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 which was rejected by the MDR on October 26, 1995, and there have been no subsequent developments on this matter since that date. The ultimate outcome of the Assessment cannot be determined at this time.
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 REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over the counter. During 1996, there were no identifiable stock transactions.
On February 28, 1997, there were approximately 765 stockholders of record of the Company's Common Stock. There were no dividends paid on the Company's Common Stock in 1996 and 1995.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DIVESTITURE OF THE LINCOLN SAVINGS BANK, LIQUIDITY AND GOING CONCERN, AND CONTINUING OPERATIONS
On January 20, 1993, in connection with the transaction described below, the Company relinquished control of Lincoln by placing the common stock of Lincoln 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 Company's 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 Company's lenders represented a reduction in the loss recorded in 1992 relating to the Company's writedown of its investment in Lincoln. Accordingly, the Company recorded a $6.1 million income adjustment in 1994 relating to the discontinued operations of Lincoln.
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 had no effect on prior period Statements of Operations and effective January 1, 1995, the Company recognized the results of its real estate operations as part of its results from continuing operations.
At December 31, 1996 the Company had approximately $171.0 million of principal and accrued interest (the "Indebtedness") outstanding under its various debt obligations which are not secured by its real estate assets. The Company's parent company, Unicorp Energy Corporation ("UEC"), holds $156.8 million of the Company's Indebtedness. On December 30, 1996, approximately $14.3 million of the Company's Indebtedness, which was previously held by an affiliate of UEC, was sold to an unrelated third party. The Company is in payment default under each of the debt obligations comprising the Indebtedness. The Indebtedness is secured by a senior security interest in all of the Company's non real estate assets and a junior security interest in
all of the Company's non real estate assets and a junior security interest in all the real estate assets. See Note 6 to the Company's Financial Statements.
The Company's sources of operating funds during the year ended December 31, 1996, and to date have been primarily from it's previously existing cash balances. The assets being utilized to fund the Company's operations are part of collateral package securing the above described credit facilities. Unless the Company's lenders are prepared to continue to defer in realizing on the pledged collateral and allow the Company to utilize the proceeds from such collateral to fund its ongoing operations, the Company will be unable to continue as a going concern.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
For the year ended December 31, 1996, the Company had a net loss of $11.2 million compared to a net loss of $12.8 million for the year ended December 31, 1995.
Total income for 1996 increased $1.8 million to $2.7 million. The increase in total income is primarily due to a $1.0 million gain recognized on the sale of one real estate asset and a $.7 million increase in rental income. The increase in rental income is attributable to the acquisition of a land lease during the second quarter of 1996.
Interest expense increased $.4 million. This increase reflects $.8 million in new interest on the debt incurred to finance a 1996 second quarter land lease acquisition, offset by a $.4 million decrease in interest relating to two notes that were restructured as of September 30, 1996.
1995 COMPARED TO 1994
For the year ended December 31, 1995, the Company had a net loss of $12.8 million compared to a net loss of $9.8 million for the year ended December 31, 1994.
As previously stated, effective January 1, 1995, the Company reflected the results of its real estate operations as a continuing operation whereas these same operations during 1994 were accounted for as a discontinued operation with no effect on operating results.
Total income for 1995 decreased by $.7 million compared to 1994 as 1994 included other income of $1.5 million resulting from the reversal of certain prior period reserves while 1995 included no such reversals. However; 1995, did include $.5 million in
rental income which was included in discontinued operations in 1994, and a $.3 million gain on the sale of mortgage receivables, which is included in other income.
During 1995, the Company sold substantially all of its interest in the Main and California Partnerships for $6.9 million which equalled the Company's recorded net book value for these investments.
Interest expense increased $2.6 million, of which $2.4 million is attributable to the debt on real estate assets which was included in discontinued operations during 1994, and the balance reflects an increase in interest rates.
