ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to Greyhound Financial Corporation ("GFC" or the "Company"), a wholly owned subsidiary of GFC Financial Corporation ("GFC Financial").
On March 3, 1992, The Dial Corp's ("Dial") shareholders approved the spin-off to its shareholders of GFC Financial, a newly-formed Delaware corporation, which comprised Dial's former commercial lending and mortgage insurance subsidiaries. In connection with the spin-off, the holders of common stock of Dial received a distribution of one share of common stock of GFC Financial for every two shares of Dial common stock (the "Distribution").
Prior to the Distribution, Dial contributed its 100% ownership interest in companies constituting the Greyhound European Financial Group ("GEFG") and Greyhound BID Holding Corp. to GFC and contributed all of the common stock of GFC to GFC Financial.
Certain contractual arrangements continue between Dial and GFC Financial or its subsidiaries for a limited period of time following the Distribution. GFC Financial and Dial entered into certain agreements providing for (i) the orderly separation of GFC Financial from Dial and the making of the Distribution; (ii) the provision by Dial of certain interim services to GFC Financial; (iii) the assignment of the "Greyhound" and "Image of the Running Dog" trademarks for use in all of GFC Financial's business activities; (iv) a sublease of certain office space currently used by GFC Financial; and (v) the administration of tax returns and allocation of certain tax liabilities and benefits.
GENERAL
GFC was incorporated in 1965 in Delaware and is the successor to a California corporation that commenced operations in 1954. GFC has conducted business continuously since that time. Foreign financial services are provided primarily in the United Kingdom, where GEFG has provided such services since 1964. Domestic and foreign financial operations, prior to the Distribution, had been conducted independently of each other for many years. Following the Distribution, they have been conducted as a consolidated enterprise; however, during the second quarter of 1992, GFC announced its intention to phase out the London based financing operations of GEFG. This phase out is expected to be substantially completed within a two to three year period.
FINANCIAL SERVICES
The Company engages in the business of providing collateralized financing of selected commercial and real estate activities in the United States and intermediate-term lending on a secured basis in foreign countries. The Company accomplishes this through secured loans and leases.
The Company generates interest and other income through charges assessed on outstanding loans, loan servicing, leasing and other fees. The Company's primary expenses are the costs of funding its loan business (including interest paid on debt), provisions for possible credit losses, marketing expenses, salaries and employee benefits, servicing and other operating expenses and income taxes.
The Company's current emphasis is on secured lending to businesses in specific industry niches, where the group's expertise in evaluating the needs and creditworthiness of prospective customers enables it to provide specialized financing services. The Company's strategy has been to seek to maintain a high-quality portfolio using clearly defined underwriting standards in an effort to minimize the level of nonearning assets and write- offs.
Lines of Business
The Company's activities now include the following lines of business:
- Corporate Finance. The Corporate Finance group provides financing, generally in the range of $2 million to $25 million, focusing on middle market businesses nationally, including distribution, wholesale, retail, manufacturing and services industries. The group's lending is primarily in the form of term loans secured by the assets of the borrower, with significant emphasis on cash flow as the source of repayment of the secured loan.
- Transportation Finance. Through the Transportation Finance group, the Company structures secured financings for specialized areas of the transportation industry, principally involving domestic and foreign used aircraft, as well as domestic short-line railroads and used rail equipment. Typical transactions involve financing up to 80% of the fair market value of used equipment in the $3 million to $30 million range. Traditionally focused on the domestic marketplace, Transportation Finance established a London, England office in 1992, broadening its product line to include international aircraft loans.
- Communications Finance. The Communications Finance group specializes in radio and television. Other markets include cable television, print and outdoor media services in the United States. The Company extends secured loans to communications businesses requiring funds for recapitalization, refinancing or acquisition. Loan sizes generally are from $3 million to $35 million.
- Commercial Real Estate Finance. The Commercial Real Estate group provides cash-flow-based financing primarily for acquisitions and refinancings to experienced real estate developers and owner tenants of income-producing properties in the United States and the United Kingdom. The Company concentrates on secured financing opportunities, generally between $3 million and $30 million, involving senior mortgage term loans on owner-occupied commercial real estate. The Company's portfolio of real estate leveraged leases is also managed as part of the commercial real estate portfolio.
- Resort Finance. The Resort Finance group focuses on successful, experienced resort developers, primarily of timeshare resorts, second home resort communities, golf resorts and resort hotels. Extending funds through a variety of lending options, the Resort Finance group provides loans and lines of credit ranging from $3 million to $30 million for construction, acquisitions, receivables financing and purchases and other uses. Through its subsidiary, GFC Portfolio Services, Inc. ("GPSI"), the Resort Finance group offers expanded convenience and service to its customers. Professional receivables collections and cash management gives developers the ability of having loan-related administrative functions performed for them by GFC.
- Asset Based Finance. Acquired in early 1993, the Asset Based Finance group ("ABF") offers a full range of nationwide collateral-oriented lending programs to middle-market businesses including manufacturers, wholesalers and distributors. GFC's ABF group mainly provides revolving lines of credit ranging between $2 million and $25 million, often partnering with the Corporate Finance group to offer convenient "one-stop" financing to businesses.
- Consumer Rediscount Group. The Consumer Rediscount Group ("CRG") offers $2 million to $25 million revolving credit lines to regional consumer finance companies, which in turn extend credit to consumers. GFC's customers provide credit to consumers to finance home improvements, automobile purchases, insurance premiums and for a variety of other financial needs.
- Ambassador Factors. On February 14, 1994, GFC purchased Fleet Factors Corp, better known as Ambassador Factors Corporation ("Ambassador") from Fleet Financial Group, Inc. Ambassador provides accounts receivable factoring and asset- based lending principally to small and medium-sized textile and apparel manufacturers and importers. See Note N of Notes to Consolidated Financial Statements included in Annex A.
- TriCon Capital Corporation. On March 4, 1994, GFC Financial announced the signing of a definitive purchase agreement under which GFC will acquire all the stock of TriCon Capital Corporation ("TriCon"), an indirect wholly-owned subsidiary of Bell Atlantic Corporation ("Bell Atlantic"), in an all cash transaction. This transaction is subject to regulatory approvals and certain other conditions. TriCon is a $1.8 billion niche-oriented provider of commercial and equipment leasing services. TriCon's marketing orientation fits well with GFC's emphasis on value-added products and services in focused niches of the commercial finance business and further diversifies GFC's asset base. See Pending Acquisition of TriCon Capital Corporation under Optional Items in Part I and Note N of Notes to Consolidated Financial Statements included in Annex A.
In conjunction with the liquidation of the GEFG portfolio, GEFG surrendered the banking license of its United Kingdom bank, Greyhound Bank PLC, and renamed the company Greyhound Guaranty Limited ("GGL"). GGL operates a finance group that was primarily involved in lending to individuals in the United Kingdom secured by second mortgages on residential real estate. The group ceased writing new consumer finance business in the first quarter of 1991 but continues to administer and collect loans previously made.
The Company's operations are conducted primarily in the United States and Europe. For a description of its assets owned, interest earned from financing transactions, interest margins earned and income before income taxes for domestic and European operations, see Note L of Notes to Consolidated Financial Statements included in Annex A.
Investment in Financing Transactions At December 31, 1993, 1992, 1991, 1990 and 1989, the Company's investment in financing transactions (before reserve for possible credit losses) was $2,846,571,000, $2,485,844,000, $2,281,872,000, $2,198,441,000 and $1,950,372,000, respectively, and consisted of the following:
An analysis of nonaccruing contracts and repossessed assets at December 31 of each year shown is as follows:
1993 1992 1991 1990 1989 ------------------------------------------------ (dollars in thousands) Nonaccruing contracts: Domestic $ 13,263 $ 24,031 $ 39,276 $ 41,201 $ 38,040 Foreign 12,320 22,400 43,875 39,777 19,231 -------- -------- -------- -------- -------- 25,583 46,431 83,151 80,978 57,271 -------- -------- -------- -------- -------- Latin America: Brazil 22,775 22,998 Ecuador 40,487 42,195 Other 3,380 7,187 -------- -------- -------- -------- -------- 66,642 72,380 -------- -------- -------- -------- -------- Total nonaccruing contracts 25,583 46,431 83,151 147,620 129,651 -------- -------- -------- -------- --------
Repossessed assets: Domestic 77,001 53,931 27,319 13,288 12,288 Foreign 23 60 826 2,611 Latin America 99 -------- -------- -------- -------- -------- Total repossessed assets 77,024 53,991 28,145 15,899 12,387 -------- -------- -------- -------- --------
Total nonaccruing contracts and repossessed assets $102,607 $100,422 $111,296 $163,519 $142,038 ======== ======== ======== ======== ========
Nonaccruing contracts and repossessed assets as a percentage of investment in financing transactions 3.6% 4.0% 4.9% 7.4% 7.3% ======== ======== ======== ======== ========
In addition to the repossessed assets in the above table, GFC had repossessed assets, with a total carrying amount of $49.0 million and $21.5 million at December 31, 1993 and 1992, respectively, which earned income of $2.7 million and $1.9 million during 1993 and 1992, respectively.
The following is an analysis of the reserve for possible credit losses for the years ended December 31:
1993 1992 1991 1990 1989 ----------------------------------------------- (dollars in thousands) Balance, beginning of year: Domestic $65,100 $72,387 $67,363 $62,158 $44,938 Foreign 4,191 15,213 9,735 10,478 32,668 ------- ------- ------- ------- ------- 69,291 87,600 77,098 72,636 77,606 ------- ------- ------- ------- ------- Provision for possible credit losses (Note 1): Domestic 5,206 144 57,210 10,094 25,252 Foreign 500 6,596 20,477 435 (17,301) ------- ------- ------- ------- ------- 5,706 6,740 77,687 10,529 7,951 ------- ------- ------- ------- ------- Write-offs (Note 1): Domestic (7,548) (7,823) (52,753) (6,114) (8,764) Foreign (5,027) (15,838) (15,593) (1,748) (20,675) ------- ------- ------- ------- ------- (12,575) (23,661) (68,346) (7,862) (29,439) ------- ------- ------- ------- ------- Recoveries: Domestic 221 392 567 1,225 732 Foreign (Note 2) 496 357 96 22 16,014 ------- ------- ------- ------- ------- 717 749 663 1,247 16,746 ------- ------- ------- ------- ------- Other: Domestic 1,286 Foreign (145) (2,137) 498 548 (228) ------- ------- ------- ------- ------- 1,141 (2,137) 498 548 (228) ------- ------- ------- ------- ------- Balance, end of year: Domestic 64,265 65,100 72,387 67,363 62,158 Foreign 15 4,191 15,213 9,735 10,478 ------- ------- ------- ------- ------- $64,280 $69,291 $87,600 $77,098 $72,636 ======= ======= ======= ======= =======
NOTES: (1) In 1991, the Company recorded a special provision for possible credit losses of $65 million and recorded a $47.8 million write-down of Latin American assets (included in the domestic portfolio) and recorded write-offs of $15 million in the foreign operations (GEFG) portfolio.
(2) In 1989, the foreign operations (GEFG) made recoveries of $16.0 million related to its shipping (maritime) portfolio.
The Company does not allocate a dollar amount of its reserve for possible credit losses to specific categories of loans and financing contracts. It does, however, allocate reserves between domestic and foreign portfolios.
Write-offs by major loan and collateral types, experienced by the Company during the years ended December 31, are as follows:
A further breakdown of the portfolio by collateral type can be found in Note C of Notes to Consolidated Financial Statements in Annex A.
Cost and Utilization of Borrowed Funds The Company relies on borrowed funds as well as internal cash flow to finance its operations. The Company follows a policy of relating provisions under its loans and leases to the terms on which it obtains funds so that, to the extent feasible, floating-rate assets are funded with floating-rate borrowings and fixed-rate assets are funded with fixed-rate borrowings.
The following table reflects the approximate average pre-tax effective cost of borrowed funds and pre-tax equivalent rate earned on accruing assets for the Company for each of the periods listed:
Year Ended December 31, --------------------------------- 1993 1992 1991 1990 1989 --------------------------------- Domestic: Short-term debt and variable rate long-term debt (1) 4.6% 5.0% 6.9% 8.8% 9.9% Fixed-rate long-term debt (1) 11.4% 10.6% 10.9% 11.4% 12.3% Aggregate borrowed funds (1) 6.4% 7.2% 8.8% 10.1% 11.2% Rate earned on accruing assets (2) (3) 10.1% 10.7% 12.2% 12.7% 13.6% Spread percentage (4) 4.8% 4.4% 4.6% 4.2% 3.9%
Foreign: Short-term debt and variable rate long-term debt 5.6% 9.3% 12.3% 15.5% 13.0% Customer deposits 6.2% 10.2% 14.2% 15.4% 14.4% Rate earned on accruing assets (3) 15.1% 17.6% 16.7% 20.1% 16.0% Spread percentage (4) 10.4% 9.8% 6.2% 8.2% 6.6% _____________________
NOTES: (1) Includes the effect of interest rate conversion agreements. (2) Accruing assets are net of deferred taxes applicable to leveraged leases. (3) Earnings include gains on sale of assets. (4) Spread percentages represent interest margins earned as a percentage of earning assets, net of deferred taxes applicable to leveraged leases.
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The effective costs presented above include costs of commitment fees and related borrowing costs and do not purport to predict the costs of funds in the future.
For further information on the Company's cost of funds, refer to Note D of the Notes to Consolidated Financial Statements included in Annex A.
Following are the ratios of income to combined fixed charges and preferred stock dividends ("ratio") for each of the past five years:
Year Ended December 31, --------------------------------- 1993 1992 1991 1990 1989 --------------------------------- 1.47 1.35 ---- 1.24 1.23 ===== ===== ===== ===== =====
Variations in interest rates generally do not have a substantial impact on the ratio because fixed-rate and floating-rate assets are generally matched with liabilities of similar rate and term.
Income available for fixed charges, for purposes of the computation of the ratio of income to combined fixed charges and preferred stock dividends, consists of the sum of income before income taxes (adjusted for the effect of reduced tax rates on income from leveraged leases) and fixed charges. Combined fixed charges include interest and related debt expense and a portion of rental expense determined to be representative of interest and preferred stock dividends grossed up to a pre-tax basis.
For the year ended December 31, 1991, earnings were inadequate to cover combined fixed charges by $35.3 million. The decline in the ratio in 1991 was due to restructuring and other charges and transaction costs recorded in the fourth quarter of 1991. Those charges and costs were recorded in connection with the spin-off of the Company from Dial.
Credit Ratings GFC currently has investment-grade credit ratings from the following rating agencies. Commercial Senior Subordinated Paper Debt Debt ------------------------------------- Duff & Phelps D1- A- BBB+ Fitch Investors Services, Inc. A A- Moody's Investors Service P2 Baa2 Ba1 Standard & Poor's Corp. A2 BBB BBB-
There can be no assurance that GFC's ratings will be maintained. None of the Company's other subsidiaries have received credit ratings.
Duff & Phelps Credit Rating Company ("Duff & Phelps") has placed GFC's senior and senior subordinated debt ratings on Rating Watch with negative implications. Duff & Phelps indicated that its action follows GFC Financial's announcement on March 4, 1994 indicating that it has signed a definitive purchase agreement to acquire TriCon from Bell Atlantic Corporation.
Fitch Investors Services, Inc. ("Fitch") announced that it has placed GFC's senior debt, subordinated debt and commercial paper ratings on Fitch Alert with negative implications. This action also follows GFC Financial's announcement of the proposed acquisition of TriCon.
Both Duff & Phelps and Fitch indicated that their actions resulted from their need to observe GFC management's ability to successfully integrate the new businesses and maintain appropriate controls in light of the significant increase in the size of GFC.
Moody's Investors Services and Standard & Poor's Corp. affirmed GFC's current ratings.
Interest and Other Core Income The Company has pursued a strategy of focusing on lending activities producing a predictable stream of revenues, as opposed to the less predictable gains on asset sales associated with leasing activities. For the year ended December 31, 1993, core income (i.e., net income before a $4.9 million adjustment to deferred income taxes made in 1993, restructuring and other charges recorded in 1991 and gains on sale of assets (after-tax) realized in each of the years) was $38.0 million, $34.6 million and $24.8 million for the years 1993, 1992 and 1991, respectively. Core income represented 92% of net income (before the adjustment to deferred income taxes) in 1993, up from 50% in 1987.
Residual Realization Experience In each of the last 38 years, the Company has realized, in the aggregate, proceeds from the sale of assets upon lease terminations (other than foreclosures) in excess of carrying amounts; however, there can be no assurance that such results will be realized in future years. Sales proceeds upon lease terminations in excess of carrying amounts are reported as income when the assets are sold.
Income from leasing activities is significantly affected by gains from asset sales upon lease termination and, hence, can be less predictable than income from non-leasing activities. During the five years ended December 31, 1993, the proceeds to the Company from sales of assets upon early termination of leases and at the expiration of leases have exceeded the respective carrying amounts and estimated residual values as follows:
Terminations at End of Lease Early Terminations Term (Note 3) (Notes 1, 2 and 4) ------------------------------ ------------------------------------
Proceeds Proceeds Carrying as a % Estimated as a % of Amount of Residual Estimated Sales of Carrying Sales Value of Residual Year Proceeds Assets Amount Proceeds Assets Value ------------------------------------ ------------------------------ (dollars in thousands) (dollars in thousands) 1993 $ --- $ --- --- $ 486 $ 248 196% 1992 20,493 17,527 117% 2,164 1,768 122% 1991 25,027 21,904 114% 10,114 6,553 154%
1990 10,854 7,127 152% 20,210 11,719 172% 1989 30,894 16,616 186% 14,559 11,305 129%
NOTES: (1) Excludes foreclosures for credit reasons which are immaterial to the above amounts. (2) Excludes proceeds of $3,201,000 in 1993 on assets held for sale. (3) Excludes proceeds of $2,000,000 in 1993 received on guarantees. (4) Excludes proceeds of $460,000 in 1990 from the disposal of warrants.
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The estimated residual value of leased assets in the accounts of the Company at December 31, 1993 aggregated 39.0% of the original cost of such assets (21.9% excluding the original costs of the assets and residuals applicable to real estate leveraged leases, which typically have higher residuals than other leases). The financing contracts and leases outstanding at that date had initial terms ranging generally from one to 25 years. The average initial term weighted by carrying amount at inception and the weighted average remaining term of financing contracts at December 31, 1993 for financing contracts excluding leveraged leases were 7.3 and 3.7 years, respectively, and for leveraged leases were approximately 20 and 12 years, respectively. The comparable average initial term and remaining term at December 31, 1992 for financing contracts excluding leveraged leases were 7.7 and 3.7 years, respectively, and for leveraged leases were approximately 20 and 13 years, respectively. The Company utilizes either employed or outside appraisers to determine the collateral value of assets to be leased or financed and the estimated residual or collateral value thereof at the expiration of each lease.
For a discussion of accounting for lease transactions, refer to Notes A and B of Notes to Consolidated Financial Statements included in Annex A.
