<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-5467
THE FOOTHILL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 94-1663353
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11111 SANTA MONICA BOULEVARD 90025
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 996-7000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
NAME OF EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- -------------------
Class A Common Stock, no par value New York Stock Exchange, Inc.
</TABLE>
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 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 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 amendment to this
Form 10-K. [X]
At March 1, 1994, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $226,243,000.
At March 1, 1994, Registrant had 16,555,952 shares of Class A Common Stock,
no par value, outstanding.
Part I and Part II incorporate information by reference from the
Registrant's Annual Report to Stockholders for the year ended December 31, 1993
and Part III incorporates information by reference from the definitive Proxy
Statement for Registrant's 1994 Annual Meeting of Stockholders, dated March 21,
1994, as set forth herein.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE REFERENCE
--------------------------------
INCORPORATED BY
REFERENCE FROM
-------------------------
ANNUAL
FORM REPORT TO PROXY
10-K STOCKHOLDERS STATEMENT
---- ------------ ----------
<S> <C> <C> <C> <C>
PART I
Item 1. Business............................................. 1-2 20-26
Item 2. Properties........................................... 2
Item 3. Legal Proceedings.................................... 3
Item 4. Submission of Matters to a Vote of Security
Holders.............................................. 3
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 3 43
Item 6. Selected Financial Data.............................. 3 18-19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 3 20-26
Item 8. Financial Statements and Supplementary Data.......... 3 27-43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 3
PART III
Item 10. Directors and Executive Officers of the Registrant... 3-4 3-6
Item 11. Executive Compensation............................... 4 7-14
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 4 1-6
Item 13. Certain Relationships and Related Transactions....... 4 15-16
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 5-6
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
The Foothill Group, Inc. ("Foothill Group" or "parent company") is a
specialized financial services company engaged in asset-based commercial lending
through Foothill Capital Corporation ("Foothill Capital") and asset management
services through Foothill Group. Unless the context otherwise indicates, the
"Company" refers to Foothill Group and its subsidiary.
Since 1970, Foothill Capital has made revolving credit and term loans to
companies which are generally unable to secure financing from traditional
lending sources. The loans are generally secured by accounts receivable and
inventory, machinery and equipment, and other assets. At December 31, 1993,
Foothill Capital had a total of $506,673,000 in loans outstanding. Foothill
Capital generates revenues principally from interest income as well as loan
commitment, appraisal and monitoring fees and other related services. Foothill
Capital's strategy is to provide innovative financing solutions to borrowers who
have adequate collateral in the form of accounts receivable, inventory and other
assets, but may not meet overall credit standards generally required by
commercial banks. As part of its operating strategy, Foothill Capital, in
conjunction with limited partnerships managed by Foothill Group, purchases loans
at a discount to their principal amounts from commercial banks.
At December 31, 1993, the loans in Foothill Capital's portfolio have
principal amounts of up to $13,568,000. The average amount per borrower in
Foothill Capital's portfolio was $2,612,000 and was either a revolving loan
secured primarily by accounts receivable and inventory or a term loan secured by
machinery, equipment or other assets. Revolving loans are normally provided for
up to three year periods and are based on 50% to 80% of eligible accounts
receivable and on 15% to 50% of the lower of cost or market value of eligible
inventory. Term loans are frequently made in combination with revolving loans,
are generally due within five years (up to ten years in specific cases). Both
revolving loans and term loans are made with full recourse to the borrower.
Foothill Capital has historically purchased secured loans from other
parties ("purchased receivables") consisting of non-public debt instruments
including bank loans and private placements, public debt instruments including
registered bonds, notes and debentures, and discounted receivables (bank debt
purchased at a discount from its principal amount from the original lenders.)
Foothill Capital's bank credit agreement limits the amount of its aggregate
purchased receivables to the lesser of $75,000,000 or 20% of consolidated
assets. At December 31, 1993, purchased receivables represented 7.7% of Foothill
Capital's assets. Foothill Capital's bank credit agreement further limits the
amount of discounted receivables to the lesser of 15% of consolidated assets,
$70,000,000 or 85% of consolidated tangible net worth. At December 31, 1993,
discounted receivables represented 6.9% of consolidated assets and 34.8% of
consolidated net worth.
In 1988, Foothill Group established an asset management business to
capitalize on its experience in lending to and investing in debt securities of
financially troubled borrowers. Foothill Group has organized four limited
partnerships for institutional investors (the "Funds") to invest in debt
securities or claims of financially troubled companies. Many of the Funds'
investments are in companies that may be involved in a restructuring or
reorganization under the Federal Bankruptcy Code. Foothill Group acts as a
general partner of such partnerships, which have aggregate capital commitments
of $598,000,000. Foothill Group earns a management fee as well as incentive
compensation based on distributed profits in excess of specified rates of
return.
Effective December 23, 1993, the parent company completed the spin-off of
its Foothill Thrift and Loan subsidiary to Foothill Group shareholders. All
previously reported financial results of Foothill Thrift and Loan, through the
record date for the spin-off, are classified as discontinued operations.
Revenues of Foothill Thrift and Loan totaled $21,658,000, $23,131,000 and
$25,067,000 for the years ended December 31, 1993, 1992 and 1991.
1
<PAGE> 4
MANAGEMENT OF CREDIT RISK
The Company endeavors to minimize credit losses by maintaining a diversity
of borrowers and types of collateral, as well as by establishing credit policies
and by maintaining close supervision of its loans and underlying collateral.
Borrowers of Foothill Capital may be a higher credit risk than traditional
unsecured borrowers of commercial banks. Foothill Capital attempts to offset
this risk by collateralizing all loans. Foothill Capital's credit policy
prohibits loans in excess of 15% of capital funds (consolidated net worth plus
subordinated debt) to any one borrower. In practice, few of its loans approach
such maximum. At December 31, 1993, Foothill Capital's largest loan was
$13,568,000 (7.6% of capital funds). Foothill Capital also manages its loan
portfolio to avoid geographic and industry concentration risk. At December 31,
1993, 61% of its finance receivables were from borrowers outside the State of
California, and borrowers from no other state represented more than 6.6% of its
loan portfolio. In addition, it is Foothill Capital's policy to have no single
industry (as defined by two digit SIC codes) account for greater than 10% of its
loan portfolio.
In addition to originating loans for its own portfolio, Foothill Capital
reduces its credit exposure by selling nonrecourse participations in loans to
affiliates of banks and other asset-based lenders. At December 31, 1993,
Foothill Capital had sold $107,746,000 in nonrecourse loan participations.
The Company's credit investigation normally involves analysis of the
underlying collateral securing the loan, review and analysis of the prospective
borrower's financial statements and background, an analysis of cash flow ability
of the prospective borrower to meet the Company's repayment requirements and
review of credit and historical data with credit reporting agencies. In
addition, the Company performs audits of information and operational data
provided by working capital loan prospects.
COMPETITION
In its commercial finance activities, the Company competes with commercial
finance companies throughout the nation as well as with banks and other
financial institutions. Competition from banks comes primarily from their
secured lending subsidiaries and divisions. The Company believes that a number
of banks have terminated or reduced their asset-based lending activities in the
last several years. Frequently, other finance companies are affiliated with
large financial institutions and have greater financial resources and the
ability to borrow at a lower cost of funds which enables them to charge lower
rates to borrowers while maintaining adequate margins. These cost structures are
available to banks and several other financial institutions with whom Foothill
Capital competes. The Company believes, however, despite the generally higher
interest rates it frequently charges, Foothill Capital's ability to respond
quickly and to design specialized and non-traditional loan structures specific
to its borrowers' needs, enables it to compete effectively in its markets.
Foothill Group faces competition in its asset management activities from
asset and money managers, some of whom are affiliated with major investment or
commercial banks and investment advisors whose investment strategies are
substantially similar to those of the Funds.
EMPLOYEES
As of December 31, 1993, the Company and its subsidiary employed 123
persons.
ITEM 2. PROPERTIES.
The Company leases all of its offices. Information with respect to the
company's offices is as follows:
<TABLE>
<CAPTION>
FLOOR SPACE LEASE
IN ANNUAL EXPIRATION
LOCATION SQUARE FEET RENTAL DATE
------------------------------------------ ------------ -------- ----------
<S> <C> <C> <C>
Foothill Capital:
Los Angeles, California(1).............. 28,455 $927,000 2000
Boston, Massachusetts................... 200 12,000 1994
</TABLE>
- ---------------
(1) Offices also used by the Registrant.
2
<PAGE> 5
ITEM 3. LEGAL PROCEEDINGS.
There are several lawsuits and claims pending against the Company which
management considers incident to normal operations, some of which seek
substantial monetary damages. Management, after review, including consultation
with counsel, believes that any ultimate liability which could arise from these
lawsuits and claims would not materially affect the financial position of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is incorporated herein by reference the information from the section
entitled "Stock Information" on page 43 of the Company's Annual Report to
Stockholders for the year ended December 31, 1993.
ITEM 6. SELECTED FINANCIAL DATA.
There is incorporated herein by reference the information from the section
entitled "Selected Consolidated Financial Data" and "Selected Financial Data For
Foothill Capital Corporation" on pages 18 to 19 of the Company's Annual Report
to Stockholders for the year ended December 31, 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
There is incorporated herein by reference the information from the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 20 to 26 of the Company's Annual Report to
Stockholders for the year ended December 31, 1993.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
There is incorporated herein by reference the "Consolidated Financial
Statements" of The Foothill Group, Inc. and its subsidiary, together with the
Report of Ernst & Young, Independent Auditors, on pages 27 to 43 of the
Company's Annual Report to Stockholders for the year ended December 31, 1993.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
With the exception of the information incorporated in Items 1, 5, 6, 7 and
8, the Annual Report is not deemed filed as part of this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There is incorporated herein by reference the information from the section
entitled "Election of Directors" on pages 3 to 6 of the Company's definitive
Proxy Statement, dated March 21, 1994, filed with the Securities and Exchange
Commission. Reference is also made to the list of Executive Officers, which is
provided below under the caption "Executive Officers of the Registrant."
3
<PAGE> 6
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals are executive officers of the Registrant.
Pertinent information relating to these individuals is set forth below. There
are no family relationships between any of the officers. All of the Registrant's
officers hold their respective offices at the pleasure of the Board of
Directors, subject to the rights, if any, of an officer under any contract of
employment.
DON L. GEVIRTZ -- Chairman of the Board and Chief Executive Officer -- Age 66
Mr. Gevirtz has been Chairman of the Board and Chief Executive Officer
since April 1972.
JOHN F. NICKOLL -- President, Vice Chairman of the Board, Co-Chief Executive
Officer and Chief Operating Officer -- Age 59
Mr. Nickoll has been President since April 1977. Since April 1972, he has
been Vice Chairman of the Board and Chief Operating Officer. He has been
Co-Chief Executive Officer since January 1985.
DAVID C. HILTON -- Executive Vice President -- Age 46
Mr. Hilton was elected Executive Vice President in January 1990 and had
served as Chief Financial Officer since November 1984, Senior Vice President
since March 1983 and as Controller from April 1979 through October 1984. He was
elected Executive Vice President of Foothill Capital in June 1985.
PETER E. SCHWAB -- Executive Vice President -- Age 50
Mr. Schwab was elected Executive Vice President in January 1990 and had
served as Senior Vice President since December 1984 and Senior Vice President of
Foothill Capital since February 1983. He was elected President of Foothill
Capital in August 1986.
HENRY K. JORDAN -- Senior Vice President, Chief Financial Officer and
Secretary -- Age 37
Mr. Jordan was elected Senior Vice President in January 1994 and has served
as Chief Financial Officer and Secretary since February 1990. He had served as
Vice President and Controller since November 1984. He was elected Senior Vice
President of Foothill Capital in September 1986.
ITEM 11. EXECUTIVE COMPENSATION.
There is incorporated herein by reference the information from the section
entitled "Executive Compensation" on pages 7 to 14 of the Company's definitive
Proxy Statement, dated March 21, 1994, filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is incorporated herein by reference the information from the section
entitled "Voting Securities" on pages 1 to 3 and "Election of Directors" on
pages 3 to 6 of the Company's definitive Proxy Statement, dated March 21, 1994,
filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There is incorporated herein by reference the information from the section
entitled "Transactions with Management and Others" on pages 15 to 16 of the
Company's definitive Proxy Statement, dated March 21, 1994, filed with the
Securities and Exchange Commission.
4
<PAGE> 7
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 and 2. Financial Statements and Financial Statement Schedules
The financial statements and schedules listed in the accompanying Index
to Financial Statements and Financial Statement Schedules are filed as
part of this Form 10-K.
3. List of Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as
part of this Form 10-K. In addition, following is a list of each
executive compensation plan and arrangement required to be filed as an
exhibit.
<TABLE>
<CAPTION>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
--------------------------------------------------------------------------
<S> <C>
(A) Employment Agreement -- Don L. Gevirtz; Form 10-K for year ended December
31, 1990, Exhibit 10.1.
(B) Employment Agreement -- John F. Nickoll; Form 10-K for year ended December
31, 1990, Exhibit 10.2.
(C) Form of Employment Agreement -- Senior Management; Form 10-K for year
ended December 31, 1990, Exhibit 10.3.
(D) Amended and Restated Top Executive Incentive Compensation Plan, dated July
1, 1992; Form 10-K for year ended December 31, 1992, Exhibit 10.4.
(E) Amended and Restated Employee Stock Option Plan; Proxy Statement dated
March 21, 1988, Exhibit A.
(F) Flexible Premium Life Insurance, Split Dollar Plan; Form 10-K for year
ended December 31, 1990, Exhibit 10.6.
(G) 1990 Foothill Performance and Equity Incentive Plan; Proxy Statement dated
March 8, 1990, Appendix A.
(H) Supplemental Executive Retirement Plan; Form 10-K for year ended December
31, 1990, Exhibit 10.23.
(I) Retirement Plan for Outside Directors; Form 10-K for year ended December
31, 1990; Exhibit 10.24.
(J) Amended and Restated Agreement of Limited Partnership of Foothill
Partners, L.P., a Delaware limited partnership; Form 10-Q for quarter
ended September 30, 1990, Exhibit 10.36.
(K) First Amendment dated June 29, 1992 to Amended and Restated Agreement of
Limited Partnership of Foothill Partners, L.P., a Delaware limited
partnership; Form 10-Q for quarter ended June 30, 1992, Exhibit 10.17(a).
(L) Agreement of Limited Partnership of Foothill Partners II, L.P., a Delaware
limited partnership, dated December 22, 1992; Form 10-K for year ended
December 31, 1992, Exhibit 10.15.
(M) First Amendment to The Foothill Group, Inc. Supplemental Executive
Retirement Plan; Form 10-K for year ended December 31, 1993, Exhibit
10.8(a)
</TABLE>
5
<PAGE> 8
(b) Reports on Form 8-K
During the quarter ended December 31, 1993 and through the date of this
filing, the following reports on Form 8-K were filed:
<TABLE>
<S> <C>
October 28, 1993 -- Item 7: Financial Statements and Exhibits
December 6, 1993 -- Item 7: Financial Statements and Exhibits
January 10, 1994 -- Item 7: Financial Statements and Exhibits
January 31, 1994 -- Item 7: Financial Statements and Exhibits
</TABLE>
(c) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as
part of this Form 10-K.
6
<PAGE> 9
THE FOOTHILL GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEM 14(A))
<TABLE>
<CAPTION>
PAGE REFERENCES
---------------------------
INCORPORATED BY
REFERENCE FROM
ANNUAL REPORT
FORM 10-K TO STOCKHOLDERS
--------- ---------------
<S> <C> <C>
Report of Ernst & Young, Independent Auditors........................ 43
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1993 and 1992.......... 27
Consolidated Statements of Income for the years ended December 31,
1993, 1992 and 1991............................................. 28
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1992 and 1991................................ 29
Consolidated Statements of Cash Flows for the years ended December
31, 1993, 1992 and 1991......................................... 30
Notes to Consolidated Financial Statements......................... 31-42
Financial Statement Schedules:
III -- Condensed Financial Information of Registrant
(unconsolidated)................................................ 7-11
IX -- Short-Term Borrowings (consolidated)......................... 12
</TABLE>
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements and related notes in the Annual Report to Stockholders for
the year ended December 31, 1993.
7
<PAGE> 10
THE FOOTHILL GROUP, INC.
(PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT (UNCONSOLIDATED)
CONDENSED BALANCE SHEETS (UNCONSOLIDATED)
DECEMBER 31, 1993 AND 1992
ASSETS
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
Cash and cash equivalents......................................... $ 5,409,000 $ 3,254,000
Investments....................................................... 7,839,000 5,098,000
Finance receivables, net.......................................... 7,645,000 1,365,000
Investment in Foothill Capital, at equity......................... 114,133,000 83,127,000
Net assets of discontinued operations............................. -- 16,830,000
Advances to Foothill Capital...................................... 10,500,000 12,250,000
Prepaid income taxes.............................................. 3,323,000 3,335,000
Other assets...................................................... 9,945,000 7,892,000
------------ ------------
$158,794,000 $133,151,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued and other liabilities................................... $ 6,646,000 $ 4,139,000
Stockholders' equity.............................................. 152,148,000 129,012,000
------------ ------------
$158,794,000 $133,151,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
8
<PAGE> 11
THE FOOTHILL GROUP, INC.
(PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT (UNCONSOLIDATED) (CONTINUED)
CONDENSED STATEMENTS OF INCOME (UNCONSOLIDATED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Interest income from:
Investments........................................ $ 215,000 $ 353,000 $ 244,000
Finance receivables................................ 684,000 51,000 76,000
Advances to subsidiaries........................... 2,362,000 2,360,000 1,769,000
Fees and other income................................ 6,196,000 3,303,000 5,146,000
Gain on investments.................................. 5,257,000 3,374,000 1,022,000
----------- ----------- ----------
Total revenues....................................... 14,714,000 9,441,000 8,257,000
----------- ----------- ----------
Costs and expenses:
Interest........................................... 283,000 2,706,000 6,475,000
Provision for credit losses........................ 539,000 30,000 920,000
General and administrative......................... 4,084,000 2,258,000 1,204,000
----------- ----------- ----------
Total costs and expenses............................. 4,906,000 4,994,000 8,559,000
----------- ----------- ----------
Income (loss) from continuing operations before
provision for income taxes and other items below... 9,808,000 4,447,000 (342,000)
Provision for income taxes........................... 4,119,000 1,771,000 165,000
----------- ----------- ----------
Income (loss) from continuing operations............. 5,689,000 2,676,000 (507,000)
Income (loss) from discontinued operations........... (1,579,000) 563,000 374,000
----------- ----------- ----------
Income (loss) before items below..................... 4,110,000 3,239,000 (133,000)
Equity in income of subsidiary before extraordinary
items:
Foothill Capital................................... 15,134,000 9,458,000 6,191,000
Extraordinary items, net............................. (561,000) (552,000) 213,000
----------- ----------- ----------
Net income........................................... $18,683,000 $12,145,000 $6,271,000
----------- ----------- ----------
----------- ----------- ----------
Cash dividends from subsidiaries:
Foothill Capital................................... $ -- $ -- $3,020,000
----------- ----------- ----------
----------- ----------- ----------
$ -- $ -- $3,020,000
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes.
9
<PAGE> 12
THE FOOTHILL GROUP, INC.
(PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT (UNCONSOLIDATED) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (UNCONSOLIDATED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Income from continuing operations before
extraordinary items........................... $18,683,000 $12,697,000 $ 6,058,000
Adjustments to reconcile income before
extraordinary items to net cash provided by
operating activities:
Equity in undistributed income of Foothill
Capital before extraordinary items.......... (15,134,000) (9,458,000) (3,171,000)
Net (income) loss from discontinued
operations.................................. 1,579,000 (563,000) (374,000)
Provision for credit losses................... 539,000 30,000 920,000
Net gain on investments....................... (5,257,000) (3,374,000) (1,022,000)
Amortization of deferred fund and debt
issuance costs.............................. 1,545,000 929,000 1,528,000
Increase (decrease) in accrued and other
liabilities................................. 2,507,000 (744,000) 299,000
Decrease in prepaid income taxes.............. 12,000 1,081,000 1,666,000
Other......................................... (423,000) (190,000) 920,000
----------- ----------- -----------
Net cash provided by operating
activities............................. 4,051,000 408,000 6,824,000
----------- ----------- -----------
Cash flows from investing activities:
Distributions received from partnerships and
proceeds from sales of investments............ 9,705,000 4,820,000 2,648,000
Contributions made to partnerships and purchases
of investments................................ (3,950,000) (2,125,000) --
Proceeds received from net finance receivables... 16,063,000 2,099,000 11,233,000
Disbursements made for net finance receivables... (22,883,000) (2,700,000) (7,550,000)
Advances (to) from discontinued operations....... 1,000,000 (1,000,000) --
Proceeds from repayments of advances to Foothill
Capital....................................... 1,750,000 1,750,000 1,750,000
----------- ----------- -----------
Net cash provided by investing
activities............................. 1,685,000 2,844,000 8,081,000
----------- ----------- -----------
Cash flows from financing activities:
Increase in deferred costs....................... (4,191,000) (1,156,000) (1,973,000)
Payments on senior notes payable................. -- (23,682,000) (6,553,000)
Payments on and retirements of subordinated notes
and debentures................................ -- (6,376,000) (7,822,000)
Issuance of preferred stock, net of related
costs......................................... -- -- 2,900,000
Dividends paid on preferred stock................ (270,000) (415,000) --
Issuance of common stock, net of related costs... 2,276,000 29,293,000 774,000
Dividends paid per common share ($.09 in 1993)... (1,396,000) -- --
----------- ----------- -----------
Net cash used in financing activities.... (3,581,000) (2,336,000) (12,674,000)
----------- ----------- -----------
Net increase in cash and cash equivalents.......... 2,155,000 916,000 2,231,000
Cash and cash equivalents at beginning of year..... 3,254,000 2,338,000 107,000
----------- ----------- -----------
Cash and cash equivalents at end of year........... $ 5,409,000 $ 3,254,000 $ 2,338,000
----------- ----------- -----------
----------- ----------- -----------
Cash paid during the year for:
Interest expense................................. $ 278,000 $ 3,314,000 $ 5,613,000
Income taxes..................................... $14,978,000 $12,140,000 $ 6,603,000
</TABLE>
See accompanying notes.
10
<PAGE> 13
THE FOOTHILL GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNCONSOLIDATED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
For financial reporting purposes, the subsidiary's provision for income
taxes is determined on a separate company basis. The subsidiary's tax benefits
are not limited by the consolidated group's ability to utilize these tax
benefits. The difference between the provision of the subsidiary and the
consolidated provision is accounted for by the parent company.
The presentation of certain prior year amounts has been conformed to the
1993 presentation.
All previously reported financial results of Foothill Thrift and Loan are
classified as discontinued operations.
For information concerning other significant accounting policies followed,
restrictions on investments in subsidiaries and extraordinary items, reference
is made to Notes to Consolidated Financial Statements in the Annual Report to
Stockholders for the year ended December 31, 1993.
NOTE 2 -- INDEBTEDNESS
See Notes 3 and 4 of Notes to Consolidated Financial Statements in the
Annual Report to Stockholders for the year ended December 31, 1993.
NOTE 3 -- CONTINGENCIES
See Note 8 of Notes to Consolidated Financial Statements in the Annual
Report to Stockholders for the year ended December 31, 1993.
11
<PAGE> 14
THE FOOTHILL GROUP, INC.
SCHEDULE IX -- SHORT-TERM BORROWINGS
(CONSOLIDATED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
AT END OF INTEREST DURING DURING DURING THE
DESCRIPTION PERIOD RATE THE PERIOD THE PERIOD(1) PERIOD(2)
- --------------------------------- ------------ -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
1993:
$235,000,000 line of credit.... $ -- -- $ 8,000,000 $ 153,000 6.3%
$10,000,000 line of credit..... -- -- 10,000,000 1,918,000 5.0%
Commercial paper............... 148,283,000 3.8% 160,986,000 114,786,000 3.9%
1992:
$195,000,000 line of credit.... $ -- -- $143,000,000 $ 35,692,000 6.4%
$10,000,000 line of credit..... -- -- 10,000,000 231,000 5.5%
Commercial paper............... 64,915,000 4.4% 149,366,000 88,953,000 4.6%
Borrowings secured by
marketable securities....... -- -- 476,000 18,000 3.5%
1991:
$245,000,000 line of credit.... $139,800,000 6.9% $193,900,000 $ 150,702,000 8.0%
Commercial paper............... 10,886,000 5.1% 19,855,000 6,363,000 6.1%
Borrowings secured by
marketable securities....... 479,000 7.0% 1,710,000 986,111 9.5%
</TABLE>
- ---------------
(1) The average amount outstanding for each period is an actual daily average.
(2) The weighted average interest rate for each period was computed by dividing
the interest expense by the average amount outstanding and excludes
commitment fees.
(3) For information concerning the terms of short-term borrowings, reference is
made to Note 3 of Notes to Consolidated Financial Statements in the Annual
Report to Stockholders for the year ended December 31, 1993.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE FOOTHILL GROUP, INC.
By: /s/ DON L. GEVIRTZ
-------------------------------
Don L. Gevirtz
Chief Executive Officer
Date: March 21, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ------ ----
<S> <C> <C>
DON L. GEVIRTZ Chairman of the Board and Chief March 21, 1994
- ------------------------------------------- Executive Officer
Don L. Gevirtz
JOHN F. NICKOLL President, Vice Chairman of the March 21, 1994
- ------------------------------------------- Board, Co-Chief Executive
John F. Nickoll Officer and Chief Operating
Officer
DAVID C. HILTON Executive Vice President March 21, 1994
- ------------------------------------------
David C. Hilton
HENRY K. JORDAN Senior Vice President, Chief March 21, 1994
- ------------------------------------------ Financial Officer and Secretary
Henry K. Jordan
WARREN BENNIS Director March 21, 1994
- ------------------------------------------
Warren Bennis
JOSEPH J. FINN-EGAN Director March 21, 1994
- ------------------------------------------
Joseph J. Finn-Egan
JEFFREY A. LIPKIN Director March 21, 1994
- ------------------------------------------
Jeffrey A. Lipkin
ARTHUR MALIN Director March 21, 1994
- ------------------------------------------
Arthur Malin
STEVEN L. VOLLA Director March 21, 1994
- ------------------------------------------
Steven L. Volla
</TABLE>
13
<PAGE> 16
THE FOOTHILL GROUP, INC.
INDEX TO EXHIBITS
(ITEM 14(C))
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ------------
<C> <S> <C>
3.1 Certificate of Incorporation (as amended)(18)........................
3.2 By-Laws as amended(18)...............................................
3.2 (a) Amendment to By-Laws dated February 1, 1991(18)......................
4.1 Preferred Stock Purchase Agreement including exhibits dated May 10,
1991 by and between the Registrant and Recovery Equity Investors,
L.P.(12).............................................................
10.1 Employment Agreement -- Don L. Gevirtz(14)...........................
10.2 Employment Agreement -- John F. Nickoll(14)..........................
10.3 Form of Employment Agreement -- Senior Management(14)................
10.4 Amended and Restated Top Executive Incentive Compensation Plan dated
July 1, 1992(22).....................................................
10.5 Amended and Restated Employee Stock Option Plan(5)...................
10.6 Flexible Premium Life Insurance, Split Dollar Plan(14)...............
10.7 1990 Foothill Performance and Equity Incentive Plan(11)..............
10.8 Supplemental Executive Retirement Plan(14)...........................
10.8 (a) First Amendment to The Foothill Group, Inc. Supplemental Executive
Retirement Plan(1)...................................................
10.9 Retirement Plan for Outside Directors(14)............................
10.10 Agreement of Foothill Managers Limited, a California Limited
Partnership, as amended(4)...........................................
10.11 Agreement of Foothill Managers Limited II, a California Limited
Partnership(7).......................................................
10.12 Agreement of Limited Partnership of The Foothill Fund, a California
Limited Partnership(6)...............................................
10.12(a) First Amendment to Agreement of Limited Partnership of The Foothill
Fund(6)..............................................................
10.12(b) Second Amendment to Agreement of Limited Partnership of The Foothill
Fund(7)..............................................................
10.12(c) Third Amendment to Agreement of Limited Partnership of The Foothill
Fund(8)..............................................................
10.13 Agreement of Limited Partnership of Foothill Recovery Fund, a
California Limited Partnership(7)....................................
10.13(a) First Amendment to Agreement of Limited Partnership of Foothill
Recovery Fund, a California Limited Partnership(8)...................
10.13(b) Second Amendment to Agreement of Limited Partnership of Foothill
Recovery Fund, a California Limited Partnership(8)...................
10.14 Amended and Restated Agreement of Limited Partnership of Foothill
Partners, L.P., a Delaware Limited Partnership(10)...................
10.14(a) First Amendment dated June 29, 1992 to Amended and Restated Agreement
of Limited Partnership of Foothill Partners, L.P., a Delaware Limited
Partnership(17)......................................................
10.15 Agreement of Limited Partnership of Foothill Partners II, L.P., a
Delaware Limited Partnership dated December 22, 1992(22).............
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
<S> <C> <C>
10.16 Loan Agreement dated November 10, 1980 by and between Foothill
Capital Corporation and Connecticut General Life Insurance
Company(4)...........................................................
10.16(a) First Amendment to Loan Agreement dated March 16, 1981 between
Foothill Capital Corporation and Connecticut General Life Insurance
Company(4)...........................................................
10.16(b) Second Amendment to Loan Agreement dated as of June 30, 1987 between
Foothill Capital Corporation and CIGNA Investments, Inc.(3)..........
10.17 Loan Agreement dated January 23, 1990 by and between Foothill Capital
Corporation and various lenders as noted in the loan agreement(15)...
10.17(a) First Amendment dated May 30, 1991 to Loan Agreement dated January
23, 1990 by and between Foothill Capital Corporation and various
lenders as noted in the amendment(13)................................
10.18 Loan Agreement dated June 15, 1990 by and between Foothill Capital
Corporation and various lenders as noted in the loan agreement(9)....
10.18(a) First Amendment dated May 30, 1991 to Loan Agreement dated June 15,
1990 by and between Foothill Capital Corporation and various lenders
as noted in the amendment(13)........................................
10.19 Loan Agreement dated May 8, 1991 by and between Foothill Capital
Corporation and various lenders as noted in the loan agreement(12)...
10.20 Loan Agreement dated January 31, 1992 by and between Foothill Capital
Corporation and various lenders as noted in the loan agreement(18)
10.21 Loan Agreement dated as of April 29, 1992 by and between Foothill
Capital Corporation and various lenders as noted in the loan
agreement(19)........................................................
10.22 Omnibus Amendment dated October 1, 1992 to Loan Agreements dated
November 10, 1980, January 23, 1990, June 15, 1990, May 8, 1991,
January 31, 1992 and April 29, 1992 by and between Foothill Capital
Corporation and various lenders as noted in the amendment(22)........
10.23 Note Agreement dated November 1, 1992 by and between Foothill Capital
Corporation and various lenders as noted in the note agreement(22)...
10.24 Note Agreement dated October 1, 1993 by and between Foothill Capital
Corporation and various lenders as noted in the note agreement(1)....
10.25 Amended and Restated Loan Agreement dated as of June 30, 1993 by and
among Foothill Capital Corporation and National Westminster Bank USA,
as Documentation Agent, Bank of America NT&SA, as Administrative
Agent, and the other banks named in the loan agreement(20)...........
10.26 Amended and Restated Letter of Credit and Guaranty Agreement dated as
of August 6, 1993 among Foothill Capital Corporation, Bank of America
NT&SA, as Agent and as Issuing Bank and other banks named in the
agreement(21)........................................................
10.27 Second Amended and Restated Letter of Credit and Guaranty Agreement
dated as of August 6, 1993 by and among Foothill Capital Corporation
and Union Bank, as Agent and as Issuing Bank(21).....................
10.28 ISDA Interest Rate Swap Agreement dated May 17, 1990 by and between
Foothill Capital Corporation and Continental Bank N.A.(9)............
10.28(a) First Amendment dated as of March 13, 1992 to ISDA Interest Rate Swap
Agreement dated May 17, 1990 by and between Foothill Capital
Corporation and Continental Bank N.A.(16)............................
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ------------
<C> <S> <C>
10.29 ISDA Interest Rate Swap Agreement dated May 21, 1990 by and between
Foothill Capital Corporation and Commonwealth Bank of Australia(9)...
10.30 ISDA Interest Rate and Currency Exchange Agreement dated March 4,
1992 between Foothill Capital Corporation and Sanwa Bank
California(16).......................................................
10.31 ISDA Interest Rate Swap Agreement dated March 12, 1992 between
Foothill Capital Corporation and National Westminster Bank USA(16)...
10.32 ISDA Master Agreement dated as of August 24, 1993 between Foothill
Capital Corporation and Bank of America NT&SA(21)....................
10.33 ISDA Interest Rate and Currency Exchange Agreement dated as of July
19, 1993 between Foothill Capital Corporation and Westdeutche
Landesbank Girozentrale(21)..........................................
10.34 Floating Rate Note with a principal amount of $5,000,000 due August
15, 1994(21).........................................................
10.35 Floating Rate Note with a principal amount of $5,000,000 due August
31, 1994(21).........................................................
11.1 Computation of Earnings Per Common Share(1)..........................
13.1 Annual Report to Stockholders for the year ended December 31, 1993(1
and 2)...............................................................
22.1 Subsidiaries of the Registrant(1)....................................
23.1 Consent of Independent Auditors(1)...................................
28 Consolidated Financial Statements of Foothill Capital Corporation for
the year ended December 31, >1993(1).................................
</TABLE>
- ---------------
(1) Filed herewith.
(2) Except for the portions thereof which are expressly incorporated by
reference into this Form 10-K, such Annual Report to Stockholders is not
deemed filed as part of this report.
(3) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1987.
(4) Incorporated herein by reference from Registrant's Annual Report on Form
10-K for its year ended December 31, 1986.
(5) Incorporated herein by reference from Exhibit A of Registrant's 1988 proxy
statement dated March 21, 1988.
(6) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1988.
(7) Incorporated herein by reference from Registrant's Annual Report on Form
10-K for its year ended December 31, 1988.
(8) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1989.
(9) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1990.
(10) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1990.
(11) Incorporated herein by reference from Appendix A of Registrant's 1990 proxy
statement dated March 8, 1990.
(12) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991.
<PAGE> 19
(13) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1991.
(14) Incorporated herein by reference from Registrant's Annual Report on Form
10-K for its year ended December 31, 1990.
(15) Incorporated herein by reference from Registrant's Annual Report on Form
10-K for its year ended December 31, >1989.
(16) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1992.
(17) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1992.
(18) Incorporated herein by reference from Registrant's Annual Report on Form
10-K for its year ended December 31, 1991.
(19) Incorporated herein by reference from Exhibit 10.34 to Registrant's
Amendment No. 2 to Form S-2 Registration Statement No. 33-46673.
(20) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993.
(21) Incorporated herein by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
(22) Incorporated herein by reference from Registrant's Annual Report on Form
10-K for its year ended December 31, 1992.
<PAGE> 1
EXHIBIT 10.8(a)
First Amendment to
The Foothill Group, Inc.
Supplemental Executive Retirement Plan
The Foothill Group, Inc. Supplemental Executive Retirement Plan
("Plan"), is hereby amended as provided below:
A. Section 3.1 of the Plan is revised by redesigning paragraphs
(b) and (c) as (c) and (d), respectively, and by adding the following new
paragraph (b) thereto:
(b) Notwithstanding the above, in the case of John F.
Nickoll and Don L. Gevirtz, Paragraph (a) above shall be applied by--
(i) Substituting the number "two and four tenths
of one percent (2.4%)" in place of the number "two percent
(2%)" in the first sentence thereof; and
(ii) Substituting the number "twenty-five (25)" in
place of the number "thirty (30)" in the second sentence
thereof.
B. This amendment will be effective retroactive to the effective
date of the Plan, which was January 1, 1991.
C. Except as provided above, all the provisions of the Plan shall
remain in full force and effect.
The Foothill Group, Inc.
By: _________________________
Its: _________________________
April 28, 1993
<PAGE> 1
EXHIBIT 10.24
(CONFORMED COPY)
================================================================================
Foothill Capital Corporation
Note Agreement
Dated as of October 1, 1993
Re: $15,000,000 5.54% Senior Notes, Series A,
Due November 15, 1996,
$5,000,000 5.89% Senior Notes, Series B,
Due November 15, 1997,
$25,000,000 6.23% Senior Notes, Series C,
Due November 15, 1998,
$15,000,000 6.56% Senior Notes, Series D,
Due November 15, 2000
and
$25,000,000 7.46% Senior Subordinated Notes
Due November 15, 2003
================================================================================
<PAGE> 2
TABLE OF CONTENTS
(Not a part of the Agreement)
<TABLE>
<CAPTION>
SECTION HEADING PAGE
<S> <C> <C>
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT1
Section 1.1. Description of Notes . . . . . . . . . . . . . . . . . . 1
Section 1.2. Commitment, Closing Date . . . . . . . . . . . . . . . . 3
Section 1.3. Other Agreements . . . . . . . . . . . . . . . . . . . . 3
SECTION 2. PREPAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . 4
Section 2.1. Required Prepayments . . . . . . . . . . . . . . . . . . 4
Section 2.2. Optional Prepayment with Premium . . . . . . . . . . . . 4
Section 2.3. Prepayment of Notes Upon a Change of Control . . . . . . 4
Section 2.4. Notice of Optional Prepayments . . . . . . . . . . . . . 8
Section 2.5. Application of Prepayments . . . . . . . . . . . . . . . 8
Section 2.6. Direct Payment . . . . . . . . . . . . . . . . . . . . . 8
SECTION 3. REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . 9
Section 3.1. Representations of the Company . . . . . . . . . . . . . 9
Section 3.2. Representations of the Purchaser . . . . . . . . . . . . 9
SECTION 4. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . 10
Section 4.1. Conditions . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.2. Waiver of Conditions . . . . . . . . . . . . . . . . . . 11
SECTION 5. FINANCIAL STATEMENTS AND OTHER INFORMATION. . . . . . . . . 12
SECTION 6. INSPECTION OF PROPERTIES AND BOOKS. . . . . . . . . . . . . 15
SECTION 7. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.1. Books of Record and Account; Reserves. . . . . . . . . . 16
Section 7.2. Payment of Taxes; Corporate Existence; Maintenance of
Properties; Compliance with Statutes, Etc. . . . . . . . 16
Section 7.3. Insurance. . . . . . . . . . . . . . . . . . . . . . . . 17
Section 7.4. Payment of Indebtedness. . . . . . . . . . . . . . . . . 18
Section 7.5. Prohibition on Indebtedness Having Priority Rights . . . 18
Section 7.6. Limitations on Indebtedness. . . . . . . . . . . . . . . 19
Section 7.7. Limitation on Liens or Subordination of Rights . . . . . 20
Section 7.8. Prohibition on Sales and Lease-Backs . . . . . . . . . . 22
Section 7.9. Limitation on Investments and Guarantees . . . . . . . . 22
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 7.10. Limitations on Dividends and Other Restricted Payments. . 24
Section 7.11. Minimum Adjusted Consolidated Net Worth . . . . . . . . . 25
Section 7.12. Limitation on Issuance of Shares of Restricted
Subsidiaries; Disposition of Shares and Indebtedness of
Restricted Subsidiaries; Ownership by Unrestricted
Subsidiary of Shares or Indebtedness of a Restricted
Subsidiary; Limitation on Purchase of Shares or
Subordinated Indebtedness of the Company by a Restricted
Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.13. Limitation on Restricted Subsidiary's or Company's
Consolidation, Merger or Disposition of Property. . . . . 27
Section 7.14. Limitation on Transactions with Affiliates. . . . . . . . 28
Section 7.15. Permitted Business . . . . . . . . . .. . . . . . . . . . 28
Section 7.16. Limitation on Sale of Receivables with Recourse or at
Discount . . . . . . . . . . . . . . .. . . . 29
Section 7.17. Limitation on Nonperforming Assets. . . . . . . . . . . . 29
Section 7.18. Limitation on Discount Receivables. . . . . . . . . . . . 29
Section 7.19. Limitation on Borrower Concentration. . . . . . . . . . . 29
SECTION 8. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.1. Definitions of Capitalized Terms. . . . . . . . . . . . . 29
Section 8.2. Other Definitions . . . . . . . . . . . . . . . . . . . . 48
Section 8.3. Accounting Terms. . . . . . . . . . . . . . . . . . . . . 48
SECTION 9. REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 9.1. Events of Default Defined; Acceleration of Maturity . . . 48
Section 9.2. Suits for Enforcement . . . . . . . . . . . . . . . . . . 51
Section 9.3. Remedies Cumulative . . . . . . . . . . . . . . . . . . . 51
Section 9.4. Remedies Not Waived . . . . . . . . . . . . . . . . . . . 51
Section 9.5. Notice by the Company of Acceleration and Certain Other
Action. . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10. AMENDMENTS, WAIVERS AND CONSENTS . . . . . . . . . . . . . . 52
Section 10.1. Consent Required. . . . . . . . . . . . . . . . . . . . . 52
Section 10.2. Solicitation of Holders . . . . . . . . . . . . . . . . . 52
Section 10.3. Effect of Amendment or Waiver . . . . . . . . . . . . . . 52
SECTION 11. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . 53
Section 11.1. Registered Notes. . . . . . . . . . . . . . . . . . . . . 53
Section 11.2. Exchange of Notes . . . . . . . . . . . . . . . . . . . . 53
Section 11.3. Loss, Theft, Etc. of Notes. . . . . . . . . . . . . . . . 53
Section 11.4. Expenses, Stamp Tax Indemnity . . . . . . . . . . . . . . 54
Section 11.5. Powers and Rights Not Waived; Remedies Cumulative;
Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . 54
Section 11.6. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 11.7. Successors and Assign.s . . . . . . . . . . . . . . . . . 55
Section 11.8. Survival of Covenants and Representations . . . . . . . . 55
Section 11.9. Severability. . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 11.10. Governing Law. . . . . . . . . . . . . . . . . . . . . . 55
Section 11.11. Captions . . . . . . . . . . . . . . . . . . . . . . . . 55
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
-iii-
<PAGE> 5
ATTACHMENTS TO NOTE AGREEMENT:
Schedule I --Names and Addresses of Purchasers and Amounts of Commitments
Schedule II --Description of Indebtedness for Borrowed Money, Leases and
Liens
Schedule III --Subsidiaries of the Company
Exhibit A-1 --Form of 5.54% Senior Note, Series A, due November 15, 1996
Exhibit A-2 --Form of 5.89% Senior Note, Series B, due November 15, 1997
Exhibit A-3 --Form of 6.23% Senior Note, Series C, due November 15, 1998
Exhibit A-4 --Form of 6.56% Senior Note, Series D, due November 15, 2000
Exhibit A-5 --Form of 7.46% Senior Subordinated Note due November 15, 2003
Exhibit B --Representations and Warranties of the Company
Exhibit C --Description of Special Counsel's Closing Opinion
Exhibit D --Description of Closing Opinion of Independent Counsel for the
Company
Exhibit E --Subordination of Senior Subordinated Notes
Exhibit F --Form of Subordination Agreement
-iv-
<PAGE> 6
FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025
NOTE AGREEMENT
Re:$15,000,000 5.54% Senior Notes, Series A,
Due November 15, 1996,
$5,000,000 5.89% Senior Notes, Series B,
Due November 15, 1997,
$25,000,000 6.23% Senior Notes, Series C,
Due November 15, 1998,
$15,000,000 6.56% Senior Notes, Series D,
Due November 15, 2000
and
$25,000,000 7.46% Senior Subordinated Notes
Due November 15, 2003
Dated as of
October 1, 1993
To the Purchaser named in Schedule I
hereto which is a signatory of this
Agreement
Ladies and Gentlemen:
The undersigned, Foothill Capital Corporation, a California corporation
(the "Company"), agrees with you as follows:
Section 1. Description of Notes and Commitment.
