Annual Report (Form 10-K), fiscal year 1993

ITEM 1. BUSINESS.
GENERAL
Industrial Funding Corp. ("Industrial" or the "Company"), an Oregon corporation organized in October 1989, services a nonperforming lease portfolio through asset collection and disposition activities through its operating subsidiary, Industrial Leasing Corporation ("Industrial Leasing"). In addition to collection activities, Industrial also manages an investment portfolio and current legal proceedings pending against the Company. The change in Industrial's business activities is the result of the sale of substantially all of the Company's assets in May 1993. The sale significantly changed the operations and business focus of the Company from its previous historical activities.
In 1990 and 1991, the Company experienced a significant increase in the level of its over 30 days past due small-ticket lease receivables, resulting in operating losses during those years. The level of operating losses caused the Company to be in violation of certain financial covenants contained in the Company's credit agreements. The Company was required to restructure its entire indebtedness under the terms of a Restructuring Agreement among the Company and its senior and subordinated lenders effective on February 24, 1992.
The constraints imposed under the Restructuring Agreement severely impacted the Company's operations, potential profitability, strategic opportunities and the potential return to shareholders. The Company investigated various alternatives which included a run-off of the lease portfolios and liquidation, and a sale of the Company or its assets. After extensive negotiation, on December 11, 1992, the Company entered into a definitive Agreement of Purchase and Sale of Assets with ILC Acquisition Corp., (the "Purchaser") providing for the sale of substantially all of the Company's assets (the "Asset Sale"), and the Asset Sale was approved by the Company's shareholders on May 17, 1993. A detailed discussion of the Asset Sale is contained in the Company's May 17, 1993 Proxy Statement.
On May 27, 1993, the Company completed the Asset Sale. Assets sold as a result of the Asset Sale included the active lease portfolio valued at $83.8 million, cash and restricted cash of $15.6 million, and certain other assets valued at $3.1 million. In consideration for the assets, Industrial received $20.2 million in cash, a Purchase Note (the "Purchase Note") in the preliminary principal amount of $19.6 million, payment by the Purchaser of Industrial's remaining senior and subordinated debt in the amount of $61.5 million and the assumption by ILC Acquisition Corp. of certain other liabilities valued at $1.2 million.
The final value of the Purchase Note was adjusted to $19.0 million, effective September 22, 1993, which reflected adjustments resulting from an audit of the Company's closing balance sheet. The Purchase Note has a three- year term with semi-annual principal and interest payments payable each May 27 and November 27. The interest rate on the Purchase Note is 6 percent per annum. The Purchase Note also supports representations and warranties made by Industrial in connection with the sale. If an indemnification obligation arises as a result of the Asset Sale, the Purchaser has the right to offset such obligation under the Purchase Note. On November 29, 1993, the Company received $3.7 million of principal and interest obligations pursuant to the terms of the Purchase Note from the Purchaser.
Prior to the Asset Sale, the Company provided small-ticket capital equipment lease financing to smaller businesses. Industrial's lease portfolio was widely diversified as to equipment type, lessee and location. The small- ticket leasing market is generally defined as leases covering capital equipment with original equipment cost of up to $250,000 and with three to five year terms. Industrial also owned and managed a "mid-ticket" equipment leasing portfolio. Effective April 1989, the Company ceased originating mid-ticket leases. Prior to the Asset Sale, Industrial originated leases principally through four sales offices located on the West Coast of the United States. These offices were all closed prior to the Asset Sale.
As of November 30, 1993, the total assets of the Company were comprised of the following: (i) $7.4 million in cash; (ii) $18.3 million in short-term investments; (iii) $15.9 million Purchase Note; and (iv) $3.1 million in nonperforming and other assets. In addition, at the end of the same period, pursuant to the indemnification obligation as a result of the Asset Sale, the Company had received an indemnification claim from the Purchaser in the amount of approximately $39,500. The Company has disputed this amount and has requested arbitration in order to resolve the dispute.
