ITEM 3. LEGAL PROCEEDINGS ------ -----------------
A tax assessment (the "Assessment") has been made by the Commonwealth of Massachusetts against a former wholly-owned subsidiary of the Company, which was dissolved in July 1990. The Massachusetts Department of Revenues (the "MDR") stated, in a notice dated February 15, 1992, that the amount due and owing was $1.2 million and it is believed that additional interest and/or penalties have been imposed with regard to the Assessment. On November 29, 1993, an Offer in Settlement (the "Offer")was forwarded to the MDR with respect to the Assessment. As of March 29, 1995, no reply to the Offer had been received. In addition, the Company has received Notices of Assessment totaling $225,000 from the MDR as discussed in Note 8 to the Companys Financial Statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------ ---------------------------------------------------
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND ------ ------------------------------------------------------------------ RELATED STOCKHOLDER MATTERS ---------------------------
LHI Common Stock was listed and traded on the American Stock Exchange until November 29, 1991; it is currently traded over the counter. During 1993 and 1994, there have been a limited number of stock transactions for an insignificant number of shares. Over 1993 and 1994, the bid and ask price has ranged from $.01 to $.10 per share.
On March 17, 1995, there were approximately 1,984 stockholders of record of LHI Common Stock. There were no dividends paid on LHIs Common Stock in 1994 and 1993.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA ------ -----------------------
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED ------ -----------------------
QUARTERLY FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------ ---------------------------------------------------------------------- OF OPERATIONS -------------
DIVESTITURE OF THE LINCOLN SAVINGS BANK, FSB LIQUIDITY AND GOING CONCERN
As previously reported, the Lincoln Savings Bank, FSB ("Lincoln" or the "Bank") was the primary asset of Lincorp Holdings, Inc., ("LHI" or the "Company"). On January 20, 1993, in connection with the transaction described below, the Company relinquished control of the Bank by placing the common stock of Lincoln (the "Lincoln Shares") into a trust for eventual sale, and by filing a divestiture notice with the Office of Thrift Supervision (the OTS).
On March 4, 1994, Lincoln entered into a definitive agreement (the "Acquisition Agreement") with Anchor Savings Bank FSB ("Anchor") whereby Anchor would acquire all of the assets in the trust (the "Trust Assets"), including outstanding preferred and common stock of Lincoln and a senior secured note, for $80 million in cash. The transaction was subject to, among other things, regulatory approval of the OTS and the Federal Deposit Insurance Corporation. Approval of the transaction was granted on July 12, 1994 and the transaction was completed on August 12, 1994. As anticipated under the Acquisition Agreement, the Company received none of the proceeds from the sale of Lincoln but two of the Companys lenders received a total of $6.1 million as repayment of a portion of the principal amount of debt owed them. This payment to the Companys lenders represents a reduction in the loss recorded in 1992 relating to the Companys writedown of its investment in Lincoln. Accordingly, the Company has recorded a $6.1 million income adjustment in 1994 relating to the discontinued operations of Lincoln.
At December 31, 1994 the Company had $105.2 million of principal indebtedness and approximately $41.0 million of accrued and unpaid interest (the principal and interest are hereinafter referred to collectively as the "Indebtedness") part of which is included in the net liability of discontinued operations. The Companys parent company, Unicorp Energy Corporation ("UEC"), holds $133.5 million of the Companys Indebtedness and Hees International Bancorp, Inc. ("Hees"), which currently owns an indirect 24.6% non-voting equity interest in UEC, holds the balance of the Indebtness, $12.7 million. All of LHIs remaining assets, $.7 million, are pledged to its lenders. The Companys sources of funds during the year ended December 31, 1994 and to date have been primarily funds from the sale of marketable securities and payments received from mortgage receivables. The assets being utilized by the Company are part of the collateral package securing the Companys Indebtedness. Unless LHIs lenders continue to defer in realizing on the pledged collateral and allow the Company to utilize the proceeds from such collateral to fund its day to day operating expenses, LHI will be unable to continue as a going concern.
The Company is continuing to meet with its lenders to discuss its future prospects. The Company hopes that its lenders will continue to forbear from exercising their remedies so that the Company may seek out opportunities which, among other matters, will allow it to realize on its intangible assets and tax attributes.
On January 20, 1993, the Company, UEC, and certain other parties entered into an agreement with the OTS (the "Lincoln Agreement") dated as of December 31, 1992 relating to Lincoln, pursuant to which (i) the Company filed a divestiture notice with the OTS which divested it of its savings and loan holding company status and all further involvement in the affairs and management of the Bank, (ii) the Company had the Lincoln Shares deposited into a Trust created pursuant to the terms of the Lincoln Agreement, (iii) all litigation between the Company, the OTS and certain other parties was settled, and (iv) the Bank received an infusion of capital by the purchase of $15 million of convertible preferred shares and $15 million in the form of a senior secured note.
As a result of this transaction, the Company deconsolidated the operations of the Bank from its operations for financial reporting purposes. This document, therefore, includes no information, financial or otherwise, relating to the operations of Lincoln for the years ended December 31, 1992, 1993 and 1994.
As part of this transaction, UEC returned to the Company $10 million of preferred stock of the Company owned by it, plus its right to receive approximately $2 million in accrued and unpaid dividends. This preferred stock was voting stock and holders of such stock were entitled to receive dividends on a cumulative basis of $.9 million per annum. This stock has been retired by the Company.
