Registration No. 33-52745
Filed pursuant to Rule 424(b)(3)
Supplement to prospectus dated 4-29-94
Dates of Previous supplements: None
HORRIGAN AMERICAN, INC.
Supplement dated May 2, 1994
to Prospectus dated April 29, 1994
The rates of interest on 1994 Series 8, A, B and C Certificates issued
from May 2, 1994 through May 31, 1994 will be as follows:
Series 8 8 years 7.40%
Series A 6 years 6.40%
Series B 30 months 5.85%
Series C 1 year 5.20%
The rate of interest payable from May 2, 1994 through May 31, 1994 on the
Passbook Series Certificates is 4.00%.
<PAGE>
PROSPECTUS
HORRIGAN AMERICAN, INC.
SUBORDINATED INVESTMENT CERTIFICATES
==============================================================================
MINIMUM
SERIES MATURITY INTEREST RATE DENOMINATIONS*
- ------------------------------------------------------------------------------
1994 Series 8 8 years Fixed $1,000
- ------------------------------------------------------------------------------
1994 Series A 6 years Fixed $1,000
- ------------------------------------------------------------------------------
1994 Series B 30 months Fixed $ 500
- ------------------------------------------------------------------------------
1994 Series C 12 months Fixed $ 500
- ------------------------------------------------------------------------------
Passbook payable on demand Variable $ 500**
==============================================================================
* Purchases must be made in multiples of $100.
** Each Passbook Series Certificate will be evidenced by an entry in a
passbook issued when an investor makes his initial purchase. Each
Certificate (entry) will be in a multiple of $100 between $500 and $50,000,
inclusive. Larger purchases may be made in a combination of these
denominations. Redemptions can be made only in the full amount of a
Certificate (entry). The aggregate investment in all Passbook Series
Certificates (including various passbook series formerly issued by the
Company) is limited to $500,000 per holder, as identified by Social
Security number.
UNLESS THE HOLDER OR THE COMPANY OTHERWISE ELECTS, THE 1994 SERIES 8, A, B AND
C CERTIFICATES WILL AUTOMATICALLY "ROLL OVER" AT MATURITY INTO CERTIFICATES
THEN BEING OFFERED BY THE COMPANY FOR THE SAME TERM AT THE THEN CURRENT
INTEREST RATE. ADVANCE NOTICE WILL BE GIVEN TO THE HOLDER. SEE PAGE 5.
The 1994 Series 8, A, B and C Certificates pay fixed rates of interest
until their maturity dates, determined by the Company on the first day of each
month for Certificates issued during that month. The interest rate paid on all
outstanding Passbook Certificates is subject to change on the first day of
each month at the discretion of the Company based on the Company's assessment
of current market conditions (notice of any change will be mailed to the
holder). No interest will be paid on a Passbook Series Certificate which is
redeemed by the holder before the eighth day after its purchase. To determine
the current rates, call the Company at 610-375-7480. This prospectus will be
supplemented from time to time with a statement of the current rates. Interest
is payable semi-annually (quarterly or monthly on a Certificate of $10,000 or
more, if requested) and is not compounded.
Early redemption in full by the holder, without penalty, is permitted upon
the death of any registered holder for a period of one year from the date of
death. The Company may call the Certificates for redemption in whole or in
part at any time without premium or penalty.
The Certificates (except the Passbook Series) are transferable, but no
trading market in these securities or in any other series of the Company's
subordinated investment certificates has developed or is expected to develop.
The Certificates are unsecured obligations of Horrigan American, Inc., and
are not obligations of any of its subsidiaries. The Certificates are
subordinated in right of payment of both principal and interest to the prior
payment in full of all indebtedness of Horrigan American, Inc. (including
indebtedness of others which it has guaranteed) for borrowed money or on
account of capitalized leases or the deferred purchase price of property or
reimbursement obligations under letters of credit.
The Company is offering the Certificates directly to the public on a
continuous basis. No other person is involved in the distribution or will
receive any compensation in connection therewith.
THE CERTIFICATES ARE NOT INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR OTHER ENTITY. IN THIS RESPECT THE CERTIFICATES REPRESENT A GREATER DEGREE
OF RISK THAN AN INSURED DEPOSIT IN A BANK OR OTHER FINANCIAL INSTITUTION.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE MATTERS SET FORTH UNDER
"INVESTMENT CONSIDERATIONS AND RISK FACTORS."
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
==============================================================================
UNDERWRITING
PRICE TO DISCOUNTS &
PUBLIC COMMISSIONS PROCEEDS (1)
- ------------------------------------------------------------------------------
Per Certificate 100% None 100%
- ------------------------------------------------------------------------------
Total(2) $25,000,000 None $25,000,000
==============================================================================
(1) Less expenses of the offering estimated at $56,470. Because the
Certificates are being sold directly by the Company without underwriting,
there is no assurance as to the amount of proceeds to be received
therefrom.
(2) No separate amount has been allocated to any series.
--------------
The Company reserves the right to reject, in whole or in part, any
application to purchase these securities.
The date of this prospectus is April 29, 1994.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission. Such reports and
other information filed by the Company can be inspected and copies made at the
offices of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Commission's Regional Offices in Chicago
(Northwestern Atrium Center, 500 West Madison Street, Suite 400, Chicago,
Illinois 60661) and New York (7 World Trade Center, 14th Floor, New York, New
York 10048); copies of such material may be obtained from the Public Reference
Section of the Commission, Washington, D.C. 20549 at prescribed rates.
It is the Company's practice to send, on an annual basis, reports
containing audited financial statements to the holders of its subordinated
investment certificates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Securities and
Exchange Commission, are incorporated herein by reference and made a part
hereof as of the date of their filing: the Company's annual report on Form 10-
K for the year ended December 31, 1993.
Any statement contained in a document incorporated by reference in this
prospectus shall be deemed to be modified or superseded, for purposes of this
prospectus, to the extent that any statement contained herein modifies or
supersedes such statement.
The Company will provide without charge to each person to whom this
prospectus is delivered, on the request of such person, a copy (without
exhibits, other than exhibits specifically incorporated by reference) of any
and all documents incorporated by reference in this prospectus. Written or
telephone requests for such copies should be directed to Joanne Haberberger,
Secretary, Horrigan American, Inc, P. O. Box 13428, Reading, Pennsylvania
19612-3428; telephone number 610-775-5199.
2
<PAGE>
THE COMPANY
Horrigan American, Inc. is primarily engaged, through wholly-owned
subsidiaries, in the commercial equipment leasing and commercial equipment
financing business and in the business of acquiring, leasing and managing
income-producing commercial real property. Horrigan American, Inc. is also
engaged through a wholly-owned subsidiary in the business of selling and
renting new, re-manufactured and off-lease and reclaimed equipment, pre-owned
office furniture, fixtures and equipment, and providing other asset related
services for the Company and other financial services institutions. Unless the
context requires otherwise, references in this prospectus to the Company
include Horrigan American, Inc., these subsidiaries, and certain real estate
partnerships which are consolidated for financial reporting purposes.
Horrigan American, Inc. was organized as a Pennsylvania corporation in
1982 to be a holding company for the various lines of business conducted by
its subsidiaries. Its executive offices are located at 6 Commerce Drive,
Shillington, Pennsylvania 19607-9704; its mailing address is P.O. Box 13428,
Reading, Pennsylvania 19612-3428; its telephone number is 610-775-5199.
The Company historically has obtained a large portion of its funds from
long and short-term borrowings from banks and other financial institutions,
and from the issuance of securities similar to those offered herein. This
offering is a continuation of earlier offerings of similar securities and is
made on a continuous basis directly by the Company without underwriting. The
Company expects that its efforts to market the securities offered by this
prospectus (collectively, the "Certificates") as well as the interest rates
and maturities of newly offered Certificates may be adjusted from time to time
depending upon its need for funds.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
Prospective investors should consider the following matters:
Subordination. Payments of principal and interest on the Certificates are
subordinated to
all present and future indebtedness of Horrigan American, Inc. (including
indebtedness of others which it has guaranteed) for borrowed money or on
account of capitalized leases or the deferred purchase price of property or
reimbursement obligations under letters of credit ("Senior Debt"). Senior debt
was $96,495,000 as of January 31, 1994. The indenture under which the
Certificates are issued does not limit the amount of additional Senior Debt
that the Company may incur. Further, no subsidiary of Horrigan American, Inc.
is liable on the Certificates. Thus, on any insolvency or liquidation of
Horrigan American, Inc. and its subsidiaries, assets of subsidiaries would be
available to pay the holders of the Certificates only after creditors of
subsidiaries had been paid, including creditors whose claims do not constitute
Senior Debt as defined. Substantially all the Company's business activities
are conducted, and substantially all its assets are held, by subsidiaries. The
Certificates rank equally with indebtedness represented by past and future
issues of subordinated investment certificates. (See "Description of
Subordinated Investment Certificates" and "Capitalization.")
Certificates Not Insured. The Certificates are not insured or guaranteed
by any governmental agency or other entity. In this respect the Certificates
represent a greater degree of risk than an insured deposit in a bank or other
financial institution.
No Trading Market. It is not expected that there will be a trading market
for the Certificates. Except in the case of the Passbook Series (which are
redeemable on demand but not transferable), this may adversely affect a
purchaser's ability to liquidate his investment before his Certificate matures
or becomes redeemable.
Redemption. The Company may in its discretion, at any time, without
premium or penalty, redeem Certificates of one series without redeeming
Certificates of any other series and may redeem Certificates bearing one rate
of interest without redeeming Certificates of the same series bearing a
different rate of interest. Thus, holders of Certificates bearing relatively
higher rates of
3
<PAGE>
interest could lose the benefit of those higher rates if the Company elected
to redeem those Certificates. The Company has never used this redemption
provision in the past to eliminate higher-rate Certificates. There can be no
assurances, however, that it would not do so in the future.
Economic conditions. Economic factors beyond the Company's control, such
as the general state of the economy, credit availability, rate of business
failures, commercial real estate vacancy rates, prevailing interest rates, and
changes in federal, state, and local tax laws could adversely affect the
Company's business by making funds less available and more expensive to borrow
and more difficult for the Company to collect its contractual lease, rental,
and finance payments resulting in potentially greater credit losses. The
payment of principal and interest to the Subordinated Certificate holders will
be dependent upon the Company's success in collecting payments, rentals, and
equipment residual values, and in selling commercial real estate and limited
partnership interests in commercial real estate, all of which, in turn, depend
partially on the state of the economy.
Risks of the real estate business. There has been a general downturn in
the commercial real estate market during the last few years. This can be
expected to adversely affect not only the prices at which the Company will be
able to rent its properties to tenants, but also its ability to sell or
refinance its properties and the prices it can expect to obtain on sale. In
1992, in recognition of these facts, the Company wrote down the book value of
its real estate assets by $4,302,000 and incurred a related after-tax, non-
cash charge to earnings of $2,773,000. As of December 31, 1993, the Company
reduced the book value of its real estate assets by an additional $488,000 and
incurred a related after-tax, non-cash charge to earnings of $322,000. See
"Business -- Real Estate."
PROSPECTUS SUMMARY
The following questions and answers will identify and answer some of the
more common questions which have been asked by the investing public over the
years. The information in this summary is qualified in its entirety by
reference to the more complete information included elsewhere in this
prospectus, which should be read prior to making any investment decision.
Who is Horrigan American, Inc.(R)
Horrigan American, Inc., a holding company, is the successor Pennsylvania
corporation to a business started in 1927 and conducts business through the
following operating companies and divisions: American Equipment Leasing Co.,
Inc.; AEL Leasing Co., Inc.; American Legal Funding, Information Systems
Funding Group and American Reli Financial (all divisions of AEL Leasing Co.,
Inc.); American Commercial Credit Corp.; American Real Estate Investment and
Development Co.; and The Business Outlet, Inc. The Company's business is
principally divided into commercial equipment leasing, commercial financing,
furniture and equipment sales and real estate investment, management and
leasing. (See "Business -- General Nature of Business.")
How is Horrigan American, Inc. directed and managed(R)
Corporate direction, values, and goals are established by a nine-person
board of directors, including four senior Company officers and five non-
employee directors with a diversity of backgrounds in accounting, law,
corporate management, and investment. Day-to-day Company activities are
directed and managed by a staff of approximately 98 people including highly
trained and experienced professionals in the fields of corporate management
and funding, commercial equipment leasing and financing, real estate,
furniture and equipment sales, marketing, securities, accounting, law,
information systems, communications, and human resource management.
Are the Certificates insured or guaranteed(R)
The Certificates are not insured or guaranteed by any governmental agency
or other entity. In this respect the Certificates represent a greater degree
of risk than an insured deposit in a bank or other financial institution.
4
<PAGE>
How does the Company use the funds from the sale of Subordinated Investment
Certificates(R)
Subordinated Investment Certificate funds provide the Company with working
capital to finance its commercial leasing and commercial financing operations,
to invest in real estate projects, to invest in furniture and equipment sales
activities, to pay holders of Certificates which mature, to invest in
marketable securities or other non-affiliated businesses, and/or reduce
borrowing from financial institutions. (See "Use of Proceeds.")
Does the interest rate change(R)
For the 1994 Series 8, A, B, and C Certificates, the interest rate
established at time of purchase will remain fixed until the Subordinated
Investment Certificate matures or is redeemed. The interest rate on all
outstanding Passbook Series Certificates is subject to change on the first day
of each month based upon current market conditions.
How can I find out what interest rates are currently being offered(R)
The Company has established a "Hot Line" so that you can obtain current
interest rate information by calling 610-375-7480 or contacting the Company
through its Fax number 610-478-8122.
When is the interest paid(R)
Semi-annually each June 1 and December 1. If a Certificate is purchased
for $10,000 or more, or if you hold Passbook Series Certificates aggregating
$10,000 or more, you may elect to have your interest paid quarterly or
monthly.
What happens when my 1994 Series 8, A, B or C Subordinated Investment
Certificate matures(R)
When a 1994 Series 8, A, B or C Certificate matures, unless the holder or
the Company otherwise elects, it will automatically "roll over" into a fixed
rate subordinated investment certificate of the series then being offered with
the same term as the maturing Certificate, but at the then current interest
rate for newly issued certificates of that series. Similar provisions are
expected to be included in future series of subordinated investment
certificates. The Company will send the holder notice of the automatic roll-
over and a copy of the then current prospectus for the new series of
certificates, at least 15 days before maturity. The Company will also send the
holder notice of the interest rate for the series of new certificates on
approximately the first day of the month in which the holder's Certificate
matures. The holder may elect not to roll over his Certificate by redeeming it
at maturity or within ten days thereafter, in which case interest will be paid
only to maturity. The Company may also elect not to roll over a Certificate by
sending notice to that effect to the holder at least 15 days before the
maturity date. (See "Description of Subordinated Investment Certificates --
The Fixed Rate Certificates -- Automatic Roll-Over.")
May I redeem my Subordinated Investment Certificate before maturity(R)
All 1994 Series 8, A, B, and C Certificates are redeemable without penalty
before maturity, upon the death of the holder or the co-holder, for a period
of one year from the date of death, but are otherwise not redeemable before
maturity.
The Passbook Series Certificates are payable on demand, but no interest
will be paid on a Passbook Series Certificate if it is redeemed by the holder
before the eighth day after the date of issuance.
When may the Company redeem my Subordinated Investment Certificate(R)
At any time, without premium or penalty. The Company may in its discretion
redeem Certificates of one series without redeeming Certificates of any other
series and may redeem Certificates bearing one rate of interest without
redeeming Certificates of the same series bearing a different rate of
interest.
What does "subordinated" mean(R)
The term "subordinated" defines the relative positions of the Subordinated
Investment Certificate holder and other creditors of the Company in the event
of the Company's insolvency or liquidation. In the event of an insolvency or
liquidation situation, holders of Certificates would
5
<PAGE>
receive payments of principal and interest only after the payment in full of
all indebtedness of Horrigan American, Inc. (including indebtedness of others
which it has guaranteed) for borrowed money or on account of capitalized
leases or the deferred purchase price of property or reimbursement obligations
under letters of credit. If any such indebtedness were not paid at maturity,
or otherwise became in default, the Company would be prohibited from making
payments of principal or interest on the Certificates until the indebtedness
was paid or the default cured or waived.
No subsidiary of Horrigan American, Inc. is liable on the Certificates.
Thus, on any insolvency or liquidation of Horrigan American, Inc. and its
subsidiaries, assets of subsidiaries would be available to pay the holders of
the Certificates only after creditors of subsidiaries had been paid, including
creditors whose claims do not constitute Senior Debt as defined. Substantially
all the Company's business activities are conducted, and substantially all its
assets are held, by subsidiaries.
Certificate holders would be entitled to payment of principal and interest
before any payment could be made to preferred or common stockholders, or
holders of the Company's Junior Subordinated Debentures, as such. The
Certificates offered hereby rank equally in priority with past and future
series of the Company's Subordinated Investment Certificates. (See
"Description of Subordinated Investment Certificates -- General --
Subordination.")
Are the Subordinated Investment Certificates subject to Pennsylvania personal
property tax(R)
No. The Certificates are subject to the Pennsylvania corporate loans tax,
which the Company agrees to pay.
Do I pay any fees when purchasing these Subordinated Investment
Certificates(R)
No. There are no broker's fees or commissions of any kind.
Whom do I contact if I have additional questions or wish to purchase(R)
Use the "Hot Line," 610-375-7480, asking for M. Jane Miller, Assistant
Vice President -- Investment Certificates, located at Berkshire Plaza, 517
Reading Avenue, West Reading, Pennsylvania; or John F. Horrigan, Jr., Chairman
of the Board, Arthur A. Haberberger, President, John F. Horrigan, III, Vice
President, Funds Management or Carol A. Lombardo, located at the Horrigan
American Building, 6 Commerce Drive, Shillington, Pennsylvania, at 610-775-
5199; or write to any of the above individuals at P.O. Box 13428, Reading,
Pennsylvania 19612-3428.
CAPITALIZATION
The consolidated capitalization of the Company as of January 31, 1994, is
set forth below. No adjustment to give effect to the issuance of additional
Subordinated Investment Certificates has been made because the offering is not
the subject of a firm underwriting and it is not known how much of the
Certificates will be sold. (See "Use of Proceeds.") The Certificates offered
hereby are subordinated to the indebtedness reflected below under the captions
"Unsecured Bank Debt", "Secured Bank Debt" and "Nonrecourse Debt". For
information concerning the Company's long-term debt and its obligations under
operating leases of real and personal property as of December 31, 1993, see
notes I and N to the consolidated financial statements.
(IN THOUSANDS)
--------------
UNSECURED BANK DEBT (1)............................. $ 73,050
SECURED BANK DEBT (2)............................... 5,069
NONRECOURSE DEBT (2)................................ 18,376
SUBORDINATED DEBT
Subordinated Investment Certificates
(4.0%-10.5%) (3)................................ 28,844
Junior Subordinated Debentures (9%) (maturing
2002)........................................... 103
--------
TOTAL DEBT................................ $125,442
--------
6
<PAGE>
STOCKHOLDERS' EQUITY
Preferred Stock -- 8% noncumulative, nonvoting,
par value $100 per share.
Authorized 20,000 shares; issued and
outstanding 1,952 shares....................... $ 195
Common Stock -- par value $1 per share.
Authorized 10,000,000 shares; issued and
outstanding 3,111,766 shares.................. 3,112
Net unrealized holding gains for available-for-
sale securities............................... 1,156
Retained earnings................................. 23,824
--------
TOTAL STOCKHOLDERS' EQUITY................ $ 28,287
--------
TOTAL OF DEBT AND EQUITY.................. $153,729
========
(1) Unsecured bank debt consists of borrowings under the following
arrangements:
A. As of January 31, 1994, $50,616,000 was outstanding under lines of
credit totalling $87,100,000 with various banks and an industrial
manufacturing company vendor (for whom the Company provides commercial
leasing and financing services), under which the Company may make fixed-
rate borrowings. Depending upon individual bank commitments, pricing is
based upon the bank's prime/base interest rate, the 24 month to 36 month
U.S. Treasury Note rates, or the bank's cost of funds as in effect during
the period in which the bank borrowing occurs. The interest rate range for
borrowings under these lines as of January 31, 1994 was 3.90% to 12.0%.
Individual loans are drawn against these lines of credit which are intended
to be matched to the terms of commercial equipment leases, commercial loans
or other working assets originated and acquired by the Company during the
period. Aggregate borrowings under these lines are limited to 90% of the
net amount of qualifying commercial leasing and commercial financing
receivables. Repayment of the loans is on a monthly basis which closely
matches the repayment cycle of the financing receivable portfolio. No
compensating balances or commitment fees are required for these lines of
credit.
