b).
(c) Subsequent Distributions on LFC Class 3 Claims. All LFC
Distributable Cash and New LFC Common Stock that is not distributed by
Reorganized LFC on or promptly after the Effective Date shall be held by
Reorganized LFC pending distribution pursuant to the provisions of this SECTION
7.5(c). Promptly after any Disputed Claim in LFC Class 3 becomes an Allowed
Claim, Reorganized LFC shall cause to be distributed to the holder of such
Allowed Claim the LFC Distributable Cash and New LFC Common Stock that such
holder would have been entitled to receive under the Plan if such Claim had been
Allowed on the Effective Date in the amount in which it has become Allowed. On
each Monthly Distribution Date on which there is at least $500,000 of
Distributable Cash available to distribute, Reorganized LFC shall make
additional distributions of LFC Distributable Cash and New LFC Common Stock to
EXHIBIT I TO DISCLOSURE STATEMENT
18
<PAGE> 128
holders of Claims that were Allowed on the Effective Date or subsequently have
become Allowed on or before the last day of the calendar month immediately
preceding such Monthly Distribution Date, in amounts necessary to cause such
holders to have received aggregate distributions of LFC Distributable Cash and
New LFC Common Stock in respect of such Allowed Claims equal to the
distributions thereof that such holders would have received in respect of such
Allowed Claims on or promptly after the Effective Date if (i) such Allowed
Claims had been Allowed on the Effective Date in the amounts in which they are
Allowed on the last day of such calendar month and (ii) Claims or portions
thereof that have become disallowed (A) after the Effective Date and (B) before
the last day of such calendar month, had been disallowed on the Effective Date.
(d) Subsequent Distributions on LIS Class 3 Claims and LAS Class 3
Claims. The provisions of SECTION 7.5(c) above with respect to the distribution
of LFC Distributable Cash to holders of LFC Class 3 Claims shall apply, mutatis
mutandis, with respect to the distribution to holders of LIS Class 3 Claims and
LAS Class 3 Claims of cash of LIS and LAS available for distribution to holders
of such Claims.
7.6 Distribution of Fractional Shares of New LFC Common Stock. The
distribution of shares of New LFC Common Stock as provided in SECTION 4.3, may
mathematically entitle the holder of an Allowed LFC Class 3 Claim to a
fractional share of New LFC Common Stock. Notwithstanding the foregoing,
Reorganized LFC shall not distribute any fractional shares of New LFC Common
Stock; rather all such fractional shares of New LFC Common Stock shall be
aggregated into a whole number of shares of New LFC Common Stock, which whole
shares shall be allocated and distributed by Reorganized LFC as follows:
(a) Reorganized LFC shall rank from largest to smallest the fractional
interests in shares of New LFC Common Stock held by holders of Allowed LFC
Class 3 Claims. In the case of ties (fractions having the same size),
Reorganized LFC shall decide such tie by the size of Allowed Claims (the
higher ranking going to the holder of the larger Allowed Claim). In the
event the tie cannot be broken in such manner, Reorganized LFC shall decide
such tie by lot.
(b) Reorganized LFC shall allocate one whole share of New LFC Common
Stock to the holder of the Allowed LFC Class 3 Claim having the largest
fractional interest in a share of New LFC Common Stock or New LFC Common
Stock and any additional whole shares to the holders of Allowed LFC Class 3
Claims (one per holder) having the next largest fractional interest in a
share of New LFC Common Stock or New LFC Common Stock, as the case may be,
until all such whole shares have been allocated.
EXHIBIT I TO DISCLOSURE STATEMENT
19
<PAGE> 129
(c) Those shares of New LFC Common Stock allocated in accordance with
SECTION 7.6(b) above shall be distributed by Reorganized LFC to the parties
to whom they have been allocated.
7.7 Transfer By the Debtors of Certain Property to the Intercompany Claims
Reserve. If the LFC Creditors' Committee and the LMUSA Creditors' Committee
determine that the Intercompany Claims Reserve should be established pending the
resolution of the Intercompany Claims or the Bankruptcy Court makes the
determination referred to in SECTION 6.1(b), then on the Effective Date:
(a) such Intercompany Claims Reserve shall be established to be operated
in accordance with the Intercompany Claims Agreement; and
(b) each Debtor and LMUSA shall transfer or cause to be transferred to
the Intercompany Claims Reserve the assets agreed upon by the
parties or ordered by the Bankruptcy Court.
7.8 Actions by the Intercompany Claims Agent. The Intercompany Claims Agent
shall hold the assets transferred to the Intercompany Claims Reserve pursuant to
the Intercompany Claims Agreement until the resolution of any of the
Intercompany Claims. Until any such resolution, the funds in the Intercompany
Claims Reserve shall be invested in high-grade short-term investments, as shall
be more fully set forth in the Intercompany Claims Agreement. Upon such
resolution, the Intercompany Claims Agent shall distribute the relevant assets
to LMUSA or the Reorganized Debtor or Debtors entitled thereto.
7.9 Management of the Reorganized Debtors. On and after the Effective Date,
governance of each of Reorganized LFC and Reorganized LIS shall be directed by
the Reorganized LFC Board as successor to the then current Debtor's board of
directors. The initial officers and directors of Reorganized LFC shall consist
of those individuals designated by the LFC Creditors' Committee and disclosed to
the Bankruptcy Court at or prior to the Confirmation Hearing. All such directors
and officers shall be deemed elected as of the Effective Date pursuant to the
Confirmation Order. Those officers and directors not continuing in office shall
be deemed removed therefrom as of the Effective Date pursuant to the
Confirmation Order.
7.10 Liquidation of Non-Reorganization Assets. Each Reorganized Debtor, as
trustee, will liquidate the Non-Reorganization Assets as promptly as possible
consistent with the maximization of the value of such assets.
EXHIBIT I TO DISCLOSURE STATEMENT
20
<PAGE> 130
7.11 Cash Distributions. All payments of cash to be made hereunder shall be
made by the relevant Reorganized Debtor or its designee, the LFC Litigation
Trustee or the Intercompany Claims Agent. Any payment of cash may be made either
by check or by wire transfer, at the option of the Reorganized Debtor, the LFC
Litigation Trustee or the Intercompany Claims Agent, as the case may be, and all
payments in excess of $250,000 to holders of Allowed Claims who timely provide
wire instructions shall be by wire transfer. Notwithstanding the foregoing,
distributions on account of Claims of holders of LFC Senior Convertible Notes
shall be paid to the LFC Indenture Trustee, which will be responsible for making
distributions to such holders. The LFC Indenture Trustee shall retain its lien
and priorities for its fees and expenses as set forth in the LFC Indenture.
7.12 Resolution of Disputed Claims. Each Reorganized Debtor will resolve any
and all Disputed Claims against such Reorganized Debtor, and LFC shall be
responsible for resolving any Disputed Claims against LAS.
7.13 LFC Litigation Trust. (a)(i) Effective as of the Effective Date, the
Debtors shall be deemed to have transferred and assigned to a litigation trust
(the "LFC Litigation Trust") governed by the LFC Litigation Trust Agreement any
and all claims, rights, or causes of action that constitute property of the
Estates or of the Debtors, whether arising under the Bankruptcy Code or under
nonbankruptcy law, (including all books, records, privileges and defenses
relating thereto) including, without limitation, all rights of setoff and rights
under section 502(d) of the Bankruptcy Code and all avoiding power actions under
sections 544, 545, 547, 548, 549, 550 and 553 of the Bankruptcy Code or under
applicable nonbankruptcy law as applied through section 544(b) of the Bankruptcy
Code, other than Intercompany Claims, and (ii) on or as soon as practicable
after the Effective Date, Reorganized LFC shall transfer to the LFC Litigation
Trust $2 million or such other amount as the LFC Creditors' Committee shall
specify in writing to the Debtors and the Bankruptcy Court at least three (3)
Business Days prior to the commencement of the Confirmation Hearing to fund the
administration of the LFC Litigation Trust.
(b) The LFC Litigation Trustee will be responsible for pursuing, as
appropriate in accordance with the best interests of the Reorganized Debtors,
the third party claims and causes of action assigned to the LFC Litigation Trust
through litigation or, if appropriate, settlement and distributing any net
proceeds of such litigation of settlement to Reorganized LFC for distribution to
holders of LFC Class 3 Claims in accordance with SECTION 4.3 and 7.5.
(c) The LFC Litigation Trust shall be deemed not to be the same entity
as any of the Debtors or a successor to any of the Debtors, but only the
assignee of the assets transferred to the LIS Litigation Trust.
EXHIBIT I TO DISCLOSURE STATEMENT
21
<PAGE> 131
7.14 Setoff. Except as otherwise provided in this Plan, each Reorganized
Debtor may, but shall not be required to, set off against any Claim and the
distributions to be made by it pursuant hereto in respect of such Claim, any
claims of any nature whatsoever that such Debtor may have against the holder of
such Claim, but neither the failure to do so nor the allowance of any Claim
hereunder shall constitute a waiver or release of any claim such Debtor may have
against such holder.
7.15 Surrender and Cancellation of Public Debt Securities. (a) No
distribution shall be made to or on behalf of a holder of Public Debt Securities
under this Plan unless and until such holder shall surrender such Public Debt
Securities to the LFC Indenture Trustee for cancellation pursuant to written
instructions to such holders from Reorganized LFC. Any holder of a Public Debt
Security that has been lost, stolen, mutilated or destroyed shall, in lieu of
surrendering such Public Debt Security, deliver to the LFC Indenture Trustee (i)
evidence satisfactory to such Indenture Trustee of the loss, theft, mutilation
or destruction of such Public Debt Security and (ii) such security or indemnity
as may reasonably be required by the LFC Indenture Trustee and Reorganized LFC
to hold both the LFC Indenture Trustee and Reorganized LFC harmless with respect
thereto.
(b) Any holder of a Public Debt Security that has not satisfied the
requirement of SECTION 7.15(a) within two (2) years after the Effective Date
shall receive no distribution on account of its LFC Class 3 Claim and shall be
forever barred from asserting any Claim thereon. As soon as practicable after
the second anniversary of the Effective Date, the LFC Indenture Trustee shall
pay any distribution to which such holder would have been entitled to the
holders of the relevant Public Debt Security who did satisfy the requirements of
SECTION 7.15(a) within two (2) years after the Effective Date, in proportion to
the amount of the Public Debt Securities surrendered by such holders.
7.16 Certain Assets to be Held in Trust. (a) Each Reorganized Debtor shall
hold its Non-Reorganization Assets in trust (in the case of Reorganized LFC, the
"LFC Creditors' Trust"; in the case of Reorganized LIS, the "LIS Creditors'
Trust") pending their dispositions and/or distribution to creditors in
accordance with the terms hereof and shall not commingle such assets with its
Reorganization Assets. For federal tax purposes, the Non-Reorganization Assets
shall be deemed to have been transferred on the Effective Date to the creditors
entitled to cash distributions pursuant to SECTION 4.3, and immediately
retransferred to the appropriate Reorganized Debtor as trustee. Such creditors
shall be treated as grantors of the trust and deemed owners of the trust assets.
(b) The LFC Creditors' Trust shall be organized for the sole purpose of
liquidating the Non-Reorganization Assets of Reorganized LFC with no objective
to continue or engage in the conduct of a trade or business.
EXHIBIT I TO DISCLOSURE STATEMENT
22
<PAGE> 132
(c) Reorganized LFC, as trustee of the LFC Creditors' Trust, shall file
federal income tax and information returns as required by Treasury Regulations
Section 1.671-4(a).
(d) The Non-Reorganization Assets of Reorganized LFC shall be valued
consistently by (i) Reorganized LFC as trustee of the LFC Creditors' Trust and
(ii) the creditors entitled to cash distributions from the LFC Creditors' Trust
pursuant to SECTION 4.3, and those valuations shall be used by such creditors
and by Reorganized LFC for purposes of filing any federal income tax and
information returns.
(e) The LFC Creditors' Trust will terminate on the fifth anniversary of the
Effective Date; provided, however, that the date on which the LFC Creditors'
Trust terminates may be postponed for a finite period of time, so long as the
Bankruptcy Court enters an order approving such extension within six months of
the beginning of the extended term of the LFC Creditors' Trust.
(f) The investment powers of Reorganized LFC as trustee of the LFC
Creditors' Trust, other than those necessary to maintain the value of
Reorganized LFC's Non-Reorganization Assets and the liquidating purpose of the
LFC Creditors' Trust, are limited to powers to invest in demand deposits,
short-term time deposits and other short-term cash-equivalent investments
consistent with the status of the LFC Creditors' Trust for federal tax purposes
as a liquidating trust.
(g) SECTIONS 7.16(b)-(f) shall apply, mutatis mutandis, with respect to
Reorganized LIS and the Reorganized LIS Creditors' Trust.
(h) Notwithstanding the foregoing, the LFC Creditors' Committee may elect
in writing to the Debtors and the Bankruptcy Court at least three Business Days
prior to the commencement of the Confirmation Hearing that Reorganized LFC's
Non-Reorganization Assets are not to be held in trust and that the provisions
of this SECTION 7.16 are not to apply.
7.17 Allocation of Consideration Between Interest and Principal.
Consideration received by the holder of an Allowed Claim in exchange for such
Claim shall be allocated first to the principal amount of such Claim and then,
to the extent that such consideration (a) exceeds the principal amount of such
Claim but (b) does not exceed the sum of the principal amount of such Claim and
accrued but unpaid interest on such Claim, shall be allocated to such accrued
but unpaid interest. Any excess of the consideration received by the holder of
an Allowed Claim in exchange for such Claim over the sum of the principal amount
of such Claim and the accrued but unpaid interest on such Claim shall be
allocated to principal.
7.18 NOL Reattribution Election. LFC shall not make an election pursuant to
Treasury Regulations Section 1.1502-20(g) to reattribute to itself any net
operating loss carryover or net capital loss carryover attributable to (a) LMUSA
or (b) any subsidiary of LMUSA.
EXHIBIT I TO DISCLOSURE STATEMENT
23
<PAGE> 133
ARTICLE 8
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
8.1 Rejection of Executory Contracts and Unexpired Leases. Each Joint
Debtor hereby rejects pursuant to section 365 of the Bankruptcy Code any and
all of its executory contracts and unexpired leases except those that shall,
prior to the date of the Confirmation Order, have been assumed or be the
subject of pending motions by such Joint Debtor to assume pursuant to section
365 of the Bankruptcy Code.
8.2 Claims Under Rejected Contracts and Leases. Any Claim for damages
arising by reason of the rejection of any executory contract or unexpired lease
by operation of SECTION 8.1 may constitute a Claim if, but only if, a proof of
claim therefor shall be (or shall have been) timely filed with the Clerk of the
Court or such other party as the Court may direct (or shall have previously
directed) not later than thirty (30) days after the Confirmation Date.
Distributions in respect of an Allowed Claim arising from the rejection of an
executory contract or unexpired lease shall be made in such manner and at such
time as is provided in ARTICLE 4 and SECTIONS 7.5 and 7.6. Any Claim filed
under this Article shall be treated as an Unsecured Claim in LFC Class 3, LIS
Class 3 or LAS Class 3, as appropriate.
ARTICLE 9
EFFECTS OF PLAN CONFIRMATION
9.1 Discharge and Injunction. (a) The rights afforded herein and the
treatment of all Claims and Interests herein shall be in exchange for and in
complete satisfaction, discharge and release of all Claims and Interests of any
nature whatsoever, against the Estates. Except as otherwise expressly provided
herein, the Confirmation of this Plan shall, provided that the Effective Date
shall have occurred, discharge all Claims and terminate all Interests to the
fullest extent authorized or provided for by the Bankruptcy Code, including,
without limitation, to the extent authorized or provided for by sections 524 and
1141 thereof. Therefore, on and after the Effective Date, except to the extent
of the distributions to be made, and other treatment provided, under this Plan,
all holders of Claims and Interests shall be precluded from asserting against
any of the Debtors, the Reorganized Debtors, any of their successors, and any of
their respective assets or properties, any Claims or Interests based on any act
or omission, transaction or other activity of any kind or nature that occurred
prior to the Effective Date, and the Confirmation Order shall permanently enjoin
said holders of Claims and Interests, their successors and assigns, from
enforcing or seeking to enforce any such Claims or Interests against any of the
Debtors, the Reorganized Debtors, any of their successors, or any of their
respective assets or properties.
(b) Notwithstanding the foregoing, if the Confirmation Order shall be
reversed or vacated, (i) all Claims and Interests against any Debtor or any of
its assets or properties shall be reinstated, (ii) the rights afforded herein
and the treatment of Claims and Interests herein shall be nullified, (iii) the
preclusion and injunction described in
EXHIBIT I TO DISCLOSURE STATEMENT
24
<PAGE> 134
SECTION 9.1(a) shall be of no force or effect, (iv) the vesting in each
Reorganized Debtor of its Estate, as contemplated by SECTION 9.2, will not occur
or will be nullified and (v) all other actions taken or deemed taken by the
Reorganized Debtors pursuant to ARTICLE 7 or this ARTICLE 9 shall, to the
greatest extent possible, be reversed.
(c) Channeling Order. Any and all postpetition claims relating to the
administration of the chapter 11 case against any and all of the Debtor and its
directors, officers, employees, and Professionals, or the LFC Creditors'
Committee and its members and Professionals, may be brought only in the
Bankruptcy Court.
9.2 Revesting. On the Effective Date, except as otherwise expressly provided
in this Plan or the Confirmation Order, each Reorganized Debtor will be vested
with all of the property of the Estate free and clear of all Claims, liens,
encumbrances, charges, Interests and other interests of any kind or nature of
claimants, equity security holders or any other entities arising on or before
the Effective Date, and each Reorganized Debtor may operate its business free of
any restrictions imposed by the Bankruptcy Code or by the Bankruptcy Court.
9.3 Contributions to LFC Litigation Trust and Intercompany Claims Reserve.
On and after the Effective Date, all property transferred to the LFC Litigation
Trust or the Intercompany Claims Reserve, if any, under this Plan shall be free
and clear of all Claims, liens, encumbrances, charges, Interests and other
interests of any kind or nature of claimants and equity security holders, the
Debtors, the Reorganized Debtors, their Estates and any other entities, except
the rights with respect thereto created pursuant to, provided for or recognized
in this Plan, the LFC Litigation Trust Agreement, the Intercompany Claims
Agreement or the Confirmation Order.
9.4 Cancellation and Release of Existing Securities, Agreements and Liens.
On the Effective Date, all evidences of Claims or Interests against a Debtor
that are impaired under this Plan, including, without limitation, any Old Common
Stock or Public Debt Securities of such Debtor (and any liens, securities,
instruments, documents or agreements created or entered into in connection
therewith), and any other liens, securities, instruments, documents and
agreements, in each case, shall be deemed released, cancelled and terminated,
and the obligations of such Debtor relating to or arising under, in respect of
or in connection with such liens, securities, instruments, documents or
agreements shall be cancelled, extinguished and discharged; provided, however,
that notes and other evidence of such Claims shall, effective on the Effective
Date, represent the right, enforceable against the Reorganized Debtor, to
participate in distributions provided for by the Plan. Except as expressly
required by the Plan, the Debtors shall not be permitted to make any payment in
respect of a Claim that is discharged by the Plan.
EXHIBIT I TO DISCLOSURE STATEMENT
25
<PAGE> 135
9.5 Retiree Medical Benefits. On and after the Effective Date, Reorganized
LFC shall continue to provide all retiree benefits (as defined in section 1114
of the Bankruptcy Code) at the level established pursuant to section 1114
(c)(1)(B) or (g) of the Bankruptcy Code.
9.6 Retention of Jurisdiction. (a) Prior to the Effective Date,
notwithstanding entry of the Confirmation Order, the Bankruptcy Court shall
exercise all jurisdiction as if Confirmation had not occurred, and the
Confirmation Order shall so provide. Unless otherwise provided, all injunctions
or stays provided for in the Reorganization Cases pursuant to section 105 or
section 362 of the Bankruptcy Code or otherwise and in effect on the
Confirmation Date shall remain in full force and effect at least until the
Effective Date.
(b) On and after the Effective Date, the Bankruptcy Court will retain
exclusive jurisdiction over the Reorganization Cases for the following purposes:
(i) to determine requests for payment of Claims entitled to priority under
section 507(a)(1) of the Bankruptcy Code and applications for allowance of
compensation and reimbursement of expenses of the Professionals and any other
fees and expenses authorized to be paid or reimbursed under the Bankruptcy Code
or this Plan, (ii) to determine all controversies, suits and disputes regarding
interpretation and implementation hereof, (iii) to enter orders in aid of
execution of this Plan, including as authorized by section 1142 of the
Bankruptcy Code, (iv) to consider any modifications of this Plan, to cure any
defect or omission herein, and to reconcile any inconsistency in any order of
the Bankruptcy Court or between any such order and this Plan, (v) to determine
applications, adversary proceedings and contested matters pending on the
Effective Date or commenced after the Effective Date as contemplated herein,
(vi) to allow, disallow, estimate, liquidate or determine any Claim, and to
enter or enforce any order requiring the filing of any such Claim before a
particular date, (vii) to determine pending applications for the rejection of
executory contracts or unexpired leases, or for the assumption or assignment of
executory contracts or unexpired leases, and to hear and determine, and if need
be to liquidate, any and all Claims arising from rejection, assumption or
assignment of any executory contract or unexpired lease, (viii) to determine any
actions or controversies described in SECTION 7.13, (ix) to ensure that
distributions to holders of Claims are accomplished as provided herein, in the
LFC Litigation Trust and in the Intercompany Claims Agreement, if any, (x) to
determine such other matters as may be set forth in the Confirmation Order or as
may arise in connection with this Plan or the Confirmation Order, (xi) to
determine all claims under SECTION 9.1(c) hereof and (xii) to enter a final
decree closing the Reorganization Cases.
9.7 Failure of Bankruptcy Court to Exercise Jurisdiction. If the Bankruptcy
Court abstains from exercising or declines to exercise jurisdiction, or is
otherwise without
EXHIBIT I TO DISCLOSURE STATEMENT
26
<PAGE> 136
jurisdiction over any matter arising under, arising in or related to the
Reorganization Cases, including the matters set forth in SECTION 9.6, this
ARTICLE 9 shall not prohibit or limit the exercise of jurisdiction by any other
tribunal having competent jurisdiction with respect to such matter.
9.8 Statutory Committee. The appointment of the LFC Creditors' Committee
shall terminate on the Effective Date; provided, however, that the LFC
Creditors' Committee shall survive to the extent, if any, required to prosecute
or defend against any matters pending on the Effective Date that are not able to
be prosecuted or defended by the Reorganized Debtor.
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Payment of Statutory Fees. All fees payable pursuant to 28 U.S.C.
Section 1930 shall be paid on or before the Effective Date.
10.2 Procedure for Determining Certain Claims. (a) Bar Date for
Administrative Claims. All applications for compensation of Professionals and
all other requests for payment of Administrative Claims incurred prior to the
Effective Date shall be filed as ordered by the Bankruptcy Court, but in no
event later than forty-five (45) days after the Effective Date. Any such claim
that is not filed within this time deadline shall be forever barred.
(b) Disputed Claims. Except with respect to those Claims the holders of
which have and preserve the right to liquidation of such Claims before a court
other than the Bankruptcy Court pursuant to 28 U.S.C. Section 157(b)(5), all
Disputed Claims shall be liquidated and determined, and allowed or disallowed,
by the Bankruptcy Court. The Bankruptcy Court may, on or prior to the
Confirmation Date or on such date or dates thereafter as the Bankruptcy Court
may set, fix or liquidate the amount of any contingent or unliquidated Claim,
pursuant to section 502(c) of the Bankruptcy Code, in which event the amount so
set, fixed or liquidated shall be deemed to be the amount of such contingent or
unliquidated Claim pursuant to section 502(c) of the Bankruptcy Code for
purposes of voting and distribution hereunder. Each Debtor (before the Effective
Date) and each successor Reorganized Debtor (on or after the Effective Date) may
file objections to Claims.
10.3 Cramdown. The Debtors reserve the right to request that the Bankruptcy
Court confirm this Plan under section 1129(b) of the Bankruptcy Code.
EXHIBIT I TO DISCLOSURE STATEMENT
27
<PAGE> 137
10.4 Modification of The Plan. The Debtors reserve the right, in accordance
with and subject to section 1127 of the Bankruptcy Code, to amend or modify this
Plan pursuant to section 1127(a), (c) and (d) of the Bankruptcy Code prior to
the entry of the Confirmation Order. In accordance with Bankruptcy Rule 3019,
any modification that does not materially and adversely change the treatment of
any Claim, the holder of which as of the Voting Deadline voted to accept this
Plan, may be approved by the Bankruptcy Court at the Confirmation Hearing
without the necessity of resoliciting votes. After Confirmation, the Debtors may
seek to amend or modify this Plan in accordance with subsections 1127(b), (c)
and (d) of the Bankruptcy Code.
10.5 Withdrawal of Plan. The Debtors reserve the right, at any time prior to
entry of the Confirmation Order, to revoke and withdraw this Plan. If the
Debtors revoke or withdraw this Plan under this SECTION 10.5, or if entry of the
Confirmation Order does not occur, then this Plan shall be deemed null and void.
In that event, nothing contained herein shall be deemed to constitute a waiver
or release of any claims by or against any Debtor or any other entity, or to
prejudice in any manner the rights of any Debtor or any other entity in any
further proceedings involving such Debtor or any other entity.
10.6 Substantial Effective of Plan. This Plan shall be deemed to be
substantially consummated when the first distribution to holders of LFC Class 3
Claims is made.
10.7 Reservation of Rights. Except as expressly set forth herein, this Plan
shall have no force and effect unless the Bankruptcy Court enters the
Confirmation Order. None of the filing of this Plan, any statement or provision
contained herein, or the taking of any action by any Debtor with respect to this
Plan shall be or shall be deemed to be an admission or waiver of any rights of
any Debtor with respect to holders of Claims against such Debtor prior to the
Effective Date.
10.8 Section 1145 Exemption. Any securities issued pursuant hereto will be
issued pursuant to the exemption from securities registration set forth in
section 1145 of the Bankruptcy Code.
10.9 Unclaimed Property. Except as specified in SECTION 7.15(b), if any
property distributable to holders of LFC Class 1, 3 and 4 Claims, it remains
unclaimed for a period of two (2) years after it has been delivered (or delivery
has been attempted) or has otherwise been made available, such unclaimed
property shall be forfeited by such holder, and the unclaimed property and the
right to receive it shall revert to and vest in the Reorganized Debtor free and
clear of the interest of the holder of the Claim. Mailing by regular mail,
postage prepaid, to the address specified in SECTION 10.12 shall constitute
delivery for purposes of this SECTION 10.9.
EXHIBIT I TO DISCLOSURE STATEMENT
28
<PAGE> 138
10.10 Section 1146 Exemption. Pursuant to section 1146(c) of the Bankruptcy
Code, the issuance, transfer or exchange of any security hereunder, or the
making or delivery of an instrument of transfer hereunder may not be taxed under
any law imposing a stamp tax or similar tax.
10.11 Record Date for Distribution. As of the close of business on the
Record Date for distribution, the transfer ledgers for the Public Debt
Securities shall be closed, there shall be no registration of or other changes
in the holders of any of the Public Debt Securities on the books of the Debtor
(or any trustee, transfer agent or registrar), and none of the LFC, Reorganized
LFC, LMUSA, Reorganized LMUSA, the LFC Indenture Trustee, the LMUSA Indenture
Trustee and any other trustee, transfer agent or registrar shall have any
obligation to recognize any transfer of Public Debt Securities occurring
thereafter (but shall instead be entitled to recognize and deal with, for all
purposes hereunder, except as otherwise provided herein, only those holders
reflected on its books as of the close of business on the Record Date for
distribution).
10.12 Notices and Distributions. On and after the Effective Date, all
notices, requests and distributions with respect to this Plan to a holder of a
Claim or an Interest shall be in writing and sent to (a) the last known address
of such entity set forth in a proof of Claim or request for payment of
Administrative Claim filed by or on behalf of such entity in a Reorganization
Case or to the last known address of such entity's attorney of record in such
Reorganization Case or (b) if there is no such evidence of a last known address,
to the last known address of such entity according to the books and records of
the relevant Debtor. Any entity may designate in writing another address for the
purposes of this SECTION 10.12 by written notice to the relevant Debtor (before
the Effective Date) or the relevant Reorganized Debtor (on or after the
Effective Date), which designation will be effective upon receipt.
10.13 Saturday, Sunday or Legal Holiday. If any payment or act hereunder is
required to be made or performed on a date that is not a Business Day, then the
making of such payment or the performance of such act may be completed on the
next succeeding Business Day, but shall be deemed to have been completed as of
the required date.
10.14 Time. Unless otherwise specified herein, in computing a period of time
prescribed or allowed hereby, the day of the act or event from which the
designated period begins to run shall not be included. The last day of the
period so computed shall be included, unless it is not a Business Day, in which
event the period runs until the end of the next succeeding day that is a
Business Day.
10.15 Severability of Provisions. If prior to Confirmation any term or
provision hereof that does not prescribe the treatment of Claims or the
conditions to the Effective
EXHIBIT I TO DISCLOSURE STATEMENT
29
<PAGE> 139
Date is held by the Bankruptcy Court to be invalid, void, or unenforceable, the
Bankruptcy Court shall have the power to alter and interpret such term or
provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be
invalid, void or unenforceable. Notwithstanding any such holding, alteration or
interpretation, the remainder of the terms and provisions hereof will remain in
full force and effect and will in no way be affected, impaired or invalidated by
such holding, alteration or interpretation. The Confirmation Order shall
constitute a judicial determination and shall provide that each term and
provision hereof, as it may have been altered or interpreted in accordance with
the foregoing, is valid and enforceable in accordance with its terms.
10.16 Binding Effect. This Plan shall be binding on and inure to the benefit
of each of the Reorganized Debtors, and all holders of Claims or Interests
(whether or not they have accepted this Plan) and their respective personal
representatives, successors and assigns.
10.17 Governing Law. Unless a rule of law or procedure is supplied by
federal law, the laws of the State of Delaware shall govern the construction and
implementation hereof and any agreements, documents and instruments executed in
connection herewith.
10.18 Interpretation of Plan and Related Documents. This Plan and each
Related Document shall be construed, to the maximum extent possible, to give
effect to every provision contained herein and therein and to avoid any
inconsistency between the provisions hereof and thereof.
10.19 Filing of Additional Documents. On or before the Effective Date, each
Debtor may file with the Bankruptcy Court such agreements and other documents as
may be necessary or appropriate to effectuate and further evidence the terms and
conditions of this Plan.
10.20 Further Assurances. The Debtors, the Reorganized Debtors, all holders
of Claims or Interests receiving distributions hereunder and all other parties
in interest shall, from time to time, prepare, execute and deliver any
agreements or documents and take any other actions as may be necessary or
advisable to effectuate the provisions and intent of this Plan and the Related
Documents.
[END OF PAGE]
EXHIBIT I TO DISCLOSURE STATEMENT
30
<PAGE> 140
10.21 Withholding and Reporting Requirements. In connection herewith and all
distributions hereunder, the Reorganized Debtors, the LFC Litigation Trustee and
the Intercompany Claims Agent (in each case with respect to the income, if any,
earned with respect to property held by it and distributions made by it) shall
comply with all withholding and reporting requirements imposed by any federal,
state, local or foreign taxing authority and all distributions hereunder shall
be subject to any such withholding and reporting requirements. Entities entitled
to receive distributions hereunder shall, as a condition to receiving such
distributions, provide such information and take such steps as the Reorganized
Debtors, the LFC Litigation Trustee or the Intercompany Claims Agent (as the
case may be) may reasonably require to ensure compliance with such withholding
and reporting requirements, and to enable the Reorganized Debtors, the LFC
Litigation Trustee or the Intercompany Claims Agent to obtain the certifications
and information as may be necessary or appropriate to satisfy the provisions of
any tax law.
Date: May 13, 1996
LOMAS FINANCIAL CORPORATION
By: /s/ Eric Booth
-------------------------------------
Name: Chief Executive Officer of
Title: Lomas Financial Corporation
LOMAS INFORMATION SYSTEMS, INC.
By: /s/ Eric Booth
------------------------------------
Name: Chief Executive Officer of
Title: Lomas Financial Corporation
LOMAS ADMINISTRATIVE SERVICES, INC.
By: /s/ Eric Booth
------------------------------------
Name: Chief Executive Officer of
Title: Lomas Financial Corporation
EXHIBIT I TO DISCLOSURE STATEMENT
31
<PAGE> 141
EXHIBIT A-1
TO JOINT CHAPTER
11 PLAN
RESTATED CERTIFICATE OF INCORPORATION
OF
[NAME OF REORGANIZED LFC]
* * * * * *
[NAME OF REORGANIZED LFC], a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. This Restated Certificate of Incorporation was duly adopted by
the Corporation's Board of Directors pursuant to the Joint Chapter 11 Plan (the
"Chapter 11 Plan") filed by the Lomas Financial Corporation and certain
affiliated debtors in proceedings under Chapter 11 of the United States
Bankruptcy Code, 11 U.S.C. Section 101 et seq., and confirmed by the United
States Bankruptcy Court for the District of Delaware in accordance with the
provisions of Section 303 of the General Corporation Law of the State of
Delaware.
2. The name of the Corporation is [Name of Reorganized LFC] and
the name under which the Corporation was originally incorporated was Wallace
Properties, Inc. The date of filing its original Certificate of Incorporation
with the Secretary of State was March 7, 1960.
3. This Restated Certificate of Incorporation amends, restates and
integrates the provisions of the Certificate of Incorporation of this
Corporation as hereby and heretofore amended or supplemented.
4. The text of the Corporation's Restated Certificate of
Incorporation as hereby amended and heretofore amended is hereby restated to
read as herein set forth in full:
FIRST: The name of the Corporation is [Name of Reorganized LFC].
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
1
<PAGE> 142
SECOND: The Corporation's registered office in the State of
Delaware is located at No. 1209 Orange Street in the City of Wilmington, County
of New Castle. The name and address of its registered agent is The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware as the same exists or may hereafter be
amended ("Delaware Law").
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is 4,000,000 consisting of 3,000,000 shares of
Common Stock, par value $0.10 per share (the "Common Stock"), and 1,000,000
shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock").
The Board of Directors is hereby empowered to authorize by
resolution or resolutions from time to time the issuance of one or more classes
or series of Preferred Stock and to fix the designations, powers, preferences
and relative, participating, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, if any, with respect to
each such class or series of Preferred Stock and the number of shares
constituting each such class or series, and to increase or decrease the number
of shares of any such class or series to the extent permitted by Delaware Law.
FIFTH: (a) The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors consisting of not less
than five (5) nor more than eleven (11) directors, the exact number of directors
to be determined from time to time solely by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors.
If the Corporation does not identify one or more individuals or
entities who are willing to invest in the Corporation in consideration for at
least [___]% of the shares of Common Stock which the Corporation has the
authority to issue (individually or collectively, as the case may be, the "New
Investors") by the [___] anniversary of the effective date of the Corporation's
Chapter 11 Plan, the Board of Directors may, in accordance with Section 303 of
Delaware Law but without the necessity of any vote by the stockholders, adopt a
plan of liquidation for the Corporation, and take the appropriate steps to
effectuate such plan of liquidation in accordance with applicable law.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
2
<PAGE> 143
(b) The names and mailing addresses of the persons who are to
serve as directors until the first annual meeting of stockholders after the date
hereof or until their successors are elected and qualified are:
(c) There shall be no cumulative voting in the election of
directors. Election of directors need not be written ballot unless the bylaws of
the Corporation so provide.
(d) Notwithstanding the foregoing, whenever the holders of one or
more classes or series of Preferred Stock shall have the right, voting
separately as a class or series, to elect directors, the election, term of
office, filling of vacancies, removal and other features of such directorships
shall be governed by the terms of the resolution or resolutions adopted by the
Board of Directors pursuant to ARTICLE FOURTH applicable thereto, and such
directors so elected shall not be subject to the provisions of this ARTICLE
SIXTH unless otherwise provided therein.
SIXTH: Until such time as 1,200,000 shares of Common Stock have
been distributed in accordance with the Chapter 11 Plan referred to in ARTICLE
FIFTH, the Board of Directors shall have responsibility for taking all actions
on behalf of the Corporation, including actions which would otherwise require
approval of the stockholders. Thereafter, until at least 2,400,000 shares of
Common Stock have been distributed in accordance with such Chapter 11 Plan, if
under Delaware Law, any proposed action requires the approval of a majority of
the stockholders under the General Corporation Law of the State of Delaware, all
issued but not outstanding shares shall be deemed to be voted for or against the
proposed action in the same proportions as the issued and outstanding shares are
so voted by the stockholders.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
3
<PAGE> 144
SEVENTH: The Board of Directors shall have the power to adopt,
amend or repeal the bylaws of the Corporation.
After at least [_______] shares of Common Stock have been
distributed in accordance with the Chapter 11 Plan referred to in ARTICLE FIFTH
the stockholders may adopt, amend or repeal the bylaws only with the affirmative
vote of the holders of not less than 66 2/3% of the total voting power of all
outstanding securities of the Corporation then entitled to vote generally in the
election of directors, voting together as a single class.
EIGHTH: Any action required or permitted to be taken at any annual
or special meeting of stockholders may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called in
accordance with Delaware Law, and may not be taken by written consent of
stockholders without a meeting.
NINTH: Special meetings of the stockholders may be called by the
Board of Directors or the Chairman of the Board of Directors of the Corporation
and may not be called by any other person. Notwithstanding the foregoing,
whenever holders of one or more classes or series of Preferred Stock shall have
the right, voting separately as a class or series, to elect directors, such
holders may call, pursuant to the terms of the resolution or resolutions adopted
by the Board of Directors pursuant to ARTICLE FOURTH hereto, special meetings of
holders of such Preferred Stock.
TENTH: (1) A director of the Corporation shall not be liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permitted by Delaware Law.
(2)(a) Each person (and the heirs, executors or administrators of
such person) who was or is a party or is threatened to be made a party to, or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified and held harmless by the Corporation to the fullest extent permitted
by Delaware Law. The right to indemnification conferred in this ARTICLE TENTH
shall also include the right to be paid by the Corporation the expenses incurred
in connection with any such proceeding in advance of its final disposition to
the fullest extent authorized by Delaware Law. The right to indemnification
conferred in this ARTICLE TENTH shall be a contract right.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
4
<PAGE> 145
(b) The Corporation may, by action of its board of Directors
provide indemnification to such of the employees and agents of the Corporation
to such extent and to such effect as the Board of Directors shall determine to
be appropriate and authorized by Delaware Law.
(3) The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or loss
incurred by such person in any such capacity or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under Delaware Law.
(4) The rights and authority conferred in this ARTICLE TENTH shall
not be exclusive or any other right which any person may otherwise have or
hereafter acquire.
(5) Neither the amendment nor repeal of this ARTICLE TENTH, nor
the adoption of any provision of this Certificate of Incorporation or the Bylaws
of the Corporation, nor, to the fullest extent permitted by Delaware Law, any
modification of law, shall eliminate or reduce the effect of this ARTICLE TENTH
in respect of any acts or omissions occurring prior to such amendment, repeal,
adoption or modification.
ELEVENTH: (a) Solely for the purpose of permitting the utilization
of the net operating loss carryovers, capital loss carryovers and future
deductions (the "Tax Benefits") to which the Corporation (or any other member of
the consolidated group of which the Corporation is common parent for federal
income tax purposes) is or may be entitled pursuant to the Internal Revenue Code
of 1986, as amended, or any successor statute (collectively the "Code") and the
regulations thereunder, the following restrictions shall apply until the
Expiration Date.
(i) From and after [THE EFFECTIVE DATE] no Person other than the
Corporation shall, except as provided in subparagraph (ii) below, Transfer
to any Person any direct or indirect interest in any Stock or Warrants to
the extent that such Transfer, if effective, would cause the Ownership
Interest Percentage of the Transferee or any other Person to increase to
4.5 percent or above, or from 4.5 percent or above to a greater Ownership
Interest Percentage.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
5
<PAGE> 146
(ii) Any Transfer of Stock or Warrants that would otherwise be
prohibited pursuant to the preceding subparagraph shall nonetheless be
permitted if prior to such Transfer being consummated (or, in the case of
an involuntary Transfer, as soon as practicable after the transaction is
consummated), the Board of Directors approves the Transfer (such approval
may relate to a Transfer or series of identified Transfers).
(iii) The Board of Directors shall approve a Transfer (such
approval may relate to a Transfer or series of identified Transfers)
pursuant to subparagraph (ii) above unless the Board of Directors concludes
(x) that there is a reasonable likelihood that such Transfer will create or
increase a material risk that limitations pursuant to Section 382 of the
Code will be imposed on the utilization of the Tax Benefits, either at the
time of the Transfer or a reasonable time thereafter, and (y) that the
benefits of such transaction to the shareholders of the Corporation as a
whole are not sufficient to permit the Transfer in the light of the risk or
increase in risk caused thereby. In determining whether to approve a
proposed Transfer, the Board of Directors may take into account: the
opinion of legal counsel selected by the Board of Directors ("Corporate
Legal Counsel") addressing the relevant legal considerations (such opinion
shall take into account any private rulings obtained by the Corporation
from the Internal Revenue Service and shall take a reasonable position with
respect to the application and interpretation of Section 382 of the Code
and the regulations, including final, temporary and proposed, thereunder
(the "Regulations")); any information and opinions of legal counsel
provided by the Person or Persons requesting that the Transfer be permitted
(the "Proponent"); the ownership shifts that have previously taken place;
the size of the ownership shift that would result from the proposed
transaction; the effect of any reasonably foreseeable transactions by the
Corporation or any other Person (including any Transfer of Stock or
Warrants that the Corporation has no power to prevent, without regard to
any knowledge on the part of the Corporation as to the likelihood of such
Transfer); the potential effect of any reasonably foreseeable value shifts
among the various classes or series of Stock (such value shifts to be
calculated using reasonable valuation methods and assumptions); the
possible effects of an ownership change within the meaning of Section 382
of the Code; and any other factor deemed relevant by the Board of Directors
to the preservation of the Tax Benefits. Notwithstanding anything in this
subparagraph (iii) to the contrary, the Board of Directors shall approve a
proposed Transfer of Stock or Warrants presented for its review pursuant to
subparagraph (ii) above if it determines that, prior to giving effect to
the proposed Transfer the proposed Transfer is to a wholly
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
6
<PAGE> 147
owned subsidiary of the Transferor or to a trust all of the beneficial
interests in which are owned by the Transferor. If requested by the Board
of Directors, the Proponent shall deliver to the Board of Directors all
information relating to the proposed Transfer and the parties thereto and
their respective Affiliates that is reasonably available to such parties
and their respective Affiliates and that the Board of Directors deems
reasonably necessary to make the determinations described in the first
sentence of this subparagraph (a)(iii) with respect to the proposed
Transfer (the "Required Information"). The Board of Directors shall
determine whether or not to approve a proposed Transfer within forty-five
(45) days of the date it receives a request for approval, provided,
however, that the foregoing time limit shall not apply if the Board of
Directors requests the Proponent to provide the Required Information and
the Proponent does not provide such information to the Board of Directors
within ten (10) days of receipt of the Board of Directors' request. If the
Proponent does not provide the Required Information within ten (10) days of
receipt of the Board of Directors' request, the Board of Directors shall
determine whether or not to approve the proposed Transfer within forty-five
(45) days of the date it receives the Required Information. Upon
determining whether or not to approve a proposed Transfer, the Board of
Directors shall cause the Corporation promptly to notify the Proponent. The
Board of Directors may establish a committee to determine whether to
approve a proposed Transfer or for any other purpose relating to this
ARTICLE ELEVENTH. The Proponent shall, as a condition to the Corporation's
consideration of a request to approve a proposed Transfer, reimburse or
agree to reimburse the Corporation, on demand, for all costs and expenses
incurred by the Corporation with respect to such proposed Transfer
("Transfer Costs"), including, without limitation, the Corporation's costs
and expenses incurred in determining whether to authorize such proposed
Transfer.
(iv) For purposes of this ARTICLE ELEVENTH:
(A) "Stock" shall mean any class or series of stock of the
Corporation (other than stock described in Section 1504(a)(4) of
the Code or any successor statute, or stock that is not so
described solely because it is entitled to vote as a result of
dividend arrearages) and any other instrument that is treated as
stock of the Corporation for purposes of Section 382 of the Code;
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
7
<PAGE> 148
(B) "Warrants" shall mean any options, warrants, rights,
convertible debt securities or other securities issued by the
Corporation and exercisable for or convertible into Stock;
(C) "Beneficial Ownership" shall have the meaning set
forth in Rule 13d-3 under the United States Securities Exchange
Act of 1934, as amended (the "1934 Act");
(D) "Person" refers to any governmental entity or agency,
and any individual, corporation, estate, trust, association,
company, partnership, joint venture, or similar organization, and
shall include any group comprised of any such Person and any other
Person or Persons with whom such Person or any Affiliate or
Associate of such Person has any formal or informal agreement,
arrangement or understanding for the purpose of directly or
indirectly acquiring Stock or rights, options, warrants or
convertible securities with respect thereto (including but not
limited to Warrants); provided, however, that a public group (as
defined in the regulations in effect on [INSERT EFFECTIVE DATE]
under Section 382 of the Code) shall not be treated as a Person
solely by reason of its status as a public group;
(E) a Person's "Ownership Interest Percentage" shall be
the ownership interest percentage with respect to the Corporation
that would be ascribed to such Person for purposes of Section 382
of the Code, assuming for this purpose that any other warrant,
option or right to acquire, or security convertible into, Stock
(including but not limited to Warrants) owned by such Person or
any Affiliate or Associate of such Person (but not those owned by
any other Person) were exercised and not applying for this purpose
any rule that would treat an entity as no longer owning Stock that
is attributed to its owners;
(F) "Transfer" refers to any means of conveying record
ownership, Beneficial Ownership or tax ownership (applying, in the
case of tax ownership, applicable attribution rules for purposes
of Section 382 of the Code) of Stock or Warrants, whether such
means is direct or indirect, voluntary or involuntary. The terms
"Transfers" and "Transferred" shall have correlative meaning.
"Transferee" means any Person to whom any Stock or Warrant is
Transferred, and "Transferor" means any Person who Transfers any
Stock or Warrant.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
8
<PAGE> 149
(G) "Affiliate" and "Associate" shall have the meanings
set forth in Rule 12b-2 under the 1934 Act;
(H) "Expiration Date" shall mean the fourth anniversary
of the effective date of the Corporation's Chapter 11 Plan; and
(I) "Related Party Request" shall mean, with respect to
any other request, a request to approve a proposed Transfer in
which the proposed Transferor or the proposed Transferee is, with
respect to such other request, a proposed Transferor, a proposed
Transferee or an Affiliate of either.
(v) The restriction on the Transfer of securities set forth
herein shall expire on the Expiration Date.
(b) Unless the Transfer is permitted as provided in subparagraph
(a)(ii) of this ARTICLE ELEVENTH any attempted Transfer of Stock or Warrants in
excess of the Stock or Warrants that could be Transferred to the Transferee
without restriction under subparagraph (a)(i) of this ARTICLE ELEVENTH shall not
be effective to Transfer ownership of such excess Stock or Warrants (the
"Prohibited Shares" or "Prohibited Warrants," as the case may be, and each, a
"Prohibited Security") to the purported acquiror thereof (the "Purported
Acquiror"), who shall not be entitled to any rights as a shareholder of the
Corporation with respect to such Prohibited Shares (including, without
limitation, the right to vote or to receive dividends with respect thereto) or
to any rights with respect to such Prohibited Warrants, as the case may be.
(i) Upon demand by the Corporation the Purported Acquiror shall
Transfer any certificate or other evidence of purported ownership of
Prohibited Securities within the Purported Acquiror's possession or
control, along with any dividends or other distributions paid by the
Corporation with respect to any Prohibited Shares that were received by the
Purported Acquiror (the "Prohibited Distributions"), to such Person as the
Corporation shall designate to act as transfer agent for such Prohibited
Securities (the "Agent"). If the Purported Acquiror has sold any Prohibited
Securities to an unrelated party in an arm's-length transaction after
purportedly acquiring them, the Purported Acquiror shall be deemed to have
sold such Prohibited Securities for the Agent, and in lieu of Transferring
such Prohibited Shares (and Prohibited Distributions with respect thereto)
or Prohibited Warrants to the Agent shall Transfer to the Agent any such
Prohibited Distributions and the proceeds of such sale (the "Resale
Proceeds") except to the extent that the Agent grants
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
9
<PAGE> 150
written permission to the Purported Acquiror to retain a portion of such
Resale Proceeds not exceeding the amount that would have been payable by
the Agent to the Purported Acquiror pursuant to subparagraph (b)(ii) below
if such Prohibited Securities had been sold by the Agent rather than by the
Purported Acquiror. If shares of Stock are issued upon the purported
exercise of Prohibited Warrants, such shares shall be Prohibited Shares.
Any purported Transfer of Prohibited Securities by the Purported Acquiror
other than a Transfer described in one of the first two sentences of this
subparagraph (b)(i) shall not be effective to Transfer any ownership of
such Prohibited Securities.
(ii) The Agent shall sell in one or more arm's-length transactions
any Prohibited Securities Transferred to the Agent by the Purported
Acquiror, and the proceeds of such sale (the "Sales Proceeds"), or the
Resale Proceeds, if applicable, shall be used to pay the expenses of the
Agent in connection with its duties under this paragraph (b) with respect
to such Prohibited Securities, and any excess shall be allocated to the
Purported Acquiror up to the following amount: (x) where applicable, the
purported purchase price paid or value of consideration surrendered by the
Purported Acquiror for such Prohibited Securities, and (y) where the
purported Transfer of Prohibited Securities to the Purported Acquiror was
by gift, inheritance, or any similar purported Transfer, the fair market
value (as determined in good faith by the Board of Directors) of such
Prohibited Securities at the time of such purported Transfer. Subject to
the succeeding provisions of this subparagraph, any Resale Proceeds or
Sales Proceeds in excess of the amount allocable to the Purported Acquiror
pursuant to the preceding sentence, together with any Prohibited
Distributions, shall be Transferred to any entity described in Section
501(c)(3) of the Code and selected by the Board of Directors or its
designee. In no event shall any such amounts described in the preceding
sentence inure to the benefit of the Corporation or the Agent, but such
amounts may be used to cover expenses incurred by the Agent in connection
with its duties under this paragraph (b) with respect to the related
Prohibited Securities. Notwithstanding anything in this ARTICLE ELEVENTH to
the contrary, the Corporation shall at all times be entitled to make
application to any court of equitable jurisdiction within the State of
Delaware for an adjudication of the respective rights and interests of any
Person in and to any Sale Proceeds, Resale Proceeds and Prohibited
Distributions pursuant to this ARTICLE ELEVENTH and applicable law and for
leave to pay such amounts into such court.
(c) Within thirty (30) business days of learning of a purported
Transfer of Prohibited Securities to a Purported Acquiror, the Corporation
through its
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
10
<PAGE> 151
Secretary shall demand that the Purported Acquiror surrender to the Agent the
certificates representing the Prohibited Securities, or any Resale Proceeds, and
any Prohibited Distributions, and if such surrender is not made by the Purported
Acquiror the Corporation may institute legal proceedings to compel such
Transfer; provided, however, that nothing in this paragraph (c) shall preclude
the Corporation in its discretion from immediately bringing legal proceedings
without a prior demand, and provided further that failure of the Corporation to
act within the time periods set out in this paragraph (c) shall not constitute a
waiver of any right of the Corporation to compel any Transfer required by
subparagraph (b)(i) of this ARTICLE ELEVENTH.
(d) Upon a determination by the Corporation that there has been or
is threatened a purported Transfer of Prohibited Securities to a Purported
Acquiror, the Corporation may take such action in addition to any action
permitted by the preceding paragraph as it deems advisable to give effect to the
provisions of this ARTICLE ELEVENTH, including, without limitation, refusing to
give effect on the books of this Corporation to such purported Transfer or
instituting proceedings to enjoin such purported Transfer.
(e) The Corporation may require as a condition to the registration
of the Transfer of any shares of its Stock or Warrants that the proposed
Transferee furnish to the Corporation all information reasonably requested by
the Corporation and reasonably available to the proposed Transferee and its
Affiliates with respect to the direct or indirect ownership interests of the
proposed Transferee (and of Persons to whom ownership interests of the proposed
Transferee would be attributed for purposes of Section 382 of the Code) in Stock
or Warrants or other options or rights to acquire Stock.
(f) All certificates evidencing ownership of shares of Stock or
Warrants that are subject to the restrictions on Transfer contained in this
ARTICLE ELEVENTH shall bear a conspicuous legend referencing the restrictions
set forth in this ARTICLE ELEVENTH.
(g) The Corporation and the Board of Directors shall be fully
protected in relying in good faith upon the information, opinions, reports,
statements of the chief executive officer, the chief financial officer, or the
chief accounting officer of the Corporation or of the Corporation's legal
counsel, independent auditors, Transfer agent, investment bankers, and other
employees and agents in making the determinations and findings contemplated by
this ARTICLE ELEVENTH to the fullest extent permitted by law. Any determination
by the Board of Directors pursuant to this ARTICLE ELEVENTH shall be conclusive.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
11
<PAGE> 152
(h) If any provision of this ARTICLE ELEVENTH or any application
of such provision is determined to be invalid by any federal or state court
having jurisdiction over the issue, the validity of the remaining provisions
shall not be affected and other applications of such provision shall be affected
only to the extent necessary to comply with the determination of such court.
(i) Nothing in this ARTICLE ELEVENTH shall preclude the settlement
of any transaction entered into through the facilities of or any national
securities exchange in the Stock or Warrants.
TWELFTH: The Corporation reserves the right to amend this Restated
Certificate of Incorporation in any manner permitted by Delaware Law and all
rights and powers conferred upon stockholders, directors and officers herein are
granted subject to this reservation. Notwithstanding the foregoing, the
provisions set forth in ARTICLES SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, ELEVENTH
and this ARTICLE TWELFTH may not be repealed or amended in any respect, and no
other provision may be adopted, amended or repealed which would have the effect
of modifying or permitting the circumvention of the provisions set forth in
ARTICLES SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, ELEVENTH and this ARTICLE
TWELFTH, unless such action is approved by the affirmative vote of the holders
of not less than 66 2/3% of the total voting power of all outstanding securities
of the Corporation then entitled to vote generally in the election of directors,
voting together as a single class.
THIRTEENTH: No nonvoting equity securities of the Corporation may
be issued; this provision, included in this Restated Certificate of
Incorporation in compliance with Section 1123 of the United States Bankruptcy
Code, 11 U.S.C. Section 1123, shall have no force and effect except to the
extent required by such Section so long as such Section is in effect and
applicable to the Corporation.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
12
<PAGE> 153
IN WITNESS WHEREOF, said [Name of Reorganized LFC] has caused this
certificate to be signed by [________________], its Chairman of the Board of
Directors and Chief Executive Officer, and attested to by [____________], its
Secretary, and has caused its corporate seal to be hereunto affixed, this
[___]th day of [___________], 1996.
[LOMAS FINANCIAL CORPORATION]
By:_______________________________
Name:
Title: Chief Executive Officer
Attested:
- ------------------------------
Secretary
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
13
<PAGE> 154
BYLAWS
OF
[NAME OF REORGANIZED LFC]
* * * * * *
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
Section 3. Books. The books of the Corporation may be kept within or
without of the State of Delaware as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place of Meetings. All meetings of stockholders
shall be held in Dallas, on such date and at such time as may be determined from
time to time by the Board of Directors (or the Chairman in the absence of a
designation by the Board of Directors).
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
<PAGE> 155
Section 2. Annual Meetings. Annual meetings of stockholders,
commencing with the year 1996, shall be held to elect the Board of Directors and
transact such other business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of stockholders may be
called by the Board of Directors or the chairman of the Board of Directors of
the Corporation and may not be called by any other person.
