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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-6868
SIENA HOLDINGS, INC.
(Formerly 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.)
5068 WEST PLANO PARKWAY, SUITE 256, PLANO TEXAS 75093
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (972) 381-4255
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
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COMMON STOCK, PAR VALUE $.10 PER SHARE NOT APPLICABLE
PREFERRED STOCK, PAR VALUE $1.00 PER SHARE
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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 16, 1998 the aggregate market value of the registrant's common
stock held by non-affiliates: $4,744,000
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 $.10 per share, as of September 16, 1998: Common Stock -- 4,000,000
shares.
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SIENA HOLDINGS, INC.
(FORMERLY LOMAS FINANCIAL CORPORATION)
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. BUSINESS.............................................................................................3
Item 2. PROPERTIES...........................................................................................8
Item 3. LEGAL PROCEEDINGS....................................................................................8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..................................................................11
Item 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA..................................................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................................................14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................................................20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................................................59
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................................60
Item 11. EXECUTIVE COMPENSATION..............................................................................61
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................64
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................65
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....................................66
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SIENA HOLDINGS, INC.
(FORMERLY LOMAS FINANCIAL CORPORATION)
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998
PART I
ITEM 1. BUSINESS
Siena Holdings, Inc. ("SHI"), formerly Lomas Financial Corporation ("LFC")
was incorporated in Delaware in 1960, and its principal executive offices are
located at 5068 West Plano Parkway, Suite 256 in Plano, Texas. Unless the
context otherwise requires, the "Company," as used herein, refers to SHI,
formerly LFC, and its subsidiaries. The Company is primarily engaged in two
businesses through its wholly-owned subsidiaries: assisted care facility
management through Siena Housing Management Corp. and real estate development
through LLG Lands, Inc. Prior to October 1, 1996, the Company's wholly-owned,
principal subsidiary was Lomas Mortgage USA, Inc. ("LMUSA"), now known as Nomas
Corp. ("Nomas"). As a result of the Chapter 11 proceedings discussed below, the
Company's interest in LMUSA was extinguished effective October 1, 1996.
REORGANIZATION
On October 10, 1995, LFC, two subsidiaries of LFC and LMUSA (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 were Lomas Information Systems, Inc. ("LIS") and Lomas
Administrative Services, Inc. ("LAS"). The Chapter 11 cases were jointly
administered until October 1, 1996. The Debtor Corporations managed 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") from October 10, 1995 through October 4, 1996.
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. An
order confirming the second amended joint plan of reorganization filed on
October 4, 1996 and a stipulation and order among the Joint Debtors and the LFC
Creditors' Committee regarding technical modifications to plan of reorganization
and confirmation order filed on January 27, 1997 together with the second
amended joint plan of reorganization filed on July 3, 1996 are collectively
referred to herein as 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").
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The LMUSA Plan was confirmed by the Bankruptcy Court on October 1, 1996,
and LMUSA was discharged from the bankruptcy case and changed its name to Nomas
Corp. As a result of LMUSA's reorganization plan, LFC distributed its interest
in LMUSA to LMUSA's creditors as of October 1, 1996. This distribution decreased
the Company's assets and liabilities by $293.3 million and $419.4 million,
respectively, and stockholders' equity was increased by $126.1 million. The
operations of LMUSA are included in the Statement of Consolidated Operations and
the Statement of Consolidated Cash Flows through the date of distribution of
LMUSA.
The Joint Plan was confirmed on October 4, 1996, by the Bankruptcy Court.
The Joint Plan's effectiveness was conditioned on the satisfaction, or waiver by
the LFC Creditors' Committee, of certain conditions. On January 23, 1997, the
LFC Creditors' Committee and the LMUSA Creditors' Committee signed an agreement
in respect of intercompany claims (the "Intercompany Agreement"), filed as an
exhibit to the Company's annual report on Form 10-K for the year ended June 30,
1997. The Intercompany Agreement was approved by the Bankruptcy Court on
February 21, 1997, resulting in the transfer of assets and writeoff of
receivables and payables with a net increase in retained earnings of $16.8
million on the effective date of March 7, 1997.
Additionally, the Company transferred $3 million in cash to partially fund
a litigation trust to pursue third-party claims pursuant to the LFC/LMUSA joint
litigation trust agreement among LFC and its subsidiaries and LMUSA, dated March
6, 1997 (the "LFC/LMUSA Litigation Trust"), filed as an exhibit to the Company's
annual report on Form 10-K for the year ended June 30, 1997. Subject to certain
exceptions in the Intercompany Agreement, the LFC Creditors' Trust (as defined
herein) and the creditors' trust established pursuant to the LMUSA Plan will
receive sixty and forty percent, respectively, of net proceeds from litigation.
There can be no assurance that the LFC/LMUSA Litigation Trust will produce any
proceeds which will benefit the Creditors Trust and former creditors. The LFC
Creditors' Committee waived all other conditions and the Joint Plan became
effective March 7, 1997 and the Company emerged with a new name, Siena Holdings,
Inc. Reference is made to the Joint Plan, consisting of Exhibit 10.1, Exhibit
10.2 and Exhibit 10.3 which are filed as exhibits to the Company's annual report
on Form 10-K for the year ended June 30, 1997.
Pursuant to the Joint Plan, the Class 3 general unsecured creditors
receive a combination of cash and new common stock as settlement of their
allowed claim. On November 12, 1997, the initial distribution date (the "Initial
Distribution Date"), $12.5 million was disbursed to the distribution agent for
the Class 3 unsecured creditors. On May 11, 1998, a second distribution in the
amount of $6.2 million was disbursed to the distribution agent for benefit of
the Class 3 unsecured creditors. In addition, as assets in the Creditors' Trust
are liquidated, additional distributions will be made to the Class 3 unsecured
creditors. See "Item 8. Financial Statements and Supplementary Data -
Reorganization and Creditors' Trust" for more information.
Also, on the Initial Distribution Date pursuant to the Joint Plan and a
decision by the LFC Creditors' Committee, 4,000,000 shares of the new common
stock were issued to the stock distribution agent. For balance sheet
presentation and earnings (loss) per share, the 4,000,000 shares were considered
issued as of April 1, 1997. The process by the stock distribution agent has
resulted in 3,781,298 shares of common stock actually distributed to former
creditors through June 30, 1998. The Company expects the stock distribution
agent to complete the issuance of the remaining shares within three years of the
Initial Distribution Date.
THE 4,000,000 SHARES OF THE NEW COMMON STOCK ARE RESTRICTED IF THE EFFECT
OF A TRANSFER WOULD RESULT IN AN OWNERSHIP INCREASE TO 4.5 PERCENT OR ABOVE OF
THE TOTAL OUTSTANDING SHARES OR FROM 4.5 PERCENT TO A GREATER PERCENTAGE OF THE
TOTAL OUTSTANDING SHARES, WITHOUT PRIOR APPROVAL BY THE BOARD OF DIRECTORS AS
DESCRIBED IN THE RESTATED CERTIFICATE OF INCORPORATION. SEE EXHIBITS TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1997.
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The amounts ultimately distributed to the former creditors will be solely
dependent on the success of the Company, the amounts realized from the
collection of assets and the settlement of liabilities for both the Creditors'
Trust and the LFC/LMUSA Litigation Trust.
THE LFC CREDITORS TRUST AND ANY PROCEEDS FROM THE LFC/LMUSA LITIGATION
TRUST ARE SOLELY FOR THE BENEFIT OF THE FORMER CREDITORS OF THE JOINT DEBTORS.
STOCKHOLDERS WILL NOT BENEFIT FROM THESE TRUSTS UNLESS THEY HELD CLASS 3 -
GENERAL UNSECURED CLAIMS AS DEFINED IN THE JOINT PLAN.
See "Item 3. Legal Proceedings" and "Item 8. Financial Statements and
Supplementary Data" for more information on the claims. 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 the
Company's annual report on Form 10-K for the year ended June 30, 1996. 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.
FRESH-START REPORTING
In accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code, the Company was required to adopt
fresh-start accounting as of March 31, 1997, after all material conditions
required by the Plan were satisfied. The delay in the adoption of fresh-start
accounting was due to uncertainties surrounding the resolution of claims and
intercompany disputes between the LMUSA Creditors' Committee and the LFC
Creditors' Committee. The Company was required to adopt fresh-start reporting
because the holders of the existing voting shares immediately prior to filing
and confirmation of the Plan received less than 50% of the voting shares of the
emerging entity and its reorganization value was less than the total of its
post-petition liabilities and allowed claims.
In accordance with fresh-start accounting, the gain on discharge of debt
resulting from the bankruptcy proceedings was reflected on the predecessor
Company's financial statements for the period ended March 31, 1997. In addition,
the accumulated deficit of the predecessor Company at March 31, 1997 was
eliminated, and, at April 1, 1997, the reorganized Company's financial
statements reflected no beginning retained earnings or deficit. Since April 1,
1997, the Company's financial statements have been prepared as if it is a new
reporting entity and a vertical black line has been placed to separate
pre-reorganization operating results (the "Predecessor Company") from
post-reorganization operating results (the "Reorganized Company") since they are
not prepared on a comparable basis.
Under fresh-start accounting, all assets and liabilities were restated to
reflect their reorganization value, which approximated fair value at the date of
reorganization. The Company's management and representatives of the creditors'
committee concluded that, based on the fact that the Company had historically
incurred losses from operations and had projected minimal future operating
profits, the reorganization value of the Company (the fair value of the Company
before considering liabilities) was equivalent to the fair value of the
Company's tangible assets and that no other intrinsic value existed. As a
result, all assets and liabilities were stated at their fair value at the date
of reorganization.
CREDITORS' TRUST
The Joint Plan established a creditors' trust (the "Creditors' Trust") for
which the Company serves as trustee. The Creditors' Trust holds the
nonreorganized assets of the Company in trust pending their disposition and/or
distribution to creditors in accordance with the terms of the Joint Plan. The
Creditors' Trust is organized for the sole purpose of liquidating the
nonreorganized assets and will terminate on October 4, 2001 unless an extension
is approved by the Bankruptcy Court. The assets and liabilities of the
Creditors' Trust are not reflected in the accompanying Consolidated Balance
Sheet as the Company is not the beneficiary of the Trust. Accordingly, revenues
and expenses
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related to the Creditors' Trust assets and liabilities since April 1, 1997, are
not reflected in the accompanying Statement of Consolidated Operations. The
allocation of costs between the Creditors' Trust and the Company is based on
management's estimate of each entity's proportional share of costs. Gains and
losses from the Creditors' Trust are solely for the former creditors and the
Company has no risk of loss on the assets or liabilities. The amounts ultimately
distributed to the former creditors will be solely dependent on the success of
the Company, amounts realized from the collection of assets and settlement of
liabilities for both the Creditors' Trust and the LFC/LMUSA Litigation Trust.
See "Item 8. Financial Statements and Supplementary Data - Creditor' Trust" for
more information. Stockholders who are not former creditors of the Joint Debtors
are not beneficiaries of the Creditors' Trust.
THE LFC CREDITORS TRUST AND ANY PROCEEDS FROM THE LFC/LMUSA LITIGATION
TRUST ARE SOLELY FOR THE BENEFIT OF THE FORMER CREDITORS OF THE JOINT DEBTORS.
STOCKHOLDERS WILL NOT BENEFIT FROM THESE TRUSTS UNLESS THEY HELD CLASS 3 -
GENERAL UNSECURED CLAIMS AS DEFINED IN THE JOINT PLAN. See "Item 3. Legal
Proceedings" and "Item 8. Financial Statements and Supplementary Data" for more
information on the claims.
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.
ASSISTED CARE FACILITY MANAGEMENT
The assisted care facility management subsidiary, Siena Housing
Management Corp. ("SHM"), is a wholly-owned subsidiary of the Company, and
conducts business in Houston, Texas pursuant to a management agreement. SHM
manages and maintains an assisted care facility in Houston, Texas under a
management agreement into which it entered on June 27, 1977 with Treemont , Inc.
("Treemont"). SHM is entitled to receive a fee under the agreement which,
subject to a required annual priority distribution of project net income to
Treemont 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.
Treemont elected to begin significant capital improvements for fire
protection that have been funded by operations. These expenditures decreased the
quarterly management fee received by SHM beginning with the second quarter of
fiscal year 1998 and are complete except for cosmetic and other details that
should be finished in the first quarter of fiscal year 1999. Also, on December
31, 1997, Treemont discontinued the reimbursement of pension benefits paid to
the employees of SHM. This reduction in Treemont's pension plan expense
increases the facility's net income thereby increasing the Company's management
fee. This reduces the effect of the capital expenditures on SHM's revenue during
fiscal year 1998.
The compensation expense and all operating expenses for SHM's employees,
who provide services at the assisted care facility, are funded directly by the
assisted care facility owner and thus not reflected in the Consolidated
Statement of Operations, except indirectly through the management fee income
received by SHM based in part on the facility's net income. The exception is the
compensation for the operations manager of the facility, including commission,
bonus and pension benefits, which is funded directly by SHM and included in
personnel expense on the Company's Consolidated Statement of Operations.
SHM 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 can only terminate the agreement
for cause or if Treemont fails to receive its required annual priority
distribution for two consecutive years. SHM 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 owners of Treemont have
recently contacted the Company's management and requested a legal review
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of the management agreement as they believe certain parts of the contract are
illegal. The Company does not believe that the review will result in a change in
the terms. The agreement is substantially secured at this time by the Treemont
property in Houston. The Treemont management agreement is not shown as an asset
on the balance sheet of the Reorganized Company because there can be no
assurance that the contract will continue in effect for an extended period and
the uncertainties inherent in the projected earnings of the facilities.
INVESTMENT IN REAL ESTATE
The Company's investment in real estate is owned by LLG Lands, Inc.
("LLG"), a wholly-owned subsidiary of the Company. The property currently held
was transferred back to LLG by LMUSA as a result of the intercompany settlement
process. See "Item 1. Business - Reorganization". The real property consists of
179.4 acres (approximately 147.2 acres net of right-of-way and flood plain) of
unimproved land in Allen, Texas (the "Allen property"). The southern boundary of
the Allen property is the recently constructed Exchange Parkway, which provides
access to the property from Central Expressway on the west and from Highway 5 on
the east. The Allen property includes five tracts of land: one tract of
approximately 36.5 net acres zoned multi-family, two tracts of approximately
85.5 net acres zoned single-family and two tracts of approximately 25.2 net
acres zoned commercial. The City of Allen recently completed the construction of
a city park off of Exchange Parkway near the multi-family tract.
The Company will attempt to increase the values of the property through
the re-zoning of the single family tracts and the multi-family tract to light
industrial and multi-family. The re-zoning will relocate the multi-family tract.
The re-zoning is subject to significant municipal review and there can be no
assurance that the re-zoning request will be approved. Management of the Company
intends to market or develop the property over an estimated period of three to
five years.
MORTGAGE BANKING
The LMUSA Plan was confirmed by the Bankruptcy Court on October 1, 1996,
and LMUSA emerged with a new name, Nomas Corp. As a result of LMUSA's
reorganization plan, the Company distributed its interest in LMUSA to LMUSA's
creditors as of October 1, 1996. This distribution decreased the Company's
assets and liabilities by $293.3 million and $419.4 million, respectively, and
stockholders' equity was increased by $126.1 million. The operations of LMUSA
are included in the Statement of Consolidated Operations and the Statement of
Consolidated Cash Flows through the date of distribution of LMUSA.
On August 16, 1996, the former Lomas headquarters and all other campus
buildings were sold through the Bankruptcy Court process for $23.5 million.
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. The net cash received was
deposited into a joint account for the Company and LMUSA. In conjunction with
the intercompany claims settlement process in March, 1997, the Company received
$1.3 million and LMUSA was granted the remainder plus interest from the joint
account. Additionally, substantially all of the furniture and equipment of the
Company and LMUSA was sold by a liquidator during July and August 1996.
On October 2, 1995, LMUSA closed the sale to First Nationwide Mortgage
Corporation ("First Nationwide") of its GNMA servicing portfolio, 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. On January 31, 1996, LMUSA closed the sale to First Nationwide of its
remaining mortgage servicing portfolio and certain other assets pursuant to
Section 363 of the Bankruptcy Code.
See "Item 8. Financial Statements and Supplementary Data - Disposal or
Sale of Assets."
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EMPLOYEES
At June 30, 1998 the Company had two executive officers under contract and
one full-time employee. One of the Company's subsidiaries, SHM, had 128
full-time and 40 part-time employees who provide services at an assisted care
facility in Houston, Texas. The compensation expense and all operating expenses
for SHM's employees are funded directly by the assisted care facility owner and
thus not reflected in the Consolidated Statement of Operations, except
indirectly through the management fee income received by SHM based in part on
the facility's net income. The exception is the compensation for the operations
manager of the facility, including commission, bonus and pension benefits, which
is funded directly by SHM and included in personnel expense on the Company's
Consolidated Statement of Operations. See "Item 1. Business - Assisted Care
Facility Management".
ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased
facilities at 5068 West Plano Parkway, Suite 256 in Plano, Texas. The original
lease for six months expires on August 15, 1998 after which the Company will
operate under a month-to-month lease with a 30-day cancellation notice.
ITEM 3. LEGAL PROCEEDINGS
On October 10, 1995, LFC, two subsidiaries of LFC and LMUSA 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 was a co-proponent of the LMUSA Plan.
The LMUSA Plan was confirmed by the Bankruptcy Court on October 1, 1996,
was discharged from the bankruptcy case, and changed its name to Nomas Corp. As
a result of LMUSA's reorganization plan, LFC distributed its interest in LMUSA
to LMUSA's creditors as of October 1, 1996. This distribution decreased the
Company's assets and liabilities by $293.3 million and $419.4 million,
respectively, and stockholders' equity was increased by $126.1 million. The
operations of LMUSA are included in the Statement of Consolidated Operations and
the Statement of Consolidated Cash Flows through the date of distribution of
LMUSA.
The Joint Plan was confirmed on October 4, 1996, by the Bankruptcy Court.
The Joint Plan's effectiveness was conditioned on the satisfaction, or waiver by
the LFC Creditors' Committee, of certain conditions. On January 23, 1997, the
LFC Creditors' Committee and the LMUSA Creditors' Committee signed an agreement
in respect of intercompany claims (the "Intercompany Agreement"), filed as an
exhibit to the Company's annual report on Form 10-K for the year ended June 30,
1997. The Intercompany Agreement was approved by the Bankruptcy Court on
February 21, 1997, resulting in the transfer of assets and writeoff of
receivables and payables with a net increase in retained earnings of $16.8
million on the effective date of March 7, 1997.
Additionally, the Company transferred $3 million in cash to partially fund
a litigation trust to pursue third-party claims pursuant to the LFC/LMUSA joint
litigation trust agreement among LFC and its subsidiaries and LMUSA, dated March
6, 1997 (the "LFC/LMUSA Litigation Trust"), filed as an exhibit to the Company's
annual report on Form 10-K for the year ended June 30, 1997. Subject to certain
exceptions in the Intercompany Agreement, the LFC Creditors' Trust (as defined
herein) and the creditors' trust established pursuant to the LMUSA Plan will
receive sixty and forty percent, respectively, of net proceeds from litigation.
There can be no assurance that the LFC/LMUSA Litigation Trust will produce any
proceeds which will benefit the Creditors Trust and former creditors of the
Joint Plan. The LFC Creditors' Committee waived all other conditions and the
Joint Plan became effective March 7, 1997 and the Company emerged with a new
name, Siena Holdings, Inc. Reference is made to the Joint Plan, consisting of
Exhibit 10.1, Exhibit 10.2 and Exhibit 10.3 which are filed as exhibits to the
Company's annual report on Form 10-K for the year ended June 30, 1997. There can
be no assurance that the LFC/LMUSA Litigation Trust will produce any proceeds
which will benefit the Creditors Trust' and former creditors.