B. As of January 31, 1994, $10,000,000 was outstanding under lines of
credit totalling $21,500,000 with four banks, under which the Company may
make fixed-rate short-term borrowings (1 day to 120 days) at negotiated
interest rates. The interest rate range for borrowings under these lines
of credit as of January 31, 1994 was 4.13% to 4.39%.
C. The Company has a $5,000,000 floating interest rate line from one
bank. There was nothing outstanding on this line of credit as of January
31, 1994. The interest rate is the prime rate or base interest rate,
changing with prime rate or base rate changes.
D. The Company has unsecured lines of credit of $20,000,000 with three
banks. The Company has the option under these lines of credit to make
short-term, or long-term fixed-rate loans at negotiated rates for periods
of time up to 36 months. As of January 31, 1994, $12,067,000 in amortizing
long-term loans were outstanding under these lines, payable in
installments through December, 1995, with interest rates ranging from
5.37% to 7.45%.
E. As of January 31, 1994, the Company has an amortizing term loan of
$367,000, payable in installments through September, 1994, with an
interest rate of 8.5%.
(2) For more detailed information concerning secured bank debt and
nonrecourse debt see note I to the consolidated financial statements.
(3) For more detailed information concerning the various series of
subordinated investment certificates, see notes H and I to the consolidated
financial statements.
As conditions of various bank loans, the Company has made certain
agreements with respect to its capital structure and other matters, the most
significant of which are described elsewhere in this prospectus. (See
"Business -- Certain Financial Covenants.") As of January 31, 1994, $115,700
7
<PAGE>
in principal amount of certain previous issues of subordinated investment
certificates were payable on demand or subject to early redemption.
Some of the loan agreements referred to above contain provisions creating
an event of default thereunder if the Company defaults under other loan
agreements and contain covenants which restrict certain actions by the Company.
(See "Business -- Certain Financial Covenants.")
USE OF PROCEEDS
The Company expects to use the proceeds of this offering for its general
corporate purposes. Among the uses to which the proceeds will be applied are
the financing of the Company's commercial leasing and lending operations,
including possible expansion, potential bulk purchase of commercial leasing
and/or loan portfolios, potential debt or equity investments in real estate
projects, investments in furniture and equipment sales activities, potential
diversification by the Company into other non-affiliated business activities,
the payment of holders of earlier series of subordinated investment
certificates as they mature or are redeemed, possible reduction of long- and
short-term bank borrowings, and loans to and other investments in
subsidiaries. The proceeds received from earlier similar offerings have been
used primarily for these purposes. How much of the proceeds will be used for
each of these various purposes will depend upon such factors as prevailing
interest rates, economic conditions which affect opportunities for expansion
and the willingness of holders to reinvest the proceeds of matured
certificates in new Certificates.
Pending application of proceeds of sales of the Certificates, the Company
may temporarily invest such proceeds in short-term investments, such as
certificates of deposit, commercial paper, government securities and money
market funds. Additional short- or long-term financing will be required from
time to time by the Company to carry on its business and will be effected at
such times and through such means as the Company may deem appropriate.
BUSINESS
GENERAL NATURE OF BUSINESS
The Company's business is principally divided into three segments:
commercial leasing and financing, investments in commercial real property
leasing and rental projects, and furniture and equipment sales.
The Company's assets primarily consist of: receivables from commercial
borrowers; direct finance leases with commercial lessees; and interests in
partnerships which own commercial real estate and rent it to others, generally
under operating leases.
As of December 31, 1993, approximately 79% of such assets were receivables
which arose from commercial leasing and financing, and 21% was real property
owned by the Company and leased or rented to others under operating leases.
COMMERCIAL LEASING AND COMMERCIAL FINANCING
The Company conducts its commercial leasing and commercial lending
operations, on a national basis, primarily from its corporate headquarters
located in Reading, Pennsylvania. Additionally, the Company maintains offices
in Crestview Hills, Kentucky (a suburb of Cincinnati, Ohio), and Deerfield,
Illinois (a suburb of Chicago). Marketing personnel are also located in
Pittsburgh, Pennsylvania; San Diego and Los Angeles, California; and Portland,
Oregon.
The Company conducts its leasing and lending activities in several ways. A
portion of its business is generated with customized sales aid leasing
programs for vendors of equipment. Direct customer solicitation programs
(telemarketing, mail solicitations, and direct customer visits and referrals)
focusing primarily on present and former lessees and commercial borrowers also
generate
8
<PAGE>
business for the Company. Also, three affinity marketing divisions generate
volume for the Company -- American Legal Funding which offers funding programs
specifically designed for the legal profession; the Information Systems
Funding Group which offers leasing and lending services for the use or
ownership of mid-size computers and computer software to businesses; and
American Reli Financial which provides leasing and lending services to general
equipment rental centers. Additionally, the Company through its General
Services Division provides equipment leases and asset-based loans to a broader
range of customers not serviced by the three affinity marketing divisions.
Sales aid leasing programs are programs wherein the Company provides full
pay out or finance instruments (usually on a nonrecourse basis to the product
seller) to assist sellers of commercial equipment in merchandising their
products. The Company approves all contracts prior to authorizing purchase of
the equipment under the sales aid leasing programs. No one program commitment
is expected to exceed 15% of the Company's annual commercial leasing/lending
volume.
As of December 31, 1993, the Company held $99,000 in repossessed equipment
and equipment returned to it at the conclusion of the lease terms (classified
as other assets on the consolidated financial statements). Repossessed and
returned equipment is initially recorded at no more than 70% of estimated fair
value and is periodically written down until resold. (See "Furniture and
Equipment Sales".)
Acquisitions
On June 1, 1993, the Company purchased all of the capital stock of Canyon
Capital, Inc. ("Canyon"), whose principal business consisted of financing and
leasing equipment. (See Note R to the consolidated financial statements.) The
Company does not intend to operate the acquired business under the trade name
Canyon and intends to liquidate the portfolio of leases and loans while
soliciting certain lessees for additional new business.
On January 31, 1992, the Company purchased substantially all the assets of
Reli Financial Corp. ("Reli"), whose principal business consists of providing
financing to the equipment rental industry. The Company continues to operate
this acquired business (as well as the existing rental and financing business)
under the trade name "American Reli Financial". Reli's pre-acquisition
policies, procedures and systems have been evaluated, and integrated with the
Company's management practices. Direct solicitation remains the focus activity
of this division, and has increased the Company's market penetration through
expanded direct marketing efforts and trade show participation.
Direct Finance Leasing
Finance leases, often referred to as full pay out or capital leases, are
non-cancellable contracts, generally for a longer term than operating leases,
under which the original equipment cost to the Company is generally less than
the stream of periodic payments to be received from the lessee during the
initial lease term.
The Company's direct finance leases are those which meet one or more of
the following four criteria: (a) the lease transfers ownership of the property
to the lessee by the end of the lease term; (b) the lease gives the lessee an
option to purchase the property at a price that is sufficiently lower than the
expected fair value of the property at the time the option becomes exercisable
such that its exercise appears, at the inception of the lease, to be
reasonably assured; (c) the lease term is equal to 75% or more of the
estimated economic life of the property; or (d) the present value of the
minimum lease payments at the beginning of the lease term equals or exceeds
90% of the fair value of the property.
In the case of its direct finance leases, the Company retains title to the
asset, yet the lessee generally bears the contractual risk of loss and the
duty to maintain and insure the asset. The Company's principal exposure on a
direct finance lease is the lessee's ability to make payments (i.e., the
credit risk); therefore, only after the Company is satisfied of the lessee's
credit worthiness
9
<PAGE>
and of its ability to make future lease payments, and upon receipt of an
executed lease, does the Company issue a purchase order to a manufacturer or
vendor for the equipment. Generally, the lessee pays the Company, over the
non-cancellable term of the lease, an amount equal to the purchase price of
the leased equipment, less its estimated unguaranteed residual value, if any,
at the end of the lease term, plus a gross profit. The lessee generally has
the option at the conclusion of the term of the lease to either (1) renew the
lease; (2) purchase the equipment at its then market value or for a
predetermined amount; or (3) return the equipment to the Company. The Company
records a direct finance lease on its books as a receivable. The terms of
direct finance leases vary in length with the size of the lease and the
estimated useful life of the leased property and generally range from 12 to 60
months. The median original term of the Company's direct finance leases is
approximately 33 months.
Direct finance leases are originated through dealer sales organizations,
or directly with the lessee. Approximately 35 marketing representatives and
support staff present the Company's leasing programs to dealer/vendors
(thereby providing their customers the alternative of lease financing when
acquiring various types of equipment), and/or engage in direct solicitation
programs focusing on present and former lessees and also potential new
lessees, generally through telemarketing and direct mail solicitation. Because
the Company generally purchases equipment from dealers on a nonrecourse basis,
the leasing transaction provides a sale for the dealer/vendor of the product.
Frequently, former or existing lessees request to lease additional equipment
from the Company. Upon re-examination and approval of the credit risk
(including the lessee's credit, capacity to pay, and nature of the leased
property) the Company makes a decision to purchase equipment for lease to the
direct lessee.
As of year-end 1993, the Company owned and serviced 6,390 direct finance
lease contracts. No individual lessee had direct finance leases accounting for
more than 2.3% of the total finance lease contracts outstanding as of December
31, 1993. (See note C to the consolidated financial statements for
concentration of credit risk related to finance receivables.) Direct finance
lease contracts (direct finance leasing receivables plus residual valuation
less unearned income) totalled $92,532,000 as of December 31, 1993.
Commercial Financing
The Company engages in commercial financing transactions with various
commercial customers. Commercial loans are generally secured by inventory,
receivables, equipment, or real estate. Installment loan agreements under
which a seller of commercial equipment enters into an installment sale of
equipment to a buyer are discounted by and assigned to the Company. Criteria
to qualify for commercial loans include credit worthiness, ability to make
future payments, and the quality of collateral used to secure the loans. As of
December 31, 1993, the Company had 2,102 commercial loans totalling
$35,050,000.
As of December 31, 1993, the Company held $732,000 in real estate from
foreclosures on two commercial loans. The real estate is recorded at estimated
fair value (net of disposal costs) and is included in other assets on the
consolidated financial statements.
REAL ESTATE
The Company, through American Real Estate Investment and Development Co.,
a wholly-owned subsidiary, is in the business of making and managing
investments in commercial real property for itself and on behalf of third
party investors. This activity principally involves the formation and
management of investment partnerships, asset management, and related advisory
and funding activities. The Company's portfolio was acquired through sale/
leaseback transactions, where existing buildings are purchased and leased back
to the seller; build-to-suit projects, where buildings are constructed for
lease to a specific tenant; or through the acquisition of specific properties
from third parties. In some instances, properties are acquired in joint
venture with other investors or management companies. Presently the Company
10
<PAGE>
subcontracts all day-to-day asset management responsibilities to third parties
with whom the Company works closely.
The emphasis the Company places on the activities of buying, managing and/
or selling properties tends to vary from time to time in concert with the
markets and the Company's objectives. Since 1991, the Company has primarily
focused on managing and refinancing its properties. Purchases of real estate
assets are likely to be considered in 1994 as certain market conditions have
improved since the Company ceased acquisition activity at the end of 1991. The
Company also is considering the sale of certain individual assets and groups
of assets, as it does from time to time. It is likely that certain property
sales will be consumated in 1994 based on present marketing activity.
The forty-one properties owned and managed as of December 31, 1993 are
classified as follows: eighteen are office buildings, twelve are industrial
buildings, three are limited service hotels, five are various retail centers,
and three are various other commercial properties. Ten of the properties are
multi-tenant, excluding the hotels. In these projects, assistance in leasing
and other onsite management activities is provided either by co-managing
partners local to the project or through third party management companies (or
both). The Company is general partner in Hampton Inn hotels in Flint,
Michigan, Reading, Pennsylvania, and Allentown, Pennsylvania, and provides
hotel management services through American Hotel Management, Inc., a
subsidiary of the Company.
The Company has in a select few instances made operating loans to
individuals or corporate entities in connection with its real estate
investment activities. These loans are included in the "Commercial Financing"
section.
Write-down
The Company's commercial real estate continues to be affected by the
general decline in real estate industry values and poor liquidity. Certain
conditions improved in 1993, somewhat mitigating these value declines.
Generally accepted accounting principles which govern the Company's
reporting of its carrying value of assets do not permit the Company to
increase the reported book value (original cost less accumulated depreciation)
of properties which increase in fair value. However, properties that are
believed to have experienced material decreases below book value, of a
permanent nature, must be written down by the Company in the current reporting
period at the time of such determination. As of June 30, 1992, eleven
properties were believed to have had an estimated current fair value
materially below book value. The Company, in order to reflect this value
degradation, incurred a charge to earnings, net of deferred taxes and net of
losses allocable to minority interests, of $2,773,000 and reduced its share of
reported book value in real estate assets by $4,302,000, to $33,836,000. As of
December 31, 1993, the Company incurred an additional charge to earnings, net
of deferred taxes, of $322,000, and reduced its share of reported book value
in real estate assets by $488,000 to $31,419,000.
Management used the best information reasonably available to develop its
estimates of market value and in the case of any substantial devaluations, the
Company has secured appraisals performed by third party appraisers as a basis
for establishing current value. The third party appraisals substantially
corroborated management's estimates of value. Future changes to these
estimates may be necessary if conditions differ substantially from the
assumptions used in developing these valuations.
Investment in Real Estate Partnerships
The following table is a summary of the Company's total investment in and
operating results from consolidated and unconsolidated real estate
partnerships based on the Company's specific ownership percentages. (See
"Write-down.")
11
<PAGE>
<TABLE>
<CAPTION
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME
BEFORE TAXES NONCASH EXPENSES INCLUDED GAIN ON
YEAR INVESTMENT IN REAL FROM REAL ESTATE IN INCOME SALE OF
ENDED ESTATE PARTNERSHIPS PARTNERSHIPS BEFORE TAXES PARTNERSHIP
12/31 CONSOLIDATED INVESTEE CONSOLIDATED INVESTEE TOTAL WRITE-DOWN DEPRECIATION INTERESTS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $9,441 $(8) $ 380 $ (39) $ 341 $ 488 $1,146 $ --
1992 4,684 66 (3,209) (229) (3,438) 4,302 1,216 1
1991 7,496 978 111 (96) 15 -- 1,081 547
1990 6,941 468 86 (199) (113) -- 908 --
1989 2,315 774 (216) (131) (347) -- 755 301
</TABLE>
Investment in real estate partnerships increased in 1993 primarily due to
the conversion of debt owed by the partnerships to the Company into capital,
capital contributions by the Company as part of the restructuring of one
partnership, and the purchase of limited partnership interests previously held
by third parties.
Investment in real estate partnerships decreased substantially in 1992 due
to the write-down of property values (see "Write-down,"). Excluding the write-
down, investment levels in 1992 increased $578,000 from 1991. Substantially
all of the increase resulted from the purchase of limited partnership
interests in investee partnerships previously held by third parties.
Continuing the trend begun in 1991, the Company refrained from the making
of investments in property acquisitions. From 1989 through 1990, investment in
real estate partnerships expanded due to property acquisitions. The Company
has not sold a material amount of properties since its inception. It is likely
in the near future that property sales will represent a more significant part
of the Company's real estate business.
Income before taxes from real estate partnerships is the aggregate of the
Company's proportionate share of such income from all partnerships in which
the Company has ownership interests. This income measure includes both income
or loss from operations (i.e., rental income less operating expenses, interest
charges, and depreciation), and income or loss from the sale of properties
owned by the partnerships. Income before taxes in 1993 and 1992 was negatively
impacted by the write-downs described above. Excluding the write-down in 1993,
income before taxes was $829,000. Excluding the write-down of $4,302,000
(including an adjustment for $198,000 of losses attributable to minority
interests), income before taxes from real estate partnerships in 1992 was
$666,000, an improvement from 1991. While a continuation of the positive trend
since 1989, the improvement in 1993 and 1992 was substantially attributable to
lower interest costs rather than an improvement in the operation of the
Company's real estate. In general, this profitability from operations is
expected to be negatively affected in future periods as leases expire and
reset to prices reflecting the lower rents prevailing in many of the markets
in which the Company owns real estate. Vacancy can also impact this income
measure, although the Company did not experience significant fluctuations in
income due to vacancy in 1993.
As is indicated in the above table, in 1993 and 1992 the Company generated
only a nominal gain on sale of partnership interests as no meaningful sales
activity was conducted. This inactivity was due primarily to poor market
conditions resulting from general investor uncertainty over values and
concerns over real estate's relative illiquidity. The Company's activities in
earlier years had consisted of sales involving one to three partnerships. The
Company considers sales based on (i) the Company's need for additional
liquidity (ii) the extent to which the Company has access to the market for
limited partnership capital, and (iii) the attractiveness of the Company's
partnership interests as a vehicle for resale to limited partner investors.
The extent of gain on sale of partnership interests is dependent on a
number of factors: the selling price (which is dependent on the yields
necessary to attract investors as compared with the yields generated by the
partnership), selling costs, and the book value of the interests being sold,
12
<PAGE>
against which gain is measured. The book value of a given interest is
dependent in part on depreciation charges previously taken, which in turn is a
function of the length of time the interest has been held prior to sale, and
other factors. Because of the interaction of these various factors, the
Company's gain on sale of partnership interests has not shown any consistent
pattern over the last five years. Because of current economic conditions, the
Company does not expect to recognize significant gains from the sale of
partnership interests in the near term.
Real Estate Financing and Contingencies
The Company has commercial loans outstanding to, and has guaranteed
portions of the debt of, nine unconsolidated real estate partnerships (See
notes E and O to the consolidated financial statements): The Company's
ownership interest in these partnerships range from 10% to 58.2% in 1993 and
1992. As of December 31, 1993 and 1992, commercial loans outstanding to these
partnerships totalled $2,412,000 and $1,408,000, respectively, and the
guaranteed portions of the debt of these partnerships were $2,400,000 and
$2,675,000, respectively.
FURNITURE AND EQUIPMENT SALES
The Company, through The Business Outlet, Inc., a wholly-owned subsidiary
located in a 36,000 square foot showroom/warehouse in West Reading,
Pennsylvania, is in the business of selling new, remanufactured and used
office furniture and equipment to the retail and wholesale market place from
the West Reading location and through several company sales representatives
located throughout central and southeastern Pennsylvania. Also, The Business
Outlet, Inc. services the computers, fax machines and copier equipment which
it sells.
The Company expects to expand this segment of its business by (i) becoming
a franchised distributor for certain lines of new office furniture; (ii)
expanding the sale of used, remanufactured and reconditioned case goods (file
cabinets, desks, shelves, etc.), seating, computer furniture, system furniture
(cubicles and panels) and new and reconditioned computers, fax machines and
copiers; and (iii) possibly opening additional showroom/warehouse locations de
novo or by acquisition.
The Company generated gross revenues from the furniture and equipment
sales segment of its business of $1,858,000 in 1993, $1,130,000 in 1992,
$281,000 in 1991, $317,000 in 1990 and $184,000 in 1989.
Additionally, The Business Outlet, Inc. continues to provide asset related
services to the commercial leasing and commercial financing segments of the
Company, including: purchase options and personal property tax collections,
equipment appraisals, repossession services, and sales of off-lease and
repossessed equipment. (See "Business -- Commercial Leasing and Commercial
Financing".)
COMPETITION
The Company's business is highly competitive. A great number of financial
institutions and others are engaged in the same lines of business as the
Company, ranging from small enterprises to national corporations, many of
which are substantially larger and have access to greater resources than the
Company. The Company's competitors include foreign and domestic commercial and
savings banks; investment banks; national and regional leasing companies;
manufacturer-related, vendor-affiliated and bank-related leasing companies;
diversified financial service companies, insurance companies, other credit
grantors, other real estate investment companies and other sellers of new,
used and remanufactured office furniture and equipment.
Based upon information published in the American Banker, the Company
ranked as the 62nd largest among all finance companies in the United States as
of December 31, 1992, as measured by size of capital funds, which consist of
capital, surplus, retained earnings and non-current subordinated debt. Finance
companies in the American Banker survey include consumer and commercial
finance and equipment leasing companies, but exclude banks and thrifts.
13
<PAGE>
Among various types of commercial lenders and lessors, competition relates
to such matters as the size and length of contracts, the interest or rental
rate and other types of finance and service charges, and the nature of the
asset residual risk which the lender or lessor is willing to assume.
In addition, equipment leasing companies and commercial finance companies
compete with other leasing companies and commercial finance companies on the
basis of name recognition, reputation for satisfactory customer service, and
retention of customers through acquisition of repeat business.
LITIGATION
The Company is party (plaintiff or defendant) to certain legal actions.