Section 4. Notice of Meetings and Adjourned Meetings; Waivers of
Notice. (a) Whenever stockholders are required or permitted to take any action
at a meeting, a written notice of the meeting shall be given which shall state
the place, date and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by the General Corporation Law of the State of Delaware as the same
exists or may hereafter be amended ("Delaware Law"), such notice shall be given
not less than 10 nor more than 60 days before the date of the meeting to each
stockholder of record entitled to vote at such meeting. Unless these bylaws
otherwise require, when a meeting is adjourned to another time or place (whether
or not a quorum is present), notice need not be given of the adjourned meeting
if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the Corporation may transact any
business which might have been transacted at the original meeting. If the
adjournment is for more than 30 days, or after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
(b) A written waiver of any such notice signed by the person entitled
thereto, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.
Section 5. Quorum. Unless otherwise provided under the certificate of
incorporation or these bylaws and subject to Delaware Law, the presence, in
person or by proxy, of the holders of a majority of the outstanding capital
stock of the Corporation entitled to vote at a meeting of stockholders shall
constitute a quorum for the transaction of business.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
2
<PAGE> 156
Section 6. Voting. (a) Unless otherwise provided in the certificate of
incorporation and subject to Delaware Law, each stockholder shall be entitled to
one vote for each outstanding share of capital stock of the Corporation held by
such stockholder. Unless otherwise provided in Delaware Law, the certificate of
incorporation or these bylaws, the affirmative vote of a majority of the shares
of capital stock of the Corporation present, in person or by proxy, at a meeting
of stockholders and entitled to vote on the subject matter shall be the act of
the stockholders.
(b) Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to a corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period.
Section 7. Action by Consent. Any action required to be taken at any
annual or special meeting of stockholders may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called in
accordance with Delaware Law and may not be taken by written consent of
stockholders without a meeting.
Section 8. Organization. At each meeting of stockholders, the Chairman
of the Board, if one shall have been elected, (or in his absence or if one shall
not have been elected, the President) shall act as chairman of the meeting. The
Secretary (or in his absence or inability to act, the person whom the chairman
of the meeting shall appoint secretary of the meeting) shall act as secretary of
the meeting and keep the minutes thereof.
Section 9. Order of Business. The order of business at all meetings of
stockholders shall be as determined by the chairman of the meeting.
Section 10. Nomination of Directors. Only persons who are nominated in
accordance with the procedures set forth in these restated bylaws shall be
eligible to serve as directors. Nominations of persons for election to the Board
of Directors of the Corporation may be made at a meeting of stockholders (a) by
or at the direction of the Board of Directors of (b) by any stockholder or the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section 10, who shall be entitled to vote for the election
of directors at the meeting and who complies with the notice procedures set
forth in this Section 10. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the secretary of the Corporation. To be
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
3
<PAGE> 157
timely, with respect to an annual meeting, a stockholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 120 days nor more than 150 days prior to the date of
the Corporation's last proxy statement sent to stockholders in connection with
the previous years' annual meeting of stockholders; provided, however, that if
(i) no annual meeting was held in the previous year, or (ii) the date of the
annual meeting has been changed to a date more than 30 days from the date
contemplated at the time of the Corporation's previous year's proxy statement,
to be timely, notice by the stockholder must be received not less than 120 days
prior to the date of the meeting. Notwithstanding the foregoing, if less than 70
days' notice or prior public disclosure of the date of a meeting is given or
made to stockholders, notice by the stockholder to be timely must be received
not later than the close of business on the 10th day following the day on which
such notice of the date of the meeting or such public disclosure was made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a director all information
related to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); and (b) as to the stockholder giving the
notice (i) the name and address, as they appear on the Corporation's books, or
such stockholder, and (ii) the class and number of shares of the Corporation
which are beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. No person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 10. The chairman of the meeting shall have the power and duty to
determine whether any nomination was made in accordance with the procedures set
forth in this Section 10, and the chairman shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the restated bylaws, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded. For purposes of this Section 10, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press, United Press International, Reuters Economic
News Service or any other comparable national news service or in a document
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act. Notwithstanding the foregoing
provisions of this Section 10, a stockholder shall also comply with all
applicable requirements of the
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
4
<PAGE> 158
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section.
Section 11. Notice of Business. At any meeting of the stockholders,
only such business shall be conducted as shall have been brought before the
meeting (a) by or at the direction of the Board of Directors or (b) by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of the notice provided for in this Section 11, who shall be entitled to
vote at such meeting and who complies with the notice procedures set forth in
this Section 11. For business to be properly brought before a stockholder
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the secretary of the Corporation. To be timely, with respect to an
annual meeting, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the Corporation not less than 120
days nor more than 150 days prior to the date of the Corporation's last proxy
statement sent to stockholders in connection with the previous year's annual
meeting of stockholders: provided, however, that if (i) no annual meeting was
held in the previous year, or (ii) the date of the annual meeting has been
changed to a date more than 30 days from the date contemplated at the time of
the Corporation's previous year's proxy statement, to be timely, notice by the
stockholder must be received not less than 120 days prior to the date of the
meeting. Notwithstanding the foregoing, if less than 70 days' notice or prior
public disclosure of the date of a meeting is given or made to stockholders,
notice by the stockholder to be timely must be received not later than the close
of business on the 10th day following the day on which such notice of the date
of the meeting or such public disclosure was made. A stockholder's notice to the
secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting (a) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting,
(b) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder and (d) any material
interest of the stockholder in such business. Notwithstanding anything in the
restated bylaws to the contrary, no business shall be conducted at a stockholder
meeting except in accordance with the procedures set forth in the Section 11.
The chairman of the meeting shall have the power and duty to determine whether
any business proposed to be brought before the meeting was proposed in
accordance with the procedures set forth in this Section 11, and the chairman
shall, if the facts warrant, determine and declare to the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of the restated bylaws, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. For purpose of this
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
5
<PAGE> 159
Section 11, "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press, United Press
International, Reuters Economic News Service or any other comparable national
news service or in a document filed by the Corporation with the Securities and
Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this Section 11, a stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this Section
11.
ARTICLE III
DIRECTORS
Section 1. General Powers. Except as otherwise provided in Delaware
Law or the certificate of incorporation, the business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors.
Section 2. Number, Election and Term of Office. The number of
directors which shall constitute the whole Board shall be fixed from time to
time by resolution of the Board of Directors but shall not be less than seven
(7) nor more than seventeen (17). The directors shall be elected at the annual
meeting of the stockholders, except as provided in Section 12 of this Article
III, and each director so elected shall hold office until his successor is
elected and qualified or until his earlier death, resignation or removal.
Directors need not be stockholders.
Section 3. Quorum and Manner of Acting. Unless the certificate of
incorporation or these bylaws require a greater number, a majority of the total
number of directors shall constitute a quorum for the transaction of business,
and the affirmative vote of a majority of the directors present at meeting at
which a quorum is present shall be the act of the Board of Directors. When a
meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the Board of Directors may transact any business which
might have been transacted at the original meeting. If a quorum shall not be
present at any meeting of the Board of directors the directors present thereat
may adjourn the meeting, from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
6
<PAGE> 160
Section 4. Time and Place of Meetings. The Board of Directors shall
hold its meetings at such place, either within or without the State of Delaware,
and at such time as may be determined from time to time by the Board of
Directors (or the Chairman in the absence of a determination by the Board of
Directors).
Section 5. Annual Meetings. The Board of Directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting shall be held.
Notice of such meeting need not be given. In the event such annual meeting is
not so held, the annual meeting of the Board of Directors may be held at such
place either within or without the State of Delaware, on such date and at such
time as shall be specified in a notice thereof given as hereinafter provided
in Section 7 of this Article III or in a waiver of notice thereof signed by any
director who chooses to waive the requirement of notice.
Section 6. Regular Meetings. After the place and time of regular
meetings of the Board of Directors shall have been determined and notice thereof
shall have been once given to each member of the Board of Directors, regular
meetings may be held without further notice being given.
Section 7. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President and shall
be called by the Chairman of the Board, President or Secretary on the written
request of three directors. Notice of special meetings of the Board of Directors
shall be given to each director at least three days before the date of the
meeting in such manner as is determined by the Board of Directors.
Section 8. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation;
provided that (i) there shall be an Audit Committee, a Compensation Committee
and a Nominating Committee of the Board of Directors, (ii) each of the Audit
Committee, the Compensation Committee and the Nominating Committee of the Board
of Directors shall consist of one or more of the directors of the Corporation,
(iii) at least a majority of the directors serving on the Nominating Committee
of the Board of Directors shall be independent directors and (iv) all of the
directors serving on each of the Audit Committee and the Compensation Committee
of the Board of Directors shall be independent directors. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
7
<PAGE> 161
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending the restated bylaws of the Corporation; and unless the resolution of
the Board of Directors or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required. For
purposes of this Section 8, an independent director means any director who is
not an officer or employee of the Corporation.
Section 9. Action by Consent. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
Section 10. Telephonic Meetings. Unless otherwise restricted by the
certificate of incorporation or these bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or such committee, as the case may be, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
Section 11. Resignation. Any director may resign at any time by giving
written notice to the Board of Directors or to the Secretary of the Corporation.
The resignation of any director shall take effect upon receipt of notice thereof
or at such later time as shall be specified in such notice; and unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 12. Vacancies. Unless otherwise provided in the certificate of
incorporation, vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all the stockholders
having the right
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
8
<PAGE> 162
to vote as a single class may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director. Whenever
the holders of any class or classes of stock or series thereof are entitled to
elect one or more directors by the certificate of incorporation, vacancies and
newly created directorships of such class or classes or series may be filled by
a majority of directors elected by such class or classes or series thereof then
in office, or by a sole remaining director so elected. Each director so chosen
shall hold office until his successor is elected and qualified, or until his
earlier death, resignation or removal. If there are no directors in office, then
an election of directors may be held in accordance with Delaware Law. Unless
otherwise provided in the certificate of incorporation, when one or more
directors shall resign from the Board, effective at a future date, a majority of
the directors then in office, including those who have so resigned, shall have
the power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective, and each director
so chosen shall hold office as provided in the filling of other vacancies.
Section 13. Removal. Any director or the entire Board of Directors may
be removed, with or without cause, at any time by the affirmative vote of the
holders of a majority of the outstanding capital stock of the Corporation
entitled to vote and the vacancies thus created may be filled in accordance with
Section 12 of this Article III.
Section 14. Compensation. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall have
authority to fix the compensation of directors, including fees and reimbursement
of expenses.
ARTICLE IV
OFFICERS
Section 1. Principal Officers. The principal officers of the
Corporation shall be a Chairman and Chief Executive Officer (who shall be a
member of the Board of Directors) or a Chairman (who shall be a member of the
Board of Directors) and a Chief Executive Officer (who shall be a member of the
Board of Directors), a President, a Treasurer and a Secretary who shall have the
duty, among other things, to record the proceedings of the meetings of
stockholders and directors in a book kept for that purpose. The Corporation may
also have such other principal officers as the Board may in its discretion
appoint. Except for the Chairman and Chief Executive Officer or the Chairman and
the Chief Executive Officer, as the case may be, no officer of the Corporation
is required to be a member of the Board of Directors. One person may hold the
offices and perform the duties of any two or more of said
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
9
<PAGE> 163
offices, except that no person shall hold the offices and perform the duties of
Chairman and Chief Executive Officer and Secretary or Chairman and Secretary.
Section 2. Election, Term of Office and Remuneration. The principal
officers of the Corporation shall be elected annually by the Board of Directors
at the annual meeting thereof. Each such officer shall hold office until his
successor is elected and qualified, or until his earlier death, resignation or
removal. The remuneration of all officers of the Corporation shall be fixed by
the Board of Directors. Any vacancy in any office shall be filled in such manner
as the Board of Directors shall determine.
Section 3. Subordinate Officers. In addition to the principal officers
enumerated in Section 1 of this Article IV, the Corporation may have one or more
Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such
other subordinate officers, agents and employees as the Board of Directors may
deem necessary, each of whom shall hold office for such period as the Board of
Directors may from time to time determine. The Board of Directors may delegate
to any principal officer the power to appoint and to remove any such subordinate
officers, agents or employees.
Section 4. Removal. Except as otherwise permitted with respect to
subordinate officers, any officer may be removed, with or without cause, at any
time, by resolution adopted by the Board of Directors; provided that no such
removal shall alter, void or otherwise effect any change in any written
contractual relationship between the Corporation and any such officer thus
removed from office.
Section 5. Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors (or to a principal officer if the Board
of Directors has delegated to such principal officer the power to appoint and to
remove such officer). The resignation of any officer shall take effect upon
receipt of notice thereof or at such later time as shall be specified in such
notice; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 6. Powers and Duties. The officers of the Corporation shall
have such powers and perform such duties incident to each of their respective
offices and such other duties as may from time to time be conferred upon or
assigned to them by the Board of Directors.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
10
<PAGE> 164
ARTICLE V
GENERAL PROVISIONS
Section 1. Fixing the Record Date. (a) In order that the Corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than 60 nor less than 10 days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided that the Board of Directors may fix a new record date for the adjourned
meeting.
(b) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than 60 days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
Section 2. Dividends. Subject to limitations contained in Delaware Law
and the certificate of incorporation, the Board of Directors may declare and pay
dividends upon the shares of capital stock of the Corporation, which dividends
may be paid either in cash, in property or in shares of the capital stock of the
Corporation.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
11
<PAGE> 165
Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed, affixed or otherwise reproduced.
Section 5. Voting of Stock Owned by the Corporation. The Board of
Directors may authorize any person, on behalf of the Corporation, to attend,
vote at and grant proxies to be used at any meeting of stockholders of any
corporation (except this Corporation) in which the Corporation may hold stock.
Section 6. Amendments. These bylaws or any of them, may be altered,
amended or repealed, or new bylaws may be made, by the stockholders entitled to
vote thereon at any annual or special meeting thereof or by the Board of
Directors.
EXHIBIT A-1 -- LFC CHARTER/BY-LAWS
12
<PAGE> 166
EXHIBIT A-2
TO JOINT PLAN
OF REORGANIZATION
CERTIFICATE OF AMENDMENT TO
ARTICLES OF INCORPORATION
* * * * * *
LOMAS INFORMATION SYSTEMS, INC., a corporation organized under the
laws of the State of Nevada, by its [vice president] and [assistant secretary]
does hereby certify:
1. That the board of directors of said corporation at a meeting
duly convened and held on the ___ day of April, 1996, passed a resolution
declaring that the following changes and amendments in the Articles of
Incorporation is advisable.
RESOLVED that Article One of said Articles of
Incorporation be amended to read as follows: "The name of the
corporation is [Name of Reorganized LIS]."
RESOLVED that Article Twelve of said Articles of
Incorporation be added, reading as follows: "No nonvoting equity
securities of the corporation may be issued; this provision,
included in these Articles of Incorporation in compliance with
Section 1123 of the United States Bankruptcy Code, 11 U.S.C.
Section 1123, shall have no force and effect except to the extent
required by such Section so long as such Section is in effect and
applicable to the corporation."
2. That the number of shares of the corporation outstanding and
entitled to vote on an amendment to the Articles of Incorporation is 1,000; that
the said changes and amendments have been consented to and authorized by the
written consent of stockholders holding at least a majority of each class of
stock outstanding and entitled to vote thereon.
EXHIBIT A-2 -- LIS CHARTER
1
<PAGE> 167
IN WITNESS WHEREOF, the said LOMAS INFORMATION SYSTEMS, INC. has
caused this certificate to be signed by its [vice president] and its [assistant
secretary] and its corporate seal to be hereto affixed this __th day of April,
1996.
LOMAS INFORMATION SYSTEMS, INC.
By________________________________
[Name]/[Vice President]
By________________________________
[Name]/[Assistant Secretary]
(SEAL)
STATE OF TEXAS
COUNTY OF DALLAS
On April __, 1996, personally appeared before me, a Notary Public, ________
and ________ who acknowledged that they executed the above instrument.
--------------------------
Notary Public
EXHIBIT A-2 -- LIS CHARTER
2
<PAGE> 168
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
LOMAS & NETTLETON INFORMATION SYSTEMS, INC., a corporation
organized under the laws of the State of Nevada, by its vice president and
assistant secretary and does hereby certify:
1. That the board of directors of said corporation at a meeting
duly convened and held on the 1st day of April, 1988, passed a resolution
declaring that the following change and amendment in the Articles of
Incorporation is advisable.
RESOLVED that Article One of said Articles of
Incorporation be amended to read as follows: "The name of the
corporation is LOMAS INFORMATION SYSTEMS, INC."
2. That the number of shares of the corporation outstanding and
entitled to vote on an amendment to the Articles of Incorporation is 1,000; that
the said change and amendment has been consented to and authorized by the
written consent of stockholders holding at least a majority of each class of
stock outstanding and entitled to vote thereon.
EXHIBIT A-2 -- LIS CHARTER
3
<PAGE> 169
IN WITNESS WHEREOF, the said LOMAS & NETTLETON INFORMATION
SYSTEMS, INC. has caused this certificate to be signed by its vice president and
its assistant secretary and its corporate seal to be hereto affixed this 7th day
of June, 1988.
LOMAS & NETTLETON INFORMATION
SYSTEMS, INC.
By________________________________
James N. Sabin/Vice President
By________________________________
Angela Marrs/Assistant Secretary
(SEAL)
STATE OF TEXAS
COUNTY OF DALLAS
On June 7, 1988, personally appeared before me, a Notary Public, James N.
Sabin and Angela Marrs who acknowledged that they executed the above instrument.
--------------------------
Notary Public
(SEAL)
EXHIBIT A-2 -- LIS CHARTER
4
<PAGE> 170
ARTICLES OF INCORPORATION OF
LOMAS & NETTLETON INFORMATION SYSTEMS, INC.
* * * * * *
FIRST: The name of the Corporation is Lomas & Nettleton
Information Systems, Inc.
SECOND: Its principal office in the State of Nevada is located at
One East First Street, Reno, Washoe County, Nevada 89501. The name and address
of its resident agent is THE CORPORATION TRUST COMPANY OF NEVADA, One East First
Street, Reno, Nevada 89501.
THIRD: The nature of the business, or objects or purposes proposed
to be transacted, promoted or carried on are:
To engage in any lawful activity.
FOURTH: The amount of the total authorized capital stock of the
corporation is One Thousand Dollars ($1,000.00) consisting of One Thousand
(1,000) shares of stock of the par value of One Dollar ($1.00) each.
The designations, preferences and relative, participating, option
or other special rights, or qualifications, limitations or restrictions thereof
are as follows:
No shareholders shall be entitled as a matter of right to
subscribe for or receive additional shares of any class of stock of the
corporation, whether now or hereafter authorized, or any bonds, debentures or
other securities convertible into stock, but such additional shares of stock or
other securities convertible into stock may be issued or disposed of by the
Board of Directors to such persons and on such terms as in its discretion it
shall deem advisable.
FIFTH: The governing board of the corporation shall be known as
directors, and the number of directors may from time to time be increased or
decreased in such manner as shall be provided by the By-Laws of this
corporation, provided that the number of directors shall not be reduced to less
than three (3),
EXHIBIT A-2 -- LIS CHARTER
5
<PAGE> 171
except that in cases where all the shares of the corporation are owned
beneficially and of record by either one or two stockholders, the number of
directors may be less than three (3) but not less than the number of
stockholders.
The names and post office addresses of the first Board of
Directors, which shall be three (3) in number, are as follows:
NAME POST OFFICE ADDRESS
Jess Hay 2001 Bryan Tower, Ste. 3600
Dallas, Texas 75201
Ted Enloe 2001 Bryan Tower, Ste. 3600
Dallas, Texas 75201
David Kelly, Jr. 2001 Bryan Tower, Ste. 3600
Dallas, Texas 75201
SIXTH: The capital stock, after the amount of the subscription
price, or par value has been paid in shall not be subject to assessment to pay
the debts of the corporation.
SEVENTH: The name and post office of each of the incorporators
signing the Articles of Incorporation are as follows:
NAME POST OFFICE ADDRESS
B.I. Crenshaw Republic National Bk. Bldg.
Dallas, TX 75201
G.P. Assed Republic National Bk. Bldg.
Dallas, TX 75201
B.J. Wilhite Republic National Bk. Bldg.
Dallas, TX 75201
EIGHTH: The corporation is to have perpetual existence.
EXHIBIT A-2 -- LIS CHARTER
6
<PAGE> 172
NINTH: In furtherance, and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized;
Subject to the By-Laws, if any, adopted by the stockholders, to
make, alter or amend the By-Laws of the corporation.
TENTH: Meetings of stockholders may be held outside the State of
Nevada, if the By-Laws so provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of Nevada
at such place or places as may be designated from time to time by the Board of
Directors or in the By-Laws of the corporation.
ELEVENTH: This corporation reserves the right to amend, alter,
change or repeal by provision contained in the Articles of Incorporation, in the
manner now or hereafter prescribed by statute, or by the Articles of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore
named, for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Nevada, do make and file these Articles of
Incorporation, hereby declaring and certifying that the facts herein stated are
true, and accordingly have hereunto set our hands this 27th day of January,
1983.
-----------------------------
B. I. Crenshaw
-----------------------------
G. P. Assed
-----------------------------
B. J. Wilhite
EXHIBIT A-2 -- LIS CHARTER
7
<PAGE> 173
STATE OF TEXAS.
COUNTY OF DALLAS.
On this 27th day of January, 1983, before me a Notary Public,
personally appeared B. I. Crenshaw, G. P. Assed and B. J. Wilhite, who severally
acknowledged that they executed the above instrument.
----------------------
Joann H. Washington
Notary Public
(NOTARIAL SEAL)
EXHIBIT A-2 -- LIS CHARTER
8
<PAGE> 174
EXHIBIT B TO JOINT
CHAPTER 11 PLAN
LFC LITIGATION TRUST AGREEMENT
dated as of _______, 1996
among
LFC,
Reorganized LFC
and _________, Trustee
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
<PAGE> 175
TABLE OF CONTENTS
<TABLE>
ARTICLE 1
DEFINITIONS
<S> <C>
1.1 Rules of Interpretation............................................ 2
1.2 Definitions........................................................ 2
ARTICLE 2
NATURE OF TRANSFER
2.1 Declaration of Trust............................................... 4
2.2 No Additional Beneficiaries........................................ 4
2.3 Property In Trust.................................................. 4
2.4 Creation of Expense Fund........................................... 4
2.5 Purpose of Trust................................................... 4
2.6 No Reversion to Reorganized LFC.................................... 5
2.7 Instruments of Further Assurance; Information...................... 5
ARTICLE 3
DURATION AND TERMINATION OF TRUST
3.1 Duration........................................................... 5
3.2 Continuance of Trust for Winding Up................................ 5
ARTICLE 4
ADMINISTRATION OF TRUST ESTATE
4.1 Expense Reserve.................................................... 6
4.2 Increase of Expense Reserve Using Trust Assets..................... 6
4.3 Interim Distributions.............................................. 6
4.4 Final Distribution................................................. 7
4.5 Reports to Reorganized LFC......................................... 7
4.6 Income Tax Information............................................. 7
</TABLE>
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
i
<PAGE> 176
<TABLE>
<S> <C>
4.7 Withholding of Taxes and Other Charges............................. 8
4.8 Other Reports...................................................... 8
ARTICLE 5
POWERS OF AND LIMITATIONS ON THE TRUSTEE
5.1 Limitations on Trustee............................................. 8
5.2 Specific Powers and Responsibilities of Trustee.................... 9
5.3 Discretionary Submission of Questions to
Reorganized LFC.................................................... 11
5.4 Additional Powers of Trustee....................................... 11
5.5 Limitations on Powers of Trustee to Deal with
Trust in Non-Fiduciary Capacity.................................... 11
ARTICLE 6
CONCERNING THE TRUSTEE
6.1 Generally.......................................................... 12
6.2 Transferee Liabilities............................................. 12
6.3 Reliance by Trustee................................................ 12
6.4 Indemnification of Trustee......................................... 13
6.5 No Implied Duties.................................................. 13
6.6 Trustee's Lien..................................................... 13
6.7 No Personal Liability.............................................. 13
ARTICLE 7
COMPENSATION OF TRUSTEE
7.1 Amount of Compensation............................................. 14
7.2 Dates of Payment................................................... 14
ARTICLE 8
TRUSTEE AND SUCCESSOR TRUSTEES
8.1 Number of Trustees................................................. 14
8.2 Resignation and Removal............................................ 14
</TABLE>
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
ii
<PAGE> 177
<TABLE>
<S> <C>
8.3 Appointment of Successor Trustee.................................. 14
8.4 Acceptance of Appointment by Successor Trustee.................... 15
8.5 Bonds............................................................. 15
ARTICLE 9
AMENDMENTS
9.1 Amendments........................................................ 15
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Filing Documents.................................................. 15
10.2 Intention of Parties to Establish Trust........................... 16
10.3 Requirement of Undertaking........................................ 16
10.4 Laws as to Construction........................................... 16
10.5 Severability...................................................... 16
10.6 Notices........................................................... 16
10.7 Counterparts...................................................... 17
10.8 Termination....................................................... 17
Exhibit A.................................................................. A-1
</TABLE>
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
iii
<PAGE> 178
LFC LITIGATION TRUST AGREEMENT
THIS AGREEMENT AND DECLARATION OF TRUST is made as of the __th
day of ____, 1996, by and among Lomas Financial Corporation, Inc., a Delaware
corporation and a Debtor and Debtor-in-possession ("LFC"), Reorganized Lomas
Financial Corporation, a Delaware corporation ("Reorganized LFC") and
_______________ (the "Trustee").
R E C I T A L S
A. LFC, and its subsidiaries LMUSA, LIS and LAS filed voluntary
petitions under Chapter 11 of the United States Bankruptcy Code on or about
October 10, 1995.
The Joint Chapter 11 Plan for LFC, LIS and LAS, dated April 8, 1996,
(the "Plan"), a copy of which is attached hereto as Exhibit A, was filed with
the Bankruptcy Court in the proceeding captioned In re Lomas Financial
Corporation, Debtor, Case No. 95-1235 (PJW).
B. The Plan was confirmed by order of the Bankruptcy Court dated _____.
C. The Plan provides that effective on the Effective Date, LFC shall be
deemed to have transferred and assigned to the Trust governed by this Agreement
any and all claims, rights, or causes of action that constitute property of the
Estate or of LFC, whether arising under the Bankruptcy Code or under
nonbankruptcy law, (including all books, records, privileges and defenses
relating thereto) including, without limitation, all rights of setoff and rights
under Section 502(d) of the Bankruptcy Code and all avoiding power actions under
sections 544, 545, 547, 548, 549, 550 and 553 of the Bankruptcy Code or under
applicable nonbankruptcy law as applied through section 544(b) of the Bankruptcy
Code, other than Intercompany Claims. In addition, the Plan provides that on or
as soon as practicable after the Effective Date, Reorganized LFC shall transfer
to the Trust $2 million or such other amount as the LFC Creditors' Committee
shall have specified in writing to LFC and the Bankruptcy Court at least three
(3) Business Days prior to the commencement of the Confirmation Hearing to fund
the administration of the Trust. [On _____, 1996, the LFC Creditors' Committee
specified $____ as such other amount.]
D. The Plan provides that the Trustee will be responsible for pursuing,
as appropriate in accordance with the best interests of LFC, the third party
claims and causes of action assigned to the Trust through litigation or, if
appropriate, settlement and distributing
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
1
<PAGE> 179
any net proceeds of such litigation of settlement to Reorganized LFC for
distribution to holders of Allowed LFC Class 3 Claims under the Plan.
E. The Trust shall be deemed not to be LFC or a successor to LFC, but
only the assignee of the assets transferred to the Trust.
F. It is desired that the mechanism for payment of funds constituting
proceeds of the Trust Assets be specified and that the Trustee's rights, powers,
and duties with respect to the Trust created hereby be established.
G. The Trustee shall be authorized to do and perform such acts, to
execute and deliver such bills of sale, instruments of transfer and other
documents and to engage the services of such agents, attorneys, accountants,
appraisers, consultants and other persons as he may deem necessary or advisable
in order to carry out the purposes of the Trust created hereby.
H. In order to implement the Plan, and in consideration of the promises
and the mutual covenants, terms, and conditions contained herein, the parties
hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Rules of Interpretation. As used herein, the following terms have
the respective meanings specified below and such meanings shall be equally
applicable to both the singular and plural, and masculine and feminine, forms of
the terms defined. In the event that the Trust is administered by a female
Trustee or a corporate Trustee, the use of masculine prepositions and pronouns
herein shall be read as if written in the feminine or neuter forms, as the case
may be. The words "herein," "hereof," "hereto," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
section, subsection or clause contained herein. Captions and headings to
articles, sections, schedules and exhibits are inserted for convenience of
reference only and are not intended to be part of or to affect the
interpretation of this Agreement. The rules of construction set forth in section
102 of the Bankruptcy Code shall apply.
1.2 Definitions. All capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them (a) in the Plan or (b) if not
defined in the Plan, in the Bankruptcy Code. In addition to such other terms as
are defined in other sections of this Agreement, the following terms (which
appear herein as capitalized terms) shall have the following meanings:
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
2
<PAGE> 180
"AGREEMENT" means this instrument as originally executed together with
all exhibits hereto, or as this instrument may from time to time be amended
pursuant to the terms hereof.
"EXPENSE FUND" means the $2 million delivered by LFC to the Trust
pursuant to the terms of SECTIONS 2.1 and 2.4.
"EXPENSE RESERVE" means the reserve created pursuant to SECTION 4.1
comprising of the Expense Fund and any additional contributions as described in
SECTION 4.2.
"INITIAL TRUST ASSETS" means (a) the Expense Fund and (b) all rights,
claims or causes of action that constitute property of the Estate or of LFC,
whether arising under the Bankruptcy Code or under nonbankruptcy law, (including
all books, records, privileges and defenses relating thereto) including, without
limitation, all rights of setoff and rights under Section 502(d) of the
Bankruptcy Code and all avoiding power actions under sections 544, 545, 547,
548, 549, 550 and 553 of the Bankruptcy Code or under applicable nonbankruptcy
law as applied through section 544(b) of the Bankruptcy Code, other than
Intercompany Claims.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended.
"PLAN" has the meaning ascribed to such term in Recital B.
"TAX CODE" means the Internal Revenue Code of 1986, as amended.
"TRUST" means the LFC Litigation Trust as created by this Agreement.
"TRUSTEE" means the original Trustee and any successor thereto.
"TRUST ASSETS" means all property held from time to time by the Trustee
hereunder, including (a) the Initial Trust Assets and (b) any assets, proceeds
or income received or earned from (i) the resolution of the rights, claims or
causes of action comprising the Initial Trust Assets and (ii) from the
investment, sale, exchange or other disposition of any of the Initial Trust
Assets or any other assets or proceeds received or earned through the
resolutions of such rights, claims or causes of action.
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
3
<PAGE> 181
ARTICLE 2
NATURE OF TRANSFER
2.1 Declaration of Trust. LFC hereby transfers the Initial Trust Assets
to the Trustee, in trust, and subject to SECTION 10.8 for the benefit of
Reorganized LFC as trustee for the benefit of certain of its creditors pursuant
to the terms of this Agreement and of the Plan.
2.2 No Additional Beneficiaries. The Trust shall be solely for the
benefit of Reorganized LFC as trustee for the benefit of certain of its
creditors as set forth in the Plan.
2.3 Property In Trust. The Trustee shall hold the legal title to all
property at any time constituting a part of the Trust Assets and hereby declares
that he shall hold such property in trust to be administered and disposed of
pursuant to the terms of this Agreement for the benefit of Reorganized LFC as
trustee for the benefit of certain of its creditors pursuant to the terms of the
Plan. The Trustee is further authorized to make disbursements and payments from
the Trust in accordance with the provisions hereof.
2.4 Creation of Expense Fund. The transfer of the Expense Fund to the
Trustee, in trust, is subject to the terms of this SECTION 2.4. The Expense Fund
is to be used solely to cover the expenses of the Trust as set forth in SECTION
4.1. Neither Reorganized LFC nor any of its subsidiaries, affiliates, agents, or
assigns shall have any obligation to pay any of the expenses of the Trust, other
than the obligation to transfer the Expense Fund to the Trust. Reorganized LFC,
as trustee, shall be entitled to receive, upon termination and winding up of the
Trust pursuant to ARTICLE 3, any amounts remaining in the Expense Fund as set
forth in SECTION 4.1.
2.5 Purpose of Trust. The sole purpose of this Trust is to liquidate
the Trust Assets in a manner calculated to conserve, protect and maximize the
value of the Trust Assets and to collect and distribute the income and proceeds
therefrom to Reorganized LFC, as trustee, in as prompt and orderly a fashion as
possible after the payment of, or provision for, expenses and liabilities. The
Trustee shall report the Trust for Federal income tax purposes as a trust
subject to the provisions of Section 641 of the Tax Code, or as may be otherwise
required or permitted under applicable law. Pursuant to this express purpose,
and subject to the provisions of ARTICLE 5, the Trustee is hereby authorized and
directed to take all reasonable and necessary action to hold, conserve, and
protect the Trust Assets and to collect on, sell, or otherwise liquidate or
dispose of the Trust Assets, and to distribute the net proceeds of such
disposition to LFC, as trustee, in as prompt, efficient and orderly a fashion as
possible in accordance with the provisions of ARTICLE 4.
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
4
<PAGE> 182
2.6 No Reversion to Reorganized LFC. In no event shall any part of the
Trust Assets revert to or be distributed to Reorganized LFC except in its
capacity as trustee for the benefit of certain creditors pursuant to the Plan.
2.7 Instruments of Further Assurance; Information. LFC and such persons
as shall have the right and power after the Effective Date, upon reasonable
request of the Trustee, shall execute, acknowledge, and deliver such further
instruments and do such further acts as may be necessary or proper to
effectively carry out the purposes of this Agreement, to transfer any property
intended to be conveyed hereby, and to vest in the Trustee, his successors and
assigns, the estate, powers, instruments or funds in trust hereunder.
ARTICLE 3
DURATION AND TERMINATION OF TRUST
3.1 Duration. The existence of this Trust shall terminate ten years
from the date hereof, unless an earlier termination is required by the
applicable laws of the State of Delaware, or by the action of Reorganized LFC as
provided in ARTICLE 8 or unless earlier terminated by the distribution of all of
the Trust Assets as provided in SECTION 4.3. Notwithstanding the foregoing, in
the event the Trustee shall have been unable after reasonable efforts to settle
or litigate to a conclusion all causes of action included in the Trust Assets
within the initial ten-year term of the Trust Agreement, the Trustee shall have
the right to extend the term of the Trust for successive one-year renewal terms
until all such causes of action have been settled or litigated to a conclusion
in fulfillment of the purposes of the Trust.
3.2 Continuance of Trust for Winding Up. After the termination of the
Trust and for the purpose of liquidating and winding up its affairs, the Trustee
shall continue to act as such until all duties have been fully performed. Upon
distribution of all of the Trust Assets, the Trustee shall hold the books,
records and files delivered to or created by the Trustee for a period of four
years. At the Trustee's discretion, all of such records and documents may be
destroyed at any time after four years from the distribution of all of the Trust
Assets. Except as otherwise specifically provided herein, upon the distribution
of all of the Trust Assets, the Trustee shall have no further duties or
obligations hereunder except to account as provided in SECTIONS 4.5 and 4.6.
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
5
<PAGE> 183
ARTICLE 4
ADMINISTRATION OF TRUST ESTATE
4.1 Expense Reserve. On the Effective Date, the Trustee shall establish
the Expense Reserve for the payment of all expenses, debts, charges, liabilities
and obligations with respect to the Trust, including without limitation (a) all
costs and expenses, including those of professionals retained by the Trustee,
incurred in connection with any litigation, (b) Trustee's fees, (c) all costs
and expenses incurred in connection with indemnifying the Trustee pursuant to
SECTION 6.4, (d) all fees and expenses, including those of professionals and
other agents and employees retained by the Trustee, incurred in connection with
the performance of the Trustee's duties and obligations including, without
limitation, fees incurred in connection with holding, collecting on, liquidating
or otherwise disposing of the Trust Assets, secretarial and office expenses, all
applicable taxes, and all expenses of distribution and (e) all fees and
expenses, including those of professionals and other agents and employees
retained by the Trustee, incurred in connection with the winding up of the Trust
pursuant to ARTICLE 3. The amount of the Expense Reserve shall initially be the
$2 million Expense Fund received by the Trustee pursuant to the terms of
SECTIONS 2.1 and 2.4. Thereafter, the Expense Reserve shall be funded out of the
proceeds of the Trust Assets as provided in SECTION 4.2. Any remaining balance
in the Expense Reserve, after the payment of all expenses, debts, charges,
liabilities and obligations intended to be paid therefrom, shall be distributed
to Reorganized LFC, as trustee, as provided in SECTIONS 4.3 and 4.4. Any monies
deposited in the Expense Reserve shall be invested in interest-bearing deposits
or investments that satisfy the requirements of SECTION 5.1 and the interest
earned thereon shall be credited to the Expense Reserve.
4.2 Increase of Expense Reserve Using Trust Assets. To the extent the
Trustee in his discretion determines that the amount of funds in the Expense
Reserve is at any time or may become insufficient, the Trustee, in his
discretion and judgment, may from time to time make additional contributions to
the Expense Reserve out of the Trust Assets, for such reasonable amount or
amounts as the Trustee in his discretion and judgment may determine to be
necessary or advisable to meet unliquidated or contingent liabilities of the
Trust. In no event shall the Trustee be required to use his personal funds or
assets for such purposes.
4.3 Interim Distributions. (a) All payments to be made by the Trustee
to Reorganized LFC shall be made only from the assets, income and proceeds of
the Trust and only to the extent that the Trustee shall have received sufficient
assets, income or proceeds of the Trust Assets to make such payments in
accordance with the terms of this SECTION 4.3. Reorganized LFC shall look solely
to the assets, income and proceeds of the Trust for any distributions as herein
provided.
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
6
<PAGE> 184
(b) As often as, in the discretion and judgment of the
Trustee, there shall be an amount of monies in the Trust sufficient to render
feasible a distribution of cash or other property to Reorganized LFC, but
(subject to there being a sufficient amount available pursuant to the terms of
this subsection) no less often than annually, the Trustee shall distribute and
pay, or cause to be distributed and paid, to Reorganized LFC, such aggregate
amount of cash or other non-cash property designated by the Trustee in his
discretion for distribution to Reorganized LFC, if any, as shall then be held in
the Trust, excluding reasonable amounts of cash held in the reserve funds
pursuant to SECTION 4.1 or 4.2 or held for withholding of taxes or other charges
pursuant to SECTION 4.8 or otherwise needed to pay the expenses, debts, charges,
liabilities and obligations of the Trust.
4.4 Final Distribution. If the Trustee determines that all claims,
debts, liabilities, and obligations of the Trust, whether contingent or
noncontingent, disputed or undisputed, liquidated or unliquidated, have been
paid or discharged, and that all the Trust Assets have been converted to cash or
non-cash property designated by the Trustee in his discretion for distribution
to Reorganized LFC, or if the existence of the Trust shall terminate pursuant to
SECTION 3.1 or 3.2, the Trustee shall, as expeditiously as is consistent with
the conservation and protection of the Trust, and notwithstanding the minimum
distribution provisions of SECTION 4.3, distribute the Trust Assets to
Reorganized LFC subject to maintaining a reserve for expenses incurred in
winding up the Trust pursuant to SECTIONS 4.1 and 4.2.
4.5 Reports to Reorganized LFC. As soon as practicable after the end of
each fiscal year of the Trust and after termination of the Trust, the Trustee
shall submit a written report and account to Reorganized LFC showing (a) the
assets and liabilities of the Trust at the end of such fiscal year or upon
termination of the Trust and the receipts and disbursements of the Trustee for
such fiscal year or period, certified by independent public accountants, (b) any
changes in the Trust Assets which have not previously been reported, (c) any
action taken by the Trustee in the performance of his duties under this
Agreement which he has not previously reported and which in his opinion
materially affects the Trust and (d) if applicable, the amount of compensation
to be provided to the Trustee for the upcoming year pursuant to SECTION 7.1. The
Trustee may submit similar reports for such interim periods during the fiscal
year as he in his discretion deems advisable. In addition, the Trustee shall
provide a written report describing any material events concerning the Trust,
the Trustee or the Trust Assets, within fifteen (15) after the occurrence of
such material events. The fiscal year of the Trust shall end on the last day of
December of each year unless the Trustee deems it advisable to establish some
other date as the date on which the fiscal year of the Trust shall end; provided
that establishment of such other date is permissible under the Tax Code.
4.6 Income Tax Information. (a) The Trustee shall, at the time and in
the manner prescribed by the Tax Code, file such tax returns and reports as may
be required by
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
7
<PAGE> 185
applicable law, and shall promptly furnish copies of such returns and reports as
filed to Reorganized LFC.
(b) As soon as practicable after the close of each fiscal
year, the Trustee shall mail to Reorganized LFC a statement showing the dates
and amounts of all distributions made by the Trustee and such other information
as is reasonably available to the Trustee which may be helpful to Reorganized
LFC for the proper reporting of income with respect to assets held by it as
trustee for the benefit of certain creditors pursuant to the Plan.
The Trustee may retain professionals to perform his duties under this
SECTION 4.6, and may rely upon the performance of such professionals with
respect to such duties.
4.7 Withholding of Taxes and Other Charges. The Trustee may withhold
from any amounts distributable at any time to Reorganized LFC such sum or sums
as may be sufficient to pay any tax or taxes or other charge or charges which
have been or may be imposed on Reorganized LFC under the income tax laws of the
United States or of any state or political subdivision or entity by reason of
any distribution provided for in SECTIONS 4.3 and 4.4, whenever such withholding
is required by any law, regulation, rule, ruling, directive or other
governmental requirement, and the Trustee, in the exercise of his discretion and
judgment, may enter into agreements with taxing or other authorities for the
payment of such amounts as may be withheld in accordance with the provisions of
this SECTION 4.7. Notwithstanding the foregoing but without prejudice to the
Trustee's rights hereunder, Reorganized LFC shall have the right with respect to
the United States or any state or political subdivision or entity to contest the
imposition of any tax or other charge by reason of any distribution hereunder.
4.8 Other Reports. The Trustee shall prepare and file audited year-end
and unaudited interim financial reports as may be required by regulatory
authorities, applicable laws, rules or regulations or as the Trustee in his
discretion deems advisable during the fiscal year.
ARTICLE 5
POWERS OF AND LIMITATIONS ON THE TRUSTEE
5.1 Limitations on Trustee. The Trustee shall carry out the purposes of
the Trust and the directions contained herein, and shall not at any time, on
behalf of the Trust or Reorganized LFC, enter into or engage in any business,
and no part of the Trust Assets or the proceeds, revenue or income therefrom
shall be used or disposed of by the Trustee in furtherance of any business. This
limitation shall apply irrespective of whether the conduct
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
8
<PAGE> 186
of any such business activities is deemed by the Trustee to be necessary or
proper for the conservation and protection of the Trust. The Trustee shall
invest any of the funds held in the Trust including, without limitation, any
reserve or escrow funds established pursuant to the terms of this Agreement,
only in (a) interest-bearing deposits or short-term repurchase obligations or
certificates of deposit of federally insured banking institutions having in
excess of $100,000,000 in capital and surplus or (b) marketable direct
obligations of, or guaranteed as to principal and interest by, the United States
of America or any agency or instrumentality thereof. Once such funds are so
invested, the Trustee shall not sell or otherwise liquidate the investment until
such time as such funds are (c) needed to pay expenses incurred pursuant to this
Agreement, or (d) to be distributed pursuant to SECTIONS 4.3 and 4.4; provided,
however, that the Trustee may liquidate such investments if the Trustee
determines in his discretion that liquidation is necessary to protect the Trust
from loss on the amounts invested. The Trustee shall be restricted to the
holding and collection of the Trust Assets and the payment and distribution
thereof for the purposes set forth herein and to the conservation and protection
of the Trust and the administration thereof in accordance with the provisions of
this Agreement. The Trustee shall keep all Trust Assets segregated from and
shall not commingle any Trust Assets with any assets of any other entity,
including any of the Trustee's own assets. The Trustee may not hold stock in or
be an officer or director of Reorganized LFC. The Trustee shall not be or become
an "affiliated person," as that term is defined in the Investment Company Act,
of any of LFC, LMUSA or any of their subsidiaries, except to the extent any
Trustee is deemed to be an "affiliated person" solely by virtue of such
Trustee's status as Trustee.
5.2 Specific Powers and Responsibilities of Trustee. Subject to the
provisions of SECTION 5.1, the Trustee shall have the following specific powers
and responsibilities in addition to any powers and responsibilities conferred
upon him by any other section or provision of this Agreement; provided, however,
that enumeration of the following powers and responsibilities shall not be
considered in any way to limit or control the power of the Trustee to act as
specifically authorized by any other section or provision of this Agreement and
to act in such a manner as the Trustee in his discretion may deem necessary or
appropriate to conserve and protect the Trust Assets or to confer on Reorganized
LFC the benefits intended to be conferred upon it by this Agreement:
(a) To collect and receive any and all money and other
property of whatsoever kind or nature due to or owing or belonging to the Trust,
including accepting securities or other property in settlement of claims of the
Trust or any of the Trust Assets, and to give full discharge and acquittance
therefor;
(b) To retain and set aside such funds out of the Trust as the
Trustee in his discretion shall deem necessary or expedient to pay or provide
for the payment of (i) unpaid
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
9
<PAGE> 187
claims, liabilities, debts or obligations of the Trust and (ii) any and all
expenses of administering the Trust.
(c) To do and perform any acts or things necessary or
appropriate for the conservation and protection of the Trust Assets, including
acts or things necessary or appropriate to maintain assets held by the Trustee
pending sale or other disposition thereof or distribution thereof to Reorganized
LFC and in connection therewith to employ such agents, including counsel,
accountants, experts, advisors or other persons, and to confer upon them such
authority as the Trustee in his discretion may deem expedient, and to pay
reasonable compensation therefor;
(d) To cause any investments of Trust Assets to be registered
and held in his name or in the name of a nominee without increase or decrease of
liability with respect thereto;
(e) To institute, join or defend actions or declaratory
judgments and to take such other action, including settlement of any such action
on any terms deemed reasonable by the Trustee in his discretion to enforce any
instruments, contracts, agreements, or causes of action relating to or forming a
part of the Trust;
(f) In connection with the sale or other disposition or
distribution of any securities held by the Trustee, to comply with the
applicable federal and state securities laws, and to enter into agreements
relating to sale or other distribution thereof;
(g) In the event any of the property which is or may become a
part of the Trust Assets is situated in any state or other jurisdiction in which
the Trustee is not qualified to act as Trustee, to nominate and appoint an
individual or corporate trustee qualified to act in such state or other
jurisdiction in connection with the property situated in the state or other
jurisdiction as a trustee of such property and require from such trustee such
security as may be designated by the Trustee. The trustee so appointed shall
have all the rights, powers, privileges and duties of the Trustee hereunder and
shall be subject to the conditions and limitations of this Trust, except as
modified or limited by the Trustee herein and except where the same may be
modified by the laws of such state or other jurisdiction (in which case, the
laws of the state or other jurisdiction in which such trustee is acting shall
prevail to the extent necessary). Such trustee shall be answerable to the
Trustee herein appointed for all monies, assets and other property which may be
received by it in connection with the administration of such property. The
Trustee hereunder may remove such trustee, with or without cause, and appoint a
successor trustee at any time by the execution by the Trustee of a written
instrument declaring such trustee removed from office and specifying the
effective date and time of removal;
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
10
<PAGE> 188
(h) To perform any act authorized, permitted, or required
under any instrument, contract, agreement, or cause of action relating to or
forming a part of the Trust, whether in the nature of an approval, consent,
demand or notice thereunder or otherwise, unless such act would require the
consent of Reorganized LFC in accordance with the express provisions of this
Agreement;
(i) To file or cause to be filed all required federal state
and local tax filings, make any tax elections available to the Trust under
federal, state or local law, and prepare applications for rulings or other
administrative determinations from federal, state and local tax authorities as
may be reasonably necessary to determine the tax liabilities of the Trust or its
beneficiaries; and
(j) To establish the fees of the Trustee, which shall be the
fees approved by the Bankruptcy Court by approval of this Agreement in
connection with confirmation of the Plan and may thereafter be modified by the
Trustee as provided herein.
5.3 Discretionary Submission of Questions to Reorganized LFC. The
Trustee, in his sole discretion and judgment, may, but shall not be required to,
submit to Reorganized LFC at any time, and from time to time, any question or
questions regarding which the Trustee may desire to have explicit approval of
Reorganized LFC for the taking of any specific action proposed to be taken by
the Trustee with respect to the Trust, or the administration and distribution of
the Trust Assets. All costs and expenses incurred by the Trustee in the exercise
of any right, power or authority conferred by this SECTION 5.3 shall be costs
and expenses of the Trust.
5.4 Additional Powers of Trustee. Subject to the express limitations
contained herein, the Trustee shall have, and may exercise with respect to the
Trust Assets, or any part thereof, and to the administration and distribution of
the Trust Assets, all powers now or hereafter conferred on trustees by the laws
of the State of Delaware. The powers conferred by this SECTION 5.4 in no way
limit any power conferred on the Trustee by any other section hereof but shall
be in addition thereto; provided, however, that the powers conferred by this
SECTION 5.4 are conferred and may be exercised only and solely within the
limitations and for the limited purposes imposed and expressed in ARTICLE 2 and
in SECTION 5.1.
5.5 Limitations on Powers of Trustee to Deal with Trust in
Non-Fiduciary Capacity. The Trustee may not sell property to or borrow property
from the Trust. The Trustee may not acquire property from the Trust unless such
acquisition is approved in advance by (a) the Bankruptcy Court or (b) the
Securities and Exchange Commission pursuant to Section 17(b) of the Investment
Company Act.
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
11
<PAGE> 189
ARTICLE 6
CONCERNING THE TRUSTEE
6.1 Generally. The Trustee accepts and undertakes to discharge the
Trust upon the terms and conditions hereof. The Trustee shall exercise those
rights and powers vested by this Agreement, and use the same degree of care and
skill in his exercise as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs. No provision hereof shall be
construed to relieve the Trustee from liability for his own grossly negligent
action, his own negligent failure to act or his own willful misconduct, except
that:
(a) The Trustee shall not be responsible for the acts or
omissions of any other trustee.
(b) The Trustee shall not be liable except for the performance
of such duties and obligations as are specifically set forth herein, and no
implied covenants or obligations shall be read into this Agreement against the
Trustee.
(c) The Trustee shall not be liable for any error of judgment
made in good faith.
(d) The Trustee shall not be liable with respect to any action
taken or omitted to be taken by him in good faith in accordance with the
direction of Reorganized LFC relating to the time, method, and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred upon the Trustee hereunder. Nothing in this SECTION
6.1(E) shall imply that the Trustee is required to seek consent for any
particular action, and the failure to seek or obtain such consent shall create
no implication with respect to the Trustee's rights or powers to undertake such
action without that consent.
6.2 Transferee Liabilities. If any liability shall be asserted against
the Trust or the Trustee as the transferee of the Trust Assets, on account of
any claimed liability of or through LFC or Reorganized LFC, the Trustee may use
such part of the Trust Assets as may be necessary in contesting any such claimed
liability and in payment, compromise, settlement and discharge thereof on terms
reasonably satisfactory to the Trustee in his discretion. In no event shall the
Trustee be required to use his personal funds or assets for such purposes.
6.3 Reliance by Trustee. Except as otherwise provided in SECTION 6.1:
(a) The Trustee may rely and shall be protected in acting upon
any resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order,
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
12
<PAGE> 190
or other paper or document believed by him to be genuine and to have been signed
or presented by the proper party or parties.
(b) The Trustee may consult with legal counsel or other
professionals to be selected by him, and the Trustee shall not be liable for any
action taken or suffered by him in accordance with the advice of such
professionals.
6.4 Indemnification of Trustee. The Trustee shall be indemnified by and
receive reimbursement from the Trust against and from any and all loss,
liability or damage, including payment of attorneys' fees and other costs of
defending himself, which he may incur or sustain, without negligence or willful
misconduct, in the exercise and performance of any of the powers and duties
hereunder. The Trustee may purchase with assets of the Trust, such insurance as
he feels, in the exercise of his discretion, adequately insures that he shall be
indemnified against any such loss, liability or damage pursuant to this SECTION
6.4. Expenses (including attorneys' fees) and other costs of the Trustee's
defense shall be paid by the Trust in advance of the final disposition of any
claims against the Trustee upon receipt of an undertaking by or on behalf of the
Trustee to repay such amounts if it shall be ultimately determined that he is
not entitled to be indemnified by the Trust as authorized in this SECTION 6.4.
The terms of this SECTION 6.4 shall continue to apply to any former Trustee.
6.5 No Implied Duties. The Trustee shall not manage, control, use,
sell, dispose, collect or otherwise deal with the Trust or otherwise take any
action hereunder except as expressly provided herein, and no implied duties or
obligations shall be read into this Trust Agreement against the Trustee. The
Trustee nevertheless agrees that he will promptly take such action as may be
necessary to duly discharge any liens or encumbrances on any part of the Trust
Assets which result from claims against the Trustee not related to (a) the
ownership or administration of the Trust Asset, (b) any other transaction
pursuant to this Trust Agreement or (c) any document included in the Trust
Assets.
6.6 Trustee's Lien. The Trustee shall have a lien on the Trust Assets
and the proceeds thereof for the amount of any unpaid fees and expenses, and any
liability, loss or expense that may be incurred by him in connection with the
performance of his duties hereunder, including the expense of defending any
action or proceeding instituted against him, with respect to which he is
entitled to indemnification pursuant to SECTION 6.4.
6.7 No Personal Liability. Persons dealing with the Trust must look
solely to the Trust or trust property for the enforcement of any claims against
the Trust or to satisfy any liability incurred by the Trustee to such persons in
carrying out the terms of this Trust, and neither the Trustee nor Reorganized
LFC shall have any personal liability or individual obligation to satisfy any
such liability.
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
13
<PAGE> 191
ARTICLE 7
COMPENSATION OF TRUSTEE
7.1 Amount of Compensation. In lieu of commissions or other
compensation fixed by law for trustees, the Trustee shall receive as
compensation for services as Trustee hereunder, an annual fee equal for each
year to __% of the amount distributed by the Trustee in such year, but in no
event less than [$______] or more than [$_______]. The amount of such
compensation shall be included in the annual report to be sent Reorganized LFC
pursuant to SECTION 4.5.
7.2 Dates of Payment. The minimum compensation payable to the Trustee
pursuant to the provisions of SECTION 7.1 shall be paid quarterly in advance,
and any amounts in excess shall be paid to the Trustee simultaneously with
distributions to LFC.
ARTICLE 8
TRUSTEE AND SUCCESSOR TRUSTEES
8.1 Number of Trustees. Subject to the provisions of SECTION 8.3
relating to the period pending the appointment of a successor Trustee, there
shall always be one and only one Trustee of this Trust. If any corporate Trustee
shall ever change its name, or shall reorganize or reincorporate, or shall merge
with or into or consolidate with any other bank or trust company, such corporate
Trustee shall be deemed to be a continuing entity and shall continue to act as a
Trustee hereunder with the same liabilities, duties, powers, titles, discretion
and privileges as are herein specified for a Trustee.
8.2 Resignation and Removal. The Trustee may resign and be discharged
from the Trust hereby created by giving written notice thereof to Reorganized
LFC at its address as it appears in the records of the Trust. Such resignation
shall become effective on the day specified in such notice or upon the
appointment of such Trustee's successor and such successor's acceptance of such
appointment, whichever is earlier. Any Trustee may be removed by Reorganized LFC
at any time with cause, or at any time after the end of the third full fiscal
year following the date of this Agreement, without cause.
8.3 Appointment of Successor Trustee. Should the Trustee at any time
resign or be removed, or die or become incapable of action, or be adjudged a
bankrupt or insolvent, a vacancy shall be deemed to exist and a successor
Trustee immediately shall be appointed by Reorganized LFC; provided that such
appointment shall be subject to the approval of the
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
14
<PAGE> 192
Bankruptcy Court; and provided, further, that no stockholder, officer or
director of Reorganized LFC shall be appointed as a successor Trustee.
