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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
____________________
For the Fiscal Year Ended Commission File Number
December 31, 1993 1-11011
GFC FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0695381
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Dial Tower, Phoenix, Arizona 85077
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code - 602-207-6900
____________________
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
_____________________________ _______________________
Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 and Exchange
Act of 1934 during the preceding 12 months, (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filings requirements for the past 90 days.
Yes X No
_____ _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
_____
As of March 1, 1994, approximately 20,087,000 shares of Common Stock ($0.01
par value) were outstanding, and the aggregate market value of the Common
Stock (based on its closing price per share on such date) held by
nonaffiliates was approximately $586,402,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part Where
Document Incorporated
1. Proxy Statement relating to 1994 Annual Meeting of
Stockholders of GFC Financial Corporation (but
excluding information contained therein furnished
pursuant to items 402(k) and (l) of SEC Regulation S-K). III
2. Prospectuses and Prospectus Supplements dated February
17, 1994 filed pursuant to SEC Rule 424(b) for
$100,000,000 of Greyhound Financial Corporation's
Floating-Rate Notes and $250,000,000 of Medium-Term
Notes, respectively. I
3. GFC Financial Corporation Current Reports on Form 8-K,
dated January 18, and 21, 1994 and February 14, 1994,
as amended. I
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TABLE OF CONTENTS
Name of Item
Item # Page
Part I
Item 1 Business:
Introduction 1
General 1
Financial Services 1
Lines of Business 2
Investment in Financing Transactions 3
Cost and Utilization of Borrowed Funds 13
Credit Ratings 14
Interest and Other Core Income 15
Residual Realization Experience 15
Business Development and Competition 16
Credit Quality 16
Risk Management 16
Portfolio Management 17
Delinquencies and Workouts 17
Governmental Regulation 18
Mortgage Insurance Operations 18
Employees 18
Item 2 Properties 18
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security
Holders 19
Optional 1. Executive Officers of Registrant 19
2. Pending Acquisition of TriCon Capital
Corporation 20
3. TriCon Capital Corporation Audited
Financial Statements 21
Part II
Item 5 Market Price of and Dividends on the Registrant's
Common Equity & Related Stockholder Matters 41
Item 6 Selected Financial Data 42
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 43
Item 8 Financial Statements & Supplementary Data 43
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 44
Part III
Item 10 Directors & Executive Officers of the Registrant 44
Item 11 Executive Compensation 44
Item 12 Security Ownership of Certain Beneficial Owners
& Management 44
Item 13 Certain Relationships & Related Transactions 44
Part IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 44
PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to GFC Financial Corporation
("GFC Financial" or the "Company"), including Greyhound Financial
Corporation ("GFC") and subsidiaries.
On March 3, 1992, The Dial Corp's ("Dial") shareholders approved
the spin-off to its shareholders of GFC Financial, a newly-formed
Delaware corporation, which comprised Dial's former commercial
lending and mortgage insurance subsidiaries. In connection with the
spin-off, the holders of common stock of Dial received a distribution
of one share of common stock of GFC Financial for every two shares of
Dial common stock (the "Distribution").
Prior to the Distribution, Dial contributed its 100% ownership
interest in companies constituting the Greyhound European Financial
Group ("GEFG") and Greyhound BID Holding Corp. to Greyhound Financial
Corporation (collectively, "Financial Services") and contributed (i)
all of the common stock of GFC and (ii) its discontinued mortgage
insurance operations, Verex Corporation and subsidiaries ("Verex") to
GFC Financial. On July 16, 1993, the Company reported the sale of
Verex.
Certain contractual arrangements continue between Dial and GFC
Financial or its subsidiaries for a limited period of time following
the Distribution. GFC Financial and Dial entered into certain
agreements providing for (i) the orderly separation of GFC Financial
from Dial and the making of the Distribution; (ii) the provision by
Dial of certain interim services to GFC Financial; (iii) the
assignment of the "Greyhound" and "Image of the Running Dog"
trademarks for use in all of GFC Financial's business activities;
(iv) a sublease of certain office space currently used by GFC
Financial; and (v) the administration of tax returns and allocation
of certain tax liabilities and benefits.
GENERAL
GFC Financial is a financial services company primarily engaged
in providing collateralized financing to commercial and real estate
enterprises in selected markets. GFC Financial is a holding company
which operates through its direct and indirect subsidiaries and was
incorporated in Delaware in December 1991.
GFC Financial's lending activities to commercial and real estate
enterprises are conducted through GFC and its subsidiaries. GFC was
incorporated in 1965 in Delaware and is the successor to a California
corporation that commenced operations in 1954. GFC has conducted
business continuously since that time. Foreign financial services
are provided primarily in the United Kingdom, where GEFG has provided
such services since 1964. Domestic and foreign financial operations,
prior to the Distribution, had been conducted independently of each
other for many years. Following the Distribution, they have been
conducted as a consolidated enterprise; however, during the second
quarter of 1992, GFC Financial announced its intention to phase out
the London based financing operations of GEFG. This phase out is
expected to be substantially completed within a two to three year
period.
FINANCIAL SERVICES
Financial Services engages in the business of providing
collateralized financing of selected commercial and real estate
activities in the United States and intermediate-term lending on a
secured basis in foreign countries. Financial Services accomplishes
this through secured loans and leases.
Financial Services generates interest and other income through
charges assessed on outstanding loans, loan servicing, leasing and
other fees. Financial Services' primary expenses are the costs of
funding its loan business (including interest paid on debt),
provisions for possible credit losses, marketing expenses, salaries
and employee benefits, servicing and other operating expenses and
income taxes.
Financial Services' current emphasis is on secured lending to
businesses in specific industry niches, where the group's expertise
in evaluating the needs and creditworthiness of prospective customers
enables it to provide specialized financing services. Financial
Services' strategy has been to seek to maintain a high-quality
portfolio using clearly defined underwriting standards in an effort
to minimize the level of nonearning assets and write-offs.
Lines of Business
Financial Services' activities now include the following lines
of business:
- Corporate Finance. The Corporate Finance group provides
financing, generally in the range of $2 million to $25
million, focusing on middle market businesses nationally,
including distribution, wholesale, retail, manufacturing
and services industries. The group's lending is primarily
in the form of term loans secured by the assets of the
borrower, with significant emphasis on cash flow as the
source of repayment of the secured loan.
- Transportation Finance. Through the Transportation Finance
group, Financial Services structures secured financings for
specialized areas of the transportation industry,
principally involving domestic and foreign used aircraft,
as well as domestic short-line railroads and used rail
equipment. Typical transactions involve financing up to
80% of the fair market value of used equipment in the $3
million to $30 million range. Traditionally focused on the
domestic marketplace, Transportation Finance established a
London, England office in 1992, broadening its product line
to include international aircraft loans.
- Communications Finance. The Communications Finance group
specializes in radio and television. Other markets include
cable television, print and outdoor media services in the
United States. Financial Services extends secured loans to
communications businesses requiring funds for
recapitalization, refinancing or acquisition. Loan sizes
generally are from $3 million to $35 million.
- Commercial Real Estate Finance. The Commercial Real Estate
group provides cash-flow-based financing primarily for
acquisitions and refinancings to experienced real estate
developers and owner tenants of income-producing properties
in the United States and the United Kingdom. Financial
Services concentrates on secured financing opportunities,
generally between $3 million and $30 million, involving
senior mortgage term loans on owner-occupied commercial
real estate. Financial Services' portfolio of real estate
leveraged leases is also managed as part of the commercial
real estate portfolio.
- Resort Finance. The Resort Finance group focuses on
successful, experienced resort developers, primarily of
timeshare resorts, second home resort communities, golf
resorts and resort hotels. Extending funds through a
variety of lending options, the Resort Finance group
provides loans and lines of credit ranging from $3 million
to $30 million for construction, acquisitions, receivables
financing and purchases and other uses. Through its
subsidiary, GFC Portfolio Services, Inc. ("GPSI"), the
Resort Finance group offers expanded convenience and
service to its customers. Professional receivables
collections and cash management gives developers the
ability of having loan-related administrative functions
performed for them by GFC.
- Asset Based Finance. Acquired in early 1993, the Asset
Based Finance group ("ABF") offers a full range of
nationwide collateral-oriented lending programs to middle-
market businesses including manufacturers, wholesalers and
distributors. GFC's ABF group mainly provides revolving
lines of credit ranging between $2 million and $25 million,
often partnering with the Corporate Finance group to offer
convenient "one-stop" financing to businesses.
- Consumer Rediscount Group. The Consumer Rediscount Group
("CRG") offers $2 million to $25 million revolving credit
lines to regional consumer finance companies, which in turn
extend credit to consumers. GFC's customers provide credit
to consumers to finance home improvements, automobile
purchases, insurance premiums and for a variety of other
financial needs.
- Ambassador Factors. On February 14, 1994, GFC purchased
Fleet Factors Corp, better known as Ambassador Factors
Corporation ("Ambassador") from Fleet Financial Group, Inc.
Ambassador provides accounts receivable factoring and
asset-based lending principally to small and medium-sized
textile and apparel manufacturers and importers. See Note
Q of Notes to Consolidated Financial Statements included in
Annex A.