In September 1993, the Company's Board of Directors initiated a review of strategic alternatives that may be available to the Company as a result of the Asset Sale. The Board's review will include consideration of various options, including but not limited to the adoption of a plan of liquidation.
The Company maintains a staff of 15 employees and expects that staffing levels will decline as the level of nonperforming assets decreases. It is anticipated that expenses associated with the defense of the securities litigation will continue to range from $1.5 million to $2.0 million per annum. Since revenue items will only consist of income generated by the available cash balance and the Purchase Note, the Company anticipates that expenses will exceed income and a loss from operations will result until the litigation against the Company is resolved.
NONPERFORMING PORTFOLIO
The Company had a write-off policy whereby those leases that were either seriously delinquent or otherwise impaired were written down to their net realizable value. The revised value was reflected as nonperforming assets on the Company's balance sheet. The nonperforming assets were specifically excluded from the Asset Sale. The Company continues to carry its nonperforming portfolio at its net realizable value.
As of May 31, 1993, the fiscal quarter end immediately following the Asset Sale, the aggregate value of the nonperforming assets, as reflected on the financial statements of the Company, was $5.7 million. As assets written down to their net realizable value cannot be written up, the Company applies all cash proceeds received to reduce the aggregate book value of the nonperforming assets. During the first six months after the closing of the Asset Sale, the Company, through the application of cash recoveries, reduced the book value of the nonperforming assets to $3.0 million as of November 30, 1993, a reduction of approximately 47 percent.
The Company will continue its collection efforts so long as the performance is deemed by management to be cost effective. If the ultimate recovery of cash is less than the book value of the nonperforming assets, a loss will occur. If the collection efforts result in recovery of the entire book value, any additional recoveries will be recorded as a gain. The Company is unable to predict with certainty whether its recovery efforts will result in a gain or loss.
INVESTMENT ACTIVITIES
At the closing of the Asset Sale, the Company received cash proceeds of $20.2 million. The Company invested these funds in a combination of short-term and mid-term government securities, either directly, through investment in government security bond funds, or through financial advisors. The Company accounts for these funds at the lower of cost or current market value.
FINANCING
As a result of the Asset Sale, all of the senior and subordinated long-term debt in the amount of $61.5 million as of May 27, 1993, was repaid. The Company currently has no available short-term or long-term debt facilities.
COMPETITION
Due to the change in the nature of the Company's business, Industrial no longer competes in providing financial services.
EMPLOYEES
The Company had 15 employees at November 30, 1993, who were primarily engaged in collection activities. In addition to the collection and equipment remarketing staff, the Company employs two accounting personnel and a company manager. The Company believes that its relationship with its employees is excellent.
MANAGEMENT INFORMATION SYSTEMS
Industrial maintains accounting records through a personal computer based general ledger software system. The Company has also contracted with Parrish Financial Servicing Company, L.P. to provide specific software and database services associated with the management of the nonperforming portfolio. This contractual arrangement, which commenced May 26, 1993, is for an initial term of twelve months.
HISTORICAL BUSINESS DISCUSSION
For detailed information regarding historical activities of the Company, see Industrial's Annual Report on Form 10-K for the period ended November 30, 1992.
ITEM 2.



ITEM 2. PROPERTIES.
The Company's office is located in a leased facility in Portland, Oregon comprising a total of approximately 6,000 square feet. The Company's lease has a two-year term expiring May 27, 1995. Prior to May 27, 1993, the Company leased 52,500 square feet under the terms of a master lease with an expiration of August 31, 2000. On May 27, 1993, this master lease was terminated by the Company in exchange for a payment in the amount of $800,000. This termination of the master lease closed simultaneously with the completion of the Asset Sale. During the first five months of the fiscal year ended November 30, 1993, the Company terminated all leases associated with its former sales offices located in Washington and California.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
There is litigation pending 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 independent auditor, 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, allege violations of federal securities law. The WADE lawsuit also alleges violations under California state law. These lawsuits were filed in the United States District Court for the Northern District of California, and allege that plaintiffs were damaged as a result of alleged misstatements and omissions in documents disseminated in connection with the initial public offering and in subsequent communications and public filings by the Company, through February 1991. The Company has retained legal counsel to defend against these actions. The lawsuits are in the early stages of discovery, and therefore management is unable to determine their probable impact. However, as the plaintiffs allege damages of approximately $22.5 million, the lawsuits could have a material effect on results of operations and financial condition of the Company, if adversely determined.