The Lincoln Shares previously had been pledged to the Companys lenders to secure the Indebtedness, which had been in default since August 1991. These lenders had informed the Company that the agreement with the OTS was in their best interests and represented the best means for the lenders to realize upon the value of the pledged collateral. In connection with the Lincoln Agreement, the Companys lenders agreed to release their liens on the Lincoln Shares and substitute therefor an interest in the proceeds from the sale of the Bank. As part of this transaction, National Bank of Canada, the Companys primary lender ("NBC"), transferred to UEC approximately $77 million in indebtedness plus accrued and unpaid interest owed to NBC by the Company. In consideration for the transfer, NBC acquired approximately 30% of the convertible preferred stock of Lincoln acquired by UEC or approximately 25% of the equity of the Bank. All of the remaining assets of the Company continue to be pledged to the Companys lenders.
The debt acquired from NBC by UEC was acquired at a cost of $4.7 million. As UEC is an affiliate of the Company, the amount of debt transferred which is in excess of the face amount is, for United States federal and state income tax purposes, considered forgiveness of indebtedness of the Company and therefore is required to be included as taxable income by the Company. The Company will not have to pay United States federal or state taxes on this income because of its insolvency. However, tax attributes of the Company (net operating loss carry forwards, capital losses and built-in losses) will be reduced to the extent of the forgiveness of indebtedness. Additionally, in connection with the transfer of the Lincoln Shares, for United States federal tax purposes, the Company may realize a bad debt loss of approximately $85 million as well as certain as yet undetermined and unrealized potential capital losses. No benefit has been recorded for these items due to the uncertainty of realization.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993 ---------------------
For the year ended December 31, 1994, the Company had net income of $4.2 million compared to a net loss of $11.5 million for the year ended December 31, 1993. This $15.7 million change from 1993 to 1994 is primarily attributable to the following, all of which were reflected in the fourth quarter of 1994:
(1) A $6.1 million recovery on the writedown of its investment in Lincoln as two of the Companys lenders received a total of $6.1 million, as repayment of a portion of the principal amount of debt owed them, in connection with the closing of the Lincoln sale to Anchor.
(2) A $4.5 million decrease in the estimated writedown of assets from discontinued real estate operations primarily due to the improved real estate market.
(3) A $3.4 million reversal of accrued income taxes relating to discontinued operations reflecting a revision of the Companys estimate of this liability.
(4) A $1.5 million increase in other income related to the reversal of certain prior period reserves that are no longer needed.
1993 COMPARED TO 1992 ---------------------
At December 31, 1992, the Company reflected the divestiture of the Bank and accounted for these activities as discontinued operations. For the year ended December 31, 1993, the Company had a net loss was $11.5 million compared to $107.7 million loss for the same period in 1992. The decrease in loss of $96.2 million was due primarily to:
(1) loss on writedown in the investment in Lincoln of $90 million in 1992; (2) loss from discontinued operations of Lincoln of $4.9 million for the year ended December 31, 1992; (3) decrease in income taxes of $.5 million; (4) decrease in interest expense of $.2 million; (5) decrease in other expenses of $.4 million; and (6) increase in interest and other income of $.2 million.
As previously discussed above, the Company reflected the divestiture of Lincoln for the year ended December 31, 1992. A writedown of $90 million was recorded because it was unlikely that the Company would realize any recovery of equity from the Bank due to the right of LHIs lenders to receive LHIs portion of the proceeds of any eventual sale of the Bank to the extent of LHIs outstanding indebtedness. The Lincoln Shares had previously been pledged to the Companys lenders to secure the indebtedness of the Company, which indebtedness has been in default since August 1991. With respect to the writedown, the Company recorded a $7 million tax benefit as a result of the loss.
Loss from discontinued operations of Lincoln amounted to $4.9 million for the year ended December 31, 1992.
The decrease in income taxes is primarily due to no benefit being recognized on disposal of real estate until such time as the losses are realized.
The decrease in interest on borrowed funds is attributable to a decline in the weighted average interest cost of borrowed funds to 10.22% in 1993 from 10.27% in 1992. The weighted average debt level was $111.3 million in 1993, as compared to $112.3 million in 1992 (inclusive of $9 million classified as discontinued operations).
The decline in other expenses was due to a reduction in the business activity of the Company.
FINANCIAL POSITION
MATERIAL CHANGES DURING 1994 ----------------------------
At December 31, 1994, the Company had $105.2 million principal indebtedness and approximately $41.0 million of accrued and unpaid interest (the principal and interest are hereinafter referred to collectively as the "Indebtedness") part of which is included in the net liability of real estate discontinued operations. The Companys parent company, Unicorp Energy Corporation ("UEC"), holds $133.5 million of the Companys Indebtedness and Hees International Bancorp, Inc. ("Hees"), which currently owns an indirect 24.6% non-voting equity interest in UEC, holds the balance of the Indebtness, $12.7 million. LHI is in default under all of its debt obligations.
The Companys assets decreased from $1.2 million at December 31, 1993 to $.7 million at December 31, 1994 as the Company wrote off approximately $.3 million in furniture and fixtures, and cash and marketable securities were used to fund the general and administrative function of the Company.
The principal amount of the Companys indebtedness was reduced $6.1 million ($5.0 million relating to continuing operations and $1.1 million relating to discontinued operations) as two of the Companys lenders received in total $6.1 million in connection with the closing of the Lincoln sale to Anchor.
The net liability of real estate discontinued operations decreased $5.5 million primarily as certain loss accrual estimates were reduced by $4.5 million due to an improving real estate market and, as previously discussed, the $1.1 million payment received by one of the Companys lenders in connection with the settlement of the Lincoln sale.
Other liabilities increased $5.9 million due to a $10.8 million increase in accrued interest payable offset by a $3.2 million decrease in accrued income taxes and a $1.7 million decrease in other accrued expenses. The decrease in taxes and other accrued expenses reflects a revision of the Companys estimate of these expenses.