8.4 Acceptance of Appointment by Successor Trustee. Any successor
Trustee appointed hereunder shall execute an instrument accepting such
appointment hereunder and shall deliver one counterpart thereof, to the retiring
Trustee (in the case of a resignation). Thereupon such successor Trustee shall,
without any further act, become vested with all the estates, properties, rights,
powers, trusts, and duties of his predecessor in the Trust with like effect as
if originally named herein; but any retiring Trustee shall nevertheless, when
requested in writing by the successor Trustee, execute and deliver an instrument
or instruments conveying and transferring to such successor Trustee upon the
trust herein expressed, all the estates, properties, rights, powers and trusts
of such retiring Trustee, and shall duly assign, transfer, and deliver to such
successor Trustee all property and money held by him hereunder.
8.5 Bonds. Unless a bond is required by law, no bond shall be required
of the original or any successor Trustee hereunder. If a bond is required by
law, no surety or security with respect to such bond shall be required unless
required by law.
ARTICLE 9
AMENDMENTS
9.1 Amendments. The parties may make and execute amendments to this
Trust Agreement; provided, however, that in no event shall the Trust Agreement
be amended so as to (a) change the purpose of the Trust as set forth in ARTICLE
2 or (b) allow investments of funds included in the Trust Assets except as
permitted in SECTIONS 5.1 and 5.2.
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Filing Documents. This Agreement shall be filed or recorded in the
office of the Secretary of State of the State of Delaware, or in such other
office or offices as the Trustee may determine to be necessary or desirable. A
copy of this Agreement and all amendments thereto shall be filed in the office
of the Trustee and shall be available at all times for inspection during regular
business hours upon reasonable notice by Reorganized LFC. The Trustee shall file
or record any amendment hereto in the same place or places where the original
Agreement has been filed or recorded. The Trustee shall file or record
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
15
<PAGE> 193
any instrument which relates to any change in the office of Trustee in the same
place or places where the original Agreement has been filed or recorded.
10.2 Intention of Parties to Establish Trust. This Agreement is not
intended to create and shall not be interpreted as creating an association,
partnership, or joint venture of any kind.
10.3 Requirement of Undertaking. The Trustee may request any court to
require, and any court may in its discretion require, in any suit for the
enforcement of any right or remedy hereunder, or in any suit against the Trustee
for any action taken or omitted by him as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and such
court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
provided, that the provisions of this SECTION 10.3 shall not apply to any suit
by the Trustee.
10.4 Laws as to Construction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, and the Trustee,
LFC and Reorganized LFC (by its acceptance of any distributions made to it
pursuant to this Agreement) consent and agree that this Agreement shall be
governed by and construed in accordance with such laws. The Trustee and
Reorganized LFC agree and consent that the Bankruptcy Court shall retain
jurisdiction to enforce this Agreement in order to effectuate the provisions of
the Plan.
10.5 Severability. In the event any provision of this Agreement or its
application to any person or circumstances shall be finally determined by a
court of proper jurisdiction to be invalid or unenforceable to any extent, the
remainder of this Agreement, or the application of such provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each provision of this Agreement shall be
valid and enforced to the fullest extent permitted by law.
10.6 Notices. (a) Any notice or other communication by the Trustee to
Reorganized LFC shall be deemed to have been sufficiently given, for all
purposes, if given by being deposited, postage prepaid, in a post office or
letter box addressed to Reorganized LFC at its address as shown in the records
of the Trust.
(b) All notices, requests, consents or other communications to
the Trustee required or permitted under this Agreement shall be in writing
(including facsimile or other similar telecommunication media) and shall be (as
elected by the person giving such notice) hand delivered by messenger or courier
service, telecommunicated or mailed by registered, certified, or overnight mail
(postage prepaid), return receipt requested, to the Trustee at
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
16
<PAGE> 194
[INSERT ADDRESS] or to such other address as the Trustee or any successor
Trustee may designate by notice to Reorganized LFC complying with the terms of
SECTION 10.6(a). Each such notice shall be deemed delivered (i) on the date
delivered if by personal delivery, (ii) on the date telecommunicated with
confirmed answer back if telecommunicated or (iii) on the date upon which the
return receipt is signed or delivery is refused, as the case may be, if mailed.
10.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
10.8 Termination. This Agreement shall terminate and shall be of no
further force or effect in the event that the Effective Date under the Plan does
not occur on or before __________________; provided, however, that such date may
be extended by the Trustee then serving or by order of the Bankruptcy Court.
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
17
<PAGE> 195
IN WITNESS WHEREOF, the parties hereto have executed this Trust
Agreement or caused this Trust Agreement to be duly executed as of the day and
year first written.
LOMAS FINANCIAL CORPORATION
By:
-------------------------------
Name:
Title:
REORGANIZED LOMAS FINANCIAL
CORPORATION
By:
-------------------------------
Name:
Title:
By:
-------------------------------
As Trustee
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
18
<PAGE> 196
LIST OF EXHIBITS
Exhibit A LFC Chapter 11 Plan (See Exhibit I to the Disclosure
Statement).
EXHIBIT B -- LFC LITIGATION TRUST AGREEMENT
19
<PAGE> 197
EXHIBIT II
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
LOMAS MORTGAGE USA, INC., ) Case No. 95-1236 (PJW)
)
Debtor. )
SECOND AMENDED CHAPTER 11 PLAN
OF LOMAS MORTGAGE USA, INC.
BAYARD, HANDELMAN & YOUNG, CONAWAY, STARGATT
MURDOCH, P.A. & TAYLOR
Neil B. Glassman (ID #2087) James L. Patton, Jr. (No. 2202)
Jeffrey M. Schlerf (ID #3047) Robert S. Brady (No. 2847)
902 Market Street, 13th Floor Brendan Linehan Shannon (No. 3136)
P.O. Box 25130 11th Floor, Rodney Square North
Wilmington, Delaware 19899 P.O. Box 391
(302) 655-5000 Wilmington, Delaware 19899-0391
(302) 571-6600
- and - - and -
WEIL GOTSHAL & MANGES LLP DAVIS POLK & WARDWELL
Martin J. Bienenstock Robert J. Levine
Beth Rosen Laureen F. Bedell
767 Fifth Avenue Richard C. Potok
New York, New York 10153 450 Lexington Avenue
(212) 310-8000 New York, New York 10017
(212) 450-4000
Co-Counsel for Statutory
Creditors' Committee Co-Counsel to Debtor and
Debtor-in-Possession
EXHIBIT II TO DISCLOSURE STATEMENT
<PAGE> 198
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1
DEFINITIONS
<S> <C>
1.1 Rules of Interpretation.......................................... 1
1.2 Definitions...................................................... 1
ARTICLE 2
TREATMENT OF ADMINISTRATIVE CLAIMS
AND PRIORITY TAX CLAIMS; CLASSIFICATION AND TREATMENT
OF PRIORITY NON-TAX CLAIMS
2.1 Administrative Claims............................................ 9
2.2 Priority Tax Claims.............................................. 10
2.3 Priority Non-Tax Claims.......................................... 10
ARTICLE 3
CLASSIFICATION OF OTHER CLAIMS AND INTERESTS
3.1 General Rules of Classification.................................. 10
3.2 LMUSA Class 1 Claims............................................. 11
3.3 LMUSA Class 2 Claims............................................. 11
3.4 LMUSA Class 3 Claims............................................. 11
3.5 LMUSA Class 4 Claims............................................. 11
3.6 LMUSA Class 5 Claims............................................. 11
3.7 LMUSA Class 6 Interests.......................................... 11
</TABLE>
EXHIBIT II TO DISCLOSURE STATEMENT
i
<PAGE> 199
<TABLE>
<CAPTION>
ARTICLE 4
TREATMENT OF CLAIMS AND INTERESTS
<S> <C>
4.1 LMUSA Class 1 Claims (Secured Claims)............................ 11
4.2 LMUSA Class 2 (D & O Claims)..................................... 12
4.3 LMUSA Class 3 (Unsecured Claims)................................. 12
4.4 LMUSA Class 4 (Convenience Unsecured Claims)..................... 12
4.5 LMUSA Class 5 (Intercompany Claims).............................. 12
4.6 LMUSA Class 6 (LMUSA Interests).................................. 12
ARTICLE 5
IMPAIRMENT OF CLAIMS AND INTERESTS; VOTING
5.1 Classes Entitled to Vote......................................... 13
5.2 Classes Not Entitled to Vote..................................... 13
ARTICLE 6
CONDITIONS PRECEDENT TO CONFIRMATION
AND EFFECTIVE DATE
6.1 Conditions to Confirmation....................................... 13
6.2 Waiver of Conditions............................................. 14
6.3 Conditions to First Distribution................................. 14
ARTICLE 7
MEANS OF IMPLEMENTING THE PLAN
7.1 Change of Names.................................................. 14
7.2 Amended and Restated Certificates of Incorporation............... 15
7.3 Corporate Action................................................. 15
7.4 Effectiveness of Securities, Instruments and Agreements.......... 15
7.5 Distributions Pursuant to the Plan............................... 15
7.6 Distribution of Fractional Shares of New LMUSA Common Stock...... 16
7.7 Transfer By the Debtor of Certain Property to the Intercompany
Claims Reserve................................................... 17
</TABLE>
EXHIBIT II TO DISCLOSURE STATEMENT
ii
<PAGE> 200
<TABLE>
<S> <C>
7.8 Actions by the Intercompany Claims Agent......................... 17
7.9 Management of the Reorganized Debtor............................. 17
7.10 Liquidation of Non-Reorganization Assets......................... 18
7.11 Cash Distributions............................................... 18
7.12 Resolution of Disputed Claims.................................... 18
7.13 LMUSA Litigation Trust........................................... 18
7.14 Setoff........................................................... 19
7.15 Surrender and Cancellation of Public Debt Securities............. 19
7.16 Certain Assets to be Held in Trust............................... 19
7.17 Allocation of Consideration Between Interest and Principal....... 20
ARTICLE 8
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
8.1 Rejection of Executory Contracts and Unexpired Leases............ 21
8.2 Claims Under Rejected Contracts and Leases....................... 21
ARTICLE 9
EFFECTS OF PLAN CONFIRMATION
9.1 Discharge and Injunction......................................... 21
9.2 Revesting........................................................ 22
9.3 Contributions to LMUSA Litigation Trust and Intercompany
Claims Reserve................................................... 22
9.4 Cancellation and Release of Existing Securities, Agreements and
Liens............................................................ 22
9.5 Retiree Medical Benefits......................................... 23
9.6 Retention of Jurisdiction........................................ 23
9.7 Failure of Bankruptcy Court to Exercise Jurisdiction............. 23
9.8 Statutory Committee.............................................. 24
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Payment of Statutory Fees........................................ 24
10.2 Procedure for Determining Certain Claims......................... 24
10.3 Cramdown......................................................... 24
10.4 Modification of The Plan......................................... 25
</TABLE>
EXHIBIT II TO DISCLOSURE STATEMENT
iii
<PAGE> 201
<TABLE>
<S> <C>
10.5 Withdrawal of Plan............................................... 25
10.6 Substantial Consummation of Plan................................. 25
10.7 Reservation of Rights............................................ 25
10.8 Section 1145 Exemption........................................... 25
10.9 Unclaimed Property............................................... 25
10.10 Section 1146 Exemption........................................... 26
10.11 Record Date for Distribution..................................... 26
10.12 Notices and Distributions........................................ 26
10.13 Saturday, Sunday or Legal Holiday................................ 26
10.14 Time............................................................. 26
10.15 Severability of Provisions....................................... 26
10.16 Binding Effect................................................... 27
10.17 Governing Law.................................................... 27
10.18 Interpretation of Plan and Related Documents..................... 27
10.19 Filing of Additional Documents................................... 27
10.20 Further Assurances............................................... 27
10.21 Incorporation of Travelers Stipulation and Order................. 28
10.22 Withholding and Reporting Requirements........................... 28
</TABLE>
Exhibit A Amended and Restated Certificate of Incorporation
and By-Laws of Reorganized LMUSA
Exhibit B Form of LMUSA Litigation Trust Agreement
EXHIBIT II TO DISCLOSURE STATEMENT
iv
<PAGE> 202
LMUSA CHAPTER 11 PLAN
Lomas Mortgage USA, Inc. and the LMUSA Creditors' Committee (as defined
below) hereby propose the following Chapter 11 Plan pursuant to Chapter 11 of
the Bankruptcy Code.
ARTICLE 1
DEFINITIONS
1.1 Rules of Interpretation. As used herein, the following terms have the
respective meanings specified below and such meanings shall be equally
applicable to both the singular and plural, and masculine and feminine, forms of
the terms defined. The words "herein," "hereof," "hereto," "hereunder" and other
words of similar import refer to this Plan as a whole and not to any particular
section, subsection or clause contained herein. Captions and headings to
articles, sections, schedules and exhibits are inserted for convenience of
reference only and are not intended to be part of or to affect the
interpretation of this Plan. The rules of construction set forth in section 102
of the Bankruptcy Code shall apply.
1.2 Definitions. Any term used herein that is not defined herein but
is defined in the Bankruptcy Code shall have the meaning ascribed to such term
in the Bankruptcy Code. In addition to such other terms as are defined in other
sections of this Plan, the following terms (which appear herein as capitalized
terms) have the following meanings as used in this Plan:
"ADMINISTRATIVE CLAIM" means, a Claim against the Debtor to the extent that
it is of the kind described in section 503(b) of the Bankruptcy Code and is
entitled to priority under section 507(a)(1) of the Bankruptcy Code, including,
without limitation, (a) any actual and necessary expenses of preserving the
Debtor's Estate, (b) any actual and necessary expenses of operating the business
of the Debtor, (c) any actual indebtedness or obligations incurred or assumed by
the Debtor as debtor-in-possession during the pendency of the LMUSA
Reorganization Case in connection with the conduct of its business, (d) any
actual expenses of the Debtor necessary or appropriate to facilitate or
effectuate this Plan, (e) any amount required to be paid by the Debtor under
section 365(b)(1) of the Bankruptcy Code in connection with the assumption of
executory contracts or unexpired leases, (f) all allowances of compensation or
reimbursement of expenses to the extent allowed by the Bankruptcy Court under
sections 330(a), 331 or 503(b)(2), (3), (4) or (5) of the Bankruptcy Code and
(g) any Reclamation Claims. To
EXHIBIT II TO DISCLOSURE STATEMENT
<PAGE> 203
the extent that any item described in clauses (a)-(f) of the preceding sentence
are allocable in part to one or more of the Affiliated Debtors, only the LMUSA
Allocation of such item shall be an Administrative Claim against LMUSA.
"AFFILIATED DEBTORS" means LFC, LIS and LAS, as debtors and
debtors-in-possession in reorganization cases commenced by them under the
Bankruptcy Code.
"ALLOWED" means: (a) with respect to an Administrative Claim of the kind
described in section 503(b)(2), (3), (4) or (5) of the Bankruptcy Code, an
Administrative Claim that has been allowed by a Final Order, to the extent so
allowed; (b) with respect to any other Administrative Claim, an Administrative
Claim with respect to which a request for payment has been timely filed pursuant
to SECTION 10.2 or with respect to which no such filing is necessary, and to
which no objection has been timely filed; (c) with respect to a Disputed Claim,
a claim that has been allowed by a Final Order, to the extent so allowed; or (d)
with respect to any other Claim, a Claim with respect to which a proof of claim
has been timely filed by the Bar Date and to which no objection has been timely
filed, or if no proof of claim was so filed, which was or hereafter is listed on
the Schedules as liquidated in amount and not disputed or contingent.
"AMENDED AND RESTATED CERTIFICATE OF INCORPORATION" means, the certificate
of incorporation and by-laws of Reorganized LMUSA, substantially in the forms
attached hereto as EXHIBIT A or in forms otherwise agreed to by the Proponents
prior to the Confirmation Date, provided that the LMUSA Creditors' Committee
shall have the right to change Article Eleventh thereof up to the third
Business Day prior to the commencement of the Confirmation Hearing.
"BALLOT" means the ballot and/or master ballot, as is appropriate in the
circumstances, distributed to a holder of a LMUSA Class 1, 2, 3 or 4 Claim for
the purpose of, among other things, voting on this Plan.
"BANKRUPTCY CODE" means the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq., as amended by the Bankruptcy Reform Act of 1994, and as
amended from time to time, to the extent applicable to the LMUSA Reorganization
Case.
"BANKRUPTCY COURT" means the United States Bankruptcy Court for the District
of Delaware or such other court as may hereafter exercise original jurisdiction
over the LMUSA Reorganization Case or any proceeding therein.
"BANKRUPTCY RULES" means the Bankruptcy Rules promulgated under 28 U.S.C.
Section 2075 and the local rules and standing orders of the Bankruptcy Court, as
amended from time to time, to the extent applicable to the LMUSA Reorganization
Case.
"BAR DATE" means the dates by which the Bankruptcy Court has ordered that
proof of certain Claims must be filed.
EXHIBIT II TO DISCLOSURE STATEMENT
2
<PAGE> 204
"BUSINESS DAY" means any day other than a Saturday, Sunday or federal
holiday.
"CAMPUS AUCTION ORDER" means that certain Order Under 11 U.S.C. Sections
363 and 105 Authorizing and Approving (i) Real Estate Agreement Among Benton
Properties, LMUSA, LFC and LIP, (ii) Bid Procedures, (iii) Due Diligence
Reimbursement Fee and (iv) Notice of Hearing of Final Approval Order, which was
entered by the Bankruptcy Court on May 31, 1996.
"CASH COLLATERAL ORDER" means that certain Stipulation and Order Pursuant
to Sections 361, 362, 363 and 506 of the Bankruptcy Code and Rules 2002 and
4001 of the Bankruptcy Rules Concerning Cash Collateral and Other Matters,
which was entered by the Bankruptcy Court on January 3, 1996.
"CLAIM" means a "claim" as defined in section 101(5) of the Bankruptcy Code
against the Debtor, property of the Debtor or property of the Estate, arising
before the Confirmation Date.
"CLASS" means Claims or Interests classified together in a class as
designated pursuant to ARTICLE 3 of this Plan.
"CONFIRMATION" means entry of the Confirmation Order.
"CONFIRMATION DATE" means the date on which the Confirmation Order is
entered on the docket by the Clerk of the Bankruptcy Court.
"CONFIRMATION HEARING" means the hearing with respect to this Plan required
by section 1128(a) of the Bankruptcy Code.
"CONFIRMATION ORDER" means the order of the Bankruptcy Court, in form and
substance reasonably satisfactory to the Proponents, confirming this Plan
pursuant to section 1129 of the Bankruptcy Code.
"CONVENIENCE UNSECURED CLAIM" means any Unsecured Claim (other than any
Unsecured Claim under or evidenced by the LMUSA Senior Notes) in an amount not
greater than $2,000 or as to which the holder has agreed in writing to reduce
such Claim to such amount and to release and to waive any further or additional
claim against the Debtor and the Estate.
"D & O CLAIM" means a pre-petition claim of a present or former officer,
director or employee of the Debtor or one of the Affiliated Debtors, or any of
their respective subsidiaries, against the Debtor in respect of indemnification
and/or contribution for defense costs or liabilities pursuant to the certificate
of incorporation or by-laws of the Debtor, an employment agreement with the
Debtor, or applicable law, in each case relating to actual or alleged conduct or
events occurring prior to the Petition Date.
"DEBTOR" means LMUSA, as debtor and debtor-in-possession in the LMUSA
Reorganization Case.
"DISCLOSURE STATEMENT" means the Disclosure Statement pertaining to this
Plan in the form approved for distribution by the Bankruptcy Court, together
with any exhibits, schedules, appendices or documents attached thereto or
otherwise incorporated by reference therein, as the same may be amended,
modified, restated or supplemented from time to time.
EXHIBIT II TO DISCLOSURE STATEMENT
3
<PAGE> 205
"DISPUTED CLAIM" means a Claim (a) that the Debtor or the Reorganized Debtor
has scheduled as unliquidated, disputed, contingent or subject to offset and
which has not been allowed by a Final Order or (b) as to which an objection or
motion to estimate for purposes of allowance in the LMUSA Reorganization Case
has been filed, but has not been withdrawn or resolved by a Final Order.
"DISTRIBUTION DATE" means, with respect to an Allowed Claim, the later of
(a) the Effective Date and (b) the date on which such Claim becomes an Allowed
Claim and all other conditions to the initial distribution with respect to such
Claim shall have been satisfied.
"EFFECTIVE DATE" means the Confirmation Date unless by written notice to the
Debtor and the Bankruptcy Court prior to the conclusion of the Confirmation
Hearing, the LMUSA Creditors' Committee has elected to require that the
"Effective Date" shall be deferred until the occurrence of events specified in
the notice.
"ESTATE" means, the estate of the Debtor, created in the LMUSA
Reorganization Case pursuant to section 541 of the Bankruptcy Code.
"FINAL ORDER" means an order or judgment of the Bankruptcy Court or any
other court exercising jurisdiction over the subject matter and the parties,
that has not been reversed, stayed, modified, amended or vacated and as to which
(a) no appeal, petition for certiorari, or request for reargument or other
review or rehearing has been requested or is pending, (b) any right to appeal,
petition for certiorari or seek reargument, other review or rehearing has been
fully and effectively waived in writing or (c) if an appeal, reargument, writ of
certiorari, review or rehearing thereof has been sought, the order or judgment
has been affirmed by the highest court to which the order was appealed or from
which the reargument, review or rehearing was sought, or by which the petition
for writ of certiorari has been denied, and, in each of the above cases, the
time to take any further appeal or to seek certiorari or further reargument,
review or rehearing has expired.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
political subdivision thereof, any federal or state court or any other agency or
authority exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"INTERCOMPANY CLAIM" means a Claim by the Debtor, any Affiliated Debtor or
any of their respective subsidiaries against the Debtor or any Affiliated
Debtor, including without limitation a Claim that any transfer to or for the
benefit of, or other transaction with or for the benefit of, the Debtor or such
Affiliated Debtor was void or should be
EXHIBIT II TO DISCLOSURE STATEMENT
4
<PAGE> 206
avoided pursuant to section 544, 547, 548 or 549 of the Bankruptcy Code and/or
offset pursuant to section 553 of the Bankruptcy Code.
"INTERCOMPANY CLAIMS AGENT" means the trustee or escrow agent under the
Intercompany Claims Agreement, if any, appointed by the LMUSA Creditors'
Committee and the LFC Creditors' Committee in accordance with section
1123(b)(3)(B) of the Bankruptcy Code by order of the Bankruptcy Court as the
Person responsible for (a) ensuring the allocation and distribution of the
assets in the Intercompany Claims Reserve to the appropriate party or parties
and (b) such other duties as may be specified in the Intercompany Claims
Agreement or by the Bankruptcy Court, and such Person's successors in such
capacity.
"INTERCOMPANY CLAIMS AGREEMENT" means a trust or escrow agreement among LFC,
LMUSA, the LFC Creditors' Committee, the LMUSA Creditors' Committee and the
Intercompany Claims Agent agreed upon among the parties thereto and approved by
the Bankruptcy Court.
"INTERCOMPANY CLAIMS RESERVE" means a trust or escrow arrangement that may
be established pursuant to SECTION 6.3.
"INTEREST" means any right arising from the ownership, beneficial or
otherwise, of Old LMUSA Common Stock.
"KPMG" means KPMG Peat Marwick LLP.
"LAS" means Lomas Administrative Services, Inc., a Nevada corporation that
was in dissolution proceedings at the Petition Date and was a wholly-owned
subsidiary of LFC and a debtor in a reorganization case under Chapter 11 of the
Bankruptcy Code.
"LFC" means Lomas Financial Corporation, a Delaware corporation and a debtor
in a reorganization case under Chapter 11 of the Bankruptcy Code.
"LFC CREDITORS' COMMITTEE" means the official committee of unsecured
creditors of LFC, consisting of representatives of holders of debt obligations
of LFC, which was appointed by the United States Trustee for the District of
Delaware on March 15, 1996.
"LIP" means Lomas Investment Properties, Inc., a Nevada corporation and a
wholly-owned indirect subsidiary of LFC.
"LIS" means Lomas Information Systems, Inc., a Nevada corporation and a
wholly-owned subsidiary of LFC and a debtor in a reorganization case under
Chapter 11 of the Bankruptcy Code.
EXHIBIT II TO DISCLOSURE STATEMENT
5
<PAGE> 207
"LLG LANDS" means LLG Lands, Inc., an Arkansas corporation and a
wholly-owned subsidiary of LFC.
"LMUSA" means Lomas Mortgage USA, Inc., a Connecticut corporation and a
wholly-owned subsidiary of LFC and Debtor in the LMUSA Reorganization Case.
"LMUSA ALLOCATION" means, with respect to claims of the type described in
clauses (a) - (f) of the definition of "Administrative Claim" that are
attributable only in part to LMUSA, such percentage of those administrative
claims as is recommended by KPMG, if LFC and LMUSA or their respective
creditors' committees do not agree with KPMG's recommendation, as determined by
agreement, or, failing such agreement, by the Bankruptcy Court.
"LMUSA CREDITORS' COMMITTEE" means the statutory creditors' committee of
LMUSA, consisting of representatives of holders of debt obligations of LMUSA,
which was appointed by the United States Trustee for the District of Delaware on
March 15, 1996.
"LMUSA DISTRIBUTABLE CASH" means (a) on the Effective Date, all cash of
LMUSA, after giving effect to (i) a payment, if any, or other transfer, if any,
by LMUSA into the Intercompany Claims Reserve, if any, (ii) appropriate reserves
for Administrative Claims, Priority Claims, Secured Claims (including a reserve
of $11,500,000 for the Travelers Secured Claim) and Convenience Unsecured
Claims, (iii) the amount placed in the LMUSA Litigation Trust pursuant to
SECTION 7.13 and (iv) a reserve for working capital equal to $5,000,000 or such
other amount as shall be specified by the LMUSA Creditors' Committee in writing
to the Debtor and the Bankruptcy Court at least three (3) Business Days prior to
the commencement of the Confirmation Hearing and (b) after the Effective Date,
all subsequently received net cash proceeds from the disposition of, or net
income on, Non-Reorganization Assets of LMUSA or Reorganized LMUSA and all cash
subsequently distributed to Reorganized LMUSA from the Intercompany Claims
Reserve or the LMUSA Litigation Trust.
"LMUSA INDENTURE" means the indenture dated as of October 1, 1992 between
LMUSA and Bankers Trust Company, pursuant to which the LMUSA Senior Notes were
issued.
"LMUSA INDENTURE TRUSTEE" means the trustee under the LMUSA Indenture.
"LMUSA LITIGATION TRUST" means the trust established pursuant to SECTION
7.13.
"LMUSA LITIGATION TRUST AGREEMENT means a trust agreement substantially in
the form of EXHIBIT B.
EXHIBIT II TO DISCLOSURE STATEMENT
6
<PAGE> 208
"LMUSA LITIGATION TRUSTEE" means the Person designated by the LMUSA
Creditors' Committee on or before the Confirmation Date to act as trustee of the
LMUSA Litigation Trust.
"LMUSA REORGANIZATION CASE" means the reorganization case under Chapter 11
of the Bankruptcy Code commenced by LMUSA.
"LMUSA SENIOR NOTES" means LMUSA's $150 million 9.75% Senior Notes due
October 1, 1997 and LMUSA's $190,000,000 10.25% Senior Notes due October 1,
2002.
"LOMAS CAMPUS" means certain properties, as more fully described in the
Campus Auction Order, situated in Dallas County, Texas and known and referred
to as 1420, 1502, 1516, 1525, 1526, 1600, 1601, 1750 and 1770 Viceroy Drive and
8600 Harry Hines Boulevard.
"LOMAS INSURANCE" means Lomas Insurance Services, Inc., a Connecticut
corporation and a wholly-owned subsidiary of LMUSA.
"MONTHLY DISTRIBUTION DATE" means the fifteenth (15th) day of each month,
starting with the first such date that is at least thirty (30) days after the
Effective Date.
"NEW LMUSA COMMON STOCK" means the Common Stock, par value $.10 per share,
of Reorganized LMUSA, which class of common stock shall have the rights, powers
and preferences set forth in the Amended and Restated Certificate of
Incorporation of LMUSA.
"NON-REORGANIZATION ASSETS" means all tangible and intangible assets of the
Estate other than its Reorganization Assets.
"OLD LMUSA COMMON STOCK" means the shares of common stock, par value $1.00
per share, of LMUSA outstanding on the Petition Date.
"PENSION PLAN" means the Lomas Financial Group Pension Plan as restated
effective January 1, 1991.
"PERSON" means any individual, corporation, partnership, association, trust
or any other entity or organization of any kind or character, including a
Governmental Authority.
"PETITION DATE" means the date on which the petition for relief commencing
the LMUSA Reorganization Case was filed, namely October 10, 1995.
"PLAN" means this Chapter 11 Plan, and any exhibits and schedules attached
hereto (that are hereby incorporated by reference), in each case as the same may
be amended, modified or supplemented from time to time in accordance with the
provisions set forth herein, the Bankruptcy Code and the Bankruptcy Rules. This
Chapter 11 Plan will be referred to herein as "the Plan" or "this Plan."
EXHIBIT II TO DISCLOSURE STATEMENT
7
<PAGE> 209
"PRIORITY CLAIM" means a Priority Tax Claim or a Priority Non-Tax claim.
"PRIORITY NON-TAX CLAIM" means any Claim to the extent entitled to priority
in payment under section 507(a)(3),(4),(5) or (6) of the Bankruptcy Code.
"PRIORITY TAX CLAIM" means any Claim to the extent entitled to priority in
payment under section 507(a)(8) of the Bankruptcy Code.
"PROFESSIONALS" means those persons retained at the expense of the Estate of
the Debtor in the LMUSA Reorganization Case pursuant to an order of the
Bankruptcy Court in accordance with sections 327, 328, or 1103 of the Bankruptcy
Code.
"PROPONENTS" means the Debtor and the LMUSA Creditors' Committee.
"PRO RATA" means bearing the same proportion that the amount of an Allowed
Claim in a particular Class bears to the total aggregate amount of Allowed
Claims in such Class.
"PUBLIC DEBT SECURITIES" means the LMUSA Senior Notes.
"RECORD DATE" means, for purposes of voting, the date on which the
Bankruptcy Court approves the Disclosure Statement, and for purposes of
distribution, the Confirmation Date.
"RECLAMATION CLAIM" means, a Claim against the Debtor that is entitled to
priority status under sections 546(c) and 507(a)(1) of the Bankruptcy Code on
the basis of a seller's statutory or common law right to reclaim goods sold to
the Debtor in the ordinary course of such seller's business.
"RELATED DOCUMENT" means each instrument, agreement and document to be
issued or executed in connection with this Plan.
"REORGANIZATION ASSETS" means the direct or indirect right, title and
interest of LMUSA in and to (i) the stock and assets of STL and LLG Lands, and
any other real estate assets that are determined by the LMUSA Creditors'
Committee (before the Effective Date) or the Reorganized LMUSA Board (on or
after the Effective Date) to be appropriate to hold for longer term development
and/or sale, (ii) the stock and assets of LMUSA's insurance agency subsidiaries
if the LMUSA Creditors' Committee (prior to the Effective Date) or the
Reorganized LMUSA Board (after the Effective Date) determines that such stock or
assets should be held as an ongoing business of Reorganized LMUSA rather than
sold, (iii) the working capital reserve retained by the
EXHIBIT II TO DISCLOSURE STATEMENT
8
<PAGE> 210
Reorganized Debtor on the Effective Date, and (iv) the income derived from, and
proceeds of any disposition of, the foregoing.
"REORGANIZED LMUSA BOARD" means the board of directors of Reorganized LMUSA
on and after the Effective Date.
"REORGANIZED DEBTOR" or "REORGANIZED LMUSA" means LMUSA on and after the
Effective Date.
"SCHEDULES" means the Debtor's Schedules of Assets and Liabilities, that
have been filed with the Clerk of the Bankruptcy Court pursuant to Bankruptcy
Rule 1007 as the same may be amended from time to time.
"SECURED CLAIM" means a Claim that constitutes a secured claim under section
506(a) or 1111(b) of the Bankruptcy Code.
"STL" means ST Lending, Inc., a Delaware corporation and a wholly-owned
subsidiary of LMUSA.
"TRAVELERS" means The Travelers Insurance Company and its successors.
"TRAVELERS SECURED CLAIM" means the Claim of Travelers against LMUSA to the
extent secured by a valid, perfected security interest over 1420, 1600 and 1750
Viceroy Drive, Dallas, Texas and certain personal property located at such
locations.
"UNSECURED CLAIM" means a Claim that is not a Secured Claim, an
Administrative Claim, a Priority Claim, an Intercompany Claim or a D & O Claim.
"VOTING DEADLINE" means the date by which the Ballots for acceptance or
rejection of this Plan must be received by the tabulating agent to be counted.
ARTICLE 2
TREATMENT OF ADMINISTRATIVE CLAIMS
AND PRIORITY TAX CLAIMS; CLASSIFICATION AND TREATMENT
OF PRIORITY NON-TAX CLAIMS
2.1 Administrative Claims. Each Allowed Administrative Claim shall
be paid in full in cash (a) at the option of the Debtor (before the Effective
Date) or the Reorganized Debtor (on or after the Effective Date) (i) in the
ordinary course of business as such Claim matures or (ii) on the Distribution
Date for such Claim, unless the holder
EXHIBIT II TO DISCLOSURE STATEMENT
9
<PAGE> 211
thereof agrees or has agreed to less favorable treatment of such Claim
(including, without limitation, any treatment that may be provided for in any
documentation, statute or regulation governing such Claim) or (b) on such other
date as the Bankruptcy Court may order. Notwithstanding the foregoing, the
Debtor's or Reorganized Debtor's failure to object to any Administrative Claim
in the LMUSA Reorganization Case or payment of such Claim shall be without
prejudice to the Reorganized Debtor's right to contest, request disgorgement of
or otherwise defend against such Claim in any forum.
2.2 Priority Tax Claims. Each Allowed Priority Tax Claim shall be paid in
full in cash on the Distribution Date for such Claim, unless the holder thereof
agrees to less favorable treatment of such Claim (including, without limitation,
any treatment that may be provided for in any documentation, statute or
regulation governing such Claim); provided, however, that the Debtor may elect
to have any Allowed Priority Tax Claim paid in deferred cash payments over a
period not to exceed six (6) years after the date of assessment of such Priority
Tax Claim, of a value, as of the Effective Date, equal to the amount of such
Allowed Priority Tax Claim, which option shall be exercised by written notice
given to the holder of a Priority Tax Claim delivered on or before the
Distribution Date specifying a payment schedule, a rate of interest, and the
date by which an objection to such treatment must be filed and served. The
Reorganized Debtor shall have the right to prepay any Allowed Priority Tax
Claim, in whole or in part at any time without penalty.
2.3 Priority Non-Tax Claims. (a) Classification. LMUSA Class A shall consist
of all Priority Non-Tax Claims against LMUSA.
(b) Treatment. LMUSA Class A Claims are not impaired. Each
Allowed Priority Non-Tax Claim shall be paid in full in cash on the Distribution
Date for such Claim or, at the option of the Reorganized Debtor, in the ordinary
course of business as such Claim matures, unless the holder agrees or has agreed
to less favorable treatment of such Claim (including, without limitation, any
treatment that may be provided for in any documentation, statute or regulation
governing such Claim).
ARTICLE 3
CLASSIFICATION OF OTHER CLAIMS AND INTERESTS
3.1 General Rules of Classification. Unless otherwise provided in this Plan,
a Claim or Interest that is properly included in more than one Class is in a
Class to the extent that it qualifies within the description of such Class and
is in a different Class to the extent that it qualifies within the description
of such different Class, but the same portion of a Claim or Interest may not be
in more than one Class.
EXHIBIT II TO DISCLOSURE STATEMENT
10
<PAGE> 212
3.2 LMUSA Class 1 Claims. LMUSA Class 1 shall consist of all Secured
Claims against LMUSA. If and to the extent that, for purposes of technical
compliance with the Bankruptcy Code, any member of this Class is entitled to be
included in a separate Class, such member automatically shall be deemed to be a
member of a separate Class to be identified by the number of this Class and next
unused alphabetical letter, starting with the letter "A." The LMUSA Class 1A
Claim shall consist of the Travelers Secured Claim.
3.3 LMUSA Class 2 Claims. LMUSA Class 2 shall consist of all D & O Claims
against LMUSA.
3.4 LMUSA Class 3 Claims. LMUSA Class 3 shall consist of all Unsecured
Claims against LMUSA and, in addition, all Convenience Unsecured Claims against
LMUSA if they have been reclassified pursuant to SECTION 5.1.
3.5 LMUSA Class 4 Claims. LMUSA Class 4 shall consist of all Convenience
Unsecured Claims against LMUSA.
3.6 LMUSA Class 5 Claims. LMUSA Class 5 shall consist of all Intercompany
Claims against LMUSA.
3.7 LMUSA Class 6 Interests. LMUSA Class 6 shall consist of all Interests in
LMUSA.
ARTICLE 4
TREATMENT OF CLAIMS AND INTERESTS
4.1 LMUSA Class 1 Claims (Secured Claims). (a) LMUSA Class 1A (Travelers
Secured Claim). The LMUSA Class 1A Claim is impaired.
(i) Provided that the closing of the sale of the Lomas Campus occurs in
accordance with the terms of the Travelers Stipulation and Order, the
holder of the Travelers Secured Claim is, pursuant to the Travelers
Stipulation and Order, entitled to receive from the Debtor at such
closing (A) $11,450,000 (subject solely to closing prorations relating
solely to the Travelers Properties, which closing prorations shall not
include personal property taxes of any nature) plus (B) 50% of the
excess, if any, of the amount actually paid at such closing over and
above $23,000,000 (which excess shall be net of up to $250,000 payable,
if applicable, to Benton properties as a due diligence reimbursement
fee).
EXHIBIT II TO DISCLOSURE STATEMENT
11
<PAGE> 213
(ii) If the closing of the sale of the Lomas Campus does not occur in
accordance with the provisions of the Travelers Stipulation and Order,
the holder of the Travelers Secured Claim shall be, pursuant to
paragraph 4 of the Travelers Stipulation and Order, entitled to receive
on the later to occur of the Effective Date and the date of the
delivery of the Travelers Termination Notice, the sum of $11,500,000.
If, for any reason or under any circumstance, such payment shall not
have been made in full to the holder of the Travelers Secured Claim on
or prior to January 31, 1997, time being of the essence, then the
holder of the Travelers Secured Claim shall be, pursuant to the
Travelers Stipulation and Order, entitled, for each day from and after
January 31, 1997 until but not including the date of satisfaction of
the Travelers Secured Claim (in accordance with the provisions of this
Plan and the Travelers Stipulation and Order) in full, to receive
interest on the Travelers Secured Claim, at a rate of six and one-half
percent (6.5%) per annum, payable in arrears on the first day of each
month, commencing on February 1, 1997, and continuing to, but
excluding, the date of such satisfaction of the Travelers Secured
Claim. For example, if the Travelers Secured Claim were to be satisfied
in full on March 10, 1997, then Travelers would be entitled to one (1)
day of interest for January 1997, payable on February 1, 1997,
twenty-eight (28) days of interest for February 1997, payable on March
1, 1997, and nine (9) days of interest for March 1997, payable on March
10, 1997.
(b) In accordance with the terms of the Travelers Stipulation and
Order, the LMUSA Class 1A Claim has been Allowed in an amount equal to the cash
payment to be made pursuant to SECTION 4.1(a) above. If the closing of the sale
of the Lomas Campus and the related payments to Travelers have been completed
in accordance with the Travelers Stipulation and Order, the LMUSA Class 1A
Claim shall be deemed to have been satisfied and no further amount shall be
payable in respect thereof under this Plan.
(c) LMUSA Class 1B (Other Secured Claims). LMUSA Class 1B Claims
are impaired. Each holder of an Allowed LMUSA Class 1B Claim shall receive (i)
the property of LMUSA in which such holder has a valid, perfected security
interest, (ii) a promissory note executed by Reorganized LMUSA providing for
deferred cash payments satisfying the requirements of section
1129(b)(2)(A)(i)(II) of the Bankruptcy Code secured by a lien on assets of
Reorganized LMUSA satisfying the requirements of section 1129(b)(2)(A)(i)(I) of
the Bankruptcy Code or (iii) cash in an amount equal to such Allowed LMUSA Class
1B Claim.
4.2 LMUSA Class 2 (D & O Claims). LMUSA Class 2 Claims are impaired.
Holders of Allowed LMUSA Class 2 Claims shall receive no distribution from LMUSA
in respect of such Claims but rather shall have recourse to the insurance
policies maintained by LMUSA and/or LFC to the extent such policies cover their
claims.
4.3 LMUSA Class 3 (Unsecured Claims). LMUSA Class 3 Claims are impaired.
Each holder of an Allowed LMUSA Class 3 Claim shall be entitled to receive such
holder's Pro Rata share of (a) 3,000,000 shares of New LMUSA Common Stock and
(b) LMUSA Distributable Cash.
4.4 LMUSA Class 4 (Convenience Unsecured Claims). LMUSA Class 4 Claims are
impaired. Each holder of a LMUSA Class 4 Claim shall receive thirty-five percent
(35%) of the Allowed amount of such Claim in cash on the Distribution Date for
such Claim.
4.5 LMUSA Class 5 (Intercompany Claims). LMUSA Class 5 Claims are impaired.
Distributions in respect of the Allowed amounts of LMUSA Class 5 Claims will be
made in accordance with the provisions of SECTION 6.3.
4.6 LMUSA Class 6 (LMUSA Interests). LMUSA Class 6 Interests are impaired.
On the Effective Date, all LMUSA Interests will be cancelled and no
distributions under this Plan will be made in respect thereof.
EXHIBIT II TO DISCLOSURE STATEMENT
12
<PAGE> 214
ARTICLE 5
IMPAIRMENT OF CLAIMS AND INTERESTS; VOTING
5.1 Classes Entitled to Vote. Holders of record of Allowed Claims as
of the Record Date for voting in LMUSA Classes 1, 2, 3, and 4 are impaired
hereunder and are entitled to vote to accept or reject this Plan. By voting to
accept this Plan, a holder of a Claim expressly waives any right it or its
successors or assigns may have to change or withdraw its acceptance after the
Voting Deadline unless the Bankruptcy Court determines that (a) the disclosure
received by such holder was not adequate as required by section 1126(b) of the
Bankruptcy Code or (b) this Plan has been modified in a manner that materially
and adversely changes the treatment of the holder's Claim or Interest. If the
majority of holders of LMUSA Class 4 Claims vote against the Plan, then the
LMUSA Class 4 Claims will be reclassified as LMUSA Class 3 Claims.
5.2 Classes Not Entitled to Vote. (a) LMUSA Class 5 Claims are all
Intercompany Claims held by LFC and/or its subsidiaries (other than the Debtor
and its subsidiaries), all of which have approved this Plan; consequently, their
votes on this Plan will not be solicited.
(b) Holders of LMUSA Class 6 Interests are impaired, will receive no
distributions hereunder and are deemed to reject this Plan pursuant to section
1126(g) of the Bankruptcy Code; consequently, their votes on this Plan have not
been and will not be solicited.
ARTICLE 6
CONDITIONS PRECEDENT TO CONFIRMATION
AND EFFECTIVE DATE
6.1 Conditions to Confirmation. There shall be conditions precedent to
Confirmation of this Plan that:
(a) the Bankruptcy Court shall have entered an order or orders
approving all relevant agreements, trustees, agents and mediators and
authorizing LMUSA, the Intercompany Claims Agent, if any, and the LMUSA
Litigation Trustee to make the transfers of property contemplated to be made
by such parties pursuant to this Plan;
(b) the LMUSA Creditors' Committee shall have (i) furnished the
names of the individuals who will serve as the members of the Reorganized
LMUSA
EXHIBIT II TO DISCLOSURE STATEMENT
13
<PAGE> 215
Board and as the principal executive officers of Reorganized LMUSA and (ii)
furnished new names for Reorganized LMUSA and its subsidiaries as required
by SECTION 7.1; and
(c) any no-action letters from the Securities and Exchange
Commission, rulings from the Internal Revenue Service or other government
approvals or interpretations required in connection with the transactions
contemplated by this Plan shall have been obtained.
6.2 Waiver of Conditions. Any and all conditions precedent
to confirmation may be waived by the LMUSA Creditors' Committee, other than the
conditions set forth in SECTIONS 6.1(a) and 6.1(b).
6.3 Conditions to First Distribution. There shall be conditions
precedent to the first distribution to holders of LMUSA Class 3 Claims that:
(a) the LFC Creditors' Committee and the LMUSA Creditors' Committee
shall have agreed to (i) a settlement of the Intercompany Claims or (ii) the
creation of an Intercompany Claims Reserve to be funded by the Debtor and/or
LFC transferring assets agreed on by such parties pending the resolution of
the Intercompany Claims through litigation, mediation or settlement, or
(b) the Bankruptcy Court shall have entered an order either (i)
determining the Allowed amounts and types of the Intercompany Claims against
LMUSA or (ii) estimating the Allowed amounts and types of such Intercompany
Claims or the maximum Allowed amounts thereof for the purpose of (A)
creating an Intercompany Claims Reserve serving the purposes described in
SECTION 6.3(a)(ii) above or (B) establishing distribution holdbacks, as the
Bankruptcy Court shall direct. For purposes of distribution holdbacks, to
the extent that any Intercompany Claim may be Allowed as an unsecured
pre-petition Claim, the holder shall receive distributions of comparable
value to those received in respect of LMUSA Class 3 Claims; to the extent it
may be Allowed as an Administrative Claim or Priority Non-Tax Claim, the
holder shall receive distributions of, or of a value equal to, the Allowed
amount thereof.
ARTICLE 7
MEANS OF IMPLEMENTING THE PLAN
7.1 Change of Names. On and after the Effective Date, the name of
Reorganized LMUSA shall be changed to a name provided by the LMUSA Creditors'
EXHIBIT II TO DISCLOSURE STATEMENT
14
<PAGE> 216
Committee, on or before the Confirmation Date, with no further act or action
under applicable law, regulation, order or rule. The Debtor and each subsidiary
of the Debtor (other than Lomas Insurance and its subsidiaries) that has the
word "Lomas" or "L & N" in its name shall change its name to remove any
reference to the word "Lomas"or "L & N" in it on the Effective Date.
7.2 Amended and Restated Certificates of Incorporation. The
Reorganized Debtor shall be deemed to have adopted its Amended and Restated
Certificate of Incorporation on the Effective Date and shall promptly thereafter
cause the same to be filed with the appropriate authority in its jurisdiction of
incorporation. After the Effective Date, the Reorganized Debtor may amend its
articles of incorporation and may amend its by-laws, in accordance with its
articles of incorporation, its by-laws and applicable state law.
7.3 Corporate Action. On the Effective Date, all actions
contemplated hereby shall be authorized and approved in all respects (subject to
the provisions of this Plan). All matters provided for herein involving the
corporate structure of the Debtor or the Reorganized Debtor in connection with
this Plan shall be deemed to have occurred and shall be in effect, without any
requirement of further action by the equity security holders or directors of the
Debtor or the Reorganized Debtor. On or as soon as practicable after the
Effective Date, the appropriate officers of Reorganized Debtor and members of
the Reorganized LMUSA Board are authorized to issue, execute and deliver the
agreements, documents, securities and instruments contemplated hereby in the
name and on behalf of the Reorganized Debtor.
7.4 Effectiveness of Securities, Instruments and Agreements. On the
Effective Date, all securities, instruments, documents and agreements
authorized, issued or entered into pursuant to this Plan, including, without
limitation, the New LMUSA Common Stock, the LMUSA Litigation Trust Agreement and
the Intercompany Claims Agreement, if any, shall become effective, legally
binding and enforceable on the parties thereto in accordance with their
respective terms and conditions without the requirement of any further action by
the equity security holders or directors of the Debtor or the Reorganized
Debtor, and shall be deemed to become effective simultaneously.
7.5 Distributions Pursuant to the Plan. (a) Initial Distributions.
On or as soon as practicable after the Effective Date, the Reorganized Debtor,
subject to the conditions set forth in SECTION 6.3, shall make all the
distributions required by ARTICLE 4; provided that, only for purposes of
distributions in respect of LMUSA Class 3 Claims, it shall be presumed that
(i) all Disputed Claims will be Allowed at their face amount, (ii) the
Travelers Secured Claim will be $11,450,000 and (iii) the Travelers Unsecured
Claim will be calculated in accordance with paragraph (i) of the definition of
"Travelers Unsecured Claim" in ARTICLE 1, with the result that a portion of the
assets (including, without limitation, the LMUSA Distributable Cash) and New
LMUSA Common Stock available for distribution will be held until the Allowed
amounts of all Disputed Claims and the Allowed amount of the Travelers
Unsecured Claim are determined.
EXHIBIT II TO DISCLOSURE STATEMENT
15
<PAGE> 217
(b) Issuance of New LMUSA Common Stock. On or as soon as
practicable after the Effective Date, Reorganized LMUSA shall issue shares of
New LMUSA Common Stock, that shall be distributed to the holders of LMUSA Class
3 Claims entitled thereto in accordance with this SECTION 7.5.
(c) Subsequent Distributions. All LMUSA Distributable Cash and New
LMUSA Common Stock that is not distributed by Reorganized LMUSA on or promptly
after the Effective Date shall be held by Reorganized LMUSA pending distribution
pursuant to the provisions of this SECTION 7.5(c) or SECTION 7.5(d). Promptly
after any Disputed Claim in LMUSA Class 3 becomes an Allowed Claim, Reorganized
LMUSA shall cause to be distributed to the holder of such Allowed Claim the
LMUSA Distributable Cash and New LMUSA Common Stock that such holder would have
been entitled to receive under the Plan if such Claim had been Allowed on the
Effective Date in the amount in which it has become Allowed. On each Monthly
Distribution Date on which there is at least $1,000,000 of Distributable Cash
available to distribute, Reorganized LMUSA shall make additional distributions
of LMUSA Distributable Cash and New LMUSA Common Stock to holders of Claims that
were Allowed on the Effective Date or subsequently have become Allowed on or
before the last day of the calendar month immediately preceding such Monthly
Distribution Date, in amounts necessary to cause such holders to have received
aggregate distributions of LMUSA Distributable Cash and New LMUSA Common Stock
in respect of such Allowed Claims equal to the distributions thereof that such
holders would have received in respect of such Allowed Claims on or promptly
after the Effective Date if (i) such Allowed Claims had been Allowed on the
Effective Date in the amounts in which they are Allowed on the last day of such
calendar month and (ii) Claims or portions thereof that have become disallowed,
(A) after the Effective Date and (B) before the last day of such calendar month,
had been disallowed on the Effective Date.
(d) If the Effective Date or any Monthly Distribution Date occurs
prior to the closing, if any, of the sale of the Lomas Campus pursuant to the
Travelers Stipulation and Order and prior to the delivery, if any, of the
Travelers Termination Notice, then (i) solely for the purpose of making a
distribution to the holder of the Travelers Unsecured Claim under SECTION 4.3
on the Effective Date or such Monthly Distribution Date, the Travelers
Unsecured Claim shall be equal to $38,862,760.41 less the sum of (A) the
aggregate amount of all payments received through the Effective Date or such
Monthly Distribution Date by Travelers pursuant to paragraph 5 of the Cash
Collateral Order and (B) $13,500,000, and (ii) a reconciliation and payment
shall be made as between the holder of the Travelers Unsecured Claim, on the
one hand, and the Debtor or Reorganized LMUSA, on the other hand, immediately
following determination of the actual amount of the Travelers Unsecured Claim
in accordance with the provisions hereof so that the holder of the Travelers
Unsecured Claim shall have received and retained the amount of LMUSA
Distributable Cash and New LMUSA Common Stock that such holder would have been
entitled to receive under the Plan on the Effective Date and any Monthly
Distribution Date if the amount of the Travelers Unsecured Claim had been known
on the Effective Date.
7.6 Distribution of Fractional Shares of New LMUSA Common Stock. The
distribution of shares of New LMUSA Common Stock as provided in SECTION 4.3, may
mathematically entitle the holder of an Allowed LMUSA Class 3 Claim to a
fractional share of New LMUSA Common Stock. Notwithstanding the foregoing,
Reorganized LMUSA shall not distribute any fractional shares of New LMUSA Common
Stock; rather all such fractional shares of New LMUSA Common Stock shall be
aggregated into a whole number of shares of New LMUSA Common Stock, which whole
shares shall be allocated and distributed by Reorganized LMUSA as follows:
(a) Reorganized LMUSA shall rank from largest to smallest the
fractional interests in shares of New LMUSA Common Stock held by holders of
Allowed LMUSA Class 3 Claims. In the case of ties (fractions having the same
size), Reorganized LMUSA shall decide such tie by the size of Allowed Claims
(the higher ranking going to the holder of the larger Allowed Claim). In the
event the
EXHIBIT II TO DISCLOSURE STATEMENT
16
<PAGE> 218
tie cannot be broken in such manner, Reorganized LMUSA shall decide such tie
by lot.
(b) Reorganized LMUSA shall allocate one whole share of New LMUSA
Common Stock to the holder of the Allowed LMUSA Class 3 Claim having the
largest fractional interest in a share of New LMUSA Common Stock or New
LMUSA Common Stock and any additional whole shares to the holders of Allowed
LMUSA Class 3 Claims (one per holder) having the next largest fractional
interest in a share of New LMUSA Common Stock or New LMUSA Common Stock, as
the case may be, until all such whole shares have been allocated.
(c) Those shares of New LMUSA Common Stock allocated in accordance
with SECTION 7.6(b) above shall be distributed by Reorganized LMUSA to the
parties to whom they have been allocated.
7.7 Transfer By the Debtor of Certain Property to the Intercompany
Claims Reserve. If the LMUSA Creditors' Committee and the LFC Creditors'
Committee determine that the Intercompany Claims Reserve should be established
pending the resolution of the Intercompany Claims or the Bankruptcy Court makes
the determination referred to in SECTION 6.3(b), then on the Effective Date:
(a) such Intercompany Claims Reserve shall be established to be
operated in accordance with the Intercompany Claims Agreement; and
(b) the Debtor and one or more of the Affiliated Debtors shall
transfer or cause to be transferred to the Intercompany Claims Reserve the
assets agreed upon by the parties or ordered by the Bankruptcy Court.
7.8 Actions by the Intercompany Claims Agent. The Intercompany
Claims Agent shall hold the assets transferred to the Intercompany Claims
Reserve pursuant to the Intercompany Claims Agreement until the resolution of
any of the Intercompany Claims. Until any such resolution, the funds in the
Intercompany Claims Reserve shall be invested in high-grade short-term
investments, as shall be more fully set forth in the Intercompany Claims
Agreement. Upon such resolution, the Intercompany Claims Agent shall distribute
the relevant assets to the Debtor or Affiliated Debtor or Debtors entitled
thereto.
7.9 Management of the Reorganized Debtor. On and after the Effective
Date, governance of Reorganized LMUSA shall be directed by the Reorganized LMUSA
Board as successor to the then current Debtor's board of directors. The initial
officers and directors of Reorganized LMUSA shall consist of those individuals
designated by the
EXHIBIT II TO DISCLOSURE STATEMENT
17
<PAGE> 219
LMUSA Creditors' Committee and disclosed to the Bankruptcy Court at or prior to
the Confirmation Hearing. All such directors and officers shall be deemed
elected as of the Effective Date pursuant to the Confirmation Order. Those
officers and directors not continuing in office shall be deemed removed
therefrom as of the Effective Date pursuant to the Confirmation Order.
7.10 Liquidation of Non-Reorganization Assets. The Reorganized
Debtor, as trustee, will liquidate the Non-Reorganization Assets as promptly as
possible consistent with the maximization of the value of such assets.
