SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended: December 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _______ to
___________.
Commission file number 0-8016
OLD STONE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Rhode Island 05-0341273
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
957 Warren Avenue, East Providence, RI 02914
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (401) 434-4632
Securities registered pursuant to
Section 12(b) of the Act: Common Stock ($1.00 par value)
Cumulative Voting Convertible
Preferred Stock, Series B
($20,000 Stated Value, $1.00 Par
Value)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
Since there is no ascertainable market value for the Registrant's stock, the
Registrant is unable to state the aggregate market value of the voting and
non-voting common equity held by non-affiliates. See Item 5.
As of the close of business on April 14, 1999, 8,297,046 shares of the
Registrant's Common Stock were outstanding.
Documents Incorporated by Reference: None.
<PAGE>
Table of Contents
Description Page Number
PART I
Item 1 Business ................................................... 1
Item 2 Properties ................................................. 2
Item 3 Legal Proceedings........................................... 3
Item 4 Submission of Matters to a Vote of Security Holders ........ 4
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters ....................................... 5
Item 6 Selected Financial Data .................................... 5
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7
Item 7A Quantitative and Qualitative Disclosures About
Market Risk ............................................... 9
Item 8 Financial Statements and Supplementary Data ................ 9
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 9
PART III
Item 10 Directors and Executive Officers of the Registrant ......... 10
Item 11 Executive Compensation ..................................... 12
Item 12 Security Ownership of Certain Beneficial Owners
and Management............................................. 13
Item 13 Certain Relationships and Related Transactions ............. 15
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 16
Signatures ............................................................ 18
<PAGE>
PART I
ITEM 1. BUSINESS
Background
Old Stone Corporation (the "Registrant") is a general business corporation
incorporated in 1969 under the laws of the State of Rhode Island. The principal
offices of the Registrant are located at 957 Warren Avenue, East Providence,
Rhode Island 02914.
On January 29, 1993, the Office of Thrift Supervision ("OTS") declared Old
Stone Bank, a Federal Savings Bank, a federally chartered stock savings bank
organized under the laws of the United States (the "Bank"), insolvent, and
appointed the Resolution Trust Company ("RTC") as receiver (the "Bank Closing").
The RTC formed a bridge bank, Old Stone Federal Savings Bank (the "Bridge Bank")
which assumed all of the deposit liabilities and substantially all of the other
liabilities of the Bank and acquired substantially all of the assets of the Bank
(including the stock of all of its subsidiaries). Immediately prior to the Bank
Closing, the Bank constituted substantially all of the assets of the Registrant.
Immediately following the Bank Closing, all of the officers of the Registrant
resigned and were hired by the Bridge Bank. A limited slate of new officers was
elected on March 8, 1993. See Item 10 below, "Directors and Executive Officers
of the Registrant." The Registrant and the Bank have instituted a suit against
the United States in connection with the Bank Closing. See Item 3 "Legal
Proceedings" below.
The Registrant continues to hold its equity interest in Old Stone
Securities Company ("Old Stone Securities"). See "Significant Subsidiary" below.
The Registrant has no equity interest in any other significant entity.
Significant Subsidiary
The Registrant's only surviving active subsidiary after the Bank Closing is
Old Stone Securities, a registered securities broker-dealer which provides
brokerage services to retail and institutional clients.
Regulation
In its capacity as registered transfer agent for the shares of the
Registrant's Common Stock and Preferred Stock, the Registrant is subject to
regulation by the U.S. Securities and Exchange Commission (the "SEC").
Old Stone Securities is subject to regulation by the SEC, the State of
Rhode Island Department of Business Regulation and the National Association of
Securities Dealers, Inc.
Employees
As of December 31, 1998, Old Stone Securities employed 3 persons, all of
whom were full-time, two of whom also serve as officers of the Registrant, and
who handle certain administrative functions on behalf of the Registrant.
Recent Developments
On November 14, 1997, a statement was filed with the SEC on Schedule 14D-1
relating to a tender offer by Manticore Properties, L.L.C. ("Manticore"), which
is wholly-owned by Gotham Partners, L.P. ("Gotham I") and Gotham Partners, II,
L.P. which was subsequently dissolved on October 1, 1998 ("Gotham II"), to
purchase any and all shares of the Registrant's Common Stock for $1.00 per share
and the Registrant's Preferred Stock for $4.00 per share. Based upon subsequent
filings with the SEC by Manticore, during the tender offer period Manticore
purchased approximately 1,405,955.529 shares of Common Stock and 297,018 shares
of Preferred Stock that were tendered by the Registrant's shareholders.
Subsequent to that time, according to filings by Manticore and its
affiliated companies (Gotham I, Gotham III, Gotham International Advisors,
L.L.C. ("Advisors") and Gotham Partners International Ltd.) (collectively, the
"Funds")), the Funds have continued to purchase shares of the Common Stock and
the Preferred Stock in the open market.
According to the Funds' most recent filing, as of March 31,1999, Manticore
had sole voting and dispositive power with respect to 1,407,144 shares of the
Common Stock and 299,016 shares of the Preferred Stock; Gotham I had sole voting
and dispositive power with respect to 332,381 shares and shared voting and
dispositive power with respect to 1,407,144 shares of the Common Stock and sole
voting power with respect to 4,600 shares and shared voting and dispositive
power with respect to 299,016 shares of the Preferred Stock; Gotham III had sole
voting and dispositive power with respect to 15,608 shares, and shared voting
and dispositive power with respect to 1,407,144 shares, of the Common Stock and
sole voting and sole dispositive power with respect to 250 shares of Preferred
Stock and shared voting and dispositive power with respect to 299,016 shares of
the Preferred Stock; and Advisors had sole voting and sole dispositive power
with respect to 434,756 shares of the Common Stock and 52,928 shares of the
Preferred Stock.
ITEM 2. PROPERTIES
The administrative offices of the Registrant and Old Stone Securities are
located at 957 Warren Avenue, East Providence, Rhode Island. Such offices are
leased on a month-to-month basis at a per month rental of $800.00, the cost of
which is shared by Old Stone Securities and the Registrant.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not aware of any material pending legal proceedings to
which it or Old Stone Securities or their respective properties, are a party or
were a party during the fourth quarter of the Registrant's fiscal year ended
December 31, 1998, except as noted in the counterclaim discussed below.
On January 29, 1993, the OTS declared the Bank insolvent and appointed the
RTC as receiver. See Item 1 above, "Business--Background."
On September 16, 1992, the Registrant and the Bank ("Plaintiffs")
instituted a suit against the United States ("Defendant") in the U.S. Court of
Federal Claims. In connection with certain government-assisted acquisitions by
Plaintiffs in the 1980s, the Defendant (through its agencies the Federal Home
Loan Bank Board ("FHLBB") and the Federal Savings and Loan Insurance Corporation
("FSLIC")), in exchange for the Bank's purchasing certain assets and assuming
certain liabilities of two FSLIC-insured thrift institutions supervised by
FHLBB, agreed among other things to provide Plaintiffs with certain valuable
capital credits and authorized Plaintiffs to treat those credits and supervisory
goodwill as regulatory capital to be amortized over a period of 25 to 30 years
on the Bank's financial statements. Furthermore, the Registrant entered into a
Net Worth Maintenance Stipulation in which it agreed to maintain the net worth
of the Bank at agreed upon regulatory levels, which included the capital credits
and supervisory goodwill in the calculation thereof.
Following the passage of the Financial Institutions Reform, Recovery, and
Enforcement Act in August, 1989, the OTS (successor in interest to the FHLBB)
required the Bank to discontinue treating these capital credits and supervisory
goodwill as part of regulatory capital and caused the Bank to write-off
immediately approximately $80 million of such capital credits and supervisory
goodwill. Based upon this breach, Plaintiffs allege breach of contract by the
United States, resulting in substantial injury to Plaintiffs, effecting a taking
of Plaintiffs' property without just compensation and unjustly enriching the
Defendant at the expense of Plaintiffs. Plaintiffs seek compensation for the
damages caused by the breach, just compensation for the property taken and
disgorgement of the amounts by which the Defendant has been unjustly enriched.
The Defendant has filed a counterclaim against the Registrant for alleged breach
of its net worth maintenance agreement. The Registrant has filed an answer
denying such counterclaim.
Following the Bank Closing, the Bank's claims and the claims of the
Registrant were split into two separate actions. The Registrant's claims are
separate and distinct from the claims of the Bank. An agency of the Defendant,
the Federal Deposit Insurance Corporation ("FDIC"), serves as receiver for the
Bank and is maintaining the Bank's claims against the Defendant. On February 27,
1998, the Registrant filed a motion for summary judgment, which the Defendant is
opposing. There are several similar cases pending before the U.S. Court of
Federal Claims. The Registrant's case is dependent upon the outcome of other
cases which are currently being, or will soon be, litigated on damages. No
prediction as to the timing or the outcome of the Registrant's case can be made
at this time.
