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