7.11 Cash Distributions. All payments of cash to be made hereunder
shall be made by the Reorganized Debtor or its designee, the LMUSA Litigation
Trustee or the Intercompany Claims Agent. Any payment of cash may be made either
by check or by wire transfer, at the option of the Reorganized Debtor, the LMUSA
Litigation Trustee or the Intercompany Claims Agent, as the case may be, and all
payments in excess of $250,000 to holders of Allowed Claims who timely provide
wire instructions shall be by wire transfer. Notwithstanding the foregoing,
distributions on account of Claims of holders of LMUSA Senior Notes shall be
paid to the LMUSA Indenture Trustee, which will be responsible for making
payments to such holders. The LMUSA Indenture Trustee shall retain its lien and
priorities for its fees and expenses as set forth in the LMUSA Indenture.
7.12 Resolution of Disputed Claims. The Reorganized Debtor will resolve any
and all Disputed Claims against the Reorganized Debtor.
7.13 LMUSA Litigation Trust. (a)(i) Effective as of the Effective
Date, LMUSA shall be deemed to have transferred and assigned to a litigation
trust (the "LMUSA Litigation Trust") governed by the LMUSA Litigation Trust
Agreement any and all claims, rights or causes of action that constitute
property of the Estate or of the Debtor, whether arising under the Bankruptcy
Code or under nonbankruptcy law, (including all books, records, privileges and
defenses relating thereto) including, without limitation, all rights of setoff
and rights under section 502(d) of the Bankruptcy Code and all avoiding power
actions under sections 544, 545, 547, 548, 549, 550 and 553 of the Bankruptcy
Code or under applicable nonbankruptcy law as applied through section 544(b) of
the Bankruptcy Code, other than Intercompany Claims, and (ii) on or as soon as
practicable after the Effective Date, Reorganized LMUSA shall transfer to the
LMUSA Litigation Trust $5,000,000 or such other amount as the LMUSA Creditors'
Committee shall specify in writing to the Debtor and the Bankruptcy Court at
least three (3) Business Days prior to the commencement of the Confirmation
Hearing to fund the administration of the LMUSA Litigation Trust.
EXHIBIT II TO DISCLOSURE STATEMENT
18
<PAGE> 220
(b) The LMUSA Litigation Trustee will be responsible for pursuing,
as appropriate in accordance with the best interests of the Reorganized Debtor,
the third party claims and causes of action assigned to the LMUSA Litigation
Trust through litigation or, if appropriate, settlement and distributing any net
proceeds of such litigation of settlement to Reorganized LMUSA for distribution
to holders of LMUSA Class 3 Claims in accordance with SECTIONS 4.3 and 7.5.
(c) The LMUSA Litigation Trust shall be deemed not to be the same
entity as LMUSA or a successor to LMUSA, but only the assignee of the assets
transferred to the LMUSA Litigation Trust.
7.14 Setoff. Except as otherwise provided in this Plan, the
Reorganized Debtor may, but shall not be required to, set off against any Claim
and the distributions to be made by it pursuant hereto in respect of such Claim,
any claims of any nature whatsoever that the Debtor may have against the holder
of such Claim, but neither the failure to do so nor the allowance of any Claim
hereunder shall constitute a waiver or release of any claim the Debtor may have
against such holder.
7.15 Surrender and Cancellation of Public Debt Securities. (a) No
distribution shall be made to or on behalf of a holder of Public Debt Securities
under this Plan unless and until such holder shall surrender such Public Debt
Securities to the LMUSA Indenture Trustee for cancellation pursuant to written
instructions to such holders from the Reorganized Debtor. Any holder of a Public
Debt Security that has been lost, stolen, mutilated or destroyed shall, in lieu
of surrendering such Public Debt Security, deliver to the LMUSA Indenture
Trustee (i) evidence satisfactory to the LMUSA Indenture Trustee of the loss,
theft, mutilation or destruction of such Public Debt Security and (ii) such
security or indemnity as may reasonably be required by the LMUSA Indenture
Trustee and the Reorganized Debtor to hold both the LMUSA Indenture Trustee and
the Reorganized Debtor harmless with respect thereto.
(b) Any holder of a Public Debt Security that has not satisfied the
requirement of SECTION 7.15(a) within two (2) years after the Effective Date
shall receive no distribution on account of its LMUSA Class 3 Claim and shall be
forever barred from asserting any Claim thereon. As soon as practicable after
the second anniversary of the Effective Date, the LMUSA Indenture Trustee shall
pay any distribution to which such holder would have been entitled to the
holders of the Public Debt Security who did satisfy the requirements of SECTION
7.15(a) within two (2) years after the Effective Date, in proportion to the
amount of the Public Debt Securities surrendered by such holders.
7.16 Certain Assets to be Held in Trust. (a) The Reorganized Debtor
shall hold its Non-Reorganization Assets in trust (the "LMUSA Creditors' Trust")
pending their dispositions and/or distribution to creditors in accordance with
the terms hereof and shall
EXHIBIT II TO DISCLOSURE STATEMENT
19
<PAGE> 221
not commingle such assets with its Reorganization Assets. For federal tax
purposes, the Non-Reorganization Assets shall be deemed to have been transferred
on the Effective Date to the creditors entitled to cash distributions pursuant
to SECTION 4.3, and immediately retransferred to the Reorganized Debtor as
trustee. Such creditors shall be treated as grantors of the trust and deemed
owners of the trust assets.
(b) The LMUSA Creditors' Trust shall be organized for the sole purpose of
liquidating the Non-Reorganization Assets with no objective to continue or
engage in the conduct of a trade or business.
(c) The Reorganized Debtor, as trustee of the LMUSA Creditors' Trust, shall
file federal income tax and information returns as required by Treasury
Regulations Section 1.671-4(a).
(d) The Non-Reorganization Assets shall be valued consistently by (i) the
Reorganized Debtor as trustee of the LMUSA Creditors' Trust and (ii) the
creditors entitled to cash distributions pursuant to SECTION 4.3, and those
valuations shall be used by such creditors and by the Reorganized Debtor for
purposes of filing any federal income tax and information returns.
(e) The LMUSA Creditors' Trust will terminate on the fifth anniversary of
the Effective Date; provided, however, that the date on which
the LMUSA Creditors' Trust terminates may be postponed for a finite period of
time by agreement between the Reorganized Debtor and the creditors entitled to
cash distributions pursuant to SECTION 4.3, so long as the Bankruptcy Court
enters an order approving such extension within six (6) months of the beginning
of the extended term of the LMUSA Creditors' Trust.
(f) The investment powers of the Reorganized Debtor as trustee of the LMUSA
Creditors' Trust, other than those necessary to maintain the value of the
Non-Reorganization Assets and the liquidating purpose of the LMUSA Creditors'
Trust, are limited to powers to invest in demand deposits, short-term time
deposits and other short-term cash-equivalent investments consistent with the
status of the LMUSA Creditors' Trust for federal tax purposes as a liquidating
trust.
7.17 Allocation of Consideration Between Interest and Principal.
Consideration received by the holder of an Allowed Claim in exchange for such
Claim shall be allocated first to the principal amount of such Claim and then,
to the extent that such consideration (a) exceeds the principal amount of such
Claim but (b) does not exceed the sum of the principal amount of such Claim and
accrued but unpaid interest on such Claim, shall be allocated to such accrued
but unpaid interest. Any excess of the consideration received by the holder of
an Allowed Claim in exchange for such Claim over the sum of the
EXHIBIT II TO DISCLOSURE STATEMENT
20
<PAGE> 222
principal amount of such Claim and the accrued but unpaid interest on such Claim
shall be allocated to principal.
ARTICLE 8
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
8.1 Rejection of Executory Contracts and Unexpired Leases. The Debtor
hereby rejects pursuant to section 365 of the Bankruptcy Code any and all of
its executory contracts and unexpired leases except those that shall, prior to
the date of the Confirmation Order, have been assumed or be the subject of
pending motions by the Debtor to assume pursuant to section 365 of the
Bankruptcy Code.
8.2 Claims Under Rejected Contracts and Leases. Any Claims for damages
arising by reason of the rejection of any executory contract or unexpired lease
by operation of SECTION 8.1 may constitute a Claim if, but only if, a proof of
claim therefor shall be (or shall have been) timely filed with the Clerk of the
Court or such other party as the Court may direct (or shall have previously
directed) not later than thirty (30) days after the Confirmation Date.
Distributions in respect of an Allowed Claim arising from the rejection of an
executory contract or unexpired lease shall be made in such manner and at such
time as is provided in ARTICLE 4 and SECTIONS 7.5 and 7.6. Any Claim filed
under this Article shall be treated as an Unsecured Claim in LMUSA Class 3.
ARTICLE 9
EFFECTS OF PLAN CONFIRMATION
9.1 Discharge and Injunction. (a) The rights afforded herein and the
treatment of all Claims and Interests herein shall be in exchange for and in
complete satisfaction, discharge and release of all Claims and Interests of any
nature whatsoever, against the Estate. Except as otherwise expressly provided
herein, the Confirmation of this Plan shall, provided that the Effective Date
shall have occurred, discharge all Claims and terminate all Interests to the
fullest extent authorized or provided for by the Bankruptcy Code, including,
without limitation, to the extent authorized or provided for by sections 524 and
1141 thereof. Therefore, on and after the Effective Date, except to the extent
of the distributions to be made, and other treatment provided, under this Plan,
all holders of Claims and Interests shall be precluded from asserting against
any of the Debtor, the Reorganized Debtor, any of its successors, and any of its
assets or properties, any Claims or Interests based on any act or omission,
transaction or other activity of any kind or nature that occurred prior to the
Effective Date, and the Confirmation Order shall permanently enjoin said holders
of Claims and Interests, their successors and assigns, from enforcing or seeking
to enforce any such Claims or Interests against the Debtor, the Reorganized
Debtor, any of its successors, or any of its respective assets or properties.
(b) Notwithstanding the foregoing, if the Confirmation Order shall
be reversed or vacated, (i) all Claims and Interests against the Debtor or any
of its assets or properties shall be reinstated, (ii) the rights afforded herein
and the treatment of Claims
EXHIBIT II TO DISCLOSURE STATEMENT
21
<PAGE> 223
and Interests herein shall be nullified, (iii) the preclusion and injunction
described in SECTION 9.1(a) shall be of no force or effect, (iv) the vesting in
the Reorganized Debtor of its Estate, as contemplated by SECTION 9.2, will not
occur or will be nullified, and (v) all other actions taken or deemed taken by
the Reorganized Debtor pursuant to ARTICLE 7 or ARTICLE 9 shall, to the greatest
extent possible, be reversed.
(c) Channeling Order. Any and all postpetition claims relating to
the administration of the LMUSA chapter 11 case against any and all of the
Debtor and its directors, officers, employees and Professionals, or the
LMUSA Creditors' Committee and its members and Professionals, may be brought
only in the Bankruptcy Court.
9.2 Revesting. On the Effective Date, except as otherwise expressly
provided in this Plan or the Confirmation Order, the Reorganized Debtor will be
vested with all of the property of the Estate free and clear of all Claims,
liens, encumbrances, charges, Interests and other interests of any kind or
nature of claimants, equity security holders or any other entities arising on or
before the Effective Date, and the Reorganized Debtor may operate its business
free of any restrictions imposed by the Bankruptcy Code or by the Bankruptcy
Court.
9.3 Contributions to LMUSA Litigation Trust and Intercompany Claims
Reserve. On and after the Effective Date, all property transferred to the
LMUSA Litigation Trust or the Intercompany Claims Reserve, if any, under this
Plan shall be free and clear of all Claims, liens, encumbrances, charges,
Interests and other interests of any kind or nature of claimants and equity
security holders, the Debtor, the Reorganized Debtor, its Estate and any other
entities, except the rights with respect thereto created pursuant to, provided
for or recognized in this Plan, the LMUSA Litigation Trust Agreement, the
Intercompany Claims Agreement or the Confirmation Order.
9.4 Cancellation and Release of Existing Securities, Agreements and
Liens. On the Effective Date, all evidences of Claims or Interests against
the Debtor that are impaired under this Plan, including, without limitation, any
Old LMUSA Common Stock or Public Debt Securities (and any liens, securities,
instruments, documents or agreements created or entered into in connection
therewith), and any other liens, securities, instruments, documents and
agreements, in each case, shall be deemed released, cancelled and terminated,
and the obligations of the Debtor relating to or arising under, in respect of or
in connection with such liens, securities, instruments, documents or agreements
shall be cancelled, extinguished and discharged; provided, however, that notes
and other evidence of such Claims shall, effective on the Effective Date,
represent the right, enforceable against the Reorganized Debtor, to participate
in distributions provided for by the Plan. Except as expressly required by the
Plan, the Debtor shall not be permitted to make any payment in respect of a
Claim that is discharged by the Plan.
EXHIBIT II TO DISCLOSURE STATEMENT
22
<PAGE> 224
9.5 Retiree Medical Benefits. On and after the Effective Date, Reorganized
LMUSA shall continue to provide all retiree benefits (as defined in section 111
4 of the Bankruptcy Code) at the level established pursuant to section 1114 (c)
(1)(B) or (g) of the Bankruptcy Code.
9.6 Retention of Jurisdiction. (a) Prior to the Effective Date,
notwithstanding entry of the Confirmation Order, the Bankruptcy Court shall
exercise all jurisdiction as if Confirmation had not occurred, and the
Confirmation Order shall so provide. Unless otherwise provided, all injunctions
or stays provided for in the LMUSA Reorganization Case pursuant to section 105
or section 362 of the Bankruptcy Code or otherwise and in effect on the
Confirmation Date shall remain in full force and effect at least until the
Effective Date.
(b) On and after the Effective Date, the Bankruptcy Court will retain
exclusive jurisdiction over the LMUSA Reorganization Case for the following
purposes: (i) to determine requests for payment of Claims entitled to priority
under section 507(a)(1) of the Bankruptcy Code and applications for allowance of
compensation and reimbursement of expenses of the Professionals and any other
fees and expenses authorized to be paid or reimbursed under the Bankruptcy Code
or this Plan, (ii) to determine all controversies, suits and disputes regarding
interpretation and implementation hereof, (iii) to enter orders in aid of
execution of this Plan, including as authorized by section 1142 of the
Bankruptcy Code and including one or more orders relating to the sale of the
Lomas Campus and related matters, (iv) to consider any modifications of this
Plan, to cure any defect or omission herein, and to reconcile any inconsistency
in any order of the Bankruptcy Court or between any such order and this Plan,
(v) to determine applications, adversary proceedings and contested matters
pending on the Effective Date or commenced after the Effective Date as
contemplated herein, (vi) to allow, disallow, estimate, liquidate or determine
any Claim, and to enter or enforce any order requiring the filing of any such
Claim before a particular date, (vii) to determine pending applications for the
rejection of executory contracts or unexpired leases, or for the assumption or
assignment of executory contracts or unexpired leases, and to hear and
determine, and if need be to liquidate, any and all Claims arising from
rejection, assumption or assignment of any executory contract or unexpired
lease, (viii) to determine any actions or controversies described in SECTION
7.13, (ix) to ensure that distributions to holders of Claims are accomplished as
provided herein, in the LMUSA Litigation Trust Agreement and in the Intercompany
Claims Agreement, if any, (x) to determine such other matters as may be set
forth in the Confirmation Order or as may arise in connection with this Plan or
the Confirmation Order, (xi) to determine all claims under SECTION 9.1(c) hereof
and (xii) to enter a final decree closing the LMUSA Reorganization Case.
9.7 Failure of Bankruptcy Court to Exercise Jurisdiction. If the
Bankruptcy Court abstains from exercising or declines to exercise jurisdiction,
or is otherwise without jurisdiction over any matter arising under, arising in
or related to the LMUSA
EXHIBIT II TO DISCLOSURE STATEMENT
23
<PAGE> 225
Reorganization Cases, including the matters set forth in SECTION 9.6, this
ARTICLE 9 shall not prohibit or limit the exercise of jurisdiction by any other
tribunal having competent jurisdiction with respect to such matter.
9.8 Statutory Committee. The appointment of the LMUSA Creditors' Committee
shall terminate on the Effective Date; provided, however, that the LMUSA
Creditors' Committee shall survive to the extent, if any, required to prosecute
or defend against any matters pending on the Effective Date that are not able to
be prosecuted or defended by the Reorganized Debtor.
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Payment of Statutory Fees. All fees payable pursuant to 28 U.S.C.
Section 1930 shall be paid on or before the Effective Date.
10.2 Procedure for Determining Certain Claims. (a) Bar Date for
Administrative Claims. All applications for compensation of Professionals and
all other requests for payment of Administrative Claims incurred prior to the
Effective Date shall be filed as ordered by the Bankruptcy Court, but in no
event later than forty-five (45) days after the Effective Date. Any such claim
that is not filed within this time deadline shall be forever barred.
(b) Disputed Claims. Except with respect to those Claims the
holders of which have and preserve the right to liquidation of such Claims
before a court other than the Bankruptcy Court pursuant to 28 U.S.C. Section
157(b)(5), all Disputed Claims shall be liquidated and determined, and allowed
or disallowed, by the Bankruptcy Court. The Bankruptcy Court may, on or prior to
the Confirmation Date or on such date or dates thereafter as the Bankruptcy
Court may set, fix or liquidate the amount of any contingent or unliquidated
Claim, pursuant to section 502(c) of the Bankruptcy Code, in which event the
amount so set, fixed or liquidated shall be deemed to be the amount of such
contingent or unliquidated Claim pursuant to section 502(c) of the Bankruptcy
Code for purposes of voting and distribution hereunder. The Debtor (before the
Effective Date) and the Reorganized Debtor (on or after the Effective Date) may
file objections to Claims.
10.3 Cramdown. The Proponents reserve the right to request that the
Bankruptcy Court confirm this Plan under section 1129(b) of the Bankruptcy Code.
EXHIBIT II TO DISCLOSURE STATEMENT
24
<PAGE> 226
10.4 Modification of The Plan. The Proponents reserve the right, in
accordance with and subject to section 1127 of the Bankruptcy Code, to amend or
modify this Plan pursuant to section 1127(a), (c) and (d) of the Bankruptcy Code
prior to the entry of the Confirmation Order. In accordance with Bankruptcy Rule
3019, any modification that does not materially and adversely change the
treatment of any Claim, the holder of which as of the Voting Deadline voted to
accept this Plan, may be approved by the Bankruptcy Court at the Confirmation
Hearing without the necessity of resoliciting votes. After Confirmation, the
Reorganized Debtor may seek to amend or modify this Plan in accordance with
subsections 1127(b), (c) and (d) of the Bankruptcy Code.
10.5 Withdrawal of Plan. The Proponents reserve the right, at any time prior
to entry of the Confirmation Order, to revoke and withdraw this Plan. If the
Proponents revoke or withdraw this Plan under this SECTION 10.5, or if entry of
the Confirmation Order does not occur, then this Plan shall be deemed null and
void. In that event, nothing contained herein shall be deemed to constitute a
waiver or release of any claims by or against any Debtor or any other entity, or
to prejudice in any manner the rights of any Debtor or any other entity in any
further proceedings involving such Debtor or any other entity.
10.6 Substantial Consummation of Plan. This Plan shall be deemed to be
substantially consummated when the first distribution to LMUSA Class 3 Claims is
made.
10.7 Reservation of Rights. Except as expressly set forth herein, this Plan
shall have no force and effect unless the Bankruptcy Court enters the
Confirmation Order. None of the filing of this Plan, any statement or provision
contained herein, or the taking of any action by the Debtor with respect to this
Plan shall be or shall be deemed to be an admission or waiver of any rights of
any Debtor with respect to holders of Claims against such Debtor prior to the
Effective Date.
10.8 Section 1145 Exemption. Any securities issued pursuant hereto will be
issued pursuant to the exemption from securities registration set forth in
section 1145 of the Bankruptcy Code.
10.9 Unclaimed Property. Except as specified in SECTION 7.15(b), if any
property distributable to holders of LMUSA Class 1, 3 and 4 Claims remains
unclaimed for a period of two (2) years after it has been delivered (or delivery
has been attempted) or has otherwise been made available, such unclaimed
property shall be forfeited by such holder, and the unclaimed property and the
right to receive it shall revert to and vest in the Reorganized Debtor free and
clear of the interest of the holder of the Claim. Mailing by regular mail,
postage prepaid, to the address specified in SECTION 10.12 hereof shall
constitute delivery for purposes of this SECTION 10.9.
EXHIBIT II TO DISCLOSURE STATEMENT
25
<PAGE> 227
10.10 Section 1146 Exemption. Pursuant to section 1146(c) of the Bankruptcy
Code, the issuance, transfer or exchange of any security hereunder, or the
making or delivery of an instrument of transfer hereunder may not be taxed under
any law imposing a stamp tax or similar tax.
10.11 Record Date for Distribution. As of the close of business on the
Record Date for distribution, the transfer ledgers for the Public Debt
Securities shall be closed, there shall be no registration of or other changes
in the holders of any of the Public Debt Securities on the books of the Debtor
(or any trustee, transfer agent or registrar), and none of LMUSA, Reorganized
LMUSA, the LMUSA Indenture Trustee or any other trustee, transfer agent or
registrar shall have any obligation to recognize any transfer of Public Debt
Securities occurring thereafter (but shall instead be entitled to recognize and
deal with, for all purposes hereunder, except as otherwise provided herein, only
those holders reflected on its books as of the close of business on the Record
Date for distribution).
10.12 Notices and Distributions. On and after the Effective Date, all
notices, requests and distributions with respect to this Plan to a holder of a
Claim or an Interest shall be in writing and sent to (a) the last known address
of such entity set forth in a proof of Claim or request for payment of
Administrative Claim filed by or on behalf of such entity in the LMUSA
Reorganization Case or to the last known address of such entity's attorney of
record in the LMUSA Reorganization Case or (b) if there is no such evidence of a
last known address, to the last known address of such entity according to the
books and records of the Debtor. Any entity may designate in writing another
address for the purposes of this SECTION 10.12 by written notice to the Debtor
(before the Effective Date) or the Reorganized Debtor (on or after the Effective
Date), which designation will be effective upon receipt.
10.13 Saturday, Sunday or Legal Holiday. If any payment or act hereunder is
required to be made or performed on a date that is not a Business Day, then the
making of such payment or the performance of such act may be completed on the
next succeeding Business Day, but shall be deemed to have been completed as of
the required date.
10.14 Time. Unless otherwise specified herein, in computing a period of time
prescribed or allowed hereby, the day of the act or event from which the
designated period begins to run shall not be included. The last day of the
period so computed shall be included, unless it is not a Business Day, in which
event the period runs until the end of the next succeeding day that is a
Business Day.
10.15 Severability of Provisions. If prior to Confirmation any term or
provision hereof that does not prescribe the treatment of Claims or the
conditions to the Effective Date is held by the Bankruptcy Court to be invalid,
void or unenforceable, the
EXHIBIT II TO DISCLOSURE STATEMENT
26
<PAGE> 228
Bankruptcy Court shall have the power to alter and interpret such term or
provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be
invalid, void or unenforceable. Notwithstanding any such holding, alteration or
interpretation, the remainder of the terms and provisions hereof will remain in
full force and effect and will in no way be affected, impaired or invalidated by
such holding, alteration or interpretation. The Confirmation Order shall
constitute a judicial determination and shall provide that each term and
provision hereof, as it may have been altered or interpreted in accordance with
the foregoing, is valid and enforceable in accordance with its terms.
10.16 Binding Effect. This Plan shall be binding on and inure to the
benefit of the Reorganized Debtor and all holders of Claims or Interests
(whether or not they have accepted this Plan) and their respective personal
representatives, successors and assigns.
10.17 Governing Law. Unless a rule of law or procedure is supplied
by federal law, the laws of the State of Delaware shall govern the construction
and implementation hereof and any agreements, documents and instruments executed
in connection herewith.
10.18 Interpretation of Plan and Related Documents. This Plan and
each Related Document shall be construed, to the maximum extent possible, to
give effect to every provision contained herein and therein and to avoid any
inconsistency between the provisions hereof and thereof.
10.19 Filing of Additional Documents. On or before the Effective Date, the
Debtor may file with the Bankruptcy Court such agreements and other documents
as may be necessary or appropriate to effectuate and further evidence the terms
and conditions of this Plan.
10.20 Further Assurances. The Debtor, the Reorganized Debtor, all
holders of Claims receiving distributions hereunder and all other parties in
interest shall, from time to time, prepare, execute and deliver any agreements
or documents and take any other actions as may be necessary or advisable to
effectuate the provisions and intent of this Plan and the Related Documents.
EXHIBIT II TO DISCLOSURE STATEMENT
27
<PAGE> 229
10.21 Incorporation of Travelers Stipulation and Order. The provisions set
forth in the Travelers Stipulation and Order are hereby incorporated by
reference and are made a part of this Plan as if fully set forth herein.
10.22 Withholding and Reporting Requirements. In connection herewith
and all distributions hereunder, the Reorganized Debtor, the LMUSA Litigation
Trustee and the Intercompany Claims Agent (in each case with respect to the
income, if any, earned with respect to property held by it and distributions
made by it) shall comply with all withholding and reporting requirements imposed
by any federal, state, local or foreign taxing authority and all distributions
hereunder shall be subject to any such withholding and reporting requirements.
Entities entitled to receive distributions hereunder shall, as a condition to
receiving such distributions, provide such information and take such steps as
the Reorganized Debtor, the LMUSA Litigation Trustee or the Intercompany Claims
Agent (as the case may be) may reasonably require to ensure compliance with such
withholding and reporting requirements, and to enable the Reorganized Debtor,
the LMUSA Litigation Trustee or the Intercompany Claims Agent to obtain the
certifications and information as may be necessary or appropriate to satisfy the
provisions of any tax law.
Date: July 3, 1996
LOMAS MORTGAGE USA, INC.
By: /s/ ERIC BOOTH
------------------------------------
Name: Eric Booth
Title: Chief Executive Officer of
Lomas Financial Corporation
STATUTORY CREDITORS' COMMITTEE OF
LOMAS MORTGAGE USA, INC.
By: /s/ PAUL LEFF
------------------------------------
Name: Paul Leff
Title: Chairman
EXHIBIT II TO DISCLOSURE STATEMENT
28
<PAGE> 230
EXHIBIT A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
[NAME OF REORGANIZED LMUSA]
(A CONNECTICUT STOCK CORPORATION)
The undersigned officers of [Name of Reorganized LMUSA] (the
"Corporation") do hereby certify as follows for the purpose of (i) amending the
Certificate of Incorporation of the Corporation in accordance with Section
33-363 of the Connecticut Stock Corporation Act and pursuant to the Chapter 11
Plan (the "Chapter 11 Plan") filed by the Corporation in proceedings under
chapter 11 of the United States Bankruptcy Code, 11 U.S.C. Section 101 et seq.,
confirmed by the United States Bankruptcy Court for the District of Delaware,
and (ii) merely restating all those provisions of the Corporation's Certificate
of Incorporation that are in effect on the date of this filing that are not
amended hereby.
FIRST: The name of the Corporation is [Name of Reorganized LMUSA]
SECOND: The Certificate of Incorporation of the Corporation is hereby
amended and restated as follows:
FIRST: The name of the Corporation is [Name of Reorganized LMUSA]
SECOND: The nature of the business to be transacted, or the purposes to be
promoted or carried out by the Corporation, are to engage in any
lawful act or activity for which corporations may be formed under
the Connecticut Stock Corporation Act (the "Corporation Act").
THIRD: The total number of shares of stock which the Corporation shall
have authority to issue is 10,000,000 shares of Common Stock, par
value ten cents ($0.10) per share, and 3,000,000 shares of
Preferred Stock, par value one dollar ($1.00) per share. In
accordance with Section 33-341(b) of the Corporation Act, the
Board of Directors is hereby empowered to authorize
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
1
<PAGE> 231
by resolution or resolutions from time to time the issuance of
Preferred Stock and to fix the powers, preferences and relative,
participating, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, if any, with
respect to the Preferred Stock to the extent permitted by the
Corporation Act, as amended from time to time.
FOURTH: The minimum amount of stated capital with which the Corporation
shall commence business is ONE THOUSAND AND NO/100 DOLLARS
($1,000.00).
FIFTH: The Corporation shall indemnify and reimburse shareholders,
directors, officers, employees and agents as permitted by Section
33-320a of the Corporation Act, including any amendment to or
substitutions for such Section 33-320a which may be made from
time to time.
SIXTH: The personal liability of a director to the Corporation or its
shareholder(s) for monetary damages for breach of duty as a
director shall be limited to an amount that is not greater than
the compensation received by the director solely for serving the
Corporation as a director during the year of the violation if
such breach does not (a) involve a knowing and culpable violation
of law by the director, (b) enable the director or an associate,
as defined in subdivision (3) of Section 33-374d of the
Corporation Act, to receive an improper personal economic gain,
(c) show a lack of good faith and a conscious disregard for the
duty of the director to the Corporation under circumstances in
which the director was aware that his conduct or omission created
an unjustifiable risk of serious injury to the Corporation, (d)
constitute a sustained and unexcused pattern of inattention that
amounted to an abdication of the director's duty to the
Corporation, or (e) create liability under Section 33-321 of the
Corporation Act. Notwithstanding the foregoing, the personal
liability of a director to the Corporation or its shareholder(s)
for monetary damages for breach of duty as a director shall
further be limited to the fullest extent allowed from time to
time by Connecticut law. No amendment or repeal of this Article
SIXTH, or the adoption of any provision inconsistent herewith,
shall eliminate or reduce the effect of this Article SIXTH in
respect of any matter occurring, or any cause of action, suit or
claim accruing or arising, prior to such amendment, repeal or
adoption of a provision inconsistent with this Article SIXTH.
SEVENTH: If the Corporation does not identify one or more individuals or
entities are willing to invest in the Corporation in
consideration for at least 25% of the
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
2
<PAGE> 232
shares of Common Stock which the Corporation has the authority to
issue (individually or collectively, as the case may be, the "New
Investors") by the third anniversary of the effective date of the
Corporation's Chapter 11 Plan, the Board of Directors may, in
accordance with the Corporation Act but without any vote by the
shareholders, adopt a plan of liquidation for the Corporation,
and take the appropriate steps to effectuate such plan of
liquidation in accordance with applicable law.
EIGHTH: Until such time as 4,000,000 shares of Common Stock have been
distributed in accordance with the Corporation's Chapter 11 Plan,
the Board of Directors shall be authorized to take all actions on
behalf of the Corporation, including actions which would otherwise
require approval of the shareholders. Thereafter, until at least
8,000,000 shares of Common Stock have been distributed in
accordance with the Chapter 11 Plan if under the Corporation Act,
any action requires the approval of a majority of the shareholders,
issued but not outstanding shares shall be deemed to be voted for
approval of the proposed action in the same proportions as issued
and outstanding shares are so voted by the shareholders.
NINTH: The duration of the Corporation shall be unlimited.
TENTH: No nonvoting equity securities of the Corporation may be issued;
this provision, included in this Amended and Restated Certificate
of Incorporation in compliance with Section 1123 of the United
States Bankruptcy Code, 11 U.S.C. Section 1123, shall have no force
and effect except to the extent required by such Section so long as
such Section is in effect and applicable to the Corporation.
THIRD: The amendment and restatement of the Certificate of Incorporation of
the Corporation set forth above was approved by the Bankruptcy Court in
an Order entered by the Bankruptcy Court on the [__] day of [______],
1996, in the proceedings entitled In re Lomas Financial Corporation,
Lomas Mortgage USA, Inc., Lomas Information Systems, Inc. and Lomas
Administrative Services, Inc., No. 95-1235, the Bankruptcy Court having
jurisdiction of these proceedings pursuant to Section [____] of the
United States Bankruptcy Code, 11 U.S.C. Section [____], and 28 U.S.C.
Section 1334. The resolution to amend and restate the Certificate of
Incorporation of the Corporation as set forth above was adopted by the
Board of Directors of the Corporation in accordance with Sections
33-362 and 33-363 of the Connecticut Stock Corporation Act.
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
3
<PAGE> 233
IN WITNESS WHEREOF, the undersigned officers of [Name of
Reorganized LMUSA] have executed this Certificate as of the [___] day of
[_________], 1996 and do hereby declare under penalties of false statement that
the statement made herein are true.
- -------------------------------- -------------------------------------
Its Secretary Its President
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
4
<PAGE> 234
BY-LAWS
OF
[NAME OF REORGANIZED LMUSA]
* * * * * *
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be
located in the City of New Haven, State of Connecticut.
Section 2. Other offices. The Corporation also may have offices at
such other places both within and without the State of Connecticut as the Board
of Directors may from time to time determine or as the business of the
Corporation may require. The principal office of the Corporation shall be in
Dallas, Texas.
ARTICLE II
MEETINGS OF THE SHAREHOLDERS
Section 1. Place of Meetings. All meetings of the shareholders for
the election of directors or for any other proper purpose shall be held in the
City of Dallas, State of Texas, or at such other place within or without the
State of Texas as the Board of Directors may from time to time designate, as
stated in the notice of such meeting or a duly executed waiver of notice
thereof.
Section 2. Annual Meeting. An annual meeting of shareholders shall
be held at 2:00 p.m. on the first Tuesday of June in each year, unless such day
is a legal holiday, in which case such meeting shall be held at the specified
time on the next full business day thereafter which is not a legal holiday. At
such meeting the shareholders entitled to vote thereat shall elect by a
plurality vote a Board of Directors, and may transact such other business as may
properly be brought before the meeting.
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
5
<PAGE> 235
Section 3. Special Meeting. Special meetings of shareholders may be
called by the Chief Executive Officer, the Chairman of the Board, the President,
the Board of Directors or the holders of not less than two-tenths of all shares
entitled to vote at the meeting.
Section 4. Notice of Annual or of Special Meeting. Written or
printed notice stating the place, day and hour of the meeting and, in case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be delivered not less than ten (10) nor more than fifty (50) days before the
date of the meeting, either personally or by mail, by or at the direction of the
Chief Executive Officer, the Chairman and Chairman of the Board, the President,
the Secretary or the officer or person calling the meeting, to each shareholder
of record entitled to vote at such meeting. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail, addressed to
the shareholder at his address as it appears on the stock transfer books of the
Corporation, with postage thereon prepaid.
Section 5. Business at Special Meeting. The business transacted at
any special meeting of shareholders shall be limited to the purposes stated in
the notice thereof.
Section 6. Quorum of Shareholders. Unless otherwise provided in the
Certificate of Incorporation, the holders of a majority of the shares entitled
to vote, represented in person or by proxy, shall constitute a quorum at a
meeting of shareholders, but in no event shall a quorum consist of the holders
of less than one-third (1/3d) of the shares entitled to vote and thus
represented at such meeting. If, however, a quorum shall not be present or
represented at any meeting of the shareholders the shareholders present in
person or represented by proxy shall have the power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified.
Section 7. Act of Shareholders' Meeting. The vote of the holders of
a majority of the shares entitled to vote and thus represented at a meeting at
which a quorum is present shall be the act of the shareholders' meeting, unless
the vote of a greater number is required by law or the Certificate of
Incorporation.
Section 8. Voting of Shares. Each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to the
shareholders for action, except to the extent that voting rights of the shares
of any class are limited or denied by the Certificate of Incorporation. At each
election shall have the right to vote, in person or by proxy, the number of
shares owned by him for as many persons as there are directors to be elected,
and
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
6
<PAGE> 236
for whose election he has the right to vote. Cumulative voting in the election
of directors or otherwise is expressly prohibited by the Certificate of
Incorporation.
Section 9. Proxies. At any meeting of the shareholders,
each shareholder having the right to vote shall be entitled to vote either in
person or by proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. No proxy shall be valid after eleven (11) months
from the date of its execution unless otherwise provided in the proxy. Each
proxy shall be revocable unless expressly provided therein to be irrevocable and
unless otherwise made irrevocable by law.
Section 10. Voting Lists. The officer or agent having
charge of the stock transfer books for shares of the Corporation shall make, at
least ten (10) days before each meeting of shareholders, a complete list of the
shareholders entitled to vote at such meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and number of shares held by
each shareholder, which list, for a period of ten (10) days prior to such
meeting, shall be kept on file at the registered office of the Corporation and
shall be subject to the inspection by any shareholder at any time during usual
business hours. Such list shall also be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any shareholder
during the whole time of the meeting. The original stock transfer books shall be
prima facie evidence as to who are the shareholders entitled to examine such
list or transfer books or to vote at any such meeting of shareholders.
Section 11. Action by Written Consent Without a Meeting. (a)
Unless otherwise provided in the certificate of incorporation, any action
required to be taken at any annual or special meeting of stockholders, or any
action which may be taken at any annual or special meeting of stockholders, may
be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding capital stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered office
in Connecticut, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within 60 days of the
earliest dated consent delivered in the manner required by this Section and
Connecticut Law to the Corporation, written consents
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
7
<PAGE> 237
signed by a sufficient number of holders to take action are delivered to the
Corporation by delivery to its registered office in Connecticut, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. The business and affairs of the
Corporation shall be managed by its Board of Directors which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by a statute or by the Certificate of Incorporation or by these By-Laws directed
or required to be exercised and done by the shareholders.
Section 2. Number of Directors. The number of directors of
the Corporation constituting the Board of Directors shall be not less than three
(3) nor more than eleven (11). The first Board shall consist of five (5)
directors; however, thereafter, the number of directors shall be determined in
accordance with the By-Laws by resolution of the Board of Directors or of the
shareholders.
Section 3. Election and Term. The directors, other than the first
Board of Directors, shall be elected at the annual meeting of the shareholders,
except as provided in Section 4 of this Article, and each director elected shall
hold office until his successor is elected and qualified or until his earlier
death, resignation or removal. Each member of the first Board of Directors shall
hold office until the second annual meeting of shareholders and until his
successor is elected and qualified or until his earlier death, resignation or
removal. Directors need not be residents of the State of Texas or shareholders
of the Corporation.
Section 4. Vacancies. Any vacancy occurring in the Board of
Directors may be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the Board of Directors. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any directorship to be filled by reason of an increase in
the number of directors shall be filled by election at an annual meeting or at a
special meeting of shareholders and until his successor is elected and qualified
or until his earlier death, resignation or removal.
Section 5. Resignation and Removal. Any director may resign
at any time upon giving written notice to the Corporation. At any meeting of
shareholders called expressly for the purpose of removing a director or
directors, any director or the entire Board of Directors
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
8
<PAGE> 238
may be removed, with or without cause, by a vote of the holders of a majority of
the shares then entitled to vote at an election of directors. If the
shareholders of this Corporation are entitled to cumulative voting in the
election of directors and if less than the entire Board is to be removed, no one
of the directors may be removed if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
Board of Directors, or if there be classes of directors, at an election of the
class of directors of which he is a part.
ARTICLE IV
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. First Meeting. The first meeting of each newly elected
Board of Directors shall be held at such time and place either within or without
the State of Texas as shall be fixed by the vote of the shareholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present, or the meeting may be convened at such place and time as shall
be fixed by the consent in writing of all the directors.
Section 2. Regular Meetings. Regular meetings of the Board of
Directors may be held with or without notice at such time and at such place
either within or without the State of Texas as from time to time shall be
prescribed by resolution of the Board of Directors.
Section 3. Special Meeting. Special meetings of the Board of
Directors may be called by the Chairman of the Board of Directors or the
President, and shall be called by the Chairman of the Board of Directors, the
President or the Secretary on the written request of two directors. Written
notice of special meetings of the Board of Directors shall be given to each
director at least two (2) days before the date of the meeting.
Section 4. Business at Regular or Special Meeting. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors need be specified in the notice or waiver of notice of
such meeting.
Section 5. Quorum of Directors. A majority of the Board of
Directors shall constitute a quorum for the transaction of business, unless a
greater number is required by law or the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than an announcement of the meeting, until a quorum shall be
present.
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
9
<PAGE> 239
Section 6. Act of Directors' Meeting. The act of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors, unless the act of a greater number is required by law or
the Certificate of Incorporation.
Section 7. Action by Written Consent Without a Meeting. Any action
required or permitted to be taken at a meeting of the Board of Directors or any
executive committee under the applicable provisions of the statutes, the
Certificate of Incorporation or these By-Laws may be taken without a meeting if
a consent in writing, setting forth the action so taken is signed by all members
of the Board of Directors or executive committee, as the case may be. Such
consent shall have the same force and effect as a unanimous vote of directors.
Section 8. Compensation of Directors. As specifically prescribed
from time to time by resolution of the Board of Directors, the directors of the
Corporation may be paid their expenses of attendance at each meeting of the
Board and may be paid a fixed sum for attendance at each meeting of the Board or
a stated salary in their capacity as directors. This provision shall not
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
ARTICLE V
COMMITTEES
The Board of Directors, by resolution adopted by a majority of the
full Board of Directors, may designate from among its members an executive
committee and one or more other committees, each of which, to the extent
provided in such resolution or in the Certificate of Incorporation or in these
By-Laws, shall have and may exercise all of the authority of the Board of
Directors, except that no such committee shall have the authority of the Board
of Directors in reference to amending the Certificate of Incorporation,
approving a plan of merger or consolidation, recommending to the shareholders
the sale, lease or exchange of all or substantially all of the property and
assets of the Corporation otherwise than in the usual and regular course of its
business, recommending to the shareholders a voluntary dissolution of the
Corporation or a revocation thereof, amending, altering or repealing the By-Laws
of the Corporation or adopting new By-Laws for the Corporation, filling
vacancies in or removing members of the Board of Directors or any such
committee, fixing the compensation of any member of such committee, or altering
or repealing any resolution of the Board of Directors which by its terms
provides that it shall not be so amendable or repealable. No such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of shares of the Corporation. Vacancies in the membership of the
committee shall be filled by the Board of Directors at a regular or special
meeting of the Board. The executive committee shall keep regular minutes of its
proceedings
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
10
<PAGE> 240
and report the same to the Board when required. The designation of such
committee and the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility imposed
upon it or him by law.
ARTICLE VI
NOTICES
Section 1. Methods of Giving Notice. Whenever any notice is
required to be given to any shareholder or director under the provisions of any
statute, the Certificate of Incorporation or these By-Laws, it shall be given in
writing and delivered personally or mailed to such shareholder or director at
such address as appears on the books of the Corporation, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail with sufficient postage thereon prepaid. Notice to directors may
also be given by telegram, and notice given by such means shall be deemed given
at the time it is delivered to the telegraph office.
Section 2. Waiver of Notice. Whenever any notice is required to be
given to any shareholder or director under the provisions of any statute, the
Certificate of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice.
Section 3. Attendance as Waiver. Attendance of a director at a
meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE VII
ACTION WITHOUT A MEETING BY USE OF CONFERENCE TELEPHONE
Subject to the provisions required or permitted by notice of
meetings, unless otherwise restricted by the Certificate of Incorporation or
these By-Laws, shareholders, members of the Board of Directors or members of any
committee designated by such Board may participate in and hold a meeting of such
shareholders, Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in such a meeting shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
11
<PAGE> 241
ARTICLE VIII
OFFICERS
Section 1. Executive Officers. The officers of the Corporation
shall consist of a Chief Executive Officer, a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary and a Treasurer, each of
whom shall be elected by the Board of Directors as provided in Section 2 of this
Article. Any two or more offices may be held by the same person except that the
President and the Secretary shall not be the same person.
Section 2. Election and Qualification. The Board of Directors at
its first meeting after each annual meeting of shareholders, shall elect the
officers.
Section 3. Other Officers and Agents. The Board of Directors may
elect or appoint such other officers, assistant officers and agents as may be
necessary, who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board.
Section 4. Salaries. The salaries of all officers and agents of the
Corporation shall be fixed by resolution or the Board of Directors.
Section 5. Term, Removal and Vacancies. Each officer of the
Corporation shall hold office until his successor is chosen and qualified or
until his earlier death, resignation or removal. Any officer may resign at any
time upon giving written notice to the Corporation. Any officer or agent or
member of the executive committee elected or appointed by the Board of Directors
may be removed by the Board of Directors whenever in its judgment the best
interests of the Corporation will be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights. Any vacancy occurring in any office of the Corporation by
death, resignation, removal or otherwise shall be filled by the Board of
Directors.
Section 6. Chief Executive Officer. The Board of Directors shall
designate a Chief Executive Officer of the Corporation. The Chief Executive
Officer shall preside at all meetings of the shareholders and the Board of
Directors, and shall have such other powers and duties as usually pertain to
such office or as may be delegated by the Board of Directors. Unless the Board
of Directors shall otherwise delegate such duties, the Chief Executive Officer
shall be ex-officio a member of all standing committees, shall have general
powers of oversight, supervision and management of the business and affairs of
the Corporation, and shall see that all orders and resolutions of the Board of
Directors are carried into effect. He shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
12
<PAGE> 242
Corporation, except where required or permitted by law to be otherwise signed
and executed, and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation.
Section 7. Chairman of the Board. The Board of Directors shall
designate one of their members as Chairman. The Chairman of the Board shall have
such powers and duties as may be designated by the Board of Directors.
Section 8. President. The President shall have such powers and
duties as usually pertain to such office, except as the same may be modified by
the Board of Directors, and shall serve under the general direction of the Chief
Executive Officer, as the Chief Operations Officer of the Company. In the
absence or disability of the Chief Executive Officer, the President shall
perform the duties and exercise the powers of the Chief Executive Officer.
Section 9. Vice Presidents. The Vice Presidents, in the order of
their seniority, unless otherwise determined by the Board of Directors or the
Chief Executive Officer, shall, in the absence or disability of the President,
perform the duties and exercise the powers of the President. They shall perform
such other duties and have such other powers as the Chief Executive Officer,
Chairman of the Board, President or Board of Directors shall prescribe.
Section 10. Secretary. The Secretary shall attend all meetings of
the Board of Directors and all meetings of the shareholders, and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose, and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the shareholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President, under whose supervision he shall be. He shall keep in
safe custody the seal of the Corporation, and when authorized by the Board of
Directors, affix the same to any instrument requiring it, and when so affixed,
it shall be attested by his signature or by the signature of the Treasurer or an
Assistant Secretary.
Section 11. Assistant Secretaries. The Assistant Secretaries, if
any, in the order of their seniority, unless otherwise determined by the Board
of Directors, shall, in the absence of disability of the Secretary, perform the
duties and exercise the powers of the Secretary. They shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
Section 12. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities, and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation, and shall
deposit all moneys and other valuable
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
13
<PAGE> 243
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the President and the Board of
Directors at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Treasurer, and of the financial condition
of the Corporation.
Section 13. Assistant Treasurers. The Assistant Treasurers, if any,
in the order of their seniority, unless otherwise determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer. They shall perform such other
duties and have such other powers as the Board of Directors from time to time
may prescribe.
Section 14. Officer's Bond. If required by the Board of Directors,
any officer so required shall have the Corporation a bond (which shall be
renewed as the Board may require) in such sum and with such surety or sureties
as shall be satisfactory to the Board of Directors for the faithful performance
of the duties of his office and for the restoration to the Corporation, in case
of his death, resignation, retirement or removal from office, of any and all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the Corporation.
ARTICLE IX
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 1. Indemnification in Third Party Actions. Except as
otherwise provided in this Article, the Corporation shall indemnify any person
who was or is a party, or was threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of the
Corporation, by reason of the fact that he, or the person whose legal
representative he is, (1) is or was a shareholder, director, officer, employee
or agent of the Corporation, or (2) is or was serving at the request of the
Corporation (A) as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, or (B) as an agent of
such other corporation, partnership, joint venture, trust or other enterprise
other than an employee benefit plan or trust, or (3) is or was a director,
officer, or employee of the Corporation serving at the request of the
Corporation as a fiduciary of an employee benefit plan or trust maintained for
the benefit of employees of the Corporation or employees of any such other
corporation, partnership, joint venture, trust or other enterprise, against
judgments, fines, penalties, amounts paid in settlement and expenses, including
attorneys' fees, actually and reasonably incurred by him and the person whose
legal representative he is, in connection with such action, suit or proceeding,
or any
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
14
<PAGE> 244
appeal therein. The Corporation shall not so indemnify any such person unless it
shall be concluded as provided in Section 3 that such person, and the person
whose legal representative he is, acted in good faith and in a manner he
reasonably believed to be in the best interests of the Corporation or, in the
case of a person serving as a fiduciary of an employee benefit plan or trust,
either in the best interests of the Corporation or in the best interests of the
participants and beneficiaries of such employee benefit plan or trust and
consistent with the provisions of such employee benefit plan or trust and, with
respect to any criminal action or proceeding, that he had not reasonable cause
to believe his conduct was unlawful; except that, in connection with an alleged
claim based upon his purchase or sale of securities of the Corporation or of
such other enterprise, the Corporation shall only indemnify such person after a
court shall have determined on application as provided in Section 4, that in
view of all the circumstances such person is fairly and reasonably entitled to
be indemnified, and then for such amount as the court shall determine. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith or in a
manner which he did not reasonably believe to be in the best interests of the
Corporation or of the participants and beneficiaries of such employee benefit
plan or trust, or, with respect to any criminal action or proceeding, that he
had reasonable cause to believe that his conduct was unlawful.
Section 2. Indemnification in Derivative Actions. Except as
otherwise provided in this section, the Corporation shall indemnify any person
who was or is a party, or was threatened to be made a party to any action, suit
or proceeding, by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he, or the person whose legal
representative he is (1) is or was a shareholder, director, officer, employee or
agent of the Corporation or (2) is or was serving at the request of the
Corporation (A) as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, or (B) as an agent of
such other corporation, partnership, joint venture, trust or other enterprise
other than an employee benefit plan or trust, or (3) is or was a director,
officer or employee of the Corporation serving as a fiduciary of an employee
benefit plan or trust maintained for the benefit of employees of the Corporation
or employees of any such corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with such action, suit or proceeding, or any
appeals therein, in relation to matters as to which such person, or the person
whose legal representative he is, is finally adjudged not to have breached his
duty to the Corporation, or where the court, on application as provided in
Section 4, shall have determined that in view of all the circumstances such
person is fairly and reasonably entitled to be indemnified, and then for such
amount as the court shall determine. The Corporation shall not so indemnify any
such person for amounts paid to the Corporation, to a plaintiff or to counsel
for a plaintiff in settling or otherwise disposing of a threatened action or a
pending
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
15
<PAGE> 245
action, with or without court approval; or for expenses incurred in defending a
threatened action or a pending action which is settled or otherwise disposed of
without court approval.
Section 3. Determination of Good Faith Conduct by Indemnitee. The
conclusion regarding an indemnitee's conduct provided for in Section 1 may be
reached by anyone of the following: (1) The board of directors of the
Corporation by a consent in writing signed by a majority of those directors who
were not parties to such action, suit or proceeding; (2) independent legal
counsel selected by a consent in writing signed by a majority of those directors
who were not parties to such action, suit or proceeding; or (3) the shareholders
of the Corporation by the affirmative vote of at least a majority of the voting
power of shares not owned by parties to such action, suit or proceeding,
represented at an annual or special meeting of shareholders, duly called with
notice of such purpose stated. Such person shall be entitled to apply to a court
for such conclusion, upon application as provided in Section 4, even though the
conclusion reached by any of the foregoing shall have been adverse to him or to
the person whose legal representative he is.
Section 4. Judicial Determination. An application for
indemnification or for a conclusion as provided in this Article shall be made to
the court in which the action is pending or to the superior court for the
judicial district where the principal office of the Corporation is located. The
application shall be made in such manner and form as may be required by the
applicable rules of the court or, in the absence thereof, by direction of the
court. The court may also direct that notice be given in such manner as it may
require at the expense of the Corporation to the shareholders of the Corporation
and to such other persons as the court may designate. In the case of an
application to a court in which an action is pending in which the person seeking
indemnification is a party by reason of the fact that he, or the person whose
legal representative he is, is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or as a fiduciary of any employee
benefit plan or trust maintained for the benefit of employees of any such other
corporation, partnership, joint venture, trust or other enterprise, timely
notice of such application shall be given by such person to the Corporation.
Section 5. Payment in Advance of Final Disposition. Expenses which
may be indemnifiable under this Article incurred in defending an action, suit or
proceeding may be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding as authorized by the board of directors upon
agreement by or on behalf of the shareholder, director, officer, employee or
agent, or his legal representative, to repay such amount if he is later found
not entitled to be indemnified by the Corporation as authorized in this Article.
Section 6. Limits of Indemnity and Insurance. The Corporation shall
not indemnify any shareholder, director, officer, employee or agent or any
director, officer or
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
16
<PAGE> 246
employee serving at the request of the Corporation as a fiduciary or an employee
benefit plan or trust, against judgments, fines, penalties, amounts paid in
settlement and expenses, including attorneys' fees, to an extent greater than
that authorized by this Article, but the Corporation may procure insurance
providing greater indemnification and may share the premium cost with any
shareholder, director, officer, employee or agent on such basis as may be agreed
upon.
Section 7. Rights Hereunder Exclusive. The rights and remedies
provided in this Article are exclusive. No indemnity of shareholders, directors,
officers, employees or agents of the Corporation shall be valid unless
consistent with this Article.
Section 8. Indemnification to Fullest Extent Permitted by Law.
Except as expressly limited, the indemnification provided in this Article is
intended to be to the greatest extent permitted by law.
ARTICLE X
CERTIFICATES FOR SHARES
Section 1. Certificates Representing Shares. The Corporation shall
deliver certificates representing all shares to which shareholders are entitled.
Such certificates shall be numbered and shall be entered in the books of the
Corporation as they are issued, and shall be signed by the President or a Vice
President and the Secretary or an Assistant Secretary of the Corporation, and
may be sealed with the seal of the Corporation or a facsimile thereof. The
signatures of the President or Vice President and the Secretary or Assistant
Secretary, upon a certificate may be facsimiles, if the certificate is
countersigned by a transfer agent, or registered by a registrar, either of which
is other than the Corporation itself or an employee of the Corporation. In case
any officer who has signed or whose facsimile signature has been placed upon
such certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer at the date of its issuance. If the Corporation is authorized to
issue shares of more than one class, there shall be set forth upon the face or
back of the certificate, or the certificate shall have a statement that the
Corporation will furnish to any shareholder upon request and without charge, a
full statement of all of the designations, preferences, limitations and relative
rights of the shares of each class authorized to be issued, and if the
Corporation is authorized to issue any preferred or special class in series, the
variations in the relative rights and preferences between the shares of each
such series so far as the same have been fixed and determined and the authority
of the Board of Directors to fix and determine the relative rights and
preferences of subsequent series. Each certificate representing shares shall
state upon the face thereof that the Corporation is organized under
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
17
<PAGE> 247
the laws of the State of Connecticut, the name of the person to whom issued,
the number and the class and the designation of the series, if any which such
certificate represents and the par value of each share represented by such
certificate or a statement that the shares are without par value. No
certificate shall be issued for any share until the consideration therefor has
been fully paid.
Section 2. Transfer of Shares. Upon surrender to the Corporation or
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction upon its books, provided that the transaction does not violate the
restrictions on transfer set forth in Section 3 below.
Section 3. Lost, Stolen or Destroyed Certificates. The Board of
Directors may direct a new certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed upon the making of an affidavit of that fact
by the person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the Board of
Directors, in its discretion and as a condition precedent to the issuance
thereof, may require the owner of such lost, stolen or destroyed certificate or
certificates, of his legal representative, to advertise the same in such manner
as it shall require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 4. Closing of Transfer Books and Fixing Record Date. For
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors may provide that the stock
transfer books shall be closed for a stated period but not to exceed, in any
case, seventy (70) days. If the stock transfer books shall be closed for the
purpose of determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least ten (10) days
immediately preceding such meeting. In lieu of closing the stock transfer books,
the Board of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than seventy
(70) days and, in case of a meeting of shareholders, not less than ten (10) days
prior to the date on which the particular action requiring such determination of
shareholders is to be taken. If the stock transfer books are not closed and no
record date is fixed for the determination of shareholders entitled to notice of
or to vote at a meeting of shareholders, or shareholders entitled to receive
payment of a dividend, the date on which notice of the meeting is mailed or the
date on which the resolution of the Board of Directors declaring
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
18
<PAGE> 248
such dividend is adopted, as the case may be, shall be the record date for
such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this Section 4, such determination shall apply to any adjournment thereof,
except where the determination has been made through the closing of stock
transfer books and the stated period of closing has expired.
Section 5. Registered Shareholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of the State of Connecticut.
