-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, O4rJGDLwzcTYgj3To2l2CfrDZFeM9Szshh9gKvpkFHNreU6vf0Uq154yn4VYspwU 3CBdDfmOhNsecbN73RrHeg== 0000912057-95-001550.txt : 19950616 0000912057-95-001550.hdr.sgml : 19950616 ACCESSION NUMBER: 0000912057-95-001550 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19931130 FILED AS OF DATE: 19950322 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDUSTRIAL FUNDING CORP CENTRAL INDEX KEY: 0000857067 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 931013278 STATE OF INCORPORATION: OR FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18071 FILM NUMBER: 95522245 BUSINESS ADDRESS: STREET 1: 2121 S W BROADWAY STE 200 CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5032282111 10-K/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1994 Commission File No. 0-18071 ------------------------ INDUSTRIAL FUNDING CORP. (Exact name of registrant as specified in its charter) OREGON 93-1013278 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
2121 S.W. BROADWAY SUITE 100 PORTLAND, OREGON 97201 (Address of principal executive offices, including zip code) 903/228-1111 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 8-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes _X_ No ____ The aggregate market value of the voting stock held by non-affiliates of the Registrant at January 31, 1995 was 3,164,063.
OUTSTANDING AT CLASS JANUARY 31, 1995 - -------------------------------- -------------------- Class A, Without Par Value 1,875,000 shares Class B, Without Par Value 5,625,000 shares
The Index to Exhibits appears on Page 24. Part III is incorporated by reference from the Annual Proxy Statement filed in connection with the Annual Meeting of Shareholders to be held in 1995. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This Form 10-K/A amends Form 10-K for the fiscal year ended November 30, 1994. Page 18 -- Note 7. Income Taxes -- the last paragraph -- the last sentence. to read as follows: At November 30, 1994 the Company had in excess of $24 million of net operating loss carry forwards, which are not expected to be utilized by the Company, expiring in the years 2007 through 2009. ITEM 8. FINANCIAL STATEMENTS. INDEPENDENT AUDITORS' REPORT The Board of Directors Industrial Funding Corp. We have audited the accompanying consolidated statement of net assets (liquidation basis) of Industrial Funding Corp. and its subsidiary as of November 30, 1994, and the related consolidated statements of changes in net assets in liquidation and cash flows for the year then ended. In addition, we have audited the accompanying consolidated balance sheet of Industrial Funding Corp. and its subsidiary as of November 30, 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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. As discussed in Note 2 to the financial statements, the Board of Directors of Industrial Funding Corp. approved a plan of liquidation in 1994, and the Company commenced liquidation shortly thereafter. As a result, the Company changed its basis of accounting from the going concern basis to the liquidation basis. In our opinion, such consolidated financial statements present fairly, in all material respects, (1) the net assets (liquidation basis) of Industrial Funding Corp. and its subsidiary at November 30, 1994, (2) the changes in their net assets in liquidation and cash flows for the year then ended, (3) their financial position at November 30, 1993, and (4) the results of their operations and their cash flows for the two years then ended, in conformity with generally accepted accounting principles on the bases described in the preceding paragraph. As discussed in Note 11 to the financial statements, the Company redeemed the Series A cumulative preferred stock and paid all accrued dividends thereon on January 26, 1995; all remaining nonperforming assets were sold by auction on December 6, 1994; and litigation relating to alleged violations of federal securities laws, in which the Company was a defendant, was settled on January 19, 1995. DELOITTE & TOUCHE LLP Portland, Oregon February 14, 1995 9 INDUSTRIAL FUNDING CORP. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF NET ASSETS (LIQUIDATION BASIS) AS OF NOVEMBER 30, 1994 AND CONSOLIDATED BALANCE SHEET (GOING CONCERN BASIS) AS OF NOVEMBER 30, 1993
NOVEMBER 30, NOVEMBER 30, (DOLLARS IN THOUSANDS) 1994 1993 - ---------------------------------------------------------------------------------- (LIQUIDATION (GOING CONCERN BASIS) BASIS) ASSETS Cash and cash equivalents.......................... $20,754 $ 6,586 Restricted cash.................................... 6,175 800 Short-term investments............................. 6,569 18,260 Note receivable.................................... 9,521 15,869 Nonperforming assets............................... 989 3,025 Other assets....................................... 99 55 ------------ -------------- TOTAL........................................ $44,107 $ 44,595 ------------ -------------- ------------ -------------- LIABILITIES Accounts payable and accrued liabilities........... $ 661 $ 619 Reserve for litigation settlement.................. 5,000 -- Reserve for estimated costs during the period of liquidation....................................... 1,427 -- ------------ -------------- Total liabilities.............................. 7,088 619 COMMITMENTS AND CONTINGENCIES REDEEMABLE PREFERRED STOCK Series A Cumulative Preferred Stock (without par value, 10,000,000 shares authorized, 134,310 shares issued and outstanding -- at redemption and liquidation value of $100 per share and accumulated dividends).......................... 