SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C, 20549
____________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 14, 1994
____________________________________________________________________________
GFC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-11011 86-0695381
____________________________________________________________________________
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) 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
_____________________
Item 2. Other Events.
On February 14, 1994, GFC Financial Corporation ("GFCFC"), through its
wholly-owned subsidiary, Greyhound Financial Corporation ("GFC"), acquired
Fleet Factors Corporation, operating under the trade name Ambassador Factors
("Ambassador"), from Fleet Financial Group, Inc. ("Fleet"). The purchase
price of the acquisition was $257,085,000 in cash and represented
Ambassador's stockholder's equity plus a premium and repayment of the
intercompany balance due from Ambassador to Fleet. GFC financed the
acquisition with proceeds received from the sale of GFCFC's discontinued
mortgage insurance subsidiary and cash generated from operations which was
previously used to repay outstanding commercial paper.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
FLEET FACTORS CORPORATION
(A Wholly-Owned Subsidiary of Fleet Financial Group, Inc.)
Financial Statements
November 30, 1993 and December 31, 1992
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fleet Factors Corporation:
We have audited the accompanying balance sheets of Fleet Factors Corporation
(a wholly-owned subsidiary of Fleet Financial Group, Inc.) as of November
30, 1993 and December 31, 1992, and the related statements of income,
changes in stockholder's equity and cash flows for the eleven months ended
November 30, 1993 and the year ended December 31, 1992. These financial
statements are the responsibility of the Corporation'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 the opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fleet Factors
Corporation as of November 30, 1993 and December 31, 1992, and the results
of its operations and its cash flows for the periods then ended in
conformity with generally accepted accounting principles.
As discussed in notes 2(i) and 6 to the financial statements, the
Corporation adopted a new method of accounting for income taxes effective
January 1, 1993.
January 28, 1994 /s/ KPMG Peat Marwick
------------------------------------------
<PAGE>
FLEET FACTORS CORPORATION
(A Wholly-Owned Subsidiary of Fleet Financial Group, Inc.)
Balance Sheets
November 30, 1993 and December 31, 1992
1993 1992
----------------------------
ASSETS:
Cash $ 7,071,616 $ 9,046,733
Factored receivables 133,253,344 125,593,210
Finance receivables, net of deferred
income of $908,572 in 1993 and $923,067
in 1992 197,459,865 192,244,072
Advances to factored clients 3,943,000 6,608,000
Less: Allowance for credit losses
(note 4) 9,206,585 7,992,601
------------ ------------
Factored and finance receivables, net 325,449,624 316,452,681
Accrued interest receivable 1,831,728 1,752,632
Goodwill, net of accumulated amortization
of $4,058,124 in 1993 and $3,870,013 in
1992 3,711,063 3,899,174
Income tax receivable 354,464
Deferred income taxes (note 6) 4,592,281 3,575,307
Property, equipment and leasehold
improvements, net of accumulated
depreciation/amortization of $1,093,549
in 1993 and $925,096 in 1992 335,131 503,584
Prepaid expenses 62,936 26,783
------------ ------------
Total assets $343,054,379 $335,611,358
============ ============
See accompanying notes to financial statements.
<PAGE>
FLEET FACTORS CORPORATION
(A Wholly-Owned Subsidiary of Fleet Financial Group, Inc.)
Balance Sheets
November 30, 1993 and December 31, 1992
1993 1992
----------------------------
LIABILITIES:
Due to parent (note 9) $ 172,000,000 $178,000,000
Due to factored clients 111,526,458 107,787,218
Accrued pension liability (notes 9
and 10(d)) 1,673,174 1,560,343
Income taxes payable 939,808
Accrued expenses and other liabilities
(note 9) 2,229,672 1,731,098
------------- ------------
Total liabilities 288,369,112 289,078,659
------------- ------------
STOCKHOLDER'S EQUITY:
Common stock - par value $1; authorized,
issued and outstanding - 100 shares 100 100
Additional paid-in capital 55,799,700 15,799,700
Retained earnings (deficit) (1,114,533) 30,732,899
------------- ------------
Total stockholder's equity 54,685,267 46,532,699
------------- ------------
Commitments and contingencies (note 10)
Total liabilities and stockholder's
equity $343,054,379 $335,611,358
============= ============
See accompanying notes to financial statements.
<PAGE>
FLEET FACTORS CORPORATION
(A Wholly-Owned Subsidiary of Fleet Financial Group, Inc.)
