<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7543
GREYHOUND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-1278569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
DIAL CORPORATE CENTER, PHOENIX, ARIZONA 85077
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602/207-6900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or such shorter period that the
Registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
YES / X / NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 8, 1994, 25,000 shares of Common Stock ($1.00 par value) were
outstanding. All the Common Stock of Greyhound Financial corporation is owned
by GFC Financial Corporation.
<PAGE> 2
<TABLE>
<CAPTION>
GREYHOUND FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION. Page No.
--------
<S> <C>
Item 1. Financial Statements.
Consolidated Financial Information:
Consolidated Balance Sheet - September 30, 1994 and
December 31, 1993 1 - 2
Consolidated Income Statement - Quarter and Nine Months
Ended September 30, 1994 and 1993 3
Consolidated Statement of Stockholder's Equity - Nine Months
Ended September 30, 1994 and 1993 4
Consolidated Statement of Cash Flows - Nine Months Ended
September 30, 1994 and 1993 5
Notes to Interim Consolidated Financial Information 6 - 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20 - 23
Part II OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREYHOUND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 34,729 $ 2,859
INVESTMENT IN FINANCING TRANSACTIONS:
Loans and other financing contracts, less unearned
income of $233,470 and $72,747, respectively 3,745,634 2,343,755
Direct financing leases 754,849 71,812
Operating leases 339,760 147,222
Leveraged leases 286,720 283,782
Factored receivables 167,136
---------- ----------
5,294,099 2,846,571
Less reserve for possible credit losses (115,231) (64,280)
---------- ----------
Investment in financing transactions - net 5,178,868 2,782,291
OTHER ASSETS AND DEFERRED CHARGES 216,659 49,747
---------- ----------
$5,430,256 $2,834,897
========== ==========
</TABLE>
See notes to interim consolidated financial information.
1
<PAGE> 4
GREYHOUND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDER'S EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 150,855 $ 30,158
Due to Parent 130,760
Customer deposits 2,730 3,064
Due to factored clients 117,107
Interest payable 21,160 23,633
Short-term debt 215 510
Senior debt 4,162,071 1,991,986
Subordinated debt 86,790
Deferred income taxes 211,081 197,705
---------- ----------
4,665,219 2,464,606
---------- ----------
REDEEMABLE PREFERRED STOCK 25,000
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value, 100,000 shares
authorized, 25,000 shares outstanding 25 25
Additional capital 677,948 298,665
Retained income 91,201 54,374
Cumulative translation adjustments (4,137) (7,773)
---------- ----------
765,037 345,291
---------- ----------
$5,430,256 $2,834,897
========== ==========
</TABLE>
See notes to interim consolidated financial information.
2
<PAGE> 5
GREYHOUND FINANCIAL CORPORATION
CONSOLIDATED INCOME STATEMENT
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1994 1993 1994 1993
------------------------- -------------------------
<S> <C> <C> <C> <C>
Interest and other income $108,985 $56,765 $266,516 $163,561
Financing lease income 20,689 4,613 40,281 13,514
Operating lease income 17,975 3,566 36,704 11,331
-------- ------- -------- --------
Interest earned from financing
transactions 147,649 64,944 343,501 188,406
Interest expense 65,881 30,788 153,391 92,779
Operating lease depreciation 11,345 1,494 21,626 4,338
-------- ------- -------- --------
Interest margins earned 70,423 32,662 168,484 91,289
Provision for possible credit losses 2,215 178 10,353 3,706
-------- ------- -------- --------
Net interest margins earned 68,208 32,484 158,131 87,583
Gains on securitizations and sale of assets
of assets 1,169 5,672 2,240
-------- ------- -------- --------
69,377 32,484 163,803 89,823
Selling, administrative and other
operating expenses 32,591 14,211 77,796 42,044
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 36,786 18,273 86,007 47,779
Income taxes:
Current 14,730 6,666 34,838 17,304
Adjustment to deferred taxes 4,857 4,857
-------- ------- -------- --------
NET INCOME $ 22,056 $ 6,750 $ 51,169 $ 25,618
======== ======= ======== ========
</TABLE>
See notes to interim consolidated financial information.
3
<PAGE> 6
GREYHOUND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1994 1993
-------- --------
<S> <C> <C>
COMMON STOCK:
Balance, beginning and end of period $ 25 $ 25
-------- --------
ADDITIONAL CAPITAL:
Balance, beginning of period 298,665 298,665
Contributions from GFC Financial Corporation 379,283
-------- --------
Balance, end of period 677,948 298,665
-------- --------
RETAINED INCOME:
Balance, beginning of period 54,374 33,783
Net income 51,169 25,618
Dividends on common and preferred stock (14,342) (11,688)
-------- --------
Balance, end of period 91,201 47,713
-------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance, beginning of period (7,773) (6,685)
Unrealized translation gain 3,636 62
-------- --------
Balance, end of period (4,137) (6,623)
-------- --------
TOTAL STOCKHOLDER'S EQUITY $765,037 $339,780
======== ========
</TABLE>
See notes to interim consolidated financial information.
4
<PAGE> 7
GREYHOUND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
OPERATING ACTIVITIES: 1994 1993
----------- ----------
<S> <C> <C>
Net income $ 51,169 $ 25,618
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Provision for possible credit losses 10,353 3,706
Operating lease depreciation 21,626 4,338
Other depreciation and amortization 6,285 2,055
Gains on securitization of assets (3,959)
Gains on sale of assets (1,713) (2,240)
Deferred income taxes 13,376 17,152
Change in assets and liabilities, net of effects from
subsidiaries purchased:
(Increase) decrease in other assets (38,356) 4,634
Decrease in accounts payable and accrued expenses (66,519) (19,679)
Decrease in customer deposits (401) (7,492)
Decrease in interest payable (2,473) (15,631)
Other (87) 62
----------- ---------
Net cash (used) provided by operating activities (10,699) 12,523
----------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of assets 22,840 2,482
Proceeds from assets securitized 115,507
Principal collections on financing transactions 639,340 420,623
Expenditures for financing transactions (973,086) (591,215)
Net change in short-term financing transactions (147,841)
Purchase of Asset Based Finance (69,808)
Purchase of Ambassador Factors (246,285)
Purchase of TriCon (344,212)
Net advances to discontinued insurance subsidiary 57,321
Other 1,109 220
----------- ---------
Net cash used by investing activities (932,628) (180,377)
----------- ---------
FINANCING ACTIVITIES:
Long-term borrowings 827,550 200,000
Net borrowings under commercial paper 1,036,915 15,966
Repayment of long-term borrowings (1,125,609) (167,664)
Net advances and contributions from Parent 233,923
Redemption of preferred stock 146,500
Dividends (14,342) (11,688)
Net change in due to factored clients 16,760
----------- ---------
Net cash provided by financing activities 975,197 183,114
----------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 31,870 15,260
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,859 19,120
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34,729 $ 34,380
=========== =========
</TABLE>
See notes to interim consolidated financial information.