Effective January 1, 1995, as a result of an improving real estate market, the Company reformulated their business plan to focus on such activity. Accordingly, effective January 1, 1995 the Company restated its balance sheet to reflect the real estate operations as a continuing operation. See Note 9 to the Companys Financial Statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------ -------------------------------------------
The Financial Statements of the Company are set forth in Part IV on pages to and incorporated herein by reference. See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" for a complete list of Financial Statements and Financial Statement Schedules.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------ --------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
(i) On November 11, 1994, Price Waterhouse, LLP declined to stand for re- election as the independent accountants for Lincorp Holdings, Inc.
(ii) The reports of Price Waterhouse, LLP on the financial statements for the two fiscal years ended December 31, 1993 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope or accounting principle. The reports of Price Waterhouse, LLP on the financial statements for the past two fiscal years were qualified as to going concern uncertainty.
(iii) The Registrants Board of Directors participated in and approved the decision to change independent accountants.
(iv) In connection with its audits for the two fiscal years ended December 31, 1993 and through November 11, 1994, there have been no disagreements with Price Waterhouse, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Price Waterhouse, LLP would have caused them to make reference thereto in their report on the financial statements for such years.
(v) During the two most recent fiscal years and through November 11, 1994, there have been no reportable events (as defined in Regulation S-K Item 304 (a) (i) (v)).
(vi) On November 11, 1994, KPMG Peat Marwick LLP was engaged as the independent accountants for Lincorp Holdings, Inc.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ------- --------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The term of each director is for one year and thereafter until his successor shall have been elected and qualified. LHIs executive officers are elected by, and serve at the discretion of the Board of Directors.
The following table sets forth the name, age, principal occupation and position with LHI, if any, of each director and executive officer of LHI on March 29, 1995, and the year each director was first elected to the Board of Directors of LHI:
--------------- (1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Arms Length Committee.
Ian G. Cockwell has been President of Westcliff Management Services Inc. since prior to 1988 and Unicorp Energy Corporation since 1992. He has been a Director of LHI since November 1994.
William Kirschenbaum has been the Chairman of the Board of Hamilton Financial Services Corporation, successor to Hamilton Savings Bank, since prior to 1988.
George S. Mann has served as Chairman of the Board and President of the Company since 1981, and 1989, respectively. He served as Chairman of the Board of UEC from 1983, until June 1990, and now serves as a Director. In connection with the Lincoln Agreement, without admitting or denying the allegations contained therein, and in order to avoid the significant costs of potential litigation, Mr. Mann consented to the entry of an order by the OTS which permanently prohibited him from participation in the conduct of the affairs of, or exercising any voting rights with respect to, depository institutions in the United States.
Ralph V. Marra has been the Chairman and President of ELM Consulting Corporation since October of 1994. He was the Chief Financial Officer of Lincoln Savings Bank, FSB from November 1989 until October of 1994 and was the Chief Accounting Officer and Treasurer of Lincoln from December 1988 through November 1989. From March 1988 to December 1988 Mr. Marra was the Chief Administrative Officer of Lincoln. From August 1984 to December 1993 he was a Senior Vice President of LHI and from March 1987 until December 1993 he was LHIs Treasurer. He has been a Director of LHI since November 1994.
Herbert R. Silverman was Chairman, Finance Committee, of Helmsley-Spear, Inc., a nationwide real estate organization, from 1974 until his retirement on January 31, 1990. He is Senior Advisor to Bank Julius Baer, an affiliate of the Julius Baer Group of Switzerland. Through 1993, Mr. Silverman was Vice Chairman of the Board of Trustees of New York University, and is a life member of the Board of Trustees of Rutgers University and a trustee of Neuberger and Berman Mutual Funds. He has been a member of the Board of Directors of Hamilton Financial Services Corporation since November 1993, and a member of the Board of Directors of National Patent Systems since 1994.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
On November 11, 1994, Messrs. Marra and Cockwell were elected to the Board of Directors of the Company, Ronald W. Cantwell was appointed Executive Vice President of the Company and Jack R. Sauer was appointed Chief Financial Officer and Secretary of the Company. Annual Statements of Changes in Beneficial Ownership on Forms 5 were
filed with the Securities and Exchange Commission to reflect these elections and appointments on February 10, 1995.
DIRECTORS REMUNERATION ----------------------
Directors of the Company receive a quarterly fee of $1,500 in addition to a fee of $600 for actual attendance at each directors or committee meeting. For meetings of any committee held on the same day as any meeting of the Board of Directors, the fee for attendance at the committee meetings is $300. Where meetings of the Board or committees thereof are held by conference telephone, directors receive a fee of $150. Fees paid to all directors for attendance at the Board and committee meetings during the year ended December 31, 1994 totaled $32,700.
DIRECTORS MEETING AND COMMITTEES --------------------------------
The Board of Directors of the Company held 4 meetings during the fiscal year ended December 31, 1994. Admiral Zumwalt, who resigned in November 1994, attended 1 of the 3 meetings held by the Board of Directors while he was a Director. Mr. Kirschenbaum attended 2 of the 4 meetings held during the fiscal year and no other member of the Board attended fewer than 3 of the 4 meetings held during the fiscal year.