Statements of Income
For the eleven month period ended November 30, 1993 and
the year ended December 31, 1992
1993 1992
---------------------------
Interest Income:
Interest, commissions and fee income $ 35,235,530 $ 37,476,598
Interest expense (note 9) 5,779,857 7,362,693
------------ ------------
Net interest income before provision for
credit losses 29,455,673 30,113,905
Provision for credit losses (note 4) 7,177,119 11,444,450
------------ ------------
Net interest income 22,278,554 18,669,455
Other Expenses:
Employee compensation and benefits 4,189,521 4,101,581
Management fees and intercompany charges
(note 9) 1,569,131 617,297
Legal and professional fees 864,872 567,407
Litigation settlement, net of insurance
recovery (note 10) 523,271
Occupancy costs 377,931 412,696
Other operating expenses 1,597,523 1,609,227
Forgiveness of management fees and
intercompany charges (note 9) (997,106)
------------ ------------
Total other expenses 8,125,143 7,308,208
Income before income taxes and cumulative
effect of accounting change 14,153,411 11,361,247
Income tax expense (note 6) 6,480,928 5,161,264
------------ ------------
Income before cumulative effect of an
accounting change 7,672,483 6,199,983
------------ ------------
Cumulative effect to January 1, 1993 of
change in accounting for income taxes
(note 2(i)) 480,085
------------ ------------
Net income $ 8,152,568 $ 6,199,983
============ ============
See accompanying notes to financial statements.
<PAGE>
FLEET FACTORS CORPORATION
(A Wholly-Owned Subsidiary of Fleet Financial Group, Inc.)
Statements of Changes in Stockholder's Equity
For the eleven month period ended November 30, 1993 and
the year ended December 31, 1992
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficit) Total
Balance at December 31,
1991 $ 100 $15,799,700 $28,282,916 $44,082,716
Net income 6,199,983 6,199,983
Dividends paid (3,750,000) (3,750,000)
----- ----------- ----------- -----------
Balance at December 31,
1992 100 15,799,700 30,732,899 46,532,699
Net income 8,152,568 8,152,568
Capital contributions
(note 2) 40,000,000 40,000,000
Dividends paid (note 2) (40,000,000) (40,000,000)
----- ----------- ----------- -----------
Balance at November 30,
1993 $ 100 $55,799,700 $(1,114,533) $54,685,267
===== =========== =========== ===========
See accompanying notes to financial statements.
<PAGE>
FLEET FACTORS CORPORATION
(A Wholly-Owned Subsidiary of Fleet Financial Group, Inc.)
Statements of Cash Flows
For the eleven month period ended November 30, 1993 and
the year ended December 31, 1992
1993 1992
-------------------------------
Cash flows from operating activities:
Net income $ 8,152,568 $ 6,199,983
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses 7,177,119 11,444,450
Depreciation and amortization 356,564 386,898
Decrease (increase) in deferred
income tax asset (1,016,974) 458,892
Decrease (increase) in accrued
interest receivable (79,096) 159,971
Decrease (increase) in income taxes
receivable 354,464 (354,464)
Increase in accrued pension liability 112,831 79,452
Increase (decrease) in income taxes
payable 939,808 (308,216)
Increase (decrease) in accrued
expenses and other liabilities 498,574 (291,138)
Decrease (increase) in prepaid
expenses (36,153) 38,148
-------------- --------------
Net cash flows provided by
operating activities 16,459,705 17,813,976
Cash Flows from Investing Activities:
Purchases of factored receivables (730,609,862) (769,760,439)
Proceeds from collection of factored
receivables 724,333,968 768,810,912
Loans made to financing clients (1,054,936,008) (1,021,312,368)
Proceeds from collection of finance
receivables 1,046,112,080 987,269,812
Net increase in advances to factored
clients 2,665,000 5,134,000
Purchase of premises and equipment (415,079)
-------------- --------------
Net cash used in investing
activities (12,434,822) (30,273,162)
Cash flows from financing activities:
Net increase (decrease) in borrowings
from parent (6,000,000) 17,000,000
Dividends paid (40,000,000) (3,750,000)
Capital contribution 40,000,000
-------------- --------------
Net cash flows provided by (used
in) financing activities (6,000,000) 13,250,000
Net increase (decrease) in cash and cash
equivalents (1,975,117) 790,814
Cash and cash equivalents at beginning
at year 9,046,733 8,255,919
-------------- --------------
Cash and cash equivalents at end of year $ 7,071,616 $ 9,046,733
============== ==============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 6,042,480 $ 7,709,068
============== ==============
Income taxes $ 5,854,170 $ 5,365,052
============== ==============
See accompanying notes to financial statements.