On October 17, 1997, Registrant and Arnold & Porter (the "Firm") entered
into a Retainer Agreement (the "Retainer Agreement") whereby the Firm is
entitled to receive compensation in the form of a contingent incentive fee (the
"Incentive Fee") based on the dollar amount of any award received by the
Registrant or through the Federal Deposit Insurance Corporation, as receiver for
the Bank. In addition to the Incentive Fee, the Firm shall be entitled to
receive payment of accrued fees for legal services rendered by the Firm.
In consideration for the agreements made by the Firm in the Retainer
Agreement, the Firm received an outright assignment of its percentage interest
in the Registrant's right, title and interest in any judgment, settlement or
consensual arrangement from the pending lawsuit. Furthermore, as security for
all amounts due to the Firm under the Retainer Agreement, the Registrant granted
to the Law Firm a first priority security interest in and to the litigation with
the United States and any proceeds derived from a judgment settlement or other
consensual resolution of the litigation. See also Item 11, "Executive
Compensation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of Registrant
during the fourth quarter of the Registrant's fiscal year ended December 31,
1998.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Until January 29, 1993, the Registrant's Common Stock was quoted on the NASDAQ
National Market and was traded under the symbol "OSTN." Commencing in January,
1999, the Registrant's Common Stock commenced trading on the bulletin board. At
April 14, 1999, there were approximately 40,976 shareholders of record. High and
low stock prices for the last year were
1998 High Low
---- ---- ----
First Quarter 5 3/16 1.00
Second Quarter 5.00 3.50
Third Quarter 4.00 3 1/8
Fourth Quarter 3 1/4 2 7/8
The Registrant discontinued dividends to holders of its Common Stock and
its Preferred Stock during the third quarter of 1991 and does not expect to pay
any dividends on such stock for the foreseeable future. As a result of the
failure to pay dividends on the Preferred Stock for more than four quarters, the
holders of the Preferred Stock collectively are entitled to elect a number of
directors of the Registrant constituting twenty percent (20%) of the total
number of directors of the Registrant at the next meeting of stockholders at
which directors are to be elected. Until the aggregate deficiency of $18,216,304
as of December 31, 1998 is declared and fully paid on the Preferred Stock, the
Registrant may not declare any dividends or make any other distributions on or
redeem the Common Stock.
The Registrant did not sell any securities within the past three years
which were not registered under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
On January 29, 1993, the OTS declared the Bank insolvent, and appointed the
RTC as receiver. See Item 1 above, "Business--Background." Bank operations are
not included in 1996, 1997 or 1998 operations. At December 31, 1997 and 1998 the
Registrant's statements of financial condition do not include any assets or
liabilities of the Bank.
The following schedule of selected financial information includes the three
years ending December 31, 1996, 1997 and 1998.
<PAGE>
Old Stone Corporation three year comparison ($ in thousands, except for
share and per share amounts):
Fiscal Year Ended: December 31, December 31, December 31,
1996 1997 1998
INCOME:
Interest income $ 20 $ 18 $ 19
Other income 231 179 238
Total income 251 197 257
EXPENSES:
Interest expense 0 0 0
Salaries and benefits 168 155 157
Other operating expenses 376 248 213
Total expense 544 403 370
OPERATING (LOSS):
Operating (loss)
before income taxes $ (293) $ (206) $ (113)
Income taxes (credit) 6 7 0
NET (LOSS) (299) (213) (113)
Net loss available to common $ (3,007) $ (2,921) $ (2,821)
shareholders
Net Loss per share $ (.36) $ (.35) $ (.34)
Average shares outstanding 8,297,046 8,297,046 8,297,046
ASSETS:
Cash $ 33 $ 27 $ 4
Short-term investments 401 251 105
Loans receivable, net 56 34 30
Other assets 80 56 276
----------- ----------- -----------
TOTAL $ 570 $ 368 $ 415
<PAGE>
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
LIABILITIES:
Long-term debt 0 0 0
Other liabilities 1,344 1,184 1,344
Total liabilities 1,344 1,184 1,344
Redeemable preferred stock 20,104 20,300 20,496
Stockholders' equity (deficit) (20,707) (21,116) (21,425)
---------- ----------- ------------
$ 570 $ 368 $ 415
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Current Operations
As a result of the Bank Closing, the Registrant's present business
activities include its only surviving significant subsidiary, Old Stone
Securities, a registered securities broker-dealer which provides brokerage
services to retail and institutional clients. Management has invested, and
intends in the future to invest, the Registrant's assets on a short-term basis.
The Registrant's Board of Directors has continued to monitor various expense
saving and revenue enhancing measures at Old Stone Securities designed and
effectuated during 1997 and 1998.
Since the Bank Closing, and except for the operation of Old Stone
Securities, the Registrant's primary expenses have been legal, insurance,
accounting, and transfer agent expenses. At the end of 1996, the Registrant
terminated its transfer agent relationship with American Stock Transfer & Trust
Company and brought this activity in-house pursuant to a software license
agreement with TS Partners, Inc.
Results for Year Ended December 31, 1998 Compared to Year Ended December 31,
1997.
Interest income was $19,000 for the year ended December 31, 1998, compared
to $18,000 for the year ended December 31, 1997.
Other income, including securities gains, was $238,000 for the year ended
December 31, 1998, compared to $179,000 for the year ended December 31, 1997.
Since the Bank Closing, the Registrant's primary operating expenses have
been legal, insurance, accounting and transfer agent expenses, as well as, the
operating expenses of Old Stone Securities. Operating expenses (including
salaries and benefits and excluding interest expense) were $370,000 for the year
ended December 31, 1998, compared to $403,000 for the year ended December 31,
1997.
Salaries and benefits for the year ended 1998 were $157,000 compared to
$155,000 for 1997.
Old Stone Securities' loss before income taxes was $2,443 for the year
ended December 31, 1998, compared to a loss of $71,154 for the year ended
December 31, 1997. The Registrant reported net loss of $113,000 for the year
ended December 31, 1998 compared to a loss of $213,000 for the year ended
December 31, 1997.
The loss per share was $.34 for the year ended December 31, 1998 after the
deduction of preferred dividends and amortization of original issue discount of
$2.7 million. The loss per share was $.35 for the year ended December 31, 1997
after the deduction of preferred dividends and amortization of original issue
discount of $2.7 million. No preferred or common dividends have been paid since
the second quarter of 1991 and the Registrant does not expect to pay dividends
in the foreseeable future. Further, the Registrant is prohibited from paying
dividends on the Common Stock until the aggregate deficiency (totaling
$18,216,304 as of December 31, 1998) on the Preferred Stock dividends is paid in
full.
Results for Year Ended December 31, 1997 Compared to Year Ended December 31,
1996.
Interest income was $18,000 for the year ended December 31, 1997, compared
to $20,000 for the year ended December 31, 1996.
Other income, including securities gains was $179,000 for the year ended
December 31, 1997, compared to $231,000 for the year ended December 31, 1996.
Since the Bank Closing, the Registrant's primary operating expenses have
been legal, insurance, accounting and transfer agent expenses as well as the
operating expenses of Old Stone Securities. Operating expenses (including
salaries and benefits and excluding interest expense) were $403,000 for the year
ended December 31, 1997, compared to $544,000 for the year ended December 31,
1996.
Salaries and benefits for the year ended 1997 were $155,000 compared to
$168,000 for 1996.
The Registrant reported net loss of $213,000 for the year ended December
31, 1997 compared to a loss of $299,000 for the year ended December 31, 1996.
The loss per share was $.35 for the year ended December 31, 1997 after the
deduction of preferred dividends and amortization of original issue discount of
$2.7 million. The loss per share was $.36 for the year ended December 31, 1996
after the deduction of preferred dividends and amortization of original issue
discount of $2.7 million.
The increase in the number of shares reported for average shares
outstanding from the previous reports for year-end 1996 and 1997 (8,246,175)
compared to 1997 (8,297,046) was not because of additional shares issued by the
Registrant. Rather, the change results from clarification of a discrepancy with
a previous transfer agent. Changes have not been made to the loss per share
calculation in previous year's statements because they are not material.
Liquidity and Capital Resources
At December 31, 1998, the Registrant had $.4 million in assets, $1.3
million in total liabilities, $20.5 million in redeemable preferred stock, and a
stockholder's deficit of $21.4 million, compared to $.4 million in assets, $1.2
million in total liabilities, $20.3 million in redeemable preferred stock and
stockholders' deficit of $21.1 million at December 31, 1997.
The Registrant's assets are currently being invested short-term, and
expenses have been reduced to a level that management believes is commensurate
with the Registrant's current activities pending resolution of any potential
claims. See "Current Operations" above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's Consolidated Financial Statements for the year ended
December 31, 1998 are filed as Exhibit 99 to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the directors
of the Registrant. In February, 1997 Thomas F. Hogg, Winfield W. Major and James
V. Rosati were elected by the Board to serve as interim Directors of the
Registrant until the next meeting of shareholders for the purpose of electing
directors. (See "Market for the Registrant's Common Equity and Related
Stockholder Matters" for a discussion of the right of the holders of the
Registrant's Preferred Stock to elect 20% of the directors of the Registrant).