While any litigation has an element of uncertainty, management, after
reviewing these actions with legal counsel, is of the opinion that the
liability, if any, resulting from these actions will not have a material
effect on the financial condition or results of operations of the Company.
PROPERTY
The Company owns (through a consolidated real estate partnership) the
Horrigan American, Inc. headquarters building in Flying Hills, Reading,
Pennsylvania, which also houses the AEL Leasing Co., Inc. corporate staff and
most of the commercial leasing and lending staff of this subsidiary, and other
tenants. This office space is suitable and adequate for the Company's office
staff and supporting computer operations, which principally utilize telephone,
fax, and computer equipment. The Company also owns (through two consolidated
real estate partnerships) the building in which The Business Outlet, Inc.
showroom/warehouse in West Reading, Pennsylvania is located and the building
in which The Business Outlet, Inc. leases warehouse space in Fleetwood,
Pennsylvania. The Company has space available in these facilities, which
should adequately cover its growth requirements.
The Company leases its commercial leasing/lending offices in Deerfield,
Illinois (a suburb of Chicago), and Crestview Hills, Kentucky (a suburb of
Cincinnati, Ohio). The American Real Estate Investment and Development Co.
corporate staff is also located in the Deerfield, Illinois office. Rental
expense for the year 1993 for the Company's leased offices was $77,000. These
leases expire at various times through March, 1996. (See note N to the
consolidated financial statements.) The Company believes that alternative
office space is available in all areas.
EMPLOYEES
As of December 31, 1993, the Company had 92 full-time and 6 part-time
employees. The Company encourages its employees to participate in college and
other professionally-sponsored programs to further their knowledge and
professional expertise. Effective January 1, 1994, the Company has a 401(k)
plan covering substantially all employees who qualify as to age and length of
service. This plan will continue with a profit sharing component. Previously,
the Company had two defined contribution profit sharing plans. The Company
provides health, life, and disability insurance protection; educational
assistance; supplemental health care expense reimbursement; and other standard
employee benefits during, but not after, employment with the Company.
CERTAIN FINANCIAL COVENANTS
In connection with various bank loans, AEL Leasing Co., Inc. and American
Commercial Credit Corp., as well as American Equipment Leasing Co., Inc. (a
wholly-owned subsidiary of Horrigan American, Inc. that owns all the stock of
those two subsidiaries), have made certain agreements with respect to its
capital structure and other matters, the most significant of which are
described below.
(i) American Equipment Leasing Co., Inc. and its subsidiaries, AEL
Leasing Co., Inc. and American Commercial Credit Corp., on a consolidated
basis, must maintain (a) a minimum
14
<PAGE>
cash flow ratio of receipts to disbursements, as specifically defined, of
1 to 1, (b) a ratio of debt to tangible net worth not in excess of 7 to 1,
and (c) a minimum tangible net worth of $21,000,000. As of December 31,
1993, the cash flow ratio of receipts to disbursements was 1.25 to 1.00,
the ratio of debt to tangible net worth was 3.43 to 1.00, and tangible net
worth totalled $28,751,000.
(ii) AEL Leasing Co., Inc. and American Commercial Credit Corp.,
on a separate company basis, must maintain a ratio of debt to tangible
net worth not in excess of 7 to 1. As of December 31, 1993, the ratio
of debt to tangible net worth was 2.84 to 1.00 in AEL Leasing Co.,
Inc. and 4.59 to 1.00 in American Commercial Credit Corp.
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
See note M to the consolidated financial statements for information
relating to the Company's total revenues, operating profit, and identifiable
assets by industry segments.
AVERAGE INTEREST RATES
The following table sets forth information regarding weighted average
interest rates on the Company's borrowed funds during the periods indicated.
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------
Short-term borrowings......... 4.42% 5.31% 7.27% 9.28% 10.19%
Long-term borrowings.......... 7.56% 8.85% 10.06% 10.43% 10.17%
Total borrowings.............. 7.24% 8.57% 9.77% 10.24% 10.17%
DESCRIPTION OF LEASING AND FINANCING ACTIVITIES
The following table contains information concerning the volume of the
Company's activities for the periods indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
AT AND FOR YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL LEASING AND FINANCING
Total Number of Leases and Loans Made.......... 2,956 3,090 4,124 5,764 6,992
Total Volume of Leases and Loans Made.......... $106,997,984 $91,364,104 $80,954,067 $95,498,633 $105,765,673
Average Balance Per Lease and Loan Made........ $36,197 $29,568 $19,630 $16,568 $15,127
Number of Leases and Loans Outstanding......... 8,492 10,488 13,942 16,917 18,166
Total of Lease and Loan Receivables............ $144,313,000 $127,880,000 $131,267,000 $149,302,000 $154,808,000
Average Balance Per Lease and Loan
Outstanding.................................. $16,994 $12,193 $9,415 $8,826 $8,522
REAL ESTATE OPERATING LEASES
Total Number of Operating Leases Made.......... -- -- 1 8 6
Total Volume of Operating Leases Made.......... $ -- $ -- $3,166,000 $18,824,000 $10,618,000
Average Balance Per Operating Lease Made....... $ -- $ -- $3,166,000 $2,353,000 $1,769,667
Number of Operating Leases Outstanding......... 28 30 29 28 21
Total Book Value (net of depreciation) of
Property Held Subject to Operating Leases... $31,419,000 $34,687,000 $37,483,000 $35,284,000 $18,733,137
Average Balance Per Operating Lease
Outstanding.................................. $1,122,107 $1,156,233 $1,292,517 $1,260,143 $892,054
</TABLE>
The volume of leases and loans made represents the total gross assets
generated by the Company's own sales staff and by the acquisition of leases
and/or loans from third parties. The Company is generally active in both of
these areas, but emphasizes principally its own sales staff.
In 1993 and 1992, gross volume included $22,410,000 and $19,866,000,
respectively, in leases and loan balances purchased in connection with certain
acquisitions. (See "Business -- Commercial
15
<PAGE>
Leasing and Commercial Financing -- Acquisitions.") In addition, a portfolio
of finance receivables totalling $4,988,000 was purchased in 1993. Excluding
the effect of these acquisitions, the Company has generated an increase in
volume of new leases and loans in 1993 compared to 1992. This increase is
attributable to a healthier economy, and improved marketing and sales efforts.
The decrease in volume prior to 1993 was due to several factors: (i)
competition, as many financial sources have developed the capacity to offer
financial products directly or indirectly competitive to the Company's
business; (ii) the recession, during which time capital spending slowed; (iii)
tightening credit standards, particularly affecting 1991 and 1992; and (iv)
the narrowing of the Company's marketing and sales efforts to include fewer
industry, customer, and equipment types.
The trend toward larger per unit leases and loans (as reflected in the
annual increases since 1988 in the average balance of loans and leases made
and outstanding) is expected to continue and is consistent with Company
strategy. Larger balances provide the Company with certain operational
efficiencies in both originating and servicing the lease and loan portfolio.
Real estate operating leases represent newly acquired properties subject
to operating leases. As discussed above (see "Business -- Real Estate --
Investment in Real Estate Partnerships"), no properties were acquired in 1993
and 1992 due to the Company's interest in preserving capital flexibility and
concerns over value declines and liquidity. The Company may consider acquiring
additional properties in 1994 since certain market conditions have improved.
As the table indicates, the average price of property acquisitions
increased steadily since 1988, consistent with the Company's strategy. It was
determined that larger assets enable the Company to attract higher quality
asset management services, a broader availability of mortgage financing, and
various operating efficiencies.
DELINQUENCY
A commercial lease or commercial finance receivable is considered
delinquent whenever the full amount of a contractually required payment is not
made within 60 days after its due date, unless a mutually agreed-upon
extension/interest payment, accompanied by a full contractual payment, has
been received. Extension/interest payments on commercial leases and commercial
finance accounts are generally restricted to two per year. Delinquent accounts
do not include receivables classified as non-performing (see "Non-performing
Assets") below.
The table which follows sets forth the Company's monthly average dollar
amounts and percentages delinquent for the twelve months of each year.
Classifications are in accordance with present contract terms.
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
61 TO 90 OVER 61 TO 90 OVER
DAYS 90 DAYS DAYS 90 DAYS
YEAR PAST DUE PAST DUE TOTAL PAST DUE PAST DUE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LEASING AND FINANCING
TOTAL UNPAID AVERAGE GROSS BALANCES % OF AVERAGE GROSS RECEIVABLES
-------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993..................... $1,175 718 $1,893 0.85% 0.52% 1.37%
1992..................... $1,657 1,282 $2,939 1.17% 0.91% 2.08%
1991..................... $1,997 1,378 $3,375 1.40% 0.97% 2.37%
1990..................... $1,340 1,018 $2,358 0.85% 0.64% 1.49%
1989..................... $1,277 1,019 $2,296 0.80% 0.64% 1.44%
</TABLE>
During 1993, delinquency as a percentage of gross receivables decreased to
1.37% from 2.08%. This decrease is reflective of several factors, principally:
(i) an improving economy; (ii) tighter underwriting standards for new leases
and loans; and (iii) more effective servicing and collection efforts given the
narrower market focus of the Company's sales efforts.
NON-PERFORMING ASSETS
Non-performing assets include the following four asset classifications:
receivables over ninety days contractually delinquent, receivables pending
settlement, receivables restructured, and inventory.
16
<PAGE>
Receivables over 90 days past due include the total of all commercial
lease and commercial finance net receivable balances, which are contractually
delinquent by more than ninety days.
Receivables pending settlement are net receivables which are (i) the
subject of disputes with lessees that senior management believes will be
resolved within a reasonable time, and in which the credit of the obligor is
deemed sound, (ii) subject to some form of legal proceeding, either litigation
initiated by the Company to compel a borrower to honor the terms of the lease
or loan, or proceedings extending from a bankruptcy prior to formal
affirmation or rejection of the receivable, (iii) subject to a repossession,
or (iv) subject to an insurance claim in which the Company is the loss payee.
Receivables restructured include (1) net receivables that are subject to a
concession of original contractual principal and/or interest and which (i) the
Company has formally settled litigation and payments have recommenced, (ii)
the borrower in bankruptcy has reaffirmed the debt to the Company and payments
have recommenced, or (iii) the Company has renegotiated the terms of the lease
or loan; and (2) net receivables which the Company has determined that a
reasonable doubt exists as to the collectibility of additional income.
Generally the Company applies payments to principal only. (See Note C to the
consolidated financial statements.)
Inventory is comprised of various repossessions made by the Company,
equipment returned at the expiration of various leases and real estate owned.
Repossessed inventory is initially recorded at 70% of its estimated wholesale
value, and returned inventory is recorded at the lower of residual value or
estimated fair value.
The following table contains information on each of the four asset
classifications of non-performing assets, and measures the total non-
performing assets as a percent of working assets (total net investment plus
the allowance for possible lease and loan losses) and inventory.
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS NON-PEFORMING
----------------------------------------------------------------------------- WORKING ASSETS AS A
YEAR RECEIVABLES RECEIVABLES ASSETS AND % OF WORKING
ENDED OVER 90 DAYS PENDING RECEIVABLES INVENTORY ASSETS AND
12/31 PAST DUE SETTLEMENT RESTRUCTURED INVENTORY TOTAL (AT 12/31) INVENTORY
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LEASING AND FINANCING
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $ 498 392 126 831 $1,847 $128,413 1.44%
1992 $ 530 651 715 1,195 $3,091 $113,793 2.72%
1991 $1,322 833 891 174 $3,220 $114,325 2.82%
1990 $ 988 814 1,111 502 $3,415 $128,886 2.65%
1989 $ 650 1,014 1,038 454 $3,156 $132,236 2.39%
</TABLE>
Total non-performing assets declined at December 31, 1993, reflecting the
influence of more stringent underwriting standards adopted by the Company in
1992, and the aggressive charge-off philosophy implemented during the same
year.
ALLOWANCE FOR POSSIBLE LEASE AND LOAN LOSSES
The Company maintains an allowance for possible lease and loan losses
based on a periodic evaluation of the finance receivable portfolio. This
allowance reflects an amount that in management's opinion is adequate to
absorb known and inherent losses in the portfolio. Management
considers a variety of factors when evaluating the allowance, recognizing that
an inherent risk of loss always exists in the lending process. Consideration
is given to the impact of current economic conditions, diversification of the
loan portfolio, historical loss experience, results of loan reviews,
borrowers' financial and managerial strengths, the adequacy of underlying
collateral and other relevant factors. While management uses the best
available information to make such evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluation. The provision for possible lease
17
<PAGE>
and loan losses is charged to operating expense. Lease and loan losses are
charged directly against the allowance, and recoveries on previously charged-
off leases and loans are added to the allowance.
The Company allocates a portion of the allowance in anticipation of future
lease and loan losses on certain individually significant accounts whenever
there is a possible event of default by (a) one or more lessees because of a
vendor problem or (b) an individual lessee with one or more leases with a
combined principal balance in excess of $125,000. As of December 31, 1993,
$290,000 of the allowance was allocated for this purpose.
The following table contains information concerning the provision for
possible lease and loan losses, the Company's loss experience, and the
allowance for possible lease and loan losses.
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------
PROVISION ALLOWANCE GROSS
FOR FOR POSSIBLE INVESTMENT ALLOWANCE
YEAR POSSIBLE NET LOSS EXPERIENCE LEASE AND LOAN IN AS A
ENDED LEASE AND ---------------------------------------- ACQUIRED LOSSES RECEIVABLES % OF GROSS
12/31 LOAN LOSSES CHARGE-OFFS RECOVERIES NET LOSSES ALLOWANCE (AT 12/31) (AT 12/31) RECEIVABLES
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LEASING AND FINANCING
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $1,573 (2,736) 1,136 (1,600) 852(A) $5,438 $144,313 3.77%
1992 $2,190 (3,205) 1,178 (2,027) 240(A) $4,613 $127,880 3.61%
1991 $4,580 (5,033) 1,095 (3,938) 225(A) $4,210 $131,267 3.21%
1990 $3,977 (4,056) 496 (3,560) -- $3,343 $149,302 2.24%
1989 $2,884 (3,801) 797 (3,004) -- $2,926 $154,808 1.89%
<FN>
(A) The balance of the allowance for possible lease and loan losses increased as a result of the acquisition of portfolios of
finance receivables.
</TABLE>
The allowance has increased in each of the years shown, as net losses also
increased, except in 1993 and 1992 when the allowance increased despite a
decrease in net losses. While the Company's new business efforts involve a
general shift to higher balance accounts with somewhat higher credit quality
- -- and therefore the potential for reduced losses and provision for losses
over time -- the Company determined that no reduction in the allowance was
appropriate at this time, given the potential for larger individual losses,
industry and/or equipment concentrations which may result from these changes,
and the loss exposure associated with the remaining balance of acquired
finance receivables.
SELECTED FINANCIAL DATA
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1993 1992 1991 1990 1989
--- --- --- --- ---
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues................................... $ 25,657 $ 23,096 $ 29,335 $ 29,684 $ 29,842
Earnings (loss) from continuing operations
(note 3)....................................... $ 3,047 $ (413) $ 1,382 $ 1,218 $ 2,602
Total assets..................................... $164,953 $153,263 $158,787 $173,529 $181,139
Long-term debt................................... $113,315 $112,465 $116,445 $121,479 $123,123
Per common share (note 1)
Earnings (loss) from continuing operations..... $ .92 $ (.13) $ .41 $ .36 $ .78
Cash dividends declared........................ $ .14 $ .08 $ .086 $ .166 $ .128
Weighted average shares outstanding (note 1)..... 3,278,159 3,310,584 3,328,109 3,361,468 3,367,106
Ratio of earnings to fixed charges (note 2)...... 1.54 -- 1.17 1.14 1.31
See accompanying notes to selected financial data.
</TABLE>
18
<PAGE>
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
NOTES TO SELECTED FINANCIAL DATA
1. Per Share Amounts Earnings from continuing operations per common share
were computed using weighted average shares and dilutive stock options
outstanding during each year after giving retroactive effect to the four-
for-three stock split in 1989 and after deducting preferred dividend
requirements from net earnings, and the purchase of treasury stock in 1993,
1992, 1991 and 1990. Earnings per common share assuming full dilution were
not reported because dilution arising from the stock options is less than
three percent.
2. Ratio of Earnings to Fixed Charges The ratio of earnings to fixed charges
has been computed by dividing earnings and fixed charges by the fixed
charges. Earnings for this purpose includes earnings from continuing
operations plus income taxes less equity in undistributed earnings of
unconsolidated affiliates. Fixed charges are considered to consist of
interest expense attributable to continuing operations and the portion of
rentals deemed representative of the interest factor. The ratio of earnings
to fixed charges is not expected to change by more than 10% as a result of
this offering. The Company guaranteed $2,400,000 of debt of unconsolidated
real estate partnerships as of December 31, 1993. The amount of fixed
charges associated with this guaranteed debt was $223,000 for 1993. The
computation of the ratio of earnings to fixed charges does not include the
fixed charges associated with the guaranteed debt because the Company has
not been required to honor the guarantees nor is it probable that the
Company will be required to honor the guarantees. In 1992, earnings from
continuing operations were inadequate to cover fixed charges by $269,000.
However, the ratio of earnings to fixed charges is not intended to disclose
cash flow from operations. In addition to the normal noncash expenses, such
as depreciation and provision for possible lease and loan losses, the
provision for write-down of real estate negatively affects the ratio for
1992. The ratio of earnings to fixed charges would be 1.35 if the provision
for write-down of real estate were excluded.
3. Earnings (Loss) from Continuing Operations In 1993, the net earnings
included an after-tax charge of $322,000 which resulted from the write-down
of the Company's real estate assets by $488,000. Excluding the after-tax
effect of this write-down, the Company's results of operations in 1993 were
$3,369,000. In 1992, the net loss included an after-tax charge of $2,773,000
which resulted from the write-down of the Company's real estate assets by
$4,302,000. Excluding the after-tax effect of this write-down, the
Company's results of operations in 1992 were $2,360,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS (LOSS)
The Company generated net earnings of $3,047,000 for 1993 compared to net
a loss of $413,000 in 1992 and net earnings of $1,382,000 for 1991.
As a result of an overall revaluation of its real estate portfolio, the
Company reduced the book value of its real estate assets by $4,302,000 as of
June 30, 1992, and incurred a related after-tax, non-cash charge to earnings
of $2,773,000. As of December 31, 1993, the Company reduced the book value of
its real estate assets by an additional $488,000, and incurred a related
after-tax,
19
<PAGE>
non-cash charge to earnings of $322,000. (See "Business -- Real Estate --
Writedown".) Excluding the after-tax effect of these write-downs, the
Company's results of operations in 1993 were $3,369,000, a 42.8% increase from
adjusted earnings of $2,360,000 in 1992, and the Company's results of
operations in 1992 represented a 70.8% increase from net earnings of
$1,382,000 for 1991.
TOTAL FINANCE REVENUE
Commercial leasing and financing revenue was $17,401,000 in 1993,
$18,869,000 in 1992, and $20,785,000 in 1991.
The decrease in commercial leasing and financing revenue in each of the
past two years is attributable primarily to lower effective yields on the
lease and loan portfolio. Lower yields result from both relatively lower
interest rates which tend to depress the Company's lease and loan rates, and
to the mix of the Company's newly acquired leases and loans, which has moved
to higher transaction sizes where credit quality and rate sensitivity are
believed to be higher.
The Company's sales efforts have resulted in an increase in total volume
of new leases and loans in 1993 compared to 1992. This increase in outstanding
finance receivables will increase the average outstanding balance of finance
receivables and will begin to offset the effect of lower yields. Net direct
finance lease receivables and commercial finance receivables totalled
$122,144,000 as of December 31, 1993 compared to $107,985,000 as of December
31, 1992.
While such revenue levels have been lower than preferred by the Company,
other factors have favorably impacted the Company, including reductions in
interest expense, certain operating expenses, and credit losses.
FINANCE REVENUE MARGIN
Finance revenue margin represents the difference between total finance
revenues and the amount the Company pays as interest on short-term borrowings
and long-term debt allocated to finance receivables. The Company's finance
revenue margin was $10,890,000 for 1993, $10,425,000 for 1992 and $10,869,000
for 1991.
The Company's finance revenue margin increased $465,000, or 4.5%, in 1993
from 1992. This increase in finance revenue margin was the result of a faster
decrease (22.9%) in interest expense than the 7.8% decrease in total finance
revenues. The average interest rate at which the Company prices its products
decreased 111 basis points to 14.43% in 1993 from 15.54% in 1992. The average
interest rate on the Company's borrowings decreased 149 basis points to 6.84%
in 1993 from 8.33% in 1992.