<PAGE>
FLEET FACTORS CORPORATION
(A Wholly-Owned Subsidiary of Fleet Financial Group, Inc.)
Notes to Financial Statements
November 30, 1993 and December 31, 1992
(1) Business:
Fleet Factors Corporation (the "Company") is engaged in providing
factoring and commercial financing services. Advances to commercial
finance clients are primarily collateralized by assigned accounts
receivable and inventory.
(2) Summary of Significant Accounting Policies:
The accounting and reporting policies of Fleet Factors Corporation
conform to generally accepted accounting principles. The following is
a summary of the significant accounting policies.
(a) Basis of Presentation:
Fleet Factors Corporation is a wholly-owned subsidiary of
Fleet Financial Group, Inc. ("FFG" or the "Parent") and was
formerly a wholly-owned subsidiary of Fleet Bank of New York (also
a wholly-owned subsidiary of FFG). The transfer of ownership
occurred on August 27, 1993. In connection with the transfer of
ownership, FFG made a capital contribution to the Company in the
amount of $40,000,000 and the Company simultaneously paid a
dividend to Fleet Bank of New York in the same amount.
(b) Factored Receivables:
Factored receivables arise from receivables that are sold to
(factored with) the Company under a maturity basis and/or
discounted factoring agreement. Under a maturity based factoring
agreement, the Company pays the client at the end of a specified
period regardless of whether the receivables have been collected
from the customer; whereas, under a discounted factoring
agreement, the Company pays the client based on collections from
customers. The receivables are sold to the Company without
recourse, up to maximum credit limits established by the Company
for individual accounts. In the event that factoring clients of
the Company invoice customers for amounts in excess of the maximum
credit limits established by the Company, such invoices are
accepted by the Company with recourse to the client in the event
of nonpayment by a customer.
(c) Finance Receivables:
Finance receivables generally are collateralized by security
interests in receivables, inventory, equipment, real estate, and
in some cases personal guarantees.
(d) Revenue Recognition:
Interest income on finance receivables is recognized on an
accrual basis commencing in the month of origination. The Company
also may receive commitment and facility fees related to its
finance receivables. These fees are deferred and amortized on a
straight line basis over the contractual life of the agreement.
Other fees received from clients, including non-refundable survey
fees, letter of credit fees and service charges covering credit
checking, record keeping and similar services, generally represent
reimbursement of direct costs and are therefore recognized as
revenue when received.
Income on factored receivables consists principally of
factoring commissions which, due to the short duration of the
factoring contracts, is recognized when receivables are acquired.
Additionally, the Company charges interest on advances to clients.
In the case of discounted factoring agreements, interest is
charged to the clients on late payments by the customers.
(e) Allowance for Credit Losses:
The Company periodically reviews the adequacy of the
allowance for credit losses by performing detailed reviews of
individual receivables with consideration given to the nature and
characteristics of the accounts, general economic conditions and
trends, historical charge-off experience, current delinquencies
and underlying collateral guarantees. It is management's judgment
that the allowance for credit losses is adequate to provide for
losses inherent in the receivables portfolio.
Charge-offs are taken on finance receivables once probability
of a loss has been established, considering such factors as the
customer's financial condition the value of underlying collateral
and guarantees, and general and industry economic conditions.
Charge-offs are taken on factored receivables when they reach 120
days past due, although collection efforts continue.
(f) Nonperforming Assets:
An account is placed on nonaccrual status either when a
payment is contractually delinquent for 90 days or more and
collateral is insufficient to cover both the outstanding principal
and accrued interest or immediately if, in the opinion of
management, full collection is doubtful. Interest accrued but not
collected at the date an account is placed on nonaccrual status is
reversed and charged against interest income when the collateral
does not satisfy the principal and accrued interest outstanding.
Subsequent cash receipts are either applied to the outstanding
principal balance or recorded as interest income, depending on
management's assessment of the ultimate collectibility of
principal and interest.
(g) Advances to Factoring Clients:
These advances are both collateralized and uncollateralized.
