ITEM 1. BUSINESS.
The Foothill Group, Inc. ("Foothill Group" or "parent company") is a specialized financial services company engaged in asset-based commercial lending through Foothill Capital Corporation ("Foothill Capital") and asset management services through Foothill Group. Unless the context otherwise indicates, the "Company" refers to Foothill Group and its subsidiary.
Since 1970, Foothill Capital has made revolving credit and term loans to companies which are generally unable to secure financing from traditional lending sources. The loans are generally secured by accounts receivable and inventory, machinery and equipment, and other assets. At December 31, 1993, Foothill Capital had a total of $506,673,000 in loans outstanding. Foothill Capital generates revenues principally from interest income as well as loan commitment, appraisal and monitoring fees and other related services. Foothill Capital's strategy is to provide innovative financing solutions to borrowers who have adequate collateral in the form of accounts receivable, inventory and other assets, but may not meet overall credit standards generally required by commercial banks. As part of its operating strategy, Foothill Capital, in conjunction with limited partnerships managed by Foothill Group, purchases loans at a discount to their principal amounts from commercial banks.
At December 31, 1993, the loans in Foothill Capital's portfolio have principal amounts of up to $13,568,000. The average amount per borrower in Foothill Capital's portfolio was $2,612,000 and was either a revolving loan secured primarily by accounts receivable and inventory or a term loan secured by machinery, equipment or other assets. Revolving loans are normally provided for up to three year periods and are based on 50% to 80% of eligible accounts receivable and on 15% to 50% of the lower of cost or market value of eligible inventory. Term loans are frequently made in combination with revolving loans, are generally due within five years (up to ten years in specific cases). Both revolving loans and term loans are made with full recourse to the borrower.
Foothill Capital has historically purchased secured loans from other parties ("purchased receivables") consisting of non-public debt instruments including bank loans and private placements, public debt instruments including registered bonds, notes and debentures, and discounted receivables (bank debt purchased at a discount from its principal amount from the original lenders.) Foothill Capital's bank credit agreement limits the amount of its aggregate purchased receivables to the lesser of $75,000,000 or 20% of consolidated assets. At December 31, 1993, purchased receivables represented 7.7% of Foothill Capital's assets. Foothill Capital's bank credit agreement further limits the amount of discounted receivables to the lesser of 15% of consolidated assets, $70,000,000 or 85% of consolidated tangible net worth. At December 31, 1993, discounted receivables represented 6.9% of consolidated assets and 34.8% of consolidated net worth.
In 1988, Foothill Group established an asset management business to capitalize on its experience in lending to and investing in debt securities of financially troubled borrowers. Foothill Group has organized four limited partnerships for institutional investors (the "Funds") to invest in debt securities or claims of financially troubled companies. Many of the Funds' investments are in companies that may be involved in a restructuring or reorganization under the Federal Bankruptcy Code. Foothill Group acts as a general partner of such partnerships, which have aggregate capital commitments of $598,000,000. Foothill Group earns a management fee as well as incentive compensation based on distributed profits in excess of specified rates of return.
Effective December 23, 1993, the parent company completed the spin-off of its Foothill Thrift and Loan subsidiary to Foothill Group shareholders. All previously reported financial results of Foothill Thrift and Loan, through the record date for the spin-off, are classified as discontinued operations. Revenues of Foothill Thrift and Loan totaled $21,658,000, $23,131,000 and $25,067,000 for the years ended December 31, 1993, 1992 and 1991.
MANAGEMENT OF CREDIT RISK
The Company endeavors to minimize credit losses by maintaining a diversity of borrowers and types of collateral, as well as by establishing credit policies and by maintaining close supervision of its loans and underlying collateral. Borrowers of Foothill Capital may be a higher credit risk than traditional unsecured borrowers of commercial banks. Foothill Capital attempts to offset this risk by collateralizing all loans. Foothill Capital's credit policy prohibits loans in excess of 15% of capital funds (consolidated net worth plus subordinated debt) to any one borrower. In practice, few of its loans approach such maximum. At December 31, 1993, Foothill Capital's largest loan was $13,568,000 (7.6% of capital funds). Foothill Capital also manages its loan portfolio to avoid geographic and industry concentration risk. At December 31, 1993, 61% of its finance receivables were from borrowers outside the State of California, and borrowers from no other state represented more than 6.6% of its loan portfolio. In addition, it is Foothill Capital's policy to have no single industry (as defined by two digit SIC codes) account for greater than 10% of its loan portfolio.
In addition to originating loans for its own portfolio, Foothill Capital reduces its credit exposure by selling nonrecourse participations in loans to affiliates of banks and other asset-based lenders. At December 31, 1993, Foothill Capital had sold $107,746,000 in nonrecourse loan participations.