5
<PAGE> 8
GREYHOUND FINANCIAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
NOTE A SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements present the financial position,
results of operations and cash flows of Greyhound Financial Corporation ("GFC"
or the "Company") and subsidiaries, including the European Financial Group,
Ambassador Factors Corporation (formerly known as Fleet Factors Corp.)
("Ambassador") acquired on February 14, 1994 and TriCon Capital ("TriCon")
acquired on April 30, 1994. GFC is a wholly-owned subsidiary of GFC Financial
Corporation ("GFC Financial" or "GFCFC").
This information should be read in connection with the financial
statements set forth in the GFC Annual Report for the year ended December 31,
1993 heretofore filed with the Commission as Annex "A" to the Registrant's
Annual Report on Form 10-K. The accounting policies utilized in the
preparation of the financial information herein are the same as set forth in
such Annual Report, as modified for interim accounting policies which are
within the guidelines set forth in Accounting Principles Board Opinion No. 28.
The Company enters into derivative financial instruments as part of its
interest rate risk management. The Company uses interest rate swaps and
interest rate hedge agreements. These interest rate derivatives are accounted
for using settlement or matched swap accounting. Periodic net cash settlements
are recognized when they accrue.
The Company's off-balance sheet derivative instruments involve credit
and interest rate risks. The credit risk is the nonperformance by the
counterparties to the financial instruments. All financial instruments have
been entered into with major financial institutions, which are expected to
fully perform under the terms of the agreements, thereby mitigating the credit
risk from the transactions. Interest rate risks relate to changes in interest
rates and the impact on earnings. The Company mitigates interest rate risks
through its matched funding policy.
The Financial Accounting Standards Board ("FASB") has issued a new
accounting standard, Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). This
standard requires that impaired loans that are within the scope of this
statement generally be measured based on the present value of expected cash
flows discounted at the loan's effective interest rate or the fair value of the
collateral, if the loan is collateral dependent. Under SFAS 114, a loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due. Presently,
the reserve for possible credit losses represents management's estimate of the
amount necessary to cover potential losses in the portfolio considering
delinquencies, loss experience and collateral. The impact of the new standard,
which is effective for fiscal years beginning after December 15, 1994 and will
be adopted by the Company effective January 1, 1995, has not yet been
determined.
Effective January 1, 1994, the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits". Analogous to SFAS No. 106
for postretirement benefits, this standard requires companies to accrue for
estimated future postemployment benefits during the periods when employees are
working. Postemployment benefits are any benefits other than retirement
benefits that are provided after employment is discontinued. The adoption of
the new standard did not have a material impact on the Company's financial
position or results of operations.
6
<PAGE> 9
The interim consolidated financial information is unaudited. In the
opinion of management all adjustments, consisting only of normal recurring
accruals, necessary to present fairly the financial position as of September
30, 1994, the results of operations for the quarter and nine months ended
September 30, 1994 and 1993 and cash flows for the nine months ended September
30, 1994 and 1993, have been included. Interim results of operations are not
necessarily indicative of the results of operations for the full year.
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
During the nine months ended September 30, 1994, GFC Financial
contributed $127,716,000 of intercompany loans and other assets and $25,000,000
of preferred stock to GFC as additional paid in capital.
NOTE B PORTFOLIO QUALITY
The following table presents a breakdown (by line of business) of the
Company's investment in financing transactions before the reserve for possible
credit losses at the dates indicated.
7
<PAGE> 10
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
SEPTEMBER 30, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------------------------- ---------------------------------
Repos- 90 Days Repos-
Original Rewritten Operating sessed Delin- sessed
Rate Contracts Leases Assets(3) quent Assets Other
------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Real Estate Finance $ 651,406 $ 7,500 $ $30,853 $ 998 $28,293 $
Transportation Finance (1) 472,284 14,455 163,814
Resort Finance 603,289 4,783 530 13,035 20,009 143
Communications Finance 523,358 6,250 8,977 6,593 27,048 671
Corporate Finance 206,776 22,200 5,181 6,759 3,787 297
Asset Based Finance 259,714
Consumer Rediscounting 59,461
European Finance (2) 87,422 1,954 4,269 19,818 11
Ambassador Factors 328,619 11,151 1,953
Medical Finance 305,996 146,323 2,437
Franchise Finance 276,013 7,363 14,710
Vendor Service 263,382 21,459
Commercial Credit Services 257,045 1,263
Commercial Equipment Finance 245,635 868 24,824 8,896
Government Finance 93,804 579
Capital Services 10,700 9,141
---------- ------- -------- ------- -------- ------- ------
TOTAL (4) $4,644,904 $65,373 $344,941 $52,865 $103,804 $81,101 $1,111
========== ======= ======== ======= ======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Total
Carrying
Amount %
-------------------
<S> <C> <C>
Commercial Real Estate Finance $ 719,050 13.6
Transportation Finance (1) 650,553 12.3
Resort Finance 641,789 12.1
Communications Finance 572,897 10.8
Corporate Finance 245,000 4.6
Asset Based Finance 259,714 4.9
Consumer Rediscounting 59,461 1.1
European Finance (2) 113,474 2.1
Ambassador Factors 341,723 6.5
Medical Finance 454,756 8.6
Franchise Finance 298,086 5.6
Vendor Service 284,841 5.4
Commercial Credit Services 258,308 4.9
Commercial Equipment Finance 280,223 5.3
Government Finance 94,383 1.8
Capital Services 19,841 0.4
---------- -----
TOTAL (4) $5,294,099 100.0
</TABLE>
NOTES:
(1) Transportation Finance includes $46.7 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
$51.8 million that were combined as one transaction pursuant to a
participation agreement with an engine and hushkitting company.