The Board of Directors has a standing Audit Committee which represents the Board of Directors in its relations with the Companys independent accountants and oversees the Companys compliance with operating procedures and policies. This committee also approves the scope of the Companys financial statement examinations, monitors the adequacy of the Companys internal controls and reviews and monitors any other activity that the committee deems necessary or appropriate. The Compensation Committee makes recommendations to the Board of Directors with respect to the salaries and other forms of remuneration paid, or benefits made available to, officers, and the fees payable to directors. The Company does not have a standing Nominating Committee. The Executive Committee is authorized to act on behalf of the Board of Directors between Board meetings and to have such powers and duties which may lawfully be assigned to it under Delaware law. The Board of Directors has an Arms Length Committee comprised of independent directors to review transactions involving both the Company and UEC.
The only Committee which held a meeting during the Companys fiscal year ended December 31, 1994 was the Audit Committee which held one meeting.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ------- ----------------------
George S. Mann, the Chief Executive Officer (CEO) of the Company, did not receive any compensation for his services as CEO during any of the fiscal years ended December 31, 1994, 1993 or 1992. No other executive officer of the Company received in excess of $100,000 per annum in any of the fiscal years ended December 31, 1994, 1993 or 1992.
No compensation committee report or performance graph is included herein because the chief executive officer draws no salary from the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND OFFICERS AND OTHER ------- ---------------------------------------------------------------- PRINCIPAL HOLDERS OF THE COMPANY'S VOTING SECURITIES ---------------------------------------------------
The table below sets forth information concerning the shares of the Common Stock beneficially owned by the individual directors, all directors and officers of the Company as a group without naming them and each person who is known by the Company to be the beneficial owner of more than five percent of the Common Stock as of March 10, 1995. The address of each of the directors is c/o Lincorp Holdings, Inc., 250 Park Avenue, Suite 2020, New York, New York 10017. The address of UEC is BCE Place Suite 2320 Toronto, Ontario, Canada M5J151.
--------------- * Less than 1%
(1) The stockholdings indicated for Mr. Mann are all owned directly by UEC. Mr. Mann disclaims beneficial ownership of all such shares.
In connection with the Lincoln Agreement, UEC returned to the Company during 1992, $10 million of preferred stock of the Company owned by it, plus its right to receive approximately $2 million in accrued and unpaid dividends. This preferred stock was voting stock and holders of such stock were entitled to receive dividends on a cumulative basis of $.9 million per annum. This stock has been retired by the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ------- ----------------------------------------------
In January 1993, UEC acquired approximately $77 million of indebtedness of the Company in connection with the Lincoln Agreement. See "Business - Recent Developments."
PART IV -------
ITEM 14.
ITEM 14. -------
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
All schedules have been omitted because they are not required or because the required information is contained in the financial statements or notes thereto.
(b) Reports on Form 8-K
A Form 8-K was filed by the Company on November 11, 1994.
(c) Exhibits PAGE ----
3.1 Restated Certificate of Incorporation of the Company, * as amended to date, (incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 1987.
3.2 By-Laws of the Company as amended to date, (incorporated * by reference to Exhibit 3.2 to the Companys Annual Report Form 10-K for the year ended December 31, 1986).
10.01 Subscription and Purchase Agreement dated December * 31, 1987 between the Company and UEC (incorporated by reference to Exhibit 2.2 to the Companys Current Report Form 8-K dated January 14, 1988).
10.02 Letter Agreement re: Line of Credit dated November * 30, 1989 between UEC and LHI (incorporated by reference to Exhibit 10.23 to the Companys Annual Report on Form 10-K for the year ended December 31, 1989).
10.03 Revolving Demand Note dated November 30, 1989 * from LHI to UEC (incorporated by reference to Exhibit 10.24 to the Companys Annual Report on Form 10-K for the year ended December 31, 1989.
10.04 Consulting Agreement dated as of February 13, 1990 * between LHI and Coscan Inc. (incorporated by reference to Exhibit 10.27 to the Companys Annual Report on Form 10-K for the year ended December 31, 1989).
10.05 Letter Agreement re: Operating Deficit Loan Agreement * dated February 13, 1990 between LHI and Coscan Inc. (incorporated by reference to Exhibit 10.28 to the Companys Annual Report on Form 10-K for the year ended December 31, 1989).
10.06 Form of Promissory Note from LHI to Coscan Inc. * (incorporated by reference to Exhibit 10.29 to the Companys Annual Report on Form 10-K for the year ended December 31, 1989).
10.07 Closing Agreement, dated as of July 23, 1990 among * the Company, Coscan Colorado Inc. ("CCI"), Coscan Colorado LHI Inc. and Coscan Commercial Limited Partnership, a California Limited Partnership ("Coscan California"). (Incorporated by reference to Exhibit 28.1 to LHIs Report on Form 8-K dated August 13, 1990).
10.08 Closing Agreement, dated as of July 23, 1990 among the * Company, Coscan California Commercial Inc. ("CCC"), Coscan California LHI Inc. and Coscan Commercial Limited Partnership, a California Limited Partnership ("Coscan California"). (Incorporated by reference to Exhibit 28.2 to LHIs Report on Form 8-K dated August 13, 1990).
10.09 Agreement of Limited Partnership of Coscan Commercial, * dated as of July 23, 1990. (Incorporated by reference to Exhibit 28.3 to LHIs Report on Form 8-K dated August 13, 1990).
10.10 Agreement of Limited Partnership of Coscan Commercial, * dated as of July 23, 1990. (Incorporated by reference to Exhibit 28.3 to LHIs Report on Form 8-K dated August 13, 1990).
10.11 Letter Agreement, dated as of July 23, 1990, among CCI, * CCC, the Company, Coscan Commercial and Coscan California, regarding loans by CCI and CCC. (Incorporated by reference to Exhibit 28.5 to LHIs Report on Form 8-K dated August 13, 1990).
