-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, mdXP3z0jPfIgyaSRHC0JXXNKHiPCzbRKu13GjA/Hu9GNOVNPVShIoh5NS1bRNTH+ RSoHfvAZi3YUXque75I55w== 0000950153-94-000085.txt : 19940512 0000950153-94-000085.hdr.sgml : 19940512 ACCESSION NUMBER: 0000950153-94-000085 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREYHOUND FINANCIAL CORP CENTRAL INDEX KEY: 0000043960 STANDARD INDUSTRIAL CLASSIFICATION: 6153 IRS NUMBER: 941278569 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07543 FILM NUMBER: 94526796 BUSINESS ADDRESS: STREET 1: DIAL TOWER STE 1159 CITY: PHOENIX STATE: AZ ZIP: 85077-1159 BUSINESS PHONE: 6022076900 FORMER COMPANY: FORMER CONFORMED NAME: GREYHOUND LEASING & FINANCIAL CORP DATE OF NAME CHANGE: 19870330 10-Q 1 QUARTERLY REPORT FOR THE PERIOD ENDING 3/31/94 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C., 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-7543 GREYHOUND FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-1278569 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
DIAL CORPORATE CENTER, PHOENIX, ARIZONA 85077 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602/207-6900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or such shorter period that the Registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 9, 1994, 25,000 shares of Common Stock ($1.00 par value) were outstanding. All the Common Stock of Greyhound Financial Corporation is owned by GFC Financial Corporation. 2 GREYHOUND FINANCIAL CORPORATION TABLE OF CONTENTS
Page No. -------- PART I FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Financial Information: Consolidated Balance Sheet - March 31, 1994 and December 31, 1993 1 - 2 Consolidated Income Statement - Three Months Ended March 31, 1994 and 1993 3 Consolidated Statement of Stockholder's Equity - Three Months Ended March 31, 1994 and 1993 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 1994 and 1993 5 Notes to Interim Consolidated Financial Information 6 - 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 - 21 PART II OTHER INFORMATION. Item 5. TriCon Capital Corporation Financial Statements as of and for the Three Months Ended March 31, 1994 22 - 30 Item 6. Exhibits and Reports on Form 8-K 31 SIGNATURES 32
3 PART I - FINANCIAL INFORMATION -------------------------------- ITEM 1. FINANCIAL STATEMENTS - - ----------------------------- GREYHOUND FINANCIAL CORPORATION ------------------------------- CONSOLIDATED BALANCE SHEET -------------------------- ASSETS ------ (Dollars in Thousands)
March 31, December 31, 1994 1993 -------------------------------------- CASH AND CASH EQUIVALENTS $ 9,007 $ 2,859 INVESTMENT IN FINANCING TRANSACTIONS: Loans and other financing contracts, less unearned income of $72,262 and $72,747, respectively 2,595,948 2,343,755 Leveraged leases 284,641 283,782 Operating and direct financing leases 248,494 219,034 Factored receivables - net 142,799 --------------- ---------------- 3,271,882 2,846,571 Less reserve for possible credit losses (73,057) (64,280) --------------- ---------------- Investment in financing transactions - net 3,198,825 2,782,291 OTHER ASSETS AND DEFERRED CHARGES 101,566 49,747 --------------- ---------------- $ 3,309,398 $ 2,834,897 =============== ================
See notes to interim consolidated financial information. 1 4 GREYHOUND FINANCIAL CORPORATION ------------------------------- CONSOLIDATED BALANCE SHEET -------------------------- LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ (Dollars in Thousands)
March 31, December 31, 1994 1993 ------------------------------------ LIABILITIES: Accounts payable and accrued expenses $ 32,586 $ 30,158 Due to Parent 16,291 130,760 Customer deposits 3,041 3,064 Due to factored clients 107,895 Interest payable 13,445 23,633 Short-term debt 470 510 Senior debt 2,420,293 1,991,986 Subordinated debt 89,827 86,790 Deferred income taxes 207,727 197,705 --------------- ---------------- 2,891,575 2,464,606 --------------- ---------------- REDEEMABLE PREFERRED STOCK 25,000 25,000 STOCKHOLDER'S EQUITY: Common stock, $1.00 par value, 100,000 shares authorized, 25,000 shares issued 25 25 Additional capital 338,665 298,665 Retained income 61,808 54,374 Cumulative translation adjustments (7,675) (7,773) --------------- ---------------- 392,823 345,291 --------------- ---------------- $ 3,309,398 $ 2,834,897 =============== ================
See notes to interim consolidated financial information. 2 5 GREYHOUND FINANCIAL CORPORATION ------------------------------- CONSOLIDATED INCOME STATEMENT ----------------------------- (Dollars in Thousands)
Three Months Ended March 31, --------------------------------- 1994 1993 --------------------------------- Interest and other income $ 65,602 $ 51,402 Lease income 6,402 6,860 -------------- -------------- Interest earned from financing transactions 72,004 58,262 Interest expense 33,862 30,568 -------------- -------------- Interest margins earned 38,142 27,694 Provision for possible credit losses 3,250 2,701 -------------- -------------- Net interest margins earned 34,892 24,993 Gains on sale of assets 3 2,061 -------------- -------------- 34,895 27,054 Selling, administrative and other operating expenses 16,241 13,638 -------------- -------------- INCOME BEFORE INCOME TAXES 18,654 13,416 Income taxes 7,058 4,871 -------------- -------------- NET INCOME $ 11,596 $ 8,545 ============== ==============
See notes to interim consolidated financial information. 3 6 GREYHOUND FINANCIAL CORPORATION ------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY ---------------------------------------------- (Dollars in Thousands)
Three Months Ended March 31, ------------------------------- 1994 1993 ------------------------------- COMMON STOCK: Balance, beginning and end of period $ 25 $ 25 ------------ ------------ ADDITIONAL CAPITAL: Balance, beginning of period 298,665 298,665 Contributions from GFC Financial Corporation 40,000 ------------ ------------ Balance, end of period 338,665 298,665 ------------ ------------ RETAINED INCOME: Balance, beginning of period 54,374 33,783 Net income 11,596 8,545 Dividends (4,162) (3,763) ------------ ------------ Balance, end of period 61,808 38,565 ------------ ------------ CUMULATIVE TRANSLATION ADJUSTMENTS: Balance, beginning of period (7,773) (6,685) Unrealized translation gain (loss) 98 (325) ------------ ------------ Balance, end of period (7,675) (7,010) ------------ ------------ TOTAL STOCKHOLDER'S EQUITY $ 392,823 $ 330,245 ============ ============
See notes to interim consolidated financial information. 4 7 GREYHOUND FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Thousands)
Three Months Ended March 31, -------------------- OPERATING ACTIVITIES: 1994 1993 -------------------- Net income $ 11,596 $ 8,545 Adjustments to reconcile net income to net cash used by operating activities: Provision for possible credit losses 3,250 2,701 Depreciation and amortization 648 454 Gains on sale of assets (3) (2,061) Deferred income taxes 10,022 5,888 Change in assets and liabilities, net of effects from subsidiaries purchased: Increase in other assets (15,042) (4,936) Decrease in accounts payable and accrued expenses (7,388) (1,023) Decrease in interest payable (10,188) (11,182) Other 121 (254) ------------ ------------ Net cash used by operating activities (6,984) (1,868) ------------ ------------ INVESTING ACTIVITIES: Proceeds from sale of assets 29 2,061 Principal collections on financing transactions 153,615 122,918 Expenditures for financing transactions (225,505) (173,935) Net change in short-term financing transactions (29,196) Purchase of Asset Based Finance subsidiary (69,808) Purchase of Ambassador Factors subsidiary (246,285) Net advances to discontinued insurance subsidiary 10,607 Other 213 26 ------------ ------------ Net cash used by investing activities (347,129) (108,131) ------------ ------------ FINANCING ACTIVITIES: Net borrowings under commercial paper 24,298 19,500 Long-term borrowings 450,000 158,200 Repayment of long-term borrowings (42,995) (59,574) Net repayment of advances from parent (74,427) Dividends (4,162) (3,763) Net change in due to factored clients 7,547 ------------ ------------ Net cash provided by financing activities 360,261 114,363 ------------ ------------ INCREASE IN CASH AND CASH EQUIVALENTS 6,148 4,364 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,859 19,120 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,007 $ 23,484 ============ ============