Collateral consists of security interests in inventory, equipment,
real estate and, in some instances, personal guarantees.
(h) Goodwill:
Goodwill represents the excess of cost over the estimated
fair values of net assets acquired. The goodwill resulted from
FFG's acquisition of the Company in 1972 and is being amortized on
a straight line basis over forty years.
(i) Income Taxes:
The operating results of the Company are included in the
consolidated federal income tax return of FFG and the combined New
York State tax return for FFG's subsidiaries doing business in New
York. Under the tax sharing agreement between the Company and
FFG, federal and state income taxes are calculated on a separate
return basis; however, recognition of tax benefits from operating
losses of the Company are limited to the extent realized in the
consolidated federal income tax return and the combined New York
State tax return. Income taxes payable/receivable on the balance
sheets include remaining amounts due to (from) FFG for the
Company's pro rata share of FFG's consolidated corporate income
taxes.
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes ("Statement 109"), which recognizes income taxes under the
asset and liability method. Under this method, deferred tax
assets and liabilities are established for the temporary
differences between the accounting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary
differences are realized or settled. The adoption of this method
as of January 1, 1993 resulted in the establishment of an
additional deferred tax asset of $480,085, which has been reported
as the cumulative effect of an accounting change.
Prior to January 1, 1993, the Company recognized income taxes
under the deferred method. Under this method, annual income tax
expense is matched with pre-tax accounting income by providing
deferred taxes at current tax rates for timing differences between
income reported and accounting purposes and that reported for tax
purposes.
(j) Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements are stated at
cost, less accumulated depreciation and amortization.
Depreciation and amortization for financial reporting purposes is
computed on the straight line basis over the estimated useful life
of each class of asset.
(k) Due to Factored Clients:
Due to factored clients represent amounts to be paid to
factored clients, adjusted for disputed or uncollected receivables
and any accrued interest charged to the client. Uncollectible
receivables exceeding the credit balances due to factored clients
are charged to the allowance for credit losses.
(3) Participation:
Included in finance receivables at November 30, 1993 and December
31, 1992 is approximately $101,233,000 and $85,733,000, respectively,
of purchased participation finance receivables purchased from Congress
Financial Corp.
(4) Allowance for Credit Losses:
The following is summary of the activity in the allowance for
credit losses for the periods ended November 30, 1993 and December 31,
1992:
1993 1992
---------------------------
Balance, beginning of period $ 7,992,601 $ ,817,550
Provision for credit losses 7,177,119 11,444,450
Receivables charged-off (7,348,830) (13,928,967)
Recoveries of receivables previously
charged-off 1,385,695 659,568
------------ ------------
Balance, end of period $ 9,206,585 $ 7,992,601
============ ============
(5) Nonperforming Assets:
The following presents the balances of receivables that are on
nonaccrual status:
1993 1992
---------------------------
Finance receivables $ 14,243,000 $ 14,605,000
Advances to factored clients 692,000 1,228,000
------------ ------------
Total nonperforming assets $ 14,935,000 $ 15,833,000
============ ============
The Company has no significant commitments to lend additional
funds to clients whose finance receivables have been placed on
nonaccrual status.
Gross interest income billed that would have been recorded in
accordance with their contractual agreements was $4,165,924 and
$7,514,043 for the periods ended November 30, 1993 and December 31,
1992, respectively. The actual interest income on those receivables
included in net income for those periods was $134,529 and $1,965,330,
respectively. The contractual agreements have a stated interest rate
which increases once the debtor is in default. For the most part, the
interest rates increase monthly upon default in accordance with the
contractual agreement.
The FASB has issued Statement No. 114, "Accounting by Creditors
for Impairment of a Loan", which requires that creditors value all
loans for which it is probable that the creditor will be unable to
collect all amounts due according to the terms of the loan agreement at
the present value of expected future cash flows discounted at the
loan's observable effective interest rate, the observable market price
of the impaired loan or the fair value of the collateral if the loan is
collateral dependent. The effect of adopting this Statement has not
been fully determined, but it is not expected to have a material
adverse impact on the Company's results of operations. Adoption of the
Standard is required in 1995.