- TriCon Capital Corporation. On March 4, 1994, GFC
Financial announced the signing of a definitive purchase
agreement under which GFC will acquire all of the stock of
TriCon Capital Corporation ("TriCon"), an indirect wholly-
owned subsidiary of Bell Atlantic Corporation ("Bell
Atlantic"), in an all cash transaction. This transaction
is subject to regulatory approvals and certain other
conditions. TriCon is a $1.8 billion niche-oriented
provider of commercial and equipment leasing services.
TriCon's marketing orientation fits well with GFC's
emphasis on value-added products and services in focused
niches of the commercial finance business and further
diversifies GFC's asset base. See Pending Acquisition of
TriCon Capital Corporation under Optional Items in Part I
and Note q to Notes to Consolidated Financial Statements
included in Annex A.
In conjunction with the liquidation of the GEFG portfolio, GEFG
surrendered the banking license of its United Kingdom bank, Greyhound
Bank PLC, and renamed the company Greyhound Guaranty Limited ("GGL").
GGL operates a finance group that was primarily involved in lending
to individuals in the United Kingdom secured by second mortgages on
residential real estate. The group ceased writing new consumer
finance business in the first quarter of 1991 but continues to
administer and collect loans previously made.
Financial Services' operations are conducted primarily in the
United States and Europe. For a description of its assets owned,
interest earned from financing transactions, interest margins earned
and income before income taxes for domestic and European operations,
see Note O of Notes to Consolidated Financial Statements included in
Annex A.
Investment in Financing Transactions
At December 31, 1993, 1992, 1991, 1990 and 1989, Financial
Services' investment in financing transactions (before reserve for
possible credit losses) was $2,846,571,000, $2,428,523,000,
$2,281,872,000, $2,198,441,000 and $1,950,372,000, respectively, and
consisted of the following:
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
December 31,
---------------------------------------------------------------------------------------------
1993 % 1992 % 1991 % 1990 % 1989 %
---------------------------------------------------------------------------------------------
(dollars in thousands)
Domestic:
Loans and
other
financing
contracts:
Commercial $1,332,734 46.8 $ 968,044 39.9 $ 838,822 36.8 $ 906,084 41.2 $ 767,926 39.4
Real estate 900,628 31.6 831,989 34.3 677,979 29.7 499,408 22.7 462,290 23.7
Operating and
direct
financing
leases 205,168 7.2 176,212 7.2 185,917 8.2 158,641 7.2 191,733 9.8
Leveraged
leases 283,782 10.0 269,370 11.1 265,363 11.6 275,635 12.5 266,569 13.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
2,722,312 95.6 2,245,615 92.5 1,968,081 86.3 1,839,768 83.6 1,688,518 86.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Foreign:
Loans and
other
financing
contracts 65,129 2.3 61,537 2.5 128,871 5.6 140,249 6.4 73,106 3.8
Consumer
Finance 45,264 1.6 57,801 2.4 94,306 4.1 120,006 5.5 86,611 4.4
Operating and
direct
financing
leases 13,866 0.5 63,570 2.6 90,614 4.0 98,418 4.5 102,137 5.2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
124,259 4.4 182,908 7.5 313,791 13.7 358,673 16.4 261,854 13.4
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
$2,846,571 100.0 $2,428,523 100.0 $2,281,872 100.0 $2,198,441 100.0 $1,950,372 100.0
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(Dollars in Thousands)
Revenue Accruing Nonaccruing
-------------------------------------- -------------------------
Repos-
Operat- sessed 90 Days Repos- Total
Original Rewritten ing Assets Delin- sessed Carrying
Rate Contracts Leases (4) quent Assets Other Amount %
-------------------------------------- ------------------------- ------------------
Domestic:
Corporate Finance
(1) $ 221,711 $27,921 $ $ $ 2,277 $ 7,428 $ 386 $ 259,723 9.1
Transportation
Finance (1) (2) 457,741 146,675 841 605,257 21.2
Communications
Finance 487,890 7,989 8,949 8,264 25,030 538,122 18.9
Commercial Real
Estate Finance
(1) 500,598 1,574 27,844 1,055 25,542 556,613 19.6
Resort Finance 530,070 4,869 547 12,163 19,001 440 567,090 19.9
Asset Based
Finance 176,068 176,068 6.2
Consumer
Rediscounting 19,439 19,439 0.7
---------- ------- -------- ------- ------- ------- ----- ---------- -----
2,393,517 42,353 147,222 48,956 12,437 77,001 826 2,722,312 95.6
---------- ------- -------- ------- ------- ------- ----- ---------- -----
Foreign:
Corporate Finance 8,036 324 70 23 8,453 0.3
Transportation
Finance 25,303 1,267 26,570 1.0
Commercial Real
Estate Finance 38,491 2,839 2,642 43,972 1.5
Consumer Finance
(3) 35,656 9,608 45,264 1.6
---------- ------- -------- ------- ------- ------- ----- ---------- -----
107,486 4,430 12,320 23 124,259 4.4
---------- ------- -------- ------- ------- ------- ----- ---------- -----
$2,501,003 $46,783 $147,222 $48,956 $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 considered delinquent after 180 days.
(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.
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1992
(Dollars in Thousands)
Revenue Accruing Nonaccruing
---------------------------------------- ------------------------
Repos-
Operat- sessed 90 Days Repos- Total
Original Rewritten ing Assets Delin- sessed Carrying
Rate Contracts Leases (4) quent Assets Other Amount %
---------------------------------------- ------------------------ ------------------
Domestic:
Corporate Finance
(1) $ 420,006 $16,081 $ $ $ 7,820 $11,808 $ 530 $ 456,245 18.8
Transportation
Finance (2) 228,626 100,336 328,962 13.5
Communications
Finance 382,914 32,548 8,744 13,182 437,388 18.0
Commercial Real
Estate Finance 463,571 12,482 21,509 6,302 15,052 518,916 21.4
Resort Finance 487,649 1,356 575 13,889 635 504,104 20.8
---------- ------- -------- ------- ------- ------- ------ ---------- -----
1,982,766 62,467 100,911 21,509 22,866 53,931 1,165 2,245,615 92.5
---------- ------- -------- ------- ------- ------- ------ ---------- -----
Foreign:
Corporate Finance 15,375 1,729 1,712 60 18,876 0.8
Transportation
Finance 42,651 2,318 2,225 47,194 1.9
Commercial Real
Estate Finance 55,144 1,792 2,101 59,037 2.4
Consumer Finance
(3) 41,439 16,362 57,801 2.4
---------- ------- -------- ------- ------- ------- ------ ---------- -----
154,609 5,839 22,400 60 182,908 7.5
---------- ------- -------- ------- ------- ------- ------ ---------- -----
$2,137,375 $68,306 $100,911 $21,509 $45,266 $53,991 $1,165 $2,428,523 100.0
========== ======= ======== ======= ======= ======= ====== ========== =====
NOTES:
(1) Includes $5.1 million of public sector Latin American loans that have been written-down to estimated
market value. During 1992, GFC successfully liquidated 72% of the face value of public sector Latin
American loans at favorable market prices, which were approximately $3.1 million in excess of the
carrying amount.
(2) Operating leases include certain aircraft and aircraft engines having a carrying amount of $58.2 million
that were combined as one transaction pursuant to a participation agreement with an engine retrofitting
and hushkitting company.
(3) Consumer Finance accounts are considered delinquent after 180 days.
(4) The Company earned income of $1.9 million on repossessed accruing assets in Commercial Real Estate
Finance during 1992.
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1991
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------ ------------------------
Operat- 90 Days Repos- Total
Original Rewritten ing Delin- sessed Carrying
Terms Contracts Leases quent Assets Other Amount %
------------------------------ ------------------------ ------------------
Domestic:
Corporate Finance $ 429,053 $ 14,594 $ $ 7,386 $ $3,694 $ 454,727 19.9
Transportation
Finance (1) 149,207 74,596 223,803 9.8
Communications
Finance 321,918 12,340 16,636 350,894 15.4
Commercial Real
Estate Finance 431,097 15,734 10,504 20,002 477,337 20.9
Resort Finance 429,505 1,511 608 7,317 1,056 439,997 19.3
---------- ------- ------- ------- ------- ------ ---------- -----
1,760,780 44,179 75,204 34,526 27,319 4,750 1,946,758 85.3
---------- ------- ------- ------- ------- ------ ---------- -----
Foreign:
Corporate Finance 51,461 1,955 5,064 221 58,701 2.6
Transportation
Finance 64,158 3,140 605 67,903 3.0
Commercial Real
Estate Finance 85,924 6,957 92,881 4.1
Consumer Finance
(2) 62,452 31,854 94,306 4.1
---------- ------- ------- ------- ------- ------ ---------- -----
263,995 5,095 43,875 826 313,791 13.8
---------- ------- ------- ------- ------- ------ ---------- -----
Latin America:
Corporate Finance
(3) 21,323 21,323 0.9
---------- ------- ------- ------- ------- ------ ---------- -----
$2,046,098 $49,274 $75,204 $78,401 $28,145 $4,750 $2,281,872 100.0
========== ======= ======= ======= ======= ====== ========== =====
NOTES:
(1) Operating leases included certain aircraft and aircraft engines having a carrying amount of $51.3
million, that were combined as one transaction pursuant to a participation agreement with an engine
retrofitting and hushkitting company.