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In December 1997, the Company received a letter from the attorney of the
insurance company that carried the former directors and officers insurance
coverage, stating that there is a $1.0 million per claim retention which must be
completely exhausted before the insurance company is implicated. Management at
this time believes that the Company is not responsible for this retention amount
as a result of the Joint Plan.
Management is also reviewing the Company's potential obligation pursuant
to the trustee agreement and the Joint Plan to lend additional funds to the
LFC/LMUSA Litigation Trust. The Board of Directors of the Company would have to
approve any such transaction.
On September 25, 1998 the Company was advised that it was named as a
Counter-Defendant in the counterclaim filed by the defendants of the Litigation
Trust's law suit against certain former officers and directors of Lomas
Financial Corp and subsidiaries. The counterclaim seeks joint and several
liability. The management of the Company and its counsel are reviewing the
documents to determine the effect that this suit may have on the Company. See
"Item 8. Financial Statements and Supplementary Data-Subsequent Events."
The Company had a Management Security Plan ("MSP") for certain of its
employees. According to the MSP, key employees of the Company who participated
in the MSP were to be paid, in the event of retirement or death, a portion of
the employee's salary which such employee chose as the basis for computation of
retirement or death benefits. The Company ceased new enrollments in 1985.
Because of the bankruptcy filings by the Company and LMUSA, no contributions,
payments or actuarial evaluation have been made to the MSP since the petition
date.
The LFC Creditors' Committee argued that the funds contributed to the MSP
were held in a trust (the "MSP Trust") subject to the claims of creditors in the
event of insolvency. 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 MSP Trust. The LFC Creditors' Committee
contended that the funds in the trust were property of the Company's estate.
However, the trustee, Bankers Trust, asserted that the trustee was obligated to
hold the assets for the sole benefit of the MSP participants. In addition,
during the course of litigation, the Unofficial Committee of MSP Beneficiaries
filed a motion to intervene in the adversary proceeding which the Bankruptcy
Court granted, and filed an action against Bankers Trust to turn over to the MSP
beneficiaries the assets held in the MSP Trust.
On April 29, 1997, pursuant to a Stipulation and Order Regarding
Reserve for MSP Claimants, the Bankruptcy Court authorized the Company to
maintain a single distribution reserve in the amount of $6.3 million in order to
satisfy any obligations to the MSP Claimants under the Joint Plan. The
preliminary MSP disputed claims totaled $8.8 million. On July 1, 1998, a federal
district court approved a settlement of the MSP Trust whereby the Creditors'
Trust and the MSP beneficiaries would equally share the assets remaining in the
MSP Trust after payment of certain legal expenses and MSP trust fees, in the
amount of $0.4 million. Accordingly, on July 10, 1998, the Creditors' Trust
received $4.085 million pursuant to the final settlement (see "Item 8. Financial
Statements and Supplementary Data - Creditors' Trust"). These proceeds are
solely for the benefit of the former creditors of the Joint Plan.
The LFC Committee also commenced an adversary proceeding to recover the
funds in the rabbi trust for the Company's Excess Benefit Plan (the "EBP Trust")
on September 20, 1996, having obtained the Bankruptcy Court's approval for such
action on September 9, 1996. Bankers Trust, the trustee of the EBP Trust, agreed
that the Company was entitled to the funds held in the EBP Trust, and
accordingly, funds totaling $0.6 million were received by the Company in June
1997 and subsequently transferred to the Creditors' Trust for the sole benefit
of former creditors of the Joint Plan. The remaining funds were received in July
1997.
On August 28, 1996 the Bankruptcy Court authorized the LFC Committee to
commence an action against Residential Information Services Limited Partnership
("RIS") and certain of its affiliates and related companies. In a complaint
dated September 30, 1996, the LFC Committee commenced such an action. On January
10, 1997, the LFC Committee filed an amended complaint. The amended complaint
contains, inter alia, claims for breach of contract, fraud, tortuous
interference with contract, turnover and quantum meruit against RIS and the
other defendants in connection with RIS' acquisition of substantially all of the
assets of Lomas Information Systems, Inc. in December 1994. The amended
complaint seeks substantial damages from the defendants together with interest,
costs and attorneys' fees and punitive damages. This case was settled and
proceeds of $5.4 million were received by the Company in June 1997 and
subsequently transferred, net of $234,000 for certain administrative claims, to
the Creditors' Trust. These proceeds are solely for the benefit of the former
creditors of the Joint Plan.
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<PAGE> 10
THE LFC CREDITORS TRUST AND ANY PROCEEDS FROM THE LFC/LMUSA LITIGATION
TRUST ARE SOLELY FOR THE BENEFIT OF THE FORMER CREDITORS OF THE JOINT DEBTORS.
STOCKHOLDERS WILL NOT BENEFIT FROM THESE TRUSTS UNLESS THEY HELD CLASS 3 -
GENERAL UNSECURED CLAIMS AS DEFINED IN THE JOINT PLAN. See "Item 8. Financial
Statements and Supplementary Data" for more information on the claims.
The assisted care facility management subsidiary, SHM, is a wholly-owned
subsidiary of the Company, and conducts business in Houston, Texas pursuant to a
management agreement. SHM manages and maintains an assisted care facility in
Houston, Texas under a management agreement into which it entered on June 27,
1977 with Treemont. The owners of Treemont have recently contacted the Company's
management and requested a legal review of the management agreement as they
believe certain parts of the contract are illegal. The Company does not believe
that the review will result in a change in the terms. The agreement is
substantially secured at this time by the Treemont property in Houston. See
"Item 1. Business" for more information on the management agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of June 30, 1998 and 1997, the Company had 15,000,000 shares of $.10
par value common stock (the "Reorganized Common Stock") authorized. Pursuant to
the Joint Plan and a decision by the LFC Creditors' Committee, 4,000,000 shares
of common stock were reserved for issuance on April 1, 1997 and ultimately
issued to the stock distribution agent on November 12, 1997. For balance sheet
presentation and earnings (loss) per share, the 4,000,000 shares were considered
issued as of April 1, 1997. The process by the stock distribution agent has
resulted in 3,781,298 shares of common stock actually distributed to former
creditors through June 30, 1998. The Company expects the stock distribution
agent to complete the issuance of the remaining shares within three years of the
Initial Distribution Date. The Reorganized 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.
SHI's common stock, with a trading symbol of SIEN, is traded in the over
the counter market. During the last two fiscal years, the high and low prices
and dividends declared on common stock per share have been (in dollars):
<TABLE>
<CAPTION>
1998 1997 Dividends Declared
----------------------- ------------------------- -------------------------
High Low High Low 1998 1997
----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter....................... * * * * -- --
Second Quarter...................... 3 1-7/64 * * -- --
Third Quarter....................... 2-39/64 1-1/4 * * -- --
Fourth Quarter...................... 1-51/64 1-1/4 * * -- --
</TABLE>
* Not meaningful due to reorganization. Reorganized SHI's common stock commenced
trading on December 11, 1997.
The Company, as of June 30, 1998 and 1997, had 1,000,000 shares of $1.00
par value preferred stock (the "Reorganized Preferred Stock") authorized, with 0
shares issued and outstanding.
All of the Predecessor Company's common stock (the "Predecessor Common
Stock"), warrants and stock options were canceled at reorganization on March 31,
1997. During fiscal 1996 the Predecessor Company's common stock was delisted by
the New York Stock Exchange.
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".
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code, the Company adopted fresh-start accounting as of
March 31, 1997. See "Item 8. Financial Statements and Supplementary
Data--Fresh-Start Reporting" footnote to the Consolidated Financial Statements
or "Item 1. Business - Fresh-Start Reporting". In accordance with fresh- start
accounting, a vertical black line has been placed to separate the operating
results of the Predecessor Company from those of the Reorganized Company, since
they are not prepared on a comparable basis.
-11-
<PAGE> 12
SIENA HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES)
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------------- -------------------------------------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Years Ended June 30
June 30, June 30, March 31, ------------------------------------
1998 1997 1997 1996 1995 1994
---------- ----------- ----------- ------ ------ ------
(in dollars and in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from operations ....................... 1,410 226 3,235 103,347 222,222 281,618
Income (loss) from operations before
reorganization items and federal income tax . 72 (86) (5,464) (229,410) (127,282) (126,002)
Reorganization items---net ..................... -- -- (7,447) (21,181) -- --
Income (loss) from operations before federal
income tax expense .......................... 72 (86) (12,911) (250,591) (127,282) (126,002)
Federal income tax expense ..................... (25) -- -- -- -- --
Income (loss) from operations before
discontinued operations .................... 47 (86) (12,911) (250,591) (127,282) (126,002)
Loss from discontinued operations:
Loss from disposal .......................... -- -- -- -- (24,409) (25,000)
Loss from operations ........................ -- -- -- -- (2,000) (31,664)
Income (loss) before extraordinary item ........ 47 (86) (12,911) (250,591) (153,691) (182,666)
Extraordinary gain on discharge of debt ........ -- -- 135,966 -- -- --
Net income (loss) .............................. 47 (86) 123,055 (250,591) (153,691) (182,666)
Earnings (loss) per share:
Income (loss) from operations before
loss from discontinued operations ...... 0.01* (0.02) * ** ** ** **
Income (loss) before extraordinary item .... 0.01* (0.02) * ** ** ** **
Net income (loss) .......................... 0.01* (0.02) * ** ** ** **
Average number of shares ................... 4,000* 4,000 * ** ** ** **
Earnings (loss) per share - assuming dilution:
Income (loss) from operations before
loss from discontinued operations ...... 0.01* (0.02) * ** ** ** **
Income (loss) before extraordinary item .... 0.01* (0.02) * ** ** ** **
Net income (loss) .......................... 0.01* (0.02) * ** ** ** **
Average number of shares ................... 4,044* 4,000 * ** ** ** **
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
* Per share amounts for Reorganized Company based on shares issued or
reserved for issuance to creditors.
** Per share amounts are not meaningful due to reorganization.
-12-
<PAGE> 13
SIENA HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES)
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(CONTINUED)
<TABLE>
<CAPTION>
As of June 30 As of June 30
-------------------- --------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------- -------
(in dollars and in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets .............................. 7,448 7,051 329,932 1,157,001 1,148,257
Cash ................................ 2,475 1,941 197,800 21,510 10,178
Investment in real estate .......... 4,800 4,800 -- -- --
Purchased future mortgage servicing
income rights ..................... -- -- -- 346,958 382,009
First mortgage loans held for sale... -- -- -- 345,039 257,534
Term and senior convertible notes ... -- -- -- 518,688 523,229
Liabilities subject to Chapter 11
proceedings ...................... -- -- 552,863 -- --
Stockholders' equity (deficit) ...... 6,143 6,061 (262,464) (11,878) 141,435
Escrow, agency and fiduciary funds... -- -- -- 641,519 603,163
</TABLE>
Note: Certain amounts in fiscal 1997, 1996, 1995, and 1994 have been
reclassified to comply with the 1998 presentation format.
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Statements contained herein that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
but not limited to statements regarding the Company's expectations, hopes,
beliefs, intentions or strategies regarding the future. Actual results could
differ materially from those projected in any forward-looking statements as a
result of a number of factors, including those detailed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, as
well as those set forth elsewhere herein. The forward-looking statements are
made as of the date of these financial statements and the Company undertakes no
obligation to update or revise the forward-looking statements, or to update the
reasons why actual results could differ materially from those projected in the
forward-looking statements.
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code", the Company adopted fresh-start accounting as of
March 31, 1997. See "Item 8. Financial Statements and Supplementary Data -
Accounting Policies" footnote. In accordance with fresh-start accounting, the
gain on discharge of debt resulting from the bankruptcy proceedings was
reflected on the predecessor Company's financial statements for the period ended
March 31, 1997. In addition, the accumulated deficit of the predecessor Company
at March 31, 1997 was eliminated, and, at April 1, 1997, the reorganized
Company's financial statements reflected no beginning retained earnings or
deficit. Since April 1, 1997, the Company's financial statements have been
prepared as if it is a new reporting entity and a vertical black line has been
placed to separate the operating results of the Predecessor Company from those
of the Reorganized Company since they are not prepared on a comparable basis.
On October 1, 1996, the Company distributed its interest in LMUSA to
LMUSA's creditors pursuant to LMUSA's reorganization plan. Effective March 7,
1997, the Company settled its intercompany disputes with LMUSA resulting in the
transfer of assets and writeoff of receivables and payables with a net increase
in retained earnings of $16.8 million. See "Item 1. Business - Reorganization".
Certain reclassification have been made to prior years' financial
statements to conform to the current year presentation.
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<PAGE> 15
The operating results of the Company during the year ended June 30, 1998,
the three month period ended June 30, 1997, the nine month period ended March
31, 1997, and the year ended June 30, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
---------------------------- ----------------------------
Three Month Nine Month
Period Period
Year Ended Ended Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating income (loss):
Assisted care management ...................... $ 272 $ 87 $ 376 $ 355
Real estate ................................... (29) 5 97 107
Mortgage banking .............................. -- -- (1,186) (34,430)
Other ......................................... 962 52 319 (340)
--------- --------- --------- ---------
1,205 144 (394) (34,308)
--------- --------- --------- ---------
Expenses:
General and administrative .................... (1,133) (230) (1,352) (2,675)
Provision for losses .......................... -- -- -- (273)
Corporate interest ............................ -- -- -- (3,463)
Loss on sale or disposal of assets ............ -- -- (3,718) (188,691)
--------- --------- --------- ---------
(1,133) (230) (5,070) (195,102)
--------- --------- --------- ---------
Income (loss) from operations before
reorganization items and federal income tax .... 72 (86) (5,464) (229,410)
Reorganization items---net ....................... -- -- (7,447) (21,181)
--------- --------- --------- ---------
Income (loss) before federal income tax .......... 72 (86) (12,911) (250,591)
Federal income tax expense ....................... (25) -- -- --
--------- --------- --------- ---------
Income (loss) before extraordinary item .......... 47 (86) (12,911) (250,591)
Extraordinary gain on discharge of debt .......... -- -- 135,966 --
--------- --------- --------- ---------
Net income (loss) .......................... $ 47 $ (86) $ 123,055 $(250,591)
========= ========= ========= =========
</TABLE>
RESULTS OF OPERATIONS--YEAR ENDED JUNE 30, 1998 COMPARED WITH PERIODS
ENDED JUNE 30, 1997
Due to the adoption of fresh-start accounting on March 31, 1997, the
results of operations for the year ended June 30, 1997, are not comparable with
the year ended June 30, 1996. See "Item 8. Financial Statements and
Supplementary Data - Accounting Policies" footnote.
Assisted Care Management. The decrease in the profitability of the
assisted care management operations from a combined annual operating income of
$463,000, for the three month period ended June 30, 1997 and the nine month
period ended March 31, 1997, to $272,000 for the year ended June 30, 1998 is
primarily attributable to the decreased management fee received by Siena Housing
Management Corp. ("SHM"), a wholly-owned subsidiary of the Company. SHM manages
and maintains an assisted care facility in Houston, Texas under a management
agreement into which it entered on June 27, 1977 with Treemont, Inc.
("Treemont").
Treemont elected to begin significant capital improvements for fire
protection that have been funded by operations. These expenditures decreased the
quarterly management fee received by SHM beginning with the second quarter of
fiscal year 1998 and are complete except for cosmetic and other details that
should be finished in the first quarter of fiscal year 1999. Also, on December
31, 1997, Treemont discontinued the reimbursement of pension benefits paid to
the employees of SHM. This reduction in Treemont's pension plan expense
increases the facility's net income thereby
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<PAGE> 16
increasing the Company's management fee. This reduces the effect of the capital
expenditures on SHM's revenue during fiscal year 1998.
The owners of Treemont have recently contacted the Company's management
and requested a legal review of the management agreement as they believe certain
parts of the contract are illegal. The Company does not believe that the review
will result in a change in the terms. The agreement is substantially secured at
this time by the Treemont property in Houston.
Real Estate. The Company holds approximately 150 net acres of undeveloped
land in Allen, Texas. Of this total, approximately 37 net acres are zoned for
multi-family use, the remaining net acreage is zoned for single family use and
commercial use. The Company is attempting to increase the values of the property
through the re-zoning of the single family tracts and the multi-family tract to
light industrial and multi-family. The re-zoning will relocate the multi-family
tract. The re-zoning is subject to significant municipal review and there can be
no assurance that the re-zoning request will be approved.
The Company's real estate subsidiary, LLG, reported an operating loss of
$29,000 for the year ended June 30, 1998 as compared to a combined annual
operating income of $102,000, for the three month period ended June 30, 1997 and
the nine month period ended March 31, 1997. The decrease is primarily
attributable to consulting and other expenses related to the re-zoning project
currently underway. Costs related to the re-zoning, marketing and developing the
property will continue, some of which may be capitalized. Additionally, the LLG
subsidiary reported decreased interest income for the year ended June 30, 1998
as compared to prior periods due to a decision by management to maintain a
smaller cash balance at the subsidiary company.
Mortgage Banking. There were no Mortgage Banking operations for the year
ended June 30, 1998, due to the distribution of LMUSA to LMUSA creditors on
October 1, 1996.
Other Operations. The Company reported other operating income of $962,000,
$52,000 and $319,000 for the year ended June 30, 1998, the three months ended
June 30, 1997 and the nine months ended March 31, 1997, respectively. Other
operating income included expenses reimbursed by the Creditors' Trust of
$796,000 and $42,000 for the year ended June 30, 1998 and the three month period
ended June 30, 1997, respectively, including $492,000 of success bonuses as
defined below. The remainder of the reimbursement from the Creditors' Trust
consisted of an overhead allocation from the Company, based upon management's
estimate of resources used by the Creditors' Trust. Other operating income for
the nine months ended March 31, 1997 did not include such an allocation as the
Creditors' Trust was not created until reorganization. The allocation of
overhead to the Creditors' Trust is expected to decrease significantly during
fiscal year 1999.
Several non-recurring items were part of other operating income for the
year ended June 30, 1998, including $43,000 proceeds from a non-related
bankruptcy claim, $39,000 tax refund from a prior year and $20,000 gain on the
sale of Vistamar, Inc., a real estate subsidiary incorporated in Puerto Rico
that was carried in the Company's financial records with a basis of zero. Other
operating income for the quarter and nine months ended March 31, 1997 included
investment and dividend income related to assets that were transferred to the
Creditors' Trust as of April 1, 1997, and therefore are not comparable to
subsequent periods.
Expenses and Other. General and administrative expenses of $1,133,000 for
the year ended June 30, 1998, consisted primarily of: (1) $728,000 of personnel
expenses, including success bonuses of $494,000; (2) corporate insurance of
$133,000; (3) accounting, public reporting and other stockholder expenses of
$86,000: and (4) other general operating expenses. There will not be a
corresponding decrease in expenses relating to the expected decrease in the
overhead allocation charged to the Creditors' Trust, due to a certain amount of
fixed expenses the Company will continue to incur.
Separate retention agreements (the "Retention Agreements") were approved
by the Board of Directors effective December 1, 1997, for the Company's two
executive officers, John P. Kneafsey - Chief Executive Officer and W. Joseph
Dryer - President. The Retention Agreements were filed as an exhibit to the
Company's quarterly Form 10-Q for the period ended December 31, 1997. The
Retention Agreements, with a five year term, provide for the payment of: (1) a
monthly retainer, (2) severance upon early termination of the contract by the
Company, and (3) a success bonus based upon certain performance criteria of the
Company and its subsidiaries and the Company's results as trustee of
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<PAGE> 17
the Creditors' Trust. See "Item 8. Financial Statements and Supplementary Data -
Stock and Compensation Plans" and "Item 11. Executive Compensation" for more
information.
