INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Lincoln International Corporation
Louisville, Kentucky
We have audited the accompanying consolidated balance sheets of Lincoln
International Corporation as of July 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended July 31, 1994. 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 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lincoln
International Corporation as of July 31, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended July 31, 1994, in conformity with generally accepted accounting
principles.
POTTER & COMPANY
September 27, 1994
F-1
LINCOLN INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31, 1994 and 1993
A S S E T S
-----------
1994 1993
---------- ----------
Current assets:
Cash $ 21,238 $ 23,061
Finance receivables (Note 2) 533,995 547,374
Other receivables (Note 3) 14,732 14,980
Inventories 681 608
Prepaid expenses 11,173 12,695
---------- ---------
Total current assets 581,819 598,718
---------- ---------
Net property, plant and equipment
(Notes 4 and 6) 1,327,400 1,380,336
---------- ---------
Other asset:
Franchise license, net of accumulated
amortization of $75,529 ($67,137 in
1993) 50,350 58,742
---------- ---------
Total assets $1,959,569 $2,037,796
========== =========
See accompanying notes.
F-2
L I A B I L I T I E S
---------------------
1994 1993
---------- ----------
Current liabilities:
Notes payable (Note 5) $ 90,379 $ 92,352
Current maturities of long-term
debt (Note 6) 352,064 304,851
Accounts payable 93,710 96,265
Income taxes payable 4,398 2,984
Accrued expenses 98,129 95,239
Deferred insurance commissions 2,435 2,970
--------- ---------
Total current liabilities 641,115 594,661
--------- ---------
Long-term debt, less current maturities
(Note 6) 819,788 871,068
--------- ---------
Total liabilities 1,460,903 1,465,729
--------- ---------
Commitments (Note 10)
S T O C K H O L D E R S' E Q U I T Y
--------------------------------------
Stockholders' equity:
Common stock, voting, $.50 stated
value, 100,000 shares authorized
and issued 50,000 50,000
Common stock, nonvoting, $.50 stated
value, 2,900,000 shares authorized,
1,532,320 shares issued 766,160 766,160
Additional paid-in capital 471,300 471,300
Retained earnings (deficit) (777,923) (704,522)
--------- ---------
509,537 582,938
Less treasury stock, nonvoting, at
cost, 9,246 shares 10,871 10,871
--------- ---------
Total stockholders' equity 498,666 572,067
--------- ---------
Total liabilities and
stockholders' equity $1,959,569 $2,037,796
========= =========
F-3
LINCOLN INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31, 1994, 1993, and 1992
1994 1993 1992
---------- ---------- ---------
Revenues:
Net service and operating revenues $1,214,993 $1,219,203 $1,226,047
Net product sales 111,803 96,213 86,119
Finance charges and other income earned
on finance receivables 180,462 182,089 205,190
---------- ---------- ---------
Total revenues 1,507,258 1,497,505 1,517,356
---------- ---------- ---------
Costs and expenses:
Cost of service and operating revenues 916,635 976,966 980,749
Cost of products sold 97,982 87,866 74,197
Operating, general and administrative expenses 437,917 416,548 395,230
Provision for credit losses on finance
receivables 5,665 10,938 14,190
Interest expense related to finance subsidiary 19,995 20,127 34,296
---------- ---------- ---------
Total costs and expenses 1,478,194 1,512,445 1,498,662
---------- ---------- ---------
Income (loss) from operations 29,064 (14,940) 18,694
---------- ---------- ---------
Other income (expense):
Gain (loss) on sale of property, equipment,
and operating assets (Note 9) 0 (1,974) 141,872
Interest expense (100,519) (90,722) (98,094)
Miscellaneous 2,452 2,300 7,695
---------- ---------- ---------
Total other income (expense) (98,067) (90,396) 51,473
---------- ---------- ---------
Income (loss) before income taxes and
extraordinary item (69,003) (105,336) 70,167
Provision for income taxes (Note 7) 4,398 2,984 13,737
---------- ---------- ---------
Income (loss) before extraordinary item (73,401) (108,320) 56,430
Extraordinary item:
Reduction of income taxes arising from
carryforward of prior year's operating loss 0 0 7,780
---------- ---------- ---------
Net income (loss) $ (73,401) $ (108,320) $ 64,210
========== ========== =========
Income (loss) per common share:
Income (loss) before extraordinary item $ (.05) $ (.07) $ .03
Extraordinary item .00 .00 .01
---------- ---------- ---------
Net income (loss) per common share $ (.05) $ (.07) $ .04
========== ========== =========
See accompanying notes.