(2) Consumer Finance accounts are considered delinquent after 180 days.
(3) Included $15.5 million of Latin American loans written-down to market value.
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1990
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------ --------------------------
Operat- 90 Days Repos- Total
Original Rewritten ing Delin- sessed Carrying
Terms Contracts Leases quent Assets Other Amount %
------------------------------ -------------------------- ------------------
Domestic:
Corporate Finance $ 478,343 $ 2,833 $ 113 $ 4,345 $ 968 $ 4,511 $ 491,113 22.4
Transportation
Finance 158,438 9,550 167,988 7.6
Communications
Finance 253,519 11,464 6,222 3,866 275,071 12.5
Commercial Real
Estate Finance 408,201 13,713 14,312 11,942 6,605 454,773 20.7
Resort Finance 374,058 215 640 94 378 1,247 376,632 17.2
---------- ------- ------- ------- ------- ------- ---------- -----
1,672,559 28,225 10,303 24,973 13,288 16,229 1,765,577 80.4
---------- ------- ------- ------- ------- ------- ---------- -----
Foreign:
Corporate Finance 79,895 3,192 1,233 462 84,782 3.8
Transportation
Finance 59,159 4,190 2,149 65,498 3.0
Commercial Real
Estate Finance 81,478 338 6,571 88,387 4.0
Consumer Finance
(1) 88,034 31,972 120,006 5.4
---------- ------- ------- ------- ------- ------- ---------- -----
308,566 7,720 39,776 2,611 358,673 16.2
---------- ------- ------- ------- ------- ------- ---------- -----
Latin America:
Corporate Finance 7,549 66,642 74,191 3.4
---------- ------- ------- ------- ------- ------- ---------- -----
$1,988,674 $35,945 $10,303 $64,749 $15,899 $82,871 $2,198,441 100.0
========== ======= ======= ======= ======= ======= ========== =====
NOTE:
(1) Consumer Finance accounts are considered delinquent after 180 days.
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1989
(Dollars in Thousands)
Revenue Accruing Nonaccruing
------------------------------- --------------------------
Operat- 90 Days Repos- Total
Original Rewritten ing Delin- sessed Carrying
Terms Contracts Leases quent Assets Other Amount %
------------------------------- -------------------------- ------------------
Domestic:
Corporate Finance $ 495,366 $9,014 $ 187 $21,170 $ 1,488 $ 1,623 $ 528,848 27.1
Transportation
Finance 123,080 123,080 6.3
Communications
Finance 164,406 164,406 8.4
Commercial Real
Estate Finance 456,216 1,464 14,857 10,420 482,957 24.8
Resort Finance 308,326 673 94 380 296 309,769 15.9
---------- ------ ------ ------- ------- ------- ---------- -----
1,547,394 9,014 2,324 36,121 12,288 1,919 1,609,060 82.5
---------- ------ ------ ------- ------- ------- ---------- -----
Foreign:
Corporate Finance 65,335 227 104 65,666 3.4
Transportation
Finance 35,150 2,856 38,006 2.0
Commercial Real
Estate Finance 64,423 7,148 71,571 3.6
Consumer Finance
(1) 77,488 9,123 86,611 4.4
---------- ------ ------ ------- ------- ------- ---------- -----
242,396 227 19,231 261,854 13.4
---------- ------ ------ ------- ------- ------- ---------- -----
Latin America:
Corporate Finance 6,979 99 72,380 79,458 4.1
---------- ------ ------ ------- ------- ------- ---------- -----
$1,796,769 $9,241 $2,324 $55,352 $12,387 $74,299 $1,950,372 100.0
========== ====== ====== ======= ======= ======= ========== =====
NOTE:
(1) Consumer Finance accounts are considered delinquent after 180 days.
An analysis of nonaccruing contracts and repossessed assets at
December 31 of each year shown is as follows:
1993 1992 1991 1990 1989
------------------------------------------------
(dollars in thousands)
Nonaccruing contracts:
Domestic $ 13,263 $ 24,031 $ 39,276 $ 41,201 $ 38,040
Foreign 12,320 22,400 43,875 39,777 19,231
-------- -------- -------- -------- --------
25,583 46,431 83,151 80,978 57,271
-------- -------- -------- -------- --------
Latin America:
Brazil 22,775 22,998
Ecuador 40,487 42,195
Other 3,380 7,187
-------- -------- -------- -------- --------
66,642 72,380
-------- -------- -------- -------- --------
Total nonaccruing
contracts 25,583 46,431 83,151 147,620 129,651
-------- -------- -------- -------- --------
Repossessed assets:
Domestic 77,001 53,931 27,319 13,288 12,288
Foreign 23 60 826 2,611
Latin America 99
-------- -------- -------- -------- --------
Total repossessed assets 77,024 53,991 28,145 15,899 12,387
-------- -------- -------- -------- --------
Total nonaccruing
contracts and
repossessed assets $102,607 $100,422 $111,296 $163,519 $142,038
======== ======== ======== ======== ========
Nonaccruing contracts
and repossessed
assets as a percentage
of investment in
financing transactions 3.6% 4.1% 4.9% 7.4% 7.3%
======== ======== ======== ======== ========
In addition to the repossessed assets in the above table, GFC had
repossessed assets, with a total carrying amount of $49.0 million and $21.5
million at December 31, 1993 and 1992, respectively, which earned income of
$2.7 million and $1.9 million during 1993 and 1992, respectively.
The following is an analysis of the reserve for possible credit losses
for the years ended December 31:
1993 1992 1991 1990 1989
------------------------------------------------
(dollars in thousands)
Balance, beginning
of year:
Domestic $ 65,100 $ 72,387 $ 67,363 $ 62,158 $ 44,938
Foreign 4,191 15,213 9,735 10,478 32,668
-------- -------- -------- -------- --------
69,291 87,600 77,098 72,636 77,606
-------- -------- -------- -------- --------
Provision for
possible credit
losses
(Note 1):
Domestic 5,206 144 57,210 10,094 25,252
Foreign 500 6,596 20,477 435 (17,301)
------- -------- ------- -------- --------
5,706 6,740 77,687 10,529 7,951
-------- ------- -------- -------- --------
Write-offs
(Note 1):
Domestic (7,548) (7,823) (52,753) (6,114) (8,764)
Foreign (5,027) (15,838) (15,593) (1,748) (20,675)
-------- -------- -------- -------- --------
(12,575) (23,661) (68,346) (7,862) (29,439)
-------- -------- -------- -------- --------
Recoveries:
Domestic 221 392 567 1,225 732
Foreign (Note 2) 496 357 96 22 16,014
-------- -------- -------- -------- --------
717 749 663 1,247 16,746
-------- -------- -------- -------- --------
Other:
Domestic 1,286
Foreign (145) (2,137) 498 548 (228)
-------- -------- -------- -------- --------
1,141 (2,137) 498 548 (228)
-------- -------- -------- -------- --------
Balance, end of
year:
Domestic 64,265 65,100 72,387 67,363 62,158
Foreign 15 4,191 15,213 9,735 10,478
-------- -------- -------- -------- --------
$ 64,280 $ 69,291 $ 87,600 $ 77,098 $ 72,636
======== ======== ======== ======== ========
NOTES:
(1) In 1991, the Company recorded a special provision for possible credit
losses of $65 million and recorded a $47.8 million write-down of Latin
American assets (included in the domestic portfolio) and recorded
write-offs of $15 million in the foreign operations (GEFG) portfolio.
(2) In 1989, the foreign operations (GEFG) made recoveries of $16.0 million
related to its shipping (maritime) portfolio.
Financial Services does not allocate a dollar amount of its reserve for
possible credit losses to specific categories of loans and financing
contracts. It does, however, allocate reserves between domestic and foreign
portfolios.
