-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P7/tWjPBdFfb2YKjzHU+MO8yx3SKEjsRAExoQx+D2whz5OoJ2APD1Xhx4DqNtZy1 +paaEv972ZQ3EQMC0Rb20w== 0000909518-95-000272.txt : 19951124 0000909518-95-000272.hdr.sgml : 19951124 ACCESSION NUMBER: 0000909518-95-000272 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950921 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19951122 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTCITY FINANCIAL CORP CENTRAL INDEX KEY: 0000828678 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 760243729 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26500 FILM NUMBER: 95595979 BUSINESS ADDRESS: STREET 1: 6400 IMPERIAL DRIVE CITY: WACO STATE: TX ZIP: 76712 BUSINESS PHONE: 8177511750 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY BANCORPORATION OF TEXAS INC/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY ACQUISITION CORP DATE OF NAME CHANGE: 19880523 8-K/A 1 AMENDMENT NO 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 8-K/A AMENDMENT TO CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------- Amendment No. 1 Date of Report (Date of earliest event reported) September 21, 1995 FIRSTCITY FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) DELAWARE 1-7614 76-0243729 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) 6400 IMPERIAL DRIVE, WACO, TX 76712 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (817) 751-1750 ----------------------------- INFORMATION TO BE INCLUDED IN THE REPORT ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS ------------------------------------ On August 9, 1995, FirstCity Financial Corporation, a Delaware corporation ("FirstCity"), through its wholly-owned subsidiary DFC Asset Corp., a Texas corporation, executed a stock purchase agreement to acquire (the "Acquisition") 100 percent of the capital stock of each of Diversified Financial Systems, Inc., an Indiana corporation ("Diversified Financial"), and Diversified Performing Assets, Inc., an Indiana corporation ("Diversified Performing" and, collectively with Diversified Financial, "Diversified"), from Randall R. Geist and J. Michael Hester. On September 21, 1995, FirstCity consummated the Acquisition. Diversified specializes in the acquisition, disposition and servicing of distressed loans and loan-related assets. Diversified is headquartered in Fort Wayne, Indiana with offices in Franklin, Massachusetts and Richardson, Texas. In exchange for 100 percent of the capital stock of Diversified Financial and Diversified Performing, FirstCity paid an aggregate of $12.9 million in cash and notes (such $12.9 million comprised of an aggregate of $14 million in cash and notes paid to Randall R. Geist and J. Michael Hester, less cash acquired in the amount of $1.1 million). The Acquisition was internally funded by FirstCity. A copy of the press release issued by FirstCity upon consummation of the Acquisition, describing such consummation, is attached hereto as Exhibit 99.1 and is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS ----------------------------------------------------------------- (a) Financial statements of businesses acquired. (i) Financial statements of Diversified Financial Systems, Inc. (ii) Financial statements of Diversified Performing Assets, Inc. (iii) Financial statements of Diversified Financial Systems, L.P. (b) Pro forma financial information. (i) FirstCity Financial Corporation and Subsidiaries Pro Forma Condensed Consolidated Financial Statements. (c) Exhibits. The Exhibit Index at page 45 is incorporated herein by reference. 2 NYFS11...:\92\54892\0003\2236\FRMN155X.270 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 hereunto duly authorized. FIRSTCITY FINANCIAL CORPORATION /s/ Gary H. Miller --------------------------------------- Gary H. Miller Senior Vice President and Controller Date: November 22, 1995 3 Item 7(a)(i) DIVERSIFIED FINANCIAL SYSTEMS, INC. Fort Wayne, Indiana FINANCIAL STATEMENTS December 31, 1992, 1993 and 1994 and June 30, 1994 and 1995 4 DIVERSIFIED FINANCIAL SYSTEMS, INC. Fort Wayne, Indiana FINANCIAL STATEMENTS December 31, 1992, 1993 and 1994 and June 30, 1994 and 1995 CONTENTS REPORT OF INDEPENDENT AUDITORS.............................................6 FINANCIAL STATEMENTS BALANCE SHEETS...................................................7 STATEMENTS OF INCOME AND RETAINED EARNINGS.......................8 STATEMENTS OF CASH FLOWS.........................................9 NOTES TO FINANCIAL STATEMENTS....................................11 5 REPORT OF INDEPENDENT AUDITORS To the Shareholders Diversified Financial Systems, Inc. Fort Wayne, Indiana We have audited the accompanying balance sheets of Diversified Financial Systems, Inc. as of December 31, 1994 and 1993, and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1994. 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 financial position of Diversified Financial Systems, Inc. as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Crowe, Chizek and Company Oak Brook, Illinois March 10, 1995 6
DIVERSIFIED FINANCIAL SYSTEMS, INC. BALANCE SHEETS June 30, .................December 31,............... 1995 ------------ 1993 1994 (Unaudited) ---- ---- ----------- ASSETS Cash $ 786,797 $ 1,783,654 $ 807,101 Unamortized cost of loan portfolios (Note 4) 20,333,235 39,329,648 41,674,709 Receivables from related parties (Note 11) 542,584 4,301,427 5,427,591 Notes receivable (Note 7) 2,153,859 1,100,670 928,672 Other receivables (Note 6) 1,929,311 985,744 1,101,727 Investment in partnerships (Notes 11 and 12) 6,216,446 1,332,538 1,267,477 Furniture and equipment, net of accumulated depreciation 139,381 162,352 146,937 Real estate held for sale 1,029,573 800,000 -- Deferred financing costs 432,770 325,379 230,861 Accrued interest receivable and other assets 401,867 782,638 818,020 ----------- ----------- ----------- $33,965,823 $50,904,050 $52,403,095 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Collateralized loans (Note 8) $19,873,090 $35,273,416 $35,712,307 Notes payable - shareholders and related parties (Note 10) 2,248,800 1,039,800 979,860 Accounts payable 318,503 727,992 765,551 Accounts payable - related parties (Note 11) -- 398,892 688,217 Other borrowings (Note 9) 407,982 332,766 -- Accrued interest payable and other liabilities 1,126,149 751,155 856,272 ----------- ----------- ----------- Total liabilities 23,974,524 38,524,021 39,002,207 Shareholders' equity Common stock - without par value; 10,000 shares authorized, 200 shares issued 1,000 1,000 1,000 Retained earnings 10,370,299 15,159,029 16,179,888 ----------- ----------- ----------- 10,371,299 15,160,029 16,180,888 Common treasury stock - at cost (Note 13) 380,000 2,780,000 2,780,000 ----------- ----------- ----------- 9,991,299 12,380,029 13,400,888 ----------- ----------- ----------- $33,965,823 $50,904,050 $52,403,095 =========== =========== =========== See accompanying notes to financial statements
7
DIVERSIFIED FINANCIAL SYSTEMS, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS Years Ended Six Months Ended ........................December 31,............. ............June 30,.......... ------------ -------- 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ..........(Unaudited)......... Income Receipts from loan portfolios $ 2,933,686 $ 9,618,378 $ 25,704,279 $ 11,912,334 $ 14,696,029 Servicing fee income (Note 11) 6,811,539 5,693,881 5,849,394 3,188,682 2,425,463 Equity in earnings of partnerships 4,332,768 2,164,550 1,510,884 2,326,158 377,909 Fees earned under First Lake Agreement (Note 3) 31,631 887,203 1,165,236 658,968 -- Gain on early extinguishment of debt (Note 8) -- -- 333,965 333,965 -- Data processing revenue (Note 11) -- -- 604,642 304,639 274,752 Gain on portfolio sale (Note 13) -- -- 436,521 436,521 -- Interest 17,411 85,181 80,600 16,577 11,621 Other 11,591 81,442 108,966 27,820 18,594 ------------ ------------ ------------ ------------ ------------ 14,138,626 18,530,635 35,794,487 19,205,664 17,804,368 Expenses Amortization of loan portfolio costs 2,468,743 5,907,185 16,300,766 8,638,140 9,481,572 Salaries and related taxes 2,781,095 2,338,915 2,895,932 1,354,282 1,453,676 Legal 1,114,922 1,734,749 2,359,970 926,428 1,188,107 Interest 618,662 1,769,530 2,523,977 1,218,742 2,127,088 Asset protection expense 146,910 906,849 706,744 283,266 46,675 Financing costs 56,519 504,210 689,544 313,522 617,019 Consulting fees (Note 13) -- 860,000 -- -- -- Servicing fees 421,567 832,850 962,440 428,313 160,111 Telephone 326,542 292,834 316,911 163,528 94,104 Provision for loss on real estate held for sale -- -- 229,573 -- -- Insurance 167,074 280,958 305,222 154,050 205,297 Field agents' travel expenses 266,177 153,234 138,734 66,360 73,771 Rent 173,701 163,947 194,194 96,302 85,287 Postage 28,466 115,445 430,516 203,660 199,101 Data processing 157,918 197,356 343,241 169,256 152,416 Professional fees 159,018 188,215 358,053 253,944 143,709 Other 543,996 605,966 1,055,565 376,586 635,911 ------------ ------------ ------------ ------------ ------------ 9,431,310 16,852,243 29,811,382 14,646,379 16,663,844 ------------ ------------ ------------ ------------ ------------ NET INCOME 4,707,316 1,678,392 5,983,105 4,559,285 1,140,524 Retained earnings at beginning of period 5,178,485 9,270,982 10,370,299 10,370,299 15,159,029 Distributions to shareholders (614,819) (579,075) (1,194,375) (479,084) (119,665) ------------ ------------ ------------ ------------ ------------ RETAINED EARNINGS AT END OF PERIOD $ 9,270,982 $ 10,370,299 $ 15,159,029 $ 14,450,500 $ 16,179,888 ============ ============ ============ ============ ============ See accompanying notes to financial statements