F-4
LINCOLN INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended July 31, 1994, 1993, and 1992
Common Stock Additional Retained Total
------------------ Paid-in Earnings Treasury Stockholder's
Voting Nonvoting Capital (Deficit) Stock Equity
------- --------- --------- ---------- --------- ------------
Balance at July 31, 1991 $50,000 $766,160 $471,300 $(660,412) $(10,871) $616,177
Net income 0 0 0 64,210 0 64,210
------ ------- -------- -------- ------- --------
Balance at July 31, 1992 50,000 766,160 471,300 (596,202) (10,871) 680,387
Net loss 0 0 0 (108,320) 0 (108,320)
------ ------- -------- -------- ------- -------
Balance at July 31, 1993 50,000 766,160 471,300 (704,522) (10,871) 572,067
Net loss 0 0 0 (73,401) 0 (73,401)
------ ------- -------- -------- ------- -------
Balance at July 31, 1994 $50,000 $766,160 $471,300 $(777,923) $(10,871) $498,666
====== ======= ======== ======== ======= =======
See accompanying notes.
F-5
LINCOLN INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31, 1994, 1993, and 1992
1994 1993 1992
-------- ---------- -----------
Cash flows from operating activities:
Income (loss) before extraordinary item $(73,401) $(108,320) $ 56,430
Extraordinary item, net of tax effect 0 0 7,780
------- -------- ----------
Net income (loss) (73,401) (108,320) 64,210
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 72,532 74,883 73,563
Provision for credit losses on finance
receivables 11,195 14,143 15,766
Provision for losses on other receivables 3,031 8,000 0
Reduction in allowance for credit losses
due to sale of operating assets 0 0 (27,043)
(Gain) loss on sale of property, equipment,
and operating assets 0 1,974 (141,872)
Reduction of cash value of life insurance
as additional officers' compensation 0 9,793 0
Other 0 0 318
Change in assets and liabilities:
(Increase) decrease in other receivables (2,783) 7,917 (18,872)
(Increase) decrease in inventories (73) 1,204 1,217
(Increase) decrease in prepaid expenses 1,522 (617) 682
Increase in cash value of life insurance 0 0 (668)
Increase (decrease) in accounts payable (2,555) 44,770 (7,294)
Increase (decrease) in income taxes
payable 1,414 (2,973) 5,957
Increase (decrease) in accrued expenses 2,890 (15,338) (42,123)
Decrease in deferred insurance commissions (535) (110) (7,919)
------- -------- ----------
Net cash provided by (used in) operating
activities 13,237 35,326 (84,078)
------- -------- ----------
Cash flows from investing activities:
Loans originated (407,876) (423,460) (366,818)
Loans repaid 412,560 415,091 412,392
Proceeds from sale of loans 0 0 1,205,000
Proceeds from disposal of property, equipment
and operating assets 0 0 121,270
Purchases of property and equipment (11,204) (66,365) (29,295)
Principal payments received on mortgage loan 0 7,935 6,526
------- -------- ----------
Net cash provided by (used in) investing
activities (6,520) (66,799) 1,349,075
------- -------- ----------
See accompanying notes.
F-6
LINCOLN INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31, 1994, 1993, and 1992
1994 1993 1992
-------- --------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under short-term
notes payable $ (4,473) $ 2,596 $(1,295,734)
Proceeds from long-term debt 30,704 62,384 35,190
Principal payments on long-term debt (34,771) (40,474) (43,132)
------- -------- ----------
Net cash provided by (used in)
financing activities (8,540) 24,506 (1,303,676)
------- -------- ----------
Net decrease in cash (1,823) (6,967) (38,679)
Cash at beginning of year 23,061 30,028 68,707
------- -------- ----------
Cash at end of year $ 21,238 $ 23,061 $ 30,028
======= ======== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest $121,226 $ 134,933 $ 148,533
======= ======== ==========
Cash paid during the year for income taxes $ 2,984 $ 5,942 $ 0
======= ======== ==========
See accompanying notes.