FINANCIAL POSITION
MATERIAL CHANGES DURING 1996
During the second quarter of 1996, the Company acquired through a wholly-owned subsidiary, DB Holdings, Inc. ("DBH"), a parcel of land (the "DBH Land") underlying a commercial real estate project in Minneapolis, Minnesota. The DBH Land was acquired for $13.0 million, with the total purchase price funded from a senior unsecured obligation of DBH (the "DBH Loan"), payable the earlier of January 2, 1999, or immediately upon the sale, transfer or disposal of the DBH Land. The DBH Loan is with a company affiliated to UEC. Interest on the DBH Loan is payable monthly, starting July 1996, at a rate equal to the 180 day Libor rate plus 3%. The DBH Land is leased to a project developer (the "Project Developer") through February 2086, and for 1996, had an annual minimum lease payment of $1.0 million. DBH has an agreement with the Project Developer that at any time up to January 2, 1999, both DBH and the Project Developer have the option to cause the transfer of the DBH Land to the other at a price of $13.0 million plus accrued and unpaid lease payments. Should the Project Developer exercise its option to purchase the DBH Land, DBH has the right to sell the DBH Land, to the Project Developer for a 25% interest in the project including the DBH Land.
During the third quarter of 1996, the Company sold its real estate investment in the Montgomery St. Land Lease for $6.6 million resulting in a gain of $1.0 million. The proceeds from this sale were used to paydown a portion of the secured debt on this asset held by UEC.
During the fourth quarter of 1996, the General Partner to the Main Partnership exercised its option to purchase from the Company its remaining 1% interest in the Main Partnership for $70,000.
Also during the fourth quarter of 1996, the Company contributed its $.9 million bridge loan mortgage receivable to a newly formed limited partnership (the "Cambridge Park Partnership") in exchange for a 28.125% limited partnership interest. The purpose of
the Cambridge Park Partnership is to develop, construct, and sell approximately 232 townhouse units. Under the terms of the partnership agreement, the Company is to receive a 18% priority return on its investment. Depending upon when the project is sold, the Company will also receive between approximately 8.4% and 14% of any profits from the partnership.
The Company has a 25% limited partnership interest in a commercial building known as the Colorado State Bank Building. During 1996 the Company funded its partnership share of capital expenditures and tenant improvements totaling $.5 million.
During the fourth quarter of 1996, the Company and UEC agreed to restructure certain debt between the companies. This debt restructuring dealt with the Colorado State Bank Building Note (the "CSBB Note") and the Montgomery St. Land Lease Note (the "MSLL Note") both of which were acquired by UEC in September 1995. The debt restructuring, which was effective September 30, 1996, forgave all interest accrued on these two notes as of September 30, 1996, and through February 6, 1997. UEC also forgave a portion of the principal of each note. For accounting purposes, the total of the principal and interest forgiven ($3.0 million on the CSBB Note and $2.2 million on the MSLL Note), has been recorded as a capital contribution by UEC in the fourth quarter of 1996. After the restructuring, the new principal amount owing as of September 30, 1996, on the MSLL Note and the CSBB Note was $1.4 million and $3.6 million, respectively. The terms of the two notes were also changed to reflect an extension of the principal and interest maturity date to June 30, 2005, and a decrease in the interest rate to 6.38%.
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
None.
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. The Company's executive officers are elected by, and serve at the discretion of the Board of Directors.
The following table sets forth certain information with respect to each director and executive officer of the Company on March 21, 1997.
Service with Name Age Position with Company Company from - ---- --- --------------------- ------------
George S. Mann 64 Chairman of the Board (1) 1981
Ronald W. Cantwell 53 Director (1) (2) (3) and 1996 Executive Vice President
Ian G. Cockwell 49 Director 1994
William Kirschenbaum 52 Director (2) (3) 1982
Ralph V. Marra 59 Director 1994
Jack R. Sauer 44 President 1996
- --------------------------------
(1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Arms Length Committee.
George S. Mann has served as Chairman of the Board since 1981, and as President from 1989 through August, 1996. 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.