20,514 18,604 ------------ -------------- Total Liabilites and Redeemable Preferred Stock......................................... 27,602 19,223 SHAREHOLDERS' EQUITY: Common stock: Class A (20,000,000 no par value shares authorized, 1,875,000 outstanding)............ -- 20,381 Class B (10,000,000 no par value shares authorized, 5,625,000 outstanding)............ -- 27,831 Accumulated deficit.............................. -- (22,840) ------------ -------------- Total shareholders' equity..................... -- 25,372 ------------ -------------- TOTAL........................................ 27,602 $ 44,595 ------------ -------------- -------------- NET ASSETS IN LIQUIDATION.................... $16,505 ------------ ------------
See Notes to Consolidated Financial Statements. 10 INDUSTRIAL FUNDING CORP. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION, 1994 CONSOLIDATED STATEMENTS OF INCOME, 1993 AND 1992
FOR THE YEARS ENDED NOVEMBER 30, ---------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- (LIQUIDATION (GOING CONCERN (GOING CONCERN BASIS) BASIS) BASIS) REVENUE: Net lease revenue.................................... -- $ 7,374 $ 22,406 Gain on sale of equipment............................ -- 1,102 2,630 Gain on nonperforming portfolio...................... $ 2,040 -- -- Interest and dividend income......................... 1,942 1,432 776 Loss on sale of short-term investments............... (519) -- -- Unrealized loss on short-term investments............ (17) (210) -- Other revenue........................................ 48 625 1,707 ------------ -------------- -------------- Total revenue...................................... 3,494 10,323 27,519 ------------ -------------- -------------- EXPENSES: Net selling, general and administrative.............. 1,820 6,456 9,072 Provision for credit losses.......................... -- 54 215 Interest expense..................................... -- 3,821 15,000 Loss on sale of assets............................... -- 1,328 17,316 ------------ -------------- -------------- Total expenses..................................... 1,820 11,659 41,603 ------------ -------------- -------------- INCOME (LOSS) FROM OPERATIONS.......................... 1,674 (1,336) (14,084) LITIGATION SETTLEMENT.................................. (5,000) -- -- ESTIMATED COSTS DURING LIQUIDATION..................... (3,631) -- -- ------------ -------------- -------------- LOSS BEFORE INCOME TAX BENEFIT......................... (6,957) (1,336) (14,084) INCOME TAX BENEFIT..................................... -- (2,635) (7,944) ------------ -------------- -------------- NET INCOME (LOSS)...................................... $(6,957) $ 1,299 $ (6,140) ------------ -------------- -------------- ------------ -------------- -------------- NET LOSS PER SHARE (Exhibit 11.1)...................... $ (1.18) $ (0.08) $ (1.07) ------------ -------------- -------------- ------------ -------------- --------------
See Notes to Consolidated Financial Statements. 11 INDUSTRIAL FUNDING CORP. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (GOING CONCERN BASIS)
SHAREHOLDERS' EQUITY ---------------------------------------------- CLASS A CLASS B RETAINED PREFERRED COMMON COMMON EARNINGS (DOLLARS IN THOUSANDS) STOCK STOCK STOCK (DEFICIT) TOTAL - --------------------------------------------------------------------------------- BALANCE, NOVEMBER 30, 1991....... $14,784 $20,381 $27,831 $(14,179) $34,033 Preferred stock dividends accreted...................... 1,910 -- -- (1,910) (1,910) Net income..................... -- -- -- (6,140) (6,140) -------- ------- ------- -------- ------- BALANCE, NOVEMBER 30, 1992....... 16,694 20,381 27,831 (22,229) 25,983 Preferred stock dividends accreted...................... 1,910 -- -- (1,910) (1,910) Net income..................... -- -- -- 1,299 1,299 -------- ------- ------- -------- ------- BALANCE, NOVEMBER 30, 1993....... $18,604 $20,381 $27,831 $(22,840) $25,372 -------- ------- ------- -------- ------- -------- ------- ------- -------- -------
During the year ended November 30, 1994 the Company changed to the liquidation basis of accounting as explained in Note 2. -- Plan of Dissolution and Complete Liquidation. The presentation format used in 1993 and 1992 is, therefore, no longer applicable. The effect of the changes of adopting the liquidation basis is reflected in the Consolidated Statement of Changes in Net Assets in Liquidation. See Notes to Consolidated Financial Statements. 12 INDUSTRIAL FUNDING CORP. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED NOVEMBER 30, ---------------------------------------------- (DOLLARS IN THOUSANDS) 1994 1993 1992 - ----------------------------------------------------------------------------------- (LIQUIDATION (GOING CONCERN (GOING CONCERN BASIS) BASIS) BASIS) CASH FLOWS FROM OPERATING ACTVITIES: Net income (loss)................ $ (6,957) $ 1,299 $ (6,140) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.................. -- 1,807 7,303 Provision for credit losses.... -- 54 215 Gain on sale of equipment...... -- (1,102) (2,630) Increase in restricted cash.... (5,375) (800) Gain on nonperforming portfolio..................... (2,040) -- -- Loss on sale of short-term investments................... 519 Unrealized loss on short-term investments................... 17 210 -- Increase in reserve for estimate costs during liquidation................... 