See notes to interim consolidated financial information. 5 8 GREYHOUND FINANCIAL CORPORATION ------------------------------- NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION --------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993 -------------------------------------------------- NOTE A SIGNIFICANT ACCOUNTING POLICIES - - ---------------------------------------- The consolidated financial statements present the financial position, results of operations and cash flows of Greyhound Financial Corporation ("GFC" or the "Company") and subsidiaries, including the European Financial Group and Ambassador Factors ("Ambassador") which was acquired on February 14, 1994. GFC is a wholly-owned subsidiary of GFC Financial Corporation ("GFC Financial" or "GFCFC"). This information should be read in connection with the financial statements set forth in the GFC Annual Report for the year ended December 31, 1993 heretofore filed with the Commission as Annex "A" to the Registrant's Annual Report on Form 10-K. The accounting policies utilized in the preparation of the financial information herein are the same as set forth in such Annual Report, as modified for interim accounting policies which are within the guidelines set forth in Accounting Principles Board Opinion No. 28. The Financial Accounting Standards Board ("FASB") has issued a new accounting standard, Statement of Financial Accounting Standards ("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. Effective January 1, 1994, the Company adopted 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 postemployment benefits during the periods when employees are working. Postemployment benefits are any benefits other than retirement benefits that are provided after employment is discontinued. The adoption of the new standard did not have a material impact on the Company's financial position or results of operations. The interim consolidated financial information is unaudited. In the opinion of management all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position as of March 31, 1994, the results of operations for the three months ended March 31, 1994 and 1993 and cash flows for the three months ended March 31, 1994 and 1993, have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year. SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: During the three months ended March 31, 1994, GFC Financial contributed $40,000,000 of intercompany loans to GFC as additional paid in capital. 6 9 NOTE B PORTFOLIO QUALITY - - -------------------------- The following table presents a breakdown (by line of business) of the Company's investment in financing transactions before the reserve for possible credit losses at the dates indicated. 7 10 INVESTMENT IN FINANCING TRANSACTIONS BY LINE OF BUSINESS MARCH 31, 1994 (Dollars in Thousands)
Revenue Accruing -------------------------------------------------- Repos- Original Rewritten Operating sessed Rate Contracts Leases Assets(3) --------------------------------------------------- Domestic: Corporate Finance $ 203,703 $ 28,005 $ $ 5,083 Transportation Finance (1) 440,308 13,870 166,523 Communications Finance 527,197 6,150 8,970 Commercial Real Estate Finance 503,398 1,594 28,076 Resort Finance 544,465 4,345 539 12,567 Asset Based Finance 197,427 Consumer Rediscounting 20,204 Ambassador Finance 333,662 ------------ ---------- ---------- ---------- 2,770,364 53,964 167,062 54,696 ------------ ---------- ---------- ---------- Foreign: Corporate Finance 6,395 327 Transportation Finance 13,308 1,212 5,172 Commercial Real Estate Finance 38,170 2,922 Consumer Finance (2) 35,583 ------------ ---------- ---------- ---------- 93,456 4,461 5,172 ------------ ---------- ---------- ---------- $ 2,863,820 $ 58,425 $ 172,234 $ 54,696 ============ ========== ========== ==========
Nonaccruing -------------------------------- 90 Days Repos- Total Delin- sessed Carrying quent Assets Other Amount % -------------------------------- --------------------------- Domestic: Corporate Finance $ 6,597 $ 2,557 $ 380 $ 246,325 7.5 Transporation Finance (1) 620,701 19.0 Communications Finance 8,264 28,348 578,929 17.7 Commercial Real Estate Finance (1) 2,917 25,837 561,822 17.2 Resort Finance 20,001 143 582,060 17.8 Asset Based Finance 197,427 6.0 Consumer Rediscounting 20,204 0.6 Ambassador Finance 12,751 1,975 348,388 10.7 -------- -------- ------ ----------- ------- 30,529 78,718 523 3,155,856 96.5 -------- -------- ------ ----------- -------- Foreign: Corporate Finance 64 168 6,954 0.2 Transportation Finance 1,773 21,465 0.7 Commercial Real Estate Finance 2,654 43,746 1.3 Consumer Finance (2) 8,278 43,861 1.3 --------- -------- ------- ------------ -------- 10,996 1,941 116,026 3.5 --------- -------- ------- ------------ -------- $ 41,525 $ 80,659 $ 523 $ 3,271,882 100.0 ========== ========= ======= ============ =========
NOTES: (1) Domestic Transportation Finance includes $50.2 million of new aircraft finance business booked through the London office. In addition, operating leases include certain aircraft and engines having a carrying amount of $52.7 million that were combined as one transaction pursuant to a participation agreement with an engine and hushkitting company. (2) Consumer Finance accounts are generally considered nonaccruing after being 180 days delinquent. (3) The Company earned income totaling $0.9 million on repossessed assets during the first quarter of 1994, including $0.5 million in Commercial Real Estate Finance, $0.2 million in Communications Finance and $0.2 million in Resort Finance. 11 INVESTMENT IN FINANCING TRANSACTIONS BY LINE OF BUSINESS DECEMBER 31, 1993 (Dollars in Thousands)
Revenue Accruing ------------------------------------------------- Repos- Original Rewritten Operating sessed Rate Contracts Leases Assets (4) ------------------------------------------------- Domestic: Corporate Finance (1) $ 221,711 $ 27,921 $ $ Transportation Finance (1) (2) 457,741 146,675 Communications Finance 487,890 7,989 8,949 Commercial Real Estate Finance (1) 500,598 1,574 27,844 Resort Finance 530,070 4,869 547 12,163 Asset Based Finance 176,068 Consumer Rediscounting 19,439 ------------ ---------- ---------- ---------- 2,393,517 42,353 147,222 48,956 ------------ ---------- ---------- ---------- Foreign: Corporate Finance 8,036 324 Transportation Finance 25,303 1,267 Commercial Real Estate Finance 38,491 2,839 Consumer Finance (3) 35,656 ------------ ---------- ---------- ---------- 107,486 4,430 ------------ ---------- ---------- ---------- $ 2,501,003 $ 46,783 $ 147,222 $ 48,956 ============ ========== ========== ==========
Nonaccruing ------------------------------- 90 Days Repos- Total Delin- sessed Other Carrying quent Assets Amount % ------------------------------ ----------------------- Domestic: Corporate Finance (1) $ 2,277 $ 7,428 $ 386 $ 259,723 9.1 Transportation Finance (1) (2) 841 605,257 21.2 Communications Finance 8,264 25,030 538,122 18.9 Commercial Real Estate Finance (1) 1,055 25,542 556,613 19.6 Resort Finance 19,001 440 567,090 19.9 Asset Based Finance 176,068 6.2 Consumer Rediscounting 19,439 0.7 -------- -------- ------- ----------- ------ 12,437 77,001 826 2,722,312 95.6 -------- -------- ------- ----------- ------ Foreign: Corporate Finance 70 23 8,453 0.3 Transportation Finance 26,570 1.0 Commerical Real Estate Finance 2,642 43,972 1.5 Consumer Finance (3) 9,608 45,264 1.6 --------- --------- ------- ----------- ------ 12,320 23 124,259 4.4 --------- --------- ------- ----------- ------ $ 24,757 $ 77,024 $ 826 $ 2,846,571 100.0 ========= ========= ======= =========== =======