The Directors serve until the end of their term or until such time as a
successor is elected. No election of Directors by stockholders has been held
since 1992.
Name Age Principal Occupation Director Since
Howard W. Armbrust 71 Retired former Chairman, 1974
Vargas Manufacturing
(jewelry manufacturer)
Bernard V. Buonanno, Jr 61 Partner, Edwards & Angell, 1979
LLP (law firm); Partner,
Riparian Partners
(investment firm);
Director, A.T. Cross Company
Robert E. DeBlois 65 Retired former Chairman of 1974
DB Companies, Inc. and its
subsidiaries (gasoline and
convenience store chain)
Thomas P. Dimeo 68 Chairman, The Dimeo Group 1974
of Companies (construction
industry)
Thomas F. Hogg 51 Chief Financial Officer, 1997
R.I. Housing & Mortgage
Finance Corporation (state
chartered housing finance
agency)
Allen H. Howland 78 Chairman, Original Bradford 1992*
Soap Works, Inc.
(manufacturer of private
label soaps)
Beverly E. Ledbetter 55 Vice President and General 1981
Counsel, Brown University
Winfield W. Major 51 General Counsel, Bacou USA, 1997
Inc. since June 29, 1998
(safety products
manufacturing company);
prior to June 29, 1998
counsel, Edwards & Angell,
LLP (law firm)
James V. Rosati 49 Chief Executive Officer, 1997*
Telecommunications Sector,
Plastics Division, Cookson
Group plc; Senior Vice
President, Cookson America,
Inc. (industrial
manufacturing company)
Alfred J. Verrecchia 56 President, Global 1987
Operations and Director,
Hasbro, Inc. (toy
manufacturer); Director
Hasbro, Inc.; Director
Bacou USA, Inc. since
February 24, 1999 1999
* Mr. Howland also served as a Director from 1981 to 1991; Mr. Rosati also
served as a Director from 1991 to 1993.
With respect to information regarding executive officers of the Registrant,
none of the officers of Registrant would be considered executive officers
thereof under the rules of the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
None of the officers of the Registrant would be considered executive
officers of the Registrant under the rules of the SEC. Accordingly, no
disclosure of executive compensation is required.
Compensation of Board of Directors
For the fiscal year ended December 31, 1998, Directors received no current
compensation for serving on the Board or attending committee meetings. However
on October 23, 1998 the Board adopted a reolution authorizing deferred
compensation to be paid to the Directors, retroactive to January, 1993, in the
event that the Corporation achieve a certain level of recovery in the Court of
Claims litigation. The deferred compensation to be paid to the Directors would
be $5,000 per year and $500 per meeting. Since January, 1993, there have been 41
meetings of the Board or Committees thereof.
On October 23, 1998, the Board of Directors of Registrant adopted a
resolution establishing a Litigation Management Committee to effectively
prosecute the Registrant's claims against the United States of America in the
Court of Federal Claims. This Committee was established in order to manage the
Registrant's litigation, including working with the Registrant's outside
attorneys, responding to discovery requests, providing documentary evidence and
testimony, and handling all day-to-day aspects of the case, subject to the
ultimate authority of the Board to approve any major strategic decision in the
case, including settlement, appeal or withdrawal of the suit. Four members of
the Board were appointed to this Committee: Bernard V. Buonanno, Jr., Thomas F.
Hogg, Winfield W. Major and James V. Rosati.
In consideration for their efforts in serving on the Committee, the members
collectively will be entitled to receive compensation of between $800,000 and
$2,200,000, contingent upon the Registrant's achieving a certain threshold of
award and then progressively receiving certain levels of awards via judgment or
settlement in the litigation (the "Recovery").
The members of the Committee shall also be reimbursed currently for their
reasonable out-of-pocket expenses in connection with the litigation. The members
of the Committee shall not be liable to the Registrant for the services they
render in this regard unless they act with "deliberate intent to injure the
Registrant or its shareholders or with reckless disregard for the best interests
of the Registrant or its shareholders." Lastly, the members of the Committee
shall be indemnified by the Registrant with respect to any damages they incur as
a result of any action, suit or other proceeding arising out of or relating to
the Registrant's litigation (subject to the same exception listed in the
previous sentence).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders of the Corporation
The following table sets forth information as to the only persons known to
the Registrant to be beneficial owners of more than five percent (5%) of any
class of outstanding voting securities of the Registrant.
Amount and Nature of Beneficial Ownership of Common Stock (1)
<TABLE>
<CAPTION>
Sole Shared Sole Shared Dispositive Percent of
Name and Address of Beneficial Owner Voting Voting Dispositive Power Outstanding
Power Power Power Stock
<S> <C> <C> <C> <C> <C>
Manticore Properties, LLC (2) 351,223 1,606,488 351,223 1,606,488 23.03
Gotham Partners, L.P.
Gotham Partners III, L.P.
110 East 42nd Street
18th Floor
New York, NY 10017
Gotham Partners 470,041 0 470,041 0 5.64
International Advisors, LLC (3)
(same as above)
</TABLE>
(1) This information with respect to beneficial ownership is based upon
information obtained by the Registrant as of March 31, 1999 from Manticore
Properties, LLC as filed with the SEC on Form 4 filed on dated April 9, 1999.
(2) Manticore Properties, LLC also has sole voting and sole dispositive power
with respect to 299,016 shares of Preferred Stock (28.56% of the class), which
it shares with Gotham I and Gotham III, and which are convertible into 199,344
shares of Common Stock.
(3) Advisors also has sole voting and sole dispositive power with respect to
52,928 shares of Preferred Sock, which are convertible into 35,285 shares of
Common Stock.
Security Ownership of Directors
The following table sets forth information furnished to the Registrant by
all present Directors regarding amounts of Common Stock of the Registrant owned
by them on December 31, 1998. Only Mr. Rosati, who owns 2,000 shares directly,
owns any shares of Preferred Stock. Except as noted, all such persons possess
sole voting and investment power with respect to the securities listed below. An
asterisk in the column listing the percentage of securities beneficially owned
indicates the person owns less than one percent.
Name of Beneficial Owner Number of Shares Percent of
Beneficially Owned Outstanding
Common Stock
Howard W. Armbrust 2,000 *
Bernard V. Buonanno, Jr. 4,613 *
Robert E. DeBlois 4,742 *
Thomas P. Dimeo 11,000 (1) *
Thomas F. Hogg 6,257 (4) *
Allen H. Howland 2,557 (2) *
Beverly E. Ledbetter 133 *
Winfield W. Major 7,476.625 (4) *
James V. Rosati 23,267.912 (3)(4) *
Alfred J. Verrecchia 1,525 *
All current Directors of
the Corporation as a group 63,571.537 (4) *1.537
(10 persons)
(1) Excludes 1,000 shares owned by Mr. Dimeo's spouse, as to which he disclaims
beneficial ownership. Includes 1,000 shares owned indirectly by Mr. Dimeo
in the Dimeo Construction Company Profit Sharing Plan.
(2) Excludes 100 shares owned by Mr. Howland's spouse, as to which he disclaims
beneficial ownership.
(3) Excludes 2,000 shares owned by Mr. Rosati's spouse, as to which he
disclaims beneficial ownership.
(4) Excludes shares held in the name of the FDIC, as Trustee of the ESOP, which
were distributed to Messrs. Hogg, Major and Rosati. As of December 31, 1998
10,659.107, 11,062.824 and 11,449.10 shares were allocated to the accounts
of Messrs. Hogg, Major and Rosati, respectively and are held by them
directly.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Interests of Directors, Officers and Others in Certain Transactions
Mr. Buonanno is a partner of Edwards & Angell, LLP, a law firm retained by
the Registrant on various legal matters. The dollar amount of fees paid to
Edwards & Angell, LLP during 1998 did not exceed 5% of the Edwards & Angell,
LLP's gross revenues for 1998.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
(1) The following consolidated financial statements and report of
independent accountants of the Corporation and subsidiaries are
filed as Exhibit 99 to this report.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) - Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flow - Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) None.
(3) List of Exhibits -- See Item 14(c) below.
(b) Reports on Form 8-K
None.
(c) Exhibit Index. The following exhibits to this Annual Report on
Form 10-K are hereby incorporated by reference herein:
Exhibit
(10) Agreement with Arnold & Porter
(21) Incorporated by reference to Exhibit 21 of the Registrant's
Form 10-K filed March 30, 1998
(27) Financial Data Schedule
(99) Consolidated Financial Statements for the Registrant for the
years ended December 31, 1998, 1997 and 1996
(d) None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
OLD STONE CORPORATION
(Registrant)
April 14, 1999 By: /s/ Bernard V. Buonanno, Jr.