(2) The European Finance balance includes transactions in Europe and other
continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. Also, European Finance includes $40.4 million of Consumer Finance
assets, of which $6.6 million are nonaccruing. Consumer Finance
accounts are generally considered nonaccruing after being 180 days
delinquent.
(3) The Company earned income totaling $2.6 million on repossessed assets
during 1994, including $1.4 million in Commercial Real Estate Finance,
$0.7 million in Resort Finance and $0.5 million in Communications
Finance.
(4) Excludes $307.5 million of assets securitized which the Company manages.
8
<PAGE> 11
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
-------------------------------------------------- ------------------------------
Repos- 90 Days Repos-
Original Rewritten Operating sessed Delin- sessed
Rate Contracts Leases Assets(4) quent Assets Other
-------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Real Estate Finance (1) $ 500,598 $ 1,574 $ $27,844 $ 1,055 $25,542 $
Transportation Finance (1) (2) 457,741 146,675 841
Resort Finance 530,070 4,869 547 12,163 19,001 440
Communications Finance 487,890 7,989 8,949 8,264 25,030
Corporate Finance (1) 221,711 27,921 2,277 7,428 386
Asset Based Finance 176,068
Consumer Rediscounting 19,439
European Finance (3) 107,486 4,430 12,320 23
---------- ------- -------- ------- ------- ------- ----
TOTAL $2,501,003 $46,783 $147,222 $48,956 $24,757 $77,024 $826
========== ======= ======== ======= ======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
Total
Carrying
Amount %
---------------------
<S> <C> <C>
Commercial Real Estate Finance (1) $ 556,613 19.6
Transportation Finance (1) (2) 605,257 21.2
Resort Finance 567,090 19.9
Communications Finance 538,122 18.9
Corporate Finance (1) 259,723 9.1
Asset Based Finance 176,068 6.2
Consumer Rediscounting 19,439 6.2
European Finance (3) 124,259 4.4
---------- -----
TOTAL $2,846,571 100.0
========== =====
</TABLE>
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) 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) The European Finance balance includes transactions in Europe and other
continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. Also, European Finance includes $45.3 million of Consumer Finance
assets of which $9.6 million are nonaccruing. Consumer Finance accounts
are generally considered nonaccruing after being 180 days delinquent.
(4) The Company earned income totaling $2.7 million on repossessed accruing
assets during 1993, including $1.5 million in Commercial Real Estate
Finance, $0.6 million in Communications Finance and $0.6 million in
Resort Finance.
9
<PAGE> 12
REWRITTEN CONTRACTS:
In the normal course of business, the Company has renegotiated certain
contracts and has modified them with respect to rates and other terms. At
September 30, 1994 and December 31, 1993, the Company had approximately $65.4
million and $46.8 million, respectively, of these rewritten contracts requiring
disclosure under the provisions of SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings". These contracts are all current
under the revised terms and yield on a weighted average basis a return of
approximately 10%.
NONACCRUING ASSETS:
Income recognition on an account is suspended and the account generally
is classified as nonaccruing at the earlier of the date when an account is 90
days or more past due (180 days for Consumer Finance contracts in the United
Kingdom) or when, in the opinion of management, a full recovery of income and
principal becomes doubtful. Payments (full or partial) are currently being
received on some of these accounts; however, income generally is not recognized
until performance is demonstrated to be resumed.
Total nonaccruals increased to $186.0 million at September 30, 1994
from $102.6 million at December 31, 1993. This increase primarily is due to
the inclusion of nonaccruing assets of TriCon ($60 million) and Ambassador
($14.7 million). The total at September 30, 1994 represented 3.3% of funds
employed and assets securitized ("managed assets") compared to 3.6% of funds
employed at December 31, 1993.
RESERVE AND ACCRUED LIABILITIES FOR POSSIBLE CREDIT LOSSES:
The reserve and accrued liabilities for possible credit losses of
$130.7 million at September 30, 1994 represents 2.3% of the aggregate carrying
amount of managed assets before deducting such reserve. Accrued liabilities of
$15.5 million represent an allowance for estimated losses under certain
recourse provisions on $307.5 million of assets securitized. Changes in the
reserve for possible credit losses were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1994 1993
-------- -------
(Dollars in Thousands)
<S> <C> <C>
Balance, beginning of period $ 64,280 $69,291
Provision for possible credit losses 10,353 3,706
Write-offs (19,009) (8,337)
Recoveries 1,109 434
Other (including addition of TriCon and Ambassador reserves) 58,498 1,245
-------- -------
Balance, end of period $115,231 $66,339
======== =======
</TABLE>
The Company believes that collateral values significantly reduce its
loss exposure and that the reserve for possible credit losses is adequate.
10
<PAGE> 13
NOTE C RECEIVABLE TRANSFER AGREEMENTS (SECURITIZATIONS)
During the nine months ended September 30, 1994, the Company
transferred its interests in approximately $125.4 million of its direct finance
lease portfolio for $135.0 million. These transfers provide limited recourse
for credit losses to the Company and certain of its assets. As of September
30, 1994, $56.7 million of finance lease receivables are the sole collateral
for certain limited recourse provisions. In addition to such finance lease
receivables, the Company has recourse exposure limited to $95.2 million. An
outstanding allowance for estimated losses under these recourse provisions of
$15.5 million is included in accounts payable and accrued expenses. The
Company will service these lease contracts for the transferee and has deferred
a portion of the proceeds to be recognized as service fee income over the term
of the agreements.
NOTE D BORROWINGS
Senior and subordinated debt was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
(Dollars in Thousands)
<S> <C> <C>
Senior debt:
Commercial paper and short-term bank loans
supported by unused long-term bank revolving credit
agreements, less unamortized discount $1,552,789 $ 515,876
Medium-term notes due to 2003, 4.5% to 12.5% 1,228,363 751,500
Term loans payable to banks due to 1996, 4.2% 130,001 150,000
Senior notes due to 2002, 6.8% to 16.0%, less
unamortized discount 1,232,829 555,666
Nonrecourse installment notes due to 2002, 10.6%
(assets of $25,189 and $25,613, respectively,
pledged as collateral) 18,089 18,944
---------- ----------
Total senior debt 4,162,071 1,991,986
---------- ----------
Subordinated debt repaid in 1994, 14.1% 86,790
---------- ----------
TOTAL $4,162,071 $2,078,776
========== ==========
</TABLE>
NOTE E DERIVATIVES
The following table provides information for each significant
derivative product type. The derivatives are primarily related to interest
rate swaps. These rate swaps generally involve the exchange of fixed- and
floating-rate interest payments based on an underlying notional amount. The
rates presented are as of October 25, 1994. To the extent that rates change,
variable interest information will change.