NOTES: (1) Reclassifications (effective January 1, 1993): Approximately $169 million of accruing assets were reclassified from Corporate Finance with $163 million going to Transportation Finance because they primarily represented aircraft financing and $6 million to Commercial Real Estate Finance. Additionally, $6.5 million of nonaccruing assets ($5.1 million classified as repossessed assets and $1.4 million classified as 90 days delinquent) were reclassified from Corporate Finance to Commercial Real Estate Finance. (2) Domestic Transportation Finance includes $31.9 million of new aircraft finance business booked through the London office. In addition, operating leases include certain aircraft and engines having a carrying amount of $53.0 million that were combined as one transaction pursuant to a participation agreement with an engine and hushkitting company. (3) Consumer Finance accounts are generally considered nonaccruing after being 180 days delinquent. (4) The Company earned income totaling $2.7 million on repossessed accruing assets during 1993, including $1.5 million in Commercial Real Estate Finance, $0.6 million in Communications Finance and $0.6 million in Resort Finance. 12 REWRITTEN CONTRACTS: In the normal course of business, the Company has renegotiated certain contracts and has modified them with respect to rates and other terms. At March 31, 1994 and December 31, 1993, the Company had approximately $58.4 million and $46.8 million, 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 all current under the revised terms and yield on a weighted average basis a return of approximately 10.2%. NONACCRUING ASSETS: Income recognition on an account is suspended and the account is classified as nonaccruing at the earlier of the date when an account is generally 90 days or more past due (180 days for Consumer Finance contracts in the United Kingdom), or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Payments (full or partial) are currently being received on some of these accounts; however, income is generally not recognized until performance is demonstrated to be resumed. Total nonaccruals increased to $122.7 million at March 31, 1994 from $102.6 million at December 31, 1993. This increase is primarily due to the addition of $14.7 million of Ambassador Factors nonaccruing assets. The total at March 31, 1994 represented 3.8% of funds employed compared to 3.6% of funds employed at December 31, 1993. RESERVE FOR POSSIBLE CREDIT LOSSES: The reserve for possible credit losses of $73.1 million at March 31, 1994 represents 2.2% of the aggregate carrying amount of financing transactions before deducting such reserve. Changes in the reserve for possible credit losses were as follows: 10 13
Three Months Ended March 31, 1994 1993 (000 Omitted) Balance, beginning of period Domestic $ 64,265 $ 65,100 Foreign 15 4,191 ---------- ----------- 64,280 69,291 ---------- ----------- Provision for possible credit losses Domestic 2,550 2,386 Foreign 700 315 ---------- ----------- 3,250 2,701 ---------- ----------- Write-offs Domestic (4,369) (1,579) Foreign (737) (1,358) ---------- ---------- (5,106) (2,937) ---------- ----------- Recoveries Domestic 98 26 Foreign 115 34 ---------- ----------- 213 60 ---------- ----------- Other Domestic 10,408 1,254 Foreign 12 (97) ---------- ----------- 10,420 1,157 ---------- ----------- Balance, end of period Domestic 72,952 67,187 Foreign 105 3,085 ---------- ----------- $ 73,057 $ 70,272 ========== ===========
The Company believes that collateral values significantly reduce its loss exposure and that the reserve for possible credit losses is adequate. NOTE C BORROWINGS At March 31, 1994 and December 31, 1993, commercial paper and short-term bank borrowings totaling $540 million and $516 million, respectively, have been presented as long-term debt because they are supported by available unused revolving credit lines which if not renewed are convertible to long-term debt at GFC's option. 11 14 NOTE D INCOME TAXES - - --------------------- The federal statutory income tax rate is reconciled to the effective income tax rate as follows:
Three Months Ended March 31, ------------------ 1994 1993 ------------------ (000 Omitted) Computed income taxes at statutory federal income tax rates 35.00% 34.00% Less tax effect of: State tax 2.42% 1.99% Foreign tax effects 1.47% 1.25% Other 0.18% 0.17% ----------- ----------- 30.93% 30.59% State tax provision 6.90% 5.86% ----------- ----------- 37.83% 36.45% =========== ===========
NOTE E RATIO OF INCOME TO COMBINED FIXED CHARGES AND PREFERRED STOCK - - ---------------------------------------------------------------------- DIVIDENDS --------- The following are the ratios of income to combined fixed charges and preferred stock dividends for the three months ended March 31, 1994 and 1993 and the years ended December 31, 1993, 1992 and 1991.
Three Months Ended Year Ended March 31, December 31, -------------- ----------------------- 1994 1993 1993 1992 1991 -------------- ----------------------- Ratio of income to combined fixed charges and preferred stock dividends 1.51 1.40 1.47 1.35 -- ====== ======= ======= ====== ========
Note: Preferred stock dividends are included in periods subsequent to March 1992 through July 30, 1993. 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 The Dial Corp in March 1992. 12 15 NOTE F PURCHASES 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 $246,285,000 and represented Ambassador's stockholder's equity, including a premium ($76,285,000), and repayment of the intercompany balance due from Ambassador to Fleet ($170,000,000). In addition, GFC assumed $100,348,000 due to factored clients, $928,000 of accrued liabilities and $8,800,000 of additional liabilities and transaction costs. The acquisition has been accounted for as a purchase and created 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, simultaneous with the acquisition, increased its investment in GFC by contributing $40,000,000 of intercompany loans as additional paid in capital of GFC. On April 30, 1994, GFC acquired all of the stock of TriCon Capital Corporation ("TriCon") from Bell Atlantic Corporation ("Bell Atlantic"), in an all-cash transaction. The cash purchase price of the acquisition was $344,250,000. In addition, GFC assumed outstanding indebtedness and liabilities of TriCon totaling $1,455,405,000 and incurred additional liabilities and acquisition costs of $7,500,000. The acquisition will 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 was financed initially with the proceeds from the issuance of $300,000,000 of debt securities of GFC and the remainder with internally generated funds. A portion of the interim debt will be replaced with the net proceeds from a planned public offering of 7,000,000 shares of GFC Financial's common stock (the "Offering"), which, together with cash, the outstanding preferred stock of GFC held by GFC Financial, the remaining intercompany loans from GFC Financial to GFC and other assets, will be contributed as additional paid in capital of GFC. There can be no assurance that the Offering will occur. The following Pro Forma Consolidated Balance Sheet of GFC as of March 31, 1994 has been prepared to reflect the historical financial position as adjusted to reflect the acquisition of TriCon as if such acquisition had occurred on March 31, 1994. The following Pro Forma Statements of Consolidated Income for the three months ended March 31, 1994 and 1993 have been prepared to reflect net income as adjusted to reflect the acquisitions of Ambassador and TriCon as if such acquisitions had occurred on January 1, 1994 and 1993, respectively, and give effect to the Offering as of such dates. The pro forma consolidated financial information is unaudited and is not necessarily indicative of the results that would have occurred if such acquisitions had been consummated as of March 31, 1994, January 1, 1994 or January 1, 1993, nor is it necessarily indicative of the results of future operations. 13 16 GREYHOUND FINANCIAL CORPORATION PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1994 (Dollars in Thousands) ASSETS
Pro Forma Historical Adjustments ---------------------------- Company(1) TriCon TriCon Pro Forma -------------------------------------------- ----------------- Cash and cash equivalents $ 9,007 $ 4,427 $ 135 (7) $ 86,943 73,374 (11) ------------- ------------- ------------- ------------- Investment in financing transactions: Loans and other financing contracts 2,595,948 894,365 3,490,313 Factored receivables 142,799 142,799 Direct finance leases 76,260 677,710 753,970 Operating leases 172,234 231,016 (53,600) (8) 349,650 Leveraged leases 284,641 284,641 ------------- ------------- ------------- ------------- 3,271,882 1,803,091 (53,600) 5,021,373 Less reserve for possible credit losses (73,057) (43,549) (116,606) ------------- ------------- ------------- ------------- 3,198,825 1,759,542 (53,600) 4,904,767 Other assets and deferred charges 101,566 26,834 69,817 (11) 202,180 3,963 (11) ------------- ------------- ------------- ------------- $ 3,309,398 $ 1,790,803 $ 93,689 $ 5,193,890 ============= ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accruals $ 49,072 $ 80,585 $ 5,000 (11) $ 134,657 Due to factored clients 107,895 107,895 Due to GFC Financial 16,291 (16,291) (11) Due to Bell Atlantic 664,906 86,155 (9) (751,061) (10) Debt 2,510,590 661,299 (53,600) (8) 4,015,720 767,121 (10) 130,310 (11) Deferred income taxes 207,727 83,355 (86,155) (9) 207,727 2,800 (11) ------------- ------------- ------------- ------------- 2,891,575 1,490,145 84,279 4,465,999 Redeemable preferred stock 25,000 (25,000) (11) Stockholder's equity 392,823 300,658 135 (7) 727,891 (16,060) (10) (284,733) (11) 216,440 (11) 93,628 (11) 25,000 (11) ------------- ------------- ------------- ------------- $ 3,309,398 $ 1,790,803 $ 93,689 $ 5,193,890 ============= ============= ============= =============