Write-offs by major loan and collateral types, experienced by
Financial Services during the years ended December 31, are as follows:
WRITE-OFFS BY MAJOR LOAN AND COLLATERAL TYPES
(Dollars in Thousands)
DOMESTIC FOREIGN (Note 1)
----------------------------------------- -----------------------------------------
1993 1992 1991 1990 1989 1993 1992 1991 1990 1989
----------------------------------------- -----------------------------------------
Consumer finance $ $ $ $ $ $4,071 $10,176 $13,687 $1,563 $
Commercial real
estate 2,319 4,417 2,204 1,976 2,027 763 4,487 690 129 1,176
Manufacturing and
processing
equipment 2,162 1,000 1,325 614 80 908 604 10
Commercial
vehicles 1,579 67 318 46
Communications
finance 1,488 1,500 1,200
Maritime 906 18,937
Latin America
(Note 1) 47,759 419 3,310
Other 1,523 2,076 2,813 113 267 612 562
------ ------- ------- ------ ------- ------ ------- ------- ------ -------
$ 7,548 $ 7,823 $52,753 $6,114 $ 8,764 $5,027 $15,838 $15,593 $1,748 $20,675
====== ======= ======= ====== ======= ====== ======= ======= ====== =======
Write-offs as a
percentage of
ending
investments in
financing
transactions 0.28% 0.35% 2.68% 0.33% 0.52% 4.05% 8.66% 4.97% 0.49% 7.90%
====== ======= ======= ====== ======= ====== ======= ======= ====== =======
TOTAL
----------------------------------------
1993 1992 1991 1990 1989
----------------------------------------
Consumer finance $ 4,071 $10,176 $13,687 $1,563 $
Commercial real
estate 3,082 8,904 2,894 2,105 3,203
Manufacturing and
processing
equipment 2,242 1,908 604 1,335 614
Commercial
vehicles 1,579 67 364
Communications
finance 1,488 1,500 1,200
Maritime 906 18,937
Latin America
(Note 1) 47,759 419 3,310
Other 113 267 2,135 2,076 3,375
------- ------- ------- ------ -------
$12,575 $23,661 $68,346 $7,862 $29,439
======= ======= ======= ====== =======
Write-offs as a
percentage of
ending
investments in
financing
transactions 0.44% 0.97% 3.00% 0.36% 1.51%
======= ======= ======= ====== =======
NOTE:
(1) In the fourth quarter of 1991, the Company recorded a special provision for possible credit
losses of $65.0 million and recorded write-offs of $15.0 million related to nonearning assets
in the GEFG (foreign) portfolio and a $47.8 million write-down to reduce Latin American assets
to current market value.
A further breakdown of the portfolio by collateral type can be found in
Note C of Notes to Consolidated Financial Statements in Annex A.
Cost and Utilization of Borrowed Funds
Financial Services relies on borrowed funds as well as internal cash
flow to finance its operations. Financial Services follows a policy of
relating provisions under its loans and leases to the terms on which it
obtains funds so that, to the extent feasible, floating-rate assets are
funded with floating-rate borrowings and fixed-rate assets are funded with
fixed-rate borrowings.
The following table reflects the approximate average pre-tax effective
cost of borrowed funds and pre-tax equivalent rate earned on accruing assets
for Financial Services for each of the periods listed:
Year Ended December 31,
--------------------------------
Domestic: 1993 1992 1991 1990 1989
--------------------------------
Short-term debt and variable rate
long-term debt (1) 4.6% 5.0% 6.9% 8.8% 9.9%
Fixed-rate long-term debt (1) 11.4% 10.6% 10.9% 11.4% 12.3%
Aggregate borrowed funds (1) 6.4% 7.2% 8.8% 10.1% 11.2%
Rate earned on accruing assets (2) (3) 10.2% 10.9% 12.2% 12.7% 13.6%
Spread percentage (4) 4.9% 4.4% 4.6% 4.2% 3.9%
Foreign:
Short-term debt and variable rate
long-term debt 5.6% 9.3% 12.3% 15.5% 13.0%
Customer deposits 6.2% 10.2% 14.2% 15.4% 14.4%
Rate earned on accruing assets (3) 15.1% 17.6% 16.7% 20.1% 16.0%
Spread percentage (4) 10.4% 9.8% 6.2% 8.2% 6.6%
_____________________
NOTES:
(1) Includes the effect of interest rate conversion agreements.
(2) Accruing assets are net of deferred taxes applicable to leveraged
leases.
(3) Earnings include gains on sale of assets.
(4) Spread percentages represent interest margins earned as a percentage of
earning assets, net of deferred taxes applicable to leveraged leases.
___________________________
The effective costs presented above include costs of commitment fees
and related borrowing costs and do not purport to predict the costs of funds
in the future.
For further information on Financial Services' cost of funds, refer to
Note E of the Notes to Consolidated Financial Statements included in Annex
A.
Following are the ratios of income to combined fixed charges and
preferred stock dividends ("ratio") for each of the past five years:
Year Ended December 31,
---------------------------------
1993 1992 1991 1990 1989
---------------------------------
1.52 1.35 ---- 1.24 1.23
Variations in interest rates generally do not have a substantial impact
on the ratio because fixed-rate and floating-rate assets are generally
matched with liabilities of similar rate and term.
Income available for fixed charges, for purposes of the computation of
the ratio of income to combined fixed charges and preferred stock dividends,
consists of the sum of income before income taxes (adjusted for the effect
of reduced tax rates on income from leveraged leases) and fixed charges.
Combined fixed charges include interest and related debt expense and a
portion of rental expense determined to be representative of interest and
preferred stock dividends grossed up to a pre-tax basis.
For the year ended December 31, 1991, earnings were inadequate to cover
combined fixed charges by $35.3 million. The decline in the ratio in 1991
was due to restructuring and other charges and transaction costs recorded in
the fourth quarter of 1991. Those charges and costs were recorded in
connection with the spin-off of the Company from Dial.
Credit Ratings
GFC currently has investment-grade credit ratings from the following
rating agencies.
Commercial Senior Subordinated
Paper Debt Debt
----------------------------------
Duff & Phelps D1- A- BBB+
Fitch Investors Services, Inc. F1 A A-
Moody's Investors Service P2 Baa2 Ba1
Standard & Poor's Corp. A2 BBB BBB-
There can be no assurance that GFC's ratings will be maintained. None
of Financial Services' other subsidiaries have received credit ratings.
Duff & Phelps Credit Rating Company ("Duff & Phelps") has placed GFC's
senior and senior subordinated debt ratings on Rating Watch with negative
implications. Duff & Phelps indicated that its action follows GFC
Financial's announcement on March 4, 1994 indicating that it has signed a
definitive purchase agreement to acquire TriCon from Bell Atlantic.
Fitch Investors Services, Inc. ("Fitch") announced that it has placed
GFC's senior debt, subordinated debt and commercial paper ratings on Fitch
Alert with negative implications. This action also follows GFC Financial's
announcement of the proposed acquisition of TriCon.
Both Duff & Phelps and Fitch indicated that their actions resulted from
their need to observe GFC management's ability to successfully integrate
the new businesses and maintain appropriate controls in light of the
significant increase in the size of GFC.
Moody's Investors Services and Standard & Poor's Corp. affirmed GFC's
current ratings.
Interest and Other Core Income
Financial Services has pursued a strategy of focusing on lending
activities producing a predictable stream of revenues, as opposed to the
less predictable gains on asset sales associated with leasing activities.
Core income (i.e., income from continuing operations before the 4.9 million
adjustment to deferred income taxes made in 1993, restructuring and other
charges recorded in 1991 and gains on sale of assets (after-tax) realized in
each of the years) was $39.4 million, $34.6 million and $24.8 million for
the years 1993, 1992 and 1991, respectively. Core income represented 92% of
income from continuing operations (before the adjustment to deferred income
taxes) in 1993, up from 50% in 1987.
Residual Realization Experience
In each of the last 38 years, Financial Services has realized, in the
aggregate, proceeds from the sale of assets upon lease terminations (other
than foreclosures) in excess of carrying amounts; however, there can be no
assurance that such results will be realized in future years. Sales
proceeds upon lease terminations in excess of carrying amounts are reported
as income when the assets are sold.
Income from leasing activities is significantly affected by gains from
asset sales upon lease termination and, hence, can be less predictable than
income from non-leasing activities. During the five years ended December
31, 1993, the proceeds to Financial Services from sales of assets upon early
termination of leases and at the expiration of leases have exceeded the
respective carrying amounts and estimated residual values as follows:
Terminations at End of Lease
Early Terminations Term (Note 3)
(Notes 1, 2 and 4) -------------------------------
-------------------------------------
Proceeds Proceeds
Carrying as a % Estimated as a % of
Amount of Residual Estimated
Sales of Carrying Sales Value of Residual
Year Proceeds Assets Amount Proceeds Assets Value
------------------------------------- -------------------------------
(dollars in thousands) (dollars in thousands)
1993 $ --- $ --- --- $ 486 $ 248 196%
1992 20,493 17,527 117% 2,164 1,768 122%
1991 25,027 21,904 114% 10,114 6,553 154%
1990 10,854 7,127 152% 20,210 11,719 172%
1989 30,894 16,616 186% 14,559 11,305 129%
Notes:
(1) Excludes foreclosures for credit reasons which are immaterial to the
above amounts.
(2) Excludes proceeds of $3,201,000 in 1993 on assets held for sale.
(3) Excludes proceeds of $2,000,000 in 1993 received on guarantees.
(4) Excludes proceeds of $460,000 in 1990 from the disposal of warrants.
The estimated residual value of leased assets in the accounts of
Financial Services at December 31, 1993 aggregated 39.0% of the original
cost of such assets (21.9% excluding the original costs of the assets and
residuals applicable to real estate leveraged leases, which typically have
higher residuals than other leases). The financing contracts and leases
outstanding at that date had initial terms ranging generally from one to 25
years. The average initial term weighted by carrying amount at inception
and the weighted average remaining term of financing contracts at December
31, 1993 for financing contracts excluding leveraged leases were 7.3 and 3.7
years, respectively, and for leveraged leases were approximately 20 and 12
years, respectively. The comparable average initial term and remaining term
at December 31, 1992 for financing contracts excluding leveraged leases were
7.7 and 3.7 years, respectively, and for leveraged leases were approximately
20 and 13 years, respectively. Financial Services utilizes either employed
or outside appraisers to determine the collateral value of assets to be
leased or financed and the estimated residual or collateral value thereof at
the expiration of each lease.