8
DIVERSIFIED FINANCIAL SYSTEMS, INC. STATEMENTS OF CASH FLOWS Years Ended Six Months Ended ...................December 31,........... ............June 30,............ ------------ -------- 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ..........(Unaudited).......... CASH FLOWS FROM OPERATING ACTIVITIES Cash collected from acquired loan portfolios $ 2,933,686 $ 9,618,378 $ 25,704,279 $ 11,912,334 $ 14,696,029 Cash received for servicing fees 6,789,248 5,428,995 5,911,560 3,450,248 2,625,060 Other cash received 60,633 112,755 2,628,814 1,675,154 601,366 Cash paid to vendors and employees (6,077,039) (8,126,271) (10,823,228) (4,979,567) (3,900,451) Interest paid (459,728) (1,676,778) (2,667,886) (1,470,428) (2,141,161) Purchase of loan portfolios (13,548,825) (9,962,403) (30,993,994) (14,955,664) (11,826,634) Deposits (paid) received, net (56,939) 425,975 (2,320) 816,856 (611,476) ------------ ------------ ------------ ------------ ------------ Net cash used in operating activities (10,358,964) (4,179,349) (10,242,775) (3,551,067) (557,267) CASH FLOWS FROM INVESTING ACTIVITIES Notes receivable -- (2,071,259) (444,134) (183,874) -- Collections on notes receivable -- -- 132,064 7,000 171,998 Capital distributions from partnership 1,828,500 3,784,631 3,052,880 2,095,141 442,970 Cash advanced to affiliates and shareholders (906,154) (699,479) (2,347,093) (981,899) (1,162,347) Repayment of advances -- -- 392,356 167,000 -- Proceeds from sale of real estate held-for-sale -- -- -- -- 736,398 Maturity of certificate of deposit 50,000 137,500 -- -- -- Property and equipment expenditures (152,294) (39,434) (82,916) (58,706) (12,324) Cash paid for net assets of Diversified Financial Planners, Inc. -- (80,247) -- -- -- Cash paid for limited partner's interest in Diversified Financial Partners III LP -- -- (1,270,000) (1,270,000) -- ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities 820,052 1,031,712 (566,843) (225,338) 176,695 CASH FLOWS FROM FINANCING ACTIVITIES Advances from related parties 250,000 -- -- -- -- Repayment of advances from related parties (421,712) (90,000) -- -- -- Financing fees (927,562) (73,604) (570,034) (678,017) (522,501) Borrowings on collateralized loans 14,293,689 9,312,403 45,077,422 19,505,441 11,826,634 Principal payments on other borrowings -- (33,334) (75,216) (112,466) (332,766) Principal payments on collateralized loans (1,233,208) (7,445,718) (30,621,214) (11,752,649) (11,387,743) Borrowings on notes payable - related parties -- 1,172,800 180,000 178,947 205,000 Repayment of notes payable -- -- (1,389,000) (1,356,000) (264,940) Cash distributions to shareholders (614,819) (579,075) (795,483) (548,834) (119,665) Purchase of common treasury stock -- (245,000) -- -- -- ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 11,346,388 2,018,472 11,806,475 5,236,422 (595,981) ------------ ------------ ------------ ------------ ------------ Increase (decrease) in cash 1,807,476 (1,129,165) 996,857 1,460,017 (976,553) Cash at beginning of period 108,486 1,915,962 786,797 786,797 1,783,654 ------------ ------------ ------------ ------------ ------------ CASH AT END OF PERIOD $ 1,915,962 $ 786,797 $ 1,783,654 $ 2,246,814 $ 807,101 ============ ============ ============ ============ ============ (Continued)
9
DIVERSIFIED FINANCIAL SYSTEMS, INC. STATEMENTS OF CASH FLOWS Years Ended Six Months Ended ..................December 31,................ .............June 30,......... ------------ -------- 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ..........(Unaudited)......... Reconciliation of net income to net cash used in operating activities Net income $ 4,707,316 $ 1,678,392 $ 5,983,105 $ 4,559,285 $ 1,140,524 Amortization of loan portfolio costs 2,468,743 5,907,185 16,300,766 8,638,140 9,481,572 Amortization of deferred financing costs 64,186 504,210 295,896 729,557 617,019 Provision for loss on real estate held for sale -- -- 229,573 -- -- Loss on real estate held for sale -- -- -- -- 63,602 Depreciation 46,891 70,257 59,945 33,195 27,739 Gain on early extinguishment of debt -- -- (333,965) 333,965 -- Equity in earnings of partnership (4,332,768) (2,164,550) (1,510,884) (2,471,413) (377,910) Gain on portfolio sale -- -- (436,521) (436,521) -- Purchase of loan portfolios (13,548,825) (9,962,403) (30,993,994) (14,955,664) (11,826,634) Decrease (increase) in receivables (118,191) (1,051,960) 123,929 598,135 (115,181) Increase in accounts payable and accrued liabilities 353,684 839,520 39,375 (579,746) 432,002 ------------ ------------ ------------ ------------ ------------ Net cash used in operating activities $(10,358,964) $ (4,179,349) $(10,242,775) $ (3,551,067) $ (557,267) ============ ============ ============ ============ ============ Schedule of noncash investing and financing activities Note payable issued in connection with purchase of loan portfolio 4,750,000 Assets acquired from Diversified Partners III LP $ 6,693,027 Notes payable and other liabilities assumed (2,081,385) Corporation's equity in net assets of Diversified Partners III LP at date of partnership termination (3,341,642) ------------ Cash paid $ 1,270,000 ============ See accompanying notes to financial statements
10 DIVERSIFIED FINANCIAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED) NOTE 1 - NATURE OF BUSINESS The Corporation is engaged in the business of providing collection services for companies who have acquired loan portfolios from the Federal Deposit Insurance Corporation (FDIC), Resolution Trust Corporation (RTC) and other sources. The Corporation also acquires loan portfolios for its own account, from these same sources, at substantial discounts from principal amounts outstanding and liquidates the portfolios through collection efforts or through bulk sales to financial institutions. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Income Recognition: The Corporation receives a fee, based upon a specified - ------------------ percentage of collections, from the loan portfolios serviced. Income from acquired loan portfolios is recognized as collections are received. Portfolio cost is amortized over periods ranging from three to five years based upon the ratio of the portfolio's original cost over the undiscounted estimated total cash collections times the amount of cash received during the period. Amortization of portfolio costs is accelerated if estimated cash collections are subsequently revised downward. The cost recovery method is used for income tax purposes. Investment in Partnerships: The Corporation's investment in partnerships is - -------------------------- carried at cost, plus its share of the partnerships' earnings. In the case of Diversified Financial Systems, L.P., the partners were first allocated an interest factor through October 15, 1993. Furniture and Equipment: Furniture and equipment are stated at cost less - ----------------------- accumulated depreciation of $137,468 at December 31, 1993, $197,413 at December 31, 1994 and $237,099 at June 30, 1995. Depreciation is computed on accelerated methods over the estimated service lives of the related assets. Real Estate Held for Sale: Real estate held for sale is carried at the lower of - ------------------------- cost or fair value less estimated selling expenses. Valuation allowances are recognized when fair value less estimated selling expenses is less than the cost of the asset, by charges to earnings. Deferred Financing Costs: Deferred financing costs represent origination and - ------------------------ legal fees associated with obtaining the Corporation's loans and are being amortized over the respective periods the loans are outstanding on a level yield basis. Income Taxes: Effective August 24, 1989, the Corporation's shareholders elected - ------------ S corporation status under Section 1362 of the Internal Revenue Code and a similar section of state income tax law. The statutes provide that, in lieu of corporate income taxes, the shareholders are taxed on their proportionate shares of the Corporation's taxable income or loss. Basis of Presentation of Unaudited Interim Financial Information: Financial - ---------------------------------------------------------------- information for the six months ended June 30, 1995 and 1994 has been derived from the Corporation's unaudited financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation of financial position, results of operations and cash flows. Reclassifications: Certain reclassifications were made to the 1993 financial - ----------------- statements to be comparable with the 1994 presentation. 11 NOTE 3 - FIRST LAKE CORP. AGREEMENT The Corporation has a loan purchase, servicing and consulting agreement with First Lake Corp. (FLC), a wholly-owned subsidiary of National Bancorp, Inc. The Corporation services all loans purchased by FLC pursuant to the agreement, in exchange for a fee equal to a negotiated percentage of amounts collected from the loan portfolios and which generally has been within a range of 10% to 15%. The agreement also provides for additional amounts payable to Diversified when third party financing has been paid, on a portfolio-by-portfolio basis. These additional amounts have ranged between 50% and 70% of amounts collected by FLC, less all FLC direct and indirect expenses. The Corporation recorded $31,631 in 1992, $887,203 in 1993 and $1,165,236 in 1994 as additional income under this agreement. (See Note 14) NOTE 4 - UNAMORTIZED COST OF LOAN PORTFOLIOS The unamortized cost of loan portfolios is comprised of the following components:
June 30, ...........December 31,......... 1995 ----------- 1993 1994 (Unaudited) ---- ---- ----------- Principal amount of loans outstanding at date of purchase $107,793,824 $278,499,835 $401,188,623 Discount 78,912,657 214,321,489 325,183,644 ----------- ----------- ----------- Original cost 28,881,167 64,178,346 76,004,979 Accumulated amortization (8,547,932) (24,848,698) (34,330,270) ----------- ----------- ----------- Unamortized cost $ 20,333,235 $ 39,329,648 $ 41,674,709 =========== =========== =========== Estimated future cash collections (unaudited) $ 31,695,000 $ 65,881,392 $ 68,218,000 =========== =========== =========== Principal and accrued interest on loans outstanding (unaudited) $ 85,344,000 $228,391,000 $243,117,000 =========== =========== ===========
NOTE 5 - ASSET PURCHASE In 1993, the Company entered into an agreement with Diversified Financial Planners, Inc. (DFP) to purchase selected assets and assume certain notes and liabilities of DFP. Additionally, promissory notes of the Company were issued to DFP. The following summarizes the assets purchased and liabilities assumed: Assets purchased Real estate $ 1,029,573 Loan portfolios 340,000 Notes receivable 82,600 Equipment 14,627 ------------------- Total assets purchased $ 1,466,800 =================== Liabilities Notes payable to DFS $ 916,000 Mortgage note 285,760 Land contracts 161,112 Other liabilities 6,701 ------------------- Total liabilities assumed $ 1,369,573 ===================
In addition, the Company paid DFP $80,247 in cash and its payable to DFP of $16,980 was canceled. 12 NOTE 6 - OTHER RECEIVABLES Other receivables consisted of the following: December 31, 1993 1994 ---- ---- Related parties - services and fees (see Note 11) $457,435 $423,900 First Lake Corp. (see Note 3) 929,604 263,535 Soil Remediation Services, Inc. (see Note 11) 200,000 -- MEPCO (see Note 11) 150,377 -- Weiss Machinery 149,937 149,937 Other 41,958 148,372 -------- -------- $1,929,311 $985,744 ========== ========
NOTE 7 - NOTES RECEIVABLE Notes receivable consisted of the following:
June 30, .........December 31,........... 1995 ----------- 1993 1994 (Unaudited) ---- ---- ----------- Lake Technology Products, Inc. Note receivable with interest at 2% over the prime rate, maturing December 31, 1998, principal and interest of $14,624 is payable monthly (see Note 11) $ 1,205,259 $ -- $ -- Note receivable with interest at 2% over the prime rate, maturing December 31, 1998, principal and interest of $1,941 is payable monthly (see Note 11) 160,000 -- -- Graves/Statewide Statewide 7.5% note receivable (face value $600,000), maturing January 20, 1998, principal and interest of $14,535 is payable monthly, collateralized by business assets 600,000 480,518 393,309 Graves/Statewide Graves notes under a $100,000 line of credit, interest at 2% over the prime rate, due May 1, 1995 -- 80,000 80,000 Graves note, interest at 2% over the prime rate 22,800 22,800 22,800 Demand note from Emergency Medical Vehicles Co. with interest at 2% over the prime rate -- 77,000 -- 6% demand notes from employee 48,000 35,416 27,627 5% demand note from Windsor Air, Inc. (see Note 11) 50,300 50,300 50,300 5% demand note from Diversified Insurance Marketing, Inc. (see Note 11) 67,500 69,170 69,170 FGH Associates (see Note 11) -- 285,466 285,466 ----------- ----------- ----------- $ 2,153,859 $ 1,100,670 $ 928,672 =========== =========== ===========
Graves and Statewide are intrastate trucking companies with common ownership. The Statewide note was acquired in 1993 and the Graves line of credit and demand note were part of a financial restructuring of those companies. 13 NOTE 8 - COLLATERALIZED LOANS Collateralized loans are as follows:
June 30, ........December 31,...... 1995 ------------ 1993 1994 (Unaudited) ---- ---- ----------- Foothill loan and security agreement Base loan $ 6,549,627 $ -- $ -- Term note 221,355 -- -- Hilco note 4,750,000 -- -- American National Bank and Trust Company of Chicago 8,352,108 28,501,032 30,713,220 Transamerica loan Term loan -- 1,391,405 -- Performing loan -- 4,901,751 4,587,572 Star Financial Bank, interest payable at 8.5%, due January 25, 1996, principal and interest of $14,535 are payable monthly -- 479,228 411,515 ----------- ----------- ----------- $19,873,090 $35,273,416 $35,712,307 =========== =========== ===========
Effective February 28, 1994, the Corporation and Diversified Performing Assets, Inc. (see Note 11) entered into a Loan and Security Agreement with Transamerica Business Credit Corporation to refinance all existing debt due Foothill Capital, Hilco and a portion of the debt due American National Bank and Trust Company of Chicago. The agreement provides for a $25,000,000 master credit facility to facilitate the refinancing and/or purchase of new loan portfolios. Part of the master credit facility is a $6,000,000 term loan to refinance a portfolio of nonperforming loans. Interest under the master credit facility is prime plus 2%. Principal reductions and interest are serviced through cash receipts from the respective loan portfolios. The term loan is due August 31, 1995 with interest payable at prime plus 3% and payable in monthly installments of $333,333 beginning April 1, 1994. The agreement provides for accelerated payments under certain circumstances and contains various financial covenants relating to tangible net worth, minimum acceptable debt to net worth and interest coverage ratios. The early retirement of the Hilco note resulted in a gain of $333,965. The Corporation has a $40,000,000 loan and security agreement with American National Bank and Trust Company of Chicago. All borrowings are on demand notes due on or before September 30, 1995, and collateralized by all of the acquired loan portfolios and the underlying collateral. Interest is payable at 2% over the prime rate. The loan is reduced by applying 87.5% of all payments received from the acquired portfolios to principal and interest. Additionally, the Corporation has provided the Bank with irrevocable letters of credit totaling $2,000,000. 14 NOTE 9 - OTHER BORROWINGS Other borrowings consisted of the following:
December 31, 1993 1994 ---- ---- Mortgage note with interest payable at variable rates, principal is payable in accordance with an adjustable amortization schedule and due on April 1, 2013, collateralized by certain real estate $285,760 $285,760 8% land contracts, payable in thirty-four monthly principal and interest payments of $6,268, collateralized by certain real estate 47,006 47,006 -------- -------- $332,766 $332,766 ======== ========
The borrowings were paid in 1995. NOTE 10 - NOTES PAYABLE - SHAREHOLDER AND RELATED PARTIES Notes payable to Randall R. Geist (60% shareholder) and related parties consisted of the following:
June 30, December 31, 1995 ------------ 1993 1994 (Unaudited) ---- ---- ----------- Geist Notes Installment note with interest payable at the prime rate, adjusted annually on January 1, principal payments of $57,600 and interest are due semi-annually $ 576,000 $ 460,800 $ 237,607 Installment note payable to Geist, interest payable at the prime rate, adjusted annually on January 1, principal payments of $34,000 and interest are due semi-annually 340,000 272,000 272,000 5% demand note payable to Geist 160,000 127,000 127,000 12% demand note payable to GHF Funding Group (See Note 11) 1,172,800 180,000 138,253 10% demand notes payable to Diversified Financial Southeast, Inc. -- -- 205,000 ----------- ----------- ----------- $ 2,248,800 $ 1,039,800 $ 979,860 =========== =========== ===========
Minimum annual principal payments as of June 30, 1995 are as follows:
1996 $ 653,453 1997 183,200 1998 75,207 1999 68,000 ----------------- $ 979,860 =================
15 NOTE 11 - RELATED PARTY TRANSACTIONS The Corporation is 60% owned by Randall R. Geist, and 40% by J. Michael Hester. Mr. Geist and Mr. Hester are involved in numerous other businesses, some of which also have transactions with the Corporation. These entities are as follows: Diversified Performing Assets, Inc. (60% owned by Geist and 40% owned by Hester) Diversified Financial Systems L.P. (See Note 12) Diversified Financial Planners, Inc. (100% owned by Geist) Business Revenue Data Systems, Inc. (84% owned by Geist) Windsor Air, Inc. (50% owned by Geist) Diversified Financial Recovery, Inc. (100% owned by Geist) Diversified Financial Partners III L.P. (See Note 12) Diversified Financial Partners I (100% owned by Geist) Lake Technology Products, Inc. (66 2/3% owned by Geist and 33 1/3% by Hester) GHF Funding Group (33 1/3% owned by Geist and 33 1/3% owned by Hester) Diversified Financial Southeast, Inc. (60% owned by Geist and 40% owned by Hester) Metro Diversified Limited Partnership (49.5% owned by Diversified Financial Southeast, Inc.) Diversified Coolidge Equities Limited Partnership (49.5% owned by Diversified Financial Southeast, Inc.) Metro Diversified, Inc. (50% owned by Diversified Financial Southeast, Inc.) Diversified Insurance Marketing, Inc. (100% owned by Geist) Business Revenue Systems, Inc. (100% owned by Hester) Quantum, Inc. (86 2/3% owned by Geist) Compositives, Inc. (100% owned by Geist) Compositives O.M., Inc. (100% owned by Geist) FGH Associates (33 1/3% owned by Geist) Petroleum Protective Systems, Inc. (100% owned by Geist) Soil Remediation Services, Inc. (50% owned by Geist) 16 Receivables from and payables to related parties were comprised of the following:
---------------------December 31,-------------------- ---------June 30,--------- --------1 9 9 3--------- --------1 9 9 4--------- ---------1 9 9 5---------- ------- ------- ------- Receivables Payables Receivables Payables Receivables Payables ----------- -------- ----------- -------- ----------- -------- --------(Unaudited)------- -------------------------- Diversified Performing Assets, Inc. $ -- $ -- $ -- $ -- $ 114,304 $ -- Diversified Financial Systems, L.P. -- -- -- -- 27,391 -- Business Revenue Data Systems, Inc. -- -- -- -- 36,760 -- Windsor Air, Inc. -- -- -- -- 8,500 -- Lake Technology Products, Inc. -- -- -- -- 39,757 -- Quantum, Inc. -- -- -- -- 30,081 -- FGH Associates -- -- 270,668 -- 338,332 -- Diversified Financial Southeast, Inc. 1,000 -- 1,000 -- 1,000 -- Randall R. Geist 373,584 -- 199,400 398,892 215,333 688,217 J. Michael Hester 167,000 -- 114,400 -- 143,556 -- Notes receivable - Randall R Geist -- -- 1,267,831 -- 1,267,831 -- Notes receivable - J. Michael Hester -- -- 682,678 -- 682,678 -- Metro Diversified Limited Partnership 1,000 -- 1,000 -- 1,000 -- Compositives, Inc. -- -- 613,119 -- 964,426 -- Compositives O.M., Inc. -- -- 540,933 -- 685,791 -- Petroleum Protective Systems, Inc. (previously classified as MEPCO) -- -- 400,398 -- 647,531 -- Soil Remediation Services, Inc. -- -- 210,000 -- 223,320 -- ---------- ---------- ---------- ---------- ---------- ---------- $ 542,584 $ -- $4,301,427 $ 398,892 $5,427,591 $ 688,217 ========== ========== ========== ========== ========== ==========
The Corporation paid $48,000, $48,000 and $87,000 in rental fees to Business Revenue Data Systems, Inc. for office space during 1992, 1993 and 1994, respectively. The Corporation paid Windsor Air, Inc. $2,000 a month plus expenses for aircraft time in 1992, 1993 and 1994, respectively. During 1994, the Corporation sold performing loans for cash in the amount of $1,918,000 to Diversified Performing Assets, Inc. (DPAI), a company formed by the shareholders of the Corporation. Bank loans were reduced by $1,428,000. The remaining proceeds were used for general corporate purposes. During the six months ended June 30, 1995, the Corporation sold performing loans to DPAI for cash in the amount of $5,116,854. Bank loans were reduced by $3,242,565. The remaining proceeds were used for general corporate purposes. As part of their agreement with DPAI, the Corporation is required to replace any of the loans sold to DPAI that subsequently become nonperforming. Nonperforming loans are defined as loans that have not made a contractual payment within 61 days. 17 As of January 1, 1994, notes receivable from Lake Technology Products, Inc. were rewritten as notes receivable from Randall R. Geist and J. Michael Hester as part of a recapitalization of Lake Technology Products, Inc. The Corporation's servicing fees are primarily received from related entities. The Corporation recognized the following collection fees from related parties:
---------------December 31,------------------ -----------June 30,--------- ---1992--- ---1993--- ---1994--- ---1994--- ---1995--- ---------- ---------- ---------- ---------- ---------- --------(Unaudited)------- -------------------------- Diversified Financial Systems L.P. $ 2,607,958 $ 1,968,317 $ 1,534,071 $ 1,138,392 $ 231,111 Diversified Financial Partners III L.P. 2,303,858 1,482,126 64,072 64,072 -- Diversified Financial Southeast, Inc. -- 240,216 1,253,422 364,604 934,780 Metro Diversified Limited Partnership -- 165,037 249,859 205,775 128,289 Diversified Coolidge Limited Partnership -- 69,982 693,111 338,150 284,534 Diversified Performing Assets, Inc. -- -- 64,652 24,495 50,074 Diversified Financial Planners, Inc. 78,788 7,257 -- -- -- Diversified Financial Partners I 42,299 8,032 -- -- -- Diversified Financial Recovery, Inc. 623 6,737 -- -- -- ------------ ------------ ------------ ------------ ------------ 5,033,526 3,947,704 3,859,187 2,135,488 1,628,788 First Lake Corp. (See Note 3) 1,778,513 1,746,177 1,990,207 1,053,194 796,675 ------------ ------------ ------------ ------------ ------------ $ 6,812,039 $ 5,693,881 $ 5,849,394 $ 3,188,682 $ 2,425,463 ============ ============ ============ ============ ============
In 1994, the Company assumed the data processing operation for all of its related entities. Data processing revenues are primarily from those related companies, including Business Revenue Data Systems, Inc., Medical Payment Center, and Business Revenue Systems, Inc. 18 NOTE 12 - INVESTMENT IN PARTNERSHIPS The Corporation is the 75% general partner in Diversified Financial Systems L.P. (Partnership) (see Note 11). The Partnership acquires loan portfolios from the FDIC, RTC and other sources. The Corporation receives a specified servicing fee for its collection work. The Corporation's share of the Partnership's income is reflected in the statements of income. Condensed balance sheets of the Partnership, are presented below:
June 30, --------December 31,--------- 1995 DIVERSIFIED FINANCIAL SYSTEMS L.P. 1993 1994 (Unaudited) ---------------------------------- ---- ---- ----------- ASSETS Cash $ 330,872 $ 1,540 $ 133,046 Unamortized cost of loan portfolios 11,348,333 3,126,299 2,111,216 Other assets 256,226 47,469 33,404 ----------- ----------- ----------- Total assets $11,935,431 $ 3,175,308 $ 2,277,666 =========== =========== =========== LIABILITIES AND PARTNERS' CAPITAL Collateralized bank loans $ 7,422,206 $ 608,825 $ -- Due to Diversified Financial Systems, Inc. 23,976 27,117 27,391 Accrued interest and other liabilities 38,000 -- -- Partners' capital 4,451,249 2,539,366 2,250,275 ----------- ----------- ----------- Total liabilities and partners' capital $11,935,431 $ 3,175,308 $ 2,277,666 =========== =========== ===========
The Corporation was a 75% general partner in Diversified Financial Partners III L.P. (DFP III). On January 25, 1994, the Corporation and its limited partner in DFP III entered into a termination agreement. As part of the agreement, the Corporation purchased the limited partner's interest for $1,270,000 in cash and repaid all outstanding loans. This transaction effectively terminated the Partnership. The Corporation, as the 75% general partner, received all of the assets of DFP III in liquidation of the partnership, including the NCNB4 and NCNB6 loan portfolios which were subsequently distributed to John McArdle (see Note 13). The carrying value of loan portfolios received by the Corporation in liquidation approximated $6,300,000. NOTE 13 - STOCK REPURCHASE AND CONSULTING AGREEMENT On November 25, 1992, the Corporation and John L. McArdle (a former 25% shareholder) entered into a stock repurchase and consulting agreement effective January 1, 1993. The consulting agreement obligated McArdle through December 31, 1993, to provide advice and counsel from time to time, as requested, on the valuation of prospective loan portfolios and strategies and methods for collecting and servicing existing loan portfolios owned by the Corporation. In addition, McArdle was to manage and service the NCNB4 and NCNB6 loan portfolios owned by Diversified Financial Partners III LP and serviced by the Corporation. McArdle's 1993 compensation for consulting services consisted of various operating expense reimbursements approximating $254,000 and consulting fees of $860,000. The stock purchase agreement provided for the Corporation to acquire all of McArdle's stock in 1993 for cash in the amount of $380,000. In addition, on January 26, 1994, the Corporation sold to McArdle its interest in the NCNB4 and NCNB6 loan portfolios for $385,000, which were acquired as a result of terminating Diversified Financial Partners III LP (see Note 12). The fair value of those two loan portfolios was approximately 19 $2,400,000, as of the date of sale, and this additional consideration was accounted for as treasury stock cost in 1994. The difference between the fair value of the loans sold and their carrying cost, plus the cash received for the loan sale and forgiveness of previous debt owed McArdle resulted in a gain of $436,521. NOTE 14 - SUBSEQUENT EVENTS On August 9, 1995, the Shareholders entered into a stock purchase agreement with DFC Asset Corp. (DFC). The Shareholders agreed to sell all of their shares to DFC for $6,360,000 in cash, promissory notes totaling $3,850,000, and certain contingent consideration based on the excess cash flow of the various pools. On September 15, 1995, the Corporation agreed to purchase the loan portfolios serviced for First Lake