Section 1.1. Description of Notes. The Company has authorized the
issue and sale of the following series of promissory notes:
(a) $15,000,000 aggregate principal amount of its 5.54% Senior
Notes, Series A, due November 15, 1996 (the "Series A Senior Notes")
to be dated the date of issue, to bear interest from such date at the
rate of 5.54% per annum, payable semiannually on
<PAGE> 7
the fifteenth day of each May and November in each year (commencing on the
first such day after the date of issue) and at maturity and to bear interest
on overdue principal (including any overdue required or optional prepayment
of principal) and premium (if any) and (to the extent legally enforceable)
on an overdue installment of interest at the rate of 7.54% per annum after
the date due, whether by acceleration or otherwise, until paid, to be
expressed to mature on November 15, 1996, and to be substantially in the
form attached hereto as Exhibit A-1;
(b) $5,000,000 aggregate principal amount of its 5.89% Senior Notes,
Series B, due November 15, 1997 (the "Series B Senior Notes") to be dated
the date of issue, to bear interest from such date at the rate of 5.89%
per annum, payable semiannually on the fifteenth day of each May and
November in each year (commencing on the first such day after the date of
issue) and at maturity and to bear interest on overdue principal (including
any overdue required or optional prepayment of principal) and premium (if
any) and (to the extent legally enforceable) on any overdue installment of
interest at the rate of 7.89% per annum after the date due, whether by
acceleration or otherwise, until paid, to be expressed to mature on
November 15, 1997, and to be substantially in the form attached hereto as
Exhibit A-2;
(c) $25,000,000 aggregate principal amount of its 6.23% Senior
Notes, Series C, due November 15, 1998 (the "Series C Senior Notes") to be
dated the date of issue, to bear interest from such date at the rate of
6.23% per annum, payable semiannually on the fifteenth day of each May and
November in each year (commencing on the first such day after the date of
issue) and at maturity and to bear interest on overdue principal (including
any overdue required or optional prepayment of principal) and premium (if
any) and (to the extent legally enforceable) on any overdue installment of
interest at the rate of 8.23% per annum after the date due, whether by
acceleration or otherwise, until paid, to be expressed to mature on
November 15, 1998, and to be substantially in the form attached hereto as
Exhibit A-3;
(d) $15,000,000 aggregate principal amount of its 6.56% Senior
Notes, Series D, due November 15, 2000 (the "Series D Senior Notes") to be
dated the date of issue, to bear interest from such date at the rate of
6.56% per annum, payable semiannually on the fifteenth day of each May and
November in each year (commencing on the first such day after the date of
issue) and at maturity and to bear interest on overdue principal
(including any overdue required or optional prepayment of principal) and
premium (if any) and (to the extent legally enforceable) on any overdue
installment of interest at the rate of 8.56% per annum after the date due,
whether by acceleration or otherwise, until paid, to be expressed to
mature on November 15, 2000, and to be substantially in the form attached
hereto as Exhibit A-4; and
(e) $25,000,000 aggregate principal amount of its 7.46% Senior
Subordinated Notes due November 15, 2003 (the "Senior Subordinated Notes")
to 7.46% per annum, payable semiannually on the fifteenth day of each May
and November in each year (commencing on the first such day after the date
of issue) and at maturity and to bear
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<PAGE> 8
interest on overdue principal (including any overdue required or optional
prepayment of principal) and premium (if any) and (to the extent legally
enforceable) on any overdue installment of interest at the rate of 9.46%
per annum after the date due, whether by acceleration or otherwise, until
paid, to be expressed to mature on November 15, 2003, to be subordinated
to Superior Indebtedness (as defined in Exhibit E attached hereto) of the
Company as set forth in Exhibit E attached hereto, and to be substantially
in the form attached hereto as Exhibit A-5.
The term "Senior Notes" as used herein shall mean and include each and
all of the Series A Senior Notes, the Series B Senior Notes, the Series C
Senior Notes and the Series D Senior Notes. The term "Notes" as used herein
shall mean and include each and all of the Senior Notes and the Senior
Subordinated Notes each as delivered pursuant to the provisions of this
Agreement and the identical agreements (except for signature pages) with each
of the other purchasers named in Schedule I. Interest on the Notes shall be
computed on the basis of a 360-day year of twelve 30-day months. The Notes
are not subject to prepayment or redemption at the option of the Company prior
to their expressed maturity dates except on the terms and conditions and in
the amounts and with the premium (if any) set forth in Section 2 of this
Agreement. You and the other purchasers named in Schedule I are hereinafter
sometimes referred to as the "Purchasers". The terms which are capitalized
herein shall have the meanings set forth in Section 8.1 unless the context
shall otherwise require.
Section 1.2. Commitment, Closing Date. Subject to the terms and
conditions hereof and on the basis of the representations and warranties
hereinafter set forth, the Company agrees to issue and sell to you, and you
agree to purchase from the Company, Notes in the principal amount set forth
opposite your name on Schedule I hereto at a price of 100% of the principal
amount thereof on the Closing Date hereafter mentioned.
Delivery of the Notes will be made at the offices of Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, against payment
therefor in Federal Reserve or other funds current and immediately available
at the principal office of Mellon Bank, N.A. in the amount of the purchase
price at 10:00 A.M., Chicago, Illinois, on November 15, 1993 (the "Closing
Date"). The Notes of any series delivered to you on the Closing Date will be
delivered to you in the form of a single registered Note for the full amount
of your purchase (unless different denominations are specified by you),
registered in your name or in the name of such nominee, as may be specified in
Schedule I attached hereto and in substantially the form attached hereto as
Exhibit A-1 or Exhibit A-2 or Exhibit A-3 or Exhibit A-4 or Exhibit A-5, as
the case may be.
Section 1.3. Other Agreements. Simultaneously with the execution and
delivery of this Agreement, the Company is entering into identical agreements
(except for signature pages) with the other Purchasers under which such other
Purchasers agree to purchase from the Company the principal amount of Notes
set opposite such Purchasers' names in Schedule I, and your obligation and the
obligations of the Company hereunder are subject to the execution and delivery
of the similar agreements by the other Purchasers. This Agreement and said
identical agreements (except for signature pages) with the other Purchasers
are herein collectively referred to as the "Agreements". The obligations of
each Purchaser shall be
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<PAGE> 9
several and not joint and no Purchaser shall be liable or responsible for the
acts of any other Purchaser.
Section 2. Prepayment of Notes.
No prepayment of the Notes may be made except to the extent and in the
manner expressly provided in this Agreement.
Section 2.1. Required Prepayments.
(a) Senior Notes. No prepayments shall be required with respect to
the Senior Notes.
(b) Senior Subordinated Notes. In addition to paying the entire
outstanding principal amount and the interest due on the Senior Subordinated
Notes on the maturity date thereof, the Company agrees that on November 15 in
each year, commencing November 15, 1998 and ending November 15, 2002, both
inclusive, it will prepay and apply and there shall become due and payable on
the principal indebtedness evidenced by the Senior Subordinated Notes an
amount equal to the lesser of (a) $4,166,667 or (b) the principal amount of
the Senior Subordinated Notes then outstanding. The entire remaining
principal amount of the Senior Subordinated Notes shall become due and payable
on November 15, 2003.
No premium shall be payable in connection with any required prepayment
made pursuant to this Section 2.1. Any payment of less than all of any series
of Notes pursuant to the provisions of any other section hereof shall not
relieve the Company of the obligation to make required payments or prepayments
(if any) of such series of Notes in accordance with the terms of this Section
2.1.
In the event that the Company shall prepay less than all of the Notes
pursuant to Section 2.2 hereof, such prepayments shall be credited in each
case first, against the final maturities of the Notes being prepaid and then,
against the amounts of the prepayments required by this Section 2.1 on such
Notes in the inverse order of the maturities thereof.
Section 2.2. Optional Prepayment with Premium. In addition to the
payments required by Section 2.1, upon compliance with Section 2.4 the Company
shall have the privilege, at any time and from time to time, of prepaying the
outstanding Notes, either in whole or in part (but if in part then in a
minimum principal amount of $1,000,000) by payment of the principal amount of
the Notes, or portion thereof to be prepaid, and accrued interest thereon to
the date of such prepayment, together with a premium equal to the Make-Whole
Amount, determined as of the prepayment date and calculated two Business Days
prior to the date of such prepayment pursuant to this Section 2.2.
Section 2.3. Prepayment of Notes Upon a Change of Control. (a) In the
event that any Change of Control shall occur or the Company shall have actual
knowledge of any impending Change of Control, the Company will give written
notice (the "Company Notice") of such fact by overnight courier in the manner
provided in Section 11.6 hereof to the holders of the Notes. The Company
Notice shall be sent promptly upon receipt of such knowledge by the
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<PAGE> 10
Company and in any event no later than three days following the occurrence of
a Change of Control. The Company Notice shall (1) be dated the date such
Company Notice is sent by overnight courier in the manner provided in Section
11.6 hereof, (2) describe the facts and circumstances of such Change of
Control in reasonable detail, (3) make reference to this Section 2.3(A) and
the right of the holders of the Notes to require payment on the terms and
conditions provided for in this Section 2.3(A), (4) offer in writing to prepay
the outstanding Notes, together with accrued interest to the date of
prepayment and a premium equal to the then applicable Make-Whole Amount,
(5) specify a date for such prepayment (the "Change of Control Prepayment
Date") which Change of Control Prepayment Date shall be the later of (i) the
date of such Change of Control or (ii) a date not more than 60 days nor less
than 30 days following the date of such Company Notice and (6) set forth a
sample computation of the Make-Whole Amount. Each holder of the then
outstanding Notes shall have the right to accept such offer and require
prepayment of the Notes held by such holder by written notice to the Company
(a "Noteholder Notice") sent by overnight courier in the manner provided in
Section 11.6 hereof not later than 25 days after the date of the Company
Notice. Not later than two Business Days prior to the Change of Control
Prepayment Date, the Company shall provide each holder of a Note which has so
accepted such offer of prepayment written notice of the premium, if any,
payable in connection with such prepayment and, whether or not any premium is
payable, a reasonably detailed computation of the Make-Whole Amount certified
as true and correct by a Responsible Officer of the Company. The Company
shall on the Change of Control Prepayment Date prepay all, but not less than
all, Notes held by holders which have so accepted such offer of prepayment.
The prepayment price of the Notes payable upon the occurrence of a Change of
Control shall be an amount equal to 100% of the outstanding principal amount
of the Notes so to be prepaid and accrued interest thereon to the date of such
prepayment, together with a premium equal to the then applicable Make-Whole
Amount determined as of the Change of Control Prepayment Date and calculated
two Business Days prior to the date of such prepayment pursuant to this
Section 2.3(A).
(b) In the event that the holder of any Note shall have delivered to
the Company a Noteholder Notice pursuant to Section 2.3(A), then the Company
shall promptly, and in any event within 5 days after receipt of such
Noteholder Notice, deliver by overnight courier in the manner provided in
Section 11.6 hereof written notice (which notice shall be dated the date such
notice is sent by overnight courier in the manner provided in Section 11.6
hereof) of such Noteholder Notice to each other holder of the Notes and,
notwithstanding the provisions of Section 2.3(A), the right of each such other
holder to accept the offer of prepayment and require prepayment of the Notes
shall remain in effect until the later to occur of (1) 30 days after the date
of the Company Notice and (2) 15 days after the date of the notice required to
be delivered pursuant to this Section 2.3(B); provided, however, that the
provisions of this clause (2) shall only apply with respect to notices
required to be sent pursuant to this Section 2.3(B) to the extent that such
notices relate to Noteholder Notices made prior to the expiration of the
period specified in Section 2.3(A).
(c) Without limiting the foregoing, notwithstanding any failure on the
part of the Company to give the Company Notice herein required as a result of
the occurrence of a Change of Control, each holder of the Notes shall have the
right to require the Company to prepay, and the Company will prepay, such
holder's Notes in full, together with accrued interest thereon to the date of
prepayment and a premium equal to the then applicable
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<PAGE> 11
Make-Whole Amount; provided that each holder of the Notes shall so notify the
Company of its election to require the Company to prepay its Notes in
accordance with this Section 2.3(C) after such holder has actual knowledge of
any such Change of Control by overnight courier in the manner provided in
Section 11.6 hereof. Notice of any required prepayment pursuant to this
Section 2.3(C) shall be delivered by a holder of the Notes (which was entitled
to, but did not receive, such Company Notice) to the Company after such holder
has actual knowledge of such Change of Control. On the date (the "Change of
Control Delayed Prepayment Date") designated in such holder's notice (which
shall be not more than 60 days nor less than 30 days following the date of
such holder's notice), the Company shall prepay in full all the Notes held by
such holder, together with accrued interest thereon to the date of prepayment
and a premium equal to the then applicable Make-Whole Amount. If the holder
of any Note gives any notice pursuant to this Section 2.3(C), the Company
shall give a Company Notice within three days of receipt of such notice and
identify the Change of Control Delayed Prepayment Date to all other holders of
the Notes and each of such holders shall then and thereupon have the right to
accept the Company's offer to prepay the Notes held by such holder and require
prepayment of such Notes by delivery of a Noteholder Notice within 21 days of
the date of such Company Notice; provided only that any date for prepayment of
such Notes shall be the Change of Control Delayed Prepayment Date. Not later
than two Business Days prior to the Change of Control Delayed Prepayment Date,
the Company shall provide each holder of a Note which has so accepted such
offer of prepayment written notice of the premium, if any, payable in
connection with such prepayment and, whether or not any premium is payable, a
reasonably detailed computation of the Make-Whole Amount certified as true and
correct by a Responsible Officer of the Company. On the Change of Control
Delayed Prepayment Date, the Company shall prepay in full the Notes of each
holder thereof which has accepted such offer of prepayment at a prepayment
price of 100% of the outstanding principal amount of the Notes so to be
prepaid and accrued interest thereon to the date of such prepayment, together
with a premium equal to the applicable Make-Whole Amount determined as of the
Change of Control Delayed Prepayment Date and calculated two Business Days
prior to the date of such prepayment pursuant to this Section 2.3(C).
(d) For purposes of this Section 2.3, the term "Change of Control"
shall have the following meaning:
(1) In the case of the Company,
(i) an issuance by the Company of, or a binding written
commitment by the Company to issue, its voting Shares, or a sale
or other disposition of, or binding written commitment to sell or
otherwise dispose of, voting Shares of the Company, whether by the
Company, The Foothill Group, Inc., any other Subsidiary of The
Foothill Group, Inc., or any other Person, which issuance, sale or
other disposition, or commitment to issue, sell or otherwise
dispose of, has not been consented to in writing by the holder or
holders of 100% of the then outstanding Notes, and which either
(A) results or will result in The Foothill Group,
Inc., directly or through one or more of its Subsidiaries,
owning or controlling less than
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<PAGE> 12
51% of the then outstanding voting Shares of the Company
(calculated by number of votes), or
(B) occurs or will occur during any period in which
The Foothill Group, Inc., directly or through one or more of
its Subsidiaries, owns or controls less than 51% of the then
outstanding voting Shares of the Company (calculated by
number of votes) and does not result in an increase in the
percentage of such voting Shares so owned and controlled by
The Foothill Group, Inc.; or
(ii) the election of a majority of the members of the Board
against the recommendation of the management of the Company or
Board which was incumbent immediately prior to such election; or
(iii) the ceasing of continuous and active participation in
the Company's operations (which shall be deemed to include a
material reduction in such Person's responsibilities relative to
those performed as of the date hereof) by any two of the
following: John F. Nickoll, David C. Hilton and Peter E. Schwab;
provided, however, that if the Person or Persons assuming the
responsibilities of John F. Nickoll, David C. Hilton or Peter E.
Schwab shall be satisfactory to 66-2/3% of the holders of the then
outstanding Notes, as evidenced by a written confirmation thereof,
such event shall not constitute a Change of Control; and
(2) In the case of The Foothill Group, Inc.,
(i) the acquisition by any Person (other than The Foothill
Group, Inc.), or by any two or more Persons acting in concert
(which group will be deemed a "Person" for purposes of this
definition), of 50% or more of the then outstanding voting Shares
of The Foothill Group, Inc. (calculated by number of votes), which
acquisition has not been consented to in writing by the holder or
holders of 100% of the then outstanding Notes; or
(ii) the election of a majority of the members of the board
of directors of The Foothill Group, Inc. against the
recommendation of the management or board of directors of The
Foothill Group, Inc. which was incumbent immediately prior to such
election.
For purposes hereof, in any case where voting Shares of the Company are
owned or controlled by a Subsidiary of The Foothill Group, Inc., the
percentage of voting Shares of the Company deemed to be owned or controlled by
The Foothill Group, Inc. as a result of such Subsidiary's ownership or control
shall be determined by multiplying the percentage of the voting Shares of such
Subsidiary which are owned and controlled by The Foothill Group, Inc. by the
percentage of the voting Shares of the Company which are owned and controlled
by such Subsidiary.
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<PAGE> 13
In the case of a Change of Control event described in Clause (2)(i) of
this definition, if all of the then outstanding unsecured senior debt
securities of the Person acquiring the voting Shares are of Investment Grade
Rating, the consent of the holders of the then outstanding Notes described in
such clause to such event shall not unreasonably be withheld. Notwithstanding
the consent of the holders of Notes to a Change of Control event described in
Clause (2)(i) of this definition, if within six months immediately following
any such event the rating of any of the then outstanding senior debt
securities of the Person having acquired the voting Shares is or becomes lower
than Investment Grade Rating, such occurrence shall be deemed a separate
Change of Control event. For purposes hereof, an "Investment Grade Rating"
means (i) a rating equal to or higher than "BBB" by Standard & Poor's
Corporation or any successor thereto ("S&P") and equal to or higher than
"Baa2" by Moody's Investors Service, Inc. or any successor thereto
("Moody's"), or (ii) in the event the applicable senior debt securities are
not rated by both S&P and Moody's, (A) the rating described in (i) for either
S&P or Moody's, and (B) a rating equal to or higher than "BBB" by Duff &
Phelps Inc. or any successor thereto or by Fitch Investors Service, Inc. or
any successor thereto, or a comparable rating by another nationally recognized
rating organization, which rating and organization are approved by all of the
holders of the then outstanding Notes.
Section 2.4. Notice of Optional Prepayments. The Company will give
notice of any prepayment of the Notes then to be prepaid pursuant to Section
2.2 to each holder thereof not less than 30 days nor more than 60 days before
the date fixed for such optional prepayment specifying (a) such date, (b) the
principal amount of the holder's Notes to be prepaid on such date, (c) that a
premium may be payable, (d) the date when such premium will be calculated,
(e) the estimated premium, and (f) the accrued interest applicable to the
prepayment. Such notice of prepayment shall also certify all facts (if any)
which are conditions precedent to any such prepayment. Notice of prepayment
having been so given, the aggregate principal amount of the Notes specified in
such notice, together with accrued interest thereon and the premium (if any)
payable with respect thereto shall become due and payable on the prepayment
date specified in said notice. Two Business Days prior to the prepayment date
specified in such notice, the Company shall provide each holder of a Note then
to be prepaid written notice of the premium (if any) payable in connection
with such prepayment and, whether or not any premium is payable, a reasonably
detailed computation of the Make-Whole Amount.
The Company will give notice of any prepayment of the Notes then to be
prepaid pursuant to Section 2.2 to each other holder of the Notes not less
than 30 nor more than 60 days before the date fixed for such optional
prepayment.
Section 2.5. Application of Prepayments. All partial prepayments
(including, without limitation, optional prepayments under Section 2.2, but
excluding required prepayments pursuant to Section 2.1 or prepayments pursuant
to Section 2.3) shall be applied first, to the payment in full of the
outstanding Senior Notes ratably in accordance with the unpaid principal
amount thereof, and second, to the payment in full of the outstanding Senior
Subordinated Notes ratably in accordance with the unpaid principal amount
thereof.
Section 2.6. Direct Payment. Notwithstanding anything to the contrary
contained in this Agreement or the Notes, in the case of any Note owned by you
or your nominee or owned
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<PAGE> 14
by any subsequent Institutional Holder which has given written notice to the
Company requesting that the provisions of this Section 2.6 shall apply, the
Company will punctually, and in any event not later than 12:00 noon New York,
New York time, pay when due the principal thereof, interest thereon and
premium (if any) due with respect to said principal, without any presentment
thereof, directly to you, to your nominee or to such subsequent Institutional
Holder at your address or your nominee's address set forth in Schedule I
hereto or such other address as you, your nominee or such subsequent
Institutional Holder may from time to time designate in writing to the Company
or, if a bank account with a United States bank is designated for you or your
nominee on Schedule I hereto or in any written notice to the Company from you,
from your nominee or from any such subsequent Institutional Holder, the
Company will make such payments in immediately available Federal funds to such
bank account, marked for attention as indicated, or in such other manner or to
such other account in any United States bank as you, your nominee or any such
subsequent Institutional Holder may from time to time direct in writing. In
the event any payment is received after 12:00 noon New York, New York time on
any payment date, such payment shall be deemed to have been received on the
Business Day next succeeding the date of such payment.
Section 3. Representations.
Section 3.1. Representations of the Company. The Company represents
and warrants that all representations and warranties set forth in Exhibit B
are true and correct as of the date hereof and are incorporated herein by
reference with the same force and effect as though herein set forth in full.
Section 3.2. Representations of the Purchaser. (a) You represent, and
in entering into this Agreement the Company understands, that you are
acquiring the Notes for the purpose of investment and not with a view to the
distribution thereof, and that you have no present intention of selling,
negotiating or otherwise disposing of the Notes; it being understood, however,
that the disposition of your property shall at all times be and remain within
your control.
(b) You further represent that: (1) no part of the funds to be used
by you to purchase the Notes constitutes assets allocated to any separate
account maintained by you; or (2) no part of the funds to be used by you to
purchase the Notes constitutes assets allocated to any separate account
maintained by you such that the application of such funds constitutes a
prohibited transaction under Section 406 of ERISA; or (3) all or a part of
such funds constitute assets of one or more separate accounts, trusts or a
commingled pension trust maintained by you, and you have disclosed to the
Company the names of such employee benefit plans whose assets in such separate
account or accounts or pension trusts exceed 10% of the total assets or are
expected to exceed 10% of the total assets of such account or accounts or
trusts as of the date of such purchase and the Company has advised you in
writing (and in making the representations set forth in this clause (3) you
are relying on such advice) that the Company is not a party-in-interest nor
are the Notes employer securities with respect to the particular employee
benefit plan disclosed to the Company by you as aforesaid (for the purpose of
this clause (3), all employee benefit plans maintained by the same employer or
employee organization are deemed to be a single plan). As used in this
Section 3.2(B), the terms "separate
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<PAGE> 15
account," "party-in-interest," "employer securities," and "employee benefit
plan" shall have the respective meanings assigned to them in ERISA.
Section 4. Closing Conditions.
Section 4.1. Conditions. Your obligation to purchase the Notes on the
Closing Date shall be subject to the performance by the Company of its
agreements hereunder which by the terms hereof are to be performed at or prior
to the time of delivery of the Notes and to the following further conditions
precedent:
(a) Closing Certificate. You shall have received a certificate
dated the Closing Date, signed by the President or an Executive Vice
President of the Company, the truth and accuracy of which shall be a
condition to your obligation to purchase the Notes proposed to be sold
to you and to the effect that (1) the representations and warranties of
the Company set forth in Exhibit B hereto are true and correct on and
with respect to the Closing Date, (2) the Company has performed all of
its obligations hereunder which are to be performed on or prior to the
Closing Date, (3) no Event of Default or event which with the lapse of
time or notice and lapse of time would become an Event of Default has
occurred and is continuing, and (4) no Change of Control has occurred
and the Company does not have actual knowledge of any impending Change
of Control.
(b) Legal Opinions. You shall have received from Chapman and
Cutler, who are acting as your special counsel in this transaction, from
Buchalter, Nemer, Fields & Younger, a Professional Corporation,
independent counsel for the Company, their respective opinions dated the
Closing Date, in form and substance satisfactory to you, and covering
the matters set forth in Exhibits C and D respectively, hereto.
(c) Company's Existence and Authority. On or prior to the
Closing Date, you shall have received, in form and substance reasonably
satisfactory to you and your special counsel, such documents and
evidence with respect to the Company as you may reasonably request in
order to establish the existence and good standing of the Company and
the authorization of the transactions contemplated by this Agreement.
(d) Related Transactions. The Company shall have consummated
the sale of the entire principal amount of the Notes scheduled to be
sold on the Closing Date pursuant to this Agreement and the other
agreements referred to in Section 1.3.
(e) Subordination Agreement. The Company and The Foothill
Group, Inc. shall have executed and delivered to each Purchaser and
National Westminster Bank USA, as subordination custodian, shall have
acknowledged the Subordination Agreement substantially in the form set
forth as Exhibit F hereto.
(f) Amendments, Waivers or Consents. The Company shall have
obtained any consents or approvals required to be obtained from any
holder or holders of any outstanding security of the Company and any
amendments of agreements pursuant to
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<PAGE> 16
which any security may have been issued which shall be necessary to
permit the consummation of the transactions contemplated by this
Agreement.
(g) Private Placement Number. On or prior to the Closing Date,
the Company shall have (1) duly made the appropriate filings with
Standard & Poor's CUSIP Services Bureau, as agent for the National
Association of Insurance Commissioners, in order to obtain private
placement numbers for each series of the Notes and (2) provided evidence
that such private placement numbers have been obtained to you in a form
satisfactory to you and your special counsel.
(h) Funding Instructions. At least 3 Business Days prior to the
Closing Date, you shall have received written instructions executed by a
Responsible Officer of the Company directing the manner of the payment of
funds and setting forth (1) the name and address of the transferee bank,
(2) such transferee bank's ABA number, (3) the account name and number
into which the purchase price for the Notes is to be deposited, and (4)
the name and telephone number of the account representative responsible
for verifying receipt of such funds.
(i) Legality of Investment. The Notes to be purchased by you
shall be a legal investment for you under the laws of each jurisdiction to
which you may be subject (without resort to any so-called "basket
provisions" to such laws).
(j) Payment of Special Counsel Fees and Expenses. On the
Closing Date, the Company shall have paid all reasonable fees and
disbursements of special counsel to the Purchasers incident to the
transactions contemplated hereby through the Closing Date, as reflected
in the statements of such special counsel delivered to the Company prior
to or on the Closing Date. Such payment shall in no way limit the
obligation of the Company under Section 11.4 to pay the remaining fees
and disbursements of such special counsel as reflected in any statement
delivered to the Company after the Closing Date.
(k) Satisfactory Proceedings. All proceedings taken in
connection with the transactions contemplated by this Agreement, and all
documents necessary to the consummation thereof, shall be satisfactory in
form and substance to you and your special counsel, and you shall have
received a copy (executed or certified as may be appropriate) of all
legal documents or proceedings taken in connection with the consummation
of said transactions.
Section 4.2. Waiver of Conditions. If on the Closing Date the Company
fails to tender to you the Notes to be issued to you on such date or if the
conditions specified in Section 4.1 have not been fulfilled, you may thereupon
elect to be relieved of all further obligations under this Agreement. Without
limiting the foregoing, if the conditions specified in Section 4.1 have not
been fulfilled, you may waive compliance by the Company with any such
condition to such extent as you may in your sole discretion determine. Nothing
in this Section 4.2 shall operate to relieve the Company of any of its
obligations hereunder or to waive any of your rights against the Company.
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Section 5. Financial Statements and Other Information.
The Company will furnish to you in duplicate, so long as you shall hold
any of the Notes and to each other Institutional Holder of the then
outstanding Notes, and in the case of the financial statements delivered
pursuant to subsection (b)(1) of this Section 5 to the Securities Valuation
Office, National Association of Insurance Commissioners, 195 Broadway, New
York, New York 10007:
(a) as soon as available and in any event within 45 days after
the end of the first, second and third quarterly accounting periods in
each fiscal year of the Company,
(1) copies of consolidated and consolidating balance
sheets of the Company and its Restricted Subsidiaries (if any) as
of the end of such accounting period and of the related
consolidated and consolidating statements of income, consolidated
statements of income and retained earnings and consolidated
statements of cash flows of the Company and its Restricted
Subsidiaries (if any) for such quarterly accounting period and for
the portion of the fiscal year ended with the last day of such
quarterly accounting period, all in reasonable detail and stating
in comparative form the respective consolidated figures for the
corresponding date and period in the previous fiscal year and all
certified by the principal financial officer of the Company to
fairly the information contained therein, subject to year-end and
audit adjustments, and
(2) a written statement of such financial officer of the
Company setting forth computations in reasonable detail showing as
at the end of such quarterly accounting period:
(i) the maximum amount of additional Senior
Indebtedness, and the maximum amounts of Subordinated
Indebtedness, Senior Subordinated Indebtedness and Junior
Subordinated Indebtedness which the Company could have
incurred without violation of Section Section 7.6(A), 7.6(B)
and 7.6(C), respectively,
(ii) the maximum amount of cash dividends which the
Company could have declared on any of its Shares without
violation of Section 7.10(A),
(iii) whether or not there was compliance with the
financial conditions required by Section 7.11,
(iv) the maximum amount of transactions with
Affiliates which could have been engaged in by the Company
or by any Restricted Subsidiary, and the maximum amount of
management fees or similar charges which the Company or any
Restricted Subsidiary could have paid to The Foothill Group,
Inc. or any other Affiliate without violation of Section 7.14,
and
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<PAGE> 18
(v) whether or not there was compliance with Section
7.17, Section 7.18 and Section 7.19, and
(b) as soon as available and in any event within 90 days after
the end of each fiscal year of the Company,
(1) copies of consolidated and consolidating balance
sheets of the Company and its Restricted Subsidiaries (if any) as
of the end of such fiscal year and of the related consolidated and
consolidating statements of income, consolidated statements of
income and retained earnings and consolidated statements of cash
flows of the Company and its Restricted Subsidiaries (if any) for
such fiscal year, all in reasonable detail and stating in
comparative form the respective consolidated figures as of the end
of and for the previous fiscal year and all accompanied by a
report thereon of Ernst & Young, or other independent public
accountants of recognized national standing selected by the
Company, containing an opinion unqualified as to scope limitations
imposed by the Company, unqualified as to the Company being a
going concern and otherwise without qualification except as
therein noted, to the effect that the consolidated financial
statements present fairly, in all material respects, the
consolidated financial position of the Company and its Restricted
Subsidiaries as of the end of the fiscal year being reported on
and that the consolidated results of the operations and cash flows
for said year are in conformity with generally accepted accounting
principles and that the examination of such accountants in
connection with such financial statements has been conducted in
accordance with generally accepted auditing standards and included
such tests of the accounting records and such other auditing
procedures as said accountants deemed necessary in the
circumstances,
(2) a written statement of the principal financial officer
of the Company showing:
(i) as at the end of such fiscal year the
information required to be shown as at the end of quarterly
accounting periods pursuant to Subdivision (i), (ii) and
(iv) of subsection (A)(2) of this Section 5,
(ii) a written statement of the accountants referred
to in clause (1) above:
(A) setting forth computations in reasonable
detail showing the maximum amount of cash dividends
which the Company could have declared on any of its
Shares at the end of such fiscal year without
violation of Section 7.10(A),
(B) setting forth computations in reasonable
detail showing whether or not at the end of such
fiscal year there was compliance with the financial
conditions required by Section 7.11, and
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<PAGE> 19
(C) stating that in making the examination necessary for
their report on such financial statements they obtained no
knowledge of any default by the Company or any of its Restricted
Subsidiaries in the observance of any of the covenants of
Sections 7.1, 7.2(A) and 7.4 to 7.19, inclusive, or, if such
accountants shall have obtained knowledge of any such default,
specifying all such defaults and the nature and status thereof;
(c) concurrently with the financial statements for each
quarterly accounting period and for each fiscal year of the Company,
furnished pursuant to subsections (a) and (b) of this Section 5, a
certificate of the President or an Executive Vice President or a
Senior Vice President of the Company stating that, based upon such
examination or investigation and review of this Agreement as in the
opinion of the signer is necessary to enable the signer to express an
informed opinion with respect thereto, neither the Company nor any of
its Restricted Subsidiaries is, in the opinion of the signer, or has
to the best knowledge of the signer during such period been, in
default in the performance or observance of any of the terms,
covenants or conditions hereof, or, if the Company or any of its
Restricted Subsidiaries shall to the best knowledge of the signer have
been, or shall in the opinion of the signer be, in default, specifying
all such defaults, and the nature and period of existence thereof, of
which the signer of such certificate may have knowledge, and what
action the Company has taken, is taking or proposes to take with
respect thereto;
(d) promptly after the receipt thereof by the Company, (1)
copies of any written report pertaining to material (as defined in
Statement of Auditing Standards Number 1) items in respect of the
internal control matters of the Company and its Subsidiaries or The
Foothill Group, Inc. submitted by independent public accountants in
connection with each annual or interim special audit of the financial
condition of the Company and its Subsidiaries or The Foothill Group,
Inc., made by such independent public accountants, and (2) copies of
any audited annual, interim or special financial statements of the
Company or of the Company and its Subsidiaries;
(e) promptly after the same are available, copies of all such
proxy statements, financial statements and reports as the Company or
The Foothill Group, Inc. shall send or make available generally to any
of their security holders or as any Restricted Subsidiary shall send
or make available generally to any of its security holders other than
the Company or another Restricted Subsidiary or The Foothill Group,
Inc., and copies of all regular and periodic reports and of all
registration statements (other than on Form S- 8 or a similar form)
which the Company, The Foothill Group, Inc. or any Restricted
Subsidiary may file with the SEC or with any securities exchange;
(f) promptly after any officer of the Company obtains
knowledge of any Event of Default, or of any event which with lapse of
time or notice and lapse of time would become an Event of Default, an
officer's certificate describing such event in reasonable detail, and
stating what action the Company has taken, is taking or proposes to
take with respect thereto;
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<PAGE> 20
(g) concurrently with the financial statements for each
quarterly accounting period and for each fiscal year of the Company,
furnished pursuant to subsections (a) and (b) of this Section 5, a list
of all the Discount Receivables owned by the Company and its Restricted
Subsidiaries (other than Discount Receivables of the same class or issue
for which the aggregate purchase price of the Company and its Restricted
Subsidiaries did not exceed $2,000,000) (if any) on the last day of the
applicable accounting period or fiscal year, reporting the year of
purchase and purchase price for each such Discount Receivable and the
Company's estimate in good faith of the market value of each such
Discount Receivable (if materially different from the purchase price for
such Discount Receivable); and
(h) with reasonable promptness, such other information,
including financial statements and computations, relating to the
performance of the provisions of this Agreement and the affairs of the
Company and any of its Subsidiaries as any holder of the Notes may from
time to time reasonably request.
The Company will keep at its principal executive office a true copy of
this Agreement (as at the time in effect), and cause the same to be available
for inspection at said office during normal business hours by any holder of a
Note or any prospective purchaser of a Note designated by a holder thereof.
Section 6. Inspection of Properties and Books.
So long as you shall be a holder of any of the Notes and each
Institutional Holder of the then outstanding Notes (or such Persons as either
you or such Institutional Holder may designate), you and such Institutional
Holder shall have the right to visit and inspect any of the properties of the
Company and of its Restricted Subsidiaries (if any) to examine the books of
account and records of the Company and of its Restricted Subsidiaries (if any)
to make copies and extracts therefrom, to discuss the affairs, finances and
accounts of the Company and of its Restricted Subsidiaries (if any) with, and
to be advised as to the same by, its and their officers and employees and its
and their independent public accountants (and by this provision the Company
authorizes said accountants, upon prior notice to the Company, to discuss with
you or such Institutional Holder the finances and affairs of the Company and
its Restricted Subsidiaries), all at such reasonable times and intervals as
you or such holder may desire. The Company will likewise afford you and each
Institutional Holder of the then outstanding Notes the opportunity to obtain
any information, to the extent the Company possesses such information or can
acquire it without unreasonable effort or expense, necessary to verify the
accuracy of any of the representations and warranties made by the Company
hereunder. Any visitation shall be at your sole expense or the sole expense
of such Institutional Holder unless an Event of Default or an event which with
the lapse of time or giving of notice and lapse of time would become an Event
of Default shall have occurred and be continuing, in which case, any such
visitation or inspection shall be at the sole expense of the Company.
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<PAGE> 21
Section 7. Covenants.
So long as any of the Notes remain outstanding, the Company shall duly
perform and observe each and all of the covenants and agreements hereinafter
set forth, which shall be construed as if made on the Closing Date.
The following covenants shall apply to the Company, the Company and its
Wholly Owned Restricted Subsidiaries, the Company and its Restricted
Subsidiaries, or the Company and its Subsidiaries, as the case may be, as
hereinafter set forth.
Section 7.1. Books of Record and Account; Reserves. The Company will,
and will cause each Restricted Subsidiary to,
(a) at all times keep proper books of record and account in
which proper entries will be made in accordance with generally
accepted accounting principles; and
(b) set aside on its books for the fiscal year ending
December 31, 1993, and for each fiscal year thereafter, reserves for
depreciation, depletion, obsolescence and amortization of its
properties during such year, determined in accordance with generally
accepted accounting principles, and all other proper reserves,
similarly determined, which should be set aside in connection with its
business.