The Company's finance revenue margin decreased $444,000, or 4.1%, in 1992
from 1991, primarily due to a decline in finance receivables. This decrease in
finance revenue margin, however, was less than the 9.2% decrease in total
finance revenues, because of a 14.8% decrease in interest expense. The average
interest rate at which the Company priced its products decreased 161 basis
points to 15.54% in 1992 from 17.15% in 1991. The average interest rate on the
Company's borrowings decreased 138 basis points to 8.33% in 1992 from 9.71% in
1991.
The 1993 increase in finance revenue margin was due to the purchase of two
portfolios of finance receivables, during 1993, at a higher interest rate
spread. The Company continues to market higher average balance commercial
leasing and financing contracts, with lower yields to achieve improved asset
quality and economies of operations. As a consequence, the Company expects a
future decrease of its finance revenue margin. The Company's Asset and
Liability Committee reviews this risk regularly and manages the matching of
debt with these finance receivables.
PROVISION FOR POSSIBLE LEASE AND LOAN LOSSES
The provision for possible lease and loan losses decreased $617,000
(28.2%) to $1,573,000 in 1993 and decreased $2,390,000 (52.2%) to $2,190,000
in 1992. The following table details the components of the provision for
possible lease and loan losses as of and for the years ended December 31,
1993, 1992 and 1991.
20
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------
PROVISION ALLOWANCE
FOR POSSIBLE FOR GROSS ALLOWANCE
LEASE AND NET LOSS EXPERIENCE POSSIBLE INVESTMENT AS A % OF
YEAR LOAN ---------------------------------------- ACQUIRED LEASE AND LOAN IN GROSS
ENDED LOSSES CHARGE-OFFS RECOVERIES NET LOSSES ALLOWANCE LOSSES RECEIVABLES RECEIVABLES
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LEASING AND FINANCING
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $1,573 (2,736) 1,136 (1,600) 852(A) $5,438 $144,313 3.77%
1992 $2,190 (3,205) 1,178 (2,027) 240(A) $4,613 $127,880 3.61%
1991 $4,580 (5,033) 1,095 (3,938) 225(A) $4,210 $131,267 3.21%
<FN>
(A) The balance of the allowance for possible lease and loan losses increased as a result of the acquisition of portfolios of
finance receivables.
</TABLE>
The Company maintains an allowance for possible lease and loan losses
based on a periodic evaluation of the finance receivable portfolio. Management
considers current economic conditions, diversification of the loan portfolio,
historical loss experience, results of loan reviews, borrower's financial and
managerial strengths, the adequacy of underlying collateral and other relevant
factors in its evaluation. While management uses the best available
information to make such evaluations, future adjustments to the allowance may
be necessary if conditions differ substantially from the assumptions used in
making the evaluation. This allowance reflects an amount that in management's
opinion is adequate to absorb known and inherent losses in the portfolio.
Receivables which are determined to be uncollectible are charged off against
the allowance for possible lease and loan losses, and recoveries on accounts
previously charged off are credited to it.
As of December 31, 1993, the Company allocated $290,000 of the allowance
for possible lease and loan losses in anticipation of future losses on certain
individually significant accounts. This allocated allowance decreased
$125,000 in 1993 over 1992. As of December 31, 1992, the Company allocated
$415,000 of the allowance for possible lease and loan losses in anticipation
of future losses on certain individually significant accounts. This allocated
allowance increased $83,000 in 1992 over 1991.
The Company's net charge-offs of commercial leasing and financing
receivables decreased by $427,000, or 21.1%, in 1993 over 1992. The Company's
net charge-offs of commercial leasing and financing receivables increased by
$1,911,000 or 48.5%, in 1992 over 1991. The decrease in net losses was the
result of improved underwriting standards, improved adjusting procedures,
aggressive use of legal remedies, strong remarketing efforts, and a somewhat
healthier economy.
The Company continues to improve its asset quality and control the
delinquency of receivables. The Company's tighter credit standards and more
focused efforts within several market niches, has enhanced asset quality. In
certain situations, larger down payments, additional security deposits, and/or
shorter terms are now required. An asset review committee monitors the quality
of the Company's assets. The Company's improved collection and adjusting
procedures have resulted in effective control of delinquent receivables.
Management believes the allowance for possible lease and loan losses is
adequate to cover estimated future credit losses.
NET OPERATING LEASE REVENUES
Net operating lease revenues represent rents on real estate and equipment
operating leases offset by related interest and depreciation expenses. Net
operating lease revenues increased $61,000 or 3.1% in 1993 over 1992, although
total operating lease revenues decreased $254,000 or 4.3% to $5,681,000. The
decrease in total operating lease revenues is due primarily to decreases in
lease revenue resulting from the sale of two properties in 1993 and the write-
off of uncollectible rents, offset by rents received on certain properties
which were on a non-accrual basis in 1992, and the collection lease arrearages
on three properties. Interest expense attributable to net operating lease
revenues decreased $289,000 due to lower interest rates on a portion of the
outstanding mortgage debt and less mortgage debt outstanding during the
period. Depreciation expense attributable to net operating leases decreased
$26,000, primarily the result of the lower basis for certain real estate
21
<PAGE>
properties due to the write-down to fair value during 1992, and the sale of
two properties, offset by an increase in depreciation due to equipment
operating leases generated in 1993.
Net operating lease revenues increased $666,000 or 51.6% in 1992 over
1991. Total operating lease revenues increased $596,000 or 11.2% to
$5,935,000. The increase in total operating lease revenues is due primarily to
revenue earned during 1992 on a real estate property acquired in May, 1991,
collection of lease arrearages from tenants in three properties, and rental
income from two partnerships, previously accounted for on the equity method,
now included in the consolidated financial statements due to the Company's
acquisition of a controlling interest in these partnerships. Interest expense
attributable to net operating lease revenues decreased $157,000 in 1992 over
1991 due to lower interest rates on a portion of the outstanding debt in 1992.
Depreciation expense attributable to net operating leases increased $87,000.
The Company's principal objective with its real estate business for the
foreseeable future is to (1) manage its properties aggressively, (2) maintain
the integrity of the assets through appropriate capital expenditures, (3)
accelerate paydown of the debt associated with those properties as available
cash flow permits, (4) continue to refinance mortgage debt at more attractive
rates, and (5) hold the assets until commercial real estate market conditions
improve at which time(s) the Company may consider selling individual
properties or groups of properties. Additionally, the Company may consider
purchasing real estate assets in 1994 since certain market conditions have
improved.
The Company's aggregate investment in real estate is not expected to
significantly appreciate in value over the next several years. In addition,
net operating lease revenues from some existing investments may decline in the
short to intermediate term, as rents under many existing leases are expected
to remain flat or decrease as leases expire over the next several years. While
this will tend to depress the Company's profitability in its real estate
operations for a period of time, it is expected that the Company's real estate
investments (after third party mortgage debt service obligations and overhead
expenses) will continue to provide positive cash flow to the Company.
The commercial real estate business is subject to several risks which
management reviews on a regular basis. These risks are identified below with
the status of each as of December 31, 1993:
1. Credit risks.
There are various levels of credit risks inherent in the Company's
lease receivables. A total of $21,200 of rents were thirty or more days
past due of which $12,300 represents amounts due from one tenant.
2. General market conditions nationally or within specific geographic
areas.
The Company is maintaining an ownership interest, ranging from 10% to
100%, in 41 real estate properties with an original cost of $63,801,000
in the following states, with the percentage of concentration indicated
in parenthesis: Pennsylvania (30%), Florida (27%), New Jersey (14%),
Ohio (10%) and other (19%).
3. Greater difficulty in releasing or selling special purpose buildings.
The Company's special purpose buildings include three day-care
facilities and one nursing home. None are presently for sale and all
are fully occupied. The Company also owns and manages three limited-
service hotels.
4. Vacancies.
Presently there are partial vacancies in seven real estate projects
which may require additional cash from the Company until the properties
are substantially leased. Management is actively pursuing new tenants
for these properties.
22
<PAGE>
5. Property repairs and improvements.
Preservation of the quality and value of commercial real estate
properties requires that repairs and improvements occur regularly. In a
majority of the Company's properties, the obligation to incur such
expenditures has been passed to the tenants. Provided the tenants have
the financial resources to comply, the Company is able to avoid or
defer this responsibility. In other cases, the responsibility is
retained by the Company, and repairs and improvements are funded out of
current operating lease cash flows or through cash reserves; and if
necessary through increased investments or additional borrowings. It is
estimated that, not including potential ADA requirements as discussed
below, up to approximately $672,000 of improvements may be made within
the next twelve months.
The timing and amount of repairs or improvements is determined by the
operating history and present level of operating lease revenue levels
of the property, by the Company's plans for a property (such as a sale,
lease, or renovation), and in some cases by regulatory directives. In
1992, the Americans with Disabilities Act ("ADA") was passed, requiring
the improvement of many properties under certain conditions in order to
accommodate the needs of the physically disabled. In certain of the
Company's properties, meeting ADA requirements will necessitate
improvements at various times. The Company has not finalized its review
but estimates that the cost of improvements will not be material
relative to the cost of the property.
6. Inability to obtain the extension or replacement of existing mortgage
loans as they mature.
The extensions or replacement of existing mortgage loans as they come
due continue to involve a higher degree of risk in the current and
reasonably foreseeable environment than was previously the case. Such
loans, when available, are frequently at lower loan amounts. In 1994,
approximately $855,000 of third party mortgage debt will come due and
will require negotiation or replacement financing. It is expected that
a substantial portion of this debt will be renegotiated for extended
terms with existing lenders. To the extent any such debt is not
extended in maturity, the Company expects to seek funding from other
lenders or provide funding internally, if necessary.
7. Valuation of real estate properties.
A decline in the market value of the Company's investment in real
estate can provide risk to the Company in several ways. To the extent
the declines indicate a reduction in the rentals expected on a
property, the Company will experience a decline in operating lease
revenues. Also, lower values can reduce the amount of available loan
borrowings or equity capital available from third parties to the
Company to fund its continued ownership of the properties, and can
reduce eventual sale proceeds if properties are sold and values have
not recovered.
In general, conditions affecting the value of individual properties can
change from period to period. Conditions include an extremely wide
variety of factors outside the control of the Company. In the case of
many of the Company's real estate operating leases, a change in
conditions can also include the early termination of a favorable lease
caused by a tenant's financial difficulties or the modification of such
a lease arising out of the negotiation of a new lease with a tenant.
The Company is presently in negotiations involving several of its
properties, any of which may result in lower operating lease revenues
in future periods.
As of December 31, 1993, three properties were believed to have an
estimated current fair value materially below book value. Accordingly,
these properties were written down as of the date of the determination.
OTHER OPERATING REVENUES
Other operating revenues increased $4,283,000 to $2,575,000 in 1993 from a
loss of $1,708,000 in 1992. The loss in 1992 resulted from the write-down of
23
<PAGE>
the Company's real estate portfolio by $4,302,000 in June 1992. A $488,000
provision for write-down of real estate was recorded in 1993 (see "Business --
Real Estate -- Write-down"). Customer service fees decreased $260,000
primarily due to a reduction in insurance premiums earned as a result of the
discontinuance of the lease insurance program in mid-1992 and fewer late
charges earned. Management income decreased $88,000 primarily due to
nonrecurring fees earned in 1992 from the negotiation of the sale of certain
equipment. Furniture and equipment sales increased $296,000 due to the entry
into the modular furniture business and the achievement of good volume. The
Company's share of losses in unconsolidated real estate partnerships decreased
$190,000. Gain on sale of debt and equity securities increased $405,000. Other
income decreased $74,000.
Other operating revenues decreased $4,919,000, in 1992 from 1991.
$4,302,000 of the decrease is attributable to the provision for write-down of
real estate (see "Business -- Real Estate -- Write-down"). Customer service
fees decreased $179,000 due to fewer leases and loans in 1992, and management
and broker income decreased $12,000. Furniture and equipment sales increased
$291,000 due to the expansion of the service department and improved volume of
computer sales. The Company's share of losses in unconsolidated real estate
partnerships increased $133,000. Other income decreased $588,000 in 1992 from
1991. Other income in 1992 includes gains of $149,000 from the sale of a
building and $69,000 from the disposition of property under a capitalized
lease. Other income in 1991 included gains totalling $547,000 recognized on
the sale of interests held in three real estate partnerships, and a $44,000
gain from the sale of a building.
OPERATING EXPENSES
Operating expenses decreased $152,000 (1.7%) to $8,831,000 in 1993.
Salaries, related taxes, and employee benefits decreased $80,000 (1.7%) due to
a reduction in number of employees, offset by an increase in incentive
compensation. Depreciation and amortization decreased $36,000 (6.0%) primarily
due to a reduction in lease insurance expense due to the discontinuance of
this program in July 1992, offset by the write-off of deferred costs
associated with a mortgage which was subsequently refinanced. All remaining
expenses decreased $36,000 (1.0%) due to an across the board reduction in
expenses offset by fees paid to third party management companies to assist in
managing the day-to-day operations of most of the real estate properties owned
by the Company (this increase, however, is offset by a reduction in salary
expense for the Company's real estate investment subsidiary) and consultant
expenses incurred due to the acquisition of the capital stock of Canyon
Capital, Inc. in June 1993 (see "Business -- Commercial Leasing and Commercial
Financing -- Acquisitions"). Although the Company contained operating expenses
based on the above analysis, further expense reductions are necessary due to
an anticipated decrease in finance revenue margin.
Operating expenses increased $533,000 (6.3%) to $8,983,000 in 1992.
Salaries, related taxes, and employee benefits increased $160,000 (3.6%) due
to the removal of a salary freeze, an increase in incentive compensation, and
termination pay for several employees. Depreciation and amortization decreased
$165,000 (21.7%) due to fewer asset acquisitions. All remaining expenses
increased $538,000 (16.8%) due primarily to an increase in real estate
expenses incurred by two real estate partnerships previously accounted for on
the equity method, now included in the consolidated financial statements due
to the Company's acquisition of a controlling interest in these partnerships.
PROVISION FOR INCOME TAXES
Income taxes for 1993 were $1,900,000; for 1992 were $144,000 (including
$241,000 of state income taxes for the Company's profitable subsidiaries); and
for 1991 were $888,000. The effective income tax rates for 1993, 1992 and 1991
were 37.4%, 28.8% and 38.0%, respectively (see note L to the consolidated
financial statements). The effective tax rate is higher than the statutory
federal income tax rate due principally to the provision for state income
taxes, net of federal tax benefit.
24
<PAGE>
Income taxes for 1993 increased $1,756,000 due to higher pre-tax income.
Income taxes for 1992 decreased $744,000 due to a pre-tax loss, principally
the result of the net provision for real estate write-down which provided a
$1,310,000 income tax benefit.
Effective January 1, 1993, the Company adopted SFAS No. 109. The
cumulative effect of this change in the method of accounting for income taxes
is $0 to the 1993 consolidated statement of operations (see note A to the
consolidated financial statements).
NET INVESTMENT IN FINANCE RECEIVABLES AND PROPERTY UNDER OPERATING LEASES
Net direct finance lease receivables and commercial finance receivables
totaled $122,144,000 as of December 31, 1993 compared to $107,985,000 as of
December 31, 1992, a net increase of $14,159,000 for the year. Property under
operating leases, net of accumulated depreciation, decreased $3,108,000,
resulting from normal depreciation, the sale of two properties, and the write-
down of certain real estate properties (see "Business -- Real Estate -- Write-
down".)
The increase in finance receivables was in accordance with the Company's
growth plans. The Company's sales efforts have generated a larger volume of
new leases and loans in 1993 due to increased penetration into focus markets,
while maintaining the Company's policy of tight credit standards. In addition,
the Company obtained the lease and loan portfolio of Canyon as part of the
purchase of that company on June 1 (see "Business -- Commercial Leasing and
Commercial Financing -- Acquisitions"), and the Company purchased a lease and
loan portfolio for $3,914,000 in cash on September 30. Future originations
will be dependent to a large extent upon economic conditions and the Company's
ability to sell services in a competitive market environment. The Company
continues to look for opportunities to acquire portfolios of leases and loans
which will compliment the Company's existing finance receivables.
The change in property under operating leases is in accordance with
management strategy. Due principally to the reduced availability of mortgage
debt financing and the illiquidity in most commercial real estate markets
(including those in which the Company owns properties), the Company, at the
present time, is primarily holding its assets for investment purposes, except
in limited circumstances, since the Company ceased acquiring properties in
1991. Purchases of real estate assets may be considered in 1994 since certain
market conditions have improved. Sales are considered at various times
depending on such factors as pricing, capital needs, and tenant interests.
LIQUIDITY
Liquidity represents the Company's ability to meet ongoing financial
obligations. The Company's ongoing liquidity is dependent upon continued
profitability and collection of its receivables and rentals, the ability to
sell equipment or collect purchase option payments at the conclusion of
maturing equipment leases, the sale of Subordinated Investment Certificates,
the ability to secure new senior debt (loans from banks and other financial
institutions), the ability to secure real estate mortgage financing, to sell
real estate, and to sell equity interests in real estate partnerships, and
other financing, and the ability to expand furniture and equipment sales
activities.
Net cash provided by continuing operating activities was $7,175,000 for
1993, $7,411,000 for 1992 and $7,044,000 for 1991.
The Company's direct finance lease receivables and equipment operating
leases are funded primarily with unsecured senior debt. The Company generally
attempts to match new leases with borrowings of like maturity and amount in
which the interest rate is fixed at the time of the borrowing. Additionally,
the Company borrows term debt with varying maturities and short-term floating
interest rate debt, and uses Subordinated Investment Certificate debt. The
Company's commercial finance receivables are similarly match funded by various
forms of unsecured senior debt and Subordinated Investment Certificate debt.
The Company has unused lines of credit totalling $51,871,000 as of December
31, 1993. (See "Capital Resources").
25
<PAGE>
The Company's investment in real estate (property under operating leases)
is leveraged substantially with borrowings by the Company. Much of the debt is
comprised of mortgage loans securing individual properties. Of the mortgage
debt, a substantial amount is nonrecourse to the Company, with the balance
being recourse through guarantees by Horrigan American, Inc. or its real
estate subsidiary. Of the investment in real estate not funded with mortgage
debt, a substantial amount is funded indirectly by the Company with
Subordinated Investment Certificate debt.
In the opinion of management, the Company's liquidity position is
sufficient under present circumstances.
CAPITAL RESOURCES
Future growth of the Company will depend in significant measure on its
ability to obtain additional lines of credit and other financing, the
continued sale of Subordinated Investment Certificates, the sale of equity
interests in real estate partnerships and continued profitability. As of
December 31, 1993, the Company had the following debt structure:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
DEBT OUTSTANDING AND
AVAILABILITY/LINES OF CREDIT
---------------------------------------------------
TOTAL IN
AVAILABILITY USE UNUSED
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Borrowings:
Investment Certificate.............................................. $ -- $ 2,805 $ --
Fixed Rate.......................................................... 23,503 13,500 10,003
Floating Rate....................................................... 5,000 -- 5,000
------------ ------------ ----------
Sub-Total....................................................... 28,503 16,305 15,003
------------ ------------ ----------
Long-Term Debt:
Recourse
Investment Certificate.............................................. -- 25,964 --
Junior Subordinated Debt............................................ -- 103 --
Unsecured Funding Program........................................... 87,193 50,325 36,868
Fixed Rate.......................................................... 12,997 12,997 --
Term Loan........................................................... -- 411 --
Real Estate Mortgages............................................... -- 5,080 --
Nonrecourse
Real Estate Mortgages............................................... -- 18,358 --
Floating Rate....................................................... -- 77 --
------------ ------------ ----------
Sub-Total....................................................... 100,190 113,315 36,868
------------ ------------ ----------
TOTAL DEBT............................................................ $ 129,620
============
TOTAL AVAILABILITY.................................................... $ 128,693 $ 51,871
============ ==========
</TABLE>
Total stockholders' equity increased by $2,647,000 from December 31, 1992
to December 31, 1993 due to the net earnings of $3,047,000 for 1993 and the
net unrealized holding gains for available-for-sale securities ($1,374,000),
offset by the payment of dividends ($475,000) and the purchase of treasury
stock ($1,373,000).
Refer to Notes H and I to the consolidated financial statements for
disclosure of the outstanding short-term and long-term debt, including lines
of credit information. In the opinion of management, the Company's capital
resources are sufficient under present circumstances to satisfy its capital
requirements based upon present asset growth projections, current leverage,
continued profitability and historic ability to secure new sources of
borrowings.
INFLATION
The Company's financial statements, and the related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which generally require the measurement of financial
26
<PAGE>
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on the operation of the Company is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's performance than the effects of general levels of inflation.