14 17 GREYHOUND FINANCIAL CORPORATION PRO FORMA STATEMENT OF CONSOLIDATED INCOME THREE MONTHS ENDED MARCH 31, 1994 (Dollars in Thousands)
Historical --------------------------------------------------------------------------- Company Ambassador Excluding Feb.and Mar. Ambassador Ambassador (1) 1994 (1) Company (1) Jan. 1994 (1) TriCon --------------------------------------------------------------------------- Interest earned from financing transactions $ 65,922 $ 6,082 $ 72,004 $ 3,072 $ 56,197 Interest expense 32,826 1,036 33,862 563 18,294 ---------- --------- ----------- ----------- --------------- Interest margins earned 33,096 5,046 38,142 2,509 37,903 Provision for possible credit losses 2,250 1,000 3,250 500 5,201 ---------- --------- ----------- ----------- ---------- Net interest margins earned 30,846 4,046 34,892 2,009 32,702 Gains on sale of assets 3 3 ---------- --------- ----------- ----------- ---------- 30,849 4,046 34,895 2,009 32,702 Selling, administrative and other operating expenses 14,730 1,511 16,241 634 13,658 Depreciation 9,981 ---------- --------- ----------- ----------- ---------- 16,119 2,535 18,654 1,375 9,063 Income taxes 6,056 1,002 7,058 649 3,035 ---------- --------- ----------- ----------- ---------- NET INCOME $ 10,063 $ 1,533 $ 11,596 $ 726 $ 6,028 ========== ========= =========== =========== ========== Pro Forma Adjustments --------------------------------------- Ambassador (1) TriCon Pro Forma --------------------------------------- --------------- Interest earned from financing transactions $ $ (2,141) (8) $ 129,507 375 (12) Interest expense 131 (2) 666 (13) 53,516 ----------- --------- ----------- Interest Margins earned (131) (2,432) 75,991 Provision for possible credit losses 8,951 ----------- ----------- ------------- Net interest margins earned (131) (2,432) 67,040 Gains on sale of assets 3 ----------- ------------ ------------- (131) (2,432) 67,043 Selling, administrative and other operating expenses 206 (3) 873 (14) 31,885 83 (4) 190 (12) Depreciation 9,981 ----------- ---------- ------------ (420) (3,495) 25,177 Income taxes (168) (5) (1,398) (15) 9,077 (99) (6) ----------- ---------- ------------ NET INCOME $ (153) $ (2,097) $ 16,100 ============ =========== ==============
15 18 GREYHOUND FINANCIAL CORPORATION PRO FORMA STATEMENT OF CONSOLIDATED INCOME THREE MONTHS ENDED MARCH 31, 1993 (Dollars in Thousands)
Historical Pro Forma Adjustments ---------------------------------------------------------------------------- Pro Company Ambassador TriCon Ambassador TriCon Forma ------------------------------------------------------------------------------------------ Interest earned from financing transactions $ 58,262 $ 9,175 $ 57,258 $ $ (773) (8) $ 124,297 375 (12) Interest expense 30,568 1,586 20,795 1,057 (2) 1,255 (13) 55,261 ------------ ------------ --------- ------------ --------- --------------- Interest margins earned 27,694 7,589 36,463 (1,057) (1,653) 69,036 Provision for possible credit losses 2,701 1,600 7,384 11,685 ------------ ------------ --------- ------------ --------- --------------- Net interest margins earned 24,993 5,989 29,079 (1,057) (1,653) 57,351 Gains on sale of assets 2,061 2,061 ------------ ------------ --------- ------------ --------- --------------- 27,054 5,989 29,079 (1,057) (1,653) 59,412 Selling, administrative and other operating 13,638 2,091 12,397 618 (3) 873 (14) 30,057 expenses 250 (4) 190 (12) Depreciation 10,416 10,416 ------------ ------------ --------- ------------ --------- --------------- 13,416 3,898 6,266 (1,925) (2,716) 18,939 Income taxes 4,871 1,983 2,214 (770) (5) (1,086) (15) 6,918 (294) (6) ------------ ------------ --------- ------------ --------- --------------- Income from continuing operations 8,545 1,915 4,052 (861) (1,630) 12,021 Cumulative effect of changes in accounting principles 480 5,763 6,243 ------------ ------------ --------- ------------ --------- --------------- NET INCOME $ 8,545 $ 2,395 $ 9,815 $ (861) $ (1,630) $ 18,264 ============ ============ ========= ============ ========= ===============
16 19 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ACQUISITION OF AMBASSADOR (1) The historical balance sheet of the Company as of March 31, 1994 includes the accounts of Ambassador, which was acquired in February 1994. The Pro Forma Statement of Consolidated Income for the three months ended March 31, 1994 has been expanded to separately identify the operations of Ambassador subsequent to its acquisition by the Company. Pro forma adjustments included in the Pro Forma Statement of Consolidated Income for the three months ended March 31, 1994 related to the acquisition of Ambassador represent the effect of the one month not included in the Company's historical financial statements. (2) To record the estimated interest expense ($131,000 - 1994; $1,057,000 - 1993) arising from the debt incurred to fund the acquisition and the repayment of the intercompany payable due to Fleet. The 1994 adjustment is partially offset by interest saved as a result of the $40,000,000 of intercompany loans from GFC Financial to GFC contributed as additional paid in capital of GFC in connection with the acquisition of Ambassador. (3) To record amortization of goodwill ($206,000 - 1994; $618,000 - 1993) based on an amortization period of twenty years and amortization of the covenant not to compete over one year (see Note (16)). (4) To record administrative expenses for additional employees and general overhead ($83,000 - 1994; $250,000 - 1993). (5) To record the income tax effect ($168,000 - 1994; $770,000 - 1993) of Notes (2), (3), and (4) at the Company's effective incremental income tax rate of 40%. (6) To adjust income taxes for the lower state income tax rate applicable to the Company ($99,000 - 1994; $294,000 - 1993). ACQUISITION OF TRICON (7) To record the original capital contribution by Bell Atlantic as part of the incorporation of TriCon ($135,000). (8) To transfer assets and the related debt of TriCon ($53,600,000), not purchased by the Company, to Bell Atlantic and reduce interest earned from financing transactions for the income recorded on such assets in 1994 and 1993 ($2,141,000 - 1994; $773,000 - 1993). (9) To record issuance of notes payable ($86,155,000) to Bell Atlantic by TriCon to repay TriCon's deferred tax liability. (10) To record a dividend from TriCon to Bell Atlantic ($16,060,000) and the conversion of the remaining short-term borrowings from affiliates of TriCon ($751,061,000) to a note payable to Bell Atlantic ($767,121,000). (11) To record the goodwill created in the acquisition of TriCon ($69,817,000), elimination of the remaining TriCon equity ($284,733,000), the elimination of deferred tax assets ($2,800,000), the debt incurred to finance the acquisition ($130,310,000), the contribution of the proceeds 17 20 received by GFC Financial from the issuance of 7,000,000 shares of its common stock at $32.00 per share, net of the underwriting discount, but before deducting estimated expenses payable by GFC Financial in connection with such Offering ($216,440,000) and the accrual of various liabilities ($5,000,000). In connection with the acquisition of TriCon, GFC Financial will contribute cash ($73,374,000), the outstanding preferred stock of GFC held by GFC Financial ($25,000,000), the remaining intercompany loans ($16,291,000) and other assets ($3,963,000) as additional paid in capital of the Company. The interest expense related to debt to be replaced with the net proceeds from the Offering and, therefore, nonrecurring and excluded from the Pro Forma Statement of Consolidated Income, is approximately $2,000,000. (12) To reflect base fees ($375,000) and incremental costs ($190,000) related to an agreement to manage leveraged leases for Bell Atlantic by TriCon . (13) To record interest expense ($666,000 - 1994; $1,255,000 - 1993) resulting from the additional debt issued to purchase TriCon and certain debt to Bell Atlantic incurred to fund the deferred tax payment and dividends referred to in Notes (9) and (10), reduced by the interest savings applicable to the debt not transferred in the TriCon acquisition referred to in Note (8) and interest savings as a result of the equity contribution of the intercompany loans in Note (11). (14) To record amortization of goodwill ($873,000) based on an amortization period of twenty years (see Note (16)). (15) To record the income tax effect ($1,398,000 - 1994; $1,086,000 - 1993) of Notes (8) and (12) through (14) at the Company's effective incremental income tax rate of 40%. (16) Goodwill may be adjusted as the final allocation of the values of the purchased assets and liabilities is established. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - - ------------------------------------------------------------------------ RESULTS OF OPERATIONS. ---------------------- COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1994 TO THE THREE MONTHS ENDED MARCH 31, 1993 The following discussion relates to Greyhound Financial Corporation ("GFC" or the "Company"), including the European Financial Group ("GEFG") and Ambassador Factors ("Ambassador") acquired on February 14, 1994. RESULTS OF OPERATIONS Net income for the first quarter of 1994 was $11.6 million compared to $8.6 million for the comparable period in 1993 (a 36% improvement). The results for the first quarter of 1994 include income for February and March from Ambassador. INTEREST MARGINS EARNED. The primary item resulting in the improved earnings in 1994 was higher interest margins earned, which represent the difference between interest earned from financing 18 21 transactions and interest expense. Interest margins earned increased by 38% during the first three months of 1994 to $38.1 million compared to $27.7 million for the first quarter of 1993. Interest earned from financing transactions increased to $72.0 million for the first quarter of 1994 from $58.3 million in the first quarter of 1993, an increase of 24%. This improvement was driven by a 29% increase in investment in financing transactions (funds employed) during the twelve months ended March 31, 1994, resulting from $1.1 billion of new business being added by the core finance operations during that period and the acquisition of Ambassador. The higher interest margins earned, which equate to a 5.6% annualized return on average earning assets compared to 5.0% for the first quarter of 1993, were attributable to the growth of the portfolio, a lower effective cost of debt in 1994 and higher fee income principally generated by Ambassador. The strong improvement in interest margins was more than enough to offset the $2 million reduction in gains on sale of assets, higher provisions for possible credit losses and the higher selling, administrative and other operating expenses. NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for possible credit losses ("reserve"), were higher by $0.5 million during the first three months of 1994 compared to the same period in 1993. Changes in the reserve are based on portfolio growth, write-offs and reserve adequacy. Management believes that reserve coverage (reserve/nonaccruing assets) remains adequate at 59.5% of nonaccruing assets and at 2.2% of funds employed. Selling, administrative and other operating expenses were up by approximately $2.6 million in the 1994 period due in part to the higher personnel costs attributable to the Asset Based Finance group acquired in February 1993 and Ambassador acquired in February 1994 and to normal cost increases. GAINS ON SALE OF ASSETS. Gains on sale of assets were $2 million lower in 1994 compared to the same period in 1993. Gains on sale of assets can vary significantly from period to period and are based on the amount and type of assets sold. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Funds employed increased by $425 million to $3,272 million at March 31, 1994 from $2,847 million at December 31, 1993. This increase is attributable to the Ambassador portfolio acquired ($329 million) and new business generated ($255 million) during the first quarter of 1994. The reserve increased by $8.8 million in 1994 to $73.1 million. The increase in the reserve during the quarter consisted of increases due to loss provisions of $3.3 million which were applicable to portfolio growth and $10.4 million of reserves acquired with Ambassador, partially offset by decreases due to write-offs of $5.1 million. The Company had total debt of approximately $2,514 million or 6.4 times its equity base of $393 million at March 31, 1994. The Company also had deferred income taxes of $208 million at that date as part of its capital base to help finance its lending activities. The Company's capitalization will change significantly as a result of the acquisition of TriCon Capital Corporation ("TriCon"), which is discussed in Note F of Notes to Interim Consolidated Financial Information. Growth in funds employed is typically financed by internally generated cash flow and additional borrowings. During the first three months of 1994, GFC issued $450 million of new senior debt, which, 19 22 together with general corporate funds, was used to finance new business and redeem or retire $43 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 the first three months of 1994, GFC issued $1.5 billion of commercial paper (with an average of $562 million outstanding during this period) and raised $450 million, as noted above, through new long-term financing facilities of one to five year durations. GFC recently filed a shelf-registration statement with the Securities and Exchange Commission that would allow for the issuance of up to $1.0 billion of senior debt securities. GFC currently maintains a three-year revolving credit facility with numerous lenders, in the aggregate principal amount of $700 million. Separately, GFC also has a 364 day revolving credit facility in the aggregate principal amount of $150 million. Both of these facilities support GFC's outstanding commercial paper and short-term borrowings. GFC is currently in negotiation with its banks to expand the aggregate principal amount of the three-year revolving credit facility from $700 million to $950 million through a bank syndicate and to provide for a new $950 million 364-day facility through the same bank syndicate. These facilities would be subject to the completion of a proposed equity Offering and the investment by GFC Financial of a substantial portion of the net proceeds from the Offering in GFC, as well as negotiation and execution of definitive documentation and other terms and conditions usual and customary for transactions of that nature. While the Company believes it will be successful in obtaining such facilities, there can be no assurance of that result. If such facilities are not successfully negotiated, the Company and GFC Financial believe they have other alternatives available to them, including the sale of additional debt or equity securities, although the ability to do so will depend on various factors including then-current market conditions and the Company's financial condition. Debt repayments due over the last nine months of 1994 will be approximately $1.1 billion, consisting of approximately $767 million payable to Bell Atlantic, approximately $169 million payable through Bell Atlantic to other third party creditors of TriCon and approximately $139 million payable to creditors of GFC. The Company believes that its current financial resources and anticipated future cash flows, together with the proceeds of the Offering and sale of commercial paper, supported by the anticipated debt facilities referred to above, will be adequate to fund the Company's 1994 debt repayments and operating requirements. The Offering is discussed in Note F of Notes to Interim Consolidated Financial Information. GFC generally mitigates the volatility of interest rate changes by matching the terms of its investments in new and existing transactions with approximately similar terms and duration applicable to its funding sources. Generally, fixed-rate assets are financed with fixed-rate funds and floating-rate assets are financed with floating-rate funds. GFC also balances the maturities of its investments so that sufficient cash flow is available to service anticipated debt requirements and has purchased interest rate hedges covering interest costs applicable to $750 million of floating-rate obligations. GFC had outstanding 30 interest rate conversion agreements with notional principal amounts totaling $1.3 billion. Five agreements with notional principal amounts of $130 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 9.3% (remaining terms of one 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 $1.14 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 20 23 (remaining terms of two 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 5.6% for the first three months of 1994 from 6.5% for the first three months of 1993. GFC's cost of and access to capital resources is significantly influenced by its debt ratings. 