Section 6. Restrictions on Transfer of Shares and Warrants. (a) In
accordance with Section 33-306a of the Connecticut Stock Corporation Act,
and solely for the purpose of permitting the utilization of the net operating
loss carryovers, capital loss carryovers and future deductions (the "Tax
Benefits") to which the Corporation (or any other member of the consolidated
group of which the Corporation is common parent for federal income tax purposes)
is or may be entitled pursuant to the Internal Revenue Code of 1986, as amended,
or any successor statute (collectively the "Code") and the regulations
thereunder, the following restrictions shall apply until the Expiration Date.
(i) From and after [THE EFFECTIVE DATE] no Person other than the
Corporation shall, except as provided in subparagraph (ii) below, Transfer
to any Person any direct or indirect interest in any Stock or Warrants to
the extent that such Transfer, if effective, would cause the Ownership
Interest Percentage of the Transferee or any other Person to increase to 4.5
percent or above, or from 4.5 percent or above to a greater Ownership
Interest Percentage.
(ii) Any Transfer of Stock or Warrants that would otherwise be
prohibited pursuant to the preceding subparagraph shall nonetheless be
permitted if prior to such Transfer being consummated (or, in the case of an
involuntary Transfer, as soon as practicable after the transaction is
consummated), the Board of Directors approves the Transfer (such approval
may relate to a Transfer or series of identified Transfers).
(iii) The Board of Directors shall approve a Transfer (such
approval may relate to a Transfer or series of identified Transfers)
pursuant to subparagraph (ii) above unless the Board of Directors concludes
(x) that there is a reasonable likelihood that such Transfer will create or
increase a material risk that limitations pursuant to Section 382 of the
Code will be imposed on the utilization of the Tax Benefits, either at the
time of the Transfer or a reasonable time thereafter, and (y) that the
benefits of such transaction to the
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
19
<PAGE> 249
shareholders of the Corporation as a whole are not sufficient to permit the
Transfer in the light of the risk or increase in risk caused thereby. In
determining whether to approve a proposed Transfer, the Board of Directors may
take into account: the opinion of legal counsel selected by the Board of
Directors ("Corporate Legal Counsel") addressing the relevant legal
considerations (such opinion shall take into account any private rulings
obtained by the Corporation from the Internal Revenue Service and shall take a
reasonable position with respect to the application and interpretation of
Section 382 of the Code and the regulations, including final, temporary and
proposed, thereunder (the "Regulations")); any information and opinions of legal
counsel provided by the Person or Persons requesting that the Transfer be
permitted (the "Proponent"); the ownership shifts that have previously taken
place; the size of the ownership shift that would result from the proposed
transaction; the effect of any reasonably foreseeable transactions by the
Corporation or any other Person (including any Transfer of Stock or Warrants
that the Corporation has no power to prevent, without regard to any knowledge on
the part of the Corporation as to the likelihood of such Transfer); the
potential effect of any reasonably foreseeable value shifts among the various
classes or series of Stock (such value shifts to be calculated using reasonable
valuation methods and assumptions); the possible effects of an ownership change
within the meaning of Section 382 of the Code; and any other factor deemed
relevant by the Board of Directors to the preservation of the Tax Benefits.
Notwithstanding anything in this subparagraph (iii) to the contrary, the Board
of Directors shall approve a proposed Transfer of Stock or Warrants presented
for its review pursuant to subparagraph (ii) above if it determines that, prior
to giving effect to the proposed Transfer the proposed Transfer is to a wholly
owned subsidiary of the Transferor or to a trust all of the beneficial interests
in which are owned by the Transferor. If requested by the Board of Directors,
the Proponent shall deliver to the Board of Directors all information relating
to the proposed Transfer and the parties thereto and their respective Affiliates
that is reasonably available to such parties and their respective Affiliates and
that the Board of Directors deems reasonably necessary to make the
determinations described in the first sentence of this subparagraph (a)(iii)
with respect to the proposed Transfer (the "Required Information"). The Board of
Directors shall determine whether or not to approve a proposed Transfer within
forty-five (45) days of the date it receives a request for approval, provided,
however, that the foregoing time limit shall not apply if the Board of Directors
requests the Proponent to provide the Required Information and the Proponent
does not provide such information to the Board of Directors within ten (10) days
of receipt of the Board of Directors' request. If the Proponent does not provide
the Required Information within ten (10) days of receipt of the Board of
Directors' request, the Board of Directors shall determine whether or not to
approve the proposed Transfer within forty-five (45) days of the date it
receives the Required Information. Upon determining whether or not to approve a
proposed Transfer, the Board of Directors shall cause the Corporation promptly
to notify the Proponent. The Board of Directors may establish a committee to
determine whether to approve a proposed Transfer or for any
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
20
<PAGE> 250
other purpose relating to this Section 6. The Proponent shall, as a
condition to the Corporation's consideration of a request to approve a
proposed Transfer, reimburse or agree to reimburse the Corporation, on
demand, for all costs and expenses incurred by the Corporation with respect
to such proposed Transfer ("Transfer Costs"), including, without limitation,
the Corporation's costs and expenses incurred in determining whether to
authorize such proposed Transfer.
(iv) For purposes of this Section 6:
(A) "Stock" shall mean any class or series of stock of the
Corporation (other than stock described in Section 1504(a)(4) of
the Code or any successor statute, or stock that is not so
described solely because it is entitled to vote as a result of
dividend arrearages) and any other instrument that is treated as
stock of the Corporation for purposes of Section 382 of the Code;
(B) "Warrants" shall mean any options, warrants, rights,
convertible debt securities or other securities issued by the
Corporation and exercisable for or convertible into Stock;
(C) "Beneficial Ownership" shall have the meaning set forth
in Rule 13d-3 under the United States Securities Exchange Act of
1934, as amended (the "1934 Act");
(D) "Person" refers to any governmental entity or agency,
and any individual, corporation, estate, trust, association,
company, partnership, joint venture, or similar organization, and
shall include any group comprised of any such Person and any other
Person or Persons with whom such Person or any Affiliate or
Associate of such Person has any formal or informal agreement,
arrangement or understanding for the purpose of directly or
indirectly acquiring Stock or rights, options, warrants or
convertible securities with respect thereto (including but not
limited to Warrants); provided, however, that a public group (as
defined in the regulations in effect on [INSERT EFFECTIVE DATE]
under Section 382 of the Code) shall not be treated as a Person
solely by reason of its status as a public group;
(E) a Person's "Ownership Interest Percentage" shall be the
ownership interest percentage with respect to the Corporation that
would be ascribed to such Person for purposes of Section 382 of the
Code, assuming for this purpose that any other warrant, option or
right to acquire, or security convertible into, Stock (including
but not limited to Warrants) owned by such Person or any Affiliate
or Associate of such Person (but not those owned by any other
Person) were
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
21
<PAGE> 251
exercised and not applying for this purpose any rule
that would treat an entity as no longer owning Stock that is
attributed to its owners;
(F) "Transfer" refers to any means of conveying record
ownership, Beneficial Ownership or tax ownership (applying, in the
case of Tax Ownership, applicable attribution rules for purposes of
Section 382 of the Code) of Stock or Warrants, whether such means
is direct or indirect, voluntary or involuntary. The terms
"Transfers" and "Transferred" shall have correlative meaning.
"Transferee" means any Person to whom any Stock or Warrant is
Transferred, and "Transferor" means any Person who Transfers any
Stock or Warrant;
(G) "Affiliate" and "Associate" shall have the meanings
set forth in Rule 12b-2 under the 1934 Act;
(H) "Expiration Date" shall mean the fourth anniversary
of the effective date of the Corporation's Chapter 11 Plan; and
(I) "Related Party Request" shall mean, with respect to any
other request, a request to approve a proposed Transfer in which
the proposed Transferor or the proposed Transferee is, with respect
to such other request, a proposed Transferor, a proposed Transferee
or an Affiliate of either.
(a) The restriction on the Transfer of securities set forth
herein shall expire on the Expiration Date.
(b) Unless the Transfer is permitted as provided in subparagraph
(a)(ii) of this Section 6 any attempted Transfer of Stock or Warrants in excess
of the Stock or Warrants that could be Transferred to the Transferee without
restriction under subparagraph (a)(i) of this Section 6 shall not be effective
to Transfer ownership of such excess Stock or Warrants (the "Prohibited Shares"
or "Prohibited Warrants," as the case may be, and each, a "Prohibited Security")
to the purported acquiror thereof (the "Purported Acquiror"), who shall not be
entitled to any rights as a shareholder of the Corporation with respect to such
Prohibited Shares (including, without limitation, the right to vote or to
receive dividends with respect thereto) or to any rights with respect to such
Prohibited Warrants, as the case may be.
(i) Upon demand by the Corporation the Purported Acquiror shall
Transfer any certificate or other evidence of purported ownership of
Prohibited Securities within the Purported Acquiror's possession or control,
along with any dividends or other distributions paid by the Corporation with
respect to any Prohibited Shares that were received by the Purported
Acquiror (the "Prohibited Distributions"), to such Person as
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
22
<PAGE> 252
the Corporation shall designate to act as transfer agent for such Prohibited
Securities (the "Agent"). If the Purported Acquiror has sold any Prohibited
Securities to an unrelated party in an arm's-length transaction after
purportedly acquiring them, the Purported Acquiror shall be deemed to have
sold such Prohibited Securities for the Agent, and in lieu of Transferring
such Prohibited Shares (and Prohibited Distributions with respect thereto)
or Prohibited Warrants to the Agent shall Transfer to the Agent any such
Prohibited Distributions and the proceeds of such sale (the "Resale
Proceeds") except to the extent that the Agent grants written permission to
the Purported Acquiror to retain a portion of such Resale Proceeds not
exceeding the amount that would have been payable by the Agent to the
Purported Acquiror pursuant to subparagraph (b)(ii) below if such Prohibited
Securities had been sold by the Agent rather than by the Purported Acquiror.
If shares of Stock are issued upon the purported exercise of Prohibited
Warrants, such shares shall be Prohibited Shares. Any purported Transfer of
Prohibited Securities by the Purported Acquiror other than a Transfer
described in one of the first two sentences of this subparagraph (b)(i)
shall not be effective to Transfer any ownership of such Prohibited
Securities.
(ii) The Agent shall sell in one or more arm's-length transactions
any Prohibited Securities Transferred to the Agent by the Purported
Acquiror, and the proceeds of such sale (the "Sales Proceeds"), or the
Resale Proceeds, if applicable, shall be used to pay the expenses of the
Agent in connection with its duties under this paragraph (b) with respect to
such Prohibited Securities, and any excess shall be allocated to the
Purported Acquiror up to the following amount: (x) where applicable, the
purported purchase price paid or value of consideration surrendered by the
Purported Acquiror for such Prohibited Securities, and (y) where the
purported Transfer of Prohibited Securities to the Purported Acquiror was by
gift, inheritance, or any similar purported Transfer, the fair market value
(as determined in good faith by the Board of Directors) of such Prohibited
Securities at the time of such purported Transfer. Subject to the succeeding
provisions of this subparagraph, any Resale Proceeds or Sales Proceeds in
excess of the amount allocable to the Purported Acquiror pursuant to the
preceding sentence, together with any Prohibited Distributions, shall be
Transferred to any entity described in Section 501(c)(3) of the Code and
selected by the Board of Directors or its designee. In no event shall any
such amounts described in the preceding sentence inure to the benefit of the
Corporation or the Agent, but such amounts may be used to cover expenses
incurred by the Agent in connection with its duties under this paragraph (b)
with respect to the related Prohibited Securities. Notwithstanding anything
in this Section 6 to the contrary, the Corporation shall at all times be
entitled to make application to any court of equitable jurisdiction within
the State of Delaware for an adjudication of the respective rights and
interests of any Person in and to any Sale Proceeds, Resale Proceeds and
Prohibited Distributions pursuant to this Section 6 and applicable law and
for leave to pay such amounts into such court.
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
23
<PAGE> 253
(c) Within thirty (30) business days of learning of a purported
Transfer of Prohibited Securities to a Purported Acquiror, the Corporation
through its Secretary shall demand that the Purported Acquiror surrender to the
Agent the certificates representing the Prohibited Securities, or any Resale
Proceeds, and any Prohibited Distributions, and if such surrender is not made by
the Purported Acquiror the Corporation may institute legal proceedings to compel
such Transfer; provided, however, that nothing in this paragraph (c) shall
preclude the Corporation in its discretion from immediately bringing legal
proceedings without a prior demand, and provided further that failure of the
Corporation to act within the time periods set out in this paragraph (c) shall
not constitute a waiver of any right of the Corporation to compel any Transfer
required by subparagraph (b)(i) of this Section 6.
(d) Upon a determination by the Corporation that there has been or
is threatened a purported Transfer of Prohibited Securities to a Purported
Acquiror, the Corporation may take such action in addition to any action
permitted by the preceding paragraph as it deems advisable to give effect to the
provisions of this Section 6, including, without limitation, refusing to give
effect on the books of this corporation to such purported Transfer or
instituting proceedings to enjoin such purported Transfer.
(e) The Corporation may require as a condition to the registration
of the Transfer of any shares of its Stock or Warrants that the proposed
Transferee furnish to the Corporation all information reasonably requested by
the Corporation and reasonably available to the proposed Transferee and its
Affiliates with respect to the direct or indirect ownership interests of the
proposed Transferee (and of Persons to whom ownership interests of the proposed
Transferee would be attributed for purposes of Section 382 of the Code) in Stock
or Warrants or other options or rights to acquire Stock.
(f) All certificates evidencing ownership of shares of Stock or
Warrants that are subject to the restrictions on Transfer contained in this
Section 6 shall bear a conspicuous legend referencing the restrictions set forth
in this Section 6.
(g) The Corporation and the Board of Directors shall be fully
protected in relying in good faith upon the information, opinions, reports,
statements of the chief executive officer, the chief financial officer, or the
chief accounting officer of the Corporation or of the Corporation's legal
counsel, independent auditors, Transfer agent, investment bankers, and other
employees and agents in making the determinations and findings contemplated by
this Section 6 to the fullest extent permitted by law. Any determination by the
Board of Directors pursuant to this Section 6 shall be conclusive.
(h) If any provision of this Section 6 or any application of such
provision is determined to be invalid by any federal or state court having
jurisdiction over the issue, the validity of the remaining provisions shall not
be affected and other applications of such
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
24
<PAGE> 254
provision shall be affected only to
the extent necessary to comply with the determination of such court.
(i) Nothing in this Section 6 shall preclude the settlement of any
transaction entered into through the facilities of any national securities
exchange in the Stock or Warrants.
ARTICLE XI
GENERAL PROVISIONS
Section 1. Dividends. The Board of Directors from time to
time may declare, and the Corporation may pay, dividends on its outstanding
shares in cash, in property or in its own shares, except when the Corporation is
insolvent or when the payment thereof would render the Corporation insolvent or
when the declaration or payment thereof would be contrary to any restrictions
contained in the Certificate of Incorporation. Such dividends may be declared at
any regular or special meeting of the Board, and the declaration and payment
shall be subject to all applicable provisions of law, the Certificate of
Incorporation and these By-Laws.
Section 2. Reserves. Before payment of any dividend, there
may be set aside out of any funds of the Corporation available for dividends
such sum or sums as the directors from time to time, in their absolute
discretion, deem proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the directors shall deem conducive to
the interest of the Corporation, and the directors may modify or abolish any
such reserve in the manner in which it was crafted.
Section 3. Reports. The Board of Directors shall, when
requested by the holders of at least a majority of the outstanding shares of the
Corporation, present full and clear written reports, not more often than
quarterly, of the amount business and the financial condition of the
Corporation.
Section 4. Checks. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors from time to time may
designate.
Section 5. Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of the Board of Directors.
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
25
<PAGE> 255
Section 6. Seal. The corporate seal shall have inscribed thereon
the name of the Corporation and may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner reproduced.
ARTICLE XII
AMENDMENTS
These By-Laws may be altered, amended or repealed or new By-Laws
may be adopted by affirmative vote of a majority of the entire Board of
Directors at any regular or special meeting of the Board, subject to repeal or
change at any regular or special meeting of shareholders at which a quorum is
present or represented by the affirmative vote of a majority of the shares
entitled to vote at such meeting and present or represented thereat, provided
notice of the proposed repeal or change is contained in the notice of such
meeting of shareholders.
EXHIBIT A -- LMUSA CHARTER/BY-LAWS
26
<PAGE> 256
EXHIBIT B TO LMUSA
CHAPTER 11 PLAN
LMUSA LITIGATION TRUST AGREEMENT
dated as of _______, 1996
among
LMUSA,
Reorganized LMUSA
and _________, Trustee
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
<PAGE> 257
<TABLE>
<CAPTION>
TABLE OF CONTENTS
ARTICLE 1
DEFINITIONS
<S> <C> <C>
1.1 Rules of Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2
NATURE OF TRANSFER
2.1 Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 No Additional Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Property In Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Creation of Expense Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.5 Purpose of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.6 No Reversion to Reorganized LMUSA . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.7 Instruments of Further Assurance; Information . . . . . . . . . . . . . . . . . . . 5
ARTICLE 3
DURATION AND TERMINATION OF TRUST
3.1 Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Continuance of Trust for Winding Up . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 4
ADMINISTRATION OF TRUST ESTATE
4.1 Expense Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 Increase of Expense Reserve Using Trust Assets . . . . . . . . . . . . . . . . . . . 6
4.3 Interim Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.4 Final Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 Reports to Reorganized LMUSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.6 Income Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
i
<PAGE> 258
<TABLE>
<S> <C> <C>
4.7 Withholding of Taxes and Other Charges . . . . . . . . . . . . . . . . . . . . . . . 8
4.8 Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 5
POWERS OF AND LIMITATIONS ON THE TRUSTEE
5.1 Limitations on Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.2 Specific Powers and Responsibilities of Trustee . . . . . . . . . . . . . . . . . . 9
5.3 Discretionary Submission of Questions to Reorganized LMUSA . . . . . . . . . . . . . 11
5.4 Additional Powers of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.5 Limitations on Powers of Trustee to Deal with Trust in Non-Fiduciary Capacity . . . 11
ARTICLE 6
CONCERNING THE TRUSTEE
6.1 Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.2 Transferee Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.3 Reliance by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.4 Indemnification of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.5 No Implied Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.6 Trustee's Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.7 No Personal Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 7
COMPENSATION OF TRUSTEE
7.1 Amount of Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.2 Dates of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 8
TRUSTEE AND SUCCESSOR TRUSTEES
8.1 Number of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.2 Resignation and Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.3 Appointment of Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
ii
<PAGE> 259
<TABLE>
<S> <C> <C>
8.4 Acceptance of Appointment by Successor Trustee . . . . . . . . . . . . . . . . . . . 15
8.5 Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 9
AMENDMENTS
9.1 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Filing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.2 Intention of Parties to Establish Trust . . . . . . . . . . . . . . . . . . . . . . 16
10.3 Requirement of Undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.4 Laws as to Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.8 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
iii
<PAGE> 260
LMUSA LITIGATION TRUST AGREEMENT
THIS AGREEMENT AND DECLARATION OF TRUST is made as of the __th
day of ____, 1996, by and among Lomas Mortgage USA, Inc., a Connecticut
corporation and a Debtor and Debtor-in-possession ("LMUSA"), Reorganized Lomas
Mortgage USA, Inc., a Connecticut corporation ("Reorganized LMUSA") and
_______________ (the "Trustee").
R E C I T A L S
A. LMUSA and its parent, LFC, and also LIS and LAS filed voluntary
petitions under Chapter 11 of the United States Bankruptcy Code on or about
October 10, 1995.
The LMUSA Chapter 11 Plan, dated April 8, 1996, (the "Plan"), a copy of
which is attached hereto as Exhibit A, was filed with the Bankruptcy Court in
the proceeding captioned In re Lomas Mortgage USA, Inc., Debtor, Case
No. 95-1236 (PJW).
B. The Plan was confirmed by Order of the Bankruptcy Court dated ______.
C. The Plan provides that effective on the Effective Date, LMUSA shall
be deemed to have transferred and assigned to the Trust governed by this
Agreement any and all claims, rights, or causes of action that constitute
property of the Estate or of LMUSA, whether arising under the Bankruptcy Code or
under nonbankruptcy law, (including all books, records, privileges and defenses
relating thereto) including, without limitation, all rights of setoff and rights
under Section 502(d) of the Bankruptcy Code and all avoiding power actions under
sections 544, 545, 547, 548, 549, 550 and 553 of the Bankruptcy Code or under
applicable nonbankruptcy law as applied through section 544(b) of the Bankruptcy
Code, other than Intercompany Claims. In addition, the Plan provides that on or
as soon as practicable after the Effective Date, Reorganized LMUSA shall
transfer to the Trust $5 million or such other amount as the LMUSA Creditors'
Committee shall have specified in writing to LMUSA and the Bankruptcy Court at
least three (3) Business Days prior to the commencement of the Confirmation
Hearing to fund the administration of the Trust. [On _____, 1996, the LMUSA
Creditors' Committee specified $____ as such other amount.]
D. The Plan provides that the Trustee will be responsible for pursuing,
as appropriate in accordance with the best interests of LMUSA, the third party
claims and causes of action assigned to the Trust through litigation or, if
appropriate, settlement and
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
1
<PAGE> 261
distributing any net proceeds of such litigation of settlement to Reorganized
LMUSA for distribution to holders of Allowed LMUSA Class 3 Claims under the
Plan.
E. The Trust shall be deemed not to be LMUSA or a successor to LMUSA,
but only the assignee of the assets transferred to the Trust.
F. It is desired that the mechanism for payment of funds constituting
proceeds of the Trust Assets be specified and that the Trustee's rights, powers,
and duties with respect to the Trust created hereby be established.
G. The Trustee shall be authorized to do and perform such acts, to
execute and deliver such bills of sale, instruments of transfer and other
documents and to engage the services of such agents, attorneys, accountants,
appraisers, consultants and other persons as he may deem necessary or advisable
in order to carry out the purposes of the Trust created hereby.
H. In order to implement the Plan, and in consideration of the promises
and the mutual covenants, terms, and conditions contained herein, the parties
hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Rules of Interpretation. As used herein, the following terms have
the respective meanings specified below and such meanings shall be equally
applicable to both the singular and plural, and masculine and feminine, forms of
the terms defined. In the event that the Trust is administered by a female
Trustee or a corporate Trustee, the use of masculine prepositions and pronouns
herein shall be read as if written in the feminine or neuter forms, as the case
may be. The words "herein," "hereof," "hereto," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
section, subsection or clause contained herein. Captions and headings to
articles, sections, schedules and exhibits are inserted for convenience of
reference only and are not intended to be part of or to affect the
interpretation of this Agreement. The rules of construction set forth in section
102 of the Bankruptcy Code shall apply.
1.2 Definitions. All capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them (a) in the Plan or (b) if not
defined in the Plan, in the Bankruptcy Code. In addition to such other terms as
are defined in other sections of this Agreement, the following terms (which
appear herein as capitalized terms) shall have the following meanings:
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
2
<PAGE> 262
"AGREEMENT" means this instrument as originally executed together with
all exhibits hereto, or as this instrument may from time to time be amended
pursuant to the terms hereof.
"EXPENSE FUND" means the $5 million delivered by LMUSA to the Trust
pursuant to the terms of SECTIONS 2.1 and 2.4.
"EXPENSE RESERVE" means the reserve created pursuant to SECTION 4.1
comprising of the Expense Fund and any additional contributions as described in
SECTION 4.2.
"INITIAL TRUST ASSETS" means (a) the Expense Fund and (b) all rights,
claims or causes of action that constitute property of the Estate or of LMUSA,
whether arising under the Bankruptcy Code or under nonbankruptcy law, (including
all books, records, privileges and defenses relating thereto) including, without
limitation, all rights of setoff and rights under Section 502(d) of the
Bankruptcy Code and all avoiding power actions under sections 544, 545, 547,
548, 549, 550 and 553 of the Bankruptcy Code or under applicable nonbankruptcy
law as applied through section 544(b) of the Bankruptcy Code, other than
Intercompany Claims.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended.
"PLAN" has the meaning ascribed to such term in Recital B.
"TAX CODE" means the Internal Revenue Code of 1986, as amended.
"TRUST" means the LMUSA Litigation Trust as created by this Agreement.
"TRUSTEE" means the original Trustee and any successor thereto.
"TRUST ASSETS" means all property held from time to time by the Trustee
hereunder, including (a) the Initial Trust Assets and (b) any assets, proceeds
or income received or earned from (i) the resolution of the rights, claims or
causes of action comprising the Initial Trust Assets and (ii) from the
investment, sale, exchange or other disposition of any of the Initial Trust
Assets or any other assets or proceeds received or earned through the
resolutions of such rights, claims or causes of action.
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
3
<PAGE> 263
ARTICLE 2
NATURE OF TRANSFER
2.1 Declaration of Trust. LMUSA hereby transfers the Initial Trust
Assets to the Trustee, in trust, and subject to SECTION 10.8 for the benefit of
Reorganized LMUSA as trustee for the benefit of certain of its creditors
pursuant to the terms of this Agreement and of the Plan.
2.2 No Additional Beneficiaries. The Trust shall be solely for the
benefit of Reorganized LMUSA as trustee for the benefit of certain of its
creditors as set forth in the Plan.
2.3 Property In Trust. The Trustee shall hold the legal title to all
property at any time constituting a part of the Trust Assets and hereby declares
that he shall hold such property in trust to be administered and disposed of
pursuant to the terms of this Agreement for the benefit of Reorganized LMUSA as
trustee for the benefit of certain of its creditors pursuant to the terms of the
Plan. The Trustee is further authorized to make disbursements and payments from
the Trust in accordance with the provisions hereof.
2.4 Creation of Expense Fund. The transfer of the Expense Fund to the
Trustee, in trust, is subject to the terms of this SECTION 2.4. The Expense Fund
is to be used solely to cover the expenses of the Trust as set forth in SECTION
4.1. Neither Reorganized LMUSA nor any of its subsidiaries, affiliates, agents,
or assigns shall have any obligation to pay any of the expenses of the Trust,
other than the obligation to transfer the Expense Fund to the Trust. Reorganized
LMUSA, as trustee, shall be entitled to receive, upon termination and winding up
of the Trust pursuant to ARTICLE 3, any amounts remaining in the Expense Fund as
set forth in SECTION 4.1.
2.5 Purpose of Trust. The sole purpose of this Trust is to liquidate the
Trust Assets in a manner calculated to conserve, protect and maximize the value
of the Trust Assets and to collect and distribute the income and proceeds
therefrom to Reorganized LMUSA, as trustee, in as prompt and orderly a fashion
as possible after the payment of, or provision for, expenses and liabilities.
The Trustee shall report the Trust for Federal income tax purposes as a trust
subject to the provisions of Section 641 of the Tax Code, or as may be otherwise
required or permitted under applicable law. Pursuant to this express purpose,
and subject to the provisions of ARTICLE 5, the Trustee is hereby authorized and
directed to take all reasonable and necessary action to hold, conserve, and
protect the Trust Assets and to collect on, sell, or otherwise liquidate or
dispose of the Trust Assets, and to distribute the net proceeds of such
disposition to LMUSA, as trustee, in as prompt, efficient and orderly a fashion
as possible in accordance with the provisions of ARTICLE 4.
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
4
<PAGE> 264
2.6 No Reversion to Reorganized LMUSA. In no event shall any
part of the Trust Assets revert to or be distributed to Reorganized LMUSA except
in its capacity as trustee for the benefit of certain creditors pursuant to the
Plan.
2.7 Instruments of Further Assurance; Information. LMUSA and
such persons as shall have the right and power after the Effective Date, upon
reasonable request of the Trustee, shall execute, acknowledge, and deliver such
further instruments and do such further acts as may be necessary or proper to
effectively carry out the purposes of this Agreement, to transfer any property
intended to be conveyed hereby, and to vest in the Trustee, his successors and
assigns, the estate, powers, instruments or funds in trust hereunder.
ARTICLE 3
DURATION AND TERMINATION OF TRUST
3.1 Duration. The existence of this Trust shall terminate ten
years from the date hereof, unless an earlier termination is required by the
applicable laws of the State of Delaware, or by the action of Reorganized LMUSA
as provided in ARTICLE 8 or unless earlier terminated by the distribution of all
of the Trust Assets as provided in SECTION 4.3. Notwithstanding the foregoing,
in the event the Trustee shall have been unable after reasonable efforts to
settle or litigate to a conclusion all causes of action included in the Trust
Assets within the initial ten-year term of the Trust Agreement, the Trustee
shall have the right to extend the term of the Trust for successive one-year
renewal terms until all such causes of action have been settled or litigated to
a conclusion in fulfillment of the purposes of the Trust.
3.2 Continuance of Trust for Winding Up. After the termination of the
Trust and for the purpose of liquidating and winding up its affairs, the
Trustee shall continue to act as such until all duties have been fully
performed. Upon distribution of all of the Trust Assets, the Trustee shall
hold the books, records and files delivered to or created by the Trustee for
a period of four years. At the Trustee's discretion, all of such records and
documents may be destroyed at any time after four years from the distribution
of all of the Trust Assets. Except as otherwise specifically provided herein,
upon the distribution of all of the Trust Assets, the Trustee shall have no
further duties or obligations hereunder except to account as provided in
SECTIONS 4.5 and 4.6.
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
5
<PAGE> 265
ARTICLE 4
ADMINISTRATION OF TRUST ESTATE
4.1 Expense Reserve. On the Effective Date, the Trustee shall
establish the Expense Reserve for the payment of all expenses, debts, charges,
liabilities and obligations with respect to the Trust, including without
limitation (a) all costs and expenses, including those of professionals retained
by the Trustee, incurred in connection with any litigation, (b) Trustee's fees,
(c) all costs and expenses incurred in connection with indemnifying the Trustee
pursuant to SECTION 6.4, (d) all fees and expenses, including those of
professionals and other agents and employees retained by the Trustee, incurred
in connection with the performance of the Trustee's duties and obligations
including, without limitation, fees incurred in connection with holding,
collecting on, liquidating or otherwise disposing of the Trust Assets,
secretarial and office expenses, all applicable taxes, and all expenses of
distribution and (e) all fees and expenses, including those of professionals and
other agents and employees retained by the Trustee, incurred in connection with
the winding up of the Trust pursuant to ARTICLE 3. The amount of the Expense
Reserve shall initially be the $5 million Expense Fund received by the Trustee
pursuant to the terms of SECTIONS 2.1 and 2.4. Thereafter, the Expense Reserve
shall be funded out of the proceeds of the Trust Assets as provided in SECTION
4.2. Any remaining balance in the Expense Reserve, after the payment of all
expenses, debts, charges, liabilities and obligations intended to be paid
therefrom, shall be distributed to Reorganized LMUSA, as trustee, as provided in
SECTIONS 4.3 and 4.4. Any monies deposited in the Expense Reserve shall be
invested in interest-bearing deposits or investments that satisfy the
requirements of SECTION 5.1 and the interest earned thereon shall be credited to
the Expense Reserve.
4.2 Increase of Expense Reserve Using Trust Assets. To the
extent the Trustee in his discretion determines that the amount of funds in the
Expense Reserve is at any time or may become insufficient, the Trustee, in his
discretion and judgment, may from time to time make additional contributions to
the Expense Reserve out of the Trust Assets, for such reasonable amount or
amounts as the Trustee in his discretion and judgment may determine to be
necessary or advisable to meet unliquidated or contingent liabilities of the
Trust. In no event shall the Trustee be required to use his personal funds or
assets for such purposes.
4.3 Interim Distributions. (a) All payments to be made by the
Trustee to Reorganized LMUSA shall be made only from the assets, income and
proceeds of the Trust and only to the extent that the Trustee shall have
received sufficient assets, income or proceeds of the Trust Assets to make such
payments in accordance with the terms of this SECTION 4.3. Reorganized LMUSA
shall look solely to the assets, income and proceeds of the Trust for any
distributions as herein provided.
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
6
<PAGE> 266
(b) As often as, in the discretion and judgment of the Trustee,
there shall be an amount of monies in the Trust sufficient to render feasible a
distribution of cash or other property to Reorganized LMUSA, but (subject to
there being a sufficient amount available pursuant to the terms of this
subsection) no less often than annually, the Trustee shall distribute and pay,
or cause to be distributed and paid, to Reorganized LMUSA, such aggregate amount
of cash or other non-cash property designated by the Trustee in his discretion
for distribution to Reorganized LMUSA, if any, as shall then be held in the
Trust, excluding reasonable amounts of cash held in the reserve funds pursuant
to SECTION 4.1 or 4.2 or held for withholding of taxes or other charges pursuant
to SECTION 4.8 or otherwise needed to pay the expenses, debts, charges,
liabilities and obligations of the Trust.
4.4 Final Distribution. If the Trustee determines that all claims,
debts, liabilities, and obligations of the Trust, whether contingent or
noncontingent, disputed or undisputed, liquidated or unliquidated, have been
paid or discharged, and that all the Trust Assets have been converted to cash or
non-cash property designated by the Trustee in his discretion for distribution
to Reorganized LMUSA, or if the existence of the Trust shall terminate pursuant
to SECTION 3.1 or 3.2, the Trustee shall, as expeditiously as is consistent with
the conservation and protection of the Trust, and notwithstanding the minimum
distribution provisions of SECTION 4.3, distribute the Trust Assets to
Reorganized LMUSA subject to maintaining a reserve for expenses incurred in
winding up the Trust pursuant to SECTIONS 4.1 and 4.2.
4.5 Reports to Reorganized LMUSA. As soon as practicable after
the end of each fiscal year of the Trust and after termination of the Trust, the
Trustee shall submit a written report and account to Reorganized LMUSA showing
(a) the assets and liabilities of the Trust at the end of such fiscal year or
upon termination of the Trust and the receipts and disbursements of the Trustee
for such fiscal year or period, certified by independent public accountants, (b)
any changes in the Trust Assets which have not previously been reported, (c) any
action taken by the Trustee in the performance of his duties under this
Agreement which he has not previously reported and which in his opinion
materially affects the Trust and (d) if applicable, the amount of compensation
to be provided to the Trustee for the upcoming year pursuant to SECTION 7.1. The
Trustee may submit similar reports for such interim periods during the fiscal
year as he in his discretion deems advisable. In addition, the Trustee shall
provide a written report describing any material events concerning the Trust,
the Trustee or the Trust Assets, within fifteen (15) after the occurrence of
such material events. The fiscal year of the Trust shall end on the last day of
December of each year unless the Trustee deems it advisable to establish some
other date as the date on which the fiscal year of the Trust shall end;
provided that establishment of such other date is permissible under the
Tax Code.
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
7
<PAGE> 267
4.6 Income Tax Information. (a) The Trustee shall, at the time
and in the manner prescribed by the Tax Code, file such tax returns and reports
as may be required by applicable law, and shall promptly furnish copies of such
returns and reports as filed to Reorganized LMUSA.
(b) As soon as practicable after the close of each fiscal year,
the Trustee shall mail to Reorganized LMUSA a statement showing the dates and
amounts of all distributions made by the Trustee and such other information as
is reasonably available to the Trustee which may be helpful to Reorganized LMUSA
for the proper reporting of income with respect to assets held by it as trustee
for the benefit of certain creditors pursuant to the Plan.
The Trustee may retain professionals to perform his duties under this
SECTION 4.6, and may rely upon the performance of such professionals with
respect to such duties.
4.7 Withholding of Taxes and Other Charges. The Trustee may withhold
from any amounts distributable at any time to Reorganized LMUSA such sum or sums
as may be sufficient to pay any tax or taxes or other charge or charges which
have been or may be imposed on Reorganized LMUSA under the income tax laws of
the United States or of any state or political subdivision or entity by reason
of any distribution provided for in SECTIONS 4.3 and 4.4, whenever such
withholding is required by any law, regulation, rule, ruling, directive or other
governmental requirement, and the Trustee, in the exercise of his discretion and
judgment, may enter into agreements with taxing or other authorities for the
payment of such amounts as may be withheld in accordance with the provisions of
this SECTION 4.7. Notwithstanding the foregoing but without prejudice to the
Trustee's rights hereunder, Reorganized LMUSA shall have the right with respect
to the United States or any state or political subdivision or entity to contest
the imposition of any tax or other charge by reason of any distribution
hereunder.
4.8 Other Reports. The Trustee shall prepare and file audited
year-end and unaudited interim financial reports as may be required by
regulatory authorities, applicable laws, rules or regulations or as the Trustee
in his discretion deems advisable during the fiscal year.
ARTICLE 5
POWERS OF AND LIMITATIONS ON THE TRUSTEE
5.1 Limitations on Trustee. The Trustee shall carry out the
purposes of the Trust and the directions contained herein, and shall not at any
time, on behalf of the Trust or
EXHIBIT B--LMUSA LITIGATION TRUST AGREEMENT
8
<PAGE> 268
Reorganized LMUSA, enter into or engage in any business, and no part of the
Trust Assets or the proceeds, revenue or income therefrom shall be used or
disposed of by the Trustee in furtherance of any business. This limitation shall
apply irrespective of whether the conduct of any such business activities is
deemed by the Trustee to be necessary or proper for the conservation and
protection of the Trust. The Trustee shall invest any of the funds held in the
Trust including, without limitation, any reserve or escrow funds established
pursuant to the terms of this Agreement, only in (a) interest-bearing deposits
or short-term repurchase obligations or certificates of deposit of federally
insured banking institutions having in excess of $100,000,000 in capital and
surplus or (b) marketable direct obligations of, or guaranteed as to principal
and interest by, the United States of America or any agency or instrumentality
thereof. Once such funds are so invested, the Trustee shall not sell or
otherwise liquidate the investment until such time as such funds are (c) needed
to pay expenses incurred pursuant to this Agreement, or (d) to be distributed
pursuant to SECTIONS 4.3 and 4.4; provided, however, that the Trustee may
liquidate such investments if the Trustee determines in his discretion that
liquidation is necessary to protect the Trust from loss on the amounts invested.
The Trustee shall be restricted to the holding and collection of the Trust
Assets and the payment and distribution thereof for the purposes set forth
herein and to the conservation and protection of the Trust and the
administration thereof in accordance with the provisions of this Agreement. The
Trustee shall keep all Trust Assets segregated from and shall not commingle any
Trust Assets with any assets of any other entity, including any of the Trustee's
own assets. The Trustee may not hold stock in or be an officer or director of
Reorganized LMUSA. The Trustee shall not be or become an "affiliated person," as
that term is defined in the Investment Company Act, of any of LFC, LMUSA or any
of their subsidiaries, except to the extent any Trustee is deemed to be an
"affiliated person" solely by virtue of such Trustee's status as Trustee.
5.2 Specific Powers and Responsibilities of Trustee. Subject to
the provisions of SECTION 5.1, the Trustee shall have the following specific
powers and responsibilities in addition to any powers and responsibilities
conferred upon him by any other section or provision of this Agreement;
provided, however, that enumeration of the following powers and
responsibilities shall not be considered in any way to limit or control the
power of the Trustee to act as specifically authorized by any other section or
provision of this Agreement and to act in such a manner as the Trustee in his
discretion may deem necessary or appropriate to conserve and protect the Trust
Assets or to confer on Reorganized LMUSA the benefits intended to be conferred
upon it by this Agreement:
(a) To collect and receive any and all money and other property
of whatsoever kind or nature due to or owing or belonging to the Trust,
including accepting securities or other property in settlement of claims of the
Trust or any of the Trust Assets, and to give full discharge and acquittance
therefor;
EXHIBIT B--LMUSA LITIGATION TRUST AGREEMENT
9
<PAGE> 269
(b) To retain and set aside such funds out of the Trust as the
Trustee in his discretion shall deem necessary or expedient to pay or provide
for the payment of (i) unpaid claims, liabilities, debts or obligations of the
Trust and (ii) any and all expenses of administering the Trust.
(c) To do and perform any acts or things necessary or
appropriate for the conservation and protection of the Trust Assets, including
acts or things necessary or appropriate to maintain assets held by the Trustee
pending sale or other disposition thereof or distribution thereof to Reorganized
LMUSA and in connection therewith to employ such agents, including counsel,
accountants, experts, advisors or other persons, and to confer upon them such
authority as the Trustee in his discretion may deem expedient, and to pay
reasonable compensation therefor;
(d) To cause any investments of Trust Assets to be registered
and held in his name or in the name of a nominee without increase or decrease of
liability with respect thereto;
(e) To institute, join or defend actions or declaratory
judgments and to take such other action, including settlement of any such action
on any terms deemed reasonable by the Trustee in his discretion to enforce any
instruments, contracts, agreements, or causes of action relating to or forming a
part of the Trust;
(f) In connection with the sale or other disposition or
distribution of any securities held by the Trustee, to comply with the
applicable federal and state securities laws, and to enter into agreements
relating to sale or other distribution thereof;
(g) In the event any of the property which is or may become a
part of the Trust Assets is situated in any state or other jurisdiction in which
the Trustee is not qualified to act as Trustee, to nominate and appoint an
individual or corporate trustee qualified to act in such state or other
jurisdiction in connection with the property situated in the state or other
jurisdiction as a trustee of such property and require from such trustee such
security as may be designated by the Trustee. The trustee so appointed shall
have all the rights, powers, privileges and duties of the Trustee hereunder and
shall be subject to the conditions and limitations of this Trust, except as
modified or limited by the Trustee herein and except where the same may be
modified by the laws of such state or other jurisdiction (in which case, the
laws of the state or other jurisdiction in which such trustee is acting shall
prevail to the extent necessary). Such trustee shall be answerable to the
Trustee herein appointed for all monies, assets and other property which may be
received by it in connection with the administration of such property. The
Trustee hereunder may remove such trustee, with or without cause, and appoint a
successor trustee at any time by the execution by the Trustee of
EXHIBIT B--LMUSA LITIGATION TRUST AGREEMENT
10
<PAGE> 270
a written instrument declaring such trustee removed from office and specifying
the effective date and time of removal;
(h) To perform any act authorized, permitted, or required under
any instrument, contract, agreement, or cause of action relating to or forming a
part of the Trust, whether in the nature of an approval, consent, demand or
notice thereunder or otherwise, unless such act would require the consent of
Reorganized LMUSA in accordance with the express provisions of this Agreement;
(i) To file or cause to be filed all required federal state and
local tax filings, make any tax elections available to the Trust under federal,
state or local law, and prepare applications for rulings or other administrative
determinations from federal, state and local tax authorities as may be
reasonably necessary to determine the tax liabilities of the Trust or its
beneficiaries; and
(j) To establish the fees of the Trustee, which shall be the
fees approved by the Bankruptcy Court by approval of this Agreement in
connection with confirmation of the Plan and may thereafter be modified by the
Trustee as provided herein.
5.3 Discretionary Submission of Questions to Reorganized LMUSA.
The Trustee, in his sole discretion and judgment, may, but shall not be required
to, submit to Reorganized LMUSA at any time, and from time to time, any question
or questions regarding which the Trustee may desire to have explicit approval of
Reorganized LMUSA for the taking of any specific action proposed to be taken by
the Trustee with respect to the Trust, or the administration and distribution of
the Trust Assets. All costs and expenses incurred by the Trustee in the exercise
of any right, power or authority conferred by this SECTION 5.3 shall be costs
and expenses of the Trust.
5.4 Additional Powers of Trustee. Subject to the express limitations
contained herein, the Trustee shall have, and may exercise with respect to the
Trust Assets, or any part thereof, and to the administration and distribution
of the Trust Assets, all powers now or hereafter conferred on trustees by the
laws of the State of Delaware. The powers conferred by this SECTION 5.4 in no
way limit any power conferred on the Trustee by any other section hereof but
shall be in addition thereto; provided, however, that the powers conferred by
this SECTION 5.4 are conferred and may be exercised only and solely within the
limitations and for the limited purposes imposed and expressed in ARTICLE 2
and in SECTION 5.1.
5.5 Limitations on Powers of Trustee to Deal with Trust in
Non-Fiduciary Capacity. The Trustee may not sell property to or borrow
property from the Trust. The Trustee may not acquire property from the Trust
unless such acquisition is approved in
EXHIBIT B--LMUSA LITIGATION TRUST AGREEMENT
11
<PAGE> 271
advance by (a) the Bankruptcy Court or (b) the Securities and Exchange
Commission pursuant to Section 17(b) of the Investment Company Act.
ARTICLE 6
CONCERNING THE TRUSTEE
6.1 Generally. The Trustee accepts and undertakes to discharge the
Trust upon the terms and conditions hereof. The Trustee shall exercise those
rights and powers vested by this Agreement, and use the same degree of care and
skill in his exercise as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs. No provision hereof shall be
construed to relieve the Trustee from liability for his own grossly negligent
action, his own negligent failure to act or his own willful misconduct, except
that:
(a) The Trustee shall not be responsible for the acts or
omissions of any other trustee.
(b) The Trustee shall not be liable except for the performance
of such duties and obligations as are specifically set forth herein, and no
implied covenants or obligations shall be read into this Agreement against the
Trustee.
(c) The Trustee shall not be liable for any error of judgment
made in good faith.
(d) The Trustee shall not be liable with respect to any action
taken or omitted to be taken by him in good faith in accordance with the
direction of Reorganized LMUSA relating to the time, method, and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred upon the Trustee hereunder. Nothing in this SECTION
6.1(e) shall imply that the Trustee is required to seek consent for any
particular action, and the failure to seek or obtain such consent shall create
no implication with respect to the Trustee's rights or powers to undertake such
action without that consent.
6.2 Transferee Liabilities. If any liability shall be asserted
against the Trust or the Trustee as the transferee of the Trust Assets, on
account of any claimed liability of or through LMUSA or Reorganized LMUSA, the
Trustee may use such part of the Trust Assets as may be necessary in contesting
any such claimed liability and in payment, compromise, settlement and discharge
thereof on terms reasonably satisfactory to the Trustee in his discretion. In no
event shall the Trustee be required to use his personal funds or assets for such
purposes.
EXHIBIT B--LMUSA LITIGATION TRUST AGREEMENT
12
<PAGE> 272
6.3 Reliance by Trustee. Except as otherwise provided in SECTION
6.1:
(a) The Trustee may rely and shall be protected in acting upon
any resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, or other paper or document believed by him to be
genuine and to have been signed or presented by the proper party or parties.
(b) The Trustee may consult with legal counsel or other
professionals to be selected by him, and the Trustee shall not be liable for any
action taken or suffered by him in accordance with the advice of such
professionals.
6.4 Indemnification of Trustee. The Trustee shall be indemnified by and
receive reimbursement from the Trust against and from any and all loss,
liability or damage, including payment of attorneys' fees and other costs of
defending himself, which he may incur or sustain, without negligence or willful
misconduct, in the exercise and performance of any of the powers and duties
hereunder. The Trustee may purchase with assets of the Trust, such insurance as
he feels, in the exercise of his discretion, adequately insures that he shall be
indemnified against any such loss, liability or damage pursuant to this SECTION
6.4. Expenses (including attorneys' fees) and other costs of the Trustee's
defense shall be paid by the Trust in advance of the final disposition of any
claims against the Trustee upon receipt of an undertaking by or on behalf of the
Trustee to repay such amounts if it shall be ultimately determined that he is
not entitled to be indemnified by the Trust as authorized in this SECTION 6.4.
The terms of this SECTION 6.4 shall continue to apply to any former Trustee.
6.5 No Implied Duties. The Trustee shall not manage, control, use,
sell, dispose, collect or otherwise deal with the Trust or otherwise take any
action hereunder except as expressly provided herein, and no implied duties or
obligations shall be read into this Trust Agreement against the Trustee. The
Trustee nevertheless agrees that he will promptly take such action as may be
necessary to duly discharge any liens or encumbrances on any part of the Trust
Assets which result from claims against the Trustee not related to (a) the
ownership or administration of the Trust Asset, (b) any other transaction
pursuant to this Trust Agreement or (c) any document included in the Trust
Assets.
6.6 Trustee's Lien. The Trustee shall have a lien on the Trust Assets
and the proceeds thereof for the amount of any unpaid fees and expenses, and any
liability, loss or expense that may be incurred by him in connection with the
performance of his duties hereunder, including the expense of defending any
action or proceeding instituted against him, with respect to which he is
entitled to indemnification pursuant to SECTION 6.4.
6.7 No Personal Liability. Persons dealing with the Trust must
look solely to the Trust or trust property for the enforcement of any claims
against the Trust or to satisfy any
EXHIBIT B--LMUSA LITIGATION TRUST AGREEMENT
13
<PAGE> 273
liability incurred by the Trustee to such persons in carrying out the terms of
this Trust, and neither the Trustee nor Reorganized LMUSA shall have any
personal liability or individual obligation to satisfy any such liability.
ARTICLE 7
COMPENSATION OF TRUSTEE
7.1 Amount of Compensation. In lieu of commissions or other compensation
fixed by law for trustees, the Trustee shall receive as compensation for
services as Trustee hereunder, an annual fee [the amount and structure of which
will be negotiated on an arms-length basis between the LMUSA Creditors'
Committee and the proposed Trustee and will be subject to Bankruptcy Court
approval]. The amount of such compensation shall be included in the annual
report to be sent Reorganized LMUSA pursuant to SECTION 4.5.
7.2 Dates of Payment. The minimum compensation payable to the Trustee
pursuant to the provisions of SECTION 7.1 shall be paid quarterly in advance,
and any amounts in excess shall be paid to the Trustee simultaneously with
distributions to LMUSA.
ARTICLE 8
TRUSTEE AND SUCCESSOR TRUSTEES
8.1 Number of Trustees. Subject to the provisions of SECTION 8.3
relating to the period pending the appointment of a successor Trustee, there
shall always be one and only one Trustee of this Trust. If any corporate Trustee
shall ever change its name, or shall reorganize or reincorporate, or shall merge
with or into or consolidate with any other bank or trust company, such corporate
Trustee shall be deemed to be a continuing entity and shall continue to act as a
Trustee hereunder with the same liabilities, duties, powers, titles, discretion
and privileges as are herein specified for a Trustee.
8.2 Resignation and Removal. The Trustee may resign and be discharged
from the Trust hereby created by giving written notice thereof to Reorganized
LMUSA at its address as it appears in the records of the Trust. Such
resignation shall become effective on the day specified in such notice or upon
the appointment of such Trustee's successor and such successor's acceptance of
such appointment, whichever is earlier. Any Trustee may be removed by
Reorganized LMUSA at any time with cause, or at any time after the end of the
third full fiscal year following the date of this Agreement, without cause.
EXHIBIT B--LMUSA LITIGATION TRUST AGREEMENT
14
<PAGE> 274
8.3 Appointment of Successor Trustee. Should the Trustee at any time
resign or be removed, or die or become incapable of action, or be adjudged a
bankrupt or insolvent, a vacancy shall be deemed to exist and a successor
Trustee immediately shall be appointed by Reorganized LMUSA; provided that such
appointment shall be subject to the approval of the Bankruptcy Court; and
provided, further, that no stockholder, officer or director of Reorganized LMUSA
shall be appointed as a successor Trustee.
8.4 Acceptance of Appointment by Successor Trustee. Any successor
Trustee appointed hereunder shall execute an instrument accepting such
appointment hereunder and shall deliver one counterpart thereof, to the retiring
Trustee (in the case of a resignation). Thereupon such successor Trustee shall,
without any further act, become vested with all the estates, properties, rights,
powers, trusts, and duties of his predecessor in the Trust with like effect as
if originally named herein; but any retiring Trustee shall nevertheless, when
requested in writing by the successor Trustee, execute and deliver an instrument
or instruments conveying and transferring to such successor Trustee upon the
trust herein expressed, all the estates, properties, rights, powers and trusts
of such retiring Trustee, and shall duly assign, transfer, and deliver to such
successor Trustee all property and money held by him hereunder.
8.5 Bonds. Unless a bond is required by law, no bond shall be required
of the original or any successor Trustee hereunder. If a bond is required by
law, no surety or security with respect to such bond shall be required unless
required by law.
ARTICLE 9
AMENDMENTS
9.1 Amendments. The parties may make and execute amendments to this
Trust Agreement; provided, however, that in no event shall the Trust Agreement
be amended so as to (a) change the purpose of the Trust as set forth in ARTICLE
2 or (b) allow investments of funds included in the Trust Assets except as
permitted in SECTIONS 5.1 and 5.2.
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
15
<PAGE> 275
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Filing Documents. This Agreement shall be filed or recorded in the
office of the Secretary of State of the State of Delaware, or in such other
office or offices as the Trustee may determine to be necessary or desirable. A
copy of this Agreement and all amendments thereto shall be filed in the office
of the Trustee and shall be available at all times for inspection during regular
business hours upon reasonable notice by Reorganized LMUSA. The Trustee shall
file or record any amendment hereto in the same place or places where the
original Agreement has been filed or recorded. The Trustee shall file or record
any instrument which relates to any change in the office of Trustee in the same
place or places where the original Agreement has been filed or recorded.
10.2 Intention of Parties to Establish Trust. This Agreement is not
intended to create and shall not be interpreted as creating an association,
partnership, or joint venture of any kind.
10.3 Requirement of Undertaking. The Trustee may request any court to
require, and any court may in its discretion require, in any suit for the
enforcement of any right or remedy hereunder, or in any suit against the Trustee
for any action taken or omitted by him as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and such
court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
provided, that the provisions of this SECTION 10.3 shall not apply to any suit
by the Trustee.
10.4 Laws as to Construction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, and the Trustee,
LMUSA and Reorganized LMUSA (by its acceptance of any distributions made to it
pursuant to this Agreement) consent and agree that this Agreement shall be
governed by and construed in accordance with such laws. The Trustee and
Reorganized LMUSA agree and consent that the Bankruptcy Court shall retain
jurisdiction to enforce this Agreement in order to effectuate the provisions of
the Plan.
10.5 Severability. In the event any provision of this Agreement or its
application to any person or circumstances shall be finally determined by a
court of proper jurisdiction to be invalid or unenforceable to any extent, the
remainder of this Agreement, or the application of such provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each provision of this Agreement shall be
valid and enforced to the fullest extent permitted by law.
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
16
<PAGE> 276
10.6 Notices. (a) Any notice or other communication by the Trustee to
Reorganized LMUSA shall be deemed to have been sufficiently given, for all
purposes, if given by being deposited, postage prepaid, in a post office or
letter box addressed to Reorganized LMUSA at its address as shown in the records
of the Trust.
(b) All notices, requests, consents or other communications to
the Trustee required or permitted under this Agreement shall be in writing
(including facsimile or other similar telecommunication media) and shall be (as
elected by the person giving such notice) hand delivered by messenger or courier
service, telecommunicated or mailed by registered, certified, or overnight mail
(postage prepaid), return receipt requested, to the Trustee at [INSERT ADDRESS]
or to such other address as the Trustee or any successor Trustee may designate
by notice to Reorganized LMUSA complying with the terms of SECTION 10.6(A). Each
such notice shall be deemed delivered (i) on the date delivered if by personal
delivery, (ii) on the date telecommunicated with confirmed answer back if
telecommunicated or (iii) on the date upon which the return receipt is signed or
delivery is refused, as the case may be, if mailed.
10.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
10.8 Termination. This Agreement shall terminate and shall be of no
further force or effect in the event that the Effective Date under the Plan does
not occur on or before October 31, 1997; provided, however, that such date may
be extended by the Trustee then serving or by order of the Bankruptcy Court.
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
17
<PAGE> 277
IN WITNESS WHEREOF, the parties hereto have executed this Trust
Agreement or caused this Trust Agreement to be duly executed as of the day and
year first written.
LOMAS MORTGAGE USA, INC.
By:
----------------------------------
Name:
Title:
REORGANIZED LOMAS MORTGAGE USA, INC.
By:
----------------------------------
Name:
Title:
By:
----------------------------------
As Trustee
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
18
<PAGE> 278
LIST OF EXHIBITS
Exhibit A LMUSA Chapter 11 Plan (See Exhibit II to the Disclosure
Statement).
EXHIBIT B -- LMUSA LITIGATION TRUST AGREEMENT
19
<PAGE> 279
EXHIBIT III
ESTIMATED LIQUIDATION PROCEEDS
ASSUMING CONVERSION TO CHAPTER 7
Section 1129(a)(7)(A) of the Bankruptcy Code states that the Bankruptcy
Court shall not confirm a plan of reorganization unless it is in the "best
interests" of creditors and interestholders. The "best interests" test is
satisfied if each impaired class of claims or interest receives or retains at
least the amount or value they would receive if the debtor were liquidated in a
hypothetical case under Chapter 7 of the Bankruptcy Code.