Section 7.2. Payment of Taxes; Corporate Existence; Maintenance of
Properties; Compliance with Statutes, Etc. The Company will, and will cause
each Subsidiary (with respect to subsections (a) and (d)) and each Restricted
Subsidiary (with respect to subsections (b) and (c)), to,
(a) pay and discharge promptly all taxes, assessments and
other governmental charges or levies imposed upon it or upon its
income or upon any of its property, as well as all claims and
liabilities of any kind (including claims and liabilities for labor,
materials and supplies) which, if unpaid, might by law become a lien
or charge upon any of its property; provided, however, that neither
the Company nor any Subsidiary shall be required to pay any such tax,
assessment, charge, levy, claim or liability if the amount,
applicability or validity thereof shall currently be contested in good
faith by appropriate proceedings and if the Company or such
Subsidiary, as the case may be, shall have set aside on its books
reserves (segregated to the extent required by generally accepted
accounting principles) deemed by it to be adequate with respect
thereto;
(b) except as otherwise specifically permitted in this
Agreement, do all things necessary to preserve and keep in full force
and effect its corporate existence, rights and franchises; provided,
however, that nothing in this Section 7.2(B) shall prevent the
abandonment or termination of the Company's authority to do business
in any foreign jurisdiction or the corporate existence, rights and
franchises of any Restricted Subsidiary, if such abandonment or
termination is in the interest of the Company and not disadvantageous
in any material respect to the holders of the Notes;
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<PAGE> 22
(c) maintain and keep all properties owned or held under
lease by it in good repair, working order and condition, and from time
to time make all needful and proper repairs, renewals and replacements,
so that the business carried on in connection therewith may be properly
and advantageously conducted at all times; and
(d) comply with all applicable statutes, regulations and
Orders of, and restrictions imposed by, all Governmental Bodies,
including those relating to environmental, occupational safety and
health, ERISA and equal employment opportunity standards and controls,
except to the extent that a failure to so comply would not have a
material adverse effect on the business, operations or financial
condition of the Company or any such Subsidiary; and provided further
that neither the Company nor any such Subsidiary shall be required to
comply with any such standards or controls if the applicability or
validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company or such Subsidiary, as the
case may be, shall have set aside on its books reserves (segregated to
the extent required by generally accepted accounting principles) deemed
by it to be adequate with respect thereto.
Section 7.3. Insurance. The Company will, and will cause each
Restricted Subsidiary to,
(a) keep or cause to be kept all its insurable properties
owned or held under lease insured against loss or damage by fire,
lightning, windstorm, hail, explosion and smoke, in amounts sufficient
to prevent the Company or such Restricted Subsidiary, as the case may
be, from becoming a coinsurer within the terms of the policies in
question, but in any event in amounts not less than 80% of the then
full insurable value thereof;
(b) keep all its insurable properties owned or held under
lease insured against war risk, as and when such insurance is
obtainable from the United States of America or any agency thereof, or
from a government in a jurisdiction wherein such properties are located
or from an agency of such a government, in such amounts and to such
extent (if any) as such insurance is usually carried by Persons of
established reputations possessing or operating like properties in the
localities where the properties are located;
(c) keep all its insurable properties insured against all
other risks usually insured against by Persons of established
reputations possessing or operating like or similar properties in the
localities where the properties are located;
(d) maintain public liability insurance against claims for
personal injury, death or property damage suffered by others upon or in
or about any premises occupied by it or occurring as a result of its
ownership, maintenance or operation of any automobiles, trucks or other
vehicles, aircraft or other facilities or as a result of the use of
products manufactured, constructed or sold by it or services rendered
by it; and
(e) maintain all such workers' compensation or similar
insurance as may be required under the laws of any jurisdiction.
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<PAGE> 23
All insurance specified in this Section 7.3 shall be maintained and to at
least such extent and in at least such amounts (and all insurance specified in
subsections (a) through (d) of this Section 7.3 may be with such deductibles)
as such insurance is usually carried by Persons of established reputations
engaged in a business subject to the same or similar hazards; and all
insurance herein specified shall be effected under a valid and enforceable
policy or policies issued by financially sound and reputable insurers of
recognized responsibility, except that the Company or any Restricted
Subsidiary may effect workers' compensation or similar insurance in respect of
operations in any jurisdiction either through an insurance fund operated by
such jurisdiction or by causing to be maintained a system or systems of self-
insurance which shall be in accord with applicable laws.
Section 7.4. Payment of Indebtedness. The Company will, and will
cause each Restricted Subsidiary (but only to the extent that such Restricted
Subsidiary's assets shall be sufficient for the purpose) to,
(a) pay the principal, premium (if any) and interest on all
Indebtedness heretofore or hereafter incurred or assumed by it when and
as the same shall become due and payable, unless such Indebtedness be
renewed or extended; and
(b) faithfully perform, observe and discharge all the
covenants, conditions and obligations which are imposed on it by any
and all indentures and other agreements securing or evidencing
Indebtedness for Money Borrowed or pursuant to which such Indebtedness
is issued, and not permit the occurrence of any act or omission which
is or may be declared to be a default thereunder.
Notwithstanding the foregoing, neither the Company nor any Restricted
Subsidiary shall be required by reason of this Section 7.4 to make any payment
or to take any other action with respect to any Indebtedness described in
subsection (c) or (d) of the definition of "Indebtedness" in Section 8.1 or
with respect to any other Indebtedness at any time while it shall be contesting
in good faith by appropriate proceedings its obligation so to do, if it shall
have set aside on its books reserves (segregated to the extent required by
generally accepted accounting principles) deemed by it to be adequate with
respect thereto.
Section 7.5. Prohibition on Indebtedness Having Priority Rights. The
Company will not, and will not permit any Restricted Subsidiary to, create,
assume, incur or guarantee, or otherwise become or be or remain liable in
respect of, any Indebtedness for Money Borrowed, or Indebtedness for advances
made or goods purchased, if the lender of such money or the Person making such
advances or the vendor of such goods (or any Person who guarantees or becomes
surety for all or any part of such Indebtedness or acquires any right or incurs
any obligation to become, either immediately or upon the occurrence of some
future contingency, the owner of all or any part thereof) shall have, either
immediately or upon the occurrence of insolvency or some other contingency, any
right, by reason of any statute (including, without limitation, 31 U.S.C.
Section 3713(a)) or otherwise, to have any claim in respect of such
Indebtedness first satisfied out of the general assets of the Company or such
Restricted Subsidiary in priority to the claims of its general creditors.
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<PAGE> 24
Section 7.6. Limitations on Indebtedness. The Company will not, and
will not permit any Subsidiary to, create, assume, incur or guarantee, or
otherwise become or be or remain liable in respect of, any Indebtedness for
Money Borrowed (other than the Notes and current liabilities incurred in the
normal course of business and not related to borrowing), except for the
following:
(a) in the case of the Company, Senior Indebtedness
(including, without limitation, reimbursement obligations with respect
to guarantees and letters of credit but otherwise excluding guarantees
and letters of credit described in Section 7.9(B)) not otherwise
permitted under this Section 7.6, provided that the aggregate amount
thereof at any one time outstanding shall not exceed 375% of the Senior
Borrowing Base;
(b) in the case of the Company, Subordinated Indebtedness,
provided that the aggregate amount thereof at any one time outstanding
shall not exceed 125% of Adjusted Consolidated Net Worth, and provided
further that the aggregate amount of Senior Subordinated Indebtedness
at any one time outstanding shall not exceed 65% of the sum of (1)
Junior Subordinated Indebtedness and (2) Adjusted Consolidated Net
Worth;
(c) in the case of the Company, guarantees and letters of
credit described in Section 7.9(B), provided the aggregate amount
thereof at any one time outstanding shall not exceed 125% of
Consolidated Net Worth;
(d) in the case of the Company, subject to the limitations
provided in Section Section 7.6(A) and (B), Indebtedness secured by
mortgages, liens or other security interests which the Company is
entitled to create, incur or suffer to exist pursuant to Section 7.7;
and
(e) in the case of a Restricted Subsidiary, Indebtedness to
the Company.
For the purposes of this Section 7.6:
(i) in case any corporation becomes a successor or
transferee of the Company in the manner prescribed in Section
7.13, such corporation shall be deemed to have incurred at the
time it becomes such successor or transferee all Indebtedness,
direct or contingent, secured or unsecured, of such
corporation outstanding immediately after it becomes such
successor or transferee other than Indebtedness of the Company
which was outstanding immediately prior thereto;
(ii) in case any Indebtedness, direct or indirect,
secured or unsecured, of the Company owned by a Restricted
Subsidiary ceases to be so owned by reason of such Subsidiary
ceasing to be a Restricted Subsidiary or otherwise, such
Indebtedness (unless it thereupon is acquired by another
Restricted Subsidiary) shall be deemed to have been incurred
by the Company concurrently with such Indebtedness ceasing to
be so owned; and
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<PAGE> 25
(iii) in case any corporation becomes a Restricted
Subsidiary, such corporation shall be deemed to have incurred
at the time it becomes a Restricted Subsidiary all
Indebtedness, direct or indirect, secured or unsecured, of such
corporation outstanding immediately after it becomes a
Restricted Subsidiary.
Notwithstanding the foregoing, the Company agrees that the holders of
the Notes shall have the benefit of the covenants contained in Section 9.6A and
Section 9.6B of the Loan Agreement dated as of March 31, 1987 between the
Company and each of the lenders named therein; provided that the holders of the
Notes shall only be entitled to the benefits of said Section 9.6A and Section
9.6B so long as said sections have not been amended to be less restrictive than
Sections 7.6(A) and 7.6(B) hereof or any notes issued under the Loan Agreement
dated as of March 31, 1987 shall remain outstanding; provided, however, the
Company shall at all times be and remain subject to the provisions of Sections
7.6(A) and 7.6(B) hereof.
Section 7.7. Limitation on Liens or Subordination of Rights. The
Company will not, and will not permit any Restricted Subsidiary to, (a) create,
assume, incur or suffer to be created, assumed, or incurred or to exist any
mortgage, lien, pledge, charge, security interest or other encumbrance of any
kind (including for all purposes of this Section 7.7 any deed of trust, title
retention agreement or any Capital Lease) in respect of any property of any
character of the Company or such Subsidiary (whether held on the date hereof or
hereafter acquired) or (b) except, in the case of the Company, in connection
with transactions in the ordinary course of its secured financing business,
give its consent to the subordination of any right or claim of the Company or
such Restricted Subsidiary to any right or claim of any other Person; except
that these restrictions will not apply to:
(a) liens for property taxes and assessments or governmental
charges or levies and liens securing claims or demands of mechanics and
materialmen, provided that payment thereof is not at the time required
by Section 7.2(A);
(b) attachment, judgment and similar liens arising in
connection with court proceedings, the time for the appeal or petition
for rehearing of which shall not have expired, or in respect of which
the Company or a Restricted Subsidiary, as the case may be, shall at
any time in good faith be diligently prosecuting an appeal or
proceeding for a review and in respect of which a stay of execution
pending such appeal or proceeding for review shall have been secured,
and the Company or such Restricted Subsidiary, as the case may be,
shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting principles) deemed by it to
be adequate with respect thereto;
(c) mortgages, liens or security interests on property of the
Company or any Restricted Subsidiary securing Indebtedness not in
excess of $100,000 in the aggregate existing on September 30, 1993 and
reflected in Schedule II attached hereto;
(d) liens, charges and encumbrances incidental to the conduct
of business or the ownership of properties and assets (including liens
in connection with workers' compensation, unemployment insurance and
other like laws, warehousemen's and
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<PAGE> 26
attorneys' liens of statutory landlords' liens) and deposits, pledges
or liens to secure the performance of bids, tenders or trade contracts,
or to secure statutory obligations, surety or appeal bonds or other
liens of like general nature incurred in the ordinary course of
business and not in connection with the borrowing of money, provided
(1) such liens, charges and encumbrances do not in any event, in the
aggregate, materially detract from the value of such properties and
assets or materially impair the use of such properties and assets in
the operation of the business of the Company and its Restricted
Subsidiaries and (2) in each case, the obligation secured is not
overdue, or, if overdue, is being contested in good faith by
appropriate actions or proceedings;
(e) minor survey exceptions or minor encumbrances, easements
or reservations, or rights of others or rights-of-way, utilities and
other similar purposes, or zoning or other restrictions as to the use
of real properties, which are necessary for the conduct of the
activities of the Company and its Restricted Subsidiaries or which
customarily exist on properties of corporations engaged in similar
activities and similarly situated and which do not in any event, in the
aggregate, materially detract from the value of such real properties or
materially impair their use in the operation of the business of the
Company and its Restricted Subsidiaries;
(f) mortgages, liens or security interests securing
receivables of the Company in the process of foreclosure or assets
acquired by the Company pursuant to foreclosure proceedings and held by
the Company or a Restricted Subsidiary for resale, provided such
mortgages, liens and security interests (1) are confined solely to the
assets foreclosed upon and (2) existed immediately following the
foreclosure upon such assets;
(g) in the case of the Company, purchase money liens on
tangible personal property of the Company securing all or part of the
purchase price thereof to the Company, and liens existing on tangible
personal property at the time of purchase thereof by the Company;
provided that (1) each such lien is confined solely to the tangible
personal property so purchased, improvements thereto and proceeds
thereof and (2) all such Indebtedness shall have been incurred within
the applicable limitations provided in Section 7.6(A);
(h) mortgages, liens or security interests created or
incurred after the Closing Date given to secure Indebtedness of the
Company in addition to the mortgages, liens or security interests
permitted by the preceding subsections (a) through (h) hereof; provided
(1) that the aggregate amount of principal, interest and other sums due
and owing on such Indebtedness in any fiscal year of the Company shall
not exceed $100,000 in the aggregate and (2) all of such Indebtedness
shall have been incurred within the applicable limitations provided in
Section 7.6(A); or
(i) any extension, renewal or replacement of any mortgage,
lien or security interest permitted by the preceding clause (d) hereof
in respect of the same property theretofore subject to such lien in
connection with the extension, renewal or refunding of the Indebtedness
secured thereby; provided that: (1) such mortgage, lien or security
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<PAGE> 27
interest shall attach solely to the same such property and (2) such
extension, renewal or refunding of such Indebtedness shall be without
increase in the principal remaining unpaid as of the date of such
extension, renewal or refunding.
The Company will not, and will not permit any Restricted Subsidiary to,
sign or file in any jurisdiction a financing statement under the Uniform
Commercial Code which names the Company or such Restricted Subsidiary as
debtor, or sign any security agreement authorizing any secured party
thereunder to file any such financing statement, except, in any such case, a
financing statement filed or to be filed to perfect or protect a security
interest which the Company or such Restricted Subsidiary is entitled to
create, assume or incur, or permit to exist, under the foregoing provisions of
this Section 7.7 or to evidence a lessor's interest in property leased to the
Company or any such Restricted Subsidiary.
Section 7.8. Prohibition on Sales and Lease-Backs. The Company will
not sell to any Person, and will not permit any Restricted Subsidiary to sell
to any Person, any plant or facilities owned by the Company or such Restricted
Subsidiary on the Closing Date or subsequently acquired if, as part of the
same transaction or a series of transactions, the Company or any Subsidiary
shall then or thereafter rent or lease, as lessee, or similarly acquire the
right to possession or use of, such plant or facilities, or one or more other
plants or facilities which it intends to use for substantially the same
purpose or purposes, under any lease, agreement or other arrangement which
obligates the Company or such Subsidiary to pay rent as lessee or make any
other payments for such possession or use, provided that the Company or a
Restricted Subsidiary may enter into any such transaction which involves a
lease or right to possession or use for a temporary period not in excess of
one year following a sale, by the end of which it is intended that the use of
such plant or facilities by the lessee will be discontinued.
Section 7.9. Limitation on Investments and Guarantees. The Company
will not, and will not permit any Restricted Subsidiary to, make, acquire or
suffer to exist any Investment in any Person (including any guarantee or other
contingent liability in respect of any obligation of any Person) other than:
(a) Investments in (1) marketable obligations issued or
guaranteed by the United States of America or by an instrumentality or
agency thereof and backed by the full faith and credit of the United
States of America, maturing not more than one year after the date of
acquisition thereof, (2) certificates of deposit or other obligations
maturing not more than one year after the date of acquisition thereof
issued by a bank or trust company incorporated under the laws of the
United States or a state thereof and having capital, surplus and
undivided profits of at least $100,000,000, and (3) open market
commercial paper with a maturity not in excess of 270 days from the date
of acquisition thereof which on said date has one of the two highest
credit ratings by either Standard & Poor's Corporation or Moody's
Investors Service, Inc.;
(b) In the case of the Company, guarantees or other contingent
liabilities represented by endorsements of negotiable instruments for
collection in the ordinary course of business, letters of credit or
guarantees thereof issued or made in the ordinary
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<PAGE> 28
course of business as financial accommodations to clients of the
Company pursuant to agreements with such clients under which the Company
has agreed, prior to the issuance of such letters of credit or the making
of such guarantees, to lend money or extend credit to such clients for
the financing of substantially the same property as is covered by the
letters of credit so issued or guaranteed, in an aggregate amount not
less than the aggregate amount of the obligations of such clients which
are the subject of such letters of credit or guarantees and guarantees
and letters of credit issued for the account of the Company securing the
Company's obligations under Interest Rate Protection Agreements entered
into in the ordinary course of business and for the purpose of reducing
the Company's exposure to fluctuations in interest rates; provided that
all such guarantees and letters of credit shall have been incurred within
the applicable limitations provided in Section 7.6(C);
(c) Investments in any corporation which is, or upon the making
of such Investment becomes, a Wholly Owned Restricted Subsidiary; and
(d) Investments in (including guarantees or other contingent
liabilities in respect of Indebtedness of) any Persons, in addition to
Investments specified in subsections (a) to (c), inclusive, of this
Section 7.9, provided that neither the Company nor any Restricted
Subsidiary shall make or acquire nor commit to make or acquire any
Investment pursuant to this Section 7.9(D), unless on the date on which
the Company or such Restricted Subsidiary makes or acquires or commits to
make or acquire such Investment, and after giving effect thereto, the
Company shall be entitled to declare a cash dividend on any of its Shares
in an aggregate amount of at least $1.00, provided, however, that the
aggregate amount (measured in book value) of Investments of the Company
and its Restricted Subsidiaries, whether of record or as beneficial
owner, in "margin stock" (as such term is used in Regulation G of the
Board of Governors of the Federal Reserve System, 12 C.F.R. Section 207),
shall not exceed 7-1/2% of Eligible Assets. For the purposes of this
Section 7.9:
(1) in case any corporation becomes a Wholly Owned
Restricted Subsidiary, any Investments of the Company or of another
Restricted Subsidiary in such corporation which previously were
made or acquired pursuant to subsection (d) of this Section 7.9
shall thereafter be deemed subject only to subsection (c) of this
Section 7.9 and shall be excluded from any computation of
Investments for the purposes of Section 7.10(A)(1)(C);
(2) in case any corporation becomes a Restricted
Subsidiary as a result of an acquisition of its Shares such
corporation shall be deemed to have made at the time it becomes a
Restricted Subsidiary all Investments of such corporation existing
immediately after it becomes a Restricted Subsidiary;
(3) in case any corporation which becomes a successor or
transferee of the Company in the manner prescribed in Section 7.13
or which becomes a Restricted Subsidiary shall have made any
Investments in contemplation of its becoming
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such successor or transferee or Restricted Subsidiary, all such
Investments shall be deemed to have been made at the time it becomes
such successor or transferee or Restricted Subsidiary;
(4) in case any corporation which is a Restricted Subsidiary
ceases to be a Restricted Subsidiary, any Investments of the Company
or of any other Restricted Subsidiary in such corporation which then
remain in existence shall be deemed to have been made at the time it
ceases to be a Restricted Subsidiary; and
(5) the Company or a Restricted Subsidiary may, without
regard to the restriction of subsection (d) of this Section 7.9, make
any payment required on account of a guarantee or other contingent
liability permitted by subsection (b) of this Section 7.9, but any
direct Investment resulting from such payment shall be included in any
subsequent computation of existing Investments for the purposes of
Section 7.10(A)(1)(C) (unless at the time permitted under another
subsection of this Section 7.9).
Notwithstanding any of the foregoing provisions of this Section 7.9,
the Company will not, and will not permit any Restricted Subsidiary to, make or
suffer to exist any guarantee or other contingent liability of the type
specified in subsection (b)(3) of the definition of "Indebtedness" in Section
8.1 in respect of any Person except a Wholly Owned Restricted Subsidiary unless
such guarantee or other contingent liability is expressly limited to a stated
dollar amount.
Section 7.10. Limitations on Dividends and Other Restricted Payments.
(a) The Company will not declare any dividend on any of its Shares (other than
a dividend payable solely in Common Shares of the Company), or make or commit
to make any other Restricted Payment in respect thereof or in respect of
Subordinated Indebtedness, unless any such dividend is declared to be payable
not more than 90 days after the date of declaration, and unless, after giving
effect to the proposed Restricted Payment, at the date of declaration in the
case of a dividend or at the date of payment or distribution or commitment
therefor (whichever is earlier) in the case of any other proposed Restricted
Payment (each such date, as the case may be, being herein called the
"Computation Date"),
(1) the sum of
(a) the aggregate amount of all dividends (other than
dividends payable solely in Common Shares of the Company) declared
during the period commencing January 1, 1993 and ending on the
Computation Date (herein called the "Computation Period"), plus
(b) the aggregate amount of all other Restricted Payments
made during the Computation Period (and any commitments for other
Restricted Payments during the Computation Period and outstanding on
the Computation Date), plus
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(c) the aggregate amount of all Investments (including
outstanding commitments to make or acquire Investments) by the
Company and its Restricted Subsidiaries (other than those specified
in subsections (a) to (c), inclusive, of Section 7.9) existing on
the Computation Date,
shall not exceed $8,040,000 plus 50% (or, in the case of a deficit,
minus 100%) of Consolidated Net Income for the Computation Period;
(2) the sum of all such Restricted Payments for the current
fiscal year shall not exceed Consolidated Net Income for the
immediately preceding fiscal year; and
(3) at the time of such Restricted Payment and immediately
after giving effect thereto, no Event of Default, and no event which
with the lapse of time or notice and lapse of time would become an Event
of Default shall have occurred and be continuing.
(b) Notwithstanding the restrictions of subsection (a) of this
Section 7.10, the Company may
(1) retire any of its Shares in exchange for, or out of the
proceeds of the substantially concurrent sale of, other of its Shares,
and no such retirement of Shares shall be included in any computation
provided for in said subsection (a),
(2) make any Optional Payment in respect of any outstanding
Subordinated Indebtedness in exchange for, or out of the proceeds of
the substantially concurrent sale of, its Shares or other Subordinated
Indebtedness, and no such Optional Payment shall be included in any
computation provided for in said subsection (a), and
(3) purchase, redeem or otherwise retire any Preferred Shares
pursuant to any sinking fund or other retirement requirement in respect
thereof, provided that the aggregate amount of all purchases, redemptions
and retirements of Preferred Shares permitted by this clause during any
Computation Period shall be included in any computation otherwise
provided for in said subsection (a).
Section 7.11. Minimum Adjusted Consolidated Net Worth. The Company
will at all times maintain Adjusted Consolidated Net Worth in an amount at
least equal to $60,000,000.
Section 7.12. Limitation on Issuance of Shares of Restricted
Subsidiaries; Disposition of Shares and Indebtedness of Restricted
Subsidiaries; Ownership by Unrestricted Subsidiary of Shares or Indebtedness of
a Restricted Subsidiary; Limitation on Purchase of Shares or Subordinated
Indebtedness of the Company by a Restricted Subsidiary. (a) The Company will
not permit any Restricted Subsidiary to issue, sell or otherwise dispose of any
of its Shares, or any securities convertible into or exchangeable for or
carrying rights to subscribe for its Shares, except (1) to the Company, (2) to
qualify directors, (3) to satisfy preemptive rights, or (4) in connection with
stock splits or stock dividends.
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(b) The Company will not permit any Restricted Subsidiary to have
outstanding any Preferred Shares other than Preferred Shares owned by the
Company.
(c) The Company will not sell or otherwise dispose of any Shares
(except to qualify directors) or any Indebtedness of any Restricted Subsidiary
or permit any Restricted Subsidiary to sell or otherwise dispose of (except to
the Company or to qualify directors) any Shares or any Indebtedness of any
other Restricted Subsidiary, unless
(1) simultaneously with such sale or other disposition all
Shares and all Indebtedness of such Restricted Subsidiary at the time
owned by the Company and by every other Restricted Subsidiary are sold
or otherwise disposed of as an entirety,
(2) the Board shall have determined that the retention of such
Shares and Indebtedness is no longer in the best interests of the
Company and the disposition thereof is not disadvantageous to the holders
of the Notes,
(3) such Shares and Indebtedness are sold or otherwise disposed
of for a consideration and upon terms deemed adequate by the Board,
(4) if such Restricted Subsidiary owns any Shares or any
Indebtedness of any other Restricted Subsidiary of which any other
Shares or any other Indebtedness are at the time also owned by the
Company or another Restricted Subsidiary, simultaneously with such sale
or other disposition all such other Shares and all such other
Indebtedness at the time owned by the Company and all other Restricted
Subsidiaries are sold or otherwise disposed of and the Board shall have
made the determinations specified in the foregoing clauses (2) and (3) as
to the sale or other disposition thereof,
(5) if the consideration for any such sale or other disposition
includes Shares of any other corporation, immediately after such
transaction either such other corporation shall be a Wholly Owned
Restricted Subsidiary or such other corporation shall not be a Restricted
Subsidiary and the acquisition of such Shares shall be permitted under
Section 7.9(D),
(6) if the consideration for any such sale or other disposition
includes obligations of any other Person, the acquisition of such
obligations shall be permitted under Sections 7.9(A) and (D), and
(7) immediately after the consummation of the transaction and
after giving effect thereto, no Event of Default, and no event which
with lapse of time or notice and lapse of time would become an Event of
Default, shall have occurred and be continuing.
(d) The Company will not permit any Unrestricted Subsidiary to own
any Shares of any Restricted Subsidiary or any Indebtedness of any Restricted
Subsidiary.
(e) The Company will not permit any Restricted Subsidiary to purchase
or otherwise acquire, or at any time hold, any Shares or any Subordinated
Indebtedness of the Company.
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Section 7.13. Limitation on Restricted Subsidiarys or Companys
Consolidation, Merger or Disposition of Property. The Company will not, and
will not permit any Restricted Subsidiary to, lease its properties
substantially as an entirety to any Person. The Company will not, and will
not permit any Restricted Subsidiary to, consolidate or merge with or, except
as contemplated in Section 7.15 in the case of FCC Holdings Limited, sell or
otherwise (but not by lease) dispose of its properties substantially as an
entirety to, any Persons, except that:
(a) any Restricted Subsidiary may merge into the Company or a
Wholly Owned Restricted Subsidiary or a corporation which, as part of
the transaction, becomes a Wholly Owned Restricted Subsidiary; and
(b) subject to the provisions of Section 2.3, the Company may
consolidate or merge with another corporation if, (1) the Company is the
surviving corporation, or (2) the successor corporation (i) shall be a
solvent corporation organized and existing under the laws of the United
States of America or a state thereof or the District of Columbia, and
(ii) shall expressly assume in writing the due and punctual payment of
the principal of (and premium, if any) and interest on the Notes
according to their terms, and the due and punctual performance of and
compliance with all of the terms, covenants, agreements and conditions of
the Agreements executed in conjunction with the issuance of the Notes to
be performed or observed by the Company to the same extent as if such
successor or transferee corporation had originally executed the
Agreements and the successor corporation shall furnish the holders of the
Notes an opinion of counsel (which opinion and counsel shall be
satisfactory to such holders) to the effect that the instrument of
assumption has been duly authorized, executed and delivered and
constitutes the legal, valid and binding contract and agreement of the
successor corporation enforceable in accordance with its terms, subject
to bankruptcy, insolvency or similar laws affecting creditors' rights
generally, and general principles of equity (regardless of whether the
application of such principles is considered in a proceeding in equity or
at law), and (3) the Company or such successor corporation or transferee
corporation, as the case may be, shall not, immediately after such merger
or consolidation, be in default in the performance of or compliance with
any such term and there shall exist no Event of Default or event which
with lapse of time or notice and lapse of time would become an Event of
Default.
The assumption of the liabilities and obligations of the Company
hereunder and on the Notes by any successor or transferee corporation, in the
manner prescribed in this Section 7.13, shall, upon the request of the holder
of any outstanding Note, be evidenced by the endorsing by such successor or
transferee corporation of an appropriate legend upon such Note. Each Note
executed after such assumption by any successor to the Company by merger or
consolidation may be executed in the name of the Company or such successor.
Each Note so executed after such assumption by a transferee corporation, or a
successor to a transferee corporation by consolidation or merger which shall
have become such in the manner prescribed in this Section 7.13, shall have an
appropriate legend endorsed thereon by such transferee corporation or
successor thereto. No sale or other disposition of properties permitted by
this Section 7.13 shall have the effect of releasing the Company (or any
successor or transferee corporation which shall at any time
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have become such in the manner prescribed in this Section 7.13) from its
liability as obligor on any of the Notes.
Section 7.14. Limitation on Transactions with Affiliates. The Company
will not engage in any transaction with any Affiliate (other than a Wholly
Owned Restricted Subsidiary), and will not permit any Restricted Subsidiary to
engage in any transaction with any Affiliate (other than the Company or a
Wholly Owned Restricted Subsidiary), on terms less favorable to the Company or
such Restricted Subsidiary than would be obtainable at the time in comparable
transactions of the Company or such Restricted Subsidiary in arm's-length
dealings with Persons other than such Affiliates, and the aggregate amount of
all such transactions with Affiliates in any fiscal year of the Company (other
than payments to The Foothill Group, Inc. on account of management fees and
income tax liability, which shall be subject to the limitations of the next
succeeding paragraph, and other than Advances, which shall be subject to the
limitations set forth in the Subordination Agreement) shall not exceed 5% of
Adjusted Consolidated Net Worth as of the end of the immediately preceding
fiscal year.
The Company will not permit the aggregate amount of all payments made by
the Company and its Restricted Subsidiaries to The Foothill Group, Inc. or any
Affiliate in any fiscal year of the Company on account of management fees or
similar charges to exceed 2% of Consolidated Net Revenues for such fiscal
year. The Company will not, and will not permit any Restricted Subsidiary, to
pay to The Foothill Group, Inc. or any other Affiliate with which the Company
or such Restricted Subsidiary files or ever has filed a consolidated Federal
income tax return or a combined state or local income or franchise tax return,
on account of the Federal, state, local or foreign tax liability of the
Company or such Restricted Subsidiary, an amount greater than the Company's
(or, in the case of a payment by a Restricted Subsidiary, such Restricted
Subsidiary's) allocated tax expense under generally accepted accounting
principles for allocation of taxes between a parent company and its
subsidiaries using the "separate entity" method under which each subsidiary
company's share of consolidated tax liability is determined by its pro rata
share of the aggregate tax liability that would exist if each member of the
consolidated or combined group were operating independently. Notwithstanding
the foregoing, the Company will not, and will not permit any Restricted
Subsidiary to, pay to The Foothill Group, Inc. or any other Affiliate any
management fees or other charges during any period of time in which an Event
of Default, or any event which with lapse of time or notice and lapse of time
would become an Event of Default, shall have occurred and be continuing. For
purposes of this paragraph, any payment of tax (including any interest and
penalties thereon) by the Company or any Restricted Subsidiary to the Internal
Revenue Service or any other taxing authority shall be deemed to be a payment
with respect to taxes to The Foothill Group, Inc.
Section 7.15. Permitted Business. The Company will not, and will not
permit any Restricted Subsidiary to, engage in any business or operation which
is substantially different from the general nature of the business of
commercial secured financing and leasing. Notwithstanding the foregoing, FCC
Holdings Limited shall be permitted to engage in the business of owning,
operating and liquidating repossessed assets. The only assets held by FCC
Holdings Limited shall be those necessary to permit it to engage in such
business.
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Section 7.16. Limitation on Sale of Receivables with Recourse or at
Discount. The Company will not, and will not permit any Restricted Subsidiary
to, sell or otherwise dispose of receivables with recourse, or at a discount,
except in connection with participations sold in the ordinary course of
business at the time such receivables are acquired.
Section 7.17. Limitation on Nonperforming Assets. Nonperforming Assets
of the Company and its Restricted Subsidiaries shall at no time exceed 65% of
Consolidated Net Worth.
Section 7.18. Limitation on Discount Receivables. Discount Receivables
of the Company and its Restricted Subsidiaries shall at no time exceed 25% of
Consolidated Total Assets.
Section 7.19. Limitation on Borrower Concentration. The Company will
not, and will not permit any Restricted Subsidiary to, enter into any loan
transaction with any borrower if, immediately after the consummation of such
loan transaction and after given effect thereto, (a) there shall be more than
ten borrowers for which the aggregate principal amount of all loans by the
Company or any Restricted Subsidiary to each such borrower exceeds 10% of
Consolidated Capital Funds or (b) the aggregate principal amount of all loans
by the Company or any Restricted Subsidiary to such borrower would exceed 15%
of Consolidated Capital Funds.
Section 8. Definitions.
Section 8.1. Definitions of Capitalized Terms. The terms defined in
this Section 8.1, wherever capitalized in this Agreement, have the respective
meanings hereinafter specified, unless the context otherwise requires.
"Adjusted Consolidated Net Worth" means Eligible Assets less the
aggregate of all liabilities (including reserves and minority interests, if
any) of the Company and its Restricted Subsidiaries, determined and
consolidated in accordance with generally accepted accounting principles.
"Advances" has the meaning specified in paragraph 8 of the form of
Subordination Agreement attached hereto as Exhibit F.
"Affiliate" of any designated Person means any Person which, directly or
indirectly, controls or is controlled by or is under common control with such
designated Person and, without limiting the generality of the foregoing,
includes (a) any Person which beneficially owns or holds 5% or more of any
class of voting securities of such designated Person or 5% or more of the
equity interest in such designated Person and (b) any Person of which such
designated Person beneficially owns or holds 5% or more of any class of voting
securities or in which such designated Person beneficially owns or holds 5% or
more of the equity interest. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the
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management and policies of such Person, whether through the ownership of
voting securities or by contract or otherwise.
"Board" means the Board of Directors of the Company or a committee
consisting of three or more directors of the Company having authority to
exercise, when the Board of Directors is not in session, the powers of the
Board of Directors (subject to any designated limitations) in the management
of the business and affairs of the Company.
"Business Day" means any day other than a Saturday, Sunday or other day
on which banks in Los Angeles, California or New York, New York are required
by law to close or are customarily closed.
"Capital Lease" means at any time any lease of property, real or
personal, which, in accordance with generally accepted accounting principles,
would at such time be required to be capitalized on a balance sheet of the
lessee or, if not so capitalized, for which the amounts of the asset and
liability (had such lease been capitalized) would at such time be so required
to be disclosed in a note to such a balance sheet; and the term "Capital Lease
Obligation" means at any time the amount of the liability in respect of a
Capital Lease which would at such time be so required to be capitalized on
such a balance sheet or disclosed in such a note.
"Closing Date" has the meaning specified in Section 1.2.
"Common Shares," as applied to Shares of any corporation, means Shares
of such corporation other than Preferred Shares.
"Company" means Foothill Capital Corporation, a California corporation,
the issuer of the original Notes, until a successor or transferee corporation
becomes such in the manner prescribed in Section 7.13, and thereafter means
such successor or transferee corporation.
"Computation Date" and "Computation Period" have the meanings specified
in Section 7.10.
"Consolidated Capital Funds" means Consolidated Net Worth plus
Subordinated Indebtedness of the Company and its Restricted Subsidiaries.
"Consolidated Indebtedness," "Consolidated Indebtedness for Money
Borrowed," "Consolidated Net Revenues" and "Consolidated Senior Indebtedness"
mean the Indebtedness, Indebtedness for Money Borrowed, Net Revenues or Senior
Indebtedness, as the case may be, of the Company and its Restricted
Subsidiaries, all consolidated in accordance with generally accepted
accounting principles and after deducting any outside minority interest in
such Restricted Subsidiaries.
"Consolidated Net Income" means Net Income of the Company and its
Restricted Subsidiaries, computed in accordance with generally accepted
accounting principles and consolidated after deducting any outside minority
interest in such Restricted Subsidiaries; provided, however, that in
determining Consolidated Net Income there shall be excluded without
duplication (1) earnings of any Restricted Subsidiary accrued prior to the
date it
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became a Restricted Subsidiary, and (2) any portion of the Net Income of any
Restricted Subsidiary which for any reason is unavailable for payment of
dividends to the Company or another Restricted Subsidiary.
"Consolidated Net Worth" means the excess of the assets of the Company
and its Restricted Subsidiaries over their liabilities, determined and
consolidated in accordance with generally accepted accounting principles.
"Consolidated Total Assets" means the total amount of all assets of the
Company and its Restricted Subsidiaries consolidated in accordance with
generally accepted accounting principles and after deducting any outside
minority interest in such Restricted Subsidiaries.
"Default Premium" shall mean, with respect to any Note, an amount equal
to the greater of (a) the Make-Whole Amount, or (b) 1% of the unpaid principal
amount of such Note.
"Delinquent Accounts" means the full unpaid amount of receivables,
loans, notes, leases and other obligations (excluding Discount Receivables) on
which an installment payment of interest or principal has not been made within
90 days of its due date (including any such obligations relating to property
or assets which are the subject of foreclosure proceedings, whether judicial
or otherwise), and includes the full amount of any such obligations (excluding
Discount Receivables) with respect to which there are such arrearages,
notwithstanding that installment payments of principal or interest are
currently being made.
"Discount Receivables" shall mean finance receivables originating from a
Person other than the Company or one of its Subsidiaries which are acquired at
less than face or par value and, at the time of acquisition, are contractually
in default.
"Eligible Assets" means the following assets of the Company and its
Restricted Subsidiaries, determined and consolidated in accordance with
generally accepted accounting principles:
(a) cash, plus the cash surrender value of life insurance
policies, if, any;
(b) Investments permitted pursuant to the provisions of Section 7.9
hereof;
(c) prepaid expenses;
(d) repossessed assets held for resale, at the lower of cost or
estimated net realizable value (as determined in good faith by the
Company or such Restricted Subsidiary); and
(e) finance receivables, less:
(1) unearned finance charges;
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(2) an amount equal to the greater of (i) reserves
for losses attributable to finance receivables, or (ii) 75%
of Nonperforming Assets;
(3) the sum of all receivables, loans, notes, leases
and other obligations to the Company and its Restricted
Subsidiaries by any one Person in excess of 25% of Consolidated
Net Worth; and
(4) loan participations acquired from Affiliates
as permitted by Section 7.14, to the extent that said loan
participations exceed 10% of Eligible Assets without regard
to this clause.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time.
References to sections of ERISA shall be construed to also refer to any
successor sections.
"ERISA Affiliate" shall mean any corporation, trade or business that is,
along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in section 414(b) and
414(c), respectively, of the Internal Revenue Code of 1986, as amended, or
Section 4001 of ERISA.
"Event of Default" has the meaning specified in Section 9.1.
"Governmental Body" means any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign.
"Indebtedness" of any Person means all obligations of such Person which
would in accordance with generally accepted accounting principles be
classified upon a balance sheet of such Person as liabilities of such Person,
but in any event including:
(a) all indebtedness guaranteed, directly or indirectly, in
any manner by such Person or endorsed (otherwise than for collection or
deposit in the ordinary course of business) or discounted with recourse;
(b) all indebtedness in effect guaranteed, directly or
indirectly, by such Person through an agreement, contingent or otherwise,
(1) to purchase such indebtedness or to advance or
supply funds for the payment or purchase of such indebtedness, or
(2) to purchase, sell or lease (as lessee or lessor)
property, products, materials or supplies, or to purchase or
sell transportation or services, primarily for the purpose of
enabling the debtor to make payment of such indebtedness or to
assure the owner of such indebtedness against loss, regardless
of the delivery or nondelivery of the property, products,
materials or supplies or the furnishing or nonfurnishing of the
transportation or services, or
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(3) to make any loan, advance, capital contribution or other
Investment in the debtor for the purpose of assuring a minimum
equity, asset base, working capital or other balance sheet condition
for any date, or to provide funds for the payment of any liability,
dividend or stock liquidation payment, or otherwise to supply funds
to or in any manner invest in the debtor;
(c) all indebtedness secured by any mortgage, lien, pledge, charge,
security interest or other encumbrance in respect of property owned by
such Person, even though such Person has not assumed or become liable for
the payment of such indebtedness;
(d) all indebtedness of such Person created or arising under any
conditional sale agreement or other title retention agreement, and all
Capital Lease Obligations of such Person, even though the rights and
remedies of the seller or lender or lessor of the property subject to
such agreement or lease in the event of default are limited to
repossession or sale of such property; and
(e) all reimbursement obligations with respect to letters of credit
and guaranties.
For the purpose of computing the Indebtedness of any Person (1) the
principal amount of any Indebtedness shall be the outstanding principal amount
of Indebtedness of the debtor benefited by such guarantee or other contingent
liability, (2) there shall be excluded any particular Indebtedness if, upon or
prior to the maturity thereof, there shall have been deposited with the proper
depositary in trust the necessary funds (or evidences of such Indebtedness, if
permitted by the instrument creating such Indebtedness) for the payment,
redemption or satisfaction of such Indebtedness; and thereafter such funds and
evidences of Indebtedness so deposited shall not be included in any
computation of the assets of such Person, and (3) a reimbursement obligation
with respect to a letter of credit or guaranty shall be deemed to be
Indebtedness equal to the maximum aggregate amount of such letter of credit or
guaranty.
"Indebtedness for Money Borrowed" of any Person includes (a) all
Indebtedness of such Person, current or funded, secured or unsecured, incurred
in connection with borrowings (including the sale of debt securities), (b) all
Indebtedness of such Person, secured or unsecured, for the purchase price of
capital assets acquired, other than accounts payable incurred or assumed in
the ordinary course of business, (c) all Capital Lease Obligations of such
Person, (d) any guarantee or other obligation specified in subsection (a) or
(b) of the definition of "Indebtedness" in this Section 8.1 in respect of
Indebtedness of any other Person of any of the types specified in the
preceding clauses (a), (b) and (c), and (e) all reimbursement obligations with
respect to letters of credit and guaranties (for purposes of all computations
made under this Agreement, a reimbursement obligation with respect to a letter
of credit or guaranty shall be deemed to be Indebtedness equal to the maximum
aggregate amount of such letter of credit or guaranty).