Business Development and Competition The Company develops business primarily through direct solicitation by its own sales force. Customers are also introduced by independent brokers and referred by other financial institutions.
At December 31, 1993, the Company had 912 financing contracts with 604 customers (excluding 2,886 contracts with consumer finance customers), compared to 874 financing contracts with 570 customers (excluding 3,481 contracts with consumer finance customers) at December 31, 1992.
The Company is engaged in an extremely competitive activity. It competes with banks, insurance companies, leasing companies, the credit units of equipment manufacturers and other finance companies. Some of these competitors have substantially greater financial resources and are able to borrow at costs below those of the Company. The Company's principal means of competition is through a combination of service and the interest rate charged for money. The interest rate is a function of borrowing costs, operating costs and other factors. While many of the Company's larger competitors are able to offer lower interest rates based upon their lower borrowing costs, the Company seeks to maintain the competitiveness of the interest rates it offers by emphasizing strict control of its operating costs.
Credit Quality As a result of the use of clearly defined underwriting standards, portfolio management techniques, monitoring of covenant breaches and active collections and workout departments, the Company believes it maintains a high-quality customer base.
Risk Management The Company generally conducts investigations of its prospective customers through a review of historical financial statements, published credit reports, credit references, discussions with management, analysis of location feasibility, personal visits and property inspections. In many cases, depending upon the results of its credit investigations and the nature and type of property involved, the Company obtains additional collateral or guarantees from others.
As part of its underwriting process, the Company gives close attention to the management, industry, financial position and level of collateral of any proposed borrower. The purpose, term, amortization and amount of any proposed transaction must be clearly defined and within established corporate policy. In addition, underwriters attempt to avoid undue concentrations in any one credit, industry or regional location.
- Management. The Company considers the reputation, experience and depth of management; quality of product or service; adaptability to changing markets and demand; and prior banking, finance and trade relationships.
- Industry. The Company evaluates critical aspects of each industry to which it lends, including the seasonality and cyclicality of the industry; governmental regulation; the effects of taxes; the economic value of goods or services provided; and potential environmental liability.
- Financial. The Company's review of a prospective borrower includes a comparison of certain financial ratios among periods and among other industry participants. Items considered include net worth; composition of assets and liabilities; debt coverage and servicing requirements; liquidity; sales growth and earning power; and cash flow needs and generation.
- Collateral. The Company regards collateral as an important factor in a credit evaluation and has established maximum loan to value ratios, normally ranging from 60% - 95%, for each of its lines of business. However, collateral is only one of the many factors considered.
The underwriting process includes, in addition to the analysis of the factors set forth above, the design and implementation of transaction structures and strategies to mitigate identified risks; a review of transaction pricing relative to product-specific return requirements and acknowledged risk elements; a multi-step, interdepartmental review and approval process, with varying levels of authority based on the size of the transaction; and periodic, interdepartmental reviews and revision of underwriting guidelines.
The Company also monitors loan portfolio concentrations in the areas of aggregate exposure to a single borrower and related entities, within a given geographical area and with respect to an industry and/or product type within an industry. The Company has established concentration guidelines for each line of business it conducts for the various product types it may entertain within that line of business. Geographical concentrations are reviewed periodically and evaluated based on historical loan experience and prevailing market and economic conditions.
The Company's financing contracts and leases generally require the customer to pay taxes, license fees and insurance premiums and to perform maintenance and repairs at the customer's expense. Contract payment rates are based on several factors, including the cost of borrowed funds, term of contract, creditworthiness of the prospective customer, type and nature of collateral and other security and, in leasing transactions, the timing of tax effects and estimated residual values. In leasing transactions, lessees generally are granted an option to purchase the equipment at the end of the lease term at its then fair market value or, in some cases, are granted an option to renew the lease at its then fair rental value. The extent to which lessees exercise their options to purchase leased equipment varies from year to year, depending on, among other factors, the status of the economy, the financial condition of the lessee, interest rates and technological developments.
Portfolio Management In addition to the review at the time of original underwriting, the Company attempts to preserve and enhance the earnings quality of its portfolio through proactive management of its financing relationships with its clients and its underlying collateral. This process includes the periodic appraisal or verification of the collateral to determine loan exposure and residual values; sales of residual and warrant positions to generate supplemental income; and review and management of covenant compliance. The Portfolio Management department regularly reviews financial statements to assess customer cash flow performance and trends; periodically confirms operations of the customer; conducts periodic reappraisals of the underlying collateral; seeks to identify issues concerning the vulnerability of debt service capabilities of the customer; disseminates such information to relevant members of the Company's staff; resolves outstanding issues with the borrower; and prepares quarterly summaries of the aggregate portfolio quality for management review. To facilitate the monitoring of a client's account, each client is assigned to a customer service representative who is responsible for all follow-up with that client.
Delinquencies and Workouts The Company monitors timely payment of all accounts. Generally, when an invoice is 10 days past due, the customer is contacted, and a determination is made as to the extent of the problem, if any. A commitment for immediate payment is pursued and the account is observed closely. If payment is not received after this contact, all guarantors of the account are contacted within the next 20 days. If an invoice becomes 31 days past due, it is reported as delinquent. A notice of default is sent prior to an invoice becoming 45 days past due and, between 60 and 90 days past the due date, if satisfactory negotiations are not underway, outside counsel is generally retained to help protect the Company's rights and to pursue its remedies.
When accounts become more than 90 days past due (or in the case of consumer finance accounts, 180 days past due), income recognition is suspended, and the Company vigorously pursues its legal remedies. Foreclosed or repossessed assets are considered to be nonperforming, and are reported as such unless such assets generate sufficient cash to result in a reasonable rate of return. Such accounts are continually reviewed, and write-downs are taken as deemed necessary. While pursuing collateral and obligors, the Company generally continues to negotiate the restructuring or other settlement of the debt, as appropriate.
Management believes that collateral values significantly reduce loss exposure and that the reserve for possible credit losses is adequate. For additional information regarding the reserve for possible credit losses, see Note C of Notes to Consolidated Financial Statements included in Annex A.
Governmental Regulation The Company's domestic activities, including the financing of its operations, are subject to a variety of federal and state regulations such as those imposed by the Federal Trade Commission, the Securities and Exchange Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of states have ceilings on interest rates chargeable to customers in financing transactions. The Company's international activities are also subject to a variety of laws and regulations promulgated by the governments and various agencies of the countries in which the business is conducted.
EMPLOYEES
At December 31, 1993, the Company and its subsidiaries had 261 employees, consisting of 230 and 31 employees in GFC and GEFG, respectively. None of such employees were covered by collective bargaining agreements. The Company believes its employee relations are satisfactory.
ITEM 2.


ITEM 2. PROPERTIES
The principal executive offices of the Company are located in premises leased from Dial in Phoenix, Arizona.
The Company operates five additional offices in the United States and one office in Europe. All such properties are leased.
Alternative office space could be obtained without difficulty in the event leases are not renewed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its subsidiaries are parties either as plaintiffs or defendants to various actions, proceedings and pending claims, including legal actions, which involve claims for compensatory, punitive or other damages in material amounts. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims referred to above could be decided against the Company. Although the ultimate amount for which the Company or its subsidiaries may be held liable with respect to matters where the Company is defendant is not ascertainable, the Company believes that any resulting liability should not materially affect the Company's financial position or results of operations.
Through a Report on Form 8-K, dated January 5, 1993, the Company reported litigation titled Cabana Limited Partnership, a South Carolina Partnership v. Greyhound Real Estate Finance Company, et al., and related litigation (collectively, the "Litigation"). On January 31, 1994, the court in the above-named case granted summary judgment in favor of the Company and the other defendants on all counts. On motion of defendants, the court dismissed the plaintiffs' claims without prejudice. The parties subsequently entered into a global settlement agreement whereby all rights to appeal and to pursue the related litigation have been waived by Plaintiffs. The terms of the settlement agreement are confidential but involve the payment by the defendants to plaintiffs' counsel of a relatively nominal amount, to secure finality, which the Company believes will cover a portion of plaintiffs' counsels' litigation costs and expenses. The summary judgment in the Company's and related defendants' favor remains unchanged.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
OPTIONAL ITEMS.
1. PENDING ACQUISITION OF TRICON CAPITAL CORPORATION.
The acquisition of TriCon, combined with the acquisition of Ambassador, would increase GFC's total assets on a pro forma basis to $5 billion with pro forma 1993 income from continuing operations on a combined basis of approximately $72 million before the $4.9 million adjustment to deferred taxes applicable to leveraged leases.
This acquisition of TriCon is expected to give the Company significant critical mass and important economies of scale. Management believes it puts the Company among the largest independent commercial finance companies in the United States and allows it to compete over a greater range of services. TriCon's marketing orientation fits well with GFC's emphasis on value-added products and services in focused niches of the commercial finance business and further diversifies GFC's asset base. Following is a brief description of TriCon and the various business activities in which it engages.
GENERAL
TriCon is a niche oriented provider of commercial finance and equipment leasing services to a highly segmented group of borrowers and lessees throughout the United States. TriCon conducts its operations through seven specialized business groups which provide financial products and services to three specific market sectors of the finance and leasing industry.
End-User Sector
The customers in the end-user sector use the assets which TriCon finances or leases for the ongoing operation of their businesses. The equipment which TriCon leases to its customers is typically purchased from an equipment manufacturer, vendor or dealer selected by the customer. The three specialized business groups associated with this market sector and the services provided by TriCon to customers of each business group include:
- Medical Finance Group. Equipment and real estate financing and asset management services targeting the top 2,400 health care providers in the United States.
- Commercial Equipment Finance Group. Direct finance leasing of, and lending for, general business equipment to quality commercial business enterprises which lack ready access to public finance markets.
- Government Finance Group. Primarily tax-exempt financing to state and local governments.
Program Finance Sector
TriCon's business groups in the Program Finance Sector provide financing programs to help manufacturers, distributors, vendors and franchisors facilitate the sale of their products or services. The three specialized business groups associated with this market sector and the services provided by TriCon to customers of each business group include:
- Vendor Service Group. Point-of-sale financing programs and support services for regional and national manufacturers, distributors and vendors of equipment classified as "small ticket" in transaction size (generally transactions with an equipment cost of less than $250,000). The equipment which TriCon leases to the ultimate end-user is typically sold to TriCon by the vendor participating in the financing program.
- Franchise Finance Group. Equipment and total facility financing programs for the franchise-based food service industry. The equipment which TriCon leases to the ultimate end-user is typically purchased by TriCon from the equipment manufacturer, vendor or dealer selected by the end-user.
- Commercial Credit Services Group. Accounts receivable and inventory lending for manufacturers and major distributors, manufacturer-sponsored inventory financing for office equipment dealers, and telecommunications receivables financing for the regional providers of long distance operator services.
Capital Services Sector
The Capital Services Sector has one business group which focuses on the management and origination of highly structured financing of "large ticket" commercial equipment (generally transactions involving the sale or lease of equipment with a cost in excess of $15 million) primarily leveraged leases for major corporations. The equipment which TriCon leases to its customers is typically purchased from an equipment manufacturer, vendor or dealer selected by the customer.
The commercial finance and equipment leasing industry is highly competitive. While price is an important consideration, many customers value a high level of service which is the primary basis on which TriCon competes. Although TriCon has only a small share of the total commercial leasing market, the "Asset Finance and Leasing Digest" ranked TriCon Leasing Corporation as one of the top 50 leasing companies in the world for 1992 based on volume and total assets.
Portfolio Composition
The total assets under the management of TriCon consist of the TriCon portfolio of owned lease and loan assets (the "Portfolio Assets") plus certain assets that are owned by others but managed by TriCon and are not reflected on TriCon's balance sheet. At December 31, 1993, the Portfolio Assets were approximately $1.8 billion. At that date, the assets of others managed by TriCon were approximately $1.3 billion, consisting of approximately $344 million of securitized assets (the "Securitizations") and approximately $976 million of net lease receivables relating to the leveraged lease and project finance portfolio of Bell Atlantic.
TriCon's primary financing products are finance leases, operating leases, collateralized loans and inventory and receivable financing. The Portfolio Assets are diversified across types of financed equipment with the largest equipment concentrations being data processing equipment, health care equipment, communications equipment, furniture and fixtures, office machines and diversified commercial use equipment. The Portfolio Assets also include real estate-related assets, consisting primarily of real estate held as collateral in conjunction with its health care and franchise-based food service equipment financings and, to a lesser extent, a portfolio of general commercial real estate mortgages currently being managed for liquidation. TriCon's investment exposure to both the aircraft-related and energy-related sectors is less than 1% of the Portfolio Assets.
TriCon's current customer base includes approximately 70,000 customer accounts; its largest exposure to any single customer is approximately $33 million or approximately 2% of the Portfolio Assets and Securitizations. Approximately 80% of the Portfolio Assets and Securitizations are located in 20 states with the five largest concentrations being California (15.8%), Texas (10.5%), New Jersey (5.7%), Florida (5.5%) and Pennsylvania (5.3%).
2. TRICON CAPITAL CORPORATION AUDITED FINANCIAL STATEMENTS.
The following financial statements contain references to a proposed public offering of stock of TriCon and certain restructuring of the business. The acquisition by GFC supersedes that public offering and the purchase agreement makes certain changes to the proposed restructuring.
Page
TRICON CAPITAL CORPORATION - PREDECESSOR BUSINESS Report of Independent Accountants 22 Consolidated Balance Sheets as of December 31, 1993 and 1992 23 Consolidated Statements of Income for the Years Ended December 31, 1993, 1992 and 1991 24 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 25 Notes to Consolidated Financial Statements 26
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors of Bell Atlantic TriCon Leasing Corporation:
We have audited the consolidated balance sheets of TriCon Capital Corporation--Predecessor Business (see Note 1 to the Consolidated Financial Statements) at December 31, 1993 and 1992, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TriCon Capital Corporation--Predecessor Business at December 31, 1993 and 1992, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Notes 2 and 9 to the Consolidated Financial Statements, in 1993 the Company adopted the method of accounting for income taxes prescribed by Statement of Financial Accounting Standards No. 109 and the method of accounting for postemployment benefits prescribed by Statement of Financial Accounting Standards No. 112, and in 1991 adopted the method of accounting for postretirement benefits other than pensions prescribed by Statement of Financial Accounting Standards No. 106.
COOPERS & LYBRAND
New York, New York February 7, 1994
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------- 1993 1992 ----------- ----------
ASSETS Cash . . . . . . . . . . . . . . . . . . . . . $ 4,483 $ 4,503 Notes receivable and finance leases: Investment in notes receivable . . . . . . . . 912,964 833,487 Investment in finance leases . . . . . . . . . 647,055 639,592
----------- ---------- Total notes receivable and finance leases 1,560,019 1,473,079
Less: Allowance for credit losses . . . . . . . . . . 43,191 48,279
----------- ---------- Net investment in notes receivable and finance leases . . . . . . . . . . . . . . 1,516,828 1,424,800 Investment in operating leases, net of accumulated depreciation . . . . . . . 240,057 230,721 Other assets . . . . . . . . . . . . . . . . . 27,091 32,222
----------- ---------- Total Assets . . . . . . . . . . . . . . . $ 1,788,459 $1,692,246 =========== ==========
LIABILITIES AND EQUITY Liabilities: Notes payable . . . . . . . . . . . . . . . . . $ 709,508 $ 919,642 Accounts payable and accrued expenses . . . . . 75,302 71,951 Due to affiliates . . . . . . . . . . . . . . . 611,194 349,842 Deferred income taxes . . . . . . . . . . . . . 81,100 93,908 ----------- ---------- Total Liabilities . . . . . . . . . . . . . . . 1,477,104 1,435,343 ----------- ---------- Total Equity . . . . . . . . . . . . . . . . . 311,355 256,903 ----------- ---------- Total Liabilities and Equity . . . . . . . $ 1,788,459 $1,692,246 =========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements.
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1993 1992 1991 -------- -------- --------
REVENUE Interest income . . . . . . . . . . . . $ 80,477 $ 77,170 $ 90,788 Finance lease revenue . . . . . . . . . 65,835 77,009 94,503 Operating lease revenue . . . . . . . . 63,806 46,337 34,679 Other . . . . . . . . . . . . . . . . . 35,182 41,751 33,879 -------- -------- -------- Total Revenue . . . . . . . . . . 245,300 242,267 253,849 -------- -------- -------- EXPENSES Interest . . . . . . . . . . . . . . . 80,211 90,298 115,190 Selling, general and administrative . . 48,128 49,638 46,533 Provision for credit losses . . . . . . 21,634 28,057 29,876 Depreciation . . . . . . . . . . . . . 41,582 31,496 23,881 -------- -------- -------- Total Expenses . . . . . . . . . . 191,555 199,489 215,480 -------- -------- -------- Income before provision for income taxes and cumulative effect of changes in accounting principles . . . 53,745 42,778 38,369 Provision for income taxes . . . . . . 22,164 15,414 15,014 -------- -------- -------- Income before cumulative effect of changes in accounting principles . . 31,581 27,364 23,355 Cumulative effect of changes in accounting principles . . . . . . . . 5,530 -- (1,471) -------- -------- -------- NET INCOME . . . . . . . . . . . . $ 37,111 $ 27,364 $ 21,884 ======== ======== ========
Pro forma earnings per share before cumulative effect of changes in accounting principles (unaudited). . . . . . . . . . . . . . $ 2.20
The accompanying notes are an integral part of these Consolidated Financial Statements.
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 1993 1992 1991 ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . $ 37,111 $ 27,364 $ 21,884 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,538 33,436 25,329 Provision for credit losses 21,634 28,057 29,876 Amortization of initial direct costs . . . . . . . 8,946 10,417 12,081 Foreign currency transaction gain . . . . -- -- (2,857) Valuation adjustment . . . -- (6,000) -- Cumulative effect of changes in accounting principles . (5,530) -- 1,471 Gain on sale of equipment and real estate held under operating leases . . (2,548) (72) (29) Gain on transfer of receivables . . . . . . . . (11,290) (13,065) (11,745) Deferred income taxes . . . (6,893) 593 (41) Changes in certain assets and liabilities: (Increase) decrease in other assets . . . . . . . (628) 2,491 28,404 Increase (decrease) in accounts payable and accrued expenses . . . . . 7,461 (8,320) (4,171) ----------- ----------- ----------- Net cash provided by operating activities . . . . . 91,801 74,901 100,202 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to notes receivable and finance leases . . . . . . (1,844,466) (1,355,261) (1,198,591) Principal payments received on notes receivable and finance leases . . . . . . 1,553,092 1,053,913 969,786 Additions to equipment and real estate held under operating leases . . (60,270) (57,686) (63,420) Proceeds from sale of equipment and real estate under operating leases . . 8,236 4,166 461 Proceeds from transfer of receivables . . . . . . 183,242 275,049 291,053 ----------- ----------- ----------- Net cash used in investing activities . . . . . . . . . . (160,166) (79,819) (711) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings . . 128,529 204,223 283,067 Principal repayments of borrowings . . . . . . . (338,663) (254,155) (458,595) Increase in amounts due to affiliates . . . . . . . 261,352 32,703 73,579 Capital contributions . . . 21,438 40,416 6,073 Capital distributions . . . (3,932) (17,932) (3,677) Other . . . . . . . . . . . (395) -- (42) ----------- ----------- ----------- Net cash provided by (used in) financing activities . . . . . 68,329 5,255 (99,595) ----------- ----------- ----------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH . . . . . . . 16 (31) (164) ----------- ----------- ----------- (DECREASE) INCREASE IN CASH . . (20) 306 (268)
CASH, BEGINNING OF YEAR . . . . 4,503 4,197 4,465 ----------- ----------- ----------- CASH, END OF YEAR . . . . . . . $ 4,483 $ 4,503 $ 4,197 =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements.
