Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
CERTAIN RECENT DEVELOPMENTS
In November, 1994 the Company determined that is was appropriate for it to consider its strategic alternatives and, in particular, the possibilities of raising additional capital from a larger company, arranging for its shareholders to sell a portion of their holdings, some combination of these alternatives, or a sale of its business as a whole. The Company has engaged an investment banking firm to advise it about its alternatives and to identify possible investors or purchasers.
To date no decision has been made with respect to these matters, and no potential investor or purchaser has been identified to the Company. It is not possible to predict with any assurance whether the Company will continue as an independent company or be acquired in whole or part by a larger concern, or in what form or at what price any such transaction might be accomplished. Nor has the Company established any time frame within which it will make a decision.
GENERAL NATURE OF BUSINESS
The Company's business is principally divided into two segments: commercial equipment leasing and commercial financing, and investments in commercial real property leasing and rental projects.
The Company's assets primarily consist of: receivables from commercial borrowers; direct finance leases with commercial lessees; and interests in partnerships which own commercial real estate and rent it to others, generally under operating leases.
As of December 31, 1994, approximately 81% of such assets were receivables which arose from commercial equipment leasing and commercial financing, and 19% was real property owned by the Company and leased or rented to others under operating leases.
COMMERCIAL EQUIPMENT LEASING AND COMMERCIAL FINANCING
The Company conducts its commercial equipment leasing and commercial lending operations, on a national basis, primarily from its corporate headquarters located in Reading, Pennsylvania. Additionally, the Company maintains offices in Crestview Hills, Kentucky (a suburb of Cincinnati, Ohio), Deerfield, Illinois (a suburb of Chicago), Portland, Oregon and Orlando, Florida. Marketing personnel are also located in Pittsburgh, Pennsylvania; San Diego and Los Angeles, California; Knoxville, Tennessee; Boston, Massachusetts; Denver, Colorado; Seattle, Washington; and Chicago, Illinois.
The Company conducts its leasing and lending activities in several ways. A portion of its business is generated with customized sales aid leasing programs for vendors of equipment. Direct customer solicitation programs (telemarketing, mail solicitations, and direct customer visits and referrals) focusing primarily on present and former lessees and commercial borrowers also generate business for the Company. Also, four affinity marketing divisions generate volume for the Company -- American Legal Funding which offers funding programs specifically designed for the legal profession; the Information Systems Funding Group which offers leasing and lending services for the use or ownership of mid-size computers and computer software to businesses; American Reli Financial which provides leasing and lending services to general equipment rental centers; and Golf Capital which provides
leasing and lending services to the country club and golf course industry. Additionally, the Company through its General Services Division provides equipment leases and asset-based loans to a broader range of customers not serviced by the four affinity marketing divisions.
Sales aid leasing programs are programs wherein the Company provides full pay out or finance instruments (usually on a nonrecourse basis to the product seller) to assist sellers of commercial equipment in merchandising their products. The Company approves all contracts prior to authorizing purchase of the equipment under the sales aid leasing programs. No one program commitment is expected to exceed 10% of the Company's annual commercial leasing/lending volume.
As of December 31, 1994, the Company held $206,000 in repossessed equipment and equipment returned to it at the conclusion of the lease terms (classified as other assets on the consolidated financial statements). Repossessed and returned equipment is initially recorded at no more than 70% of estimated fair value and is periodically written down until resold.
Acquisitions
On June 1, 1994, the Company purchased all of the capital stock of American Capital Leasing Corporation ("ACL"), whose principal business consists of financing and leasing equipment. (See Note R to the consolidated financial statements.) The Company operates the acquired business as a separate subsidiary. The Company has retained all five employees of ACL.
On June 1, 1993, the Company purchased all of the capital stock of Canyon Capital, Inc. ("Canyon"), whose principal business consisted of financing and leasing equipment. The Company does not operate the acquired business under the trade name Canyon and intends to liquidate the portfolio of leases and loans while soliciting certain lessees for additional new business.
On January 31, 1992, the Company purchased substantially all the assets of Reli Financial Corp. ("Reli"), whose principal business consists of providing financing to the equipment rental industry. The Company continues to operate this acquired business (as well as the other rental and financing activities) under the trade name "American Reli Financial". Reli's pre-acquisition policies, procedures and systems have been evaluated, and integrated with the Company's management practices. Direct solicitation remains the focus activity of this division, and has increased the Company's market penetration through expanded direct marketing efforts and trade show participation.
Direct Finance Leasing
Finance leases, often referred to as full pay out or capital leases, are non-cancellable contracts, generally for a longer term than operating leases, under which the original equipment cost to the Company is generally less than the stream of periodic payments to be received from the lessee during the initial lease term.
The Company's direct finance leases are those which meet one or more of the following four criteria: (a) the lease transfers ownership of the property to the lessee by the end of the lease term; (b) the lease gives the lessee an option to purchase the property at a price that is sufficiently lower than the expected fair value of the property at the time the option becomes exercisable such that its exercise appears, at the inception of the lease, to be reasonably assured; (c) the lease term is equal to 75% or more of the estimated economic life of the property; or (d) the present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair value of the property.
In the case of its direct finance leases, the Company retains title to the asset, yet the lessee generally bears the contractual risk of loss and the duty to maintain and insure the asset. The Company's principal exposure on a direct finance lease is the lessee's ability to make payments (i.e., the credit risk); therefore, only after the Company is satisfied of the lessee's credit worthiness and of its ability to make future lease payments, and upon receipt of an executed lease, does the Company issue a purchase order to a manufacturer or vendor for the equipment. Generally, the lessee pays the Company, over the non-cancellable term of the lease, an amount equal to the
purchase price of the leased equipment, less its estimated unguaranteed residual value, if any, at the end of the lease term, plus a gross profit. The lessee generally has the option at the conclusion of the term of the lease to either (1) renew the lease; (2) purchase the equipment at its then market value or for a predetermined amount; or (3) return the equipment to the Company. The Company records a direct finance lease on its books as a receivable. The terms of direct finance leases vary in length with the size of the lease and the estimated useful life of the leased property and generally range from 12 to 60 months. The average original term of the Company's direct finance leases is approximately 37 months.
Direct finance leases are originated through dealer sales organizations, or directly with the lessee. Approximately 40 marketing representatives and support staff present the Company's leasing programs to dealer/vendors (thereby providing their customers the alternative of lease financing when acquiring various types of equipment), and/or engage in direct solicitation programs focusing on present and former lessees and also potential new lessees, generally through telemarketing and direct mail solicitation. Because the Company generally purchases equipment from dealers on a nonrecourse basis, the leasing transaction provides a sale for the dealer/vendor of the product. Frequently, former or existing lessees request to lease additional equipment from the Company. Upon re-examination and approval of the credit risk (including the lessee's credit, capacity to pay, and nature of the leased property) the Company makes a decision to purchase equipment for lease to the direct lessee.
As of year-end 1994, the Company owned and serviced 5,184 direct finance lease contracts. No individual lessee had direct finance leases accounting for more than 1.4% of the total finance lease contracts outstanding as of December 31, 1994. (See note C to the consolidated financial statements for concentration of credit risk related to finance receivables.) Direct finance lease contracts (direct finance leasing receivables plus residual valuation less unearned income) totalled $123,040,000 as of December 31, 1994.
Commercial Financing
The Company engages in commercial financing transactions with various commercial customers. Commercial loans are generally secured by inventory, receivables, equipment, or real estate. Installment loan agreements under which a seller of commercial equipment enters into an installment sale of equipment to a buyer are discounted by and assigned to the Company. Criteria to qualify for commercial loans include credit worthiness, ability to make future payments, and the quality of collateral used to secure the loans. As of December 31, 1994, the Company had 1,022 commercial loans totalling $31,088,000.
As of December 31, 1994, the Company held $600,000 in real estate from foreclosures on one commercial loan. The real estate is recorded at estimated fair value (net of disposal costs) and is included in other assets on the consolidated financial statements.
REAL ESTATE
The Company, through American Real Estate Investment and Development Co., a wholly-owned subsidiary, is in the business of making and managing investments in commercial real property for itself and on behalf of third party investors. This activity principally involves the formation and management of investment partnerships, asset management, and related advisory and funding activities. The Company's portfolio was acquired through sale/leaseback transactions, where existing buildings are purchased and leased back to the seller; build-to-suit projects, where buildings are constructed for lease to a specific tenant; or through the acquisition of specific properties from third parties. In some instances, properties are acquired in joint venture with other investors or management companies. Presently the Company subcontracts all day-to-day asset management responsibilities to third parties with whom the Company works closely.
The emphasis the Company places on the activities of buying, managing and/or selling properties tends to vary from time to time in concert with the markets and the Company's objectives. Beginning 1991, the Company primarily
focused on managing and refinancing its existing properties. The selective purchase of real estate assets resumed in 1994 as certain market conditions appeared attractive. The Company also remained active in the sale of certain individual assets and groups of assets, as it does from time to time. It is likely that certain property sales will be consummated in 1995 based on present marketing activity.
The forty-three properties owned and managed as of December 31, 1994 are classified as follows: eighteen are office buildings, sixteen are industrial buildings, two are limited service hotels, five are various retail centers, and two are various other commercial properties. Fifteen of the properties are multi-tenant, excluding the hotels. In these projects, assistance in leasing and other onsite management activities is provided either by co-managing partners local to the project or through third party management companies (or both). The Company is general partner in Hampton Inn hotels in Flint, Michigan, and Allentown, Pennsylvania, and provides hotel management services through American Hotel Management, Inc., a subsidiary of the Company.
The Company has in a select few instances made operating loans to individuals or corporate entities in connection with its real estate investment activities. These loans are included in the "Commercial Financing" section.
Write-down
The Company's commercial real estate is affected by market driven changes in value and by specific factors affecting individual properties. Market conditions improved in 1994, and appear to have recovered substantially since falling in previous years.
Generally accepted accounting principles which govern the Company's reporting of its carrying value of assets do not permit the Company to increase the reported book value (original cost less accumulated depreciation) of properties which increase in fair value. However, properties that are believed to have experienced material decreases below book value, of a permanent nature, must be written down by the Company in the current reporting period at the time of such determination. As of June 30, 1992, eleven properties were believed to have had an estimated current fair value materially below book value. The Company, in order to reflect this value degradation, incurred a charge to earnings, net of deferred taxes and net of losses allocable to minority interests, of $2,773,000 and reduced its share of reported book value in real estate assets by $4,302,000, to $33,836,000. As of December 31, 1993, the Company incurred an additional charge to earnings, net of deferred taxes, of $322,000, and reduced its share of reported book value in real estate assets by $488,000 to $31,419,000.
Management used the best information reasonably available to develop its estimates of market value. Future changes to these estimates may be necessary if conditions differ substantially from the assumptions used in developing these valuations.
Investment in Real Estate Partnerships
The following table is a summary of the Company's total investment in and operating results from consolidated and unconsolidated real estate partnerships based on the Company's specific ownership percentages. (See "Write-down.")
Investment in real estate partnerships increased in 1994 as a result of the acquisition of two new partnerships, offset by several asset sales and the sale of the Company's interest in one partnership. In January, 1995, interest in one of the real estate partnerships acquired in 1994 was sold for a gain.
Investment in real estate partnerships increased in 1993 primarily due to the conversion of debt owed by the partnerships to the Company into capital, capital contributions by the Company as part of the restructuring of one partnership, and the purchase of limited partnership interests previously held by third parties. The decrease in 1992 was due to the write-down of property values (see "Write- down,"). Excluding the write-down, investment levels in 1992 increased $578,000 from 1991. Substantially all of the increase resulted from the purchase of limited partnership interests in investee partnerships previously held by third parties.
Although since its inception the Company has not sold properties representing a material amount of its investment in real estate partnerships, it is likely in the near future that property sales will represent a more significant part of the Company's real estate business.