10.12 $24,000,000 Secured Revolving Credit Agreement, dated * as of July 25, 1990 (the "Senior Credit Agreement"), among the Company, Hees International Bancorp Inc. ("Hees"), National Bank of Canada ("NBC") and NBC, as Agent. (Incorporated by reference to Exhibit 28.6 to LHIs Report on Form 8-K dated August 13, 1990).
10.13 Amended and Restated Credit Agreement, dated as of July * July 25, 1990, between LHI and NBC. (Incorporated by reference to Exhibit 28.7 to LHIs Report on Form 8-K dated August 13, 1990).
10.14 Letter Agreement, dated July 25, 1990, between UEC * and the Company regarding the revolving line of credit from UCC to the Company (Incorporated by reference to Exhibit 28.8 to LHIs Report on Form 8-K dated August 13, 1990).
10.15 Securities Pledge Agreement, dated as of July 25, 1990, * by the Company in favor of UEC. (Incorporated by reference to Exhibit 28.8 to LHIs Report on Form 8-K dated August 13, 1990).
10.16 Lincorp Pledge Agreement, dated as of July 25, 1990, by * Lincorp Inc. in favor of UEC. (Incorporated by reference to Exhibit 28.10 to LHIs Report on Form 8-K dated August 13, 1990).
10.17 Subsidiaries Pledge Agreement, dated as of July 25, 1990, * by Unicorp Delaware I, Inc., Unicorp Delaware II, Inc. and ITT Missouri Corp. in favor of UEC. (Incorporated by reference to Exhibit 28.11 to LHIs Report on Form 8-K dated August 13, 1990).
10.18 Security Agreement, dated as of July 25, 1990, by the * Company in favor of UEC. (Incorporated by reference to Exhibit 28.12 to LHIs Report on Form 8-K dated August 13, 1990).
10.19 Agreement Relating to the Lincoln Savings Bank, FSB dated * as of December 31, 1992 among the OTS, the Company and certain other parties (incorporated by reference to Exhibit A to LHIs Current Report on Form 8-K dated January 20, 1993).
10.20 Trust Agreement dated as of January 20, 1993 among the * OTS, the Company and certain other parties (incorporated by reference to Exhibit B to LHIs Current Report on Form 8-K dated January 20, 1993).
10.21 Consent Agreement dated March 4, 1994 among Unicorp * Energy Corporation, Union Holdings, Inc., Lincorp, Inc., Lincorp Holdings, Inc. Hees International Bancorp, Inc., National Bank of Canada, Anthony M. Frank, as trustee, The Lincoln Savings Bank, FSB and Anchor Savings Bank FSB. (incorporated by referenced to Exhibit 10.23 to the Companys Annual Report on Form 10-K for the year ended December 31, 1993).
22 Subsidiaries of the Company.
28 Report of KPMG Peat Marwick LLP dated March 24, 1995.
29 Report of Price Waterhouse, LLP dated April 8, 1994.
--------------- * Incorporated by reference.
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 in New York, New York.
Dated: March 29, 1995
LINCORP HOLDINGS, INC.
By: /s/ Jack R. Sauer -------------------------- Jack R. Sauer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Lincorp Holdings, Inc.:
We have audited the accompanying balance sheet of Lincorp Holdings, Inc. ("Company") as of December 31, 1994, and the related statements of operations, changes in stockholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lincorp Holdings, Inc. as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is in default on all its credit facilities and, at December 31, 1994, has $105.2 million of principal indebtedness, and $41.0 million of accrued and unpaid interest. In addition, the Company has a net capital deficiency of $148.9 million as of December 31, 1994. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
New York, New York March 24, 1995
[Letterhead of Price Waterhouse LLP appears here]
REPORT OF INDEPENDENT ACCOUNTANTS
April 8, 1994
To the Board of Directors and Stockholder of Lincorp Holdings, Inc.
In our opinion, the accompanying balance sheet and the related statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position, results of operations and cash flows of Lincorp Holdings, Inc. as of December 31, 1993 and for each of the two years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Lincorp Holdings, Inc.'s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Lincorp Holdings, Inc. for any period subsequent to December 31, 1993.
The accompanying financial statements have been prepared assuming that Lincorp Holdings, Inc. will continue as a going concern. As described in Note 1, on January 20, 1993, Lincorp Holdings, Inc. relinquished control of its primary asset and only operating entity, The Lincoln Savings Bank, FSB ("Lincoln"), and wrote-off its investment in Lincoln. Lincorp Holdings, Inc. (the "Company") has experienced significant losses in operations, is in default on all of its credit facilities and, at December 31, 1993, has $111.3 million of principal indebtedness, $29.7 million of accrued and unpaid interest and $1.2 million of assets. The Company's parent and lenders have indicated that they are not prepared to (1) defer in collecting the amounts due them and (2) provide funds to meet the Company's liabilities during the next 12 months. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
LINCORP HOLDINGS, INC. BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
LINCORP HOLDINGS, INC. STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
LINCORP HOLDINGS, INC. STATEMENTS OF OPERATIONS (continued)
The accompanying notes are an integral part of these financial statements.
LINCORP HOLDINGS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIT
The accompanying notes are an integral part of these financial statements.
LINCORP HOLDINGS, INC. STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
LINCORP HOLDINGS, INC. STATEMENTS OF CASH FLOWS (continued)
The accompanying notes are an integral part of these financial statements.
LINCORP HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DIVESTITURE OF THE LINCOLN SAVINGS BANK, FSB -----------------------------------------------------
As previously reported, the Lincoln Savings Bank, FSB ("Lincoln" or the "Bank") was the primary asset of Lincorp Holdings, Inc., ("LHI" or the "Company"). On January 20, 1993, in connection with the transaction described below, the Company relinquished control of the Bank by placing the common stock of Lincoln (the "Lincoln Shares") into a trust for eventual sale, and by filing a divestiture notice with the Office of Thrift Supervision (the "OTS").