"Institutional Holder" shall mean any of the following Persons: (a) any
bank, savings and loan association, savings institution, trust company or
national banking association, acting for its own account or in a fiduciary
capacity, (b) any charitable foundation, (c) any insurance
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company, (d) any fraternal benefit society, (e) any pension, retirement or
profit sharing trust or fund within the meaning of Title I of ERISA or for
which any bank, trust company, national banking association or investment
adviser registered under the Investment Advisers Act of 1940, as amended, is
acting as trustee or agent, (f) any investment company or business development
company, as defined in the Investment Company Act of 1940, as amended, (g) any
small business investment company licensed under the Small Business Investment
Act of 1958, as amended, (h) any broker or dealer registered under the
Securities Exchange Act of 1934, as amended, or any investment adviser
registered under the Investment Adviser Act of 1940, as amended, (i) any
government, any public employees' pension or retirement system, or any other
government agency supervising the investment of public funds, (j) any venture
capital operating company as defined in 29 C.F.R. 2510.3-101(d), (k) any other
entity all of the equity owners of which are Institutional Holders or (l) any
other Person which may be within the definition of "qualified institutional
buyer" as such term is used in Rule 144A, as from time to time in effect,
promulgated under the Securities Act of 1933, as amended.
"Interest Rate Protection Agreement" means any agreement, device or
arrangement designed to protect at least one of the parties thereto from the
fluctuations of interest rates, exchange rates or forward rates applicable to
such party's assets, liabilities or exchange transactions, including but not
limited to dollar-denominated or cross-currency interest rate exchange
agreements, forward currency exchange agreements, dollar protection
agreements, interest rate cap agreements, interest rate collar agreements,
forward rate currency or interest rate options, puts and warrants.
"Investment" in any Person means all investments, computed in accordance
with generally accepted accounting principles, made by stock purchase, capital
contribution, loan, advance, guarantee of any Indebtedness of such Person or
creation or assumption of any other contingent liability in respect of any
Indebtedness of such Person, or otherwise; provided, however, that in
computing any Investment in any Person:
(a) all expenditures for such Investment shall be taken into account
at the actual amounts thereof in the case of expenditures of cash and at
the fair value thereof (as determined by the Board) or net book value
thereof (in accordance with generally accepted accounting principles),
whichever is greater, in the case of expenditures of property;
(b) undistributed earnings of, and interest accrued in respect of
Indebtedness owing by, such Person shall not be included;
(c) there shall not be deducted from the amounts invested in such
Person any amounts received as earnings (in the form of dividends or
interest or otherwise) on the Investment in, or as loans from, such Person;
(d) there shall be included all notes and accounts receivable from
such Person, other than notes or accounts receivable payable in U.S. or
Canadian dollars and not outstanding more than 90 days, arising from sales
to such Person as a customer in the ordinary course of business;
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<PAGE> 40
(e) a guarantee or other contingent liability in respect of any
Indebtedness of such Person shall be deemed an Investment equal to the
principal amount of such Indebtedness; and
(f) a transfer of property or rendition of service to such Person for
less than the greater of the full agreed price thereof or the fair value
thereof shall be deemed an Investment equal to the amount of the
deficiency.
"Investment Grade Rating" shall have the meaning specified in Section
2.3(D)(4).
"Junior Subordinated Indebtedness" means Subordinated Indebtedness of
the Company which is by its terms subordinate and junior to all Senior
Indebtedness and Senior Subordinated Indebtedness, including without
limitation, the Company's 11.82% Junior Subordinated Notes due December 1999,
the Company's 12.26% Junior Subordinated Notes due April 2000, the Company's
9.93% Junior Subordinated Notes due December 2002, the Company's Subordinated
Promissory Note dated October 25, 1978, in the original principal amount of
$9,590,000, issued pursuant to the Loan Agreement dated as of October 25, 1978
between the Company and The Foothill Group, Inc., the Company's Class 2 Junior
Subordinated Promissory Note dated December 31, 1984, in the original
principal amount of $12,000,000, issued pursuant to the Loan Agreement dated
as of December 31, 1984 between the Company and The Foothill Group, Inc., and
any other Indebtedness (other than "Advances" as defined in and to the extent
permitted by the Subordination Agreement referred to in Section 4.1(E) and
other than Indebtedness for payments permitted by Section 7.14) of the Company
to The Foothill Group, Inc. or any other Affiliate, whether heretofore or
hereafter created, incurred or assumed, and unsecured Indebtedness of the
Company which
(a) on the date on which the status of such Indebtedness is
determined for any purpose hereof,
(1) has a final maturity not earlier than November 15, 2003,
(2) has a Weighted Average Life to Maturity at least as long
as the longest remaining Weighted Average Life to Maturity of the
Senior Notes and the Senior Subordinated Notes, and
(3) is not subject to principal payment, redemption or other
retirement by means of any installment, sinking fund, serial maturity
or other required payments prior to November 15, 1998; and
(b) is issued or assumed pursuant to, or evidenced by, an indenture
or other instrument which contains provisions for the subordination of such
Indebtedness (to which appropriate reference shall be made in the
instruments evidencing such Indebtedness if not contained therein) to the
Senior Notes and the Senior Subordinated Notes (and, at the option of the
Company, if so provided, to other Indebtedness for Money Borrowed of the
Company, either generally or as specifically designated) substantially as
follows (without limitation as to further, but not inconsistent,
provisions, if so desired):
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<PAGE> 41
"Subordination. Anything in this Junior Subordinated Note to
the contrary notwithstanding, the indebtedness evidenced by this
Junior Subordinated Note shall be subordinate and junior in right of
payment, to the extent and in the manner hereinafter set forth, to all
indebtedness of the Company evidenced by its 13-1/8% Senior Notes,
9.40% Senior Notes, 9.80% Senior Notes, 10.23% Senior Notes, 10.27%
Senior Notes, 10.35% Senior Notes, 9.43% Senior Notes, 9.76% Senior
Notes, 10.10% Senior Notes, 8.51% Senior Notes, 8.98% Senior Notes,
9.44% Senior Notes, 9.25% Senior Notes, 6.77% Series A Senior Notes,
7.31% Series B Senior Notes, 7.93% Series C Senior Notes, 5.54% Series
A Senior Notes, 5.89% Series B Senior Notes, 6.23% Series C Senior
Notes, 6.56% Series D Senior Notes, 13-5/8% Senior Subordinated Notes,
10.15% Senior Subordinated Notes, 10.60% Senior Subordinated Notes,
11.26% Senior Subordinated Notes, 8.93% Senior Subordinated Notes and
7.46% Senior Subordinated Notes from time to time outstanding (whether
outstanding at the date of this Junior Subordinated Note or issued
after the date of this Junior Subordinated Note and as said 13-1/8%
Senior Notes, 9.40% Senior Notes, 9.80% Senior Notes, 10.23% Senior
Notes, 10.27% Senior Notes, 10.35% Senior Notes, 9.43% Senior Notes,
9.76% Senior Notes, 10.10% Senior Notes, 8.51% Senior Notes, 8.98%
Senior Notes, 9.44% Senior Notes, 9.25% Senior Notes, 6.77% Series A
Senior Notes, 7.31% Series B Senior Notes, 7.93% Series C Senior
Notes, 5.54% Series A Senior Notes, 5.89% Series B Senior Notes, 6.23%
Series C Senior Notes, 6.56% Series D Senior Notes, 13-5/8% Senior
Subordinated Notes, 10.15% Senior Subordinated Notes, 10.60% Senior
Subordinated Notes, 11.26% Senior Subordinated Notes, 8.93% Senior
Subordinated Notes and 7.46% Senior Subordinated Notes may at any time
and from time to time be modified or amended in any respect), and to(*
_______________ (all such indebtedness to which this Junior
Subordinated Note is subordinate as aforesaid being sometimes
hereinafter referred to as 'Superior Indebtedness'):
'(i) In the event of any insolvency or bankruptcy proceedings,
and any receivership, liquidation, reorganization or other
similar proceedings in connection therewith, relative to the
Company or to its creditors, as such, or to its property, and in
the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company, whether or not
involving insolvency or bankruptcy, then the holders of Superior
Indebtedness shall be entitled to receive payment in full of all
principal, premium (if any) and interest on all Superior
Indebtedness (including interest thereon accruing after the
commencement of any such proceedings) before the holder of this
Junior Subordinated Note shall be entitled to receive any payment
on account of principal, premium (if any) or interest on this
Junior Subordinated Note. Pursuant to the foregoing (but subject
to the power of a court of competent jurisdiction to make other
________________________
* Here will be inserted the identification of any
other Superior Indebtedness incurred by the Company after
the Closing Date.
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<PAGE> 42
equitable provisions reflecting the rights conferred herein
upon Superior Indebtedness and the holders thereof with respect
to the subordinated indebtedness represented by this Junior
Subordinated Note and the holder hereof by a lawful plan of
reorganization under applicable bankruptcy law) the holders of
Superior Indebtedness (until payment in full of all principal,
premium (if any) and interest on all Superior Indebtedness,
including interest thereon accruing after the commencement of any
such proceeding) shall be entitled to receive for application in
payment thereof any payment or distribution of any kind or
character, whether in cash or property or securities, which may
be payable or deliverable in any such proceedings in respect of
this Junior Subordinated Note (including any such payment or
distribution which may be payable or deliverable by virtue of the
provisions of, or any security for, any securities which are
subordinate and junior in right of payment to this Junior
Subordinated Note), except securities which are subordinate and
junior (to at least the same extent as this Junior Subordinated
Note) in right of payment to the payment of all Superior
Indebtedness then outstanding. The holder of this Junior
Subordinated Note shall not exercise or attempt to exercise any
right of setoff or counterclaim in respect of any obligations of
the holder of this Junior Subordinated Note to the Company
against the obligations of the Company under this Junior
Subordinated Note if the effect thereof shall be to reduce the
amount of any such payment or distribution to which the holders
of Superior Indebtedness would be entitled in the absence of such
setoff or counterclaim; and if and to the extent that,
notwithstanding the foregoing, the holder of this Junior
Subordinated Note is required by any mandatory provision of law
to exercise any such right of setoff or counterclaim, each
reduction of the amount owing on account of the principal of or
premium (if any) or interest on this Junior Subordinated Note by
reason of such setoff or counterclaim shall be deemed to be a
payment by the Company in a like amount in respect of this Junior
Subordinated Note to which the second sentence of this paragraph
(i) shall apply.
"(ii) In the event that this Junior Subordinated Note is
declared due and payable before its expressed maturity because of
the occurrence of an event of default hereunder (under
circumstances when the provisions of the foregoing paragraph (i)
or the following paragraph (iii) shall not be applicable), the
holders of Superior Indebtedness then due or becoming due by
acceleration or otherwise, prior to the expiration of a period of
75 days after the date on which the Company or a holder of this
Junior Subordinated Note gives to the holders of the Superior
Indebtedness the written notice provided for below in this
paragraph (ii), shall be entitled to receive payment in full of
all principal, premium (if any) and interest on all such Superior
Indebtedness before the holder of this Junior Subordinated Note
shall be entitled to receive any payment on account of the
principal, premium (if any) or interest on this Junior
Subordinated Note other than
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<PAGE> 43
any such principal, premium (if any) and interest due otherwise
than by reason of such declaration. For the purposes of this
paragraph (ii) the Company agrees, for the benefit of the holders
of Superior Indebtedness as well as the holder of this Junior
Subordinated Note, that, if any such declaration remains
unrescinded for 15 days, the Company will promptly give written
notice thereof to all holders of Superior Indebtedness. If the
Company fails to give such notice, the holder of this Junior
Subordinated Note may do so on behalf of the Company. At any
time within 75 days after the date on which such notice is given,
any holder of outstanding Superior Indebtedness shall have the
right to declare all Superior Indebtedness held by such holder to
be due and payable, whereupon such Superior Indebtedness shall
forthwith become immediately due and payable regardless of the
expressed maturity date thereof. Nothing herein shall prevent
the holder of this Junior Subordinated Note from seeking any
remedy allowed at law or in equity so long as any judgment or
decree obtained thereby makes provision for enforcing this
paragraph (ii).
"(iii) In the event that any default shall occur and be
continuing with respect to any Superior Indebtedness permitting
the holders of such Superior Indebtedness to accelerate the
maturity thereof, the holder of this Junior Subordinated Note
shall not be entitled to receive any payment on account of
principal, premium (if any) or interest hereon (including any
such payment which would cause a default) if either (a) judicial
proceedings shall be pending in respect of such default, or (b)
written notice of such default directing the Company to cease
payment on the subordinated indebtedness in accordance with this
paragraph (iii) shall have been given to the Company by any
holder of Superior Indebtedness and a period of 180 days in the
case of a monetary default or 90 days in the case of any other
default shall not have expired since the giving of such notice;
provided, however, that this paragraph (iii) shall apply to only
one such notice given in any twelve month period. The Company,
forthwith upon receipt of any such notice, shall send a copy
thereof to the holder of this Junior Subordinated Note.
"No present or future holder of Superior Indebtedness shall be
prejudiced in such holder's right to enforce subordination of this Junior
Subordinated Note by any act or failure to act on the part of the Company.
The provisions of this Section are solely for the purpose of defining the
relative rights of the holders of Superior Indebtedness on the one hand,
and the holder of this Junior Subordinated Note on the other hand, and
nothing herein shall impair, as between the Company and the holder of this
Junior Subordinated Note, the obligation of the Company, which is
unconditional and absolute, to pay to the holder hereof the principal and
interest hereon in accordance with the terms hereof, nor shall anything
herein prevent the holder of this Junior Subordinated Note from exercising
all remedies otherwise permitted by applicable law or hereunder upon
default hereunder, subject to the rights (if any) under this Section of
holders of Superior Indebtedness to receive cash, property or securities
otherwise payable or
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<PAGE> 44
deliverable to the holder of this Junior Subordinated Note and all
amounts which are deemed to be payments in respect of this Junior
Subordinated Note by reason of setoff or counterclaim in respect of any
obligations of the holder of this Junior Subordinated Note to the Company
against the obligations of the Company under this Junior Subordinated
Note.' "
"Lease" means a lease of real or personal property; and "Lease Rental"
for any period means the sum of the rental and other payments required to be
paid by the lessee in such period under a Lease, excluding any amounts required
to be paid by the lessee (whether or not therein designated as rental or
additional rental) on account of maintenance and repairs, insurance, taxes,
assessments, water rates and similar charges.
"Make-Whole Amount" shall mean in connection with any prepayment or
acceleration of the Notes the excess (if any) of (a) the aggregate present
value as of the date of such prepayment or acceleration of each dollar of
principal being prepaid or accelerated (taking into account the application of
such prepayment required by Section 2.1 (if any)) and the amount of interest
(exclusive of interest accrued to the date of prepayment or acceleration) that
would have been payable in respect of such dollar if such prepayment had not
been made or the Notes had not been accelerated, determined by discounting
such amounts at the Reinvestment Rate from the respective dates on which they
would have been payable, over (b) 100% of the principal amount of the Notes
being prepaid or accelerated at the date such Notes are to be prepaid or are
accelerated. If the applicable Reinvestment Rate at the time of determination
of the Make-Whole Amount is equal to or higher than 5.54% in the case of any
payment, prepayment or acceleration of the Series A Senior Notes, 5.89% in the
case of any payment, prepayment or acceleration of the Series B Senior Notes,
6.23% in the case of any payment, prepayment or acceleration of the Series C
Senior Notes, 6.56% in the case of any payment, prepayment or acceleration of
the Series D Senior Notes, or 7.46% in the case of any payment, prepayment or
acceleration of the Senior Subordinated Notes, the Make-Whole Amount for any
payment, prepayment or acceleration of Notes of such series is zero. For
purposes of any determination of the Make-Whole Amount:
"Reinvestment Rate" shall mean .50%, plus (1) the yield reported on
page "USD" of the Bloomberg Financial Market Service (or, if not available,
any other nationally recognized trading screen reporting on-line intraday
trading in United States government securities) at 10:00 a.m. (New York
time) for United States government securities having a maturity (rounded to
the nearest month) corresponding to the Weighted Average Life to Maturity
of the principal being prepaid or accelerated or, in the event that no such
nationally recognized trading screen reporting on-line intraday trading in
United States government securities is available (2) the arithmetic mean of
the yields for the two columns under the heading "Week Ending" published in
the Statistical Release under the caption "Treasury Constant Maturities"
for the maturity (rounded to the nearest month) corresponding to the
Weighted Average Life to Maturity of the principal being prepaid or
accelerated (taking into account the application of such prepayment
required by Section 2.1, if any). If no maturity exactly corresponds to
such Weighted Average Life to Maturity, yields for the published maturity
next longer than such Weighted Average Life to Maturity and for the
published maturity next shorter
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<PAGE> 45
than such Weighted Average Life to Maturity shall be calculated and the
Reinvestment Rate shall be interpolated from such yields on a straight-line
basis, rounding in each of such relevant periods to the nearest month. For
the purposes of calculating the Reinvestment Rate pursuant to clause (2)
above, the most recent Statistical Release published prior to the date of
determination of the Make-Whole Amount shall be used.
"Statistical Release" shall mean the then most recently published
statistical release designated "H.15(519)" or any successor publication
which is published weekly by the Federal Reserve System and which
establishes yields on actively traded U.S. government securities adjusted
to constant maturities or, if such statistical release is not published at
the time of any determination hereunder, then such other reasonably
comparable index which shall be designated by the holders of 66-2/3% in
aggregate principal amount of the outstanding Notes.
"Weighted Average Life to Maturity" of the principal amount of the
Notes being prepaid or accelerated shall mean, as of the time of any
determination thereof, the number of years obtained by dividing the then
Remaining Dollar- Years of such principal by the aggregate amount of such
principal. The term "Remaining Dollar-Years" of such principal shall mean
the amount obtained by (1) multiplying (i) the remainder of (A) the amount
of principal that would have become due on each scheduled payment date if
such prepayment had not been made or the Notes had not been accelerated,
less (B) the amount of principal on the Notes scheduled to become due on
such date after giving effect to such prepayment or acceleration and the
application thereof in accordance with the provisions of Section 2.1 (if
any) by (ii) the number of years (calculated to the nearest one-twelfth)
which will elapse between the date of determination and such scheduled
payment date, and (2) totalling the products obtained in (1).
"Multiemployer Plan" shall have the same meaning as in ERISA.
"Net Income" of any Person for any period means the net income (or net
deficit) of such Person for such period, determined in the following manner:
(a) The gross revenues and other proper income credits of such Person
shall be computed for such period in accordance with generally accepted
accounting principles, but excluding:
(1) any gain arising from (i) the sale or other disposition
of any capital assets (other than property foreclosed by such Person
and sold or disposed of in the ordinary course of business), (ii) any
write-up of assets or (iii) the acquisition by such Person of its
outstanding debt securities for a cost less than the principal of and
interest accrued on such securities;
(2) any reversal of any reserve, except to the extent that
provision for such reserve shall have been made during such period;
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<PAGE> 46
(3) any amount representing the interest of such Person in
the undistributed earnings of any other Person; and
(4) any earnings, prior to the date of acquisition, of any
other Person acquired in any manner.
(b) From the amount of such gross revenues and other proper income
credits for such period, determined as provided in the preceding subsection
(a), there shall be deducted all operating expenses and all other proper
revenue and income deductions and charges for such period, determined in
accordance with generally accepted accounting principles, exclusive of any
loss from the sale, abandonment or other disposition of any capital asset
(other than property foreclosed by such Person and sold or disposed of in
the ordinary course of business); but in any event there shall be deducted:
(1) amortization of debt discount and any other amortization
of deferred charges; and
(2) provisions for depreciation, depletion, obsolescence and
amortization of the properties of such Person in amounts in the
aggregate not less than those actually deducted on its books,
determined in accordance with generally accepted accounting
principles.
"Net Revenues" of any Person for any period means interest and finance
income, plus other income, all determined in accordance with generally
accepted accounting principles.
"Nonperforming Assets" include Delinquent Accounts and repossessed
assets held for resale. For purposes hereof, repossessed assets held for
resale shall be valued at the lower of cost or estimated net realizable value.
"Note" and "Notes" have the meanings specified in Section 1.1.
"Note Register" has the meaning specified in Section 11.1.
"Optional Payment" in respect of any Subordinated Indebtedness, means
any payment on account of the principal of and prepayment charge (if any) on,
or any expenditure for the purchase or other retirement of, such Subordinated
Indebtedness other than an installment, sinking fund, serial maturity or other
required payment in respect thereof permitted by subsection (a)(3) of the
definition of "Junior Subordinated Indebtedness" or subsection (a)(3) of the
definition of "Subordinated Indebtedness", in this Section 8.1.
"Order," in respect of a court, arbitrator or Governmental Body, means
any order, writ, injunction, decree, judgment, award, determination, direction
or demand.
"Person" means an individual, a corporation, a partnership, a trust, an
unincorporated organization, or a government or any agency or political
subdivision thereof.
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<PAGE> 47
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributed or is a member or otherwise may
have any liability.
"Preferred Shares," as applied to Shares of any corporation, means
Shares of such corporation which are entitled to preference or priority over
any other Shares of such corporation in respect of voting rights, the payment
of dividends or the distribution of assets upon liquidation.
"Purchasers" has the meaning specified in Section 1.1.
"Reportable Event" shall have the same meaning as in ERISA.
"Responsible Officer" means the President, an Executive Vice President,
a Senior Vice President or any other Vice President of the Company.
"Restricted Payment," in respect of the Company, means
(a) any dividend on its Shares whether (in any such case) in cash or
property or obligations of the Company (other than a dividend payable
solely in Common Shares of the Company); or
(b) any payment on account of the purchase, redemption or other
retirement of any of its Shares whether (in any such case) in cash or
property or obligations of the Company, or of any warrant, option or
other right to acquire such Shares (except a payment on account of the
principal of and prepayment charge (if any) on convertible Indebtedness),
or any other distribution whether (in any such case) in cash or property
or obligations of the Company made in respect thereof, either directly or
indirectly; or
(c) any Optional Payment on Subordinated Indebtedness; whether (in
any such case) in cash or property or obligations of the Company. The
amount of any Restricted Payment in property of the Company shall be
deemed to be the greater of the fair value of such property (as
determined by the Board) or the net book value of such property on the
Company's books on the Computation Date.
"Restricted Subsidiary" means any Subsidiary which (a) is incorporated
or organized under the laws of the United States of America or a state thereof
or the District of Columbia or Canada or a province thereof and
(b) substantially all of the operating assets of which are located in and
substantially all of the business of which is conducted within the United
States of America and/or Canada.
"SEC" means the Securities and Exchange Commission or any similar or
corresponding governmental commission, department or agency substituted
therefor.
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<PAGE> 48
"Senior Borrowing Base" means the sum of Adjusted Consolidated Net Worth
and all Subordinated Indebtedness of the Company and its Restricted
Subsidiaries, determined and consolidated in accordance with generally
accepted accounting principles.
"Senior Indebtedness" of any Person means
(a) all Indebtedness of such Person other than Subordinated
Indebtedness,
(b) all Indebtedness of Subsidiaries of such Person, and
(c) all security deposits of lessee clients of such Person and its
Subsidiaries.
"Senior Notes" shall have the meaning specified in Section 1.1.
"Senior Subordinated Indebtedness" means the Senior Subordinated Notes
and any other Indebtedness of the Company which is by its terms subordinate
and junior only to Senior Indebtedness.
"Senior Subordinated Notes" has the meaning specified in Section 1.1.
"Shares" of any corporation include any and all shares of capital stock
of such corporation of any class or classes, and other shares, interests,
participations, convertible Indebtedness or other equivalents (however
designated) in the capital of such corporation.
"Subordinated Indebtedness" means the Company's 13-5/8% Senior
Subordinated Notes due November 1995, 10.15% Senior Subordinated Notes due
March 1997, 10.60% Senior Subordinated Notes due December 1999, 11.26% Senior
Subordinated Notes due April 2000, 8.93% Senior Subordinated Notes due
December 2002, 7.46% Senior Subordinated Notes due November 2003, 11.82%
Junior Subordinated Notes due December 1999, 12.26% Junior Subordinated Notes
due April 2000, 9.93% Junior Subordinated Notes due December 2002, the
Indebtedness of the Company to The Foothill Group, Inc. represented by the
Company's Subordinated Promissory Note dated October 25, 1978, in the original
principal amount of $9,590,000, issued pursuant to the Loan Agreement dated as
of October 25, 1978 between the Company and The Foothill Group, Inc., the
Indebtedness of the Company to The Foothill Group, Inc. represented by the
Company's Class 2 Junior Subordinated Promissory Note dated December 31, 1984
in the original principal amount of $12,000,000, issued pursuant to the Loan
Agreement dated as of December 31, 1984, between the Company and The Foothill
Group, Inc., any other Indebtedness (other than "Advances" as defined in and
to the extent permitted by the Subordination Agreement referred to in Section
4.1(E) and other than Indebtedness for payments permitted by Section 7.14) of
the Company to The Foothill Group, Inc. or any other Affiliate, and unsecured
Indebtedness of the Company which
(a) on the date on which the status of such Indebtedness is
determined for any purpose hereof,
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<PAGE> 49
(1) has a final maturity not earlier than November 15, 2003,
(2) has a Weighted Average Life to Maturity at least as long
as the longest remaining Weighted Average Life to Maturity of
the Senior Notes, and
(3) is not subject to principal payment, redemption or other
retirement by means of any installment, sinking fund, serial
maturity or other required payments prior to November 15, 1998;
and
(b) is issued or assumed pursuant to, or evidenced by, an
indenture or other instrument which contains provisions for the
subordination of such Indebtedness (to which appropriate reference shall
be made in the instruments evidencing such Indebtedness if not contained
therein) to the Senior Notes (and, at the option of the Company, if so
provided, to other Indebtedness for Money Borrowed of the Company,
either generally or as specifically designated) substantially as follows
(without limitation as to further, but not inconsistent, provisions, if
so desired):
"Subordination. Anything in this Subordinated Note to
the contrary notwithstanding, the indebtedness evidenced by this
Subordinated Note shall be subordinate and junior in right of
payment, to the extent and in the manner hereinafter set forth,
to all indebtedness of the Company evidenced by its 13-1/8%
Senior Notes, 9.40% Senior Notes, 9.80% Senior Notes, 10.23%
Senior Notes, 10.27% Senior Notes, 10.35% Senior Notes, 9.43%
Senior Notes, 9.76% Senior Notes, 10.10% Senior Notes, 8.51%
Senior Notes, 8.98% Senior Notes, 9.44% Senior Notes, 9.25%
Senior Notes, 6.77% Series A Senior Notes, 7.31% Series B Senior
Notes, 7.93% Series C Senior Notes, 5.54% Series A Senior Notes,
5.89% Series B Senior Notes, 6.23% Series C Senior Notes and
6.56% Series D Senior Notes from time to time outstanding
(whether outstanding at the date of this Subordinated Note or
issued after the date of this Subordinated Note and as said
13-1/8% Senior Notes, 9.40% Senior Notes, 9.80% Senior Notes,
10.23% Senior Notes, 10.27% Senior Notes, 10.35% Senior Notes,
9.43% Senior Notes, 9.76% Senior Notes, 10.10% Senior Notes,
8.51% Senior Notes, 8.98% Senior Notes, 9.44% Senior Notes,
9.25% Senior Notes, 6.77% Series A Senior Notes, 7.31% Series B
Senior Notes, 7.93% Series C Senior Notes, 5.54% Series A Senior
Notes, 5.89% Series B Senior Notes, 6.23% Series C Senior Notes
and 6.56% Series D Senior Notes may at any time and from time
to time be modified or amended in any respect), and to( )*
_______________ (all such indebtedness to which this
Subordinated Note is subordinate as aforesaid being sometimes
hereinafter referred to as 'Superior Indebtedness'):
________________________
* Here will be inserted the identification of any other Superior
Indebtedness incurred by the Company after the Closing Date.
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<PAGE> 50
"(i) In the event of any insolvency or bankruptcy proceedings,
and any receivership, liquidation, reorganization or other similar
proceedings in connection therewith, relative to the Company or to
its creditors, as such, or to its property, and in the event of
any proceedings for voluntary liquidation, dissolution or other
winding up of the Company, whether or not involving insolvency or
bankruptcy, then the holders of Superior Indebtedness shall be
entitled to receive payment in full of all principal, premium (if any)
and interest on all Superior Indebtedness (including interest thereon
accruing after the commencement of any such proceedings) before the
holder of this Subordinated Note shall be entitled to receive any
payment on account of principal, premium (if any) or interest on this
Subordinated Note. Pursuant to the foregoing (but subject to the power
of a court of competent jurisdiction to make other equitable
provisions reflecting the rights conferred herein upon Superior
Indebtedness and the holders thereof with respect to the subordinated
indebtedness represented by this Subordinated Note and the holder
hereof by a lawful plan of reorganization under applicable bankruptcy
law) the holders of Superior Indebtedness (until payment in full of
all principal, premium (if any) and interest on all Superior
Indebtedness, including interest thereon accruing after the
commencement of any such proceeding) shall be entitled to receive for
application in payment thereof any payment or distribution of any kind
or character, whether in cash or property or securities, which may be
payable or deliverable in any such proceedings in respect of this
Subordinated Note (including any such payment or distribution which
may be payable or deliverable by virtue of the provisions of, or any
security for, any securities which are subordinate and junior in right
of payment to this Subordinated Note), except securities which are
subordinate and junior (to at least the same extent as this
Subordinated Note) in right of payment to the payment of all Superior
Indebtedness then outstanding. The holder of this Subordinated Note
shall not exercise or attempt to exercise any right of setoff or
counterclaim in respect of any obligations of the holder of this
Subordinated Note to the Company against the obligations of the
Company under this Subordinated Note if the effect thereof shall be to
reduce the amount of any such payment or distribution to which the
holders of Superior Indebtedness would be entitled in the absence of
such setoff or counterclaim; and if and to the extent that,
notwithstanding the foregoing, the holder of this Subordinated Note is
required by any mandatory provision of law to exercise any such right
of setoff or counterclaim, each reduction of the amount owing on
account of the principal of or premium (if any) or interest on this
Subordinated Note by reason of such setoff or counterclaim shall be
deemed to be a payment by the Company in a like amount in respect of
this Subordinated Note to which the second sentence of this paragraph
(i) shall apply.
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'(ii) In the event that this Subordinated Note is declared due
and payable before its expressed maturity because of the occurrence of
an event of default hereunder (under circumstances when the provisions
of the foregoing paragraph (i) or the following paragraph (iii) shall
not be applicable), the holders of Superior Indebtedness then due or
becoming due by acceleration or otherwise, prior to the expiration of
a period of 75 days after the date on which the Company or a holder of
this Subordinated Note gives to the holders of the Superior
Indebtedness the written notice provided for below in this paragraph
(ii), shall be entitled to receive payment in full of all principal,
premium (if any) and interest on all such Superior Indebtedness before
the holder of this Subordinated Note shall be entitled to receive any
payment on account of the principal, premium (if any) or interest on
this Subordinated Note other than any such principal, premium (if any)
and interest due otherwise than by reason of such declaration. For
the purposes of this paragraph (ii) the Company agrees, for the
benefit of the holders of Superior Indebtedness as well as the holder
of this Subordinated Note, that, if any such declaration remains
unrescinded for 15 days, the Company will promptly give written notice
thereof to all holders of Superior Indebtedness. If the Company fails
to give such notice, the holder of this Subordinated Note may do so on
behalf of the Company. At any time within 75 days after the date on
which such notice is given, any holder of outstanding Superior
Indebtedness shall have the right to declare all Superior Indebtedness
held by such holder to be due and payable, whereupon such Superior
Indebtedness shall forthwith become immediately due and payable
regardless of the expressed maturity date thereof. Nothing herein
shall prevent the holder of this Subordinated Note from seeking any
remedy allowed at law or in equity so long as any judgment or decree
obtained thereby makes provision for enforcing this paragraph (ii).
'(iii) In the event that any default shall occur and be
continuing with respect to any Superior Indebtedness permitting the
holders of such Superior Indebtedness to accelerate the maturity
thereof, the holder of this Subordinated Note shall not be entitled to
receive any payment on account of principal, premium (if any) or
interest hereon (including any such payment which would cause a
default) if either (a) judicial proceedings shall be pending in
respect of such default, or (b) written notice of such default
directing the Company to cease payment on the subordinated
indebtedness in accordance with this paragraph (iii) shall have been
given to the Company by any holder of Superior Indebtedness and a
period of 180 days in the case of a monetary default or 90 days in the
case of any other default shall not have expired since the giving of
such notice; provided, however, that this paragraph (iii) shall apply
to only one such notice given in any twelve month period. The
Company, forthwith upon receipt of any such notice, shall send a copy
thereof to the holder of this Subordinated Note.
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<PAGE> 52
No present or future holder of Superior Indebtedness shall be
prejudiced in such holder's right to enforce subordination of this
Subordinated Note by any act or failure to act on the part of the
Company. The provisions of this Section are solely for the purpose of
defining the relative rights of the holders of Superior Indebtedness on
the one hand, and the holder of this Subordinated Note on the other hand,
and nothing herein shall impair, as between the Company and the holder of
this Subordinated Note, the obligation of the Company, which is
unconditional and absolute, to pay to the holder hereof the principal and
interest hereon in accordance with the terms hereof, nor shall anything
herein prevent the holder of this Subordinated Note from exercising all
remedies otherwise permitted by applicable law or hereunder upon default
hereunder, subject to the rights (if any) under this Section of holders
of Superior Indebtedness to receive cash, property or securities
otherwise payable or deliverable to the holder of this Subordinated Note
and all amounts which are deemed to be payments in respect of this
Subordinated Note by reason of setoff or counterclaim in respect of any
obligations of the holder of this Subordinated Note to the Company
against the obligations of the Company under this Subordinated Note.' "
"Subordination Agreement" shall have the meaning specified in Section
4.1(E).
"Subsidiary" of any designated corporation means any corporation of
which such designated corporation, or one or more Subsidiaries of such
designated corporation, or such designated corporation and one or more
Subsidiaries of such designated corporation, own Shares (however designated)
having ordinary voting power for the election of at least a majority of the
members of the board of directors (or other governing body) of such
corporation, other than Shares having such power only by reason of the
happening of a contingency. Unless the context otherwise requires, the term
"Subsidiary" means a Subsidiary of the Company.
"Unrestricted Subsidiary" means any Subsidiary other than a Restricted
Subsidiary.
"Weighted Average Life to Maturity" of any Indebtedness means at any
time the number of years obtained by dividing the then Remaining Dollar-years
of such Indebtedness by the then outstanding principal amount of such
Indebtedness; and the "Remaining Dollar-years" of any Indebtedness means at
any time the amount obtained by (a) multiplying the amount of each then
remaining installment, sinking fund, serial maturity or other required
payment, including payment at final maturity, by the number of years
(calculated to the nearest one-twelfth) which will elapse between the time in
question and the making of that payment and (b) totaling all of the products
obtained in (a).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all
of the outstanding Shares of which, other than directors' qualifying Shares,
are owned by the Company, or by one or more Wholly Owned Restricted
Subsidiaries, or by the Company and one or more Wholly Owned Restricted
Subsidiaries.
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Section 8.2. Other Definitions. The terms defined in this Section 8.2,
wherever used in this Agreement, have the respective meanings hereinafter
specified, unless the context otherwise requires.
"this Agreement" means, and the words "herein," "hereof," "hereunder"
and words of similar import refer to, this instrument as it may from time to
time be amended or supplemented.
"holder," with respect to any of the Notes, means the registered owner
thereof as shown on the Note Register.
"outstanding," with respect to the Notes, means, at any date, all Notes
theretofore executed and delivered under the Agreements which have not been
paid or prepaid in full, except Notes in exchange for or in lieu of which
other Notes have been executed and delivered in accordance with the
Agreements; provided, however, that in determining whether the holders of
outstanding Notes of the requisite aggregate unpaid principal amount at any
time have given any authorization, notice, consent or waiver hereunder Notes
owned by the Company or any Affiliate of the Company shall be disregarded and
deemed not to be outstanding.
Section 8.3. Accounting Terms. All accounting terms used herein which
are not expressly defined in this Agreement have the meanings respectively
given to them in accordance with United States generally accepted accounting
principles as in effect from time to time, all computations made pursuant to
this Agreement shall be made in accordance with United States generally
accepted accounting principles as in effect from time to time and all balance
sheets and other financial statements shall be prepared in accordance with
United States generally accepted accounting principles as in effect from time
to time. Wherever reference is made in any provision of this Agreement to a
consolidated or consolidating balance sheet or other consolidated or
consolidating financial statement or financial computation with respect to the
Company and its Restricted Subsidiaries, if at the time that any such
provision is applicable the Company does not have any Restricted Subsidiary,
such terms shall mean a balance sheet or other financial statement or
financial computation, as the case may be, with respect to the Company only.
Section 9. Remedies.
Section 9.1. Events of Default Defined; Acceleration of Maturity. If
any one or more of the following events (herein called "Events of Default")
shall have occurred and be continuing (whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any Order of any court or any Order, rule or
regulation of any Governmental Body), that is to say:
(a) default shall be made in the due and punctual payment of all or
any part of the principal of, or prepayment charge (if any) on, any Note
when and as the same shall become due and payable, whether at the stated
maturity thereof, at the time for required
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prepayment as provided in Section 2.1, by acceleration, by notice of
prepayment or repurchase or otherwise;
(b) default shall be made in the due and punctual payment
of any interest on any Note when and as such interest shall become due and
payable, and such default shall have continued for a period of two days;
(c) default shall be made in the performance or observance of
any covenant, agreement or condition contained in Section 5(F), Section 6,
Section 7.2(A) or in Section Section 7.5 to 7.19, inclusive;
(d) default shall be made in the performance or observance of any
other covenant, agreement or condition contained in this Agreement and such
default shall have continued for a period of 30 days;
(e) default shall be made in the payment when due (whether by lapse
of time, by declaration, by call for redemption or otherwise) of the
principal of, premium (if any), or interest on, any Indebtedness for
Borrowed Money (other than the Notes) of the Company or any Restricted
Subsidiary or of any amount due pursuant to any Interest Rate Protection
Agreement of the Company or any Restricted Subsidiary and such default
shall continue beyond the period of grace (if any) allowed with respect
thereto;
(f) default or the happening of any event shall occur under any
indenture, agreement or other instrument pursuant to which any Indebtedness
for Borrowed Money of the Company or any Restricted Subsidiary is or may be
issued or under any Interest Rate Protection Agreement of the Company or
any Restricted Subsidiary and such default or event shall continue for a
period of time sufficient to permit the acceleration of the maturity of any
Indebtedness for Borrowed Money of the Company or any Restricted Subsidiary
outstanding thereunder or result in the termination of any Interest Rate
Protection Agreement of the Company or any Restricted Subsidiary;
(g) the Company or any Restricted Subsidiary shall,
(1) admit in writing its inability to pay its debts generally
as they become due,
(2) file or consent to the filing against it of a petition
for relief under any Chapter of Title 11 of the United States Code or
any similar act,
(3) make an assignment for the benefit of its creditors,
(4) consent to the appointment of a receiver of itself or of
the whole or any substantial part of its property,
(5) on an involuntary petition for relief under any Chapter
of Title 11 of the United States Code or any similar act filed against
it, have an order for relief entered under any such Chapter or any
such similar act, or
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(6) file a petition or answer seeking reorganization or
arrangement under the Federal bankruptcy laws or any other applicable
law or statute of the United States of America or any other
jurisdiction;
(h) a court of competent jurisdiction shall enter an order
appointing, without the consent of the Company or a Restricted Subsidiary,
a receiver of the Company or such Restricted Subsidiary, respectively, or
of the whole or any substantial part of the property of either, or
approving the filing of a petition seeking the reorganization or
arrangement of the Company or such Restricted Subsidiary under the Federal
bankruptcy laws or any other applicable law or statute of the United States
of America or any other jurisdiction, and such Order shall not be vacated
or set aside or stayed within 60 days from the date of entry thereof;
(i) final judgment shall be rendered against the Company or any
Restricted Subsidiary for the payment of money in excess of $500,000 and
such judgment, within 60 days after its entry, shall not be discharged or
execution thereon stayed pending appeal or, in the event of such a stay,
such judgment shall not be discharged within 60 days after such stay
expires; or
(j) any representation or warranty heretofore or hereafter made by or
on behalf of the Company herein or in any certificate or other writing
delivered under or pursuant to this Agreement or in connection with any
provision hereof or related to the transactions contemplated hereby shall
prove to have been false or incorrect or breached in any respect on the
date as of which made;
then (1) upon the occurrence of any Event of Default described in subsection
(g) or (h), the unpaid principal amount of the Notes, together with accrued
interest thereon which shall be deemed matured and, to the extent permitted by
law, together with a Default Premium, shall automatically become immediately
due and payable, without presentment, demand, protest or other requirements of
any kind, all of which are hereby expressly waived by the Company, or (2) upon
the occurrence of any other Event of Default, (i) the holder or holders of 50%
or more of the aggregate unpaid principal amount of the Senior Notes at the
time outstanding may, by written notice to the Company, declare all of the
Senior Notes to be, and the same shall forthwith become, due and payable,
together with accrued interest thereon which shall be deemed matured and, to
the extent permitted by law, together with a Default Premium and (ii) the
holder or holders of at least 66-2/3% of the aggregate unpaid principal amount
of the Senior Subordinated Notes at the time outstanding may, by written
notice to the Company, declare all of the Senior Subordinated Notes to be, and
the same shall forthwith become, due and payable, together with accrued
interest thereon which shall be deemed matured and, to the extent permitted by
law, together with a Default Premium, provided that during the existence of an
Event of Default described in subsection (a) or (b) with respect to any Note,
the holder of such Note may, by written notice to the Company, declare such
Note to be, and the same shall forthwith become, due and payable, together
with accrued interest thereon which shall be deemed matured and, to the extent
permitted by law, together with a Default Premium. If any holder of any Note
shall exercise the option specified in the proviso to the preceding sentence,
each other holder of any Note may, by written notice to the Company, declare
all Notes held
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by it to be, and the same shall forthwith become, due and payable, together
with accrued interest thereon which shall be deemed matured and, to the extent
permitted by law, together with a Default Premium. Nevertheless, if at any
time after acceleration of the maturity of any Note or Notes, no judgment or
decree has been entered for the payment of any monies due pursuant to the
Notes or this Agreement, the Company shall pay all arrears of interest and all
payments on account of the principal and prepayment or other charge which
shall have become due otherwise than by acceleration (with, to the extent
permitted by applicable law, interest on principal and prepayment charge and
on overdue interest, at the rate specified in the Notes) and all Events of
Default (other than nonpayment of principal of and accrued interest on Notes,
in amounts equal to prepayment or other charge as aforesaid, due and payable
solely by virtue of acceleration) shall be remedied or waived pursuant to
Section 10.1, then, and in every such case, (x) the holder or holders of at
least 66-2/3% of the aggregate unpaid principal amount of the Senior Notes at
the time outstanding, by written notice to the Company may rescind and annul
any such acceleration and its consequences as to the Senior Notes and (y) the
holder or holders of at least 66-2/3% of the aggregate unpaid principal amount
of the Senior Subordinated Notes at the time outstanding, by written notice to
the Company may rescind and annul any such acceleration and its consequences
as to the Senior Subordinated Notes, but no such action shall affect any
subsequent default or Event of Default or impair any right consequent thereon.