Income before taxes from real estate partnerships is the aggregate of the Company's proportionate share of such income from all partnerships in which the Company has ownership interests. This income measure includes both income or loss from operations (i.e., rental income less operating expenses, interest charges, and depreciation), and income or loss from the sale of properties owned by the partnerships. Income before taxes in 1994 increased from both recurring operations, due to improved occupancy and stabilized operating rentals, and the sale of various partnership properties. Income before taxes in 1993 and 1992 was negatively impacted by the write-downs described above. Excluding the write-down in 1993, income before taxes was $829,000. Excluding the write-down of $4,302,000 (including an adjustment for $198,000 of losses attributable to minority interests), income before taxes from real estate partnerships in 1992 was $666,000, an improvement from 1991. The improvement in 1993 and 1992 was substantially attributable to lower interest costs rather than an improvement in the operation of the Company's real estate. In general, profitability from operations remains susceptible to the impact of lease expirations and the lowering of certain rents, although this risk has somewhat diminished.
The sale of the Company's interest in one partnership to a third party, through the exercise of a purchase option, accounted for the gain on sale of partnership interests in 1994. In 1993 and 1992 the Company generated only a nominal gain on sale of partnership interests as no meaningful sales activity was conducted. This inactivity was due primarily to poor market conditions resulting from general investor uncertainty over values and concerns over real estate's relative illiquidity. The Company's activities in earlier years had consisted of sales involving one to three partnerships. The Company considers sales based on (i) the Company's need for additional liquidity, (ii) the extent to which the Company has access to the market for limited partnership capital, and (iii) the attractiveness of the Company's partnership interests as a vehicle for resale to limited partner investors.
The extent of gain on sale of partnership interests is dependent on a number of factors: the selling price (which is dependent on the yields necessary to attract investors as compared with the yields generated by the partnership), selling costs, and the book value of the interests being sold, against which gain is measured. The book value of a given interest is dependent in part on depreciation charges previously taken, which in turn is a function of the length of time the partnership interest has been held prior to sale and other factors. Because of the interaction of these various factors, the Company's gain on sale of partnership interests has not shown any consistent pattern over the last five years, and the Company does not expect to recognize significant gains from the sale of partnership interests in the near term.
Real Estate Financing and Contingencies
The Company has commercial loans outstanding to, and has guaranteed portions of the debt of, eight unconsolidated real estate partnerships (See notes E and O to the consolidated financial statements). The Company's ownership interest in these partnerships range from 15% to 58.2% in 1994 and
from 10% to 58.2% in 1993. As of December 31, 1994 and 1993, commercial loans outstanding to these partnerships totalled $2,299,000 and $2,412,000, respectively, and the guaranteed portions of the debt of these partnerships were $2,253,000 and $2,400,000, respectively.
COMPETITION
The Company competes with a number of financial institutions, including: domestic and foreign commercial and savings banks; independent leasing and finance companies; captive manufacturer-related, vender-affiliated leasing and finance companies; and diversified financial services companies, including insurance companies and pension funds, other credit grantors and other real estate investment companies. These competitors include large companies operating on a national basis and smaller local entities. Based upon Asset Finance & Leasing Digest's most recent listing, the Company was the 40th largest finance company in the United States, based on 1993 originations (as measured by cost of new equipment added) and the 41st largest based on 1993 portfolio size.
Competition is based on the size and length of contracts, the interest or rental rate, other finance and service charges, assessment of the residual value, name recognition, reputation and customer service. The Company believes that it has been able to compete successfully against larger competitors because its employees' in-depth knowledge of the industries they are serving and the availability of information through its systems enable the Company to offer superior response to its customers' needs.
EMPLOYEES
As of December 31, 1994, the Company had 75 full-time and 4 part-time employees. The Company encourages its employees to participate in college and other professionally-sponsored programs to further their knowledge and professional expertise. Effective January 1, 1994, the Company has a 401(k) plan covering substantially all employees who qualify as to age and length of service. This plan includes a profit sharing component. Previously, the Company had two defined contribution profit sharing plans. The Company provides health, life, and disability insurance protection; educational assistance; supplemental health care expense reimbursement; and other standard employee benefits during, but not after, employment with the Company.
CERTAIN FINANCIAL COVENANTS
In connection with various bank loans, AEL Leasing Co., Inc., American Commercial Credit Corp., and American Capital Leasing Corporation, as well as American Equipment Leasing Co., Inc. (a wholly-owned subsidiary of Horrigan American, Inc. that owns all the stock of those three subsidiaries), have made certain agreements with respect to their capital structures and other matters, the most significant of which are described below.
(i) American Equipment Leasing Co., Inc. and its subsidiaries, on a consolidated basis, must maintain (a) a minimum cash flow ratio of receipts to disbursements, as specifically defined, of 1 to 1, (b) a ratio of debt to tangible net worth not in excess of 7 to 1, and (c) a minimum tangible net worth of $21,000,000. As of December 31, 1994, the cash flow ratio of receipts to disbursements was 1.32 to 1.00, the ratio of debt to tangible net worth was 4.21 to 1.00, and tangible net worth totalled $28,772,000.
(ii) AEL Leasing Co., Inc., American Commercial Credit Corp. and American Capital Leasing Corporation, on a separate company basis, must each maintain a ratio of debt to tangible net worth not in excess of 7 to 1. As of December 31, 1994, the ratio of debt to tangible net worth was 3.92 to 1.00 in AEL Leasing Co., Inc., 4.88 to 1.00 in American Commercial Credit Corp. and 2.78 to 1.00 in American Capital Leasing Corporation.
The Company is in compliance with the above covenants as of December 31, 1994.
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
See note M to the consolidated financial statements for information relating to the Company's total revenues, operating profit, and identifiable assets by industry segments.
AVERAGE INTEREST RATES
The following table sets forth information regarding weighted average interest rates on the Company's borrowed funds during the periods indicated.
ITEM 2.



ITEM 2. PROPERTIES
PROPERTY
The Company owns (through a consolidated real estate partnership) the Horrigan American, Inc. headquarters building in Flying Hills, Reading, Pennsylvania, which also houses the AEL Leasing Co., Inc. corporate staff and most of the commercial leasing and lending staff of this subsidiary, and other tenants. This office space is suitable and adequate for the Company's office staff and supporting computer operations, which principally utilize telephone, fax, and computer equipment. The Company has space available in these facilities which should adequately cover its growth requirements.
The Company leases its commercial leasing/lending offices in Deerfield, Illinois (a suburb of Chicago), Crestview Hills, Kentucky (a suburb of Cincinnati, Ohio), Portland, Oregon and Orlando, Florida. American Real Estate Investment and Development Co. leases its corporate office in Chicago, Illinois. Rental expense for the year 1994 for the Company's leased offices was $167,000. These leases expire at various times through July, 2000. (See note N to the consolidated financial statements.) The Company believes that alternative office space is available in all areas.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
LITIGATION
The Company is party (plaintiff or defendant) to certain legal actions. While any litigation has an element of uncertainty, management, after reviewing these actions with legal counsel, is of the opinion that the liability, if any, resulting from these actions will not have a material effect on the financial condition or results of operations of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
There is no trading market for the registrant's common stock. See Item 13, "Certain Relationships and Related Transactions" for agreements restricting the right of individual parties to dispose of their stock in the Company.
At February 28, 1995, there were 64 holders of common stock of the Registrant.
Common stock dividends were paid quarterly in 1994 and in January and July of 1993. Total dividends paid were $1,182,566 and $459,805 in 1994 and 1993, respectively. (See Item 8, "Consolidated Statements of Changes in Stockholders' Equity.")
See Item 8, Note J to the consolidated financial statements for covenants which restrict payment of dividends.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA HORRIGAN AMERICAN, INC. AND SUBSIDIARIES
See accompanying notes to selected financial data.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO SELECTED FINANCIAL DATA
1. Per Share Amounts Earnings from continuing operations per common share were computed using weighted average shares and dilutive stock options outstanding during each year after deducting preferred dividend requirements from net earnings, and the purchase of treasury stock. Earnings per common share assuming full dilution were not reported because dilution arising from the stock options is less than three percent.
2. Ratio of Earnings to Fixed Charges The ratio of earnings to fixed charges has been computed by dividing earnings plus fixed charges by the fixed charges. Earnings for this purpose includes earnings from continuing operations plus income taxes less equity in undistributed earnings of unconsolidated affiliates. Fixed charges are considered to consist of interest expense attributable to continuing operations and the portion of rentals deemed representative of the interest factor. The ratio of earnings to fixed charges is not expected to change by more than 10% as a result of this offering. The Company guaranteed $2,253,000 of debt of unconsolidated real estate partnerships as of December 31, 1994. The amount of fixed charges associated with this guaranteed debt was $205,000 for 1994. The computation of the ratio of earnings to fixed charges does not include the fixed charges associated with the guaranteed debt because the Company has not been required to honor the guarantees nor is it probable that the Company will be required to honor the guarantees. In 1992, earnings from continuing operations were inadequate to cover fixed charges by $269,000. However, the ratio of earnings to fixed charges is not intended to disclose cash flow from operations. In addition to the normal noncash expenses, such as depreciation and provision for possible lease and loan losses, the provision for write-down of real estate negatively affects the ratio for 1992. The ratio of earnings to fixed charges would be 1.35 if the provision for write-down of real estate were excluded.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO SELECTED FINANCIAL DATA
3. Earnings (Loss) from Continuing Operations In 1993, the net earnings included an after-tax charge of $322,000 which resulted from the write-down of the Company's real estate assets by $488,000. Excluding the after-tax effect of this write-down, the Company's results of operations in 1993 were $3,369,000. In 1992, the net loss included an after-tax charge of $2,773,000 which resulted from the write-down of the Company's real estate assets by $4,302,000. Excluding the after-tax effect of this write-down, the Company's results of operations in 1992 were $2,360,000.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
EARNINGS (LOSS)
The Company generated net earnings of $3,688,000 for 1994, a 21% increase from net earnings of $3,047,000 for 1993. The Company incurred a net loss of $413,000 in 1992.
As a result of an overall revaluation of its real estate portfolio, the Company reduced the book value of its real estate assets by $4,302,000 as of June 30, 1992, and incurred a related after-tax, non- cash charge to earnings of $2,773,000. As of December 31, 1993, the Company reduced the book value of its real estate assets by an additional $488,000, and incurred a related after-tax, non-cash charge to earnings of $322,000. (See "Business -- Real Estate -- Writedown".) Excluding the after-tax effect of these write-downs, the Company's results of operations in 1993 were $3,369,000, a 42.8% increase from adjusted earnings of $2,360,000 in 1992.
TOTAL FINANCE REVENUE
Commercial leasing and financing revenue was $18,625,000 in 1994, $17,401,000 in 1993 and $18,869,000 in 1992.
The Company's sales efforts have resulted in an increase in total volume of new leases and loans in each of the past two years. This increase in outstanding finance receivables has increased the average outstanding balance of finance receivables and has started to offset the effect of lower yields. Net direct finance lease receivables and commercial finance receivables totalled $148,073,000 as of December 31, 1994 compared to $122,144,000 as of December 31, 1993.
The decrease in commercial leasing and financing revenue in 1993 was attributable primarily to lower effective yields on the lease and loan portfolio. Lower yields resulted from both relatively lower market interest rates which lowered the Company's lease and loan rates, and to the mix of the Company's newly acquired leases and loans, which includes higher transaction sizes where credit quality and rate sensitivity are believed to be higher.
While revenue levels have been lower than preferred by the Company, reductions in credit losses have favorably impacted the Company.
FINANCE REVENUE MARGIN
Finance revenue margin represents the difference between total finance revenues and the amount the Company pays as interest on short-term borrowings and long-term debt allocated to finance receivables. The Company's finance revenue margin was $11,642,000 for 1994, $10,890,000 for 1993, and $10,425,000 for 1992.