The Company's credit investigation normally involves analysis of the underlying collateral securing the loan, review and analysis of the prospective borrower's financial statements and background, an analysis of cash flow ability of the prospective borrower to meet the Company's repayment requirements and review of credit and historical data with credit reporting agencies. In addition, the Company performs audits of information and operational data provided by working capital loan prospects.
COMPETITION
In its commercial finance activities, the Company competes with commercial finance companies throughout the nation as well as with banks and other financial institutions. Competition from banks comes primarily from their secured lending subsidiaries and divisions. The Company believes that a number of banks have terminated or reduced their asset-based lending activities in the last several years. Frequently, other finance companies are affiliated with large financial institutions and have greater financial resources and the ability to borrow at a lower cost of funds which enables them to charge lower rates to borrowers while maintaining adequate margins. These cost structures are available to banks and several other financial institutions with whom Foothill Capital competes. The Company believes, however, despite the generally higher interest rates it frequently charges, Foothill Capital's ability to respond quickly and to design specialized and non-traditional loan structures specific to its borrowers' needs, enables it to compete effectively in its markets.
Foothill Group faces competition in its asset management activities from asset and money managers, some of whom are affiliated with major investment or commercial banks and investment advisors whose investment strategies are substantially similar to those of the Funds.
EMPLOYEES
As of December 31, 1993, the Company and its subsidiary employed 123 persons.
ITEM 2.
ITEM 2. PROPERTIES.
The Company leases all of its offices. Information with respect to the company's offices is as follows:
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(1) Offices also used by the Registrant.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are several lawsuits and claims pending against the Company which management considers incident to normal operations, some of which seek substantial monetary damages. Management, after review, including consultation with counsel, believes that any ultimate liability which could arise from these lawsuits and claims would not materially affect the financial position of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is incorporated herein by reference the information from the section entitled "Stock Information" on page 43 of the Company's Annual Report to Stockholders for the year ended December 31, 1993.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
There is incorporated herein by reference the information from the section entitled "Selected Consolidated Financial Data" and "Selected Financial Data For Foothill Capital Corporation" on pages 18 to 19 of the Company's Annual Report to Stockholders for the year ended December 31, 1993.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
There is incorporated herein by reference the information from the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 20 to 26 of the Company's Annual Report to Stockholders for the year ended December 31, 1993.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
There is incorporated herein by reference the "Consolidated Financial Statements" of The Foothill Group, Inc. and its subsidiary, together with the Report of Ernst & Young, Independent Auditors, on pages 27 to 43 of the Company's Annual Report to Stockholders for the year ended December 31, 1993.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
With the exception of the information incorporated in Items 1, 5, 6, 7 and 8, the Annual Report is not deemed filed as part of this report.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There is incorporated herein by reference the information from the section entitled "Election of Directors" on pages 3 to 6 of the Company's definitive Proxy Statement, dated March 21, 1994, filed with the Securities and Exchange Commission. Reference is also made to the list of Executive Officers, which is provided below under the caption "Executive Officers of the Registrant."
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals are executive officers of the Registrant. Pertinent information relating to these individuals is set forth below. There are no family relationships between any of the officers. All of the Registrant's officers hold their respective offices at the pleasure of the Board of Directors, subject to the rights, if any, of an officer under any contract of employment.
DON L. GEVIRTZ -- Chairman of the Board and Chief Executive Officer -- Age 66
Mr. Gevirtz has been Chairman of the Board and Chief Executive Officer since April 1972.
JOHN F. NICKOLL -- President, Vice Chairman of the Board, Co-Chief Executive Officer and Chief Operating Officer -- Age 59
Mr. Nickoll has been President since April 1977. Since April 1972, he has been Vice Chairman of the Board and Chief Operating Officer. He has been Co-Chief Executive Officer since January 1985.
DAVID C. HILTON -- Executive Vice President -- Age 46
Mr. Hilton was elected Executive Vice President in January 1990 and had served as Chief Financial Officer since November 1984, Senior Vice President since March 1983 and as Controller from April 1979 through October 1984. He was elected Executive Vice President of Foothill Capital in June 1985.
PETER E. SCHWAB -- Executive Vice President -- Age 50
Mr. Schwab was elected Executive Vice President in January 1990 and had served as Senior Vice President since December 1984 and Senior Vice President of Foothill Capital since February 1983. He was elected President of Foothill Capital in August 1986.
HENRY K. JORDAN -- Senior Vice President, Chief Financial Officer and Secretary -- Age 37
Mr. Jordan was elected Senior Vice President in January 1994 and has served as Chief Financial Officer and Secretary since February 1990. He had served as Vice President and Controller since November 1984. He was elected Senior Vice President of Foothill Capital in September 1986.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
There is incorporated herein by reference the information from the section entitled "Executive Compensation" on pages 7 to 14 of the Company's definitive Proxy Statement, dated March 21, 1994, filed with the Securities and Exchange Commission.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is incorporated herein by reference the information from the section entitled "Voting Securities" on pages 1 to 3 and "Election of Directors" on pages 3 to 6 of the Company's definitive Proxy Statement, dated March 21, 1994, filed with the Securities and Exchange Commission.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There is incorporated herein by reference the information from the section entitled "Transactions with Management and Others" on pages 15 to 16 of the Company's definitive Proxy Statement, dated March 21, 1994, filed with the Securities and Exchange Commission.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 and 2. Financial Statements and Financial Statement Schedules
The financial statements and schedules listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this Form 10-K.