1,427 -- -- Increase in reserve for litigation settlement......... 5,000 -- -- (Increase) decrease in other assets........................ (44) 176 1,057 Increase (decrease) in accounts payable and other liabilities................... 42 (2,659) (588) Decrease in deferred income taxes......................... -- (2,057) (7,093) Decrease in income taxes payable....................... -- ] (250) Loss on sale of assets......... -- 1,328 17,316 Other.......................... (48) (15) 172 ------------ -------------- -------------- Total adjustments.............. (502) (3,058) 15,502 ------------ -------------- -------------- Net cash provided by (used in) operating activities............ (7,459) (1,759) 9,362 ------------ -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Principal payments received on lease receivables............... -- 27,697 73,206 Payments received on sale of equipment....................... -- 11,239 24,654 Payments received on nonperforming assets............ 4,124 -- -- Purchase of short-term investments..................... (19,933) (18,470) -- Payments received on sale of short-term investments.......... 31,088 -- -- Principal payment received on note receivable................. 6,348 3,174 -- Cash received on sale of assets (Net of $12,829 cash sold)...... -- 7,356 -- Purchase of equipment to be financed........................ -- (2,773) (10,745) Initial direct costs -- deferred........................ -- (130) (885) Purchase of property and equipment....................... -- (81) (143) ------------ -------------- -------------- Net cash provided by investing activities...................... 21,627 28,012 86,087 ------------ -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt............................ -- (44,311) (99,264) Deferred financing costs......... -- -- (1,168) Decrease (increase) in restricted cash............................ -- 23,478 (5,526) ------------ -------------- -------------- Net cash used in financing activities...................... 0 (20,833) (105,958) ------------ -------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 14,168 5,420 (10,509) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 6,586 1,166 11,675 ------------ -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 20,754 $ 6,586 $ 1,166 ------------ -------------- -------------- ------------ -------------- -------------- SUPPLEMENTAL DISCLOSURES: Interest paid.................... -- $ 3,890 $ 13,917 Income taxes refunded............ -- 650 600 Non-cash -- preferred stock dividends accreted.............. $ 1,910 1,910 1,910 Non-cash -- note receivable from sale of assets.................. -- 19,043 --
See Notes to Consolidated Financial Statements. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION Industrial Funding Corp. ("Industrial" or the "Company"), a majority owned subsidiary of IFC Holdings Inc. ("IFC Holdings"), was incorporated in October 1989, as a holding company formed for the purpose of owning Industrial Leasing Corporation ("Industrial Leasing"). During 1992, First City Realty Investment Corp. ("FCRIC"), the Company's previous majority shareholder, transferred all of its interest in the Company to IFC Holdings. The accompanying consolidated financial statements include all of the accounts of the Company and its wholly-owned subsidiary. All significant intercompany transactions and accounts have been eliminated in consolidation. Until May 27, 1993, the business of the Company was providing capital equipment lease financing to small businesses. At that time, the Company completed a sale of substantially all of the assets of Industrial Leasing (the "Asset Sale"), to ILC Acquisition Corp., a wholly-owned subsidiary of Parrish Equipment Partner L.P. ("Parrish"), in a transaction approved by shareholders of the Company on May 17, 1993. Subsequent to the Asset Sale, Company activities include collection of the remaining assets, investment of its financial resources, and the management of legal proceedings against the Company. The Company has adopted the liquidation basis of accounting as of May 20, 1994. This basis of accounting is considered appropriate when the Company has adopted a plan of liquidation and liquidation appears imminent, the Company is no longer viewed as a going concern and the net realizable value of the Company's assets are reasonably determinable. Under this basis of accounting, assets and liabilities are stated at their estimated net realizable value and estimated costs of liquidating the Company are provided to the extent they are reasonably determinable. The Company's Plan of Dissolution and Complete Liquidation (the "Plan of Liquidation") (see NOTE 2. -- Plan of Dissolution and Complete Liquidation) provides for the liquidation of all of the Company's assets. In connection with the adoption of the liquidation basis of accounting, the Company has accrued what management believes are reasonable estimates of costs to liquidate its remaining assets and to defend legal claims. The actual costs may differ significantly depending on a number of factors, including the length of time it takes to dispose of and the amount received for the remaining assets and the holding costs associated therewith, and the resolution of the claims against the Company's insurance carriers for reimbursement of legal fees and expenses related to the security litigation. Estimated cost to liquidate are reflected in the Consolidated Statement of Net Assets as "Reserve for estimated costs during the period of liquidation". The Consolidated Financial Statements