The Company's finance revenue margin increased $752,000 (6.9%) in 1994 from 1993. Total finance revenues increased 7.0% in 1994 from 1993 and interest expense increased 7.2% for the same period. The average interest rate at which the Company prices its products decreased 121 basis points to 13.22% in 1994 from 14.43% in 1993. The average interest rate on the Company's borrowings decreased 24 basis points to 6.60% in 1994 from 6.84% in 1993.
Finance revenue margin increased in 1994 as a result of the $25,929,000 growth in finance receivables and the 7% increase in total finance revenues. Interest expense increased at a faster rate than finance revenue due to increased leverage.
The Company's finance revenue margin increased $465,000 (4.5%) in 1993 from 1992. This increase in finance revenue margin was the result of a faster decrease (22.9%) in interest expense than the 7.8% decrease in total finance revenues. The average interest rate at which the Company prices its products decreased 111 basis points to 14.43% in 1993 from 15.54% in 1992. The average interest rate on the Company's borrowings decreased 149 basis points to 6.84% in 1993 from 8.33% in 1992.
The 1993 increase in finance revenue margin was due to the purchase of two portfolios of finance receivables, during 1993, at a higher interest rate spread. The Company continues to market higher average balance commercial leasing and financing contracts, with lower yields to achieve improved asset quality and economies of operations. The Company's Asset and Liability Committee reviews this risk regularly and manages the matching of debt with these finance receivables.
PROVISION FOR POSSIBLE LEASE AND LOAN LOSSES
The provision for possible lease and loan losses decreased $196,000 (12.5%) to $1,377,000 in 1994 and decreased $617,000 (28.2%) to $1,573,000 in 1993. The following table details the components of the provision for possible lease and loan losses as of and for the years ended December 31, 1994, 1993 and 1992.
(In thousands) - -----------------------------------------------------------------------------
(A) The balance of the allowance for possible lease and loan losses increased as a result of the acquisition of portfolios of finance receivables.
The Company maintains an allowance for possible lease and loan losses based on a periodic evaluation of the finance receivable portfolio. Management considers current economic conditions, diversification of the loan portfolio, historical loss experience, results of loan reviews, borrower's financial and managerial strengths, the adequacy of underlying collateral and other relevant factors in its evaluation. While management uses the best available information to make such evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. This allowance reflects an amount that in management's opinion is adequate to absorb known and inherent losses in the portfolio. Receivables which are determined to be uncollectible are charged off against the allowance for possible lease and loan losses, and recoveries on accounts previously charged off are credited to it.
As of December 31, 1994, the Company allocated $135,000 of the allowance for possible lease and loan losses in anticipation of future losses on certain individually significant accounts. This allocated allowance decreased $155,000 in 1994 from 1993. As of December 31, 1993, the Company allocated $290,000 of the allowance for possible lease and loan losses in anticipation of future losses on certain individually significant accounts. This allocated allowance decreased $125,000 in 1993 from 1992.
The Company's net charge-offs of commercial leasing and financing receivables decreased by $625,000 (73.4%) in 1994 from 1993. The Company's
net charge-offs of commercial leasing and financing receivables decreased by $427,000 (21.1%) in 1993 from 1992. The decrease in net losses was the result of improved underwriting standards, improved adjusting procedures, aggressive use of legal remedies, strong remarketing efforts, and a healthier economy.
The Company continues to improve its asset quality and control delinquency. The Company's tighter credit standards and more focused efforts within several market niches, has enhanced asset quality. In certain situations, larger down payments, additional security deposits, and/or shorter terms are now required. An asset review committee monitors the quality of the Company's assets. The Company's improved collection and adjusting procedures have resulted in effective control of delinquent receivables. Management believes the allowance for possible lease and loan losses is adequate to cover estimated future credit losses.
NET OPERATING LEASE REVENUES
Net operating lease revenues represent rents on real estate and equipment operating leases offset by related interest and depreciation expenses. Net operating lease revenues decreased $365,000 (18.1%) in 1994 over 1993, although total operating lease revenues increased $31,000 (0.6%) to $5,712,000. Total equipment operating lease revenues increased $87,000 and real estate operating leases revenue decreased $56,000 resulting from the sale of properties in 1994 and 1993. Interest expense attributable to net operating lease revenues increased $321,000 (12.8%) due to an increase in mortgage debt outstanding during the period and higher interest rates. On December 31, 1993, loans from the Company to several partnerships were converted to capital contributions to these partnerships. The corresponding interest incurred on this debt in 1994 is reflected as interest to fund real estate operating leases. In 1993, this interest was appropriately included in the Company's finance revenue margin. Depreciation expense attributable to operating leases increased $75,000 (6.5%) primarily the result of an increase in equipment operating leases and the acquisition of real estate property in July and December, 1994, offset by a decrease in depreciation on real estate operating leases due to the sale of properties in 1994 and 1993, and a lower basis for certain real estate properties due to a $488,000 write-down to fair value on December 31, 1993.
Net operating lease revenues increased $61,000 (3.1%) in 1993 over 1992, although total operating lease revenues decreased $254,000 (4.3%) to $5,681,000. The decrease in total operating lease revenues in 1993 was due primarily to decreases in lease revenue resulting from the sale of two properties in 1993 and the write-off of uncollectible rents, offset by rents received on certain properties which were on a non-accrual basis in 1992, and the collection of lease arrearages on three properties. Interest expense attributable to net operating lease revenues decreased $289,000 due to lower interest rates on a portion of the outstanding mortgage debt and less mortgage debt outstanding during the period. Depreciation expense attributable to operating leases decreased $26,000, primarily the result of the lower basis for certain real estate properties due to the write-down to fair value during 1992, and the sale of two properties, offset by an increase in depreciation due to equipment operating leases generated in 1993.
The Company's principal objectives for its real estate business are to (1) manage its properties aggressively, maintaining the integrity of the assets through appropriate capital expenditures, (2) accelerate paydown of the debt associated with those properties as available cash flow permits, (3) hold most assets for long-term investment, (4) consider the selective sale of individual properties or groups of properties, and (5) selectively invest in additional real estate.
The Company's aggregate investment in real estate is not expected to significantly appreciate in value over the next several years. In addition, net operating lease revenues from some existing investments may decline in the short to intermediate term, as rents under many existing leases are expected to remain flat or decrease as leases expire over the next several years. While this will tend to depress the Company's profitability in its real estate operations for a period of time, it is expected that the Company's real estate investments (after third party mortgage debt service obligations and overhead expenses) will continue to provide positive cash flow to the Company.
The commercial real estate business is subject to several risks which management reviews on a regular basis. These risks are identified below with the status of each as of December 31, 1994:
1. Credit risks.
There are various levels of credit risks inherent in the Company's rent receivables. A total of $2,000 of rents were thirty-one or more days past due.
2. General market conditions nationally or within specific geographic areas.
The Company is maintaining an ownership interest, ranging from 10% to 100%, in 43 real estate properties with an original cost of $63,325,000 in the following states, with the percentage of concentration indicated in parenthesis: Florida (27%), Pennsylvania (22%), New Jersey (14%), Michigan (10%) and other (27%).
3. Greater difficulty in releasing or selling special purpose buildings.
The Company's special purpose buildings include three day-care facilities. None are presently for sale and all are fully occupied. The Company also owns and manages two limited-service hotels. The Company sold its interest in a nursing home property in December, 1994.
4. Vacancies.
Total vacancy (excluding the hotels), based on the portfolio's total square footage, approximated 5.3%. The vacancy percentage included partial vacancies in eleven real estate projects, some of which may require additional cash from the Company until the properties are substantially leased. Management is actively pursuing new tenants for these properties.
5. Property repairs and improvements.
Preservation of the quality and value of commercial real estate properties requires that repairs and improvements occur regularly. In a majority of the Company's properties, the obligation to incur such expenditures has been passed to the tenants. Provided the tenants have the financial resources to comply, the Company is able to avoid or defer this responsibility. In other cases, the responsibility is retained by the Company, and repairs and improvements are funded out of current operating lease cash flows or through cash reserves; and if necessary through increased investments or additional borrowings.
The timing and amount of repairs or improvements is determined by the operating history and present level of operating lease revenue levels of the property, by the Company's plans for a property (such as a sale, lease, or renovation), and in some cases by regulatory directives. In 1992, the Americans with Disabilities Act ("ADA") was passed, requiring the improvement of many properties under certain conditions in order to accommodate the needs of the physically disabled. In certain of the Company's properties, meeting ADA requirements will necessitate improvements at various times. The Company estimates that the cost of such improvements will not be material relative to the aggregate cost of the properties.
It is estimated that, not including potential ADA requirements, up to approximately $629,000 of improvements may be made within the next twelve months. Approximately 36% of the cost of these improvements will be funded through operating cash generated by the partnerships, and the balance through additional debt.
6. Mortgage loan rollover.
The extension or replacement of existing mortgage loans as they come due continue to involve a high degree of risk in the current and reasonably foreseeable future. Such loans, when available, are frequently at lower loan amounts. In 1995, approximately $5,009,000 of third party mortgage debt will come due and will require negotiation or replacement financing. It is expected that a substantial portion of this debt will be renegotiated for extended terms with existing lenders. To the extent any
such debt is not extended in maturity, the Company expects to seek funding from other lenders or provide funding internally, if necessary. As interest rates have been increasing, however, any such extensions or new loans may be at higher interest rates than in the recent past. This has the potential to decrease the Company's operating margin, as several factors can tend to reduce the ability to achieve higher revenues to offset such increases. Such factors include the timing of rent adjustments and market limitations.
7. Valuation of real estate properties.
A decline in the market value of the Company's investment in real estate can provide risk to the Company in several ways. To the extent the declines indicate a reduction in the rentals expected on a property, the Company will experience a decline in operating lease revenues. Also, lower values can reduce the amount of available loan borrowings or equity capital available from third parties to the Company to fund its continued ownership of the properties, and can reduce eventual sale proceeds if properties are sold and values have not recovered.
In general, conditions affecting the value of individual properties can change from period to period. Conditions include an extremely wide variety of factors outside the control of the Company. In the case of many of the Company's real estate operating leases, a change in conditions can also include the early termination of a favorable lease caused by a tenant's financial difficulties or the modification of such a lease arising out of the negotiation of a new lease with a tenant. The Company is presently in negotiations involving several of its properties, any of which may result in lower operating lease revenues in future periods.
As of December 31, 1994, there were no properties believed to have an estimated current fair value materially below book value. Future changes to the property valuations may be necessary if any conditions differs substantially from the assumptions used in developing current valuations.
OTHER OPERATING REVENUES
Other operating revenues increased $1,713,000 (66.5%) to $4,288,000 in 1994 from 1993. Customer service fees decreased $143,000 (11.7%) primarily due to a continued reduction in insurance premiums earned as a result of the discontinuance of the lease insurance program and fewer late charges earned due to lower overall delinquency. Management income increased $39,000 (17.5%) due to a fee received in connection with the sale of one real estate property. Furniture and equipment sales, net of cost of goods sold, increased $483,000 (69.6%) due to increased volume in the modular and systems furniture business but the Company disposed of this line of business in March, 1995. The Company's share of income in unconsolidated real estate partnerships increased $812,000 primarily due to a pre-tax gain of approximately $813,000 from the sale of one real estate property in June, 1994, and an increase in revenues generated by certain partnerships. Gain on sale of equity securities decreased $381,000 (92.7%) due to less sales activity in 1994. Other income increased $415,000 (74.6%) primarily due to a gain on the sale of a partnership interest and the recovery of finance receivables which were charged off prior to the Company's acquisition of those charged off finance receivables.