Section 9.2. Suits for Enforcement. In case any one or more of the
Events of Default specified in Section 9.1 shall have occurred and be
continuing, each holder of any Note may proceed to protect and enforce its
rights either by suit in equity or by action at law, or both, whether for the
specific performance of any covenant or agreement contained in this Agreement
or in aid of the exercise of any power granted in this Agreement, or the
holder of any Note may proceed to enforce the payment of all sums due upon
such Note or to enforce any other legal or equitable right of the holder of
such Note.
If the Company shall default in the payment of principal of, or interest
or premium (if any) on, any Note, or shall default in the performance or
observance of any covenant, agreement or condition contained herein, it will
pay to the holder of any Note, to the extent lawful, such amounts as shall be
sufficient to cover the costs and expenses, including but not limited to
reasonable attorneys' fees, incurred by such holder in collecting any sums due
on such holder's Note or in otherwise enforcing any of such holder's rights.
Section 9.3. Remedies Cumulative. No remedy herein conferred upon the
holder of any Note is intended to be exclusive of any other remedy and each
and every such remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity
or by statute or otherwise.
Section 9.4. Remedies Not Waived. No course of dealing between the
Company and the holder of any Note nor any delay in exercising any rights
hereunder or under any Note shall operate as a waiver of any rights of any
holder of such Note.
Section 9.5. Notice by the Company of Acceleration and Certain Other
Action. If the holder or holders of 50% or more of the aggregate unpaid
principal amount of the Senior
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Notes at the time outstanding shall accelerate the maturity of all of the
Senior Notes, or the holder or holders of at least 66-2/3% of the aggregate
unpaid principal amount of the Senior Subordinated Notes at the time
outstanding shall accelerate the maturity of all of the Senior Subordinated
Notes, or if the holder of any Note shall accelerate the maturity thereof, as
provided in Section 9.1, or if any event or condition specified in Section
9.1(D), 9.1(E) or 9.1(F) shall occur, the Company will forthwith give written
notice thereof to the holders of all outstanding Notes, describing the nature
and status of the Event of Default giving rise to such acceleration, or of the
default in the performance or observance of any covenant, agreement or
condition contained herein giving rise to such Notice of Default, or of the
event or condition specified in Section 9.1(D), 9.1(E) or 9.1(F), as the case
may be.
Section 10. Amendments, Waivers and Consents.
Section 10.1. Consent Required. Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended
or compliance therewith may be waived (either generally or in a particular
instance and either retroactively or prospectively), if the Company shall have
obtained the consent in writing of the holder or holders of at least 66-2/3%
in aggregate unpaid principal amount of the Senior Notes at the time
outstanding and, the holder or holders of at least 66-2/3% of the aggregate
unpaid principal amount of the Senior Subordinated Notes at the time
outstanding; provided that without the written consent of the holders of all
of the Notes then outstanding, no such amendment or waiver shall be effective
(a) which will change the time of payment (including any prepayment required
by Section 2.1, if any) of the principal of or the interest on any Note or
change the principal amount thereof or change the rate of interest thereon, or
(b) which will change any of the provisions with respect to prepayments, or
(c) which will change any of the provisions of Exhibit E attached hereto, or
(d) which will change the percentage of holders of the Notes required to
consent to any such amendment or waiver of any of the provisions of this
Section 10 or Section 9.
Section 10.2. Solicitation of Holders. So long as there are any Notes
outstanding, the Company will not solicit, request or negotiate for or with
respect to any proposed waiver or amendment of any of the provisions of this
Agreement or the Notes unless each holder of Notes (irrespective of the amount
of Notes then owned by it) shall be informed thereof by the Company and shall
be afforded the opportunity of considering the same and shall be supplied by
the Company with sufficient information to enable it to make an informed
decision with respect thereto. The Company will not, directly or indirectly,
pay or cause to be paid any remuneration, whether by way of supplemental or
additional interest, fee or otherwise, to any holder of Notes as consideration
for or as an inducement to entering into by any holder of Notes of any waiver
or amendment of any of the terms and provisions of this Agreement or the Notes
unless such remuneration is concurrently offered and paid, on the same terms,
ratably to the holders of all Notes then outstanding. Promptly and in any
event within 30 days of the date of execution and delivery of any such waiver
or amendment, the Company shall provide a true, correct and complete copy
thereof to each of the holders of the Notes.
Section 10.3. Effect of Amendment or Waiver. Any such amendment or
waiver shall apply equally to all of the holders of the Notes and shall be
binding upon them, upon each
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future holder of any Note and upon the Company, whether or not such Note shall
have been marked to indicate such amendment or waiver. No such amendment or
waiver shall extend to or affect any obligation not expressly amended or
waived or impair any right consequent thereon.
Section 11. Miscellaneous.
Section 11.1. Registered Notes. The Company shall cause to be kept at
its principal office a register for the registration and transfer of the Notes
(the "Note Register"), and the Company will register or transfer or cause to
be registered or transferred, as hereinafter provided any Note issued pursuant
to this Agreement.
At any time and from time to time the holder of any Note which has been
duly registered as hereinabove provided may transfer such Note upon surrender
thereof at the principal office of the Company duly endorsed or accompanied by
a written instrument of transfer duly executed by the registered holder of
such Note or its attorney duly authorized in writing.
The Person in whose name any Note shall be registered shall be deemed
and treated as the owner and holder thereof for all purposes of this
Agreement. Payment of or on account of the principal, premium (if any) and
interest on any Note shall be made to or upon the written order of such
registered holder.
Section 11.2. Exchange of Notes. At any time and from time to time,
upon not less than ten days' notice to that effect given by the holder of any
Note initially delivered or of any Note substituted therefor pursuant to
Section 11.1, this Section 11.2 or Section 11.3, and, upon surrender of such
Note at its office, the Company will deliver in exchange therefor, without
expense to such holder, except as set forth below, a Note for the same
aggregate principal amount as the then unpaid principal amount of the Note so
surrendered, or Notes in the denomination of $100,000 (or such lesser amount
as shall constitute 100% of the Notes of such holder) or any amount in excess
thereof as such holder shall specify, dated as of the date to which interest
has been paid on the Note so surrendered or, if such surrender is prior to the
payment of any interest thereon, then dated as of the date of issue,
registered in the name of such Person or Persons as may be designated by such
holder, and otherwise of the same form and tenor as the Notes so surrendered
for exchange. The Company may require the payment of a sum sufficient to
cover any stamp tax or governmental charge imposed upon such exchange or
transfer.
Section 11.3. Loss, Theft, Etc. of Notes. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of
any Note, and in the case of any such loss, theft or destruction upon delivery
of a bond of indemnity in such form and amount as shall be reasonably
satisfactory to the Company, or in the event of such mutilation upon surrender
and cancellation of the Note, the Company will make and deliver without
expense to the holder thereof, a new Note, of like tenor, in lieu of such
lost, stolen, destroyed or mutilated Note. If the Purchaser or any subsequent
Institutional Holder is the owner of any such lost, stolen or destroyed Note,
then the affidavit of an authorized officer of such owner, setting forth the
fact of loss, theft or destruction and of its ownership of such Note at the
time of such
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<PAGE> 59
loss, theft or destruction shall be accepted as satisfactory evidence thereof
and no further indemnity shall be required as a condition to the execution and
delivery of a new Note other than the written agreement of such owner to
indemnify the Company.
Section 11.4. Expenses, Stamp Tax Indemnity. Whether or not the
transactions herein contemplated shall be consummated, the Company agrees to
pay directly all of your out-of-pocket expenses in connection with the
preparation, execution and delivery of this Agreement and the transactions
contemplated hereby, including but not limited to the reasonable charges and
disbursements of Chapman and Cutler, your special counsel, duplicating and
printing costs and charges for shipping the Notes, adequately insured to you
at your home office or at such other place as you may designate, and all such
expenses (including reasonable attorney's fees) relating to any amendment,
waivers or consents pursuant to the provisions hereof (whether or not the same
are actually executed and delivered), including, without limitation, any
amendments, waivers, or consents resulting from any work-out, renegotiation or
restructuring relating to the performance by the Company of its obligations
under this Agreement and the Notes. The Company also agrees that it will pay
and save you harmless against any and all liability with respect to stamp and
other taxes (if any) which may be payable or which may be determined to be
payable in connection with the execution and delivery of this Agreement or the
Notes, whether or not any Notes are then outstanding. The Company agrees to
protect and indemnify you against any liability for any and all brokerage fees
and commissions payable or claimed to be payable to any Person in connection
with the transactions contemplated by this Agreement. Without limiting the
foregoing, the Company agrees to pay the cost of obtaining the private
placement numbers for each series of Notes.
Section 11.5. Powers and Rights Not Waived; Remedies Cumulative; Waiver
of Jury Trial. No delay or failure on the part of the holder of any Note in
the exercise of any power or right shall operate as a waiver thereof, nor
shall any single or partial exercise of the same preclude any other or further
exercise thereof, or the exercise of any other power or right, and the rights
and remedies of the holder of any Note are cumulative to, and are not
exclusive of, any rights or remedies any such holder would otherwise have.
THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY WITH
RESPECT TO ANY PROCEEDINGS RELATING TO THE ENFORCEMENT OF THE TERMS AND
PROVISIONS OF THIS AGREEMENT AND THE NOTES.
Section 11.6. Notices. All communications provided for hereunder shall
be in writing and, if to you, delivered or mailed prepaid by registered or
certified mail or overnight air courier, or by facsimile communication, in
each case addressed to you at your address appearing on Schedule I to this
Agreement or such other address as you or the subsequent holder of any Note
initially issued to you may designate to the Company in writing, and if to the
Company, delivered or mailed by registered or certified mail or overnight air
courier, or by facsimile communication, to the Company at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025, Attention: Chief
Financial Officer or to such other address as the Company may in writing
designate to you or to a subsequent holder of the Note initially issued to
you; provided, however, that a notice to you by overnight air courier shall
only be effective if delivered to you at a street address designated for such
purpose in Schedule I, and a notice to you by facsimile communication shall
only be effective if made by confirmed
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transmission to you at a telephone number designated for such purpose in
Schedule I and a copy of such facsimile communication is delivered to you by
overnight air courier on the next succeeding day, or, in either case, as you
or a subsequent holder of any Note initially issued to you may designate to
the Company in writing.
Section 11.7. Successors and Assigns. This Agreement shall be binding
upon the Company and its successors and assigns and shall inure to your
benefit and to the benefit of your successors and assigns, including each
successive holder or holders of any Notes.
Section 11.8. Survival of Covenants and Representations. All
covenants, representations and warranties made by the Company herein and in
any certificates delivered pursuant hereto, whether or not in connection with
the Closing Date, shall survive the closing and the delivery of this Agreement
and the Notes.
All covenants, representations and warranties made by the Company herein
shall be deemed to have been relied upon by you notwithstanding any
investigation heretofore or hereafter made by you or on your behalf.
Section 11.9. Severability. Should any part of this Agreement for any
reason be declared invalid or unenforceable, such decision shall not affect
the validity or enforceability of any remaining portion, which remaining
portion shall remain in force and effect as if this Agreement had been
executed with the invalid or unenforceable portion thereof eliminated.
SECTION 11.10. GOVERNING LAW. THIS AGREEMENT AND THE NOTES ISSUED AND
SOLD HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH NEW YORK
LAW.
Section 11.11. Captions. The descriptive headings of the various
Sections or parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions hereof.
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The execution hereof by you shall constitute a contract between us for
the uses and purposes hereinabove set forth, and this Agreement may be
executed in any number of counterparts, each executed counterpart constituting
an original but all together only one agreement.
FOOTHILL CAPITAL CORPORATION
By
--------------------------
Its
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Accepted as of November 15, 1993.
[VARIATION]
By
-----------------------
Its
[By
----------------------
Its ]
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<PAGE> 1
EXHIBIT 11.1
THE FOOTHILL GROUP, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
Primary:
Income from continuing operations $20,823,000 $12,134,000 $ 5,684,000
Preferred stock dividends (270,000) (277,000) (138,000)
Income (loss) from discontinued operations (1,579,000) 563,000 374,000
Extraordinary items (561,000) (552,000) 213,000
----------- ----------- -----------
Income for primary calculation $18,413,000 $11,868,000 $ 6,133,000
=========== =========== ===========
Weighted average number of common shares outstanding 16,262,000 13,326,000 10,067,000
Effect of dilutive stock options 421,000 404,000 39,000
----------- ------------ ----------
Number of common shares used in computation 16,683,000 13,730,000 10,106,000
=========== =========== ===========
Per share:
Income from continuing operations $1.23 $0.89 $0.55
Income (loss) from discontinued operations (0.09) 0.04 0.04
Extraordinary items (0.03) (0.04) 0.02
----------- --------- -----------
Net income $1.11 $0.89 $0.61
=========== ========== ===========
Fully diluted:
Income from continuing operations $20,823,000 $12,134,000 $ 5,684,000
Interest expense avoided on assumed conversion of 9.5%
debentures - 1,003,000 1,337,000
Tax benefit lost due to assumed conversion - (401,000) (562,000)
Income (loss) from discontinued operations (1,579,000) 563,000 374,000
Extraordinary items (561,000) (552,000) 213,000
----------- ----------- -----------
Income for fully diluted calculation $18,683,000 $12,747,000 $ 7,046,000
=========== =========== ===========
Weighted average number of shares outstanding 16,262,000 13,326,000 10,068,000
Shares issued upon assumed conversion of convertible
preferred stock 667,000 667,000 343,000
Shares issued upon assumed conversion of 9.5% debentures - 1,240,000 1,937,000
Effect of dilutive stock options 434,000 417,000 52,000
----------- ----------- ------------
Number of shares used in computation 17,363,000 15,650,000 12,400,000
=========== =========== ===========
Per share:
Income from continuing operations $ 1.20 $ 0.81 $ 0.52
Income (loss) from discontinued operations (0.09) 0.04 0.03
Extraordinary items (0.03) (0.03) 0.02
------------ ------------ -----------
Net income $ 1.08 $ 0.82 $ 0.57
============ ============ ===========
</TABLE>
<PAGE> 1
THE FOOTHILL GROUP, INC. EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
--------------- --------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA*:
Interest income.............. $ 57,536 11.4% $ 49,915 11.5% $ 52,080 12.3% $ 61,170 14.3% $ 63,212 14.9%
Interest expense............. 21,064 4.2% 24,268 5.6% 34,511 8.2% 39,046 9.2% 41,571 9.8%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Interest margin.............. 36,472 7.2% 25,647 5.9% 17,569 4.1% 22,124 5.1% 21,641 5.1%
Fees and other income........ 27,288 5.4% 16,820 3.9% 12,585 3.0% 5,247 1.2% 9,309 2.2%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total margin................. 63,760 12.6% 42,467 9.8% 30,154 7.1% 27,371 6.3% 30,950 7.3%
Gain (loss) on investments,
net........................ 5,257 1.0% 3,373 0.8% 1,022 0.2% (7,958) (1.9)% 489 0.1%
Provision for credit
losses..................... 12,794 2.5% 8,671 2.0% 7,298 1.7% 3,443 0.8% 3,681 0.9%
General and administrative
expenses................... 20,322 4.0% 16,414 3.8% 13,727 3.3% 12,583 2.9% 12,824 3.0%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Income from continuing
operations before income
taxes...................... 35,901 7.1% 20,755 4.8% 10,151 2.3% 3,387 0.7% 14,934 3.5%
Provision for income taxes
from continuing
operations................. 15,078 3.0% 8,621 2.0% 4,467 1.1% 437 0.1% 6,553 1.5%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Income from continuing
operations................. 20,823 4.1% 12,134 2.8% 5,684 1.2% 2,950 0.6% 8,381 2.0%
Income (loss) from
discontinued operations.... (1,579) (0.3)% 563 0.1% 374 0.1% (5,238) (1.2)% 2,313 0.5%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Income (loss) before
extraordinary items........ 19,244 3.8% 12,697 2.9% 6,058 1.3% (2,288) (0.6)% 10,694 2.5%
Extraordinary items............ (561) (0.1)% (552) (0.1)% 213 0.1% 563 0.1% -- --
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Net income (loss)............ $ 18,683 3.7% $ 12,145 2.8% $ 6,271 1.4% $ (1,725) (0.5)% $ 10,694 2.5%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
PER SHARE DATA (SHARES IN
THOUSANDS):
Fully diluted earnings from
continuing operations...... $ 1.20 $ 0.81 $ 0.52 $ 0.30 $ 0.77
Income (loss) from
discontinued operations.... (0.09) 0.04 0.03 (0.54) 0.19
Extraordinary items.......... (0.03) (0.03) 0.02 0.06 --
-------- -------- -------- -------- --------
Earnings (loss) per common
share...................... $ 1.08 $ 0.82 $ 0.57 $ (0.18) $ 0.96
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Number of shares used in
computing per share
amount..................... 17,363 15,650 12,400 9,690 11,961
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Declared cash dividends per
common share............... $ 0.14 $ -- $ -- $ .21 $ .28
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
SELECTED BALANCE SHEET DATA:
Total assets................. $606,507 $474,383 $440,877 $450,944 $458,385
Average assets**............. 520,105 448,941 435,492 441,092 441,845
Average assets of continuing
operations**............... 504,022 433,158 421,734 426,651 425,240
Average stockholders'
equity..................... 137,448 103,823 68,765 66,216 63,512
Average stockholders' equity
in continuing operations... 121,365 88,040 55,007 51,775 46,907
Finance receivables.......... 514,518 394,895 390,314 412,681 392,976
Average finance
receivables**.............. 480,353 413,067 403,856 404,362 396,818
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Sources of funds employed:
Commercial paper and bank
borrowings................. $148,283 $ 64,915 $150,686 $166,358 $242,324
Senior notes................. 237,404 216,560 143,995 131,602 53,960
Subordinated notes and
debentures................. 53,725 48,940 64,142 81,919 87,977
Stockholders' equity......... 152,147 129,012 74,505 63,298 67,061
-------- -------- -------- -------- --------
Total funds employed......... $591,559 $459,427 $433,328 $443,177 $451,322
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ---------------
*Percentages are percent of average assets of continuing operations.
**Average assets and finance receivables are a monthly average.
18
<PAGE> 2
FOOTHILL CAPITAL CORPORATION
SELECTED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
--------------- --------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA*:
Interest income.............. $ 56,636 11.4% $ 49,543 11.5% $ 51,760 12.4% $ 56,466 13.9% $ 56,175 14.3%
Interest expense............. 22,218 4.5% 23,113 5.3% 29,805 7.2% 33,143 8.2% 34,021 8.6%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Interest margin.............. 34,418 6.9% 26,430 6.2% 21,955 5.2% 23,323 5.7% 22,154 5.7%
Fees and other income........ 20,916 4.2% 13,485 3.1% 8,249 2.0% 3,697 0.9% 6,850 1.7%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total margin................. 55,334 11.1% 39,915 9.3% 30,204 7.2% 27,020 6.6% 29,004 7.4%
Provision for credit
losses..................... 12,254 2.5% 8,641 2.0% 6,377 1.5% 3,774 0.9% 2,710 0.7%
General and administrative
expenses................... 16,987 3.4% 14,967 3.5% 13,334 3.2% 12,461 3.1% 12,261 3.1%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Income before income taxes
and extraordinary item..... 26,093 5.2% 16,307 3.8% 10,493 2.5% 10,785 2.6% 14,033 3.6%
Provision for income taxes... 10,959 2.2% 6,849 1.6% 4,302 1.0% 4,314 1.1% 5,613 1.4%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Income before extraordinary
item....................... 15,134 3.0% 9,458 2.2% 6,191 1.5% 6,471 1.5% 8,420 2.2%
Extraordinary item........... (561) (0.1)% -- -- -- -- -- -- -- --
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Net income................... $ 14,573 2.9% $ 9,458 2.2% $ 6,191 1.5% $ 6,471 1.5% $ 8,420 2.2%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
SELECTED BALANCE SHEET DATA:
Total assets................. $572,630 $437,867 $408,713 $416,584 $394,545
Average assets**............. 495,501 431,120 417,332 405,310 393,795
Finance receivables.......... 506,673 393,530 389,521 407,134 386,225
Average finance
receivables**.............. 476,382 412,203 401,858 397,232 390,723
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Sources of funds employed:
Commercial paper............. $148,283 $ 64,915 $ 10,886 $ 4,058 $242,324
Senior notes................. 233,817 216,560 260,113 278,942 27,125
Subordinated notes and
debentures................. 64,225 62,190 58,420 54,850 48,500
Stockholder's equity......... 114,133 83,127 73,669 70,498 69,045
-------- -------- -------- -------- --------
Total funds employed......... $560,458 $426,792 $403,088 $408,348 $386,994
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
OTHER SELECTED DATA:
Nonperforming finance
receivables and repossessed
assets***.................. $ 16,296 $ 22,057 $ 20,890 $ 17,957 $ 16,795
Allowance for credit
losses..................... $ 13,857 $ 10,527 $ 8,047 $ 8,475 $ 8,225
Actual writeoffs during the
year....................... $ 8,924 $ 6,161 $ 6,805 $ 3,524 $ 2,459
Number of employees.......... 108 100 101 98 100
</TABLE>
- ---------------
* Percentages are percent of average assets.
** Average assets and finance receivables are a monthly average.
*** Includes repossessed assets and loans that have contractual installments
more than sixty days past due.
19
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business -- Subsidiaries, Offices and Receivables Outstanding
The Foothill Group, Inc. ("Foothill" or "Parent Company") is a specialized
financial services company which operates two tightly linked businesses:
commercial lending and money management. Foothill Capital Corporation ("Foothill
Capital"), Foothill's wholly owned subsidiary, provides asset-based financing to
businesses throughout the United States. Foothill also engages in money
management through the operation of four institutional limited partnerships.
Unless the context otherwise indicates, the "Company" refers to Foothill and its
subsidiary. The areas of commercial finance in which the Company principally
engages include accounts receivable and term lending. The Company's loans are
secured by accounts receivable, inventory, real estate and/or personal property,
equipment and other assets. Such lending can involve a higher degree of credit
risk than unsecured commercial loans. The Company attempts to offset this risk
by lending on a collateralized basis.
Foothill's money management activities include limited partnerships (The
Foothill Fund, Foothill Recovery Fund, Foothill Partners, L.P. and Foothill
Partners II, L.P.) in which Foothill is a general partner. These partnerships
invest in loans or securities of companies in financial difficulty or in
reorganization. At December 31, 1993, capital subscriptions of the partnerships
were $598 million. The Foothill Fund and Foothill Recovery Fund have total
capital subscriptions of $77 million and expect to cease operations and be fully
liquidated by December 31, 1994.
Foothill Capital operates out of one office in Los Angeles, California and
also maintains a satellite office in the Boston area for use by its field
examiners.
Effective December 23, 1993, Foothill completed the spin-off of its Foothill
Thrift and Loan subsidiary to Foothill shareholders. All previously reported
financial results of Foothill Thrift and Loan, through the record date for the
spin-off, are classified as discontinued operations. Revenues of Foothill Thrift
and Loan totaled $21,658,000, $23,131,000 and $25,067,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
Finance receivables outstanding by company were as follows for the past
three years:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
---------------- ---------------- ----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Foothill Capital........................ $506,673 98.5% $393,530 99.7% $389,521 99.8%
Parent Company.......................... 7,845 1.5% 1,365 0.3% 793 0.2%
-------- ----- -------- ----- -------- -----
Total finance receivables..... $514,518 100.0% $394,895 100.0% $390,314 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
ANALYSIS OF AMOUNTS DUE THE COMPANY BY CATEGORIES
The following table shows the net amounts due the Company (before the
allowance for credit losses) in the various financing categories and the
percentages of the total represented by each category:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
---------------- ---------------- ----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable loans:
Foothill Capital...................... $319,792 62.1% $186,422 47.3% $170,512 43.7%
Parent Company........................ 6,581 1.3% -- -- 12 --
-------- ----- -------- ----- -------- -----
Total accounts receivable
loans....................... 326,373 63.4% 186,422 47.3% 170,524 43.7%
-------- ----- -------- ----- -------- -----
Term loans:
Foothill Capital...................... 186,881 36.3% 207,108 52.4% 219,009 56.1%
Parent Company........................ 1,264 0.3% 1,365 0.3% 781 0.2%
-------- ----- -------- ----- -------- -----
Total term loans................... 188,145 36.6% 208,473 52.7% 219,790 56.3%
-------- ----- -------- ----- -------- -----
Total loans................... $514,518 100.0% $394,895 100.0% $390,314 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
As shown in the previous table, accounts receivable loans outstanding
increased $139,951,000 from $186,422,000 at December 31, 1992 to $326,373,000 at
December 31, 1993. Accounts receivable loans fluctuate on a daily basis and
continue to be a principal area of emphasis in Foothill Capital's lending
operations. Term loans decreased $20,328,000 from $208,473,000 at December 31,
1992 to $188,145,000 at December 31, 1993. The overall increase in outstandings
was primarily the result of new business at Foothill Capital offset by loan
repayments.
20
<PAGE> 4
RESULTS OF OPERATIONS
Year ended December 31, 1993 compared to year ended December 31, 1992:
The Company recorded net income of $18,683,000 and $12,145,000 for the years
ended December 31, 1993 and 1992, respectively. Fully diluted earnings per share
were $1.08 and $.82 for the years ended December 31, 1993 and 1992,
respectively.
The increase in net income was due primarily to (a) a significant increase
in interest margin, (b) a higher level of fees and other income, and (c) an
increase in gains on investments, offset by a loss on discontinued operations,
increases in general and administrative expenses, the provision for credit
losses and the provision for income taxes.
Year ended December 31, 1992 compared to year ended December 31, 1991:
The Company recorded net income of $12,145,000 and $6,271,000 for the years
ended December 31, 1992 and 1991, respectively. Fully diluted earnings per share
were $.82 and $.57 for the years ended December 31, 1992 and 1991, respectively.
The increase in net income was due primarily to (a) a significant increase
in interest margin, (b) a higher level of fees and other income, and (c) a
substantial increase in gains on investments, offset by increases in general and
administrative expenses, the provision for credit losses and the provision for
income taxes.
GAIN (LOSS) ON INVESTMENTS
For the year ended December 31, 1993, the Company recorded a net gain on
investments of $5,257,000. For the years ended December 31, 1992 and 1991, the
Company recorded a net gain on investments of $3,373,000 and $1,022,000,
respectively. The gains on investments in 1993 and 1992 were primarily due to
earnings recognized by the Company from its investments in the limited
partnerships it manages. See additional information in "Investments".
ANALYSIS OF INTEREST MARGIN
Interest margin is the difference between interest income and interest
expense. See "Selected Consolidated Financial Data." The Company does not
currently record income on certain assets including a portion of discounted
finance receivables due from borrowers in reorganization (see Note 1 of Notes to
Consolidated Financial Statements), nonperforming finance receivables,
repossessed assets, and nonperforming investments, but does incur holding costs
(primarily interest expense), which adversely affect margin. Interest margin is
also impacted by a number of other factors including loan pricing, the Company's
liability structure and its ability to match interest sensitive assets and
liabilities.
Year ended December 31, 1993 compared to year ended December 31, 1992:
Interest margin increased to $36,472,000 in 1993 from $25,647,000 in 1992
and increased as a percent of average assets to 7.2% in 1993 from 5.9% in 1992.
The increase resulted from a decreased cost of funds at Foothill due to the
elimination of its senior and subordinated debt in late 1992, a significant
reduction in cost of funds at Foothill Capital due to an increase in outstanding
commercial paper and the effect of swap agreements. Specifically, at Foothill
Capital, interest margin increased from 6.2% in 1992 to 6.9% in 1993.
Year ended December 31, 1992 compared to year ended December 31, 1991:
Interest margin increased to $25,647,000 in 1992 from $17,569,000 in 1991
and increased as a percent of average assets to 5.9% in 1992 from 4.1% in 1991.
The increase resulted from (a) a significant increase in the yields over the
prime rate on earning finance receivables, (b) a decreased cost of funds at
Foothill due to the elimination of its senior and subordinated debt, and (c) a
significant reduction in cost of funds at Foothill Capital due to an increase in
outstanding commercial paper and the effect of swap agreements, offset by a
higher average level of nonperforming finance receivables at Foothill Capital.
Specifically, at Foothill Capital, interest margin increased from 5.2% in 1991
to 6.2% in 1992.
Yearly margin comparisons are affected by, among other things, differences
in the amount of interest-free funds obtained by the Company (for example,
equity). The following table illustrates the source of funds employed between
interest-bearing borrowings and interest-free funds for the past three years.
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
---------------- ---------------- ----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average interest-bearing borrowings..... $367,657 70.7% $336,118 74.9% $359,178 82.5%
Average interest-free funds............. 152,448 29.3% 112,823 25.1% 76,314 17.5%
-------- ----- -------- ----- -------- -----
Total......................... $520,105 100.0% $448,941 100.0% $435,492 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
21
<PAGE> 5
FEES AND OTHER INCOME
Fees and other income consist primarily of income from gains on sales and
exchanges of finance receivables, fees related to the Company's accounts
receivable and term lending, and fees from asset management activities.
Year ended December 31, 1993 compared to year ended December 31, 1992:
For the years ended December 31, 1993 and 1992, the Company recorded fees
and other income of $27,288,000 and $16,820,000, respectively. The increase in
1993 was due primarily to a significant increase in net gains resulting from
sales and exchanges of finance receivables at Foothill Capital, an increase in
the level of fees related to finance receivables, and a significant increase in
asset management fees at Foothill.
Year ended December 31, 1992 compared to year ended December 31, 1991:
For the years ended December 31, 1992 and 1991, the Company recorded fees
and other income of $16,820,000 and $12,585,000, respectively. The increase in
1992 was due primarily to a significant increase in net gains resulting from
sales and exchanges of finance receivables at Foothill Capital and an increase
in the level of fees related to finance receivables, offset by slight decreases
in asset management fees at Foothill.
The following table illustrates the composition of fees and other income for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gains from sales and exchanges of finance receivables........... $13,493 $ 8,523 $ 3,650
Fees related to finance receivables............................. 7,179 4,952 4,609
Asset management fees, net...................................... 6,025 2,979 3,255
Other income.................................................... 591 366 1,071
------- ------- -------
Total fees and other income................................. $27,288 $16,820 $12,585
------- ------- -------
------- ------- -------
</TABLE>
INTEREST RATE FLUCTUATIONS
The Company attempts to minimize the effect of fluctuating interest rates by
approximately matching interest sensitive assets and liabilities. The following
table illustrates interest sensitive assets and liabilities at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Assets interest sensitive or maturing within 90 days......... $517,584 $348,755 $312,486
Liabilities interest sensitive or maturing within 90 days.... 446,871 322,415 253,539
-------- -------- --------
Excess interest sensitive assets............................. $ 70,713 $ 26,340 $ 58,947
-------- -------- --------
-------- -------- --------
</TABLE>
The Company monitors the relationship of interest sensitive assets and
liabilities in an attempt to minimize interest rate risk. The Company can also
"match" interest sensitive assets and liabilities through its balance between
lending to customers on a variable or fixed rate basis. During the last several
years at Foothill Capital, a number of fixed rate finance receivables and
investments were liquidated and replaced with interest sensitive assets. Since
1990, medium and long-term fixed rate indebtedness raised by Foothill Capital
has been converted into variable rate indebtedness through the use of interest
rate swaps which extend through the year 2000 and which total $285,000,000 at
December 31, 1993.
WRITEOFFS AND ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for possible losses at a level it
considers adequate to cover future potential losses on finance receivables. The
amount of the allowance is based on management's evaluation of numerous factors,
including historical loss experience and adequacy of collateral. The level of
the allowance is affected by the provision for losses charged to expense,
writeoffs and recoveries of amounts previously written off.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Finance receivables plus repossessed assets.......... $514,518 $396,677 $397,534
Allowance for credit losses.......................... 14,057 10,527 8,047
Percent of such allowance to finance receivables plus
repossessed assets................................. 2.73% 2.65% 2.02%
Actual writeoffs during the year, net of
recoveries......................................... 9,264 6,191 7,876
Provision for credit losses charged to income during
the year........................................... 12,794 8,671 7,298
Percent of provision for credit losses to net
writeoffs during the year.......................... 138% 140% 93%
Percent of net writeoffs to finance receivables plus
repossessed assets................................. 1.80% 1.56% 1.98%
</TABLE>
22
<PAGE> 6
The provision for credit losses increased from $8,671,000 at December 31,
1992 to $12,794,000 at December 31, 1993 due to an increase in the general
allowance for credit losses, as a percent of finance receivables plus
repossessed assets, from 2.65% to 2.73% at December 31, 1992 and 1993,
respectively, and due to an increase in actual writeoffs at Foothill Capital.
NONPERFORMING FINANCE RECEIVABLES AND REPOSSESSED ASSETS
The following table contains information concerning delinquencies on loans
under which installments are more than sixty days past due, loans which are
contractually in default, other than discounted finance receivables, and for
which legal proceedings have been initiated to repossess or liquidate the
underlying collateral, and repossessed assets, all of which are classified as
nonperforming assets. Nonperforming assets have a significant negative effect on
interest margin and general and administrative expense since the Company does
not recognize income on these accounts but does incur holding costs (primarily
interest expense). As the following table illustrates, the Company's
nonperforming assets as a percent of finance receivables plus repossessed assets
decreased from 5.75% at December 31, 1992 to 3.17% at December 31, 1993.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Finance receivables plus repossessed
assets................................... $514,518 $396,677 $397,534
Loans more than 60 days past due........... 16,296 21,026 14,453
Percent of above to finance receivables
plus repossessed assets.................. 3.17% 5.30% 3.64%
Repossessed assets, net.................... -- 1,782 7,219
Percent of above to finance receivables
plus repossessed assets.................. -- 0.45% 1.82%
-------- -------- --------
Total nonperforming assets................. $ 16,296 $ 22,808 $ 21,672
-------- -------- --------
-------- -------- --------
Percent of above to finance receivables
plus repossessed assets.................. 3.17% 5.75% 5.45%
-------- -------- --------
-------- -------- --------
</TABLE>
As shown in the preceding table, nonperforming assets have decreased in both
dollars and as a percentage of finance receivables plus repossessed assets in
1993. Historically, such percentage of nonperforming assets has generally ranged
between 3% and 6% of finance receivables plus repossessed assets and has
fluctuated within this range from quarter to quarter. The decrease in total
nonperforming assets as of December 31, 1993 occurred primarily at Foothill
Capital. The Company's finance receivable portfolio is well diversified within
various industries, however, no assurances can be given that nonperforming
assets will not increase above the historical 3% to 6% range. Material increases
in nonperforming assets would have a significant negative effect on the
Company's interest margin and could also negatively impact the Company's
writeoff levels. See "Analysis of Interest Margin" and "Writeoffs and Allowance
for Credit Losses."
Loans more than 60 days past due can vary based on borrowers' timeliness in
servicing their obligations. Foreclosure proceedings can commence at anytime,
but generally commence when no contractual payment has been made within the past
91 days or more. Repossession occurs when the Company has taken physical
possession and title to the chattel or other property.
Repossessed assets and other nonperforming loans have been written down to
the lower of cost or fair value less selling costs. These values are based on
management's evaluation of numerous factors, including estimated holding costs
and periods prior to ultimate disposition, appraisals, sales of comparable
assets and estimated market conditions at projected disposal dates.
GENERAL AND ADMINISTRATIVE EXPENSE
The following table sets forth major items of general and administrative
expense for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Employee related...................................... $14,796 $11,393 $ 9,299
Occupancy and office.................................. 1,908 1,589 1,400
Professional services................................. 497 511 527
Data processing and communications.................... 783 740 536
Credit and collection................................. 1,041 1,040 1,157
Advertising........................................... 411 324 150
Insurance and bond premiums........................... 371 342 328
Other................................................. 515 475 330
------- ------- -------
Total general and administrative expense.... $20,322 $16,414 $13,727
------- ------- -------
------- ------- -------
</TABLE>
23
<PAGE> 7
Year ended December 31, 1993 compared to year ended December 31, 1992:
As a percent of average assets of continuing operations, general and
administrative expense increased from 3.8% to 4.0% for the years ended December
31, 1992 and 1993, respectively. In dollars, general and administrative expense
increased from $16,414,000 in 1992 to $20,322,000 in 1993. Foothill Capital had
an increase in general and administrative expenses of $2,020,000 for the year
ended December 31, 1993 compared to the year ended December 31, 1992. The
increase in 1993 was primarily due to increases in employee compensation levels
and related expenses and an increase in occupancy expense due to the lease of
additional office space.
Year ended December 31, 1992 compared to year ended December 31, 1991:
As a percent of average assets of continuing operations, general and
administrative expense increased from 3.3% to 3.8% for the years ended December
31, 1991 and 1992, respectively. In dollars, general and administrative expense
increased from $13,727,000 in 1991 to $16,414,000 in 1992. Foothill Capital had
an increase in general and administrative expense of $1,633,000 for the year
ended December 31, 1992 compared to the year ended December 31, 1991. The
increase in 1992 was primarily due to increases in employee compensation levels.
PROVISION FOR INCOME TAXES
The 1993, 1992, and 1991 provision for income taxes was 42%, 41%, and 43%,
respectively, which is based on combined state and federal statutory tax rates.
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Under Statement No. 109, the liability method is
used in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and the tax bases of assets and liabilities and are measured using the tax rates
that will be in effect when the differences are expected to reverse. Prior to
the adoption of Statement No. 109, income tax expense was determined using the
deferred method. Deferred tax expense was based on items of income and expense
that were reported in different years in the financial statements and tax
returns and were measured using the tax rate in effect in the year the
difference originated. As permitted by Statement No. 109, the Company has
elected not to restate the financial statements of any prior years. The effect
of the change on income at January 1, 1993 and for the year ended December 31,
1993 was not significant.
EXTRAORDINARY ITEMS
The extraordinary item in 1993 was due to the prepayment of approximately
$29,000,000 of 9.4% senior and 10.15% subordinated debt at Foothill Capital,
which was replaced with lower coupon debt. The nonrecurring extraordinary charge
resulted from prepayment penalties combined with the elimination of unamortized
deferred costs on the prepaid debt. The extraordinary item in 1993 is presented
net of provision for income taxes of $406,000. The extraordinary items in 1992
were due to the retirement of $9,229,000 face value of the Company's 14% senior
notes, $5,648,000 face value of the Company's 12.5% debentures and $9,375,000
face value of the Company's variable rate senior term note. These nonrecurring
extraordinary charges resulted from the elimination of unamortized deferred
costs on the aforementioned debt obligations which were retired in advance of
their scheduled maturities. The extraordinary items in 1992 are presented net of
provision for income taxes of $383,000. The extraordinary item in 1991
represents a state tax benefit resulting from recognition of a net operating
loss carryforward generated in 1990.