INTEREST RATES
Interest rates do not necessarily move in the same direction or in the
same magnitude as the price of goods and services. Management believes that
continuation of its efforts to manage the rates, liquidity and interest
sensitivity of the Company's assets and liabilities is necessary to generate
an acceptable return on assets and return on equity.
Interest rate sensitivity management seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest margins
through periods of changing interest rates.
Interest rate risks arise when interest-earning assets mature or when
their rates of interest change in time frames that are different from those of
interest-bearing liabilities. The matching of assets and liabilities may be
analyzed by examining the extent to which they are "interest rate sensitive"
and by monitoring an institution's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to result in an increase
in net interest income. During a period of falling interest rates, a negative
gap would tend to result in an increase in net interest income while a
positive gap would tend to adversely affect net interest income.
The rate of growth in interest free sources of funds (e.g., stockholders'
equity) will influence the level of interest sensitive funding sources. In
addition, the absolute level of interest rates will affect the volume of
earning assets and funding sources. As a result of these limitations, the
interest sensitivity gap is only one factor to be considered in estimating the
net finance revenue margin. The Company monitors and adjusts the gap position,
taking into consideration current interest rate projections, and maintaining
flexibility if rates move contrary to expectations.
As of December 31, 1993, the Company had a three-month negative cumulative
gap of 3.7%, a six-month negative cumulative gap of 3.8% and a twelve-month
negative cumulative gap of 2.4% on total earning assets of $146,464,000. The
cumulative gaps for years two through ten ranged from 18.5% positive to 3.1%
positive. These percentages are reflective of scheduled principal payments only
and have not been adjusted for anticipated early pay-offs. The relatively short
duration of many of the Company's earning assets indicates that the interest
rate sensitivity gap will probably remain within its present, rather narrow,
margin under current market interest rate conditions. Management believes the
Company's cumulative gap ranges are satisfactory for achieving acceptable net
interest margins.
DESCRIPTION OF SUBORDINATED INVESTMENT CERTIFICATES
GENERAL
This section summarizes the principal provisions of the various documents
referred to herein. For a complete description of their terms, reference is
27
<PAGE>
made to the documents themselves, copies of which have been filed with the
Securities and Exchange Commission as exhibits to the registration statement
of which this prospectus is a part.
The Company (which, in this section, refers only to Horrigan American,
Inc.) is offering five series of Subordinated Investment Certificates
(collectively, the "Certificates"). The Certificates are issued under an
Indenture dated July 21, 1977, between the Company and First Eastern Bank,
Wilkes-Barre, Pennsylvania, as trustee (the "Trustee"), as amended by various
supplemental indentures (such Indenture, as so amended, being herein referred
to as the "Indenture").
The Indenture does not limit the amount of Certificates which may be
issued, and it provides for the Company and the Trustee to enter into one or
more further supplemental indentures providing for the issuance of additional
series of subordinated investment certificates with the same or different
interest rates, maturities, and other terms and conditions. The Indenture does
not limit the amount of certificates which may be issued under any such
supplemental indenture.
Subordination
The indebtedness evidenced by the Certificates and any accrued interest
thereon are part of the Company's subordinated debt. In the event of the
Company's bankruptcy or other liquidation, holders of the Certificates will be
entitled to be paid principal of and interest on the Certificates only after
the payment in full of the Company's indebtedness (including indebtedness of
others guaranteed by the Company) for borrowed money or on account of
capitalized lease obligations or the deferred purchase price of property or
reimbursement obligations under letters of credit whether incurred before or
after the issuance of the Certificates ("Senior Debt"). The Company has agreed
that upon maturity of or default on any of its Senior Debt the Company will
not make any payment of principal of or interest on the Certificates until the
matured Senior Debt has been paid or any default in respect thereof has been
cured or waived. The Indenture does not limit the amount of Senior Debt which
the Company may incur. A default under any of the Certificates would be a
default under the terms of substantially all the Company's Senior Debt. (For
further information regarding the relative position of the Certificate holders
with respect to other creditors see "Capitalization.")
Redemption by the Company
The Company, at its option and upon not less than thirty days' written
notice to the registered holders by certified or registered mail, may redeem
any or all of the Certificates at any time prior to maturity at 100% of the
principal amount together with interest accrued to the date fixed for
redemption, after which interest will cease to accrue. The Company may in its
discretion redeem Certificates of one series without redeeming Certificates of
any other series and may redeem Certificates bearing one rate of interest
without redeeming Certificates of the same series bearing a different rate of
interest. In case of redemption by the Company of less than all of the
Certificates bearing the same rate of interest, the Company will select the
Certificates to be redeemed by lot, or by another method which the Company
deems fair and appropriate.
Place and Method of Payment
Principal of and interest on the Certificates will be payable at the
principal office of the Company in Reading, Pennsylvania, and at such other
locations as the Company may designate from time to time. At the option of the
Company, however, payment may be made by check or draft mailed to the person
or persons entitled thereto at the address appearing in the register which the
Company will maintain for this purpose. The Company is not obligated to pay
the principal of a redeemed or matured Certificate until it is surrendered to
the Company duly endorsed by the registered holder.
28
<PAGE>
Form
All Certificates will be issued in fully registered form as to both
principal and interest. The Company will be entitled to treat the registered
holder shown on its records as the owner of the Certificate for all purposes.
Ownership of a Certificate may be registered in the name of any two or more
named persons as joint tenants with right of survivorship, as tenants in
common or as tenants by the entireties, and payment of principal of and
interest on any Certificate so registered will be made to the person or
persons entitled to receive such payment as their interests may appear.
THE PASSBOOK SERIES CERTIFICATES
Maturity and Redemption by the Holder
The Passbook Series Certificates have no stated maturity and will remain
outstanding until redeemed by the Company or by the holder. A Passbook Series
Certificate may be redeemed by the holder at any time on demand, but it is not
transferable to a third party. Redemptions will be recorded in the holder's
passbook where the corresponding purchases of the Certificates to be redeemed
have been recorded. Each Passbook Series Certificate purchased remains a
separate security and may be redeemed only in its entirety in the denomination
in which it was first issued and not in any fraction thereof. Any number or
combination of Passbook Series Certificates may be redeemed at one time.
Interest
The Company will establish an interest rate for all outstanding Passbook
Series Certificates on the first day of each month, and interest will accrue
at that rate during that month. No interest will be paid on a Passbook Series
Certificate which is redeemed by the holder before the eighth day after the
date of its issuance. Otherwise, interest will accrue from the date of
issuance until payment or redemption at the rates in effect from time to time.
Interest is not compounded and is not exempt from federal, state or local
taxes. Interest is payable semiannually (each June 1 and December 1) to the
holder, but upon the written request of a holder of Passbook Series
Certificates in the aggregate principal amount of $10,000 or more, interest
will be paid either quarterly or monthly.
Form and Denominations
Each Passbook Series Certificate will be evidenced by an entry in a
passbook issued to the holder at the time of his initial purchase. Subsequent
purchases by the holder will be recorded on this same passbook. The Passbook
Series Certificates may be purchased in denominations that are multiples of
$100 between $500 and $50,000, inclusive. A single purchase of less than $500
is not permitted. An investment in excess of $50,000 must be made by
purchasing a combination of individual certificates of the above-listed
denominations, and will be recorded as a series of separate purchases on the
holder's passbook. An aggregate investment of more than $500,000 by a single
holder will not be permitted, including investment in various passbook series
Certificates formerly issued by the Company.
THE FIXED RATE CERTIFICATES
The 1994 Series 8, A, B and C Subordinated Investment Certificates are
referred to in this section as the "Fixed Rate Certificates."
Maturity and Early Redemption by the Holder
Each 1994 Series 8 Certificate matures eight years after the date of its
original issuance. Each 1994 Series A Certificate matures six years after the
date of its original issuance. Each 1994 Series B Certificate matures 30
29
<PAGE>
months after the date of its original issuance. Each 1994 Series C Certificate
matures 12 months after the date of its original issuance.
Any of the Fixed Rate Certificates may be redeemed by the holder at any
time after 30 days following the date of its original issuance upon the death
of any of the registered holders for a period of one year from the date of
death. The Company may require up to 30 days' notice of any such redemption
and may require satisfactory proof of death and of other matters affecting the
right of the person requesting payment.
Interest
Interest on the Fixed Rate Certificates accrues from the date of issuance
until payment or redemption at a fixed rate stated on the face of the
Certificate, which will depend upon the date of issuance. The Company will
establish a rate on the first day of each month for Fixed Rate Certificates
issued during that month.
Interest is payable semi-annually each June 1 and December 1 to the
registered holder, but at the option of the holder of a Certificate in the
principal amount of $10,000 or more, interest will be paid either quarterly or
monthly. Interest payments will be made to the persons who were the registered
holders of the Certificates at the close of business on the 20th day (whether
or not a business day) of the calendar month next preceding an interest
payment date.
Automatic Roll-Over
When a Fixed Rate Certificate matures, unless the holder or the Company
otherwise elects, it will automatically "roll over" into a fixed rate
subordinated investment certificate of the series then being offered with the
same term as the maturing Certificate. The new certificate will bear interest
at the then current interest rate for newly issued certificates of that
series. It is expected that the terms of future series of subordinated
investment certificates will include similar roll-over provisions.
The Company will send the holder notice of the automatic roll-over and a
copy of the then current prospectus for the series of certificates being
offered at least 15 days before maturity. The Company will also send the
holder notice of the interest rate for the series of new certificates being
offered on approximately the first day of the month in which the holder's
Certificate matures. The holder may elect not to roll over his Certificate by
presenting it for payment at maturity or within ten days thereafter, in which
case interest will be paid only to the maturity date. If a maturing
Certificate is not presented within that time, it will not thereafter be
redeemable by the holder before the new maturity date except in accordance
with the provisions of the new certificate. Promptly after a Fixed Rate
Certificate has rolled over, the Company will prepare and deliver to the
holder a confirmation showing the new maturity date and interest rate. The
Company's obligation under the newly issued certificate will be represented by
the Certificate originally issued and by the current confirmation.
The Company may elect not to roll over a maturing Fixed Rate Certificate
by sending notice to that effect to the holder at least 15 days before the
maturity date.
Denominations
The 1994 Series 8 and Series A Certificates may be purchased in $1,000
minimum denominations, and the 1994 Series B and C Certificates may be
purchased in $500 minimum denominations. Fixed Rate Certificates will be
issued only in multiples of $100.
OTHER PROVISIONS OF THE INDENTURE
Modification of the Indenture
The Indenture may be modified by the Company and the Trustee at any time
or times with the consent of the holders of a majority in principal amount of
the Certificates then outstanding thereunder, but if a proposed modification
30
<PAGE>
would affect the rights of less than all holders of such Certificates, only
the consent of a majority of holders whose rights would be affected need be
obtained. In no event may any modification be made which will affect the terms
of payment of the principal of, or any interest on, any Certificate
outstanding under the Indenture, or reduce the percentage of Certificate
holders whose consent to modification is required, without the consent of the
holders of every Certificate affected thereby. However, the Indenture provides
that, without notice to or action by Certificate holders, (1) the interest
rate (including the method of determining the interest rate), minimum interest
rate, if any, maturity, provisions relating to redemption by the holder, and
the authorized denominations of unissued Certificates available to be issued
under the Indenture may be modified prospectively from time to time by notice
from the Company to the Trustee, and (2) the Company and the Trustee may enter
into supplemental indentures providing for the issuance of additional series
of Certificates at the same or different rates of interest and upon the same
or different terms and conditions. No such modification or supplemental
indenture will affect previously issued Certificates. The Company and the
Trustee may also enter into supplemental indentures adding covenants or
agreements of the Company for the protection of the Certificate holders, or
clarifying any ambiguity or correcting any defect in the Indenture, consistent
with its terms, without notice to or action by the Certificate holders.
Default and Remedies
The following constitute events of default under the Indenture and the
Certificates: (a) default for a period of thirty days in the payment of
interest on any Certificate; (b) default in the payment of principal of any
Certificate at its maturity; (c) breach of other covenants made by the Company
in the Indenture and continuation thereof for a period of 30 days after notice
thereof has been given in the manner provided in the Indenture; (d) the
institution by the Company of bankruptcy, reorganization, arrangement or
insolvency proceedings, or other proceedings for relief under any bankruptcy
or similar law or laws for the relief of debtors, or the institution against
the Company of such proceedings which are consented to or are not dismissed
within 60 days after such institution.
The Indenture provides that the holders of a majority in aggregate
principal amount of the Certificates at the time outstanding thereunder may,
on behalf of all holders, waive any past default or event of default except in
payment of principal of or interest on the Certificates.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an event of default shall occur and be continuing, the
Trustee shall be under no obligation to exercise any of its rights or powers
under the Indenture at the request, order or direction of any of the
Certificate holders, unless such Certificate holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, the holders of a majority in principal amount
of the Certificates at the time outstanding under the Indenture shall have the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any power conferred on the
Trustee. The Indenture contains limitations on the right of any individual
Certificate holder to institute legal proceedings in the event of default by
the Company.
Satisfaction and Discharge of Indenture
The Indenture may be discharged upon the payment of all Certificates
outstanding thereunder or upon deposit in trust of funds sufficient therefor,
as provided in the Indenture.
The Trustee
The Trustee under the Indenture is First Eastern Bank, Wilkes-Barre,
Pennsylvania. The Indenture permits the Trustee to hold Senior Debt and to be
entitled to the rights of a holder of Senior Debt. The Company currently has
no relationship with the Trustee other than the Indenture. However, it has
been announced that PNC Bank, National Association ("PNC") and the Trustee
31
<PAGE>
have agreed that PNC will acquire the Trustee, subject to the shareholder and
regulatory approval, in the second quarter of 1994. The Company has credit
facilities with PNC in the amount of $18,000,000 at January 31, 1994. Amounts
outstanding under this facility constitute Senior Debt.
LEGAL OPINION
The legality of the Certificates offered hereby has been passed upon for
the Company by Drinker Biddle & Reath, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107.
EXPERTS
The consolidated financial statements of Horrigan American, Inc. and
subsidiaries, as of December 31, 1993 and 1992, and for each of the years in
the three-year period ended December 31, 1993 have been included herein in
reliance upon the report of KPMG Peat Marwick, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
This prospectus does not contain all of the information set forth in the
registration statement relating to this offering which has been filed with the
Securities and Exchange Commission, Washington, D.C. For further information
with respect to the Company or the Certificates offered hereby, reference is
made to the registration statement, including the exhibits thereto.
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
HORRIGAN AMERICAN, INC.
We have audited the accompanying consolidated balance sheets of Horrigan
American, Inc. and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horrigan
American, Inc. and subsidiaries as of December 31, 1993 and 1992 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, and Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, in 1993.
KPMG PEAT MARWICK
February 2, 1994
Philadelphia, Pennsylvania
33
<PAGE>
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1992
------------ ------------
(In thousands)
--------------
<S> <C> <C>
Cash..................................................................................... $ 2,160 $ 2,202
Investments in debt and equity securities................................................ 2,697 719
Net investment in finance receivables.................................................... 122,144 107,985
Equity investments in real estate partnerships........................................... (8) 66
Property under operating leases, net..................................................... 31,631 34,739
Property and equipment, net.............................................................. 2,301 2,122
Other assets............................................................................. 4,028 5,430
------------ ------------
$ 164,953 $ 153,263
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.................................................................... $ 16,305 $ 9,894
Accounts payable and accrued expenses.................................................... 4,244 2,989
Customer deposits........................................................................ 2,188 1,038
Long-term debt:
Recourse............................................................................... 94,880 93,098
Nonrecourse............................................................................ 18,435 19,367
------------ ------------
Total Liabilities.................................................................. 136,052 126,386
------------ ------------
Minority interest........................................................................ 244 867
------------ ------------
Stockholders' equity:
Preferred stock, $100 par value: 8% noncumulative, nonvoting: autho-
rized 20,000 shares; issued and outstanding 1,952 shares............................. 195 195
Common stock, $1 par value: authorized 10,000,000 shares; issued
3,111,766 shares in 1993 and 3,597,666 shares in 1992; outstanding 3,111,766 shares
in 1993 and 3,300,298 shares in 1992................................................. 3,112 3,598
Capital in excess of par value......................................................... -- 1,215
Net unrealized holding gains for available-for-sale securities......................... 1,374 --
Retained earnings...................................................................... 23,976 22,639
Less treasury stock, at cost; 0 shares in 1993 and 297,368 shares
in 1992.............................................................................. -- (1,637)
------------ ------------
Total Stockholders' Equity......................................................... 28,657 26,010
------------ ------------
$ 164,953 $ 153,263
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
34
<PAGE>
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(In thousands, except per share amounts) 1993 1992 1991
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Finance revenues:
Commercial leasing and financing revenue.................................... $ 17,401 $ 18,869 $ 20,785
Interest expense............................................................ 6,511 8,444 9,916
---------- ---------- ----------
Finance revenue margin.................................................. 10,890 10,425 10,869
Provision for possible lease and loan losses................................ 1,573 2,190 4,580
---------- ---------- ----------
Finance revenues after provision for possible lease
and loan losses....................................................... 9,317 8,235 6,289
---------- ---------- ----------
Operating lease revenues:
Rents on real estate operating leases....................................... 5,556 5,850 5,281
Rents on equipment operating leases......................................... 125 85 58
---------- ---------- ----------
Total operating lease revenues.......................................... 5,681 5,935 5,339
Interest expense............................................................ 2,517 2,806 2,963
Depreciation................................................................ 1,147 1,173 1,086
---------- ---------- ----------
Net operating lease revenues............................................ 2,017 1,956 1,290
---------- ---------- ----------
Other operating revenues (losses):
Customer service fees....................................................... 1,218 1,478 1,657
Management and broker income................................................ 223 311 323
Furniture and equipment sales, net of cost of goods sold.................... 694 345 4
Equity loss in real estate partnerships.....................................
(39) (229) (96)
Provision for write-down of real estate..................................... (488) (4,302) --
Gain on sale of debt and equity securities.................................. 411 6 2
Other income................................................................ 556 683 1,321
---------- ---------- ----------
Total other operating revenues (losses)................................. 2,575 (1,708) 3,211
---------- ---------- ----------
Operating expenses:
Salaries and employee benefits.............................................. 4,566 4,646 4,486
Depreciation and amortization............................................... 560 596 761
Other taxes................................................................. 633 738 521
Credit and collection....................................................... 324 328 449
Other expenses.............................................................. 2,748 2,675 2,233
---------- ---------- ----------
Total operating expenses................................................ 8,831 8,983 8,450
---------- ---------- ----------
Earnings (loss) before income taxes and minority interest..................... 5,078 (500) 2,340
Income tax provision........................................................ 1,900 144 888
---------- ---------- ----------
Earnings (loss) before minority interest...................................... 3,178 (644) 1,452
Minority interest (income)/loss............................................. (131) 231 (70)
---------- ---------- ----------
Net earnings (loss)........................................................... $ 3,047 $ (413) $ 1,382
========== ========== ==========
Net earnings (loss) per common share.......................................... $ 0.92 $ (0.13) $ 0.41
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED NET UNREALIZED
CAPITAL LOSS ON HOLDING GAINS
IN EXCESS MARKETABLE FOR AVAILABLE-
PREFERRED COMMON OF PAR EQUITY FOR-SALE RETAINED TREASURY
(In thousands) STOCK STOCK VALUE SECURITIES SECURITIES EARNINGS STOCK
- ---------- ----------- ---------- ---------- ---------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1991............. $195 $3,568 $1,080 $(166) $ -- $22,253 $(1,173)
Net earnings............... -- -- -- -- -- 1,382 --
Cash dividends declared
($.086 per common share). -- -- -- -- -- (286) --
($8.00 per preferred
share)................. -- -- -- -- -- (16) --
Purchase of treasury
stock at cost --
29,498 shares............ -- -- -- -- -- -- (195)
Issuance of 12,465 shares
in connection with
incentive stock options.. -- 13 54 -- -- -- --
Issuance of 327 shares..... -- -- 2 -- -- -- --
Change in carrying
value.................... -- -- -- 166 -- -- --
------ -------- -------- ------- -------- --------- ---------
Balance as of
December 31, 1991........... 195 3,581 1,136 -- -- 23,333 (1,368)
Net loss................... -- -- -- -- -- (413) --
Cash dividends declared
($.080 per common
share)................. -- -- -- -- -- (265) --
($8.00 per preferred
share)................. -- -- -- -- -- (16) --
Purchase of treasury
stock at cost --
39,278 shares............ -- -- -- -- -- -- (269)
Issuance of 16,045 shares
in connection with
incentive stock options.. -- 16 76 -- -- -- --
Issuance of 476 shares..... -- 1 3 -- -- -- --
------ -------- -------- ------- -------- --------- ---------
Balance as of
December 31, 1992........... 195 3,598 1,215 -- -- 22,639 (1,637)
NET EARNINGS............... -- -- -- -- -- 3,047 --
CASH DIVIDENDS DECLARED
($.14 PER COMMON
SHARE)................. -- -- -- -- -- (459) --
($8.00 PER PREFERRED
SHARE)................. -- -- -- -- -- (16) --
PURCHASE OF TREASURY
STOCK AT COST --
200,566 SHARES........... -- -- -- -- -- -- (1,373)
ISSUANCE OF 11,300 SHARES
IN CONNECTION WITH
INCENTIVE STOCK OPTIONS.. -- 11 58 -- -- -- --
ISSUANCE OF 734 SHARES..... -- 1 4 -- -- -- --
RETIREMENT OF TREASURY
STOCK -- 497,934 SHARES.. -- (498) (1,277) -- -- (1,235) 3,010
CHANGE IN CARRYING VALUE,
NET OF TAX............... -- -- -- -- 1,374 -- --
------ -------- -------- ------- -------- --------- ---------
BALANCE AS OF
DECEMBER 31, 1993........... $195 $3,112 $ -- $ -- $1,374 $23,976 $ --
====== ======== ======== ======= ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(In thousands) 1993 1992 1991
- -------------- ---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Finance revenues received................................................. $ 15,498 $ 16,790 $ 17,988
Rentals and other cash received........................................... 9,534 9,115 8,455
Lease purchase options received........................................... 2,695 3,306 3,483
Dividends received........................................................ 26 36 43
Interest paid............................................................. (9,069) (11,395) (12,898)
Cash paid to suppliers and employees...................................... (9,027) (8,770) (8,686)
Income taxes paid......................................................... (2,482) (1,671) (1,341)
---------- ---------- ----------
Net cash provided by operating activities (note P)...................... 7,175 7,411 7,044
---------- ---------- ----------
Cash flows from investing activities:
Originations and purchases of finance receivables......................... (74,552) (57,064) (65,172)
Principal collections of finance receivables..............................