(6) Income Taxes:
The following is a summary of income tax expense (benefit) for the
periods ended November 30, 1993 and December 31, 1992:
Current Deferred Total
---------------------------------------
1993:
Federal $ 4,544,579 $(374,619) $ 4,169,960
State 2,473,238 (162,270) 2,310,968
----------- --------- -----------
$ 7,017,817 $(536,889) $ 6,480,928
=========== ========== ===========
1992:
Federal $ 3,013,908 $ 294,119 $ 3,308,027
State 1,688,464 164,773 1,853,237
----------- --------- -----------
$ 4,702,372 $ 458,892 $ 5,161,264
=========== ========= ===========
The approximate tax effects of temporary differences that give
rise to gross deferred tax assets at November 30, 1993 are as follows:
Gross deferred tax assets:
Allowance for credit losses $ 4,179,789
Deferred finance receivable fees 412,492
------------
Total deferred tax asset $ 4,592,281
============
The deferred federal income tax asset is supported by the
potential recovery of taxes previously paid in the carryback period.
Since there is no carryback provision for state purposes, Management
believes the existing deductible temporary differences which give rise
to the state deferred tax asset will reverse during periods in which
the Company will generate net taxable income.
For the year ended December 31, 1992, under the prior method of
accounting for income taxes (see note 2 (i)), the deferred income tax
benefit of $458,892 results from timing differences in the recognition
of certain deductions for tax and financial reporting purposes. The
sources of these differences and the tax effects of each were:
Provision for credit losses in excess of $ 813,196
deductible amounts
Deferred finance receivable fees (271,733)
Other (82,571)
---------
Total $ 458,892
=========
Total income tax expense varied from the amount computed by
applying the statutory income tax rate to income before taxes for the
periods ended November 30, 1993 and December 31, 1992 as follows:
1993 1992
-------------------------------------
Tax expense at statutory
rate $ 4,953,693 35.0% $ 3,862,824 34.0%
Increase in taxes resulting
from:
State and local income
taxes, net of federal
income tax effect 1,502,129 10.6% 1,223,135 10.7%
Other, net 25,106 0.2% 75,305 0.7%
----------- ----- ----------- -----
$ 6,480,928 45.8% $ 5,161,264 45.4%
=========== ===== =========== =====
(7) Employee Benefit Plans:
The Company participates in the FFG sponsored defined benefit
pension plan that covers employees who have completed one year of
service and have attained age twenty-one. The plan is noncontributory
and benefits vest after five years of service. Under the plan,
benefits accrue to participants based upon salary and term of service.
Assets of the pension fund which are available for benefits exceeded
the actuarially computed value of vested benefits as of the most recent
valuation date of December 31, 1993. The actuarial present value of
vested and nonvested accumulated plan benefits is not calculated for
individual companies participating in the plan. Accrued pension
expense allocated to the Company for the periods ended November 30,
1993 and December 31, 1992 was $112,831 and $79,452, respectively.
The Company also participates in the FFG contributory thrift plan,
which covers substantially all full-time and permanent part-time
employees. This plan provides that eligible employees may elect to
contribute a percentage of their annual salary to the trust fund. The
Company matches a percentage of the employee's contributions up to 6%
of the employee's salary. The Company's contributions to the plan for
the periods ended November 30, 1993 and December 31, 1992 were $72,734
and $78,794, respectively.
The Company participates in FFG's program which provides health
care cost assistance with life insurance benefits for retired
employees. Effective January 1, 1993, FFG adopted FASB Statement No.
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions". The Company's expense did not differ significantly from the
expense under the former cash basis method of accounting for
postretirement benefits.
The FASB has issued Statement No. 112, "Employers' Accounting for
Postemployment Benefits", which requires accrual of a liability for
benefits paid to former or inactive employees after employment but
before retirement. The net periodic impact, as well as the initial
impact of implementing this Standard on the Company's result of
operations is insignificant. Adoption of this Statement is required in
1994.
(8) Fair Value of Financial Instruments:
Generally, fair value of the Company's financial instruments is
equivalent to their book value. The following methods and assumptions
were used by the Company in estimating the fair value of each class of
financial instruments:
Cash and cash equivalents: Fair value approximates the carrying
amounts reported in the balance sheet for these instruments.
Receivables: For variable-rate receivables that reprice
frequently and with no significant change in credit risk, fair
values are based on carrying values. The majority of the
receivables purchased from factored clients are collected within
sixty days and are short-term in nature. The majority of the
finance receivables are performing variable-rate receivables that
reprice frequently. The fair value of the portfolio that is
nonperforming approximates the cash collection value, which
approximates the underlying collateral for the receivable. The
carrying amount of accrued interest approximates its fair value.