In accordance with the Retention Agreements, the Board of Directors
approved a bonus payable to the executive officers of the Company based on cash
received by the Creditors' Trust in excess of the book value upon liquidation of
a subordinated promissory note held in the Creditors' Trust (see "Creditors'
Trust" footnote). The Company received $590,000 in May 1998 for the bonus pool
from the proceeds received by the Creditors' Trust. The Board of Directors
approved an aggregate bonus amount of $492,000 for the executive officers. Based
on the same bonus criteria but subject to shareholder approval, $98,000 remains
payable to the directors.
The Retention Agreements also awarded stock options to Mr. Kneafsey and
Mr. Dryer pursuant to the SHI Nonqualified Stock Option Agreements, included as
exhibits to the Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1997. The plan according to the SHI Nonqualified Stock Option
Agreements (the "SHI Stock Option Plan") granted the officers options to
purchase an aggregate of 434,750 shares of the Company's common stock, with an
effective date of December 1, 1997 (the "Date of Grant"). The stock options
resulted in compensation expense of $10,000, with a corresponding increase in
additional paid-in capital, for the year ended June 30, 1998.
Pursuant to shareholder approval, stock options will also be awarded to
the Company's directors under the SHI Directors' Stock Option Plan. Under the
proposed plan, each of the five directors would receive options to purchase
40,000 shares of the Company's common stock, with the same Date of Grant and
other features as the officers' plan. If approved by the shareholders, the
Company would recognize compensation expense of $4,000 in fiscal year 1999 for
the period from December 1, 1997 through June 30, 1998. This would have an
insignificant impact on earnings (loss) per share.
See "Item 11. Executive Compensation" for more information on the
compensation and stock options of the directors and officers.
In December 1997, the Company received a letter from the attorney of the
insurance company that carried the former directors and officers insurance
coverage, stating that there is a $1.0 million per claim retention which must be
completely exhausted before the insurance company is implicated. Management at
this time believes that the Company is not responsible for this retention amount
as a result of the Joint Plan.
Management is also reviewing the Company's potential obligation pursuant
to the trustee agreement and the Joint Plan to lend additional funds to the
LFC/LMUSA Litigation Trust. The Board of Directors of the Company would have to
approve any such transaction. See "Item 8. Financial Statements and
Supplementary Data - Subsequent Events".
Due to the Company's lack of dependence on computer software, the Company
does not expect the cost of addressing the Year 2000 issue to have a material
impact on the Company's future operating results.
See "Item 8. Financial Statements and Supplementary Data".
RESULTS OF OPERATIONS--PERIODS ENDED JUNE 30, 1997 COMPARED WITH YEAR ENDED JUNE
30, 1996
Due to the adoption of fresh-start accounting on March 31, 1997, the
results of operations for the year ended June 30, 1997, are not comparable with
the year ended June 30, 1996. See "Item 8. Financial Statements and
Supplementary Data - Accounting Policies" footnote.
Assisted Care Management. The assisted care management operations recorded
a gain of $87,000 and $376,000 for the periods ended June 30, 1997 and March 31,
1997, respectively. This is compared to a gain of $355,000 in fiscal 1996. The
increased profitability of Housing Management operations as compared to the same
period in fiscal 1996 is primarily attributable to the termination of a
non-profitable management contract in October 1996. The assisted care management
operations was included in other operations in previous filings but has been
reclassified as the assisted care management is a significant business unit
prospectively.
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<PAGE> 18
Real Estate. The Company's real estate subsidiary, LLG, reported
consistent net operating income of $102,000 for fiscal year 1997 as compared to
$107,000 for fiscal year 1996, both primarily due to interest income.
Mortgage Banking. Prior to the distribution of LMUSA to the LMUSA
Creditors' Committee on October 1, 1996, the operations of LMUSA's mortgage
banking division recorded an operating loss of $1.2 million, including $0
provision for losses. This is compared to an operating loss of $34.4 million,
including a provision for losses of $29.9 million, for the fiscal year ended
June 30, 1996. LMUSA recorded an additional loss on sale or disposal of assets
of $3.7 million prior to October 1, 1996, related to the sale of substantially
all its assets to First Nationwide during fiscal 1996. The loss on sale or
disposal of assets recorded for the year ended June 30, 1996 was $188.7 million.
After October 1, 1996, the operations of LMUSA were reported completely separate
by Nomas Corp.
Other Operations. Other operations reported net operating income as
reclassified of $52,000 and $319,000 for the periods ended June 30, 1997 and
March 31, 1997, respectively, as compared to a net operating loss as
reclassified of $340,000 for the year ended June 30, 1996. The loss for 1996
includes losses from STL operations and LIS operations. For the period ended
March 31, 1997, the net operating income of $319,000 is primarily interest and
investment income earned on various investments. Substantially all the
investments were included in the transfer of assets to the Creditors' Trust on
March 31, 1997, thus the Company saw a significant decrease in the net operating
income for other operations for the period ended June 30, 1997.
Expenses and Other. As a result of the bankruptcy filings on October 10,
1995 by LFC, LMUSA and two other insignificant subsidiaries, the Company
reported net reorganization items of $7.4 million and $21.2 million for the
period ended March 31, 1997 and the year ended June 30, 1996, respectively. The
reorganization items consisted primarily of professional and other fees of $7.0
million and $14.2 million reduced by a credit for interest earned on cash
accumulated of $3.0 million and $8.7 million for the period ended March 31, 1997
and the year ended June 30, 1996, respectively. Upon filing bankruptcy on
October 10, 1995, the Company ceased accruing corporate interest, thus there was
no corporate interest expense for the period ended March 31, 1997.
For the period ended March 31, 1997, the Company recorded an adjustment to
prepetition liabilities for allowed or disputed claims of $3.5 million which is
included in Reorganization Items-Net on the Company's Statement of Consolidated
Operations. An extraordinary gain on discharge of debt of $136.0 million was
recorded for the period ended March 31, 1997, based on the estimated
distribution to creditors pursuant to the Plan of Reorganization. For fiscal
1996, there were charges for the write-off of deferred interest swap debits of
$9.1 million and unamortized debt issuance cost of $6.6 million. After the
adoption of fresh-start reporting on March 31, 1997, any professional fees
related to the reorganization or interest earned on the cash held by the
Creditors' Trust will be charged or credited to the income of the Creditors'
Trust. The interest earned on the cash held by the Reorganized Company for the
period ended June 30, 1997 is reported as operating income for the appropriate
operating division.
General and administrative expenses decreased from $2.7 million for the
year ended June 30, 1996 to $1.4 million for the period ended March 31, 1997 and
$188,000 for the period ended June 30, 1997, as a result of the significant
decrease in the number of employees or consultants and related occupancy and
office expenses.
See "Item 8. Financial Statements and Supplementary Data".
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
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<PAGE> 19
the severance and retention plans which has been recognized in loss from
disposal or sale on the Statement of Consolidated Operations.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the only liabilities of the Company were accounts
payable and other accrued expenses which will be paid from current operating
cash available as of June 30, 1998.
In December 1997, the Company received a letter from the attorney of the
insurance company that carried the former directors and officers insurance
coverage, stating that there is a $1.0 million per claim retention which must be
completely exhausted before the insurance company is implicated. Management at
this time believes that the Company is not responsible for this retention amount
as a result of the Joint Plan.
Management is also reviewing the Company's potential obligation pursuant
to the trustee agreement and the Joint Plan to lend additional funds to the
LFC/LMUSA Litigation Trust. The Board of Directors of the Company would have to
approve any such transaction.
On September 25, 1998 the Company was advised that it was named as a
Counter-Defendant in the counterclaim filed by the defendants of the Litigation
Trust's law suit against certain former officers and directors of Lomas
Financial Corp and subsidiaries. The counterclaim seeks joint and several
liability. The management of the Company and its counsel are reviewing the
documents to determine the effect that this suit may have on the Company. See
"Item 8. Financial Statements and Supplementary Data-Subsequent Events".
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<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Siena Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Siena
Holdings, Inc. and subsidiaries, formerly Lomas Financial Corporation and
subsidiaries, (the "Company") as of June 30, 1998 and 1997, and the related
statements of consolidated operations, stockholders' equity (deficit), and cash
flows for the year ended June 30, 1998, the three month period ended June 30,
1997, the nine month period ended March 31, 1997 and the year ended June 30,
1996. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedules, Schedule I-- Condensed
Financial Information of the Registrant as of June 30, 1998 and 1997 and for the
year ended June 30, 1998, the three month period ended June 30, 1997, the nine
month period ended March 31, 1997 and the year ended June 30, 1996 and Schedule
III -- Real Estate and Accumulated Depreciation as of June 30, 1998. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to report on
these consolidated financial statements and financial statement schedules 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 financial statement presentation. We
believe that our audits provide a reasonable basis for our report.
The accompanying consolidated financial statements and related financial
statement schedule for the nine month period ended March 31, 1997 and the year
ended June 30, 1996, were prepared assuming that the Company would 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 had not
been confirmed by the Bankruptcy Court. Claims which are 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 were not determinable.
As a result of the reorganization proceedings, the Company could have sold
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 raised substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
and related financial statement schedule for the nine month period ended March
31, 1997 and the year ended June 30, 1996, do not include any adjustments that
resulted 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 consolidated financial statements and financial statement
schedule for the nine month period ended March 31, 1997 and the year ended June
30, 1996.
In our opinion, the consolidated balance sheets of Siena Holdings, Inc.
and subsidiaries as of June 30, 1998 and 1997, and the related statements of
consolidated operations, stockholders' equity (deficit), and cash flows for the
year ended June 30, 1998 and the three month period ended June 30, 1997, present
fairly, in all material respects, the financial position of Siena Holdings, Inc.
and subsidiaries, as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for the year ended June 30, 1998 and the three
month period ended June 30, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion the related 1998 and 1997 financial
-20-
<PAGE> 21
statement schedules when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects,
the information set forth therein.
As discussed in the notes to the consolidated financial statements,
effective March 31, 1997, the Company emerged from bankruptcy and applied fresh
start accounting. As a result, the consolidated balance sheets as of June 30,
1998 and 1997, and the related statements of consolidated operations and cash
flows for the year ended June 30, 1998 and the three month period ended June 30,
1997, are presented on a different basis than that for the periods before fresh
start, and therefore, are not comparable.
KPMG Peat Marwick LLP
Dallas, Texas
September 25, 1998
-21-
<PAGE> 22
CONSOLIDATED BALANCE SHEET
SIENA HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES)
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
Reorganized Company
-------------------------------
June 30, 1998 June 30, 1997
------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................. $ 2,475 $ 1,941
Receivables ........................................................... 119 242
Prepaid expenses ...................................................... 54 68
------- -------
2,648 2,251
------- -------
Long Term Investments:
Investment in real estate ............................................. 4,800 4,800
------- -------
$ 7,448 $ 7,051
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ................................. $ 594 $ 216
Long Term Liabilities:
Accrued medical insurance premiums .................................... 711 774
------- -------
1,305 990
------- -------
Stockholders' equity:
Preferred stock --($1.00 par value, 1,000 shares authorized, 0 shares
issued and outstanding) ........................................... -- --
Common stock--($.10 par value, 15,000 shares authorized, 4,000
shares issued and outstanding) .................................... 400 400
Other paid-in capital ................................................. 5,782 5,747
Accumulated deficit ................................................... (39) (86)
------- -------
6,143 6,061
------- -------
$ 7,448 $ 7,051
======= =======
</TABLE>
See notes to consolidated financial statements.
-22-
<PAGE> 23
STATEMENT OF CONSOLIDATED OPERATIONS
SIENA HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------------------ -------------------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Commissions and fees............................ $ 394 $ 156 $ 1,555 $ 16,040
Interest........................................ 101 27 956 7,933
Trust expense reimbursement.................... 796 42 -- --
Mortgage servicing............................. -- -- -- 59,938
Investment...................................... -- -- 16 13,191
Gain on sales................................... 20 -- 253 214
Other........................................... 99 1 455 6,031
-------------- -------------- -------------- --------------
1,410 226 3,235 103,347
-------------- -------------- -------------- --------------
Expenses:
Personnel....................................... 846 101 1,728 38,555
Other operating................................. 492 211 3,147 32,476
Interest........................................ -- -- -- 24,563
Depreciation and amortization................... -- -- 106 17,358
Provision for losses............................ -- -- -- 31,114
Loss on sale or disposal of assets.............. -- -- 3,718 188,691
-------------- -------------- -------------- --------------
1,338 312 8,699 332,757
-------------- -------------- -------------- --------------
Income (loss) from operations before
reorganization items and federal income tax..... 72 (86) (5,464) (229,410)
Reorganization items--net.......................... -- -- (7,447) (21,181)
-------------- -------------- -------------- --------------
Income (loss) from operations before federal
income tax...................................... 72 (86) (12,911) (250,591)
Federal income tax expense......................... (25) -- -- --
-------------- -------------- -------------- --------------
Income (loss) before extraordinary item............ 47 (86) (12,911) (250,591)
Extraordinary gain on discharge of debt............ -- -- 135,966 --
-------------- -------------- -------------- --------------
Net income (loss).................................. $ 47 $ (86) $ 123,055 $ (250,591)
============== ============== =============== ==============
Basic earnings (loss) per share:
Net income (loss)............................... $ 0.01* $ (0.02)* ** **
Average number of shares........................... 4,000* 4,000 * ** **
Diluted earnings (loss) per share:
Net income (loss)............................... $ 0.01* $ (0.02)* ** **
Average number of shares........................... 4,044* 4,000 * ** **
</TABLE>
* Per share amounts for Reorganized Company based on shares issued or
reserved for issuance to creditors.
** Per share amounts are not meaningful due to reorganization.
See notes to consolidated financial statements.
-23-
<PAGE> 24
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
SIENA HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES)
YEAR ENDED JUNE 30, 1998
THREE MONTH PERIOD ENDED JUNE 30, 1997
NINE MONTH PERIOD ENDED MARCH 31, 1997 AND
YEAR ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Other
Shares Common Paid-in Accumulated
Outstanding Stock Capital Deficit Total
------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995......................... 20,146 $ 20,146 $ 309,761 $ (341,785) $ (11,878)
Net loss for year ended June 30, 1996............ -- -- -- (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)
Net income for nine months ended March 31, 1997.. -- -- -- 123,055 123,055
Distribution of LMUSA to LMUSA creditors......... -- -- -- 126,101 126,101
Settlement of intercompany claims with LMUSA..... -- -- -- 16,798 16,798
Effect of reorganization and fresh-start
accounting:
Cancellation of Predecessor equity ........... (20,149) (20,149) (306,273) 326,422 --
- --------------------------------------------------------------------------------------------------------------------------
Issuance of new shares pursuant to the Plan of
Reorganization............................. 4,000 400 (400) -- --
Fresh-start accounting valuation adjustments.. -- -- 2,657 -- 2,657
------------ ----------- ----------- ------------ -------------
Balance at March 31, 1997................... 4,000 400 5,747 -- 6,147
Net loss for three months ended June 30, 1997.... -- -- -- (86) (86)
------------ ----------- ----------- ------------ -------------
Balance at June 30, 1997................... 4,000 400 5,747 (86) 6,061
Net income for year ended June 30, 1998.......... -- -- -- 47 47
Utilization of tax benefits of pre-reorganization
net operating loss carryforwards and
deductible temporary difference............. -- -- 25 -- 25
Issuance of stock options........................ -- -- 10 -- 10
------------ ----------- ----------- ------------ -------------
Balance at June 30, 1998................... 4,000 $ 400 $ 5,782 $ (39) $ 6,143
============ =========== =========== ============ =============
</TABLE>
See notes to consolidated financial statements.
-24-
<PAGE> 25
STATEMENT OF CONSOLIDATED CASH FLOWS
SIENA HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
---------------------------- -----------------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
--------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss)............................................... $ 47 $ (86) $ 123,055 $ (250,591)
Adjustments to reconcile income (loss) from operations to
cash provided by operations before working capital changes:
Federal income tax expense charged to other paid-in
capital due to the utilization of pre-reorganization
tax attributes .......................................... 25 -- -- --
Compensation expense for stock options...................... 10 -- -- --
Gain on sale................................................ (20) -- -- --
Extraordinary gain on discharge of debt..................... -- -- (135,966) --
Loss from disposal or sale of assets........................ -- -- 3,718 188,691
Depreciation and amortization............................... -- -- 106 17,358
Provision for losses........................................ -- -- -- 31,114
Reorganization items:
Claims in excess of recorded prepetition liabilities...... -- -- 3,454 --
Write off of unamortized debt issuance cost............... -- -- -- 6,571
Write off of net deferred debits on interest rate swap.... -- -- -- 9,115
-------------- ------------ --------------- -------------
Cash provided (used) by operations before working
capital changes....................................... 62 (86) (5,633) 2,258
Net change in first mortgage loans held or sale................. -- -- -- 345,278
Net change in sundry receivables, payables and other assets..... 452 27 (1,601) (29,859)
--------------- ------------ --------------- -------------
Net cash provided (used) by operating activities......... 514 (59) (7,234) 317,677
--------------- ------------ --------------- -------------
Investing activities:
Purchases of investments........................................ -- -- (12,383) (31,417)
Maturities / sales of investments............................... 20 -- -- 283,012
Net collections of mortgage notes receivable.................... -- -- -- 2,214
Purchases of loans from pools................................... -- -- -- (4,283)
Net sales of foreclosed real estate............................. -- -- 276 13,993
Net sales of fixed assets...................................... -- -- 25,374 3,708
Net purchases of future mortgage servicing income rights........ -- -- -- (2,264)
Proceeds from LMUSA assets sold to First Nationwide............. -- -- 6,160 185,750
Proceeds from settlement of intercompany dispute with
LMUSA......................................................... -- -- 6,754 --
Transfer to Litigation Trust pursuant to intercompany
agreement..................................................... -- -- (3,000) --
LMUSA cash balance at date of distribution...................... -- -- (191,557) --
Transfer of cash to LFC Creditors' Trust for payment of
claims and other liabilities pursuant to reorganization
plan.......................................................... -- -- (8,558) --
--------------- ------------ --------------- -------------
Net cash provided (used) by investing activities......... 20 -- (176,934) 450,713
--------------- ------------ --------------- -------------
</TABLE>
-25-
<PAGE> 26
STATEMENT OF CONSOLIDATED CASH FLOWS
(CONTINUED)
SIENA HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
---------------------------- ----------------------------
Three Month Nine Month
Period Ended Period Ended Year Ended
Year Ended June 30, March 31, June 30,
June 30, 1998 1997 1997 1996
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Financing activities:
Net borrowings (repayments) of notes payable........... $ -- $ -- $ -- $ (591,089)
Term debt repayments................................... -- -- (11,632) (1,011)
-------------- ------------ -------------- ------------
Net cash provided (used) by financing activities. -- -- (11,632) (592,100)
-------------- ------------ -------------- ------------
Net increase (decrease) in cash and cash equivalents...... 534 (59) (195,800) 176,290
Cash and cash equivalents at beginning of period.......... 1,941 2,000 197,800 21,510
-------------- ------------ -------------- ------------
Cash and cash equivalents at end of period................ $ 2,475 $ 1,941 $ 2,000 $ 197,800
============== ============ ============== ============
Cash payments for:
Interest............................................... -- -- -- $ 12,727
Federal income tax..................................... -- -- -- --
Non-cash transactions:
Issuance of stock options............................ $ 10 -- -- --
</TABLE>
See notes to consolidated financial statements.