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND:
TriCon Capital Corporation, a wholly-owned subsidiary of Bell Atlantic Investments, Inc. and, ultimately, Bell Atlantic Corporation ("Bell Atlantic"), was incorporated on December 3, 1993 and will be the successor entity to certain businesses of Bell Atlantic TriCon Leasing Corporation ("Old TriCon") which is wholly owned by Bell Atlantic Capital Corporation.
Prior to a planned restructuring (the "Restructuring") in contemplation of a public offering of the Company's common stock, the Company will be capitalized with amounts sufficient to acquire from Old TriCon certain assets which comprise the Predecessor Business (described below).
Pursuant to the Restructuring, the Company will acquire substantially all of the assets and assume certain liabilities of Old TriCon, other than its leveraged lease portfolio, project finance portfolio and certain other assets to be retained by Old TriCon (the "Transferred Assets" and "Excluded Assets," respectively). The purchase price will be equivalent to the net book value of the Transferred Assets, subject to certain adjustments, and will be paid in part by the issuance of notes payable to Old TriCon.
Pursuant to the Restructuring, the Company will also, among other things, assume the rights and obligations of Old TriCon under its securitization agreements and enter into a five-year agreement to manage, for a fee, the leveraged lease and project finance portfolios retained by Old TriCon.
BASIS OF PRESENTATION:
The consolidated financial statements reflect the financial position, results of operations and cash flows of TriCon Capital Corporation--Predecessor Business, which consists of the assets and liabilities to be acquired or assumed by the Company in the contemplated Restructuring described above. Use of "the Company" in these financial statements refers to the Predecessor Business, unless the context indicates reference to TriCon Capital Corporation. The consolidated financial statements include the accounts of a Canadian division and all wholly owned subsidiaries which are included in the Predecessor Business. All significant intercompany balances are eliminated.
The consolidated financial statements include allocations of certain liabilities and expenses relating to the Predecessor Business to be transferred to the Company in the Restructuring. Debt and related interest expense were allocated between the Transferred Assets and the Excluded Assets based upon the internal "match funding" and debt-to-equity ratio policies of Old TriCon in place during such periods. Common expenses were allocated on a proportional basis between the Transferred Assets and the Excluded Assets. Management believes that these allocation methods are reasonable.
Pro Forma Earnings Per Share (unaudited)
Pro forma earnings per share is calculated based on pro forma net income divided by the number of shares of common stock of TriCon Capital Corporation to be outstanding after the proposed offering of approximately 13,500,000 shares of common stock and grants of 11,972 shares to non-management employees in connection therewith.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Finance Leases
Investment in finance leases consists of the minimum lease payments receivable, estimated residual value of the equipment and initial direct costs less unearned income and security deposits. The unearned income represents the excess of the gross lease payments receivable plus the estimated residual value over the cost of the equipment leased. Unearned income is amortized to income so as to provide an approximate level rate of return on the net outstanding investment. The original lease terms of the direct finance leases are generally from 36 to 84 months.
Investment in Operating Leases
Investment in operating leases consist predominantly of medical equipment and health care facilities. The Company recognizes operating lease revenue on a straight-line basis over the term of the lease. The cost of equipment and facilities held under operating leases is depreciated to the estimated residual value, on a straight-line basis, over the shorter of the estimated economic life or the period specified under the lease term. Initial direct costs are deferred and amortized over the lease term on a straight-line basis.
Residual Values
Residual values are reviewed by the Company at least annually. Declines in residual values for finance leases are recognized as charges to income. Declines in residual values for operating leases are recognized as adjustments to depreciation on operating leases over the shorter of the useful life of the asset or the remaining term of the lease.
Allowance for Credit Losses
In connection with the financing of leases and other receivables, the Company records an allowance for credit losses to provide for estimated losses in the portfolio. The allowance for credit losses is based on a detailed analysis of delinquencies, an assessment of overall risks, management's review of historical loss experience and evaluation of probable losses in the portfolio as a whole given its diversification. An account is fully reserved for or written off when analysis indicates that the probability of collection of the account is remote.
Income Taxes
For federal income tax purposes, the results of the Company's operations are included in Bell Atlantic's consolidated tax return. In accordance with the Bell Atlantic Consolidated Federal Income Tax Allocation Policy, the Company is allocated federal income tax, or benefit, to the extent it contributes taxable income or loss, and credits, which are utilized in consolidation. The Company and each of its subsidiaries file separate state tax returns in the jurisdictions in which they conduct business.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which the Company adopted effective January 1, 1993. SFAS 109 requires the determination of deferred taxes using the liability method. Under the liability method, deferred taxes must be provided on all book and tax basis differences and deferred tax balances must be adjusted to reflect enacted changes in income tax rates. The cumulative impact of adopting SFAS 109 on the earnings of the Company is a tax benefit of $5,763.
Prior to January 1, 1993, deferred taxes were provided for differences in the measurement of revenue and expenses for financial accounting and income tax purposes using the deferral method under Accounting Principles Board Opinion No. 11 (APB 11), "Accounting for Income Taxes."
Interest Rate Swaps
Interest rate swaps are contracts between two parties to exchange interest payments without the exchange of the underlying notional principal amounts. The Company enters into interest rate swap agreements primarily to hedge interest rate risks. The Company records a net receivable or payable related to the interest to be paid or received as an adjustment to interest expense. In the event of an early termination of an interest rate swap contract, the gain or loss would be amortized over the remaining life of the swap.
Foreign Currency Translation Adjustments
The financial statements of foreign operations are translated in accordance with the provisions of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Under the provisions of the statement, assets and liabilities are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the year. The related translation adjustments are recorded as a separate component of Total Equity. Transactions denominated in foreign currencies are translated at rates in effect at the time of the transaction. Gains or losses resulting from foreign currency transactions are included in results of operations.
3. INVESTMENT IN NOTES RECEIVABLE AND FINANCE LEASES
Investment in notes receivable consists primarily of amounts due the Company relating to commercial inventory and accounts receivable financing and first mortgage notes which are collateralized by the underlying commercial real estate. The notes bear interest at rates ranging from 5.1% to 15.4% and mature between the years 1994 and 2015. The components of investment in notes receivable as of December 31 are as follows:
1993 1992 -------- --------
Notes receivable . . . . . . . . . . . . . . .. $883,122 $803,009 Initial direct costs . . . . . . . . . . . . . 5,002 4,272 Non-accrual accounts . . . . . . . . . . . . . 24,840 26,206 -------- -------- Investment in notes receivable . . . . . . . . $912,964 $833,487 ======== ========
Investment in finance leases consists of various types of equipment including diversified commercial use equipment, health care equipment and data processing equipment. The original lease terms are generally from 36 to 84 months. The components of investment in finance leases as of December 31 are as follows:
1993 1992 -------- --------
Minimum lease payments . . . . . . . . . . . . $685,578 $659,097 Estimated residual value . . . . . . . . . . . 64,004 75,834 Less: Unearned income . . . . . . . . . . . . . . . . 133,991 134,364 Security deposits . . . . . . . . . . . . . . . 20,737 20,171 Plus: Initial direct costs . . . . . . . . . . . . . 15,259 13,426 Net investment in non-accrual accounts . . . . 36,942 45,770 -------- -------- Investment in finance leases . . . . . . . . . . $647,055 $639,592 ======== ========
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
3. INVESTMENT IN NOTES RECEIVABLE AND FINANCE LEASES(Continued) At December 31, 1993, estimated minimum annual receipts from notes receivable and finance leases based upon contractual terms are as follows:
NOTES FINANCE YEAR ENDING DECEMBER 31 RECEIVABLE LEASES ----------------------- ---------- ---------
1994 . . . . . . . . . . . . . . . . . . . . $338,390 $ 223,413 1995 . . . . . . . . . . . . . . . . . . . . 113,977 177,670 1996 . . . . . . . . . . . . . . . . . . . . . 95,010 130,487 1997 . . . . . . . . . . . . . . . . . . . . 81,733 82,128 1998 . . . . . . . . . . . . . . . . . . . . . 51,897 38,629 Thereafter . . . . . . . . . . . . . . . . . . 202,115 33,251 -------- --------- $883,122 $ 685,578 ======== =========
4. INVESTMENT IN OPERATING LEASES
Operating leases have original terms from 12 to 120 months. Investment in operating leases consists of the following at December 31:
1993 1992 -------- --------
Medical equipment, at cost . . . . . . . . . . $215,951 $193,828 Commercial real estate, at cost . . . . . . . . 99,943 95,926 Other, at cost . . . . . . . . . . . . . . . . 6,466 6,466 -------- -------- Total cost . . . . . . . . . . . . . . . . . . 322,360 296,220 Less accumulated depreciation . . . . . . . . . (82,303) (65,499) -------- -------- Net investment in operating leases . . . . . . $240,057 $230,721 ======== ========
Depreciation expense relating to equipment and real estate held under operating leases was $39,012, $28,645 and $21,191 in 1993, 1992 and 1991, respectively.
Estimated minimum annual lease receipts from noncancelable operating leases as of December 31, 1993 are as follows:
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------- 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,934 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,454 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,273 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,989 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 61,893 -------- $250,543 ========
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
5. NOTES PAYABLE
Notes payable at December 31 consist of the following:
1993 1992 -------- --------
Recourse notes payable with interest rates from 3.31% to 11.0% and maturity dates through 2005 . . . . . . . . . . . . . . . . . $709,508 $918,617 Nonrecourse notes payable with fixed interest rates from 8.5% to 9.3% and retired in 1993 . -- 1,025 -------- -------- Total notes payable . . . . . . . . . . . . $709,508 $919,642 ======== ========
At December 31, 1992, all nonrecourse notes were collateralized by specific lease receivables and the underlying equipment. During 1993, 1992 and 1991, the Company paid $82,656, $91,434 and $113,925, respectively, in interest.
The above recourse note amounts are allocated from aggregate recourse notes of Old TriCon of $847,917 and $1,066,193 at December 31, 1993 and 1992, respectively (see Note 1).
Under the terms of various recourse notes and receivable transfer agreements, Old TriCon was subject to certain restrictive covenants. The most restrictive of these covenants require Old TriCon to maintain a minimum net worth of $150,000; an interest coverage ratio of at least 1.2:1; and a ratio of indebtedness (as defined in the various agreements) to net worth not to exceed 8:1. Old TriCon was in compliance with all covenants as of the balance sheet dates. In addition, certain affiliates have agreed to maintain Old TriCon's compliance with certain financial covenants pursuant to agreements covering the majority of recourse borrowings at December 31, 1993. During 1993 and 1992, Old TriCon participated with an affiliate in the issuance of medium-term notes. Old TriCon's share of the issuance was $184,567 and $60,750 in 1993 and 1992, respectively, which is included in recourse notes payable above. The notes bear interest at varying rates from 4.33% to 6.625% and have maturity dates through December 1999. The Company recognized interest expense on these medium-term notes of $8,054 and $217 in 1993 and 1992, respectively.
Maturities of notes payable are as follows:
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,627 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,072 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,824 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,011 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,045 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 56,929 -------- $709,508 ========
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
6. TOTAL EQUITY
The following are transactions affecting total equity:
1993 1992 1991 -------- -------- --------
Balance at beginning of year . . . . $256,903 $206,674 $185,069 Capital contributions . . . . . . . . 21,438 40,416 6,073 Net income . . . . . . . . . . . . . 37,111 27,364 21,884 Capital distributions . . . . . . . . (3,932) (17,932) (3,677) Foreign currency translation adjustments . . . . . . . . . . . . . 230 381 (2,633) Other . . . . . . . . . . . . . . . . (395) -- (42) -------- -------- -------- Total Equity at end of year . . . $311,355 $256,903 $206,674 ======== ======== ========
7. INCOME TAXES
In 1990, Bell Atlantic was subject to the alternative minimum tax (AMT) provisions of the 1986 Tax Reform Act on a tax return basis. The Company has provided for its share of Bell Atlantic's consolidated current AMT liability and for the deferred benefit relating to the corresponding AMT credit carryforward.Bell Atlantic was able to utilize all AMT carryforwards in 1991 and 1992. The Company's income tax expense for the years 1993, 1992 and 1991 would not have differed materially from that reported had the Company filed tax returns on a stand alone basis.
The provision for income taxes (exclusive of the tax effect of the cumulative effect of changes in accounting principles in 1993 and 1991) for the years ended December 31 consists of the following:
1993 1992 1991 -------- ------- -------
Current: Federal . . . . . . . . . . . . . . . $ 28,912 $14,065 $15,045 State and local . . . . . . . . . . . 145 756 10 -------- ------- ------- 29,057 14,821 15,055 -------- ------- ------- Deferred: Federal . . . . . . . . . . . . . . . (11,365) (3,071) (4,012) State and local . . . . . . . . . . . 4,472 3,664 3,971 -------- ------- ------- (6,893) 593 (41) -------- ------- ------- Provision for income taxes . . . $ 22,164 $15,414 $15,014 ======== ======= =======
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
7. INCOME TAXES (Continued) Deferred tax liabilities (assets) are comprised of the following:
--------
Gross deferred tax liabilities: Lease related differences . . . . . . . . . . . . . . . . $ 75,263 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 57,704 -------- Gross deferred tax liabilities . . . . . . . . . . . . . . 132,967 -------- Gross deferred tax assets: Allowance for credit losses and accrued liabilities for securitizations . . . . . . . . . . . . . . . . . . . (23,031) Other . . . . . . . . . . . . . . . . . . . . . . . . . . (28,836) -------- Gross deferred tax assets . . . . . . . . . . . . . . . . . (51,867) -------- Net deferred taxes . . . . . . . . . . . . . . . $ 81,100 ========
Under APB 11, deferred taxes resulted from timing differences in the recognition of revenue and expenses for federal and state tax and for financial statement purposes. The tax effects of the timing differences that resulted in the provision for deferred income taxes are summarized as follows:
1992 1991 -------- --------
Accelerated depreciation . . . . . . . . . . . $ (407) $ 3,151 Direct finance and operating leases . . . . . . (23,681) (10,653) State taxes . . . . . . . . . . . . . . . . . 2,418 2,621 Deferred AMT credits . . . . . . . . . . . . . 7,937 6,597 Asset backed securitizations . . . . . . . . 7,834 103 Provision for credit losses . . . . . . . . . . 3,227 (9,195) Other, net . . . . . . . . . . . . . . . . . . 3,265 7,335 -------- -------- Total . . . . . . . . . . . . . . . . $ 593 $ (41) ======== ========
During 1993, 1992 and 1991 the Company paid $24,989, $23,415 and $8,322, respectively, in income taxes.
The provision for income taxes recorded for financial reporting purposes differs from the expense computed at the statutory federal income tax rate as follows:
1993 1992 1991 ---- ---- ----
Federal income tax provision at the statutory rate . . . . . . . . . . . . . . 35.0% 34.0% 34.0% State income tax provision, net of federal tax benefit . . . . . . . . . . . 5.6 6.8 6.8 Adjust prior years' tax provision . . . . . (.1) (1.1) -- Income tax expense related to acquisition of business . . . . . . . . . .5 1.4 2.1 Income tax benefit related to tax exempt income . . . . . . . . . . . . (4.3) (3.8) (3.9) Impact of 1% rate change . . . . . . . . . 4.4 -- -- Other . . . . . . . . . . . . . . . . . . . .1 (1.3) .1 ---- ---- ---- Provision for income taxes . . . . . . . 41.2% 36.0% 39.1% ==== ==== ====
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
8. TRANSACTIONS WITH AFFILIATES
The Company purchased equipment from affiliates of Bell Atlantic totaling $4,574, $7,793 and $10,923 in 1993, 1992 and 1991, respectively, which is being leased to third parties under financing lease arrangements. In 1990, the Company purchased $11,800 of equipment from an affiliate in return for a non-interest bearing note payable due in 1991. During 1991, the Company returned such equipment to the affiliate in full payment of the note. During 1993, 1992 and 1991, the Company leased various equipment to affiliates under direct finance and operating leases and recognized earned income of $1,540, $1,143 and $1,481, respectively.
During 1993, 1992 and 1991, the Company earned $100, $1,174 and $234, respectively, of management fees from an affiliate. The Company has entered into a short-term borrowing arrangement with an affiliate that bears interest at a rate which approximates the affiliate's average daily cost of funds (weighted average effective rates of 3.28%, 3.83% and 6.04% for the years ended December 31, 1993, 1992 and 1991, respectively). The Company recognized interest expense of $13,844, $13,910 and $19,727 in 1993, 1992 and 1991, respectively, under these arrangements.
Due to Affiliates consists of the following at December 31:
1993 1992 1991 -------- -------- --------
Advances under short-term borrowing arrangements . . . . . $603,501 $347,260 $311,029 Payables to affiliates . . . . . 4,437 3,855 4,723 Receivables from affiliates . . . (2,148) (2,825) (2,846) Income tax payable. . . . . . . . 5,404 1,552 4,235 -------- -------- -------- $611,194 $349,842 $317,141 ======== ======== ========
9. EMPLOYEE BENEFITS
Pension Plans
Substantially all of the Company's employees are covered under a noncontributory defined benefit pension plan sponsored by Bell Atlantic Capital Corporation and its subsidiaries. The pension benefit formula used is based on a stated percentage of adjusted career average income. The funding objective of the plan is to accumulate funds at a relatively stable rate over participants' working lives so that benefits are fully funded at retirement. Amounts contributed to the plan are determined actuarially, principally under the aggregate cost method, and are subject to applicable federal income tax regulations. Plan assets consist principally of investments in domestic and foreign corporate equity securities, U.S. Government and corporate debt securities, and real estate. In addition, the Company participates in the Executive Management Retirement Plan, a non-qualified pension plan, sponsored by Bell Atlantic and its subsidiaries.
Aggregate pension costs are as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1993 1992 1991 ------- ------- -------
Current year cost . . . . . . . . . $1,306 $1,417 $1,464 Percentage of salaries and wages . 3.7% 4.0% 4.6%
The decrease in pension cost from 1991 to 1993 is the net result of changes in plan provisions and other actuarial assumptions, and amortization of actuarial gains and losses relating to demographic and investment experience.
Statement of Financial Accounting Standards No. 87, "Employers Accounting for Pensions" requires a comparison of the actuarial present value of projected benefit obligations with the fair value of plan assets, the disclosure of the components of net periodic pension costs, and a reconciliation of the funded status of the plan with amounts recorded on the balance sheets. Such disclosures are not presented for the Company because the structure of the plan does not allow for the determination of this information on an individual company basis.