Ronald W. Cantwell has been the President and Director of The Catalyst Group, Inc. since October, 1988. He is also the President, Director and owner of VC Holdings, Inc, which is the managing member of Trilon Dominion Partners, LLC. Mr. Cantwell is also a Director of Caldera Environmental Corp., Shepherd Surveillance Solutions, Inc., Morrison International, Inc. and Odyssey Nutriceutical Science, Inc. He has been the Executive Vice President of the Company since 1995 and a Director since August, 1996.
Ian G. Cockwell has been President of Westcliff Management Services Inc. since prior to 1988, and UEC since 1992. He has been a Director of the Company 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.
Ralph V. Marra has been a Senior Managing Director of Grubb and Ellis Inc. since October of 1994. He was the Chief Financial Officer of Lincoln 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 the Company and from March 1987, until December 1993, he was the Company's Treasurer. He has been a Director of the Company since November 1994.
Jack R. Sauer has been the Vice President and Director of the Catalyst Group, Inc. since February, 1990. He is also the Vice President and a Director of VC Holdings, Inc., which is the managing member of Trilon Dominion Partners, LLC. Mr. Sauer is also a Director of Shepherd Surveillance Solutions, Inc., Microspeed, Inc. and Accessware, Inc. He has been the President of the Company since August, 1996.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and directors and persons who own more than 10% of the Company's Common Stock to file initial reports of ownership and reports of changes of ownership (Forms 3, 4 and 5) of the Company's Common Stock with the Securities and Exchange Commission (the "SEC"). Officers, directors and beneficial owners of more than 10% of the Company's Common Stock are required by the SEC regulations to furnish the Company with copies of such forms that they file.
To the Company's knowledge, based solely on the Company's review of the copies of such reports received by the Company during the fiscal year ended December 31, 1996, all Section 16(a) filing requirements applicable to its
officers, directors and beneficial owners of more than 10% of the Company's Common Stock, were complied with.
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 telephone conference, 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, 1996, totaled approximately $30,000.
DIRECTORS MEETING AND COMMITTEES
The Board of Directors of the Company held 5 meetings during the fiscal year ended December 31, 1996. During fiscal year 1996, all of the directors attended at least 75% of the meetings of the Board of Directors.
The Board of Directors has a standing Audit Committee which represents the Board of Directors in its relations with the Company's independent accountants and oversees the Company's compliance with operating procedures and policies. This committee also approves the scope of the Company's financial statement examinations, monitors the adequacy of the Company's internal controls and reviews and monitors any other activity that the committee deems necessary or appropriate. The Company does not have a standing Compensation or 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 Company's fiscal year ended December 31, 1996, was the Audit Committee which held one meeting.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
No executive officer of the Company, received any compensation for their services during any of the fiscal years ended December 31, 1996, 1995 or 1994.
No compensation committee report or performance graph is included herein because none of the executive officers' draw any 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 February 28, 1997. The address of each of the directors is c/o Lincorp Holdings, Inc., 245 Park Avenue, 28th Floor, New York, New York 10167. The address of UEC is BCE Place Suite 2320 Toronto, Ontario, Canada M5J151.
Shares of Common Stock Beneficially Name of Owned as of Percent of Beneficial Owner February 28, 1997 Class - ---------------- ----------------- ---------- Unicorp Energy 1,286,886 74.3% Corporation (1)
Ian G. Cockwell (1) 1,286,886 74.3%
William Kirschenbaum 3,767 *
George S. Mann (1) 1,286,886 74.3%
All officers and directors 1,290,653 74.6% as a group (4 persons) (1)
- ------------ * Less than 1%
(1) The stockholdings indicated for Messrs. Cockwell and Mann are all owned directly by UEC. Messrs. Cockwell and Mann disclaim beneficial ownership of all such shares.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 2 - Real Estate Transactions and Debt Restructuring.
PART IV
ITEM 14.

ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
(a) (1) Consolidated Financial Statements Report of Independent Accountants................
Consolidated Balance Sheets as of December 31, 1996 and 1995......................
Consolidated Statements of Operations for the years ended December 31, 1996, 1995, and 1994...
Consolidated Statements of Changes in Stockholders' Deficit for the years ended December 31, 1996, 1995, and 1994...............
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994....
Notes to Consolidated Financial Statements.......
All schedules have been omitted because they are not required or because the required information is contained in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
None.
(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 Company's 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 Company's 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 Company's Current Report Form 8-K dated January 14, 1988).
10.02 Letter Agreement re: Line of Credit dated November 30, * 1989, between UEC and the Company (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
10.03 Revolving Demand Note dated November 30, 1989, * from the Company to UEC (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
10.04 Consulting Agreement dated as of February 13, 1990, * between the Company and Coscan Inc. (incorporated by reference to Exhibit 10.27 to the Company's 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 the Company and Coscan Inc. (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
10.06 Form of Promissory Note from the Company to Coscan * Inc. (incorporated by reference to Exhibit 10.29 to the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's Report on Form 8-K dated August 13, 1990).
10.13 Amended and Restated Credit Agreement, dated as of * July 25, 1990, between the Company and NBC (incorporated by reference to Exhibit 28.7 to the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's Current Report on Form 8-K dated January 20, 1993).
10.21 Consent Agreement dated March 4, 1994, among UEC, * Union Holdings, Inc., Lincorp, Inc., the Company, 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 Company's Annual Report on Form 10-K for the year ended December 31, 1993).
10.22 Loan Modification Agreement dated as of September 28, * 1995, by and between Coscan, Inc. and the Company (incorporated by reference to Exhibit B to the Company's Report on Form 8-K dated September 28, 1995).
10.23 Loan Modification Agreement dated as of September 28, * 1995, by and between CCI and the Company (incorporated by reference to Exhibit C to the Company's Report on Form 8-K dated September 28, 1995.)
10.24 Agreement dated as of September 5, 1995,by and among * CCI, the Company, Coscan Limited Partner Corporation, CCC, Coscan California Limited Partner Corporation and Coscan, Inc.
22 Subsidiaries of the Company.
- ------------------
* 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 26, 1997
LINCORP HOLDINGS, INC.
By: s/ Jack R. Sauer ---------------------------- Jack R. Sauer President
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.
Name Title Date - ---- ----- ---- s/George S. Mann Chairman of the March 25, 1997 - ----------------------- Board of Directors George S. Mann (Principal Executive Officer)
s/Jack R. Sauer President March 25, 1997 - ----------------------- (Principal Accounting Officer) Jack Sauer
s/Ronald W. Cantwell Director March 25, 1997 - ----------------------- Ronald W. Cantwell
s/Ian G. Cockwell Director March 25, 1997 - ----------------------- Ian G. Cockwell
s/William Kirschenbaum Director March 25, 1997 - ----------------------- William Kirschenbaum
s/Ralph V. Marra Director March 25, 1997
- ----------------------- Ralph V. Marra
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Lincorp Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Lincorp Holdings, Inc. and Subsidiary ("Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for each of the years in the three year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lincorp Holdings, Inc. and Subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company is in default on all of its credit facilities and, at December 31, 1996, has $106.6 million of principal indebtedness, and $64.4 million of accrued and unpaid interest. In addition the Company has a net capital deficiency of $167.7 million as of December 31, 1996. 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 Notes 2 and 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/KPMG Peat Marwick LLP
New York, New York February 27, 1997
LINCORP HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, ----------------------- 1996 1995 ---- ---- (dollars in thousands) ASSETS Cash........................................ $ 210 $ 660 Investment in real estate assets, net....... 23,608 15,517 Other assets................................ 160 4 ---------- --------- $ 23,978 $ 16,181 ========== ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Liabilities: Debt on real estate assets, including accrued interest........................ $ 16,812 $ 15,663 Other borrowed funds, including accrued interest........................ 171,045 157,989 Other liabilities......................... 3,776 4,195 ---------- --------- 191,633 177,847 Commitments and contingent liabilities