-----------------------------
Chairman
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 indicated on March ____, 1999.
/s/ Howard W. Armbrust Director
- -----------------------
Howard W. Armbrust
/s/ Bernard V. Buonanno, Jr Director
- ---------------------------
Bernard V Buonanno, Jr.
/s/ Robert E. DeBlois Director
- ----------------------
Robert E. DeBlois
/s/ Thomas P. Dimeo Director
- -------------------
Thomas P. Dimeo
/s/ Thomas F. Hogg Director
- ------------------
Thomas F. Hogg
/s/ Allen H. Howland Director
- --------------------
Allen H. Howland
/s/ Beverly E. Ledbetter Director
- ------------------------
Beverly E. Ledbetter
/s/ Winfield W. Major Director
- ---------------------
Winfield W. Major
/s/ James V. Rosati Director
- -------------------
James V. Rosati
/s/ Alfred J. Verrecchia Director
- ------------------------
Alfred J. Verrecchia
<PAGE>
EXHIBITS
Exhibit 10
Agreement with Arnold & Porter
EXHIBIT 27
FINANCIAL DATA SCHEDULE
EXHIBIT 99
OLD STONE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
EXHIBIT 10
October 17, 1997
Gerald L. Nelson, President
Bernard V. Buonanno, Jr., Esq.
Chairman, Board of Directors
Old Stone Corporation
957 Warren Avenue
East Providence, R. I. 02914
Re: Old Stone Corporation v. United States
Dear Ms. Nelson and Mr. Buonanno:
This letter (the "Retainer Agreement") will replace in its entirety the
October 26, 1992 Retainer Agreement among Old Stone Corporation (the
"Corporation"), Old Stone Bank, F.S.B. ("Old Stone Bank") and Arnold & Porter
(the "Firm"). This Retainer Agreement shall set forth our mutual understanding
as to the basis on which the Firm's fees and related expenses will be charged
and paid with respect to legal services in connection with the litigation of
certain Winstar-Related Claims described more fully below.
The Firm will continue to represent the Corporation in connection with its
pending claims against the United States for money damages and other relief
resulting from the Government's abrogation of certain contracts. The Firm is
undertaking to represent the Corporation in asserting its claims in the United
States Court of Federal Claims ("Claims Court") and, subject to Section 5 below,
through any appeal of an order issued by the Claims Court to the U.S. Court of
Appeals for the Federal Circuit and/or the U.S. Supreme Court. Specifically, the
Firm will represent the Corporation in connection with all claims asserted by it
in the U.S. Claims Court action enumerated 92-647C (Old Stone Corporation, et
al. v. U.S.). Melvin C. Garbow and Howard N. Cayne of the Firm will be
principally responsible for the representation.
1. Incentive Fee Arrangement. In order to compensate the Firm for its
efforts in litigating the Corporation's claims, the Corporation agrees to pay
the Firm a contingent incentive fee as follows:
A. Fees For Any Litigated Judgment, and For Settlements Exceeding Fifty
Million Dollars.
(i) Incentive Fees. In the event that the Corporation obtains an award,
either directly or through Old Stone Bank or through the FDIC as receiver for
Old Stone Bank, as the result of a litigated judgment or through a settlement or
other consensual resolution of the claims in Old Stone Corporation, et al. v.
United States, 92-647C, the Corporation shall pay the Firm: (i) ten percent
(10%) of any monies (e.g., damages or restitutionary payments) from one dollar
to twenty-five million dollars ($1 - $25,000,000) comprising such award; (ii)
fifteen percent (15%) of any monies from twenty-five million to fifty million
dollars ($25,000,000 - $50,000,000); (iii) twenty percent (20%) of any monies
from fifty to one hundred million dollars ($50,000,000 - $100,000,000); and (iv)
twenty-five percent of any monies exceeding one hundred million dollars
($100,000,000).
(ii) Hourly Fees. In addition to the fees described above, the Corporation
shall pay the accrued fees for legal services rendered by the Firm, charged at
the Firm's standard hourly rates for such services, on the following terms: (i)
for recoveries of one hundred million dollars ($100,000,000) and less, accrued
fees shall be capped at one and one-half million dollars ($1,500,000), and the
Corporation shall pay a fraction of such capped accrued fees as follows: (a) for
recoveries ranging from one dollar to thirty million dollars ($1 - $30,000,000),
the Corporation shall pay one-third (1/3) of the capped accrued fees; (b) for
recoveries ranging from thirty to sixty million dollars ($30,000,000 -
$60,000,000), the Corporation shall pay two-thirds (2/3) of the capped accrued
fees; (c) for recoveries ranging from sixty to one hundred million dollars
($60,000,000 - $100,000,000), the Corporation shall pay the capped accrued fees
in full. For recoveries of more than one hundred million dollars ($100,000,000),
the Corporation shall pay the Firm its actual accrued fees without regard to any
cap on such fees.
B. Special Rules for Settlements of Fifty Million Dollars or Less.
Notwithstanding the foregoing, in the event that the Corporation obtains an
award, either directly or through Old Stone Bank or through the FDIC as receiver
for Old Stone Bank, of fifty million dollars ($50,000,000) or less through a
settlement, or other resolution of the claims in Old Stone Corporation, et al.
v. United States, 92-647C not involving the entry of a litigated judgment, the
Corporation shall pay the Firm as follows: (i) ten percent (10%) of any monies
(e.g., damages or restitutionary payments) from one dollar to twenty million
dollars ($1 - $20,000,000) comprising such award; (ii) fifteen percent (15%) of
any monies from twenty to forty million dollars ($20,000,000 - $40,000,000); and
(iii) twenty percent (20%) of any monies from forty to fifty million dollars
($40,000,000 - $50,000,000). In addition to such fees, the Corporation shall pay
the Firm its actual accrued fees for legal services rendered, calculated at the
Firm's standard hourly rates for such services, provided, however, that such
fees shall be capped at one and one-half million dollars ($1,500,000).
C. Statutory Fees. In addition to the fees set forth in Paragraphs A and B,
above, the Corporation shall pay the Firm fifty percent (50%) of any attorney
fees awarded to it pursuant to the Equal Access to Justice Act, 28 U.S.C.A. ss.
2412.
D. Fees Are In Addition To Disbursements and Costs. Client is obliged to
pay costs, as detailed in Paragraph 6 below, in addition to the incentive,
hourly and statutory fees described above. The incentive fee calculation
described above will be based on the gross amount of any judgment, settlement or
other award, without reduction for costs incurred.
E. Applicable Percentage. The portion of any judgment, settlement or other
consensual resolution payable as the contingent incentive fee shall be referred
to herein as the "Applicable Percentage."
2. Non-Monetary Consideration. In the event that the Corporation resolves
its claims against the government in whole or in part for any non-monetary
consideration, the Corporation shall compensate the Firm with a cash payment
that is equal to the appropriate percentage, as set forth in Section 1, of the
fair value of all consideration received in the resolution of the claims. The
Corporation and the Firm agree to determine the amount of this payment by
good-faith negotiation.
3. Alternative Remedy. In the event the United States Government shall in
the future create a remedy by statute or regulation or otherwise by which the
Corporation recovers on the claims the Firm has asserted on its behalf in the
Claims Court or elsewhere (or claims similar thereto), all such recoveries shall
be treated as if they were payments made to the Corporation in the litigation
undertaken by the Firm, and the Corporation shall compensate the Firm as set
forth in Section 1, above.
4. Replacement of Counsel. In the event that the Corporation replaces the
Firm as its counsel at any stage in the proceedings, the Corporation shall
compensate the Firm either in the amount of the Firm's usual and customary
hourly charges for all work performed by the Firm through the date of
replacement or, at the Firm's election, on the basis of any eventual recovery by
the Corporation (by litigated judgment or a judicial settlement or other
consensual resolution of the claims or any alternative remedy as described
above). In the event the Firm makes such election, compensation to the Firm
shall be at the levels of the incentive fees in Sections 1, 2 and 3, above.
5. Appeals. As set forth above, the Firm shall undertake to represent the
Corporation through any appeal of an order issued by the Claims Court to the
U.S. Court of Appeals for the Federal Circuit and/or the U.S. Supreme Court,
provided, however, that if the Court of Appeals for the Federal Circuit or the
Supreme Court has rendered a decision which in the Firm's professional judgment
is so adverse to the Corporation's claims as to make an appeal to either Court
by the Corporation inappropriate, the Firm shall not be bound to continue the
representation. In any such event, the Firm shall advise the Corporation of its
professional judgment and discuss the matter with the Corporation in good faith.