75,629 74,769 76,386
Acquisition of assets of Reli Financial Corp.............................. -- (21,404) --
Acquisition of capital stock of Canyon Capital, Inc.
(net of cash received) (note R)......................................... (4,138) -- --
Acquisition of debt and equity securities................................. (166) (106) (267)
Proceeds from sale of debt and equity securities.......................... 673 211 1,925
Acquisition of property under operating leases............................ (328) (369) (440)
Proceeds from sale of property under operating leases..................... 1,476 540 242
Acquisition of property and equipment..................................... (182) (282) (174)
Proceeds from sale of property and equipment.............................. 5 1 11
Acquisition of equity, partnership and long-term
investments............................................................. (164) (491) (798)
Proceeds from sale of equity, partnership and long-term
investments............................................................. 152 127 710
Insurance premium paid increasing cash value.............................. (30) (64) (12)
---------- ---------- ----------
Net cash provided by (used by) investing activities..................... (1,625) (4,132) 12,411
---------- ---------- ----------
Cash flows from financing activities:
Issuance of common stock.................................................. 74 96 69
Minority capital received................................................. -- 37 42
Dividends paid and partnership distributions.............................. (629) (522) (373)
Acquisition of treasury stock............................................. (1,373) (269) (195)
Short-term debt borrowings................................................ 87,250 59,640 130,905
Short-term debt repayment................................................. (84,986) (59,890) (141,705)
Long-term debt borrowings................................................. 54,236 51,581 50,953
Long-term debt repayment.................................................. (59,663) (58,041) (60,678)
Certificate borrowings.................................................... 6,307 9,000 7,801
Certificate repayment..................................................... (6,566) (6,364) (4,092)
Net change in customer deposits........................................... (242) (342) (305)
---------- ---------- ----------
Net cash used by financing activities................................... (5,592) (5,074) (17,578)
---------- ---------- ----------
Net increase (decrease) in cash............................................. (42) (1,795) 1,877
Cash at beginning of year................................................. 2,202 3,997 2,120
---------- ---------- ----------
Cash at end of year....................................................... $ 2,160 $ 2,202 $ 3,997
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements follows.
Principles of Consolidation
The consolidated financial statements include the accounts of Horrigan
American, Inc., eight wholly-owned subsidiaries (American Equipment Leasing
Co., Inc., AEL Leasing Co., Inc., American Commercial Credit Corp., AEL
Holdings, Inc., Horrigan American Securities, Inc., American Real Estate
Investment and Development Co., American Hotel Management, Inc. and The
Business Outlet, Inc.), and thirty real estate partnership investments,
wherein the Company is maintaining a controlling interest, ranging from 10% to
100% (the Company).
All significant intercompany balances and transactions have been
eliminated in consolidation.
Investments in ten real estate partnerships, wherein the Company is not
maintaining a controlling interest, are stated at cost plus equity in
undistributed net earnings since dates of acquisition.
Minority interest, as reported in the consolidated balance sheets,
includes the income or loss for the minority investors of real estate
partnerships. This minority interest balance fluctuates due to current year
income or loss, contributions to, and distributions from, the partnerships;
changes in ownership percentages; or the addition or deletion of partnerships
from the group of consolidated partnerships.
Investments in Debt and Equity Securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). This statement requires
investments in equity securities with a readily determinable fair value and
investments in all debt securities to be classified at the date of acquisition
in one of three categories. The three categories are (1) held to maturity --
carried at amortized cost; (2) available for sale -- carried at fair value
(with unrealized gains and losses flowing through a separate component of
stockholders' equity); and (3) trading account -- carried at fair value (with
unrealized gains and losses flowing through the income statement).
Effective December 31, 1993, the Company adopted SFAS No. 115. The fair
value of securities is based on quoted market prices. The cumulative effect of
this change in the method of accounting for the Company's investments in
securities is $1,374,000 and has been included as a separate component of
stockholders' equity as of December 31, 1993. Prior to 1993, the Company
carried all debt securities at amortized cost (because it had the intent and
ability to hold such securities until maturity) and all equity securities at
the lower of aggregate cost or market.
Net Investment in Finance Receivables
Net investment in finance receivables consists of commercial leasing and
financing receivables, and lease residual value receivables. Receivables are
stated at gross balances net of unearned income and net of the allowance for
possible lease and loan losses.
Real Estate Investment Activity
Included in Equity Investments in Real Estate Partnerships and Property
Under Operating Leases are various investments in commercial real estate. This
activity principally involves the formation and management of investment
partnerships, property management, and related advisory and funding
activities. The forty-one properties owned and managed as of December 31, 1993
are classified as follows: eighteen are office buildings, twelve are
industrial buildings, three are limited service hotels, five are various
retail centers and three are various other commercial
38
<PAGE>
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- CONTINUED
properties. Ten of the properties are multi-tenant, excluding the hotels.
Significant geographic concentrations (based on property cost) within the
portfolio are: Pennsylvania (30%), Florida (27%), New Jersey (14%) and Ohio
(10%).
Real estate properties are recorded at the lower of cost or net realizable
value. Properties that are believed to have experienced material decreases in
net realizable value below book value, of a permanent nature, are written down
in the current reporting period at the time of such determination. In making
such determinations, consideration is given to such factors as cash flows,
reserves, vacancy factors, capitalization rates and growth rates.
On a periodic basis, or upon the occurrence of a triggering event (e.g.,
default of a major tenant), management performs an internal valuation on such
properties. These valuations reflect current expectations relating to cash
flows, reserves, vacancy factors, capitalization rates and growth rates. If
such valuation results in the devaluation of a property, which management
believes is other than temporary, that valuation is recognized as a charge to
earnings in the current period.
Revenue Recognition
The accounting for nonrefundable fees and costs associated with
originating or acquiring loans and initial direct costs of leases is presented
in accordance with Statement of Financial Accounting Standards No. 91.
Income on direct finance leases included in the minimum lease payments is
deferred and earned on the interest method to reflect a constant periodic rate
of return on the net investment in the lease. Residual values of leased
equipment represent the estimated fair value of the equipment at the
conclusion of the lease. Residual values for direct finance leases are earned
on the interest method over the life of the related leases.
Income on commercial finance receivables is earned on the interest method
to reflect a constant periodic rate of return.
The accrual of income on finance receivables is discontinued once a
finance receivable becomes one day past due. Also, when in management's
judgment it is determined that a reasonable doubt exists as to the
collectibility of additional income, future payments are applied to the
principal balance only, and the finance receivable is classified as non-
performing.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114). This statement requires that certain
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate. SFAS No. 114 becomes
effective for the Company in 1995, although earlier adoption is permitted.
Management is currently analyzing the impact of SFAS No. 114 and does not
expect this statement to have a material effect on the Company's consolidated
financial position or results of operations.
Rentals from equipment operating leases are recognized as income when due.
Depreciation is provided on the double declining-balance method over the
useful life of the equipment as follows: transportation and machinery
equipment -- five years; office, data processing and other equipment -- four
to five years.
Rentals from real estate operating leases are recognized as income when
due. Depreciation is provided on the straight-line method over the useful life
of the property: nineteen to thirty-one and one-half years.
Allowance for Possible Lease and Loan Losses
The allowance for possible lease and loan losses is based on a periodic
evaluation of the finance receivable portfolio and reflects an amount that in
management's opinion is adequate to absorb known and inherent losses in the
portfolio.
39
<PAGE>
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- CONTINUED
Management considers a variety of factors when evaluating the allowance
recognizing that an inherent risk of loss always exists in the lending
process. Consideration is given to the impact of current economic conditions,
diversification of the loan portfolio, historical loss experience, results of
loan reviews, borrower's financial and managerial strengths, the adequacy of
underlying collateral and other relevant factors. While management uses the
best available information to make such evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluation. The provision for possible lease
and loan losses is charged to operating expense. Lease and loan losses are
charged directly against the allowance and recoveries on previously charged-
off leases and loans are added to the allowance.
Interest Rate Swaps
Interest rate swaps are entered into as hedges against fluctuations in the
interest rates of specifically identified liabilities. There is no effect on
the total liabilities of the Company, however, net amounts receivable or
payable under agreements designated as hedges are recorded as adjustments to
the interest expense related to the hedged liability.
Property and Equipment
Depreciation on fixed assets (not including property leased to others) is
provided primarily by the straight-line method over the estimated useful lives
of the respective asset classes as follows: building and improvements -- five
to forty years; office and data processing equipment -- two to eight years.
Income Taxes
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109) requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability
method of accounting for income taxes. Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Effective January 1, 1993, the Company adopted SFAS No. 109. The
cumulative effect of this change in the method of accounting for income taxes
is $0 to the 1993 consolidated statement of operations.
Pursuant to the deferred method under APB Opinion 11, which was applied in
1992 and prior years, deferred income taxes are recognized for income and
expense items that are reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year of
the calculation. Under the deferred method, deferred taxes are not adjusted
for subsequent changes in tax rates.
Retirement and Postemployment Benefits
Effective January 1, 1994, the Company has a 401(k) plan covering
substantially all employees who qualify as to age and length of service. This
plan will continue with a profit sharing component. During 1993, 1992 and
1991, the Company had two defined contribution profit sharing plans. The
contribution percentage is determined each year by the Board of Directors of
each subsidiary of the Company. Profit sharing expense, aggregating $315,000,
$295,000 and $290,000 in 1993, 1992 and 1991, respectively, was reported as
salaries and employee benefits. The Company currently has no postretirement
benefits as contemplated under Statement of Financial Accounting Standards No.
106, nor postemployment benefits as contemplated under Statement of Financial
Accounting Standards No. 112.
40
<PAGE>
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- CONTINUED
Earnings Per Common Share
Earnings per common share are computed using weighted average shares and
dilutive stock options outstanding during each year after deducting preferred
dividend requirements from net income. Earnings per common share assuming full
dilution are not reported because dilution arising from the stock options is
less than three percent.
Reclassifications
Prior period amounts have been reclassified when necessary to conform to
the current year's presentation.
NOTE B -- INVESTMENTS IN DEBT AND EQUITY SECURITIES
The following is a summary of information as of and for the years ended
December 31:
<TABLE>
<CAPTION>
GROSS GROSS
AGGREGATE UNREALIZED UNREALIZED GROSS GROSS
AGGREGATE FAIR HOLDING HOLDING REALIZED REALIZED
(In thousands) COST VALUE GAINS LOSSES PROCEEDS GAINS LOSSES
------------------ ------------ ------------ ------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE EQUITY SECURITIES:
1993.............. $615 $2,697 $2,082 $ -- $ 629 $413 $ 1
EQUITY SECURITIES:
1992.............. $666 $1,991 $1,325 $ -- $ 66 $ 9 $ 3
1991.............. $620 $1,015 $ 395 $ -- $ 848 $ 33 $31
DEBT SECURITIES:
1993.............. $ -- $ -- $ -- $-- $ 44 $ -- $ 1
1992.............. $ 53 $ 48 $ -- $ 5 $ 145 $ -- $ --
1991.............. $198 $164 $ -- $34 $1,078 $11 $11
</TABLE>
NOTE C -- NET INVESTMENT IN FINANCE RECEIVABLES
Net investment in finance receivables and maximum terms remaining as of
December 31, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
MAXIMUM
TERMS-MONTHS
----------------
(In thousands) 1993 1992 1993 1992
---------- ------------ ------------ ----- -----
<S> <C> <C> <C> <C>
Commercial financing receivables........................... $ 35,050 $ 32,948 63 67
Direct finance leasing receivables......................... 104,320 89,213 58 61
------------ ------------
Total receivables........................................ 139,370 122,161
Residual valuation......................................... 4,943 5,719 58 61
Unearned income............................................ (16,731) (15,282)
Allowance for possible lease and loan losses............... (5,438) (4,613)
------------ ------------
Total net investment..................................... $ 122,144 $107,985
============ ============
</TABLE>
Installments due on total receivables for each of the five years
subsequent to December 31, 1993 are as follows: 1994, $65,665,000; 1995,
$40,410,000; 1996, $20,133,000 1997, $7,802,000; 1998, $2,669,000; and
thereafter, $2,691,000.
41
<PAGE>
NOTE C -- NET INVESTMENT IN FINANCE RECEIVABLES -- CONTINUED
Included within the finance receivables are non-performing leases and
loans on which the Company is applying payments to principal only. Such
receivables approximated $101,000 and $700,000 as of December 31, 1993 and
1992, respectively. If these receivables had been current in accordance with
their original terms, finance revenue in 1993, 1992 and 1991 would have
increased $39,000, $100,000 and $63,000, respectively.
The Company's credit risk of finance receivables arises in the normal
course of business, principally from commercial businesses, throughout the
United States with some geographic concentration (based on equipment cost) in
California (18%), Pennsylvania (9%), Texas (7%), New York (6%) and Ohio (6%).
There is also some leased asset equipment concentration in computers and
computer software (31%), construction (24%) and party rental equipment (10%).
The Company has identified the following significant concentrations by
industry type (including the total net investment) of credit risk as of
December 31, 1993: Equipment Rental ($41,778,000), Attorneys ($16,936,000) and
Printing Services ($8,447,000). The Company retains title to the equipment
asset in the case of its direct finance leasing receivables, while the lessee
bears the contractual risk of loss and the duty to maintain and insure the
asset. The commercial financing receivables are generally secured by
inventory, receivables, real estate or equipment.
NOTE D -- ALLOWANCE FOR POSSIBLE LEASE AND LOAN LOSSES
The following is a summary of the Company's allowance for possible lease
and loan losses as of and for the years ended December 31:
<TABLE>
<CAPTION>
BALANCE AT CHARGE-OFFS, BALANCE AT
BEGINNING NET OF ACQUIRED END
(In thousands) OF YEAR PROVISION RECOVERIES ALLOWANCE OF YEAR
---------- ------------ ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
1993.............................. $4,613 1,573 (1,600) 852(A) $5,438
1992.............................. $4,210 2,190 (2,027) 240(A) $4,613
1991.............................. $3,343 4,580 (3,938) 225(A) $4,210
<FN>
(A) The balance of the allowance for possible lease and loan losses increased as a result of the acquisition of portfolios
of finance receivables.
</TABLE>
NOTE E -- EQUITY INVESTMENTS IN REAL ESTATE PARTNERSHIPS
Investments in ten unconsolidated real estate partnerships consist of
total ownership interests ranging from 10% to 58.2%.
Summary combined financial information for the investee partnerships as of
and for the years ended December 31, 1993 and 1992 follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992
---------- ---------- ----------
<S> <C> <C>
Land, building and improvements, net............................................. $ 13,648 $ 16,007
Other assets..................................................................... 1,111 1,197
Long-term debt............................................................... (14,318) (15,460)
Other liabilities............................................................ (205) (192)
---------- ----------
Net assets....................................................................... $ 236 $ 1,552
========== ==========
Revenue:
Rents on real estate operating leases........................................ $ 1,175 $ 1,202
Hotel revenue & other........................................................ 5,273 4,655
---------- ----------
Total revenue.............................................................. 6,448 5,857
========== ==========
Net income (loss)................................................................ $ 349 $ (105)
========== ==========
</TABLE>
42
<PAGE>
The unamortized portion of the excess of cost over the Company's share of
net assets of investee partnerships was $56,000 and $43,000 as of December 31,
1993 and 1992, respectively.
The Company provides management services to the investee partnerships
under terms of an agreement. The revenue for these services, aggregating
$230,000, $223,000 and $246,000 in 1993, 1992 and 1991, respectively, was
reported as management income.
The Company has commercial loans outstanding to investee partnerships of
$2,412,000 and $1,408,000 as of December 31, 1993 and 1992, respectively. The
Company has also guaranteed the debt (refer to note O) of certain
unconsolidated real estate partnerships.
The Company has sold certain partnership interests. Total gain on sale of
the partnership interests, aggregating $0, $1,000 and $547,000 in 1993, 1992
and 1991, respectively, was reported as other income.
NOTE F -- PROPERTY UNDER OPERATING LEASES
The following is a schedule of the Company's investment in property under
operating leases as of December 31, 1993 and 1992:
<TABLE>
<CAPTION>
(In thousands) 1993 1992
---------- ---------- ----------
<S> <C> <C>
Real Estate Cost:
Land......................................................................... $ 7,002 $ 7,327
Building and improvements.................................................... 29,782 31,897
---------- ----------
Total.................................................................... 36,784 39,224
Accumulated depreciation..................................................... (5,365) (4,537)
---------- ----------
Real estate, net......................................................... 31,419 34,687
---------- ----------
Equipment Cost:
Transportation and office equipment.......................................... 335 95
Accumulated depreciation..................................................... (123) (43)
---------- ----------
Equipment, net........................................................... 212 52
---------- ----------
Property under operating leases.................................................. $ 31,631 $ 34,739
========== ==========
</TABLE>
Depreciation for each of the three years ended December 31 follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
---------- ---------- ---------- ----------
<S> <C> <C> <C>
Depreciation Expense:
Real estate.................................................. $ 1,053 $ 1,144 $ 1,075
Equipment.................................................... 94 29 11
---------- ---------- ----------
Total.................................................... $ 1,147 $ 1,173 $ 1,086
========== ========== ==========
</TABLE>
The estimated minimum future rental revenues on operating leases for each
of the five years subsequent to December 31, 1993 are as follows: 1994,
$4,689,000; 1995, $4,051,000; 1996, $3,507,000; 1997, $3,046,000; 1998,
$2,943,000; and thereafter, $21,504,000.
43
<PAGE>
NOTE G -- PROPERTY AND EQUIPMENT
Property and equipment utilized by the Company is summarized by major
classifications as follows as of December 31:
<TABLE>
<CAPTION>
(In thousands) 1993 1992
---------- --------- ---------
<S> <C> <C>
Buildings (owned by consolidated real estate partnerships).......................... $2,189 $1,821
Office and data processing equipment................................................ 2,216 2,085
--------- ---------
4,405 3,906
Accumulated depreciation............................................................ (2,276) (1,929)
--------- ---------
2,129 1,977
Land (owned by consolidated real estate partnerships)............................... 172 145
--------- ---------
$2,301 $2,122
========= =========
</TABLE>
Land and building value is based on the percentage of space occupied by
the Company. For the years ended December 31, 1993, 1992 and 1991,
depreciation of $308,000, $294,000 and $328,000, respectively, was provided
on the Company's property and equipment.
NOTE H -- SHORT-TERM BORROWINGS
Short-term borrowings represent: (1) Amounts payable to banks, including
unsecured demand notes with fixed interest rates and unsecured floating or
fixed interest rate lines of credit of $28,503,000 as of December 31, 1993.