3. List of Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part of this Form 10-K. In addition, following is a list of each executive compensation plan and arrangement required to be filed as an exhibit.
(b) Reports on Form 8-K
During the quarter ended December 31, 1993 and through the date of this filing, the following reports on Form 8-K were filed:
(c) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part of this Form 10-K.
THE FOOTHILL GROUP, INC.
AND FINANCIAL STATEMENT SCHEDULES
(ITEM 14(A))
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and related notes in the Annual Report to Stockholders for the year ended December 31, 1993.
THE FOOTHILL GROUP, INC. (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (UNCONSOLIDATED)
CONDENSED BALANCE SHEETS (UNCONSOLIDATED)
DECEMBER 31, 1993 AND 1992
ASSETS
See accompanying notes.
THE FOOTHILL GROUP, INC. (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (UNCONSOLIDATED) (CONTINUED)
CONDENSED STATEMENTS OF INCOME (UNCONSOLIDATED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
THE FOOTHILL GROUP, INC. (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (UNCONSOLIDATED) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (UNCONSOLIDATED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
THE FOOTHILL GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNCONSOLIDATED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
For financial reporting purposes, the subsidiary's provision for income taxes is determined on a separate company basis. The subsidiary's tax benefits are not limited by the consolidated group's ability to utilize these tax benefits. The difference between the provision of the subsidiary and the consolidated provision is accounted for by the parent company.
The presentation of certain prior year amounts has been conformed to the 1993 presentation.
All previously reported financial results of Foothill Thrift and Loan are classified as discontinued operations.
For information concerning other significant accounting policies followed, restrictions on investments in subsidiaries and extraordinary items, reference is made to Notes to Consolidated Financial Statements in the Annual Report to Stockholders for the year ended December 31, 1993.
NOTE 2 -- INDEBTEDNESS
See Notes 3 and 4 of Notes to Consolidated Financial Statements in the Annual Report to Stockholders for the year ended December 31, 1993.
NOTE 3 -- CONTINGENCIES
See Note 8 of Notes to Consolidated Financial Statements in the Annual Report to Stockholders for the year ended December 31, 1993.
THE FOOTHILL GROUP, INC.
SCHEDULE IX -- SHORT-TERM BORROWINGS (CONSOLIDATED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
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(1) The average amount outstanding for each period is an actual daily average.
(2) The weighted average interest rate for each period was computed by dividing the interest expense by the average amount outstanding and excludes commitment fees.
(3) For information concerning the terms of short-term borrowings, reference is made to Note 3 of Notes to Consolidated Financial Statements in the Annual Report to Stockholders for the year ended December 31, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE FOOTHILL GROUP, INC.
By: /s/ DON L. GEVIRTZ ------------------------------- Don L. Gevirtz Chief Executive Officer
Date: March 21, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
THE FOOTHILL GROUP, INC.
INDEX TO EXHIBITS
(ITEM 14(C))
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(1) Filed herewith.
(2) Except for the portions thereof which are expressly incorporated by reference into this Form 10-K, such Annual Report to Stockholders is not deemed filed as part of this report.
(3) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987.
(4) Incorporated herein by reference from Registrant's Annual Report on Form 10-K for its year ended December 31, 1986.
(5) Incorporated herein by reference from Exhibit A of Registrant's 1988 proxy statement dated March 21, 1988.
(6) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988.
(7) Incorporated herein by reference from Registrant's Annual Report on Form 10-K for its year ended December 31, 1988.
(8) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.
(9) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990.
(10) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990.
(11) Incorporated herein by reference from Appendix A of Registrant's 1990 proxy statement dated March 8, 1990.
(12) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
(13) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991.
(14) Incorporated herein by reference from Registrant's Annual Report on Form 10-K for its year ended December 31, 1990.
(15) Incorporated herein by reference from Registrant's Annual Report on Form 10-K for its year ended December 31, >1989.
(16) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.
(17) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
(18) Incorporated herein by reference from Registrant's Annual Report on Form 10-K for its year ended December 31, 1991.
(19) Incorporated herein by reference from Exhibit 10.34 to Registrant's Amendment No. 2 to Form S-2 Registration Statement No. 33-46673.
(20) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
(21) Incorporated herein by reference from Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(22) Incorporated herein by reference from Registrant's Annual Report on Form 10-K for its year ended December 31, 1992.