Corp. for $565,000 in cash and the assumption of debt in an amount approximating $10,000,000. Additionally, a fee was paid in the amount of $1,100,000 to secure the consent of First Lake Corp. to the stock sale and the assignment of servicing rights. Both entities simultaneously cancelled the portion of the loan purchase, servicing and consulting agreement relating to additional fees (see Note 2). If the assumed debt is not completely liquidated by April 30, 1996, FLC will retain its ownership rights in the loan portfolios and the related debt. 20 Item 7(a)(ii) DIVERSIFIED PERFORMING ASSETS, INC. Fort Wayne, Indiana FINANCIAL STATEMENTS December 31, 1994 and June 30, 1994 and 1995 21 DIVERSIFIED PERFORMING ASSETS, INC. Fort Wayne, Indiana FINANCIAL STATEMENTS December 31, 1994 and June 30, 1994 and 1995 CONTENTS REPORT OF INDEPENDENT AUDITORS..............................................23 FINANCIAL STATEMENTS BALANCE SHEETS...............................................24 STATEMENTS OF INCOME.........................................25 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY................26 STATEMENTS OF CASH FLOWS.....................................27 NOTES TO FINANCIAL STATEMENTS................................28 22 REPORT OF INDEPENDENT AUDITORS To the Stockholders Diversified Performing Assets, Inc. Fort Wayne, Indiana We have audited the accompanying balance sheet of Diversified Performing Assets, Inc. as of December 31, 1994, and the related statements of income, changes in shareholders' equity and cash flows for the period February 28, 1994 (date of inception) through December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diversified Performing Assets, Inc. at December 31, 1994, and the results of its operations and its cash flows for the period February 28, 1994 (date of inception) through December 31, 1994 in conformity with generally accepted accounting principles. Crowe, Chizek and Company Oak Brook, Illinois March 10, 1995 23
DIVERSIFIED PERFORMING ASSETS, INC. BALANCE SHEETS December 31, June 30, 1994 1995 ---- ---- (Unaudited) ASSETS Cash $ 51,495 $ 229,642 Loans 14,260,780 19,374,988 Unearned discount (4,546,038) (6,187,428) Accounts receivable 178,641 406,049 Due from shareholder 316,000 -- Accrued interest receivable 447,565 499,154 ------------ ------------ $ 10,708,443 $ 14,322,405 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Revolving note payable (Note 3) $ 9,229,528 $ 12,788,221 Accounts payable 10,426 168,094 Accrued interest 84,798 105,804 ------------ ------------ 9,324,752 13,062,119 Shareholders' equity Common stock - without par value; authorized 10,000 shares, issued, 1,000 shares 1,000 1,000 Retained earnings 1,382,691 1,259,286 ------------ ------------ 1,383,691 1,260,286 ------------ ------------ $ 10,708,443 $ 14,322,405 ============ ============ See accompanying notes to financial statements
24
DIVERSIFIED PERFORMING ASSETS, INC. STATEMENTS OF INCOME Ten months Four months Six months ended ended ended December 31, June 30, June 30, 1994 1994 1995 ---- ---- ---- .....(Unaudited)..... --------------------- INCOME Interest and discount on loans $2,086,439 $ 851,860 $1,494,101 EXPENSES Interest 619,442 196,753 524,444 Servicing fees 64,652 24,513 50,074 Loan losses 19,548 37,414 23,094 Legal and professional -- -- 31,724 Finance fees -- -- 92,124 Other 106 50 46 ---------- ---------- ---------- 703,748 258,730 721,506 ---------- ---------- ---------- NET INCOME $1,382,691 $ 593,130 $ 772,595 ========== ========== ========== See accompanying notes to financial statements
25
DIVERSIFIED PERFORMING ASSETS, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Total Common Retained Shareholders' Stock Earnings Equity ----- -------- ------ Balance at February 28, 1994 (date of inception) $ -- $ -- $ -- Stock issued 1,000 -- 1,000 Net income -- 1,382,691 1,382,691 ---------- ---------- ---------- Balance at December 31, 1994 1,000 1,382,691 1,383,691 Net income (unaudited) -- 772,595 772,595 Dividends ($896 per share) -- (896,000) (896,000) ---------- ---------- ---------- Balance at June 30, 1995 (unaudited) $ 1,000 $1,259,286 $1,260,286 ========== ========== ========== See accompanying notes to financial statements
26
DIVERSIFIED PERFORMING ASSETS, INC. STATEMENTS OF CASH FLOWS Ten months Four months Six months ended ended ended December 31, June 30, June 30, 1994 1994 1995 ---- ---- ---- ...........(Unaudited)......... ----------- CASH FLOWS FROM OPERATING ACTIVITIES Interest received $ 1,169,471 $ 460,022 $ 910,326 Interest paid (534,644) (146,463) (503,438) Cash paid for collection and other expenses (73,880) (56,559) (39,394) ----------- ----------- ---------- Net cash provided by operating activities 560,947 257,000 367,494 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of loans and accrued interest (11,770,081) (7,399,834) (5,136,217) Collections on loans 2,346,102 801,416 1,968,177 Advances to shareholder (316,000) (171,000) -- ----------- ----------- ---------- Net cash used in investing activities (9,739,979) (6,769,418) (3,168,040) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on revolving notes 12,403,874 7,399,834 5,116,854 Principal payments on revolving notes (3,174,347) (871,937) (1,558,161) Dividends paid -- -- (580,000) Common stock issued 1,000 1,000 -- ----------- ----------- ---------- Net cash provided by financing activities 9,230,527 6,528,897 2,978,693 ----------- ----------- ---------- Net increase in cash 51,495 16,479 178,147 Cash at beginning of period -- -- 51,495 ----------- ----------- ---------- CASH AT END OF PERIOD $ 51,495 $ 16,479 $ 229,642 =========== =========== ========== Reconciliation of net income to net cash provided by operating activities Net income $ 1,382,691 $ 593,130 $ 772,595 Unearned discount (942,580) (388,387) (641,016) Accrued interest receivable 84,798 50,290 57,241 Accounts payable 10,426 5,418 157,668 Accrued interest payable 25,612 (3,451) 21,006 ----------- ----------- ---------- Net cash provided by operating activities $ 560,947 $ 257,000 $ 367,494 =========== =========== ========== See accompanying notes to financial statements
27 DIVERSIFIED PERFORMING ASSETS, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED) NOTE 1 - NATURE OF BUSINESS Diversified Performing Assets, Inc. was incorporated on November 29, 1993 and began its operating activities on February 28, 1994. The Corporation acquires, through related party intermediaries, performing loans that were originally held by the FDIC or RTC as the result of foreclosure proceedings on Banks and Savings and Loan Associations. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation of Unaudited Interim Financial Information: Financial - ---------------------------------------------------------------- information for the four months ended June 30, 1994 and the six months ended June 30, 1995 has been derived from the Corporation's unaudited financial statements and, in the opinion of management, reflect all adjustments of a normal occurring nature necessary for a fair presentation of financial position and results of operations. Loans: Loans are stated at the principal amount outstanding, net of unearned - ----- discount. Interest income and unearned discount are reported on the accrual basis over the term of the loan based on the amount of principal outstanding. The Corporation does not provide for loan losses because all loans, with principal payments 60 days past due, are replaced by the seller. Income Taxes: The Corporation's shareholders elected S corporation status under - ------------ Section 1362 of the Internal Revenue Code and a similar section of state income tax law. These statutes provide that, in lieu of corporate income taxes, the shareholders are taxed on their proportionate shares of the Corporation's taxable income or loss. NOTE 3 - REVOLVING NOTE PAYABLE The Corporation has entered into a $25,000,000 revolving loan and security agreement with Transamerica Business Credit Corporation. Borrowings under the agreement are collateralized by all of the Corporation's assets, including the collateral securing the loans. Interest is payable monthly, generally at prime plus 2%. The agreement contains various financial covenants relating to limitations on the payment of dividends, tangible net worth, and minimum acceptable debt to net worth and interest coverage ratios. As part of the agreement, the Company's bank accounts are restricted. NOTE 4 - RELATED PARTY TRANSACTIONS The loans receivable were acquired from affiliated companies owned by Randall R. Geist and J. Michael Hester. A servicing fee of 2% is paid to Diversified Financial Systems, Inc., owned by Geist and Hester, for portfolio collection fees and administrative expenses. 28 NOTE 5 - STOCK PURCHASE AGREEMENT On August 9, 1995, Randall R. Geist and J. Michael Hester agreed to sell all of the outstanding capital stock of the Corporation to DFC Asset Corp. for $640,000 in cash and certain contingent consideration based on excess cash flow. 29 Item 7(a)(iii) DIVERSIFIED FINANCIAL SYSTEMS, L.P. Fort Wayne, Indiana FINANCIAL STATEMENTS December 31, 1992, 1993 and 1994 and June 30, 1994 and 1995 30 DIVERSIFIED FINANCIAL SYSTEMS, L.P. Fort Wayne, Indiana FINANCIAL STATEMENTS December 31, 1992, 1993 and 1994 and June 30, 1994 and 1995 CONTENTS REPORT OF INDEPENDENT AUDITORS................................................32 FINANCIAL STATEMENTS BALANCE SHEETS......................................................33 STATEMENTS OF INCOME................................................34 STATEMENTS OF PARTNERS' CAPITAL.....................................35 STATEMENTS OF CASH FLOWS............................................36 NOTES TO FINANCIAL STATEMENTS.......................................37 31 REPORT OF INDEPENDENT AUDITORS To the Partners Diversified Financial Systems, L.P. Fort Wayne, Indiana We have audited the accompanying balance sheets of Diversified Financial Systems, L.P., as of December 31, 1994 and 1993, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership'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 financial position of Diversified Financial Systems, L.P. at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Crowe, Chizek and Company Oak Brook, Illinois March 10, 1995 32