As a result of the sale of substantially all of Industrial Leasing's assets on May 27, 1993, plaintiffs moved the court for a preliminary injunction restraining the Company from withdrawing, transferring, pledging or disposing of any funds or assets received in connection with the Asset Sale, and further moved the court to supervise the transfer of any such assets. The court denied plaintiffs' injunction motions. In so doing, the court stated that plaintiffs were likely to prevail on their Section 11 claims and that, in the absence of the requested injunction, there was a possibility plaintiffs would be irreparably harmed. The preliminary findings of the court, however, will not control the ultimate determination of liability in connection with the plaintiffs' Section 11 claim. Subsequently, plaintiffs filed an appeal with the Ninth Circuit Court of Appeals. It is not known when the Court of Appeals will review the appeal.
On October 6, 1993, the trial judge ordered the WADE and BOWER cases to a settlement magistrate, in an attempt to facilitate a settlement of the securities litigation. A settlement conference was held on January 6, 1994, before the magistrate, with the parties and their counsel. Another settlement conference is scheduled before the magistrate on April 5, 1994. There can be no assurance, however, that the securities litigation will be resolved by a settlement between the parties.
On December 14, 1993, the court certified the WADE lawsuit as a class action.
The court has ordered a jury trial of the WADE action to begin in September, 1994.
The Company has filed a lawsuit against two insurance carriers, demanding coverage against American Home under a directors and officers liability policy in the amount of approximately $5 million (Canadian), and against Continental Insurance under a general liability policy and umbrella policy of approximately $4 million (Canadian) and $16 million (Canadian), respectively. American Home and Continental have each filed answers denying liability. Continental has also filed a counterclaim against the Company, demanding reimbursement of the attorney fees and costs it advanced to the Company in connection with the defense of the securities class action lawsuits under a reservation of rights. As of September 30, 1993, Continental has advanced the Company attorney fees and costs in the amount of $560,667, which represents approximately 17 percent of the legal costs incurred to date by the Company in defense of the class action lawsuit.
In January 1993, Alex. Brown & Sons and Piper Jaffray, Inc., the underwriters of the Company's initial public offering, filed an action against the Company, demanding that the Company pay the underwriters' attorney fees and costs associated with their defense of the securities litigation, in accordance with the Underwriting Agreement entered into by the Company. The court has granted the underwriterers' motion for summary judgment, on July 9, 1993, and ordered the Company to pay the underwriters' costs and legal fees as they are incurred. The Company has filed an appeal with the Ninth Circuit Court of Appeals. The Company has been advised that as of November 30, 1993, the total amount of expenses incurred by the underwriters was approximately $357,000.
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 financial position or results of operation of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 17, 1993, the Company held its annual meeting and the shareholders of the Company approved the following proposals: (i) the sale of substantially all of the operating assets of Industrial Leasing pursuant to the Asset Sale between ILC Acquisition Corp. and Industrial Leasing; (ii) the election of Messrs. Alan R. Hibben, Brent S. Belzberg, Richard L. Doege, John J. Estok, and K. Peter Zech to the Board of Directors; and (iii) the selection of Deloitte & Touche as the Company's independent certified public accountants. The table below shows the results of the shareholder voting:
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and current office of the executive officer of Industrial, who is to serve until the next annual meeting of the Board of Directors or his early resignation, are set forth below. Also indicated is the date when such person commenced serving as an executive officer of Industrial.