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 the sum of accumulated earnings and the proceeds from equity issued after December 31, 1991. BUSINESS OUTLOOK AND RECENT DEVELOPMENTS Following the spin-off from The Dial Corp in March 1992, the Company decided to focus its resources and capital on its core domestic commercial finance activities. The Company embarked on a program of selling or winding down those businesses included in the spin-off that were not associated with the Company's core domestic commercial finance activities. The Company has concentrated on redeploying the capital previously invested in such businesses to support internal portfolio growth and to make selected acquisitions which complement the Company's core operations. This strategy has resulted in (i) the managed liquidation and sale of the Greyhound European Financial Group and Latin America loan portfolios, (ii) an increase (excluding acquisitions) in GFC's domestic loan portfolio from March 31, 1992 of $678 million or 33%, (iii) the acquisition of the Asset Based Finance group from U.S. Bancorp, (iv) the sale of the discontinued mortgage insurance subsidiary, (v) the acquisition of Ambassador, and (vi) the acquisition of TriCon. As a result of management's execution of its business strategy, management believes that the Company now ranks among the largest independent commercial finance companies, based on assets, in the United States, and can direct its energies primarily on its core business operations in the United States, rather than on terminating discontinued operations. 21 24 PART II - OTHER INFORMATION --------------------------- ITEM 5. TRICON CAPITAL CORPORATION FINANCIAL STATEMENTS. - - --------------------------------------------------------- TRICON CAPITAL CORPORATION - PREDECESSOR BUSINESS ------------------------------------------------- CONSOLIDATED BALANCE SHEET -------------------------- ASSETS ------ (Dollars in Thousands)
March 31, December 31, 1994 1993 --------------------------------- CASH $ 4,427 $ 4,483 NOTES RECEIVABLE AND FINANCING LEASES: Investment in notes receivable 894,365 912,964 Investment in finance leases 677,710 647,055 --------------- ---------------- 1,572,075 1,560,019 Less reserve for possible credit losses (43,549) (43,191) --------------- ---------------- Net investment in notes receivable and finance leases 1,528,526 1,516,828 Investment in operating leases, net of accumulated depreciation 231,016 240,057 Other assets 26,834 27,091 --------------- ---------------- $ 1,790,803 $ 1,788,459 =============== ================
See notes to interim consolidated financial information. 22 25 TRICON CAPITAL CORPORATION - PREDECESSOR BUSINESS ------------------------------------------------- CONSOLIDATED BALANCE SHEET -------------------------- LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ (Dollars in Thousands)
March 31, December 31, 1994 1993 LIABILITIES: Notes payable $ 661,299 $ 709,508 Accounts payable and accrued expenses 80,585 75,302 Due to affiliates 664,906 611,194 Deferred income taxes 83,355 81,100 --------------- ---------------- 1,490,145 1,477,104 --------------- ---------------- TOTAL EQUITY 300,658 311,355 --------------- ---------------- $ 1,790,803 $ 1,788,459 =============== ================
See notes to interim consolidated financial information. 23 26 TRICON CAPITAL CORPORATION - PREDECESSOR BUSINESS ------------------------------------------------- CONSOLIDATED INCOME STATEMENT ----------------------------- (Dollars in Thousands)
Three Months Ended March 31, --------------------- 1994 1993 --------------------- Interest income $ 19,903 $ 20,837 Finance lease revenue 15,383 16,000 Operating lease revenue 15,847 14,249 Other 5,064 6,172 -------------- -------------- 56,197 57,258 -------------- -------------- Interest 18,294 20,795 Selling, general and administrative expenses 13,658 12,397 Provision for credit losses 5,201 7,384 Depreciation 9,981 10,416 -------------- -------------- 47,134 50,992 -------------- -------------- Income before provision for income taxes and cumulative effect of change in accounting principle 9,063 6,266 Provision for income taxes 3,035 2,214 -------------- -------------- Income before cumulative effect of change in accounting principle 6,028 4,052 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 5,763 -------------- -------------- NET INCOME $ 6,028 $ 9,815 ============== ==============
See notes to interim consolidated financial information. 24 27 TRICON CAPITAL CORPORATION - PREDECESSOR BUSINESS CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Thousands)
Three Months Ended March 31, ------------------- OPERATING ACTIVITIES: 1994 1993 ------------------- Net income $ 6,028 $ 9,815 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,559 10,979 Provision for credit losses 5,201 7,384 Amortization of initial direct costs 1,718 2,433 Cumulative effect of change in accounting principle (5,763) Gain on sale of equipment and real estate held under operating leases (1,428) (643) Deferred income taxes 2,255 (978) Changes in certain assets and liabilities: Decrease in other assets (853) (4,056) Increase in accounts payable and accrued expenses 5,283 15,801 ------------ ------------ Net cash provided by operating activities 28,763 34,972 ------------ ------------ INVESTING ACTIVITIES: Additions to notes receivable and finance leases (495,982) (377,864) Principal payments received on notes receivable and finance leases 477,356 307,575 Additions to equipment and real estate held under operating leases (2,763) (20,607) Proceeds from sale of equipment and real estate held under operating leases 3,783 1,818 ------------ ------------ Net cash used by investing activities (17,606) (89,078) ------------ ------------ FINANCING ACTIVITIES: Proceeds from borrowings 76,625 Principal repayments of borrowings (48,209) (23,979) Increase in amounts due to affiliates 53,712 8,161 Capital distribution (16,725) (7,316) ------------ ------------ Net cash (used) provided by financing activities (11,222) 53,491 ------------ ------------ EFFECTS OF EXCHANGE RATE CHANGES ON CASH 9 (3) ------------ ------------ DECREASE IN CASH (56) (618) CASH, beginning of period 4,483 4,503 ------------ ------------ CASH, end of period $ 4,427 $ 3,885 ============ ============