for 1993 and 1992 were prepared on a going concern basis of accounting which contemplated the realization of assets and the satisfaction of liabilities in the normal course of business. The 1994 Consolidated Financial Statements were prepared on the liquidation basis of accounting. The effects of adopting the Plan of Liquidation are explained in NOTE 2. -- Plan of Dissolution and Complete Liquidation. NOTE 2. PLAN OF DISSOLUTION AND COMPLETE LIQUIDATION The Board of Directors of the Company approved the Plan of Liquidation, on May 20, 1994, for submission to the shareholders of the Company. A Special Meeting of Shareholders was scheduled for August 18, 1994, for shareholders to consider approval of the Plan of Liquidation. However, on August 15, 1994, the Company reached a preliminary agreement to settle the securities class action lawsuits pending against the Company. (See NOTE 8. -- Commitments and Contingencies). Due to the material financial implications of this proposed settlement, the Special Meeting was adjourned to enable the Company to revise the Proxy Statement, and provide its shareholders with additional information concerning the terms of the proposed settlement. No date has been set for the continuation of the Special Meeting. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. PLAN OF DISSOLUTION AND COMPLETE LIQUIDATION (CONTINUED) The Plan of Liquidation will be effective the date on which it is approved by the shareholders. IFC Holdings Inc., record owner of 100% of the Company's Class B Common Stock, which represents 75% of the ownership of the Company and of 96.8% of the outstanding Common Stock voting rights, has a sufficient number of votes to approve the Plan of Liquidation, regardless of the vote of any other shareholder. IFC Holdings has provided the Company with a proxy for those shares, to be voted by management in favor of the proposed Plan of Liquidation, and, consequently, approval of the Plan of Liquidation is assured. As a result of the Board's approval of the Plan of Liquidation, the Company's 1994 Consolidated Financial Statements have been prepared on a liquidation basis of accounting. Accordingly, assets are valued at their estimated net realizable value, and liabilities include the estimated costs to carry out the Plan of Liquidation. The net adjustment at May 31, 1994 required to convert from the going concern (historical cost) basis to the liquidation basis of accounting was a decrease in the carrying value of net assets of $4.2 million which was included in the Consolidated Statement of Changes in Net Assets in Liquidation. This decrease in the carrying value of net assets is principally a result of recording estimated costs associated with carrying out the Plan of Liquidation. For the period from June 1, 1994 to November 30, 1994, the Company reduced the Reserve for estimated costs during the period of liquidation by $529,000, reflecting accrued legal fees which are not expected to be incurred of $975,000 and estimated liabilities in excess of previous estimates of $446,000. Under the liquidation basis, the Company has accrued future liabilities associated with carrying out the Plan of Liquidation (see assumptions below). The Company has not reflected future revenues from interest income or income associated with investment activities as such income will be recognized when realized. The Consolidated Balance Sheet as of November 30, 1993, and the Consolidated Statements of Income for the years ended November 30, 1993 and 1992 have been prepared using the going concern (historical cost) basis of accounting which the Company has previously used to report its financial condition and results of operations. The conversion of the Company's assets and liabilities from the going concern (historical cost) basis to the liquidation basis of accounting has required the determination of significant estimates and judgments by management of the Company. A summary of the Plan of Liquidation, and of the significant estimates and judgments made, are described below. The Plan of Liquidation calls for an orderly liquidation of the Company over a five year period from the effective date of the Plan. This period may be shortened or lengthened if it is deemed to be in the best interest of the shareholders. The Company may engage in transactions as may be appropriate to complete its liquidation, including the sale, exchange, or other disposition of all or part of its remaining assets for cash, shares, bonds, or other security or property, or any combination of the foregoing. Prior to distributions of the assets of the Company to its shareholders, the Company will invest its financial resources and will discharge or otherwise provide for all of its known liabilities and obligations. The Company has made the following assumptions in the valuation of the assets and liabilities of the Company on the liquidation basis of accounting: 1) SHORT-TERM INVESTMENTS are carried at their estimated market value. No accrual has been made for future income or loss on investments except for unrealized gains or losses that existed on November 30, 1994. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. PLAN OF DISSOLUTION AND COMPLETE LIQUIDATION (CONTINUED) 2) NOTE RECEIVABLE. The Company has the intent and ability to hold this receivable, acquired in connection with the Asset Sale, to maturity, which is May 27, 1996. No valuation allowance is deemed necessary. Interest income will be recognized when earned, calculated at the stated rate of 6% per annum. 