-26-
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIENA HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY LOMAS FINANCIAL CORPORATION AND SUBSIDIARIES)
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation. The consolidated
financial statements include the accounts of Siena Holdings, Corp. ("SHI"),
formerly Lomas Financial Corporation ("LFC"), and its subsidiaries
(collectively, the "Company"). SHI's wholly-owned, principal subsidiaries are
Siena Housing Management Corp. and LLG Lands, Inc.. Prior to October 1, 1996,
SHI's wholly-owned, principal subsidiary was Lomas Mortgage USA, Inc. ("LMUSA"),
now known as Nomas Corp.("Nomas"). As a result of the confirmation of LMUSA's
Chapter 11 reorganization plan (see "Reorganization" footnote), the Company's
interest in LMUSA was extinguished effective October 1, 1996. LFC's plan of
reorganization was confirmed on October 4, 1996, but not effective until March
1997.
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code", the Company adopted fresh-start accounting as of
March 31, 1997, after all material conditions required by the Plan were
satisfied (see "Fresh-Start Reporting" footnote). Since April 1, 1997, the
Company's financial statements have been prepared as if it is a new reporting
entity and a vertical black line has been placed to separate post-reorganization
operating results (the "Reorganized Company") from pre-reorganization operating
results (the "Predecessor Company") since they are not prepared on a comparable
basis. Under fresh-start accounting, all assets and liabilities were restated to
reflect their reorganization value, which approximated fair value at the date of
reorganization. Significant intercompany balances and transactions have been
eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand
and investments with original maturities of three months or less.
First Mortgage Loans Held for Sale. First mortgage loans held for sale
were carried at the lower of cost or market determined on a net aggregate basis
by the Predecessor Company. Adjustments to market were made by charges or
credits to income.
Gains and Losses on Sale of Mortgage Loans. Gains or losses on sales of
mortgage loans were recognized by the Predecessor Company 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, were recognized at the time
of sale in the gain or loss determination.
Investment in Real Estate. Real estate is carried at the fresh-start
reporting value as of March 31, 1997. The Company continually monitors the value
of the real estate based on estimates of future cash flows. Any amounts deemed
to be impaired are charged, in the period in which such impairment was
determined. For the year ended June 30, 1998 and the three month period ended
June 30, 1997, there were no charges to earnings for impairment of the real
estate.
Fixed Assets. Fixed assets included land, buildings, furniture and
fixtures and other equipment and were carried at amortized cost by the
Predecessor Company. Fixed assets that were anticipated to be disposed of were
carried at estimated fair value net of estimated selling costs. Depreciation was
computed on the straight line method over the estimated useful lives of the
related assets.
Purchased Future Mortgage Servicing Income Rights. Purchased future
mortgage servicing income rights ("PMSR's") represented the portion of the
purchase price of mortgage servicing portfolios acquired from others by the
Predecessor Company and allocated to future net servicing income to be derived
from servicing such mortgages.
-27-
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Predecessor Company periodically monitored its servicing portfolio to
determine if adjustments should be made to its amortization schedules or
carrying values of its PMSR'S due to changes in interest rates, current
prepayment rates, expected future prepayment rates and certain other factors.
The amortization and impairment analyses were performed for individual mortgage
tranches with similar economic characteristics on an undiscounted basis and
adjusted as required. The Predecessor Company amortized the capitalized PMSR'S
in proportion to, and over the period of, the estimated net servicing income.
The expected life of the estimated net servicing income was based on the
expected prepayment rates of the underlying mortgages within the tranches.
Sales of Servicing Rights. The Predecessor Company recognized gain or loss
on the sales of servicing rights when all risks and rewards were irrevocably
passed to the purchasers and there were no unresolved contingencies.
Mortgage Servicing. Fees received by the Predecessor Company for servicing
mortgage loans owned by investors were generally based on a stipulated
percentage of the outstanding monthly principal balance of such loans and were
payable only out of interest collected from mortgagors. Servicing fees, late
charges and miscellaneous other fees collected from mortgagors and others were
recognized as income when collected. Servicing costs were charged to expense as
incurred. In addition, the Predecessor Company performed mortgage servicing on a
subcontract basis for other parties who owned the servicing rights. Subservicing
fees were usually agreed to be paid on a per-loan basis calculated as an annual
dollar amount paid monthly.
Reverse Interest Rate Swap Agreements. The Predecessor 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 reduced the
exposure of the Company, as a whole, to changes in interest rates were
designated as hedges of the Company's fixed rate debt and treated as hedges of
the debt. Swap agreements that did not reduce the Company's exposure to changes
in interest rates were not considered to be hedges. The interest differential to
be paid or received on swap agreements that were treated as hedges was 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 were recognized over the remaining term of the
swap agreement. Interest rate swaps that were not considered hedges, and losses
where the fixed rate debt associated with the swap was reduced below the
notional amount of the swap, were 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.
Assisted Care Facility Management Fee. The Company, through its
wholly-owned subsidiary Siena Housing Management Corp. ("SHM"), manages and
maintains an assisted care facility in Houston, Texas under a management
agreement into which it entered on June 27, 1977 with Treemont, Inc.
("Treemont"). SHM is entitled to receive a fee under the agreement which,
subject to a required annual priority distribution of project net income to
Treemont 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.
The compensation expense and primarily all operating expenses of SHM's
employees who provide services at the assisted care facility are funded directly
by the assisted care facility owner thus not reflected in the Consolidated
Statement of Operations, except indirectly through the management fee income
received by SHM based in part on the facility's net income. The exception is the
compensation for the operations manager of the facility which is funded directly
by SHM and included in personnel expense on the Company's Consolidated Statement
of Operations.
The Treemont management agreement is not shown as an asset on the balance
sheet of the Reorganized Company because there can be no assurance that the
contract will continue in effect for an extended period and the uncertainties
inherent in the projected earnings of the facilities.
-28-
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Federal Income Taxes. Income taxes have been provided in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". Under SFAS No. 109, the deferred tax assets and 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 forwards and
enacted tax rates that will be in effect for the years in which the differences
are expected to reverse. Under fresh-start reporting, benefits realized in the
consolidated income tax return from the utilization of pre-reorganization net
operating loss carryforwards and recognition of pre-reorganization deductible
temporary differences existing at the date of confirmation of the Joint Plan are
reported as direct additions to other paid-in capital.
Escrow, Agency and Fiduciary Funds. The Predecessor Company maintained
certain cash balances on behalf of its servicing customers and investors as part
of its servicing operations. These funds were held in trust in segregated,
generally noninterest bearing, bank accounts and were excluded from the
corporate assets and liabilities of the Predecessor Company.
Earnings (Loss) Per Share. During the fiscal year ended June 30, 1998, the
Company adopted SFAS No. 128, "Earnings Per Share," which replaces the
presentation of primary earnings per share ("EPS") with a presentation of basic
EPS and requires dual presentation of basic and diluted EPS. SFAS No. 128 is
effective for both interim and annual financial statements issued after December
15, 1997. The Company retroactively applied SFAS No. 128 to the three month
period ended June 30, 1997. Earnings per share information for the Predecessor
Company is not presented because the revision of the Company's capital structure
pursuant to the Plan of Reorganization makes such information not meaningful.
Adoption of SFAS No. 128 did not have a material impact on the earnings (loss)
per share.
Earnings per share for the year ended June 30, 1998 and the three month
period ended June 30, 1997 were determined using the weighted average shares
issued or reserved for issuance as of June 30, 1998 and 1997, respectively. The
effects of outstanding options are included in the calculation of diluted
earnings per common share to the extent that they are dilutive to earnings.
-29-
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a reconciliation of net income applicable to common stock
as well as common stock used to compute basic and diluted earnings (loss) per
share for the periods presented:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------------------ ------------------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME APPLICABLE TO
COMMON STOCK:
Basic net income applicable to common stock:
Income (loss) applicable to common stockholders
before extraordinary item...................... $ 47 $ (86) $ (12,911)$ (250,591)
Extraordinary gain on discharge of debt........... -- -- 135,966 --
-------------- --------------- --------------- --------------
Net income (loss) applicable to common
stockholders................................... $ 47 $ (86) $ 123,055 $ (250,591)
============== =============== =============== ==============
Diluted net income applicable to common stock:
Income (loss) applicable to common stockholders
before extraordinary item...................... $ 47 $ (86) $ (12,911)$ (250,591)
Income effect of assumed conversions.............. -- -- -- --
-------------- --------------- --------------- --------------
Income (loss) available to common stockholders
+ assumed conversions.......................... 47 (86) (12,911) (250,591)
Extraordinary gain on discharge of debt........... -- -- 135,966 --
-------------- --------------- --------------- --------------
Net income (loss) available to common
stockholders + assumed conversions............. $ 47 $ (86) $ 123,055 $ (250,591)
============== =============== =============== ==============
RECONCILIATION OF WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic shares of common stock:
Weighted average common shares outstanding........ 4,000* 4,000* ** **
Diluted shares of common stock:
Weighted average common shares outstanding........ 4,000* 4,000* ** **
Plus: Dilutive potential common shares
SHI Nonqualified Stock Option Plan....... 44* -- * ** **
-------------- --------------- --------------- --------------
Adjusted weighted average shares outstanding...... 4,044* 4,000* ** **
============== =============== =============== ==============
</TABLE>
* Based on shares issued or reserved for issuance to creditors.
** Number of shares not meaningful due to reorganization.
Stock-Based Compensation. The Company has adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation". This
statement provides a choice for the accounting of employee stock compensation
plans. A company may elect to use a new fair-value methodology, under which
compensation cost is measured and recognized in the Statement of Consolidated
Operations, or continue to account for these plans under Accounting Principles
Bulletin ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The
-30-
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company has elected to continue to account for these plans under APB No. 25. The
"Stock and Compensation Plans" footnote contains a summary of the pro forma
effects to reported net income applicable to common stock and earnings (loss)
per share for the year ended June 30, 1998 and the three months ended June 30,
1997, as if the Company had elected to account for employee stock compensation
plans utilizing the fair value methodology prescribed by SFAS No.
123.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Accounting Pronouncements Not Yet Adopted. In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 is effective for annual and interim periods
beginning after December 15, 1997. This statement establishes standards for
reporting and displaying comprehensive income and its components and requires
all items to be recognized under accounting standards as comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The only item the Company currently has that would
be included in the Company's presentation of comprehensive income, in addition
to net income applicable to common stock, is the benefit realized from the
utilization of pre-reorganization tax attributes. The Company will adopt the
provisions of SFAS No. 130 in fiscal 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997 by the FASB. This statement requires
that companies disclose segment data on the basis that it is used internally by
management for evaluating segment performance and allocating resources to
segments. This statement requires that a company report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets.
It also requires various reconciliations of total segment information to amounts
in the consolidated financial statements. The Company's current definition of
its business segments will not materially change from the current presentation.
SFAS No. 131 is effective for fiscal years beginning after December 31, 1997,
thus the Company will adopt this statement in fiscal 1999.
Reclassifications. Certain reclassifications have been made to prior
years' and prior quarters' financial statements to conform to the 1998
presentation.
REORGANIZATION
On October 10, 1995, Lomas Financial Corporation ("LFC"), two subsidiaries
of LFC and Lomas Mortgage USA ("LMUSA") (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 were Lomas Information Systems, Inc. ("LIS") and Lomas
Administrative Services, Inc. ("LAS"). The Chapter 11 cases were jointly
administered until October 1, 1996. The Debtor Corporations managed 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") from October 10, 1995 through October 4, 1996.
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. An
order confirming the second amended joint plan of reorganization filed on
October
-31-
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4, 1996 and a stipulation and order among the Joint Debtors and the LFC
Creditors' Committee regarding technical modifications to plan of reorganization
and confirmation order filed on January 27, 1997 together with the second
amended joint plan of reorganization filed on July 3, 1996 are collectively
referred to herein as 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 LMUSA Plan was confirmed by the Bankruptcy Court on October 1, 1996
and LMUSA was discharged from the bankruptcy case, and changed its name to Nomas
Corp. As a result of LMUSA's reorganization plan, LFC distributed its interest
in LMUSA to LMUSA's creditors as of October 1, 1996. This distribution decreased
the Company's assets and liabilities by $293.3 million and $419.4 million,
respectively, and stockholders' equity was increased by $126.1 million. The
operations of LMUSA are included in the Statement of Consolidated Operations and
the Statement of Consolidated Cash Flows through the date of distribution of
LMUSA.
The Joint Plan was confirmed on October 4, 1996, by the Bankruptcy Court.
The Joint Plan's effectiveness was conditioned on the satisfaction, or waiver by
the LFC Creditors' Committee, of certain conditions. On January 23, 1997, the
LFC Creditors' Committee and the LMUSA Creditors' Committee signed an agreement
in respect of intercompany claims (the "Intercompany Agreement"), filed as an
exhibit to the Company's annual report on Form 10-K for the year ended June 30,
1997. The Intercompany Agreement was approved by the Bankruptcy Court on
February 21, 1997, resulting in the transfer of assets and writeoff of
receivables and payables with a net increase in retained earnings of $16.8
million on the effective date of March 7, 1997.
Additionally, the Company transferred $3 million in cash to partially fund
a litigation trust to pursue third-party claims pursuant to the LFC/LMUSA joint
litigation trust agreement among LFC and its subsidiaries and LMUSA, dated March
6, 1997 (the "LFC/LMUSA Litigation Trust"), filed as an exhibit to the Company's
annual report on Form 10-K for the year ended June 30, 1997. Subject to certain
exceptions in the Intercompany Agreement, the LFC Creditors' Trust (as defined
herein) and the creditors' trust established pursuant to the LMUSA Plan will
receive sixty and forty percent, respectively, of net proceeds from litigation.
There can be no assurance that the LFC/LMUSA Litigation Trust will produce any
proceeds which will benefit the Creditors Trust and former creditors. The LFC
Creditors' Committee waived all other conditions and the Joint Plan became
effective March 7, 1997 and the Company emerged with a new name, Siena Holdings,
Inc.
Under the terms of the Joint Plan, the amount of allowed and disputed
priority, convenience and unsecured claims totaled $155.8 million. This exceeded
the amount of prepetition liabilities recorded on the Company's financial
statements by $3.5 million, which was a charge to Reorganization Items - Net on
the Company's Statement of Consolidated Operations for the period ended March
31, 1997. Of the increase in the prepetition liabilities, $3.0 million related
to Management Security Plan claims (see the "Management Security Plan"
footnote).
-32-
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the claims, excluding administrative, as of
the initial distribution date (in thousands):
<TABLE>
<S> <C>
Priority LIS claims - allowed.............................. $ 234
Convenience claims - allowed................................ 1
Unsecured Class 3 claims -
Bondholders - allowed.................................. 145,433
Other claims - allowed................................. 1,366
MSP claims - disputed....................................... 8,803
----------
$ 155,837
==========
</TABLE>
Pursuant to the Joint Plan, the Class 3 unsecured creditors receive a
combination of cash and new common stock as settlement of their allowed claim.
On November 12, 1997, the initial distribution date (the "Initial Distribution
Date"), $12.5 million was disbursed to the distribution agent for the Class 3
unsecured creditors. On May 11, 1998, a second distribution in the amount of
$6.2 million was disbursed to the distribution agent for benefit of the Class 3
unsecured creditors. In addition, as assets in the Creditors' Trust (see
"Creditors' Trust" footnote) are liquidated, additional distributions will be
made to the Class 3 unsecured creditors. Also, on the Initial Distribution Date
pursuant to the Joint Plan and a decision by the LFC Creditors' Committee,
4,000,000 shares of the new common stock were issued to the stock distribution
agent. For balance sheet presentation and earnings (loss) per share, the
4,000,000 shares were considered issued as of April 1, 1997. The process by the
stock distribution agent has resulted in 3,781,298 shares of common stock
actually distributed to former creditors through June 30, 1998. The Company
expects the stock distribution agent to complete the issuance of the remaining
shares within three years of the Initial Distribution Date.
The 4,000,000 shares of the new common stock are restricted if the effect
of a transfer would result in an ownership increase to 4.5 percent or above of
the total outstanding shares or from 4.5 percent to a greater percentage of the
total outstanding shares, without prior approval by the board of directors as
described in the restated certificate of incorporation.
The amounts ultimately distributed to the former creditors will be solely
dependent on the success of the Company, the amounts realized from the
collection of assets and the settlement of liabilities for both the Creditors'
Trust and the LFC/LMUSA Litigation Trust. See "Creditors' Trust" footnote.
The LFC Creditors Trust and any proceeds from the LFC/LMUSA Litigation
Trust are solely for the benefit of the former creditors of the Joint Debtors.
Stockholders will not benefit from these trusts unless they held Class 3 -
general unsecured claims as defined in the Joint Plan. See "Creditors' Trust"
footnote.
FRESH-START REPORTING
In accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", the Company was required to adopt
fresh-start accounting as of March 31, 1997, after all material conditions
required by the Plan were satisfied. The delay in the adoption of fresh-start
accounting was due to uncertainties surrounding the resolution of claims and
intercompany disputes between the LMUSA Creditors' Committee and the LFC
Creditors' Committee. The Company was required to adopt fresh-start reporting
because the holders of the existing voting shares immediately prior to filing
and confirmation of the Plan received less than 50% of the voting shares of the
emerging entity and its reorganization value was less than the total of its
post-petition liabilities and allowed claims.
In accordance with fresh-start accounting, the gain on discharge of debt
resulting from the bankruptcy proceedings was reflected on the predecessor
Company's financial statements for the period ended March 31, 1997. In addition,
the accumulated deficit of the predecessor Company at March 31, 1997 was
eliminated, and, at April 1, 1997, the reorganized Company's financial
statements reflected no beginning retained earnings or deficit. Since April 1,
1997, the Company's financial statements have been prepared as if it is a new
reporting entity and a vertical black line has
-33-
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
been placed to separate pre-reorganization operating results (the "Predecessor
Company") from post-reorganization operating (the "Reorganized Company") results
since they are not prepared on a comparable basis.
Under fresh-start accounting, all assets and liabilities were restated to
reflect their reorganization value, which approximated fair value at the date of
reorganization. The Company's management and representatives of the creditors'
committee concluded that, based on the fact that the Company has historically
incurred losses from operations and has projected minimal future operating
profits, the reorganization value of the Company (the fair value of the Company
before considering liabilities) was equivalent to the fair value of the
Company's tangible assets and that no other intrinsic value existed. As a
result, all assets and liabilities have been stated at their fair value.
The effect of the plan of reorganization on the Company's Consolidated
Balance Sheet as of March 31, 1997 is as follows (in dollars in thousands):
<TABLE>
<CAPTION>
Pre- Adjustments Fresh-Start
reorganization to Record Accounting Reorganized
Balance Sheet Plan of Valuation Balance Sheet
March 31, 1997 Reorganization * Adjustments April 1, 1997
---------------- ----------------- --------------- ---------------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents................ $ 10,559 $ (8,559) $ -- $ 2,000
Investments.............................. 13,338 (13,338) -- --
Receivables - net........................ 4,186 (4,038) -- 148
Investment in real estate................ 2,143 -- 2,657 4,800
---------------- ----------------- --------------- ---------------
19,667 (17,376) 2,657 4,948
Allowance for losses..................... (3,828) 3,828 -- --
---------------- ----------------- --------------- ---------------
15,839 (13,548) 2,657 4,948
Prepaid expenses and other assets........ 336 (218) -- 118
---------------- ----------------- --------------- ---------------
$ 26,734 $ (22,325) $ 2,657 $ 7,066
================ ================= =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued expenses.... $ 3,373 $ (2,454) $ -- $ 919
Liabilities subject to Chapter 11
proceedings ........................... 155,837 (155,837) -- --
---------------- ----------------- --------------- ---------------
159,210 (158,291) -- 919
---------------- ----------------- --------------- ---------------
Stockholders' Equity (Deficit):
Common stock............................. 20,149 -- (19,749) 400
Preferred stock.......................... -- -- -- --
Other paid-in capital.................... 309,763 -- (304,016) 5,747
Retained earnings (deficit).............. (462,388) 135,966 326,422 --
---------------- ----------------- --------------- ---------------
(132,476) 135,966 2,657 6,147
---------------- ----------------- --------------- ---------------
$ 26,734 $ (22,325) $ 2,657 $ 7,066
================ ================= =============== ===============
</TABLE>
* The adjustments to record the plan of reorganization includes the transfer of
assets and liabilities to the Creditors' Trust (see "Creditors' Trust"
footnote).