On March 4, 1994, Lincoln entered into a definitive agreement (the "Acquisition Agreement") with Anchor Savings Bank FSB ("Anchor") whereby Anchor would acquire all of the assets in the trust (the "Trust Assets"), including outstanding preferred and common stock of Lincoln and a senior secured note, for $80 million in cash. The transaction was subject to, among other things, regulatory approval of the OTS and the Federal Deposit Insurance Corporation. Approval of the transaction was granted on July 12, 1994 and the transaction was completed on August 12, 1994. As anticipated under the Acquisition Agreement, the Company received none of the proceeds from the sale of Lincoln but two of the Companys lenders received a total of $6.1 million as repayment of a portion of the principal amount of debt owed them. This payment to the Companys lenders represents a reduction in the loss recorded in 1992 relating to the Companys writedown of its investment in Lincoln. Accordingly, the Company has recorded a $6.1 million income adjustment in 1994 relating to the discontinued operations of Lincoln.
On January 20, 1993, the Company, its parent company, Unicorp Energy Corporation ("UEC"), and certain other parties entered into an agreement with the OTS (the "Lincoln Agreement") dated as of December 31, 1992 relating to Lincoln, pursuant to which (i) the Company filed a divestiture notice with the OTS which divested it of its savings and loan holding company status and all further involvement in the affairs and management of the Bank, (ii) the Company had the Lincoln Shares deposited into a Trust created pursuant to the terms of the Lincoln Agreement, (iii) all litigation between the Company, the OTS and certain other parties was settled, and (iv) the Bank received an infusion of capital by the purchase of $15 million of convertible preferred shares and $15 million in the form of a senior secured note.
As a result of this transaction, the Company deconsolidated the operations of the Bank from its operations for financial reporting purposes. Therefore, the financial statements include no information, financial or otherwise relating to the operations of Lincoln for the years ended December 31, 1994, 1993 and 1992.
LINCORP HOLDINS, INC. NOTES TO FINANCIAL STATEMENTS
As part of this transaction, UEC returned to the Company $10 million of preferred stock of the Company owned by it, plus its right to receive approximately $2 million in accrued and unpaid dividends. This preferred stock was voting stock and holders of such stock were entitled to receive dividends on a cumulative basis of $.9 million per annum. This stock has been retired by the Company.
The Lincoln Shares previously had been pledged to the Companys lenders to secure the Bank indebtedness, which had been in default since August 1991. These lenders had informed the Company that the agreement with the OTS was in their best interests and represented the best means for the lenders to realize upon the value of the pledged collateral. In connection with the Lincoln Agreement, the Companys lenders agreed to release their liens on the Lincoln Shares and substitute therefor an interest in the proceeds from the sale of the Bank. As part of this transaction, National Bank of Canada, the Companys primary lender ("NBC"), transferred to UEC approximately $77 million in indebtedness plus accrued and unpaid interest owed to NBC by the Company. In consideration for the transfer, NBC acquired approximately 30% of the convertible preferred stock of Lincoln acquired by UEC or approximately 25% of the equity of the Bank. All of the remaining assets of the Company continue to be pledged to the Companys lenders.
The debt acquired from NBC by UEC was acquired at a cost of $4.7 million. As UEC is an affiliate of the Company, the amount of debt transferred which is in excess of the face amount is, for United States federal and state income tax purposes, considered forgiveness of indebtedness of the Company and therefore is required to be included as taxable income by the Company. The Company will not have to pay United States federal or state taxes on this income because of its insolvency. However, tax attributes of the Company (net operating loss carry forwards, capital losses and built-in losses) will be reduced to the extent of the forgiveness of indebtedness. Additionally, in connection with the transfer of the Lincoln Shares, for United States federal tax purposes, the Company may realize a bad debt loss of approximately $85 million as well as certain as yet undetermined and unrealized potential capital losses. No benefit has been recorded for these items due to the uncertainty of realization.
NOTE 2 - LIQUIDITY AND GOING CONCERN ------------------------------------
At December 31, 1994, LHI had outstanding $146.2 million of indebtedness (the "Indebtedness") (including interest payable of $41.0 million) under its Senior, Subordinated and Junior Credit Facilities part of which is included in the net liability of discontinued operations. UEC holds $133.5 million of the Companys, Indebtedness and Hees
LINCORP HOLDINS, INC. NOTES TO FINANCIAL STATEMENTS
International Bancorp, Inc. ("Hees"), which currently owns an indirect 24.6% non-voting equity interest in UEC, holds the balance of the Indebtness, $12.7 million. LHI is in payment default under each of the above mentioned credit facilities. As part of the Agreement, the Companys lenders agreed to release their liens on the Lincoln Shares and substitute therefor an interest in the proceeds from the sale of the Bank. These credit facilities are secured by a security interest in all of LHIs remaining assets.
LHIs sources of funds during the year ended December 31, 1994 and to date have been primarily funds from the sales of marketable securities and payments received from mortgage receivables. The assets generating the funds being utilized by LHI are part of the collateral package securing the above described credit facilities. Unless LHIs lenders are prepared to continue to defer in realizing on the pledged collateral and allow LHI to utilize the proceeds from such collateral to fund its limited ongoing operations, LHI will be unable to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ---------------------------------------------------
BASIS OF ACCOUNTING
On December 31, 1992, LHI relinquished control over Lincoln and filed a divestiture notice with the OTS (See Note 1). Since the divestiture was consummated effective as of December 31, 1992, the operating results of Lincoln have been reclassified as discontinued operations in the financial statements for the year ended December 31, 1992 and subsequent years.