Other operating revenues increased $4,283,000 to $2,575,000 in 1993 from a loss of $1,708,000 in 1992. The loss in 1992 resulted from the write-down of the Company's real estate portfolio by $4,302,000 in June 1992. A $488,000 provision for write-down of real estate was recorded in 1993 (see "Business - -- Real Estate -- Write-down"). Customer service fees decreased $260,000 primarily due to a reduction in insurance premiums earned as a result of the discontinuance of the lease insurance program in mid-1992 and fewer late charges earned. Management income decreased $88,000 primarily due to nonrecurring fees earned in 1992 from the negotiation of the sale of certain equipment. Furniture and equipment sales increased $296,000 due to the entry into the modular furniture business and the achievement of higher volume. The Company's share of losses in unconsolidated real estate partnerships decreased $190,000. Gain on sale of debt and equity securities increased $405,000. Other income decreased $74,000.
OPERATING EXPENSES
Operating expenses increased $1,029,000 (11.7%) to $9,860,000 in 1994. Salaries, related taxes, and employee benefits increased $695,000 (15.2%) due to an increase in incentive compensation, the addition of several marketing personnel, and the addition of employees through the acquisition of American Capital Leasing Corporation. Depreciation and amortization decreased $111,000 (19.8%) primarily due to a continued reduction in lease insurance expense due to the discontinuance of this program in 1992. All remaining expenses increased $445,000 (12.0%) due to an increase in the maintenance and repair of various real estate properties, an increase in rent expense and the addition of operating expenses incurred by American Capital Leasing Corporation.
Operating expenses decreased $152,000 (1.7%) to $8,831,000 in 1993. Salaries, related taxes, and employee benefits decreased $80,000 (1.7%) due to a reduction in number of employees, offset by an increase in incentive compensation. Depreciation and amortization decreased $36,000 (6.0%) primarily due to a reduction in lease insurance expense due to the discontinuance of this program in July 1992, offset by the write-off of deferred costs associated with a mortgage which was subsequently refinanced. All remaining expenses decreased $36,000 (1.0%) due to an across the board reduction in expenses offset by fees paid to third party management companies to assist in managing the day-to-day operations of most of the real estate properties owned by the Company (this increase, however, is offset by a reduction in salary expense for the Company's real estate investment subsidiary) and consultant expenses incurred due to the acquisition of the capital stock of Canyon Capital, Inc. in June 1993 (see "Business -- Commercial Equipment Leasing and Commercial Financing -- Acquisitions"). The Company continues to control operating expenses based on the above analysis; however, further expense reductions are necessary to improve profitability.
PROVISION FOR INCOME TAXES
Income taxes for 1994 were $2,502,000; for 1993 were $1,900,000; and for 1992 were $144,000 (including $241,000 of state income taxes for the Company's profitable subsidiaries). The effective income tax rates for 1994, 1993 and 1992 were 39.4%, 37.4% and 28.8%, respectively (see note L to the consolidated financial statements). The effective tax rate is higher than the statutory federal income tax rate due principally to the provision for state income taxes, net of federal tax benefit.
Income taxes for 1994 and 1993 increased $602,000 and $1,756,000, respectively due to higher pre-tax income. Income taxes for 1992 decreased $744,000 due to a pre-tax loss, principally the result of the net provision for real estate write-down which provided a $1,310,000 income tax benefit.
Effective January 1, 1993, the Company adopted SFAS No. 109. This change in the method of accounting for income taxes had no cumulative effect on the 1993 consolidated statement of operations (see note A to the consolidated financial statements).
NET INVESTMENT IN FINANCE RECEIVABLES AND PROPERTY UNDER OPERATING LEASES
Net direct finance lease receivables and commercial finance receivables totaled $148,073,000 as of December 31, 1994 compared to $122,144,000 as of December 31, 1993, a net increase of $25,929,000 for the year. Property under operating leases, net of accumulated depreciation, increased $3,391,000, resulting primarily from the acquisition of two properties.
The increase in finance receivables was in accordance with the Company's growth plans. The Company's sales efforts have generated a larger volume of new leases and loans in 1994 due to increased penetration into focus markets, while maintaining the Company's policy of tight credit standards. In addition, the Company's lease and loan portfolio expanded through the acquisition of American Capital Leasing Corporation on June 1 (see "Business - -- Commercial Equipment Leasing and Commercial Financing -- Acquisitions"). Future originations will be dependent to a large extent upon economic conditions and the Company's ability to sell services in a competitive market environment. The Company continues to look for opportunities to acquire portfolios of leases and loans which will compliment the Company's existing finance receivables.
The change in property under operating leases is in accordance with management strategy. The Company's activities in buying and selling properties varies in concert with the markets. Additional purchases of real estate assets are considered as certain market conditions appear attractive. Sales are considered at various times depending on such factors as pricing, capital needs, and tenant interests.
LIQUIDITY
Liquidity represents the Company's ability to meet ongoing financial obligations. The Company's ongoing liquidity is dependent upon continued profitability and collection of its receivables and rentals, the ability to sell equipment or collect purchase option payments at the conclusion of maturing equipment leases, the sale of Subordinated Investment Certificates, the ability to secure new senior debt (loans from banks and other financial institutions), the ability to secure real estate mortgage financing, to sell real estate, and to sell equity interests in real estate partnerships, and the ability to obtain other financing.
Net cash provided by continuing operating activities was $6,769,000 for 1994, $7,175,000 for 1993 and $7,411,000 for 1992.
The Company's direct finance lease receivables and equipment operating leases are funded primarily with unsecured senior debt. The Company generally attempts to match new leases with borrowings of like maturity and amount in which the interest rate is fixed at the time of the borrowing. Additionally, the Company borrows term debt with varying maturities and short-term floating interest rate debt, and uses Subordinated Investment Certificate debt. The Company's commercial finance receivables are similarly match funded by various forms of unsecured senior debt and Subordinated Investment Certificate debt. The Company has unused lines of credit totalling $56,382,000 as of December 31, 1994. (See "Capital Resources").
The Company's investment in real estate (property under operating leases) is leveraged substantially with borrowings by the Company. Much of the debt is comprised of mortgage loans securing individual properties. Of the mortgage debt, a substantial amount is nonrecourse to the Company, with the balance being recourse through guarantees by Horrigan American, Inc. or its real estate subsidiary. Of the investment in real estate not funded with mortgage debt, a substantial amount is funded indirectly by the Company with Subordinated Investment Certificate debt.
In the opinion of management, the Company's liquidity position is sufficient under present circumstances.
CAPITAL RESOURCES
Future growth of the Company will depend in significant measure on its ability to obtain additional lines of credit and other financing, the continued sale of Subordinated Investment Certificates, the sale of equity interests in real estate partnerships and continued profitability. As of December 31, 1994, the Company had the following debt structure:
Total stockholders' equity increased by $1,789,000 from December 31, 1993 to December 31, 1994 primarily due to the net earnings of $3,688,000 for 1994, offset by the payment of dividends ($1,190,000) and the decrease in the net unrealized holding gains for available-for-sale securities ($622,000).
Refer to Notes H and I to the consolidated financial statements for disclosure of the outstanding short-term and long-term debt, including lines of credit information. In the opinion of management, the Company's capital resources are sufficient under present circumstances to satisfy its capital requirements based upon present asset growth projections, current leverage, continued profitability and historic ability to secure new sources of borrowings.
INFLATION
The Company's financial statements, and the related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which generally require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operation of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation.
INTEREST RATES
Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. Management believes that continuation of its efforts to manage the rates, liquidity and interest sensitivity of the Company's assets and liabilities is necessary to generate an acceptable return on assets and return on equity.
Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest margins through periods of changing interest rates.
Interest rate risks arise when interest-earning assets mature or when their rates of interest change in time frames that are different from those of interest-bearing liabilities. The matching of assets and liabilities may be analyzed by examining the extent to which they are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.
The rate of growth in interest free sources of funds (e.g., stockholders' equity) will influence the level of interest sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest sensitivity gap is only one factor to be considered in estimating the net finance revenue margin. The Company monitors and adjusts the gap position, taking into consideration current interest rate projections, and maintaining flexibility if rates move contrary to expectations.
As of December 31, 1994, the Company had a three-month negative cumulative gap of 3.8%, a six-month negative cumulative gap of 3.3% and a twelve-month negative cumulative gap of 2.8% on total earning assets of $185,551,000. The cumulative gaps for years two through ten ranged from 9.7% positive to 4.7% positive. These percentages are reflective of scheduled principal payments only and have not been adjusted for anticipated early pay-offs. The relatively short duration of many of the Company's earning assets indicates that the interest rate sensitivity gap will probably remain within its present, rather narrow, margin under current market interest rate conditions. Management believes the Company's cumulative gap ranges are satisfactory for achieving acceptable net interest margins.
The Company has interest rate swap agreements outstanding where the Company pays fixed interest rates and receives variable interest rates. The following table contains information concerning these agreements as of December 31, 1994:
Interest expense is adjusted for the net amount receivable or payable under the interest rate swap agreements. The following table contains information concerning these agreements for the year ended December 31, 1994:
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS HORRIGAN AMERICAN, INC.
We have audited the accompanying consolidated balance sheets of Horrigan American, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Horrigan American, Inc. and subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
January 31, 1995 Philadelphia, Pennsylvania
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
See accompanying notes to consolidated financial statements.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.
Principles of Consolidation
The consolidated financial statements include the accounts of Horrigan American, Inc., nine wholly-owned subsidiaries (American Equipment Leasing Co., Inc., AEL Leasing Co., Inc., American Commercial Credit Corp., American Capital Leasing Corporation, AEL Holdings, Inc., Horrigan American Securities, Inc., American Real Estate Investment and Development Co., American Hotel Management, Inc. and The Business Outlet, Inc.), and thirty-one real estate partnership investments, wherein the Company is maintaining a controlling interest, ranging from 10% to 100% (the Company).
All significant intercompany balances and transactions have been eliminated in consolidation.
Investments in nine real estate partnerships, wherein the Company is not maintaining a controlling interest, are stated at cost plus equity in undistributed net earnings since dates of acquisition.
Minority interest, as reported in the consolidated balance sheets, includes the income or loss for the minority investors of real estate partnerships. This minority interest balance fluctuates due to current year income or loss, contributions to, and distributions from, the partnerships; changes in ownership percentages; or the addition or deletion of partnerships from the group of consolidated partnerships.
Debt and Equity Securities
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). This statement requires investments in equity securities with a readily determinable fair value and investments in all debt securities to be classified at the date of acquisition in one of three categories. The three categories are (1) held to maturity -- carried at amortized cost; (2) available for sale -- carried at fair value (with unrealized gains and losses, net of tax, flowing through a separate component of stockholders' equity); and (3) trading account -- carried at fair value (with unrealized gains and losses flowing through the income statement). Effective December 31, 1993, the Company adopted SFAS No. 115. The fair value of securities is based on quoted market prices. Prior to 1993, the Company carried all debt securities at amortized cost (because it had the intent and ability to hold such securities until maturity) and all equity securities at the lower of aggregate cost or market.
Net Investment in Finance Receivables
Net investment in finance receivables consists of commercial leasing and financing receivables, and lease residual value receivables. Receivables are stated at gross balances net of unearned income and net of the allowance for possible lease and loan losses.
Real Estate Investment Activity
Included in Equity Investments in Real Estate Partnerships and Property Under Operating Leases are various investments in commercial real estate. This activity principally involves the formation and management of investment partnerships, property management, and related advisory and funding activities. The forty-three properties owned and managed as of December 31, 1994 are classified as follows: eighteen are office buildings, sixteen are
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- (Continued)
industrial buildings, two are limited service hotels, five are various retail centers and two are various other commercial properties. Fifteen of the properties are multi-tenant, excluding the hotels. Significant geographic concentrations (based on property cost) within the portfolio are: Florida (27%), Pennsylvania (22%), New Jersey (14%) and Michigan (10%).