This Liquidation Analysis (the "Analysis") presents estimated amounts
that would be paid to claimants and interestholders under hypothetical Chapter 7
liquidations. The assumptions and estimates utilized in this Analysis are
considered reasonable by management of the Debtors-in-Possession (LMUSA, LFC,
LIS and LAS, collectively the "Debtors"). This Analysis is also based upon
assumptions with regard to management decisions that are subject to change.
Accordingly, there can be no assurance that the values reflected in this
Analysis would be realized if the Debtors were, in fact, to undergo such a
liquidation.
This Analysis is believed to reflect all relevant information known to
management as of the date of this Disclosure Statement. The Debtors are not
aware of any events subsequent to such date that would materially affect this
Analysis. There can be no assurance that the assumptions underlying this
Analysis would be made or accepted by the Bankruptcy Court.
This Analysis is based upon the Debtors' unaudited financial statements
as of March 31, 1996 and various adjustments thereto, as well as other amounts
estimated by Debtors' management. The Analysis assumes that the Debtors' asset
and liability values at June 30, 1996, the date of hypothetical conversion of
the case to a Chapter 7 proceeding, would be based upon a rollforward of these
March 31, 1996 financial statements utilizing the Debtors' 1996 budget, with no
significant variances. In addition, this Analysis assumes that the Debtors'
operations would immediately cease upon conversion of the case to a Chapter 7
proceeding. Actual recoveries in a Chapter 7 liquidation may differ materially
from the preliminary estimate of recoveries included herein.
In order to determine the liquidation values of the Debtors for
purposes of this Analysis, the following material assumptions were made: (a) a
Chapter 7 trustee would
EXHIBIT III TO DISCLOSURE STATEMENT
<PAGE> 280
liquidate the assets on an accelerated schedule; (b) the First Nationwide
holdbacks would be paid in full (other than $20.3 million, representing
estimated reserves for receivables to which a portion of the holdbacks relate);
(c) the Chapter 7 trustee would first distribute from the proceeds of the
liquidation the Chapter 7 administrative expenses (including the trustee's fees
and expenses and those of professionals retained by the trustee); (d) the
Debtors' assets would be liquidated over a seven-month period; (e) the Lomas
Campus real estate would be liquidated at $23 million, which is the sale price
under an agreement in principle reached with a potential purchaser; (f) each STL
asset would be liquidated at an amount representing management's best estimate
of net proceeds under a distressed sale situation with the value of the Debtors'
real estate assets being eroded due to the rapid liquidation of the real estate
portfolio and the general "fire sale" atmosphere of the liquidation; (g) the
value of assets other than real estate would be reduced from book value in a
Chapter 7 liquidation due to (i) a lower cash value for liquidation of
furniture, fixtures and equipment and (ii) the elimination of prepaid items,
which have minimal potential cash value to the Debtors but are reported at cost
as "other assets" in accordance with generally accepted accounting principles;
and (h) general Chapter 7 administrative costs and expenses, including (i) the
Chapter 7 trustee's fees (assumed to be 3%), (ii) fees for Chapter 7 bankruptcy
counsel, (iii) legal fees relating to real estate sales transactions, (iv) fees
for consultants and/or brokers to design and implement a marketing strategy and
(v) accounting fees, would be paid out of liquidation proceeds and deducted
prior to distributions.
Based upon the foregoing assumptions, following is a summary of the
Analysis, including a comparison of the estimated recoveries in hypothetical
Chapter 7 liquidations with estimated recoveries under the Plans.
IT SHOULD BE NOTED THAT THE ESTIMATED RECOVERIES UNDER A CHAPTER 7
LIQUIDATION AND UNDER THE PLANS ARE BASED ON THE ASSUMPTION THAT THERE ARE NO
ALLOWED INTERCOMPANY CLAIMS AND THEREFORE THE ASSETS OF EACH DEBTOR AS SHOWN ON
ITS BOOKS AND RECORDS, AND ONLY THOSE ASSETS, ARE AVAILABLE TO SATISFY
NON-INTERCOMPANY CLAIMS AGAINST SUCH DEBTOR.
EXHIBIT III TO DISCLOSURE STATEMENT
2
<PAGE> 281
LOMAS FINANCIAL CORPORATION
BEST INTERESTS TEST
Estimated as of 7/1/96 in thousands
(Unaudited)
<TABLE>
<CAPTION>
A. CHAPTER 7-- LIQUIDATION ANALYSIS
ESTIMATED
CHAPTER 7
SOURCES OF CASH PROCEEDS FOOTNOTES
--------- ---------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 3,000 B
CASH AND CASH EQUIVALENTS HELD IN TRUST 11,028 B
INVESTMENT INCOME 101 B
MANAGEMENT FEES 350 C
ASSET SALES:
INVESTMENTS 3,186 D
RECEIVABLES 4,305 E
FIXED ASSETS 335 F
PREPAID EXPENSES AND OTHER ASSETS 623 G
---------
SOURCES OF CASH $ 22,928
USES OF CASH
ADMINISTRATION AND CARRYING COSTS 4,533 H, I
PROFESSIONAL FEES 645
TRUSTEE FEES (3% OF SOURCES) 688
---------
USES OF CASH $ 5,866
---------
NET DISTRIBUTABLE PROCEEDS -- CHAPTER 7 $ 17,062 J
=========
B. PLAN OF REORGANIZATION VALUE ESTIMATED
PLAN VALUE
----------
CASH DISTRIBUTIONS UPON CONFIRMATION $ 6,309 K
CASH CONTRIBUTIONS TO LITIGATION TRUST 2,000 K
CONTRIBUTIONS TO INTERCOMPANY CLAIMS RESERVE --
NET NON-REORGANIZATION ASSETS 8,469
CAPITAL STOCK IN REORGANIZED LFC 2,735 L
--------
ESTIMATED PLAN VALUE $ 19,513
========
</TABLE>
<TABLE>
<CAPTION>
C. COMPARISON OF NET
PROCEEDS CHAPTER 7 PLAN
------------------------------------- --------------------------------------
Estimated Payments Estimated Payments
Allowed on Allowed Percentage Allowed on Allowed Percentage
Claims Claims Recovery Claims Claims Recovery
---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Administrative (see footnotes H and I) $ -- $ -- 100.0% $ -- $ -- 100.0%
Priority - Tax 79.0 79.0 100.0% 79.0 79.0 100.0%
Priority - Nontax -- -- 0.0% -- -- 0.0%
LFC Class 1 (Secured) -- -- 0.0% -- -- 0.0%
LFC Class 2 (D & O) -- -- 0.0% -- -- 0.0%
LFC Class 3 (General Unsecured) 155,674.0 16,982.0 10.9% 155,674.0 19,433.7 12.5%
LFC Class 4 (Convenience) 1.0 0.1 10.9% 1.0 0.3 25.0%
LFC Class 5 (Intercompany) -- -- 0.0% -- -- 0.0%
LFC Class 6 (Interests)(see footnotes) -- -- 0.0% -- -- 0.0%
---------- --------- ----- ---------- --------- ------
TOTAL $155,754.0 $17,062.0 11.0% $155,754.0 $19,513.0 12.5%
========== ========= ===== ========== ========= ======
</TABLE>
<PAGE> 282
LOMAS MORTGAGE USA, INC.
BEST INTERESTS TEST
Estimated As Of 7/1/96 In Thousands
(Unaudited)
A. CHAPTER 7-- LIQUIDATION ANALYSIS
<TABLE>
<CAPTION>
ESTIMATED
CHAPTER 7
Sources of Cash PROCEEDS FOOTNOTES
-------- ---------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 5,000 B
CASH AND CASH EQUIVALENTS HELD IN TRUST 193,992 B
INVESTMENT INCOME 389 B
OTHER INCOME 150 C
ASSET SALES:
INVESTMENTS 18,752 D
RECEIVABLES 40,121 E
FIXED ASSETS 25,266 F
PREPAID EXPENSES AND OTHER ASSETS 1,166 G
--------
SOURCES OF CASH $284,836
USES OF CASH
ADMINISTRATION AND CARRYING COSTS $ 12,231 H, I
PROFESSIONAL FEES 2,255
TRUSTEE FEES (3% OF SOURCES) 8,545
--------
USES OF CASH $ 23,031
--------
NET DISTRIBUTABLE PROCEEDS -- CHAPTER 7 $261,805 J
========
B. PLAN OF REORGANIZATION VALUE ESTIMATED
PLAN VALUE
----------
CASH DISTRIBUTIONS UPON CONFIRMATION $218,266 K
CASH CONTRIBUTIONS TO LITIGATION TRUST 5,000 K
CONTRIBUTIONS TO INTERCOMPANY CLAIMS RESERVE --
NET NON-REORGANIZATION ASSETS 40,653
CAPITAL STOCK IN REORGANIZED LMUSA 20,609 L
--------
ESTIMATED PLAN VALUE 284,528
========
</TABLE>
<TABLE>
<CAPTION>
C. COMPARISON OF NET PROCEEDS CHAPTER 7 PLAN
----------------------------------- ----------------------------------------
Estimated Payments Estimated Payments
Allowed on Allowed Percentage Allowed on Allowed Percentage
Claims Claims Recovery Claims Claims Recovery
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Administrative (see footnotes H and I) $ 3,000.0 $ 3,000.0 100.0% $ 3,000.0 $ 3,000.0 100.0%
Priority - Tax 540.0 540.0 100.0% 540.0 540.0 100.0%
Priority - Nontax 15.0 15.0 100.0% 15.0 15.0 100.0%
LMUSA Class 1A (Secured) 11,450.0 11,450.0 100.0% 11,450.0 11,450.0 100.0%
LMUSA Class 1B (Secured) -- -- 0.0% -- -- 0.0%
LMUSA Class 2 (D & O) -- -- 0.0% -- -- 0.0%
LMUSA Class 3 (General Unsecured) 399,886.0 246,759.3 61.7% 399,886.0 269,478.5 67.4%
LMUSA Class 4 (Convenience) 66.0 40.7 61.7% 66.0 44.5 67.4%
LMUSA Class 5 (Intercompany) -- -- 0.0% -- -- 0.0%
LMUSA Class 6 (Interests) (see footnotes) -- -- 0.0% -- -- 0.0%
---------- ---------- ----- ---------- ---------- -----
TOTAL $414,957.0 $261,805.0 63.1% $414,957.0 $284,528.0 68.6%
========== ========== ===== ========== ========== =====
</TABLE>
<PAGE> 283
FOOTNOTES TO LIQUIDATION ANALYSIS
The notes that are presented below identify and describe the principal
assumptions that are incorporated in the Analysis:
Note References
(A) Represents the Debtors' best estimates of liquidation values based upon
hypothetical liquidations under Chapter 7 of the Bankruptcy Code. Such
estimates may not prove accurate. Assumes total liquidation period of 7
months.
(B) Cash would be distributed as it becomes available. Investment income is cash
received from holding an asset prior to its sale in liquidation.
(C) Management fees are from the assisted care management agreement in a
subsidiary of LFC (Treemont - assumed to have value only to the current
contract renewal date) and from fees related to the Beaumeade property
managed by STL, a subsidiary of LMUSA.
(D) Significant LFC investments include, among other items, interests in
Financial Insurance Ltd., Triad Ventures, Invesco Funds (which is discounted
by 70% to account for early liquidation of this illiquid investment under
current market conditions) and Vista. Significant LMUSA investments include
the CMO Trust, residual interest in excess benefits plans and STL real
estate. See pages 30-31 and 34-38 of the Disclosure Statement for further
information on the LFC and LMUSA investments, respectively.
(E) Accounts receivable are presented net of estimated uncollectible accounts.
LFC receivables include the accrued investment income, management fees and
the RIS note. LMUSA receivables include net First Nationwide sales proceeds,
Landel Plaza receivable and mortgage notes payable to STL.
(F) Excess furniture, fixtures and equipment (including computer hardware and
software) were reduced to 25% of net book value at June 30, 1996, and are
expected to be sold by August 31, 1996. Art and antiques are recorded at
book value and are expected to be sold by August 31, 1996. All campus
buildings are to be sold as of August 31, 1996.
(G) Prepaid items are assumed to have no cash value, except that early
termination of the D & O policy may result in a partial refund.
(H) Overhead reimbursement is a Debtor-calculated amount of post-conversion
overhead expenses that have been borne by LMUSA. Administrative claims are
an estimate of Chapter 7 professional fees and expenses through the date of
completion of the Chapter 7 liquidation. Although the amount reflected in
the analysis is the Debtors' best estimate of the amount owed to LMUSA by
LFC, the Debtors' calculations are subject to further scrutiny by the
creditors of the respective estates, and the amount of certain
administrative expenses must ultimately be approved by the Court. It is
assumed that LMC's operating expenses for legal and accounting services will
be approximately $10,000 per month until liquidation is complete.
(I) For purposes of this analysis it is assumed that 20% of the estimated
professional and related bankruptcy costs through June 30, 1996 are
reimbursed to LMUSA immediately prior to conversion to Chapter 7, although
the exact amount is subject to subsequent determination and allocation.
(J) Distributions are assumed to occur as soon as available.
(K) LMUSA cash includes $5 million designated for the LMUSA Litigation Trust and
$218.3 million for distribution to creditors. LFC cash includes $2 million
designated for the LFC Litigation Trust and $6.3 million for distribution to
creditors for a total of $8.3 million distributed to or on behalf of
creditors. No assumptions have been made with respect to cash distribution
to be held back from distribution to creditors or funded into an
Intercompany Claims Reserve.
EXHIBIT III TO DISCLOSURE STATEMENT
5
<PAGE> 284
FOOTNOTES TO LIQUIDATION ANALYSIS (CONTINUED)
(L) This amount represents the pro forma book value of the Debtors after
reorganization.
Other Significant Assumptions
The Estimated Plan Value and this Analysis assume the Debtors have
sufficient tax attributes to offset any potential federal and/or state taxes
associated with gains from asset sales, etc. Accordingly, this Analysis
assumes no federal and state tax liabilities, although this assumption may
be subject to change.
All severance and retention payments, including excess benefit plan
distributions and vacation pay, will be paid to terminated employees. The
majority of employees are anticipated to be terminated by June 30, 1996.
Operations of Debtors would be moved to a smaller office location as of July
1, 1996 for either the liquidation or reorganization scenarios and allocated
as noted in footnote H above. Cost to relocate operations projected at
$80,000 in July 1996. This is primarily a LMUSA cost and is in support of
contractual requirements pursuant to the First Nationwide sale.
Assumes rent at $11/s.f. utilizing 21,000 s.f. for the liquidation period.
Lomas Insurance Services will be sold as of August 31, 1996.
The Debtors' pension plan will be terminated as of December 31, 1996.
First Nationwide holdbacks for transfer costs will be recovered in full.
Excess funds estimated available at October 1996 (GNMA Sale) and January
1997 (Section 363 Sale) over out of pocket costs are included in LMUSA's
projections as an increase in cash.
Recovery for LFC and LMUSA Class 6 Interests will be $0 because such
interests will be canceled under the Plan.
No amounts are recovered in respect of claims by the Debtors against third
parties. If there are any such recoveries, 100% will be available to
creditors under the Plans, while 97% would be available in a Chapter 7
liquidation, due to the 3% trustee's fee.
No value is attributed under the Plans to the tax attributes of the Debtors,
except to the extent that income of the reorganized companies is assumed to
be sheltered by net operating loss carryforwards.
Estimated Allowed Claims also include estimates for damages due to rejection
of executory contracts and estimates for litigation and settlement costs.
EXHIBIT III TO DISCLOSURE STATEMENT
6
<PAGE> 285
EXHIBIT IV
LOMAS FINANCIAL CORPORATION ("LFC")
AND LOMAS MORTGAGE USA, INC. ("LMUSA")
PROJECTED FINANCIAL STATEMENTS
NATURE OF PRESENTATION
The following presentation includes projected consolidated balance
sheets of Lomas Financial Corporation and Lomas Mortgage USA, Inc. as of June
30, 1997, 1998 and 1999, and projected statements of consolidated operations and
consolidated cash flows for the years then ending. These financial projections
present, to the best of management's knowledge and belief, each company's
expected financial position, results of operations and cash flows for the
projection periods, after giving effect to changes in its debt and capital
structure that would result from the consummation of its Chapter 11 Plan on July
1, 1996. Accordingly, the projections reflect management's judgment, as of June
30, 1996, based on present circumstances, of the most likely set of conditions
and its most likely course of action. The assumptions disclosed herein are those
that management believes are significant to the projections or are key factors
upon which the financial results of the Companies depend. Some assumptions
inevitably will not materialize, and unanticipated events or circumstances may
occur subsequent to the date of these projections. Therefore, the actual results
achieved during the projection period will vary from the forecast, and the
variations may be material. The LFC Creditors' Committee and the LMUSA
Creditors' Committee do not necessarily agree with the assumptions made herein.
Reorganized LFC and Reorganized LMUSA are required to adopt fresh-start
reporting as of each respective Effective Date. Fresh-start reporting does not
reflect historical values as previously reflected on LFC's and LMUSA's books.
Pursuant to fresh-start reporting, the reorganization value of Reorganized LFC
and Reorganized LMUSA is allocated to its assets at fair value. In addition,
liabilities are stated at present value determined at appropriate interest rates
and any goodwill and the retained earnings deficit are eliminated. Statement of
Position 90-7 of the American Institute of Certified Public Accountants,
"Financial Reporting by Entities in Reorganization Under the Code," defines
reorganization value as the amount of resources available for the satisfaction
of postpetition liabilities and allowed claims and interests, as negotiated
between the debtors, the creditors and the holders of equity interests. However,
notwithstanding the foregoing, because the application of fresh-start accounting
has no material impact on the carrying values of the assets of either
Reorganized LFC or
EXHIBIT IV TO DISCLOSURE STATEMENT
<PAGE> 286
Reorganized LMUSA, the approach has not been applied for purposes of this
Disclosure Statement and the assets are reflected herein at their net realizable
values.
SIGNIFICANT PROJECTION ASSUMPTIONS
- - These pro forma projected financial statements have been prepared based on
fresh start reporting being recorded as of June 30, 1996. The expected
confirmation date used in the projections is August 31, 1996. The companies
believe that while the expected August 31, 1996 Confirmation Date occurs
between two financial statement reporting dates, the sixty day timing
differential does not materially affect creditor recoveries or the financial
condition of Reorganized LFC or Reorganized LMUSA. All references to LFC and
LMUSA in these assumptions refer to Reorganized LFC and Reorganized LMUSA.
The distributions to the LFC or LMUSA Creditors Trusts and to LFC's or
LMUSA's working capital accounts are all presented in these projected
financial statements as if Confirmation occurred on July 1, 1996.
- - The pro forma projected financial statements assume that there will no
expansion of the reorganization assets of either LFC or LMUSA, even though
it appears likely that the boards of directors and management of Reorganized
LFC and Reorganized LMUSA will seek to expand their respective businesses,
possibly in connection with third party investors or through acquisitions of
business combinations. See "General Information relating to Reorganized LFC
- Potential for Growth, New Investors" and "General Performation Relating to
Reorganized LMUSA - Potential for New Growth."
- - While the Debtors believe that the initial working capital reserves
provided are sufficient for the operation of the Reorganized Debtors'
ongoing business, the costs of litigation by the Debtors over the disputed
Intercompany Claims have not been factored in. If these costs are large
enough, it is possible that the working capital will be insufficient. Each
Creditors' Committee has been given the right to increase (or decrease) the
amount of its respective Reorganized Debtor's initial working capital at
least three business days before the commencement of the Confirmation
Hearing.
- - The approximately $7.5 million currently held by the trustee under the
"rabbi trust" established for the benefit of the MSP Participants will be
turned over to LFC before the Confirmation Date pursuant to the adversary
proceeding commenced by the LFC Creditors' Committee.
- - Cash is accumulated as assets are sold and income is earned in
reorganization assets. The operating cash earns 5% per annum and this
account is not distributed to the creditors. The net cash provided or used
relating to the non-reorganization assets and
EXHIBIT IV TO DISCLOSURE STATEMENT
2
<PAGE> 287
SIGNIFICANT PROJECTION ASSUMPTIONS -- CONTINUED
liabilities are credited to the LFC or LMUSA Creditors Trust as is
appropriate. Proceeds from earnings of non-reorganization assets if
they exceed $1 million for LMUSA and $500,000 for LFC will be distributed
from the relevant Creditors Trust on a monthly basis.
- - The projected financial statements do not reflect any recoveries,
adjustments or costs related to any intercompany claims between and among
the Debtors. Accordingly, assets shown on the books of one Debtor may
ultimately be determined to belong to another Debtor.
- - LFC and LMUSA's board of directors will have five outside directors with a
compensation of $2,000 per quarter, plus travel reimbursement.
- - Buildings will be sold at August 31, 1996 for $23 million cash. Travelers
will receive $11.45 million for the collateral and will share distribution
with other creditors on the undersecured portion.
- - The Treemont Texas management agreement is not shown as an asset on the
balance sheet of LFC because there can be no assurance that the contract
will continue in effect for an extended period. Because the Treemont Denver
management agreement is terminable at will by Treemont Denver and has been
producing no net income for LFC, it is also not shown as an asset on LFC's
balance sheet.
- - Excess furniture and equipment was reduced to $.25 on the dollar at June 30,
1996, and is expected to be sold by August 31, 1996. Arts and antiques
were already carried at a discounted value and will also be sold by August
31, 1996.
- - Insurance operations will be sold effective August 31, 1996 for net
proceeds of approximately $6.3 million cash based on the April 30, 1996
financial statements (the date of the proposed sale). The insurance
operations had approximately $3.9 million in cash at the date of the
proposal.
- - The Company's pension plan will be terminated by December 31, 1996.
- - LFC will not be required to remain a reporting company after fiscal 1998,
because its assets will be less than $5 million.
EXHIBIT IV TO DISCLOSURE STATEMENT
3
<PAGE> 288
SIGNIFICANT PROJECTION ASSUMPTIONS -- CONTINUED
- - In fiscal 1997, 1998 and 1999, LFC will treat 10%, 40% and 80%,
respectively, of total operating expenses (other than for Treemont) as
relating to reorganization assets.
- - Operations would be moved to an executive office complex on North Harwood
Street as of July 1, 1996.
- Cost to relocate operations projected at $80,000 in July 1996.
- Assumes rent at $11/s.f. for approximately 21,000 s.f. for four months
in fiscal 1997 reducing to 15,000 s.f. for the balance of fiscal 1997
and reducing further to 6,000 s.f. at the beginning of fiscal 1998 and
continuing at that level. Beginning July 1, 1996 LFC's monthly rent
will be approximately $2,000 and LMUSA's approximately $18,000 per
month which will continue for four months.
- - LMUSA will charge ST Lending a fee of $25,000 per month for a prorated share
of operating costs (legal, accounting and facilities).
- - Directors and officers insurance to the reorganized companies is expected
to cost $1.3 million and is allocated 50% of the cost to LMUSA and 50% of
the cost to LFC. This insurance provides $35 million of coverage with a $1
million retention.
- - LFC has provided for external legal and accounting costs of $110,000,
$100,000 and $75,000 for fiscal years 1997, 1998 and 1999, respectively.
These costs are allocated to reorganization and non-reorganization assets
for LFC. LMUSA has provided for external legal and accounting costs of
$485,000, $150,000 and $15,000 for fiscal years 1997, 1998 and 1999,
respectively.
- - Certain Chapter 11 professional fees, estimated to be $1.7 million or 20%
of the total incurred by LMUSA through August 31, 1996 are allocated to and
paid by LFC.
EXHIBIT IV TO DISCLOSURE STATEMENT
4
<PAGE> 289
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
(EXCLUDING LOMAS MORTGAGE USA, INC.)
PRO FORMA REORGANIZED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZATION ENTRIES
-------------------------------------------------------------
OPERA- CANCELLATION TRANSFER
TIONS REORGANI- OF DISCHARGE CANCELLATION OF NON-
BALANCE QUARTER ZATION INVESTMENT OF OF REORGANI-
AT ENDING VALUE IN PRE- PRE- ZATION REORGANIZED
MARCH 31, JUNE 30, ADJUST- LOMAS PETITION PETITION ITEMS BALANCE
1996 1996 MENTS MORTGAGE DEBT STOCK TO TRUST SHEET
--------- -------- -------- ------------ --------- ------------ -------- -----------
(1) (2) (2) (2)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 11,606 $ 2,422(3) ($1,028)(4) $ (1,700) $ (8,300) $ -- $ -- $3,000
Receivables . . . . . . . 538 7,102 (3,335) -- (4,049) -- -- 256
Investments . . . . . . . 4,330 (1,453) 1,622 1,700 (6,199) -- -- 0
Investment in
unconsolidating
subsidiaries . . . . . (106,841) (5,004) -- 111,845 -- -- -- --
Fixed assets . . . . . . 1,247 (682) (230) -- (335) -- -- 0
--------- ------- --------- -------- --------- -------- ------- --------
(100,726) (37) (1,943) 113,545 (10,583) -- -- 256
Allowance for losses . . (3,609) 424 3,185 -- -- -- -- --
--------- ------- --------- -------- --------- -------- ------- --------
(104,335) 387 1,242 113,545 (10,583) -- -- 256
Prepaid expenses and other
assets . . . . . . . . . 128 495 -- -- (623) -- -- 0
Net assets of discontinued
operations . . . . . . 6,947 (6,947) -- -- -- -- -- 0
Non-reorganization assets
held in trust . . . . . -- -- -- -- 19,506(5) -- (19,506)(5) 0
Contingent distribution
obligation . . . . . . -- -- -- -- (16,778) -- 16,778 0
Accrued liquidating
liabilities . . . . . . -- -- -- -- (2,728) -- 2,728 0
--------- ------- --------- -------- --------- -------- ------- ---------
$ (85,654) $(3,643) $ 214 $ 111,845 $ (19,506) $ -- $ -- $ 3,256
========= ======= ========= ======== ========= ======== ======= ========
LIABILITIES
Accounts payable and
accrued expenses . . . . $ 505 $ 110 $ 466 $ -- $ (560) $ -- $ -- $ 521
Payable to unconsolidating
subsidiaries . . . . . 781 (313) -- 1,700 (2,168) -- -- 0
Liabilities subject to
Chapter 11 proceedings 153,304 (140) (466) -- (152,698) -- -- 0
--------- ------- --------- -------- --------- -------- ------- --------
154,590 (343) -- 1,700 (155,426) -- -- 521
--------- ------- --------- -------- --------- -------- ------- --------
STOCKHOLDERS'
EQUITY DEFICIT)
Common stock . . . . . . 20,149 -- -- -- 100 (20,149) -- 100
Paid-in capital . . . . . 309,763 -- -- -- 2,635 (309,763) -- 2,635
Retained earnings (deficit) (570,156) (3,300) 214 110,145 133,185 329,912 -- 0
--------- ------- --------- -------- --------- -------- ------- --------
(240,244) (3,300) 214 110,145 135,920 -- -- 2,735
--------- ------- --------- -------- --------- -------- ------- --------
$ (85,654) $(3,643 $ 214 $ 111,845 $ (19,506) $ -- $ -- $ 3,256
========= ======= ========= ======== ========= ======== ======= ========
</TABLE>
EXHIBIT IV TO DISCLOSURE STATEMENT
5
<PAGE> 290
NOTES TO PRO FORMA REORGANIZED BALANCE SHEET
(1) The reorganization value was determined with the assistance of independent
advisors by reliance on various valuation methods including discounted cash
flow analysis and independent appraisal.
(2) Discharge of debt and cancellation of prepetition stock:
<TABLE>
<S> <C>
Debt discharged
Senior convertible notes $ 139,918
Accrued interest on senior notes 5,562
Accrued MSP liabilities 5,755
Other liabilities 1,463
Prepetition stock cancelled 329,912
---------
482,610
Less:
Net assets held in trust pending distribution (16,778)
Reorganized LFC securities issued (2,735)
Elimination of retained earnings deficit (329,912)
---------
Gain on discharge $ 133,642
=========
</TABLE>
(3) Comprised of cash of $1,300 received from the sale of Capstead options,
cash of $513 from the liquidation of Financial Insurance Ltd. CDS, cash of
$403 received from the sale of Harry Hines Trailer Park (owned of record by
LIP but shown as an asset on the books of LMUSA) and investment income from
cash accumulated.
(4) This represents cash to be paid for the Chapter 11 professional fees and
holdbacks of $418, taxes of $142 and proceeds from the sale of Harry Hines
Trailer Park (owned of record by LIP but shown as an asset on the books of
LMUSA) of $468 to LMUSA (SEE (3) above) -- total $1,028.
(5) This is the gross amount of non-reorganization assets ultimately projected
to be distributed to creditors. The net amount after deducting "accrued
liquidating liabilities" as June 30, 1996, is projected to be $16,778. The
non-reorganization assets include the following: cash, receivables, Vista
Properties, Triad Ventures, Invesco, fixed assets and prepaid expenses.
EXHIBIT IV TO DISCLOSURE STATEMENT
6
<PAGE> 291
LOMAS FINANCIAL CORPORATION
PROJECTED BALANCE SHEET
(Unaudited, in thousands)
<TABLE>
<CAPTION>
June 30
----------------------------------------
1996 1997 1998 1999
------- ------- ------- -------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents ........ $ 3,000 $ 2,880 $ 2,753 $ 3,104
Receivables ...................... 256 285 325 365
Advances to non-
reorganization(1) .............. -- 162 305 --
Prepaid expenses and other
assets.......................... -- 58 46 29
------- ------- ------- -------
Reorganization assets .......... 3,256 3,385 3,429 3,498
------- ------- ------- -------
Non-reorganization assets held in
trust ........................ 19,506 617 411 --
Less: Accrued liquidating
liabilities ............... (2,728) (14) (7) --
Less: Contingent distribution
obligation ................ (16,778) (603) (404) --
------- ------- ------- -------
0 0 0 0
------- ------- ------- -------
$ 3,256 $ 3,385 $ 3,429 $ 3,498
======= ======= ======= =======
LIABILITIES
Accounts payable and accrued
expenses ...................... $ 521 $ 441 $ 357 $ 273
------- ------- ------- -------
STOCKHOLDERS' EQUITY
Common stock ..................... $ 100 $ 100 $ 100 $ 100
Paid-in capital .................. 2,635 2,635 2,635 2,635
Retained earnings ................ -- 209 337 490
------- ------- ------- -------
2,735 2,944 3,072 3,225
------- ------- ------- -------
$ 3,256 $ 3,385 $ 3,429 $ 3,498
======= ======= ======= =======
</TABLE>
- ------------------
(1) Expenses associated with non-reorganization assets to the extent greater
than the cash on hand will be covered by "advances" of working capital
from the funds associated with the reorganization assets. This accounts
for differences in timing between the realization of the
non-reorganization assets and the expenses associated therewith.
EXHIBIT IV TO DISCLOSURE STATEMENT
7
<PAGE> 292
LOMAS FINANCIAL CORPORATION
PROJECTED STATEMENT OF REVENUES AND EXPENSES
(REORGANIZATION ASSETS/LIABILITIES)
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Fiscal Year
Ending June 30
-----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
REVENUES
Interest and investment income ................. $151 $157 $168
Other revenue .................................. 600 600 600
---- ---- ----
751 757 768
---- ---- ----
EXPENSES
Personal and consulting (Treemont) ............. 156 156 156
Amortization of prepaid insurance (Treemont) ... 292 290 193
Personnel and consulting ....................... 18 72 144
Insurance allocation .......................... 44 29 --
Legal fees ..................................... 6 24 40
Accounting fees ................................ 5 16 20
Franchise and other taxes ...................... 6 4 8
Occupancy, office operations and other ......... 15 38 54
---- ---- ----
542 629 615
---- ---- ----
NET INCOME ........................................ $209 $128 $153
==== ==== ====
</TABLE>
EXHIBIT IV TO DISCLOSURE STATEMENT
8
<PAGE> 293
LOMAS FINANCIAL CORPORATION
PROJECTED STATEMENT OF CASH FLOWS
(REORGANIZATION ASSETS/LIABILITIES)
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ending June 30
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ........................................... $ 209 $ 128 $ 153
Noncash items included in determination of
net income:
Amortization of prepaid insurance .................. 292 290 193
Net change in receivables, payables and other assets.. (459) (402) (300)
------- ------- -------
Net cash provided by operating activities .......... 42 16 46
------- ------- -------
FINANCING ACTIVITIES
Advances (to) from non-reorganization(1) ........... (162) (143) 305
------- ------- -------
Net change in cash and cash equivalents .............. (120) (127) 351
Cash and cash equivalents at beginning of
period ............................................. 3,000 2,880 2,753
------- ------- -------
Cash and cash equivalents at end of period ........... $ 2,880 $ 2,753 $ 3,104
======= ======= =======
</TABLE>
- ----------
(1) Expenses associated with non-reorganization assets to the extent
greater than the cash on hand will be covered by "advances" of working
capital from the funds associated with the reorganization assets. This
accounts for differences in timing between the realization of the
non-reorganization assets and the expenses associated therewith.
EXHIBIT IV TO DISCLOSURE STATEMENT
9
<PAGE> 294
LOMAS FINANCIAL CORPORATION
PROJECTED STATEMENT OF REVENUES AND EXPENSES
(NON-REORGANIZATION ASSETS/LIABILITIES)
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ending June 30
----------------------------------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
REVENUES
Interest and investment income . . . . . . . . $ 214 $ 96 $ 100
Gain on sale of assets . . . . . . . . . . . . -- -- 615
--------- -------- --------
214 96 715
--------- -------- --------
EXPENSES
Personnel and consulting . . . . . . . . . . . 162 108 36
Amortization of prepaid insurance . . . . . . 391 44 --
Legal fees . . . . . . . . . . . . . . . . . . 54 36 10
Accounting fees . . . . . . . . . . . . . . . 45 24 5
Franchise and other taxes . . . . . . . . . . 54 6 2
Occupancy, office operations and other . . . . 141 57 14
--------- -------- --------
847 275 67
--------- -------- --------
INCOME (LOSS) BEFORE BANKRUPTCY EXPENSES . . . . (633) (179) 648
Bankruptcy related expenses . . . . . . . . . . (670) (20) --
--------- -------- --------
NET LOSS . . . . . . . . . . . . . . . . . . . . $ (1,303) $ (199) $ 648
========= ======== ========
</TABLE>
EXHIBIT IV TO DISCLOSURE STATEMENT
10
<PAGE> 295
LOMAS FINANCIAL CORPORATION
PROJECTED STATEMENT OF CASH FLOWS
(NON-REORGANIZATION ASSETS/LIABILITIES)
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ending June 30
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ..................................... $(1,303) $ (199) $ 648
Noncash items included in the determination
of net income:
Amortization of prepaid insurance ...... 391 44 --
Gain on sale of investments ............. -- -- (615)
Net change in receivables, payables
and other assets ......................... (827) 12 24
------- ------- -------
Net cash provided (used) by operating
activities ........................ (1,739) (143) 57
------- ------- -------
FINANCING ACTIVITIES
Advances from (to) reorganization(1) ......... 162 143 (305)
Net collections on liquidation of non-
reorganization assets .................... 7,121 -- 1,300
Liquidating distributions .................... (14,872) -- (1,052)
------- ------- -------
Net cash used by financing activities .... (7,589) 143 (57)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents ......................... (9,328) -- --
Cash and cash equivalents at beginning
of period ................................ 9,328 -- --
------- ------- -------
Cash and cash equivalents at end of
period ................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
- -------------------------
(1) Expenses associated with non-reorganization assets to the extent greater
than the cash on hand will be covered by "advances" of working capital
from the funds associated with the reorganization assets. This accounts
for differences in timing between the realization of the
non-reorganization assets and the expenses associated therewith.
EXHIBIT IV TO DISCLOSURE STATEMENT
11
<PAGE> 296
LOMAS MORTGAGE USA, INC. AND SUBSIDIARIES
PRO FORMA REORGANIZATION BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED ENTRIES
-------------------------------------------------------------
OPERA- TRANSFER
TIONS CANCELL- OF NON-
BALANCE QUARTER REORGANI- DISCHARGE ATION REORGANI- REORGA
AT ENDING ZATION VALUE OF OF ZATION -NIZED
MARCH 31, JUNE 30, ADJUST- PREPETITION PREPETITION ITEMS BALANCE
1996 1996 MENTS DEBT STOCK TO TRUST SHEET
---- ---- ----- ---- ----- -------- -----
(1) (2) (2) (2)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents ....... $ 120,309 $ 73,695 $ -- $(189,004) $ -- $ -- $ 5,000
First mortgage loans
held for sale ...... 270 (270) -- -- -- -- 0
Receivables .............. 147,898 (72,427) (813) (74,267) 256 -- 647
Investments .............. 18,813 (2,092) (435) (16,286) -- -- 0
Fixed assets ............. 32,511 (2,159) (5,486) (24,866) -- -- 0
Real estate owned ........ -- 14,623 231 -- -- -- 14,854
--------- --------- --------- --------- --------- -------- -------
199,492 (62,325) (6,503) (115,419) 256 -- 15,501
Allowance for losses ..... (20,802) 498 275 20,029 -- -- 0
--------- --------- --------- --------- --------- -------- -------
178,690 (61,827) (6,228) (95,390) 256 -- 15,501
Prepaid expenses and
other assets ....... 973 193 -- (1,058) -- -- 108
Net assets of
discontinued
operations ......... 26,815 (26,815) -- -- -- -- 0
Non-reorganization
assets held in trust -- -- -- 271,251 -- (271,251) 0
Contingent distribution
obligation ......... -- -- -- (263,919) -- 263,919 0
Accrued liquidating
liabilities ........ -- -- -- (7,332) -- 7,332 0
--------- --------- --------- --------- --------- -------- -------
$ 326,787 $ (14,754) $ (6,228) $(285,452) $ 256 $ -- $20,609
========= ========= ========= ========= ========= ======== =======
LIABILITIES
Accounts payable and
accrued expenses ... $ 35,084 $ (12,093) $ (1,458) $ (21,533) $ -- $ -- $ 0
Liabilities subject to
Chapter 11
proceedings ....... 398,544 853 -- (399,397) -- -- 0
--------- --------- --------- --------- --------- -------- -------
433,628 (11,240) (1,458) (420,930) -- -- 0
--------- --------- --------- --------- --------- -------- -------
STOCKHOLDERS'
EQUITY (DEFICIT)
Common stock ............. $ 1 $ -- $ -- $ 300 $ (1) $ -- $ 300
Paid-in capital .......... 311,202 -- -- 20,309 (311,202) -- 20,309
Retained earnings
(deficit) ......... (418,044) (3,514) (4,770) 114,869 311,459 -- 0
--------- --------- --------- --------- --------- -------- -------
(106,841) (3,514) (4,770) 135,478 256 -- 20,609
--------- --------- --------- --------- --------- -------- -------
$ 326,787 $ (14,754) $ (6,228) $(285,452) $ 256 $ -- $20,609
========= ========= ========= ========= ========= ======== =======
</TABLE>
EXHIBIT IV TO DISCLOSURE STATEMENT
12
<PAGE> 297
NOTES TO PRO FORMA REORGANIZED BALANCE SHEET
(1) The reorganization value was determined with the assistance of independent
advisors by reliance on various valuation methods including discounted cash
flow analysis and independent appraisal.
(2) Discharge of debt and cancellation of prepetition stock:
<TABLE>
<S> <C>
Debt discharged $ 399,397
Prepetition stock cancelled 311,203
---------
710,600
Less:
Net assets held in trust pending distribution (263,919)
Reorganized Lomas Mortgage securities issued (20,609)
Elimination of retained earnings deficit (311,203)
---------
Gain on discharge $ 114,869
=========
</TABLE>
EXHIBIT IV TO DISCLOSURE STATEMENT
13
<PAGE> 298
LOMAS MORTGAGE USA, INC.
PROJECTED BALANCE SHEET
(Unaudited, in thousands)
<TABLE>
<CAPTION>
June 30
--------------------------------------------
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ............... $ 5,000 $ 14,078 $ 23,968 $ 24,139
Receivables ............................. 647 146 -- --
Advances to non-reorganization(1)........ -- 168 734 1,072
Investments ............................. 14,854 6,991 -- --
Prepaid expenses and other assets ....... 108 99 57 34
--------- -------- -------- --------
20,609 21,482 24,759 25,245
--------- -------- -------- --------
Non-reorganization assets
held in trust ...................... 271,251 5,110 4,384 4,016
Less: Accrued liquidating liabilities .. (7,332) (1,174) (1,126) (1,096)
Less: Contingent distribution obligation (263,919) (3,936) (3,258) (2,920)
--------- -------- -------- --------
0 0 0 0
--------- -------- -------- --------
$ 20,609 $ 21,482 $ 24,759 $ 25,245
========= ======== ======== ========
LIABILITIES
Accounts payable and accrued expenses ... $ -- $ 54 $ 59 $ 94
--------- -------- -------- --------
STOCKHOLDERS' EQUITY
Common stock ............................ 300 300 300 300
Paid-in capital ......................... 20,309 20,309 20,309 20,309
Retained earnings ....................... -- 819 4,091 4,542
--------- -------- -------- --------
20,609 21,428 24,700 25,151
--------- -------- -------- --------
$ 20,609 $ 21,482 $ 24,759 $ 25,245
========= ======== ======== ========
</TABLE>
- -----------------
(1) Expenses associated with non-reorganization assets to the extent greater
than the cash on hand will be covered by "advances" of working capital from
the funds associated with the reorganization assets. This accounts for
differences in timing between the realization of the non-reorganization
assets and the expenses associated therewith.
EXHIBIT IV TO DISCLOSURE STATEMENT
14
<PAGE> 299
LOMAS MORTGAGE USA, INC.
PROJECTED STATEMENT OF REVENUES AND EXPENSES
(REORGANIZATION ASSETS/LIABILITIES)
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ending June 30
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
REVENUES
Interest and investment income ........ $ 469 $ 876 $1,110
Gain on sale .......................... 1,925 3,549 --
Other revenue ......................... 150 -- --
------ ------ ------
2,544 4,425 1,110
------ ------ ------
EXPENSES
Personnel ............................. 144 144 --
REO Expenses .......................... 402 270 --
Management fees (STL) ................. 300 300 300
Amortization of prepaid insurance ..... 567 362 226
Franchise and other taxes ............. 300 75 133
Occupancy, office operations and
other ............................... 12 2 --
------ ------ ------
1,725 1,153 659
------ ------ ------
NET INCOME ................................ $ 819 $3,272 $ 451
====== ====== ======
</TABLE>
EXHIBIT IV TO DISCLOSURE STATEMENT
15
<PAGE> 300
LOMAS MORTGAGE USA, INC.
PROJECTED STATEMENT OF CASH FLOWS
(REORGANIZATION ASSETS/LIABILITIES)
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ending June 30
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................... $ 819 $ 3,272 $ 451
Noncash items included in the determination
of net income:
Amortization of prepaid insurance expense .... 567 362 226
Gain on sale of assets ....................... (1,925) (3,549) --
Net change in receivables, payables and
other assets ................................. (504) (315) (168)
------- ------- -------
Net cash provided by operating activities .... (1,043) (230) 509
------- ------- -------
FINANCING ACTIVITIES
Advances to non-reorganization(1) ............... (168) (566) (338)
Net collections on notes receivable ............. 501 146 --
Net proceeds of sales of real estate assets ..... 9,788 10,540 --
------- ------- -------
Net cash provided (used) by financing
activities ................................ 10,121 10,120 (338)
------- ------- -------
Net increase in cash and cash equivalents .......... 9,078 9,890 171
Cash and cash equivalents at beginning of year ..... 5,000 14,078 23,968
------- ------- -------
Cash and cash equivalents at end of year ........... $14,078 $23,968 $24,139
======= ======= =======
</TABLE>
- ---------------
(1) Expenses associated with non-reorganization assets to the extent greater
than the cash on hand will be covered by "advances" of working capital
from the funds associated with the reorganization assets. This accounts
for differences in timing between the realization of the
non-reorganization assets and the expenses associated therewith.
EXHIBIT IV TO DISCLOSURE STATEMENT
16
<PAGE> 301
LOMAS MORTGAGE USA, INC.
PROJECTED STATEMENT OF REVENUES AND EXPENSES
(NON-REORGANIZATION ASSETS/LIABILITIES)
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ending June 30
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
REVENUES
Interest and investment income .......................... $ 3,595 $ 228 $ 228
Gain on sale of assets .................................. 10,800 -- --
------- ------- -------
14,395 228 228
------- ------- -------
EXPENSES
Personnel and consulting ................................ 2,064 474 393
Depreciation and amortization ........................... 100 50 29
Amortization of prepaid insurance expense ............... 839 108 --
Legal fees .............................................. 285 100 50
Accounting fees ......................................... 200 50 25
Franchise and other taxes ............................... 375 30 15
Occupancy, office operations and other .................. 968 54 54
------- ------- -------
4,831 866 566
------- ------- -------
INCOME (LOSS) BEFORE BANKRUPTCY EXPENSES .................. 9,564 (638) (338)
Bankruptcy related expenses ............................... (2,356) (40) --
------- ------- -------
NET INCOME (LOSS) ......................................... $ 7,208 $ (678) $ (338)
======= ======= =======
</TABLE>
EXHIBIT IV TO DISCLOSURE STATEMENT
17
<PAGE> 302
LOMAS MORTGAGE USA, INC.
PROJECTED STATEMENT OF CASH FLOWS
(NON-REORGANIZATION ASSETS/LIABILITIES)
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ending June 30
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................ $ 7,208 $ (678) $ (338)
Noncash items included in the
determination of net income:
Depreciation and amortization ....... 100 50 29
Amortization of prepaid insurance ... 839 108 --
Gain on sale of assets .................... (10,800) -- --
Net change in receivables,
payables and other assets ........... (5,641) (48) (30)
-------- ------ ------
Net cash used by operating
activities ....................... (8,294) (568) (339)
-------- ------ ------
FINANCING ACTIVITIES
Advances from reorganization(1) ........... 168 566 338
Net collections on liquidation on
non-reorganization assets ........... 81,325 2 1
Liquidating distributions ................. (267,191) -- --
-------- ------ ------
Net cash provided (used) by financing
activities ..................... (185,698) 568 339
-------- ------ ------
Net decrease in cash and cash
equivalents ......................... (193,992) -- --
Cash and cash equivalents at
beginning of year ......................... 193,992 -- --
-------- ------ ------
Cash and cash equivalents at end of year ..... $ -- $ -- $ --
======== ====== ======
</TABLE>
- ----------
(1) Expenses associated with non-reorganization assets to the extent greater
than the cash on hand will be covered by "advances" of working capital
from the funds associated with the reorganization assets. This accounts
for differences in timing between the realization of the
non-reorganization assets and the expenses associated therewith.
EXHIBIT IV TO DISCLOSURE STATEMENT
18
<PAGE> 303
EXHIBIT V
OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF LFC
COMMITTEE MEMBERS:
GEM CAPITAL MANAGEMENT, INC.
70 East 55th Street
New York, NY 10022
Robert P. Masterson
JOHN P. KNEAFSEY
12 Lochwynd Court
Phoenix, MD 21131-1210
OPPENHEIMER MANAGEMENT CORP.
2 World Trade Center
34th Floor
New York, NY 10048
Thomas Reedy
ORION CAPITAL CORP.
600 Fifth Avenue
New York, NY 10020-2302
Robert T. Clairborne
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION,
HOUSTON
600 Travis
Suite 1150
Houston, Texas 77002
J. Chris Matthews
EXHIBIT V TO DISCLOSURE STATEMENT
<PAGE> 304
COUNSEL :
ANDREWS & KURTH, L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Hugh M. Ray, Esq.
ANDREWS & KURTH, L.L.P.
425 Lexington Avenue
New York, New York 10017
Peter S. Goodman, Esq.
DELAWARE COUNSEL:
WILLIAM, HERSHMAN & WISLER, P.A.
Suite 600
One Commerce Center
Twelfth Orange Street
P.O. Box 511
Wilmington, DE 19899-0511
Jeffrey C. Wisler
FINANCIAL ADVISORS:
HOULIHAN LOKEY HOWARD & ZUKIN
31 West 52nd Street
11th Floor
New York, New York 10019
David A. Preiser
John D. Finnerty
EXHIBIT V TO DISCLOSURE STATEMENT
2
<PAGE> 305
OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF LMUSA
COMMITTEE MEMBERS:
BANKERS TRUST COMPANY
4 Albany Street
New York, NY 10006
Stanley Berg
BENNETT RESTRUCTURING FUND, L.P.
450 Park Avenue
New York, NY 10022
James D. Bennett
Stephen Landzberg
ELLIOTT ASSOCIATES L.P.
712 Fifth Avenue
New York, NY 10019
Paul Singer
Andrew I. Kurtz
PERRY PARTNERS
245 Park Avenue
New York, NY 10167
Paul Leff
THE TRAVELERS INSURANCE COMPANY
190 South La Salle Street
Suite 2740
Chicago, IL 60603-3410
Betty D. Davis
Christine Schmuker
EXHIBIT V TO DISCLOSURE STATEMENT
3
<PAGE> 306
COUNSEL:
WEIL, GOTSHAL & MANGES
767 Fifth Avenue
New York, New York 10153
Martin J. Bienenstock
Beth J. Rosen
Mark Hoenig
BAYARD, HANDELMAN &
MURDOCH, P.C.
902 Market Street
Wilmington, Delaware 19899
Neil B. Glassman
ACCOUNTANTS:
ZOLFO COOPER
292 Madison Avenue
New York, New York 10117
Steve Cooper
Norman Lavin
Patrick Smith
Michael Winschuh
FINANCIAL ADVISORS:
COHANE RAFFERTY SECURITIES, INC.
212 Carnegie Center
Suite 206
Princeton, New Jersey 08540
Ed Elanjian
Liz Workman
EXHIBIT V TO DISCLOSURE STATEMENT
4
<PAGE> 307
---------------------------------
PRESENTATION TO
THE CREDITORS' COMMITTEE
OF LFC AND LMUSA
=============================
February 27, 1996
---------------------------------
---------------------------
Price Waterhouse LLP LOGO
---------------------------
==================================================== Lomas Financial Corporation
<PAGE> 308
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
I. Executive Summary
II. Overview of Intercompany Activity
III. Examples of Intercompany Activity
IV. Scope of Transactions Reviewed
V. Overview of Transactions Reviewed
VI. Preliminary Findings
==================================================== Lomas Financial Corporation
<PAGE> 309
- --------------------------------------------------------------------------------
PREFACE
- --------------------------------------------------------------------------------
This material was presented by Price Waterhouse LLP to the Creditors' Committee
of LFC and LMUSA on February 27, 1996. It served as the basis for discussion
regarding intercompany transactions between LFC and LMUSA.
At the presentation, these slides served as a focal point for discussion. They
are incomplete without the accompanying oral commentary. This document will be
most meaningful, therefore, to those who attended the discussion.
As stated throughout the presentation materials, this document is confidential
and should be treated accordingly. In addition, the schedules included herein
are preliminary in nature and subject to change as new or additional information
is obtained.