The assumed discount rate used to measure the projected benefit obligation was 7.25% at December 31, 1993 and 7.75% at December 31, 1992 and 1991. The assumed rate of future increases in compensation levels was 5.25% at December 31, 1993, 1992 and 1991. The expected long-term rate of return on plan assets was 8.25% for December 31, 1993 and 1992 and, 7.5% for December 31, 1991.
Postretirement Benefits Other than Pensions
Effective January 1, 1991, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106) which requires accrual accounting for all postretirement benefits other than pensions. Under the prescribed accrual method, the Company's obligation for these postretirement benefits is to be fully accrued by the date employees attain full eligibility for such benefits. Prior to this adoption, the Company charged costs relating to such benefits to expense as paid.
In conjunction with the 1991 adoption of SFAS 106, the Company elected to immediately recognize the accumulated postretirement benefit obligation for current and future retirees, net of the fair value of any plan assets, and recognized accrued postretirement benefit cost (transition obligation) in the amount of $1,471, net of a deferred income tax benefit of $758.
Substantially all of the Company's employees are covered under postretirement health benefit plans sponsored by Bell Atlantic Capital Corporation and its subsidiaries. The determination of benefit cost for the postretirement health benefit plan is based on comprehensive hospital, medical and surgical benefit provisions.
Aggregate postretirement benefit cost for the year ended December 31, 1993, 1992 and 1991 was $571, $394 and $332, respectfully. There were no amounts paid for postretirement health benefits in 1990.
SFAS 106 requires a comparison of the actuarial present value of the accumulated postretirement benefit obligation with the fair value of the plan assets, the disclosure of the components of net periodic postretirement benefit cost, and a reconciliation of the funded status of the plan with the amount recorded on the balance sheet. Such disclosures are not presented for the Company because the structure of the Bell Atlantic plan does not allow for the determination of this information on an individual company basis.
The assumed discount rate used to measure the accumulated postretirement benefit obligation was 7.25% at December 31, 1993 and 7.75% at December 31, 1992 and 1991. The assumed rate of future increases in compensation levels was 5.25% at December 31, 1993 and 1992. The expected long-term rate of return on plan assets was 8.25% for 1993 and 1992 and 7.50% for 1991. The medical cost trend rate in 1993 was approximately 13.0%, grading down to an ultimate rate in year 2003 of approximately 5.0%.
Employee Stock Ownership Plans
The Company maintains savings plans which cover substantially all of its employees. Under these plans, the Company matches a certain percentage of eligible contributions made by the employees. In 1989, Bell Atlantic established two leveraged employee stock ownership plans (ESOPs) within two existing employee savings plans. Under the ESOP provisions, which began January 1, 1990, a substantial portion of Company matching contributions are allocated to the employees in the form of Bell Atlantic stock from the ESOP trusts. Bell Atlantic stock allocated by the ESOP trusts to the participating employees is based on the proportion that principal and interest paid in a year bears to remaining principal and interest due over the life of the notes.
Leveraged ESOP expense for the years ended December 31, 1993, 1992 and 1991 is $786, $912 and $803, respectively.
Employers' Accounting for Postemployment Benefits
Effective January 1, 1993 the Company adopted Statement of Financial Accounting Standard No. 112 "Employers' Accounting for Postemployment Benefits" (SFAS 112) which requires employers who provide benefits to former or inactive employees to recognize the obligation relative to such future benefits on an accrual basis. This change principally affects the Company's accounting for long-term disability benefits which were previously charged to expenses as benefits were paid. The cumulative impact at January 1, 1993 of adopting SFAS 112 was a reduction of net income of $232, net of a deferred income tax benefit of $151.
10. COMMITMENTS
At December 31, 1993, the Company's commitments under noncancelable operating leases having remaining terms in excess of one year, primarily for office space are as follows:
YEAR ENDING DECEMBER 31, - ------------------------- 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,803 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,543 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,488 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,251 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,741 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 3,739 ------- $15,565 =======
Such leases generally include escalation and renewal clauses and require that the Company pay for utilities, taxes, insurance and maintenance. Rent expense under operating lease agreements was $2,972, $2,985 and $2,952 in 1993, 1992 and 1991, respectively.
At December 31, 1993, the Company has outstanding commitments to finance notes receivable of $171,985. The anticipated expirations of such commitments are $167,487 in 1994, $0 in 1995, $0 in 1996, and $4,498 in 1997.
11. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly affect groups of customers whose aggregate credit exposure is material in relation to the Company's total credit exposure. Although the Company's portfolio is broadly diversified along industry, customer, equipment and geographic lines, there does exist a concentration of transactions within the health care industry (approximately 22% of total assets plus transferred receivables at December 31, 1993 and 1992). The Company's exposure to credit risk in these and other industries is mitigated by the diversity of customers in the customer base and in many cases by the quality of the underlying collateral.
Receivable Transfer Agreements (Securitizations)
During 1993, 1992 and 1991, the Company transferred its interests in approximately $179,206, $248,048 and $246,721, respectively, of its direct finance lease portfolio for $200,447, $275,049 and $270,621, respectively. These transfers provide limited recourse for credit losses to the Company and certain of its assets. As of December 31, 1993, $60,153 of finance lease receivables are the sole collateral for certain limited recourse provisions. In addition to such finance lease receivables, the Company has recourse exposure at December 31, 1993 limited to $106,429. At December 31, 1993 and 1992, an outstanding allowance for estimated losses under these recourse provisions of $14,146 and $17,360, respectively, is included in Accounts Payable and Accrued Expenses. The outstanding gross receivable balance of transferred receivables was $495,906 and $541,834 at December 31, 1993 and 1992, respectively. The Company will service these lease contracts for the transferee, and a portion of the proceeds on the transfer has been deferred representing service fees to be earned over the term of the agreements.
Interest Rate Swaps
The Company has entered into a number of interest rate swap agreements which have effectively fixed interest rates on $424,432 of floating rate instruments including debt and receivable transfer agreements. Under these interest rate swap agreements, the Company will pay the counterparties interest at a fixed rate and the counterparties will pay the Company interest at a variable rate based on the London Interbank Offered Rate (LIBOR), the A1/P1 commercial paper rate or a money market yield. The fixed rates payable under these agreements range from 4.08% to 7.96% with terms expiring at various dates from February 1994 to August 1996. Cash flows resulting from the above are classified with the transactions being hedged. The Company would be exposed to increased interest costs in the event of non-performance by the counterparties for the fixed to floating interest rate swap agreements. However, because of the stature of the counterparties, the Company does not anticipate non-performance.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of the fair value of financial instruments, both recognized and unrecognized on the consolidated balance sheet, for which it is practicable to estimate fair value. Leases are not considered financial instruments under SFAS 107 and are accordingly excluded from the fair value disclosures. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange nor can they be substantiated by comparison to independent markets.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash, Accounts Payable, Accrued Expenses, Other Amounts Due to Affiliates and Recourse Provisions under Receivable Transfer Agreements The carrying amount approximates fair value.
Notes Receivable
Fair values of notes receivable are based principally on the net present value of the future expected cash flows using current interest rates.
Notes Payable and Advances under Short-term Borrowing Arrangements with Affiliates
The fair values of notes payable and advances under short-term borrowing arrangements with affiliates is estimated based on the quoted market prices for the same or similar issues, where available or is based on the net present value of the future expected cash flows using current interest rates.
Interest Rate Swap Agreements
The fair value of interest rate swap agreements is the estimated amount that the Company would have to pay to terminate the swap agreements at December 31, 1993, taking into account current interest rates and the creditworthiness of the swap counterparties.
Loan Commitments
The fair value of loan commitments is estimated using the fees currently charged to enter into similar commitments.
The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 1993 DECEMBER 31, 1992 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- --------- ---------
FINANCIAL INSTRUMENTS ON THE BALANCE SHEETS Notes Receivable net of Allowance for Credit Losses . . . . $ 894,486 $ 896,051 $ 818,216 $ 827,264 Notes Payable . . . . . (709,508) (740,970) (919,642) (973,021) Advances under Short-term Borrowing Arrangements with Affiliates . . . . . (603,501) (603,793) (347,260) (348,897) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Interest Rate Swap Agreements . . . . . -- $ (1,160) -- $ 1,321 Loan Commitments . . . -- 6,516 -- 4,383
12. SUPPLEMENTAL CASH FLOW ACTIVITIES
During 1992 and 1991 the Company transferred $5,859 and $57,050, respectively, of investment in notes receivable to other assets. In addition, during 1992 the Company transferred $41,585 of property foreclosed in 1991 and included in other assets to investment in operating leases, following the determination to hold such property for operating purposes. The resultant valuation adjustment of $6,000 is reflected in other revenues in 1992.
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS)
13. QUARTERLY INFORMATION (Unaudited)
FIRST SECOND THIRD FOURTH TOTAL ------- ------- ------- ------- --------
Total revenue . . . . $57,258 $58,629 $62,253 $67,160 $245,300 Interest expense . . 20,795 20,956 19,564 18,896 80,211 Provision for credit losses . . . 7,384 7,606 2,966 3,678 21,634 Depreciation . . . . 10,416 9,902 10,138 11,126 41,582 Cumulative effect of changes in accounting principles . . . . . 5,763 -- -- (233) 5,530 Net income . . . . . 9,815 5,368 8,111 13,817 37,111 Total revenue . . . . $53,980 $54,217 $59,137 $74,933 $242,267 Interest expense . . 23,736 22,804 22,012 21,746 90,298 Provision for credit losses . . . 5,606 6,671 9,355 6,425 28,057 Depreciation . . . . 6,960 7,193 8,049 9,294 31,496 Net income . . . . . 2,706 4,892 4,859 14,907 7,364
Net income in the fourth quarter of 1993 and 1992 was increased by certain securitization transactions (see Note 11).
EXHIBIT 12
TRICON CAPITAL CORPORATION - PREDECESSOR BUSINESS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
At or for the Year Ended December 31, ------------------------------------------------ 1993 1992 1991 1990 1989 ------------------------------------------------ (Dollars in Thousands) Income before income taxes and cumulative effect of changes in accounting principles $ 53,745 $ 42,778 $ 38,369 $ 39,380 $ 30,391
Add: Fixed charges 81,201 91,293 116,174 121,039 97,424 -------- -------- -------- -------- -------- Income as adjusted $134,946 $134,071 $154,543 $160,419 $127,815
Fixed Charges: Interest or indebtedness $ 80,211 $ 90,298 $115,190 $119,965 $ 96,347 Interest factor of annual rentals (1) 990 995 984 1,074 1,077 -------- -------- -------- -------- -------- Fixed Charges $ 81,201 $ 91,293 $116,174 $121,039 $ 97,424 -------- -------- -------- -------- --------
Ratio of earnings to fixed charges 1.66x 1.47x 1.33x 1.33x 1.31x ======== ======== ======== ======== ========
____________
(1) The interest portion of annual rentals is estimated to be one- third of such rentals.
PART II
ITEM 5.
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS.
There is no market for the Company's common stock or redeemable preferred stock as the Company is wholly owned by GFC Financial. The preferred stock is subject to mandatory redemption on July 1, 1997. Dividends paid on the common stock for the first through fourth quarters of 1993 were $3,200,000, $3,200,000, $3,600,000 and $3,600,000, respectively. Dividends paid on the common stock for the first through fourth quarters of 1992 were $3,000,000, $3,000,000, $2,900,000 and $2,900,000, respectively.
See Note D of Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Annex A for a discussion of restrictions on the ability of GFC to pay dividends and Note E thereof for a discussion on dividends relating to the preferred stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
See pages 1 - 7 of Annex A.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
1. Financial Statements - See Item 14 hereof. 2. Supplementary Data - See Condensed Quarterly Results included in Note M of Notes to Consolidated Financial Statements included in Annex A.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING & FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10.


ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
Omitted.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
Omitted.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed. 1. Financial Statements. (i) The following financial statements of Greyhound Financial Corporation are included in Annex A:
Annex Page ------- Management's Discussion and Analysis of Financial Condition and Results of Operations 1 - 7 Report of Management and Independent Auditors' Report 8 Consolidated Balance Sheet 9 - 10 Statement of Consolidated Operations 11 Statement of Consolidated Stockholder's Equity 12 Statement of Consolidated Cash Flows 13 Notes to Consolidated Financial Statements 14 - 45
(ii) The Financial Statements of TriCon Capital Corporation are included in Part I, Optional Item 2.
2. All Schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits.
Exhibit No. -----------
(3-A) The Company's Certificate of Incorporation, as amended through the date of this filing (incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1991 (the "1991 10-K"), Exhibit 3-A).
(3-B) The Company's By-Laws, as amended through the date of this filing (incorporated by reference from the Company's 1991 10- K, Exhibit 3-B).
(4.A) Instruments with respect to issues of long-term debt have not been filed as exhibits to this Annual Report on Form 10-K if the authorized principal amount of any one of such issues does not exceed 10% of total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of each such instrument to the Securities and Exchange Commission upon request.
(4-B-1) Form of Common Stock Certificate of the Company from the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (the "1992 10-K"), Exhibit 4-B-1.
(4-B-2) Form of the Company's Series A Redeemable Preferred Stock Certificate from the 1992 10-K, Exhibit 4-B-2.
(4-C) Certificate of Designations of Series A Redeemable Preferred Stock of the Company (incorporated by reference from the 1992 GFC Financial Annual Report on Form 10-K for the year ended December 31, 1992 (the "GFC Financial 1992 10-K", Exhibit 10- MM)).
(4-D) Relevant portions of the Company's Certificate of Incorporation and Bylaws are included in Exhibits 3-A and 3-B above, respectively.
(4-E) Indenture dated as of November 1, 1990 between the Company and the Trustee named therein (incorporated by reference from the Company's Registration Statement on Form S-3, Registration No. 33-37743, Exhibit 4).
(4-F) Fourth Supplemental Indenture dated as of April 17, 1992 between the Company and the Trustee named therein, supplementing the Indenture referenced in Exhibit 4-E above, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-F.
(4-G) Prospectus and Prospectus Supplement dated April 17, 1992, relating to $350,000,000 principal amount of the Company's Medium-Term Notes, Series A, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-G.
(4-H) Form of Floating-rate, Medium-Term Notes, Series A, is hereby incorporated by reference from the 1992 GFC Financial 10-K, Exhibit 4-H.
(4-I) Form of Fixed-rate, Medium-Term Notes, Series A, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-I.
(4-J) Form of Indenture dated as of September 1, 1992 between the Company and the Trustee named therein (incorporated by reference from the Company's Registration Statement on Form S-3, Registration No. 33-51216, Exhibit 4).
(4-K) Prospectus and Prospectus Supplement dated September 25, 1992 regarding $250,000,000 principal amount of the Company's Medium-Term Notes, Series B, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-K.
(4-L) Form of Floating-rate Medium-Term Notes, Series B, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-L.
(4-M) Form of Fixed-rate Medium-term Notes, Series B, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-M.
(4-N) Indenture dated as of June 1, 1985 between the Company and the trustee named therein is hereby incorporated by reference from the 1992 10-K, Exhibit 4-N.
(4-O) Prospectus and Prospectus Supplement dated February 16, 1994 regarding $250,000,000 principal amount of the Company's Medium-Term Notes, Series B is hereby incorporated by reference from the Company's Registration Statement on Form S-3, Registration No. 33-51216, as amended on that date.
(4-P) Prospectus, dated February 16, 1994, and Prospectus Supplement dated February 17, 1994 regarding $100,000,000 principal amount of the Company's Floating-Rate Notes, is hereby incorporated by reference from the Company's Registration Statement on Form S-3, Registration No. 33- 51216, as amended on that date.
(9) Form of Distribution Agreement among the Company, GFC Financial Corporation, The Dial Corp and certain other parties named therein, dated as of January 28, 1992 (incorporated by reference from GFC Financial's Registration Statement on Form S-1, Registration No. 33-45452, Annex II to the Prospectus and Exhibit 2.1) (containing section 2.08(b), regarding the voting of the Greyhound Financial Corporation preferred stock).
(10-A) Fifth Amendment and Restatement dated as of May 18, 1993 of the Credit Agreement dated as of May 31, 1976 among the Company and the banking institutions listed on the signature pages thereto, and Bank of America National Trust and Savings Association, Chemical Bank and Citibank, N.A., as agents (incorporated by reference from the Corporation's Current Report on Form 8-K dated February 14, 1994, Exhibit 7(c)).
(10.A1) Amendment dated as of January 31, 1994, to the Fifth Amendment and Restatement, noted in 10-A above incorporated by reference from the GFC Financial 1992 10-K, Exhibit 10. A1.*
(10-C) Sublease dated as of April 1, 1991 among the Company, GFC Financial, Dial and others, relating to the Company principal office space is hereby incorporated by reference from the GFC Financial 1992 Form 10-K, Exhibit 10-NN.
(10-D) Interim Service Agreement dated January 28, 1992 among the Company, GFC Financial, Dial and others is hereby incorporated by reference from the GFC Financial 1992 Form 10-K, Exhibit 10-JJ.
(10-E) Tax Sharing Agreement dated February 19, 1992 among the Company, GFC Financial, Dial and others is hereby incorporated by reference from the GFC Financial 1992 Form 10-K, Exhibit 10-KK.
(10.F) Stock Purchase Agreement between the Company and Bell Atlantic TriCon Leasing Corporation dated as of March 4, 1994.*
(10.G) Form of Assets Purchase Agreement between Bell Atlantic TriCon Leasing Corporation and TriCon Capital Corporation.*
(12) Computation of Ratio of Income to Combined Fixed Charges and Preferred Stock Dividends.*
(23) Consent of Independent Accountants - Deloitte & Touche.*
(23.A) Consent of Independent Accountants - Coopers & Lybrand.*
(23.B) Consent of Independent Accountants - Coopers & Lybrand.*
(23.C) Consent of Independent Accountants - KPMG Peat Marwick.*
* Filed herewith.
(b) Reports on Form 8-K:
A Report on Form 8-K dated January 18, 1994 was filed by Registrant, which reported under Item 5 the revenues, net income and selected financial data and ratios for the fourth quarter and twelve months ended 1993 (unaudited).
Reports on Form 8-K dated January 21, 1994 were filed by Registrant, which reported under Item 5 the settlement of the litigation between Cabana Limited Partnership, a South Carolina Limited Partnership v. Greyhound Real Estate Finance Company, et al, a subsidiary of Greyhound Financial Corporation, the principal operating subsidiary of the Registrant.
Reports on Form 8-K, 8-K/A and 8-K-A-1, dated February 14, 1994 were filed by Registrant, which reported under Items 2 and 7 the signing of an agreement by the registrant to purchase Ambassador Factors from Fleet Financial Group, Inc. and the Fifth Amendment and Restatement, dated as of May 18, 1993, of Credit Agreement dated as of May 31, 1976 among Greyhound Financial Corporation, Bank of America National Trust and Savings Association, Chemical Bank and Citibank, N.A., as agents, and the financial institutions listed.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the capacities indicated, in Phoenix, Arizona on the 10th day of March, 1994.