-34-
<PAGE> 35
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 Statement of Consolidated Operations and include the
following (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Year Ended Ended Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C>
Interest earned on cash accumulated............... $ -- $ -- $ (3,049) $ (8,691)
Write off of unamortized debt issuance cost....... -- -- -- 6,571
Write off of deferred interest swap debits........ -- -- -- 9,115
Professional fees................................. -- -- 6,911 13,605
Adjustment to liabilities for allowed or
disputed claims:
MSP claims.................................. -- -- 3,048 --
Other....................................... -- -- 406 --
Other............................................. -- -- 131 581
-------------- -------------- -------------- --------------
$ -- $ -- $ 7,447 $ 21,181
============== ============== ============== ==============
</TABLE>
CREDITORS' TRUST
The Joint Plan established a creditors' trust (the "Creditors' Trust")
which the Company serves as trustee. The Creditors' Trust holds the
nonreorganized assets of the Company in trust pending their disposition and/or
distribution to creditors in accordance with the terms of the Joint Plan. The
Creditors' Trust is organized for the sole purpose of liquidating the
non-reorganized assets and will terminate on October 4, 2001 unless an extension
is approved by the Bankruptcy Court. The assets and liabilities of the
Creditors' Trust are not reflected in the accompanying Consolidated Balance
Sheet as the Company is not the beneficiary of the Trust. Accordingly, revenues
and expenses related to the Creditors' Trust assets and liabilities since April
1, 1997, are not reflected in the accompanying Statement of Consolidated
Operations. The allocation of costs between the Creditors' Trust and the Company
is based on management's estimate of each entity's proportional share of costs.
Gains and losses from the Creditors' Trust are solely for the former creditors'
benefit and the Company has no risk of loss on the assets or liabilities. The
amounts ultimately distributed to the former creditors will be solely dependent
on the success of the Company, the amounts realized from the collection of
assets and the settlement of liabilities for both the Creditors' Trust and the
LFC/LMUSA Litigation Trust. Stockholders who are not former creditors of the
Joint Debtors are not beneficiaries of the Creditors' Trust.
There can be no assurance that the LFC/LMUSA Litigation Trust will produce
any proceeds which will benefit the Creditors' Trust and the former creditors.
-35-
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the nonreorganized assets and liabilities
held in the Creditors' Trust as of June 30, 1998 carried at the estimated fair
value (in thousands) (unaudited):
<TABLE>
<S> <C>
Cash held in reserve for payment of administrative expenses and other trust liabilities . $ 380
Accounts payable and accrued expenses.................................................... (172)
--------------
Cash available for future trust expenses *........................................ $ 208
==============
Cash held in reserve for payment of certain claims....................................... $ 82
==============
Net assets of the Creditors' Trust:
Cash .............................................................................. $ 858
Cash reserved for contingent obligations........................................... 3,500
Investments:
Cash in the MSP Trust available pursuant to approved settlement agreement .... 4,085
Two limited partnerships which fund institutional mortgage loans.............. 460
Other......................................................................... 20
--------------
Total investments....................................................... 4,565
--------------
Net assets of the Creditors' Trust..................................... $ 8,923
==============
</TABLE>
*Pursuant to the Joint Plan, an additional $300,000 of cash has been set aside
during the year ended June 30, 1998, for the payment of additional Creditors'
Trust expenses.
The Company charged to the Creditors' Trust expenses of $796,000 and
$42,000 for the year ended June 30, 1998 and the three month period ended June
30, 1997, respectively, reported as trust expense reimbursement on the Company's
Statement of Consolidated Operations. The expenses for fiscal 1998 include
$492,000 of success bonuses as discussed in the following paragraph. The
remainder of the expense reimbursement from the Creditors' Trust for both years
consisted of an overhead allocation from the Company, based upon management's
estimate of resources used by the Creditors' Trust. The allocation of overhead
to the Creditors' Trust is expected to decrease significantly during fiscal year
1999.
On January 14, 1998, the Creditors' Trust received $8.1 million pursuant
to the negotiated final settlement of a subordinated promissory note. The
Company as trustee began negotiations early in 1997. The Bankruptcy Court
approved the settlement on December 29, 1997. The settlement provided the
Creditors' Trust with a gain of $5.9 million. This gain was recognized for
income tax purposes in April 1997 upon the transfer of the promissory note from
the Company to the Creditors' Trust. Pursuant to certain retention agreements,
the SHI Board of Directors approved a bonus payable to the executive officers of
the Company based on the cash received by the Creditors' Trust in excess of the
book value. The Company received $590,000 in May 1998 for the bonus pool from
the $8.1 million proceeds received by the Creditors' Trust. The Board of
Directors approved an aggregate bonus amount of $492,000 for the executive
officers. One payment was made in May 1998 and the other officer elected not to
receive the payment at this time, thus a payable of $295,000 is included in
accounts payable and accrued expenses on the Company's Consolidated Balance
Sheet as of June 30, 1998. Based on the same bonus criteria but subject to
shareholder approval, $98,000 remains payable to the directors. See "Stock and
Compensation Plans" and "Accounts Payable and Accrued Expenses" footnotes.
On July 10, 1998, the Creditors' Trust received $4.085 million pursuant to
a final settlement of the net assets in the MSP Trust approved by a federal
district court on July 1, 1998. The court approved settlement procedures for the
Creditors' Trust and the MSP beneficiaries to equally share the assets remaining
in the trust after payment of certain legal expenses and MSP trust fees, in the
amount of $0.4 million. See "Management Security Plan" footnote.
-36-
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A cash reserve for contingent obligations in the amount of $3.5 million
has been established in the Creditors' Trust as of June 30, 1998. The reserve
includes $1.0 million for a contingent liability to SHI related to insurance
retention, $1.0 million for additional legal expense related to the LFC/LMUSA
Litigation Trust and $1.5 million for other legal and administrative expenses.
See "Contingent Liabilities" footnote.
The LFC Creditors' Trust and any proceeds from the LFC/LMUSA Litigation
Trust are solely for the benefit of the former creditors of the Joint Debtors.
Stockholders will not benefit from these trusts unless they held Class 3 general
unsecured claims as defined in the Joint Plan. See "Reorganization" footnote.
INVESTMENT IN REAL ESTATE
The Company's investment in real estate in the amount of $4.8 million
as of June 30, 1998 and June 30, 1997, is owned by LLG Lands, Inc. ("LLG"), a
wholly-owned subsidiary of the Company. The property currently owned was
transferred back to LLG by LMUSA as a result of the intercompany settlement
process in March 1997 (see "Reorganization" footnote). For fresh-start
reporting, the land was valued by an independent third party using a discounted
cash flow method of future projected proceeds.
The real property consists of 179.4 acres (approximately 147.2 acres net
of right-of-way and flood plain) of unimproved land in Allen, Texas (the "Allen
property"). The southern boundary of the Allen property is the recently
constructed Exchange Parkway, which provides access to the property from Central
Expressway on the west and from Highway 5 on the east. The Allen property
includes five tracts of land: one tract of approximately 36.5 net acres zoned
multi-family, two tracts of approximately 85.5 net acres zoned single-family and
two tracts of approximately 25.2 net acres zoned commercial. The City of Allen
recently completed the construction of a city park off of Exchange Parkway near
the multi-family tract.
The Company has reviewed the real estate interests held in its subsidiary
LLG Lands, Inc. and has begun to market the property zoned for multi-family use,
approximately 36.5 net acres. The Company will attempt to increase the values of
the property through the re-zoning of the single family tracts and the
multi-family tract to light industrial and multi-family. The re-zoning will
relocate the multi-family tract. The re-zoning is subject to significant
municipal review and there can be no assurance that the re-zoning request will
be approved. Management of the Company intends to market or develop the property
over an estimated period of three to five years.
RECEIVABLES
Receivables consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
---------------- ---------------
<S> <C> <C>
Management fees receivable - assisted care facility..................... $ 119 $ 240
Accrued interest........................................................ -- 2
---------------- ---------------
$ 119 $ 242
================ ===============
</TABLE>
The Company, through its wholly-owned subsidiary Siena Housing Management
Corp. ("SHM"), manages and maintains an assisted care facility in Houston, Texas
under a management agreement into which it entered on June 27, 1977 with
Treemont, Inc. ("Treemont"). SHM is entitled to receive a fee under the
agreement which, subject to a required annual priority distribution of project
net income to Treemont 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.
Treemont elected to begin significant capital improvements for fire
protection that have been funded by operations. These expenditures decreased the
quarterly management fee received by SHM beginning with the second quarter of
fiscal year 1998 and are complete except for cosmetic and other details that
should be finished in the first quarter of fiscal year 1999. Also, on December
31, 1997, Treemont discontinued the reimbursement of pension benefits paid to
the employees of SHM. This reduction in Treemont's pension plan expense
increases the facility's net income thereby
-37-
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
increasing the Company's management fee. This reduces the effect of the capital
expenditures on SHM's revenue during fiscal year 1998.
SHM 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 can only terminate the agreement
for cause or if Treemont fails to receive its required annual priority
distribution for two consecutive years. SHM 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 owners of Treemont have
recently contacted the Company's management and requested a legal review of the
contract as they believe certain parts of the contract are illegal. The Company
does not believe that the review will result in a change in the terms. The
agreement is substantially secured at this time by the Treemont property in
Houston. The Treemont management agreement is not shown as an asset on the
balance sheet of the Reorganized Company because there can be no assurance that
the contract will continue in effect for an extended period and the
uncertainties inherent in the projected earnings of the facilities.
ALLOWANCE FOR LOSSES
Activity in the allowance account was as follows (in thousands):
<TABLE>
<CAPTION>
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
$ -- $ -- $ 24,821 $ 32,394
Provision for losses........................... -- -- -- 31,114
Charge-offs or write downs..................... -- -- (483) (48,884)
Recoveries..................................... -- -- -- 9,290
Distribution of LMUSA to LMUSA creditors....... -- -- (20,510) --
Fresh-start valuation adjustment............... -- -- (3,828) --
Other changes - net............................ -- -- -- 907
------------- ------------- -------------- -------------
$ -- $ -- $ -- $ 24,821
============= ============= ============== =============
</TABLE>
The provision for losses for the year ended June 30, 1996 was $31.1
million, consisting of $12.6 million for the reduction in the carrying value of
Company-owned land and buildings, $6.6 provision for loss on swaps, $5.2 million
provision for mortgage servicing related receivables and other assets, $4.9
million for the reduction in the carrying values of furniture and equipment,
$3.1 million provision for the RIS note receivable and a miscellaneous credit of
$1.3 million.
-38-
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Purchased Future Mortgage Servicing Income Rights
The purchased future mortgage servicing rights ("PMSR's") recorded by the
Company through LMUSA 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 recorded through the loss on disposal or sale on the Statement of
Consolidated Operations.
Changes in PMSR'S were as follows (in thousands):
<TABLE>
<CAPTION>
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Beginning balance........................... $ -- $ -- $ -- $ 346,958
Additions................................... -- -- -- 13,711
Sales and write-offs........................ -- -- -- (346,543)
Amortization................................ -- -- -- (14,126)
-------------- -------------- -------------- ---------------
Ending balance.............................. $ -- $ -- $ -- $ --
============== ============== ============== ===============
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
--------------- ----------------
<S> <C> <C>
Accrued medical insurance premiums - current portion.......... $ 63 $ 58
Accounts payable - Executive Officer.......................... 295 --
Deferred revenue - Bonus for Directors ....................... 98 --
Accrued compensation - Other ................................. 33 53
Other accounts payable and accrued expenses................... 105 105
--------------- ----------------
$ 594 $ 216
=============== ================
</TABLE>
At reorganization, the Company agreed to assume the pre-petition liability
to provide certain employees of a former subsidiary with medical insurance. As
of June 30, 1998 the Company was providing medical insurance to 25 retirees. The
total amount of the liability was estimated using a life expectancy age of 90,
an annual health care cost increase rate of approximately 5% and a discount rate
of approximately 6%. As of June 30, 1998 and 1997, the current portion of the
accrual for medical insurance premiums is $63,000 and $58,000, respectively, and
the long-term liability is $711,000 and $774,000, respectively.
Pursuant to certain retention agreements, the SHI Board of Directors
approved a bonus payable to the executive officers of the Company based on cash
received by the Creditors' Trust in excess of the book value upon liquidation of
a subordinated promissory note held in the Creditors' Trust. The Company
received $590,000 in May 1998 for the bonus pool from the proceeds received by
the Creditors' Trust. The Board of Directors approved an aggregate bonus amount
of $492,000 for the executive officers. One payment was made in May 1998 and the
other officer elected not to receive the payment at this time, thus it remains
as a payable in the amount of $295,000 as of June 30, 1998. Based on the same
bonus criteria but subject to shareholder approval, $98,000 remains payable to
the directors. See "Stock and Compensation Plans" and "Creditors' Trust"
footnotes.
Prior to the adoption of fresh-start reporting and recording the discharge
of debt on March 31, 1997, all prepetition liabilities were segregated on the
Consolidated Balance Sheet as Liabilities Subject to Chapter 11 Proceedings as a
result of the bankruptcy filing on October 10, 1995 (see "Fresh-Start Reporting"
and "Reorganization" footnotes). The Company ceased accruing and paying
corporate interest upon filing for bankruptcy
-39-
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on October 10, 1995, thus the average annual interest rates for the period ended
June 30, 1996 is not applicable. The Reorganized Company has not incurred or
paid interest.
CONTINGENT LIABILITIES
In March 1997, in connection with the settlement of the intercompany
claims, the Company transferred $3 million in cash to partially fund a
litigation trust to pursue third-party claims pursuant to the LFC/LMUSA
Litigation Trust Agreement. Subject to certain exceptions in the Intercompany
Agreement, the LFC Creditors' Trust and the creditors' trust established
pursuant to the LMUSA Plan will receive sixty and forty percent, respectively,
of net proceeds from litigation.
The LFC Creditors' Trust and any proceeds from the LFC/LMUSA Litigation
Trust are solely for the benefit of the former creditors of the Joint Debtors.
Stockholders will not benefit from these trusts unless they held Class 3 general
unsecured claims as defined in the Joint Plan. See "Reorganization" footnote.
In December 1997, the Company received a letter from the attorney of the
insurance company that carried the former directors and officers insurance
coverage, stating that there is a $1.0 million per claim retention which must be
completely exhausted before the insurance company is implicated. Management at
this time believes that the Company is not responsible for this retention amount
as a result of the Joint Plan.
FEDERAL INCOME TAXES
The Company in prior years filed a consolidated federal income tax return
as the common parent of a group of corporations which included LFC and its
subsidiaries as well as LMUSA and its subsidiaries. The LMUSA Plan of
Reorganization was confirmed by the United States Bankruptcy Court on October 1,
1996 and it immediately emerged with a new name, Nomas Corp. (see
"Reorganization" footnote). As a result of the LMUSA Plan, the Company ceased to
own any common stock of LMUSA and its subsidiaries as of October 1, 1996.
Accordingly, SHI and its subsidiaries thereafter no longer file a consolidated
federal income tax return with Nomas and its subsidiaries. SHI and its
subsidiaries will instead continue to file its own consolidated federal income
tax return for the periods ended June 30, 1998 and 1997. Various tax attributes,
including net operating loss carryforwards, have been allocated between the SHI
consolidated group and the Nomas consolidated group pursuant to Internal Revenue
Service consolidated return regulations and based upon the balances calculated
as of the date that LMUSA and its subsidiaries were deconsolidated from the
Company's consolidated group. All companies included in a consolidated federal
income tax return remain jointly and severally liable for any tax assessments
based on such consolidated returns.
Fresh-start reporting requires SHI and its subsidiaries to report federal
income tax expense when in a taxable position before utilization of any
pre-reorganization net operating loss carryforwards and recognition of any pre-
reorganization deductible temporary differences. Benefits realized in the
consolidated income tax return from utilization of pre-reorganization net
operating loss carryforwards and recognition of pre-reorganization deductible
temporary differences existing at the date of confirmation of the Plan are
reported as direct additions to paid-in capital under fresh- start reporting.
SHI and its subsidiaries reported a tax benefit of $25,000 as an addition
to paid-in capital for fiscal year ended June 30, 1998, resulting from
utilization of a portion of the Company's pre-reorganization net operating loss
carryforwards and deductible temporary differences.
SHI and its subsidiaries had no gross deferred tax liabilities and
approximately $95 million and $92 million in gross deferred tax assets as of
June 30, 1998 and 1997, respectively, subject to an offsetting valuation
allowance of approximately $95 million and $92 million, respectively.
Essentially all of this valuation allowance is considered to be attributable to
pre-reorganization tax attributes. Accordingly, future utilization of these
pre-reorganization tax attributes on a consolidated basis will result in
adjustments to paid-in capital.
-40-
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to current year activity, an adjustment of $3.7 million was
made to increase the balance of the deferred tax assets, with an equal
adjustment to the offsetting valuation allowance, to reflect additional net
operating loss carryforwards which were determined to be allocable to SHI and
its subsidiaries as a result of the deconsolidation of the former LFC group
during the fiscal year ended June 30, 1997.
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 reversal of any deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Management does
not believe that it is more likely than not that the Company will realize the
benefit of these deferred tax assets. Any such tax benefits subsequently
recognized related to the valuation allowance for pre-reorganization deferred
tax assets as of June 30, 1998 will be allocated to paid-in capital.
SHI and its subsidiaries had allocable consolidated tax net operating loss
carryforwards at June 30, 1998 totaling approximately $270 million. These net
operating loss carryforwards expire in the years 2003 through 2013.
Approximately $139 million of these net operating losses arose prior to the
previous 1991 reorganization of the LFC group and will therefore remain subject
to the annual limitations of Internal Revenue Code ("IRC")Section 382. At June
30, 1998, SHI and its subsidiaries had a cumulative unused Section 382
limitation of approximately $103 million, which represents the portion of the
$139 million of pre-1991 net operating loss carryforwards which may be utilized
currently by SHI and its subsidiaries under the restrictions of Section 382. The
remaining net operating losses of approximately $131 million arose subsequent to
the 1991 reorganization and are considered to come under the "bankruptcy
exception" of Section 382(1)(5) and are therefore not subject to the annual
limitations provided by Section 382(a).
All of the net operating loss carryforwards are subject to applicable
provisions of the IRC, and approximately $131 million of the total of $270
million of net operating loss carryforwards will expire if SHI undergoes another
change in ownership, within the meaning of Section 382, within the two year
period following the most recent ownership change resulting from the Plan of
Reorganization. The remaining $139 million of net operating loss will continue
to be subject to the annual limitation of IRC 382, and could be further limited
upon any subsequent ownership change.