The Company has the option to make $7,003,000 in long-term, fixed rate loans
at negotiated rates which would reduce the available short-term lines of
credit when elected. Short-term lines of credit in use as of December 31, 1993
are $13,500,000. (2) Amounts payable upon demand to holders of floating
interest rate subordinated investment certificates.
The following is a summary of information pertaining to such borrowings as
of and for the years ended December 31:
<TABLE>
<CAPTION>
WEIGHTED MAXIMUM AVERAGE WEIGHTED
AVERAGE AMOUNT AMOUNT AVERAGE
CATEGORY BALANCE INTEREST OUTSTANDING OUTSTANDING INTEREST
OF AT END OF RATE AT DURING DURING RATE DURING
(In thousands) BORROWINGS YEAR END OF YEAR THE YEAR THE YEAR THE YEAR
---------- ------------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1993.................. (1) BANKS $13,500 4.41% $13,500 $ 8,807 4.44%
1993.................. (2) OTHER $ 2,805 4.00% $ 4,286 $ 3,810 4.39%
-----------------------------------------------------------------------------------------------------------------------
1992 (A).............. (1) Banks $ 6,250 4.61% $ 8,000 $ 5,389 5.28%
1992 (A).............. (2) Other $ 3,644 5.00% $ 4,592 $ 3,803 5.37%
-----------------------------------------------------------------------------------------------------------------------
1991 (A).............. (1) Banks $ 6,500 6.39% $14,500 $ 9,667 7.35%
1991 (A).............. (2) Other $ 3,019 6.30% $ 3,071 $ 2,048 6.81%
<FN>
(A) Average amount outstanding during the year is computed by dividing the total monthly outstanding principal balances by 12.
Weighted average interest rate during the year is computed by dividing the actual short-term interest expense by the
average short-term borrowings outstanding.
</TABLE>
44
<PAGE>
NOTE I -- LONG-TERM DEBT
Long-term debt as of December 31, 1993 and 1992 consists of the following:
<TABLE>
<CAPTION>
(In thousands) 1993 1992
---------- ------------ ------------
<S> <C> <C>
Senior debt:
Unsecured notes payable to banks and other financial
institutions, with interest rates from 3.9% to 12.0%, due
through July, 1997...................................................... $ 63,733 $ 62,210
Nonrecourse debt:
Nonrecourse notes payable to banks, with interest rates
from 5.87% to 11.06%, due at various dates through
December, 2004. The notes are collateralized by real estate
property................................................................ 18,358 19,367
Nonrecourse note payable to bank with interest at prime
plus 3%, due February, 1996............................................. 77 --
Other long-term debt:
Secured notes payable to banks, with interest rates from
5.99% to 10.5%, due at various dates through May, 2008.
The notes are collateralized by real estate property.................... 5,080 5,401
Subordinated investment certificate debt:
Certificates subordinated in right of payment to indebted
ness of the Company (including indebtedness of any sub
sidiary guaranteed by the Company) for money borrowed
from banks or other financial institutions. The fixed rate
certificates have various rates from 5.1% to 10.5% and ma
ture at various dates to 2001........................................... 25,964 25,384
Junior subordinated debenture debt:
A 9% debenture due in 2002 subordinated in right of pay
ment to indebtedness of the Company (including indebted
ness of any subsidiary guaranteed by the Company) for
money borrowed from banks, other financial institutions
and subordinated investment certificate holders......................... 103 103
------------ ------------
Total long-term debt.............................................. $ 113,315 $ 112,465
============ ============
</TABLE>
The Company has $100,190,000 in unsecured lines of credit with banks. The
total lines in use as of December 31, 1993 are $63,322,000.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1993 are as follows: 1994, $52,538,000; 1995,
$26,185,000; 1996, $11,611,000; 1997, $4,772,000; 1998, $4,008,000; and
thereafter, $14,201,000.
NOTE J -- CERTAIN COVENANTS
The terms of the subordinated investment certificate offerings, certain
unsecured loan agreements and a bank letter of credit provide for various
restrictive covenants. The most significant of these provide that: (1)
American Equipment Leasing Co., Inc. and it's subsidiaries, AEL Leasing Co.,
Inc. and American Commercial Credit Corp., on a consolidated basis, shall
maintain (a) a minimum cash flow ratio of receipts to disbursements, as
specifically defined, of 1 to 1 (b) a ratio of debt to tangible net worth not
45
<PAGE>
NOTE J -- CERTAIN COVENANTS -- CONTINUED
in excess of 7 to 1 and (c) a minimum tangible net worth of $21,000,000. (2)
AEL Leasing Co., Inc. and American Commercial Credit Corp., on a separate
Company basis, shall maintain a ratio of debt to tangible net worth not in
excess of 7 to 1.
The Company is in compliance with the above covenants as of December 31,
1993.
NOTE K -- STOCKHOLDERS' EQUITY
The 8% noncumulative and nonvoting preferred stock has no earnings
participation rights and, in case of involuntary liquidation, there is no
preference to preferred stockholders other than the stated value of the stock.
The preferred stock dividend was paid each quarter during 1993.
The common stock of the Company is covered by an agreement restricting its
sale, redemption or transfer.
During 1993, the Company retired all treasury stock then held by the
Company.
The Company terminated on November 30, 1992 a non-qualified stock option
plan for certain key employees. The options are exercisable at a price of 100%
of the fair market value of the stock on the date that the option is granted.
Options granted under the plan are exercisable at any time and expire five
years from the date of issuance. An analysis of the activity in this plan for
the last three years follows:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF COMMON SHARES PER SHARE FOR
1993 1992 1991 CURRENT YEAR
---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
Options outstanding, January 1.................. 102,620 141,500 112,930 --
Options granted................................. -- -- 35,870 --
Options exercised............................... (11,300) (16,045) (1,600) $6.17
Options forfeited............................... (16,350) (22,835) (5,700) $6.17 TO $7.79
---------- ---------- ----------
Options outstanding, December 31................ 74,970 102,620 141,500
========== ========== ==========
</TABLE>
Under this stock option plan, the option price for the grant made in 1991
was $6.43 per share.
The total options outstanding, by each year's option price, as of December
31, 1993 are: 21,000 at $7.41, 23,900 at $7.79 and 30,070 at $6.43.
NOTE L -- INCOME TAXES
The total provision for income taxes consists of:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
---------- ---------- ---------- ---------
<S> <C> <C> <C>
Deferred income tax (benefit)
Federal.......................................................... $ (18) $ (979) $ (226)
State............................................................ 124 (157) (223)
---------- ---------- ---------
Total deferred............................................. 106 (1,136) (449)
---------- ---------- ---------
Current income tax
Federal.......................................................... 1,596 882 955
State............................................................ 198 398 382
---------- ---------- ---------
Total current.............................................. 1,794 1,280 1,337
---------- ---------- ---------
Total provision............................................ $ 1,900 $ 144 $ 888
========== ========== =========
</TABLE>
46
<PAGE>
NOTE L -- INCOME TAXES -- CONTINUED
The sources of deferred income taxes (benefits) and the tax effect of each
are as follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
---------- ---------- ---------- ---------
<S> <C> <C> <C>
Direct finance lease revenue and expenses.......................... $ 141 $ (743) $ (972)
Alternative minimum tax credit..................................... -- 1,083 724
Partnership revenue and expenses including write-
down of real estate.............................................. (216) (1,310) --
State tax provision (less than) in excess of state taxes
currently payable................................................ 124 (157) (223)
Other.............................................................. 57 (9) 22
---------- ---------- ---------
Total deferred............................................. $ 106 $ (1,136) $ (449)
========== ========== =========
</TABLE>
The following is a reconciliation between the statutory federal income tax
rate and the effective income tax rate on the total provision for income
taxes:
<TABLE>
<CAPTION>
1993 1992 1991
--- ------- ------
<S> <C> <C> <C>
Statutory federal income tax rate applied to earnings
(loss) before income taxes and minority interest................. 34.0% (34.0%) 34.0%
Investment tax credit basis adjustment............................. -- -- 0.3
Limited taxability of dividend income.............................. (0.1) (1.7) (0.4)
State taxes, net of federal tax benefit............................ 4.2 31.8 4.5
Tax-exempt interest income......................................... -- (1.2) (0.7)
Minority interest of partnership investments....................... (0.7) 31.6 (0.1)
Other, net......................................................... -- 2.3 0.4
------- ------- ------
Effective rate............................................. 37.4% 28.8% 38.0%
======= ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1993, in accordance with SFAS No. 109, are presented below:
<TABLE>
<CAPTION>
(In thousands) 1993
---------- --------
<S> <C>
Deferred tax assets:
Allowance for possible lease and loan losses...................... $ 840
Partnership revenue and expenses including write-
down of real estate............................................. 1,674
Other............................................................. 167
--------
Total gross deferred tax assets............................... 2,681
--------
Deferred tax liabilities:
Direct finance lease revenue and expenses......................... (1,229)
Net unrealized holding gains for available-for-sale
securities...................................................... (708)
Other............................................................. (71)
--------
Total gross deferred tax liabilities.......................... (2,008)
--------
Deferred income taxes, net.................................... $ 673
========
</TABLE>
In order to fully realize the gross deferred tax asset, the Company will
need to generate future taxable income of approximately $7,900,000. Based upon
the Company's current and historical tax history and the anticipated level of
future taxable income, management of the Company believes the existing
deductible temporary differences will, more likely than not, reverse in future
47
<PAGE>
NOTE L -- INCOME TAXES -- CONTINUED
periods in which the Company generates net taxable income. There can be no
assurance, however, that the Company will generate any earnings or any
specific level of continuing earnings.
For income tax reporting purposes: The Company has no credit carryover to
offset regular tax liability during 1993.
For financial reporting purposes: (1) The Company records a provision for
income taxes on the minority interest share of loss absorbed by the Company
from any partnership investment. (2) The Company has no credit carryover to
offset regular tax liability during 1993. (3) The Company records a deferred
tax liability on the net unrealized holding gains for available-for-sale
securities in accordance with SFAS No. 115.
NOTE M -- BUSINESS SEGMENTS
The Company operates principally in three business segments, reports a
fourth segment pertaining to general corporate and other, and discloses any
significant transaction which is not specifically related to the normal
operations of a segment:
COMMERCIAL LEASING AND FINANCING -- leasing of various types of equipment
under direct finance and operating leases, lease financing programs, and
direct cash loans to commercial businesses.
REAL ESTATE -- leasing of real estate property under operating leases, and
investments in real estate. Three limited service hotel operations provide
operating earnings on three equity investments. Real estate management,
development and advisory services; and hotel management services are included.
FURNITURE AND EQUIPMENT SALES -- selling various types of office furniture
and equipment, and servicing equipment sold.
GENERAL CORPORATE AND OTHER -- includes investment activities other than
real estate; and consolidating elimination entries which are not material.
UNALLOCATED GENERAL CORPORATE EXPENSE -- consists of interest expense
allocated to the investments in marketable securities and long-term
investments.
Revenues by segment are comprised of revenues from unaffiliated customers;
intersegment revenues are not significant.
Operating profit is total revenue less directly incurred costs and
expenses, and allocated corporate operating costs and expenses.
Identifiable assets by industry are those assets of the Company that are
used exclusively in or are reasonably allocated to operations in each
industry. Assets employed by the segment "general corporate and other" are
principally cash, investments exclusive of the real estate industry segment,
and property and equipment.
The following segment information is reconciled to the related
consolidated financial statements' amounts.
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
---------- ------------ ------------ ------------
<S> <C> <C> <C>
Revenues by business segment:
Commercial leasing and financing................................. $ 19,529 $ 20,862 $ 23,066
Real estate...................................................... 4,973 1,822 6,037
Furniture and equipment sales.................................... 694 345 4
General corporate and other...................................... 461 67 228
------------ ------------ ------------
Total...................................................... $ 25,657 $ 23,096 $ 29,335
============ ============ ============
</TABLE>
54
<PAGE>
NOTE M -- BUSINESS SEGMENTS -- CONTINUED
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Operating earnings (loss) by business segment:
Commercial leasing and financing................................. $ 5,220 $ 4,230 $ 2,662
Real estate...................................................... (713) (4,744) (307)
Furniture and equipment sales.................................... 175 31 (17)
General corporate and other...................................... 440 52 139
------------ ------------ ------------
Total...................................................... 5,122 (431) 2,477
Unallocated general corporate expense............................ (44) (69) (137)
------------ ------------ ------------
Earnings (loss) before income taxes and minority
interest....................................................... $ 5,078 $ (500) $ 2,340
============ ============ ============
Identifiable assets by segment:
Commercial leasing and financing................................. $ 126,294 $ 111,578 $ 114,446
Real estate...................................................... 35,486 37,559 40,191
Furniture and equipment sales.................................... 681 777 239
General corporate and other...................................... 2,492 3,349 3,911
------------ ------------ ------------
Total...................................................... $ 164,953 $ 153,263 $ 158,787
============ ============ ============
Capital expenditures:
Commercial leasing and financing:
Direct finance leases...................................... $ 24,383 $ 28,300 $ 20,599
Operating leases........................................... 328 75 22
Other...................................................... 163 211 149
Real estate:
Operating leases........................................... -- 294 418
Other...................................................... -- 2 11
Furniture and equipment sales.................................... 19 81 14
General corporate and other...................................... -- -- --
------------ ------------ ------------
Total...................................................... $ 24,893 $ 28,963 $ 21,213
============ ============ ============
Depreciation and amortization:
Commercial leasing and financing:
Direct finance leases...................................... $ -- $ -- $ --
Operating leases........................................... 94 29 11
Other...................................................... 304 413 606
Real estate:
Operating leases........................................... 1,053 1,144 1,075
Other...................................................... 223 150 139
Furniture and equipment sales.................................... 33 33 15
General corporate and other...................................... -- -- 1
------------ ------------ ------------
Total...................................................... $ 1,707 $ 1,769 $ 1,847
============ ============ ============
</TABLE>
NOTE N -- LEASES
Rental expense included in operating expenses for each of the years in the
three-year period ended December 31, 1993 was $77,000, $64,000 and $10,000,
respectively. The Company also incurred rent expense on an operating lease
with an investee partnership. The rent expense, aggregated $53,000 in 1991,
and was reported as operating expense.
As of December 31, 1993, the Company is committed to minimum rentals
under various operating leases totaling $115,000. The minimum annual rentals
for each of the five years subsequent to December 31, 1993 are as follows:
1994, $70,000; 1995, $38,000; 1996, $6,000; 1997, $1,000; and 1998, $0.
49
<PAGE>
NOTE O -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingent liabilities on which management does not anticipate any material
losses. Such commitments and contingent liabilities expose the company to
various degrees and types of risks, including credit risk, interest rate risk,
and liquidity risk.
A summary of significant commitments and contingent liabilities as of
December 31 follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992
---------- ---------- ----------
<S> <C> <C>
Unused lines of credit............................................................ $38,183 $17,774
Commitments to fund leases and loans.............................................. $ 924 $ 1,314
Financial guarantees for unconsolidated real estate partnerships.................. $ 2,400 $ 2,675
</TABLE>
Unused lines of credit represent conditional offers by the Company to lend
additional funds to qualified customers. Commitments to fund leases and loans
represent finance agreements secured by the Company wherein the equipment
collateral has not yet been delivered. Financial guarantees are conditional
commitments issued by the Company guaranteeing performance by an
unconsolidated real estate partnership to a third party.
Interest rate swap transactions are not reflected in the above table. The
notional principal amounts of outstanding contracts were $2,000,000 and
$3,000,000 as of December 31, 1993 and 1992. The weighted average maturity of
these swap agreements was 2.2 and 0.7 years as of December 31, 1993 and 1992.
The Company is exposed to loss should one of the counterparties to these
agreements default when the variable rate exceeds the weighted average fixed
rate. The weighted average rate paid by the Company was 4.25% and the weighted
average rate received by the Company was 3.44% as of December 31, 1993.
The Company's Employee Stock Option Plan (ESOP) terminated in 1993 and
paid off the outstanding ESOP debt which was guaranteed by the Company.
As of December 31, 1993, the Company was party (plaintiff or defendant) to
certain legal actions. While any litigation has an element of uncertainty,
management, after reviewing these actions with legal counsel, is of the
opinion that the liability, if any, resulting from these actions will not have
a material effect on the financial condition or results of operations of the
Company.
In connection with a state sales tax audit and the treatment of
abandonment leases, the Company was assessed in 1992 an additional sales tax
of $34,800 (net of income tax) and penalties and interest of $284,400 (net of
income tax). During 1992, the Company paid and expensed $27,700 (net of income
tax). During 1993, the Company expensed the balance due of $14,400 (net of
income tax) after the penalties were waived and 94% of the interest reversed.
50
<PAGE>
NOTE P -- CASH FLOW INFORMATION
The following is the reconciliation of net earnings (loss) to net cash
provided by operating activities for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
---------- ---------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss)...................................................... $ 3,047 $ (413) $ 1,382
Noncash expenses, revenues, losses and gains included in
net earnings (loss):
Depreciation and amortization.......................................... 1,707 1,769 1,847
Excess of income taxes paid over provision for income
taxes................................................................ (582) (1,527) (453)
Net change in prepaid expenses and payables............................ 437 351 (934)
Decrease (increase) in income receivable............................... 136 (7) 571
Lease purchase options: cash received in excess of earned.............. 1,682 2,126 1,739
Decrease in interest payable........................................... (41) (145) (18)
Gain on sale of debt and equity securities, finance and
operating leases, property and equipment, and
investments.......................................................... (1,479) (1,283) (1,904)
Provision for possible lease and loan losses........................... 1,573 2,190 4,580
Equity loss in real estate partnerships and associated
companies............................................................ 76 279 164
Provision for write-down of real estate................................ 488 4,302 --
Minority interest income (loss)........................................ 131 (231) 70
---------- ---------- ----------
Net cash provided by operating activities................................ $ 7,175 $ 7,411 $ 7,044
========== ========== ==========
</TABLE>
The following is a schedule of noncash investing and financing activities
for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
---------- ---------- ---------- ----------
<S> <C> <C> <C>
Acquisition of Canyon Capital, Inc.:
Net investment in finance receivables................................. $12,186 $ -- $ --
Other assets.......................................................... $ 87 $ -- $ --
Short-term debt assumed............................................... $ (4,985) $ -- $ --
Long-term debt assumed................................................ $ (5,656) $ -- $ --
Security deposits..................................................... $ (1,392) $ -- $ --
Other liabilities..................................................... $ (240) $ -- $ --
Change in carrying value of available-for-sale securities:
Investments in debt and equity securities............................. $ 2,082 $ -- $ --
Deferred tax liabilities.............................................. $ (708) $ -- $ --
Net unrealized holding gains for available-for-sale
securities.......................................................... $ (1,374) $ -- $ --
Real estate partnerships, previously accounted for on the
equity method, now included in the consolidated finan-
cial statements:
Operating lease assets and other assets acquired...................... $ -- $ 1,927 $ --
Long-term debt and other liabilities assumed.......................... $ -- $ (1,683) $ --
Partnership capital................................................... $ -- $ (244) $ --
Investment interest in real estate partnership received
from minority interest in payment of commercial finance
receivable............................................................ $ 397 $ 100 $ --
Land received in foreclosure of commercial finance
receivable............................................................ $ -- $ 627 $ --
New real estate partnerships:
Operating lease assets acquired....................................... $ -- $ -- $ 3,166
Long-term debt assumed................................................ $ -- $ -- $ (2,900)
Partnership capital contribution of property.......................... $ -- $ -- $ (266)
Operating lease asset reclassification:
Net investment in finance receivables................................. $ -- $ -- $ 248
Property under operating leases....................................... $ -- $ -- $ (248)
</TABLE>
51
<PAGE>
NOTE Q -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" (SFAS No. 107), which requires the estimation of fair values of
financial instruments, as defined in SFAS No. 107.
Limitations
Estimates of fair value are made at a specific point in time, based upon,
where available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparties, future expected
loss experience and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only and, therefore,
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies are likely to result in significantly different
fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's existing customer relationships,
property, equipment, goodwill or certain tax implications related to the
realization of unrealized gains or losses.
The following methods and assumptions were used by the Company to estimate
the fair value as of December 31, 1993 of each class of financial instrument
(refer to note B for the fair value of investments in debt and equity
securities).
Net Investment in Finance Receivables
The fair value of net investment in finance receivables with variable
rates and no significant change in credit risk approximates the carrying
amount. The fair value of fixed-rate finance receivables is estimated by
discounting future cash flows using current rates at which similar leases and
loans would be made to borrowers with similar credit ratings and for similar
remaining maturities. Included in direct finance leasing receivables is the
fair value of lessee purchase options which approximates the net residual
valuation carrying amount.
Short-term Borrowings
The fair value of short-term borrowings (refer to note H) is the amount
payable.