3) NONPERFORMING ASSETS are carried at their estimated net realizable value. Bad debt recoveries of $41,000 and auction proceeds of $948,000 were received in December 1994 and are reflected in the carrying value as of November 30, 1994. 4) PREFERRED STOCK DIVIDENDS are accreted through November 30, 1994. The Company redeemed the preferred stock and accumulated dividends on January 26, 1995 for a total of $20.8 million, which includes $297,000 in dividends accreted subsequent to November 30, 1994. 5) RESERVE FOR ESTIMATED COSTS DURING THE PERIOD OF LIQUIDATION represents management estimates of costs to be incurred in the future to liquidate the company. Major considerations and assumptions are as follows: a) Nonperforming assets were sold at auction as of December 15, 1994 b) Administrative costs have been accrued through May 31, 1996, the anticipated date of the final payment on the note receivable. No costs have been accrued subsequent to May 1996, as the Company currently anticipates that all significant outstanding matters will be resolved by that time. 6) RESERVE FOR THE LITIGATION SETTLEMENT represents the amount paid by the Company subsequent to November 30, 1994 to settle its share of the securities litigation outstanding against the Company, pursuant to a settlement agreement which was finalized as of January 19, 1995. All of the above assumptions may be subject to change as facts emerge and circumstances change. NOTE 3. SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING FOR LEASES. Prior to the Asset Sale, for financial reporting purposes, the Company's leases were classified as direct financing leases and were accounted for in accordance with Statement of Financial Accounting Standards No. 13. -- "Accounting for Leases". REVENUE RECOGNITION. For its mid-ticket leases, the Company has recognized the related unearned Income as lease revenue over the term of the lease by the interest method. For its small-ticket portfolio the Company recognized unearned lease income by the sum-of-the-months digits method on leases booked has prior to September 1, 1989 and by the interest method on leases booked subsequent to that date. Revenue was recognized on an accrual basis for both lease categories. INITIAL DIRECT COSTS OF LEASES. Prior to the Asset Sale, the Company deferred certain initial direct costs of originating leases and recognized these costs over the lives of the related leases as a reduction of their yields. NON-ACCRUAL LEASES. Prior to the Asset Sale, the Company ceased income recognition when a lease receivable became 90 days past due, or when other conditions adversely affected collectibility of the receivable. NONPERFORMING ASSETS. Nonperforming assets consist primarily of equipment held for sale or equipment repossessed, leases which are more than 180 days past due, and lease deficiencies which represent the remaining balance due to the Company after proceeds from equipment sales have been applied to the outstanding lease receivable. The nonperforming assets are valued at their estimated net realizable value. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHORT-TERM INVESTMENTS. Short-term investments consisted of Treasury Bills and U.S. Government Agency Securities at November 30, 1994, recorded at market value, which is lower than cost and of mutual funds at November 30, 1993, recorded at the lower of average cost or market. Aggregate net unrealized investment losses are included in the Consolidated Statement of Changes in Net Assets in Liquidation and the Consolidated Statement of Income. CONSOLIDATED STATEMENT OF CASH FLOW. For purposes of reporting cash flows, cash and cash equivalents includes cash in banks and temporary investments with an original maturity of three months or less. ACCOUNTING FOR INCOME TAXES. Under Federal income tax laws, the Company is not part of a controlled group and files its tax return separately. Effective December 1, 1993, the Company prospectively adopted Statement of Financial Accounting Standards No. 109. -- Accounting for Income Taxes. The effects of adopting this Statement were not material. NOTE 4. SHORT-TERM INVESTMENTS At November 30, 1994 and 1993, short-term investments consist of the following:
MARKET CARRYING COST VALUE VALUE ------- ------- -------- (DOLLARS IN THOUSANDS) November 30, 1994 U.S. Government Agency Securities........... $ 2,685 $ 2,627 $ 2,627 U.S. Government Treasury Bills.............. 3,901 3,942 3,942 November 30, 1993 MUTUAL FUNDS: U.S. Government Agency Securities........... $15,917 $15,720 $15,720 U.S. Government Treasury Bills.............. 2,553 2,540 2,540
At November 30, 1994, short-term investments with an original cost of $6,586,000 were recorded at market. Mutual funds at November 30, 1993 with an original cost of $18,470,000 were recorded at the lower of average cost or market. To reduce the carrying amount of the short-term investments to market, the Company recorded a valuation allowance of $17,000 at November 30, 1994 and of $210,000 at November 30, 1993 with a corresponding charge to net income. At November 30, 1994 and 1993, gross unrealized losses were $17,000 and $210,000, respectively. NOTE 5. NOTE RECEIVABLE As part of the sale of substantially all of Industrial Leasing's assets to ILC Acquisition Corp., on May 27, 1993, the Company received a note in the amount of $19,043,000 bearing interest at 6 percent per annum. The note is payable in equal semi-annual installments of $3,174,000, plus accrued interest, through May 27, 1996. NOTE 6. RESTRICTED CASH Restricted cash of $6,176,000 at November 30, 1994 consists of collateral for the underwriters' defense costs for the securities litigation and for funds required to settle the Company's share of this litigation. Of this balance, $1,174,000 and $800,000 as of November 30, 1994 and 1993 respectively, represent security to support underwriters' defense costs as ordered by the U.S. District Court for the Northern District of California. The remainder of $5,000,000 was placed in escrow pursuant to the preliminary agreement to settle the securities litigation. (See NOTE 8. -- Commitments and Contingencies). 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. INCOME TAXES The difference between taxes calculated at the federal statutory tax rate and the recorded tax benefit was as follows:
FOR THE YEARS ENDED NOVEMBER 30, ----------------------- 1994 1993 1992 ---- ------- ------- (DOLLARS IN THOUSANDS) Statutory federal tax rate.............................. 34% 35% 34% Computed federal income tax benefit..................... -- $ (468) $(4,789) Adjustment in tax resulting from: Allocation of purchase price.......................... -- -- (47) Elimination of deferred taxes previously provided..... (2,057) (2,685) Other................................................. -- (70) -- ---- ------- ------- Federal income tax benefit.............................. -- (2,595) (7,521) State income tax benefit, net of federal income tax benefit................................................ -- (40) (423) ---- ------- ------- Total income tax benefit................................ -- $(2,635) $(7,944) ---- ------- ------- ---- ------- -------
Income tax benefit consists of the following:
FOR THE YEARS ENDED NOVEMBER 30, ---------------------- 1994 1993 1992 ---- ------- ------- (DOLLARS IN THOUSANDS) Taxes currently provided: Federal............................................... -- -- -- State................................................. -- -- -- Deferred income taxes: Leasing income recognition differences................ -- (2,635) (7,557) Other................................................. -- -- (387) ---- ------- ------- Total income tax benefit................................ -- $(2,635) $(7,944) ---- ------- ------- ---- ------- -------
The Company has determined that it has adequate net operating loss carry forwards and other deductions that no future income tax liability is anticipated. As all timing differences were eliminated as a result of the Asset Sale in 1993, the Company reviewed its deferred tax obligations and concluded that no future income tax obligations existed as of November 30, 1993. Consequently, the results of the year ended November 30, 1993, include the reversal of all outstanding deferred tax obligations previously recorded. As discussed in NOTE 1. -- Organization and Basis of Presentation, during 1992 the Company's previous majority shareholder transferred all of its interest in the Company to IFC Holdings. This resulted in a change in ownership for federal and state income tax purposes, which could limit the use in future years of net operating losses and other tax credit carry forwards. The amount which will be usable in any one year is limited to the value of the Company at the time of the change in ownership multiplied by the interest rate on federal long-term exempt securities at that date. At November 30, 1994 the Company had in excess of $24 million of net operating loss carry forwards, which are not expected to be utilized by the Company, expiring in the years 2007 through 2009. NOTE 8. COMMITMENTS AND CONTINGENCIES On August 20, 1994, the Company established a reserve in the amount of $5.0 million as its share of the settlement of the securities lawsuits previously filed against the Company, Industrial Leasing, the Company's previous majority shareholder First City and certain of its former affiliates and subsidiaries, certain directors, certain former directors and officers, its certified public accountants, 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) and the underwriters of the December 8, 1989, initial public offering. The class action lawsuits, WADE ET. AL. V. INDUSTRIAL ET. AL., filed January 1992, and a related case BOWER ET. AL. V. BELZBERG ET. AL., filed February 1992, alleged violations of federal securities laws. The WADE lawsuit also alleged violations under California state law. These lawsuits were filed in the United States District Court for the Northern District of California, and alleged that plaintiffs were damaged as a result of alleged misstatements and omissions in documents disseminated in connection with the Company's initial public offering and subsequent communications and public filings through February 1991. Damages of approximately $22.5 million plus prejudgement interest were alleged. On August 15, 1994 a preliminary agreement was reached to settle these lawsuits. A settlement agreement was executed by the parties on October 7, 1994. The settlement was approved by the Court on December 19, 1994 and became effective January 19, 1995, at which time all claims were fully settled. Under the terms of the settlement, the Company contributed $5 million, without any presumption or admission of liability, of a total settlement of $10 million. The Company maintains that its litigation positions have merit, but has agreed to the settlement to avoid the risk, exposure, and costs of further legal proceedings. In January 1993, Alex. Brown & Sons and Piper Jaffray, Inc., the underwriters of the initial public offering, filed an action against the