Stockholders' deficit: Preferred stock, Series A; 200 shares authorized; no shares issued and outstanding....... - - Preferred stock, $.01 par value; 10,000 shares authorized; no shares issued and outstanding....... - - Common stock, $.01 par value; 1,990,000 shares authorized; 1,730,559 shares issued and outstanding.......................... 17 17 Capital contributed in excess of par value............................ 153,638 148,434 Accumulated deficit...................... (321,310) (310,117) ---------- --------- (167,655) (161,666) ---------- --------- $ 23,978 $ 16,181 ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
LINCORP HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, ----------------------------------- 1996 1995 1994 ---- ---- ---- (in thousands, except per share amounts) Income: Rental income...................... $ 1,169 $ 487 $ - Interest income.................... 23 144 47 Gain on sale of real estate asset.. 1,033 - - Other income....................... 479 253 1,537 --------- -------- -------- Total income................... 2,704 884 1,584 --------- -------- -------- Expense: Interest expense................... 13,720 13,316 10,751 General and administrative expense 160 312 375 --------- -------- -------- Total expense.................. 13,880 13,628 11,126 --------- -------- --------
Loss from continuing operations before income taxes.................. (11,176) (12,744) (9,542)
Provision for state and local income taxes......................... 17 23 300 --------- -------- --------
Loss from continuing operations........ (11,193) (12,767) (9,842) --------- -------- --------
Discontinued operations: Recovery on writedown of investment in the Lincoln Savings Bank...... - - 6,143 Decrease in estimated writedown of assets from discontinued real estate operations................ - - 4,510 Reversal of provision for income taxes..................... - - 3,370 --------- -------- -------- Income from discontinued operations - - 14,023 --------- -------- --------
Net income (loss)................... $ (11,193) $(12,767) $ 4,181 ========= ========= ========
Loss from continuing operations per share of common stock......... $ (6.47) $ (7.38) $ (5.68) Income from discontinued operations
per share of common stock......... - - 8.10 ---------- --------- --------
Income (loss) per share of common stock outstanding................. $ (6.47) $ (7.38) $ 2.42 ========== ========= ========
Weighted average shares of common... 1,731 1,731 1,731 ========== ========= ========
The accompanying notes are an integral part of these consolidated financial statements.
LINCORP HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
The accompanying notes are an integral part of these consolidated financial statements.
LINCORP HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
LINCORP HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31, ---------------------------------- 1996 1995 1994 ---- ---- ---- (dollars in thousands)
FINANCING ACTIVITIES
Funds borrowed.............................. - 8,877 - Repayment of borrowed funds................. (6,649) (9,200) - --------- --------- ---------
Net cash used in financing activities....... (6,649) (323) - --------- --------- ---------
Net increase (decrease) in cash............. (450) 535 12
Cash, beginning of year..................... 660 125 113 -------- -------- ---------
Cash, end of year........................... $ 210 $ 660 $ 125 ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for: Interest................................ $ 706 $ 4,519 $ - Income taxes............................ $ 17 $ 23 $ 16
Noncash investing and financing activities: Fair value of assets acquired........... $ 13,025 $ - $ - Liabilities assumed..................... $ 13,025 $ - $ - Debt forgiveness........................ $ 5,204 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
LINCORP HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REAL ESTATE OPERATIONS
Effective January 1, 1995, as a result of an improving real estate market, Lincorp Holdings, Inc. (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 had no effect on prior period Statements of Operations but effective January 1, 1995, the Company recognized the results of its real estate operations as part of its results from continuing operations. This included recording its equity in the operating results of its real estate joint ventures in accordance with the equity method of accounting as well as recording rental and other income and expenses from its other real estate activities. Prior to January 1, 1995, the Company's real estate operations were accounted for as discontinued operations. During 1994, the real estate operations had total income of approximately $1.8 million and a net loss of approximately $.3 million, which was charged against the net liability of real estate operations.