DIVERSIFIED FINANCIAL SYSTEMS, L.P. BALANCE SHEETS June 30, ---December 31,--- 1995 1993 1994 (Unaudited) ---- ---- ----------- ASSETS Cash $ 330,872 $ 1,540 $ 133,046 Unamortized cost of acquired loan portfolios (Note 3) 11,348,333 3,126,299 2,111,216 Other assets 256,226 47,469 33,404 ----------- ---------- ---------- $11,935,431 $3,175,308 $2,277,666 =========== ========== ========== LIABILITIES AND PARTNERS' CAPITAL Liabilities Collateralized loans (Note 4) $ 7,422,206 $ 608,825 $ -- Due to Diversified Financial Systems, Inc. (Note 5) 23,976 27,117 27,391 Accrued interest and other liabilities 38,000 -- -- ----------- ---------- ---------- 7,484,182 635,942 27,391 Partners' capital 4,451,249 2,539,366 2,250,275 ----------- ---------- ---------- $11,935,431 $3,175,308 $2,277,666 =========== ========== ========== See accompanying notes to financial statements
33
DIVERSIFIED FINANCIAL SYSTEMS, L.P. STATEMENTS OF INCOME Six Months Ended Years Ended ------------June 30,----------- ---------------December 31,----------------- 1994 1995 1992 1993 1994 --------(Unaudited)--------- ---- ---- ---- --------- INCOME Receipts from loan portfolios $ 20,845,130 $ 15,746,551 $ 12,272,649 $ 9,107,133 $ 1,775,666 Amortization of loan portfolio cost (14,696,758) (10,795,753) (8,222,034) (5,398,628) (1,015,083) ------------ ------------ ------------ ------------ ------------ 6,148,372 4,950,798 4,050,615 3,708,505 760,583 Interest -- 1,263 -- -- -- ------------ ------------ ------------ ------------ ------------ 6,148,372 4,952,061 4,050,615 3,708,505 760,583 OPERATING EXPENSES Portfolio servicing fees (Note 5) 2,607,458 1,968,317 1,534,081 1,138,392 231,111 Interest 817,025 774,426 250,548 180,903 11,529 Other 74,655 134,964 124,989 63,052 14,064 ------------ ------------ ------------ ------------ ------------ 3,499,138 2,877,707 1,909,618 1,382,347 256,704 ------------ ------------ ------------ ------------ ------------ NET INCOME $ 2,649,234 $ 2,074,354 $ 2,140,997 $ 2,326,158 $ 503,879 ============ ============ ============ ============ ============ See accompanying notes to financial statements
34
DIVERSIFIED FINANCIAL SYSTEMS, L.P. STATEMENTS OF PARTNERS' CAPITAL Total Partners' General Limited Capital Partner Partners ------- ------- -------- Balance at January 1, 1992 $ 7,044,313 $ 5,283,235 $ 1,761,078 Net income 2,649,234 1,755,925 893,309 Distributions to partners (2,746,000) (1,828,500) (917,500) ----------- ----------- ----------- Balance at December 31, 1992 6,947,547 5,210,660 1,736,887 Net income 2,074,354 1,353,641 720,713 Distributions to partners (4,570,652) (3,784,631) (786,021) ----------- ----------- ----------- Balance at December 31, 1993 4,451,249 2,779,670 1,671,579 Net income 2,140,997 1,605,748 535,249 Distributions to partners (4,052,880) (3,052,880) (1,000,000) ----------- ----------- ----------- Balance at December 31, 1994 2,539,366 1,332,538 1,206,828 Net income (unaudited) 503,879 377,909 125,970 Distributions to partners (792,970) (442,970) (350,000) ----------- ----------- ----------- Balance at June 30, 1995 (unaudited) $ 2,250,275 $ 1,267,477 $ 982,798 =========== =========== =========== See accompanying notes to financial statements
35
DIVERSIFIED FINANCIAL SYSTEMS, L.P. STATEMENTS OF CASH FLOWS Six Months Ended Years Ended ----------June 30,------------ ---------------December 31,-------------- 1994 1995 1992 1993 1994 --------(Unaudited)-------- ---- ---- ---- --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Receipts from acquired loan portfolios $ 20,845,130 $ 15,746,551 $ 12,272,649 $ 9,351,101 $ 1,789,733 Interest received -- 1,263 -- -- -- Interest paid (830,525) (774,426) (250,548) (180,903) (11,529) Payments for collection and other expenses (2,624,008) (2,137,591) (1,662,208) (1,256,363) (244,903) Cash (paid) received to protect interest in collateral -- (250,036) 250,036 -- -- Deposits -- -- (40,000) -- -- Purchase of loan portfolios (7,022,397) (10,469,807) -- -- -- ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities 10,368,200 2,115,954 10,569,929 7,913,835 1,533,301 CASH FLOWS FROM FINANCING ACTIVITIES Bank borrowings 7,022,397 11,180,261 -- -- -- Principal payments on borrowings (14,959,179) (10,007,560) (6,813,381) (5,167,164) (608,825) Distributions to partners (2,746,000) (4,570,652) (4,085,880) (2,700,278) (792,970) ------------ ------------ ------------ ------------ ------------ Net cash used in financing activities (10,682,782) (3,397,951) (10,899,261) (7,867,442) (1,401,795) ------------ ------------ ------------ ------------ ------------ Increase (decrease) in cash (314,582) (1,281,997) (329,332) 46,393 131,506 Cash at beginning of period 1,927,451 1,612,869 330,872 330,872 1,540 ------------ ------------ ------------ ------------ ------------ CASH AT END OF PERIOD $ 1,612,869 $ 330,872 $ 1,540 $ 377,265 $ 133,046 ============ ============ ============ ============ ============ Reconciliation of net income to net cash provided by operating activities Net income 2,649,234 $ 2,074,354 $ 2,140,997 $ 2,326,158 $ 503,879 Adjustments to reconcile net income to net cash provided by operating activities Amortization of portfolio cost 14,696,758 10,795,753 8,222,034 5,398,628 1,015,083 Purchase of loan portfolios (7,022,397) (10,469,807) -- -- -- Decrease (increase) in other assets (2,714) (253,512) 208,757 243,968 14,065 Increase (decrease) in accrued interest and other liabilities 25,028 (528) (5,000) (33,000) -- Increase (decrease) in due to related company 22,291 (30,306) 3,141 (21,919) 274 ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities $ 10,368,200 $ 2,115,954 $ 10,569,929 $ 7,913,835 $ 1,533,301 ============ ============ ============ ============ ============ See accompanying notes to financial statements
36 DIVERSIFIED FINANCIAL SYSTEMS, L.P. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED) NOTE 1 - NATURE OF BUSINESS Diversified Financial Systems, L.P. (the Partnership) is an Indiana limited partnership engaged in the business of acquiring loan portfolios from the Federal Deposit Insurance Corporation (FDIC), Resolution Trust Corp. (RTC) and other sources, at substantial discounts from principal amounts outstanding, and liquidating the portfolios through collection efforts or through bulk sales to financial institutions. The portfolios owned at December 31, 1994, consist of loan concentrations in Louisiana, Oklahoma, Texas, Massachusetts and Illinois. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation of Unaudited Interim Financial Information: Financial - ---------------------------------------------------------------- information for the six months ended June 30, 1994 and 1995 has been derived from the Partnership's unaudited financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation of financial position, results of operation and cash flows. Income Recognition: For financial statement purposes income is recognized as - ------------------ collections are received. Portfolio cost is amortized over periods ranging from three to five years, based upon the ratio of the portfolio's original cost over the undiscounted initial estimated total cash collections times the amount of cash received during the period. Amortization of portfolio cost is accelerated if estimated cash collections are subsequently revised downward. Income Taxes: The Partnership does not provide for income taxes in the financial - ------------ statements. Instead, the Partnership's taxable income or loss will be included in the individual income tax returns of the partners. For income tax purposes, the Partnership uses the cost recovery method of reporting taxable income. NOTE 3 - UNAMORTIZED COST OF ACQUIRED LOAN PORTFOLIOS The unamortized cost of acquired loan portfolios as of December 31, 1993 and 1994, and June 30, 1995, is as follows:
June 30, ------December 31,------ 1995 ------------------------ ---- 1993 1994 (Unaudited) ---- ---- ----------- Principal amount of loans outstanding, at date of purchase $252,449,725 $252,449,725 $252,449,725 Discount (198,963,203) (198,963,203) (198,963,203) ----------- ----------- ----------- Original cost 53,486,522 53,486,522 53,486,522 Accumulated amortization (42,138,189) (50,360,223) (51,375,306) ----------- ----------- ----------- Unamortized cost $ 11,348,333 $ 3,126,299 $ 2,111,216 =========== =========== =========== Principal balance and accrued interest on loans outstanding (unaudited) $135,146,000 $120,098,000 $117,813,000 =========== =========== =========== Estimated future cash collections (unaudited) $ 27,298,000 $ 8,697,000 $ 6,951,000 =========== =========== ===========