11
<PAGE> 14
GREYHOUND FINANCIAL CORPORATION
DERIVATIVE MATURITIES AND AVERAGE INTEREST
(Dollars in Millions)
<TABLE>
<CAPTION>
Maturities of Derivative Products
--------------------------------------------------------------
There- Sept. 30,
1994 1995 1996 1997 1998 after 1994
-------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RECEIVE FIXED-RATE SWAPS:
Notional value $ $ 40 $ 100 $ 275 $ 325 $ 450 $1,190
Weighted average receive rate 5.52% 5.22% 6.80% 6.76% 6.72% 6.58%
Weighted average pay rate 6.00% 5.69% 5.69% 5.69% 5.76% 5.73%
PAY FIXED-RATE GENERIC SWAPS:
Notional value 30 225 125 50 430
Weighted average receive rate 6.00% 5.79% 5.69% 6.00% 5.80%
Weighted average pay rate 9.09% 6.22% 7.20% 9.10% 7.04%
PAY FIXED-RATE AMORTIZING SWAPS:
Notional value 67 137 66 18 288
Weighted average receive rate 4.98% 4.98% 4.98% 4.98% 4.98%
Weighted average pay rate 4.66% 4.88% 5.25% 6.18% 4.99%
INTEREST RATE HEDGE AGREEMENTS:
Notional value 750 750
Weighted average receive rate 1.75% 1.75%
Weighted average pay rate 1.75% 1.75%
BASIS SWAPS:
Notional value 50 76 128 254
Weighted average receive rate 5.01% 5.07% 5.78% 5.42%
Weighted average pay rate 5.13% 5.58% 6.10% 5.75%
----- ----- ------ ------ ---- ----- ------
TOTAL NOTIONAL VALUE $ 117 $ 283 $1,141 $ 418 $ 503 $ 450 $2,912
===== ===== ====== ====== ===== ===== ======
TOTAL WEIGHTED AVERAGE RATES ON SWAPS
Receive rate 4.99% 5.19% 3.04% 6.39% 6.44% 6.72% 4.96%
===== ===== ====== ====== ===== ===== ======
Pay rate 4.86% 5.67% 3.18% 6.16% 6.13% 5.76% 4.83%
===== ===== ====== ====== ===== ===== ======
</TABLE>
12
<PAGE> 15
NOTE F INCOME TAXES
The federal statutory income tax rate is reconciled to the effective
income tax rate as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1994 1993
---- ----
<S> <C> <C>
Federal statutory income tax rate 35.0 % 35.0 %
State income tax (net of federal deduction) 4.6 % 3.9 %
Foreign tax effects 1.7 % (1.6)%
Other (0.8)% (1.1)%
---- ----
Current income taxes 40.5 % 36.2 %
Adjustment to deferred taxes 10.2 %
---- ----
Provision for income taxes 40.5 % 46.4 %
==== ====
</TABLE>
NOTE G AVERAGE BALANCES/INTEREST MARGIN/AVERAGE ANNUAL RATES
The following table presents a breakdown of the Company's average
balance sheet, interest margins and average annual rates for the nine months
ended or at September 30, 1994:
13
<PAGE> 16
<TABLE>
<CAPTION>
Nine Months Ended
or at
September 30, 1994 (1)
---------------------------------------
Average Average
ASSETS: Balance Interest Rate
---------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 22,356 $
Investment in financing transactions 4,133,147 321,875 11.4% (2)
Less reserve (92,582) --------
----------
Investment in financing transactions - net 4,040,565
----------
Other assets and deferred charges 172,063
----------
$4,234,984
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Other liabilities $ 239,620
Senior and subordinated debt 3,201,708 153,391 6.4%
Deferred income taxes 208,054
----------
3,649,382
Redeemable preferred stock 10,000
Stockholder's equity 575,602
----------
$4,234,984
==========
Interest income/average earning assets (2) 321,875 11.4%
Interest expense/average earning assets (2) (3) 153,391 5.4%
-------- ----
Interest margin earned (3) $168,484 6.0%
======== ====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
or at
September 30, 1993 (1)
---------------------------------------
Average Average
Balance Interest Rate
---------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 26,750 $
Investment in financing transactions
Less reserve 2,570,355 184,068 10.9% (2)
(67,815) --------
Investment in financing transactions - net ----------
2,502,540
Other assets and deferred charges ----------
45,805
----------
$2,575,095
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Other liabilities
Senior and subordinated debt $ 125,353
Deferred income taxes 1,906,758 92,779 6.5%
185,200
----------
2,217,311
Redeemable preferred stock 25,000
Stockholder's equity 332,784
----------
$2,575,095
==========
184,068 10.9%
Interest income/average earning assets (2) 92,779 5.5%
Interest expense/average earning assets (2) (3) -------- ----
Interest margin earned (3) $ 91,289 5.4%
======== ====
</TABLE>
______________
(1) Includes financial results from the acquisitions of Ambassador
(February 14, 1994) and TriCon (April 30, 1994).
(2) Average earning assets ($3,759,107 and $2,255,330 for 1994 and 1993,
respectively) are net of average deferred taxes on leveraged leases
and average nonaccruing assets.
(3) For the nine months ended September 30, 1994, excluding the impact of
derivatives, interest expense would have been $171,695 or 6.1% of
average earning assets and interest margins earned would have been
$150,180 or 5.3% of average earning assets. For the nine months ended
September 30, 1993, excluding the impact of derivatives, interest
expense would have been $112,623 or 6.7% of average earning assets and
interest margins would have been $71,445 or 4.2% of average earning
assets.
14
<PAGE> 17
NOTE H RATIO OF INCOME TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
The following are the ratios of income to combined fixed charges and
preferred stock dividends for the nine months ended September 30, 1994 and 1993
and the years ended December 31, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
-------------- -----------------------
1994 1993 1993 1992 1991
-------------- -----------------------
<S> <C> <C> <C> <C> <C>
Ratio of income to combined fixed charges
and preferred stock dividends 1.55 1.40 1.47 1.35 --
==== ==== ==== ==== ====
</TABLE>
Note: Preferred stock dividends are included in periods subsequent
to March 1992 through March 31, 1994.