The Company has a 25% limited partnership interest in a commercial building known as the Colorado State Bank Building ("CSBB"). During 1996, the Company funded its partnership share of capital expenditures and tenant improvements totaling $.5 million.
During the second quarter of 1996, the Company acquired through a wholly owned subsidiary, DB Holdings, Inc. ("DBH"), a parcel of land (the "DBH Land") underlying a commercial real estate project in Minneapolis, Minnesota. The DBH Land was acquired for $13.0 million, with the total purchase price funded from a senior unsecured obligation of DBH (the "DBH Loan"), payable the earlier of January 2, 1999, or immediately upon the sale, transfer or disposal of the DBH Land. The DBH Loan is with a company affiliated to UEC. Interest on the DBH Loan is payable monthly, starting July, 1996, at a rate equal to the 180 day Libor rate plus 3%. The DBH Land is leased to a project developer (the "Project Developer") through February 2086, and for 1996, had an annual minimum lease payment of $1.0 million. DBH has an agreement with the Project Developer that at any time up to January 2, 1999, both DBH and the Project Developer have the option to cause the transfer of the DBH Land to the other at a price of $13.0 million plus accrued and unpaid lease payments. Should the Project Developer exercise its option to purchase the DBH Land, DBH has the right to sell the DBH Land, to the Project Developer for a 25% interest in the project including the DBH Land.
During the third quarter of 1996, the Company sold its real estate investment in the Montgomery St. Land Lease ("MSLL") for $6.6 million resulting in a gain of $1.0 million. The proceeds from this sale were used to paydown a portion of the secured debt (the "MSLL Note") on this asset held by its parent company, Unicorp Energy Corporation ("UEC").
LINCORP HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, the Company made a $.9 million loan to a developer to refinance land previously purchased by the developer for residential home development. The loan was for one year and carried a 10% interest rate, payable monthly, and was secured by a first mortgage on the land. In order to make this loan, the Company borrowed $.6 million from UEC under its existing Junior credit facility. During the fourth quarter of 1996, the Company contributed its $.9 million loan to a newly formed limited partnership (the "Cambridge Park Partnership") in exchange for a 28.125% limited partnership interest. The purpose of the Cambridge Park Partnership is to develop, construct, and sell approximately 232 townhouse units. Under the terms of the partnership agreement, the Company is to receive a 18% priority return on its investment. Depending upon when the project is sold, the Company will also receive between approximately 8.4% and 14% of any profits from the partnership. The Company uses equity accounting to account for it's interest in this partnership.
During September 1995, the Company sold substantially all of its limited partnership interests in the Main and California Partnerships to the General Partner for $6.9 million, which equalled the Company's recorded net book value for these investments. In connection with the sale, the Company granted the General Partner an option, which the General Partner exercised in the fourth quarter of 1996, to purchase it's remaining Main Partnership interest not sold (1%) for $70,000. The 1995 proceeds from this sale were used to repay loans from the General Partner relating to the Company's real estate investments in CSBB and MSLL.
During September 1995, the Company drew down $6.0 million of an existing but unutilized line of credit provided by the General Partner and secured by the Company's investment in the CSBB (the "CSBB Note"), for the purpose of investing an additional $2.3 million in CSBB and making an additional repayment against the MSLL Note.
At the end of September 1995, UEC purchased from the General Partner the outstanding balance on the Company's CSBB Note and MSLL Note at face value.