Greyhound Financial Corporation
By: /s/ Samuel L. Eichenfield _________________________________________ Samuel L. Eichenfield President and Chief Executive Officer (Chief Executive Officer)
By: /s/ Robert J. Fitzsimmons _________________________________________ Robert J. Fitzsimmons Vice President - Treasurer (Chief Financial Officer)
By: /s/ Bruno A. Marszowski _________________________________________ Bruno A. Marszowski Vice President - Controller (Chief Accounting Officer)
Pursuant to the requirements of the Securities 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:
_________________________________ ________________________________ W. Carroll Bumpers (Director) Samuel L. Eichenfield (Chairman) March 10, 1994 March 10, 1994
_________________________________ ________________________________ Robert J. Fitzsimmons (Director) Bruno A. Marszowski (Director) March 10, 1994 March 10, 1994
ANNEX A
Page
Management's Discussion and Analysis of Financial Condition and Results of Operations 1 - 6
Report of Management and Independent Auditors' Report 7
Consolidated Balance Sheet at December 31, 1993 and 1992 8 - 9
Statement of Consolidated Operations for the Years Ended December 31, 1993, 1992 and 1991 10
Statement of Consolidated Stockholder's Equity for the Years Ended December 31, 1993, 1992 and 1991 11
Statement of Consolidated Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 12
Notes to Consolidated Financial Statements for the Years Ended December 31, 1993, 1992 and 1991 13 - 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to Greyhound Financial Corporation ("GFC" or the "Company"), including the European Financial Group ("GEFG") and Greyhound BID Holding Corporation ("BID"), the subsidiaries contributed to GFC prior to the Distribution as discussed in Note A of Notes to the Consolidated Financial Statements. The following comments and information should be read in conjunction with the Annual Report as a whole. GFC is a wholly owned subsidiary of GFC Financial Corporation ("GFC Financial"). GFC Financial is a holding company, the principal subsidiaries of which are GFC and Verex Corporation ("Verex"), a mortgage insurance company that was sold on July 16, 1993.
Results of Operations
1993 Compared to 1992 Net income for 1993 was $36.4 million compared to $36.8 million in 1992. The 1993 results included a $4.9 million adjustment in the third quarter for deferred taxes applicable to leveraged leases and $1.6 million (pre-tax) of expenses that can no longer be allocated to Verex. Excluding these amounts, net income for 1993 was $42.3 million, an increase of 15% over 1992. The $4.9 million adjustment in 1993 represented the effects of the recent increases in federal and state income tax rates as they applied to deferred income taxes generated by the Company's leveraged lease portfolio.
Financial Services. Interest Margins Earned. Interest margins earned, which represent the difference between interest earned from financing transactions and interest expense, increased by 17% in 1993 compared to 1992. These margins were improved significantly by more favorable debt costs in 1993 when compared to 1992 (approximately a 1% reduction in the aggregate cost of debt). Also contributing to the improved margins was the growth of the domestic portfolio and higher prepayment fees, partially offset by the effects of larger foreign exchange gains reported by GEFG in 1992 and the continued winding down of the GEFG portfolio.
The $10.0 million reduction in interest expense primarily is attributable to more favorable debt costs in 1993. The more favorable debt costs, in comparison to 1992, primarily relate to the Company's ability to consistently maintain a matched position throughout 1993 relative to financing its floating-rate assets with floating-rate debt. During the second and third quarters of 1992, GFC, because of the significant refinancing done in connection with the spin-off, had to finance a major portion of its floating-rate assets with fixed-rate debt. That fixed-rate debt was subsequently converted to floating-rate debt through interest rate conversion agreements. However, the timing between the issuance of fixed- rate debt and the execution of the interest rate conversion agreements caused interest margins to shrink by approximately $2.8 million in 1992.
Non-Interest Expense. Although the provision for possible credit losses was lower in 1993, in the opinion of management, such provision was adequate to cover the growth and risk in the portfolio. The reserve for possible credit losses, which is increased by the loss provisions and reduced by write-offs, was 2.3% of funds employed at December 31, 1993. Details of the write-offs by collateral type can be found in Note C of Notes to Consolidated Financial Statements.
Selling, administrative and other operating expenses increased during 1993 due to the addition of the Asset Based Finance ("ABF") operations acquired from U.S. Bancorp Financial, Inc. (see "Recent Developments and Business Outlook"), expenses that are no longer allocated to discontinued operations and legal expenses incurred in connection with certain problem accounts. See Note K of Notes to Consolidated Financial Statements.
Gains on Sale of Assets. Gains on sale of assets were higher in 1993 than in 1992 due to the amount and type of assets sold.
Income Taxes. Income taxes, excluding the $4.9 million adjustment applicable to deferred taxes, were higher in 1993 and more in the range of an ongoing effective tax rate (approximately 36% of income before income taxes) for the Company. The higher income taxes were attributable to the effects of a 1% increase in both federal and state income tax rates, which increased the provision for taxes by approximately $1 million, and to higher income before income taxes. Additionally, in 1992, income taxes were reduced by $3.1 million representing tax adjustments related to the refinancing of the Company's debt. See Note F of Notes to Consolidated Financial Statements.
Cash Flow. Net cash provided by operating activities in 1993 was $42.7 million, an increase of $10.0 million when compared to 1992. This increase was principally due to the increase in deferred income taxes, partially offset by a decline in customer deposits in GEFG's subsidiary bank, Greyhound Bank, PLC ("GBL") and a decrease in interest payable.
Net cash used by investing activities was $369.4 million in 1993, up by $107.2 million from 1992. The major reasons for the increase in 1993 were the record amount of expenditures for new business and the purchase of ABF, partially offset by the collection of advances made to Verex. Also offsetting the increase was higher principal collections on financing transactions (which included a significant amount of prepayments in 1993).
Net cash provided by financing activities was $310.5 million, an increase of $99.7 million from 1992. The increase primarily consisted of higher advances from GFC Financial representing the proceeds received on the sale of its discontinued mortgage insurance operations (Verex) and higher net borrowings primarily used to finance new business.
1992 Compared to 1991 Net income for 1992 was $36.8 million compared to a loss of $38.7 million in 1991. The 1991 results include $69 million (after-tax) of restructuring and other charges as part of the spin-off from The Dial Corp ("Dial"). Excluding the effects of the restructuring and other charges made in 1991, net income in 1992 increased by 21% over 1991 ($36.8 million compared to $30.3 million).
The following discussion of results of operations excludes the $69 million (after-tax) of restructuring and other charges recorded in 1991.
Interest Margins Earned. Interest margins earned increased by 11% in 1992 compared to 1991. This increase is attributable primarily to higher margins in the domestic portfolio ($83.4 million in 1992 compared to $73.6 million in 1991) due to the growth of $334.9 million in the domestic portfolio in 1992. GEFG's interest margins earned increased by $1.0 million in 1992 as a result of the $47.2 million of additional capital infused by Dial in December 1991 as part of the spin-off. The effect of this capital infusion helped to offset the reduction in margins caused by the continued liquidation of the GEFG portfolio.
During the second and third quarters of 1992, GFC, because of the significant refinancing done in connection with the spin-off, had to finance a major portion of its floating-rate assets with fixed-rate funds. Those fixed-rate funds were subsequently converted to floating-rate funds through interest rate conversion agreements. The timing between the issuance of fixed-rate funds and the execution of interest rate conversion agreements resulted in a decrease in margins of approximately $2.8 million. GFC was able to liquidate a substantial portion of its Latin American assets for gains of $3.1 million, which offset the adverse effect of the temporary imbalance of rate-sensitive assets and liabilities.
Also contributing to the improved interest margins were the effects of lower nonaccruals, which averaged $114 million in 1992 compared to $185 million in 1991, higher prepayment fees and interest expense reductions related to the refinancing of high cost fixed-rate debt during 1991 and 1992. These increases were partially offset by the effect of recognizing $6.3 million of additional income in 1991, related to the leveraged lease portfolio, with no comparable amount being recognized in 1992.
Non-Interest Expense. Provisions for possible credit losses were lower in 1992 but, nevertheless, were adequate to cover the growth and risk in the portfolio. A breakdown of the write-offs by collateral type can be found in Note C of Notes to Consolidated Financial Statements.
Selling, administrative and other operating expenses increased during 1992 due to additional costs associated with being a subsidiary of a public company, the liquidation of GEFG (which included $1.3 million of after-tax employee termination costs) and normal cost increases. See Note K of Notes to Consolidated Financial Statements.
Gains on Sale of Assets. Gains on sale of assets were lower in 1992 than in 1991 due to reduced quantities and values of assets coming off lease. This reduction was the result of the gradual liquidation of the Company's lease portfolio and is in line with the Company's strategy of improving core income (i.e., net income excluding after-tax gains on sale of assets).
Income Taxes. The effective income tax rate for 1992 is lower than the statutory rate primarily because of a $3.1 million reduction in taxes for tax benefits related to the expenses of refinancing the Company's debt. See Note F of Notes to Consolidated Financial Statements.
Cash Flow. Cash provided by operating activities was $32.7 million in 1992, an improvement of $101.8 million over 1991. The improvement was due to higher earnings and reduced uses of cash in 1992. The lower uses of cash, when compared to 1991, primarily related to withdrawals of customer deposits in GBL, reductions in deferred income taxes and lower interest paid resulting from lower effective interest rates in 1992. Partially offsetting these increases in cash was the payment in 1992 of restructuring and other charges and transaction costs related to the spin-off.
Net cash used by investing activities was $262.3 million in 1992, up $105.0 million from 1991. The major reasons for the higher use of cash were the increases in expenditures for financing transactions, net advances of $57.3 million made to Verex in 1992 to refinance its debt obligations and lower proceeds from the sale of assets, partially offsetting these items was an increase in principal collections from financing transactions in the domestic portfolio, increased prepayments and the principal and interest recovered from the sale of certain Latin American assets.
Net cash provided by financing activities was $210.8 million during 1992, a decline of $28.1 million from 1991. The decline was due primarily to lower net borrowings, partially reduced by amounts received from a subsidiary of Dial in connection with the spin-off to purchase GFC preferred stock and settle intercompany balances.
Liquidity and Capital Resources Funds employed (i.e., investment in financing transactions before the reserve for possible credit losses) increased by $361 million, or approximately 15%, to $2,847 million at December 31, 1993 from $2,486 million at December 31, 1992. This increase was due to approximately $1 billion of new business being added during 1993 and the acquisition of $63 million of ABF assets, partially offset by $702 million of portfolio runoff, early terminations, translation adjustments, write-offs and collections on net advances made to Verex ($57 million). The primary focus of ABF, which was acquired on February 1, 1993, is financing through revolving lines of credit secured by accounts receivable and inventories. This acquisition extends the financial services the Company can provide.
The GEFG portfolio continued to wind down in 1993 reflecting a reduction of $58.6 million to $124.3 million at December 31, 1993 from $182.9 million at December 31, 1992. In conjunction with the winding down of the GEFG portfolio, GEFG, in December 1993, surrendered the banking license of the United Kingdom bank and, therefore, will not be taking in any more customer deposits. Additional geographic information can be found in Note L of Notes to Consolidated Financial Statements.
The reserve for possible credit losses ("reserve") declined in 1993 by $5.0 million to $64.3 million at December 31, 1993 from $69.3 million at December 31, 1992. The decline was principally attributable to write-offs of $12.6 million ($5.0 million of which were in GEFG), partially offset by provisions for possible credit losses made in connection with the growth in funds employed. The reserve is believed to be adequate at December 31, 1993 at 2.3% of funds employed and 62.6% of nonaccruing assets.
Nonaccruing contracts and repossessed assets were $102.6 million at December 31, 1993 compared to $100.4 million at December 31, 1992. This increase is comprised of a $12.3 million increase in the domestic portfolio (to $90.3 million at December 31, 1993) partially offset by a decrease of $10.1 million in GEFG's portfolio (to $12.3 million at December 31, 1993). Nonaccruing contracts and repossessed assets as a percent of funds employed declined to 3.6% at December 31, 1993 from 4.0% at December 31, 1992. For more information on write-offs and nonaccruing assets see Note C of Notes to Consolidated Financial Statements.
The Company's outstanding debt of approximately $2,107 million (including $25 million of redeemable preferred stock) was 6.1 times its equity base of $345 million at December 31, 1993. The Company also had deferred taxes of $198 million at that date to help finance its lending activities.
Growth in funds employed is typically financed by internally generated cash flow and additional borrowings. During 1993, GFC issued $200 million of new senior debt, which, together with general corporate funds and net borrowings through the issuance of commercial paper, was used to finance new business and redeem or retire $200 million of maturing debt.
GFC satisfies a significant portion of its cash requirements from a diversified group of worldwide funding sources and is not dependent upon any one lender. Additionally, GFC relies on the issuance of commercial paper as a major funding source. During 1993, GFC issued $3.3 billion of commercial paper (with an average of $294 million outstanding during the year) and raised $200 million through new long-term senior notes of two to ten year durations. Commercial paper and short-term borrowings are supported by a $700 million unused long-term revolving bank credit agreement. Debt repayments in 1993 included the prepayment ($145 million) of six term loans due February 1994 to August 1996.
GFC generally mitigates the volatility of interest rate changes by matching the terms of its investments in new and existing transactions with approximate similar terms and duration applicable to its funding sources. Generally, fixed-rate assets are financed with fixed-rate debt and floating- rate assets are financed with floating-rate debt. GFC also balances the maturities of its investments so that sufficient cash flow is available to service anticipated debt requirements. In the third quarter of 1993, GFC entered into four three-year interest rate hedge agreements on $750 million of floating-rate borrowings to effectively guarantee a spread of approximately 2.3% between its borrowing rate (LIBOR) and the Prime interest rate.
GFC had outstanding 31 interest rate conversion agreements with notional principal amounts totaling $1.3 billion. Six agreements with notional principal amounts of $180 million were arranged to effectively convert certain floating interest rate obligations into fixed interest rate obligations and require interest payments on the stated principal amount at rates ranging from 8.3% to 9.8% (remaining terms of three months to five years) in return for receipts calculated on the same notional amounts at floating interest rates. In addition, 25 agreements with notional principal amounts of $1.1 billion were arranged to effectively convert certain fixed interest rate obligations into floating interest rate obligations and require interest payments on the stated principal amount at the three month or six month LIBOR (remaining terms of five months to nine years) in return for receipts calculated on the same notional amounts at fixed interest rates of 4.9% to 7.6%. The agreements have been entered into with major financial institutions which are expected to fully perform under the terms of the agreements, thereby mitigating the credit risk from the transactions.
GFC's aggregate cost of funds has declined to 6.3% for 1993 from 7.2% in 1992. GFC's cost of and access to capital resources is significantly influenced by its debt ratings.
Recent Developments and Business Outlook On February 1, 1993, GFC purchased the Asset Based Lending Division of U.S. Bancorp Financial, Inc., a wholly owned subsidiary of U.S. Bancorp, for approximately $70 million in cash. The primary focus of the Asset Based Finance group, which is based in Los Angeles and recently opened an office in Chicago, is to offer revolving lines of credit and term loans secured by accounts receivable and inventories on a national basis.
GFC established a new line of business (in August 1993), the Consumer Rediscount Group, which provides senior financing to independent consumer finance companies. Based in Dallas, Texas, this type of secured lending, known as rediscounting, represents another niche-business for GFC.
On February 14, 1994, GFC acquired Fleet Financial Group, Inc.'s factoring and asset-based lending subsidiary, Fleet Factors Corp, operating under the trade name Ambassador Factors ("Ambassador"). As of November 30, 1993, Ambassador had a $336 million loan portfolio and generated $810 million of factoring volume in 1993. Its customer base primarily consists of small to medium-sized textile and apparel manufacturers in the factoring operation and similar sized manufacturers, distributors and wholesalers in the asset-based lending business. See Note N of Notes to Consolidated Financial Statements.
On March 4, 1994, GFC Financial announced the signing of a definitive purchase agreement under which it will acquire all of the stock of TriCon Capital Corporation ("TriCon"), an indirect wholly-owned subsidiary of Bell Atlantic Corporation, in an all cash transaction. The transaction is subject to regulatory approvals and certain other conditions. TriCon is a $1.8 billion niche-oriented provider of commercial and equipment leasing services. TriCon's marketing orientation fits well with GFC's focus on value-added products and services in focused niches of the commercial finance business and further diversifies GFC's asset base. See Note N to Notes to Consolidated Financial Statements.
The expanding and improving U.S. and United Kingdom economies, are predicted to stimulate business investment and pave the way for stronger growth. Signs of these changes are becoming evident to the Company by the improved liquidity in its domestic Commercial Real Estate and Communication Finance businesses, as well as reduced nonaccruals in the European Consumer Finance portfolio. Strategies implemented during 1993 position the Company to take advantage of the improving domestic economy and to expand its financial services operations into three new niche businesses.
New Accounting Standards In November 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits". Analogous to SFAS No. 106 for postretirement benefits, this standard requires companies to accrue for estimated future postemployement benefit expenses during the periods when employees are working. Postemployment benefits are any benefits other than retirement benefits that are provided after employment is discontinued. This standard must be adopted for fiscal years beginning after December 15, 1993, which for the Company would be 1994. Based on management's review, the adoption of the new standard will not have a material impact on the Company's financial position or results of operations.
The FASB has issued a new accounting standard, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). This standard requires that impaired loans that are within the scope of this statement generally be measured based on the present value of expected cash flows discounted at the loan's effective interest rate or the fair value of the collateral, if the loan is collateral dependent. Under SFAS 114, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due. Presently, the reserve for possible credit losses represents management's estimate of the amount necessary to cover potential losses in the portfolio considering delinquencies, loss experience and collateral. The impact of the new standard, which is effective for fiscal years beginning after December 15, 1994, has not yet been determined.
New accounting standards adopted by GFC in 1993 included SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("OPEB"). The disclosure required by this statement is included in Note G of Notes to Consolidated Financial Statements.
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Greyhound Financial Corporation is responsible for the preparation, integrity and objectivity of the financial statements and other financial information included in this Annual Report. The financial statements are presented in accordance with generally accepted accounting principles reflecting, where applicable, management's best estimates and judgments. Management of the Company has established and maintains a system of internal controls to reasonably assure the fair presentation of the financial statements, the safeguarding of the Company's assets and the prevention or detection of fraudulent financial reporting. The internal control structure is supported by careful selection and training of personnel, documented policies and procedures and regular review by both internal auditors and the independent auditors. The Board of Directors, through its Audit Committee, also oversees the financial reporting of the Company and its adherence to established procedures and controls. Periodically, the Audit Committee meets, jointly and separately, with management, the internal auditors and the independent auditors to review auditing, accounting and financial reporting matters. The Company's financial statements have been audited by Deloitte & Touche, independent auditors. Management has made available to Deloitte & Touche all of the Company's financial records and related data, and has made valid and complete written and oral representations and disclosures in connection with the audit. Management believes it is essential to conduct its business in accordance with the highest ethical standards, which are characterized and set forth in the Company's written Code of Conduct. These standards are communicated to all of the Company's employees.