6. Reimbursement for Expenses. In performing this engagement, the Firm will
inevitably make disbursements and incur other internal charges on the
Corporation's behalf and for which the Corporation shall be responsible for
payment on a current basis in response to statements sent monthly. These are
likely to include such items as travel and transportation expenses (including
subsistence expenses while on travel); charges for long distance telephone
calls; express delivery and postage charges; duplicating charges; expenses
associated with overtime work; and any special computer, data processing, or
similar expenses that are beyond the capacity of the Firm's existing system. The
Firm will on a monthly basis bill the Corporation at cost for charges paid to
third parties. Charges for internal services will be billed at the Firm's usual
and customary rates for such services. The Firm has agreed not to include
secretarial time charges as internal charges for purposes of this engagement.
If in the course of the engagement it is necessary for the Firm to arrange
for the services of other outside counsel, experts, or consultants, or to incur
other major expenses on the Corporation's behalf, the Firm will, with the
Corporation's prior consent, arrange to have the charges for such services or
items billed directly to the Corporation, unless other arrangements are agreed
to between the Corporation and the Firm.
There is likely to be a need to retain an expert on the issue of the
damages sustained by the Corporation as the result of the Government's violation
of the Corporation's rights. In the event of the retention of such an expert,
the Corporation shall bear responsibility for paying the cost of such an expert
on a current basis. This cost shall be billed directly to the Corporation. The
Firm will work with the Corporation to identify for the Corporation's retention
an appropriate expert and to obtain from the expert a budget for the expert's
estimated time charges and expenses. The Firm will also monitor the accrued time
and expenses of the expert and report monthly or as appropriate to the
Corporation on such expert's performance compared to the estimated budget.
7. Possible Conflicts. Because of the breadth of the Firm's practice,
conflicts may arise between the Firm's clients and the Corporation on issues
that are not related to the work that the Firm does for the Corporation. The
Firm has agreed that, without the express consent of the Corporation, Arnold &
Porter will not represent parties adverse to the Corporation on matters that are
substantially related to the work the Firm does for the Corporation. The
Corporation and the Firm have agreed, however, that the Firm's representation of
the Corporation will not preclude the Firm from counseling or representing (in
negotiations, litigation and otherwise) clients that have interests adverse to
the Corporation or that take positions adverse to the Corporation in matters
that are not substantially related to work the Firm does for the Corporation,
and that the Corporation will not seek to use the Firm's representation of it as
a basis for disqualifying Arnold & Porter from any such representation. The firm
will confer with the Corporation if it in the future recognizes a conflict of
interest in its continued representation of the Corporation, and the Firm
expects that the Corporation will bring the matter to the Firm's attention
promptly if it recognizes any such conflicts. Without prejudging the matter, the
Corporation recognizes that under the Rules of Professional Conduct applicable
to the Firm, circumstances could arise in which the Firm would be unable to
continue to represent it, with or without its consent, as to some or all of the
issues in this matter. The Firm will make the decision concerning the nature and
extent of any such recusal by the Firm in light of all of the circumstances that
exist at the time. In the event that the Firm withdraws from its representation
of the Corporation, the Corporation shall compensate the Firm in accordance with
the principles established by this Retainer Agreement.
8. Absolute Assignment to the Firm.
A. In consideration for the agreements and undertakings made by the Firm in
this Retainer Agreement, and the terms and conditions set forth herein, and in
exchange for certain other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Corporation does hereby
absolutely and unconditionally assign, transfer, convey and set over unto the
Firm the Applicable Percentage (as defined in this Retainer Agreement) of: all
of the Corporation's right, title and interest in and to any judgment,
settlement or other consensual resolution or alternative remedy received in
connection with the Litigation, together with any and all proceeds and right to
receive proceeds from the Litigation or any judgment, settlement or other
consensual resolution or alternative remedy received in connection with or as a
result of the Litigation, and any and all other funds or property of any sort
whatsoever, regardless of the source, which may at any time be received by the
Corporation or which at any time the Corporation may have a right to receive as
a result of the Litigation or any claims or causes of action asserted or which
might be or could have been asserted therein, or otherwise in connection with
the Litigation, including, without limitation, any and all payments which may be
received in full or partial settlement of the Litigation or as a result of any
judgment, order, award or decree entered in or in connection with the Litigation
(the Applicable Percentage of any and all of the foregoing is hereinafter
referred to collectively as the "Assigned Property"); provided, however, that in
the event that the Corporation replaces the Firm as its counsel, the Firm shall
surrender any portion of this Assigned Property to the extent that such portion
of the Assigned Property is unearned and exceeds the Firm's right to a fee under
Sections 1, 2, 3 and 4 of this Retainer Agreement.
B. The foregoing absolute assignment is a present, absolute, and
unconditional assignment, conveyance and transfer of the Assigned Property and
is not, and shall not be construed to be, a collateral assignment or an
assignment to secure any debt or obligation. It is further agreed that, as a
result of this absolute assignment, the Firm shall own the Assigned Property,
and such Assigned Property shall not be the property of the Corporation. But it
is agreed that the Firm may not and will not assert in an action against the
United States any of the Firm's interests in the Assigned Property to the extent
that such assertion is barred under the Anti-Assignment Act, 31 U.S.C. ss. 3727
and 41 U.S.C ss. 15.
C. In the event that the Corporation were to become subject to any
proceeding under Title 11 of the United States Code, or any successor provision
of United States law, or any similar proceeding under state or federal law, or
any other insolvency proceeding of any sort whatsoever (any of the foregoing
being hereinafter referred to as a "Bankruptcy Proceeding"), the Assigned
Property shall not be property of the Corporation's estate, such property having
been absolutely and unconditionally assigned, transferred and conveyed to the
Firm by this absolute assignment. By way of illustration, and without in any way
limiting the foregoing, if the Corporation were to become subject to any
proceeding under Title 11 of the United States Code, the Assigned Property would
not be "property of the estate" under 11 U.S.C. ss. 541.
D. If the Corporation shall, at any time, receive any funds or other
property which constitute part of, or otherwise on account of, the Assigned
Property, the Corporation shall (i) hold such funds or other property in trust
for the Firm, (ii) immediately notify the Firm in writing of his receipt of such
funds or other property, and (iii) immediately deliver such funds or other
property to the Firm, without deduction, offset or counterclaim of any sort
whatsoever.
E. In connection with this absolute assignment, the Corporation agrees to
take any and all acts, and to execute, acknowledge and deliver to the Firm any
and all other and further documents and instruments, and further assurances,
from time to time, as the Firm may request in order better to confirm,
memorialize or perfect the assignment, conveyance, and transfer of the Assigned
Property to the Firm.
F. No other document or instrument executed in connection with or pursuant
to this Retainer Agreement or otherwise in connection with the Firm's
representation of the Corporation shall impair in any way the Firm's rights
under this absolute assignment.
G. In the event of any inconsistency between the terms set forth in this
section of the Retainer Agreement and any other provision of this Retainer
Agreement or any other provision of any document, instrument or agreement made
or entered into by the Corporation pursuant to this Retainer Agreement or
otherwise in connection with the Firm's representation of the Corporation, the
terms of this section of the Retainer Agreement shall govern and control.
H. The terms of this section of the Retainer Agreement are subject to,
limited by, and shall be construed to be consistent with the provisions of 31
U.S.C. ss. 3727 and 41 U.S.C. ss. 15. Nothing set forth in this section of the
Retainer Agreement shall (i) impair the Corporation's standing in the
Litigation; notwithstanding this absolute assignment, the Corporation (and not
the Firm) shall be a party and have the right to be a party to the Litigation;
(ii) confer upon the Firm any obligation or any right to prosecute the
Litigation in its own name; or (iii) require the Firm to take any action in
connection with the Litigation other than as may be expressly set forth in this
Retainer Agreement.
I. Nothing in this section of the Retainer Agreement shall impair or
otherwise adversely affect any equitable lien, attorney's lien or other lien on
or right with respect to any property of the Corporation (including without
limitation the Corporation's interest in the Litigation and any proceeds derived
therefrom by judgment, settlement or otherwise) to which the Firm may be
entitled by contract, at law or in equity; the rights of the Firm under the this
section of the Retainer Agreement shall be in addition to, and not in
substitution for, any such lien or right.
J. The terms of this section of the Retainer Agreement shall survive
termination of this Retainer Agreement.
9. Security Interest.
A. In consideration for the agreements and undertakings made by the Firm in
this Retainer Agreement, the Corporation hereby grants to the Firm a first
priority lien and attorney's lien on and security interest in and to all of the
Corporation's right, title and interest in and to the Litigation and any
proceeds derived therefrom by judgment, settlement or other consensual
resolution or alternative remedy or otherwise in order to secure any amounts
which are or may become due to the Firm under this Retainer Agreement, including
without limitation, any and all attorneys' fees and/or litigation costs owed the
Firm under this Retainer Agreement. The Corporation hereby grants the Firm to
file UCC Financing Statements disclosing the existence of the Firm's
above-described assignment, first priority lien, attorney's lien and security
interest. The rights of the Firm under this section of the Retainer Agreement
shall be in addition to, and not in substitution for, any other rights of the
Firm under this Retainer Agreement.