37 NOTE 4 - COLLATERALIZED BANK LOANS On June 13, 1994, the Partnership entered into a $2,399,700 term loan and security agreement with Transamerica Lender Finance (Transamerica). Proceeds of the loan were used to refinance the remaining debt associated with loan portfolios originally purchased with borrowings under a $20,000,000 line of credit with American National Bank and Trust Company of Chicago (American National Bank). All borrowings under the Transamerica agreement are collateralized by the Partnership's assets, including but not limited to the underlying collateral. The loan was due on March 1, 1995. Interest is payable monthly at 3% over the prime rate. Principal reductions and interest are serviced through cash receipts from the Partnership's loan portfolio. The agreement provides for minimum principal payments and interest equal to the greater of: 1) 87.5% of the collections on loan portfolios with no remaining debt; or 2) an amount equal to the outstanding principal as of the monthly payment date divided by the remaining months to maturity. Distributions to partners are limited to the lesser of: 1) Monthly collections on loan portfolios with no remaining debt; or 2) The difference between the total collections for the month less the minimum required principal payment. All loans associated with a loan portfolio must be paid off within 21 months of the original purchase date. NOTE 5 - RELATED PARTY TRANSACTIONS Diversified Financial Systems, Inc. (DFSI), which is 60% owned by Randall R. Geist, is the 75% general partner. The remaining 25% is divided among 8 limited partners. DFSI manages and administers the acquired loan portfolios and receives a percentage of loan collections as a fee for these services. During 1994, the Partnership sold performing loans for cash in the amount of $8,523,000 to Diversified Performing Assets, Inc. (DPAI), a corporation formed by the shareholders of DFSI (Note 5). Bank loans were reduced by $3,894,000. The remaining proceeds, net of $1,065,000 in servicing fees, was used for general partnership purposes. As part of their agreement with DPAI, the Partnership is required to replace any of the loans sold to DPAI that subsequently become nonperforming. Nonperforming loans are defined as loans that have not made a payment within 61 days. NOTE 6 - PARTNERS' CAPITAL Prior to October 15, 1993, the general partner and each of the limited partners either provided American National Bank with an irrevocable letter of credit or pledged a certificate of deposit to secure partnership borrowings. The total of all such letters of credit and certificates of deposit was $3,300,000 at December 31, 1992. As of October 15, 1993, the letter of credit or pledged certificate of deposit requirement was released by American National Bank. Prior to October 15, 1993, income, losses and net cash flow were allocated 75% to the general partner and 25% to the limited partners, after first allocating to each partner an amount equal to 12% per annum on each partner's letter of credit or pledged certificate of deposit through the date of any cash flow distribution. Subsequent to October 15, 1993, income, losses and cash flow are allocated 75% to the general partner and 25% to the limited partners without an interest allocation. 38 Item 7(b)(i) FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited Pro Forma Condensed Consolidated Financial Statements of FirstCity Financial Corporation present the pro forma statements of FirstCity Financial Corporation and Subsidiaries from the July 3, 1995 Form 8-K/A together with pro forma adjustments to reflect the acquisition of Diversified Financial Systems, Inc. and Diversified Performing Assets, Inc. described elsewhere herein. These pro forma financial statements should be read in conjunction with the consolidated financial statements of J-Hawk Corporation included in the July 3, 1995 Form 8-K/A and the consolidated financial statements of FirstCity Financial Corporation in the September 30, 1995 Form 10-Q. On September 21, 1995, FirstCity acquired the capital stock of Diversified Financial Systems, Inc. and Diversified Performing Assets, Inc. (collectively, "Diversified") for $12.9 million in cash and notes. A portion ($2.7 million) of the notes is contingent upon the future performance of the Diversified portfolios. Diversified also specializes in the acquisition and disposition of distressed loans and loan-related assets. The acquisition, accounted for as a purchase, increased FirstCity's assets by approximately $79 million, including $4.7 million attributable to servicing rights held by Diversified and $4.3 million of goodwill. Diversified's assets secure $62 million of non-recourse debt reflected in the accompanying consolidated pro forma balance sheet. The accompanying Pro Forma Condensed Consolidated Financial Statements of FirstCity reflect the estimated pro forma effects of the acquisition of Diversified. The consolidated pro forma balance sheet assumes the transactions were consummated on June 30, 1995, and the consolidated pro forma income statements assume consummation on January 1, 1994. Subsequent to the implementation of the Plan of Reorganization and Merger discussed in the July 3, 1995 Form 8-K/A, FirstCity will provide services to the FirstCity Liquidating Trust under the terms of an Investment Management Agreement. In that the Trust has no historical operations, no pro forma adjustment was made to reflect servicing fee income and related expenses attributed to the services to be provided by FirstCity to the Trust or interest income on the "A" Certificate and related interest expense on the senior subordinated debt. Consequently, these pro forma income statements are not necessarily indicative of future results to be achieved and should not be relied upon as an indicator of future performance of FirstCity. 39
FirstCity Financial Corporation and Subsidiaries Pro Forma Condensed Consolidated Balance Sheet June 30, 1995 (unaudited) Pro Forma Pro Forma FirstCity as adjustments to Presented in the reflect the July 3, 1995 acquisition of (Dollars in thousands, Form 8-K/A Diversified except per share data) (Note A) (Note B) Pro Forma - ------------------------------------------------------------------------------------------------------------------------------------ Assets ------ Cash and equivalents .................................................................... $ 24,027 $ (7,746) $ 16,281 Purchased loan pools, net ............................................................... -- 68,704 68,704 Equity investments in acquisition partnerships .......................................... 13,717 -- 13,717 Class "A" Certificate of FirstCity Liquidating Trust .................................... 158,369 -- 158,369 Other assets ............................................................................ 5,669 9,965 15,634 -------- -------- -------- Total Assets .................................................................. $201,782 $ 70,923 $272,705 ======== ======== ======== Liabilities and Shareholders' Equity ------------------------------------ Liabilities: Notes payable to banks ............................................................. $ -- $ 61,660 $ 61,660 Senior subordinated notes payable .................................................. 106,690 -- 106,690 Notes payable to others ............................................................ -- 7,063 7,063 Other liabilities .................................................................. 3,413 2,200 5,613 -------- -------- -------- Total Liabilities .................................................................. 110,103 70,923 181,026 -------- -------- -------- Commitments and contingencies ........................................................... -- -- -- Special preferred stock (nominal stated value of $21.00 per share; 2,500,000 shares authorized; 2,460,911 issued and outstanding) ............................................................ 51,679 -- 51,679 Shareholders' equity: Optional preferred stock (par value $.01 per share; 100,000,000 shares authorized; no shares issued or outstanding) .................................................................. -- -- -- Common stock (par value $.01per share; 100,000,000 shares authorized; issued and outstanding: 4,921,422 shares) ............................................................. 49 -- 49 Paid in capital .................................................................... 22,916 -- 22,916 Retained earnings .................................................................. 17,035 -- 17,035 -------- -------- -------- Total Shareholders' Equity .................................................... 40,000 -- 40,000 -------- -------- -------- Total Liabilities and Shareholders' Equity .................................... $201,782 $ 70,923 $272,705 ======== ======== ======== See accompanying notes to pro forma condensed consolidated balance sheet.