Samuel L. Eichenfield Chairman, President & Chief Executive Officer
Bruno A. Marszowski Vice President - Controller
Derek C. Bruns Director - Internal Audit GFC Financial Corporation
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Greyhound Financial Corporation
We have audited the accompanying consolidated balance sheet of Greyhound Financial Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Greyhound Financial Corporation and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
Deloitte & Touche Phoenix, Arizona March 4, 1994
CONSOLIDATED BALANCE SHEET (Dollars in Thousands)
ASSETS
- ---------------------------------------------------------------------------- December 31, 1993 1992 - ---------------------------------------------------------------------------- Cash and cash equivalents $ 2,859 $ 19,120
Investment in financing transactions: Loans and other financing contracts, less unearned income of $72,747 and $122,381, respectively 2,343,755 1,919,371 Leveraged leases 283,782 269,370 Operating and direct financing leases 219,034 239,782 Related party advances 57,321 - ---------------------------------------------------------------------------- 2,846,571 2,485,844
Less reserve for possible credit losses (64,280) (69,291) - ----------------------------------------------------------------------------
Investment in financing transactions - net 2,782,291 2,416,553
Other assets and deferred charges 49,747 44,653 - ----------------------------------------------------------------------------
$ 2,834,897 $ 2,480,326
============================================================================
See notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDER'S EQUITY
- ---------------------------------------------------------------------------- December 31, 1993 1992 - ---------------------------------------------------------------------------- Liabilities: Accounts payable and accrued expenses $ 30,158 $ 27,613 Due to Parent 130,760 Customer deposits 3,064 15,064 Interest payable 23,633 29,062 Short-term debt 510 1,360 Senior debt 1,991,986 1,806,433 Subordinated debt 86,790 75,916 Deferred income taxes 197,705 174,090 - ---------------------------------------------------------------------------- 2,464,606 2,129,538 - ----------------------------------------------------------------------------
Redeemable preferred stock 25,000 25,000 - ----------------------------------------------------------------------------
Stockholder's equity: Common stock, $1 par value, 100,000 shares authorized, 25,000 shares outstanding 25 25 Additional capital 298,665 298,665 Retained income 54,374 33,783 Cumulative translation adjustments (7,773) (6,685) - ---------------------------------------------------------------------------- 345,291 325,788 - ----------------------------------------------------------------------------
$ 2,834,897 $ 2,480,326 ============================================================================
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED OPERATIONS (Dollars in Thousands)
- ---------------------------------------------------------------------------- Years Ended December 31, 1993 1992 1991 - ---------------------------------------------------------------------------- Interest and other income $218,171 $210,873 $212,706 Lease income 30,529 29,933 38,766 - ---------------------------------------------------------------------------- Interest earned from financing 248,700 240,806 251,472 transactions Interest expense 126,152 136,107 157,560 - ----------------------------------------------------------------------------
Interest margins earned 122,548 104,699 93,912 - ---------------------------------------------------------------------------- Provision for possible credit losses 5,706 6,740 12,687 Restructuring and other charges 65,000 - ---------------------------------------------------------------------------- 5,706 6,740 77,687 - ---------------------------------------------------------------------------- Net interest margins earned 116,842 97,959 16,225 Gains on sale of assets 5,439 3,362 6,684 - ---------------------------------------------------------------------------- 122,281 101,321 22,909 - ---------------------------------------------------------------------------- Selling, administrative and other 58,158 50,728 46,923 operating expenses Transaction costs of the Distribution 13,000 - ---------------------------------------------------------------------------- 58,158 50,728 59,923 - ----------------------------------------------------------------------------
Income (loss) before income taxes 64,123 50,593 (37,014) Income taxes: Current and deferred 22,825 13,843 1,728 Adjustment to deferred taxes 4,857 - ---------------------------------------------------------------------------- 27,682 13,843 1,728 - ---------------------------------------------------------------------------- NET INCOME (LOSS) $36,441 $36,750 $(38,742) ============================================================================
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED STOCKHOLDER'S EQUITY (Dollars in Thousands)
- ----------------------------------------------------------------------------
Years Ended December 31, 1993 1992 1991 - ---------------------------------------------------------------------------- COMMON STOCK: Balance, beginning and end of year $25 $25 $25 - ----------------------------------------------------------------------------
ADDITIONAL CAPITAL: Balance, beginning of year 298,665 270,680 272,355 Contributions from (distribution to) The Dial Corp 27,985 (1,675) - ---------------------------------------------------------------------------- Balance, end of year 298,665 298,665 270,680 - ----------------------------------------------------------------------------
RETAINED INCOME: Balance, beginning of year 33,783 10,605 64,382 Net income (loss) 36,441 36,750 (38,742) Dividends (15,850) (13,572) (15,035) - ---------------------------------------------------------------------------- Balance, end of year 54,374 33,783 10,605 - ----------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS: Balance, beginning of year (6,685) (1,639) 351 Unrealized translation loss (1,088) (5,046) (1,990) - ---------------------------------------------------------------------------- Balance, end of year (7,773) (6,685) (1,639) - ---------------------------------------------------------------------------- STOCKHOLDER'S EQUITY $345,291 $325,788 $279,671 ============================================================================
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED CASH FLOWS (Dollars in Thousands)
- ---------------------------------------------------------------------------- Years Ended December 31, 1993 1992 1991 - ---------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $36,441 $36,750 $(38,742) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Provision for possible credit losses 5,706 6,740 77,687 Gains on sale of assets (5,439) (3,362) (6,684) Deferred income taxes 21,608 (4,837) (17,760) Increase in accounts payable and accrued expenses 2,545 4,418 19,275 Decrease in customer deposits (12,287) (577) (126,979) (Decrease) increase in interest payable (5,429) 3,576 (4,906) Other (475) (10,019) 29,035 - ---------------------------------------------------------------------------- Net cash provided (used) by operating activities 42,670 32,689 (69,074) - ----------------------------------------------------------------------------
INVESTING ACTIVITIES: Proceeds from sale of assets 5,681 22,657 35,141 Principal collections on financing transactions 644,939 454,390 338,451 Expenditures for financing transactions (1,007,794) (682,369) (525,659) Purchase of subsidiary (69,808) Net related party advances 57,321 (57,321) Other 221 392 (5,213) - ---------------------------------------------------------------------------- Net cash used by investing activities (369,440) (262,251) (157,280) - ----------------------------------------------------------------------------
FINANCING ACTIVITIES: Borrowings 646,701 974,232 760,947 Repayment of borrowings (451,102) (829,212) (539,609) Issuance of preferred stock 25,000 Advances and contributions from The Dial Corp 54,331 32,575 Net advances from Parent 130,760 Dividends (15,850) (13,572) (15,035) - ---------------------------------------------------------------------------- Net cash provided by financing 310,509 210,779 238,878 activities - ---------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (16,261) (18,783) 12,524 Cash and cash equivalents, beginning of year 19,120 37,903 25,379 - ---------------------------------------------------------------------------- Cash and cash equivalents, end of year $2,859 $19,120 $37,903 ============================================================================
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in Thousands in Tables)
NOTE A SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation--On March 3, 1992, The Dial Corp's ("Dial") shareholders approved the spin-off to its shareholders of GFC Financial Corporation ("GFC Financial"), a newly-formed Delaware corporation, which comprised Dial's former commercial lending and mortgage insurance subsidiaries. In connection with the spin-off, the holders of common stock of Dial received a distribution of one share of common stock of GFC Financial for every two shares of Dial common stock (the "Distribution").
Prior to the Distribution, Dial contributed its 100% ownership interest in companies constituting the Greyhound European Financial Group ("GEFG") and Greyhound BID Holding Corp. ("BID") to Greyhound Financial Corporation ("GFC") and contributed all of the common stock of GFC (collectively the "Company") to GFC Financial.
The historical consolidated financial statements of GFC and subsidiaries have been retroactively restated to include the accounts and results of operations of GFC, GEFG and BID for all periods presented as if a pooling of interests of companies under common control. All intercompany accounts and transactions have been eliminated from the consolidated financial statements.
These consolidated financial statements are prepared in accordance with generally accepted accounting principles. Described below are those accounting policies particularly significant to GFC, including those selected from acceptable alternatives.
Financing Transactions--For loans and other financing contracts earned income is recognized over the life of the contract, using the interest method.
Leases that are financed by nonrecourse borrowings and meet certain other criteria are classified as leveraged leases. For leveraged leases, aggregate rentals receivable are reduced by the related nonrecourse debt service obligation including interest ("net rentals receivable"). The difference between (a) the net rentals receivable and (b) the cost of the asset less estimated residual value at the end of the lease term is recorded as unearned income. Earned income is recognized over the life of the lease at a constant rate of return on the positive net investment, which includes the effects of deferred income taxes.
For operating leases, earned income is recognized on a straight-line basis over the lease term and depreciation is taken on a straight-line basis over the estimated useful life. Operating lease income is net of depreciation and related expenses.
For leases classified as direct financing leases, the difference between (a) aggregate lease rentals and (b) the cost of the related assets less estimated residual value at the end of the lease term is recorded as unearned income. Earned income is recognized over the life of the contracts using the interest method.
Income recognition is generally suspended for leases, loans and other financing contracts at the earlier of the date at which payments become 90 days past due (other than consumer finance accounts of GEFG, which are considered nonaccruing when 180 days past due) or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.
The reserve for possible credit losses is available to absorb credit losses. The provision for possible credit losses is the charge to income to increase the reserve for possible credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral. Other factors include changes in geographic and product diversification, size of the portfolio and current economic conditions. Accounts are either written-off or written-down when the probability of loss has been established in amounts determined to cover such losses after giving consideration to the customer's financial condition, the value of the underlying collateral and any guarantees. Any deficiency between the carrying amount of an asset and the ultimate sales price of repossessed collateral is charged to the reserve for possible credit losses. Recoveries of amounts previously written-off as uncollectible are credited to the reserve for possible credit losses.
Repossessed assets are carried at the lower of cost or fair value. Loans classified as in-substance foreclosures are included in repossessed assets. Loans are classified as in-substance foreclosed assets, even though legal foreclosure has not occurred, when (i) the borrower has little or no equity in the collateral at its current fair value, (ii) proceeds for repayment are expected to come only from the operation or sale of the collateral and (iii) it is doubtful that the borrower will rebuild equity in the collateral or otherwise repay the loan in the foreseeable future.
The Financial Accounting Standards Board ("FASB") has issued a new accounting standard, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). This standard requires that impaired loans that are within the scope of this statement generally be measured based on the present value of expected cash flows discounted at the loan's effective interest rate or the fair value of the collateral, if the loan is collateral dependent. Under SFAS 114, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due. Presently, the reserve for possible credit losses represents management's estimate of the amount necessary to cover potential losses in the portfolio considering delinquencies, loss experience and collateral. The impact of the new standard, which is effective for fiscal years beginning after December 15, 1994, has not yet been determined.
Pension and Other Benefits--Trusteed, noncontributory pension plans cover substantially all employees. Benefits are based primarily on final average salary and years of service. Net periodic pension cost for GFC is based on the provisions of SFAS No. 87, "Employers' Accounting for Pensions". Funding policies provide that payments to pension trusts shall be at least equal to the minimum funding required by applicable regulations.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires accrual of such benefits during the years the employees provide services. Prior to 1993, the costs of such benefits were expensed as incurred. See Note G of Notes to Consolidated Financial Statements for further information.
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits". Analogous to SFAS No. 106 for postretirement benefits, this standard requires companies to accrue for estimated future postemployement benefits during the periods when employees are working. Postemployment benefits are any benefits other than retirement benefits that are provided after employment is discontinued. This standard must be adopted for fiscal years beginning after December 15, 1993, which for the Company would be 1994. Based on management's review, the adoption of the new standard will not have a material impact on the Company's financial position or results of operations.
Income Taxes--Income taxes are provided based upon the provisions of SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the estimated future tax effects 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 law.
Cash Equivalents--For purposes of the Statement of Consolidated Cash Flows, the Company has classified highly liquid investments with original maturities of three months or less from date of purchase as cash equivalents.
Reclassifications--Certain reclassifications have been made to the 1992 financial statements to conform to the 1993 presentation.
NOTE B INVESTMENT IN FINANCING TRANSACTIONS
The Company provides secured financing to commercial and real estate enterprises principally under financing contracts (such as loans and other financing contracts, leveraged leases, operating leases and direct financing leases). At December 31, 1993 and 1992, the carrying amount of the investment in financing transactions, including the estimated residual value of leased assets upon lease termination, was $2,846,571,000 and $2,485,844,000 (before reserve for possible credit losses), respectively, and consisted of the following types of loans and collateral:
- ---------------------------------------------------------------------------- Percent of Total Carrying Amount - ---------------------------------------------------------------------------- 1993 1992 - ---------------------------------------------------------------------------- Resort receivables 19.8% 18.3% Aircraft and related equipment 19.6 19.1 Communications finance 17.8 16.2 Commercial real estate 12.4 18.1 Real estate leveraged leases 6.9 7.3 Asset based finance 6.2 Production and processing equipment 4.7 5.8 Land receivables 2.6 3.7 Railroad equipment 2.6 2.5 Consumer finance (GEFG) 1.6 2.3 Commercial vehicles 0.4 1.4 Other (1) 5.4 5.3 - ---------------------------------------------------------------------------- 100.0% 100.0% ============================================================================
(1) The category "Other" includes different classes of commercial and industrial contract receivables, none of which accounted for more than 1% of the aggregate carrying amount of the net investment in financing transactions.
The Company's investment in financing transactions outside of the United States at December 31 consisted of the following:
- ---------------------------------------------------------------------------- 1993 1992 - ---------------------------------------------------------------------------- Europe, primarily United Kingdom $ 196,499 $ 206,893 Mexico 30,952 33,827 Other countries 17,740 38,168 - ---------------------------------------------------------------------------- $ 245,191 $ 278,888 ============================================================================
The Company's investment in financing transactions is primarily settled in U.S. dollars, except for approximately $100,000,000 and $128,000,000 at December 31, 1993 and 1992, respectively, which is primarily due in British pounds. The exchange rate of British pounds to dollars at December 31, 1993 and 1992 was 1.48:1 and 1.52:1, respectively.
Aggregate installments on loans and other financing contracts, leveraged leases, operating leases and direct financing leases at December 31, 1993 (excluding repossessed assets of $77,024,000 and estimated residual values) are due during each of the years ending December 31, 1994 to 1998 and thereafter as follows:
- ---------------------------------------------------------------------------- There- 1994 1995 1996 1997 1998 after - ---------------------------------------------------------------------------- Domestic: Loans and other financing contracts: Commercial: Fixed interest rate $ 80,796 $ 77,294 $ 72,707 $ 45,984 $ 31,600 $ 81,838 Floating interest rate 179,164 211,921 218,987 141,294 126,221 75,418 Real Estate: Fixed interest rate 61,416 43,634 39,777 27,935 18,702 46,941 Floating interest rate 147,101 167,375 147,507 92,831 53,461 39,204 Leveraged leases 4,834 5,385 7,282 13,862 8,395 171,883 Operating and direct financing leases, primarily at fixed interest rates 21,120 20,389 29,295 17,907 16,873 115,737 - ---------------------------------------------------------------------------- 494,431 525,998 515,555 339,813 255,252 531,021 - ----------------------------------------------------------------------------
Foreign, primarily at floating interest rates: Loans and other financing contracts 10,078 6,429 8,915 16,007 23,700 Consumer Finance 14,122 7,858 7,212 9,617 5,255 1,200 Operating and direct financing leases 4,284 3,038 4,343 2,496 2,870 - ---------------------------------------------------------------------------- 28,484 17,325 20,470 28,120 31,825 1,200 - ---------------------------------------------------------------------------- $522,915 $543,323 $536,025 $367,933 $287,077 $532,221 ============================================================================
The net investment in leveraged leases at December 31 consisted of the following:
- ---------------------------------------------------------------------------- 1993 1992 - ---------------------------------------------------------------------------- Rentals receivable $1,377,107 $1,451,925 Less principal and interest payable on nonrecourse debt (1,165,466) (1,237,776) - ---------------------------------------------------------------------------- Net rentals receivable 211,641 214,149 Estimated residual values 306,894 306,691 Less unearned income (234,753) (251,470) - ---------------------------------------------------------------------------- Investment in leveraged leases 283,782 269,370 Less deferred taxes arising from leveraged leases (223,006) (206,342) - ---------------------------------------------------------------------------- Net investment in leveraged leases $60,776 $63,028 ============================================================================
The components of income from leveraged leases, before the effects of interest on nonrecourse debt and other related expenses, for the years ended December 31 were as follows:
- ---------------------------------------------------------------------------- 1993 1992 1991 - ---------------------------------------------------------------------------- Lease and other income $11,376 $ 9,172 $16,421 Income tax expense 8,363 2,757 4,903 - ----------------------------------------------------------------------------
The investment in operating and direct financing leases at December 31 consisted of the following:
- ---------------------------------------------------------------------------- 1993 1992 - ---------------------------------------------------------------------------- Operating leases $147,222 $100,911 Direct financing leases: Rentals receivable 91,153 154,463 Estimated residual values 23,121 42,158 Unearned income (42,462) (57,750) - ---------------------------------------------------------------------------- 71,812 138,871 - ---------------------------------------------------------------------------- Investment in operating and direct financing leases $219,034 $239,782 ============================================================================
The investment in operating leases is net of accumulated depreciation of $10,601,000 and $4,110,000 as of December 31, 1993 and 1992, respectively. Depreciation expense relating to equipment held under operating leases was $6,491,000, $2,531,000 and $1,685,000 in 1993, 1992 and 1991, respectively.
The Company has a substantial number of loans and leases with payments that fluctuate with changes in index rates, primarily Prime interest rates and the London Interbank Offered Rate ("LIBOR"). The investment in loans and leases with floating interest rates (excluding nonaccruing contracts and repossessed assets) at December 31 was as follows:
- ---------------------------------------------------------------------------- 1993 1992 - ---------------------------------------------------------------------------- Receivables due on financing transactions $1,661,602 $1,368,412 Estimated residual values 8,162 Less unearned income (25,928) (34,899) - ---------------------------------------------------------------------------- Investment in loans and leases $1,635,674 $1,341,675 ============================================================================
Interest earned from financing transactions with floating interest rates was approximately $154,000,000 in 1993, $127,000,000 in 1992 and $128,000,000 in 1991. The adjustments, which arise from changes in index rates, can have a significant effect on interest earned from financing transactions; however, the effects on interest margins earned and net income are substantially offset by related interest expense changes on debt obligations with floating interest rates.
At December 31, 1993, the Company had a committed backlog of new business of approximately $420,000,000 compared to $317,000,000 at December 31, 1992.