Variations in interest rates generally do not have a substantial
impact on the ratio because fixed-rate and floating-rate assets are generally
matched with liabilities of similar rate and term.
Income available for fixed charges, for purposes of the computation of
the ratio of income to combined fixed charges and preferred stock dividends,
consists of the sum of income before income taxes (adjusted for the effect of
reduced tax rates on income from leveraged leases) and fixed charges. Combined
fixed charges include interest and related debt expense and a portion of rental
expense determined to be representative of interest and preferred stock
dividends grossed up to a pre-tax basis.
For the year ended December 31, 1991, earnings were inadequate to
cover combined fixed charges by $35.3 million. The decline in the ratio in
1991 was due to restructuring and other charges and transaction costs recorded
in the fourth quarter of 1991. Those charges and costs were recorded in
connection with the spin-off of the Company from The Dial Corp in March 1992.
NOTE I PURCHASES OF AMBASSADOR FACTORS AND TRICON CAPITAL
On February 14, 1994, GFC acquired Ambassador from Fleet Financial
Group, Inc. ("Fleet"). The cash purchase price of the acquisition was
$246,285,000 and represented Ambassador's stockholder's equity, including a
premium ($76,285,000), and repayment of the intercompany balance due from
Ambassador to Fleet ($170,000,000). In addition, GFC assumed $100,348,000 due
to factored clients, $928,000 of accrued liabilities and $8,800,000 of
additional liabilities and transaction costs. The acquisition has been
accounted for as a purchase and created approximately $30,400,000 of goodwill,
which will be amortized on a straight line basis over 20 years.
The acquisition was financed with proceeds received from the sale of
GFC Financial's discontinued mortgage insurance subsidiary and cash generated
from operations. GFC Financial, simultaneous with the acquisition, increased
its investment in GFC by contributing $40,000,000 of intercompany loans as
additional paid in capital of GFC.
On April 30, 1994, GFC acquired all of the stock of TriCon from Bell
Atlantic Corporation ("Bell Atlantic"), in an all-cash transaction. The cash
purchase price of the acquisition was $344,212,000. In addition, GFC assumed
outstanding indebtedness and liabilities of TriCon totaling $1,500,650,000 and
incurred additional liabilities and acquisition costs of $7,500,000. The
acquisition has been
15
<PAGE> 18
accounted for as a purchase and created approximately $69,817,000 of goodwill,
which will be amortized on a straight line basis over 20 years.
The cash purchase price was financed initially with the proceeds from
the issuance of $300,000,000 of debt securities of GFC and the remainder with
internally generated funds. A portion of the interim debt was replaced with
the net proceeds from a public offering completed in May 1994 of 8,050,000
shares of GFC Financial's common stock (the "Offering"), which, together with
cash, the outstanding preferred stock of GFC held by GFC Financial and the
remaining intercompany loans from GFC Financial to GFC were contributed as
additional paid in capital of GFC (the "Contributions").
The following Pro Forma Statements of Consolidated Income for the nine
months ended September 30, 1994 and 1993 have been prepared to reflect net
income as adjusted to reflect the acquisitions of Ambassador and TriCon as if
such acquisitions had occurred on January 1, 1994 and 1993, respectively and
give effect to the Offering and contributions as of such dates. The Pro Forma
Statements of Consolidated Income are unaudited and are not necessarily
indicative of the results that would have occurred if such acquisitions had
been consummated as of January 1, 1994 or January 1, 1993, nor are they
necessarily indicative of the results of future operations.
16
<PAGE> 19
GREYHOUND FINANCIAL CORPORATION
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Historical
------------------------------------------
TriCon
Ambassador January
January thru April
Company(1) 1994(1) 1994(1)
------------------------------------------
<S> <C> <C> <C>
Interest earned from financing transactions $343,501 $3,072 $75,566
Interest expense and depreciation 175,017 563 37,711
-------- ------ -------
Interest margins earned 168,484 2,509 37,855
Provision for possible credit losses 10,353 500 7,749
-------- ------ -------
Net interest margins earned 158,131 2,009 30,106
Gains on securitizations and sale of assets 5,672
-------- ------ -------
163,803 2,009 30,106
Selling, administrative and other operating
expenses 77,796 634 18,198
-------- ------ -------
86,007 1,375 11,908
Income taxes 34,838 649 4,059
-------- ------ -------
NET INCOME $ 51,169 $ 726 $ 7,849
======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------------------
Ambassador TriCon
(1) (1) Pro Forma
------------------------------------- ---------
<S> <C> <C> <C>
Interest earned from financing transactions $ $(3,158) (7) $419,481
500 (8)
Interest expense and depreciation 131 (2) 949 (9) 214,371
----- ------- --------
Interest margins earned (131) (3,607) 205,110
Provision for possible credit losses 18,602
----- ------- --------
Net interest margins earned (131) (3,607) 186,508
Gains on securitizations and sale of assets 5,672
----- ------- --------
(131) (3,607) 192,180
Selling, administrative and other operating
expenses 206 (3) 1,164 (10) 98,334
83 (4) 253 (8)
----- ------- --------
(420) (5,024) 93,846
Income taxes (168) (5) (2,010) (11) 37,269
(99) (6)
----- ------- --------
NET INCOME $(153) $(3,014) $ 56,577
===== ======= ========
</TABLE>
17
<PAGE> 20
GREYHOUND FINANCIAL CORPORATION
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
Historical
------------------------------------
Company Ambassador TriCon
------------------------------------
<S> <C> <C> <C>
Interest earned from financing transactions $188,406 $28,522 $178,140
Interest expense and depreciation 97,117 4,865 91,771
-------- ------- --------
Interest margins earned 91,289 23,657 86,369
Provision for possible credit losses 3,706 5,200 17,956
-------- ------- --------
Net interest margins earned 87,583 18,457 68,413
Gains on sale of assets 2,240
-------- ------- --------
89,823 18,457 68,413
Selling, administrative and other
operating expenses 42,044 6,222 35,581
-------- ------- --------
47,779 12,235 32,832
Income taxes 22,161 5,942 15,301
-------- ------- --------
Income from continuing operations 25,618 6,293 17,531
Cumulative effect of changes in
accounting principles 480 5,763
-------- ------- --------
NET INCOME $ 25,618 $ 6,773 $ 23,294
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------------- Pro
Ambassador TriCon Forma
---------------------------- ---------
<S> <C> <C> <C>
Interest earned from financing transactions $ $(3,527) (7) $392,666
1,125 (8)
Interest expense and depreciation 3,170 (2) 3,460 (9) 200,383
------- ------- --------
Interest margins earned (3,170) (5,862) 192,283
Provision for possible credit losses 26,862
------- ------- --------
Net interest margins earned (3,170) (5,862) 165,421
Gains on sale of assets 2,240
------- ------- --------
(3,170) (5,862) 167,661
Selling, administrative and other
operating expenses 1,853 (3) 2,618 (10) 89,637
750 (4) 569 (8)
------- ------- --------
(5,773) (9,049) 78,024
Income taxes (2,309) (5) (3,620) (11) 33,313
(918) (6) (3,244) (12)
------- ------- --------
Income from continuing operations (2,546) (2,185) 44,711
Cumulative effect of changes in
accounting principles 6,243
------- ------- --------
NET INCOME $(2,546) $(2,185) $ 50,954
======= ======= ========
</TABLE> 18
<PAGE> 21
NOTES TO PRO FORMA STATEMENTS OF CONSOLIDATED INCOME
(1) Pro forma adjustments included in the Pro Forma Statement of
Consolidated Income for the nine months ended September 30, 1994
related to the acquisitions of Ambassador and TriCon present the
effects of the one month and four months, respectively, not included
in the Company's historical financial statements.