Real estate properties are recorded at the lower of cost or net realizable value. Properties that are believed to have experienced material decreases in net realizable value below book value, of a permanent nature, are written down in the current reporting period at the time of such determination. In making such determinations, consideration is given to such factors as cash flows, reserves, vacancy factors, capitalization rates and growth rates.
On a periodic basis, or upon the occurrence of a triggering event (e.g., default of a major tenant), management performs an internal valuation on such properties. These valuations reflect current expectations relating to cash flows, reserves, vacancy factors, capitalization rates and growth rates. If such valuation results in the devaluation of a property, which management believes is other than temporary, that valuation is recognized as a charge to earnings in the current period.
Revenue Recognition
The accounting for nonrefundable fees and costs associated with originating or acquiring loans and initial direct costs of leases is presented in accordance with Statement of Financial Accounting Standards No. 91.
Income on direct finance leases included in the minimum lease payments is deferred and earned on the interest method to reflect a constant periodic rate of return on the net investment in the lease. Residual values of leased equipment represent the estimated fair value of the equipment at the conclusion of the lease. Residual values for direct finance leases are earned on the interest method over the life of the related leases.
Income on commercial finance receivables is earned on the interest method to reflect a constant periodic rate of return.
The accrual of income on finance receivables is discontinued once a finance receivable becomes one day past due. Also, when in management's judgment it is determined that a reasonable doubt exists as to the collectibility of additional income, future payments are applied to the principal balance only, and the finance receivable is classified as non-performing.
Rentals from equipment operating leases are recognized as income when due. Depreciation is provided on the double declining-balance method over the useful life of the equipment as follows: transportation and machinery equipment -- five years; office, data processing and other equipment -- four to five years.
Rentals from real estate operating leases are recognized as income when due. Depreciation is provided on the straight-line method over the useful life of the property: nineteen to thirty-nine years.
Loan Impairment
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114). In October 1994, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" (SFAS No. 118) which amends SFAS No. 114. These statements require that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. This statement excludes leases as defined in SFAS No. 13, Accounting for Leases.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- (Continued)
Effective January 1, 1994, the Company adopted SFAS No. 114 and SFAS No. 118. The cumulative effect of this change in the method of accounting for loan impairment is $0 to the 1994 consolidated statement of operations. The Company will recognize future changes in the present value of impaired loans by reporting the entire charge as bad-debt expense in the same manner in which impairment initially was recognized.
Allowance for Possible Lease and Loan Losses
The allowance for possible lease and loan losses is based on a periodic evaluation of the finance receivable portfolio and reflects an amount that in management's opinion is adequate to absorb known and inherent losses in the portfolio.
Management considers a variety of factors when evaluating the allowance recognizing that an inherent risk of loss always exists in the lending process. Consideration is given to the impact of current economic conditions, diversification of the loan portfolio, historical loss experience, results of loan reviews, borrower's financial and managerial strengths, the adequacy of underlying collateral and other relevant factors. While management uses the best available information to make such evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluation. The provision for possible lease and loan losses is charged to operating expense. Lease and loan losses are charged directly against the allowance and recoveries on previously charged-off leases and loans are added to the allowance.
Derivative Financial Instruments
Interest rate swap agreements are entered into as hedges against fluctuations in the interest rates of specifically identified liabilities. There is no effect on the total liabilities of the Company, however, net amounts receivable or payable under agreements designated as hedges are recorded as adjustments to the interest expense related to the hedged liability.
Property and Equipment
Depreciation on fixed assets (not including property leased to others) is provided primarily by the straight-line method over the estimated useful lives of the respective asset classes as follows: building and improvements - -- five to forty years; office and data processing equipment -- two to eight years.
Income Taxes
Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative effect of this change in the method of accounting for income taxes was $0 to the 1993 consolidated statement of operations.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- (Continued)
Pursuant to the deferred method under APB Opinion 11, which was applied in 1992 and prior years, deferred income taxes were recognized for income and expense items that were reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes were not adjusted for subsequent changes in tax rates.
Retirement and Postemployment Benefits
Effective January 1, 1994, the Company has a 401(k) plan covering substantially all employees who qualify as to age and length of service. This plan includes a profit sharing component. During 1993 and 1992, the Company had two defined contribution profit sharing plans. The contribution percentage is determined each year by the Board of Directors of each subsidiary of the Company. Profit sharing expense, aggregating $299,000, $315,000 and $295,000 in 1994, 1993 and 1992, respectively, was reported as salaries and employee benefits. The Company currently has no postretirement benefits as contemplated under Statement of Financial Accounting Standards No. 106, nor postemployment benefits as contemplated under Statement of Financial Accounting Standards No. 112.
Earnings Per Common Share
Earnings per common share are computed using weighted average shares and dilutive stock options outstanding during each year after deducting preferred dividend requirements from net income. Earnings per common share assuming full dilution are not reported because dilution arising from the stock options is less than three percent.
Reclassifications
Prior period amounts have been reclassified when necessary to conform to the current year's presentation.
NOTE B -- DEBT AND EQUITY SECURITIES The following is a summary of information as of and for the years ended December 31:
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE C -- NET INVESTMENT IN FINANCE RECEIVABLES Net investment in finance receivables and maximum terms remaining as of December 31, 1994 and 1993 are as follows:
Installments due on total receivables for each of the five years subsequent to December 31, 1994 are as follows: 1995, $76,659,000; 1996, $49,359,000; 1997, $26,909,000 1998, $10,458,000; 1999, $3,963,000; and thereafter, $1,993,000.
Included within the finance receivables are non-performing leases and loans on which the Company is applying payments to principal only. Such receivables approximated $245,000 and $101,000 as of December 31, 1994 and 1993, respectively. If these receivables had been current in accordance with their original terms, finance revenue in 1994, 1993 and 1992 would have increased $35,000, $39,000 and $100,000, respectively.
The Company's credit risk of finance receivables arises in the normal course of business, principally from commercial businesses, throughout the United States with some geographic concentration (based on equipment cost) in California (17%), Pennsylvania (9%), Texas (8%), New York (6%) and Florida (6%). There is also some leased asset equipment concentration (based on total receivables) in construction (28%), computers and computer software (26%), manufacturing/machine tools (5%) and party rental equipment (5%). The Company has identified by industry type (based on total receivables) the following significant concentrations of credit risk as of December 31, 1994: Equipment Rental (36%), Attorneys (14%) and manufacturing/machine tools (7%). The Company retains title to the equipment asset in the case of its direct finance leasing receivables, while the lessee bears the contractual risk of loss and the duty to maintain and insure the asset. The commercial financing receivables are generally secured by inventory, receivables, real estate or equipment.
NOTE D -- ALLOWANCE FOR POSSIBLE LEASE AND LOAN LOSSES
The following is a summary of the Company's allowance for possible lease and loan losses as of and for the years ended December 31:
(A) The balance of the allowance for possible lease and loan losses increased as a result of the acquisition of portfolios of finance receivables.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE E -- EQUITY INVESTMENTS IN REAL ESTATE PARTNERSHIPS
Investments in nine unconsolidated real estate partnerships consist of total ownership interests ranging from 10% to 58.2%.
Summary combined financial information for the investee partnerships as of and for the years ended December 31, 1994 and 1993 follows:
The unamortized portion of the excess of cost over the Company's share of net assets of investee partnerships was $33,000 and $56,000 as of December 31, 1994 and 1993, respectively.
The Company provides management services to the investee partnerships under terms of an agreement. The revenue for these services, aggregating $262,000, $230,000 and $223,000 in 1994, 1993 and 1992, respectively, was reported as management income.
The Company has commercial loans outstanding to investee partnerships of $2,299,000 and $2,412,000 as of December 31, 1994 and 1993, respectively. The Company has also guaranteed the debt (refer to note O) of certain unconsolidated real estate partnerships.
The Company has sold certain partnership interests. Total gain on sale of the partnership interests, aggregating $307,000, $0 and $1,000 in 1994, 1993 and 1992, respectively, was reported as other income.
NOTE F -- PROPERTY UNDER OPERATING LEASES
The following is a schedule of the Company's investment in property under operating leases as of December 31, 1994 and 1993:
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE F -- PROPERTY UNDER OPERATING LEASES -- (Continued)
Depreciation for each of the three years ended December 31 follows:
The estimated minimum future rental revenues on operating leases for each of the five years subsequent to December 31, 1994 are as follows: 1995, $5,695,000; 1996, $4,575,000; 1997, $3,795,000; 1998, $3,498,000; 1999, $3,433,000; and thereafter, $18,837,000.
NOTE G -- PROPERTY AND EQUIPMENT
Property and equipment utilized by the Company is summarized by major classifications as follows as of December 31:
Land and building value is based on the percentage of space occupied by the Company. For the years ended December 31, 1994, 1993 and 1992, depreciation of $301,000, $308,000 and $294,000, respectively, was provided on the Company's property and equipment.
NOTE H -- SHORT-TERM BORROWINGS
Short-term borrowings represent: (1) Amounts payable to banks, including unsecured demand notes with fixed interest rates and unsecured floating or fixed interest rate lines of credit of $42,707,000 as of December 31, 1994. The Company has the option to borrow $13,707,000 in long-term, fixed rate loans at negotiated rates which would reduce the available short-term lines of credit when elected. Short-term lines of credit in use as of December 31, 1994 are $20,250,000. (2) Amounts payable upon demand to holders of floating interest rate subordinated investment certificates.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE H -- SHORT-TERM BORROWINGS -- (Continued)
The following is a summary of information pertaining to such borrowings as of and for the years ended December 31:
(A) Average amount outstanding during the year is computed by dividing the total monthly outstanding principal balances by 12.
Weighted average interest rate during the year is computed by dividing the actual short-term interest expense by the average short-term borrowings outstanding.
NOTE I -- LONG-TERM DEBT
Long-term debt as of December 31, 1994 and 1993 consists of the following:
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE I -- LONG-TERM DEBT -- (Continued)
The Company has $111,433,000 in unsecured lines of credit with banks. The total lines in use as of December 31, 1994 are $77,508,000.
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1994 are as follows: 1995, $58,728,000; 1996, $31,659,000; 1997, $16,143,000; 1998, $4,828,000; 1999, $12,545,000; and thereafter, $7,310,000.
NOTE J -- CERTAIN COVENANTS
The terms of certain unsecured loan agreements provide for various restrictive covenants. The most significant of these provide that: (1) American Equipment Leasing Co., Inc. and its subsidiaries, AEL Leasing Co., Inc., American Commercial Credit Corp. and American Capital Leasing Corporation, on a consolidated basis, shall maintain (a) a minimum cash flow ratio of receipts to disbursements, as specifically defined, of 1 to 1 (b) a ratio of debt to tangible net worth not in excess of 7 to 1 and (c) a minimum tangible net worth of $21,000,000. (2) AEL Leasing Co., Inc., American Commercial Credit Corp. and American Capital Leasing Corporation, on a separate Company basis, shall maintain a ratio of debt to tangible net worth not in excess of 7 to 1.
The Company is in compliance with the above covenants as of December 31, 1994.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE K -- STOCKHOLDERS' EQUITY
The 8% noncumulative and nonvoting preferred stock was purchased and retired by the Company in April, 1994. The preferred stock dividend was paid in January and April, 1994.
The common stock of the Company is covered by an agreement restricting its sale, redemption or transfer.
The Company terminated on November 30, 1992 a non-qualified stock option plan for certain key employees. The options are exercisable at a price of 100% of the fair market value of the stock on the date that the option is granted. Options granted under the plan are exercisable at any time and expire five years from the date of issuance. An analysis of the activity in this plan for the last three years follows:
The total options outstanding, by each year's option price, as of December 31, 1994 are: 23,900 at $7.79 and 30,070 at $6.43.