See notes to interim consolidated financial information. 25 28 TRICON CAPITAL CORPORATION -------------------------- NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION ------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 1994 ----------------------------------------- NOTE A BACKGROUND AND BASIS OF PREPARATION - - -------------------------------------------- TriCon Capital Corporation ("TriCon"), a wholly-owned subsidiary of Bell Atlantic TriCon Leasing Corporation ("Old TriCon") and, ultimately, by Bell Atlantic Corporation ("Bell Atlantic"), was incorporated on December 3, 1993 and will be the successor entity to certain businesses of Old TriCon. 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 TriCon in the contemplated restructuring described below. Use of "the Company" in these financial statements refers to the Predecessor Business. 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. Prior to a planned restructuring (the "Restructuring") in contemplation of a sale of TriCon's common stock to Greyhound Financial Corporation ("GFC"), a wholly owned subsidiary of GFC Financial Corporation, the Company will be capitalized with amounts sufficient to acquire from Old TriCon certain assets and liabilities which comprise the Predecessor Business (described below). Pursuant to the Restructuring, TriCon 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, TriCon 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. The consolidated financial statements include allocations of certain liabilities and expenses relating to the Predecessor Business to be transferred to TriCon 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. NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - - --------------------------------------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and, accordingly, certain information and footnote disclosure required for complete financial statements prepared in accordance with generally accepted accounting principles have been omitted. In management's opinion, the accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for each period shown. The results for interim periods are not necessarily indicative of financial results for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements and Notes heretofore filed with the Securities and Exchange Commission as Amendment 26 29 No. 3 to Form S-1A. The Financial Accounting Standards Board ("FASB") has issued a new accounting standard, Statement of Financial Accounting Standard ("SFAS") SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). The 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. The impact of the new standard, which is effective for fiscal years beginning after December 15, 1994, is not expected to have a material impact on the Company's financial position or results of operations as the Company's current loan review policies require identification of impaired loans and establishment of provisions thereon in a manner which management believes is substantially consistent with SFAS 114. NOTE C INCOME TAXES - - --------------------- The federal statutory income tax rate is reconciled to the effective income tax rate as follows:
Three Months Ended March 31, ------------------- 1994 1993 ------------------- (000 Omitted) Computed income taxes at statutory federal income tax rates 35.00% 34.00% Less tax effect of: Municipal income 5.21% 8.36% State taxes 2.83% 2.83% Other 1.55% (4.19%) ----------- ----------- 25.41% 27.00% State income tax provision 8.08% 8.33% ----------- ----------- 33.49% 35.33% =========== ===========
NOTE D SUBSEQUENT EVENT - - ------------------------- On March 4, 1994, Bell Atlantic entered into an agreement to sell substantially all of the assets and liabilities of the Company other than those assets and liabilities relating to its investment in leveraged leases and joint ventures and certain real estate assets to GFC. Prior to the sale, the Company will transfer these assets and liabilities to TriCon. The stock of TriCon was sold to GFC on April 30, 1994 in an all cash transaction. The cash purchase price of the acquisition was $344,250,000. In addition, GFC assumed indebtedness and liabilities of TriCon totaling $1,455,405,000. 27 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1994 TO THE THREE MONTHS ENDED MARCH 31, 1993 The Consolidated Financial Statements included in these interim financial statements reflect the historical financial results of TriCon Capital Corporation (the "Company") after giving effect to the Restructuring. See "Basis of Preparation". The Company's total revenues are comprised of interest income, finance lease revenue, operating lease revenue and other income. The amount of revenues reported by the Company in the form of interest income, finance lease revenues and operating lease revenues is affected by the amount of Portfolio Assets reflected on its balance sheet and the interest rate implicit in its Portfolio Assets. The principal Portfolio Assets reflected on the Company's balance sheet are investments in notes receivable, direct finance leases and operating leases. Portfolio Assets are increased by the volume of new business originations and decreased by liquidations of such assets, which can take the form of payments by the obligor of amounts owed under such financings, securitizations, early termination or prepayments, depreciation and write-offs of uncollectible Portfolio Assets. The interest rate implicit in Portfolio Assets is principally affected by the level of general market interest rate indices, such as commercial paper rates, prime rates and treasury note rates. Other income recognized by the Company is attributable to collections of fee-based revenue, income related to disposition of leased equipment, early termination of Portfolio Assets, securitization transactions, late charges, documentation-related fees and servicing fee income. Securitization transactions reduce the Company's investment in finance leases as the Company removes from its balance sheet the net investment in finance leases related to the assets securitized. The future revenue stream of the securitized assets, in excess of revenue allocated to the securitization investor, is re-characterized into two components: (i) servicing fee income which is recognized by the Company over time as other income; and (ii) gains on sale which is currently recognized as other income. The proceeds from securitizations typically are used by the Company to reduce debt or to invest in new financing transactions. RESULTS OF OPERATIONS The Company's total revenues for the three months ended March 31, 1994 were $56.2 million, a decrease of $1.1 million, or 1.9%, compared to the same period in 1993. Total revenues are comprised of interest income, finance lease revenue, operating lease revenue and other income. Interest income for the three months ended March 31, 1994 was $19.9 million, a decrease of $0.9 million, or 4.5%, compared to the three month period in 1993. The Company's interest income is dependent upon the amount of the Company's investment in notes receivable and the impact of the interest rate environment on the yields of loans during the period. The decrease in interest income for the first quarter of 1994 was primarily attributable to a decline in loan yields on the average investment in notes receivable. Finance lease revenue during the first three months of 1994 was $15.4 million, a decrease of $0.6 million, or 3.9%, from 1993. Finance lease revenues are dependent primarily upon the size of the 28 31 Company's finance lease receivable portfolio and the impact of the interest rate environment on the pricing terms of new finance leases entered into during the period. The average investment in finance leases is affected by finance lease additions to the portfolio as offset by lease payments, early terminations and write-offs. The decrease in finance lease revenues is principally due to the maturity of transactions originated in a higher interest rate environment being replaced by current lease originations reflecting market interest rate levels which are lower than historical periods. Operating lease revenue was $15.8 million during the first quarter of 1994, an increase of $1.6 million, or 11.2% compared to 1993. This increase was primarily attributable to the stronger operating performance of commercial real estate operating leases in 1994 as compared to 1993. Other income was $5.1 million during the first three months of 1994, a decrease of $1.1 million, or 18.0%, compared to 1993. This decrease was attributable to decreases in income from securitizations entered into in prior periods and gains on sale of equipment. These decreases were partially offset by income from early termination of leases and other fee income. Total expenses were $47.1 million during the first three months of 1994, a decrease of $3.9 million, or 7.6%, compared to 1993. The Company's total expenses are comprised of interest expense, selling, general and administrative expenses, provision for credit losses and depreciation expense. Interest expense during the first quarter of 1994 was $18.3 million, a decrease of $2.5 million, or 12.0%, compared to 1993. The decrease in interest expense was primarily the result of lower interest rates on the Company's borrowings. Selling, general and administrative expenses for the first quarter of 1994 were $13.7 million, an increase of $1.3 