==================================================== Lomas Financial Corporation
<PAGE> 310
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
OVERVIEW OF PRICE WATERHOUSE LLP ASSIGNMENT
- --------------------------------------------------------------------------------
1. Reporting/lines of communication
- Retained by Young, Conaway, Stargatt & Taylor
- Worked independently of Debtor
- Two prior meetings with Counsel and Debtors'/Creditors' Committee's
professionals to discuss status and scope of review
- No interaction with Debtor Management or Committee other than meetings
and interviews necessary to perform work
2. Objective/Direction
- Investigate intercompany activity between January 1992 and October 1995
- Identify transactions which could arguably result in a cause of action
between LFC and LMUSA
I-1 ============================================== Lomas Financial Corporation
<PAGE> 311
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
OPERATIONAL AND ENGAGEMENT ISSUES
- --------------------------------------------------------------------------------
1. Centralized cash management/common payor of bills
2. LFC's use of LAS as the corporate administrative services subsidiary
3. Very large level of intercompany transactions
4. Several changes by Lomas in the processing of intercompany transactions
5. LFC's method of equity accounting
I-2 ============================================== Lomas Financial Corporation
<PAGE> 312
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
OPERATIONAL AND ENGAGEMENT ISSUES - CONTINUED
- --------------------------------------------------------------------------------
6. Large number of Lomas entities
7. Significant number of changes to the organizational structure
8. Limited audit trail for some transactions
9. Limited staffing resources available at Lomas to assist in obtaining data
10. RIS maintenance of computer system
11. Valuation issues
I-3 ============================================== Lomas Financial Corporation
<PAGE> 313
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
CENTRALIZED CASH MANAGEMENT/LFC AS THE COMMON PAYOR OF BILLS *
- --------------------------------------------------------------------------------
----------- -----------
LMUSA STL
----------- -----------
\ /
\ /
\ /
\ /
----------- ----------- -----------
LLG LANDS ----------- LFC ----------- LIS
----------- ----------- -----------
/ \
/ \
/ \
/ \
----------- -----------
LMI LAS
----------- -----------
* Significant Lomas
Subsidiaries
I-4 ============================================== Lomas Financial Corporation
<PAGE> 314
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
PROJECT APPROACH
- --------------------------------------------------------------------------------
1. Initially reviewed general ledger detail
- Noted a very large number of transactions needed to be analyzed
2. Determined that virtually all intercompany transactions with LMUSA flowed
through LFC's intercompany account with LMUSA and its subsidiaries enabling
our review to focus on LFC's intercompany account with LMUSA
3. Performed materiality screen to determine scope of review
- Transactions greater than $5,000
- 4% of the transactions provided 98% of the total gross dollars
I-5 ============================================== Lomas Financial Corporation
<PAGE> 315
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
PROJECT APPROACH - CONTINUED
- --------------------------------------------------------------------------------
4. Created database using accounting transaction data downloaded from Lomas'
accounting system
- All transactions greater than $5,000
- Over 12,000 database records for LMUSA, LAS, LIS, LLG, and STL
- 22 database fields
- Over 264,000 pieces of information
- Developed database structure to incorporate the downloaded data
- Developed database reports which summarize intercompany transaction
activity on a quarterly basis
- Developed customized database reports to expedite screening process
analysis
- Reconciled database activity reports to Lomas' quarterly general
ledger detail
I-6 ============================================== Lomas Financial Corporation
<PAGE> 316
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
PROJECT APPROACH - CONTINUED
- --------------------------------------------------------------------------------
5. Performed screen analysis to review for potentially non-recurring
transactions
- Analyzed cash and non-cash intercompany transactions
- Developed program to reconcile all advances and repayments to cash
accounts
- Analyzed "external" checks to determine top 15 vendors and the
associated activity
- Developed program to analyze Lomas' use of "zero-dollar" checks and
categorized the associated intercompany transaction activity
- Developed program to analyze all journal entries over $5,000 and
categorized the associated intercompany transaction activity
- Reviewed all investment in subsidiaries account activity
I-7 ============================================== Lomas Financial Corporation
<PAGE> 317
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
PROJECT APPROACH - CONTINUED
- --------------------------------------------------------------------------------
6. Researched potential non-recurring transactions to evaluate each
transaction's impact on LFC and LMUSA
7. Analyzed potential avoidance transactions that occurred during the period
from November 1993 through October 9, 1995
I-8 ============================================== Lomas Financial Corporation
<PAGE> 318
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
PRELIMINARY FINDINGS
- --------------------------------------------------------------------------------
1. $3.4 billion of intercompany and investment activity processed through
over 235,000 intercompany and investment transactions
2. $1.7 billion of intercompany activity between LFC and LMUSA processed
through over 135,000 transactions
3. Reviewed $1.6 billion of intercompany transactions between LFC and LMUSA
4. Reviewed $1.0 billion of transactions impacting LFC's investment in
subsidiaries accounts
5. Determined that 78 transactions required further analysis
6. Identified $199 million of transaction activity:
- $141 million of transactions involving STL
- $22 million of potential avoidance claims by LFC against LMUSA based on
book value of transaction activity
- $9 million of potential avoidance claims by LMUSA against LFC based on
book value of transaction activity
I-9(R) ============================================= Lomas Financial Corporation
<PAGE> 319
- --------------------------------------------------------------------------------
SUMMARY OF ACTIVITY IN LFC'S INTERCOMPANY AND INVESTMENT
IN SUBSIDIARIES ACCOUNTS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
By Dollar ($ Millions) By Transaction
Number of Transactions
[Pie Chart] [Bar Chart]
Intercompany $2,465 Intercompany 235,849
Investment $ 984 Investment 76
II-1(R) ============================================ Lomas Financial Corporation
<PAGE> 320
- --------------------------------------------------------------------------------
ANALYSIS OF ACTIVITY
IN LFC'S INTERCOMPANY AND INVESTMENT IN SUBSIDIARIES ACCOUNTS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
% of Gross Number of % of Total
($ Millions) Gross Total Total Transactions Transactions
-----------------------------------------------------------------
LMUSA $2,169 62.9% 135,365 57.4%
STL 254 7.4% 83 0.0%
LIS 610 17.7% 13,972 5.9%
LLG 55 1.6% 257 0.1%
LMI 155 4.5% 16,618 7.0%
LAS 206 6.0% 69,630 29.5%
-----------------------------------------------------------------
Total $3,448 100.0% 235,925 100.0%
=================================================================
II-2(R) ============================================ Lomas Financial Corporation
<PAGE> 321
- --------------------------------------------------------------------------------
SUMMARY OF LFC'S INTERCOMPANY ACCOUNT ACTIVITY
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
By Dollar ($ Millions) By Transaction
Number of Transactions
[Pie Chart] [Bar Chart]
LMUSA $1,692 LMUSA 135,355
STL $ 113 STL 75
LIS $ 302 LIS 13,942
LLG $ 35 LLG 245
LMI $ 120 LMI 16,611
LAS $ 202 LAS 69,621
II-3 ============================================== Lomas Financial Corporation
<PAGE> 322
- --------------------------------------------------------------------------------
ANALYSIS OF LFC'S INTERCOMPANY ACCOUNT ACTIVITY
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
% of Gross Number of % of Total
($ Millions) Gross Total Total Transactions Transactions
-----------------------------------------------------------------
LMUSA $1,692 68.6% 135,355 57.4%
STL 113 4.6% 75 0.0%
LIS 302 12.2% 13,942 5.9%
LLG 35 1.4% 245 0.1%
LMI 120 4.9% 16,611 7.0%
LAS 202 8.2% 69,621 29.5%
-----------------------------------------------------------------
Total $2,465 100.0% 235,849 100.0%
=================================================================
II-4 ============================================== Lomas Financial Corporation
<PAGE> 323
- --------------------------------------------------------------------------------
SUMMARY OF LFC'S INVESTMENT IN SUBSIDIARIES ACCOUNT ACTIVITY
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
By Dollar ($ Millions) By Transaction
Number of Transactions
[Pie Chart] [Bar Chart]
LMUSA $ 478 LMUSA 10
STL $ 141 STL 8
LIS $ 308 LIS 30
LLG $ 20 LLG 12
LMI $ 34 LMI 7
LAS $ 3 LAS 9
II-5(R) ============================================ Lomas Financial Corporation
<PAGE> 324
- --------------------------------------------------------------------------------
ANALYSIS OF LFC'S INVESTMENT IN SUBSIDIARIES ACCOUNT ACTIVITY
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
% of Gross Number of % of Total
($ Millions) Gross Total Total Transactions Transactions
-----------------------------------------------------------------
LMUSA $478 48.5% 10 13.2%
STL 141 14.3% 8 10.5%
LIS 308 31.3% 30 39.5%
LLG 20 2.0% 12 15.8%
LMI 34 3.5% 7 9.2%
LAS 3 0.3% 9 11.8%
-----------------------------------------------------------------
Total $984 100.0% 76 100.0%
=================================================================
II-6(R) ============================================ Lomas Financial Corporation
<PAGE> 325
- --------------------------------------------------------------------------------
SUMMARY OF ACTIVITY IN LFC'S INTERCOMPANY ACCOUNT WITH LMUSA
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
By Dollar ($ Millions) By Transaction
Number of Transactions
[Pie Chart] [Bar Chart]
Advances & Repayments $1,378 Advances & Repayments 681
External Checks $ 44 External Checks 89,711
Zero-Dollar Checks $ 133 Zero-Dollar Checks 43,885
Journal Entries $ 136 Journal Entries 1,078
II-7 ============================================== Lomas Financial Corporation
<PAGE> 326
- --------------------------------------------------------------------------------
ANALYSIS OF ACTIVITY IN LFC'S INTERCOMPANY ACCOUNT WITH LMUSA
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
Gross % of Gross Total % of Total
($ Millions) Total Total Transactions Transactions
--------------------------------------------------------
Advances & Repayments $1,378 81.5% 681 0.5%
External Checks 44 2.6% 89,711 66.3%
Zero-Dollar Checks 133 7.9% 43,885 32.4%
Journal Entries 136 8.1% 1,078 0.8%
--------------------------------------------------------
Total $1,692 100.0% 135,355 100.0%
========================================================
II-8 ============================================== Lomas Financial Corporation
<PAGE> 327
- --------------------------------------------------------------------------------
LFC INTERCOMPANY ACCOUNT WITH LMUSA
MONTHLY ENDING BALANCE
- --------------------------------------------------------------------------------
Monthly Intercompany Balance
($ Millions)
[LINE CHART]
(12/93) (3/94) (6/94) (9/94) (12/94) (3/95) (6/95) (9/95)
- --------------------------------------------------------------------------------
II-9 ============================================== Lomas Financial Corporation
<PAGE> 328
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
SCREENING PROCESS
- ------------------------------------------------------------------------------------------------------------------------------------
-------------------------
LFC and Subsidiaries
Intercompany and
Investment Transactions
-------------------------
*
-------------------------------------------------------------------------
* *
-------------------- -----------------------
LFC Intercompany LFC Investment in
with LMUSA Subsidiaries
-------------------- -----------------------
* *
-------------------- -----------------------
Rolling Intercompany Investment Transactions
Balance Categorized by Purpose
-------------------- -----------------------
* *
------------------------------------------------------------------------------ * -------
* * * *--- LMUSA
---------------- -------- ----------------- * -------
Advances and ---- Checks --- -- Journal Entries -* * -------
Repayments * -------- * ------------- * ----------------- * *--- LIS
---------------- * *- Zero-Dollar -------- * * * -------
* * * ------------- * * * ------------
- ------------------ * * ------------- ------------- ------- *--- Lomas
Deatail Work for -------------------- -- External Allocations Other * Management
Exceptions to Cash Intercompany Checks ------------- 92,93,94,95 ------- * ------------
Accounts Impacting LMUSA * ------------- * ---------------- *
- ------------------ ---- through A/P Detail ------------- * *-- Dividends * -------
* * 93,94,95 Summary by * ------------ * ---------------- *--- STL
* * -------------------- Vendor *-- LMUSA * ---------------- * -------
* * ------------- * ------------ *-- Corrections * ------------
* * ---------------------- * ------------ * ---------------- *--- LLG Land
* *--- Checks Impacting P&L *-- Intellifile * ---------------- * ------------
* * ---------------------- * ------------ *-- Intercompany * -------
* * * ------- * ------------ * Interest *--- LAS
* * *- LIS *-- LFC * ---------------- -------
* * * ------- * ------------ * ---------------- *
* * * ------- * ------------ --- Miscellaneous *
* * *- LAS * * * * * * * * * * * * * * * * * * **-- LAS Transactions *
* * * ------- ------------ ---------------- *
* * * ------- * *
* * *- Other * *
* * ------- * *
* * * *
* * ---------------------- * *
* *--- Checks Impacting B/S * *
* ---------------------- * *
* * * *
* * ------------------------- * *
* *- Liquidating Items * *
* * ------------------------- * *
* * ------------------------- * *
* *- CIP, Clearing Accounts * *
* ------------------------- * *
* * * *
* * * * * * * * * * * * * * * * * * *
* * *
---------------- * *
Non-Recurring * *
Transactions * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
----------------
</TABLE>
III-1 ============================================== Lomas Financial Corporation
<PAGE> 329
- -------------------------------------------------------------------------------
TRANSACTION FLOW THAT LEADS TO INTERCOMPANY ADVANCES
LFC ADVANCE TO LMUSA
- -------------------------------------------------------------------------------
------------------------------------------------------------
LFC
------------------------------------------------------------
Debit Credit
----- ------
Intercompany
Receivable due
from LMUSA Cash
$3,913,250 ($3,913,250)
------------------------------------------------------------
------------------------------------------------------------
LMUSA
------------------------------------------------------------
Debit Credit
----- ------
Intercompany
Payable
Cash due to LFC
$3,913,250 ($3,913,250)
------------------------------------------------------------
III-2 ============================================= Lomas Financial Corporation
<PAGE> 330
- -------------------------------------------------------------------------------
TRANSACTION FLOW THAT LEADS TO INTERCOMPANY REPAYMENTS
LMUSA REPAYMENT TO LFC
- -------------------------------------------------------------------------------
------------------------------------------------------------
LFC
------------------------------------------------------------
Debit Credit
----- ------
Intercompany
Receivable due
Cash from LMUSA
$2,273,250 ($2,273,250)
------------------------------------------------------------
------------------------------------------------------------
LMUSA
------------------------------------------------------------
Debit Credit
----- ------
Intercompany
Payable
due to LFC Cash
$2,273,250 ($2,273,250)
------------------------------------------------------------
III-3 ============================================= Lomas Financial Corporation
<PAGE> 331
- -------------------------------------------------------------------------------
TRANSACTION FLOW THAT LEADS TO INTERCOMPANY CHECKS
TWO TYPES - EXTERNAL AND ZERO-DOLLAR
- -------------------------------------------------------------------------------
TWO TYPES OF INTERCOMPANY CHECKS(1)
1. External - The check is made payable to an outside vendor for services
or goods (e.g. - Insurance or Office Supplies). These
checks result in an actual outflow of cash from LFC or
one of its subsidiaries.
2. Zero-Dollar - The A/P system is used to process intercompany
charges in a manner more efficient than manual journal
entries. A zero-dollar check (non-cash) is made payable to a
Lomas entity in order to allocate intercompany expenses
(rent, general accounting) or to charge one entity for
intercompany services that had been provided by a different
Lomas entity. These checks do not result in an actual
outflow of cash from LFC or one of its subsidiaries.
(1) "External check" is a classification developed by PW to explain and analyze
some of the transactions impacting intercompany accounts. The Lomas
accounting staff does not make a distinction between "external" checks
which result in an actual outflow of cash or "zero-dollar" checks which do
not affect cash balances.
III-4 ============================================= Lomas Financial Corporation
<PAGE> 332
- -------------------------------------------------------------------------------
TRANSACTION FLOW THAT LEADS TO INTERCOMPANY CHECKS
"EXTERNAL CHECKS"
- -------------------------------------------------------------------------------
- ----------------------
Invoice from insurance
vendor, Alexander & ******
Alexander, is received *
for $405,000 *
- ---------------------- *
-------------------
Allocation Schedule
is prepared (based ******
on headcount by the *
Company) *
------------------- *
--------------------
Account Payable
Check Request
(APCR) is prepared
based on the *****
Allocation Schedule. *
Intercompany entries *
will be produced *
automatically from *
the APCR. *
-------------------- *
----------------
Check is sent to
Alexander &
Alexander for
the invoice
amount of
$405,000.
----------------
III-5 ============================================= Lomas Financial Corporation
<PAGE> 333
- -------------------------------------------------------------------------------
TRANSACTION FLOW THAT LEADS TO INTERCOMPANY CHECKS
"EXTERNAL CHECKS"
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------ ------------------------------------
LMI - Co. 042 LFC - Co. 1140
Debit Credit Debit Credit
- ------------------------------------ ------------------------------------
Prepaid Insurance Intercompany LFC Prepaid Cash -------------
Payable to LFC Insurance ($405,000) *** Vendor
* -------------
$9,500 ($9,500) **** $74,700 * Alexander &
- ------------------------------------ * 9,500 ***** Alexander
* -------- $405,000
* $84,200 Cash
- ------------------------------------ * -------------
LAS - Co. 139 * Intercompany
Debit Credit * Receivable from
- ------------------------------------ * LMI
Prepaid Insurance Intercompany ***** $9,500
Payable to LFC
**** Intercompany
$57,200 ($57,200) * Receivable from
- ------------------------------------ ***** LAS
$57,200
- ------------------------------------ Intercompany
LMUSA - Co. 001 Receivable from
Debit Credit LMUSA
- ------------------------------------ ****** $209,950
Prepaid Insurance Intercompany * 31,850
Payable to LFC * 7,650
* 4,650
$209,950 (1) ($209,950) * --------
31,850 (2) (31,850) * $254,100
7,650 (3) (7,650) * ------------------------------------
4,650 (4) (4,650) ***
-------- ---------
$254,100 ($254,100)
- ------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Notes:
1. LMUSA Allocation
2. Lomas Field Services, a LMUSA subsidiary
3. Lomas Insurance, a LMUSA subsidiary
4. Lomas General Insurance, a LMUSA subsidiary
LMUSA will create the appropriate intercompany entries with its subsidiaries.
- --------------------------------------------------------------------------------
III-6 ============================================= Lomas Financial Corporation
<PAGE> 334
- -------------------------------------------------------------------------------
TRANSACTION FLOW THAT LEADS TO INTERCOMPANY CHECKS
"ZERO-DOLLAR CHECKS"
- -------------------------------------------------------------------------------
[FLOW CHART]
1. Allocations of general services
- The budget for LAS services is prepared (e.g. General Accounting).
- Allocations for various subsidiaries are determined. LAS charges other
subsidiaries monthly using amounts based on budget.
- LAS Corporate Accounting generates a zero dollar check with LAS as
Payee and LFC as Payor.
- LAS is "reimbursed" by increasing its interco. receivable, while the
other subsidiary increases its general accounting expense account.
- No cash is exchanged as the check amount is zero. Only intercompany
accounts and expense accounts are affected.
- --------------------------------------------------------------------------------
2. Direct charges for services
- Service (e.g. Voice & Data Communications) provided by one subsidiary
(e.g. LIS) to other subsidiaries.
- LIS invoices the other subsidiary directly.
- LAS Corporate Accounting generates a zero-dollar check with LIS as Payee
and LFC as Payor.
- LIS is "reimbursed" by increasing its intercompany receivable, while
the other subsidiary increases its LIS expense account.
- No cash is exchanged as the check amount is zero. Only intercompany
accounts and expense accounts are affected.
III-7 ============================================= Lomas Financial Corporation
<PAGE> 335
- -------------------------------------------------------------------------------
TRANSACTION FLOW THAT LEADS TO INTERCOMPANY CHECKS
"ZERO-DOLLAR CHECKS"
- -------------------------------------------------------------------------------
----------------------------------------
LFC
----------------------------------------
Debit Credit
----- ------
Intercompany Intercompany
Receivable from Payable to
LMUSA LAS
$180,644 ($180,644)
----------------------------------------
/ \
/ \
/ \
/ \
/ \
/ \
/ \
- ----------------------------------- -----------------------------------------
LMUSA LAS
- ----------------------------------- -----------------------------------------
Debit Credit Debit Credit
----- ------ ----- ------
General Accounting Intercompany Intercompany General Accounting
Allocation Payable to Receivable from Contra-Expense to
Expense LFC LFC Reduce Expense at LAS
$180,644 ($180,644) $180,644 ($180,644)
- ----------------------------------- -----------------------------------------
III-8 ============================================= Lomas Financial Corporation
<PAGE> 336
- -------------------------------------------------------------------------------
TRANSACTION FLOW THAT LEADS TO INTERCOMPANY CHECKS
ANATOMY OF A "ZERO-DOLLAR" CHECK
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
After the budget for the General Accounting The computerized accounting system will first
Department has been determined and the automatically prepare matching entries for
allocation to LMUSA decided, a monthly check each company listed on the check request:
request is prepared to allocate the expense.
The following information is input by Transactions Processed by Computerized Accounting System
accounting as a result of the check request: --------------------------------------------------------
----------------------------------------------
Check Request Form Input DR CR Company Account
------------------------ -- -- ------- -------
- ---------------------------------------------- * * * * * (180,644) LMUSA Intercompany
DR CR COMPANY ACCOUNT * Account with LFC
-- -- ------- ------- *
180,644 LMUSA General Accounting * * * * 180,644 LAS Intercompany
Expense Allocation * * * * * Account with LFC
*
(180,644) LAS General Accounting * * * * * *
Contra Expense * * 0 LFC Trade A/P
Allocation * ----------------------------------------------
*
(0) LFC Cash Account * * * * * * * * * * The computerized accounting system will then
- ------- -------- prepare an additional entry to balance the
180,644 (180,644) intercompany accounts of LFC:
======= ========
- ---------------------------------------------- ----------------------------------------------
180,644 LFC Intercompany
Note: Entry balances to zero. But the entry Account with LMUSA
includes three one sided entries for each of
the companies involved. The computerized (180,644) LFC Intercompany
accounting system will then automatically Account with LAS
generate the corresponding entries to the ------- --------
necessary intercompany accounts in order 361,288 (361,288)
to balance the transactions. ======= ========
----------------------------------------------
</TABLE>
III-9 ============================================= Lomas Financial Corporation
<PAGE> 337
- -------------------------------------------------------------------------------
SCOPE OF TRANSACTIONS REVIEWED
- -------------------------------------------------------------------------------
Advances & Repayments All reviewed for exceptions
External Checks Greater than $100,000
Zero-Dollar Checks Greater than $100,000
Journal Entries Greater than $5,000
Investment Accounts All reviewed
IV-1 ============================================= Lomas Financial Corporation
<PAGE> 338
- --------------------------------------------------------------------------------
ANALYSIS OF TRANSACTIONS REVIEWED IN LFC'S INTERCOMPANY ACCOUNT WITH LMUSA
BY DOLLAR
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
Gross Total Gross Total %
($ Millions) Reviewed Not Reviewed[1] Gross Total Reviewed
-------------------------------------------------------
Advances & Repayments $1,378 $ 0 $1,378 100.0%
External Checks 14 30 44 31.3%
Zero-Dollar Checks 59 74 133 44.5%
Journal Entries 136 1 136 99.6%
-------------------------------------------------------
Total $1,587 $ 105 $1,692 93.8%
=======================================================
[1] Represents items less than selected scope levels.
IV-2 ============================================= Lomas Financial Corporation
<PAGE> 339
- --------------------------------------------------------------------------------
ANALYSIS OF TRANSACTIONS REVIEWED IN LFC'S INTERCOMPANY ACCOUNT WITH LMUSA
BY NUMBER OF TRANSACTIONS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
Number of Number of
Transactions Transactions[1] Number of %
Reviewed Not Reviewed Transactions Reviewed
----------------------------------------------------
Advances & Repayments 681 0 681 100.0%
External Checks 53 89,658 89,711 0.1%
Zero-Dollar Checks 266 43,619 43,885 0.6%
Journal Entries 490 588 1,078 45.5%
-------------------------------------------------
Total 1,490 133,865 135,355 1.1%
=================================================
[1] Represents items less than selected scope levels.
IV-3 ============================================= Lomas Financial Corporation
<PAGE> 340
- --------------------------------------------------------------------------------
CLASSIFICATION OF ADVANCE AND REPAYMENT TRANSACTIONS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
LFC to LMUSA to
LMUSA LFC Gross Number of
($ Millions) Debits (Credits) Net Total Total Transactions
--------------------------------------------------
Cash to Cash Account $ 621 ($757) ($136) $1,378 676
Other Transactions 0 0 0 0 5
--------------------------------------------------
Total $ 621 ($757) ($136) $1,378 681
IV-4 ============================================= Lomas Financial Corporation
<PAGE> 341
- --------------------------------------------------------------------------------
SUMMARY OF EXTERNAL CHECK TRANSACTIONS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
By Dollars ($ Millions) By Transaction
[Pie Chart] [Pie Chart]
Top 15 Vendors $17 Top 15 Vendors 65,746
Other Vendors $15 Other Vendors 23,859
IV-5 ============================================= Lomas Financial Corporation
<PAGE> 342
Tentative and Preliminary - Draft
- --------------------------------------------------------------------------------
ANALYSIS OF EXTERNAL CHECK TRANSACTIONS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Total Number Percent of
Total Gross Total of Total
Vendor ($ Thousands) Transactions (Dollars) Transactions (Number) Activity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Texas Commerce Bank 2,380 7.4% 80 0.1% Payroll Tax
2 Kelly Services 2,365 7.3% 6,276 7.0% Temporary Personnel
3 Southwest Health Plan 2,238 6.9% 183 0.2% Insurance
4 Airborne Express 1,445 4.5% 51,292 57.2% Postage/Courier Services
5 Rollins Hudig Hall Agency 1,414 4.4% 481 0.5% Insurance
6 Edelman & Combs 1,280 4.0% 1 0.0% Litigation Settlement
7 Alexander & Alexander 1,111 3.4% 268 0.3% Insurance
8 Boise Cascade 912 2.8% 3,453 3.9% Office Supplies
9 Travelers Health 872 2.7% 167 0.2% Insurance
10 Jones Day 845 2.6% 245 0.3% Legal Services
11 Cananwill Inc. 782 2.4% 30 0.0% Insurance
12 Greater Dallas Office 543 1.7% 878 1.0% Office Supplies
13 TLC Enterprises 499 1.5% 9 0.0% Construction Contractor
14 Ameritrust Texas 243 0.8% 26 0.0% Insurance
15 National Presort 226 0.7% 2,357 2.6% Postage
-------------------------------------------
Sub-Total 17,154 53.2% 65,746 73.4%
Other Vendors 15,094 46.8% 23,859 26.6%
-------------------------------------------
Sub-Total 32,248 100.0% 89,605 100.0%
Reversing Transactions 11,788 n/a 106 n/a
-------------------------------------------
Net Total $44,036 n/a 89,711 n/a
===========================================
</TABLE>
IV-6 ============================================= Lomas Financial Corporation
<PAGE> 343
- --------------------------------------------------------------------------------
SUMMARY OF ZERO-DOLLAR CHECK TRANSACTIONS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
By Dollars ($ Millions) By Transaction
[Pie Chart] [Pie Chart]
LIS $39 LIS 18,797
Non-Recurring $6 Non-Recurring 7
Other $1 Other 874
Reversing $4 Reversing 108
Allocations & Allocations &
Other Dir. Chgs. $84 Other Dir. Chgs. 24,099
IV-7 ============================================= Lomas Financial Corporation
<PAGE> 344
- -------------------------------------------------------------------------------
CLASSIFICATION OF ZERO-DOLLAR CHECK TRANSACTIONS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Gross Number of % of Total
($ Thousands) Gross Total Total Transactions Transactions
------------------------------------------------
<S> <C> <C> <C> <C>
LIS $38,540 28.9% 18,797 42.8%
Allocations & Other Direct Charges 83,795 62.9% 24,099 54.9%
Reversing 4,322 3.2% 108 0.2%
Other 543 0.4% 874 2.0%
Non-Recurring 5,938 4.5% 7 0.0%
------------------------------------------------
Total Zero-Dollar Checks $133,138 100.0% 43,885 100.0%
================================================
</TABLE>
IV-8 ============================================= Lomas Financial Corporation
<PAGE> 345
- --------------------------------------------------------------------------------
CLASSIFICATION OF ZERO-DOLLAR CHECK TRANSACTIONS
DETAIL OF ALLOCATION & OTHER DIRECT CHARGES
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Gross Number of % of Total
($ Thousands) Gross Total Total Transactions Transactions
------------------------------------------------
<S> <C> <C> <C> <C>
Allocations & Other Direct Charges
LAS $60,423 45.4% 21,347 48.6%
LFC 4,951 3.7% 418 1.0%
LMUSA 15,915 12.0% 2,219 5.1%
Intellifile 2,505 1.9% 115 0.3%
------------------------------------------------
Sub-total $83,795 62.9% 24,099 54.9%
================================================
</TABLE>
IV-9(R) ============================================ Lomas Financial Corporation
<PAGE> 346
- --------------------------------------------------------------------------------
SUMMARY OF JOURNAL ENTRY TRANSACTIONS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
By Dollars ($ Millions) By Transaction
[Pie Chart] [Pie Chart]
LIS $7 LIS 51
Accounting Adjustments $58 Accounting Adjustments 153
Allocations $13 Allocations 131
Misc. Trans. $3 Misc. Trans 95
Non-Recurring $55 Non-Recurring 60
JE's <= $5,000 $1 JE's <= $5,000 588
IV-10 ============================================= Lomas Financial Corporation
<PAGE> 347
- --------------------------------------------------------------------------------
CLASSIFICATION OF JOURNAL ENTRY TRANSACTIONS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Gross Number of % of Total
($ Thousands) Gross Total Total Transactions Transactions
---------------------------------------------------
<S> <C> <C> <C> <C>
Accounting Adjustments $58,272 42.7% 153 14.2%
LIS 7,043 5.2% 51 4.7%
Allocations 13,098 9.6% 131 12.2%
Misc. Trans. 2,578 1.9% 95 8.8%
Non-Recurring 54,829 40.2% 60 5.6%
---------------------------------------------------
Sub-Total 135,819 99.6% 490 45.5%
Journal Entries <= $5,000 609 0.4% 588 54.5%
---------------------------------------------------
Total $136,429 100.0% 1,078 100.0%
===================================================
</TABLE>
IV-11 ============================================= Lomas Financial Corporation
<PAGE> 348
- --------------------------------------------------------------------------------
CLASSIFICATION OF JOURNAL ENTRY TRANSACTIONS
DETAIL OF ACCOUNTING ADJUSTMENTS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Gross Number of % of Total
($ Thousands) Gross Total Total Transactions Transactions
--------------------------------------------------
<S> <C> <C> <C> <C>
Accounting Adjustments
Corrections $21,000 15.4% 2 0.2%
Reversing Entries 6,928 5.1% 99 9.2%
Dividends 27,875 20.4% 8 0.7%
Intercompany Interest 2,469 1.8% 44 4.1%
--------------------------------------------------
Sub-Total $58,272 42.7% 153 14.2%
==================================================
</TABLE>
IV-12(R) =========================================== Lomas Financial Corporation
<PAGE> 349
- --------------------------------------------------------------------------------
TRANSACTIONS REVIEWED IN LFC'S INTERCOMPANY ACCOUNT WITH LMUSA
EXTERNAL AND ZERO-DOLLAR CHECKS
JANUARY 31, 1992 THROUGH SEPTEMBER 30, 1995 BY TRANSACTION TYPE
- --------------------------------------------------------------------------------
By Dollar ($ Millions) By Transaction
[Bar Chart] [Bar Chart]
% Reviewed 41% % Reviewed .2%
% Analyzed[1] 85% % Analyzed[1] 75%
[1] % Analyzed is based on the checks greater than $100,000 that were reviewed
as well as the gross dollar value and number of checks processed through
LFC's intercompany account wth LMUSA in fiscal years 1993 and 1994. All
checks processed through the intercompany account in fiscal years 1993 and
1994 were analyzed to determine the impact on LMUSA's balance sheet and
P&L accounts. Check details for fiscal years 1992 and 1995-1996 are still
outstanding.
IV-13 ============================================= Lomas Financial Corporation
<PAGE> 350
- -------------------------------------------------------------------------------
TIMELINE OF EVENTS - INTERCOMPANY TRANSACTIONS
1992 THROUGH 1995
- -------------------------------------------------------------------------------
[TIMELINE CHART]
1992
- ----
Emergence from Bankruptcy
LFC acquires Tycher Properties
LFC transfers Tycher Properties to LLG Lands
1993
- ----
LMUSA transfers file-imaging assets to LFC as Intellifile is incorporated as a
subsidiary of LFC
LFC transfers 49% of STL to LMUSA
1994
- ----
LLG Lands transfers 49% of Tycher Properties through LFC to LMUSA
LFC transfers Intellifile to LMUSA after writing off $6.9mm of Intellifile's
operating losses it had funded
1995
- ----
LMUSA transfers 49% of Tycher Properties back to LLG Lands through LFC
LMUSA transfers Intellifile back to LFC
LMUSA becomes 100% owner of STL when LFC writes-off its intercompany payable
to STL by eliminating its investment in STL
LFC transfers the Conseco Tranche B Note to LMUSA
LLG Lands transfers 100% of Tycher Properties and other assets through LFC to
LMUSA which transfers them to STL
STL advances $8.2mm of excess cash to LMUSA
LFC transfers Lomas NY's assets (cash) to LMUSA
LFC transfers assets to LMUSA as it dissolves LAS and Lomas Marketing
LFC sells Intellifile to Dataplex
V-1 ============================================= Lomas Financial Corporation
<PAGE> 351
- -------------------------------------------------------------------------------
TIMELINE OF EVENTS - THIRD PARTY TRANSACTIONS
1992 THROUGH 1995
- -------------------------------------------------------------------------------
[TIMELINE CHART]
1992
- ----
Emergence from Bankruptcy
Capstead and LFC extend management contract through 12/96
LFC sells remaining interest in First USA for $23mm
First SWAP contract of $375mm
Capstead merges with Tyler Cabot as LFC sells assets to Capstead for $1mm
LMUSA issues $340mm of unsecured bonds to retire $330mm due 1999
1993
- ----
Capstead pays LFC $4.5mm to shorten its management contract with LFC
LMUSA is not in compliance with debt covenants due to advances to LFC
Notional amount of SWAP contracts reach $700mm
Capstead pays LFC $4.8mm to get out of future management fees
1994
- ----
LMUSA pledges $2 billion of PMSRS as collateral for SWAPs
Notional amount of SWAP contracts reach $800mm
LMUSA's bank agreements amended to allow up to $12mm to LFC if net worth is
greater than $175mm
LMUSA pledges an additional $2.8 billion of PMSRS as collateral for SWAPs
LFC agrees to sell LIS to Prudential
When Jess Hay retires in 12/94, he will receive $1.4mm contract
LMUSA pledges an additional $2 billion of PMSRS as collateral for SWAPs.
STL sells 12 properties to Lennar for $31mm
LMUSA's bank agreements amended to allow up to $10mm to LFC if net worth is
greater than $150mm
Eric Booth hired as CEO, Bob Denton as Treasurer
Restructuring provision of $37mm is recorded
1995
- ----
Joseph Dryer hired as Senior Vice President
LFC sells LIS to Prudential
Salomon Bros. receives fee of $1.2mm on LIS sale
LMUSA's bank agreements amended to allow up to $3mm to LFC if net worth is
greater than $150mm
Off balance sheet accounts related to Capstead Mortgages under-funded by
$6.5mm
Real estate provision of $23mm is recorded
$160mm of SWAPs closed out for $5mm
P&I line of $7.8mm is paid off due to ratios at 6/95
$1.6 billion of Capstead PMSRs sold to GE for $16mm
First Nationwide selected as Acquiror
$155mm of SWAPs closed out for $6mm
$3.0 billion of Quality servicing portfolio sold to DLJ for $16mm
Field Services sold by LMUSA to FATS for $600K
Intellifile sold by LFC to Dataplex
Agreement signed to sell GNMA portfolio for $100mm
Real Estate is written down by an additional $12mm
Agreement signed to sell remaining portfolio for $150mm
$485mm of SWAPs closed out for $19mm
V-2 ============================================= Lomas Financial Corporation
<PAGE> 352
- -------------------------------------------------------------------------------
ORGANIZATIONAL CHART OVER TIME
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
January 31, 1992 ------------- (Including all subsidiaries)
Lomas
Financial
Corporation
-------------
*
*
--------------------------------------------------------------------------------------------------------------------------------
* * * * * * * * * * *
- --- ------- ----------- ---------- ---------- -------- -------- --------------- ------------- ---------- -------
Lomas
LLG Financial Lomas Housing Lomas Lomas Roosevelt
LAS Lands Insurance Management Management LMUSA New York Properties,Inc. Office Center ST Lending LIS
$1 $12,416 Ltd. $3,907 $10,232 $974 $223,856 $710 $1,509 $455 $133,089 $48,451
- --- ------- ----------- ---------- ---------- -------- -------- --------------- ------------- ---------- -------
* *
- --------- *
Lomas *
Marketing ----------------
Services, Assets Used to
Inc. form Intellifile
- --------- ----------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
January 31, 1992 ------------- (Including only selected subsidiaries)
Lomas
Financial
Corporation
-------------
*
---------------------------------------------------------------
* * * * *
--- --------- -------- -------- -------
LLG ST
LAS Lands LMUSA Lending LIS
$1 $12,416 $223,856 $133,089 $48,451
--- --------- -------- -------- -------
* *
--------------- ----------------
Lomas Marketing Assets Used to
Services, Inc. form Intellifile
--------------- ----------------
</TABLE>
(1) Dollar figures represent LFC Investment in each company in thousands
('000's).
(2) Shaded entities reflect recent intercompany transactions.
V-3 ============================================= Lomas Financial Corporation
<PAGE> 353
- --------------------------------------------------------------------------------
ORGANIZATIONAL CHART OVER TIME
(INCLUDING ONLY SELECTED SUBSIDIARIES)
- --------------------------------------------------------------------------------
January 31, 1992 ----------- Emergence from Bankruptcy
Lomas
Financial
Corporation
-----------
*
---------------------------------------------------------------
* * * * * * *
--- --------- -------- ---------- ------- * ---------
LAS LLG Lands LMUSA ST Lending LIS * Lomas NY
$1 $12,416 $223,856 $133,089 $48,451 * $709
--- --------- -------- ---------- ------- * ---------
* * *
* * *
- --------------- ---------------- --------------
Lomas Marketing Assets Used to Conseco
Services, Inc. form Intellifile Tranche B Note
$2,800 $4,749
- --------------- ---------------- --------------
- --------------------------------------------------------------------------------
March 31, 1992 ----------- LFC acquires Tycher Properties
Lomas
Financial
Corporation
-----------
*
*
-------------------------------------------------------
* * * * * * * *
--- * ----- ----- ------- --- * -----
* LLG ST * Lomas
LAS * Lands LMUSA Lending LIS * NY
--- * ----- ----- ------- --- * -----
* * * *
********* * * *
* * * *
- ------------- ---------- ----------- ---------
Lomas Tycher Assets Used Conseco
Marketing Properties to form Tranche B
Services, Inc. Intellifile Note
- -------------- ---------- ----------- ---------
[1] Dollar figures under each subsidiary represent LFC Investment in each
company in thousands ('000's).
[2] Dollar figure for the Intellifile assets is based on LFC's initial
investment at 7/1/92.
[3] Dollar figure for Conseco B Note is Book Value at 1/31/92.
[4] Shaded entities reflect recent intercompany transactions.
V-4 ============================================= Lomas Financial Corporation
<PAGE> 354
- --------------------------------------------------------------------------------
ORGANIZATIONAL CHART OVER TIME
(INCLUDING ONLY SELECTED SUBSIDIARIES)
- --------------------------------------------------------------------------------
November 30, 1992 LFC transfers Tycher Properties to LLG Lands
-----------
Lomas
Financial
Corporation
-----------
*
*
------------------------------------------------------------
* * * * * * *
--- ----- ----- ------- --- * -----
LLG ST * Lomas
LAS Lands LMUSA Lending LIS * NY
--- ----- ----- ------- --- * -----
* * * *
* * * *
-------------- ---------- ------------ ---------
Lomas Tycher Assets Conseco
Marketing Properties Used to form Tranche B
Services, Inc. ---------- Intellifile Note
-------------- ------------ ---------
July 1, 1993 Intellifile is incorporated
as a subsidiary of LFC
-----------
Lomas
Financial
Corporation
-----------
*
*
----------------------------------------------------------------
* * * * * * * *
--- ----- ----------- ----- ------- --- * -----
LLG ST * Lomas
LAS Lands Intellifile LMUSA Lending LIS * NY
--- ----- ----------- ----- ------- --- * -----
* * *
* * *
-------------- ---------- ---------
Lomas Tycher Conseco
Marketing Properties Tranche B
Services, Inc. ---------- Note
-------------- ---------
V-5 ============================================= Lomas Financial Corporation
<PAGE> 355
- --------------------------------------------------------------------------------
ORGANIZATIONAL CHART OVER TIME
(INCLUDING ONLY SELECTED SUBSIDIARIES)
- --------------------------------------------------------------------------------
November 1, 1993
49% of ST Lending transferred to LMUSA
-----------
Lomas
Financial
Corporation
-----------
*
*
----------------------------------------------------------------
* * * * * * * *
--- ----- ----------- ----- * --- * -----
LLG * * Lomas
LAS Lands Intellifile LMUSA * LIS * NY
--- ----- ----------- ----- * --- * -----
* * * * *
* * * * *
-------------- ---------- *49% *51% ---------
Lomas Tycher ------------- Conseco
Marketing Properties ST Lending Tranche B
Services, Inc. ---------- ------------- Note
-------------- ---------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
June 29, 1994
49% of Tycher Properties transferred to
LMUSA
-----------
Lomas
Financial
Corporation
-----------
*
*
-----------------------------------------------------------------
* * * * * * * *
--- ----- ----------- ----- * --- * -----
LLG * * Lomas
LAS Lands Intellifile LMUSA * LIS * NY
--- ----- ----------- ----- * --- * -----
* * / * * *
* 51%* 49% / * * *
-------------- ---------- / *49% *51% ---------
Lomas Tycher / * ----------- Conseco
Marketing Properties / ****** ST Lending Tranche B
Services, Inc. ---------- ----------- Note
-------------- ---------
[1] Shaded entities reflect recent intercompany transactions.
V-6 ============================================= Lomas Financial Corporation
<PAGE> 356
- --------------------------------------------------------------------------------
ORGANIZATIONAL CHART OVER TIME
(INCLUDING ONLY SELECTED SUBSIDIARIES)
- --------------------------------------------------------------------------------
December 31, 1994 Sale of assets of LIS
Transfer of Intellifile to LMUSA
-----------
Lomas
Financial
Corporation
-----------
*
------------------------------------------------------------------
* * * * * * *
--- ----- ----- * ---- * -----
LLG * * Lomas
LAS Lands LMUSA * LIS(*) * NY
--- ----- / ----- \ *51% ---- * -----
* 51%* / * \ * *
----------- * 49%/ * \49% * *
Lomas ---------- / * \ * ---------
Marketing Tycher / ----------- ----------- Conseco
Services, Properties Intellifile ST Lending Tranche B
Inc. ---------- ----------- ----------- Note
----------- ---------
(*) Investment in Subsidiary account remained open with the note and earnout as
the only assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
January 31, 1995 Transfer 49 % Tycher Properties back to LLG Lands
-----------
Lomas
Financial
Corporation
-----------
*
------------------------------------------------------------------
* * * * * * *
--- ----- ----- * ---- * -----
LLG * * Lomas
LAS Lands LMUSA * LIS(*) * NY
--- ----- ----- \ *51% ---- * -----
* * * \ * *
----------- * * \49% * *
Lomas ---------- * \ * ---------
Marketing Tycher ----------- ----------- Conseco
Services, Properties Intellifile ST Lending Tranche B
Inc. ---------- ----------- ----------- Note
----------- ---------
(*) Investment in Subsidiary account remained open with the note and earnout
as the only assets.
[1] Shaded entities reflect recent intercompany transactions.
V-7 ============================================= Lomas Financial Corporation
<PAGE> 357
- --------------------------------------------------------------------------------
ORGANIZATIONAL CHART OVER TIME
(INCLUDING ONLY SELECTED SUBSIDIARIES)
- --------------------------------------------------------------------------------
March 31, 1995 Transfer Intellifile to LFC
-----------
Lomas
Financial
Corporation
-----------
*
*
-----------------------------------------------------------------
* * * * * * * *
--- ----- ----------- ----- * ---- * -----
LLG * * Lomas
LAS Lands Intellifile LMUSA * LIS(*) NY
--- ----- ----------- ----- * ------ * -----
* * * *51% *
* * *49% * *
-------------- ---------- --------- ---------
Lomas Tycher ST Conseco
Marketing Properties Lending Tranche B
Services, Inc. ---------- --------- Note
-------------- ---------
(*) Investment in Subsidiary account remained open with the note and earnout
as the only assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
May 1, 1995 LFC cancels 51% interest in ST Lending
Transfer of Conseco Tranche B Note to LMUSA
-----------
Lomas
Financial
Corporation
-----------
*
*
----------------------------------------------------------------
* * * * * *
--- ----- ----------- ----- ---- -----
LLG Lomas
LAS Lands Intellifile LMUSA LIS(*) NY
--- ----- ----------- ----- ------ -----
* * * \
* * * \
-------------- ---------- ------- \ ---------
Lomas Tycher ST \ Conseco
Marketing Properties Lending \ Tranche B
Services, Inc. ---------- ------- Note
-------------- ---------
(*) Investment in Subsidiary account remained open with the note and earnout
as the only assets.
V-8 ============================================= Lomas Financial Corporation
<PAGE> 358
- --------------------------------------------------------------------------------
ORGANIZATIONAL CHART OVER TIME
(INCLUDING ONLY SELECTED SUBSIDIARIES)
- --------------------------------------------------------------------------------
June 30, 1995 Dissolve LAS and Lomas Marketing and
transfer their assets to LMUSA
Transfer of Lomas NY to LMUSA
Transfer of Tycher Properties to LMUSA,
subsequent transfer to ST Lending
-----------
Lomas
Financial
Corporation
-----------
*
----------------------------------------------------------------
* * * *
- ----------- --------- ----- ------
Intellifile LLG Lands LMUSA LIS(*)
- ----------- --------- ----- ------
*
*
-------------------------------------------------
* * * *
--------- * ----------- *
Assets of * ST Lending ---------
LAS and -------- ----------- Conseco
Lomas Lomas NY * Tranche B
Marketing -------- ----------- Note
--------- Tycher ---------
Properties
-----------
(*) Investment in Subsidiary account remained open with the note and earnout
as the only assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 30, 1995 Sale of stock of Intellifile
-----------
Lomas
Financial
Corporation
-----------
*
----------------------------------------------------------------
* * *
----- ----- ------
LLG
LANDS LMUSA LIS(*)
----- ----- ------
*
*
-------------------------------------------------
* * * *
--------- * ----------- *
Assets of * ST Lending ---------
LAS and ----- ----------- Conseco
Lomas Lomas * Tranche B
Marketing NY ----------- Note
--------- ----- Tycher ---------
Properties
-----------
(*) Investment in Subsidiary account remained open with the note and earnout
as the only assets.
[1] Shaded entities reflect recent intercompany transactions.
V-9 ============================================= Lomas Financial Corporation
<PAGE> 359
- --------------------------------------------------------------------------------
ORGANIZATIONAL CHART OVER TIME
(INCLUDING ONLY SELECTED SUBSIDIARIES)
- --------------------------------------------------------------------------------
July 1, 1993 Intellifile is incorporated
as a subsidiary of LFC
-----------
Lomas
Financial
Corporation
-----------
*
*
----------------------------------------------------------------
* * * * * * * *
--- ----- ----------- ----- ------- --- * -----
LLG ST * Lomas
LAS Lands Intellifile LMUSA Lending LIS * NY
--- ----- ----------- ----- ------- --- * -----
* * *
* * *
-------------- ---------- ---------
Lomas Tycher Conseco
Marketing Properties Tranche B
Services, Inc. ---------- Note
-------------- ---------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 30, 1995 Sale of stock of Intellifile
-----------
Lomas
Financial
Corporation
-----------
*
----------------------------------------------------------------
* * *
----- ----- ------
LLG
LANDS LMUSA LIS(*)
----- ----- ------
*
*
-------------------------------------------------
* * * *
--------- * ----------- *
Assets of * ST Lending ---------
LAS and -------- ----------- Conseco
Lomas Lomas NY * Tranche B
Marketing -------- ----------- Note
--------- Tycher ---------
Properties
-----------
(*) Investment in Subsidiary account remained open with the note and earnout
as the only assets.
V-10 ============================================= Lomas Financial Corporation
<PAGE> 360
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
STL
- --------------------------------------------------------------------------------
12/91 LFC incorporated STL in December 1991 to manage Lomas' short term
lending operations. STL's net worth upon emergence was $125.6
million.
- --------------------------------------------------------------------------------
11/93 In November 1993, LFC transferred 49% of its interest in STL to
LMUSA valued at approximately $44 million. This transfer, which
resulted in the issuance of LMUSA capital stock, increased the amount
of permitted restricted payments allowed by LMUSA's debt covenants.
- --------------------------------------------------------------------------------
5/94-4/95 LFC's intercompany payable due to STL reached a peak of $36.7
million as a result of activity during these twelve months. LFC's
intercompany payable to STL was mainly the result of a note payable
due to STL by LFC ($6.2 million), accrued interest on that note ($.5
million) and excess cash transferred from STL to LFC ($30.3 million).
- --------------------------------------------------------------------------------
6/94 During FY 1994, LFC reinstated its liquidity support agreement with
STL whereby STL (through a trustee) can deposit up to $20 million
into an account that is then available to LFC to cover interest
shortfalls. As of June 1994, STL had advanced $6.2 million for such
interest shortfall. This $6.2 million was included in the balance of
$36.7 million which was written-off in May 1995 when LFC wrote-off
its intercompany account payable due to STL.
- --------------------------------------------------------------------------------
5/95 LMUSA became the 100% owner of STL in May, 1995 when LFC wrote-off
its intercompany account payable due to STL ($36.7 million) by
eliminating its investment in STL ($35.6 million) and transferring
the balance of its intercompany account payable due to STL ($1.1
million) to its intercompany account with LMUSA. LFC canceled its
stock of STL.
- --------------------------------------------------------------------------------
5/95-6/95 STL advanced $8.2 million of excess cash to LMUSA.
- --------------------------------------------------------------------------------
6/95-9/95 LFC continued to carry on its books loss reserves related to
"Discontinued Short Term Lending Operations" (not losses related to
assets sold below book value). From June through September 1995,
Lomas Management (LMI) continued to incur losses related to its
management of STL. STL reimbursed LMI for providing these management
services by writing checks directly to LMI. Since STL was reimbursing
LMI for its services, STL's books reflected a loss. STL transferred
these losses totaling $.6 million through LFC to LMI. Since LMI was a
subsidiary of LFC, the losses transferred to LMI by STL would be
offset by the reserves carried on LFC's books to cover future STL
losses. As of 9/30/95, there was a balance of $2.2 million left in
this account.
Scenarios 1-2 through 1-8
V-11 ============================================= Lomas Financial Corporation
<PAGE> 361
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF 49% OWNERSHIP OF STL TO LMUSA (11/93)
- --------------------------------------------------------------------------------
- -------------------------------------------
LFC's Investment in STL
-----------------------
$ 125.5 mm Initial investment by LFC
(33.1) mm STL losses from 2/92 - 10/93
- -----------
$ 92.4 mm
(45.3) mm 49% Transfer to LMUSA
- -----------
$ 47.1 mm Remaining Investment by LFC
- -------------------------------------------
-----
LFC
-----
/ \
/ \
/ \
/ \
/ \
$47.1 mm LFC investment Increased LFC's
in STL / Investment in LMUSA by $44.0 mm
/ $45.3 mm investment in STL
/ 51% $1.3 mm loss provision for STL
/ \
/ \
/ \
/ \
/ \
/ \
----- $45.3 mm LMUSA investment in STL -------
STL ---------------------------------- LMUSA
----- 49% -------
-----------------------------------------------------
LMUSA's Investment in STL
-------------------------
$44.0 mm Additional investment by LFC into LMUSA
1.3 mm Loss provision for STL transferred from LFC
--------
$45.3 mm LMUSA's investment in STL
-----------------------------------------------------
Transactions through LFC's Investment
Account with LMUSA.
Scenarios 1-2 through 1-8
V-12 ============================================= Lomas Financial Corporation
<PAGE> 362
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF ITS REMAINING 51% OWNERSHIP OF STL TO LMUSA (4/95)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- --------------------------------------------------------- ---------------------------------------------------------
Elimination of LFC's Remaining Investment in STL Impact on LFC's Intercompany Balance with LMUSA
------------------------------------------------ -----------------------------------------------
$ 47.1 mm Investment by LFC as of 11/93 $ 36.7 mm Payable to STL
(11.5)mm STL losses from 11/93 - 3/95 (35.6) mm Decrease in investment
(35.6)mm Write-off of Investment due to cash received ----------
--------- $ 1.1 mm Payable to LMUSA (as 100% owner of STL)
$ 0.0 mm Remaining Investment by LFC 1.7 mm Additional loss provision for STL
- --------------------------------------------------------- ----------
$ 2.8 mm Intercompany Account Payable due to LMUSA
---------------------------------------------------------
</TABLE>
-----
LFC
-----
/ \
/ \
/ \
/ \
/ \
$1.1LFC I/C A/P due to STL LMUSA assumed $1.1 mm I/C A/P due to
$35.6 mm LFC investment in STL STL and $1.7 mm STL loss provision
$36.7 mm of Cash / Increased LFC's I/C A/P due to
/ LMUSA by $2.8 mm
/ \
/ \
/ \
/ \
/ \
/ \
----- $1.1 mm I/C A/R due from LMUSA -------
STL ------------------------------------ LMUSA
----- LMUSA received 100% ownership of STL -------
Transactions through LFC's Intercompany
Account with LMUSA.
Scenarios 1-2 through 1-8
V-13 ============================================= Lomas Financial Corporation
<PAGE> 363
- --------------------------------------------------------------------------------
SIGNIFICANT TRANSFERS FROM STL TO LFC AND LMUSA
($MILLIONS)
- --------------------------------------------------------------------------------
[TIMELINE CHART]
STL's Significant Transfers to LFC....... $36.5
*
*
- -------------------------------------------------------------
* * * * *
* * * * *
$6.2 $10.0 $12.6 $7.2 $.5
* * * * *
* * * * *
*---------------------------------------------------------------------*
* *
* *
5/94 6/94 7/94 8/94 9/94 10/94 11/94 12/94 1/95 2/95 3/95 4/95 5/95 6/95
STL's Significant Transfers to LMUSA......................... $8.2
*
*
*********
* *
* *
$.6 $7.6
* *
*---------------------------------------------------------------------*
* *
* *
5/94 6/94 7/94 8/94 9/94 10/94 11/94 12/94 1/95 2/95 3/95 4/95 5/95 6/95
Scenario 1-2 through 1-8
V-14 ============================================= Lomas Financial Corporation
<PAGE> 364
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LLG LANDS/TYCHER PROPERTIES
- --------------------------------------------------------------------------------
1/92 LFC formed LLG Lands (LLG) in January 1992 to hold and sell residual
properties and notes left over from LFC's sale of three life
insurance companies to Conseco.
- --------------------------------------------------------------------------------
11/92 LFC transferred Tycher properties located in Allen, Texas to LLG in
November 1992 with a book value of $7.2 million. LFC had paid $17.2
million in cash in November 1992 for the property as a result of a
standby commitment from Mbank. LFC wrote off $10 million of the $17.2
million it had paid for the property prior to transferring the
property to LLG.
- --------------------------------------------------------------------------------
6/94 According to Gary White of Lomas, due to the pressure from E&Y LFC
transferred 49% ownership of the Tycher properties to LMUSA. E&Y
allegedly believed that this transfer was necessary because LFC
included the anticipated gain on the sale of the Tycher properties
when it calculated the provision for losses for discontinued
operations, 49% of which was allocated to LMUSA.
- --------------------------------------------------------------------------------
1/95 Since E&Y had been replaced by KPMG, and neither KPMG nor G. White
believed the entry to transfer 49% of the Tycher properties in 6/94
was necessary, LFC reversed the 6/94 entry and transferred 49% of the
Tycher properties back to LFC.
- --------------------------------------------------------------------------------
6/95 On June 30, 1995, LLG transferred the remaining portion of the Tycher
properties through LFC to LMUSA (book value of $6.5 million). Since
LMUSA's debt covenants required that LMUSA reduce its intercompany
balance with LFC, this transfer reduced LFC's intercompany account
payable due to LMUSA.
- --------------------------------------------------------------------------------
6/95 In addition to the Tycher properties LLG transferred to LMUSA, LLG
also transferred notes receivable of $850k and unallocated reserves
of $388k to LMUSA which had a net impact of reducing LFC's
intercompany payable by $472k.
- --------------------------------------------------------------------------------
6/95 LMUSA transferred the property (net book value of $6.5 million),
notes receivable (net book value of $850k) and unallocated reserves
(net book value of $388k) to STL.
- --------------------------------------------------------------------------------
9/95 As of September 30, 1995, the notes receivable had been collected by
STL leaving STL with net proceeds of $825k and an unallocated reserve
of $363k that it may no longer need.
Scenarios 3-2 and 3-3
V-15 ============================================= Lomas Financial Corporation
<PAGE> 365
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
OWNERSHIP OF SELECTED ASSETS OF LLG LANDS PRIOR TO TRANSFERS (PRE-6/94)
- --------------------------------------------------------------------------------
---
LFC
---
*
-----------------------------------------
* *
--------- -----
LLG Lands LMUSA
--------- -----
*
--------------------------
* * 100%
--------- ----------
$850K N/R Tycher
--------- Properties
----------
V-16 ============================================= Lomas Financial Corporation
<PAGE> 366
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF 49% OF TYCHER PROPERTIES TO LMUSA (6/94)
- --------------------------------------------------------------------------------
---
LFC
---
*
-----------------------------------------
* *
--------- -----
LLG Lands LMUSA
--------- -----
* /
-------------------------- /
* 51% * / 49%
--------- ---------- /
$850K N/R Tycher /
--------- Properties /
-----------
---
LFC
---
* *
-------------- * *
49% * * --------------
ownership of * * Decreased
Tycher * * LFC's I/C A/P
Properties * * Due to LMUSA
valued at * * by $3.5 mm
$3.5 mm * * --------------
-------------- * *
* *
-----
LMUSA
-----
Transactions through LFC's Intercompany
Account with LMUSA.
V-17 ============================================= Lomas Financial Corporation
<PAGE> 367
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF 49% OF TYCHER PROPERTIES BACK TO LFC (1/95)
- --------------------------------------------------------------------------------
---
LFC
---
*
-----------------------------------------
* *
--------- -----
LLG Lands LMUSA
--------- -----
*
--------------------------
* * 100%
---------- ----------
$850K N/R Tycher
---------- Properties
----------
---
LFC
---
* *
* * --------------
-------------- * * 49%
Increased * * ownership
LFC's * * of Tycher
I/C A/P due to * * Properties
LMUSA by * * valued at
$3.5 mm * * $3.5 mm
-------------- * * --------------
* *
-----
LMUSA
-----
Transactions through LFC's
Intercompany Account with LMUSA.
Scenario 3-2
V-18 ============================================= Lomas Financial Corporation
<PAGE> 368
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF 100% OF TYCHER PROPERTIES TO LMUSA (6/95)
- --------------------------------------------------------------------------------
--- -----
LFC LFC
--- -------------------- -----
* 100% ownership of * * -----------
------------------- remaining Tycher * * Decreased
* * Properties valued at * * LFC's
- --------- ----- $6.5 mm * * I/C A/P due
LLG Lands LMUSA * * to LMUSA by
- --------- ----- Notes Receivable * * $6.9 mm
* $850K and Loss * * -----------
----- Provision of $388K * *
STL -------------------- -----
----- LMUSA
* -------------------- -----
--------------- 100% ownership of * * -----------
* * remaining Tycher * * Eliminated
--------- ---------- Properties valued at * * LMUSA's I/C
$850K N/R Tycher $6.5 mm * * A/P due to
--------- Properties * * STL, and
---------- Notes Receivable * * created an
$850K and Loss * * I/C A/R due
Provision of $388K * * from STL
-------------------- * * -----------
-----
STL
-----
Transactions through LFC's Intercompany Account with
LMUSA, or LMUSA's Intercompany Account with STL.
Scenario 3-3
V-19 ============================================= Lomas Financial Corporation
<PAGE> 369
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
CONSECO TRANCHE B NOTE
- --------------------------------------------------------------------------------
11/90 LFC sold three life insurance companies to Conseco. As part of the
sale, LFC received a Tranche A Note ($10 million) and a Tranche B
Note ($15 million) on November 27, 1990. Interest on the Tranche A
Note was paid currently while interest on the Tranche B Note was
accrued. The Tranche A Note was treated by LFC as additional
consideration received for the sale of the insurance companies. The
Tranche B Note, in effect, limited Lomas' liability regarding the
representations and warranties included in the closing documents
regarding the sale to $15 million, plus accrued interest.