F-7
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
This summary of significant accounting policies of Lincoln International
Corporation (the Company) is presented to assist in understanding the Company's
financial statements. The financial statements and notes are representations of
the Company's management who is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
Company's Activities:
Lincoln International Corporation is engaged in the operation of a stock yard
and small consumer loan company in the state of Kentucky. The Company also is
engaged in the operation of ice cream franchises in the mid-western United
States.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions are
eliminated in consolidation.
Finance Receivables:
All new direct cash loans of the Company have been recorded on the discount-
basis. Income from discount-basis direct cash loans and retail contracts is
calculated using a method which approximates the interest method. Accrual of
interest income is suspended when a loan is contractually delinquent for ninety
days or more at which time the loan is converted to interest-bearing. Income
from interest-bearing loans is credited to income as and when collections are
made. Extension fees and late charges on discount-basis direct cash loans and
retail contracts are credited to income when collected. Insurance commissions
are recognized over the terms of the related loans based on the straight-line
method which approximates the interest method.
Allowance for Losses:
Provisions for credit losses are charged to income in amounts sufficient to
maintain the allowance at a level considered adequate to cover the losses of
principal in the existing portfolio. The Company's charge-off policy is based
on a loan-by-loan review for all receivables, which are charged-off when they
have had no collections during the preceding twelve-month period.
F-8
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------
Other Receivables:
Royalties are recorded as income on the accrual basis. Expenses associated with
franchise fees and royalties are charged as expense as incurred. Individual
unit franchise fees are recorded as income when substantially all Company
obligations have been completed.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. Depreciation is provided
over the following estimated useful lives:
Buildings and improvements 20-40 years
Yard and administration building 10-55 years
Leasehold improvements 3- 5 years
Machinery and equipment 3-12 years
The Company uses the straight-line method of computing depreciation for
financial statement purposes and accelerated methods for income tax purposes.
Leasehold improvements are amortized using the straight-line method over the
lease term.
Franchise License:
The Company amortizes the license using the straight-line method over 15 years
which is the term of the franchise license agreement.
Income Taxes:
The Company files a consolidated federal income tax return. Investment tax
credits are treated as a reduction of the tax provision in the year in which the
benefit is earned (flow-through method). Separate state income tax returns are
filed for the Company and each subsidiary.
Earnings Per Share:
Earnings per share are based on the weighted average number of shares
outstanding during each year.
F-9
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 2 - FINANCE RECEIVABLES
- ----------------------------
Finance receivables consist of the following:
1994 1993
-------- --------
Direct cash loans:
Interest-bearing $ 29,942 $ 31,311
Discount-basis 635,456 655,751
Retail contracts 12,783 17,794
------- -------
678,181 704,856
------- -------
Less:
Unearned finance charges 127,671 140,553
Allowance for credit losses 16,515 16,929
------- -------
144,186 157,482
------- -------
Totals $533,995 $547,374
======= =======
Contractual maturities of direct cash loans and retail contracts as of July 31,
1994 were as follows:
1995 1996 1997 1998 1999 Totals
-------- -------- -------- -------- -------- --------
Direct cash loans:
Interest bearing $ 17,398 $ 7,801 $ 2,406 $ 991 $ 1,346 $ 29,942
Discount-basis 424,098 195,297 16,025 36 0 635,456
Retail contracts 9,508 3,033 242 0 0 12,783
------- ------- ------- ------- ------- -------
Totals $451,004 $206,131 $18,673 $ 1,027 $ 1,346 $678,181
======= ======= ======= ======= ======= =======
Experience of the Company has shown that a substantial majority of finance
receivables will be renewed or repaid before contractual maturity dates.
Accordingly, the foregoing tabulation is not to be regarded as a forecast of
future cash collections. During the years ended July 31, 1994, 1993, and 1992,
cash collections of principal amounts on direct cash loans and retail contracts
were approximately $413,000, $415,000, and $412,000, respectively, and the
ratios of cash collections to average principal balances were 60%, 59%, and 29%,
respectively.