PART II
ITEM 5.

ITEM 5. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Industrial's Class A Common Stock is traded in the over-the-counter market and reported on Nasdaq under the ticker symbol "IFDCA." On December 6, 1993, the Company was informed by the National Association of Securities Dealers, that pursuant to its bylaws, the Company did not meet the requirements to continue inclusion under the Nasdaq National Market due to its failure to maintain a sustained bid price of $1 per share during the preceding 6 month period. On December 22, 1993, at the Company's request, the Company was removed from the National Market, and hereafter will be included in the Nasdaq Small Capitalization Market.
The Company has never paid dividends on its outstanding common or preferred stock and does not expect to pay cash dividends on its outstanding common stock. As of November 30, 1993, the accumulated but undeclared dividends with respect to the preferred stock were $5.2 million. The Company intends to redeem its preferred stock as soon as the litigation is resolved, assuming funds are then available.
On November 30, 1993, there were approximately 112 holders of record of the Class A Common Stock of Industrial.
CLASS A COMMON STOCK INFORMATION
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is a discussion of the Company's financial condition and results of operations. This discussion should be read in conjunction with the audited financial statements appearing under Item 8


ITEM 8. FINANCIAL STATEMENTS.
INDEPENDENT AUDITORS' REPORT
The Board of Directors Industrial Funding Corp.
We have audited the accompanying consolidated balance sheets of Industrial Funding Corp. and its subsidiary as of November 30, 1993 and 1992, and the related consolidated statement of income, shareholders' equity, and cash flows for each of the three years in the period ended November 30, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiary at November 30, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, the Company is a defendant in litigation relating to alleged violations of federal securities laws. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any loss that may result upon resolution of this matter has been made in the accompanying financial statements.
DELOITTE & TOUCHE
Portland, Oregon January 12, 1994
SEE NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
INDUSTRIAL FUNDING CORP.
Consolidated Statements of Income
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Industrial Funding Corp. (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 sale, Company activities include: collection of the remaining assets; investment of financial liquid assets; and management of legal proceedings against the Company. The Company will review other strategic alternatives that may become available from time to time, including but not limited to, the adoption of a plan of liquidation.
NOTE 2. 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. The Company had two types of direct financing leases: Fair Market Value (FMV) and Purchase Upon Termination (PUT) leases. FMV leases were recorded with end of lease estimated residual values, PUT leases had guaranteed residuals as lessees had committed to purchase the equipment at the end of the lease terms. The guaranteed lease residuals were included with the minimum lease payments receivable.
The Company accounted for its investment in direct financing leases by recording as an asset the total minimum lease payments receivable plus the estimated residual value of the leased equipment, if applicable, less the unearned lease income. The unearned lease income represented the excess of the total minimum lease payments receivable plus the estimated residual value over the cost of the related equipment.
REVENUE RECOGNITION. Prior to the Asset Sale, the Company recognized unearned lease income as lease revenue over the term of the lease by the sum-of-the-months digits method on leases booked prior to September 1, 1989 and by the interest method on leases booked subsequent to September 1, 1989 on its small-ticket portfolio and by the interest method on its mid-ticket portfolio. Revenue was recognized on an accrual basis.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 may have adversely affected collectibility of the receivable.
SHORT-TERM INVESTMENTS. Short-term investments consist of mutual funds which are recorded at the lower of average cost or market. Aggregate net unrealized investment losses are included in results of operations.
NONPERFORMING ASSETS. Nonperforming assets consists primarily of equipment held for sale on 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 the equipment sale have been applied to the outstanding lease receivable. The nonperforming assets are valued at their estimated net realizable value.
DEPRECIATION. Depreciation of property and equipment is provided over the estimated useful life of the respective assets on a straight-line basis. Accumulated depreciation was $1,515,000 as of November 30, 1992.