ACQUISITION OF AMBASSADOR
(2) To record the estimated interest expense ($131,000 - 1994; $3,170,000
- 1993) arising from the debt incurred to fund the acquisition and the
repayment of the intercompany payable due to Fleet. The 1994
adjustment is partially offset by interest saved as a result of the
$40,000,000 of intercompany loans from GFC Financial to GFC
contributed as additional paid in capital of GFC in connection with
the acquisition of Ambassador.
(3) To record amortization of goodwill ($206,000 - 1994; $1,853,000 -
1993) based on an amortization period of twenty years and amortization
of the covenant not to compete over one year (see Note (13)).
(4) To record administrative expenses for additional employees and general
overhead ($83,000 - 1994; $750,000 - 1993).
(5) To record the income tax effect ($168,000 - 1994; $2,309,000 - 1993)
of Notes (2), (3), and (4) at the Company's effective incremental
income tax rate of 40%.
(6) To adjust income taxes for the lower state income tax rate applicable
to the Company ($99,000 - 1994; $918,000 - 1993).
ACQUISITION OF TRICON
(7) To reduce interest earned from financing transactions for the income
recorded on assets not purchased by the Company in 1994 and 1993
($3,158,000 - 1994; $3,527,000 - 1993).
(8) To reflect base fees ($500,000 - 1994; $1,125,000 - 1993) and
incremental costs ($253,000 - 1994; $569,000 - 1993) related to an
agreement to manage leveraged leases for Bell Atlantic by TriCon.
(9) To record interest expense ($949,000 - 1994; $3,460,000 - 1993)
resulting from the additional debt issued to purchase TriCon and
certain debt to Bell Atlantic incurred to fund a deferred tax payment
and dividends, reduced by the interest savings applicable to the debt
not transferred in the TriCon acquisition and interest savings as a
result of the equity contribution of the intercompany loans.
(10) To record amortization of goodwill ($1,164,000 - 1994; $2,618,000 -
1993) based on an amortization period of twenty years (see Note (13)).
(11) To record the income tax effect ($2,010,000 - 1994; $3,620,000 - 1993)
of Notes (7) through (10) at the Company's effective incremental
income tax rate of 40%.
(12) To reduce TriCon's income taxes for the effect of increases in income
tax rates for 1993 (principally the increase in the federal tax rate)
due to the deferred tax payment and the new tax basis in assets at the
beginning of the pro forma period ($3,244,000).
19
<PAGE> 22
(13) Goodwill may be adjusted as the final allocation of the values of the
purchased assets and liabilities is established.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1994
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1993
The following discussion relates to Greyhound Financial Corporation
("GFC" or the "Company") and subsidiaries, including European Financial Group
("GEFG"), Ambassador Factors ("Ambassador") acquired on February 14, 1994 and
TriCon Capital ("TriCon") acquired on April 30, 1994. GFC is a wholly owned
subsidiary of GFC Financial Corporation.
RESULTS OF OPERATIONS
Net income increased 100% during the nine months of 1994 to $51.2
million from $25.6 million in the comparable 1993 period. The 1994 results
include income for eight and five months from Ambassador and TriCon,
respectively. Net income in 1993 included a $4.9 million adjustment for tax
rate increases applicable to deferred income taxes generated by the Company's
leveraged lease portfolio.
INTEREST MARGINS EARNED. Interest margins earned, which represent the
difference between interest earned from financing transactions and interest
expense and operating lease depreciation, increased to $168.5 million for the
nine months of 1994 from $91.3 million for the comparable 1993 period, an
increase of 85%.
This increase was driven by portfolio growth, together with the
addition of TriCon and Ambassador in 1994. The primary source of the growth
was new business, which totaled $1.12 billion for the nine months of 1994
compared to $591 million for the 1993 period (an increase of 90%).
Interest margins earned, measured as a percent of average earning
assets, were strong at 6.0%. This measurement compares to 5.4% for the 1993
period and reflects the contributions of the acquisitions made in 1994 as well
as the continuing strong returns of the core finance operations.
The improvement in interest margins more than offset the higher
provisions for possible credit losses and the higher selling, administrative
and other operating expenses (collectively "operating expenses").
NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for
possible credit losses ("reserve"), were higher by $6.6 million during the
first nine months of 1994 compared to the same period in 1993. The higher loss
provisions are consistent with the requirements of a larger portfolio and the
risk characteristics of some of the businesses acquired. Higher interest
margins generated by Ambassador and certain TriCon businesses are used to cover
the higher risk profile associated with those businesses. Management believes
that reserve coverage (reserve and accrued liabilities/nonaccruing assets)
remains adequate at 70.3% of nonaccruing assets and at 2.3% of funds employed
and securitizations.
Selling, administrative and other operating expenses were up by
approximately $35.8 million in the 1994 period reflecting an increase
consistent with the growth in assets. The running rate of these expenses
(measured as a percent of interest margins earned) was 46.2% (for the combined
entities) in 1994, an increase from 46.1% for GFC (which excluded TriCon and
Ambassador) in 1993.