CAPITAL RESOURCES
Growth of the Company's assets is dependent, in part, on its ability to
increase capital funds (common and/or preferred stock, retained earnings and
subordinated debt). The increase in capital funds in 1993 is due to the issuance
of subordinated notes at Foothill Capital, the increase in retained earnings
resulting from continued profitability and the increase in equity as a result of
adoption of FASB Statement No. 115 (see Note 10 of Notes to Consolidated
Financial Statements). During 1993, a number of stock option holders also
elected to exercise their stock options, which generated $2,112,000 of capital
funds. The increase in capital funds in 1992 is due primarily to the sale of
3,450,000 Class A common shares of the Company which generated net proceeds of
$26,677,000. During 1992, a number of stock option holders also elected to
exercise their stock options. Exercise of these options generated proceeds of
$2,448,000, which increased the capital funds of the Company. Total capital
funds were as follows on the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total capital funds........................ $205,872 $177,952 $138,647
-------- -------- --------
-------- -------- --------
</TABLE>
Under the terms of various loan agreements, Foothill Capital cannot exceed
certain maximum senior liabilities to capital funds ratios. At December 31,
1993, Foothill Capital was in compliance with loan agreement covenants. Foothill
Capital had a ratio of senior liabilities to capital funds of 2.2:1 at December
31, 1993, which was less than the maximum 3.2:1, as defined and allowable under
its various loan agreements.
24
<PAGE> 8
In addition to borrowing from external sources, Foothill Capital is
capitalized by loans and equity investments from Foothill. Repayment of such
loans or equity investments is subject to restrictions under the various loan
agreements described above. At December 31, 1993, Foothill's aggregate equity
investment in Foothill Capital was $114,133,000 and its advances to Foothill
Capital were $10,500,000, which was in the form of subordinated debt.
LIQUIDITY
Liquidity is the ability to meet cash requirements such as payment of
maturing debt obligations or availability of loan funds for existing or new
customers' borrowing needs. Management monitors liquidity for the Company.
The primary source of Foothill Capital's short-term funding is commercial
paper borrowings, which represented 33% of its total debt outstanding as of
December 31, 1993. During 1993, commercial paper borrowings increased by
$83,368,000 to $148,283,000 at December 31, 1993, and were used primarily to
fund growth in the finance receivable portfolio. Commercial paper borrowings are
supported by a committed bank credit facility with 15 banks, which totaled
$235,000,000 as of December 31, 1993. As of January 1, 1994, the credit facility
was increased to $245,000,000 due to the addition of one bank. The bank credit
facility was renewed and extended in the second quarter of 1993 and currently
expires on June 30, 1995. As of December 31, 1993, Foothill Capital had
$86,717,000 in availability (total amount of credit facilities minus outstanding
commercial paper and bank borrowings) under its bank credit facility.
During 1993, Foothill Capital issued $60,000,000 of senior fixed rate notes
with maturities ranging from three to seven years and $25,000,000 in senior
subordinated notes with a final maturity of ten years to several institutional
lenders. Proceeds from this placement were used to prepay approximately
$29,000,000 of higher coupon senior and subordinated debt, repay debt maturing
during 1993, and fund growth in Foothill Capital's finance receivable portfolio.
The prepayment of the higher coupon notes resulted in an extraordinary after tax
charge of $561,000 in the fourth quarter of 1993. This charge will be offset by
interest savings in future years. Foothill Capital also issued $10,000,000 in
floating rate notes with maturities of one year to two bank lenders in 1993.
During 1992, Foothill Capital issued $100,000,000 of senior notes with
maturities from three to seven years and $10,000,000 of subordinated notes with
final maturities of ten years. During the past four years, Foothill Capital has
reduced its overall reliance on short-term sources of financing.
Foothill Capital's total capitalization of $560,458,000 at December 31, 1993
consisted of stockholder's equity of $114,133,000 and debt of $446,325,000.
Foothill Capital's debt-to-equity ratio at December 31, 1993 was 3.91 to 1
compared to 4.13 to 1 at December 31, 1992. Included in the debt of Foothill
Capital at December 31, 1993 was $10,500,000 of junior subordinated notes
payable to Foothill. Foothill Capital paid no dividends to Foothill during the
past two fiscal years. The repayment of subordinated debt and dividends are
limited by the provisions of Foothill Capital's debt agreements with its bank
and institutional lenders. Dividends to Foothill are currently limited to 50% of
net income and as of December 31, 1993, Foothill Capital could pay $15,326,000
in dividends to Foothill.
Foothill Capital has numerous interest rate swap agreements with financial
institutions with notional amounts aggregating $285,000,000 as of December 31,
1993. The purpose of these agreements is to manage Foothill Capital's exposure
to interest rate fluctuations and match the interest sensitivity of its assets
and liabilities. At December 31, 1993, after giving effect to the interest rate
swap agreements, Foothill Capital's assets sensitive to interest rate changes
within the next twelve months exceeded its interest sensitive liabilities by
approximately $56,407,000, which represented approximately 10% of its total
assets.
Foothill Capital's commercial paper is rated "D-2" by Duff & Phelps Credit
Rating Co. and "F-2" by Fitch Investors Service, Inc. Senior long-term debt is
rated "BBB" by Duff & Phelps. The Company's senior debt, senior subordinated
debt and junior subordinated debt have investment grade ratings of "2" from the
National Association of Insurance Commissioners.
The Company believes that Foothill Capital's liquidity requirements in the
foreseeable future will be satisfied through internally generated funds,
together with unused portions of its bank lines of credit and other credit
facilities, commercial paper facilities, and term debt issuances.
The major cash outflows of Foothill have historically consisted of payments
of interest and principal on its indebtedness and taxes. However, Foothill
eliminated most of its senior indebtedness in 1992 using proceeds of the
previously noted common stock offering. Subordinated indebtedness was also
eliminated during 1992 as $13,473,000 in 9.5% convertible subordinated
debentures were converted to Class A common stock. The balance of the 9.5%
debentures totaling $601,000 as well as $4,948,000 in 12.5% subordinated
debentures were redeemed in 1992 for cash. In February 1993, the Company's Board
of Directors reinstituted its regular quarterly cash dividend and declared $.14
in cash dividends on its Class A Common Stock during the year ended December 31,
1993. In 1993, Foothill's cash requirements consisted primarily of expenditures
for general and administrative costs, tax payments, payments of its remaining
liabilities, and payment of preferred and common stock dividends. These
expenditures are funded largely through management fees and profits earned in
its asset management operations as well as by management fees and loan
repayments by Foothill Capital. Management believes these potential sources of
liquidity should be sufficient to meet its obligations for the foreseeable
future.
25
<PAGE> 9
INFLATION
The Company attempts to protect itself from the impact of inflation on
interest rates by approximately matching interest sensitive assets with interest
sensitive liabilities. See "Interest Rate Fluctuations." Over the past several
years, inflation has caused moderate increases in general and administrative
expenses.
PARTICIPATION IN HIGHLY LEVERAGED TRANSACTIONS
Since inception, Foothill and its subsidiaries have been in the commercial
finance business. This business includes accounts receivable and term lending on
a secured basis. Such business has historically involved a higher degree of
credit risk than unsecured or partially secured commercial lending.
Foothill Capital's portfolio of finance receivables includes loans made to
highly leveraged borrowers and loans made in conjunction with corporate
recapitalizations and bankruptcy reorganizations. Foothill Capital has been
involved with transactions of this nature since 1972.
Foothill Capital has historically extended credit lines up to $100,000,000
by participating portions of these lines with other commercial finance lenders.
Under the terms of its various borrowing agreements, Foothill Capital's largest
allowable loan (net of participations) at December 31, 1993 was $26,754,000.
Foothill Capital's largest loan (net of participations) to any borrower and its
affiliates was $13,568,000 and $15,084,000 at December 31, 1993 and 1992,
respectively. Loans in this portfolio are made in industries including
manufacturing, health care, real estate and numerous others.
Since Foothill and its subsidiary have been involved with highly leveraged
transactions since inception, it is unlikely that its involvement in
transactions of this nature will be curtailed in the foreseeable future.
INVESTMENTS
The Company had $32,842,000 and $13,992,000 at December 31, 1993 and 1992,
respectively, in its investment portfolio including some investments which are
in unrated or less than investment grade corporate securities. This portfolio
includes numerous debt and equity security positions as well as partnership
investment positions held by the Company. (See Note 1 of Notes to Consolidated
Financial Statements.) Some of these investments are in companies undergoing
reorganization or restructuring.
At December 31, 1993, the Company adopted the requirements of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
classified its marketable debt and equity securities as "available for sale."
Accordingly, these Securities have been marked-to-market, with the increase in
their carrying value, net of income tax, included as a component of
stockholder's equity. The estimated market value of this portfolio of securities
(net of income taxes in 1993) was $35,095,000 and $24,429,000 at December 31,
1993 and 1992, respectively. Estimated unrealized market appreciation before
income taxes as of December 31, 1993 and 1992 was $37,805,000 and $10,437,000,
respectively.
Foothill is also a general and/or limited partner in four limited
partnerships, The Foothill Fund, Foothill Recovery Fund, Foothill Partners,
L.P., and Foothill Partners II, L.P. ("the Funds"). The Foothill Fund and
Foothill Recovery Fund were established to invest, primarily, in the debt of
restructuring and reorganizing companies. Foothill Partners, L.P. and Foothill
Partners II, L.P. were established to invest in performing and nonperforming
senior bank debt of distressed companies. Foothill's investments in the Funds
are accounted for on an equity basis. (See Note 1 of Notes to Consolidated
Financial Statements.)
Investments in unrated or less than investment grade corporate securities
have different risks than other investments in corporate securities rated
investment grade. Risk of loss upon default by the borrower is significantly
greater with respect to such corporate securities than with other corporate
securities because these securities are generally unsecured and are often
subordinated to other creditors of the issuer, and because these issuers usually
have higher levels of indebtedness and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are investment
grade issuers. Current market values of corporate securities are estimated by
the Company's management based primarily on public market quotations for the
majority of the securities.
26
<PAGE> 10
THE FOOTHILL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1992
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 50,907,000 $ 39,765,000
Finance receivables (Note 2):
Accounts receivable loans..................................... 326,373,000 186,422,000
Term loans.................................................... 188,145,000 208,473,000
------------ ------------
Finance receivables................................... 514,518,000 394,895,000
Allowance for credit losses................................... 14,057,000 10,527,000
------------ ------------
Finance receivables, net.............................. 500,461,000 384,368,000
Net assets of discontinued operations........................... -- 15,830,000
Repossessed assets, net......................................... -- 1,782,000
Equity, debt and partnership investments........................ 32,842,000 13,992,000
Deferred income tax assets (Note 6)............................. 9,009,000 8,035,000
Deferred fund and debt issuance costs, net...................... 9,897,000 7,692,000
Property and equipment, at cost less accumulated depreciation
and amortization ($1,769,000 in 1993; $1,392,000 in 1992)..... 2,269,000 1,552,000
Other assets.................................................... 1,122,000 1,367,000
------------ ------------
$606,507,000 $474,383,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commercial paper (Note 3)..................................... $148,283,000 $ 64,915,000
Senior notes payable (Note 3)................................. 237,404,000 216,560,000
Accounts payable and accrued liabilities...................... 14,948,000 14,956,000
Subordinated notes and debentures (Note 4).................... 53,725,000 48,940,000
------------ ------------
Total liabilities..................................... 454,360,000 345,371,000
------------ ------------
Lease commitments (Note 7)
Contingencies (Note 8)
Stockholders' equity (Note 5):
Convertible preferred stock, $1.00 par value, $30.00 per share
liquidation preference, 9% cumulative, 100,000 shares
issued and outstanding..................................... 2,900,000 2,900,000
Class A common stock, no par value, 16,538,874 shares issued
and outstanding (16,203,523 at December 31, 1992).......... 101,285,000 99,009,000
Unrealized gains on securities available for sale............. 19,672,000 --
Retained earnings............................................. 28,290,000 27,103,000
------------ ------------
Total stockholders' equity............................ 152,147,000 129,012,000
------------ ------------
$606,507,000 $474,383,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
27
<PAGE> 11
THE FOOTHILL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Revenues (Note 1):
Interest income from:
Finance receivables............................ $57,321,000 $49,594,000 $51,836,000
Investments.................................... 215,000 321,000 244,000
Fees and other income............................. 27,288,000 16,820,000 12,585,000
Gain on investments, net.......................... 5,257,000 3,373,000 1,022,000
----------- ----------- -----------
Total revenues...................................... 90,081,000 70,108,000 65,687,000
----------- ----------- -----------
Costs and expenses:
Interest.......................................... 21,064,000 24,268,000 34,511,000
Provision for credit losses....................... 12,794,000 8,671,00 7,298,000
General and administrative........................ 20,322,000 16,414,000 13,727,000
----------- ----------- -----------
Total costs and expenses............................ 54,180,000 49,353,000 55,536,000
----------- ----------- -----------
Income from continuing operations before income
taxes............................................. 35,901,000 20,755,000 10,151,000
Provision for income taxes (Note 6)................. 15,078,000 8,621,000 4,467,000
----------- ----------- -----------
Income from continuing operations................... 20,823,000 12,134,000 5,684,000
Income (loss) from discontinued operations.......... (1,579,000) 563,000 374,000
----------- ----------- -----------
Income before extraordinary items................... 19,244,000 12,697,000 6,058,000
Extraordinary items (Note 9)........................ (561,000) (552,000) 213,000
----------- ----------- -----------
Net income.......................................... $18,683,000 $12,145,000 $ 6,271,000
----------- ----------- -----------
----------- ----------- -----------
Earnings per share:
Primary:
Income from continuing operations.............. $ 1.23 $ 0.89 $ 0.55
Income (loss) from discontinued operations..... (0.09) 0.04 0.04
Extraordinary items............................ (0.03) (0.04) 0.02
----------- ----------- -----------
Earnings per common and common equivalent
share........................................ $ 1.11 $ 0.89 $ 0.61
----------- ----------- -----------
----------- ----------- -----------
Fully diluted:
Income from continuing operations.............. $ 1.20 $ 0.81 $ 0.52
Income (loss) from discontinued operations..... (0.09) 0.04 0.03
Extraordinary items............................ (0.03) (0.03) 0.02
----------- ----------- -----------
Earnings per common share assuming full
dilution..................................... $ 1.08 $ 0.82 $ 0.57
----------- ----------- -----------
----------- ----------- -----------
Number of shares used in per share computations:
Primary........................................... 16,683,000 13,730,000 10,106,000
----------- ----------- -----------
----------- ----------- -----------
Fully diluted..................................... 17,363,000 15,650,000 12,400,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
28
<PAGE> 12
THE FOOTHILL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
CONVERTIBLE CLASS A COMMON STOCK UNREALIZED GAINS
PREFERRED ------------------------- ON SECURITIES RETAINED
STOCK SHARES AMOUNT AVAILABLE FOR SALE EARNINGS
----------- ---------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1990...... $ -- 9,693,076 $ 54,196,000 $ -- $ 9,102,000
Issuance of stock to 14%
noteholders, at market........... -- 400,000 1,400,000 -- --
Purchase of stock under employee
stock purchase plan (Note 5)..... -- 35,239 114,000 -- --
Exercise of stock options (Note
5)............................... -- 136,510 660,000 -- --
Issuance of 100,000 shares of
convertible preferred stock, net
(Note 5)......................... 2,900,000 -- -- -- --
Dividends on preferred stock....... -- -- -- -- (138,000)
Net income......................... -- -- -- -- 6,271,000
----------- ---------- ------------ ------------------ ------------
Balances at December 31, 1991...... 2,900,000 10,264,825 56,370,000 -- 15,235,000
Issuance of common stock (Note
5)............................... -- 3,450,000 26,677,000 -- --
Conversion of 9.5% subordinated
debentures (Note 5).............. -- 1,886,906 13,346,000 -- --
Purchase of stock under employee
stock purchase plan (Note 5)..... -- 33,251 168,000 -- --
Exercise of stock options (Note
5)............................... -- 568,541 2,448,000 -- --
Dividends on preferred stock....... -- -- -- -- (277,000)
Net income......................... -- -- -- -- 12,145,000
----------- ---------- ------------ ------------------ ------------
Balances at December 31, 1992...... 2,900,000 16,203,523 99,009,000 -- 27,103,000
Purchase of stock under employee
stock purchase plan (Note 5)..... -- 19,460 164,000 -- --
Exercise of stock options (Note
5)............................... -- 315,891 1,525,000 -- --
Tax benefit from exercise of stock
options.......................... -- -- 587,000 -- --
Dividends on preferred stock....... -- -- -- -- (270,000)
Dividends declared on common stock
($.14 per share)................. -- -- -- -- (2,308,000)
Dividends on spin-off of
discontinued operations.......... -- -- -- -- (14,918,000)
Unrealized gains on securities
available for sale (Note 10)..... -- -- -- 19,672,000 --
Net income......................... -- -- -- -- 18,683,000
----------- ---------- ------------ ------------------ ------------
Balances at December 31, 1993...... $2,900,000 16,538,874 $101,285,000 $ 19,672,000 $ 28,290,000
----------- ---------- ------------ ------------------ ------------
----------- ---------- ------------ ------------------ ------------
</TABLE>
See accompanying notes.
29
<PAGE> 13
THE FOOTHILL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1992 1991
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating Activities:
Income from continuing operations before
extraordinary items................................ $ 20,823,000 $ 12,134,000 $ 5,684,000
Adjustments to reconcile income before extraordinary
items to net cash provided by operating activities:
Provision for credit losses........................ 12,794,000 8,671,000 7,298,000
Net gain on investments............................ (5,257,000) (3,373,000) (1,022,000)
Depreciation and amortization...................... 560,000 524,000 311,000
Amortization of deferred fund and debt issuance
costs............................................ 2,345,000 1,752,000 2,291,000
Increase (decrease) in accounts payable and accrued
liabilities...................................... (854,000) 7,543,000 (411,000)
Net income (loss) from discontinued operations..... (1,579,000) 563,000 374,000
Other.............................................. (444,000) 3,859,000 (9,216,000)
--------------- --------------- ---------------
Net cash provided by operating activities..... 28,388,000 31,673,000 5,309,000
--------------- --------------- ---------------
Investing Activities:
Proceeds from sales of investments and distributions
from partnerships.................................. 15,556,000 6,288,000 6,837,000
Contributions made to partnerships and purchases of
investments........................................ (3,950,000) (3,125,000) (465,000)
Payments received from net finance receivables and
sales of repossessed assets........................ 4,613,538,000 3,729,191,000 3,753,090,000
Disbursements made for net finance receivables and
repossessed assets................................. (4,745,171,000) (3,737,457,000) (3,744,284,000)
Purchase of property and equipment................... (1,277,000) (642,000) (544,000)
--------------- --------------- ---------------
Net cash provided by (used in) investing
activities.................................. (121,304,000) (5,745,000) 14,634,000
--------------- --------------- ---------------
Financing Activities:
Increase in deferred fund and debt issuance costs.... (4,550,000) (5,348,000) (2,547,000)
Proceeds from commercial paper sales................. 786,633,000 661,540,000 65,218,000
Payments on commercial paper maturities.............. (703,265,000) (607,511,000) (58,390,000)
Proceeds from senior notes payable and net bank
borrowings......................................... 75,656,000 100,000,000 8,000,000
Payments on senior notes payable and net bank
borrowings......................................... (54,811,000) (167,235,000) (33,382,000)
Proceeds from subordinated notes and debentures...... 25,000,000 10,000,000 10,000,000
Payments on and retirements of subordinated notes and
debentures......................................... (21,215,000) (10,738,000) (12,502,000)
Issuance of common stock, net of related costs....... 2,276,000 29,175,000 774,000
Issuance of preferred stock, net of related costs.... -- -- 2,900,000
Dividends paid on preferred stock.................... (270,000) (416,000) --
Dividends paid per common share ($.09 in 1993)....... (1,396,000) -- --
--------------- --------------- ---------------
Net cash provided by (used in) financing
activities.................................. 104,058,000 9,467,000 (19,929,000)
--------------- --------------- ---------------
Net increase in cash and cash equivalents.............. 11,142,000 35,395,000 14,000
Cash and cash equivalents at beginning of year......... 39,765,000 4,370,000 4,356,000
--------------- --------------- ---------------
Cash and cash equivalents at end of year............... $ 50,907,000 $ 39,765,000 $ 4,370,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Cash paid during the year for:
Interest expense..................................... $ 20,962,000 $ 23,654,000 $ 37,443,000
Income taxes......................................... $ 14,978,000 $ 12,140,000 $ 6,603,000
</TABLE>
See accompanying notes.
30
<PAGE> 14
THE FOOTHILL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Foothill Group, Inc. ("Foothill") is a financial services company
engaged principally in the commercial finance business through its wholly owned
subsidiary, Foothill Capital Corporation ("Foothill Capital"). Foothill also
engages in other activities including money management through the operation of
four institutional limited partnerships. Unless the context otherwise indicates,
the "Company" refers to Foothill and its subsidiary. The consolidated financial
statements include the accounts of Foothill and Foothill Capital. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior year amounts to
conform to the 1993 presentation. For purposes of the Statements of Cash Flows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Effective December 23, 1993, Foothill completed the spin-off of its Foothill
Thrift and Loan subsidiary to Foothill Group shareholders. All previously
reported financial results of Foothill Thrift and Loan, through the record date
for the spin-off, are classified as discontinued operations. Revenues of
Foothill Thrift and Loan totaled $21,658,000, $23,131,000 and $25,067,000 for
the years ended December 31, 1993, 1992 and 1991, respectively.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the year. Actual results in future periods could be different from those
estimates made in the current year. Estimates particularly susceptible to
significant change relate to the level of the allowance for credit losses and
the valuation of investments.
Revenue Recognition
INTEREST INCOME
Interest income includes interest on finance receivables and investments,
which is recognized as earned using the interest method, and amortization of
loan fees. Loan fees, net of incremental direct costs, are deferred and
recognized over the term of the loan commitment using the interest method.
One of the Company's lending activities, primarily at Foothill Capital in
conjunction with managed partnerships, involves the purchase of significantly
discounted finance receivables which are generally due from borrowers in
reorganization or in the midst of restructuring. The Company does not amortize
discounts into income but does recognize interest income as paid on a cash
basis. These discounted finance receivables which were paying interest currently
totaled $34,299,000 and $31,464,000 at December 31, 1993 and 1992, respectively.
Interest income is not recognized on the remaining discounted receivables which
totaled $6,283,000 and $5,340,000 at December 31, 1993 and 1992, respectively.
Gains or losses, as appropriate, are recorded with respect to these discounted
finance receivables as they are liquidated through sale, exchange or other
distributions received upon borrowers' reorganizations or restructuring.
It is the Company's general policy to suspend the recognition of income on
term loans which are 61 days or more contractually delinquent. Recognition of
income is generally resumed, and suspended income is recognized, when the loan
becomes contractually current or collection of suspended amounts is assured. At
December 31, 1993 and 1992, income recognition was suspended on $10,366,000 and
$15,046,000, respectively, of term loans. In addition, at December 31, 1993 and
1992, Foothill Capital has $5,930,000 and $5,980,000, respectively, in accounts
receivable loans in the process of liquidation on which income has been
deferred.
It is the Company's general policy to suspend recognition of income on
investments which become contractually delinquent as to timely payment of
principal or interest. Recognition of income may be resumed and suspended income
recognized when the investment becomes contractually current or collection of
suspended amounts is assured.
FEES AND OTHER INCOME
The Company receives fees and other income which consist primarily of gains
and losses on sales and exchanges of finance receivables, fees related to its
accounts receivable and term lending, and fees from money management activities.
Included in fees and other income are asset management fees received from
limited partnerships in which the Company is a general partner. (See "Equity,
Debt and Partnership Investments" below.) Also included in fees and other income
are net gains resulting from sales and exchanges of nonoriginated loans totaling
$13,493,000, $8,479,000 and $3,715,000 for the years ended December 31, 1993,
1992 and 1991, respectively. The net gains in 1993, 1992 and 1991 were comprised
of gross realized gains of $13,897,000, $9,319,000 and $4,671,000 and gross
realized losses of $404,000, $840,000 and $956,000 resulting from sale and
exchange transactions having cash proceeds of $45,039,000, $43,776,000 and
$42,691,000, respectively, and noncash proceeds of $15,167,000, $2,937,000 and
$5,084,000, respectively. Certain portions of these gains resulted from
reorganizations by borrowers in which the Company exchanged receivables
purchased at a discount primarily for new debt or equity securities of the
reorganized borrowers. The new securities were recorded at fair value, if
determinable, when issued to the Company. The excess of fair value, if any, over
the Company's cost of the receivable is recorded as a gain upon reorganization.
Net gains resulting from exchange transactions included above totaled
$2,924,000, $3,819,000 and $1,475,000 for the years ended December 31, 1993,
1992 and 1991, respectively.
31
<PAGE> 15
Repossessed Assets
Repossessed assets are included in the financial statements at the lower of
cost or fair value less selling costs. Estimated realizable values are based on
management's evaluation of numerous factors, including estimated holding costs
and periods, appraisals, sales of comparable assets and estimated market
conditions at projected disposal dates, and do not necessarily represent current
auction values. The Company's writeoff policy is based on a loan by loan review.
The Company did not have any repossessed assets as of December 31, 1993.
Repossessed assets, net of specific writedowns, were $1,782,000 as of December
31, 1992.
Allowance for Credit Losses
The Company maintains a general allowance for credit losses at an amount
deemed adequate to cover potential losses on finance receivables. The amount of
the allowance is based on management's evaluation of numerous factors, including
adequacy of collateral supporting finance receivables as well as historical loss
experience and reflects management's best estimate of the necessary level of the
allowance for credit losses. Activity in the allowance for credit losses for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Allowance for credit losses on finance
receivables:
Balance at beginning of year............ $10,527,000 $ 8,047,000 $ 8,625,000
Provisions for credit losses............ 12,794,000 8,671,000 7,298,000
Actual writeoffs, net................... (9,264,000) (6,191,000) (7,876,000)
----------- ----------- -----------
Balance at end of year.................. $14,057,000 $10,527,000 $ 8,047,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Deferred Fund and Debt Issuance Costs
At December 31, 1993, there are $8,926,000 ($6,305,000 at December 31, 1992)
in unamortized syndication costs, including fees to placement agents, relating
to the formation of partnerships managed by the Company. Such deferred costs are
amortized on a straight line basis over the lives of the partnerships. Debt
issuance costs are amortized using the interest method over the applicable lives
of the debt instruments.
Equity, Debt and Partnership Investments
Equity securities were primarily received as a result of exchanges of
private placements and discounted receivables for new securities of the
reorganized debtors. At December 31, 1993, the Company adopted the requirements
of FASB Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and classified its marketable debt and equity securities as
"available for sale." Accordingly, these securities have been marked-to-market,
with the increase in their carrying value, net of income taxes, included as a
component of stockholder's equity. The Company has recorded valuation
adjustments in cases where an "other than temporary"impairment in estimated net
realizable value below the Company's cost basis in investments is believed to
have occurred.
For the years ended December 1993, 1992 and 1991, there were gross realized
gains of $282,000, $1,275,000 and $506,000 and gross realized losses of $0,
$33,000 and $2,924,000, respectively, resulting from sales of these equity
securities whose gross sales proceeds totaled $761,000, $2,064,000 and
$3,462,000, respectively. Included in the 1993, 1992 and 1991 proceeds are cash
proceeds of $634,000, $1,950,000 and $2,647,000, respectively, and noncash
proceeds of $127,000, $114,000 and $815,000 in 1993, 1992 and 1991,
respectively, which resulted from investment reorganizations or exchanges.
Included in partnership investments are four limited partnerships, The
Foothill Fund, Foothill Recovery Fund, Foothill Partners, L.P. and Foothill
Partners II, L.P. ("the Funds"), in which the Company is a general partner. The
1% general partnership interest in Foothill Partners, L.P. is owned 60% by the
Company and 40% by certain of its officers as individuals. The 1% general
partnership interest in Foothill Partners II, L.P. is owned 48% by the Company
and 52% by certain of its officers as individuals. The general partners make all
investment decisions on behalf of the partnerships and manage their operations.
Foothill Partners, L.P. and Foothill Partners II, L.P. were established to
invest in performing and nonperforming senior bank loans of distressed
companies. The Foothill Fund and Foothill Recovery Fund were established to
invest, primarily, in the debt of restructuring and reorganizing companies. The
Company is also a limited partner in The Foothill Fund and Foothill Recovery
Fund. The Company's investments in the Funds are accounted for on an equity
basis and totaled $1,892,000 and $2,619,000 at December 31, 1993 and 1992,
respectively.
Management fees from the Funds, net of amortized deferred fund issuance
costs totaled $6,025,000, $2,979,000 and $3,255,000 for the years ended December
31, 1993, 1992 and 1991, respectively. The Company recorded a net gain on
investments principally composed of equity method earnings recognized for its
investments in the Funds during the years ended December 31, 1993, 1992 and 1991
of $5,257,000, $3,373,000 and $1,022,000, respectively.
Foothill Capital has agreements to jointly purchase loans with Foothill
Partners, L.P. and Foothill Partners II, L.P., limited partnerships in which
Foothill is a general partner. At December 31, 1993, loans outstanding which
were purchased under these agreements by the Foothill Capital amounted to
$38,799,000. Loan purchases, under both of these agreements, are subject to
Foothill Capital's normal due diligence and loan approval processes.
32
<PAGE> 16
Income Taxes
The Company and its subsidiary file a consolidated federal income tax return
and combined state tax returns. Certain income and expense items, primarily
related to investments, exchange and repossession transactions and the allowance
for credit losses, are accounted for in different time periods for financial
reporting purposes as compared to income tax purposes. Appropriate provisions
are made in the consolidated financial statements for deferred or prepaid taxes
in recognition of these timing differences.
FASB Statement No. 109 "Accounting for Income Taxes" was implemented
effective January 1, 1993. Under the new rules, deferred taxes are recognized
using the liability method, and tax rates are applied to cumulative temporary
differences based on when and how they are expected to affect the tax return.
Deferred tax assets and liabilities are adjusted for tax rate changes. Under the
rules previously applied, deferred taxes were measured using tax rates in the
year in which timing differences arose and were not adjusted for tax rate
changes. Application of the new rule did not have a significant impact on the
Company's financial position or income from continuing operations.
Earnings Per Common Share and Income Applicable to Common Stock
In 1993, 1992 and 1991, primary earnings per common and common equivalent
share were determined by dividing net income by the weighted average number of
common and dilutive common equivalent shares outstanding. Fully diluted earnings
per share calculations in 1992 and 1991 reflect the additional dilution of the
9.5% convertible subordinated debentures and the resultant increased
availability of earnings due to the reduction of interest expense on these
debentures, using the "if converted" method. Fully diluted earnings per share
are no longer impacted in this fashion due to the elimination of these
debentures in 1992. In 1993, 1992 and 1991, fully diluted earnings per share
calculations also reflect the additional dilution which would occur through the
conversion of the Company's convertible preferred stock and the resultant
increased availability of earnings due to the elimination of the cumulative
dividend on this preferred stock.
Income applicable to common stock after deducting preferred stock dividends
of $270,000, $277,000 and $138,000 totaled $18,413,000, $11,868,000 and
$6,133,000 in 1993, 1992 and 1991, respectively.
Retirement Savings and Supplemental Benefit Plans
The Company sponsors an employee savings plan under section 401(k) of the
Internal Revenue Code. This plan covers substantially all employees. Employees
may contribute up to 15% of their salary (to a maximum of $8,994 for calendar
1993) and the Company matches employee contributions for 100% of the first 6% of
compensation contributed by each participant. Amounts charged to expense for
these matching contributions were $368,000, $326,000 and $273,000 for the years
ended December 31, 1993, 1992 and 1991, respectively.
In 1991, the Company established an unfunded supplemental benefit plan for
certain directors and officers that provides for payment to participants upon
retirement from the Company's service. The charges to expense for this unfunded
plan, using an actuarial determination of the present values of the estimated
future payments were $526,000, $309,000 and $299,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
NOTE 2. FINANCE RECEIVABLES
The Company is engaged primarily in the commercial finance business which
includes accounts receivable and term lending. The Company's loans are secured
by accounts receivable, inventory, real estate and/or personal property,
equipment and other assets. The Company attempts to offset lending risk by
providing credit only on a fully collateralized basis.
The largest industry concentrations, as a percent of finance receivables, at
December 31, 1993, and as defined by the two digit standard industrial
classifications, are manufacturing (38.3%), finance, insurance and real estate
(17.1%), and wholesale trade (15.9%). With the exception of California, which
represents 35.9% of the finance receivable portfolio at December 31, 1993, the
Company's loans are not concentrated geographically.
Accounts receivable loans are normally contractually due within three years
under revolving credit agreements. These loans, totaling $326,373,000
($186,422,000 in 1992), are shown at the unpaid balance of cash advanced and are
secured by $1,346,172,000 of underlying trade accounts receivable and inventory
at December 31, 1993 ($779,187,000 in 1992). The amounts of cash advanced under
these loans is based upon stated percentages of the borrowers' eligible trade
accounts receivable and specific advance rates on borrowers' eligible inventory.
Yields on accounts receivable loans for the years ended December 31, 1993, 1992
and 1991 exceeded the average prime rate by 6.9%, 6.9% and 6.5%, respectively.
The average prime rates for the years ended December 31, 1993, 1992 and 1991
were 6.0%, 6.3% and 8.4%, respectively.
Generally, term loans are due over periods up to five years and are
collateralized by security agreements on various types of equipment, other
assets and/or mortgages on real property. This category includes term loans
originated by the Company to borrowers in conjunction with making accounts
receivable loans, as well as on a stand alone basis. This category also includes
nonoriginated loans, primarily at Foothill Capital, which are defined as
non-public debt instruments including bank loans and private placements, public
debt instruments including registered bonds, notes and debentures, and
discounted receivables (which includes public debt instruments and non-public
debt instruments acquired at significant discounts and which were in contractual
default at the time of the Company's purchase) originated by other lenders and
purchased by the Company. At December 31, 1993 and 1992, nonoriginated loans
33
<PAGE> 17
totaled $45,169,000 and $57,461,000, respectively. The Company generally becomes
a member of a group of several lenders with respect to each of these
nonoriginated loans. Average yields on term loans for the years ended December
31, 1993, 1992 and 1991 were 10.2%, 11.0% and 11.5%, respectively.
Finance receivables have been reduced by unearned income of $7,160,000 and
$4,126,000 at December 31, 1993 and 1992, respectively. Unearned finance income
is primarily composed of deferred loan fees on finance receivables.
The following table shows the net amounts due (excluding the allowance for
credit losses) in the various lending categories and the percentages of the
total represented by each category at December 31:
<TABLE>
<CAPTION>
1993 1992
----------------- -----------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Accounts receivable loans:
Originated loans.............................. $315,990 61.4% $186,422 47.2%
Purchased loans:
Discounted receivables..................... 10,383 2.0% -- --
-------- ----- -------- -----
Total accounts receivable loans............ 326,373 63.4% $186,422 47.2%
-------- ----- -------- -----
Term loans:
Originated loans:
Accounts receivable related................ 52,555 10.2% 41,808 10.6%
Stand alone 100,804 19.6% 109,204 27.7%
Purchased loans:
Non-public debt instruments................ 4,587 0.9% 12,708 3.2%
Discounted receivables 30,199 5.9% 36,804 9.3%
Public debt instruments.................... -- -- 7,949 2.0%
-------- ----- -------- -----
Total term loans........................... 188,145 36.6% 208,473 52.8%
-------- ----- -------- -----
$514,518 100.0% $394,895 100.0%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
At December 31, 1993 and 1992, finance receivables have been reduced by
nonrecourse loan participations of $98,620,000 and $55,200,000, respectively.
The approximate contractual principal maturities for loans, net of premiums
and discounts associated with purchased loans, by category are as follows at
December 31, 1993:
<TABLE>
<CAPTION>
TERM LOANS
---------------------------------------------------
ACCOUNTS RECEIVABLE PURCHASED
LOANS ORIGINATED LOANS -------------------------
------------------------ ----------------------- NON-PUBLIC
ORIGINATED DISCOUNTED ACCOUNTS STAND DEBT DISCOUNTED
LOANS RECEIVABLES REC. RELATED ALONE INSTRUMENTS RECEIVABLES TOTAL
---------- ----------- ------------ -------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1994........................ $106,290 $ 162 $ 24,334 $ 40,146 $ -- $ 4,057 $174,989
1995........................ 123,277 9,117 14,969 13,262 -- 8,024 168,649
1996........................ 64,549 -- 8,156 3,144 1,975 2,834 80,658
1997........................ 2,924 1,013 1,314 19,858 -- 9,891 35,000
1998........................ 12,701 91 3,477 18,955 -- 2,413 37,637
Thereafter.................. 6,249 -- 305 5,439 2,612 2,980 17,585
---------- ----------- ------------ -------- ----------- ----------- --------
Total................... $315,990 $10,383 $ 52,555 $100,804 $ 4,587 $30,199 $514,518
======== ======= ======== ======== ======= ======= ========
</TABLE>
In May, 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting by Creditors for Impairment of a Loan". This Statement
addresses the accounting by creditors for impairment of certain loans. It
requires that values for impaired loans generally be measured based on the
present value of expected future cash flows discounted at the loan's effective
rate. This Statement is effective for fiscal years beginning after December 15,
1994. Management believes that the adoption of this pronouncement will not
significantly impact the Company's financial statements.
34
<PAGE> 18
NOTE 3. SENIOR NOTES PAYABLE AND COMMERCIAL PAPER
Senior notes payable and commercial paper consist of the following at
December 31:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
Commercial paper with maturities ranging from 21 to 245
days and bearing interest rates ranging from 3.47% to
3.84%................................................. $148,283,000 $ 64,915,000
------------ ------------
Senior notes payable:
Various notes bearing interest at rates ranging from
9.25% to 9.80% payable semiannually, principal
payable in annual installments aggregating
$5,850,000 through March 1994, increasing to
$13,850,000 annually through December 1999......... 75,150,000 81,000,000
Various notes bearing interest at rates ranging from
6.54% to 13.25% payable semiannually, principal
payable at various annual maturity dates through
November 2000...................................... 148,667,000 89,000,000
Various floating rate notes, interest payable
quarterly, principal payable in quarterly
installments aggregating $598,000 with various
annual maturities through June 1995................ 13,587,000 --
Notes paid in 1993.................................... -- 46,560,000
------------ ------------
Total senior notes payable......................... 237,404,000 216,560,000
------------ ------------
Total senior notes payable and commercial
paper....................................... $385,687,000 $281,475,000
============ ============
</TABLE>
Foothill Capital has a committed bank line of credit totaling $235,000,000
($195,000,000 in 1992) which is used to fund short-term liquidity requirements
and which supports commercial paper outstanding. Interest rates under this line
are at the lower of prime or, at Foothill Capital's option, at the certificate
of deposit rate plus 1 1/2% or the London Interbank Offered Rate
("LIBOR")(3.375% at December 31, 1993) plus 1 1/2%. Actual rates are dependent
upon the level of borrowings under the facility. This line of credit is granted
for a two-year period, renewable annually each June 30. Foothill Capital also
has an agreement for an uncommitted bank line of credit totaling $10,000,000
which is used for overnight borrowings. The interest rate under this line is
based on the daily Federal Funds rate.
Except for a floating rate note of $3,587,000 with a final maturity of June
1995, all notes above are obligations of Foothill Capital. Most loan agreements
relating to the notes and the subordinated notes discussed in Note 4 have
covenants which must be met. At December 31, 1993 and during the year then
ended, the Company was in compliance with such covenants. Under the more
restrictive provisions of the agreements, Foothill Capital must maintain minimum
net worth levels, payments to Foothill, including dividends, are limited and
certain defined senior and subordinated debt ratios must be met. At December 31,
1993, the Company's investment in Foothill Capital amounted to $114,133,000 of
which $98,807,000 was restricted by certain loan agreements. Under the terms of
these agreements, Foothill Capital is allowed to pay dividends of up to 50% of
its net income to Foothill. At December 31, 1993, dividends available for
payment from Foothill Capital to Foothill totaled $15,326,000.
Foothill Capital has investment grade ratings on its commercial paper and
senior debt. During 1993, Foothill Capital issued commercial paper with
maturities generally ranging from 21 to 245 days. At December 31, 1993, interest
rates on commercial paper ranged from 3.47% to 3.84%.
In order to better match rate sensitive assets and liabilities, Foothill
Capital executes interest rate swaps to effectively convert the fixed rates on
long-term senior and subordinated notes to variable rates. Under these swap
agreements, Foothill Capital is required to pay interest semiannually at
variable rates calculated at the average monthly Federal Reserve commercial
paper composite rate or the one, three and six month LIBOR rates on aggregate
principal balances. In return, Foothill Capital receives interest payments
semiannually on the same principal balances at fixed rates. The differential to
be paid or received on all swap agreements is accrued as interest rates change.