B. The terms of this section of the Retainer Agreement shall survive
termination of this Retainer Agreement.
10. Bankruptcy of The Corporation.
A. In the event that the Corporation shall at any time during the term of
this Retainer Agreement become subject to any Bankruptcy Proceeding, such
Bankruptcy Proceeding shall not in any way alter or affect any of the terms or
provisions of this Retainer Agreement, and this Retainer Agreement shall remain
in full force and effect, unaltered by such Bankruptcy Proceeding
B. The Corporation agrees and acknowledges that this Retainer Agreement is
not an executory contract which may be rejected pursuant to 11 U.S.C. ss. 365 or
otherwise. Notwithstanding the foregoing, the Corporation agrees that, in any
Bankruptcy Proceeding to which he may become subject, if any court were to
determine that this Retainer Agreement is any executory contract that could be
assumed or rejected under 11 U.S.C. ss. 365 or otherwise, the Corporation shall
assume this Retainer Agreement immediately upon commencement of such Bankruptcy
Case, unless the Firm agrees or directs otherwise in writing.
C. If the Corporation becomes subject to any Bankruptcy Proceeding during
the term of this Retainer Agreement, the Corporation agrees immediately to file
any necessary motion or application to retain and employ the Firm upon the terms
and conditions set forth in this Retainer Agreement without any alteration or
modification, except as may be agreed to by the Firm in writing, in the Firm's
sole and absolute discretion. In any Bankruptcy Proceeding of the Corporation,
the Corporation agrees that all fees and expenses of the Firm shall be an
administrative expense and shall be entitled to administrative priority in such
Bankruptcy Proceeding, and the Corporation agrees not to propose or support any
plan of reorganization or liquidation, or any other resolution of any such
Bankruptcy Proceeding, that does not afford to the Firm all of the rights to
which the Firm is entitled under the terms of this Retainer Agreement.
11. Setoffs. In the event that the United State Government withholds any
amount fro the payment of a judgment upon litigation or settlement of the claims
presented to the U.S. Court of Federal Claims (a "Withholding" or "Setoff") or
asserts a right to a Withholding or Setoff or effectuates a Withholding or
Setoff, such Withholding or Setoff shall not affect or impair any of the Firm's
rights under this Retainer Agreement. The amount of any Withholding or Setoff
shall be deducted only from the Corporation's portion of any payment made to or
for the benefit of the Corporation in connection with the Litigation or any
judgment entered or settlement reached therein. In the event of a Withholding or
Setoff, the Firm shall receive from the Corporation the same amount of legal
fees and other payments that it would have received had there been no
withholding or setoff. For example, and without in any way limiting the
foregoing, the amount of any Withholding or Setoff shall not be used to decrease
the amount of recovery used as the basis for the fee calculation set forth in
Section 1.
12. Continuing Cooperation. The Corporation hereby agrees to use all
reasonable efforts in good faith to ensure that the Firm is paid its attorneys
fees and litigation costs in accordance with the terms herein. Should that Firm
request that it do so, the Corporation agrees to execute an absolute assignment
to the Firm of the Applicable Percentage of its right, title and interest in and
to the Litigation, and each and every claim, right or cause of action asserted
in connection therewith.
13. Binding Nature. This Retainer Agreement shall be binding upon any
successor to, or any assignee of, the Corporation's interests in the litigation
referenced herein, including, without limitation, any conservator, trustee or
person holding a similar position appointed by a court to act on the
Corporation's behalf.
14. Advice of Counsel. The Corporation represents and warrants to the Firm
that it has received independent counsel with respect to the risks and benefits
of entering into this Retainer Agreement with the Firm, that such legal advice
was rendered by a qualified attorney who is not a partner in or otherwise
associated with the Firm, and that the Corporation is fully satisfied with such
legal advice.
15. Choice of Law. This Retainer Agreement shall be governed in accordance
with the laws of the District of Columbia without regard to the conflict of law
provisions thereof.
* * *
Please let us know if you have any questions about the terms of the
engagement, as described above. During the course of the engagement, please feel
free to raise promptly with us any questions you may have about our statements.
If the terms of this renewed engagement are acceptable to you, we would
appreciate it if you would sign and return to us the enclosed copy of this
letter evidencing your agreement to these terms.
Once again, let us say how pleased we are to represent you in this matter.
Sincerely,
Arnold & Porter
By:/s/ Melvin C. Garbow
-------------------------
Melvin C. Garbow
ACCEPTED AND AGREED TO:
OLD STONE CORPORATION
By: /s/ Geraldine L. Nelson, President
-----------------------------------
Geraldine L. Nelson, President
By: /S/ Bernard V. Buonanno, Jr., Esq.,
-----------------------------------
Bernard V. Buonanno, Jr., Esq.,
Chairman, Board of Directors
OLD STONE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
<PAGE>
OLD STONE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CONTENTS
Independent Auditors' Report................................................1
Consolidated Balance Sheets.................................................2
Consolidated Statements of Operations.......................................3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)........4
Consolidated Statements of Cash Flows.......................................5
Notes to Consolidated Financial Statements............................. 6-16
<PAGE>
Independent Auditor's Report
Board of Directors
Old Stone Corporation
East Providence, Rhode Island
We have audited the consolidated balance sheets of Old Stone Corporation and
Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to report on these consolidated financial statement based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our report.
As discussed in Note 1, substantially all of the operations of the Corporation
have been discontinued and the Corporation is subject to a number of commitments
and contingencies, all of which raise substantial doubt about its ability to
continue as a going concern. The accompanying 1998, 1997 and 1996 consolidated
financial statements have been prepared by the Corporation assuming that the
Corporation will continue as a going concern and, accordingly, include no
adjustments for the outcome of these uncertainties.
Because of the possible material effects of the uncertainties referred to in the
preceding paragraph, we are unable to express, and we do not express, an opinion
on the 1998, 1997 and 1996 consolidated financial statements.
/s/ Lefkowitz, Garfinkel, Champi & DeRienzo, P.C.
-------------------------------------------
Lefkowitz, Garfinkel, Champi & DeRienzo, P.C.
Providence, Rhode Island
January 20, 1998
<PAGE>
<TABLE>
<CAPTION>
OLD STONE CORPORATION
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1998 AND 1997
($ in thousands)
ASSETS
1998 1997
------------- -----------
<S> <C> <C>
Cash $ 4 $ 27
Short-term investments 105 251
Loans receivable (net of reserve for loan losses of $29 for 1998 and $52
for 1997) 30 34
Other assets 276 56
------------- -----------
415 368
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Other liabilities $ 1,344 $ 1,184
------------- -----------
Commitments and contingencies (Notes 1, 5, 6 and 7)
Redeemable preferred stock:
Preferred stock, series B, $1 par value; 1,046,914 shares authorized, issued
and outstanding (Liquidation value $20,938)
20,496 20,300
------------ -----------
Stockholders' equity (deficit):
Common stock, $1 par value; 25,000,000 shares authorized; 8,300,175
shares issued 8,300 8,300
Additional paid-in capital 91,489 91,685
Surplus 30,000 30,000
Accumulated deficit (150,071) (149,958)
Treasury stock, at cost, 54,000 shares (1,143) (1,143)
------------ -----------
(21,425) (21,116)
============= ===========
$ 415 $ 368
============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD STONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997
AND 1996 ($ in thousands except
for per share data)
1998 1997 1996
------------ ---------- -----------
Income:
<S> <C> <C> <C>
Interest income $ 19 $ 18 $ 20
Securities gains, net 40 50
Commission income 178 164 156
Other income 20 15 25
------------ ---------- -----------
257 197 251
------------ ---------- -----------
Expenses:
Salaries and employee benefits 157 155 168
Net occupancy expense 12 18 21
Equipment expense, including depreciation
9 3 13
Other expenses 192 234 348
------------ ---------- -----------
370 410 550
------------ ---------- -----------
Net loss $ (113) $ (213) $ (299)
============ ========== ===========
Net loss available for common stockholders
$ (2,821) $ (2,921) $ (3,007)
============ ========== ===========
Loss per share $ (.34) $ (.35) $ (.36)
============ =========== ===========
Average common shares outstanding 8,297,046 8,297,046 8,297,046
============ ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD STONE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
($ in thousands)
Additional
Common stock paid-in Accumulated Treasury
Common Stock capital Surplus deficit Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 8,300 $ 92,077 $ 30,000 $(149,446) $ (1,143) $ (20,212)
- ------------------------
Net loss (299) (299)
- ------------------------
Accretion of discount on
preferred stock, Series B (196) (196)
--------- --------- ---------- ---------- ------------ -----------
Balance, December 31, 1996 8,300 91,881 30,000 (149,745) (1,143) (20,707)
Net loss (213) (213)
Accretion of discount on
preferred stock, Series B (196) (196)
--------- --------- ---------- ---------- ------------ -----------
Balance, December 31, 1997 8,300 91,685 30,000 (149,958) (1,143) (21,116)
Net loss (113) (113)
Accretion of discount on
preferred stock, Series B (196) (196)
========= ========= ========= ========= ============ ===========
$ 8,300 $ 91,489 $ 30,000 $(150,071) $ (1,143) $(21,425)
Balance, December 31, 1998
========= ========== ========= ========= ============ ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD STONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
($ in thousands)
1998 1997 1996
------------ ----------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (113) $ (213) $ (299)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loan losses (14) 20 18
Depreciation 2 3 4
Increase in:
Other assets (222)
Other liabilities 160 11
Decrease in:
Accrued interest receivable 1 6
Other assets 20 205
Other liabilities (196)
------------ ------------- ---------
Net cash used in operating activities $ (187) $ (158) $ (262)
------------ ------------- ---------
Cash flows from investing activities:
Net decrease in investments 146 150 23
Net decrease in loans 18 2 2
Acquisition of premises and equipment
(2)
Net cash provided by investing activities ------------ ------------- ---------
164 152 23
------------ ------------- ---------
Decrease in cash $ (23) $ (6) $ (239)
Cash, beginning of year $ 27 $ 33 $ 272
------------ ------------- ---------
Cash, end of year $ 4 $ 27 $ 33
============ ============= =========
</TABLE>
<PAGE>
OLD STONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. Description of business, basis of presentation and summary of significant
accounting policies:
Description of business and basis of presentation:
Old Stone Corporation (the "Company") was originally formed as a unitary
savings and loan holding company which conducted substantially all of its
business through its ownership of Old Stone Bank (a federal savings bank)
and subsidiaries (together, the "Bank"). On January 29, 1993, the Office
of Thrift Supervision of the United States Department of the Treasury
("OTS") placed the Bank into receivership due to the Bank's under
capitalization. The OTS created a new institution, Old Stone Federal
Savings Bank ("Old Stone Federal") to assume all deposits and certain
assets and liabilities of the Bank. The Resolution Trust Corporation
("RTC") was appointed receiver to handle all matters related to the Bank
and as conservator of Old Stone Federal. A substantial portion of the
assets and liabilities of Old Stone Federal was sold by the RTC to
another Rhode Island financial institution in 1994. The Federal Deposit
Insurance Corporation ("FDIC"), as successor-in-interest to the RTC,
continues to act as conservator of the remaining assets and liabilities
of Old Stone Federal.