NOTE L -- INCOME TAXES
The total provision for income taxes for the years ended December 31 consists of:
The sources of deferred income taxes (benefits) and the tax effect of each for the years ended December 31 are as follows:
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE L -- INCOME TAXES -- (Continued)
The following is a reconciliation between the statutory federal income tax rate and the effective income tax rate on the total provision for income taxes for the years ended December 31:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1994 and 1993, in accordance with SFAS No. 109, are presented below:
In order to fully realize the gross deferred tax asset, the Company will need to generate future taxable income of approximately $8,800,000. Based upon the Company's current and historical tax history and the anticipated level of future taxable income, management of the Company believes the existing deductible temporary differences will, more likely than not, reverse in future periods in which the Company generates net taxable income. There can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings.
For income tax reporting purposes: The Company has no credit carryover to offset regular tax liability during 1994.
For financial reporting purposes: (1) The Company records a provision for income taxes on the minority interest share of loss absorbed by the Company from any partnership investment. (2) The Company has no credit carryover to offset regular tax liability during 1994. (3) The Company records a deferred tax liability on the net unrealized holding gains for available-for-sale securities in accordance with SFAS No. 115.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE M -- BUSINESS SEGMENTS
The Company operates principally in three business segments, reports a fourth segment pertaining to general corporate and other, and discloses any significant transaction which is not specifically related to the normal operations of a segment:
COMMERCIAL LEASING AND FINANCING -- leasing of various types of equipment under direct finance and operating leases, lease financing programs, and direct cash loans to commercial businesses.
REAL ESTATE -- leasing of real estate property under operating leases, and investments in real estate. Two limited service hotel operations provide operating earnings on two equity investments. Real estate management, development and advisory services; and hotel management services are included.
FURNITURE AND EQUIPMENT SALES -- selling various types of office furniture and equipment, and servicing equipment sold.
GENERAL CORPORATE AND OTHER -- includes investment activities other than real estate; and consolidating elimination entries which are not material.
UNALLOCATED GENERAL CORPORATE EXPENSE -- consists of interest expense allocated to the investments in marketable securities and long-term investments.
Revenues by segment are comprised of revenues from unaffiliated customers; intersegment revenues are not significant.
Operating profit is total revenue less directly incurred costs and expenses, and allocated corporate operating costs and expenses.
Identifiable assets by industry are those assets of the Company that are used exclusively in or are reasonably allocated to operations in each industry. Assets employed by the segment "general corporate and other" are principally cash, investments exclusive of the real estate industry segment, and property and equipment.
The following segment information is reconciled to the related consolidated financial statements' amounts.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE M -- BUSINESS SEGMENTS -- (Continued)
NOTE N -- LEASES
Rental expense included in operating expenses for each of the years in the three-year period ended December 31, 1994 was $167,000, $77,000 and $64,000, respectively.
As of December 31, 1994, the Company is committed to minimum rentals under various operating leases totaling $760,000. The minimum annual rentals for each of the five years subsequent to December 31, 1994 are as follows: 1995, $197,000; 1996, $145,000; 1997, $134,000; 1998, $110,000; and 1999, $110,000; and thereafter, $64,000.
NOTE O -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and contingent liabilities on which management does not anticipate any material losses. Such commitments and contingent liabilities expose the company to various degrees and types of risks, including credit risk, interest rate risk, and liquidity risk.
A summary of significant commitments and contingent liabilities as of December 31 follows:
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE O -- COMMITMENTS AND CONTINGENCIES -- (Continued)
Unused lines of credit represent conditional offers by the Company to lend additional funds to qualified customers. Commitments to fund leases and loans represent finance agreements secured by the Company wherein the equipment collateral has not yet been delivered. Financial guarantees are conditional commitments issued by the Company guaranteeing performance by an unconsolidated real estate partnership to a third party.
As of December 31, 1994, the Company was party (plaintiff or defendant) to certain legal actions. While any litigation has an element of uncertainty, management, after reviewing these actions with legal counsel, is of the opinion that the liability, if any, resulting from these actions will not have a material effect on the financial condition or results of operations of the Company.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. This involvement under existing agreements is in the form of interest rate swap agreements where the Company pays a fixed interest rate and receives a variable interest rate. The Company manages its exposure to changes in interest rates on certain floating-rate short-term borrowings up to the interest rate swap notional principal amount outstanding. This strategy is utilized as an alternative to fixed-rate long-term borrowings under the Company's interest rate sensitivity objective of matching fixed-rate assets and fixed-rate liabilities within a reasonable range, as measured with the Company's "gap" analysis.
Interest rate swap transactions are not reflected in the above table. The notional principal amounts of outstanding agreements were $7,587,701 and $2,000,000 as of December 31, 1994 and 1993. The weighted average maturity of these agreements was 2.4 and 2.2 years as of December 31, 1994 and 1993. The weighted average fixed rate paid by the Company was 5.79% and the weighted average variable rate received by the Company was 6.10% as of December 31, 1994.
The Company is exposed to loss (additional interest expense) in the event of nonperformance by the counterparties to its agreements, whenever the variable rate receivable exceeds the fixed rate payable as specified in the agreements. The Company enters into agreements with credit worthy counterparties and anticipates that counterparties will be able to fully satisfy their obligations under the agreements. The Company does not obtain collateral or other security to support these agreements.
NOTE P -- CASH FLOW INFORMATION
The following is the reconciliation of net earnings (loss) to net cash provided by operating activities for the years ended December 31:
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE P -- CASH FLOW INFORMATION -- (Continued)
The following is a schedule of noncash investing and financing activities for the years ended December 31:
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE P -- CASH FLOW INFORMATION -- (Continued)
NOTE Q -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS No. 107), requires the estimation of fair values of financial instruments, as defined in SFAS No. 107.
Limitations
Estimates of fair value are made at a specific point in time, based upon, where available, relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. For a substantial portion of the Company's financial instruments, no quoted market exists. Therefore, estimates of fair value are necessarily based on a number of significant assumptions (many of which involve events outside the control of management). Such assumptions include assessments of current economic conditions, perceived risks associated with these financial instruments and their counterparties, future expected loss experience and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only and, therefore, cannot be compared to the historical accounting model. Use of different assumptions or methodologies are likely to result in significantly different fair value estimates.
The estimated fair values presented neither include nor give effect to the values associated with the Company's existing customer relationships, property, equipment, goodwill or certain tax implications related to the realization of unrealized gains or losses.
The following methods and assumptions were used by the Company to estimate the fair value as of December 31, 1994 of each class of financial instrument.
Debt and equity securities
The fair value of debt and equity securities are based on quoted market values.
Net investment in finance receivables
The fair value of net investment in finance receivables with variable rates and no significant change in credit risk approximates the carrying amount. The fair value of fixed-rate finance receivables is estimated by discounting future cash flows using current rates at which similar leases and loans would be made to borrowers with similar credit ratings and for similar remaining maturities. Included in direct finance leasing receivables is the fair value of lessee purchase options which approximates the net residual valuation carrying amount.
Short-term borrowings
The fair value of short-term borrowings (refer to note H) is the amount payable.
Customer deposits
Customer deposits are interest bearing and non-interest bearing deposits received on finance lease receivables and real estate operating leases. The carrying amount of these deposits approximates fair value.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE Q -- FAIR VALUES OF FINANCIAL INSTRUMENTS -- (Continued)
Long-term debt
The fair value of the Company's fixed rate long-term debt is estimated using discounted cash flow analyses based on the estimated current rates offered by banks to the Company for debt of similar remaining maturities, or current rates offered by the Company for subordinated investment certificate debt with similar remaining maturities. The fair value of floating rate long-term debt approximates the carrying amount.
Unused lines of credit
Proceeds from both short-term and long-term lines of credit are issued at current market rates at the time of each borrowing. The fair value of such unused lines is considered nominal.
Commitments
Unused lines of credit and commitments to fund leases and loans: the Company does not charge a fee to extend lines of credit and commitments to fund leases and loans to customers. Extension of credit is conditional upon Company approval (of the amount, rate, and maturity) at the time of request. The fair value of unused lines of credit and commitments to fund leases and loans is considered nominal.
Financial guarantees for unconsolidated real estate partnerships: the Company receives nominal fees for two agreements, and the estimated cost to terminate such guarantees is considered nominal.
Derivative financial instruments: the fair value of interest rate swap agreements is based on the cost to terminate the agreement. The costs were obtained from the counterparties. The Company does not use the interest rate swaps for trading purposes. See Note O to the Consolidated Financial Statements.
The carrying amounts and estimated fair values of the Company's financial instruments as of December 31 were as follows:
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE R -- ACQUISITIONS
On June 1, 1993, the Company purchased all of the capital stock of Canyon Capital, Inc. ("Canyon") whose principal business consisted of financing and leasing equipment, for $4,270,000 in cash. Until the purchase, Canyon was a wholly-owned subsidiary of KOA Holdings, Inc. The purchase price was based principally on the book value of the common stock multiplied by a factor of 126.8%. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Canyon have been included in the Company's consolidated financial statements since the acquisition date.
On June 1, 1994, the Company purchased all of the capital stock of American Capital Leasing Corporation ("ACL") whose principal business consists of financing and leasing equipment, for $3,869,000 in cash. The purchase price was based principally on the book value of the common stock multiplied by a factor of 109.5%, less a credit because of ACL's deferred tax liability. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of ACL have been included in the Company's consolidated financial statements since the acquisition date.
The following unaudited pro forma financial information for the years ended December 31, 1994 and 1993 presents the combined results of operations of the Company, ACL and Canyon as if the acquisitions had occurred as of the beginning of 1993, after giving effect to certain adjustments. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company, ACL and Canyon constituted a single entity during such periods.
In conjunction with the Company's acquisition of ACL, ACL recorded a total pre-tax loss of $96,000 for the five months ended May 31, 1994 (consisting of a non-recurring pre-tax charge of $400,000 and normal pre-tax operating earnings of $304,000). The non-recurring pre-tax charge recorded by ACL was for an expense accrual in conjunction with this transaction. This adjustment is not reflected in the above pro formas because it is considered to be non-recurring. Also, the pro forma adjustments record premium expense and additional interest expense, and a provision for income taxes for the conversion of ACL from an S corporation to a C corporation.
NOTE S -- SUBSEQUENT EVENT
Certain shareholders of the Company, through a stock swap exchange offer, have committed to an exchange of at least 21,806 shares of the Company's common stock for 90% of the common stock of the Company's wholly-owned subsidiary, The Business Outlet, Inc., and additional commitments may be received. The exchange of shares is expected to be recorded, for accounting purposes, as a sale of investment in March 1995. The Company anticipates recognizing no significant gain or loss. The major business activity of this subsidiary was reported as the Furniture and Equipment Segment in Note M.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS AMERICAN CAPITAL LEASING CORPORATION:
We have audited the accompanying balance sheet of American Capital Leasing Corporation as of December 31, 1993, and the related statements of operations, stockholders' equity, and cash flows for the vear 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Capital Leasing Corporation as of December 31, 1993, and the results of its operations, and its cash flows for the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
January 5, 1994, except for note 7, which is as of June 1, 1994 Portland, Oregon
AMERICAN CAPITAL LEASING CORPORATION BALANCE SHEET DECEMBER 31, 1993
See accompanying notes to financial statements.
AMERICAN CAPITAL LEASING CORPORATION STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1993
See accompanying notes to financial statements.
===============================================================================
AMERICAN CAPITAL LEASING CORPORATION STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1993
See accompanying notes to financial statements.
AMERICAN CAPITAL LEASING CORPORATION STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1993
See accompanying notes to financial statements.
AMERICAN CAPITAL LEASING CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1993
(1) SUMMARY OF ACCOUNTING POLICIES
(a) Nature of Business
American Capital Leasing Corporation (the Company) was incorporated in the State of Oregon on September 5, 1989. The Company leases diversified types of equipment, generally for a period of three to five years which represents a substantial portion of the estimated economic life of the equipment.