At December 31, 1993, 1992 and 1991, the weighted average interest rates at
Foothill Capital on fixed rate long-term debt, including the effect of interest
rate swaps, were 5.91%, 7.04% and 9.39%, respectively. Foothill Capital's credit
risk with respect to these swaps is the risk of nonperformance by the
counterparties to the agreements. Foothill Capital does not anticipate
nonperformance because the counterparties are major banks. As of December 31,
1993, Foothill Capital had swap agreements totaling $285,000,000.
At December 31, 1993, the annual installments due in the next five years on
notes payable, excluding notes payable under lines of credit and other
short-term borrowings, are approximately as follows:
<TABLE>
<S> <C>
1994.................................................... $28,576,000
1995.................................................... 36,378,000
1996.................................................... 40,850,000
1997.................................................... 46,850,000
1998.................................................... 38,850,000
Thereafter.............................................. 45,900,000
</TABLE>
35
<PAGE> 19
NOTE 4. SUBORDINATED NOTES AND DEBENTURES
Subordinated notes and debentures, which are subordinated to all other
indebtedness of the Company, consist of the following at December 31:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Senior subordinated:
Various notes bearing interest at rates ranging from 10.60% to
13.63% payable semiannually, principal payable in annual
installments aggregating $825,000 through November 1995,
decreasing to $575,000 annually through December 1999........ $ 4,425,000 $ 5,500,000
Various notes bearing interest at rates ranging from 7.46% to
11.26% payable semiannually, principal payable in annual
installments of $700,000 commencing in April 1994, increasing
to $1,843,000 in 1996, increasing to $6,010,000 in 1998,
decreasing to $5,310,000 in 2001, decreasing to $4,167,000 in
2002 through November 2003................................... 38,000,000 13,000,000
Notes paid in 1993.............................................. -- 18,440,000
Junior subordinated:
Notes bearing interest at 11.82% payable semiannually, principal
payable in annual installments of $700,000 through December
1999......................................................... 4,300,000 5,000,000
Various notes bearing interest at rates ranging from 9.93% to
12.26% payable semiannually, principal payable in annual
installments of $700,000 commencing in April 1994, increasing
to $986,000 in 1996, decreasing to $286,000 in 2001 through
December 2002................................................ 7,000,000 7,000,000
----------- -----------
Total senior subordinated and junior subordinated notes
payable.............................................. $53,725,000 $48,940,000
----------- -----------
----------- -----------
</TABLE>
The subordinated notes in the above table are obligations of Foothill
Capital and have the same restrictions as set forth in Note 3.
At December 31, 1993, the annual installments due on subordinated notes and
debentures in the next five years are as follows:
<TABLE>
<S> <C>
1994.................................................... $ 3,175,000
1995.................................................... 3,175,000
1996.................................................... 4,104,000
1997.................................................... 4,104,000
1998.................................................... 8,271,000
Thereafter.............................................. 30,896,000
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
At December 31, 1993, 22,000,000 shares of Class A common stock were
authorized of which 16,538,874 shares were issued and outstanding. At December
31, 1993, 969,075 shares were reserved for issuance for employee stock option
and stock purchase plans, and 666,666 shares were reserved for issuance upon
conversion of the Company's convertible preferred stock.
In May 1992, the Company sold 3,450,000 shares of its Class A common stock
through a secondary public offering. Net proceeds to the Company totaled
approximately $26,677,000 and were used to eliminate Foothill's senior debt
obligations of $18,604,000 and for general corporate purposes.
During July and September 1992, holders of $13,473,000 of the Company's 9.5%
convertible subordinated debentures converted their debentures into a total of
1,886,906 shares of the Company's Class A Common Stock. Each debenture was
converted into 140.056 shares of Common Stock using the adjusted conversion
price of $7.14 per share.
At December 31, 1993, there were 1,000,000 shares of preferred stock, $1 par
value, authorized for issuance of which 100,000 shares are issued and
outstanding. The outstanding shares of preferred stock are convertible at the
holders option into 666,666 shares of Class A common stock using the current
conversion price of $4.50 per share. This conversion price is subject to certain
antidilution adjustments. The holders of preferred stock are entitled to receive
cumulative quarterly dividends which commenced April 1, 1992, payable in cash or
common stock (based on fair market value) at the annual rate of $2.70 per share.
The holders of the preferred stock are entitled to elect, as a class, one member
of the Company's Board of Directors. On other matters, the holders of the
preferred stock are entitled to vote with common stockholders on an as converted
basis. In the event of any liquidation or winding up of the Company, holders of
the preferred stock are entitled to receive an amount equal to $30.00 per
preferred share before any payments or distributions are made to common
stockholders of the Company.
Employee Stock Option and Stock Purchase Plans
At December 31, 1993, no shares of the Company's Class A common stock were
available for future grants under the Company's 1978 non-qualified and incentive
stock option plan, as amended. Options previously issued to employees are
generally exercisable at a price that is not less than 95% of fair market value
at date of grant, are exercisable in varying increments during each year of
employment and expire up to ten years from date of grant.
36
<PAGE> 20
In 1990, the Board of Directors of the Company adopted, and stockholders
approved, the 1990 Foothill Performance and Equity Incentive Plan. This plan is
an "omnibus" plan and is used to promote and advance the interests of the
Company and its stockholders by enabling the Company to attract, retain and
reward key employees. The plan offers stock and cash incentive awards as well as
stock options (which may be discounted below fair market value at the date of
grant). There were 205,500 and 5,000 options granted under this plan during 1993
and 1992, respectively. At January 1, 1994, there were 219,602 shares of the
Company's Class A common stock available for future grant under this plan.
The following is a summary of changes in employee stock options during the
years ended December 31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
1978 NON-QUALIFIED AND
1990 PLAN INCENTIVE OPTIONS
------------------------ -------------------------
SHARES PRICE RANGE SHARES PRICE RANGE
-------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1990..... -- -- 1,546,592 $ 3.73-$5.21
Granted............................ 196,900 $ 3.19-$3.94 -- --
Exercised.......................... -- -- (136,510) 3.73- 4.91
Cancelled.......................... -- -- (196,470) 3.73- 5.21
-------- ------------ --------- ------------
Outstanding at December 31, 1991..... 196,900 3.19- 3.94 1,213,612 3.73- 5.21
Granted............................ 5,000 5.00 -- --
Exercised.......................... (191,900) 3.19 (376,641) 3.74- 5.21
Cancelled.......................... -- -- (31,417) 5.09- 5.14
-------- ------------ --------- ------------
Outstanding at December 31, 1992..... 10,000 3.94- 5.00 805,554 3.73- 5.21
Granted............................ 205,500 9.38 -- --
Exercised.......................... (5,000) 3.94- 5.00 (310,891) 4.44- 5.14
Cancelled.......................... -- -- (2,979) 5.02- 5.09
-------- ------------ --------- ------------
Outstanding at December 31, 1993..... 210,500 $ 3.94-$9.38 491,684 $ 4.44-$5.14
-------- ------------ --------- ------------
-------- ------------ --------- ------------
Options exercisable at December 31,
1993............................... 2,400 $ 3.94-$5.00 402,133 $ 4.44-$5.14
-------- ------------ --------- ------------
-------- ------------ --------- ------------
</TABLE>
Under the 1979 Employee Stock Purchase Plan, employees may purchase shares
of the Company's Class A common stock at the lower of fair market value at the
beginning of the Plan year or 90% of fair market value at the end of the Plan
year. Employees' purchases may not exceed the lesser of $25,000 or 15% of their
annual base compensation. Shares of common stock purchased under the Plan are
not issuable until the end of the year. During 1993, 1992 and 1991, employees
purchased 19,460, 33,251, and 35,239 shares, respectively, and at December 31,
1993, 47,289 shares were available for future purchases. On January 14, 1992,
the Board of Directors adopted an amendment, approved by stockholders at the
Company's 1992 annual meeting, to increase the number of shares of common stock
covered by the 1979 plan by 100,000 to a total of 250,000.
NOTE 6. INCOME TAXES
In August 1993, due to federal legislation, the Company's federal income tax
rate increased by 1% retroactive to January 1, 1993. The effect on the Company's
current provision for income taxes was offset by an increased benefit related to
higher tax rates used to value the Company's deferred tax assets.
The 1993, 1992 and 1991 provision for income taxes was 42%, 41% and 43%,
respectively, which is based on combined state and federal statutory tax rates.
The provision (credit) for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current................................. $12,174,000 $ 7,606,000 $ 4,636,000
Deferred................................ (1,045,000) (1,268,000) (1,286,000)
----------- ----------- -----------
11,129,000 6,338,000 3,350,000
----------- ----------- -----------
State:
Current................................. 4,233,000 2,269,000 1,422,000
Deferred................................ (284,000) 14,000 (305,000)
----------- ----------- -----------
3,949,000 2,283,000 1,117,000
----------- ----------- -----------
$15,078,000 $ 8,621,000 $ 4,467,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
37
<PAGE> 21
As previously reported, the significant components of the net tax effect of
changes in temporary differences reflected in deferred tax expense for the years
ended December 31, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
1992 1991
----------- -----------
<S> <C> <C>
Investment valuation adjustments.................. $ 1,214,000 $ 7,000
Allowance for credit losses....................... (1,116,000) (205,000)
Effect of repossession transactions............... (882,000) (938,000)
State taxes....................................... (245,000) (156,000)
Effect of debt exchange transactions.............. (168,000) (64,000)
Deferred compensation............................. (139,000) (135,000)
Leasing........................................... 23,000 --
Other, net........................................ 59,000 (100,000)
----------- -----------
$(1,254,000) $(1,591,000)
----------- -----------
----------- -----------
</TABLE>
Significant temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
ASSET LIABILITY
----------- ----------
<S> <C> <C>
Allowance for credit losses........................ $ 6,178,000 $ --
Investment valuation adjustments................... 2,176,000 --
Organization cost amortization..................... 975,000 --
State taxes........................................ 873,000 --
Deferred compensation.............................. 847,000 --
Effect of debt exchange transactions............... -- 773,000
Leasing............................................ 56,000
Other, net......................................... -- 1,211,000
----------- ----------
$11,049,000 $2,040,000
----------- ----------
----------- ----------
</TABLE>
NOTE 7. COMMITMENTS
Lease Commitments
The following is a schedule by year of future minimum rental payments
required under operating leases for the Company's office facilities that have
initial and remaining noncancelable terms in excess of one year as of December
31, 1993. The major lease contains one five-year renewal option and requires the
Company to pay a share of the facilities common operating expenses.
<TABLE>
<S> <C>
1994..................................................... $ 939,000
1995..................................................... 1,115,000
1996..................................................... 1,212,000
1997..................................................... 1,212,000
1998..................................................... 1,212,000
Thereafter............................................... 1,817,000
----------
$7,507,000
----------
----------
</TABLE>
The total rental expense for all operating leases, except those with
remaining terms of a month or less that were not renewed, for the years ended
December 31, 1993, 1992 and 1991 was approximately $1,072,000, $942,000 and
$837,000, respectively.
Unfunded Commitments
In the normal course of business, the Company continually extends unfunded
commitments associated primarily with its accounts receivable lending activities
at Foothill Capital. These unfunded commitments vary on a daily basis and are
based on the eligibility for advances of the borrowers' receivables. As of
December 31, 1993, the Company had unfunded commitments of $110,386,000.
In addition, the Company had approved new loan commitments totaling
$37,500,000 at December 31, 1993. However, funded amounts for these commitments
are expected to be less because actual advances will be based on the borrowers'
eligible collateral at the time of funding.
NOTE 8. CONTINGENCIES
Letters of Credit and Guarantees
Foothill Capital has two committed letter of credit issuance facilities
totaling $40,000,000 under which it guarantees letters of credit issued for the
benefit of its borrowers. These facilities have committed terms up to two years.
38
<PAGE> 22
As of December 31, 1993, the Company had issued guarantees and letters of credit
to its borrowers totaling $38,416,000, net of participants' commitments totaling
$20,979,000. Letters of credit are an integral part of the Company's business
and contingent liabilities under these letters of credit are collateralized by
pledges of borrowers' eligible accounts receivable.
Litigation
There are several lawsuits and claims pending against the Company which
management considers incidental to normal operations, some of which seek
substantial monetary damages. Management, after review, including consultation
with counsel, believes that any ultimate liability which could arise from these
lawsuits and claims would not materially affect the financial position or
results of operations of the Company.
NOTE 9. EXTRAORDINARY ITEMS
The extraordinary item in 1993 was due to the prepayment of approximately
$29,000,000 of senior and subordinated debt at Foothill Capital resulting in
prepayment fees and the elimination of unamortized deferred costs on this
prepaid debt. The extraordinary item in 1993 is presented net of provision for
income taxes of $406,000. The extraordinary items in 1992 were due to the
retirement of $9,229,000 face value of the Company's 14% senior notes,
$5,648,000 face value of the Company's 12.5% debentures and $9,375,000 face
value of the Company's variable rate senior term note. These nonrecurring
extraordinary charges resulted from the elimination of unamortized deferred
costs on the aforementioned debt obligations which were retired in advance of
their scheduled maturities. The extraordinary items in 1992 are presented net of
provision for income taxes of $383,000. The extraordinary item in 1991
represents a state tax benefit resulting from recognition of a net operating
loss carryforward from 1990.
NOTE 10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimates are required under Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments."
These estimates may not represent values which would be received should these
financial instruments be sold, liquidated or otherwise terminated.
The estimated fair values for the Company's financial assets and related
off-balance sheet financial instruments at December 31, 1993 and 1992 are
summarized below:
<TABLE>
<CAPTION>
1993 1992
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents..... $ 50,907,000 $ 50,907,000 $ 39,765,000 $ 39,765,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Accounts receivable loans:
Originated loans............ $315,990,000 $321,722,000 $186,422,000 $187,971,000
Purchased:
Discounted receivables... 10,383,000 11,141,000 -- --
------------ ------------ ------------ ------------
Total accounts
receivable........ 326,373,000 332,863,000 186,422,000 187,971,000
------------ ------------ ------------ ------------
Term loans:
Originated loans:
Accounts receivable
related................ 52,555,000 52,863,000 41,808,000 41,808,000
Stand alone.............. 100,804,000 110,371,000 109,204,000 115,677,000
Purchased:
Non-public debt
instruments............ 4,587,000 4,592,000 12,708,000 13,605,000
Discounted receivables... 30,199,000 34,751,000 36,804,000 38,979,000
Public debt
instruments............ -- -- 7,949,000 7,819,000
------------ ------------ ------------ ------------
Total term loans......... 188,145,000 202,577,000 208,473,000 217,888,000
------------ ------------ ------------ ------------
Total finance
receivables....... $514,518,000 $535,440,000 $394,895,000 $405,859,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Equity securities, debt and
partnership investments..... $ 32,842,000 $ 35,095,000 $ 13,992,000 $ 24,429,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Commitments to extend credit
(Committed amount:
$110,386,000 at 12/31/93;
$86,593,000 at 12/31/92).... $ 916,000 $ 955,000
Guarantees and letters of
credit
(Contract amount:
$36,486,000 at 12/31/93;
$24,727,000 at 12/31/92).... $ 591,000 $ 511,000
</TABLE>
Estimated fair values are calculated as follows:
Cash and cash equivalents: The carrying amounts for cash and cash
equivalents approximate fair value.
39
<PAGE> 23
Originated loans: Fair value and carrying value for the accounts receivable
and variable-rate originated loan portfolios are similar as these portfolios
reprice frequently. The estimated fair value of the fixed-rate portion of the
originated loan portfolio is calculated by discounting scheduled cash flows
through contractual maturity using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loans.
Purchased loans: Purchased loans above have an estimated market value of
$50,484,000, which is $5,315,000 more than carrying value at December 31, 1993.
At December 31, 1992, these loans had an estimated market value of $60,403,000,
which was $2,942,000 more than carrying value. Management has classified
purchased loans as "available for sale," and has thus included the unrealized
gains and losses from this portfolio, net of tax, as a separate component of
stockholder's equity as specified in FASB Statement No. 115. Market values are
based on available market information which may be limited as certain loans are
rarely or infrequently traded on the open market. Market values for public debt
instruments are more readily ascertainable than market values of other types of
nonoriginated loans noted above. Management estimates market values based on
discussions with brokers, investment bankers or market makers, as well as on
prices of recent trades of identical or similar debt instruments. Such estimates
may not necessarily represent actual trades. Market values are not indicative of
collateral values supporting such loans.
Equity, debt and partnership investments: Equity securities of $30,889,000
(original cost of $11,217,000) and $11,079,000 at December 31, 1993 and 1992,
respectively, had estimated market values net of income taxes in 1993 of
$33,138,000 and $20,862,000 at December 31, 1993 and 1992, respectively.
Management has classified equity securities as "available for sale," and has
included the unrealized gains and losses from this portfolio, net of tax, as a
separate component of stockholder's equity as specified in FASB Statement No.
115. Corporate marketable debt securities of $61,000 and $294,000 at December
31, 1993 and 1992, respectively, had estimated market values of $65,000 and
$948,000, respectively. Current market values of both equity securities and
marketable debt securities are estimated by the Company's management based
primarily on public market quotations for the majority of the securities.
Partnership investments of $1,892,000 and $2,619,000 at December 31, 1993 and
1992, respectively, are accounted for on an equity basis and, therefore, fair
value and carrying value are identical.
Commitments to extend credit: The fair value of commitments to extend credit
is calculated by combining commitment fees collected but unearned as of December
31, 1993 with an estimate of unused line fees to be earned during 1994. The
actual level of unused line fees earned during 1994 will vary based on actual
line usage as well as growth of the finance receivable portfolio.
Guarantees and letters of credit: Fair value is the estimated net amount of
letters of credit and guarantee fees to be earned during 1994, assuming
historical experience continues as to letters of credit drawings, replacements,
and fee levels. The actual level of guarantee and letters of credit income will
vary based on actual drawings and replacements as well as the growth of the
finance receivable portfolio.
Subsequent to December 31, 1993, the Company realized pretax gains of
$5,622,000 in excess of fair values noted above on certain directly owned debt
and equity securities redeemed by a privately held company.
The estimated fair values for the Company's financial liabilities and
related interest rate swap agreements at December 31, 1993 and 1992 are
summarized below:
<TABLE>
<CAPTION>
1993 1992
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Commercial paper................ $148,283,000 $148,283,000 $ 64,915,000 $ 64,915,000
Long-term senior notes
payable....................... 237,404,000 245,158,000 216,560,000 224,526,000
Long-term subordinated notes and
debentures.................... 53,725,000 54,413,000 48,940,000 51,671,000
Interest rate swap agreements
(Notional amount: $285,000,000
at 12/31/93; $257,500,000 at
12/31/92)..................... -- (8,759,000) -- (10,947,000)
</TABLE>
Estimated fair values are calculated as follows:
Commercial paper: Fair value and carrying value are identical due to the
short maturity and repricing of these instruments.
Senior notes payable and subordinated notes and debentures: Fair value is
calculated by discounting scheduled cash flows through contractual maturity
using estimated market discount rates.
Interest rate swap agreements: Fair value is obtained from dealer quotes.
These values represent the estimated amount the Company would receive to
terminate the agreements, taking into account current interest rates and, when
appropriate, the current credit worthiness of the counterparties. The Company
does not intend to unwind these agreements as they are used to effectively
convert the fixed rates on long-term debt to variable rates and match interest
sensitive assets and liabilities.
40
<PAGE> 24
NOTE 11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for 1993 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
1993
Total revenues................................ $17,717,000 $21,965,000 $21,491,000 $23,651,000
----------- ----------- ----------- ------------
Net gain on investments....................... 179,000 2,852,000 2,147,000 79,000
----------- ----------- ----------- ------------
Costs and expenses:
Interest.................................... 4,940,000 5,073,000 5,455,000 5,596,000
Provision for credit losses................. 3,403,000 2,759,000 3,582,000 3,050,000
General and administrative.................. 4,357,000 5,404,000 4,676,000 5,885,000
----------- ----------- ----------- ------------
Total costs and expenses...................... 12,700,000 13,236,000 13,713,000 14,531,000
----------- ----------- ----------- ------------
Income from continuing operations before
taxes....................................... 5,196,000 11,581,000 9,925,000 9,199,000
Provision for income taxes -- continuing
operations.................................. 2,187,000 4,870,000 4,151,000 3,870,000
----------- ----------- ----------- ------------
Income from continuing operations............. 3,009,000 6,711,000 5,774,000 5,329,000
Income (loss) from discontinued operations.... 410,000 (629,000) (124,000) (1,236,000)
----------- ----------- ----------- ------------
Income before extraordinary items............. 3,419,000 6,082,000 5,650,000 4,093,000
Extraordinary items (1)....................... -- -- -- (561,000)
----------- ----------- ----------- ------------
Net income.................................... $ 3,419,000 $ 6,082,000 $ 5,650,000 $ 3,532,000
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Primary earnings per share:
Income from continuing operations........... $ 0.18 $ 0.41 $ 0.33 $ 0.31
Income (loss) from discontinued
operations................................ 0.02 (0.04) -- (0.07)
Extraordinary items (1)..................... -- -- -- (0.03)
----------- ----------- ----------- ------------
Earnings per common and common equivalent
share..................................... 0.20 0.37 0.33 0.21
----------- ----------- ----------- ------------
Fully diluted earnings per share:
Income from continuing operations........... $ 0.18 $ 0.39 $ 0.33 $ 0.30
Income (loss) from discontinued
operations................................ 0.03 (0.04) (0.01) (0.07)
Extraordinary items (1)..................... -- -- -- (0.03)
----------- ----------- ----------- ------------
Earnings per common share assuming full
dilution.................................. $ 0.21 $ 0.35 $ 0.32 $ 0.20
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
- ------------------
(1) See Note 9 "Extraordinary Items."
41
<PAGE> 25
Unaudited quarterly financial data for 1992 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
1992:
Total revenues................................ $16,843,000 $19,597,000 $16,130,000 $14,165,000
----------- ----------- ----------- ------------
Net gain (loss) on investments................ 1,853,000 1,001,000 (236,000) 755,000
----------- ----------- ----------- ------------
Costs and expenses:
Interest.................................... 7,213,000 6,524,000 5,557,000 4,974,000
Provision for credit losses................. 2,231,000 3,770,000 1,790,000 880,000
General and administrative.................. 4,012,000 4,055,000 4,083,000 4,264,000
----------- ----------- ----------- ------------
Total costs and expenses...................... 13,456,000 14,349,000 11,430,000 10,118,000
----------- ----------- ----------- ------------
Income from continuing operations before
taxes....................................... 5,240,000 6,249,000 4,464,000 4,802,000
Provision for income taxes -- continuing
operations.................................. 2,225,000 2,639,000 1,847,000 1,910,000
----------- ----------- ----------- ------------
Income from continuing operations............. 3,015,000 3,610,000 2,617,000 2,892,000
Income (loss) from discontinued operations.... 350,000 348,000 74,000 (209,000)
----------- ----------- ------------ ------------
Income before extraordinary................... 3,365,000 3,958,000 2,691,000 2,683,000
Extraordinary items (1)....................... -- (505,000) (5,000) (42,000)
----------- ----------- ----------- ------------
Net income.................................... $ 3,365,000 $ 3,453,000 $ 2,686,000 $ 2,641,000
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Primary earnings per share:
Income from continuing operations........... $ 0.27 $ 0.28 $ 0.17 $ 0.17
Income (loss) from discontinued
operations................................ 0.03 0.02 -- (0.01)
Extraordinary items (1)..................... -- (0.04) -- --
----------- ----------- ----------- ------------
Earnings per common and common equivalent
share..................................... $ 0.30 $ 0.26 $ 0.17 $ 0.16
----------- ----------- ----------- ------------
Fully diluted earnings per share:
Income from continuing operations........... $ 0.24 $ 0.24 $ 0.16 $ 0.17
Income (loss) from discontinued
operations................................ 0.03 0.02 -- (0.01)
Extraordinary items (1)..................... -- (0.03) -- --
----------- ----------- ----------- ------------
Earnings per common share assuming full
dilution.................................. $ 0.27 $ 0.23 $ 0.16 $ 0.16
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
- ------------------
(1) See Note 9 "Extraordinary Items."
42
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Foothill Group, Inc.
We have audited the accompanying consolidated balance sheets of The Foothill
Group, Inc. as of December 31, 1993 and 1992 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Foothill
Group, Inc. at December 31, 1993 and 1992 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Notes to the Financial Statements, in 1993 the Company
changed its method of accounting for income taxes and certain debt and equity
securities.
ERNST & YOUNG
Los Angeles, California
January 28, 1994
STOCK INFORMATION
The Common Stock of The Foothill Group, Inc. is listed on the New York Stock
Exchange. The NYSE symbol is FGI.
<TABLE>
<CAPTION>
QUARTERLY STOCK
PRICES
---------------
HIGH LOW
---- ----
<S> <C> <C>
Calendar Quarters 1993:
First Quarter............................................................ $ 9 7/8 $ 7 1/2
Second Quarter........................................................... $11 3/8 $ 8 7/8
Third Quarter............................................................ $13 3/8 $10 5/8
Fourth Quarter........................................................... $17 1/2 $12 1/8
Calendar Quarters 1992:
First Quarter............................................................ $ 9 $ 5
Second Quarter........................................................... $ 8 3/4 $ 7 5/8
Third Quarter............................................................ $ 8 7/8 $ 7 3/4
Fourth Quarter........................................................... $ 8 3/4 $ 6 1/2
</TABLE>
During the year ended December 31, 1993, the Board of Directors declared
quarterly cash dividends on its Class A Common Stock of $.03 per common share
with record dates of March 20, July 20 and October 20. On December 17, 1993, the
Board of Directors declared a quarterly cash dividend on its Class A Common
Stock of $.05 per common share with a record date of December 28, 1993. No
dividends on common shares were paid or declared during 1992 or 1991.
REGISTRAR AND TRANSFER AGENT
Harris Trust Company of California, 601 South Figueroa, Suite 4900, Los
Angeles, California 90017, (213) 239-0672
STOCKHOLDERS OF RECORD
As of February 25, 1994, there were 807 Foothill Class A Common Stockholders
of record.
43
<PAGE> 1
EXHIBIT 22.1
THE FOOTHILL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
The following list sets forth the subsidiaries of the Company at
December 31, 1993, all of which are wholly owned and are included in the
Consolidated Financial Statements of the Company:
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
Foothill Capital Corporation California
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of The Foothill Group, Inc. of our report dated January 28, 1994 included in
the 1993 Annual Report to Shareholders of The Foothill Group, Inc.
Our audits also included the financial statement schedules of The Foothill
Group Inc. listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (S-8's number 2-63196, 2-91151, 2-65632, 33-03476, 33-22370,
2-69595, 33-35852 and 33-50168) pertaining to The Foothill Group, Inc.'s
employee stock option and stock purchase plans and in the related Prospectuses,
of our report dated January 28, 1994 with respect to the consolidated financial
statements and financial statement schedules of The Foothill Group, Inc.
included and incorporated by reference in this Annual Report (Form 10-K) for
the year ended December 31, 1993.
ERNST & YOUNG
Los Angeles, California
March 21, 1994
<PAGE> 1
EXHIBIT 28
FOOTHILL CAPITAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1992 AND 1991
<PAGE> 2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Foothill Capital Corporation
We have audited the accompanying consolidated balance sheets of Foothill
Capital Corporation as of December 31, 1993 and 1992, and the related
consolidated statements of income and retained earnings, and cash flows for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Foothill Capital
Corporation at December 31, 1993 and 1992 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
As discussed in Notes to the financial statements, in 1993 the Company changed
its method of accounting for income taxes and certain debt and equity
securities.
January 28, 1994
2
<PAGE> 3
FOOTHILL CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Notes 1 and 5) $ 45,498 $ 36,511
Finance receivables (Notes 1, 2 and 5):
Accounts receivable loans 319,792 186,422
Term loans 186,881 207,108
- --------------------------------------------------------------------------------------
Finance receivables 506,673 393,530
Allowance for credit losses 13,857 10,527
- --------------------------------------------------------------------------------------
Finance receivables, net 492,816 393,003
Repossessed assets, net (Note 1) - 1,782
Property and equipment, at cost less accumulated depreciation
and amortization ($1,769 in 1993; $1,392 in 1992) 2,269 1,552
Other assets (Notes 1 and 5) 32,047 15,019
- --------------------------------------------------------------------------------------
$572,630 $437,867
======================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Commercial paper (Notes 3 and 5) $148,283 $ 64,915
Senior notes payable (Notes 3 and 5) 233,817 216,560
Accounts payable and accrued liabilities 12,172 11,075
Subordinated notes and debentures (Notes 4 and 5) 64,225 62,190
- --------------------------------------------------------------------------------------
Total liabilities 458,497 354,740
- --------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 7)
Stockholder's equity (Notes 1 and 3):
Common stock, $1 par value, 3,000,000 shares authorized,
1,575,000 shares issued and outstanding 1,575 1,575
Capital in excess of par value 41,950 41,950
Unrealized gains on securities available for sale 16,433 -
Retained earnings 54,175 39,602
- --------------------------------------------------------------------------------------
Total stockholder's equity 114,133 83,127
- --------------------------------------------------------------------------------------
$572,630 $437,867
======================================================================================
</TABLE>
See accompanying notes.
3
<PAGE> 4
FOOTHILL CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $56,636 $49,543 $51,760
Interest expense 22,218 23,113 29,805
- --------------------------------------------------------------------------------
Interest margin 34,418 26,430 21,955
Fees and other income 20,916 13,485 8,249
- --------------------------------------------------------------------------------
Total margin (Note 1) 55,334 39,915 30,204
Provision for credit losses (Note 1) 12,254 8,641 6,377
General and administrative expenses (Note 1) 16,987 14,967 13,334
- --------------------------------------------------------------------------------
Income before provision for income taxes 26,093 16,307 10,493
Provision for income taxes (Notes 1 and 6) 10,959 6,849 4,302
- --------------------------------------------------------------------------------
Net income before extraordinary item 15,134 9,458 6,191
Extraordinary item (Note 3) (561) - -
- --------------------------------------------------------------------------------
Net Income 14,573 9,458 6,191
Retained earnings, beginning of year 39,602 30,144 26,973
Dividends paid to parent company - - (3,020)
- --------------------------------------------------------------------------------
Retained earnings, end of year $54,175 $39,602 $30,144
================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 5
FOOTHILL CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income before extraordinary item $ 15,134 $ 9,458 $ 6,191
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 12,254 8,641 6,377
Depreciation and amortization 560 524 305
Amortization of debt issuance costs 800 823 763
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable and
accrued liabilities 278 5,450 (2,611)
Other (1,460) 2,176 (5,937)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,566 27,072 5,088
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds received from finance receivables and
sales of repossessed assets 4,597,475 3,727,092 3,738,552
Disbursements made for net finance receivables
and repossessed assets (4,722,288) (3,734,757) (3,736,734)
Proceeds from sales of investments 4,851 1,468 2,899
Purchase of property and equipment (1,277) (642) (571)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (121,239) (6,839) 4,146
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from commercial paper sales 786,633 661,540 65,218
Payments on commercial paper maturities (703,265) (607,511) (58,390)
Proceeds from senior notes payable and net cash borrowings 70,000 100,000 8,000
Payments on senior notes payable and net bank borrowings (52,743) (143,553) (26,829)
Proceeds from subordinated notes 25,000 10,000 10,000
Payments on subordinated notes (22,965) (6,230) (6,430)
Dividends paid to parent company - - (3,020)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 102,660 14,246 (11,451)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 8,987 34,479 (2,217)
Cash and cash equivalents at beginning of year 36,511 2,032 4,249
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 45,498 $ 36,511 $ 2,032
========================================================================================================================
Cash paid during the year for:
Interest expense $ 22,041 $ 21,911 $ 30,370
Income taxes (paid to parent company) $ 10,936 $ 8,417 $ 9,196
=======================================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 6
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Foothill Capital Corporation ("Foothill Capital" or the "Company"), a
wholly owned subsidiary of The Foothill Group, Inc. (the "Parent"), is engaged
in the commercial finance business. The consolidated financial statements
include the accounts of FCC Holdings Limited, a wholly owned subsidiary of
Foothill Capital Corporation. All intercompany accounts and transactions have
been eliminated in consolidation. Certain reclassifications have been made to
prior year amounts to conform to the 1993 presentation. For purposes of the
Statement of Cash Flows, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Transactions with affiliates
During the years ended December 31, 1993, 1992 and 1991, the Company
was charged $750,000 annually in management fees by the Parent.
The Company has $5,500,000 in 1993 ($6,250,000 in 1992) in
subordinated debentures and $5,000,000 ($6,000,000 in 1992) in subordinated
notes payable to the Parent. Interest expense paid to the Parent for the years
ended December 31, 1993, 1992 and 1991 amounted to $1,315,000, $1,529,000 and
$1,715,000, respectively.
The Company has agreements to jointly purchase loans with Foothill
Partners, L.P. and Foothill Partners II, L.P., limited partnerships in which
the Parent is a general partner At December 31, 1993, loans outstanding which
were purchased under these agreements by the Company amounted to $38,799,000.
Loan purchases under these agreements are subject to the Company's normal due
diligence and loan approval processes.
The Company participates loans to Foothill Recovery Fund, a limited
partnership of which the Parent is a general partner. At December 31, 1993,
loan participations outstanding to Foothill Recovery Fund totaled $514,000.
Income taxes
The Company and its Parent file a consolidated federal income tax
return and combined state tax returns. Income taxes are allocated by the
Parent to the Company as though the Company filed separate income tax returns.
Revenue recognition
Interest income:
Interest income includes interest on finance receivables, which is
recognized as earned (interest method), and amortization of loan fees. Loan
fees, net of initial direct costs, are deferred and recognized over the term of
the loan commitment using a similar method.
6
<PAGE> 7
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
One of the Company's lending activities involves the purchase of
significantly discounted finance receivables which are generally due from
borrowers in reorganization or in the midst of restructuring. The Company does
not amortize these discounts into income but does recognize interest income on
a cash basis. These discounted finance receivables which were paying interest
currently totaled $38,295,000 and $31,464,000 at December 31, 1993 and 1992,
respectively. Interest income is not accrued or recognized on the remaining
discounted finance receivables which totaled $5,967,000 and $4,727,000 at the
same dates. Gains or losses, as appropriate, are recorded with respect to
these receivables as they are liquidated through sale, exchange or other
distributions received upon borrowers' reorganization or restructuring.
It is the Company's general policy to suspend the recognition of
income on term loans which are 61 days or more contractually delinquent.
Recognition of income is generally resumed, and suspended income is recognized,
when the loan becomes contractually current or collection of suspended amounts
is assured. At December 31, 1993 and 1992, income recognition was suspended on
$10,366,000 and $14,294,000, respectively, of term loans. In addition, at
December 31, 1993 and 1992, the Company had $5,930,000 and $5,981,000,
respectively, in accounts receivable loans in the process of liquidation on
which income had been deferred.
Fees and other income:
Included in fees and other income are net gains resulting from sales
and exchanges of purchased loans totaling $13,493,000, $8,461,000 and
$3,637,000 for the years ended December 31, 1993, 1992 and 1991, respectively.
The net gains in 1993, 1992 and 1991 were comprised of gross realized gains of
$13,897,000, $9,301,000 and $4,593,000 and gross realized losses of $404,000,
$840,000 and $956,000 resulting from sale and exchange transactions having
proceeds of $45,039,000, $45,158,000 and $45,649,000, respectively. Certain of
these gains resulted from reorganizations by borrowers in which the Company
exchanged receivables purchased at a discount primarily for new debt or equity
securities of the reorganized borrowers. The new securities received were
recorded at fair value, if determinable, when issued to the Company. The
excess of fair value, if any, over the Company's cost of the receivable is
recorded as a gain upon reorganization. Net gains resulting from exchange
transactions included above totaled $2,924,000, $3,819,000 and $1,467,000 for
the years ended December 31, 1993, 1992 and 1991, respectively.
Repossessed assets
Repossessed assets are included in the financial statements at the
lower of cost or estimated realizable value. Estimated realizable values are
based on management's evaluation of numerous factors, including estimated
holding periods and costs, appraisals, sales of comparable assets and estimated
market conditions at projected disposal dates, and do not necessarily represent
current auction values. The Company's writeoff policy is based on a loan by
loan review. The Company did not have any repossessed assets as of December
31, 1993. Repossessed assets were, net of specific writedowns, $1,782,000 as
of December 31, 1992.
Allowance for credit losses
The Company maintains a general allowance for credit losses at an
amount deemed adequate to cover potential losses on finance receivables. The
amount of the allowance is based on management's evaluation of numerous factors
including adequacy of collateral supporting finance receivables and historical
loss experience, and reflects management's best estimate of the necessary level
of the allowance for credit losses.
7
<PAGE> 8
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Activity in the allowance for credit losses is as follows for the
years ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for credit losses on finance receivables:
Balance at beginning of year $ 10,527 $ 8,047 $ 8,475
Additions charged to expense 12,254 8,641 6,377
Actual writeoffs, net (8,924) (6,161) (6,805)
- ---------------------------------------------------------------------------------------------------
Balance at end of year $ 13,857 $ 10,527 $ 8,047
===================================================================================================
</TABLE>
Other assets
The following table shows the composition of other assets at
December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992
- ------------------------------------------------------------------------------------
<S> <C> <C>
Equity securities (at market value, net of income
tax, in 1993; cost of $8,570 in 1993) $ 25,003 $ 8,894
Deferred income taxes assets 5,686 4,700
Deferred debt expenses 1,055 1,425
Other 303 --
- ------------------------------------------------------------------------------------
Total other assets $ 32,047 $ 15,019
====================================================================================
</TABLE>
At December 31, 1993, the Company adopted the requirements of FASB
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and classified its marketable debt and equity securities as
"available for sale." Accordingly, these securities have been
marked-to-market, with the increase in their carrying value, net of income tax,
included as a component of stockholder's equity.
The equity securities at December 31, 1993 and 1992 were received as
a result of several exchanges of non-public debt instruments and discounted
receivables for new securities of the reorganized debtors. The market value
adjustment to equity securities, net of income tax, for December 31, 1992 would
have been $6,344,000 if mark-to-market positions had been applied retroactively
to prior years.
Retirement savings and supplemental benefit plans
The Company sponsors an employee savings plan under section 401(k)
of the Internal Revenue Code. This plan covers substantially all employees.
Employees may contribute up to 15% of their salary (to a maximum of $8,994 for
calendar 1993) and the Company matches employee contributions equal to 100% of
the first 6% of compensation contributed by each participant. Amounts charged
against income were $308,000, $289,000 and $270,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
In 1991, the Company established an unfunded supplemental benefit
plan for certain officers that provides for payment to participants upon
retirement from the Company's service. The charge to expense, using an
actuarial determination of the present values of the estimated future payments
was $254,000, $233,000 and $223,000 in 1993, 1992 and 1991, respectively.
8
<PAGE> 9
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE 2. FINANCE RECEIVABLES
The Company is engaged primarily in the commercial finance business,
which includes accounts receivable and term lending secured by accounts
receivable, inventory, real estate and/or personal property and equipment. The
Company attempts to offset lending risk by providing credit only on a fully
collateralized basis.
The Company extends credit lines of up to $100,000,000 by
participating portions of these lines with other commercial finance lenders.
Under the terms of its various borrowing agreements, Foothill Capital's largest
allowable loan (net of participations) at December 31, 1993 was $26,754,000.
The Company's largest loan (net of participations) to any borrower and its
affiliates was $13,568,000 and $15,084,000 at December 31, 1993 and 1992,
respectively. Loans are made in numerous industries. The largest industry
loan concentrations at December 31, 1993 were wholesale trade - durable goods
(9.6%), machinery and equipment (8.4%), real estate (8.3%), and business
services (7.9%). With the exception of California, which represented 39.1% of
the finance receivable portfolio at December 31, 1993, the Company's loans are
not concentrated geographically.
Accounts receivable loans are normally contractually due within three
years under revolving credit agreements. These loans, totaling $319,792,000
($186,422,000 in 1992), are shown at the unpaid balance of cash advanced and
are secured by $1,346,172,000 of underlying trade accounts receivable and
inventory at December 31, 1993 ($779,187,000 at December 31, 1992). The
amounts of cash advanced under these loans are based upon stated percentages of
the borrowers' eligible trade accounts receivable and specific advance rates on
borrowers' eligible inventory. At December 31, 1993 and 1992, the amounts
shown on the balance sheets have been reduced by nonrecourse loan
participations of $92,229,000 and $41,147,000, respectively, which included
loan participations sold to the Parent of $6,581,000.
Generally, term loans are due over periods up to five years and are
collateralized by security agreements on various types of equipment, other
assets and/or mortgages on real property. This category includes term loans
originated by the Company to borrowers in conjunction with making accounts
receivable loans, as well as on a stand alone basis. This category also
includes purchased receivables which are defined as non-public debt instruments
including bank loans and private placements, public debt instruments including
registered bonds, notes and debentures, and discounted receivables (which
includes public debt instruments and non-public debt instruments acquired at
significant discounts and which were in contractual default at the time of the
Company's purchase) originated by other lenders and purchased by the Company.