CASH FLOW STATEMENT. For purposes of reporting cash flows, cash and temporary investments includes cash in banks and temporary investments with an original maturity of three months or less. Certain items presented in the statement of cash flows for the year ended November 30, 1992 are presented in the balance sheet as net assets held for sale at November 30, 1992.
ACCOUNTING FOR INCOME TAXES. Under federal income tax laws, the Company is not part of a controlled group and files its tax return separately. For financial statement purposes, the federal income tax provision is computed as if the Company were filing separately.
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 96, "ACCOUNTING FOR INCOME TAXES". The Company uses the liability method to reflect the tax effect of differences between taxable income and pre-tax financial income and adjusts deferred tax liabilities or assets for changes in tax rates in the period such law is enacted.
In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 "ACCOUNTING FOR INCOME TAXES". This statement supersedes Statement No. 96 and is effective for the Company's fiscal year beginning December 1, 1993. Statement No. 109, like Statement No. 96, uses the liability method as discussed above. The Company does not expect that this statement, once adopted, will have a material effect on the Company's financial statements.
For income tax purposes, FMV leases are accounted for by the operating method. Rental payments are recognized as income when they are received, and the cost of the leased equipment acquired is depreciated over its designated useful life. Deferred taxes are provided on the difference between income recognized for financial reporting purposes and income reported for tax purposes. For PUT leases, the equipment is treated as sold for tax purposes with the Company supplying the financing. Therefore, there is no difference between income recognition for financial reporting purposes and income reported for tax purposes.
RECLASSIFICATION. Certain reclassifications have been made to fiscal 1991 financial statements to conform to the fiscal 1992 presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SHORT-TERM INVESTMENTS
At November 30, 1993, short-term investments in mutual funds consist of the following:
At November 30, 1993, short-term investments, with an original cost of $18,000,000 plus $469,844 of dividends reinvested during the year, were recorded at market. To reduce the carrying amount of the short-term investments to market, the Company recorded a valuation allowance of $210,000 with a corresponding charge to net income.
At November 30, 1993, gross unrealized losses were $210,000.
NOTE 4. 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 six equal semi-annual installments of $3,174,000, plus accrued interest, beginning November 27, 1993.
NOTE 5. NET ASSETS HELD FOR SALE
The amounts included in net assets held for sale at November 30, 1992, are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. RESTRICTED CASH
Restricted cash at November 30, 1993 collateralizes underwriter's defense costs for securities litigation. The balance represents the level of cash required to maintain a level of security to support underwriter's defense costs as ordered by the District Court of Northern California. See Note 9, Commitments and Contingencies.
NOTE 7. LONG-TERM DEBT
As of May 27, 1993, all the Company's long-term debt was retired as a result of the Asset Sale. For an additional discussion of the Company's previous debt structure, see the Annual Report on Form 10-K for the fiscal year ended November 30, 1992.
NOTE 8. INCOME TAXES
The Company's effective combined state and federal income tax benefit rate was (197.2%), (56.4%), and (38.5%) for the years ended November 30, 1993, 1992, and 1991, respectively. The difference between taxes calculated at the federal statutory tax rate and the recorded tax benefit was as follows:
Income tax benefit consists of the following:
The Asset Sale resulted in a loss for tax purposes. Furthermore, the Company has determined that it has adequate net operating loss carryforwards and other deductions such that no income tax liability will result. As all timing differences have now been eliminated as a result of the Asset Sale, the Company has reviewed its deferred tax obligations, and has
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
concluded that no future income tax obligations exist as of November 30, 1993. Consequently, the results of the year ended November 30, 1993, have been adjusted to reverse all outstanding deferred tax obligations previously recorded.
As discussed in Note 1, 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 carryforwards. 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, 1993 and 1992, the Company had $2.4 million and $4.1 million, respectively, of net operating loss carryforwards for tax purposes.