F-10
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 2 - FINANCE RECEIVABLES (CONTINUED)
Changes in the allowance for credit losses were as follows:
Balance as of July 31, 1992 $17,108
Provision for credit losses 14,143
Loans charged off (17,527)
Recoveries 3,205
------
Balance as of July 31, 1993 16,929
Provision for credit losses 11,188
Loans charged off (17,132)
Recoveries 5,530
------
Balance as of July 31, 1994 $16,515
======
NOTE 3 - OTHER RECEIVABLES
Other receivables consist of the following:
1994 1993
------- -------
Accounts receivable $16,576 $23,760
Less allowance for doubtful accounts 4,081 12,100
------ ------
12,495 11,660
Royalty receivables 2,237 3,320
------ ------
Totals $14,732 $14,980
====== ======
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
1994 1993
---------- ----------
Land $ 718,022 $ 718,022
Building and improvements 85,850 85,850
Yard and administration building 2,374,658 2,373,888
Machinery and equipment 526,774 516,340
Leasehold improvements 5,703 5,703
--------- ---------
3,711,007 3,699,803
Less accumulated depreciation 2,383,607 2,319,467
--------- ---------
Net property, plant and equipment $1,327,400 $1,380,336
========= =========
F-11
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 5 - NOTES PAYABLE
Notes payable consist of the following:
1994 1993
------- -------
Notes payable - officer $15,379 $17,352
Notes payable - other 75,000 75,000
------ ------
Total $90,379 $92,352
====== ======
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
1994 1993
---------- ----------
12% subordinated capital notes,
various maturity dates,
unsecured. $ 421,079 $ 394,163
Mortgage note payable, interest
at .5% over prime (prime was
7.0% as of July 31, 1994),
monthly payments of $7,566,
including principal and
interest, final payment due
June, 2011, secured by real
property. 747,700 774,944
Note payable, interest at 10%
monthly payments of $356,
including principal and
interest, final payment due
February, 1995, collateralized
by equipment. 3,073 6,812
--------- ---------
1,171,852 1,175,919
Less current maturities 352,064 304,851
--------- ---------
Totals $ 819,788 $ 871,068
========= =========
F-12
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 6 - LONG-TERM DEBT (CONTINUED)
Aggregate maturities required on long-term debt at July 31, 1994 are as follows:
1995 $ 352,064
1996 127,163
1997 61,834
1998 44,973
1999 48,465
Later years 537,353
---------
Total $1,171,852
=========
NOTE 7 - INCOME TAXES
The provision for income taxes consists of the following:
1994 1993 1992
------ ------ -------
Federal income taxes $ 0 $ 0 $ 7,780
State and local income taxes 4,398 2,984 5,957
----- ----- ------
Provision for income taxes $4,398 $2,984 $13,737
===== ===== ======
The Company has available at July 31, 1994 unused tax credits and operating loss
carryforwards, which may provide future tax benefits. If not used, the
carryforwards will expire as follows:
Year of Tax Operating Loss
Expiration Credits Carryforwards
---------- ------- --------------
2001 $61,247 $ 0
2002 0 170,356
2003 0 208,651
2004 0 129,419
2005 0 81,096
2006 0 216,677
2007 0 0
2008 0 89,623
2009 0 76,331
------ -------
$61,247 $972,153
====== =======
F-13
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 7 - INCOME TAXES (CONTINUED)
The difference between the statutory income tax rate and the Company's effective
tax rate is reconciled as follows:
1994 1993 1992
------------------ ------------------ -----------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
Federal taxes
(benefit) at
statutory rate $(23,500) (34.0)% $(35,800) (34.0)% $23,800 34.0%
Surtax exemption 0 .0 0 .0 (12,800) (18.0)
Tax effect of
current
operating
loss available
for carryover 23,500 34.0 35,800 34.0 0 0.0
Temporary
differences 804 1.2 0 .0 (3,220) (3.0)
State and local
income taxes,
net of federal
benefit 3,594 5.2 2,984 2.8 5,957 8.0
------- ----- ------- ----- ------ -----
$ 4,398 6.4% $ 2,984 2.8% $13,737 21.0%
------- ----- ------- ----- ------ -----
A deferred tax asset due to the operating loss and tax credit carryforwards has
not been recognized because it is more likely than not that it will not be
realized based on current circumstances.