-41-
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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>
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Tax expense (benefit) at statutory rate............ $ 25 $ (30) $ 43,069 $ (87,707)
Book/tax difference in loss reserves
attributable to sale of assets.................. 1,102 -- 2,253 --
Change in beginning-of-the-year balance
of valuation allowance for deferred tax
assets allocated to income taxes................ -- 30 (45,322* 105,216
Adjustment to net operating loss
carryforward to reflect actual allocation of
consolidated net operating loss to SHI.......... (3,699) -- -- --
Net operating loss for fiscal year ended
June 30, 1998.................................. (1,077) -- -- --
Change in valuation allowance for deferred
tax assets for current year activity and for
adjustment to net operating loss
carryforward................................... 3,674 -- -- --
Other.............................................. -- -- -- (17,509)
-------------- -------------- -------------- --------------
Actual tax expense............................ $ 25 $ -- $ -- $ --
============== ============== ============== ==============
</TABLE>
* The balance of the valuation allowance for deferred tax assets for the
period ended March 31, 1997 has been reduced by an additional $221,104
to reflect the reduction in net deferred tax assets attributable to the
distribution of LMUSA pursuant to the Plan of Reorganization. The
progression of the valuation allowance is as follows:
<TABLE>
<S> <C>
Valuation allowance at June 30, 1996 . ....................... $ (358,104)
Reduction attributable to the distribution of LMUSA........... 221,104
Change in valuation allowance for the period ending
March 31, 1997............................................. 45,322
----------
Valuation allowance at March 31, 1997......................... $ (91,678)
==========
</TABLE>
-42-
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1998 and 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Post-reorganization net operating loss carryover.. $ 30 $ 30 $ -- $ 234,946
Pre-reorganization net operating loss carryover... 94,726 89,950 89,950 110,950
Loss reserves..................................... 626 1,728 1,728 31,165
Employee benefits................................. -- -- -- 2,814
Partnership income............................... -- -- -- 315
Uniform capitalization expense................... -- -- -- 2,730
Miscellaneous assets............................. -- -- -- 145
---------------- --------------- --------------- --------------
Total gross deferred tax assets............... 95,382 91,708 91,678 383,065
Less valuation allowance.......................... (95,382) (91,708) (91,678)* (358,104)
---------------- --------------- --------------- --------------
Net deferred tax assets.................... -- -- -- 24,961
---------------- --------------- --------------- --------------
Deferred tax liabilities:
Pension overfunding............................... -- -- -- 4,800
Accelerated depreciation.......................... -- -- -- 18,524
Partnership loss.................................. -- -- -- 627
Miscellaneous liabilities......................... -- -- -- 1,010
---------------- --------------- --------------- --------------
Total gross deferred tax liabilities.......... -- -- -- 24,961
---------------- --------------- --------------- --------------
Net deferred tax liability................. $ -- $ -- $ -- $ --
================ =============== =============== ==============
</TABLE>
* See footnote detailing the progression of the valuation allowance at the end
of the previous table.
STOCKHOLDERS' EQUITY
As of June 30, 1998 and 1997, the Company had 15,000,000 shares of $.10
par value common stock (the "Reorganized Common Stock") authorized. Pursuant to
the Joint Plan and a decision by the LFC Creditors' Committee, 4,000,000 shares
of common stock were reserved for issuance on March 31, 1997 and ultimately
issued to the stock distribution agent on November 12, 1997. The process by the
stock distribution agent has resulted in 3,781,298 shares of common stock
actually distributed to former creditors through June 30, 1998. The Company
expects the stock distribution agent to complete the issuance of the remaining
shares within three years of the Initial Distribution Date. The Reorganized
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.
The Company, as of June 30, 1998 and 1997, had 1,000,000 shares of $1.00
par value preferred stock (the "Reorganized Preferred Stock") authorized, with 0
shares issued and outstanding.
SHI and its subsidiaries reported a tax benefit of $25,000 as an addition
to paid-in capital for fiscal year ended June 30, 1998, resulting from
utilization of a portion of the Company's pre-reorganization net operating loss
carryforwards and deductible temporary differences. Future utilization of these
pre-reorganization tax attributes on a consolidated basis will result in
adjustments to paid-in capital. See "Federal Income Taxes" footnote.
-43-
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the Predecessor Company's common stock (the "Predecessor Common
Stock"), warrants and stock options were canceled at reorganization on March 31,
1997.
STOCK AND COMPENSATION PLANS
Compensation Plan. Separate retention agreements (the "Retention
Agreements") were approved by the Board of Directors effective December 1, 1997,
for the Company's two executive officers, John P. Kneafsey - Chief Executive
Officer and W. Joseph Dryer - President. The Retention Agreements, with a five
year term, provide for the payment of: (1) a monthly retainer, (2) severance
upon early termination of the contract by the Company, and (3) a success bonus
based upon certain performance criteria of the Company and its subsidiaries and
the Company's results as trustee of the Creditors' Trust.
In accordance with the success bonus defined above, the Board of Directors
approved a bonus payable to the executive officers of the Company based on cash
received by the Creditors' Trust in excess of the book value upon liquidation of
a subordinated promissory note held in the Creditors' Trust (see "Creditors'
Trust" footnote). The Company received $590,000 in May 1998 for the bonus pool
from the proceeds received by the Creditors' Trust. The Board of Directors
approved an aggregate bonus amount of $492,000 for the executive officers. Based
on similar bonus criteria but subject to shareholder approval, the remaining
$98,000 remains payable to the directors. See "Accounts Payable and Accrued
Expenses" footnote.
Stock Option Plan. The Retention Agreements also awarded stock options to
Mr. Kneafsey and Mr. Dryer pursuant to the SHI Nonqualified Stock Option
Agreements. The plan according to the SHI Nonqualified Stock Option Agreements
(the " Stock Option Plan") granted the officers options to purchase an aggregate
of 434,750 shares of the Company's common stock, with an effective date of
December 1, 1997 (the "Date of Grant").
The options granted under the Stock Option Plan have an exercise price of
$0.92 per common share and vest at a rate of twenty percent per year for five
years on the anniversary of the Date of Grant. The fair market value of the
common stock on the Date of Grant was $1.109. Upon the event of any
change-in-control of the Company the stock options shall be 100% vested. The
stock options resulted in compensation expense of $10,000, with a corresponding
increase in additional paid-in capital, for the year ended June 30, 1998.
Additional stock options or other forms of long-term incentive compensation
arrangements may from time to time be granted by the Board of Directors.
Director's Stock Option Plan. Pursuant to shareholder approval, stock
options will also be awarded to the Company's directors under the SHI Stock
Option Plan. Under the proposed plan, each of the five directors would receive
options to purchase 40,000 shares of the Company's common stock, with the same
Date of Grant and other features as the officers' plan. If approved by the
shareholders, the Company would recognize compensation expense of $4,000 in
fiscal year 1999 for the period from December 1, 1997 through June 30, 1998.
This would have an insignificant impact on earnings (loss) per share for the
year ended June 30, 1998.
As allowed under the provisions of SFAS No. 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option plans
and, accordingly, does not recognize compensation cost based on fair value as a
component of net income applicable to common stock. The fair value of each
option granted was estimated as of the grant date, using the Black-Scholes
multiple options approach prescribed by SFAS No. 123, with the following
assumptions for fiscal year 1998: expected volatility of 58.58%, risk free
interest rate of 6.35%, and an expected life of 10 years. If the Company had
elected to recognize compensation cost based on the fair value of the options as
of the grant date, the Company's net income applicable to common stock as well
as earnings (loss) per share would have been reduced by the pro forma amounts
(net of income tax effect) indicated in the following table:
-44-
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- -----------------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME APPLICABLE TO COMMON STOCK:
Basic net income available to common stockholders:
Income (loss) available to common stockholders
before extraordinary item (As reported)......... $ 47 $ (86) $ (12,911) $ (250,591)
Extraordinary gain on discharge of debt............. -- -- 135,966 --
------------- -------------- -------------- -------------
Net income (loss) available to common
stockholders (As reported)............... 47 (86) 123,055 (250,591)
Pro forma compensation expense - net of tax effect.. (22) -- -- --
------------- -------------- -------------- -------------
Net income (loss) available to common
stockholders (Pro forma)................ $ 25 $ (86) $ 123,055 $ (250,591)
============= ============== ============== =============
Diluted net income applicable to common stock:
Income (loss) available to common stockholders
before extraordinary item (As reported)......... $ 47 $ (86) $ (12,911) $ (250,591)
Income effect of assumed conversions................ -- -- -- --
Extraordinary gain on discharge of debt............. -- -- 135,966 --
------------- -------------- -------------- -------------
Net income (loss) available to common
stockholders (As reported)............... 47 (86) 123,055 (250,591)
Pro forma compensation expense - net of tax effect.. (22) -- -- --
------------- -------------- -------------- -------------
Net income (loss) available to common
stockholders (Pro forma)................. $ 25 $ (86) $ 123,055 $ (250,591)
============= ============== ============== =============
EARNINGS (LOSS) PER SHARE ("EPS") INFORMATION:
Basic net income available to common stockholders:
Income (loss) available to common stockholders
before extraordinary item (As reported)......... $ 0.01* (0.02)* ** **
Extraordinary gain on discharge of debt............. -- -- ** **
------------- -------------- -------------- -------------
Net income (loss) available to common
stockholders (As reported)............... 0.01* (0.02)* ** **
Pro forma compensation expense - net of tax effect. -- -- ** **
------------- -------------- -------------- -------------
Net income (loss) available to common
stockholders (Pro forma)................. $ 0.01* $ (0.02)* ** **
============= ============== ============== =============
Common shares used in computing basic EPS:............. 4,000* 4,000* ** **
============= ============== ============== =============
Diluted net income applicable to common stockholders:
Income (loss) available to common stockholders
before extraordinary item (As reported)......... $ 0.01* $ (0.02) ** **
Income effect of assumed conversions................ -- -- ** **
Extraordinary gain on discharge of debt............. -- -- ** **
------------- -------------- -------------- -------------
Net income (loss) available to common
stockholders (As reported)............... 0.01* (0.02)* ** **
Pro forma compensation expense - net of tax effect. -- -- ** **
------------- -------------- -------------- -------------
Net income (loss) available to common
stockholders (Pro forma)................. $ 0.01* $ (0.02)* ** **
============= ============== ============== =============
Common shares used in computing diluted EPS:........... 4,044* 4,000* ** **
============= ============== ============== =============
</TABLE>
* Average share and per share amounts for Reorganized Company based on shares
issued or reserved for issuance to creditors.
** Average share and per share amounts are not meaningful due to reorganization
-45-
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
Reverse Interest Rate Swaps. The Company, through its subsidiary LMUSA,
entered into reverse interest rate swap agreements from July 1992 through
October 1995. 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. 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, the Company
incurred net interest expense of $1.4 million from the swaps.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 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 No. 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 and maturities are less
than three months.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
----------------------------- -----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents................. $ 2,475 $ 2,475 $ 1,941 $ 1,941
</TABLE>
-46-
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LEASES
The Company's continuing operations incurred rental expense for the year ended
June 30, 1998, the three month period ended June 30, 1997, the nine month period
ended March 31, 1997, and the year ended June 30, 1996, and had future minimum
rental commitments at June 30, 1998 for noncancellable leases, as follows (in
thousands):
<TABLE>
<CAPTION>
Office
Space Equipment Total
-------- --------- --------
<S> <C> <C> <C>
Expense for the year ended:
June 30, 1998................................................. $ 12 $ -- $ 12
Expense for the three month period ended:
June 30, 1997................................................. $ 2 $ -- $ 2
Expense for the nine month period ended:
March 31, 1997................................................ $ 124 $ 13 $ 137
Expense for the year ended:
June 30, 1996................................................. $ 523 $ 772 $ 925
Commitments for the years ending June 30:
1999.......................................................... $ -- $ -- $ --
Thereafter.................................................... -- -- --
-- -- --
-------- --------- --------
Total minimum lease payments.................................. $ -- $ -- $ --
======== ========= ========
</TABLE>
REDUCTION IN FORCE AND RESTRUCTURING
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 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 and the remainder were terminated during fiscal year 1997.
PENSION PLANS
Defined Benefit Plan. The Company's pension plan, the Lomas Financial
Group Pension Plan ("the Plan"), was sponsored by LMUSA. The Plan was a
noncontributory plan which covered substantially all employees of the Company.
Benefits were based on the employee's years of service and compensation. Pension
plan assets consisted principally of listed stocks and bonds and United States
government securities. The Company made contributions to the Plan which equaled
or exceeded the minimum amounts required by the Employee Retirement Income
Security Act of 1974.
The Company terminated approximately 1,000 employees in fiscal 1996 and
the remainder were terminated in fiscal 1997. The Company was in the process of
terminating the Plan and either purchasing annuities or making lump sum payments
to all participants at the time LMUSA was distributed to the LMUSA creditors on
October 1, 1996. The Company, through LMUSA, expensed the prepaid pension in
connection with the termination of the employees. The expense is reflected
through the loss on disposal or sale of assets on the Company's Statement of
Consolidated Operations for the year ended June 30, 1996.
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
-47-
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The right to any excess assets was included in
the distribution of LMUSA to LMUSA creditors on October 1, 1996.
(Expense) credits to expense related to the defined benefit plan included
the following components (in thousands):
<TABLE>
<CAPTION>
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Actual return on plan assets....................... $ -- $ -- $ -- $ (3,948)
Net amortization and deferrals..................... -- -- -- 571
Service costs--benefits earned...................... -- -- -- 998
Interest on projected benefit obligations.......... -- -- -- 1,240
-------------- -------------- -------------- -------------
Net expense recognized............................. $ -- $ -- $ -- $ (1,139)
============== ============== ============== =============
</TABLE>
The assumptions used in the accounting were: discount/settlement rate of
6.8%, rate of increase in compensation level of 7.9%, and expected long term
rate of return on assets of 9.0%, for the fiscal year ended June 30, 1996.
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 was $213,000. The plan was terminated by
the Company effective June 30, 1996.
MANAGEMENT SECURITY PLAN
The Company had a Management Security Plan ("MSP") for certain of its
employees. According to the MSP, key employees of the Company who participated
in the MSP were to be paid, in the event of retirement or death, a portion of
the employee's salary which such employee chose as the basis for computation of
retirement or death benefits. The Company ceased new enrollments in 1985.
Because of the bankruptcy filings by the Company and LMUSA, no contributions,
payments or actuarial evaluation have been made to the MSP since the petition
date.
The LFC Creditors' Committee argued that the funds contributed to the MSP
were held in a trust (the "MSP Trust") subject to the claims of creditors in the
event of insolvency. 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 MSP Trust. The LFC Creditors' Committee
contended that the funds in the trust were property of the Company's estate.
However, the trustee, Bankers Trust, asserted that the trustee was obligated to
hold the assets for the sole benefit of the MSP participants. In addition,
during the course of litigation, the Unofficial Committee of MSP Beneficiaries
filed a motion to intervene in the adversary proceeding which the Bankruptcy
Court granted, and filed an action against Bankers Trust to turn over to the MSP
beneficiaries the assets held in the MSP Trust.
On April 29, 1997, pursuant to a Stipulation and Order Regarding
Reserve for MSP Claimants, the Bankruptcy Court authorized the Company to
maintain a single distribution reserve in the amount of $6.3 million in order to
satisfy any obligations to the MSP Claimants under the Joint Plan. The
preliminary MSP disputed claims totaled $8.8 million. On July 1, 1998, a federal
district court approved a settlement of the MSP Trust whereby the Creditors'
Trust and the MSP beneficiaries would equally share the assets remaining in the
MSP Trust after payment of certain legal expenses and MSP trust fees, in the
amount of $0.4 million. Accordingly, on July 10, 1998, the Creditors' Trust
received $4.085 million pursuant to the final settlement (see "Item 8. Financial
Statements and Supplementary Data - Creditors' Trust").
-48-
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The LFC Creditors' Trust and any proceeds from the LFC/LMUSA Litigation
Trust are solely for the benefit of the former creditors of the Joint Debtors.
Stockholders will not benefit from these trusts unless they held Class 3 general
unsecured claims as defined in the Joint Plan.
The assets of the MSP Trust, which consist solely of cash, were included
in investments on the Consolidated Balance Sheet of the Predecessor Company and
totaled $7.6 million at June 30, 1996. Income and expenses of the MSP Trust were
included in the Company's Statement of Consolidated Operations for the nine
month period ended March 31, 1997 and the year ended June 30, 1996. After
distribution to the Creditors' Trust on March 31, 1997, income and expenses of
the MSP Trust are credited or charged to the Creditors' Trust for the year ended
June 30, 1998 and the three month period ended June 30, 1997.
DISPOSAL OR SALE OF ASSETS
Mortgage Banking. On October 2, 1995, LMUSA closed the sale to First
Nationwide Mortgage Corporation ("First Nationwide") of its 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"). 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 above transactions resulted in a loss on sale or disposal of assets in
the Company's Statement of Consolidated Operations of $3.7 million for the nine
month period ended March 31, 1997 and $188.7 million for the year ended June 30,
1996. These transactions are subject to additional adjustments which are solely
the responsibility of Nomas Corp.
as a result of the distribution on October 1, 1996.
Fixed Assets. On August 16, 1996, the former Lomas headquarters and all
other campus buildings were sold through the Bankruptcy Court process for $23.5
million. Pursuant to a stipulation and order among Travelers Insurance Company
("Travelers"), the Debtors', and the LMUSA Creditors' Committee, Travelers
received $11.43 million of the proceeds. The net cash received was deposited
into a joint account for the Company and LMUSA. In conjunction with the
intercompany claims settlement process in March, 1997, the Company received $1.3
million and LMUSA was granted the remainder plus accrued interest from the joint
account. Additionally, substantially all the furniture and equipment of the
Company and LMUSA was sold by a liquidator during July and August 1996.
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 the year ended June 30, 1996, the Company
received subservicing fees of approximately $1.7 million from the Partnership.
LEGAL PROCEEDINGS
In March 1997, in connection with the settlement of the intercompany
claims, the Company transferred $3 million in cash to partially fund a
litigation trust to pursue third-party claims pursuant to the LFC/LMUSA
Litigation Trust Agreement. See "Reorganization" footnote. Subject to certain
exceptions in the Intercompany Agreement, the LFC Creditors' Trust and the
creditors' trust established pursuant to the LMUSA Plan will receive sixty and
forty percent, respectively, of net proceeds from litigation. There can be no
assurance that the LFC/LMUSA Litigation Trust will produce any proceeds which
will benefit the Creditors Trust' and former creditors.
In December 1997, the Company received a letter from the attorney of the
insurance company that carried the former directors and officers insurance
coverage, stating that there is a $1.0 million per claim retention which must be
-49-
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
completely exhausted before the insurance company is implicated. Management
believes that the Company is not responsible for this retention amount as a
result of the Joint Plan.
Management is also reviewing the Company's potential obligation pursuant
to the trustee agreement and the Joint Plan to lend additional funds to the
LFC/LMUSA Litigation Trust. The Board of Directors of the Company would have to
approve any such transaction. See "Subsequent Events" footnote.
The LFC Committee commenced an adversary proceeding to recover the funds
in the rabbi trust for the Company's Excess Benefit Plan (the "EBP Trust") on
September 20, 1996, having obtained the Bankruptcy Court's approval for such
action on September 9, 1996. Bankers Trust, the trustee of the EBP Trust, agreed
that the Company is entitled to the funds held in the EBP Trust, and
accordingly, funds totaling $0.6 million were received by the Company in June,
1997 and subsequently transferred to the Creditors' Trust for the benefit of
former creditors of the Joint Debtors. The remaining funds were received in July
1997.
On August 28, 1996 the Bankruptcy Court authorized the LFC Committee to
commence an action against Residential Information Services Limited Partnership
("RIS") and certain of its affiliates and related companies. In a complaint
dated September 30, 1996, the LFC Committee commenced such an action. On January
10, 1997, the LFC Committee filed an amended complaint. The amended complaint
contains, inter alia, claims for breach of contract, fraud, tortuous
interference with contract, turnover and quantum meruit against RIS and the
other defendants in connection with RIS' acquisition of substantially all of the
assets of Lomas Information Systems, Inc. in December 1994. The amended
complaint seeks substantial damages from the defendants together with interest,
costs and attorneys' fees and punitive damages. This case was settled and
proceeds of $5.4 million were received in June 1997 by the Company and
subsequently transferred, net of $234,000 for certain administrative claims, to
the Creditors' Trust.