NOTE 9. COMMITMENTS AND CONTINGENCIES
There is litigation pending 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 independent auditor, 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, allege violations of federal securities law. The WADE lawsuit also alleges violations under California state law. These lawsuits were filed in the United States District Court for the Northern District of California, and allege that plaintiffs were damaged as a result of alleged misstatements and omissions in documents disseminated in connection with the initial public offering and in subsequent communications and public filings by the Company, through February 1991. The Company has retained legal counsel to defend against these actions. The lawsuits are in the early stages of discovery, and therefore management is unable to determine their probable impact. However, as the plaintiffs allege damages of approximately $22.5 million, the lawsuits could have a material effect on the results of operations and financial condition of the Company, if adversely determined.
As a result of the sale of substantially all of Industrial Leasing's assets on May 27, 1993, plaintiffs moved the court for a preliminary injunction restraining the Company from withdrawing, transferring, pledging or disposing of any funds or assets received in connection with the Asset Sale, and further moved the court to supervise the transfer of any such assets. The court denied plaintiffs injunction motions. In so doing, the court stated that plaintiffs were likely to prevail on their Section 11 claims and that, in the absence of the requested injunction, there was a possibility plaintiffs would be irreparably harmed. The preliminary findings of the court, however, will not control the ultimate determination of liability in connection with the plaintiffs' Section 11 claim. Subsequently, plaintiffs filed an appeal with the Ninth Circuit Court of Appeal. It is not known when the Court of Appeal will review the appeal.
On October 6, 1993, the trial judge ordered the WADE and BOWER cases to a settlement magistrate, in an attempt to facilitate a settlement of the securities litigation. A settlement conference was held on January 6, 1994 before the magistrate, with the parties and their counsel. Another settlement conference is scheduled before the magistrate on April 5, 1994. There can be no assurance, however, that the securities litigation will be resolved by a settlement between the parties.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 14, 1993, the court certified the WADE lawsuit as a class action.
The court has ordered a jury trial of the WADE action to begin in September, 1994.
The Company has filed a lawsuit against two insurance carriers, demanding coverage against American Home for coverage under a directors liability policy in the amount of approximately $5 million (Canadian), and against Continental Insurance under a general liability policy and umbrella policy of approximately $4 million (Canadian) and $16 million (Canadian), respectively. American Home and Continental have each filed answers denying liability. Continental has also filed a counterclaim against the Company, demanding reimbursements of the attorney fees and costs it advanced to the Company in connection with the defense of the securities class action lawsuits under a reservation of rights. As of September 30, 1993, Continental has advanced the Company attorney fees and costs in the amount of $560,667, which represents approximately 17 percent of the legal costs incurred to date by the Company in defense of the class action lawsuit.
In January 1993, the underwriters of the Company's initial public offering filed an action against the Company, demanding that the Company pay the underwriters' attorney fees and costs associated with their defense of the securities litigation, in accordance with the Underwriters Agreement entered into by the Company. The court has granted the underwriters motion for summary judgment, on July 9, 1993, and ordered the Company to pay the underwriters costs and legal fees as they are incurred. The Company has filed an appeal with the Ninth Circuit Court of Appeals. The Company has been advised that as of November 30, 1993, the total amount of expenses incurred by the underwriters was approximately $357,000. Such amount has not been accrued as the Company, based in part on discussions with counsel, believe that any liability related to the matter is unlikely to occur.
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 financial position or results of operations 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.
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 as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. 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 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 owing 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 the Shares accrue quarterly at a rate of $14.22 per share per annum. 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 accrued 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 accrued 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 accreted preferred stock dividends totaled $5.2 million, $3.3 million and $1.4 million as of November 30, 1993, 1992 and 1991, respectively.
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 authorized an additional 72,000 shares of stock for a total of 100,000 shares available under the plan. At November 30, 1992, the total shares Class A Common Stock reserved 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. All options previously granted were canceled and no options are outstanding as of November 30, 1993.
NOTE 11. 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 are 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, $38,000, and $85,000 in fiscal 1993, 1992 and 1991, respectively.