(b) Accounting for Unearned Lease Income
The Company accounts for its leases as direct financing leases under the provisions of Statement of Financial Accounting Standards No. 13, and accordingly, the aggregate lease payments to be received over the term of the leases plus the estimated residual value are capitalized as the Company's net investment in the leases. The excess of the investment in the leases over the cost of the equipment (unearned lease income) is recognized as income over the term of the leases on the interest method to reflect a constant periodic rate of return on the net investment in the leases.
(c) Furniture and Equipment
The Company records all furniture and equipment at cost. Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis (generally five to ten years).
(d) Income Taxes
The Company and its stockholders have elected treatment as an S Corporation under Federal income tax regulations whereby the Company is not subject to corporate income taxes. Accordingly, there is no provision for income taxes included in the accompanying financial statements.
(e) Earnings Per Share
Earnings per common share are based on the weighted average number of common shares outstanding during the period. The weighted average number of common shares used in the earnings per common share computation for the year ended December 31, 1993 was 10,000 shares.
(2) NET INVESTMENT IN DIRECT FINANCING LEASES
The following lists the components of the net investment in direct financing leases as of December 31, 1993:
Future minimum lease payments to be received on direct financing leases are as follows:
The realization of the estimated residual value of leased property depends on the ultimate sale of the leased equipment at the end of the lease term. The residual value is not a part of the contractual agreement with the lessee but is based on values that have been realized in the past by the principals in the Company and their history with similar businesses.
(3) FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following at December 31, 1993:
(4) LEASES
The Company leases office facilities under a month-to-month agreement and equipment under a long-term lease agreement. The equipment lease is classified as an operating lease and expired in November 1993. Rental expense for all leases was $16,470 for the year ended December 31, 1993.
(5) NOTE PAYABLE TO BANK
Note payable at December 31, 1993 of $6,100,000 consists of draws upon the Company's loan and security agreement (hereinafter referred to as the agreement) with First Interstate Bank of Oregon. If the bank declines the Company's request to renew the agreement upon its expiration (June 30, 1994) or any subsequent expiration date, the Company shall be entitled to convert the then outstanding principle balance to an installment term loan (due 48 months from such expiration date). Borrowings under the agreement are secured by a continuing security interest in all goods of the Company (including receivables, intangible assets, furniture and equipment and cash) currently owned or hereinafter acquired by the Company. The agreement contains certain restrictive covenants with which the Company was in compliance as of December 31, 1994.
(6) RELATED PARTY TRANSACTIONS
During the year ended December 31, 1993, the Company made equipment purchases from an affiliated company, in the amount of $678,578. Amounts due to such affiliated company of $101,856 related to these transactions are reflected as amount due to affiliated company in the accompanying balance sheet.
(7) SUBSQUENT EVENT
On June 1, 1994, the Company entered into an agreement with American Equipment Leasing Co., Inc. (the buyer) wherein the Company agreed to sell all of its outstanding common stock as of June 1, 1994 to the buyer. Pursuant to the agreement, the Company is obligated to pay certain miscellaneous costs related to the acquisition in the amount of $400,000.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
The attached pro forma financial information gives effect to the acquisition of American Capital Leasing Corporation ("ACL") by the Company. The pro forma consolidated condensed statements of operations for the year ended December 31, 1993 reflects the operations of the combined entities as though the acquisition has been made at the beginning of 1993. It should be read in conjunction with the historical consolidated financial statements and notes thereto of the Company and ACL as of and for the year ended December 31, 1993.
The pro forma financial information does not purport to be indicative of the actual results of operations that would have occurred if the acquisition had been consummated on the date indicated or that may be obtained in the future. Adjustments in anticipation of cost savings through consolidation of the Company and ACL are not included.
The pro forma adjustments reflected in the pro forma statements of operations include adjustments to amortize the premium on the acquired net investment in finance receivables; to record the interest incurred on funds borrowed to fund the purchase and to refinance all outstanding debt of ACL, and to remove ACL's historical interest expenses; and to apply the Company's estimated incremental income tax rate.
HORRIGAN AMERICAN, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS Year ended December 31, 1993 ($ In thousands, except per share data)
- ------ (a) The finance receivables acquired were valued at their estimated fair values as of May 31, 1994. The resulting premium is being amortized against finance revenue over the remaining life of the portfolio to produce a constant yield to maturity.
(b) The debt to fund the purchase of the capital stock of ACL and to pay-off all of the outstanding debt as of June 1, 1994 has been borrowed under existing Company credit lines at a rate of 7.3%. ACL's historical interest expense has been removed and replaced with estimated interest expense under the new funding terms using average balances outstanding for the period.
(c) The pro forma adjustment to the provision for income taxes is calculated using an estimated incremental income tax rate of 38%.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Management
The names and positions of the executive officers and directors of Horrigan American, Inc. (including certain executive officers of certain of its subsidiaries) are shown below. Also shown is the year in which each was first elected as an officer or director of Horrigan American, Inc. (or of its predecessor, Horrigan Companies, Inc.) or of the relevant subsidiary.
All of the officers except Richard W. Horrigan devote substantially all of their time to the activities of the Company.
- ---------- * Audit Committee member
Each director serves until the next annual meeting of shareholders and until his successor is duly elected and qualified. All officers are elected to annual terms and serve at the pleasure of the Board of Directors.
JOHN F. HORRIGAN, JR., is Chairman of the Board of Directors and Assistant Secretary of the Company, and a director and an executive officer of each of its operating subsidiaries. He has been employed by the Company since 1953.
RICHARD W. HORRIGAN is Vice Chairman of the Board of Directors and Treasurer of the Company. Mr. Horrigan is associated with the Company part time; his principal occupation is President of Dick Horrigan Volkswagen, Inc. and President of Dick Horrigan, Inc., both of Reading, Pennsylvania. Mr. Horrigan is a member of the Berks County Regional Advisory Committee of Meridian Bancorp, Inc., Reading, Pennsylvania; and Past Chairman of the Board and member of the Executive Committee of the American Imported Automobile Dealers Association, Washington, D.C.
ARTHUR A. HABERBERGER is President, Chief Executive Officer, Assistant Secretary, and a director of the Company and of its leasing and commercial financing subsidiaries and a director and an executive officer of each of its other operating subsidiaries. He has been employed by the Company since 1963.
W. MICHAEL HORRIGAN is Senior Vice President, Assistant Secretary, and a director of the Company, and a director and Executive Vice President of its leasing and commercial financing subsidiaries. He has been employed by the Company since 1971.
SIDNEY D. KLINE, JR., is a director of the Company and of its leasing and commercial financing subsidiaries. He is a principal in the law firm of Stevens & Lee, Reading, Pennsylvania. Mr. Kline is also a director of Meridian Bancorp, Inc., and two of its subsidiaries (Meridian Bank and Meridian Asset Management, Inc.), The Bachman Company, and Reading Eagle Company.
JOHN A. MULLINEAUX, JR., is a director of the Company and of its leasing and commercial financing subsidiaries. Since February 1993, Mr. Mullineaux has been President of Fenner Manheim, Manheim, Pennsylvania, a division of Fenner, Inc. From September 1990 until February 1993, he was Vice President and General Manager of Fenner Manheim, and from October 1984 until September 1990, he was Vice President, Finance, of Fenner Manheim. He is also a director of Fenner, Inc. Mr. Mullineaux is a certified public accountant.
ELIZABETH HORRIGAN RATHZ is a director of the Company and of its leasing and commercial financing subsidiaries. Ms. Rathz has been employed as an investment banking consultant with CoreStates Financial Corp., Philadelphia, Pennsylvania, since 1993. From 1986 to 1993, she was employed with CoreStates in the Investment Banking Division, where she held the position of Assistant Vice President from 1987 to 1988 and Vice President from 1988 to 1993.
ALTHEA L. A. SKEELS is a director of the Company and of its leasing and commercial financing subsidiaries. In December 1994, Ms. Skeels co-founded Main Street Investment Advisors, Inc., a registered investment advisory firm headquartered in Moorestown, New Jersey. From March 1990 through October, 1994, she was Executive Vice President of Rittenhouse Financial Services, Inc., a registered investment advisory firm headquartered in Radnor, Pennsylvania. From 1975 to March 1990, Ms. Skeels was employed by Deloitte & Touche and its predecessor firm, Touche Ross & Co., and was a partner in the firm since 1987. Ms. Skeels is a certified public accountant.
RICHARD W. HORRIGAN, JR., is a director of the Company and of its leasing and commercial financing subsidiaries. Since 1989, he has been Vice President of Customer Service and Finance with Wilkerson Corporation in Englewood, Colorado. He currently serves as a director of the Colorado Society of Certified Public Accountants, and as a director and secretary of the Financial Executive Institute, Rocky Mountain Chapter. Mr. Horrigan is a certified public accountant.
JOANNE HABERBERGER is Senior Vice President, Chief Human Resources Officer, and Secretary of the Company, and Vice President, Chief Human Resources Officer and Secretary of its leasing and commercial financing subsidiaries. She has been employed by the Company since 1980. Ms. Haberberger is also a director of Inroads, a non-profit employee assistance program, and of the Reading Area Trainers Organization Chapter of the American Society for Training and Development.
JOHN F. HORRIGAN, III, is Vice President, Funds Management, of the Company and of its leasing and commercial financing subsidiaries and a director of one of its leasing and financing subsidiaries. He is also President and a director of the Company's real estate investment and development subsidiary. He has been employed by the Company since 1987. He is a member of the Illinois Bar Association.
ROBERT ORDWAY is Senior Vice President and Chief Financial Officer of the Company and of its leasing and commercial financing subsidiaries, and a director and officer of its investment subsidiary. He has been employed by the Company since 1977. Mr. Ordway is a certified public accountant.
VINCENT A. FAINO is Executive Vice President of the Company's leasing and commercial financing subsidiaries, and President of the leasing subsidiary's legal market division. He has been employed by the Company since 1982. Mr. Faino is a member of the Equipment Leasing Association Lease Management Institute.
John F. Horrigan, Jr., Richard W. Horrigan and W. Michael Horrigan are brothers. Elizabeth Horrigan Rathz and John F. Horrigan, III, are children of John F. Horrigan, Jr., and Richard W. Horrigan, Jr. is the son of Richard W. Horrigan. Mr. and Mrs. Haberberger are spouses.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the cash compensation from the Company and its subsidiaries of the following executive officers of the Company.
NOTE A: All other compensation for the year ended December 31, 1994 includes the following: for J. F. Horrigan. Jr. - split dollar insurance ($1,477), group life insurance over $50,000 ($1,197), 401(k) employer match and profit sharing plan contribution ($16,237) and director fees ($5,500); for A. A. Haberberger - group life insurance over $50,000 ($9OO), 401(k) employer match and profit sharing contribution ($12,015) and director fees ($5,500); for W. M. Horrigan - group life insurance over $50,000 ($348), 401(k) employer match and profit sharing contribution ($9,344) and director fees ($5,500); for V. A. Faino - group life insurance over $50,000 ($10) and 401(k) employer match and profit sharing contribution ($10,525); and for J. F. Horrigan, III - group life insurance over $50,000 ($5) and 401(k) employer match and profit sharing contribution ($9,087).
The Company is party to employment agreements with each of the named officers. Under these agreements the Company is to pay for 1995 a minimum of $110,000 to John F. Horrigan, Jr., $135,000 to Mr. Haberberger, $90,600 to W. Michael Horrigan, $100,000 to Mr. Faino and $91,000 to John F. Horrigan, III. The agreements provide these officers with such benefits as life and health insurance, seniority bonuses, salary continuation to dependents in the event of death, and participation in the Company's 401(k) Plan. They also provide for the Company to pay an officer who is discharged without cause up to one year's compensation based on his pre-termination salary and incentive bonuses. At present, such payments would amount to approximately $146,636 to John F. Horrigan, Jr., $180,518 to Mr. Haberberger and $107,641 to W. Michael Horrigan.