20
<PAGE> 23
GAINS ON SECURITIZATIONS AND SALE OF ASSETS. Gains on securitizations
and sale of assets were $3.4 million higher in 1994 compared to the same period
in 1993. The increase principally is the result of a $4.0 million ($2.4
million after-tax) gain from the securitization of assets recorded in the
second quarter of 1994.
INCOME TAXES. Income taxes for the nine months of 1994 increased to
$34.8 million from $22.2 million in 1993. This increase is attributable to:
(a) higher income before income taxes; (b) higher income tax rates in 1994
(both federal and state), and (c) increased foreign income taxes. The overall
effective income tax rate for the Company, including both federal and state
income taxes, approximates 40.5% for 1994 and 36.2% for 1993, excluding the tax
adjustment for the Company's leveraged lease portfolio.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Funds employed increased by $2.5 billion to $5.3 billion at September
30, 1994 from $2.8 billion at December 31, 1993. This increase is attributable
to the acquisition of TriCon ($1.8 billion) and Ambassador ($329 million) in
1994 and new business generated ($1.12 billion) by the core finance operations
in 1994.
The reserve and accrued liabilities increased by $66.4 million in 1994
to $130.7 million. The increase in the reserve and accrued liabilities during
the nine months consisted of increases due to loss provisions of $10.4 million
which were applicable to portfolio growth, $62.6 million of reserves and
accrued liabilities acquired with TriCon and $10.4 million of reserves acquired
with Ambassador, partially offset by decreases due to write-offs of $19.0
million.
The Company had total debt of approximately $4.2 billion or 5.4 times
its equity base of $765.0 million at September 30, 1994. The Company also had
deferred income taxes of $211 million at that date as part of its capital base
to help finance its lending activities.
Growth in funds employed is typically financed by internally generated
cash flow and additional borrowings. During the first nine months of 1994, GFC
issued $828 million of new senior debt, which, together with general corporate
funds and the GFC Financial Corporation contributions from proceeds of an
equity offering, was used to finance new business and redeem or retire $1,126
million of maturing debt.
GFC satisfies a significant portion of its cash requirements from a
diversified group of worldwide funding sources and is not dependent upon any
one lender. Additionally, GFC relies on the issuance of commercial paper as a
major funding source. During the first nine months of 1994, GFC issued $6.3
billion of commercial paper (with an average of $810 million outstanding during
this period) and raised $828 million, as noted above, through new long-term
financing facilities of one to seven year durations. At September 30, 1994 and
December 31, 1993, commercial paper and short-term bank borrowings totaling
$1.6 billion and $516 million, respectively, are supported by available unused
revolving credit lines which if not renewed are convertible to long-term debt
at GFC's option. In the second quarter of 1994, GFC filed a shelf-registration
statement with the Securities and Exchange Commission that would allow for the
issuance of up to $1.0 billion of senior debt securities, $900 million of which
remains available. GFC currently maintains a three-year revolving credit
facility with numerous lenders, in the aggregate principal amount of $1.0
billion. Separately, GFC also has a 364 day revolving credit facility with the
same lenders in the aggregate principal amount of $1.0 billion. Both of these
facilities support GFC's outstanding commercial paper and short-term
borrowings. The Company intends to borrow under the domestic revolving credit
agreements to refinance commercial paper and short-term bank loans to the
extent that it experiences significant difficulties in rolling over its
outstanding commercial paper and short-term bank loans. There were no
borrowings under these facilities during 1994.
Maturities of long-term debt outstanding at September 30, 1994 due
through June 2003 (excluding the amount supported by the revolving credit
agreements expected to be renewed) will approximate
21
<PAGE> 24
$63,985,000 (for the last three months of 1994), $563,202,000 (1995),
$399,221,000 (1996), $358,625,000 (1997), $349,305,000 (1998) and $874,944,000
(thereafter).
The Company utilizes derivative instruments to minimize its exposure to
fluctuations in interest rates arising from normal business operations. The
Company strives to minimize its overall debt costs while limiting the
short-term variability of interest expense and funds required for debt service.
To achieve this objective, the Company diversifies its borrowing sources
(short- and long-term debt with a fixed or a variable rate) and maintains a
portfolio that is matched funded. The Company's matched funding policy
generally requires that floating-rate assets are financed with floating-rate
liabilities and fixed-rate assets are financed with fixed-rate liabilities. In
instances where the lowest cost of borrowing sources are fixed-rate instruments
to finance floating-rate assets, the Company utilizes derivative instruments to
convert those fixed-rate liabilities into floating-rate liabilities. Through
this matched funding strategy, the Company minimizes its overall debt costs and
mitigates variability in interest rates. The Company's matched funding policy
requires that the difference between floating-rate liabilities and floating-
rate assets, as measured as a percent of investment in financing transactions
("funds employed"), does not vary by more than 3% for any extended period. The
amount of derivatives used is a function of this 3% gap policy with the
maturities of the derivatives being correlated to the maturities of the assets
being financed. The Company's derivative policy also stipulates that the
maximum exposure to any one counterparty, relative to the derivative products,
is limited to 10% of the Company's outstanding debt at the time of that
transaction. The Company continually monitors its position relative to
derivatives and does not utilize speculative derivative instruments.
During the nine months ended September 30, 1994 and 1993, the use of
derivatives decreased interest expense by $18.3 million, a decrease in the
annual aggregate cost of funds of 0.8%, and $19.8 million, a decrease in the
aggregate cost of funds of 1.4%, respectively. These reductions in interest
expense from off-balance sheet derivatives effectively alters on-balance sheet
costs and must be viewed as total interest rate management.
The Company had outstanding 46 interest rate conversion agreements with
notional principal amounts totaling $1.9 billion. Twenty agreements with
notional principal amounts of $718 million were arranged to effectively convert
certain floating interest rate obligations into fixed interest rate obligations
and require interest payments on the stated principal amount at rates ranging
from 4.1% to 9.3% (remaining terms of one to five years) in return for receipts
calculated on the same notional amounts at floating interest rates. In
addition, 26 agreements with notional principal amounts of $1.19 billion were
arranged to effectively convert certain fixed interest rate obligations into
floating interest rate obligations and require interest payments on the stated
principal amount at the three month or six month London Interbank Offered Rate
("LIBOR") (remaining terms of one to eight years) in return for receipts
calculated on the same notional amounts at fixed interest rates of 4.9% to
7.6%. The Company has also entered into five basis swaps with notional
principal amounts of $254 million and remaining terms of one month to four
years.