The LFC Creditors' Trust and any proceeds from the LFC/LMUSA Litigation
Trust are solely for the benefit of the former creditors of the Joint Debtors.
Stockholders will not benefit from these trusts unless they held Class 3 general
unsecured claims as defined in the Joint Plan.
The assisted care facility management subsidiary, SHM, is a wholly-owned
subsidiary of the Company, and conducts business in Houston, Texas pursuant to a
management agreement. SHM manages and maintains an assisted care facility in
Houston, Texas under a management agreement into which it entered on June 27,
1977 with Treemont. The owners of Treemont have recently contacted the Company's
management and requested a legal review of the management agreement as they
believe certain parts of the contract are illegal. The Company does not believe
that the review will result in a change in the terms. The agreement is
substantially secured at this time by the Treemont property in Houston. See the
"Receivables" footnote for more information on the management agreement.
SUBSEQUENT EVENTS
On September 25, 1998 the Company was advised that it was named as a
Counter-Defendant in the counterclaim filed by the defendants of the Litigation
Trust's law suit against certain former officers and directors of Lomas
Financial Corp and subsidiaries. The counterclaim seeks joint and several
liability. The management of the Company and its counsel are reviewing the
documents to determine the effect that this suit may have on the Company.
Recognizing the need of the Company for additional working capital, the
Chairman of the Company offered to make a cash investment for a certain number
of shares of the Company's common stock. This offer was considered and accepted
by the Company's Board of Directors at its regularly scheduled quarterly meeting
held in Wilmington, Delaware on September 23, 1998. The Chairman did not
participate in the vote of the Board accepting this offer.
Management expects this transaction to close within 30 days.
-50-
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the year ended June 30, 1998 (in thousands of dollars, except per
share amounts):
<TABLE>
<CAPTION>
Year Ended June 30, 1998
-------------------------------------------------------
Reorganized Company
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues................................... 241 224 187 758
Income (loss) before federal income tax.... 69 17 (15) 1
Federal income tax benefit (expense)....... (24) (6) 5 --
Net income (loss)...................... 45 11 (10) 1
Basic earnings (loss) per common share:
Net income (loss)..................... .01* .00* .00* .00*
Diluted earnings (loss) per common share:
Net income (loss)..................... .01* .00* .00* .00*
</TABLE>
* Per share amounts for Reorganized Company based on shares issued or reserved
for issuance to creditors.
Certain reclassifications have been made to prior quarters' financial
statements to conform to the current presentation. Some of the reimbursements
from the Creditors' Trust received in the first and second quarters were
previously netted against expenses but are now shown as trust expense
reimbursement revenue.
Management fees from the Company's assisted care management subsidiary
were significantly lower in the second and third quarters, $61,000 and $56,000,
respectively, than in the first and fourth quarters, $151,000 and $126,000,
respectively, as a result of the election by Treemont to make significant
capital improvements for fire protection that were funded by operations. See
"Accounts Receivable" footnote.
The Creditors' Trust reimbursed the Company for certain expenses
incurred during the year, including an overhead allocation that fluctuated from
quarter to quarter based upon management's estimate of resources used by the
Creditors' Trust. The overhead allocation by quarter was $20,000, $138,000,
$105,000 and $41,000, for the first, second, third and fourth quarters,
respectively, which included an adjustment in the second quarter. The Creditors'
Trust also reimbursed the Company $492,000 for success bonuses paid to the
officers in the fourth quarter. See "Stock and Compensation Plans" footnote.
Personnel expenses increased in December 1997 as a result of an
increase in executive officer compensation pursuant to new employment
agreements. All other consulting expense was significantly lower in the first
quarter as much of the work related to the prior fiscal year was charged to an
accrual during the first quarter. The fourth quarter included an additional
accrual for fiscal year end accounting and tax consulting work to be performed
in fiscal 1999.
The Company's real estate subsidiary, LLG, reported an operating loss of
$37,000 for the fourth quarter as compared to a combined operating income for
the first three quarters of $8,000. The expense in the fourth quarter is
primarily attributable to consulting and other expenses related to the re-zoning
project currently underway.
-51-
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the unaudited quarterly results of
operations for the year ended June 30, 1997 (in thousands of dollars, except per
share amounts):
<TABLE>
<CAPTION>
Year Ended June 30, 1997
---------------------------------------------------------------------
Reorganized
Predecessor Company Company
---------------------------------------------------------------------
Period
First Second Third Reorganization Ended
Quarter Quarter Quarter Adjustments June 30
------------ ---------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues................................... 2,538 338 359 -- 226
Loss from operations before
reorganization items..................... (5,044) (89) (49) (282) (86)
Reorganization items---net................. (1,940) (929) (674) (3,904) --
Loss before extraordinary item............. (6,984) (1,018) (723) (4,186) (86)
Extraordinary gain on discharge of debt.... -- -- -- 135,966 --
Net income (loss)..................... (6,984) (1,018) (723) 131,780 (86)
Earnings (loss) per common share:
Loss before extraordinary item........ ** ** ** ** (.02)*
Net income (loss)..................... ** ** ** ** (.02)*
Earnings (loss) per common share -
assuming dilution:
Loss before extraordinary item........ ** ** ** ** (.02)*
Net income (loss)..................... ** ** ** ** (.02)*
</TABLE>
* Per share amounts for Reorganized Company based on shares issued or reserved
for issuance to creditors.
** Per share amounts not meaningful due to reorganization.
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1998 presentation, specifically the
reclassification of a contra expense account related to an overhead allocation
from the Creditors' Trust to revenue for the three month period ended June 30,
1998.
The first quarter of fiscal 1997 included the results of operations for
LMUSA prior to the disbursement of LMUSA to LMUSA creditors on October 1, 1996.
LMUSA recorded a loss on sale or disposal of assets of $3.7 million in the first
quarter related to the sale of assets to First Nationwide (see "Disposal or Sale
of Assets" footnote).
The Company continued to incur reorganization expenses in all periods
presented for the Predecessor Company. For the first, second and third quarters,
the reorganization expenses consisted primarily of professional fees net of
interest earned on cash accumulated.
Subsequent to the third quarter, the Company adopted fresh-start
accounting and recorded certain adjustments pursuant to the Plan of
Reorganization (see the "Reorganization" and "Fresh-Start Reporting" footnotes).
These adjustments included reorganization expense of $3.9 million, primarily
related to the increase of prepetition liabilities to the amount of allowed or
disputed claims outstanding, and an extraordinary gain on the discharge of debt
of $136.0 million.
-52-
<PAGE> 53
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, 1998 and 1997 and for the year ended June 30, 1998, the three
month period ended June 30, 1997, the nine month period ended March 31, 1997,
and the year ended June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- ----------------------------
Year Three Month Nine Month Year
Ended Period Ended Period Ended Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Assisted care management.......................... $ 423 $ 168 $ 523 $ 672
Real estate....................................... 22 5 -- 104
Mortgage banking.................................. -- -- 2,242 98,038
Other............................................. 965 63 470 5,923
------------- -------------- -------------- ------------
1,410 226 3,235 104,737
Intersegment revenues eliminated in consolidation. -- -- -- (1,390)
------------- -------------- -------------- ------------
Total revenues per Statement of Consolidated
Operations.................................. $ 1,410 $ 226 $ 3,235 $ 103,347
============= ============== ============== ============
Operating income (loss):
Assisted care management.......................... $ 272 $ 87 $ 376 $ 355
Real estate....................................... (29) 5 97 107
Mortgage banking.................................. -- -- (1,186) (34,430)
Other............................................. 962 52 319 (340)
------------- -------------- -------------- ------------
1,205 144 (394) (34,308)
Expenses:
General and administrative........................ (1,133) (230) (1,352) (2,675)
Provision for losses.............................. -- -- -- (273)
Corporate interest................................ -- -- -- (3,463)
Loss on sale or disposal of assets................ -- -- (3,718) (188,691)
------------- -------------- -------------- ------------
(1,133) (230) (5,070) (195,102)
------------- -------------- -------------- ------------
Income (loss) from operations before
reorganization items and federal income tax....... 72 (86) (5,464) (229,410)
Reorganization items---net........................... -- -- (7,447) (21,181)
------------- -------------- -------------- ------------
Income (loss) before federal income tax............. 72 (86) (12,911) (250,591)
Federal income tax expense........................... (25) -- -- --
------------- -------------- -------------- ------------
Income (loss) before extraordinary item.............. 47 (86) (12,911) (250,591)
Extraordinary gain on discharge of debt.............. -- -- 135,966 --
------------- -------------- -------------- ------------
Net income (loss)............................... $ 47 $ (86) $ 123,055 $ (250,591)
============= ============== ============== ============
</TABLE>
-53-
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
--------------- ----------------
<S> <C> <C>
Identifiable assets:
Assisted care facility management................................. $ 394 $ 1,165
Real estate....................................................... 4,885 5,246
Other............................................................. 2,169 640
--------------- ----------------
Total assets per Consolidated Balance Sheet..................... $ 7,448 $ 7,051
=============== ================
</TABLE>
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- ------------------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Depreciation and amortization expense:
Assisted care facility management.............. $ -- $ -- $ -- $ --
Real estate.................................... -- -- -- --
Mortgage banking............................... -- -- 106 17,057
Other.......................................... -- -- -- 301
-------------- -------------- --------------- --------------
$ -- $ -- $ 106 $ 17,358
============== ============== =============== ==============
Net charges to allowance for losses:
Assisted care facility management.............. $ -- $ -- $ -- $ --
Real estate.................................... -- -- -- --
Mortgage banking............................... -- -- -- 47,199
Other.......................................... -- -- 483 1,685
-------------- -------------- --------------- --------------
$ -- $ -- $ 483 $ 48,884
============== ============== =============== ==============
Capital expenditures:
Assisted care facility management.............. $ -- $ -- $ -- $ --
Real estate.................................... -- -- -- --
Mortgage banking............................... -- -- -- 149
Other.......................................... -- -- -- --
-------------- -------------- --------------- --------------
$ -- $ -- $ -- $ 149
============== ============== =============== ==============
</TABLE>
Intersegment charges to LMUSA operations for the year ended June 30,
1996 consisted solely of $2.4 million from Intellifile for image processing.
Intellifile was sold as of August 31, 1996.
-54-
<PAGE> 55
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SIENA HOLDINGS, INC.
(FORMERLY LOMAS FINANCIAL CORPORATION)
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
Reorganized Company
-----------------------------
June 30, 1998 June 30, 1997
------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................................... $ 2,096 $ 240
Receivables ......................................................... -- 1
Prepaid expenses .................................................... 54 68
------------- -------------
2,150 309
------------- -------------
Long Term Investments:
Investments (including $5,246 and $6,678, respectively, investments
in subsidiaries eliminated in consolidation) ................... 5,246 6,678
------------- -------------
$ 7,396 $ 6,987
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ................................ $ 542 $ 152
Long Term Liabilities:
Accrued medical insurance premiums .................................. 711 774
------------- -------------
1,253 926
------------- -------------
Stockholders' equity:
Preferred stock --( $1.00 par value, 1,000 shares authorized, 0 shares
issued and outstanding) .......................................... -- --
Common stock--($.10 par value, 15,000 shares authorized, 4,000
shares issued and outstanding)
400 400
Other paid-in capital ................................................ 5,782 5,747
Accumulated deficit .................................................. (39) (86)
------------- -------------
6,143 6,061
------------- -------------
$ 7,396 $ 6,987
============= =============
</TABLE>
-55-
<PAGE> 56
SCHEDULE I----CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
SIENA HOLDINGS, INC.
(FORMERLY LOMAS FINANCIAL CORPORATION)
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PAR VALUES)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------------------ -------------------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Investment (excluding dividends from
subsidiaries)............................. $ 52 $ 6 $ -- $ 1,434
Trust expense reimbursement.................... 796 42 -- --
Gain on sale of investments.................... 20 -- -- --
Other........................................... 90 1 299 1,554
-------------- -------------- -------------- --------------
958 49 299 2,988
-------------- -------------- -------------- --------------
Expenses:
Interest........................................ -- -- -- 3,463
General and administrative...................... 1,133 230 1,352 2,674
Provision for losses............................ -- -- -- 273
-------------- -------------- -------------- --------------
1,133 230 1,352 6,410
-------------- -------------- -------------- --------------
Loss from operations before reorganization items
and equity in income (loss) of subsidiaries........ (175) (181) (1,053) (3,422)
Equity in income (loss) of subsidiaries......... 247 95 (4,818) (243,730)
Reorganization items--net....................... -- -- (7,040) (3,439)
-------------- -------------- -------------- --------------
Income (loss) before federal income tax............ 72 (86) (12,911) (250,591)
Federal income tax expense......................... (25) -- -- --
-------------- -------------- -------------- --------------
Income (loss) before extraordinary item............ 47 (86) (12,911) (250,591)
Extraordinary gain on discharge of debt............ -- -- 135,966 --
-------------- -------------- -------------- --------------
Net income (loss)............................. $ 47 $ (86) $ 123,055 $ (250,591)
============== ============== ============== ==============
</TABLE>
-56-
<PAGE> 57
SCHEDULE I---CONDENSED FINANCIAL INFORMATION OF REGISTRANT---(CONTINUED)
SIENA HOLDINGS, INC.
(FORMERLY LOMAS FINANCIAL CORPORATION)
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------------ -----------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) ........................................ $ 47 $ (86) $ 123,055 $(250,591)
Adjustments to reconcile income (loss) from operations to
cash provided (used) by operations before working capital
changes:
Federal income tax utilization of pre-reorganization
tax attributes .................................... 25 -- -- --
Compensation expense for stock options ................ 10 -- -- --
Gain on sales ......................................... (20) -- -- --
Extraordinary gain on discharge of debt ............... -- -- (135,966) --
Depreciation and amortization ........................... -- -- -- 140
Provision for losses and restructuring .................. -- -- -- 273
Equity in (income) loss of subsidiaries ............... (247) (95) 4,818 243,730
Reorganization items:
Claims in excess of recorded prepetition liabilities .. -- -- 3,454 --
--------- --------- --------- ---------
Cash provided (used) by operations before working
capital changes ................................. (185) (181) (4,639) (6,448)
Net change in sundry receivables, payables and other assets 342 91 5,179 6,182
--------- --------- --------- ---------
Net cash provided (used) by operating activities .... 157 (90) 540 (266)
--------- --------- --------- ---------
Investing activities:
Net maturities/sales (purchases) of investments .......... 20 -- -- 3,715
Return of capital from investments in subsidiaries ....... 1,679 -- -- --
Proceeds from settlement of intercompany dispute with
LMUSA .................................................. -- -- 6,754 --
Transfer to Litigation Trust pursuant to intercompany
agreement ............................................... -- -- (3,000) --
Transfer to LFC Creditors' Trust for payment of claims and
other liabilities pursuant to reorganization plan ..... -- -- (8,558) --
--------- --------- --------- ---------
Net cash provided (used) by investing activities ... 1,699 -- (4,804) 3,715
--------- --------- --------- ---------
Financing activities:
Changes in receivables from (payables to) subsidiaries ... -- -- -- 585
--------- --------- --------- ---------
Net cash provided (used) by financing activities .... -- -- -- 585
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ......... 1,856 (90) (4,264) 4,034
Cash and cash equivalents at beginning of period ............. 240 330 4,594 560
--------- --------- --------- ---------
Cash and cash equivalents at end of period ................... $ 2,096 $ 240 $ 330 $ 4,594
========= ========= ========= =========
Non-cash transactions:
Issuance of stock options ................................ $ 10 -- -- --
</TABLE>
-57-
<PAGE> 58
SCHEDULE III---REAL ESTATE AND ACCUMULATED DEPRECIATION
SIENA HOLDINGS, INC. AND SUBSIDIARIES
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cost capitalized to
Initial cost to Company acquisition
----------------------- -----------------------------
Buildings and
Description Encumbrances Land improvements Improvements Carrying costs
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
189.3 gross acres of
unimproved land in Allen,
Texas (the "Allen
property") ................ -- $ 2,143 $ -- $ -- $ --
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Gross amount at which carried at
close of June 30, 1998 (*)
----------------------------------
Buildings and Accumulated Date of Date
Description Land improvements Total depreciation construction acquired
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
189.3 gross acres of
unimproved land in Allen,
Texas (the "Allen
property") ................ $ 4,800 $ -- $ 4,800 -- N/A 3/5/97
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The changes in the investment in real estate is as follows (in thousands):
<TABLE>
<S> <C>
Balance at June 30, 1997 .................... $ 4,800
Additions during the period:
Additions through foreclosure ....... --
Other acquisitions .................. --
Improvements, etc ................... --
Other ............................... --
---------
--
---------
Deductions during the period:
Cost of real estate sold ............ --
Other ............................... --
---------
--
---------
Balance at June 30, 1998 .................... $ 4,800
=========
</TABLE>
* The aggregate cost for Federal income tax purposes of the Allen property at
June 30, 1998 is $6.59 million.
-58-
<PAGE> 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-59-
<PAGE> 60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS OF THE REGISTRANT
Pursuant to the Joint Plan, the LFC Creditors' Committee appointed a new
Board of Directors for the Reorganized Company, Siena Holdings, Inc., effective
with the confirmation of the Joint Plan on October 4, 1997. The five members of
the Board of Directors include:
JOHN P. KNEAFSEY -- Chairman and Chief Executive Officer of the Company,
since October 1996; President, Pathfinder Advisory Services, Inc., since
1997; Senior Vice President - Investments, Prudential Securities, Inc.,
from 1980 to 1997. Age 51.
ERIC M. BODOW -- Senior Vice President, Sagner/Marks, Inc., since 1992;
Vice President, First National Bank of Chicago, from 1985 to 1992. Age 53.
JAMES D. KEMP -- Principal, Antaean Solutions, LLC, since 1997; President
and Chief Executive Officer, The Trust Company, N.A., from 1996 to 1997;
President and Chief Executive Officer, Kemp Consulting, from 1992 to 1997;
President, Ameritrust Texas, N.A., from 1980 to 1992. Age 51.
MATTHEW S. METCALFE -- Chairman and President, Airland Corporation;
Director Emeritus, Amsouth Bancorporation; Member, State of Alabama Oil and
Gas Board; Chairman, Mobile Airport Authority. Age 67.
FRANK B. RYAN -- Professor of Mathematics at Rice University (currently on
leave); Director, Danielson Holding Corporation; Director, Texas Micro,
Inc.; Director, America West Airlines, Inc. Age 62.
For information as to former directors of the Predecessor Company,
reference is made to the Joint Disclosure Statement a copy of which was filed as
an exhibit to the Company's annual report on Form 10-K for the year ended June
30, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following two officers were designated by the LFC Creditors' Committee
at confirmation of the Joint Plan on October 4, 1996:
JOHN P. KNEAFSEY -- Chief Executive Officer of the Company. See information
under "Directors of the Registrant" above.
W. JOSEPH DRYER -- President and Chief Accounting Officer of the Company
since October 4, 1996; prior thereto, Senior Vice President from January
1995; also, President and Director of Russian River Energy Co. from 1992 to
1994; and President and Director of Geothermal Resources International,
Inc. since 1994; prior thereto, an officer since 1984. Age 43.
For information as to former officers of the Predecessor Company, reference
is made to the Joint Disclosure Statement a copy of which was filed as an
exhibit to the Company's annual report on Form 10-K for the year ended June 30,
1996.