Each director receives a fee of $1,000 for each meeting attended. Successive meetings of directors of the Company and its subsidiaries held on the same day are treated as a single meeting for this purpose. Each member of the Audit Committee receives $150 for each meeting attended. Directors receive in addition an annual retainer of $1,500 for service on all Boards of Directors of which they are members.
Stock Options
The following table sets forth certain information regarding options exercised during 1994 by the named executive officers of the Company and the unexercised options for these individuals as of December 31, 1994.
Aggregated Option Exercises in 1994 and December 31, 1994 Option Value
NOTE A: All options are exercisable as of December 31, 1994.
Long-Term Incentive Plans
The following table sets forth certain information regarding the number of units awarded to each of the named executive officers of the Company in 1994 under the Company's Phantom Stock Plan.
Long-Term Incentive Plans - Awards in 1994
The Phantom Stock Plan authorizes awards in the form of "phantom stock units," each of which entitles the recipient to a future payment based on a hypothetical investment in a share of Common Stock. The Plan is administered by an administrative committee consisting of three directors of the Company, none of whom is eligible to participate in the Plan. Participation in the Plan is restricted to key officers of the Company and its principal subsidiaries, as determined by the administrative committee.
A phantom stock unit does not represent or entitle the recipient to any equity securities of the Company but instead involves the creation of an unfunded account for the recipient, the value of which is measured by reference to the value of the Company's common stock. Units vest in stages between the fifth and tenth anniversaries of an officer's becoming a participant in the Plan. Vesting is accelerated upon the participant's normal retirement, death or disability. All units are forfeited (even if previously vested) if a participant resigns or is dismissed for cause. The value of a participant's account is determined at the time of his or her retirement, death or disability, or at the time the participant is discharged by the Company without cause, to be equal to (1) the excess of the per-share fair market value of the Company's common stock at that time over the per-share fair market value at the respective dates of awards of units, times the number of units credited to the account at the time of determination, plus (2) the per-share amount by which common stock dividends paid in any year after an award of units exceeds 20% of the consolidated net earnings per share of the Company for the immediately preceding fiscal year, times the number of units credited to the account at the relevant dividend payment dates.
Payment at the value of a participant's account is made beginning at the time of the participant's normal retirement, death or disability, or at the time a participant who is discharged without cause with vested units in his or her account reaches age 62. The Company may elect to pay the account value in a lump sum or in installments (with interest) over ten years.
Compensation Committee Interlocks and Insider Participation
In 1994, the Company formed an Executive Compensation Committee, comprised of John A. Mullineaux, Jr., Elizabeth A. Rathz, and Althea L. A. Skeels, directors of the Company. None of the committee members is or has ever been an officer or employee of the Company.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains the indicated information as of February 28, 1994, concerning the ownership of the Company's common stock (the only class of voting securities), by the Company's directors and executive officers and by all persons who to the Company's knowledge own beneficially more than 5% of the Company's common stock. Except as otherwise indicated, such ownership consists of sole voting and investment power. Some or all of these persons may be deemed to be "parents" of the Company.
- ---------- (1) Includes 1,760 shares owned jointly by Mr. J. F. Horrigan, Jr., and his wife.
(2) Includes 1,800 shares owned jointly by Mr. R. W. Horrigan and his wife.
(3) Includes 40,490 shares held by Mr. Haberberger as trustee under trusts established by Mr. W. Michael Horrigan for his children and not reflected opposite Mr. Horrigan's name in the table.
(4) Includes 19,650 shares held by Ms. Rathz and her husband as custodians for their children.
(5) Includes 1,075 shares held by Mr. Richard W. Horrigan, Jr. and his wife as custodians for their child.
(6) Includes 25,953 shares held by Mr. John F. Horrigan, III and his wife as custodians for their children.
(7) Includes 200,000 shares held by the Horrigan Family Trust (established by J. F. Horrigan, Jr.), of which Mr. John F. Horrigan, III and Ms. Mary Jo Dever are co-trustees.
(8) Includes 20,153 shares held by Ms. Dever and her husband as custodians for their child.
Solely for the purpose of presenting information on the cover of this report concerning the market value of voting stock held by non-affiliates, the Company has excluded shares owned or controlled by its directors or executive officers.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and all the individual common stockholders are parties to an agreement restricting the right of the individual stockholders to dispose of their stock in the Company and (with certain exceptions for transfers to family members and to other stockholders) giving the Company or the other individual parties to the agreement, in the event of a voluntary sale by one of the individuals, the right but not the obligation to purchase the shares of common stock offered for sale by the individual. The agreement provides that the purchase price in such event will be determined as of the last day of the calendar quarter immediately preceding such purchase, by any reasonable method selected by the Board of Directors of the Corporation. In the event the Company and the other individual stockholders decline to purchase all the common stock, the other individual common stockholders retain the right to purchase the common stock at a price offered by the third party.
The Company is party to an agreement with Mr. Arthur A. Haberberger under which the Company is obligated upon Mr. Haberberger's death, at the option of his estate, to purchase any or all shares of the Company owned by Mr. Haberberger at his death. The purchase price will be determined consistently with the method used under the stockholders' agreement described in the preceding paragraph. For purposes of funding its obligation under this agreement the Company maintains insurance in the amount of $3,000,000 on Mr. Haberberger's life. If the insurance proceeds are insufficient, the balance of the purchase price is payable, with interest, over a period of not more than ten years. If Mr. Haberberger's estate elects to require the Company to purchase no shares, or shares with a purchase price of less than $3,000,000, then his children and a trust established by him can require the Company to purchase shares held by them, so long as the total purchase price for their shares and any shares purchased from Mr. Haberberger's estate does not exceed $3,000,000.
The Company is party to agreements with John F. Horrigan, Jr., Richard W. Horrigan and W. Michael Horrigan under which the Company is obligated upon death, at the option of the decedant's estate, to purchase up to a specific amount of shares of the Company then owned by the decedant. The purchase price will be determined consistently with the method used under the stockholders' agreement described above. The maximum number of shares to be purchased is that number of shares for which the aggregate purchase price does not exceed the proceeds received by the Company from life insurance policies maintained by the Company in the amounts of $750,000 on Mr. J. F. Horrigan, Jr.; $500,000 on Mr. R. W. Horrigan, and $1,000,000 on Mr. W. M. Horrigan.
J. F. Horrigan, Jr. and eight investment partnerships consisting of various combinations of J. F. Horrigan, Jr., A. A. Haberberger, Sidney D. Kline, Jr., and various members of their families have invested as limited partners in nine real estate partnerships sponsored by American Real Estate Investment and Development Co. ("American Real Estate"), a wholly-owned subsidiary of the Company (see "Business - Real Estate"). American Real Estate is a general partner in each of the real estate partnerships and is also a limited partner in four of them. The Company is a general partner (in addition to American Real Estate) in one of the partnerships. Unaffiliated persons are limited partners in eight of the real estate partnerships. In each case, the investment partnership acquired its interest in the real estate partnership on terms not more favorable than those offered to American Real Estate and the Company and to unaffiliated persons. The Company leases its Corporate Office (which also contains various leasing departments) from one of the real estate partnerships for an annual rental of $343,000. The Company is also leasing storage space from another real estate partnership for an annual rental of $5,000. The Company has loaned $2,115,000 to five of the real estate partnerships and has guaranteed $1,540,000 of indebtedness of two of the real estate partnerships. Mr. and Mrs. Haberberger are limited partners in a partnership to which the Company has finance receivables of $183,000 outstanding as of December 31, 1994.
Stevens & Lee, of which Sidney D. Kline, Jr. is a principal, has from time to time performed legal services for the Company and may perform services for the Company in 1995.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed (or incorporated by reference, as indicated) as part of this report:
1. Financial statements: Horrigan American, Inc. and subsidiaries:
- consolidated balance sheets as of December 31, 1994 and 1993;
- consolidated statements of earnings for the years ended December 31, 1994, 1993 and 1992;
- consolidated statements of changes in stockholders' equity for the years ended December 31, 1994, 1993 and 1992;
- consolidated statements of cash flows for the years ended December 31, 1994, 1993 and 1992
- notes to consolidated financial statements.
2. Financial statement schedules.- None.
3. Exhibits. The following exhibits are filed herewith or incorporated by reference, as indicated. Exhibits 10.1 through 10.7, 10.16 through 10.18, and 10.21 are compensatory contracts, plans or arrangements in which certain members of registrant's management participate.
Certain exhibits are incorporated by reference to registrant's registration statement on Form S-2, No. 33-52745, filed March 18, 1994 (the "1994 Registration Statement") or Amendment No. 1 thereto, filed April 26, 1994 (the "1994 Amendment"); to registrant's current report on Form 8-K, dated June 15, 1994 (the "1994 8-K"); to registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 10-K"); to registrant's registration statement on Form S-2, No. 33-59620, filed March 16, 1993 (the "1993 Registration Statement"); to registrant's current report on form 8-K, filed June 16, 1993 (the "1993 8-K"); to registrant's annual report on Form 10-K for the year ended December 31, 1992 (the "1992 10-K"); to registrant's registration statement on Form S-2, No. 33-46346, filed March 12, 1992 (the "1992 Registration Statement"); to registrant's current report on Form 8-K, filed February 18, 1992 (the "1992 8-K"); to registrant's annual report on Form 10-K for the year ended December 31, 1991 (the "1991 10-K"); to registrant's registration statement on Form S-2, No. 33-39469, filed March 15, 1991 (the "1991 Registration Statement"); to registrant's annual report on Form 10-K for the year ended December 31, 1990 (the "1990 10-K"); to registrant's registration statement on Form S-2, No. 33-33771, filed March 7, 1990 (the "1990 Registration Statement"), to registrant's annual report on Form 10-K for the year ended December 31, 1989 (the "1989 10-K"); to registrant's registration statement on Form S-2, No. 33-28009, filed April 7, 1989 (the "1989 Registration Statement"); to registrant's registration statement on Form S-2, No. 33-20953, filed March 30, 1988 (the "1988 Registration Statement"); to registrant's Annual Report on Form 10-K for the year ended December 31, 1987 (the "1987 Form 10-K"); to registrant's registration statement on Form S-2, No. 33-12869, filed March 24, 1987 (the "1987 Registration Statement"); to registrant's registration statement on Form S-2, No. 33-4051, filed March 17, 1986 (the "1986 Registration Statement"); to registrant's Annual Report on Form 10-K for the year ended December 31, 1985 (the "1985 Form 10-K"); to registrant's registration statement on Form S-1, No. 2-96525, filed March 19, 1985 (the "1985 Registration Statement"), to registrant's Registration Statement on Form S-1, No. 2-90161, filed March 26, 1984 (the "1984 Registration Statement"); to registrant's registration statement on Form S-1, No. 2-82551, filed March 21, 1983 (the "1983 Registration Statement") or Amendment No. 1 thereto, filed April 28, 1983 (the "1983 Amendment"); to Amendment No. 1 to the registration statement on Form S-1. No. 2-76479, of registrant's predecessor, Horrigan Companies, Inc. ("HCI"), filed April 14, 1982 (the "1982 Amendment"); to Amendment No. 1, filed April 24, 1981, to HCI's registration statement on Form S-1, No. 2-71420, (the "1981 Amendment"); or to Amendment No. 1 to HCI's registration statement on Form S-1, No. 2-58452; filed July 1, 1977 (the "1977 Amendment").
- ---------- * Other instruments defining the rights of holders of long-term debt of registrant and its subsidiaries are not filed, pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees to furnish a copy of any such instrument to the Commission upon request.
(b) No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HORRIGAN AMERICAN, INC.
DATED: March 20, 1995 By: /s/ JOHN F. HORRIGAN, JR ------------------------------ John F. Horrigan, Jr. Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.