The following summarizes the Company's net investment in real estate assets:
December 31, ----------------------------- 1996 1995 ---- ---- (dollars in thousands)
CSBB $ 9,683 $ 8,931 DBH Land 13,025 - Cambridge Park Partnership 900 900
Coscan Main Partnership - 70 MSLL - 5,616 ---------- ---------- $ 23,608 $ 15,517 ========== ==========
LINCORP HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the financial statements of CSBB:
December 31, ------------------------ 1996 1995 ---- ---- (dollars in thousands) Assets: Rental properties $ 37,645 $ 34,827 Other assets 1,557 1,430 ---------- --------- Total assets 39,202 36,257 Liabilities 731 790 ---------- --------- Total equity $ 38,471 $ 35,467 ========== ========
Revenue $ 3,209 $ 2,645 Expenses 2,195 2,141 ---------- --------- Net operating income $ 1,014 $ 504 ========== =========
Company's equity in net income $ 254 $ 96 ========== =========
NOTE 2 - DEBT RESTRUCTURING
During the fourth quarter of 1996, the Company and UEC agreed to restructure certain debt between the companies. This debt restructuring, which was effective September 30, 1996, dealt with the the CSBB Note and the the MSLL Note and forgave all interest accrued on these two notes as of September 30, 1996, and through February 6, 1997. UEC also forgave a portion of the principal of each note. For accounting purposes, the total of the principal and interest forgiven ($3.0 million on the CSBB Note and $2.2 million on the MSLL Note), has been recorded as a capital contribution by UEC in the fourth quarter of 1996. After the restructuring, the new principal amount owing as of September 30, 1996, on the MSLL Note and the CSBB Note was $1.4 million and $3.6 million, respectively. The terms of the two notes were also changed to reflect an extension of the principal and interest maturity date to June 30, 2005, and a decrease in the interest rate to 6.38%. See Note 6.
NOTE 3 - DIVESTITURE OF THE LINCOLN SAVINGS BANK, FSB
On January 20, 1993, in connection with the transaction described below, the Company relinquished control of Lincoln by placing the common stock of Lincoln into a trust for eventual sale, and by filing a divestiture notice with the Office of Thrift Supervision (the "OTS").
LINCORP HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 Company's 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 Company's lenders represented a reduction in the loss recorded in 1992, relating to the Company's writedown of its investment in Lincoln. Accordingly, the Company recorded a $6.1 million income adjustment in 1994, relating to the discontinued operations of Lincoln.
NOTE 4 - LIQUIDITY AND GOING CONCERN
At December 31, 1996, the Company had approximately $171.0 million of principal and accrued interest (the"Indebtedness") outstanding under its various debt obligations which are not secured by its real estate assets. UEC holds $156.8 million of the Indebtedness. On December 30, 1996, approximately $14.3 million of the Company's Indebtedness, which was previously held by an affiliate of UEC, was sold to an unrelated third party. The Company is in payment default under each of the debt obligations comprising the Indebtedness. The Indebtedness is secured by a senior security interest in all of the Company's non real estate assets and a junior security interest in all the real estate assets.
The Company's sources of operating funds during the year ended December 31, 1996, and to date have been primarily from it's previously existing cash balances. The assets being utilized to fund the Company's operations are part of collateral package securing the above described credit facilities. Unless the Company's lenders are prepared to continue to defer in realizing on the pledged collateral and allow the Company to utilize the proceeds from such collateral to fund its ongoing operations, the Company will be unable to continue as a going concern.
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
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 the years in
LINCORP HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement established the recognition and measurement standards related to the impairment of long-lived assets. Effective January 1, 1996, the Company adopted SFAS No. 121. The adoption of this standard did not have any effect on the Company's financial position or results of operations.
NOTE 6 - DEBT ON REAL ESTATE ASSETS AND OTHER BORROWED FUNDS
The Company's debt on real estate assets are as follows:
December 31, ------------------------ 1996 1995 ---- ---- (dollars in thousands)
CSBB Note (a).............................. $ 3,628 $ 6,153 MSLL Note (b).............................. - 9,510 DBH Loan (c)............................... 13,184 -
-------- -------- $ 16,812 $ 15,663 ======== ========
(a) This is a $9 million promissory note line of credit with UEC which is secured by the Company's investment in CSBB and is to be used to fund the Company's share of any operating shortfalls of CSBB. As explained in Note 2, the CSBB Note was restructured effective September 30, 1996. The restructured note matures June 30, 2005, and has an interest rate of 6.38%.