Due to Parent: Due to Parent is a revolving note which accrues
interest at the Parent's borrowing rate and has no stated maturity
date; therefore, fair value approximates the carrying amount.
Commitments to extend credit, standby letters of credit, financial
guarantees: The terms of such commitments are generally at market
terms and management believes that no material contingent asset or
liability related to such commitments exist at November 30, 1993
and December 31, 1992.
(9) Related Party Transactions:
The Parent provides certain management and staff services, as well
as allocates certain legal and other expenses to its subsidiaries. For
the periods ended November 30, 1993 and December 31, 1992, the Company
was billed $1,569,131 and $617,297, respectively, for management fees
and intercompany charges. The Parent has forgiven certain charges to
the Company relating to 1993 and prior years. The total amount
forgiven of $997,106 is presented as a reduction of other expenses in
the 1993 statement of income. Included in accrued expenses and other
liabilities for the periods ended November 30, 1993 and December 31,
1992, was approximately $360,000 and $310,000, respectively, of accrued
expenses due to the Parent.
Due to Parent consists of open account advances with no stated
maturity. In accordance with the Parent's corporate policy, the
Company borrows funds from the Parent at an interest rate which
approximates the Parent's effective cost of funds borrowed under
similar terms. The interest rate on this debt was 3.44% and 3.52% at
November 30, 1993 and December 31, 1992, respectively. The Company has
no other open commitments or lines of credit under which funds can be
borrowed.
In addition, the Company has an accrued pension liability due to
the Parent at November 30, 1993 and December 31, 1992 in the amount of
$1,673,174 and $1,560,343, respectively.
(10) Commitments and Contingencies:
(a) Litigation:
The Company is involved in various legal proceedings arising
out of, and incident to its business. Management of the Company,
based on its review with counsel of the development of these
matters to date, does not believe that any losses incurred as a
result of these legal proceedings would have a materially adverse
effect on the Company's financial position or results of
operations.
During 1993, the Company reached a settlement on litigation
involving environmental cleanup of a facility owned and operated
by a factoring client. The settlement paid by the Company, net of
insurance proceeds, amounted to $523,271. The Company has no
additional liability under this claim. Management has no
knowledge of any other material existing environmental liability
for which the Company might be determined to be liable.
(b) Lease Commitments:
The Company has a noncancelable operating lease agreement for
its office space. This lease, which expires on January 31, 1995,
contains real estate tax and other expense escalation clauses.
The minimum lease commitments under this lease are: 1994 -
$247,600 and 1995 - $20,633. Total rental expense for the periods
ended November 30, 1993 and December 31, 1992 was $310,584 and
$347,049, respectively.
(c) Credit Related Commitments and Concentration of Credit Risk
(Unaudited):
Loan commitments are made to accommodate the financial needs
of the Company's clients. Commercial letters of credit are issued
to facilitate the clients' trade transactions. Standby letters of
credit commit the Company to make payments on behalf of clients
when certain specified future events occur. Generally, standby
letters of credit expire unfunded.
The arrangements described above have credit risk essentially
the same as that involved in extending loans to clients and are
subject to the Company's normal credit policies. Collateral
(e.g., securities, receivables, inventory, equipment) is obtained
based on management's credit assessment of the client.
The Company's clients have standby letters of credit at
November 30, 1993 and December 31, 1992 which approximates
$1,771,000 and $3,231,000, respectively.
As of November 30, 1993 and December 31, 1992, the Company
was liable in the amount of approximately $444,000 and $1,524,000,
respectively, on guarantees of client's purchases.
Substantially all factored accounts receivable were from
companies in the textile and apparel industry. Credit is extended
based on an evaluation of the customer's financial condition and
generally collateral is not required.
(d) Intent to Sell the Company:
FFG has entered into a letter of intent with Greyhound
Financial Corporation ("GFC") to sell all of the outstanding stock
of the company to GFC in a transaction to be structured for tax
purposes as a sale of assets under IRC Section 338 (h)(10). The
letter of intent expired on January 31, 1994. The above parties
are currently negotiating a stock purchase agreement and the
anticipated closing date of the transaction is February 14, 1994.