For a discussion of accounting for lease transactions, refer to Notes A
and C of Notes to Consolidated Financial Statements included in Annex A.
Business Development and Competition
Financial Services develops business primarily through direct
solicitation by its own sales force. Customers are also introduced by
independent brokers and referred by other financial institutions.
At December 31, 1993, Financial Services had 912 financing contracts
with 604 customers (excluding 2,886 contracts with consumer finance
customers), compared to 874 financing contracts with 570 customers
(excluding 3,481 contracts with consumer finance customers) at December 31,
1992.
Financial Services is engaged in an extremely competitive activity. It
competes with banks, insurance companies, leasing companies, the credit
units of equipment manufacturers and other finance companies. Some of these
competitors have substantially greater financial resources and are able to
borrow at costs below those of Financial Services. Financial Services'
principal means of competition is through a combination of service and the
interest rate charged for money. The interest rate is a function of
borrowing costs, operating costs and other factors. While many of Financial
Services' larger competitors are able to offer lower interest rates based
upon their lower borrowing costs, Financial Services seeks to maintain the
competitiveness of the interest rates it offers by emphasizing strict
control of its operating costs.
Credit Quality
As a result of the use of clearly defined underwriting standards,
portfolio management techniques, monitoring of covenant breaches and active
collections and workout departments, Financial Services believes it
maintains a high-quality customer base.
Risk Management
Financial Services generally conducts investigations of its prospective
customers through a review of historical financial statements, published
credit reports, credit references, discussions with management, analysis of
location feasibility, personal visits and property inspections. In many
cases, depending upon the results of its credit investigations and the
nature and type of property involved, Financial Services obtains additional
collateral or guarantees from others.
As part of its underwriting process, Financial Services gives close
attention to the management, industry, financial position and level of
collateral of any proposed borrower. The purpose, term, amortization and
amount of any proposed transaction must be clearly defined and within
established corporate policy. In addition, underwriters attempt to avoid
undue concentrations in any one credit, industry or regional location.
- Management. Financial Services considers the reputation,
experience and depth of management; quality of product or service;
adaptability to changing markets and demand; and prior banking,
finance and trade relationships.
- Industry. Financial Services evaluates critical aspects of each
industry to which it lends, including the seasonality and
cyclicality of the industry; governmental regulation; the effects
of taxes; the economic value of goods or services provided; and
potential environmental liability.
- Financial. Financial Services' review of a prospective borrower
includes a comparison of certain financial ratios among periods
and among other industry participants. Items considered include
net worth; composition of assets and liabilities; debt coverage
and servicing requirements; liquidity; sales growth and earning
power; and cash flow needs and generation.
- Collateral. Financial Services regards collateral as an important
factor in a credit evaluation and has established maximum loan to
value ratios, normally ranging from 60% - 95%, for each of its
lines of business. However, collateral is only one of the many
factors considered.
The underwriting process includes, in addition to the analysis of the
factors set forth above, the design and implementation of transaction
structures and strategies to mitigate identified risks; a review of
transaction pricing relative to product-specific return requirements and
acknowledged risk elements; a multi-step, interdepartmental review and
approval process, with varying levels of authority based on the size of the
transaction; and periodic, interdepartmental reviews and revision of
underwriting guidelines.
Financial Services also monitors loan portfolio concentrations in the
areas of aggregate exposure to a single borrower and related entities,
within a given geographical area and with respect to an industry and/or
product type within an industry. Financial Services has established
concentration guidelines for each line of business it conducts for the
various product types it may entertain within that line of business.
Geographical concentrations are reviewed periodically and evaluated based on
historical loan experience and prevailing market and economic conditions.
Financial Services' financing contracts and leases generally require
the customer to pay taxes, license fees and insurance premiums and to
perform maintenance and repairs at the customer's expense. Contract payment
rates are based on several factors, including the cost of borrowed funds,
term of contract, creditworthiness of the prospective customer, type and
nature of collateral and other security and, in leasing transactions, the
timing of tax effects and estimated residual values. In leasing
transactions, lessees generally are granted an option to purchase the
equipment at the end of the lease term at its then fair market value or, in
some cases, are granted an option to renew the lease at its then fair rental
value. The extent to which lessees exercise their options to purchase
leased equipment varies from year to year, depending on, among other
factors, the status of the economy, the financial condition of the lessee,
interest rates and technological developments.
Portfolio Management
In addition to the review at the time of original underwriting,
Financial Services attempts to preserve and enhance the earnings quality of
its portfolio through proactive management of its financing relationships
with its clients and its underlying collateral. This process includes the
periodic appraisal or verification of the collateral to determine loan
exposure and residual values; sales of residual and warrant positions to
generate supplemental income; and review and management of covenant
compliance. The Portfolio Management department regularly reviews financial
statements to assess customer cash flow performance and trends; periodically
confirms operations of the customer; conducts periodic reappraisals of the
underlying collateral; seeks to identify issues concerning the vulnerability
of debt service capabilities of the customer; disseminates such information
to relevant members of Financial Services' staff; resolves outstanding
issues with the borrower; and prepares quarterly summaries of the aggregate
portfolio quality for management review. To facilitate the monitoring of a
client's account, each client is assigned to a customer service
representative who is responsible for all follow-up with that client.
Delinquencies and Workouts
Financial Services monitors timely payment of all accounts. Generally,
when an invoice is 10 days past due, the customer is contacted, and a
determination is made as to the extent of the problem, if any. A commitment
for immediate payment is pursued and the account is observed closely. If
payment is not received after this contact, all guarantors of the account
are contacted within the next 20 days. If an invoice becomes 31 days past
due, it is reported as delinquent. A notice of default is sent prior to an
invoice becoming 45 days past due and, between 60 and 90 days past the due
date, if satisfactory negotiations are not underway, outside counsel is
generally retained to help protect Financial Services' rights and to pursue
its remedies.
When accounts become more than 90 days past due (or in the case of
consumer finance accounts, 180 days past due), income recognition is
suspended, and Financial Services vigorously pursues its legal remedies.
Foreclosed or repossessed assets are considered to be nonperforming, and are
reported as such unless such assets generate sufficient cash to result in a
reasonable rate of return. Such accounts are continually reviewed, and
write-downs are taken as deemed necessary. While pursuing collateral and
obligors, Financial Services generally continues to negotiate the
restructuring or other settlement of the debt, as appropriate.
Management believes that collateral values significantly reduce loss
exposure and that the reserve for possible credit losses is adequate. For
additional information regarding the reserve for possible credit losses, see
Note D of Notes to Consolidated Financial Statements included in Annex A.
Governmental Regulation
Financial Services' domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such
as those imposed by the Federal Trade Commission, the Securities and
Exchange Commission, the Consumer Credit Protection Act, the Equal Credit
Opportunity Act and the Interstate Land Sales Full Disclosure Act.
Additionally, a majority of states have ceilings on interest rates
chargeable to customers in financing transactions. The Company's
international activities are also subject to a variety of laws and
regulations promulgated by the governments and various agencies of the
countries in which the business is conducted.
MORTGAGE INSURANCE OPERATIONS
Verex, which conducted GFC Financial's mortgage insurance operations,
ceased writing new business as of January 1, 1988 but continued to write
renewals and settle valid claims in accordance with insurance contracts in
force. Accordingly, Verex was treated as a discontinued operation. On July
16, 1993, GFC Financial consummated the sale of Verex. Proceeds from the
sale of Verex were approximately $215 million. The sale price was generally
determined by the book value of the Verex assets plus a premium of $6
million and an adjustment for the difference between the market value and
book value of Verex's investment portfolio, calculated as prescribed more
fully by the Agreement. For additional information, including revenues and
income (loss) of Verex, see Note B of Notes to Consolidated Financial
Statements included in Annex A.
EMPLOYEES
At December 31, 1993, the Company and its subsidiaries had 275
employees, consisting of 14, 230 and 31 employees in GFC Financial, GFC and
GEFG, respectively. None of such employees were covered by collective
bargaining agreements. The Company believes its employee relations are
satisfactory.
ITEM 2. PROPERTIES
The principal executive offices of GFC Financial, and of its Financial
Services operations, are located in premises leased from Dial in Phoenix,
Arizona.
Financial Services operates five additional offices in the United
States and one office in Europe. All such properties are leased.
Alternative office space could be obtained without difficulty in the
event leases are not renewed.
ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its subsidiaries are parties either as
plaintiffs or defendants to various actions, proceedings and pending claims,
including legal actions, which involve claims for compensatory, punitive or
other damages in material amounts. Litigation is subject to many
uncertainties and it is possible that some of the legal actions, proceedings
or claims referred to above could be decided against the Company. Although
the ultimate amount for which the Company or its subsidiaries may be held
liable with respect to matters where the Company is defendant is not
ascertainable, the Company believes that any resulting liability should not
materially affect the Company's financial position or results of operations.