Company, demanding that the Company pay the underwriters' attorney fees and expenses associated with their defense of the securities litigation, in accordance with the Underwriting Agreement between the Company and the underwriters. The Court granted the underwriters' motion for summary judgment, on July 9, 1993, and ordered the Company to pay the underwriters' legal costs as they were incurred. The Company appealed this decision to the Court of Appeals. In the interim, pending a decision regarding this appeal, the Company deposited funds with the Court to cover these costs. As of November 30, 1994, the amount on deposit with the court was $1.2 million, and is included in the Consolidated Statement of Net Assets in restricted cash. Under the terms of the final settlement of the securities litigation, this deposit was returned by the Court to the Company on January 20, 1995. In connection with the securities litigation, the Company has filed a lawsuit against two insurance companies, demanding coverage against American Home Assurance Company under a directors and officers liability policy in the amount of approximately $5.0 million (Canadian), and against The Continental Insurance Company (Continental Insurance) under a general liability policy and umbrella policy of approximately $4.0 million (Canadian) and $16.0 million (Canadian), respectively. Continental Insurance has agreed to reimburse the Company for reasonable defense fees and expenses. As of November 30, 1994, Continental Insurance has advanced $1.6 million of legal costs which represents approximately 27 percent of the total legal costs incurred to date by the Company in defense of the class action lawsuit. The Company and Continental Insurance have agreed to negotiate the amount of the remaining reimbursement. Both parties have further agreed to submit the matter to binding arbitration if negotiations are not successful. The Company has submitted approximately $5.9 million of fees and expenses for reimbursement to Continental Insurance. Any additional reimbursements from Continental Insurance will be recorded as income when received. The Company is also a defendant in various lawsuits resulting from normal business activity. In the opinion of management, the disposition of all other such litigation currently pending will not have a material effect on the net assets or changes in net assets of the Company. The Company had noncancellable operating leases for office space. The cost to terminate these leases has been recorded as part of the loss on sale of assets at November 30, 1992. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company entered into a noncancellable operating lease for office space on May 27, 1993. This lease expires on May 27, 1995. Future minimum lease payments under this lease are $41,000 for the year ended November 30, 1995. Total rent expense was as follows:
(DOLLARS IN THOUSANDS) November 30, 1994.......................................... $ 87 November 30, 1993.......................................... 369 November 30, 1992.......................................... 450
NOTE 9. SHAREHOLDERS' EQUITY COMMON AND PREFERRED STOCK. The Company's authorized capital consists of 20,000,000 shares of Class A Common Stock, without par value, 10,000,000 shares of Class B Common Stock, without par value, and 10,000,000 shares of preferred stock, without par value. The Class A Common Stock has one vote per share and the Class B Common Stock has 10 votes per share. In March 1991, the Company issued 134,310 shares of the Series A Cumulative Preferred Stock ("Shares") of the Company to FCRIC for $10,000,000 in cash and the forgiveness of $3,431,000 of indebtedness owed by the Company arising from federal income taxes of the Company paid by FCRIC in fiscal years ended prior to November 30, 1990. Under the terms of the issuance, cash dividends on these Shares accreted quarterly at a rate of $14.22 per share per annum. These dividends are cumulative. The Company may, at anytime and at its option, redeem all or any part of the shares at a redemption price of $100 per share plus all accreted and unpaid dividends. The holder of the redeemable preferred stock may, at its option, redeem the stock after March 15, 1996. In the event of any liquidation, whether voluntary or otherwise, each holder is entitled to receive an amount of $100 per share plus all accumulated but unpaid dividends before any distribution shall be made to the holders of the common stock. The Shares are not convertible into any other securities of the Company, including Class A or Class B Common Stock. The accumulated preferred stock dividends totaled $7.1 million, $5.2 million, and $3.3 million as of November 30, 1994, 1993 and 1992, respectively. On January 26, 1995, the Shares and accumulated dividends were redeemed for $20.8 million including $297,000 of dividends accreted subsequent to November 30, 1994. STOCK OPTION PROGRAMS. In October 1989, the Company adopted two stock option plans for selected key executives and employees and directors, authorizing options to acquire 450,500 shares of Class A Common Stock. In April 1992, the directors' plan was amended and an additional 72,000 shares of stock were authorized for a total of 100,000 shares available under this plan. At November 30, 1994, the total shares Class A Common Stock authorized for issuance under the plans was 522,500. There are six different vesting plans within both stock options plans. The following sets forth the activity relating to the stock options granted under the plans. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. SHAREHOLDERS' EQUITY (CONTINUED) OPTIONS OUTSTANDING UNDER THE 1989 PLANS