Under the provisions of the agreement, FFG will sell all of
the outstanding stock of the Company to GFC for cash proceeds
equal to one hundred fifty percent of the November 30, 1993 net
book value, as adjusted for certain items which are not freely
transferable or realized by GFC, including but not limited to
goodwill. The Company will pay a dividend to (receive a capital
contribution from) FFG for the amount of net income (loss) for the
period from December 1, 1993 to January 31, 1994. Either party
has the option to terminate the purchase agreement upon the
occurrence of certain events, as outlined in the purchase
agreement. A sale is predicated upon GFC's ability to enter into
an employment contract with the president of the Company.
Under the terms of the agreement, GFC will settle all
intercompany balances prior to the closing and refinance the
intercompany debt at or before the closing. Effective with the
closing, all intercompany agreements will be terminated, including
the Company's participation in FFG's pension plan. Pension
benefits will be frozen at the accumulated benefit level as of the
date of the sale and the obligation for such benefits will remain
the responsibility of FFG.
Under the terms of the agreement, FFG will indemnify GFC
against certain actual and contingent liabilities of the Company.
Item 7. Financial Statements and Exhibits:
(b) Pro Forma Financial Information:
The accompanying Pro Forma Consolidated Balance Sheet of
GFCFC, as of September 30, 1993, and Pro Forma Statements of
Consolidated Income for the nine months ended September 30, 1993
and for the year ended December 31, 1992 have been prepared to
reflect the historical financial position and results of
continuing operations as adjusted to reflect the acquisition of
Ambassador by GFC.
In the opinion of management, all adjustments necessary to
present fairly such pro forma consolidated financial statements
have been made.
The Pro Forma Consolidated Balance Sheet has been prepared as
if such acquisition occurred on September 30, 1993; the Pro Forma
Statements of Consolidated Income have been prepared as if such
acquisition occurred on the first day of the respective periods
presented. The pro forma consolidated financial information is
unaudited and is not necessarily indicative of the results that
would have occurred if the acquisition had been consummated as of
September 30, 1993, or at the beginning of the respective periods
presented.
The pro forma consolidated financial information should be
read in conjunction with the accompanying Notes to Pro Forma
Consolidated Financial Statements and the historical consolidated
financial statements of GFCFC and Ambassador and the respective
notes thereto.
<PAGE>
GFC FINANCIAL CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1993
(Dollars in Thousands)
Historical
--------------------
Ambas- Pro Forma
sador Adjust-
GFCGC (1) ments Pro Forma
-----------------------------------------------------
Assets:
Cash and cash
equivalents $ 33,733 $ 7,072 $ $ 40,805
Investment in
financing
transactions:
Loans and other
financing
contracts 2,258,536 203,235 2,461,771
Leases 396,329 396,329
Factored
receivables 133,253 133,253
--------- ------- ----------
2,654,865 336,488 2,991,353
--------- ------- ----------
Less reserve for
possible credit
losses (66,339) (9,207) (75,546)
--------- ------- ---------
Investment in
financing
transactions -
net 2,588,526 327,281 2,915,807
Other assets and
deferred charges 56,733 4,109 (2) 30,400 91,242
---------- -------- -------- ----------
$2,678,992 $338,462 $ 30,400 $3,047,854
========== ======== ======== ==========
Liabilities:
Accounts payable
and accrued
expenses $ 58,866 $ 4,843 (2) $ 8,800 $ 72,509
Due to Factored
clients 111,526 111,526
Due to Fleet 172,000 (3) (172,000)
Debt 1,932,007 (2) 76,285 2,180,292
(3) 172,000
Deferred income
taxes 189,387 (4,592) 184,795
---------- -------- -------- ----------
2,180,260 283,777 85,085 2,549,122
---------- -------- -------- ----------
Stockholders'
equity 498,732 54,685 (2) (54,685) 498,732
---------- -------- ------- ----------
$2,678,992 $338,462 $ 30,400 $3,047,854
========== ======== ======== ==========
<PAGE>
GFC FINANCIAL CORPORATION
PRO FORMA STATEMENTS OF CONSOLIDATED INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1993
(Dollars in Thousands)
Historical
----------------------
Pro
Forma
Ambassador Adjust-
GFCFC (1) ments Pro Forma
----------------------------------------------------
Interest and other
income $ 163,561 $ 35,236 $ $ 198,797