NOTE 8 - MAJOR BUSINESS SEGMENTS
The Company considers its activities to comprise two reportable segments:
financial lending and agribusiness. Summary data is as follows:
1994 1993 1992
---------- ---------- ----------
Revenues:
Finance $ 180,462 $ 182,089 $ 205,190
Agribusiness 1,316,632 1,303,996 1,288,885
Other 10,164 11,420 23,281
--------- --------- ---------
Consolidated $1,507,258 $1,497,505 $1,517,356
========= ========= =========
F-14
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 8 - MAJOR BUSINESS SEGMENTS (CONTINUED)
1994 1993 1992
---------- ---------- ----------
Operating profit (loss):
Finance $ 31,848 $ 23,204 $ 46,588
Agribusiness 132,454 95,117 47,258
--------- --------- ---------
Total segments 164,302 118,321 93,846
Corporate and other
expenses (135,238) (133,261) (75,152)
--------- --------- ---------
Income (loss) from
operations 29,064 (14,940) 18,694
Nonoperating income 2,452 326 149,567
Interest expense (100,519) (90,722) (98,094)
--------- --------- ---------
Income (loss) before
income taxes and
extraordinary item $ (69,003) $ (105,336) $ 70,167
========= ========= =========
Total assets:
Finance $ 545,209 $ 554,569 $ 578,059
Agribusiness 1,333,934 1,389,036 1,394,619
--------- --------- ---------
Total segments 1,879,143 1,943,605 1,972,678
Corporate and other 80,426 94,191 122,584
--------- --------- ---------
Consolidated $1,959,569 $2,037,796 $2,095,262
========= ========= =========
Capital expenditures:
Finance $ 0 $ 0 $ 0
Agribusiness 8,639 63,169 29,295
--------- --------- ---------
Total segments 8,639 63,169 29,295
Corporate and other 2,565 3,196 0
--------- --------- ---------
Consolidated $ 11,204 $ 66,365 $ 29,295
========= ========= =========
Depreciation and
amortization:
Finance $ 832 $ 879 $ 991
Agribusiness 55,726 54,652 52,556
--------- --------- ---------
Total segments 56,558 55,531 53,547
Corporate and other 15,974 19,352 20,016
--------- --------- ---------
Consolidated $ 72,532 $ 74,883 $ 73,563
========= ========= =========
F-15
LINCOLN INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1994, 1993, and 1992
NOTE 9 - SALE OF OPERATING ASSETS
On August 28, 1991, the Company sold all finance receivables and ceased
operations at the Columbia, Pineville, and Shelbyville branch offices of Lincoln
Finance Company, Inc. The Greensburg, Kentucky office of Lincoln Finance
Company, Inc. continues to operate. Net finance receivables of $1,123,613 were
sold at a gain of $75,466, and the Company received $30,000 for agreements not
to compete, which is included in other income. In connection with the sale of
these financial receivables, the note payable to Security Pacific Credit
Corporation was liquidated September, 1991.
Following is a summary of the results of operations of the Lincoln Finance
Company, Inc.'s offices sold for the period through August 28, 1992, and the
year ended July 31, 1991:
August 1, 1991
through Year ended
August 28, 1992 July 31, 1991
--------------- -------------
Revenues $ 28,289 $361,445
Costs and expenses 38,451 379,842
------- -------
Income (loss) from
operations $(10,162) $(18,397)
======= =======
On August 15, 1991, Farmers Friend Mineral Company, Inc. sold a trademark, which
had no basis, for $50,000, which is included in other income.
NOTE 10 - LEASE COMMITMENTS
The Company and its subsidiaries lease facilities, sales offices and equipment
under operating leases, the majority of which do not extend beyond one year.
Total rental expense amounted to $33,855 in 1994, $29,114 in 1993, and $34,140
in 1992. Future minimum rentals are as follows:
Year ending July 31:
-------------------
1995 $ 9,104
1996 1,701
------
Totals $10,805
======
F-16