The Company generally becomes a member of a group of several lenders with
respect to each of these purchased receivables.
At December 31, 1993 and 1992, the term loans have been reduced by
nonrecourse loan participations of $15,517,000 and $13,753,000, respectively,
including amounts sold without recourse to affiliates of $2,545,000 and
$2,337,000 at December 31, 1993 and 1992, respectively.
Finance receivables have been reduced by unearned income of $7,160,000
and $4,126,000 at December 31, 1993 and 1992, respectively. Unearned finance
income is primarily composed of deferred loan fees and deferred income on
finance receivables.
9
<PAGE> 10
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The following table shows the net amounts due (before allowance for
credit losses) in the various lending categories and the percentages of the
total represented by each category at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1993 1992
- ---------------------------------------------------------------------------------------------
% OF % OF
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AMOUNT TOTAL
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounts receivable loans:
Originated loans $ 309,409 61.1% $ 186,422 47.4%
Purchased loans:
Discounted receivables 10,383 2.0% - -
- ---------------------------------------------------------------------------------------------
Total accounts receivable loans 319,792 63.1% 186,422 47.4%
- ---------------------------------------------------------------------------------------------
Term loans:
Originated loans:
Accounts receivable related 52,198 10.3% 41,808 10.6%
Stand alone 100,804 19.9% 109,204 27.8%
Purchased loans:
Non-public debt instruments 4,587 0.9% 12,708 3.2%
Discounted receivables 29,292 5.8% 36,191 9.2%
Public debt instruments - - 7,197 1.8%
- ---------------------------------------------------------------------------------------------
Total term loans 186,881 36.9% 207,108 52.6%
- ---------------------------------------------------------------------------------------------
$ 506,673 100.0% $ 393,530 100.0%
=============================================================================================
</TABLE>
The approximate maturities of loans, net of discounts associated with
purchased loans, for the various categories are as follows at December 31,
1993:
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE LOANS TERM LOANS
-------------------------- ------------------------------------------------------
ORIGINATED LOANS PURCHASED
--------------------- -----------------------------
ORIGINATED DISCOUNTED ACCOUNTS STAND NON-PUBLIC DEBT DISCOUNTED
(DOLLARS IN THOUSANDS) LOANS RECEIVABLES REC. RELATED ALONE INSTRUMENTS RECEIVABLES TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 $106,290 $ 162 $24,334 $ 40,146 $ - $ 3,466 $174,398
1995 116,696 9,117 14,612 13,262 - 8,024 161,711
1996 64,549 - 8,156 3,144 1,975 2,518 80,342
1997 2,924 1,013 1,314 19,858 - 9,891 35,000
1998 12,701 91 3,477 18,955 - 2,413 37,637
Thereafter 6,249 - 305 5,439 2,612 2,980 17,585
- ------------------------------------------------------------------------------------------------------------------------
Total $309,409 $10,383 $52,198 $100,804 $4,587 $29,292 $506,673
========================================================================================================================
</TABLE>
In May 1993, the Financial Accounting Standards Board issued Statement
No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement
addresses the accounting by creditors for impairment of certain loans. It
requires that impaired loans generally be measured based on the present value
of expected future cash flows discounted at the loan's effective rate. This
Statement is effective for fiscal years beginning after December 15, 1994.
Management believes that the adoption of this pronouncement will not
significantly impact the Company's financial statements.
10
<PAGE> 11
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE 3. SENIOR NOTES PAYABLE AND COMMERCIAL PAPER
Commercial paper and senior notes payable consist of the following at
December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $ 148,283 $ 64,915
- -----------------------------------------------------------------------------------------------------------------
Senior notes payable:
Notes with interest at 9.25% payable semiannually, principal payable in annual
installments of $8,000 commencing March 1995 through March 1998, with
the balance due in March 1999 40,000 40,000
Notes with interest at 9.8% payable semiannually, principal payable in annual
installments of $5,850 through December 1998, with the balance due in
December 1999 35,150 41,000
Notes with interest at 6.23% payable semiannually with the principal
balance due in November 1998 25,000 -
Notes with interest at 7.31% payable semiannually with the principal
balance due in December 1997 23,000 23,000
Notes with interest at 7.93% payable semiannually with the principal
balance due in December 1999 17,000 17,000
Notes with interest at 6.56% payable semiannually with the principal
balance due in November 2000 15,000 -
Notes with interest at 5.54% payable semiannually with the principal
balance due in November 1996 15,000 -
Notes with interest at 10.35% payable semiannually with the principal
balance due in June 1995 15,000 15,000
Notes with interest at 5.89% payable semiannually with the principal
balance due in November 1997 5,000 -
Notes with interest at 9.44% payable semiannually with the principal
balance due in January 1997 5,000 5,000
Notes with interest at 6.77% payable semiannually with the principal
balance due in December 1996 5,000 5,000
Notes with interest at 8.98% payable semiannually with the principal
balance due in January 1996 5,000 5,000
Notes with interest at 8.51% payable semiannually with the principal
balance due in January 1995 5,000 5,000
Notes with floating interest payable quarterly with the principal
balance due in August 1994 5,000 -
Notes with floating interest payable quarterly with the principal
balance due in August 1994 5,000 -
Notes with interest at 10.27% payable semiannually with the principal
balance due in June 1994 5,000 5,000
Notes with interest at 9.43% payable semiannually with the principal
balance due in April 1994 5,000 5,000
Notes with interest at 10.10% payable semiannually with the principal
balance due in April 1996 2,000 2,000
Notes with interest at 9.76% payable semiannually with the principal
balance due in April 1995 1,000 1,000
Notes with interest at 13.125% payable semiannually, principal payable
in semiannual installments of $167 through November 1995 667 1,000
Notes with interest at 9.4% payable semiannually, principal payable
in annual installments of $3,220 through March 1996
with balance due in March 1997 (prepaid in 1993) - 1,650
Notes with interest at 10.23% payable semiannually with the principal
balance due in December 1993 - 15,000
Notes with interest at 10.18% payable semiannually with the principal
balance due in June 1993 - 15,000
- -----------------------------------------------------------------------------------------------------------------
Total senior notes payable 233,817 216,560
- -----------------------------------------------------------------------------------------------------------------
Total senior notes payable, borrowings from banks and commercial paper $ 382,100 $ 281,475
=================================================================================================================
</TABLE>
11
<PAGE> 12
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The Company has an agreement for a committed bank line of credit
totaling $235,000,000 ($195,000,000 in 1992) which is used to fund short term
liquidity requirements and which supports commercial paper outstanding.
Interest rates under this line are at the lower of prime or, at the Company's
option, at the certificate of deposit rate plus 1 1/2% or the London Interbank
Offered Rate ("LIBOR") plus 1 1/2%. Actual rates are dependent upon the level
of borrowings under the facility. This line of credit is granted for a
two-year period, renewable annually each June 30.
The Company has an agreement for an uncommitted bank line of credit
totaling $10,000,000 which is used for overnight borrowings. The interest rate
under this line is based on the daily Federal Funds rate.
The Company has investment grade ratings on its commercial paper and
senior debt. During 1993, the Company issued commercial paper with maturities
generally ranging from 21 to 245 days. At December 31, 1993, interest rates on
commercial paper ranged from 3.47% to 3.84%.
In order to better match rate sensitive assets and liabilities, the
Company executes interest rate swaps to effectively convert the fixed rates on
long term senior and subordinated notes to variable rates. Under these swap
agreements, the Company is required to pay interest semiannually at variable
rates calculated at the average monthly Federal Reserve commercial paper
composite rate or the one, three and six- month LIBOR rates on aggregate
principal balances. In return, Foothill Capital receives interest payments
semiannually on the same principal balances at fixed rates. The differential
to be paid or received on all swap agreements is accrued as interest rates
change. At December 31, 1993 and 1992, the weighted average interest rates on
fixed rate long-term debt, including the effect of interest rate swaps, were
5.91% and 7.04%, respectively. The Company's credit risk with respect to these
swaps is the risk of nonperformance by the counterparties to the agreements.
The Company does not anticipate nonperformance because such counterparties to
these agreements are major banks. As of December 31, 1993, Foothill Capital
had swap agreements totaling $285,000,000.
Loan agreements relating to the bank line of credit, senior notes and
subordinated notes discussed in Note 4 have covenants which must be met. At
December 31, 1993 and during the year then ended, the Company was in compliance
with such covenants. Under the more restrictive provisions of the agreements,
the Company must maintain defined minimum net worth levels and certain defined
leverage ratios must be met. Dividend payments to its Parent are also limited.
Amounts available for dividends under these agreements at December 31, 1993
total $15,326,000.
During 1993, the Company prepaid approximately $29,000,000 of senior
and subordinated notes. This prepayment of debt resulted in an extraordinary
after tax charge of $561,000 in the fourth quarter of 1993. These nonrecurring
extraordinary charges included early repayment penalties along with the
elimination of unamortized deferred costs on the aforementioned debt
obligations.
At December 31, 1993, the annual principal installments due in the
next five years on senior notes payable are follows:
<TABLE>
<CAPTION>
- ---------------------------------------------
(DOLLARS IN THOUSANDS)
- ---------------------------------------------
<S> <C>
1994 $ 26,184
1995 35,183
1996 40,850
1997 46,850
1998 38,850
Thereafter 45,900
- ---------------------------------------------
$ 233,817
=============================================
</TABLE>
12
<PAGE> 13
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE 4. SUBORDINATED NOTES AND DEBENTURES
Subordinated notes and debentures, which are subordinated to all other
indebtedness of the Company, consist of the following at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Senior subordinated:
Notes with interest at 7.46% payable semiannually, principal payable in
annual installments of $4,167 commencing November 1998 with the balance
due in November 2003 $25,000 $ -
Notes with interest at 8.93% payable semiannually, principal payable in annual
installments of $1,143 commencing December 1996 through December 2001
with the balance due in December 2002 8,000 8,000
Notes with interest at 11.26% payable semiannually, principal payable in annual
installments of $700 commencing April 1994 through April 1999 with the balance
due in April 2000 5,000 5,000
Notes with interest at 10.6% payable semiannually, principal payable in annual
installments of $575 through December 1998 with the balance due in December 1999 3,425 4,000
Notes with interest at 13.625% payable semiannually, principal payable in semi-
annual installments of $250 through November 1995 1,000 1,500
Notes with interest at 10.15% payable semiannually, principal payable in annual
installments of $3,780 through March 1996 with the balance due in March 1997
(prepaid in 1993) - 19,440
Junior subordinated:
Debentures payable to Parent with interest at 12.5% payable semiannually,
principal payable in annual installments of $750 through October 1997 with
the balance due in October 1998 5,500 6,250
Notes payable to Parent with interest at 10.83% payable quarterly, principal
in annual installments of $1,000 through February 1998 5,000 6,000
Notes with interest at 12.26% payable semiannually, principal payable in annual
installments of $700 commencing April 1994 through April 1999 with the balance
due in April 2000 5,000 5,000
Notes with interest at 11.82% payable quarterly, principal payable in annual
installments of $700 through December 1998 with the balance due in December 1999 4,300 5,000
Notes with interest at 9.93% payable semiannually, principal payable in annual
installments of $286 commencing December 1996 through December 2001
with the balance due in December 2002 2,000 2,000
- ---------------------------------------------------------------------------------------------------------------
$64,225 $62,190
===============================================================================================================
</TABLE>
The subordinated notes, with the exception of notes and debentures
payable to the Parent, have the same restrictions as set forth in Note 3.
At December 31, 1993, the annual principal installments due on
subordinated notes and debentures in the next five years are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
1994 $ 4,925
1995 4,925
1996 5,854
1997 5,854
1998 11,771
Thereafter 30,896
- ---------------------------------------------------------------------------------------------------------------
$64,225
===============================================================================================================
</TABLE>
13
<PAGE> 14
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimates are required under FASB Statement No. 107,
"Disclosures About Fair Value of Financial Instruments." These estimates may
not represent values which would be received should these financial instruments
be sold, liquidated or otherwise terminated. The estimated fair values for the
Company's financial assets and related off-balance sheet financial instruments
at December 31, 1993 are summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1993 1992
------------------------ -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 45,498 $ 45,498 $ 36,511 $ 36,511
=====================================================================================================================
Accounts receivable loans:
Originated loans $ 309,409 $ 315,141 $ 186,422 $ 187,971
Purchased:
Discounted receivables 10,383 11,141 - -
- ---------------------------------------------------------------------------------------------------------------------
Total accounts receivable loans 319,792 326,282 186,422 187,971
- ---------------------------------------------------------------------------------------------------------------------
Term loans:
Originated loans:
Accounts receivable related 52,198 52,506 41,808 41,808
Stand alone 100,804 110,371 114,779 115,677
Purchased:
Non-public debt instruments 4,587 4,592 12,708 13,605
Discounted receivables 29,292 33,747 36,191 38,366
Public debt instruments - - 1,622 1,492
- ---------------------------------------------------------------------------------------------------------------------
Total term loans 186,881 201,216 207,108 210,948
- ---------------------------------------------------------------------------------------------------------------------
Total Finance Receivables $ 506,673 $ 527,498 $ 393,530 $ 398,919
=====================================================================================================================
Equity securities - available for sale $ 25,003 $ 26,640 $ 8,994 $ 16,871
=====================================================================================================================
Commitments to extend credit
(Committed amount: $110,386 at 12/31/93; $86,593 at 12/31/92) 916 955
Guarantees and letters of credit
(Contract amount: $36,486 at 12/31/93; $24,727 at 12/31/92) 591 511
=====================================================================================================================
</TABLE>
Estimated fair values are calculated as follows:
- - Cash and cash equivalents: The carrying amounts for cash and cash
equivalents approximate fair value.
- - Originated loans: Fair value and carrying value for the accounts
receivable and variable-rate originated loan portfolios are similar as
these portfolios reprice frequently. The estimated fair value of the
fixed-rate portion of the originated loan portfolio is calculated by
discounting scheduled cash flows through contractual maturity using
estimated market discount rates that reflect the credit and interest
rate risk inherent in the loans.
14
<PAGE> 15
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
- - Purchased loans: Purchased loans above have an estimated market value
of $49,479,000, which is $5,218,000 more than carrying value at
December 31, 1993. At December 31, 1992, these loans had an estimated
market value of $53,462,000, which was $2,941,000 more than carrying
value. Management has classified purchased loans as "available for
sale," and has thus included the unrealized gains and losses from this
portfolio, net of tax, as a separate component of stockholder's equity
as specified in FASB Statement No. 115. Market values are based on
available market information which may be limited as certain loans are
rarely or infrequently traded on the open market. Market values for
public debt instruments are more readily ascertainable than market
values of other types of purchased loans noted above. Management
estimates market values based on discussions with brokers, investment
bankers or market makers, as well as on prices of recent trades of
identical or similar debt instruments. Such estimates may not
necessarily represent actual trades. Market values may not be
indicative of collateral values supporting such loans.
- - Equity securities: Equity securities (included in other assets) of
$25,003,000 and $8,894,000 at December 31, 1993 and 1992,
respectively, had estimated market values of $26,640,000 and
$16,871,000 at December 31, 1993 and 1992, respectively. Management
has classified equity securities as "available for sale," and has
included the unrealized gains and losses from this portfolio, net of
tax, as a separate component of stockholder's equity as specified in
FASB Statement No. 115. Unrealized gains and losses, net of income
tax, from securities with restrictions as to their sale totaled
$1,637,000 at December 31, 1993, and are not included as a separate
component of stockholder's equity. Current market values of equity
securities are estimated by the Company's management based primarily
on public market quotations for the majority of the securities.
- - Commitments to extend credit: The fair value of commitments to extend
credit is calculated by combining commitment fees collected but
unearned as of December 31, 1993 with an estimate of unused line fees
to be earned during 1994. The actual level of unused line fees earned
during 1994 will vary based on actual line usage as well as growth of
the finance receivable portfolio.
- - Guarantees and letters of credit: Fair value is the estimated net
amount of letters of credit and guarantee fees to be earned during
1994 assuming historical experience continues as to letters of credit
drawings, replacements, and fee levels. The actual level of guarantee
and letters of credit income will vary based on actual drawings and
replacements as well as the growth of the finance receivable
portfolio.
Subsequent to December 31, 1993, the Company realized pretax gains of
$4,666,000 in excess of fair values noted above on certain debt and equity
securities redeemed by a privately held company.
The estimated fair values for the Company's financial liabilities and
related interest rate swap agreements at December 31, 1993 are summarized
below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1993 1992
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper $ 148,283 $ 148,283 $ 64,915 $ 64,915
Long-term senior notes payable 233,817 241,571 216,560 224,526
Long-term subordinated notes and debentures 64,225 65,827 62,190 64,567
Interest rate swap agreements
(Notional amount: $285,000 at 12/31/93; $257,500 at 12/31/92) - 8,759 - 10,947
======================================================================================================================
</TABLE>
Estimated fair values are calculated as follows:
- - Commercial paper: Fair value and carrying value are identical due to
the short maturity and repricing of these instruments.
- - Senior notes payable and subordinated notes and debentures: Fair
value is calculated by discounting scheduled cash flows through
contractual maturity using estimated market discount rates.
15
<PAGE> 16
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
- - Interest rate swap agreements: Fair value is obtained from dealer
quotes. These values represent the estimated amount the Company would
receive to terminate the agreements, taking into account current
interest rates and, when appropriate, the current credit worthiness of
the counterparties. The Company does not intend to unwind these
agreements as they are used to effectively convert the fixed rates on
long-term debt to variable rates and match interest sensitive assets
and liabilities. (See Note 4.)
NOTE 6. INCOME TAXES
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Under Statement No. 109, the liability method
is used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and the tax bases of assets and liabilities and are measured using
the enacted tax rates that will be in effect when the differences are expected
to reverse. Prior to the adoption of Statement No. 109, income tax expense was
determined using the deferred method. Deferred tax expense was based on items
of income and expense that were reported in different years in the financial
statements and tax returns and were measured using the tax rate in effect in
the year the difference originated. As permitted by Statement No. 109, the
Company has elected not to restate the financial statements of any prior years.
The effect of the change on income at January 1, 1993, and for the year ended
December 31, 1993 was not significant.
In August 1993, due to federal legislation, the Company's federal
income tax rate increased by 1% retroactive to January 1, 1993. The effect on
the Company's current provision for income taxes was offset by an increased
benefit related to higher tax rates on the Company's deferred tax assets.
The provision for income taxes was 42% for both of the years ended
December 31, 1993 and 1992, and was based on combined state and federal
statutory rates.
The provision for income taxes for the years ended December 31, 1993,
1992 and 1991 consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 8,316 $ 6,538 $3,758
Deferred (227) (1,646) (610)
- --------------------------------------------------------------------------------
8,089 4,892 3,148
- --------------------------------------------------------------------------------
State:
Current 2,876 2,453 1,274
Deferred (6) (496) (120)
- --------------------------------------------------------------------------------
2,870 1,957 1,154
- --------------------------------------------------------------------------------
$10,959 $6,849 $4,302
================================================================================
</TABLE>
As previously reported, the significant components of the net tax
effect of changes in temporary differences reflected in deferred tax expense
for the years ended December 31, 1992 and 1991 are as follows:
16
<PAGE> 17
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C>
Allowance for credit losses $(1,116) $(209)
Debt exchange transactions (348) 363
Repossession transactions (882) (863)
Valuation allowances on nonoriginated receivables 500 (138)
State taxes (221) 145
Other, net (75) (28)
- -------------------------------------------------------------------------------
$(2,142) $(730)
===============================================================================
</TABLE>
Significant temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(DOLLARS IN THOUSANDS) ASSET LIABILITY
- -------------------------------------------------------------------
<S> <C> <C>
Allowance for credit losses $5,574 $ -
Debt exchange transactions - 951
State taxes 778 -
Leasing - 56
Other, net 341 -
- -------------------------------------------------------------------
$6,693 $1,007
===================================================================
</TABLE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
Rentals
The following is a schedule by years of future minimum rental payments
required under the operating lease for the Company's office facilities. This
lease contains one five-year renewal option and requires the Company to pay a
share of the building's common operating expenses.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------
<S> <C>
1994 $ 939
1995 1,115
1996 1,212
1997 1,212
1998 1,212
Thereafter 1,817
- ------------------------------------------------------------------------
$7,507
========================================================================
</TABLE>
The total rental expense for all leases, except those with remaining
terms of a month or less that were not renewed, for the years ended December
31, 1993, 1992 and 1991 was approximately $952,000, $942,000 and $837,000,
respectively.
17
<PAGE> 18
FOOTHILL CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Letters of Credit and Guarantees
The Company has two committed letter of credit issuance facilities
with banks totaling $40,000,000 under which the Company guarantees letters of
credit issued for the benefit of its borrowers. These facilities have
committed terms up to two years. As of December 31, 1993, the Company had
issued guarantees and letters of credit on behalf of its borrowers totaling
$36,486,000, net of participants' commitments totaling $22,909,000. Letters of
credit are an integral part of the Company's business and contingent
liabilities under these letters of credit are collateralized by borrowers'
collateral.
Unfunded Commitments
In the normal course of business, the Company has unfunded commitments
associated with its accounts receivable lending activities. These unfunded
commitments vary on a daily basis and are based on the eligibility of the
borrowers' receivables. As of December 31, 1993, the Company had unfunded
commitments of $110,386,000 in the accounts receivable loan portfolio.
In addition, the Company had approved new loan commitments totaling
$37,500,000 at December 31, 1993. However, funded amounts are expected to be
less because actual advances will be based on the borrowers' eligible
collateral at the time of funding.
Litigation
There are several lawsuits and claims pending against the Company
which management considers incident to normal operations, some of which seek
substantial monetary damages. Management, after review, including consultation
with counsel, believes that any ultimate liability which could arise from these
lawsuits and claims would not materially affect the financial position or
results of operations of the Company.
18
<PAGE> 19
FOOTHILL CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(NOT COVERED BY REPORT OF INDEPENDENT AUDITORS)
19
<PAGE> 20
FOOTHILL FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
- -----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
------------------ ------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA (1):
Interest income $ 56,636 11.4% $ 49,543 11.5% $ 51,760 12.4%
Interest expense 22,218 4.5% 23,113 5.3% 29,805 7.2%
- -----------------------------------------------------------------------------------------------------------
Interest margin 34,418 6.9% 26,430 6.2% 21,955 5.2%
Fees and other income 20,916 4.2% 13,485 3.1% 8,249 2.0%
- -----------------------------------------------------------------------------------------------------------
Total margin 55,334 11.1% 39,915 9.3% 30,204 7.2%
Provision for credit losses 12,254 2.5% 8,641 2.0% 6,377 1.5%
General and administrative 16,987 3.4% 14,967 3.5% 13,334 3.2%
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 26,093 5.2% 16,307 3.8% 10,493 2.5%
Provision for income taxes 10,959 2.2% 6,849 1.6% 4,302 1.0%
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary item 15,134 3.0% 9,458 2.2% 6,191 1.5%
Extraordinary item -561 -0.1% -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Net income $ 14,573 2.9% $ 9,458 2.2% $ 6,191 1.5%
===========================================================================================================
SELECTED BALANCE SHEET DATA:
Total assets $572,630 $437,867 $408,713
Average assets (2) 495,501 431,120 417,332
Finance receivables:
Net 506,673 393,530 389,521
Average, net (2) 476,382 412,203 401,858
===========================================================================================================
% of Total % of Total % of Total
Funds Funds Funds
Sources of Funds Employed: Employed Employed Employed
---------- ---------- ----------
Commercial paper $148,283 26.5% $ 64,915 15.2% $ 10,886 2.7%
Borrowings from banks -- -- -- -- 139,800 34.7%
Long term senior notes 233,817 41.6% 216,560 50.7% 120,313 29.8%
Long term subordinated notes:
Senior subordinated 42,425 7.6% 37,940 8.9% 34,420 8.5%
Junior subordinated 21,800 3.9% 24,250 5.7% 24,000 6.0%
Stockholder's equity 114,133 20.4% 83,127 19.5% 73,669 18.3%
- -----------------------------------------------------------------------------------------------------------
Total funds employed $560,458 100.0% $426,792 100.0% $403,088 100.0%
===========================================================================================================
Ratio of Total Debt to Equity 3.9:1 4.1:1 4.5:1
Ratio of Senior Debt to Capital Funds 2.1:1 1.9:1 2.1:1
===========================================================================================================
</TABLE>
(1) Percentages are percent of average assets.
(2) Average assets and net finance receivables are a monthly average.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
Foothill Capital Corporation ("Foothill Capital" or the "Company") was
incorporated in 1971 in the State of California and operates its business
primarily from one office located in Los Angeles, California. The Company is
primarily engaged in making secured revolving credit and term loans to
companies which have adequate collateral in the form of accounts receivable,
inventory, equipment and other assets.
Foothill Capital provides asset-based financing primarily to
manufacturers, wholesale dealers, distributors and service enterprises. The
Company's borrowers use the financing for working capital, restructurings,
reorganizations, purchasing fixed assets and acquisitions. Foothill Capital
operates its business according to clearly-defined formal credit approval,
underwriting, collateral evaluation, credit monitoring and collection
procedures. The Company's strength is its experience in analyzing complex
transactions, appraising realizable (liquidation) asset values, creating
innovative financing solutions, and then monitoring and controlling credit
situations after a loan is made.
Foothill Capital's "core" business consists of its traditional
asset-based financing where loans are directly originated and serviced by the
Company. The revolving loans are normally provided for up to three year
periods and are secured primarily by accounts receivable and inventory. The
Company typically advances to its clients between 50% and 85% of the amounts of
eligible accounts receivable and between 15% and 50% of the amounts of eligible
inventory. Eligible accounts receivable and inventory are determined by the
Company based on the amount projected to be received in the event of a
liquidation of the borrowers' assets. Term loans are frequently made in
conjunction with revolving loans, are generally due within five years, and are
secured by plant, equipment, real estate and other assets. Term loan amounts
are based on the estimated net realizable value of the collateral securing the
finance receivable in the event of a liquidation of the borrowers' assets.
Both revolving and term loans are made with full recourse to the borrower.
Although Foothill Capital's primary business is originating its own
finance receivables, the Company has also purchased, since 1983, senior secured
debt instruments from other parties. These purchased receivables consist of
public debt instruments, non-public debt instruments (which include private
placements), and discounted receivables (primarily senior secured bank debt
purchased at a discount from its principal amount from the original lender).
During the past three years, the Company's principal emphasis in its purchased
receivables portfolio has been the purchase of discounted receivables under
co-investment arrangements with Foothill Partners, L.P. and Foothill Partners
II, L.P., institutional limited partnerships in which The Foothill Group, Inc.
is a general partner. At December 31, 1993, Foothill Capital's purchased
receivables portfolio represented 7.7% of total assets.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
ANALYSIS OF FINANCE RECEIVABLES DUE BY CATEGORIES
The following table shows the net amounts due (before allowance for
credit losses) as well as new loans funded and liquidations for the year ended
December 31, 1993:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
BALANCE AT PAYOFFS BALANCE AT
DECEMBER 31, NEW LOANS AND DECEMBER 31,
(DOLLARS IN THOUSANDS) 1992 FUNDED LIQUIDATIONS 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounts receivable loans:
Originated loans $186,422 $169,484 $ 46,497 $309,409
Purchased loans:
Discounted receivables - 10,383 - 10,383
- ----------------------------------------------------------------------------------------------------
Total accounts receivable loans 186,422 179,867 46,497 319,792
- ----------------------------------------------------------------------------------------------------
Term loans:
Originated loans:
Accounts receivable related 41,808 42,523 32,133 52,198
Stand alone 109,204 35,554 43,954 100,804
Purchased loans:
Non-public debt instruments 12,708 - 8,121 4,587
Discounted receivables 36,191 25,451 32,350 29,292
Public debt instruments 7,197 - 7,197 -
- ----------------------------------------------------------------------------------------------------
Total term loans 207,108 103,528 123,755 186,881
- ----------------------------------------------------------------------------------------------------
Total finance receivables $393,530 $283,395 $170,252 $506,673
====================================================================================================
</TABLE>
Originated accounts receivable and related term loans increased as a
percent of total finance receivables from 58.0% at December 31, 1992 to 71.4%
at December 31, 1993. Originated stand alone term loans and purchased loans
decreased as a percent of finance receivables from 42.0% at December 31, 1992
to 28.6% at December 31, 1993.
RESULTS OF OPERATIONS
Year ended December 31, 1993 compared to year ended December 31, 1992:
The Company recorded net income of $14,573,000 for the year ended
December 31, 1993 compared to net income of $9,458,000 for the year ended
December 31, 1992.
The increase in net income was due primarily to (a) a significant
increase in average finance receivables outstanding during 1993, (b) an
increase in interest margin as a percent of average assets, and (c) a
significant increase in fees and other income as a percent of average assets,
offset by (d) increases in the provision for credit losses, general and
administrative expenses and the provision for income taxes as a percent of
average assets.
Year ended December 31, 1992 compared to year ended December 31, 1991:
The Company recorded net income of $9,458,000 for the year ended
December 31, 1992 compared to net income of $6,191,000 for the year ended
December 31, 1991.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The increase in net income was due primarily to (a) an increase in
interest margin as a percent of average assets, and (b) a significant increase
in fees and other income as a percent of average assets, offset by (c)
increases in the provision for credit losses, general and administrative
expenses and the provision for income taxes as a percent of average assets.
ANALYSIS OF INTEREST MARGIN
Interest margin is the difference between interest income and interest
expense. See "Selected Financial Data". The Company does not currently accrue
income on certain assets including discounted finance receivables due from
certain borrowers in reorganization or in the midst of restructuring,
nonperforming finance receivables and repossessed assets, but does incur
holding costs (primarily interest expense), which adversely affect margin.
Year ended December 31, 1993 compared to year ended December 31, 1992:
Interest margin increased to $34,418,000 in 1993 from $26,430,000 in
1992 and increased as a percent of average assets to 6.9% in 1993 from 6.2% in
1992. The increase in margin as a percent of average assets was due primarily
to (a) a significant reduction in cost of funds due to increases in outstanding
commercial paper and the effect of swap agreements, and (b) an increase in the
level of average interest free funds.
Year ended December 31, 1992 compared to year ended December 31, 1991:
Interest margin increased to $26,430,000 in 1992 from $21,955,000 in
1991 and increased as a percent of average assets to 6.2% in 1992 from 5.2% in
1991. The increase in margin as a percent of average assets was due primarily
to (a) a significant increase in the yields over prime on earning finance
receivables, (b) a significant reduction in cost of funds due to increases in
outstanding commercial paper and the effect of swap agreements, and (c) an
increase in the level of average interest free funds, offset by (d) a higher
average level of nonperforming assets.
Yearly margin comparisons are affected by, among other things,
differences in the amount of interest-free funds (for example, equity). The
following table illustrates the source of funds employed between
interest-bearing borrowings and interest-free funds for the past three years.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
------------------- ------------------- -------------------
% OF % OF % OF
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average interest-bearing borrowings $390,925 78.9% $343,094 79.6% $337,504 80.9%
Average interest-free funds 104,576 21.1% 88,026 20.4% 79,828 19.1%
- -----------------------------------------------------------------------------------------------------------
Total $495,501 100.0% $431,120 100.0% $417,332 100.0%
===========================================================================================================
</TABLE>
Fees and Other Income
Fees and other income consist of fees and charges related to finance
receivables and gains from sales or exchanges of finance receivables. Fees
related to finance receivables arise from the Company's commercial lending
activities and include late charges, prepayment penalties, commitment and
guarantee fees, unused line of credit fees and other miscellaneous charges.
Gains and losses from sales or exchanges of finance receivables occur
irregularly. The Company often does not control the timing of such exchanges,
which typically occur in connection with the restructuring of discounted
receivables held by the Company.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table shows the composition of fees and other income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees related to finance receivables $ 7,423 $ 5,024 $4,612
Gains from sales or exchanges of finance receivables 13,493 8,461 3,637
- ----------------------------------------------------------------------------------------
Total fees and other income $20,916 $13,485 $8,249
========================================================================================
</TABLE>
WRITEOFFS AND ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for possible credit losses at a
level it considers adequate to cover future potential losses on finance
receivables. The amount of the allowance is based on management's evaluation
of numerous factors, including historical loss experience and adequacy of
collateral. The level of the allowance is affected by the provision for losses
charged to expense, writeoffs and recoveries of amounts previously written off.
The following table illustrates the level of the allowance for credit
losses, the provision charged to expense and writeoffs for the three years
ended December 31, 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance receivables plus repossessed assets $506,673 $395,312 $396,740
Allowance for credit losses $ 13,857 $ 10,527 $ 8,047
Percent of such allowance to finance receivables
plus repossessed assets 2.73% 2.66% 2.03%
Actual writeoffs during the period, net of recoveries $ 8,924 $ 6,161 $ 6,805
Percent of actual writeoffs to finance receivables
plus repossessed assets (annualized) 1.76% 1.56% 1.72%
Provision for credit losses charged to income during
the period $ 12,254 $ 8,641 $ 6,377
Percent of provision for credit losses to net writeoffs 137% 140% 94%
===========================================================================================
</TABLE>
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The provision for credit losses increased from $8,641,000 for the year
ended December 31, 1992 to $12,254,000 for 1993. This increase was primarily
due to (a) an increase in the general allowance for credit losses as a percent
of finance receivables plus repossessed assets from 2.66% to 2.73% at December
31, 1992 and 1993, respectively, and (b) an increase in actual writeoffs.
Details of net writeoffs by portfolio type are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable loans:
Originated loans: $ 434 $ 771 $ (7)
Purchased loans:
Discounted receivables - - -
- -------------------------------------------------------------------------------
Total accounts receivable loans 434 771 (7)
- -------------------------------------------------------------------------------
Term loans:
Originated loans:
Accounts receivable related - 1,368 621
Stand alone 6,162 3,132 3,085
Purchased loans:
Non-public debt instruments (69) - (303)
Discounted receivables - - -
Public debt instruments 2,397 890 3,409
- -------------------------------------------------------------------------------
Total term loans 8,490 5,390 6,812
- -------------------------------------------------------------------------------
Total finance receivables $8,924 $6,161 $6,805
===============================================================================
</TABLE>
NONPERFORMING FINANCE RECEIVABLES AND REPOSSESSED ASSETS
The following table contains information concerning delinquencies on
term loans under which installments are more than sixty days past due and
repossessed assets, both of which are classified as nonperforming assets.
Nonperforming assets have a significant negative effect on interest margin and
general and administrative expense. See "General and Administrative Expense".
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance receivables plus repossessed assets $506,673 $395,312 $396,740
======================================================================================================
Repossessed assets, net $ - $ 1,782 $ 7,219
Percent of preceding line to finance receivables plus
repossessed assets - 0.45% 1.82%
Net balance on loans as to which installments are past due
more than 60 days and on which income is being deferred $ 16,296 $ 20,275 $ 13,671
Percent of preceding line to finance receivables plus
repossessed assets 3.22% 5.13% 3.45%
- ------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 16,296 $ 22,057 $ 20,890
======================================================================================================
Percent of above to finance receivables plus repossessed assets 3.22% 5.58% 5.27%
======================================================================================================
</TABLE>
Repossessed assets and other deferred loans have been written down,
where appropriate, to estimated realizable values. These values are based on
management's evaluation of numerous factors, including estimated holding costs
and periods prior to ultimate disposition, appraisals, sales of comparable
assets and estimated market conditions at projected disposal dates.
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GENERAL AND ADMINISTRATIVE EXPENSE
The following table sets forth major items of general and
administrative expense:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee related $11,919 $10,068 $ 8,878
Occupancy and office 1,631 1,460 1,323
Professional services 281 328 289
Data processing and communications 756 730 523
Credit and collection 1,006 1,040 1,158
Advertising 317 273 150
Other (Primarily allocated expense from the Parent) 1,077 1,068 1,013
- -------------------------------------------------------------------------------------------------------
Total general and administrative expense $16,987 $14,967 $13,334
=======================================================================================================
</TABLE>
Year ended December 31, 1993 compared to year ended December 31, 1992:
As a percent of average assets, general and administrative expense
decreased from 3.5% to 3.4% for the years ended December 31, 1992 and 1993,
respectively. In dollars, general and administrative expense increased from
$14,967,000 in 1992 to $16,987,000 in 1993. The increase in dollars was
primarily due to increases in employee compensation and related expenses and
increases in occupancy and office expenses. Other categories remained
relatively constant with prior years.
Year ended December 31, 1992 compared to year ended December 31, 1991:
As a percent of average assets, general and administrative expense
increased from 3.2% to 3.5% for the years ended December 31, 1991 and 1992,
respectively. In dollars, general and administrative expense increased from
$13,334,000 in 1991 to $14,967,000 in 1992. The increase in dollars was
primarily due to (a) increases in employee compensation and related expenses,
as well as data processing and communications, and occupancy and office
expenses, offset by (b) a slight decrease in credit and collection expenses.
Other categories remained relatively constant with prior years.
PROVISION FOR INCOME TAXES
The Company and its parent file a consolidated federal income tax
return and combined state tax returns. Income taxes, which are allocated to
the Company by the parent, approximate amounts which would be provided in the
accompanying financial statements if the Company filed separate income tax
returns. Timing differences, the tax effects of which are recorded by the
Company, are the result of differences between income for financial statement
and tax return purposes and are principally related to the Company's allowance
for credit losses, state income taxes, debt exchange transactions, and
repossession transactions.
The provision for income taxes increased in dollars from $6,849,000 to
$10,959,000 for the years ended December 31, 1992 and 1993, respectively, with
an effective tax rate of 42% for both periods, which is based on the combined
state and federal statutory tax rates.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CAPITAL RESOURCES AND LIQUIDITY
Foothill Capital maintains liquidity in order to meet its commitments
under customer borrowing arrangements, to repay maturing debt obligations and
to fund growth in its finance receivable portfolio. Liquidity is enhanced by
the Company's ability to generate cash flow from operations and to raise funds
in the money and capital markets.
The primary source of Foothill Capital's short term funding is
commercial paper borrowings, which represented 33% of total debt outstanding as
of December 31, 1993. During 1993, commercial paper borrowings increased by
$83,368,000 to $148,283,000 at December 31, 1993, and were used primarily to
fund growth in the finance receivable portfolio. Commercial paper borrowings
are supported by a committed bank credit facility with 15 banks, which totaled
$235,000,000 as of December 31, 1993. As of January 1, 1994, the credit
facility was increased to $245,000,000 due to the addition of one bank. The
bank credit facility was renewed and extended in the second quarter of 1993 and
currently expires on June 30, 1995. As of December 31, 1993, the Company had
$86,717,000 in availability (total amount of credit facilities minus
outstanding commercial paper and bank borrowings) under its bank credit
facility.
During 1993, Foothill Capital issued $60,000,000 of senior fixed rate
notes with maturities ranging from three to seven years and $25,000,000 in
senior subordinated notes with a final maturity of ten years to several
institutional lenders. Proceeds from the issuance were used to prepay
approximately $29,000,000 of higher coupon senior and subordinated debt, repay
debt maturing during 1993, and fund growth in the Company's finance receivable
portfolio. The prepayment of the higher coupon notes resulted in an
extraordinary after tax charge of $561,000 in the fourth quarter of 1993. This
charge will be offset by interest savings in future years. The Company also
issued $10,000,000 in floating rate notes with maturities of one year to two
bank lenders in 1993. During 1992, Foothill Capital issued $100,000,000 of
senior notes with maturities from three to seven years and $10,000,000 of
subordinated notes with final maturities of ten years. During the past four
years, the Company has reduced its overall reliance on short term sources of
financing.
Total capitalization of $560,458,000 at December 31, 1993 consisted of
stockholder's equity of $114,133,000 and debt of $446,325,000. The
debt-to-equity ratio at December 31, 1993 was 3.91 to 1 compared to 4.13 to 1
at December 31, 1992. Included in the debt of Foothill Capital at December 31,
1993 was $10,500,000 of junior subordinated notes payable to The Foothill
Group, Inc. The Company paid no dividends to Foothill Group during the past
two fiscal years. The repayment of subordinated debt and dividends are limited
by the provisions of the Company's debt agreements with its bank and
institutional lenders. Dividends are currently limited to 50% of net income
and as of December 31, 1993, Foothill Capital could pay $15,326,000 in
dividends to Foothill Group.
Foothill Capital has numerous interest rate swap agreements with
financial institutions with notional amounts aggregating $285,000,000 as of
December 31, 1993. The purpose of these agreements is to manage the Company's
exposure to interest rate fluctuations and match the interest sensitivity of
its assets and liabilities. At December 31, 1993, after giving effect to the
interest rate swap agreements, Foothill Capital's interest sensitive assets
exceeded its interest sensitive liabilities by approximately $56,407,000, which
represented approximately 10% of total assets.
Foothill Capital's commercial paper is rated "D-2" by Duff & Phelps
Credit Rating Co. and "F-2" by Fitch Investors Service, Inc. Senior long-term
debt is rated "BBB" by Duff & Phelps. The Company's senior debt, senior
subordinated debt and junior subordinated debt have investment grade ratings of
"2" from the National Association of Insurance Commissioners.
27