Through a Report on Form 8-K, dated January 5, 1993, the Company
reported litigation titled Cabana Limited Partnership, a South Carolina
Partnership v. Greyhound Real Estate Finance Company, et al., and related
litigation (collectively, the "Litigation"). On January 31, 1994, the court
in the above-named case granted summary judgment in favor of the Company and
the other defendants on all counts. On motion of defendants, the court
dismissed the plaintiffs' claims without prejudice. The parties
subsequently entered into a global settlement agreement whereby all rights
to appeal and to pursue the related litigation have been waived by
Plaintiffs. The terms of the settlement agreement are confidential but
involve the payment by the defendants to plaintiffs' counsel of a relatively
nominal amount, to secure finality, which the Company believes will cover a
portion of plaintiffs' counsels' litigation costs and expenses. The summary
judgment in the Company's and related defendants' favor remains unchanged.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1993.
OPTIONAL ITEMS.
1. EXECUTIVE OFFICERS OF REGISTRANT.
Set forth below is information with respect to those individuals who
serve as executive officers of GFC Financial.
Name Age Position and Background
- --------------------- --- -------------------------------------
Samuel L. Eichenfield 56 Chairman, President and Chief
Executive Officer and a Director of
GFC Financial since 1992; also
Chairman, President and Chief
Executive Officer and a Director of
GFC since 1987, and prior thereto was
President of Equipment Finance Group
of Heller Financial, Inc.; also a
Director of America West Airlines,
Inc. since 1992.
Robert J. Fitzsimmons 53 Vice President - Treasurer of GFC
Financial and a Director of GFC since
1992; also, Vice President - Treasurer
of GFC for more than five years.
William J. Hallinan 51 Vice President - General Counsel and
Secretary of GFC Financial since 1992;
prior thereto for more than five years
served as Vice President - Taxes and
Associate General Counsel or a similar
position of The Dial Corp.
Robert M. Korte 38 Vice President - Human and Corporate
Development of GFC Financial since
1992; also Vice President - Human and
Corporate Development, or in a similar
position, of GFC since 1989, and prior
thereto as Assistant Vice President -
Administration.
Bruno A. Marszowski 52 Vice President - Controller of GFC
Financial and a Director of GFC since
1992; also, Vice President -
Controller of GFC for more than five
years.
Derek C. Bruns 34 Director - Internal Audit since 1992;
prior thereto was Senior Manager -
Audit Services or in a similar
position at Deloitte & Touche for more
than five years.
Greg Smalis 41 Senior Vice President - Portfolio
Management since 1993; prior thereto
served as Managing Director of GEFG
since 1993 and as Vice President -
Credit of GFC for more than five
years.
2. PENDING ACQUISITION OF TRICON CAPITAL.
The acquisition of TriCon, combined with the acquisition of Ambassador
Factors Corporation, would increase GFC Financial's total assets on a pro
forma basis to $5 billion with pro forma 1993 income from continuing
operations on a combined basis of approximately $72 million before the $4.9
million adjustment to deferred taxes applicable to leveraged leases.
This acquisition of TriCon is expected to give GFC Financial
significant critical mass and important economies of scale. Management
believes it puts the Company among the largest independent commercial
finance companies in the United States and allows it to compete over a
greater range of services. TriCon's marketing orientation fits well with
GFC Financial's emphasis on value-added products and services in focused
niches of the commercial finance business and further diversifies GFC's
asset base. Following is a brief description of TriCon and the various
business activities in which it engages.
GENERAL
TriCon is a niche oriented provider of commercial finance and equipment
leasing services to a highly segmented group of borrowers and lessees
throughout the United States. TriCon conducts its operations through seven
specialized business groups which provide financial products and services to
three specific market sectors of the finance and leasing industry.
End-User Sector
The customers in the end-user sector use the assets which TriCon
finances or leases for the ongoing operation of their businesses. The
equipment which TriCon leases to its customers is typically purchased
from an equipment manufacturer, vendor or dealer selected by the
customer. The three specialized business groups associated with this
market sector and the services provided by TriCon to customers of each
business group include:
- Medical Finance Group. Equipment and real estate financing and
asset management services targeting the top 2,400 health care
providers in the United States.
- Commercial Equipment Finance Group. Direct finance leasing of,
and lending for, general business equipment to quality commercial
business enterprises which lack ready access to public finance
markets.
- Government Finance Group. Primarily tax-exempt financing to
state and local governments.
Program Finance Sector
TriCon's business groups in the Program Finance Sector provide
financing programs to help manufacturers, distributors, vendors and
franchisors facilitate the sale of their products or services. The
three specialized business groups associated with this market sector
and the services provided by TriCon to customers of each business group
include:
- Vendor Service Group. Point-of-sale financing programs and
support services for regional and national manufacturers,
distributors and vendors of equipment classified as "small ticket"
in transaction size (generally transactions with an equipment cost
of less than $250,000). The equipment which TriCon leases to the
ultimate end-user is typically sold to TriCon by the vendor
participating in the financing program.
- Franchise Finance Group. Equipment and total facility financing
programs for the franchise-based food service industry. The
equipment which TriCon leases to the ultimate end-user is
typically purchased by TriCon from the equipment manufacturer,
vendor or dealer selected by the end-user.
- Commercial Credit Services Group. Accounts receivable and
inventory lending for manufacturers and major distributors,
manufacturer-sponsored inventory financing for office equipment
dealers, and telecommunications receivables financing for the
regional providers of long distance operator services.
Capital Services Sector
The Capital Services Sector has one business group which focuses
on the management and origination of highly structured financing of
"large ticket" commercial equipment (generally transactions involving
the sale or lease of equipment with a cost in excess of $15 million)
primarily leveraged leases for major corporations. The equipment which
TriCon leases to its customers is typically purchased from an equipment
manufacturer, vendor or dealer selected by the customer.
The commercial finance and equipment leasing industry is highly
competitive. While price is an important consideration, many customers
value a high level of service which is the primary basis on which TriCon
competes. Although TriCon has only a small share of the total commercial
leasing market, the "Asset Finance and Leasing Digest" ranked TriCon Leasing
Corporation as one of the top 50 leasing companies in the world for 1992
based on volume and total assets.
Portfolio Composition
The total assets under the management of TriCon consist of the TriCon
portfolio of owned lease and loan assets (the "Portfolio Assets") plus
certain assets that are owned by others but managed by the TriCon and are
not reflected on TriCon's balance sheet. At December 31, 1993, the
Portfolio Assets were approximately $1.8 billion. At that date, the assets
of others managed by TriCon were approximately $1.3 billion, consisting of
approximately $344 million of securitized assets (the "Securitizations") and
approximately $976 million of net lease receivables relating to the
leveraged lease and project finance portfolio of Bell Atlantic.
TriCon's primary financing products are finance leases, operating
leases, collateralized loans and inventory and receivable financing. The
Portfolio Assets are diversified across types of financed equipment with the
largest equipment concentrations being data processing equipment, health
care equipment, communications equipment, furniture and fixtures, office
machines and diversified commercial use equipment. The Portfolio Assets
also include real estate-related assets, consisting primarily of real estate
held as collateral in conjunction with its health care and franchise-based
food service equipment financings and, to a lesser extent, a portfolio of
general commercial real estate mortgages currently being managed for
liquidation. TriCon's investment exposure to both the aircraft-related and
energy-related sectors is less than 1% of the Portfolio Assets.
TriCon's current customer base includes approximately 70,000 customer
accounts; its largest exposure to any single customer is approximately $33
million or approximately 2% of the Portfolio Assets and Securitizations.
Approximately 80% of the Portfolio Assets and Securitizations are located in
20 states with the five largest concentrations being California (15.8%),
Texas (10.5%), New Jersey (5.7%), Florida (5.5%) and Pennsylvania (5.3%).
3. TRICON CAPITAL CORPORATION AUDITED FINANCIAL STATEMENTS.
The following financial statements contain references to a proposed
public offering of stock of TriCon and certain restructuring of the
business. The acquisition by GFC supersedes that public offering and the
purchase agreement makes certain changes to the proposed restructuring.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 23
Consolidated Balance Sheets as of December 31, 1993 and 1992 . . . . 24
Consolidated Statements of Income for the Years Ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . 27
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges . . . 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors of
Bell Atlantic TriCon Leasing Corporation:
We have audited the consolidated balance sheets of TriCon Capital
Corporation--Predecessor Business (see Note 1 to the Consolidated Financial
Statements) at December 31, 1993 and 1992, and the related consolidated
statements of income and cash flows for each of the three years in the
period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
TriCon Capital Corporation--Predecessor Business at December 31, 1993 and
1992, and the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31, 1993, in conformity
with generally accepted accounting principles.
As discussed in Notes 2 and 9 to the Consolidated Financial Statements,
in 1993 the Company adopted the method of accounting for income taxes
prescribed by Statement of Financial Accounting Standards No. 109 and the
method of accounting for postemployment benefits prescribed by Statement of
Financial Accounting Standards No. 112, and in 1991 adopted the method of
accounting for postretirement benefits other than pensions prescribed by
Statement of Financial Accounting Standards No. 106.