NOTE 12. CONDENSED FINANCIAL STATEMENT INFORMATION OF REGISTRANT
INDUSTRIAL FUNDING CORP. (PARENT COMPANY ONLY)
- - - ------------------------------------------------------------------------------ Condensed Balance Sheets
INDUSTRIAL FUNDING CORP. (PARENT COMPANY ONLY) - - - ------------------------------------------------------------------------------- Condensed Statements of Income
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDUSTRIAL FUNDING CORP. (PARENT COMPANY ONLY) - - - ------------------------------------------------------------------------------- Condensed Statements of Cash Flow
NOTE 13. QUARTERLY INFORMATION (UNAUDITED)
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 accounting principles and by necessity include certain amounts determined using management's best estimates and judgments.
The financial statements have been audited by independent accountants who were appointed by the Board for fiscal 1993. 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 reporting. 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 ESTOK PRESIDENT AND CHIEF EXECUTIVE OFFICER
February 10, 1994
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No information is required to be reported under this item.
PART III
Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14 (the "Annual Proxy Statement") no later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference.
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this Item is incorporated by reference to the Company's Annual Proxy Statement.
The information concerning the Company's executive officers required by this Item is incorporated by reference to the Section in Part 1, Item 4.1 hereof entitled "Executive Officers of the Registrant."
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the Company's Annual Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the Company's Annual Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the Company's Annual Proxy Statement.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Documents Filed.
(1) Financial statements, Industrial Funding Corp. (included in Item 8).
Independent Auditors' Report dated January 12, 1994. Consolidated balance sheets November 30, 1993 and 1992. Consolidated statements of income for the three years ended November 30, 1993. Consolidated Statements of shareholders' equity for the three years ended November 30, 1993. Consolidated statements of cash flows for the three years ended November 30, 1993. Notes to consolidated financial statements.
(2) Schedules supporting consolidated financial statements:
Independent Auditors' Report
Schedule VIII. Valuation and qualifying accounts for the two years ended November 30, 1992.
Schedule IX. Short-term borrowings for the year ended November 30, 1991.
All other schedules have been omitted because of the absence of conditions under which they are required or because the required information is included elsewhere in the financial statements.
(3) Exhibits. Those exhibits indicated by an asterisk (*) are incorporated by reference to the same exhibit number unless otherwise noted as follows: (A) incorporated herein by reference to Registration Statement on Form S-1 filed on October 27, 1989 and amended on December 5, 1989 (File No. 33-31784)); (B) incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1990 as filed March 11, 1991; (C) incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 as filed February 28, 1992; (D) incorporated herein by reference to the Company's Report on Form 8 as filed May 5, 1992; (E) incorporated herein by reference to the Company's Report on Form 10-K for the period ended November 30, 1992, as filed February 25, 1993.
3.1* (A) Form of Restated Articles of Incorporation of the Company.
3.2* (A) Form of Bylaws of the Company.
4.1* (D) Restructuring Agreement dated as of February 24, 1992, by and among Industrial Leasing Corporation, the Purchasers of the Original Note Agreements, the Term Lenders, the Commercial Paper Lenders, and the Subordinated Lender.
4.2* (C) Statement of Designation of Series and Determination of Rights and Preferences of Series A Cumulative Preferred Stock dated March 15, 1991. (Exhibit 4.8.)
4.3* [E] Amendment to Restructuring Agreement dated January 11, 1993.
10.1* (A) Interest Rate and Currency Exchange Swap Agreement dated October 18, 1989, by and between Industrial Leasing Corporation and Algemene Bank Nederland N.V.. (Exhibit 10.3.)
10.2* (A) Revolving Credit and Term Loan Agreement dated as of March 8, 1988, by and between First City Credit Corp. ("FCC") and First Bank, as amended by Amendment No. 1 thereto dated as of May 31, 1989 and Amendment No. 2 thereto dated as of October 20, 1989, as assumed, agreed to and accepted by the Company, as further amended by a letter agreement, dated October 23, 1989. (Exhibit 10.12.)