-60-
<PAGE> 61
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation paid by the Company for the
year ended June 30, 1998, the three month period ended June 30, 1997 and the
nine month period ended March 31, 1997, for services rendered in all capacities
to the two executive officers of the Company during fiscal year 1998. For
compensation information as to officers of the Predecessor Company in prior
fiscal years, reference is made to the Joint Disclosure Statement, a copy of
which was filed as an exhibit to the Company's annual report on Form 10-K for
the year ended June 30, 1996.
<TABLE>
<CAPTION>
Base Other Cash Total Cash
Officer Period Compensation Compensation Compensation
- ---------------------------- ----------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
John P. Kneafsey ........... Year Ended June 30, 1998 $ 84,667 $ 6,200(1) $ 90,867
Chairman and Chief
Executive Officer
Three Months Ended June 30, 1997 $ 6,000 -- $ 6,000
Nine Months Ended March 31, 1997 $ 12,000 -- $ 12,000
W. Joseph Dryer ............ Year Ended June 30, 1998 $ 139,000 $ 197,467(2) $ 336,467
President
Three Months Ended June 30, 1997 $ 33,000 -- $ 33,000
Nine Months Ended March 31, 1997 $ 170,106 -- $ 170,106
</TABLE>
- ----------
(1) Excludes a bonus in the amount of $295,000 earned in May 1998, in accordance
with Mr. Kneafsey's Retention Agreement discussed below, as a result of the
negotiated final settlement of a subordinated promissory note held by the
Creditors' Trust in excess of the book value. Mr. Kneafsey elected not to
receive the payment at this time, thus it is carried in accounts payable and
accrued expenses in the Consolidated Balance Sheet as of June 30, 1998. Includes
$5,000 in director fees.
(2) Includes a bonus in the amount of $196,667 paid in accordance with Mr.
Dryer's Retention Agreement discussed below, as a result of the negotiated final
settlement of a subordinated promissory note held by the Creditors' Trust in
excess of the book value.
EMPLOYMENT AND OTHER COMPENSATORY AGREEMENTS
Effective December 1, 1997, the Board of Directors approved two separate
retention agreements for John P. Kneafsey and W. Joseph Dryer (the "Retention
Agreements"), filed as exhibits to the Company's quarterly Form 10-Q for the
period ended December 31, 1997, which are summarized as follows:
John P. Kneafsey. Mr. Kneafsey has a retention agreement with SHI expiring
December 1, 2002, retaining the officer as the Chief Executive Officer of SHI.
Mr. Kneafsey's base annual retainer beginning December 1, 1997 is $128,000, with
such adjustments thereto as may be determined by the Board of Directors in its
sole discretion. The agreement also provides for incentive bonuses for the sale
or liquidation of assets based on a percentage of the deal value established by
the Board of Directors or the appreciated value above the fair market value of
the asset, which as a result of the fresh start adjustments is the same as book
value as of March 31, 1997. Mr. Kneafsey shall be paid 6% of the gross
appreciation value above book value or 6% of the deal value, upon the close of
such transaction. Such bonus provision shall be applied to the Company and its
subsidiaries and the Company's results as trustee of the Creditors' Trust. Mr.
Kneafsey shall also receive non-qualified stock options as defined in separate
agreements. The Board of Directors shall have the option to extend the agreement
for successive 6 month periods, upon proper notice of not less than 60 days to
the officer, under terms and retention payments to be mutually agreed to by the
Company and Mr. Kneafsey. In the event of termination without cause or other
breach of the agreement by SHI, Mr. Kneafsey will be entitled to receive a
lump-sum termination payment equal to the retention payment (excluding bonuses)
that Mr. Kneafsey would have received for the next 12 months following
termination, adjusted up to take into consideration taxes that would have to be
paid on the termination payment.
W. Joseph Dryer. Mr. Dryer has a retention agreement with SHI expiring
December 1, 2002, retaining the officer as President of SHI. Mr. Dryer's base
annual retainer beginning December 1, 1997 is $144,000, with such adjustments
-61-
<PAGE> 62
thereto as may be determined by the Board of Directors in its sole discretion.
The agreement also provides for incentive bonuses for the sale or liquidation of
assets based on a percentage of the deal value established by the Board of
Directors or the appreciated value above the fair market value of the asset,
which as a result of the fresh start adjustments is the same as book value as of
March 31, 1997. Mr. Dryer shall be paid 4% of the gross appreciation value above
book value or 4% of the deal value, upon the close of such transaction. Such
bonus provision shall be applied to the Company and its subsidiaries and the
Company's results as trustee of the Creditors' Trust. Mr. Dryer shall also
receive non-qualified stock options as defined in separate agreements. The Board
of Directors shall have the option to extend the agreement for successive 6
month periods, upon proper notice of not less than 60 days to the officer, under
terms and retention payments to be mutually agreed to by the Company and Mr.
Dryer. In the event of termination without cause or other breach of the
agreement by SHI, Mr. Dryer will be entitled to receive a lump-sum termination
payment equal to the retention payment (excluding bonuses) that Mr. Dryer would
have received for the next 12 months following termination, adjusted up to take
into consideration taxes that would have to be paid on the termination payment.
STOCK OPTION PLAN
The Retention Agreements also awarded stock options to Mr. Kneafsey and Mr.
Dryer pursuant to the SHI Nonqualified Stock Option Agreements, included as
exhibits to the Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1997. The plan according to the SHI Nonqualified Stock Option
Agreements (the "Stock Option Plan") granted Mr. Kneafsey and Mr. Dryer options
to purchase 271,250 and 163,000 shares, respectively, of the Company's common
stock, with an effective date of December 1, 1997 (the "Date of Grant").
The options granted under the Stock Option Plan have an exercise price of
$0.92 per common share and vest at a rate of twenty percent per year for five
years on the anniversary of the Date of Grant. The fair market value of the
common stock on the Date of Grant was $1.109. Upon the event of any
change-in-control (as defined) of the Company, the stock options shall be 100%
vested. The stock options resulted in compensation expense of $10,000, with a
corresponding increase in additional paid-in capital, for the year ended June
30, 1998. Additional stock options or other forms of long-term incentive
compensation arrangements may from time to time be granted by the Board of
Directors.
The Reorganized Company had no stock plans as of June 30, 1997. All of the
Predecessor Company's stock plans or other retirement benefits for the officers
were canceled during the nine months ended March 31, 1997, pursuant to the
confirmation of the Joint Plan.
COMPENSATION OF DIRECTORS
Directors of the Company receive annual compensation at the rate of
$5,000 and fees of $1,000 for each directors' meeting attended. The following
items related to additional compensation of the Board of Directors will be
submitted to the shareholders for approval:
(1) Nonqualified Stock Option Agreements. Pursuant to the proposed
Non-Oualified Stock Option Agreements for the Board of Directors (the
"Directors' Stock Option Plan"), each director of the Company would receive
options to purchase 40,000 shares of the Company's common stock, with an
effective date of December 1, 1997 (the "Date of Grant"). The options to be
granted under the Directors' Stock Option Plan will have an exercise price of
$0.92 per common share and vest at a rate of twenty percent per year for five
years on the anniversary of the Date of Grant. The fair market value of the
common stock on the Date of Grant was $1.109. Upon the event of any
change-in-control of the Company the stock options shall be 100% vested. If
approved by the shareholders, the Company would recognize compensation expense
of $4,000 in fiscal year 1999 for the period from December 1, 1997 through June
30, 1998. This would have an insignificant impact on earnings (loss) per share
for the year ended June 30, 1998.
(2) Directors' Bonus Plan. The proposed bonus plan for the non-officer
members of the Board of Directors (the "Directors' Bonus Plan") includes a
success incentive bonus for the sale of liquidation of assets which will pay a
percentage of the deal value established by the Board of Directors or the
appreciated value above the fair market value of the asset, which as a result of
the fresh start adjustments is the same as book value as of March 31, 1997. In
aggregate, the non-officer directors shall be paid 2% of the gross appreciation
value above book value or 2% of the
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<PAGE> 63
deal value, upon the close of such transaction. Such bonus provision shall be
applied to the Company and its subsidiaries and the Company's results as trustee
of the Creditors' Trust. During the year ended June 30, 1998, two transactions
were closed that will result in payments to the non-officer directors under the
Directors' Bonus Plan, if the approved by the shareholders, as follows:
o On January 14, 1998, the Creditors' Trust received $8.1 million
pursuant to the negotiated final settlement of a subordinated
promissory note. The Company as trustee began negotiations early in
1997. The Bankruptcy Court approved the settlement on December 29,
1997. The settlement provided the Creditors' Trust with a gain of $5.9
million. This gain was recognized for income tax purposes in April
1997 upon the transfer of the promissory note from the Company to the
Creditors' Trust. The Company received $590,000 in May 1998 for the
bonus pool from the proceeds received by the Creditors' Trust based on
the cash received by the Creditors' Trust in excess of book value. The
Board of Directors approved an aggregate bonus amount of $492,000 for
the executive officers. Based on the same bonus criteria but subject
to shareholder approval, the remaining $98,000 remains payable to the
directors in accounts payable and other expenses on the Company's
Consolidated Balance Sheet as of June 30, 1998.
o The Company sold its investment in Vistamar, Inc., a former real
estate subsidiary incorporated in Puerto Rico, for $20,000 in April
1998. Upon receipt of the proceeds, the executive officers received an
aggregate bonus amount of $2,000 and $400 remains payable to the
directors in accounts payable and other expenses on the Company's
Consolidated Balance Sheet as of June 30, 1998.
The Reorganized Company had no stock plans for the directors as of June
30, 1997. All of the Predecessor Company's stock plans or other retirement
benefits for the directors were canceled during the nine months ended March 31,
1997, pursuant to the confirmation of the Joint Plan.
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<PAGE> 64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of September 16, 1998, the number of
shares and percentages of SHI Common Stock owned beneficially by persons or
groups, within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, known to the Company to be the beneficial owners of more than
5 percent of the SHI Common Stock outstanding (see "Item 8. Financial Statements
and Supplementary Data -- Stockholders' Equity").
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Title of Class Name of Beneficial Owner Ownership Class
- ---------------------- ----------------------------------------------- ----------------- ---------------
<S> <C> <C> <C>
SHI Common Stock Credit Suisse First Boston Corporation (1) .... 910,509(1) 22.8%
11 Madison Avenue
New York, New York 10010
John P. Kneafsey (2).......................... 385,176(2) 9.6%(3)
c/o Pathfinder Advisory Services
9515 Deereco Road, Suite 903
Timonium, Maryland 21093
</TABLE>
- ----------
(1) Based on information set forth in the Schedule 13G filing dated February 23,
1998, by Credit Suisse First Boston, a registered bank in Zurich, Switzerland,
acting solely on behalf of the Credit Suisse First Boston business unit.
According to the filing, Credit Suisse First Boston Corporation directly
beneficially owns the securities reported herein.
(2) Based on information set forth in the Schedule 13G filing dated August 26,
1998, by John P. Kneafsey According to the filing, John P. Kneafsey beneficially
owns the securities reported herein. Mr. Kneafsey is also Chairman and Chief
Executive Officer of SHI.
(3) Recognizing the need of the Company for additional working capital, the
Chairman of the Company offered to make a cash investment for a certain number
of shares of the Company's common stock. This offer was considered and accepted
by the Company's Board of Directors at its regularly scheduled quarterly
meeting held in Wilmington, Delaware on September 23, 1998. The Chairman did
not participate in the vote of the Board accepting this offer. Management
expects this transaction to close within 30 days. See "Item 8. Financial
Statements and Supplementary Data - Subsequent Events".
Pursuant to the confirmation of the Joint Plan, the Predecessor Company's
common stock was canceled during fiscal 1997. According to the Joint Plan and a
decision by the LFC Creditors' Committee, 4,000,000 shares of new common stock
of Siena Holdings, Inc. were held in reserve for issuance as of March 31, 1997
and ultimately issued on November 12, 1997 by the stock distribution agent for
distribution to the Class 3 unsecured creditors, pending finalization of all
paperwork. As of November 12, 1997, the estimated Class 3 claims totaled $146.8
million. The composition of the Class 3 unsecured creditors includes claims
relating to the holders of LFC senior convertible notes due 2003 (the
"Bondholders") of $145.4 million and other unsecured claims of $1.4 million.
As of September 16, 1998, the identities of all the Bondholders are not yet
known, therefore, management of the Company is not aware of all persons or
groups within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, who would be a beneficial owner of more than 5 percent of
SHI's outstanding Common Stock, except for those listed above. The process by
the stock distribution agent has resulted in 3,781,298 shares of common stock
actually distributed to former creditors through June 30, 1998. The Company
expects that their will be other
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<PAGE> 65
beneficial owners of shares once the identities of the Bondholders are known in
conjunction with the complete issuance of the securities.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The stock ownership by directors and executive officers of SHI as of
September 16, 1998, is as follows:
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Title of Class Name of Beneficial Owner Ownership Class
- ---------------------- --------------------------------------------- ---------------- ------------------
<S> <C> <C> <C>
SHI Common Stock John P. Kneafsey ............................ 385,176 9.6% (1)
W. Joseph Dryer.............................. -- --
Eric M. Bodow................................ -- --
James D. Kemp................................ -- --
Matthew S. Metcalfe.......................... -- --
Frank B. Ryan................................ -- --
</TABLE>
(1) Recognizing the need of the Company for additional working capital, the
Chairman of the Company offered to make a cash investment for a certain number
of shares of the Company's common stock. This offer was considered and accepted
by the Company's Board of Directors at its regularly scheduled quarterly meeting
held in Wilmington, Delaware on September 23, 1998. The Chairman did not
participate in the vote of the Board accepting this offer. Management expects
this transaction to close within 30 days. See "Item 8. Financial Statements
and Supplementary Data - Subsequent Events".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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<PAGE> 66
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, 1998 and 1997......................................... 22
Statement of Consolidated Operations--Year Ended June 30, 1998, Three Month Period
Ended June 30, 1997, Nine Month Period Ended March 31, 1997 and Year Ended
June 30, 1996........................................................................... 23
Statement of Consolidated Stockholders' Equity (Deficit)--Year Ended June 30, 1998,
Three Month Period Ended June 30, 1997, Nine Month Period Ended March 31, 1997
and Year Ended June 30, 1996.......................................................... 24
Statement of Consolidated Cash Flows--Year Ended June 30, 1998, Three Month Period
Ended June 30, 1997, Nine Month Period Ended March 31, 1997 and Year Ended
June 30, 1996........................................................................... 25
Notes to Consolidated Financial Statements................................................. 27
(ii) The following financial statement schedules are included in Item 8:
Schedule I--Condensed Financial Information of Registrant.................................. 55
Schedule III--Real Estate and Accumulated Depreciation..................................... 58
</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
(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.
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<PAGE> 67
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.
SIENA HOLDINGS, INC.
Registrant
Date: September 23, 1998 /S/ W. JOSEPH DRYER
-------------------------------------
W. Joseph Dryer
Principal Accounting 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, 1998 /S/ W. JOSEPH DRYER
-------------------------------------
W. Joseph Dryer
President
<PAGE> 68
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, 1998 By /S/ JOHN P. KNEAFSEY
--------------------------------
(John P. Kneafsey, Chairman)
Date: September 23, 1998 By /S/ ERIC M. BODOW
--------------------------------
(Eric M. Bodow)
Date: September 23, 1998 By /S/ JAMES D. KEMP
--------------------------------
(James D. Kemp)
Date: September 23, 1998 By /S/ MATTHEW S. METCALFE
--------------------------------
(Matthew S. Metcalfe)
Date: September 23, 1998 By /S/ FRANK RYAN
--------------------------------
(Frank Ryan)
<PAGE> 69
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
(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).
</TABLE>
<PAGE> 1
EXHIBIT 11
SIENA HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- --------------------------------
Three Month Nine Month
Year Ended Period Ended Period Ended Year Ended
June 30, June 30, March 31, June 30,
1998 1997 1997 1996
----------------------------- --------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
COMPUTATION:
Income (loss) before extraordinary item - available
to common stockholders ............................ $ 47 $ (86) $ (12,911) $(250,591)
Extraordinary gain on discharge of debt ............... -- -- 135,966 --
--------- --------- --------- ---------
Net income (loss)available to common stockholders ..... $ 47 $ (86) $ 123,055 $(250,591)
========= ========= ========= =========
Weighted average common shares outstanding ............ 4,000* 4,000* ** **
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item - available
to common stockholders ............................ $ 0.01* $ (0.02)* ** **
Extraordinary gain on discharge of debt ............... -- -- ** **
--------- --------- --------- ---------
Net income (loss)available to common stockholders ..... $ 0.01* $ (0.02)* ** **
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE
COMPUTATION:
Income (loss) available to common stockholders ........ $ 47 $ (86) $ (12,911) $(250,591)
Income effect of assumed conversions .................. -- -- -- --
Extraordinary gain on discharge of debt ............... -- -- 135,966 --
--------- --------- --------- ---------
Net income (loss)available to common stockholders
+ assumed conversions ............................. $ 47 $ (86) $ 123,055 $(250,591)
========= ========= ========= =========
Weighted average common shares outstanding ............ 4,000* 4,000* ** **
Plus: Dilutive potential common shares
SHI Nonqualified Stock Option Plan ............ 44* -- * ** **
--------- --------- --------- ---------
Adjusted weighted average shares outstanding .......... 4,044* 4,000* ** **
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item ............... $ 0.01* $ (0.02)* ** **
Income effect of assumed conversions .................. -- -- ** **
Extraordinary gain on discharge of debt ............... -- -- ** **
--------- --------- --------- ---------
Net income (loss)available to common stockholders
+ assumed conversions ............................. $ 0.01* $ (0.02)* ** **
========= ========= ========= =========
</TABLE>
* Average share and per share amounts for Reorganized Company based on shares
issued or reserved for issuance to creditors.
** Average share and per share amounts are not meaningful due to reorganization.
<PAGE> 1
EXHIBIT 21
SIENA HOLDINGS, INC. AND SUBSIDIARIES
CORPORATE STRUCTURE
JUNE 30, 1998
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 SHI and its subsidiaries are incorporated.
Except as otherwise specified, each entity is headquartered at 5068 West Plano
Parkway in Plano, Texas.
<TABLE>
<CAPTION>
State of
Corporation Incorporation
- ----------- -------------
<S> <C>
Siena Holdings, Inc. (formerly Lomas Financial Corporation) (1).................................... Delaware
Siena Information Systems, Inc (formerly Lomas Information Systems)............................ Nevada
Siena Management, Inc. (formerly Lomas Management, Inc.)....................................... Nevada
Siena Properties, Inc. (formerly Lomas Properties, Inc.)....................................... Texas
Louisiana National Land Corporation (4).................................................... Louisiana
Siena Investment Properties, Inc. (formerly Lomas Investment Properties, Inc.)............. Nevada
Naples Bay View, Inc. (4).................................................................. Florida
Financial Insurance Ltd.(2) (4)................................................................ Bermuda
Siena Housing Management Corp. (formerly Lomas Housing Management Corp.)....................... Texas
Roosevelt Office Center, Inc.(3) (4)........................................................... New York
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) Located at Dorchester House, P. O. Box HM2020, Church Street, Hamilton 5,
Bermuda.
(3) Located at 67 Wall Street, Suite 2411, New York, New York 10005.
(4) Dissolution pending.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,475
<SECURITIES> 0
<RECEIVABLES> 119
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,648
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,448
<CURRENT-LIABILITIES> 594
<BONDS> 0
0
0
<COMMON> 400
<OTHER-SE> (39)
<TOTAL-LIABILITY-AND-EQUITY> 7,448
<SALES> 0
<TOTAL-REVENUES> 1,410
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (1,338)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 72
<INCOME-TAX> (25)
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