Customer deposits
Customer deposits are interest bearing and non-interest bearing deposits
received on finance lease receivables and real estate operating leases. The
carrying amount of these deposits approximates fair value.
Long-term debt
The fair value of the Company's fixed rate long-term debt is estimated
using discounted cash flow analyses based on the estimated current rates
offered by banks to the Company for debt of similar remaining maturities, or
current rates offered by the Company for subordinated investment certificate
debt with similar remaining maturities. The fair value of floating rate long-
term debt approximates the carrying amount.
Unused lines of credit
Proceeds from both short-term and long-term lines of credit are issued at
current market rates at the time of each borrowing. The fair value of such
unused lines is considered nominal.
Commitments
Unused lines of credit and commitments to fund leases and loans: the
Company does not charge a fee to extend lines of credit and commitments to
fund leases and loans to customers. Extension of credit is conditional upon
Company approval (of the amount, rate, and maturity) at
52
<PAGE>
NOTE Q -- FAIR VALUES OF FINANCIAL INSTRUMENTS -- CONTINUED
the time of request. The fair value of unused lines of credit and commitments
to fund leases and loans is considered nominal.
Financial guarantees for unconsolidated real estate partnerships: the
Company receives nominal fees for two agreements, and the estimated cost to
terminate such guarantees is considered nominal.
Interest rate swap agreements: the fair value of interest rate swaps is
based on the cost to terminate the agreement. The costs were obtained from the
counterparties.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31 were as follows:
<TABLE>
<CAPTION>
1993 1992
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VAUE
------------ ------------ ------------ ------------
(In thousands)
----------
<S> <C> <C> <C> <C>
Net investment in finance receivables
Commercial financing receivables................. $ 35,050 $ 34,952 $ 32,948 $ 32,054
Direct finance leasing receivables............... 92,532 91,856 79,650 79,385
Allowance for possible lease and loan
losses......................................... (5,438) -- (4,613) --
------------ ------------ ------------ ------------
Total net investment........................... $ 122,144 $ 126,808 $ 107,985 $ 111,439
------------ ------------ ------------ ------------
Short-term borrowings.............................. $ 16,305 $ 16,305 $ 9,894 $ 9,894
------------ ------------ ------------ ------------
Customer deposits.................................. $ 2,188 $ 2,188 $ 1,038 $ 1,038
------------ ------------ ------------ ------------
Long-term debt
Senior debt...................................... $ 63,733 $ 63,876 $ 62,210 $ 62,626
Nonrecourse and other debt....................... 23,515 24,205 24,768 25,138
Subordinated debt................................ 26,067 27,191 25,487 26,356
------------ ------------ ------------ ------------
Total long-term debt........................... $ 113,315 $ 115,272 $ 112,465 $ 114,120
------------ ------------ ------------ ------------
Off-balance sheet financial instruments
Cost to terminate interest rate swaps............ $ 1 $ 4 $ 19 $ 56
------------ ------------ ------------ ------------
</TABLE>
NOTE R -- ACQUISITION
On June 1, 1993, the Company purchased all of the capital stock of Canyon
Capital, Inc. ("Canyon") whose principal business consisted of financing and
leasing equipment, for $4,270,000 in cash. Until the purchase, Canyon was a
wholly-owned subsidiary of KOA Holdings, Inc. The purchase price was based
principally on the book value of the common stock multiplied by a factor of
126.8%. The acquisition has been accounted for as a purchase and, accordingly,
the results of operations of Canyon have been included in the Company's
consolidated financial statements since the acquisition date.
The following unaudited pro forma financial information for the years
ended December 31, 1993 and 1992 presents the combined results of operations
of the Company and Canyon as if the acquisition had occurred as of the
beginning of 1992, after giving effect to certain adjustments. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and Canyon constituted a single
entity during such periods.
<TABLE>
<CAPTION>
1993 1992
--------------- ---------------
<S> <C> <C>
Commercial leasing and financing revenue $18,878,000 $23,511,000
Net earnings $ 3,018,000 $ 373,000
Earnings per share $ 0.92 $ 0.11
</TABLE>
In conjunction with the Company's acquisition of Canyon, Canyon recorded
a total net loss of $139,000 for the five months ended May 31, 1993
(consisting of non-recurring after-tax charges of $269,000 and normal
after-tax operating earnings of $130,000). The non-recurring after-tax
charges were primarily due to additional charge-offs ($1,383,000)
taken by Canyon and a replenishing of the allowance for possible lease
and loan losses ($498,000) prior to the acquisition date. These
additional adjustments were the result of applying the Company's more
restrictive charge-off and reserving policies to Canyon's delinquent
lease and loan accounts.
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
CANYON CAPITAL, INC.:
We have audited the accompanying balance sheets of Canyon Capital, Inc. as
of December 31, 1992 and 1991, and the related statements of earnings,
stockholders' equity, and cash flows for each of the years in the two year
period ended December 31, 1992. 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 financial position of Canyon Capital, Inc. as of
December 31, 1992 and 1991, and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 1992, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
Orange County, California
February 9, 1993
54
<PAGE>
CANYON CAPITAL, INC.
BALANCE SHEETS
DECEMBER 31, 1992 AND 1991
<TABLE>
<CAPTION>
Assets 1992 1991
----- ---- ----
<S> <C> <C>
Cash $ 91,776 75,008
Investment in leases (notes 2, 3 and 5):
Gross lease receivables 24,488,598 27,925,322
Estimated residual values 752,204 958,471
Deferred lease origination costs, net 731,683 853,221
Equipment held for lease 690,398 896,679
---------------- ----------------
26,662,883 30,633,693
Less:
Security deposits (1,636,306) (1,552,357)
Unearned income (6,623,228) (7,984,825)
Allowance for possible credit losses (1,501,192) (1,380,166)
---------------- ----------------
Net investment in leases 16,902,157 19,716,345
---------------- ----------------
Other receivables 119,344 154,945
Furniture and equipment, net (note 4) 20,766 28,450
Other assets 40,796 45,774
---------------- ----------------
$17,174,839 20,020,522
================ ================
Liabilities and Stockholders' Equity
------------------------
Equipment obligations (note 5) $ 8,473,414 12,671,455
Accounts payable and accrued expenses 190,615 259,098
Notes payable to Parent Company (note 3) 4,300,000 3,300,000
Income taxes payable (note 7) 38,942 2,279
Deferred income taxes (note 7) 972,000 965,000
---------------- ----------------
Total liabilities 13,974,971 17,197,832
---------------- ----------------
Stockholder's equity:
Common stock, $1 par value; 100,000 shares
authorized; 10,000 shares issued
and outstanding 10,000 10,000
Additional paid-in capital 320,600 320,600
Retained earnings 2,869,268 2,492,090
---------------- ----------------
Total stockholder's equity 3,199,868 2,822,690
Commitments (note 8) -- --
$17,174,839 20,020,522
================ ================
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
CANYON CAPITAL, INC.
STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31, 1992 AND 1991
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Revenues:
Lease income (note 6) $4,513,257 4,789,714
Interest income 10,975 14,649
Late charges 108,542 94,215
-------------- --------------
4,632,774 4,898,578
-------------- --------------
Cost and expenses:
Interest 1,430,008 1,984,360
Provision for possible credit losses 1,178,411 964,085
Selling, general and administrative 787,738 726,168
Amortization of deferred lease origination costs 508,439 485,039
-------------- --------------
3,904,596 4,159,652
-------------- --------------
Earnings before income tax expense 728,178 738,926
Income tax expense (note 7) 351,000 351,000
-------------- --------------
Net earnings $ 377,178 387,926
============== ==============
</TABLE>
See accompanying notes to financial statements.
56
<PAGE>
CANYON CAPITAL, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1992 AND 1991
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK
------------------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1990 10,000 $10,000 320,600 2,104,164 2,434,764
Net earnings -- -- -- 387,926 387,926
---------- ---------- ------------ ------------ ---------------
Balance at December 31, 1991 10,000 10,000 320,600 2,492,090 2,822,690
Net earnings -- -- -- 377,178 377,178
---------- ---------- ------------ ------------ ---------------
Balance at December 31, 1992 10,000 $10,000 320,600 2,869,268 3,199,868
========== ========== ============ ============ ===============
</TABLE>
See accompanying notes to financial statements.
57
<PAGE>
CANYON CAPITAL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992 AND 1991
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Operating activities:
Net earnings $ 377,178 387,926
Adjustments to reconcile net earnings to cash
provided by operating activities:
Provision for possible credit losses 1,178,411 964,085
Deferred income tax provision (benefit) 7,000 (20,000)
Amortization of deferred lease origination costs 508,439 485,039
Depreciation and other amortization 20,491 26,738
Decrease (increase) in other receivables 35,601 (20,785)
Increase in other assets (3,713) (41,619)
Decrease in accounts payable and accrued expenses (68,483) (44,931)
Increase (decrease) in income taxes payable 36,663 (190,270)
--------------- ---------------
Net cash provided by operating activities 2,091,587 1,546,183
--------------- ---------------
Investing activities:
Principal collections on leases 8,249,529 7,997,015
Additions to net investment in leases (7,122,191) (8,542,797)
Additions to furniture and equipment (4,116) (1,033)
--------------- ---------------
Net cash provided by (used for) investing activities 1,123,222 (546,815)
--------------- ---------------
Financing activities:
Proceeds from issuance of equipment obligations 3,489,505 5,847,071
Repayments of equipment obligations (7,687,546) (9,161,335)
Proceeds from notes payable to Parent Company 1,000,000 2,300,000
--------------- ---------------
Net cash used by financing activities (3,198,041) (1,014,264)
--------------- ---------------
Net increase (decrease) in cash 16,768 (14,896)
Cash at beginning of year 75,008 89,904
--------------- ---------------
Cash at end of year $ 91,776 75,008
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $1,424,888 1,973,855
=============== ===============
Income taxes $ 307,337 561,270
=============== ===============
</TABLE>
See accompanying notes to financial statements.
58
<PAGE>
CANYON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
Canyon Capital, Inc. (the "Company") is a wholly-owned subsidiary of KOA
Holdings Inc. (the "Parent Company") and is in the business of providing
equipment financing to small businesses under direct financing leases. A
portion of the Company's business (approximately 10% in 1992 and 8% in 1991)
is leasing printing equipment to franchisees of Sir Speedy, Inc., also a
wholly-owned subsidiary of the Parent Company.
Investment in Leases
In accounting for direct financing leases, no income is recorded
initially. The finance charges are deferred and subsequently amortized to
income over the respective lease terms to produce a level rate of return on
the unrecovered investments.
Residual values are unguaranteed and represent amounts estimated to be
recoverable on disposition of the equipment at the end of the lease terms. The
Company periodically reviews the residual value estimates to ascertain if any
impairment to the carrying value has occurred. Writedowns to the carrying
values are recorded when identified. Gains are recorded only when realized.
Terms of leases vary from two to five years; the majority are written for five
years.
Deferred Lease Origination Fees and Costs
All fees and direct costs associated with the origination of leases are
deferred and amortized to operations over the respective lease terms using the
interest method. The amortization of fees is recorded as an adjustment to
yield while the amortization of direct costs is recorded as an operating
expense.
Allowance for Possible Credit Losses
The provision for possible credit losses is charged to operating expense
based on management's evaluation of the lease portfolio, including residual
values. It is management's policy to maintain the allowance for possible
credit losses at an adequate level to absorb losses that may occur in the
lease portfolio.
Equipment Held for Lease
Equipment held for lease consists of new and used equipment and is carried
at the lower of cost or market on a specific identification basis.
Furniture and Equipment
Furniture and equipment are stated at cost less accumulated depreciation,
which is charged to expense on a straight-line basis over the estimated useful
lives of the related assets, principally five years.
Income Taxes
The Company files a consolidated Federal tax return with the Parent
Company. Tax expense is determined on a separate return basis.
Deferred income taxes are provided for temporary differences arising from
the classification of leases as operating leases for tax purposes and capital
leases for financial reporting purposes in accordance with the provisions of
Statement of Financial Accounting Standards No. 96, "Accounting for Income
Taxes" ("FASB 96"). The Financial Accounting Standards Board has issued
Statement 109, "Accounting for Income Taxes" ("FASB 109") which will supersede
FASB 96. FASB 109 must be adopted in the first quarter of fiscal 1993 and may
be adopted either prospectively or retroactively. The Company believes that
the implementation of FASB 109 will not have a material impact on its
financial statements.
59
<PAGE>
(2) INVESTMENT IN LEASES
The gross maturities of lease receivables at December 31, 1992 are as
follows:
Year Ended
December 31,
------------------
1993 $ 9,851,280
1994 7,420,065
1995 4,386,768
1996 1,927,787
1997 902,698
---------------
$24,488,598
===============
Lease receivables totaling $14,506,096 and the underlying leased equipment
are pledged under equipment obligations (Note 5)
The credit risk associated with the Company's lease receivables arises in
the normal course of business throughout the United States, with some
geographic concentration. Geographic concentrations (based on gross lease
receivables) exist in California (68%) and Arizona (6%). The Company has
identified the following significant concentration by industry type (based on
gross lease receivables) of 23% for the printing industry.
(3) TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
The notes payable to Parent Company totaling $4,300,000 and $3,300,000 at
December 31, 1992 and 1991, respectively, are subordinated to the Company's
equipment obligations. Interest is payable monthly at the prime lending rate
plus 1% and totaled $254,186 in 1992 and $104,142 in 1991. The prime lending
rate as of December 31, 1992 was 6%.
The Company purchases equipment from Sir Speedy, Inc. for lease to Sir
Speedy franchised printing centers; such purchases totaled approximately
$225,000 in 1992 and $350,000 in 1991. Included in gross lease receivables at
December 31, 1992 were three leases to affiliates totaling approximately
$17,000.
(4) FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost less accumulated depreciation
as follows:
1992 1991
-------- -------
Furniture and equipment $110,959 106,843
Accumulated depreciation (90,193) (78,393)
-------- -------
$ 20,766 28,450
======== =======
(5) EQUIPMENT OBLIGATIONS
Equipment obligations consist of debt incurred in acquiring equipment for
lease and are secured by the related lease receivables and underlying
equipment. Interest rates on these obligations range from 7.5% to 11.25%.
Interest expense averaged 10.6% in 1992 and 11.9% in 1991. Maturities of
equipment obligations as of December 31, 1992 are as follows:
Year Ended
December 31,
------------------
1993 $3,543,212
1994 2,448,991
1995 1,532,768
1996 724,670
1997 223,773
--------------
$8,473,414
==============
60
<PAGE>
(6) LEASE INCOME
Lease income is summarized as follows:
<TABLE>
<CAPTION>
1992 1991
-------------- ------------
<C> <S> <C>
Deferred lease income recognized using the
interest method $4,274,807 4,578,232
Gain on residual values 238,450 208,782
Other -- 2,700
-------------- ------------
$4,513,257 4,789,714
============== ============
</TABLE>
(7) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
Federal State Total
------------ --------- ----------
<S> <C> <C> <C> <C>
1992:
Current $264,000 80,000 344,000
Deferred 6,000 1,000 7,000
------------ --------- ----------
$270,000 81,000 351,000
============ ========= ==========
1991:
Current $296,000 75,000 371,000
Deferred (18,000) (2,000) (20,000)
------------ --------- ----------
$278,000 73,000 351,000
============ ========= ==========
</TABLE>
Actual income tax expense differs from the amount computed by applying the
statutory Federal income tax rate of 34% to earnings before income tax expense
as follows:
<TABLE>
<CAPTION>
1992 1991
---------------------- --------------------
Amount % Amount %
------------ ------ ---------- ------
<S> <C> <C> <C> <C>
Tax at statutory rate $248,000 34.0 251,000 34.0
State income taxes, net of Federal
income tax benefit 53,000 7.3 48,000 6.5
Other 50,000 6.9 52,000 7.0
------------ ------ ---------- ------
$351,000 48.2 351,000 47.5
============ ====== ========== ======
</TABLE>
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
the $972,000 deferred tax liability at December 31, 1992 relate to differences
arising from the classification of leases as operating leases for tax purposes
and capital leases for financial reporting purposes.
(8) COMMITMENTS
The Company has a two-year operating lease commitment for rental of its
office space requiring rental payments totaling $42,000 per year in 1993 and
1994.
Rental expense totaled $44,148 and $37,423 in 1992 and 1991, respectively.
61
<PAGE>
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS
The attached pro forma financial information gives effect to the
acquisition of Canyon Capital, Inc. ("Canyon") by the Company. The pro forma
consolidated condensed statements of operations for the year ended December
31, 1992 reflects the operations of the combined entities as though the
acquisition has been made at the beginning of 1992. It should be read in
conjunction with the historical consolidated financial statements and notes
thereto of the Company and Canyon as of and for the year ended December 31,
1992.
The pro forma financial information does not purport to be indicative of
the actual results of operations that would have occurred if the acquisition
had been consummated on the date indicated or that may be obtained in the
future. Adjustments in anticipation of cost savings through consolidation of
the Company and Canyon are not included.
The pro forma adjustments reflected in the pro forma statements of
operations include adjustments to amortize the discount on the acquired net
investment in finance receivables; to record the interest incurred on funds
borrowed to fund the purchase and to refinance all outstanding debt of Canyon,
and to remove Canyon's historical interest expenses; and to apply the
Company's estimated incremental income tax rate. The pro forma statement of
operations does not reflect a five-year covenant not to compete entered into
as part of the acquisition, or the amortization thereof, because the amount is
contingent upon future recoveries of previously charged off accounts. The
amount, if any, will be amortized, beginning in the period in which the amount
is determined, using the straight line method over the remainder of the five
year term.
62
<PAGE>
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1992
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HORRIGAN CANYON PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- -------------- ------------
<S> <C> <C> <C> <C>
Finance Revenues:
Commercial leasing and financing
revenues................................................ $18,869 4,524 118 (a) 23,511
Interest expense.......................................... 8,444 1,430 (541)(b) 9,333
------ ------- ------ -----
Finance revenue margin................................ 10,425 3,094 659 14,178
Provision for possible lease and loan losses.............. 2,190 1,179 0 3,369
------ ------- ------ -----
Finance revenues after provision for possible lease
and loan losses..................................... 8,235 1,915 659 10,809
------ ------- ------ -----
Net operating lease revenues................................ 1,956 0 0 1,956
Total other operating revenues.............................. (1,708) 109 0 (1,599)
Operating expenses:
Salaries and employees benefits........................... (4,646) (588) 0 (3,234)
Other expenses............................................ (4,337) (708) 0 (5,045)
------ ------- ------ -----
Earnings (loss) before income taxes and minority interest... (500) 728 659 887
Provision for income taxes................................ 144 351 250 (c) 745
------ ------- ------ -----
Earnings (loss) before minority interest.................... (644) 377 409 142
Minority interest loss.................................... 231 0 0 231
------ ------- ------ -----
Net earnings (loss)......................................... (413) 377 409 373
====== ======= ====== =====
Net earnings (loss) per common share........................ 0.13 0.11
====== =====
Weighted number of shares outstanding....................... 3,310,584 3,310,584
============ ============
<FN>
- ---------
(a) The finance receivables acquired were valued at their estimated fair
values as of May 31, 1993. The resulting discount is being amortized into
finance revenue over the remaining life of the portfolio to produce a
constant yield to maturity.
(b) The debt to fund the purchase of the capital stock of Canyon and to pay-
off all of the outstanding debt as of June 1, 1993 has been borrowed under
existing Company credit lines at a blended rate of 5.07%. Canyon's
historical interest expense has been removed and replaced with estimated
interest expense under the new funding terms using average balances
outstanding for the period.
(c) The pro forma adjustment to the provision for income taxes is calculated
using an estimated incremental income tax rate of 38%.
</TABLE>
63
<PAGE>
==============================================================================
TABLE OF CONTENTS
PAGE
---
Available Information................................. 2
Incorporation of Certain Documents by
Reference........................................... 2
The Company........................................... 3
Investment Considerations and Risk
Factors............................................. 3
Prospectus Summary.................................... 4
Capitalization........................................ 6
Use of Proceeds....................................... 8
Business.............................................. 8
Selected Financial Data............................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................... 19
Description of Subordinated Investment
Certificates........................................ 27
Legal Opinion......................................... 32
Experts............................................... 32
Additional Information................................ 32
Financial Statements.................................. 34
--------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS IS NOT
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY TO WHICH
THIS PROSPECTUS RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR
THE COMPANY TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE
THE DATE HEREOF.
==============================================================================
==============================================================================
SUBORDINATED INVESTMENT CERTIFICATES
1994 SERIES 8
1994 SERIES A
1994 SERIES B
1994 SERIES C
PASSBOOK SERIES
APRIL 29, 1994
==============================================================================