Lease income 20,507 20,507
---------- -------- ----------
Interest earned
from financing
transactions 184,068 35,236 219,304
Interest expense 92,779 5,780 (6) 1,724 100,283
---------- -------- ------- ----------
Interest margins
earned 91,289 29,456 (1,724) 119,021
Provision for
possible credit
losses 3,706 7,177 10,883
---------- -------- ------- ----------
Net interest 87,583 22,279 (1,724) 108,138
margins earned
Gains on sale of
assets 2,240 2,240
---------- -------- ------- ----------
89,823 22,279 (1,724) 110,378
Selling,
administrative and
other operating
expenses 42,044 8,125 (4) 1,853 52,772
(5) 750
---------- -------- ------- ----------
Income before
income taxes 47,779 14,154 (4,327) 57,606
Income taxes 22,161 6,481 (7) (1,731) 26,092
(8) (819)
---------- -------- ------- ----------
Income from
continuing
operations $ 25,618 $ 7,673 $(1,777) $ 31,514
========== ======== ======= ==========
Income from
continuing
operations per
common and
equivalent share $ 1.19 $ .48
========== ==========
Average outstanding
common and
equivalent shares 20,390,000 20,390,000
========== ==========
<PAGE>
GFC FINANCIAL CORPORATION
PRO FORMA STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31, 1992
(Dollars in Thousands)
Historical
---------------------
Pro
Forma
Ambassador Adjust-
GFCFC (1) ments Pro Forma
---------------------------------------------------
Interest and other
income $ 210,873 $ 37,477 $ $ 248,350
Lease income 29,933 29,933
---------- -------- ----------
Interest earned
from financing
transactions 240,806 37,477 278,283
Interest expense 136,107 7,363 (6) 2,643 146,113
---------- -------- ------- ----------
Interest margins
earned 104,699 30,114 (2,643) 132,170
Provision for
possible credit
losses 6,740 11,445 18,185
---------- -------- ------- ----------
Net interest
margins earned 97,959 18,669 (2,643) 113,985
Gains on sale of
assets 3,362 3,362
---------- -------- ------- ----------
101,321 18,669 (2,643) 117,347
Selling,
administrative and
other operating
expenses 50,728 7,308 (4) 2,470 61,506
(5) 1,000
---------- -------- ------- ----------
Income before
income taxes 50,593 11,361 (6,113) 55,841
Income taxes 13,843 5,161 (7) (2,445) 15,942
(8) (617)
---------- -------- ------- ----------
Income from
continuing
operations $ 36,750 $ 6,200 $(3,051) $ 39,899
========== ======== ======= ==========
Income from
continuing
operations per
common and
equivalent share $ 1.71 $ 1.86
========== ==========
Average outstanding
common and
equivalent shares 20,464,000 20,464,000
========== ==========
<PAGE>
GFC FINANCIAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The Pro Forma Consolidated Balance Sheet, as of September 30,1993, and
the Pro Forma Statement of Consolidated Income for the nine months
ended September 30, 1993 include the historical balance sheet of
Ambassador as of November 30, 1993 and the historical statement of
income of Ambassador for the eleven months ended November 30, 1993.
(2) To record the purchase of Ambassador including the accrual of various
liabilities and the resulting goodwill using the proceeds received from
the sale of GFCFC's discontinued mortgage insurance subsidiary and cash
generated from operations which was previously used to repay commercial
paper.
(3) To record repayment of Ambassador's intercompany payable to Fleet using
the proceeds from the sale of GFCFC's discontinued mortgage insurance
subsidiary and cash generated from operations which was previously used
to repay commercial paper.
(4) To record amortization of goodwill based on an amortization period of
twenty years and amortization of the covenant not to compete over one
year prorated for the respective period shown.
(5) To record additional administrative expenses estimated to be $1,000,000
per year for additional employees and general overhead.
(6) To record the amount of additional interest expense (at GFC's
incremental borrowing rate of approximately 4%) as a result of the
issuance of debt noted in items (2) and (3) above in excess of interest
charged by Fleet on the intercompany payable.
(7) To record the income tax effect of items (4), (5) and (6) at GFCFC's
effective incremental income tax rate of 40%.
(8) To adjust income taxes for the lower state income tax rate
applicable to GFCFC.
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.
GFC FINANCIAL CORPORATION
(Registrant)
Dated: February 15, 1994 By /s/ Bruno A. Marszowski
----------------------------------------------
Bruno A. Marszowski, Vice President-Controller
Principal Financial Officer/Authorized Officer