NOTE C RESERVE FOR POSSIBLE CREDIT LOSSES
The following is an analysis of the reserve for possible credit losses for the years ended December 31:
- ---------------------------------------------------------------------------- 1993 1992 1991 - ---------------------------------------------------------------------------- Balance, beginning of year $69,291 $87,600 $77,098 Provision for possible credit losses (1) 5,706 6,740 77,687 Write-offs (1) (12,575) (23,661) (68,346) Recoveries 717 749 663 Other 1,141 (2,137) 498 - ---------------------------------------------------------------------------- Balance, end of year $64,280 $69,291 $87,600 ============================================================================
(1) In the fourth quarter of 1991, the Company recorded a special provision for possible credit losses of $65,000,000 and recorded write-offs of $15,000,000 related to nonearning assets in the GEFG portfolio and a $47,759,000 write-down to reduce Latin American assets to current market value.
Write-offs by major loan and collateral types experienced by the Company during the years ended December 31 are as follows:
- ---------------------------------------------------------------------------- 1993 1992 1991 - ---------------------------------------------------------------------------- Consumer finance (GEFG) $ 4,071 $ 10,176 $ 13,687 Commercial real estate 3,082 8,904 2,894 Manufacturing and processing equipment 2,242 1,908 604 Commercial vehicles 1,579 67 Communications finance 1,488 1,500 1,200 Maritime 906 Latin America 47,759 Other 113 267 2,135 - ---------------------------------------------------------------------------- $ 12,575 $ 23,661 $ 68,346 ============================================================================ Write-offs as a percentage of investment in financing transactions 0.44% 0.95% 3.00% ============================================================================
An analysis of nonaccruing contracts and repossessed assets at December 31 is as follows:
- ---------------------------------------------------------------------------- 1993 1992 - ---------------------------------------------------------------------------- Nonaccruing contracts: Domestic $ 13,263 $ 24,031 Foreign 12,320 22,400 - ---------------------------------------------------------------------------- Total nonaccruing contracts 25,583 46,431 - ---------------------------------------------------------------------------- Repossessed assets: Domestic 77,001 53,931 Foreign 23 60 - ---------------------------------------------------------------------------- Total repossessed assets 77,024 53,991 - ---------------------------------------------------------------------------- Total nonaccruing contracts and repossessed assets $ 102,607 $ 100,422 ============================================================================
Nonaccruing contracts and repossessed assets as a percentage of investment in financing transactions 3.6% 4.0% ============================================================================
In addition to the repossessed assets included in the above table, the Company had repossessed assets, with a total carrying amount of $48,956,000 and $21,509,000 at December 31, 1993 and 1992 which earned income of $2,700,000 and $1,900,000 during 1993 and 1992, respectively.
In the normal course of business, the Company has renegotiated and modified certain contracts with respect to rates and other terms. At December 31, 1993 and 1992, the Company had approximately $47,000,000 and $68,000,000, respectively, of these rewritten contracts requiring disclosure under the provisions of SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". These contracts are yielding, on a weighted average basis, a return of approximately 9.3%.
Had all contracts placed in a nonaccrual status outstanding at December 31, 1993, 1992 and 1991, respectively, remained accruing, interest earned would have been increased by approximately $6,000,000, $7,500,000 and $11,300,000, respectively, for domestic contracts and $5,000,000, $5,100,000 and $9,100,000, respectively, for foreign contracts. Income recognized on these accounts was approximately $1,732,000, $589,000 and $1,100,000 for domestic contracts during the years 1993, 1992 and 1991, respectively.
NOTE D DEBT
The Company satisfies its short-term financing requirements from bank lines of credit, other bank loans, public medium-term notes and the issuance of commercial paper. In conjunction with the winding down of the GEFG portfolio, GEFG, in December 1993, surrendered the banking license of the United Kingdom bank and, therefore, will not be taking in any more customer deposits. At December 31, 1993, short-term bank loans and commercial paper of $515,876,000 (net of unamortized discount) are considered to be long-term debt because they are supported by an unused long-term revolving bank credit agreement of $700,000,000.
The following information pertains to all short-term financing, including bank loans and commercial paper (considered to be long-term debt), for the years ended December 31:
- --------------------------------------------------------------------------- 1993 1992 1991 - --------------------------------------------------------------------------- Maximum amount of short-term debt outstanding during year $ 516,386 $ 504,829 $ 533,446 Average short-term debt outstanding during year 336,672 322,176 448,174 Weighted average short-term interest rates at end of year: Short-term borrowings 3.5% 4.1% 8.1% Commercial paper* 3.6% 4.2% 5.6% Weighted average interest rate on short- term debt outstanding during year* 3.5% 4.3% 6.9% - ----------------------------------------------------------------------------
* Exclusive of the cost of maintaining bank lines in support of outstanding commercial paper and the effects of interest rate conversion agreements.
Senior and subordinated debt at December 31 was as follows:
- ---------------------------------------------------------------------------- 1993 1992 - ---------------------------------------------------------------------------- Senior debt: Commercial paper and short-term bank loans supported by unused long-term bank revolving credit agreements, less unamortized discount $515,876 $330,141 Medium-term notes due to 2003, 4.6% to 12.5% 751,500 591,433 Term loans payable to banks due to 1996, 4.2% 150,000 310,000 Senior notes due to 2002, 8.3% to 16.0%, less unamortized discount 555,666 555,147 Nonrecourse installment notes due to 2002, 10.6% (assets of $25,613 and $25,579, respectively, pledged as collateral) 18,944 19,712 - ---------------------------------------------------------------------------- Total senior debt 1,991,986 1,806,433 - ---------------------------------------------------------------------------- Subordinated debt: Senior subordinated loans, due 1994, 14.1% 92,270 92,270 Less unamortized discount (5,480) (16,354) - ---------------------------------------------------------------------------- Total subordinated debt 86,790 75,916 - ---------------------------------------------------------------------------- TOTAL $2,078,776 $1,882,349 ============================================================================
Aggregate commitments under the Company's domestic revolving credit agreement availability was $700,000,000 at December 31, 1993. Under the terms of this agreement, the Company has the option to periodically select either domestic dollars or Eurodollars as the basis of borrowings. Interest is based on the banks' Prime rate for domestic dollar advances or LIBOR for Eurodollar advances. The agreements also provide for a commitment fee on the unused credit. The Company, in the event it becomes advisable, intends to exercise its right under this agreement to borrow for the purpose of refinancing commercial paper and short-term bank loans.
The credit agreement for $700,000,000, described in the preceding paragraph, will be subject to renewal in May 1996. If the credit facility with any or all of the participating banks is not renewed, the Company may, at its option, repay the non-renewing banks' outstanding participation, if any, immediately or in equal quarterly installments over a four year period.
As of December 31, 1993, the Company had outstanding 31 interest rate conversion agreements with notional principal amounts totaling $1,320,000,000. Six agreements with notional principal amounts of $180,000,000 were arranged to effectively convert certain floating interest rate obligations into fixed interest rate obligations and require interest payments on the stated principal amount at rates ranging from 8.3% to 9.8% (remaining terms of three months to five years) in return for receipts calculated on the same notional amounts at floating interest rates. In addition, 25 agreements with notional principal amounts of $1,140,000,000 were arranged to effectively convert certain fixed interest rate obligations into floating interest rate obligations and require interest payments on the stated principal amount at the three month or six month LIBOR (remaining terms of five months to nine years) in return for receipts calculated on the same notional amounts at fixed interest rates of 4.9% to 7.6%. In the third quarter of 1993, GFC entered into four three-year interest rate hedge agreements on $750 million of floating-rate borrowings to effectively guarantee a spread of approximately 2.3% between its borrowing rate (LIBOR) and the Prime interest rate. The agreements have been entered into with major financial institutions, which are expected to fully perform under the terms of the agreements, thereby mitigating the credit risk from the transactions.
Annual maturities of long-term debt outstanding at December 31, 1993 due through June 2003 (excluding the amount supported by the revolving credit agreements expected to be renewed) will approximate $179,392,000 (1994), $192,135,000 (1995), $163,030,000 (1996), $198,747,000 (1997), $204,072,000 (1998) and $625,524,000 (thereafter).
The agreements pertaining to long-term debt of GFC include various restrictive covenants and require the maintenance of certain defined financial ratios with which GFC has complied. Under one of these covenants, dividend payments are limited to 50 percent of accumulated earnings after December 31, 1991. As of December 31, 1993, GFC had $7,174,000 of excess accumulated earnings available for distribution.
Total interest paid is not significantly different from interest expense.
NOTE E REDEEMABLE PREFERRED STOCK
On July 30, 1993, GFC Financial acquired 2,500 shares of GFC's Series A Redeemable Preferred Stock ("GFC Preferred Stock") from a subsidiary of Dial. The GFC Preferred Stock was issued in connection with the Distribution for a purchase price of $25 million in cash. The GFC Preferred Stock, par value of $10,000 per share, entitles the holder thereof to receive cash dividends at the annual rate of 9%, payable quarterly, but only, when, as and if declared by the Board of Directors of GFC, and such dividends shall be cumulative (provided that such rate shall increase to 15% per annum in the event that GFC fails to redeem such shares on July 1, 1997). The GFC Preferred Stock has a liquidation preference of $10,000 per share, and ranks prior to the common stock, par value $1 per share, of GFC (the "GFC Common Stock"), both as to payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up of GFC.
The GFC Preferred Stock is redeemable, in whole or in part, at the option of GFC, at $10,000 in cash per share plus accrued and unpaid dividends, and must be redeemed, on July 1, 1997, for $10,000 per share. In addition, the GFC Preferred Stock must be redeemed if, prior to July 1, 1997, GFC receives at least $25 million of proceeds from the issuance of additional preferred or common stock or other contributions to its capital. With the consent of the holders of at least two thirds of the GFC Preferred Stock, GFC may defer the mandatory redemption beyond July 1, 1997, for a specified period of time.
Each share of GFC Preferred Stock has one vote and votes together with the GFC Common Stock on all matters submitted to a vote of the shareholders of GFC. There are 25,000 shares of GFC Common Stock issued and outstanding, all of which are owned by GFC Financial. Thus, the GFC Preferred Stock represents approximately 9% of the voting securities of GFC.
NOTE F INCOME TAXES
Prior to the Distribution, Dial credited or charged the Company an amount equal to the tax reductions realized or tax payments made by Dial as a result of including the Company's tax results and credits in Dial's consolidated federal and other applicable income tax returns. In all other respects, the Company's tax provisions have been computed on a separate return basis.
The consolidated provision (benefit) for income taxes consist of the following for the years ended December 31:
- ---------------------------------------------------------------------------- 1993 1992 1991 - ---------------------------------------------------------------------------- Current: United States: Federal $4,976 $16,265 $20,087 State 1,254 2,069 1,364 Foreign (156) 346 (1,963) - ---------------------------------------------------------------------------- 6,074 18,680 19,488 - ---------------------------------------------------------------------------- Deferred: United States 21,608 (2,377) (17,760) Foreign (2,460) - ---------------------------------------------------------------------------- 21,608 (4,837) (17,760) - ----------------------------------------------------------------------------
Provision for income taxes $27,682 $13,843 $1,728 ============================================================================
Deferred income taxes relate to the following principal temporary differences:
- ---------------------------------------------------------------------------- 1993 1992 1991 - ---------------------------------------------------------------------------- Lease and other contract income and related depreciation $13,791 $3,882 $6,244 Gains on sale of assets (1,377) 1,726 (16,732) Provision for possible credit losses (277) 1,551 (8,175) Recognition of deferred intercompany gain (7,531) Adjustment to deferred taxes related to the increase in the U.S. federal statutory income tax rate 4,857 Operating expense deferrals 2,365 Recognition of tax benefit on refinancing charges accrued in 1991 (3,153) Minimum tax credit carryforward 1,456 Other 793 1,148 903 - ---------------------------------------------------------------------------- Provision (benefit) for deferred income taxes $21,608 $(2,377) $(17,760) ============================================================================
The benefit for foreign deferred income taxes for the year ended December 31, 1992 relates to operating losses of GEFG. Income taxes paid in 1993, 1992 and 1991 amounted to $10,511,000, $19,096,000 and $16,769,000, respectively.
The federal statutory income tax rate is reconciled to the effective income tax rate as follows:
- ---------------------------------------------------------------------------- 1993 1992 1991 - ---------------------------------------------------------------------------- Federal statutory income tax rate 35.0% 34.0% (34.0%) State income tax 3.4% 2.7% 2.3% Foreign tax effects (2.1%) (2.4%) 11.7% Tax provision on intercompany gains resulting from the Distribution 21.6% Recognition of tax benefits on refinancing charges accrued in 1991 (6.2%) Permanent differences on transaction costs 12.0% Other (0.7%) (0.7%) (8.9%) - ---------------------------------------------------------------------------- Current provision for income tax 35.6% 27.4% 4.7% Adjustment to deferred taxes 7.6% - ---------------------------------------------------------------------------- Provision for income taxes 43.2% 27.4% 4.7% ============================================================================
NOTE G PENSION AND OTHER BENEFITS
Pension Benefits Net periodic pension (income) cost for the years ended December 31, included the following components:
- ---------------------------------------------------------------------------- United States Foreign - ---------------------------------------------------------------------------- 1993 1992 1993 1992 - ---------------------------------------------------------------------------- Service cost benefits earned during period $603 $493 $215 $341 Interest cost on projected benefit obligation 638 499 293 345 Actual return on plan assets (1,504) (1,071) (736) (382) Net amortization and deferral 625 303 459 79 - ---------------------------------------------------------------------------- Periodic pension cost 362 224 231 383 Curtailment gain (777) - ---------------------------------------------------------------------------- Net periodic pension (income) cost $(415) $224 $231 $383 ============================================================================
Assumptions regarding the determination of net periodic pension (income) costs were:
- ---------------------------------------------------------------------------- United States Foreign - ---------------------------------------------------------------------------- 1993 1992 1993 1992 - ---------------------------------------------------------------------------- Discount rate for obligation 8.5% 9.0% 9.0% 9.0% Rate of increase in compensation levels 5.5% 6.0% 8.0% 8.0% Long-term rate of return on assets 9.5% 9.5% 9.0% 9.0% - ----------------------------------------------------------------------------
GFC participated in a Dial pension plan and was allocated pension credits of $21,000 for 1991.
The following table indicates the plans' funded status and amounts recognized in the Company's consolidated balance sheet at December 31, 1993 and 1992:
- ---------------------------------------------------------------------------- United States Foreign - ---------------------------------------------------------------------------- 1993 1992 1993 1992 - ---------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligations $12,000 $3,195 $3,440 $3,088 ============================================================================ Accumulated benefit obligations $12,600 $3,835 $3,440 $3,088 ============================================================================ Projected benefit obligation $14,400 $6,724 $3,755 $3,548 Market value of plan assets, primarily equity and fixed income securities 17,606 9,625 3,781 3,319 - ---------------------------------------------------------------------------- Plan asset over (under) projected benefit obligation 3,206 2,901 26 (229) Unrecognized transition asset (451) (285) (109) (123) Unrecognized prior service cost reduction 404 450 72 96 Unrecognized net loss 1,804 539 101 254 - ---------------------------------------------------------------------------- Prepaid (accrued) pension costs $4,963 $3,605 $90 $(2) ============================================================================
Assumptions regarding the funded status of pension plans are:
- ---------------------------------------------------------------------------- United States Foreign - ---------------------------------------------------------------------------- 1993 1992 1993 1992 - ---------------------------------------------------------------------------- Discount rate for obligation 7.75% 8.50% 8.00% 9.00% Rate of increase in compensation levels 4.25% 5.50% 6.00% 8.00% Long-term rate of return on assets 9.50% 9.50% 9.00% 9.00% - ----------------------------------------------------------------------------
There are restrictions on the use of excess pension plan assets in the event of a defined change in control of the Company.
Postretirement Benefits Other Than Pensions Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("OPEB"), which requires the accrual of retiree benefits during the years the employees provide services. OPEB requires the recognition of a transition obligation that represents the aggregate amount that would have accrued in the years prior to adoption of OPEB had the standard been in effect for those years. The Company elected to accrue the transition obligation over 20 years. The adoption of SFAS No. 106 has no cash impact because the plans are not funded and the pattern of benefit payments did not change.
Net periodic postretirement benefit cost for the year ended December 31, 1993 included the following components:
- ---------------------------------------------------------------------------- Service cost benefits earned during period $ 55 Interest cost on accumulated postretirement benefit obligation 143 Net amortization and deferral 85 - ---------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 283 ============================================================================
Assumptions regarding the determination of net periodic postretirement benefit costs were:
- ---------------------------------------------------------------------------- Discount rate for obligation 8.5% Rate of increase in compensation levels 5.5% Rate of increase in health care costs (1) 14.0% ============================================================================
(1) Rate of increase in health care costs was 14.0% in 1993, graded to 7.0% in 2000 and thereafter.
OPEB benefit costs for 1993 are $223,000 higher than postretirement benefits paid and expensed in 1992 due to the adoption of SFAS No. 106. Amounts paid for postretirement benefits in 1992 and 1991 were approximately $60,000 and $38,000, respectively.
The following table indicates the amounts recognized in the Company's consolidated balance sheet at December 31, 1993:
- --------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 1,680 Actives eligible for full benefits 230 Other actives 370 - --------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 2,280 Unrecognized transition obligation 1,607 Unrecognized net loss 437 - --------------------------------------------------------------------------- Accrued postretirement benefit cost $ 236 ===========================================================================
Assumptions regrading the accrued postretirement benefit at December 31, 1993 were:
- ---------------------------------------------------------------------------- Discount rate for obligation 7.75% Rate of increase in compensation levels 4.25% Rate of increase in health care costs (1) 13.25% - ----------------------------------------------------------------------------
(1) Rate of increase in health care costs was 13.25% in 1993, graded to 6.25% in 2000 and thereafter.
A one percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately 7% and the ongoing annual expense by approximately 5%.
NOTE H TRANSACTIONS WITH DIAL
Pursuant to the Distribution, the Company and Dial entered into several agreements, including the Distribution Agreement, Tax Sharing Agreement, Sublease Agreement, Interim Services Agreement and Trademark Assignment and Agreement. These agreements do not result in significant additional expenses.
The Company leases its corporate office facilities from Dial under an agreement which expires March 31, 2001. Annual rentals under the lease are approximately $1,616,000 to 1996 and $1,806,000 thereafter.
NOTE I LITIGATION AND CLAIMS
The Company and certain of its subsidiaries are parties either as plaintiffs or defendants to various actions, proceedings and pending claims, including legal actions, certain of which involve claims for compensatory, punitive or other damages in material amounts. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims referred to above could be decided against the Company. Although the ultimate amount for which the Company or its subsidiaries may be held liable is not ascertainable, the Company believes that any resulting liability should not materially affect the Company's financial position or results of operations.
NOTE J SFAS NO. 107 - "DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS"
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company using available market information and valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of the Company's financial instruments are as follows for the years ended December 31:
- --------------------------------------------------------------------------- 1993 1992 - --------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - --------------------------------------------------------------------------- Balance Sheet - Financial Instruments: Assets: Loans and other financing contracts $ 2,192,192 $ 2,172,154 $ 1,854,761 $ 1,812,864 Liabilities: Senior debt 1,991,986 2,149,387 1,806,433 1,847,875 Subordinated debt 86,790 88,390 75,916 83,915
Off-Balance Sheet - Financial Instruments: Interest rate conversion agreements --- 36,361 ---- 4,536 - ----------------------------------------------------------------------------
The carrying values of cash and cash equivalents, accounts payable and accrued expenses, customer deposits, interest payable and short-term debt approximate fair values due to the short-term maturities of these instruments.