As a result of the receivership of the Bank, the Company has undergone
material changes in the nature of its business and is no longer operating
as a savings and loan holding company. Accordingly, the operations of the
Bank subsequent to receivership have not been included in the
accompanying consolidated financial statements.
The Company's continuing business activities include its sole active
surviving subsidiary, ("Old Stone Securities"), Old Stone Securities
Company, a registered securities broker/dealer which provides brokerage
services to retail and institutional clients. All material intercompany
transactions and balances have been eliminated.
The accompanying 1998, 1997 and 1996 consolidated financial statements
have been prepared assuming the Company will continue as a going concern.
As discussed previously, substantially all of the operations of the
Company have been discontinued. The Company has a net equity deficiency
of approximately $21,400,000 at December 31, 1998 and is subject to a
number of commitments and contingencies, as follows:
The Company's sole remaining active subsidiary incurred a loss of
approximately $3,000 in 1998. Management does not expect these operating
results to improve in the near future to a level which would provide
significant capital or cash flow to the Company from this subsidiary.
<PAGE>
OLD STONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. Description of business, basis of presentation and summary of
significant accounting policies (continued):
The Company may be subject to legal proceedings related to its management
of the Bank prior to receivership.
The Company has been unable to pay cumulative dividends on the Series B
preferred stock outstanding. Also, management does not expect the Company
to be able to meet its redemption obligations, unless the Company is
successful in its litigation against the United States Government (see
also Note 7).
All of the above raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Until the outstanding uncertainties discussed above are resolved,
management has invested, and intends to continue to invest, the Company's
assets on a short-term basis. The Company's Board of Directors has made
no decision at the present time as to whether or not it would be
appropriate for the Company to liquidate its assets.
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 revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less when purchased, excluding money market funds, to be
cash equivalents. There were no cash equivalents at December 31, 1998 or
1997.
<PAGE>
OLD STONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. Description of business, basis of presentation and summary of significant
accounting policies (continued):
Short-term investments:
The Company's short-term investments consist principally of investments
in money market funds and are classified as available for sale.
Accordingly, short-term investments are carried at market value, which
approximates cost. These money market funds primarily hold investments in
U.S. Government securities in the name of the fund.
The cost of investments sold is determined using the specific
identification method.
As a securities broker/dealer, Old Stone Securites is engaged in buying
and selling securities for a diverse group of institutional and
individual investors. Old Stone Securities introduces transactions for
clearance to another broker/dealer on a fully disclosed basis.
Customers' securities transactions are recorded on a settlement date
basis with related commission income and expenses recorded on a trade
date basis. Securities transactions entered into for the account and risk
of the Company are rendered on a trade date basis.
Loans and reserve for loan losses:
Investments in loans are stated at amortized cost, less an allowance for
amounts deemed uncollectible by management. Substantially all such
investments in loans are being serviced by Old Stone Federal or its
successor-in-interest and were purchases of participating interests in
loans or groups thereof in prior years. The loans bear interest at 8.25%
and are collateralized by real estate or tangible property.
Premises and equipment depreciation:
Premises and equipment, included in other assets, are stated at cost.
Depreciation is provided using straight-line and accelerated methods over
the estimated useful lives of the assets.
Income taxes:
The Company has filed consolidated federal income tax returns, including
all of its subsidiaries, for 1997 and prior years and is expected to
continue to do so for 1998.
The Company accounts for certain income and expenses for financial
reporting purposes in different periods than for income tax reporting
purposes, principally with respect to the continuing losses incurred by
the Company and its sole active surviving subsidiary.
The change in deferred tax assets and liabilities resulting from these and other
temporary differences are recognized currently in the provision for income
taxes.
<PAGE>
OLD STONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. Description of business, basis of presentation and summary of significant
accounting policies (continued):
Loss per common share:
Loss per common share is computed by dividing net loss, increased by
required dividends on preferred stock and the accretion of the discount on
the preferred stock, by the weighted average number of shares of common
stock outstanding during each period presented.
Reclassifications:
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with the current year presentation.
2. Loss per share:
The calculation of loss per share is as follows (dollars in thousands,
except for per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ---------- -----------
<S> <C> <C> <C>
Net loss $ (113) $ (213) $ (299)
Required dividends and accretion of discount on
Series B preferred stock 2,708 2,708 2,708
============= ========= ===========
Net loss applicable to common stock $ (2,821) $ (2,921) $ (3,007)
============= ========= ===========
Average shares outstanding 8,297,046 8,297,046 8,297,046
============= ========= ===========
Loss per share $ (.34) $ (.35) $ (.36)
============= ========= ===========
The Company's common stock ceased trading on national exchanges shortly
after the Bank was placed in receivership by the OTS.
</TABLE>
<PAGE>
3. Other assets and liabilities:
The following comprise other assets (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Restricted Cash 252 33
Premises and equipment, less accumulated
depreciation of $21 and $19 in 1998 and 1997,
respectively
4 7
Customer and other receivables 20 16
========== ==========
Total 276 56
========== ==========
Restricted cash represents funds held by the Company to be paid to
holders of the Company's called Series A and C preferred stock. During
1998, the Company became aware of and received from a former stock
transfer agent of the Company $222,000 owed to holders of the
Company's called Series C preferred stock. The Company is currently in
the process of evaluating its responsibility with respect to these
funds.
The following comprise other liabilities (dollars in thousands):
December 31,
--------------------------
1998 1997
---------- ----------
Due Old Stone Federal (Note 6) 478 478
Accrued state income taxes 607 607
Accounts payable and accrued expenses 7 66
Amounts due to holders of called Series
A and C Preferred Stock 252 33
========== ==========
Total 1,344 1,184
========== ==========
</TABLE>
4. Income taxes:
The Company is the parent company of an affiliated group of
corporations that file consolidated income tax returns. For the years
ended December 31, 1998, 1997, and 1996, the tax calculations do not
include the operations of the Bank, as they relate to discontinued
operations that are not presented in 1998, 1997 and 1996.
<PAGE>
4. Income taxes (continued):
The components of income tax expense for each of the years ended
December 31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense - 0 - - 0 - - 0 -
Deferred tax benefit (38) (72) (102)
Benefit of net operating loss not
recognized, deferred 38 72 102
---------- --------- ----------
Total - 0 - - 0 - - 0 -
========== ========= ==========
The differences between income tax expense and the amount computed by
applying the statutory federal income tax rate to loss from operations
are as follows (dollars in thousands):
1998 1997 1996
---------- -------- --------
Loss from operations before income taxes
(113) (213) (299)
========== ======== ========
Tax benefit at statutory rate (38) (72) (102)
Increase in taxes resulting from benefit
of net operating loss not recognized
38 72 102
---------- -------- ------
Income tax expense - 0 - - 0 - - 0 -
========== ======== ======
</TABLE>
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the
Company's assets and liabilities.