NUMBER OF SHARES EXERCISE PRICE ---------- ----------------- Outstanding at 11/30/92.................................................. 493,000 $0.75 - $12.25 Granted during Fiscal year 1993.......................................... 0 Canceled during Fiscal year 1993......................................... (223,000) $1.13 - $12.25 ---------- Outstanding at 11/30/93.................................................. 270,000 $0.75 - $1.19 ---------- ---------- Granted during Fiscal year 1994.......................................... 0 Canceled during Fiscal year 1994......................................... 0 ---------- Outstanding at 11/30/94.................................................. 270,000 $0.75 - $1.19 ---------- ---------- Exercisable at 11/30/93.................................................. 270,000 $0.75 - $1.19 Exercisable at 11/30/94.................................................. 270,000 $0.75 - $1.19
In October 1989, the Company also adopted a stock option plan for key executives authorizing options to acquire 135,000 shares of Class B Common Stock. These options were canceled and no options are outstanding as of November 30, 1994. NOTE 10. PENSION PLAN Industrial Leasing had a Savings and Profit Sharing Plan covering substantially all employees. The plan provided for employees to contribute up to 10 percent of their salary to the plan under Section 401(k) of the Internal Revenue Code, and the Company could match up to 3 percent of the employee's compensation. The plan was terminated effective December 31, 1992, and, as a result, all Company contributions were 100 percent vested. The plan was fully funded and all benefits were distributed in 1993. The impact of the plan termination on the financial statements was not material. The total plan expenses were $9,000, and $38,000, for the years ended November 30, 1993 and 1992, respectively. NOTE 11. SUBSEQUENT EVENTS All remaining nonperforming assets were sold at auction December 6. 1994. See NOTE 2. -- Plan of Dissolution and Complete Liquidation. The class action lawsuits, WADE ET AL V. INDUSTRIAL ET AL, and the related case BOWER ET AL V. BELZBERG ET AL, were settled effective January 19, 1995. See NOTE 8. -- Commitments and Contingencies. The Company redeemed its Series A Cumulative Preferred Stock and accumulated dividends January 26, 1995. See NOTE 2. -- Plan of Dissolution and Complete Liquidation. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. QUARTERLY INFORMATION (UNAUDITED)
FEBRUARY 28, MAY 31, AUGUST 31, NOVEMBER 30, ------------ --------- ----------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 Revenues............................................... $ 363 $ 194 $ 1,434 $1,503 Income (loss) before income taxes (benefit)............ (582) (4,842)(1) (2,588)(2) 1,055(3) Net income (loss)...................................... (582) (4,842)(1) (2,588)(2) 1,055(3) Net income (loss) per common share..................... (0.14) (0.71) (0.41) 0.08 1993 Revenues............................................... $5,439 $ 3,915 $ 484 $ 485 Income (loss) before income taxes (benefit)............ 888 (265) (1,233) (726) Net income (loss)...................................... 588 2,311 (1,031) (569) Net income (loss) per common share..................... 0.01 0.24 (0.20) (0.13) - ------------------------ (1) Includes a $4,200,000 initial charge to change to the liquidation basis of accounting. (2) Includes a charge of $5,000,000 for the Company's share of the settlement of the securities litigation. This charge is partially offset by an adjustment in the Reserve for estimated costs during the period of liquidation. (3) Includes auction proceeds of $948,000 and bad debt recoveries related to the sale of nonperforming assets in December 1994.
22 MANAGEMENT'S REPORT To the Shareholders of Industrial Funding Corp.: The management of Industrial Funding Corp. has prepared and is responsible for the financial statements and related financial data contained in this report. The financial statements were prepared in accordance with generally accepted principles and by necessity include certain amounts determined using management's best estimate and judgments. The financial statements have been audited by independent accountants who were appointed by the Board for fiscal 1994. Their audit was made in accordance with generally accepted auditing standards and included a review of internal accounting controls, for the purpose of providing a basis for reliance thereon in connection with their audit of the financial statements. Management of the Company has established and maintains an internal control structure that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial report. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefit derived. The internal control structure is continually monitored for compliance. The Board of Directors, through its Audit Committee, is responsible for reviewing and monitoring the financial statements and accounting practices. The Audit Committee meets annually with management and the independent accountants to ensure that each is properly discharging its duties. Independent accountants have full and free access to, and meet with the Audit Committee, with or without the presence of management. JOHN PITT -------------------------------------- VICE PRESIDENT FINANCE AND CHIEF EXECUTIVE OFFICER February 28, 1995 23 -----END PRIVACY-ENHANCED MESSAGE-----