LINCORP HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) As explained in Notes 1 and 2, $6.6 million of this note was paid off during 1996 from the proceeds from the sale of the MSLL and the balance of the note was restructured effective September 30, 1996. Since this note is no longer secured by a real estate asset, the amount owing on this note has been reclassified to other borrowed funds.
(c) See Note 1 for a description of this loan.
The Company's other borrowed funds are as follows:
December 31, ----------------------- 1996 1995 ---- ---- (dollars in thousands)
Principal
Senior secured revolving credit facility (a)... $ 19,921 $ 19,921 Subordinated term loan (b)..................... 65,000 65,000 Junior line of credit (c)...................... 20,294 20,294 MSLL Note (d).................................. 1,399 - -------- -------- 106,614 105,215 Accrued interest............................... 64,431 52,774 -------- -------- $171,045 $157,989
(a) Through November 1996, the outstanding principal on this facility was held by UEC ($12.0 million) and a company affiliated with UEC ($7.9 million). During December 1996, the debt portion held by the UEC affiliate was sold to an unrelated third party. This debt facility expired in August 1991 and the Company has made no interest payments on this facility since its expiration.
(b) This $65 million facility with UEC matures in August 1997, and calls for interest-only payments at a fixed rate of 11.4 %, 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 it has not paid its semi-annual interest payment since August 1991.
(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 with an interest rate of prime plus 3.5% and a standby fee of one quarter of one percent of the unused portion of the commitment.
LINCORP HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) This note matures June 30, 2005, and has an interest rate of 6.38% and has been reclassified in 1996 from debt on real estate assets. See note (b) to debt on real estate assets included in this Note 6.
During 1996, the weighted average amount of total principal debt outstanding was $127.5 million (1995 - $123.0 million) and the weighted average interest cost of these funds during the year was 10.76 % (1995 - 10.82 %). The maximum amount of borrowed principal funds outstanding at any one time during 1996 and 1995 was approximately $133.2 million and $124.7 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 financial position of the Company at December 31, 1996, management has determined it is not practicable to estimate the fair value of debt and other borrowed funds.
NOTE 7 - INCOME TAXES
Set forth below is an analysis of the Company's provision for income taxes for the years ended December 31, 1996, 1995 and 1994.
1996 1995 1994 ---- ---- ---- (dollars in thousands)
Current provision: State and local income taxes............ $ 17 $ 23 $ 300 ====== ====== ======
A reconciliation of the total provision for income taxes to amounts computed by applying the federal tax rate to income is as follows:
1996 1995 1994 ---- ---- ---- (dollars in thousands)
Computed at statutory rate................. $(3,800) $(4,333) $(3,241) State and local income taxes............... 17 23 300 Effect of no benefit recognized for net operating losses........................ 3,800 4,333 3,241 ------- ------- ------- Provision for income taxes................. $ 17 $ 23 $ 300 ======= ======= =======
LINCORP HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying balance sheets reflect no deferred tax assets or liabilities as of December 31, 1996 and 1995.
As part of the sale of Lincoln (see Note 2), the Company's debt previously owed to the National Bank of Canada ("NBC") of approximately $77 million plus accrued and unpaid interest 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 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.
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 Massachusetts Department of Revenue (the"MDR") on such transfer. Shortly thereafter, this subsidiary was dissolved but the tax liability remains outstanding. On November 29, 1993, an Offer of Settlement was forwarded to the MDR with respect to this assessment which was rejected by the MDR on October 26, 1995, and there have been no subsequent developments on this matter since that date. The ultimate outcome of this assessment cannot be determined at this time.
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT NAME - ----------- -------------
22 Subsidiaries of the Company