COOPERS & LYBRAND
New York, New York
February 7, 1994
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
-------------------------
1993 1992
----------- ----------
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . $ 4,483 $ 4,503
Notes receivable and finance leases:
Investment in notes receivable . . . . . . . . 912,964 833,487
Investment in finance leases . . . . . . . . . 647,055 639,592
----------- ----------
Total notes receivable and finance leases 1,560,019 1,473,079
Less:
Allowance for credit losses . . . . . . . . . . 43,191 48,279
----------- ----------
Net investment in notes receivable
and finance leases . . . . . . . . . . . . . . 1,516,828 1,424,800
Investment in operating leases,
net of accumulated depreciation . . . . . . . 240,057 230,721
Other assets . . . . . . . . . . . . . . . . . 27,091 32,222
----------- ----------
Total Assets . . . . . . . . . . . . . . . $ 1,788,459 $1,692,246
=========== ==========
LIABILITIES AND EQUITY
Liabilities:
Notes payable . . . . . . . . . . . . . . . . . $ 709,508 $ 919,642
Accounts payable and accrued expenses . . . . . 75,302 71,951
Due to affiliates . . . . . . . . . . . . . . . 611,194 349,842
Deferred income taxes . . . . . . . . . . . . . 81,100 93,908
----------- ----------
Total Liabilities . . . . . . . . . . . . . . . 1,477,104 1,435,343
----------- ----------
Total Equity . . . . . . . . . . . . . . . . . 311,355 256,903
----------- ----------
Total Liabilities and Equity . . . . . . . $ 1,788,459 $1,692,246
=========== ==========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
REVENUE
Interest income . . . . . . . . . . . . $ 80,477 $ 77,170 $ 90,788
Finance lease revenue . . . . . . . . . 65,835 77,009 94,503
Operating lease revenue . . . . . . . . 63,806 46,337 34,679
Other . . . . . . . . . . . . . . . . . 35,182 41,751 33,879
-------- -------- --------
Total Revenue . . . . . . . . . . 245,300 242,267 253,849
-------- -------- --------
EXPENSES
Interest . . . . . . . . . . . . . . . 80,211 90,298 115,190
Selling, general and administrative . . 48,128 49,638 46,533
Provision for credit losses . . . . . . 21,634 28,057 29,876
Depreciation . . . . . . . . . . . . . 41,582 31,496 23,881
-------- -------- --------
Total Expenses . . . . . . . . . . 191,555 199,489 215,480
-------- -------- --------
Income before provision for income
taxes and cumulative effect of
changes in accounting principles . . . 53,745 42,778 38,369
Provision for income taxes . . . . . . 22,164 15,414 15,014
-------- -------- --------
Income before cumulative effect of
changes in accounting principles . . 31,581 27,364 23,355
Cumulative effect of changes in
accounting principles . . . . . . . . 5,530 -- (1,471)
-------- -------- --------
NET INCOME . . . . . . . . . . . . $ 37,111 $ 27,364 $ 21,884
======== ======== ========
Pro forma earnings per share before
cumulative effect of changes
in accounting principles
(unaudited). . . . . . . . . . . . . . $ 2.20
The accompanying notes are an integral part of these Consolidated
Financial Statements.
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended December 31,
------------------------------------------
1993 1992 1991
------------ ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income . . . . . . . . . $ 37,111 $ 27,364 $ 21,884
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 43,538 33,436 25,329
Provision for credit losses 21,634 28,057 29,876
Amortization of initial
direct costs . . . . . . . 8,946 10,417 12,081
Foreign currency
transaction gain . . . . . -- -- (2,857)
Valuation adjustment . . . . -- (6,000) --
Cumulative effect of changes
in accounting principles. . (5,530) -- 1,471
Gain on sale of equipment
and real estate held
under operating leases. . . (2,548) (72) (29)
Gain on transfer of
receivables . . . . . . . . (11,290) (13,065) (11,745)
Deferred income taxes. . . . (6,893) 593 (41)
Changes in certain assets
and liabilities:
(Increase) decrease in
other assets . . . . . . . (628) 2,491 28,404
Increase (decrease) in
accounts payable and
accrued expenses . . . . . 7,461 (8,320) (4,171)
----------- ----------- -----------
Net cash provided by
operating activities . . . . . 91,801 74,901 100,202
----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to notes
receivable and
finance leases . . . . . . (1,844,466) (1,355,261) (1,198,591)
Principal payments
received on notes
receivable and
finance leases. . . . . . . 1,553,092 1,053,913 969,786
Additions to equipment
and real estate held
under operating leases. . . (60,270) (57,686) (63,420)
Proceeds from sale of
equipment and real estate
under operating leases. . . 8,236 4,166 461
Proceeds from transfer
of receivables . . . . . . 183,242 275,049 291,053
----------- ----------- -----------
Net cash used in investing
activities . . . . . . . . . . (160,166) (79,819) (711)
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from borrowings . . 128,529 204,223 283,067
Principal repayments
of borrowings . . . . . . . (338,663) (254,155) (458,595)
Increase in amounts due
to affiliates . . . . . . . 261,352 32,703 73,579
Capital contributions . . . 21,438 40,416 6,073
Capital distributions . . . (3,932) (17,932) (3,677)
Other . . . . . . . . . . . (395) -- (42)
----------- ----------- -----------
Net cash provided by (used in)
financing activities . . . . . 68,329 5,255 (99,595)
----------- ----------- -----------
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH . . . . . . . 16 (31) (164)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH . . (20) 306 (268)
CASH, BEGINNING OF YEAR . . . . 4,503 4,197 4,465
----------- ----------- -----------
CASH, END OF YEAR . . . . . . . $ 4,483 $ 4,503 $ 4,197
=========== =========== ===========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND:
TriCon Capital Corporation, a wholly-owned subsidiary of Bell Atlantic
Investments, Inc. and, ultimately, Bell Atlantic Corporation ("Bell
Atlantic"), was incorporated on December 3, 1993 and will be the successor
entity to certain businesses of Bell Atlantic TriCon Leasing Corporation
("Old TriCon") which is wholly owned by Bell Atlantic Capital Corporation.
Prior to a planned restructuring (the "Restructuring") in contemplation
of a public offering of the Company's common stock, the Company will be
capitalized with amounts sufficient to acquire from Old TriCon certain
assets which comprise the Predecessor Business (described below).
Pursuant to the Restructuring, the Company will acquire substantially
all of the assets and assume certain liabilities of Old TriCon, other than
its leveraged lease portfolio, project finance portfolio and certain other
assets to be retained by Old TriCon (the "Transferred Assets" and "Excluded
Assets," respectively). The purchase price will be equivalent to the net
book value of the Transferred Assets, subject to certain adjustments, and
will be paid in part by the issuance of notes payable to Old TriCon.
Pursuant to the Restructuring, the Company will also, among other
things, assume the rights and obligations of Old TriCon under its
securitization agreements and enter into a five-year agreement to manage,
for a fee, the leveraged lease and project finance portfolios retained by
Old TriCon.
BASIS OF PRESENTATION:
The consolidated financial statements reflect the financial position,
results of operations and cash flows of TriCon Capital
Corporation--Predecessor Business, which consists of the assets and
liabilities to be acquired or assumed by the Company in the contemplated
Restructuring described above. Use of "the Company" in these financial
statements refers to the Predecessor Business, unless the context indicates
reference to TriCon Capital Corporation. The consolidated financial
statements include the accounts of a Canadian division and all wholly owned
subsidiaries which are included in the Predecessor Business. All significant
intercompany balances are eliminated.
The consolidated financial statements include allocations of certain
liabilities and expenses relating to the Predecessor Business to be
transferred to the Company in the Restructuring. Debt and related interest
expense were allocated between the Transferred Assets and the Excluded
Assets based upon the internal "match funding" and debt-to-equity ratio
policies of Old TriCon in place during such periods. Common expenses were
allocated on a proportional basis between the Transferred Assets and the
Excluded Assets. Management believes that these allocation methods are
reasonable.
Pro Forma Earnings Per Share (unaudited)
Pro forma earnings per share is calculated based on pro forma net
income divided by the number of shares of common stock of TriCon Capital
Corporation to be outstanding after the proposed offering of approximately
13,500,000 shares of common stock and grants of 11,972 shares to
non-management employees in connection therewith.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Finance Leases
Investment in finance leases consists of the minimum lease payments
receivable, estimated residual value of the equipment and initial direct
costs less unearned income and security deposits. The unearned income
represents the excess of the gross lease payments receivable plus the
estimated residual value over the cost of the equipment leased. Unearned
income is amortized to income so as to provide an approximate level rate of
return on the net outstanding investment. The original lease terms of the
direct finance leases are generally from 36 to 84 months.
Investment in Operating Leases
Investment in operating leases consist predominantly of medical
equipment and health care facilities. The Company recognizes operating lease
revenue on a straight-line basis over the term of the lease. The cost of
equipment and facilities held under operating leases is depreciated to the
estimated residual value, on a straight-line basis, over the shorter of the
estimated economic life or the period specified under the lease term.
Initial direct costs are deferred and amortized over the lease term on a
straight-line basis.
Residual Values
Residual values are reviewed by the Company at least annually. Declines
in residual values for finance leases are recognized as charges to income.
Declines in residual values for operating leases are recognized as
adjustments to depreciation on operating leases over the shorter of the
useful life of the asset or the remaining term of the lease.