million, or 10.2%, for the same period in 1993. The increase was primarily related to costs for an increase in the sale force, costs incurred in connection with an initial public offering that was aborted with the sale of the Company to GFC and normal cost increases, partially offset by a reduction in investment portfolio related expenses. The provision for credit losses during the first three months of 1994 was $5.2 million, a decrease of $2.2 million, or 29.6%, from 1993. The decrease was primarily the result of a decrease in the Company's nonaccruing accounts and general improvement in the business environment. Depreciation expense for the first quarter of 1994 was $10.0 million, a decrease of $0.4 million, or 4.2%, from the first three months of 1993. This is due primarily to the net reduction of assets under operating lease. The provision for income taxes was $3.0 million for the first quarter of 1994 and $2.2 million for the same period in 1993. The effective income tax rate was 33.5% for 1994 and 35.3% for 1993. The reduction in the 1994 rate was mainly attributable to an increase in tax exempt income for 1994. The income before cumulative effect of accounting change in the first quarter of 1994 was $6.0 million, an increase of $2.0 million, or 48.8%, over the first quarter of 1993. Net income for the first three months of 1994 was $6.0 million, a decrease of $3.8 million, or 38.6%, over the same period in 1993. The decrease resulted primarily from a $5.8 million gain in 1993 resulting from the effect of the Company's adoption of SFAS No. 109, "Accounting for Income Taxes". No such gains were reported in 1994. 29 32 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Portfolio assets, at March 31, 1994, were $1.803 billion, an increase of $3.0 million or 0.2% from $1.800 billion at December 31, 1993. Portfolio assets generally increase as a result of new lease and loan originations by the Company and decrease primarily through liquidations of Portfolio Assets, including normal principal repayments, securitizations, early termination or prepayments of financing arrangements, depreciation and write-offs. Investment in notes receivable at March 31, 1994 was $894.4 million, a decrease of $18.6 million, or 2.0%, from December 31, 1993. This decrease is primarily due to a net increase in prepayment and normal principal repayment over new loan originations. Investment in finance leases at March 31, 1994 was $677.7 million, an increase of $30.6 million, or 4.7%, from $647.1 million at December 31, 1993. This increase was primarily due to new lease originations (principally in the Vendor Service Group) partially offset by portfolio liquidation. Investment in operating leases at March 31, 1994 was $231.0 million, a decrease of $9.1 million, or 3.8%, from $240.1 million at December 31, 1993. The decrease principally relates to normal depreciation. The Company generates a substantial portion of its funds from lease and loan payments and is also highly dependent upon financing from Bell Atlantic Financial Services, Inc. ("FSI") which issued commercial paper and medium-term notes, supported by Bell Atlantic, in the public and private markets on behalf of Old TriCon. The financing provided by FSI and use of the Bell Atlantic support agreement will not be available to the Company after the date of the sale of the Company to GFC. All future financing for the Company will be provided by GFC. Funds required to support the Company's operations during the quarter ended March 31, 1994 included both internally generated funds, consisting primarily of receipts of finance lease receivables, operating lease receivables and notes receivable and funds generated through short-term financings from FSI. During the quarters ended March 31, 1994 and 1993, the Company's net additions to investment in finance leases and notes receivable ($18.6 million and $70.3 million, respectively) and investment in operating leases ($2.8 million and $20.6 million, respectively) were funded primarily through proceeds from cash flows from operating activities and, to a lesser extent, cash from available financing sources. The Company reduced outstanding medium-term notes payable by $48.2 million and $24.0 million during the quarters ended March 31, 1994 and 1993, respectively, and increased short-term borrowings from affiliates by $53.7 million and $8.1 million in 1994 and 1993, respectively. The increase in short-term borrowings in 1994 was due to Bell Atlantic's request to the Company, in the fourth quarter of 1993, to satisfy its financing requirements through short-term advances from FSI in anticipation of the sale. The Company's debt (notes payable and due to affiliates) to equity ratio was 4.4:1 at March 31, 1994 and 4.2:1 at December 31, 1993. Future financing is expected to be arranged by GFC as necessary to meet the Company's capital and other requirements with the timing of issue, principal amount and form dependent on the Company's needs, prevailing market and general economic conditions. 30 33 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. - - ------------------------------------------ (a) The following exhibits are filed herewith:
Exhibit No. Document ----------- -------- 12 Computation of Ratio of Income to Combined Fixed Charges and Preferred Stock Dividends (interim period).
(b) Reports on Form 8-K: A Report on Form 8-K dated January 21, 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 December 31, 1993 (unaudited). A Report on Form 8-K dated January 21, 1994 was 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 GFC Financial Corporation. 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 acquisition by Greyhound Financial Corporation of Ambassador Factors from Fleet Financial Group, Inc. and included 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. A Report on Form 8-K dated April 18, 1994 was filed by Registrant, which reported under Item 5 the revenues, net income and selected financial data and ratios for the three months ended March 31, 1994 (unaudited). A Report on Form 8-K dated May 2, 1994 was filed by Registrant, which reported under Item 5 the consummation of the TriCon acquisition. 31 34 GREYHOUND FINANCIAL CORPORATION SIGNATURES Pursuant to the requirements 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. GREYHOUND FINANCIAL CORPORATION (Registrant) Dated: May 9, 1994 By: /s/ Bruno A. Marszowski --------------------------------------------------- Bruno A. Marszowski, Vice President - Controller Principal Accounting Officer/Authorized Officer
32 35 GREYHOUND FINANCIAL CORPORATION COMMISSION FILE NUMBER 1-7543 EXHIBIT INDEX MARCH 31, 1994 FORM 10-Q
Page No. in Sequentially Numbered Form 10-Q No. Title Report - - ----------------- --------------------------------------------------------- ------------- (12) Computation of Ratio of Income to Combined Fixed Charges and Preferred Stock Dividends.
33 EX-12 2 COMPUTATION OF RATIO OF INCOME TO COMBINED FXD CHG 1 EXHIBIT 12 GREYHOUND FINANCIAL CORPORATION COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (000 Omitted)
Three Months Ended Twelve Months Ended March 31, December 31, ------------------- -------------------------------- 1994 1993 1993 1992 1991 ------------------- -------------------------------- Net income (loss) before income taxes $ 18,654 $ 13,416 $ 64,123 $ 50,593 $ (37,014) Add leverage lease adjustment 233 243 1,505 1,059 1,758 Add fixed charges: Interest expense 33,862 30,568 126,152 136,107 157,560 One-third rentals 366 346 1,387 1,498 1,148 ---------- ---------- ----------- ----------- ----------- Total fixed charges 34,228 30,914 127,539 137,605 158,708 ---------- ---------- ----------- ----------- ----------- Net income as adjusted $ 53,115 $ 44,573 $ 193,167 $ 189,257 $ 123,452 ---------- ---------- ----------- ----------- ----------- Ratio of income to fixed charges 1.55 1.44 1.51 1.38 --- ========== ========== =========== =========== =========== Preferred stock dividends on a pre-tax basis $ 930 $ 908 $ 3,682 $ 2,826 Total combined fixed charges and preferred stock dividends $ 35,158 $ 31,822 $ 131,221 $ 140,431 $ 158,708 ---------- ---------- ----------- ----------- ----------- Ratio of income to combined fixed charges and preferred stock dividends 1.51 1.40 1.47 1.35 ---- ========== ========== =========== =========== ===========
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