40 FirstCity Financial Corporation and Subsidiaries Notes to Pro Forma Condensed Consolidated Balance Sheet June 30, 1995 (unaudited) A. The condensed balance sheet as presented in the July 3, 1995 Form 8-K/A reflects the merger of J-Hawk Corporation and First City Bancorporation of Texas, Inc. to form FirstCity Financial Corporation as if it occurred June 30, 1995. B. Assets acquired and liabilities assumed in the Diversified acquisition are reflected at estimated fair values. A reduction in cash reflects a portion of the purchase price paid. The cost of purchased loan pools is determined by discounting, at appropriate discount rates, the currently estimated cash flows projected to be realized from the collection, liquidation and disposition of these assets. Such assets consist principally of performing and non-performing loans, income producing real estate and interests in real estate, and miscellaneous other assets and receivables. Servicing rights from loan pools (included in other assets) are recorded at the net present value of estimated servicing fees, net of related costs, on certain loan pools. Notes payable to banks are secured by the purchased loan pools. Notes payable to others (former Diversified shareholders) include $2.7 million in contingent notes payable based on the future performance of Diversified's asset portfolios. Since the acquisition is accounted for as a purchase, the excess of the fair value of the consideration given over the fair value of the tangible net assets of Diversified acquired is recorded as goodwill (included in other assets). 41
FirstCity Financial Corporation and Subsidiaries Pro Forma Condensed Consolidated Statement of Income For the Six Months Ended June 30, 1995 (Unaudited) Pro Forma FirstCity as Presented in the Other Pro July 3, 1995 Diversified Forma Form 8-K/A Historical Adjustments (Amounts in thousands) (Note A) (Note B) (Note C) Pro Forma - ------------------------------------------------------------------------------------------------------------------------------------ Proceeds from disposition and payments received on purchased loan pools .................... $ -- $ 14,696 $ -- $ 14,696 Cost of purchased loan pools ............................. -- 9,482 -- 9,482 -------- -------- -------- -------- Net gain on purchased loan pools .................... -- 5,214 -- 5,214 Other income: Servicing fees ...................................... 4,508 2,425 (50) 6,883 Other ............................................... 598 1,800 -- 2,398 -------- -------- -------- -------- 5,106 9,439 (50) 14,495 -------- -------- -------- -------- Expenses: Interest on notes payable ........................... -- 2,652 -- 2,652 General and administrative .......................... 4,268 5,252 (613) 8,907 -------- -------- -------- -------- 4,268 7,904 (613) 11,559 -------- -------- -------- -------- Equity in earnings of acquisition partnerships ........................................ 1,359 378 -- 1,737 -------- -------- -------- -------- Earnings from operations before federal income taxes ........................... 2,197 1,913 563 4,673 Provision for federal income taxes ....................... 44 -- 49 93 -------- -------- -------- -------- Net earnings ................................... $ 2,153 $ 1,913 $ 514 $ 4,580 ======== ======== ======== ======== See accompanying notes to pro forma condensed consolidated statements of income.
42
FirstCity Financial Corporation and Subsidiaries Pro Forma Condensed Consolidated Statement of Income Year Ended December 31. 1994 (Unaudited) Pro Forma FirstCity as Presented in the Other Pro July 3, 1995 Diversified Forma Form 8-K/A Historical Adjustments (Amounts in thousands) (Note A) (Note B) (Note C) Pro Forma - ------------------------------------------------------------------------------------------------------------------------------------ Proceeds from disposition and payments received on purchased loan pools .................... $ -- $ 25,704 $ -- $ 25,704 Cost of purchased loan pools ............................. -- 16,301 -- 16,301 -------- -------- -------- -------- Net gain on purchased loan pools .................... -- 9,403 -- 9,403 Other income: Servicing fees ...................................... 8,854 5,849 (65) 14,638 Other ............................................... 761 3,651 -- 4,412 -------- -------- -------- -------- 9,615 18,903 (65) 28,453 -------- -------- -------- -------- Expenses: Interest on notes payable ........................... -- 3,143 -- 3,143 General and administrative .......................... 11,727 11,071 (896) 21,902 -------- -------- -------- -------- 11,727 14,214 (896) 25,045 -------- -------- -------- -------- Equity in earnings of acquisition partnerships.................................... 7,497 2,675 -- 10,172 -------- -------- -------- -------- Earnings from operations before federal income taxes ........................... 5,385 7,364 831 13,580 Provision for federal income taxes ....................... 108 -- 164 272 -------- -------- -------- -------- Net earnings ................................... $ 5,277 $ 7,364 $ 667 $ 13,308 ======== ======== ======== ======== See accompanying notes to pro forma condensed consolidated statements of income.
43 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Pro Forma Condensed Consolidated Income Statements Six Months Ended June 30, 1995 and Year Ended December 31, 1994 (unaudited) A. The consolidated income statements as presented in the July 3, 1995 Form 8-K/A reflect the operating results of J-Hawk Corporation adjusted for the effects of the merger with First City Bancorporation of Texas, Inc. as if the merger occurred January 1, 1994. Income taxes subsequent to the merger are provided at a 34% rate. Net operating loss carry forwards are available to FirstCity and are recognized as an offset to the provision. The net tax expense reflected in the pro forma income statements represents the effect of the alternative minimum tax of 2% of taxable income. B. Column B is the historical operating results of Diversified. C. Intercompany servicing fees and certain non-recurring administrative expenses of Diversified are eliminated in Column C. An adjustment was also made to reflect the federal income taxes on the adjusted pro forma net taxable income. 44 EXHIBIT INDEX Exhibit number Description -------------- ----------- 2.1 Stock Purchase Agreement dated as of August 9, 1995 by and among DFC Asset Corp., and Randall R. Geist and J. Michael Hester (incorporated herein by reference to Exhibit 2.1 of the Registrant's Form 8-K dated August 9, 1995). *2.2 First Amendment to Stock Purchase Agreement dated as of September 15, 1995 by and among DFC Asset Corp., and Randall R. Geist and J. Michael Hester. *99.1 Press Release dated September 21, 1995. - -------------- *Previously filed. 45 -----END PRIVACY-ENHANCED MESSAGE-----