10.3* (A) Consent and Waiver Agreement regarding Revolving Credit and Term Loan Agreement dated as of October 20, 1989, among FCC, First City Equipment Finance Corp., First City Equipment Credit Corp., RNB Leasing Inc., the Company and First Bank. (Exhibit 10.13.)
10.4* (A) Consolidated, Amended and Restated Security Agreement dated as of October 20, 1989, by FCC, the Washington Subsidiaries, the Company and First Bank. (Exhibit 10.14.)
10.5* (A) Security Agreement dated as of October 20, 1989, by the Company in favor of First Bank. (Exhibit 10.15.)
10.6* (B) Office Lease dated June 15, 1990, by and between A.L. McCormick, as landlord, and the Company, as tenant, for the Company's headquarters in Portland, Oregon. (Exhibit 10.16.)
10.7* (A) Industrial Funding Corp. 1989 Stock Option Plan. (Exhibit 10.18.)
10.8* (E) Industrial Funding Corp. Amended Directors' Nonqualified Stock Option Plan.
10.9* (A) Form of Incentive Stock Option Agreement. (Exhibit 10.32.)
10.11*(A) Form of Non-Qualified Stock Option Agreement. (Exhibit 10.33.)
10.12*(B) Interest Rate Swap Agreement dated as of June 30, 1987, by and between Industrial Leasing Corporation and First Bank. (Exhibit 10.35.)
10.13*(C) Employment agreement from the Company to John J. Estok dated November 8, 1991. (Exhibit (10.26.)
10.14*(C) Industrial Funding Corp. 1992 Savings and Profit Sharing Plan. (Exhibit 10.27.)
10.15*[E] Industrial Funding Corp. Agreement of Purchase and Sale of Assets. (Exhibit 10.18.)
10.16 Revised employment agreement from the Company to John J. Estok dated July 1, 1993.
10.17 Lease agreement of the Company related to its primary operating facilities in Portland, Oregon dated May 27, 1993.
11.1 Exhibit 11.1 is a statement of computation of per share earnings that includes the preferred stock dividend amount.
22.1*(A) Schedule of Subsidiaries.
23.1 Independent Auditor's consent related to Form S-8. Registration Statement No. 33-63514 filed with the Securities and Exchange Commission on May 28, 1993.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the fourth quarter ended November 30, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Portland, State of Oregon, on February 10, 1994.
INDUSTRIAL FUNDING CORP.
/s/ JOHN J. ESTOK --------------------------------- John J. Estok President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on February 10, 1994, on behalf of the Registrant and in the capacities indicated.
Signatures Title - - - ---------- -----
/s/ JOHN J. ESTOK President, Chief Executive Officer, - - - ------------------------- Director John J. Estok (Principal Executive Officer)
/s/ BRENT S. BELZBERG Chairman of the Board of Directors - - - ------------------------- Brent S. Belzberg
/s/ RICHARD L. DOEGE Director - - - ------------------------- Richard L. Doege
/s/ ALAN R. HIBBEN Director - - - ------------------------- Alan R. Hibben
/s/ K. PETER ZECH Director - - - ------------------------- K. Peter Zech
Supplemental Schedules Supporting Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
Industrial Funding Corp.:
We have audited the consolidated financial statements of Industrial Funding Corp. and subsidiary as of November 30, 1993 and 1992 and for each of the three years in the period ended November 30, 1993, and have issued our report thereon dated January 12, 1994, which report includes an explanatory paragraph as to an uncertainty because of litigation relating to alleged violations of federal securities laws; such consolidated financial statements and report are included elsewhere on this Form 10-K. Our audits also included the consolidated financial statement schedules of Industrial Funding Corp. and subsidiary, listed in Item 14. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE
Portland, Oregon January 12, 1994
Note: In addition to the above, a $4,000 write down was taken directly against the nonperforming assets.
INDUSTRIAL FUNDING CORP. - - - ----------------------------------------------------------------------- Schedule IX - Short-term Borrowings