In the third quarter of 1993, GFC entered into four three-year interest
rate hedge agreements on $750 million of floating- rate borrowings. GFC's
assets are primarily Prime based while a portion of its liabilities are LIBOR
based. The agreements enable GFC to hedge against a narrowing of the spread
between the Prime and the LIBOR interest rates.
The Company's aggregate cost of funds has declined to 6.2% for the nine
months of 1994 from 6.3% for the nine months of 1993. The Company's cost of
and access to capital resources is significantly influenced by its debt
ratings.
The agreements pertaining to long-term debt of the Company include
various restrictive covenants and require the maintenance of certain defined
financial ratios with which the Company has complied.
22
<PAGE> 25
Under one of these covenants, dividend payments are limited to 50 percent of
the sum of accumulated earnings and the proceeds from equity issued, excluding
the Offering, after December 31, 1991.
BUSINESS OUTLOOK AND RECENT DEVELOPMENTS
Following the spin-off from The Dial Corp in March 1992, the Company
decided to focus its resources and capital on its core domestic commercial
finance activities. The Company embarked on a program of selling or winding
down those businesses included in the spin-off that were not associated with
the Company's core domestic commercial finance activities. The Company has
concentrated on redeploying the capital previously invested in such businesses
and has raised additional capital to support internal portfolio growth and to
make selected acquisitions which complement the Company's core operations.
This strategy has resulted in (i) the managed liquidation and sale of the
European Financial Group and Latin America loan portfolios, (ii) an increase
(excluding acquisitions) in GFC's domestic loan portfolio from March 31, 1992,
(iii) the acquisition of the Asset Based Finance group from U.S. Bancorp, (iv)
the sale of the discontinued mortgage insurance subsidiary, (v) the acquisition
of Ambassador, and (vi) the acquisition of TriCon. In 1994, GFC Financial
raised $226 million of equity through the sale of 8,050,000 shares in a
secondary offering, which, together with cash, the outstanding preferred stock
of GFC held by GFC Financial and the remaining intercompany loans from GFC
Financial, were contributed as additional paid in capital of GFC. In addition,
GFC has expanded its debt sources through a $1 billion shelf registration with
the SEC and has increased its revolving credit lines to $2.0 billion. As a
result of the execution of its business strategy, management believes that the
Company now ranks among the largest independent commercial finance companies,
based on assets, in the United States, and can direct its energies primarily to
its core business operations in the United States, rather than on terminating
discontinued operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed herewith:
Exhibit No. Document
----------- --------
12 Computation of Ratio of Income to Combined
Fixed Charges and Preferred Stock Dividends
(interim period).
27 Financial Data Statement.
(b) Reports on Form 8-K:
A Report on Form 8-K dated July 20, 1994 was filed by Registrant,
which reported under Items 5 and 7 the revenues, net income and
selected financial data and ratios for the six months ended June
30, 1994 (unaudited).
A Report on Form 8-K dated October 20, 1994 was filed by
Registrant, which reported under Items 5 and 7 the revenues, net
income and selected financial data and ratios for the nine months
ended September 30, 1994 (unaudited).
23
<PAGE> 26
GREYHOUND FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREYHOUND FINANCIAL CORPORATION
(Registrant)
Dated: November 11, 1994 By: /s/ BRUNO A. MARSZOWSKI
-----------------------------------------
Bruno A. Marszowski,
Senior Vice President,
Chief Financial Officer Principal
Accounting Officer/Authorized Officer
24
<PAGE> 27
GREYHOUND FINANCIAL CORPORATION
COMMISSION FILE NUMBER 1-7543
EXHIBIT INDEX
SEPTEMBER 30, 1994 FORM 10-Q
<TABLE>
<CAPTION>
Page No. in
Sequentially
Numbered
Form 10-Q
No. Title Report
--- ----- ------------
<S> <C> <C>
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends. 26
(27) Financial Data Schedule. 27
</TABLE>
25
<PAGE> 1
EXHIBIT 12
GREYHOUND FINANCIAL CORPORATION
Computation of Ratio of Income to Combined Fixed Charges
and Preferred Stock Dividends
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------------- --------------------------------------
1994 1993 1993 1992 1991
----------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Net income (loss) before
income taxes $ 86,007 $ 47,779 $ 64,123 $ 50,593 $(37,014)
Add leveraged lease
adjustment 630 (6,700) 1,505 1,059 1,758
Add fixed charges:
Interest expense 153,391 92,779 126,152 136,107 157,560
One-third rentals 1,597 1,047 1,387 1,498 1,148
-------- -------- -------- -------- --------
Total fixed charges 154,988 93,826 127,539 137,605 158,708
-------- -------- -------- -------- --------
Net income as adjusted $241,625 $134,905 $193,167 $189,257 $123,452
-------- -------- -------- -------- --------
Ratio of income to fixed
charges 1.56 1.44 1.51 1.38 ---
======== ======== ======== ======== ========
Preferred stock dividends
on a pre-tax basis $ 930 $ 2,763 $ 3,682 $ 2,826
Total combined fixed
charges and preferred
stock dividends $155,918 $ 96,589 $131,221 $140,431 $158,708
-------- -------- -------- -------- --------
Ratio of income to combined
fixed charges and preferred
stock dividends 1.55 1.40 1.47 1.35 ----
======== ======== ======== ======== ========
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1994
<PERIOD-END> SEP-30-1994
<CASH> 34,729
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,294,099
<ALLOWANCE> 115,231
<TOTAL-ASSETS> 5,430,256
<DEPOSITS> 0
<SHORT-TERM> 2,945
<LIABILITIES-OTHER> 500,203
<LONG-TERM> 4,162,071
<COMMON> 25
0
0
<OTHER-SE> 765,012
<TOTAL-LIABILITIES-AND-EQUITY> 5,430,256
<INTEREST-LOAN> 343,501
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 153,391
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 168,484
<LOAN-LOSSES> 10,353
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 77,796
<INCOME-PRETAX> 86,007
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,169
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 6.0
<LOANS-NON> 186,016
<LOANS-PAST> 0
<LOANS-TROUBLED> 65,373
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 64,280
<CHARGE-OFFS> 19,009
<RECOVERIES> 1,109
<ALLOWANCE-CLOSE> 130,727
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