- --------------------------------------------------------------------------------
11/90-5/95 From November 1990 through May 1995, Conseco made
indemnification claims against the Conseco Tranche B Note due to
representations and warranties which LFC had included in the
closing documents. As a result of these claims, LFC's management
reduced the book value of the Tranche B Note from $15 million to
$3.4 million. According to G. White and L. Gregory, the book value
of the Note of $3.4 million accurately represented the actual fair
value of the Note.
- --------------------------------------------------------------------------------
5/95 LFC transferred the Conseco Tranche B Note to LMUSA on May 1, 1995.
LFC's transfer of the Conseco Tranche B Note to LMUSA decreased
LFC's intercompany payable due to LMUSA which meant that LMUSA
could make additional advances to LFC without contravening the bank
limits placed on intercompany transactions (debt covenant
restrictions).
- --------------------------------------------------------------------------------
5/95 According to L. Gregory of Lomas, a letter from Lomas to Conseco
which outlined LFC's intent to transfer the Conseco Tranche B Note
to LMUSA was the only document executed by Lomas to effectuate the
transfer of the Note (other than journal entries with supporting
internal memos).
Scenarios 4-2
V-20 ============================================= Lomas Financial Corporation
<PAGE> 370
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
DISSOLUTION OF LAS AND LOMAS MARKETING
- --------------------------------------------------------------------------------
6/95 Prior to dissolving Lomas Administrative Services (LAS) and LAS's
subsidiary Lomas Marketing Services (LMS), LFC transferred LAS's
$310K prepaid pension account (a "FAS 87" Asset) to LMUSA.
- --------------------------------------------------------------------------------
6/95 LFC dissolved LAS and LAS's subsidiary LMS in June 1995. LFC
transferred the book value of the assets ($2.6 million) and
liabilities ($.7 million) of LAS and Lomas Marketing to LMUSA. The
only liabilities that were not transferred from LAS and Lomas
Marketing to LMUSA were a $.5 million Bryan Tower lease liability
and a $2.2 million intercompany payable due to LFC from LAS. The
most significant assets transferred were land with a book value of
$1.4 million and PP&E with a book value of $.8 million. The most
significant liabilities that were transferred included accounts
payable of $.3 million and accrued taxes of $.2 million.
- --------------------------------------------------------------------------------
6/95 LFC wrote-off its intercompany account receivable due from LAS of
$2.2 million and decreased its investment in LAS to $0. LFC then
assumed the $.5 million Bryan Tower lease liability.
- --------------------------------------------------------------------------------
6/95 LFC wanted to substantially reduce the need for LAS's primary
responsibility of allocating administrative and overhead expenses
to the appropriate Lomas subsidiaries. According to G. White of
Lomas, the majority of the assets and liabilities of LAS and Lomas
Marketing were transferred to LMUSA because the majority of LAS's
allocations were to LMUSA since LMUSA had the greatest number of
employees and office space. LMUSA's current function is to bill
Lomas entities for the appropriate allocation of services. These
entities each have their own checking accounts which are then used
to pay in cash the invoices provided to them by LMUSA.
Scenarios 5-2 and 11-2
V-21 ============================================= Lomas Financial Corporation
<PAGE> 371
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
OWNERSHIP OF SELECTED ASSETS PRIOR TO DISSOLUTION OF
LAS AND LOMAS MARKETING (6/95)
- --------------------------------------------------------------------------------
---
LFC
---
*
-----------------------------------------
* *
--- -----
LAS LMUSA
--- -----
* *
* ---------------------
* *
-------------- ---------------
Lomas Prepaid Pension
Marketing Account of
Services, Inc. $310K
-------------- ---------------
Scenarios 5-2 and 11-2
V-22 ============================================= Lomas Financial Corporation
<PAGE> 372
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF LAS'S PREPAID PENSION ACCOUNT TO LMUSA (6/95)
- --------------------------------------------------------------------------------
---
LFC -----
--- LFC
* -----
------------------- * *
* * -------- * * ---------------
--- ----- "FAS 87" * * Decreased LFC's
LAS LMUSA Asset of * * I/C A/P due to
--- ----- $310K * * LMUSA by $310K
* * -------- * * ---------------
* * * *
* * -----
- -------------- --------------- LMUSA
Lomas Prepaid Pension -----
Marketing Account of
Services, Inc. $310K
- -------------- ---------------
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 11-2
V-23 ============================================= Lomas Financial Corporation
<PAGE> 373
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
DISSOLUTION OF LAS AND LOMAS MARKETING
- --------------------------------------------------------------------------------
--- -----
LFC LFC
--- -----
* ----------------- * *
* Book Value of * * -----------------
* the assets and * * Decreased LFC's
----- liabilities of * * I/C A/P due to
LMUSA LAS and Lomas * * LMUSA by $1.937mm
----- Marketing Assets * * -----------------
* of $1.937 mm * *
* ----------------- -----
* LMUSA
------------------- -----
* *
* *
- --------------- ---------------
Assets and Prepaid Pension
liabilities Account of
of LAS and $310K
Lomas Marketing ---------------
- ---------------
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 5-2
V-24 ============================================= Lomas Financial Corporation
<PAGE> 374
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
TRANSFER OF LOMAS NY
- --------------------------------------------------------------------------------
5/92 LMUSA transferred its intercompany account payable due to Lomas NY (LNY)
to LFC. LNY was thus established as a subsidiary of LFC rather than LMUSA.
Per L. Gregory of Lomas, obtaining a license to originate loans, as well
as the incorporation process as a whole in the state of New York, was
difficult. Thus once established, Lomas did not want to give up its
opportunity to do business in New York. L. Gregory has indicated that
titles and bills of sale were not executed in relation to this transfer.
Per G. White of Lomas, LMUSA transferred LNY to LFC in order to establish
LNY as a separate and distinct entity from LMUSA to service loans.
- --------------------------------------------------------------------------------
6/95 LFC transferred its net investment in LNY ($.7 million) and its
intercompany account payable due to LNY ($.5 million), to LMUSA. Thus, LNY
became a subsidiary of LMUSA rather than LFC.
Scenario 6-2
V-25 ============================================= Lomas Financial Corporation
<PAGE> 375
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
INTELLIFILE
- --------------------------------------------------------------------------------
7/93 LMUSA transferred file-imaging assets through its intercompany
account with LFC to Intellifile. The assets, with a
book value of $2.8 million, included computers, scanners,
computer software, printers, optical disks and office furniture.
LFC recorded its investment in Intellifile at $2.8 million.
- --------------------------------------------------------------------------------
7/93 LFC incorporated Intellifile in July 1993. Intellifile's
services included document preparation, scanning, indexing,
optical disk archiving, and database and communications services
for managing document work flows. Per L. Gregory of Lomas, LFC
wanted to establish Intellifile as a separate entity thereby
making it easier to market Intellifile's services to competition
of LMUSA. Per G. White of Lomas, approximately 80% of
Intellifile's business came from LMUSA.
- --------------------------------------------------------------------------------
7/93-12/94 LFC funded Intellifile's operating losses of $7 million
which resulted in an intercompany account payable due from
Intellifile to LFC. On December 31, 1994, LFC transferred the
intercompany payable balance to its investment account in
subsidiaries for Intellifile increasing its investment in
Intellifile to almost $10 million.
- --------------------------------------------------------------------------------
12/94 LFC transferred Intellifile to LMUSA on December 31, 1994 by
writing off Intellifile's operational losses which LFC had
transferred to its investment account. LFC transferred
Intellifile to LMUSA.
- --------------------------------------------------------------------------------
3/95 LFC reversed a portion of the December 1994 transaction as LMUSA
transferred Intellifile back to LFC. Per G. White of Lomas, by
March 1995, LFC had decided to sell Intellifile and therefore
decided to establish Intellifile as a separate subsidiary from
LMUSA to facilitate a sale to a third party.
- --------------------------------------------------------------------------------
8/95-9/95 LFC sold Intellifile to Dataplex Corporation for $4.1
million in cash, a $.3 million note receivable and a revenue
earnout of $.1 million. As a result of this transaction, LFC
wrote off the revenue earnout amount and paid a $.2 million
commission to an LFC employee. LMUSA then purchased $3.9 million
of prepaid consulting and image processing services from
Dataplex. LFC advanced $3.9 million to LMUSA for the prepaid
services LMUSA had just purchased from Dataplex. LMUSA then
repaid LFC $2.3 million. LMUSA also reduced its prepaid services
by $1.6 million by debiting its intercompany account with LFC.
LFC then credited its intercompany account with LMUSA for $1.6
million and debited its gain/loss account for the sale of
investments.
Scenarios 8-2 through 8-9
V-26 ============================================= Lomas Financial Corporation
<PAGE> 376
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LMUSA'S INITIAL OWNERSHIP OF ASSETS USED TO FORM INTELLIFILE (PRE-7/93)
- --------------------------------------------------------------------------------
---
LFC
---
*
*
*
-----
LMUSA
-----
*
*
*
------------
Assets
eventually
used to form
Intellifile
------------
V-27 ============================================= Lomas Financial Corporation
<PAGE> 377
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LMUSA'S TRANSFER OF ASSETS TO LFC FOR INTELLIFILE (7/93)
- --------------------------------------------------------------------------------
--- -----
LFC LFC
--- -----
* ------------- * *
------------------- Increased * * ----------
* * LFC's I/C A/P * * $2.8 mm of
----- ----------- due to * * image
LMUSA Intellifile LMUSA by * * processing
----- ----------- $2.8 mm * * assets
------------- * * ----------
-----
LMUSA
-----
Transactions through LFC's
Intercompany Account with LMUSA.
V-28 ============================================= Lomas Financial Corporation
<PAGE> 378
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF INTELLIFILE TO LMUSA (12/94)
- --------------------------------------------------------------------------------
--- ---
LFC LFC
--- ---
* * *
* ------------- * * ---------------
----- $2.8 mm * * Decreased LFC's
LMUSA investment in * * I/C A/P due to
----- Intellifile * * LMUSA by
* ------------- * * $2.8 mm
* * * ----------------
----------- -----
Intellifile LMUSA
----------- -----
----------------------------------------------------------
LFC's Investment in Intellifile
-------------------------------
$ 2.8 mm Investment after 7/93 transfer
7.0 mm Additional contributions to Intellifile
------
$ 9.8 mm
(6.9)mm Write-off due to Intellifile's losses 7/93-12/94
(2.8)mm Transfer to LMUSA on 12/94
------
$ 0.1 mm Investment after 12/94 transfer (rounding)
----------------------------------------------------------
Transactions through LFC's
Intercompany Account with LMUSA.
Scenarios 8-2 and 8-3
V-29 ============================================= Lomas Financial Corporation
<PAGE> 379
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LMUSA'S TRANSFER OF INTELLIFILE TO LFC (3/95)
- --------------------------------------------------------------------------------
--- ---
LFC LFC
--- ---
* * *
------------------------- ---------------- * * -------------
* * Increased LFC's * * $2.8 mm
----- ----------- I/C A/P due to * * investment in
LMUSA Intellifile LMUSA by $2.8 mm * * Intellifile
----- ----------- ---------------- * * -------------
* *
-----
LMUSA
-----
Transactions through LFC's
Intercompany Account with LMUSA.
Scenarios 8-4 and 8-5
V-30 ============================================= Lomas Financial Corporation
<PAGE> 380
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S SALE OF STOCK OF INTELLIFILE TO DATAPLEX (8/95-9/95)
- --------------------------------------------------------------------------------
/ Write-off $1.6 mm of prepaid services
/ related to Consulting Services
/
--- $0.2 mm of Cash Commission
/LFC\-------------------------- to Employee
/ --- \
/ \
/ $1.6 mm Reduction of
Intellifile's Stock Prepaid Services
/ \
/ $2.3 mm of Cash
/ \
/ \
/ \
$4.1 mm of Cash $3.9 mm of Cash
/ \
/ \
/ \
/ \
/ \
/ \
-------- $3.9 mm of Cash -----
DATAPLEX --------------------------- LMUSA
-------- $3.9 mm of Prepaid Services -----
Transactions through LFC's Intercompany
Account with LMUSA.
Scenarios 8-6 through 8-9
V-31 ============================================= Lomas Financial Corporation
<PAGE> 381
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF ITS $604K INVESTMENT IN A TRUST ACCOUNT AND
THE RELATED $491K EXCESS BENEFITS LIABILITY TO LMUSA (7/95)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
----- ----- ---
LFC LFC * *
----- ----- ----------------- * * -----------------
* * * * $604K Investment * * Increased LFC's
------- * ------- * $491K * * I/C A/R due from
* * * * Related Liability * * LMUSA by $113K
- ------------- * ------ ----- ----------------- * * -----------------
Investment in * LMUSA LMUSA * *
Trust Account * ------ ----- -----
of $604K * * LMUSA
- ------------- * ----------------------- -----
* * *
--------------- ------------- ---------------
Excess Benefits Investment in Excess Benefits
Liability of Trust Account Liability of
$491K of $604K $491K
--------------- ------------- ---------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 14-2
V-32 ============================================= Lomas Financial Corporation
<PAGE> 382
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF ITS PAYROLL BANK ACCOUNTS TO LMUSA (8/95)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
----- ----- ---
LFC LFC * *
----- ----- ----------------- * * -----------------
* * Payroll Bank * * Increased LFC's
* * Accounts of * * I/C A/R due from
----------------------- * $160K * * LMUSA by $160K
* * ----- ----------------- * * -----------------
- ------------- ----- LMUSA * *
Payroll Bank LMUSA ----- -----
Accounts of ----- * LMUSA
$160K * -----
- ------------- ------------
Payroll Bank
Accounts of
$160K
------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 14-3
V-33 ============================================= Lomas Financial Corporation
<PAGE> 383
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF THE DEFICIT IN ITS PREPAID PENSION ACCOUNT TO LMUSA (6/95)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
----- ----- ---
LFC LFC -------------- * *
----- ----- Deficit in * * ---------------
* * * "FAS 87" Asset * * Increased LFC's
*----------- * * Account of * * I/C A/P due to
* * * $183K * * LMUSA by $183K
* * ----- -------------- * * ---------------
- ---------------- ----- LMUSA * *
Deficit in LFC LMUSA ----- -----
Prepaid ----- * LMUSA
Pension Account, * -----
"FAS 87" Asset -----------------
of $183K Deficit in LFC
- -------------- Prepaid Pension
Account, "FAS 87"
Asset of $183K
-----------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 14-4
V-34 ============================================= Lomas Financial Corporation
<PAGE> 384
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LMUSA'S TRANSFER OF THE DEFICIT IN INTELLIFILE'S RESTRUCTURING PROVISION TO LFC
(3/95)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
--- ----- ---
LFC LFC * *
--- ----- --------------- * *
* * Increased LFC's * * -------------------------
* * I/C A/P due to * * Deficit in Intellifile's
* --------------- LMUSA by $208K * * Restructuring
* * * ---------------- * * Provision of $208K
----- ------------- ----- * * -------------------------
LMUSA Deficit in LMUSA -----
----- Intellifile's ----- LMUSA
* Restructuring -----
--------------- Provision of
Deficit in $208K
Intellifile's -------------
Restructuring
Provision of
$208K
---------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 17-2
V-35 ============================================= Lomas Financial Corporation
<PAGE> 385
- -------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF THE DEFEICIT IN ITS ACCRUED RESTRUCTURING PROVISION TO LMUSA
(6/95)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
----- ----- ---
LFC LFC * *
----- ----- ------------- * * ---------------
*----------------------* * Deficit in * * Decreased LFC's
* * * Accrued * * I/C A/P due to
* * * Restructuring * * LMUSA by $545K
* * ----- Provision * * ---------------
- ------------- ----- LMUSA (a contra * *
Deficit in LMUSA ----- liability) * *
Accrued ----- * of $545K * *
Restructuring * ------------- * *
Provision ------------- * *
(a contra Deficit in -----
liability) Accrued LMUSA
of $545K Restructuring -----
- ------------- Provision
(a contra
liability)
of $545K
-------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 18-3
V-36 ============================================= Lomas Financial Corporation
<PAGE> 386
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF A PORTION OF ITS ALLOWANCE FOR LOSSES TO LMUSA (9/94)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
----- ----- ---
LFC LFC --------------- * *
----- ----- Allowance for * * ---------------
* * Losses of $600K * * Increased LFC's
*---------------* * --------------- * * I/C A/P due to
* * * * * LMUSA by $600K
* * ----- * * ---------------
- ------------- ----- LMUSA * *
Allowance for LMUSA ----- -----
Losses of ----- * LMUSA
$600K * -----
- ------------- -----------------
Allowance for
Losses of $600K.
(LMUSA used
allowance of
$600K to write-
down value of
PMSR's.)
-----------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 18-4
V-37 ============================================= Lomas Financial Corporation
<PAGE> 387
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LFC'S TRANSFER OF ITS CONTINGENCY RESERVE TO LMUSA (12/94)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
----- ----- ---
LFC LFC ------------- * *
----- ----- Contingency * * ---------------
* * Reserve of * * Increased LFC's
*---------------* * $419K * * I/C A/P due to
* * * ------------- * * LMUSA by $419K
* * ----- * * ---------------
- ------------- ----- LMUSA * *
Contingency LMUSA ----- -----
Reserve of ----- * LMUSA
$419K * -----
- ------------- -------------
Contingency
Reserve of
$419K
-------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 18-5
V-38 ============================================= Lomas Financial Corporation
<PAGE> 388
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LMUSA'S TRANSFER OF MORTGAGE PLAN INSURANCE ACCOUNTS RECEIVABLE TO LFC (9/94)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
--- ----- ---
LFC LFC * *
--- ----- --------------- * *
* * Increased LFC's * * ---------------
* * I/C A/P due to * * Mortgage Plan
* --------------- LMUSA by $277K * * Insurance
* * * ---------------- * * Accounts
----- ------------- ----- * * Receivable of
LMUSA Mortgage Plan LMUSA * * $277K
----- Insurance ----- * * --------------
* Accounts * *
--------------- Receivable of -----
Mortgage Plan $277K. LFC LMUSA
Insurance immediately -----
Accounts charged-off
Receivable of the accounts
$277K receivable
--------------- against its
allowance for
losses.
-------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 19-2
V-39 ============================================= Lomas Financial Corporation
<PAGE> 389
- --------------------------------------------------------------------------------
INTERCOMPANY AND INVESTMENT TRANSACTIONS BETWEEN LFC AND LMUSA
LMUSA'S TRANSFER OF BRYAN TOWER LEASEHOLD IMPROVEMENTS TO LFC (12/94)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Before After ---
------ ----- LFC
--- ----- ---
LFC LFC * *
--- ----- --------------- * *
* * Increased LFC's * * ---------------
* * I/C A/P due to * * Bryan Tower
* --------------- LMUSA by $395K * * Leasehold
* * * ---------------- * * Improvements
----- --------------- ----- * * of $395K
LMUSA Bryan Tower LMUSA * * ---------------
----- Leasehold ----- * *
* Improvements * *
--------------- of $395K. -----
Bryan Tower LFC had LMUSA
Leasehold established
Improvements of the contingency
$395K reserve for
--------------- writing-off
these assets.
----------------
</TABLE>
Transactions through LFC's Intercompany
Account with LMUSA.
Scenario 19-3
V-40 ============================================= Lomas Financial Corporation
<PAGE> 390
- --------------------------------------------------------------------------------
ASSUMPTIONS/FOOTNOTES TO SUMMARY AND ANALYSIS OF IDENTIFIED TRANSACTIONS
BETWEEN LFC AND LMUSA
- --------------------------------------------------------------------------------
General As requested by Counsel, the analyses identifying
transactions and summarizing potential claims as a
result of transaction activity between LFC and LMUSA
were prepared to provide a summary listing of
transactions which could arguably result in the
assertion of potential intercompany claims. These
analyses are preliminary in nature and subject to
material change as further information is obtained and
analyzed. These analyses are not intended to, and do
not, present defenses to the potential claims nor an
estimate as to the probability of prevailing under any
potential cause of action.
1. Time Period Analyzed Although transactions since LFC's emergence in January,
1992 from its previous bankruptcy were analyzed, only
those transactions that occurred on or after 11/1/93
were taken into account to estimate the "maximum"
potential claims.
2. Claim Amounts The claim amounts listed in the analyses are tentative
and preliminary and subject to further investigation
and analysis.
3. Screening Process As the "screening" process being used to identify and
analyze the 135,355 transactions between LFC and LMUSA
is still underway, the information contained in these
schedules is still tentative and preliminary.
Information that will be obtained as a result of the
completion of this process may result in claim figures
in these schedules being either increased or
decreased.
VI-1 ============================================= Lomas Financial Corporation
<PAGE> 391
- --------------------------------------------------------------------------------
ASSUMPTIONS/FOOTNOTES TO SUMMARY OF POTENTIAL CLAIMS AS A RESULT OF IDENTIFIED
TRANSACTIONS BETWEEN LFC AND LMUSA
- --------------------------------------------------------------------------------
4. Non-LMUSA Although data relating to transactions impacting the
Transactions intercompany accounts between LFC and its subsidiaries
other than LMUSA was obtained and preliminarily
analyzed, the claims referred to in these analyses
relate solely to transactions which impacted the
intercompany or investment accounts between LFC and
LMUSA. Lomas accounting staff represent that all
intercompany transactions between LFC and its
subsidiaries have been processed through LFC's
intercompany account with its subsidiaries. However,
if LFC, or a subsidiary of LFC, was a party to a
transaction with LMUSA that was not processed though
the intercompany accounts, that transaction has not
been included in this analysis.
5. Cash Management For the majority of the time period subject to review,
Practices LFC acted as the common bill payor for its
subsidiaries. Accordingly, for purposes of this
analysis, we have not identified "stand alone" claims
transactions in which cash transfers/payments were
made on behalf of LFC/LMUSA, as applicable. These
transactions include, but are not limited to: (i) LFC
paying for goods or services for LMUSA and in turn
decreasing its payable balance to LMUSA after paying
such bill; and (ii) LFC or LMUSA transferring funds
from the cash account of LMUSA to the cash account of
LFC (or the reverse) in order for LFC to have the
necessary funds to function in its role as the common
bill payor. The same comments apply during the period
in which LMUSA was the common payor of bills.
VI-2 ============================================= Lomas Financial Corporation
<PAGE> 392
- --------------------------------------------------------------------------------
ASSUMPTIONS/FOOTNOTES TO SUMMARY OF POTENTIAL CLAIMS AS A RESULT OF IDENTIFIED
TRANSACTIONS BETWEEN LFC AND LMUSA
- --------------------------------------------------------------------------------
6. Offsets to Inter-Co. In order to identify potential avoidance claims
Transactions between LFC and LMUSA without analyzing all 135,355
intercompany transactions between LFC and LMUSA,
LMUSA's P&L or balance sheet account offsetting its
intercompany transaction with LFC was used as a method
to evaluate transactions processed through the Lomas
accounts payable system. In general, if the offset was
to a P&L account (i.e. expenses) or a balance sheet
account that appeared to reflect a transaction that
was completed due to LFC's role as the common payor of
bills (i.e. prepaids or accruals), the resulting
transactions were not selected for further review and
analysis. These accounts have only been analyzed in
this manner for 1993 and 1994 as Lomas is still trying
to provide the reports necessary to analyze fiscal
years 1992 and 1995-1996.
7. Allocations For the purposes of this analysis only, expenses
charged between Lomas entities through intercompany
allocations were assumed to be charged to the
appropriate entities, at reasonable or fair market
rates, at the appropriate points in time. The
potential claims estimate does not take into account
claims, if any, resulting from the fairness of the
allocated amounts. The significant types of allocated
expenses include: (i) LIS charges to LMUSA for
computer services and communications; (ii) LAS charges
for overhead costs such as facilities or accounting;
(iii) LFC charges for management and treasury fees;
and (iv) LMUSA's charges for records management.
8. Dividends No potential claim has been scheduled with respect to
the $24 million in dividends paid by LMUSA to LFC from
June 1992 to June 1993.
VI-3 ============================================= Lomas Financial Corporation
<PAGE> 393
- --------------------------------------------------------------------------------
ASSUMPTIONS/FOOTNOTES TO SUMMARY OF POTENTIAL CLAIMS AS A RESULT OF IDENTIFIED
TRANSACTIONS BETWEEN LFC AND LMUSA
- --------------------------------------------------------------------------------
9. Third Party Third party transactions have not been analyzed.
Transactions Instead, a listing of the more significant third party
transactions has been maintained in order to provide
additional areas that may require further
investigation.
10. Reasonably For purposes of these analyses, book value, which may
Equivalent Value be higher or lower than fair market value, was the
primary method relied upon to analyze the value of
exchanges between LFC and LMUSA. No separate
assessment as to the fair value of the identified
transactions has been performed.
11. Legal Title Verification of the validity of alleged asset transfers
needs to be performed. Davis Polk & Wardwell are
leading this exercise.
12. Other The claims analyses do not include any estimate of
pre-judgement interest claims, the estimated costs of
litigation, equitable subordination claims or
substantive consolidation.
VI-4 ============================================= Lomas Financial Corporation
<PAGE> 394
Confidential - Attorney Work Product
Tentative and Preliminary - Draft
LOMAS FINANCIAL CORPORATION
SUMMARY OF TRANSACTION ACTIVITY BETWEEN LFC AND LMUSA (1)(2)
AS OF FEBRUARY 21, 1996
($000'S)
<TABLE>
<CAPTION>
Transaction Activity
11/1/93- 10/1/94-
Scen. Date Nature of Transaction 9/30/94 9/30/95 Total
- -------------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C>
TRANSACTIONS INVOLVING STL
- --------------------------
1-5 11/19/93 LFC's transfer of its 49% share of STL to LMUSA $43,963 $0 $43,963
1-5 Various STL's advances to LFC 16,200 20,500 36,700
1-5 05/01/95 LFC's cancellation of its 51% share in STL - 51% of book value at 9/95 0 14,076 14,076
1-5 05/01/95 - Reduction of payable to STL 36,700 36,700
1-6 06/23/95 STL's cash pmts to LMUSA after LFC cancelled its invest. in STL 0 8,230 8,230
1-8 05/01/95 LFC's transfer of its I/C account payable due to STL to LMUSA 0 1,075 1,075
------------------------------
Sub-total 60,163 80,581 140,744
LFC'S POTENTIAL AVOIDANCE CLAIMS AGAINST LMUSA
- ----------------------------------------------
3-3 06/30/95 LLG's transfer of Tycher properties and related N/R to LMUSA 0 7,309 7,309
4-2 05/01/95 LFC's transfer of Conseco Tranche B Note to LMUSA 0 3,373 3,373
5-2 06/30/95 LFC's transfer of LAS and Lomas Mktg to LMUSA 0 1,937 1,937
6-2 06/30/95 LFC's transfer of Lomas NY to LMUSA 0 260 260
8-3 12/31/94 LFC's 12/94 transfer of Intellifile to LMUSA 0 2,824 2,824
14-2 07/28/95 LFC's transfer of investment in Trust Account (net of liab.) to LMUSA 0 113 113
14-3 08/18/95 LFC's transfer of payroll bank accounts to LMUSA 0 160 160
14-4 06/30/95 LFC's transfer of credit in prepaid pension acct related to R.I.F. 0 183 183
17-2 03/31/95 LMUSA's transfer of restructuring provision liability to LFC 0 208 208
18-4 09/30/94 LFC's transfer of allowance for losses to LMUSA 600 0 600
18-5 12/31/94 LFC's transfer of contingency reserve to LMUSA 0 419 419
19-2 09/30/94 LMUSA's transfer of mortgage plan insurance receivable to LFC 277 0 277
19-3 12/31/94 LMUSA's transfer of leasehold improvements to LFC 0 395 395
------------------------------
877 17,181 18,058
10/09/95 "Other" potential preferential transfers from 10/10/94-10/9/95 0 3,497 3,497
------------------------------
Sub-total 877 20,678 21,555
------------------------------
LMUSA'S POTENTIAL AVOIDANCE CLAIMS AGAINST LFC
- ----------------------------------------------
3-2 01/31/95 LMUSA's 1/95 transfer of 49% interest in Tycher properties to LFC 0 3,528 3,528
8-5 03/31/95 LMUSA's 3/95 transfer of Intellifile to LFC 0 2,824 2,824
8-9 09/01/95 LMUSA's purchase of prepaid services from Dataplex 0 2,273 2,273
11-2 06/30/95 LFC's transfer of LAS prepaid pension acct to LMUSA 0 310 310
18-3 06/30/95 LFC's transfer of accrued restructuring (contra liability) to LMUSA 0 545 545
------------------------------
Sub-total 0 9,480 9,480
------------------------------
$61,040 $110,739 $171,779
==============================
</TABLE>
(1) See attached schedule for assumptions/footnotes which is an integral part
of this analysis.
(2) Amounts are not necessarily additive as certain amounts herein are
inter-related and dependent upon the outcome of other potential avoidance
actions.
VI-5
<PAGE> 395
Confidential - Attorney Work Product
Tentative and Preliminary - Draft
LOMAS FINANCIAL CORPORATION
ANALYSIS OF IDENTIFIED TRANSACTIONS AND
IMPACT ON LFC/LMUSA INTERCOMPANY ACCOUNT (1)(2)
AS OF FEBRUARY 21, 1996
($000'S)
<TABLE>
<CAPTION>
IMPACT ON LFC/LMUSA INTER-CO ACCT
02/1/92 - 11/1/93 - 10/1/94 -
TAB # DATE TRANSACTION 10/31/93 09/30/94 09/30/95 TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TRANSACTIONS INVOLVING STL
1-5* 1 11/19/93 LFC's transfer of its 49% share of STL to LMUSA $0 $0 $0 $0
1-5* 1 Various STL's advances to LFC 0 0 0 0
1-5* 1 05/01/95 LFC's cancellation of its 51% share in STL
- 51% of book value at 9/95 0 0 0 0
1-5* - Reduction of payable to STL 0 0 0 0
1-6* 1 06/23/95 STL's cash pmts to LMUSA after LFC cancelled
its invest. in STL 0 0 0 0
1-8 1 05/01/95 LFC's transfer of its I/C account payable due
to STL to LMUSA 0 0 (1,075) (1,075)
---------------------------------------
0 0 (1,075) (1,075)
LFC'S POTENTIAL AVOIDANCE CLAIMS AGAINST LMUSA
3-3 2 06/30/95 LLG's transfer of Tycher properties and
related N/R to LMUSA 0 0 7,309 7,309
4-2 1 05/01/95 LFC's transfer of Conseco Tranche B Note
to LMUSA 0 0 3,373 3,373
5-2 1 06/30/95 LFC's transfer of LAS and Lomas Mktg to LMUSA 0 0 1,937 1,937
6-2 2 06/30/95 LFC's transfer of Lomas NY to LMUSA 0 0 260 260
8-3 1 12/31/94 LFC's 12/94 transfer of Intellifile to LMUSA 0 0 2,824 2,824
14-2 2 07/28/95 LFC's transfer of investment in Trust Account
(net of liab.) to LMUSA 0 0 113 113
14-3 1 08/18/95 LFC's transfer of payroll bank accounts to LMUSA 0 0 160 160
14-4 1 06/30/95 LFC's transfer of credit in prepaid pension acct
related to R.I.F. 0 0 (183) (183)
17-2 1 03/31/95 LMUSA's transfer of restructuring provision
liability to LFC 0 0 (208) (208)
18-4 1 09/30/94 LFC's transfer of allowance for losses to LMUSA 0 (600) 0 (600)
18-5 1 12/31/94 LFC's transfer of contingency reserve to LMUSA 0 0 (419) (419)
19-2 1 09/30/94 LMUSA's transfer of mortgage plan insurance
receivable to LFC 0 (277) 0 (277)
19-3 1 12/31/94 LMUSA's transfer of leasehold improvements
to LFC 0 0 (395) (395)
---------------------------------------
0 (877) 14,771 13,894
LMUSA'S POTENTIAL AVOIDANCE CLAIMS AGAINST LFC
3-2 2 01/31/95 LMUSA's 1/95 transfer of 49% interest in Tycher
properties to LFC 0 0 (3,528) (3,528)
8-5 1 03/31/95 LMUSA's 3/95 transfer of Intellifile to LFC 0 0 (2,824) (2,824)
8-9* 5 09/01/95 LMUSA's purchase of prepaid services from
Dataplex 0 0 0 0
11-2 1 06/30/95 LFC's transfer of LAS prepaid pension acct
to LMUSA 0 0 310 310
18-3 1 06/30/95 LFC's transfer of accrued restructuring
(contra liability) to LMUSA 0 0 545 545
--- ---------------------------------------
31 0 0 (5,497) (5,497)
---------------------------------------
$0 ($877) $8,199 $7,322
=======================================
</TABLE>
<PAGE> 396
<TABLE>
<CAPTION>
TAB # DATE TRANSACTION BENEFIT TO LFC BENEFIT TO LMUSA(STL)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRANSACTIONS INVOLVING STL
1-5* 1 11/19/93 LFC's transfer of its 49% share of STL
to LMUSA Loss of investment 49% ownership of STL
1-5* 1 Various STL's advances to LFC Cash Incr. A/R due from LFC
1-5* 1 05/01/95 LFC's cancellation of its 51% share in STL
- 51% of book value at 9/95 Decr. A/P to STL 51% ownership of STL
1-5* - Reduction of payable to STL Decr. A/P to STL 51% ownership of STL
1-6* 1 06/23/95 STL's cash pmts to LMUSA after LFC cancelled
its invest. in STL No direct benefit $8.2mm of advances
1-8 1 05/01/95 LFC's transfer of its I/C account payable
due to STL to LMUSA No direct benefit Incr. A/R due from LFC
LFC'S POTENTIAL AVOIDANCE CLAIMS AGAINST LMUSA
3-3 2 06/30/95 LLG's transfer of Tycher properties and
related N/R to LMUSA Decr. A/P to LMUSA Tycher assets
4-2 1 05/01/95 LFC's transfer of Conseco Tranche B Note
to LMUSA Decr. A/P to LMUSA Conseco Tranche B asset
5-2 1 06/30/95 LFC's transfer of LAS and Lomas Mktg
to LMUSA Decr. A/P to LMUSA Lomas NY assets
6-2 2 06/30/95 LFC's transfer of Lomas NY to LMUSA Decr. A/P to LMUSA LAS/LMS assets
8-3 1 12/31/94 LFC's 12/94 transfer of Intellifile to LMUSA Decr. A/P to LMUSA Intellifile assets
14-2 2 07/28/95 LFC's transfer of investment in Trust Account
(net of liab.) to LMUSA Incr. A/R from LMUSA Rec'd positive net investment
14-3 1 08/18/95 LFC's transfer of payroll bank accounts to
LMUSA Incr. A/R from LMUSA Rec'd payroll bank accounts
14-4 1 06/30/95 LFC's transfer of credit in prepaid pension
acct related to R.I.F. No direct benefit Incr. A/R due from LFC
17-2 1 03/31/95 LMUSA's transfer of restructuring provision
liability to LFC No direct benefit Incr. A/R due from LFC
18-4 1 09/30/94 LFC's transfer of allowance for losses to
LMUSA No direct benefit Incr. A/R due from LFC
18-5 1 12/31/94 LFC's transfer of contingency reserve to
LMUSA No direct benefit Incr. A/R due from LFC
19-2 1 09/30/94 LMUSA's transfer of mortgage plan insurance
receivable to LFC No direct benefit Incr. A/R due from LFC
19-3 1 12/31/94 LMUSA's transfer of leasehold improvements
to LFC No direct benefit Incr. A/R due from LFC
LMUSA'S POTENTIAL AVOIDANCE CLAIMS AGAINST LFC
3-2 2 01/31/95 LMUSA's 1/95 transfer of 49% interest in
Tycher properties to LFC 49% interest in Tycher Incr. A/R due from LFC
8-5 1 03/31/95 LMUSA's 3/95 transfer of Intellifile to LFC Intellifile assets Incr. A/R due from LFC
8-9* 5 09/01/95 LMUSA's purchase of prepaid services from
Dataplex Incr. A/R due from LMUSA No direct benefit
11-2 1 06/30/95 LFC's transfer of LAS prepaid pension acct
to LMUSA Decr. A/P to LMUSA No direct benefit
18-3 1 06/30/95 LFC's transfer of accrued restructuring
(contra liability) to LMUSA Decr. A/P to LMUSA No direct benefit
---
31
</TABLE>
* Scenarios 1-5, 1-6, and 8-9 did not impact LFC's intercompany account with
LMUSA
(1) See attached schedule for assumptions/footnotes which is an integral part
of this analysis.
(2) Amounts are not necessarily additive as certain amounts herein are
inter-related and dependent upon the outcome of other potential avoidance
actions.
VI-6 (R)
<PAGE> 397
Confidential - Attorney Work Product
Tentative and Preliminary - Draft
LOMAS FINANCIAL CORPORATION
ANALYSIS OF IDENTIFIED TRANSACTIONS AND
IMPACT ON LFC/LMUSA INTERCOMPANY ACCOUNT (1)(2)
AS OF FEBRUARY 21, 1996
($000'S)
<TABLE>
<CAPTION>
IMPACT ON LFC/LMUSA INTER-CO ACCT
02/1/92 - 11/1/93 - 10/1/94 -
TAB # DATE TRANSACTION 10/31/93 09/30/94 09/30/95 TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPEN ITEMS
- ----------
8 3 Various Intellifile I/C acct balances transferred
between LFC and LMUSA $0 $0 ($557) ($557)
13 D 1 02/22/95 Clear suspense accts when LMUSA became
Common Payor 0 0 (532) (532)
14 B 1 04/26/95 LFC transferred State Unempl. Ins. liability
to LMUSA 0 0 (152) (152)
16 1 06/30/95 Intellifile transferred lease liability to
LMUSA through LFC 0 0 (208) (208)
18-2 1 11/22/94 LMUSA's transfer of prepaid pensions (excess
liability) to LFC 0 0 277 277
20-2 1 05/31/95 LFC's transfer of allowance for STL losses
to LMUSA 0 0 (1,734) (1,734)
20-3 6 09/30/95 LMUSA's transfer of STL losses to LFC 0 0 (854) (854)
28 1 05/26/95 LMUSA paid fee to B Byerly on behalf of LFC 0 0 (156) (156)
------------------------------------------
0 0 (3,916) (3,916)
NO STAND-ALONE CLAIMS - DEBIT TRANSACTIONS
- ------------------------------------------
3 1 06/29/94 LLG's transfer of 49% ownership of Tycher's
properties 0 3,528 0 3,528
6 1 05/29/92 LFC's correction of Lomas NY's intercompany
account 203 0 0 203
9 1 06/30/94 LFC funded LMUSA's contribution to the
Rabbi Trust 0 496 0 496
10 1 04/01/93 LFC transferred cost of Simmons Bldg
(CIP) to LMUSA 1,879 0 0 1,879
12 A 1 06/11/93 LFC funded LMUSA's sub's purchase of Capstead
shares 100 0 0 100
12 B 1 03/30/94 LFC funded LMUSA's sub's purchase of Hinton
Ins. Agency 0 200 0 200
13 B 1 05/01/92 LFC's bond proceeds deposited to LMUSA's acct. 255 0 0 255
13 C 1 06/15/94 LFC paid for LMUSA's E&Y accounting fees 0 106 0 106
13 D 1 02/17/95 Clear suspense accts when LMUSA became Common
Payor 0 0 100 100
13 E/F 2 03/01/95 LFC paid Fed. Unempl. taxes on behalf of
subsidiaries 0 0 505 505
13 G 1 Various Losses on sale of arts and antiques; represents
a reversing entry 0 0 0 0
14 A 1 01/17/95 LFC transferred Booth/Denton payroll expenses
to LMUSA 0 0 114 114
15 1 04/21/93 LMUSA transferred its MSP unfunded liability
to LFC 2,521 0 0 2,521
18 A 1 08/31/93 LMUSA transferred excess accrual for short
term incentive pmts to LFC 189 0 0 189
22 1 01/16/95 LFC funded LMUSA class action settlement,
payment of atty fees 0 0 1,280 1,280
23 1 12/17/93 LFC transferred expense to buy-out G. Kell's
house to LMUSA 0 116 0 116
24 1 02/01/93 LFC charged LMUSA a one-time treasury fee for
swap analyses 350 0 0 350
------------------------------------------
5,497 4,446 1,999 11,942
NO STAND-ALONE CLAIMS - CREDIT TRANSACTIONS
- -------------------------------------------
8 1 07/07/93 LMUSA's transfer of assets to incorporate
Intellifile (2,791) 0 0 (2,791)
8 1 07/21/93 LMUSA's transfer of assets to incorporate
Intellifile (148) 0 0 (148)
13 A 1 04/22/92 LMUSA's cash deposited in error in LFC's
account (437) 0 0 (437)
18 F 1 06/30/95 Intellifile transferred its accrued restr.
provision to LMUSA thru LFC 0 0 (34) (34)
21 5 Various Intercompany Account balance transfers 0 0 (7,233) (7,233)
25 1 11/02/92 LMUSA paid rent on behalf of LAS (265) 0 0 (265)
26 1 05/24/95 LMUSA paid fee to Colliers Baldwin on
behalf of LLG Lands 0 0 (100) (100)
27 1 02/28/94 LMUSA transferred TQM training expenses to LAS 0 (106) 0 (106)
29-2 2 09/30/94 LMUSA paid incentive fee on behalf of STL 0 (205) 0 (205)
--- ------------------------------------------
47 (3,641) (311) (7,367) (11,319)
------------------------------------------
$1,856 $4,135 ($9,284) ($3,293)
==========================================
</TABLE>
<PAGE> 398
<TABLE>
<CAPTION>
TAB # DATE TRANSACTION BENEFIT TO LFC BENEFIT TO LMUSA(STL)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPEN ITEMS
- ----------
8 3 Various Intellifile I/C acct balances transferred
between LFC and LMUSA Open Item Incr. A/R due from LFC
13 D 1 02/22/95 Clear suspense accts when LMUSA became
Common Payor Open Item Incr. A/R due from LFC
14 B 1 04/26/95 LFC transferred State Unempl. Ins. liability
to LMUSA Open Item Incr. A/R due from LFC
16 1 06/30/95 Intellifile transferred lease liability to
LMUSA through LFC Open Item Incr. A/R due from LFC
18-2 1 11/22/94 LMUSA's transfer of prepaid pensions (excess
liability) to LFC Decr. A/P to LMUSA Open Item
20-2 1 05/31/95 LFC's transfer of allowance for STL losses
to LMUSA Open Item Incr. A/R due from LFC
20-3 6 09/30/95 LMUSA's transfer of STL losses to LFC Open Item Incr. A/R due from LFC
28 1 05/26/95 LMUSA paid fee to B Byerly on behalf of LFC Funding of expense Incr. A/R due from LFC
NO STAND-ALONE CLAIMS - DEBIT TRANSACTIONS
- ------------------------------------------
3 1 06/29/94 LLG's transfer of 49% ownership of Tycher's
properties Decr. A/P to LMUSA 49% ownership of Tycher
6 1 05/29/92 LFC's correction of Lomas NY's intercompany
account Decr. A/P to LMUSA No direct benefit
9 1 06/30/94 LFC funded LMUSA's contribution to the
Rabbi Trust Decr. A/P to LMUSA Funding of pension program
10 1 04/01/93 LFC transferred cost of Simmons Bldg
(CIP) to LMUSA Decr. A/P to LMUSA Funding of bldg. construction
12 A 1 06/11/93 LFC funded LMUSA's sub's purchase of Capstead
shares Decr. A/P to LMUSA Funding of share purchase
12 B 1 03/30/94 LFC funded LMUSA's sub's purchase of Hinton
Ins. Agency Decr. A/P to LMUSA Funding of acquisition
13 B 1 05/01/92 LFC's bond proceeds deposited to LMUSA's acct. Decr. A/P to LMUSA Received cash
13 C 1 06/15/94 LFC paid for LMUSA's E&Y accounting fees Decr. A/P to LMUSA Payment of accounting fees
13 D 1 02/17/95 Clear suspense accts when LMUSA became Common
Payor Decr. A/P to LMUSA Payment of postage costs
13 E/F 2 03/01/95 LFC paid Fed. Unempl. taxes on behalf of
subsidiaries Decr. A/P to LMUSA Payment of taxes
13 G 1 Various Losses on sale of arts and antiques; represents
a reversing entry No direct benefit No direct benefit
14 A 1 01/17/95 LFC transferred Booth/Denton payroll expenses
to LMUSA Decr. A/P to LMUSA Accrual of payroll expenses
15 1 04/21/93 LMUSA transferred its MSP unfunded liability
to LFC Decr. A/P to LMUSA Funding of MSP liability
18 A 1 08/31/93 LMUSA transferred excess accrual for short
term incentive pmts to LFC Decr. A/P to LMUSA Funding of liability
22 1 01/16/95 LFC funded LMUSA class action settlement,
payment of atty fees Decr. A/P to LMUSA Funding of settlement
23 1 12/17/93 LFC transferred expense to buy-out G. Kell's
house to LMUSA Decr. A/P to LMUSA Funding of expense
24 1 02/01/93 LFC charged LMUSA a one-time treasury fee for
swap analyses Decr. A/P to LMUSA Swap analysis
NO STAND-ALONE CLAIMS - CREDIT TRANSACTIONS
- -------------------------------------------
8 1 07/07/93 LMUSA's transfer of assets to incorporate
Intellifile Intellifile Assets Incr. A/R due from LFC
8 1 07/21/93 LMUSA's transfer of assets to incorporate
Intellifile Intellifile Assets Incr. A/R due from LFC
13 A 1 04/22/92 LMUSA's cash deposited in error in LFC's
account Received cash Incr. A/R due from LFC
18 F 1 06/30/95 Intellifile transferred its accrued restr.
provision to LMUSA thru LFC No direct benefit Incr. A/R due from LFC
21 5 Various Intercompany Account balance transfers Funding of expense Incr. A/R due from LFC
25 1 11/02/92 LMUSA paid rent on behalf of LAS Funding of expense Incr. A/R due from LFC
26 1 05/24/95 LMUSA paid fee to Colliers Baldwin on
behalf of LLG Lands Funding of expense Incr. A/R due from LFC
27 1 02/28/94 LMUSA transferred TQM training expenses to LAS Funding of expense Incr. A/R due from LFC
29-2 2 09/30/94 LMUSA paid incentive fee on behalf of STL Funding of expense Incr. A/R due from LFC
---
47
</TABLE>
* Scenarios 1-5, 1-6, and 8-9 did not impact LFC's intercompany account with
LMUSA
(1) See attached schedule for assumptions/footnotes which is an integral part
of this analysis.
(2) Amounts are not necessarily additive as certain amounts herein are
inter-related and dependent upon the outcome of other potential avoidance
actions.
VI-7
<PAGE> 399
Confidential - Attorney Work Product
Tentative and Preliminary - Draft
LOMAS FINANCIAL CORPORATION
"OTHER" POTENTIAL PREFERENTIAL TRANSFERS
BASED ON IDENTIFIED TRANSACTIONS BETWEEN LFC AND LMUSA (1)
AS OF FEBRUARY 21, 1996
($000'S)
"OTHER" POTENTIAL PREFERENTIAL TRANSFERS:
- -----------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Beginning Balance - Due to LMUSA as of October 13, 1994 ($11,520)(2)
Transaction involving STL (1,075)
LFC's Potential Avoidance Claims Against LMUSA:
Debit Transactions 15,976
Credit Transactions (1,205)
------------
14,771
------------
LMUSA's Potential Avoidance Claims Against LFC:
Debit Transactions 855
Credit Transactions (6,352)
------------
(5,497)
------------
"Other" Potential Preferential Transfers 3,497
------------
Ending Balance - Due from LMUSA as of October 9, 1995 $176
============
</TABLE>
(1) See attached schedule for assumptions/footnotes which is an integral part
of this analysis.
(2) Represents "peak" due to LMUSA during one year preference period.
VI-8
<PAGE> 400
- --------------------------------------------------------------------------------
TRANSACTIONS NOT YET ANALYZED
INTERCOMPANY TRANSACTIONS
- --------------------------------------------------------------------------------
Standard Intercompany Allocations
Basis for the allocations
Consistency of the method used to develop the allocations
Non-Standard Intercompany Allocations
Building of the East Campus
Rental of Bryan Tower
Fees for the Board of Directors of LFC and LMUSA
Media center costs
Company jet
Employees that performed services for both LFC and LMUSA
Funding of the pension plan and use of pension plan for retiring executives
Analysis of LMUSA's alleged "arms-length" transactions
LIS
Intellifile
Lomas Field Service
Complete verification of title/ownership documentation of asset transfers
VI-9 ============================================= Lomas Financial Corporation
<PAGE> 401
- --------------------------------------------------------------------------------
TRANSACTIONS NOT YET ANALYZED
TRANSACTIONS WITH THIRD PARTIES
- --------------------------------------------------------------------------------
Real Estate
Building of the East Campus (Simmons Mattress Factory) that was $17
million over the budget of $5 million
SWAPs
Pledge of servicing rights to Lehman Bros.
Payment of interest to Lehman Bros. after servicing rights were pledged
Payment of $30mm to close out SWAPs after servicing rights were pledged
Asset Sales
Sale of remaining interests in First USA for $23mm
Sale of assets by STL to Lennar for $31mm
Sale of LIS to Prudential
Sale of $1.6 billion of PMSRs to GE for $16mm
Sale of Intellifile to Dataplex
Sale of PMSRs to First Nationwide
Payment of fees to Salomon Brothers and/or Lazard Freres
Capstead
Sale of assets to Capstead for $1mm
Payments by Capstead to shorten contract relating to future management fees
Payments by LMUSA to underfunded off-balance sheet accounts related to
Capstead mortgages
VI-10 ============================================= Lomas Financial Corporation
<PAGE> 402
- --------------------------------------------------------------------------------
TRANSACTIONS NOT YET ANALYZED
TRANSACTIONS WITH THIRD PARTIES
- --------------------------------------------------------------------------------
Bank Agreements
Amendments to LMUSA's bank agreements decreasing the amount that LMUSA
could advance to LFC
Repayment of the P&I line of $7.8mm due to ratios as of 6/95
Employees
Jess Hay Received 10-year $1.4mm consulting contract, office and admin.
staff upon retirement
What was the value of security received when note due from Jess
Hay was paid back with stock?
Ted Enloe What was the value of security received when $1.3 million note
due from Ted Enloe was sold?
Loans or significant bonus payments made to employees
Utilization of pension plan for executives that "resigned"
Payment of $250K commission to Charlie Kight as a result of the sale of
Intellifile to Dataplex
Payment of bonuses to employees/settlement packages
Other
Claim against R.I.S. for loss of value in the earnout (R.I.S. did not add
Prudential's mortgages to the system)
Lomas Mortgage Partnership
Charitable contributions made to the University of Texas (biotechnology
project) and others
VI-11 ============================================= Lomas Financial Corporation
<PAGE> 1
EXHIBIT 11
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------
1996 1995 1994
----------- ------------ ----------
<S> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER SHARE:
Average common shares outstanding . . . . . . . . . . 20,149 20,131 20,099
Average common stock equivalents under non-employee
Directors Long Term Incentive Plan . . . . . . . . . 11 23 33
----------- ----------- ----------
TOTAL SHARES . . . . . . . . . . . . . . . . . . . . 20,160 20,154 20,132
=========== =========== ==========
Loss before loss from discontinued operations . . . . . $ (250,591) $ (127,282) $(126,002)
Loss from discontinued operations . . . . . . . . . . . -- (26,409) (56,664)
----------- ----------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (250,591) $ (153,691) $ (182,666)
=========== =========== ==========
Primary earnings (loss) per share:
Loss before loss from discontinued operations . . . . $ (12.43) $ (6.32) $ (6.26)
Loss from discontinued operations . . . . . . . . . . -- (1.31) (2.81)
----------- ----------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (12.43) $ (7.63) $ (9.07)
=========== =========== ==========
ADDITIONAL COMPUTATION OF EARNINGS (LOSS) PER SHARE:
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
Average common shares outstanding . . . . . . . . . . . 20,149 20,131 20,099
Average common stock equivalents under non-employee
Directors Long Term Incentive Plan . . . . . . . . . . 11 23 33
----------- ----------- ----------
TOTAL SHARES . . . . . . . . . . . . . . . . . . . . 20,160 20,154 20,132
=========== =========== ==========
Loss before loss from discontinued operations . . . . . $ (250,591) $ (127,282) $(126,002)
Loss from discontinued operations . . . . . . . . . . . -- (26,409) (56,664)
----------- ----------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (250,591) $ (153,691) $ (182,666)
=========== =========== ==========
Primary earnings (loss) per share:
Loss before loss from discontinued operations . . . . $ (12.43) $ (6.32) $ (6.26)
Loss from discontinued operations . . . . . . . . . . -- (1.31) (2.81)
----------- ----------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (12.43) $ (7.63) $ (9.07)
=========== =========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21
LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES
CORPORATE STRUCTURE
JUNE 30, 1996
The consolidated structure of the Company is set forth in the following
table which identifies each corporate entity's subsidiaries and shows the state
of incorporation in which each of LFC and its subsidiaries are incorporated.
Except as otherwise specified, each entity is headquartered at 717 North
Harwood in Dallas.
<TABLE>
<CAPTION>
State of
Corporation Incorporation
- ----------- -------------
<S> <C>
Lomas Financial Corporation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
LMUSA USA, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Connecticut
Property Exchange USA, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
Lomas Field Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada
Gibraltar Deed Company (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California
Lomas Insurance Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Connecticut
Lomas Insurance Services of Arizona, Inc. . . . . . . . . . . . . . . . . . . . . Arizona
Lomas Insurance Services of Florida, Inc. . . . . . . . . . . . . . . . . . . . Florida
Lomas Insurance Services of Louisiana, Inc. . . . . . . . . . . . . . . . . . . Louisiana
Lomas General Insurance Services, Inc. . . . . . . . . . . . . . . . . . . . . Texas
Lomas Insurance Services of Virginia, Inc. . . . . . . . . . . . . . . . . . . Virginia
L&N Funding Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
ST Lending, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Meaderose, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada
L&N Consultants, Inc.(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada
Lomas New York, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York
LMUSA Funding Corporation (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
Lomas Information Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada
Lomas Management, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada
Lomas Properties, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
Louisiana National Land Corporation (5) . . . . . . . . . . . . . . . . . . . . . . . Louisiana
Lomas Investment Properties, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada
Bay South, Inc (5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada
Naples Bay View, Inc. (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Florida
Financial Insurance Ltd.(3) (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bermuda
Lomas Housing Management Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
Roosevelt Office Center, Inc.(4) (5) . . . . . . . . . . . . . . . . . . . . . . . . . . New York
Vistamar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Puerto Rico
LLG Lands, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arkansas
</TABLE>
Notes to Table of Corporate Structure:
(1) Unless otherwise stated, each affiliated entity is a corporation and is
100 percent owned by the indicated parent company.
(2) 100 percent of common stock owned by LFC but only 50 percent of the voting
stock. Preferred stock owned by third parties including 50 percent of the
voting stock.
(3) Located at Dorchester House, P. O. Box HM2020, Church Street, Hamilton 5,
Bermuda.
(4) Located at 67 Wall Street, Suite 2411, New York, New York 10005.
(5) Dissolution pending.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 197,800
<SECURITIES> 25,318
<RECEIVABLES> 85,467
<ALLOWANCES> (24,821)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,443
<DEPRECIATION> (17,610)
<TOTAL-ASSETS> 329,932
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 20,419
<OTHER-SE> (282,613)
<TOTAL-LIABILITY-AND-EQUITY> 329,932
<SALES> 0
<TOTAL-REVENUES> 103,347
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 277,080
<LOSS-PROVISION> 31,114
<INTEREST-EXPENSE> 24,563
<INCOME-PRETAX> (250,591)
<INCOME-TAX> 0
<INCOME-CONTINUING> (229,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (250,591)
<EPS-PRIMARY> (12.43)
<EPS-DILUTED> (12.43)
</TABLE>