INVESTMENTS IN MARKETABLE SECURITIES
Effective January 1, 1994 the Company adopted the provisions of the Financial Accounting Standards Boards Statement of Financial Accounting Standards (SFAS) No. 115 Accounting for Certain Investments in Debt and Equity Securities. At December 31, 1994, the Company has classified its marketable securities as available-for-sale.
Investments in marketable securities represent investments in U.S. Government bonds and are carried at quoted market value.
INCOME TAXES
In January 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes, resulting in no cumulative effect for prior periods. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
LINCORP HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of change in tax rates is recognized in income in the period that includes the enactment date.
NOTE 4 - DISCONTINUED REAL ESTATE OPERATIONS --------------------------------------------
In 1989, the Company announced its intention to dispose of its real estate rental and development operations owned outside of Lincoln and to account for these activities as discontinued operations. A provision for loss on disposal of real estate operations in the amount of $68 million, including $14.4 million for operating losses during the phaseout period, was recorded for the year ended December 31, 1989.
Assets of discontinued operations at December 31, 1994 and 1993 are recorded at their estimated net realizable value including provision for the cost of disposition, interest, and other carrying costs estimated for the disposition period. Mortgage loans and note payable on real estate assets and the amount advanced under the new facility to repay the remaining outstanding indebtedness under the previous Senior Credit Facility, which was secured by real estate assets, were included in the discontinued operations. During 1994 the Company decreased its estimated loss on the writedown of the assets of the discontinued real estate operations by $4.5 million, primarily reflecting an improved real estate market. (See Note 9).
Net liability for discontinued operations consisted of the following:
(a) Indebtedness to bank consisted of a portion of the $24 million Senior Credit Agreement (See Note 6). $9 million under the new facility was advanced to repay the remaining outstanding indebtedness under the previous senior loan facility and was classified with discontinued operations. The balance was decreased to $7.9 million due to a payment made to the lender in connection with the closing of the Lincoln sale to Anchor (See Note 1).
NOTE 5 - OTHER LIABILITIES --------------------------
A summary of other liabilities is as follows:
NOTE 6 - BORROWED FUNDS -----------------------
The Companys borrowed funds are as follows:
(a) In July 1990, as part of the refinancing of the Companys debt, the Company entered into a $24 million Secured Revolving Credit Facility provided by National Bank of Canada (NBC) and Hees. The facility expired in August 1991 and the Company has not paid any interest due since that time. Furthermore, the $24 million Secured Revolving Credit Facility was secured by a first lien on substantially all the Company's
LINCORP HOLDINS, INC. NOTES TO FINANCIAL STATEMENTS
remaining assets including the shares of Lincorp, Inc., the holding company of Lincoln, which were released, as part of the Lincoln Agreement on January 20, 1993. In connection with the Lincoln Agreement, NBC assigned its rights and obligations under the credit facility to UEC. In connection with the settlement of the Lincoln sale to Anchor, Hees was repaid $3.1 million of which $2.0 million was allocated to continuing operations and $1.1 million was allocated to discontinued operations (See Notes 1 and 4).
(b) In August 1987, the Company entered into the $65 million Subordinated Credit Facility with the NBC which matures in August 1997 and calls for interest- only payments at a fixed rate of 11.4 percent, payable semi-annually. The Company may prepay the loan at any time in whole or in amounts aggregating $1 million or any larger multiple of $1 million. The term loan includes convenants, among others, that require the maintenance of a minimum level of tangible net worth and limit aggregate levels of additional indebtedness. As a result of the losses incurred by the Company, it was not in compliance with the above covenants and has not paid its semi-annual interest payment since August 1991 (See Note 1). In connection with Lincoln Agreement, NBC assigned its rights and obligations under the Subordinated Credit Facility to UEC.
(c) In November 1989, the Company entered into an agreement with UEC that provided the Company with a line of credit in the aggregate amount of $30 million (amended to $25 million on July 25,1990) due on demand pursuant to the following terms and conditions:
1. Interest is paid at a rate per annum determined daily, equal to three and one-half percent above the rate publicly announced from time to time by Citibank, N.A. as the rate charged for unsecured borrowings of 90 days or less to its credit-worthy customers. 2. A standby fee of one quarter of one percent of the unused portion of the commitment.
All payments of principal and interest above the prime rate under this agreement shall be subordinated in right to payment to senior indebtedness which means the $24 million Secured Revolving Credit Facility (as described in Note 1) and the Subordinated Credit Facility. Payment of all interest charges and a portion of the fees referred to above will be deferred until payment in full of the senior indebtedness.
In connection with the closing of the Lincoln sale to Anchor, UEC was repaid $3.1 million (See Note 1).
LINCORP HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS
During the year, the weighted average amount of borrowed funds outstanding (including debt related to discontinued operations) was $109 million (1993 - $111.3 million) and the weighted average interest cost of these funds during the year was 10.45 percent (1993 - 10.37 percent). The maximum amount of borrowed funds at any one time during 1994 and 1993 was approximately $111.3 million and $112.3 million, respectively.
In December 1991, the Financial Accounting Standards Board issued SFAS No. 107 Disclosures about Fair Value of Financial Instruments ("FAS 107"). The statement generally became effective for fiscal years ending after December 15, 1992, at which time entities were required to disclose the fair value of on and off-balance sheet financial instruments, determined on a basis consistent with the requirements of FAS 107. In view of the current financial position of the Company at December 31, 1994, management has determined it is not practicable to estimate the fair value of payables.