The methods and assumptions used to estimate the fair values of other financial instruments are summarized as follows:
Loans and other financing contracts: The fair value of loans and other financing contracts was estimated by discounting expected cash flows using the current rates at which loans of similar credit quality, size and remaining maturity would be made as of December 31, 1993 and 1992. Management believes that the risk factor embedded in the entry-value interest rates applicable to performing loans for which there are no known credit concerns results in a fair valuation of such loans on an entry value basis. As of December 31, 1993 and 1992, the fair value of nonaccruing contracts with a carrying amount of $25,583,000 and $46,431,000, respectively, was not estimated because it is not practicable to reasonably assess the credit adjustment that would be applied in the market place for such loans. As of December 31, 1993 and 1992, the carrying amount of loans and other financing contracts excludes repossessed assets with a total carrying amount of $125,980,000 and $75,500,000, respectively.
Senior and subordinated debt: The fair value of senior and subordinated debt was estimated by discounting future cash flows using rates currently available for debt of similar terms and remaining maturities. The carrying values of commercial paper and borrowings under revolving credit facilities were assumed to approximate fair values due to their short maturities.
Interest rate conversion agreements: The fair values of interest conversion agreements is based on quoted market prices obtained from participating banks and dealers.
The fair value estimates presented herein were based on information available as of December 31, 1993 and 1992. Although management is not aware of any factors that would significantly affect the estimated fair values, such values have not been updated since December 31, 1993 and 1992; therefore, current estimates of fair value may differ significantly from the amounts presented herein.
NOTE K SELLING, ADMINISTRATIVE AND OTHER OPERATING EXPENSES:
The following represents a summary of the major components of selling, administrative and other operating expenses for the three years ended December 31:
- -------------------------------------------------------------------------- 1993 1992 1991 - -------------------------------------------------------------------------- Salaries and employee benefits $ 29,502 $ 27,247 $ 24,362 Problem account costs 11,822 7,642 5,790 Occupancy expense 4,160 4,494 3,444 Depreciation and amortization 2,803 1,970 1,502 Other 9,871 9,375 11,825 - -------------------------------------------------------------------------- $ 58,158 $ 50,728 $ 46,923 ==========================================================================
NOTE L GEOGRAPHIC INFORMATION
The Company operates primarily in the United States and Europe. Geographic information for the three years ended December 31, 1993 is shown below:
- ---------------------------------------------------------------------------- Domestic Europe Consolidated - ---------------------------------------------------------------------------- Assets at year end: 1993 $ 2,699,030 $ 135,867 $ 2,834,897 1992 2,272,036 208,290 2,480,326 1991 1,960,520 351,332 2,311,852 - ----------------------------------------------------------------------------
Interest earned from financing transactions: 1993 225,688 23,012 248,700 1992 202,472 38,334 240,806 1991 197,080 54,392 251,472 - ----------------------------------------------------------------------------
Interest margins earned: 1993 106,651 15,897 122,548 1992 83,390 21,309 104,699 1991 73,647 20,265 93,912 - ----------------------------------------------------------------------------
Income (loss) before income taxes: 1993 62,822 1,301 64,123 1992 54,937 (4,344) 50,593 1991 (19,076) (17,938) (37,014) - ----------------------------------------------------------------------------
NOTE M CONDENSED QUARTERLY RESULTS (UNAUDITED)
- ---------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------- Interest earned from financing transactions: 1993 $ 58,262 $ 62,356 $ 63,450 $ 64,632 1992 57,842 60,219 63,100 59,645 - ---------------------------------------------------------------------------- Interest expense: 1993 30,568 31,423 30,788 33,373 1992 35,263 33,896 34,580 32,368 - ---------------------------------------------------------------------------- Gains on sale of assets: 1993 2,061 179 --- 3,199 1992 --- 1,617 196 1,549 - ---------------------------------------------------------------------------- Non-interest expenses (includes provision for possible credit losses): 1993 16,339 15,022 14,389 18,114 1992 11,860 14,934 12,760 17,914 - ---------------------------------------------------------------------------- Net income: 1993 8,545 10,323 6,750 (1) 10,823 1992 7,185 8,969 10,087 10,509 - ---------------------------------------------------------------------------- (1) Income from continuing operations and net income for the third quarter of 1993 include an adjustment of $4,857,000 representing the effect of recent federal and state income tax increases applicable to deferred income taxes generated by the Company's leveraged lease portfolio.
NOTE N SUBSEQUENT EVENT (Unaudited) - PURCHASE OF AMBASSADOR FACTORS AND TRICON CAPITAL CORPORATION
On February 14, 1994, GFC acquired Fleet Financial Group, Inc.'s ("Fleet") factoring and asset based lending subsidiary, Fleet Factors Corporation, which operates under the trade name Ambassador Factors ("Ambassador"). The cash purchase price of the acquisition was $248,285,000 and represented Ambassador's stockholder's equity, including a premium ($76,285,000), and repayment of the intercompany balance due from Ambassador to Fleet ($172,000,000). In addition, GFC assumed $111,526,000 due to to factored clients, $4,843,000 of accrued liabilities and $8,800,000 of additional liabilities and transaction costs. The acquisition will be accounted for as a purchase and will create approximately $30,400,000 of goodwill, which will be amortized on a straight line basis over 20 years.
The acquisition was financed with proceeds received from the sale of GFC Financial's discontinued mortgage insurance subsidiary and cash generated from operations. GFC Financial, simultaneously with the acquisition, increased its investment in GFC by contributing $40,000,000 of intercompany loans as additional paid in capital of GFC.
On March 4, 1994, GFC signed a definitive purchase agreement under which it will acquire all of the stock of TriCon Capital Corporation ("TriCon") from Bell Atlantic Corporation ("Bell Atlantic"), in an all-cash transaction. This transaction is subject to regulatory approvals and certain other conditions. Accordingly, there can be no assurance that the acquisition will be consummated. The cash purchase price of the acquisition is $344,250,000. In addition, GFC will assume outstanding indebtedness and liabilities of TriCon totaling $1,453,201,000 and additional accrued liabilities and acquisition costs of $7,500,000. The acquisition is expected to be accounted for as a purchase and will create approximately $69,817,000 of goodwill, which will be amortized on a straight line basis over 20 years.
The cash purchase price is expected to be financed initially with the proceeds of interim debt and internally generated funds. A portion of the interim debt is expected to be replaced with additional equity to be raised in the near future by GFC Financial in public or private offerings which, together with the remaining intercompany loans from GFC Financial to GFC and other assets, will be contributed as additional paid in capital of GFC. It is not expected that such equity securities of GFC Financial will be issued prior to the consummation of the acquisition of TriCon by GFC. There can be no assurance that such an offering or the raising of the interim debt will occur.
The Company's obligation to consummate the acquisition of TriCon is conditioned upon the receipt of waivers or consents from lenders under certain of the Company's credit and loan agreements with respect to certain financial covenants contained therein. The Company is in the process of obtaining such consents and waivers, believes they will be obtained and will not complete the acquisition until they are obtained. Upon receipt, such waivers and consents will be conditioned upon the receipt by the Company, not later than 120 days following the consummation of the acquisition of TriCon, of the equity investment from GFC Financial referred to above. The failure of GFC Financial to complete the equity offering or offerings and invest the required proceeds in the Company by such date would constitute a default under such credit and loan agreements, unless the Company could obtain additional waivers, consents or amendments to such credit and loan agreements. The Company's inability to obtain additional waivers, consents or amendments to such credit and loan agreements would allow GFC's lenders to declare an event of default and could result in the acceleration of the indebtedness due thereunder. Such default and/or acceleration would constitute a default under other borrowing arrangements and could result in the acceleration of substantially all of the Company's outstanding indebtedness, which would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that GFC Financial will complete such equity offering or offerings and make the required investment in the Company by the required date or at any other date.
The following Pro Forma Consolidated Balance Sheet (unaudited) of GFC as of December 31, 1993 and Pro Forma Statement of Consolidated Income From Continuing Operations (unaudited) for the year ended December 31, 1993 have been prepared to reflect the historical financial position and income from continuing operations as adjusted to reflect the acquisition of Ambassador and the pending acquisition of TriCon by GFC. The Pro Forma Consolidated Balance Sheet has been prepared as if such acquisitions occurred on December 31, 1993 and the Pro Forma Statement of Consolidated Income From Continuing Operations has been prepared as if such acquisitions occurred on January 1, 1993. The pro forma consolidated financial information is unaudited and is not necessarily indicative of the results that would have occurred if the acquisitions had been consummated as of December 31, 1993 or January 1, 1993.
Total assets on a pro forma basis increased to $5,010,959,000 at December 31, 1993. Pro forma income from continuing operations would have been $66,693,000 after a $4,857,000 adjustment for deferred taxes applicable to leveraged leases. Excluding the $4,857,000 charge, pro forma income from continuing operations would be approximately $72 million.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The Pro Forma Consolidated Balance Sheet, as of December 31, 1993 and the Pro Forma Statement of Consolidated Income From Continuing Operations for the year ended December 31, 1993 include the historical balance sheet of Ambassador, incorporated herein by reference from the Company's Current Report on Form 8-K, dated February 14, 1994, as amended, as of November 30, 1993 and the historical statement of income of Ambassador for the eleven months ended November 30, 1993.
ACQUISITION OF AMBASSADOR
(2) To record the purchase of Ambassador, including the accrual of various liabilities and the resulting goodwill, using the proceeds advanced to GFC upon the sale of GFCFC's discontinued mortgage insurance subsidiary and cash generated from operations.
(3) To record repayment of Ambassador's intercompany payable to Fleet using the proceeds advanced to GFC upon the sale of GFCFC's discontinued mortgage insurance subsidiary and cash generated from operations.
(4) To record the contribution by GFCFC of $40,000,000 of intercompany loans from GFCFC to GFC as additional paid in capital of GFC.
(5) Adjustments to reflect interest expense of debt repaid in 1993 with proceeds received from the sale of GFCFC's discontinued mortgage insurance operation and cash generated from operations. Such debt is assumed to be outstanding for the entire pro forma period. The adjustment is partially offset by interest saved as a result of the $40,000,000 equity contribution in item (4).
(6) To record amortization of goodwill based on an amortization period of twenty years and amortization of the covenant not to compete over one year (see item (20)).
(7) To record additional administrative expenses for additional employees and general overhead.
(8) To record the income tax effect of items (5), (6) and (7) at GFC's effective incremental income tax rate of 40%.
(9) To adjust income taxes for the lower state income tax rate applicable to GFC.
ACQUISITION OF TRICON
(10) To record the original capital contribution by Bell Atlantic as part of the incorporation of TriCon.
(11) To transfer assets and the related debt of TriCon, not purchased by GFC, to Bell Atlantic and reduce interest earned from financing transactions for the income recorded on such assets in 1993.
(12) To record issuance of notes payable to fund the deferred tax payment to Bell Atlantic for an amount equal to the deferred taxes of TriCon, exclusive of deferred tax assets.
(13) To record a dividend from TriCon to Bell Atlantic and the issuance of a note payable to Bell Atlantic for the remaining principal amount of the short-term borrowings from affiliates of TriCon.
(14) To record the purchase of TriCon. The acquisition of TriCon is expected to be financed initially with interim debt, the assumption of outstanding indebtedness of TriCon to Bell Atlantic, the assumption of TriCon's third party debt and liabilities and internally generated funds. A portion of the interim debt is assumed to be replaced with equity raised by GFCFC and, such equity, together with the outstanding preferred stock of GFC held by GFCFC, the remaining intercompany loans due to GFCFC from GFC and other assets will be contributed to GFC as additional paid in capital of GFC. The pro forma adjustment assumes the equity contributions were made at the beginning of the pro forma period. The interest expense related to the debt that is being replaced with equity and, therefore, nonrecurring and excluded from the pro forma consolidated statement of income from continuing operations is approximately $2,000,000.
Including new debt, the debt assumed, the accrual of various additional liabilities and acquisition costs, the total purchase price of the acquisition is estimated to be $1,804,951,000 resulting in $69,817,000 of goodwill. The purchase will result in a new tax basis for TriCon's assets, eliminating the remaining deferred tax asset.
(15) To reflect base fees and incremental costs related to an agreement to manage leveraged leases for Bell Atlantic.
(16) To record additional interest expense resulting from additional debt to Bell Atlantic and interim debt not replaced with the proceeds from the GFCFC equity issuance in item (14). The adjustment is partially offset by the interest saved on the debt transferred to Bell Atlantic and interest saved as a result of equity contribution of the intercompany loans in item (14).
(17) To record amortization of goodwill based on an amortization period of twenty years (see item (20)).
(18) To reduce TriCon's income taxes for the effect of increases in income tax rates for 1993 (principally the increase in the federal tax rate) due to the deferred tax payment and new tax basis in assets at the beginning of the pro forma period.
(19) To record the income tax effect of adjustments (11) and (15) through (17) at GFC's effective incremental income tax rate of 40%.
(20) Goodwill may be adjusted as the final allocation of the values of the purchased assets and liabilities is established.
GREYHOUND FINANCIAL CORPORATION
COMMISSION FILE NUMBER 1-7543
EXHIBIT INDEX
DECEMBER 31, 1993 FORM 10-K
Page No. in Sequentially Numbered Form 10-K No. Title Report - --------- ------------------------------------------------------ ---------- (3-A) The Company's Certificate of Incorporation, as amended through the date of this filing (incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1991 (the "1991 10-K"), Exhibit 3-A.
(3-B) The Company's By-Laws, as amended through the date of this filing, (incorporated by reference from the Company's 1991 10-K, Exhibit 3-B.
(4-A) Instruments with respect to issues of long-term debt have not been filed as exhibits to this Annual Report on Form 10-K if the authorized principal amount of any one of such issues does not exceed 10% of total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of each such instrument to the Securities and Exchange Commission upon request.
(4-B-1) Form of Common Stock Certificate of the Company from the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (the "1992 10-K", Exhibit 4-B-1.
(4-B-2) Form of the Company's Series A Redeemable Preferred Stock Certificate from the 1993 10-K, Exhibit 4-B-2.
(4-C) Certificate of Designations of Series A Redeemable Preferred Stock of the Company (incorporated by reference from the 1992 GFC Financial Annual Report on Form 10-K for the year ended December 31, 1992 (the "GFC Financial 1992 10-K", Exhibit 10-MM).
(4-D) Relevant portions of the Company's Certificate of Incorporation and Bylaws are included in Exhibits 3- A and 3-B above, respectively.
(4-E) Indenture dated as of November 1, 1990 between the ompany and the Trustee named therein (incorporated by reference from the Company's Registration Statement on Form S-3, Registration No. 33-37743, Exhibit 4).
(4-F) Fourth Supplemental Indenture dated as of April 17, 1992 between the Company and the Trustee named therein, supplementing the Indenture referenced in Exhibit 4-E above, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-F.
(4-G) Prospectus and Prospectus Supplement dated April 17, 1992, relating to $350,000,000 principal amount of the Company's Medium-Term Notes, Series A, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-G.
(4-H) Form of Floating-rate, Medium-Term Notes, Series A, is hereby incorporated by reference from the 1992 GFC Financial 10-K, Exhibit 4-H.
(4-I) Form of Fixed-rate, Medium-Term Notes, Series A, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-I.
(4-J) Form of Indenture dated as of September 1, 1992 between the Company and the Trustee named therein (incorporated by reference from the Company's Registration Statement on Form S-3, Registration No. 33-51216, Exhibit 4).
(4-K) Prospectus and Prospectus Supplement dated September 25, 1992 regarding $250,000,000 principal amount of the Company's Medium-Term Notes, Series B, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-K.
(4-L) Form of Floating-rate Medium-Term Notes, Series B, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-L.
(4-M) Form of Fixed-rate Medium-term Notes, Series B, is hereby incorporated by reference from the GFC Financial 1992 10-K, Exhibit 4-M.
(4-N) Indenture dated as of June 1, 1985 between the Company and the trustee named therein is hereby incorporated by reference from the 1992 10-K, Exhibit 4-N.
(4-O) Prospectus and Prospectus Supplement dated February 16, 1994 regarding $250,000,000 principal amount of the Company's Medium-Term Notes, Series B is hereby incorporated by reference from the Company's Registration Statement on Form S-3, Registration No. 33-51216, as amended on that date.
(4-P) Prospectus, dated February 16, 1994, and Prospectus Supplement dated February 17, 1994 regarding $100,000,000 principal amount of the Company's Floating-Rate Notes, is hereby incorporated by reference from the Company's Registration Statement on Form S-3, Registration No. 33-51216, as amended on that date.
(9) Form of Distribution Agreement among the Company, GFC Financial Corporation, The Dial Corp and certain other parties named therein, dated as of January 28, 1992 (incorporated by reference from GFC Financial's Registration Statement on Form S-1, Registration No. 33-45452, Annex II to the Prospectus and Exhibit 2.1) (containing section 2.08(b), regarding the voting of the Greyhound Financial Corporation preferred stock).
(10-A) Fifth Amendment and Restatement dated as of May 18, 1993 of the Credit Agreement dated as of May 31, 1976 among the Company and the banking institutions listed on the signature pages thereto, and Bank of America National Trust and Savings Association, Chemical Bank and Citibank, N.A., as agents (incorporated by reference from the Corporation's Current Report on Form 8-K dated February 14, 1994, Exhibit 7(c)).
(10.A1) Amendment dated as of January 31, 1994, to the Fifth Amendment and Restatement, noted in 10-A above incorporated by reference from the GFC Financial 1992 10-K, Exhibit 10-A1.*
(10-C) Sublease dated as of April 1, 1991 among the Company, GFC Financial, Dial and others, relating to the Company's principal office space is hereby incorporated by reference from the GFC Financial 1992 Form 10-K, Exhibit 10-NN.
(10-D) Interim Service Agreement dated January 28, 1992 among the Company, GFC Financial, Dial and others is hereby incorporated by reference from the GFC Financial 1992 Form 10-K, Exhibit 10-JJ.
(10-E) Tax Sharing Agreement dated February 19, 1992 among the Company, GFC Financial, Dial and others is hereby incorporated by reference from the GFC Financial 1992 Form 10-K, Exhibit 10-KK.
(10.F) Stock Purchase Agreement between the Company and Bell Atlantic TriCon Leasing Corporation dated as of March 4, 1994.*
(10.G) Form of Assets Purchase Agreement between Bell Atlantic TriCon Leasing Corporation and TriCon Capital Corporation.*
(12) Computation of Ratio of Income to Combined Fixed Charges and Preferred Stock Dividends.*
(23) Consent of Independent Accountants - Deloitte & Touche.*
(23.A) Consent of Independent Accountants - Coopers & Lybrand.*
(23.B) Consent of Independent Accountants - Coopers & Lybrand.*
(23.C) Consent of Independent Accountants - KPMG Peat Marwick.*