Allowance for Credit Losses
In connection with the financing of leases and other receivables, the
Company records an allowance for credit losses to provide for estimated
losses in the portfolio. The allowance for credit losses is based on a
detailed analysis of delinquencies, an assessment of overall risks,
management's review of historical loss experience and evaluation of probable
losses in the portfolio as a whole given its diversification. An account is
fully reserved for or written off when analysis indicates that the
probability of collection of the account is remote.
Income Taxes
For federal income tax purposes, the results of the Company's
operations are included in Bell Atlantic's consolidated tax return. In
accordance with the Bell Atlantic Consolidated Federal Income Tax Allocation
Policy, the Company is allocated federal income tax, or benefit, to the
extent it contributes taxable income or loss, and credits, which are
utilized in consolidation. The Company and each of its subsidiaries file
separate state tax returns in the jurisdictions in which they conduct
business.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109),
which the Company adopted effective January 1, 1993. SFAS 109 requires the
determination of deferred taxes using the liability method. Under the
liability method, deferred taxes must be provided on all book and tax basis
differences and deferred tax balances must be adjusted to reflect enacted
changes in income tax rates. The cumulative impact of adopting SFAS 109 on
the earnings of the Company is a tax benefit of $5,763.
Prior to January 1, 1993, deferred taxes were provided for differences
in the measurement of revenue and expenses for financial accounting and
income tax purposes using the deferral method under Accounting Principles
Board Opinion No. 11 (APB 11), "Accounting for Income Taxes."
Interest Rate Swaps
Interest rate swaps are contracts between two parties to exchange
interest payments without the exchange of the underlying notional principal
amounts. The Company enters into interest rate swap agreements primarily to
hedge interest rate risks. The Company records a net receivable or payable
related to the interest to be paid or received as an adjustment to interest
expense. In the event of an early termination of an interest rate swap
contract, the gain or loss would be amortized over the remaining life of the
swap.
Foreign Currency Translation Adjustments
The financial statements of foreign operations are translated in
accordance with the provisions of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation." Under the provisions of
the statement, assets and liabilities are translated at year-end exchange
rates, and revenues and expenses are translated at average exchange rates
prevailing during the year. The related translation adjustments are
recorded as a separate component of Total Equity. Transactions denominated
in foreign currencies are translated at rates in effect at the time of the
transaction. Gains or losses resulting from foreign currency transactions
are included in results of operations.
3. INVESTMENT IN NOTES RECEIVABLE AND FINANCE LEASES
Investment in notes receivable consists primarily of amounts due the
Company relating to commercial inventory and accounts receivable financing
and first mortgage notes which are collateralized by the underlying
commercial real estate. The notes bear interest at rates ranging from 5.1%
to 15.4% and mature between the years 1994 and 2015. The components of
investment in notes receivable as of December 31 are as follows:
1993 1992
-------- --------
Notes receivable . . . . . . . . . . . . . . .. $883,122 $803,009
Initial direct costs . . . . . . . . . . . . . 5,002 4,272
Non-accrual accounts . . . . . . . . . . . . . 24,840 26,206
-------- --------
Investment in notes receivable . . . . . . . . $912,964 $833,487
======== ========
Investment in finance leases consists of various types of equipment
including diversified commercial use equipment, health care equipment and
data processing equipment. The original lease terms are generally from 36 to
84 months. The components of investment in finance leases as of December 31
are as follows:
1993 1992
-------- --------
Minimum lease payments . . . . . . . . . . . . $685,578 $659,097
Estimated residual value . . . . . . . . . . . 64,004 75,834
Less:
Unearned income . . . . . . . . . . . . . . . . 133,991 134,364
Security deposits . . . . . . . . . . . . . . . 20,737 20,171
Plus:
Initial direct costs . . . . . . . . . . . . . 15,259 13,426
Net investment in non-accrual accounts . . . . 36,942 45,770
-------- --------
Investment in finance leases . . . . . . . . . . $647,055 $639,592
======== ========
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENT IN NOTES RECEIVABLE AND FINANCE LEASES(Continued)
At December 31, 1993, estimated minimum annual receipts from notes
receivable and finance leases based upon contractual terms are as follows:
NOTES FINANCE
YEAR ENDING DECEMBER 31 RECEIVABLE LEASES
----------------------- ---------- ---------
1994 . . . . . . . . . . . . . . . . . . . . $338,390 $ 223,413
1995 . . . . . . . . . . . . . . . . . . . . 113,977 177,670
1996 . . . . . . . . . . . . . . . . . . . . . 95,010 130,487
1997 . . . . . . . . . . . . . . . . . . . . 81,733 82,128
1998 . . . . . . . . . . . . . . . . . . . . . 51,897 38,629
Thereafter . . . . . . . . . . . . . . . . . . 202,115 33,251
-------- ---------
$883,122 $ 685,578
======== =========
4. INVESTMENT IN OPERATING LEASES
Operating leases have original terms from 12 to 120 months. Investment
in operating leases consists of the following at December 31:
1993 1992
-------- --------
Medical equipment, at cost . . . . . . . . . . $215,951 $193,828
Commercial real estate, at cost . . . . . . . . 99,943 95,926
Other, at cost . . . . . . . . . . . . . . . . 6,466 6,466
-------- --------
Total cost . . . . . . . . . . . . . . . . . . 322,360 296,220
Less accumulated depreciation . . . . . . . . . (82,303) (65,499)
-------- --------
Net investment in operating leases . . . . . . $240,057 $230,721
======== ========
Depreciation expense relating to equipment and real estate held under
operating leases was $39,012, $28,645 and $21,191 in 1993, 1992 and 1991,
respectively.
Estimated minimum annual lease receipts from noncancelable operating
leases s of December 31, 1993 are as follows:
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,934
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,454
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,273
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,989
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 61,893
--------
$250,543
========
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. NOTES PAYABLE
Notes payable at December 31 consist of the following:
1993 1992
-------- --------
Recourse notes payable with interest rates
from 3.31% to 11.0% and maturity dates
through 2005 . . . . . . . . . . . . . . . . . $709,508 $918,617
Nonrecourse notes payable with fixed interest
rates from 8.5% to 9.3% and retired in 1993 . -- 1,025
-------- --------
Total notes payable . . . . . . . . . . . . $709,508 $919,642
======== ========
At December 31, 1992, all nonrecourse notes were collateralized by
specific lease receivables and the underlying equipment. During 1993, 1992
and 1991, the Company paid $82,656, $91,434 and $113,925, respectively, in
interest.
The above recourse note amounts are allocated from aggregate recourse
notes of Old TriCon of $847,917 and $1,066,193 at December 31, 1993 and
1992, respectively (see Note 1).
Under the terms of various recourse notes and receivable transfer
agreements, Old TriCon was subject to certain restrictive covenants. The
most restrictive of these covenants require Old TriCon to maintain a minimum
net worth of $150,000; an interest coverage ratio of at least 1.2:1; and a
ratio of indebtedness (as defined in the various agreements) to net worth
not to exceed 8:1. Old TriCon was in compliance with all covenants as of the
balance sheet dates. In addition, certain affiliates have agreed to maintain
Old TriCon's compliance with certain financial covenants pursuant to
agreements covering the majority of recourse borrowings at December 31,
1993. During 1993 and 1992, Old TriCon participated with an affiliate in the
issuance of medium-term notes. Old TriCon's share of the issuance was
$184,567 and $60,750 in 1993 and 1992, respectively, which is included in
recourse notes payable above. The notes bear interest at varying rates from
4.33% to 6.625% and have maturity dates through December 1999. The Company
recognized interest expense on these medium-term notes of $8,054 and $217 in
1993 and 1992, respectively.
Maturities of notes payable are as follows:
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,627
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,072
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,824
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,011
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,045
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 56,929
--------
$709,508
========
TRICON CAPITAL CORPORATION--PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. TOTAL EQUITY
The following are transactions affecting total equity:
1993 1992 1991
-------- -------- --------
Balance at beginning of year . . . . $256,903 $206,674 $185,069
Capital contributions . . . . . . . . 21,438 40,416 6,073
Net income . . . . . . . . . . . . . 37,111 27,364 21,884
Capital distributions . . . . . . . . (3,932) (17,932) (3,677)
Foreign currency translation
adjustments . . . . . . . . . . . . . 230 381 (2,633)
Other . . . . . . . . . . . . . . . . (395) -- (42)
-------- -------- --------
Total Equity at end of year . . . $311,355 $256,903 $206,674
======== ======== ========
7. INCOME TAXES
In 1990, Bell Atlantic was subject to the alternative minimum tax (AMT)
provisions of the 1986 Tax Reform Act on a tax return basis. The Company
has provided for its share of Bell Atlantic's consolidated current AMT
liability and for the deferred benefit relating to the corresponding AMT
credit carryforward.Bell Atlantic was able to utilize all AMT carryforwards
in 1991 and 1992. The Company's income tax expense for the years 1993, 1992
and 1991 would not have differed materially from that reported had the
Company filed tax returns on a stand alone basis.
The provision for income taxes (exclusive of the tax effect of the
cumulative effect of changes in accounting principles in 1993 and 1991) for
the years ended December 31 consists of the following:
1993 1992 1991
-------- ------- -------
Current:
Federal . . . . . . . . . . . . . . . $