At December 31, 1998, the Company has net operating loss carryforwards
available for tax reporting purposes amounting to approximately
$1,157,000. These net operating loss carryforwards expire in various
years through 2013.
Since the future use of these net operating carryforwards for tax
reporting purposes is uncertain, a valuation allowance for the entire
amount of deferred tax assets resulting from same has been provided as
of December 31, 1998 and 1997.
Income taxes paid in 1998, 1997 and 1996 totalled approximately
$7,000, $7,000 and $6,000, respectively.
5. Redeemable preferred stock:
The Cumulative Voting Convertible Series B stock ($20.000 stated value)
is convertible into common stock, at the option of the holder, until
February 20, 2001. Thereafter, the holders of the Series B stock will
have no further conversion rights. The basis of exchange is determined
by dividing the per share book value of the common stock, as defined in
the authorizing stock resolution, by the $20.00 per share stated value
of the Series B stock, with a minimum exchange rate of one share of
Series B stock for two- thirds share of common stock. Each share is
entitled to one-half vote on all matters upon which common shares are
voted.
The Company may redeem the Series B stock on any dividend date after
February 20, 1991, beginning with the dividend payable on March 15,
1991, for redemption prices which decline from $21.60 in the first year
of the redemption period until February 20, 2001, when the redemption
price becomes $20.00 per share for all ensuing years.
5. Redeemable preferred stock (continued):
Additionally, beginning on February 20, 2002 and on each succeeding
February 20 thereafter, the Company is required to redeem 10 percent of
the Series B stock at $20.00 per share.
On October 6, 1991, the annual dividend of $2.40 per share was
suspended. As of December 31, 1998, cumulative preferred dividends of
$18,216,304 ($17.40 per share) have not been declared or paid.
6. Employee benefits:
Prior to the action by the OTS as discussed in Note 1, the Company and
its subsidiaries, along with other subsidiaries of the Bank,
participated in a noncontributory defined benefit pension plan and an
employee stock ownership plan ("ESOP") sponsored by the Company, which
covered substantially all full-time employees. The benefits under the
pension plan were based primarily on years of service and employee
compensation. The ESOP, which was a defined contribution plan, was
established as an offset to the pension plan to provide possible
additional future retirement benefits for the participants in
conjunction with the defined benefit pension plan.
Credit for service subsequent to January 29, 1993 is no longer awarded
under either of the plans. Under the terms of the sale of certain
assets and liabilities of Old Stone Federal by the RTC in 1994, the
purchaser has accepted responsibility for administration of and payment
of benefit obligations under the defined benefit pension plan. The
FDIC, as successor-in-interest to the RTC, is currently in the process
of terminating the ESOP and beginning in January 1999, the FDIC
began to distribute shares of the Company's common stock that were held
by the ESOP to ESOP participants as part of that process. The transfer
of responsibility for the defined pension plan and the termination of
the ESOP are not expected to have any effect on the Company.
At December 31, 1998 and 1997, amounts due Old Stone Federal or its
successor-in-interest (see Note 3) consist of prior years pension
contribution allocations of approximately $478,000.
7. Other commitments and contingencies:
On September 16, 1992, the Company and the Bank ("Plaintiffs")
instituted a suit against the United States ("Defendant") in the U.S.
Court of Federal Claims. In connection with certain government-assisted
acquisition by Plaintiffs in the 1980's, the Defendant (through its
various agencies) agreed to provide Plaintiffs with certain valuable
capital credits and supervisory goodwill and authorized Plaintiffs to
treat those credits and supervisory goodwill as regulatory capital on
the Bank's financial statements.
Following the passage of the Financial Institutions Reform, Recovery,
and Enforcement Act in August 1989, the OTS required the Bank to
discontinue treating these capital credits and supervisory goodwill as
part of regulatory capital and cause the Bank to immediately write off
approximately $80,000,000 of such capital credits and supervisory
goodwill. In this suit Plaintiffs allege breach of contract by the
United States, resulting in substantial injury to Plaintiffs, effecting
a taking of Plaintiffs' property without just compensation, and
unjustly enriching the Defendant at the expense of the Plaintiffs.
Plaintiffs seek compensation for the damages caused by the breach, just
compensation for the property taken, and disgorgement of the amounts by
which the Defendant has been unjustly enriched.
<PAGE>
7. Other commitments and contingencies (continued):
The Defendant has filed a counterclaim against the Company for alleged
breach of its net worth maintenance agreement. The Company has filed
an answer denying such counterclaim. Following the Bank closing, the
Bank's claims and the claims of the Company were split into two
separate actions. The Company's claims are separate and distinct from
the claims of the Bank. An agency of the Defendant serves as receiver
for the Bank and is maintaining the Bank's claims against the Federal
Claims. The Company's case is dependent upon the outcome of other
cases which are being litigated on damages.
In February 1998, the Company filed a motion for summary judgment,
which is currently pending before the Court. Discovery proceedings are
taking place and are scheduled to be completed by July 31, 1999. No
prediction as to the timing or the outcome of this case can be made at
this time.
During 1998, the Board of Directors of the Company adopted a
Resolution establishing a Litigation Management Committee (the
Committee) to effectively prosecute the Company's claims against the
United States of America in the Court of Federal Claims.
This Committee was established in order to manage the Company's
litigation, including working with the Company's outside attorneys,
responding to discovery requests, providing documentary evidence and
testimony, and handling all day-to-day aspects of the case, subject to
the ultimate authority of the Board to approve any major strategic
decision in the case, including settlement, appeal or withdrawal of
the suit.
In consideration for their efforts in serving on the Committee, the
members collectively will be entitled to receive compensation of
between $800,000 and $2,200,000, contingent upon the Company's
receiving a judgment or settlement in the litigation (the Recovery)
in excess of a certain dollar threshold.
The Company and a law firm (the Firm) have entered into a retainer
agreement (the Retainer Agreement) whereby the Firm is entitled to
receive the following compensation based on the dollar amount of the
Recovery by the Company or through the FDIC, as receiver for the Bank,
in the suit against the Defendant:
Litigated judgment with a Recovery in any amount or a settlement with
a Recovery in excess of $50,000,000:
o The Company shall pay the Firm an incentive fee at a rate of 10%
to 25% based on various dollar threshold levels relating to the
Recovery as stipulated in the Retainer Agreement.
o In addition, if the Recovery is less than $100,000,000, fees for
services rendered by the Firm shall be paid to the Firm at a rate
of one-third of the fees up to the full fees, capped at
$1,500,000, based on various dollar threshold levels relating to
the Recovery as stipulated in the Retainer Agreement, or if the
Recovery is more than $100,000,000, fees for services rendered by
the Firm shall be paid to the Firm without regard to any cap on
such fees.
Settlement of suit with Recovery being $50,000,000 or less:
o The Company shall pay the Firm at a rate of 10% to 20% based on
various dollar threshold levels relating to the Recovery as
stipulated in the Retainer Agreement.
o The Company shall pay the Firm actual fees for services rendered
by the Firm. Such fees shall be capped at $1,500,000.
Other:
o In addition, the Company shall pay the Firm 50% of any attorney
fees awarded the Company relating to its suit against the
Defendant.
In consideration for agreements made by the Firm in the Retainer
Agreement, the Firm received an (outright) assignment of its
percentage interest in the Company's right, title and interest in any
judgment, settlement or consensual arrangement from the suit.
Furthermore, as security for all amounts due to the Firm under the
Retainer Agreement, the Company granted the Firm a first priority
security interest in and to the litigation with the Defendant and any
proceeds derived from a judgment, settlement or other consensual
resolution of the litigation.
The Company has an oral agreement with another law firm to pay for
legal services on a contingency basis that will be determined by the
Recovery in the suit against the United States. It is the intent of
the Company and the law firm to formalize their oral understanding in
writing. As of December 31, 1998, unbilled legal fees for services
rendered by this firm totalled approximately $72,000.
8. Fair value of financial instruments:
The fair values of cash, receivables and payables approximate the
carrying amounts of such instruments due to their short maturities.
All of the Company's financial instruments are held for nontrading
purposes.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000074273
<NAME> Edwards & Angell
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,000
<RECEIVABLES> 30,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 105,000
<PP&E> 4,000
<TOTAL-ASSETS> 415,000
<SHORT-TERM> 0
<PAYABLES> 1,344,000
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
20,496,000
<COMMON> 8,300,000
<OTHER-SE> 21,425,000
<TOTAL-LIABILITY-AND-EQUITY> 415,000
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 19,000
<COMMISSIONS> 178,000
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 0
<COMPENSATION> 157,000
<INCOME-PRETAX> (113,000)
<INCOME-PRE-EXTRAORDINARY> (113,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113,000)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