NOTE 7 - STOCKHOLDERS DEFICIT -----------------------------
On September 16, 1992, LHI effected a 10-for-1 reverse stock split of its Common Stock and 10,000-for-1 reverse stock split of its Series A 9% Convertible Preferred Stock ("Preferred Stock"). As a result, the Company had 1,730,559 shares of Common Stock outstanding and 200 shares of Preferred Stock outstanding as of December 31, 1992 of which the Preferred Stock was contributed back to the Company. All per share data has been adjusted for the stock split.
As part of the Lincoln Agreement discussed in Note 1, UEC contributed back to the Company $10 million of the Companys Preferred Stock owned by it, plus its right to receive approximately $2 million in accrued and unpaid dividends. This Preferred Stock was voting stock and holders of such stock were entitled to receive dividends on a cumulative basis of $.9 million per annum. This stock has been retired by the Company.
The Company is authorized to issue 2,000,000 shares, consisting of 10,000 shares of Preferred Stock and 1,990,000 shares of Common Stock.
The holders of the Common Stock are entitled to one vote for each share held on all matters presented to the stockholders.
LINCORP HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES ---------------------
Set forth below is an analysis of the Companys provision for income taxes for the years ended December 31, 1994, 1993 and 1992.
A reconciliation of the total provision for income taxes to amounts computed by applying the federal tax rate to income is as follows:
The accompanying balance sheets reflect no deferred tax assets or liabilities as of December 31, 1994 and 1993, as a result of the application of FAS 109.
As part of the Lincoln Agreement (See Note 1), the Companys debt owed to the NBC of approximately $77 million plus accrued and unpaid interest owed to NBC by the Company was transferred to UEC. The debt acquired from NBC by UEC was acquired at a cost of $4.7 million. As a result of the transfer of the debt to an affiliate of the Company, the amount of debt transferred which is in excess of the face amount is, for federal and state income tax purposes, considered forgiveness of debt of the Company and therefore is required to be included as taxable income by the Company. The Company will not have to pay federal or state taxes on this income because of its insolvency pursuant to Internal Revenue Service Code Section 108 (Discharge of Indebtedness). However, tax attributes of the Company (net operating loss carry forwards, capital losses and built-in losses) will be reduced to the extent of the forgiveness of indebtedness. Additionally, for federal tax purposes, the Company may realize a bad debt loss of approximately $85 million, as well as
LINCORP HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS
certain as yet undetermined and unrealized potential capital losses. The Company has fully reserved any deferred tax benefit associated with the net operating loss carryforwards.
With respect to the loss on disposal of real estate, no tax benefit has been recorded due to the uncertainty of realization. Accordingly, the tax benefit attributable to the loss on disposal of real estate will be recorded if and when such benefits are realized.
Under current tax law, the utilization of the Companys tax attributes and unrecorded tax benefits will be restricted if an ownership change were to occur. Section 382 of the Code provides, in general, that if an ownership change occurs with respect to a corporation with net operating, capital or built-in loss carryforwards, such carryforwards will be available to offset taxable income in each taxable year after the ownership change only up to the Section 382 limitation for each year (generally, the product of the fair market value of the corporations stock, at the time of the ownership change, with certain adjustments, and a specified long-term tax-exempt bond rate at such time). For these purposes, an ownership change occurs if over a three-year statutory testing period, there has been more than a 50 percentage point increase in the stock ownership of the corporation by 5 percent shareholders. A 5 percent shareholder includes an owner of 5% or more of the stock of the corporation (determined after application of special ownership attribution rules) and a group (or groups) consisting of those other stockholders owning individually less than 5% of the stock of the corporation. The Companys ability to use its loss carryforwards would probably be limited in the event of an ownership change.
In May 1990, a subsidiary of the Company conveyed a property to one of its lenders, in the form of a deed in lieu of foreclosure, resulting in a tax assessment of $1.2 million being made by the Commonwealth of Massachusetts on such transfer. Shortly thereafter, this subsidiary was dissolved but the tax liability remains outstanding. If the Company were required to pay this liability, it may not have the financial resources to do so.
In addition, the Company has received notices of assessment dated February 15, 1992 and March 17, 1994 totaling $70 thousand and $165 thousand, respectively. The assessments disclosed in the Notice dated February 15, 1992 were based upon tax liabilities previously paid by the Company. The Company is attempting to determine whether the assessments disclosed in the Notice dated March 17, 1994 are in addition to, or corrections to, the assessments disclosed in the Notice dated February 15, 1992, or, with regard to the apparent assessment for the tax period ended December 31, 1995, why the assessment has been made. The Company is reviewing its alternatives with regard to these assessments, which include payment, litigation before the Massachusetts Appellate Tax Board, or an Offer in Settlement to the Massachusetts Department of Revenue. The interest and penalties disclosed in the Notice dated February 15, 1992 appear to have been properly made, and the assessments appear to be correct if the previous tax payments were proper. The assessment disclosed in the notice dated March 17, 1994 have not yet been explained by the Massachusetts Department of Revenue. The potential success of any of the above alternatives cannot be determined at this time.
LINCORP HOLDINGS, INC. NOTES TO FINANCIAL STATEMENTS
NOTE 9 -SUBSEQUENT EVENT ------------------------
Effective January 1, 1995, as a result of an improving real estate market the Company reformulated their business plan to focus on such activity. Accordingly, effective January 1, 1995, the Company restated its balance sheet to reflect the real estate operations as a continuing operation. The restatement will have no effect on the statement of operations. In 1995 the Company will recognize its equity in earnings in accordance with the equity method of accounting. The following is the restated balance sheet of the Company as of January 1, 1995 (dollars in thousands):
EXHIBIT INDEX -------------