<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1994
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GFC Financial Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
86-0695381
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
DIAL TOWER
PHOENIX, ARIZONA 85077
(602) 207-6900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SAMUEL L. EICHENFIELD
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
GFC FINANCIAL CORPORATION
DIAL TOWER
PHOENIX, ARIZONA 85077
(602) 207-6900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
WILLIAM J. HALLINAN
VICE PRESIDENT AND GENERAL COUNSEL
GFC FINANCIAL CORPORATION
DIAL TOWER
PHOENIX, ARIZONA 85077
PAUL C. PRINGLE
BROWN & WOOD
10900 WILSHIRE BOULEVARD
SUITE 1100
LOS ANGELES, CALIFORNIA 90024
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
SHARES PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(2)
- ---------------------------------------------------------------------------------------------------
Common Stock, $.01 par
value per share 8,050,000 $31.81 $256,070,500 $88,301
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, based on the average of the high and low sales prices
of the Common Stock on March 31, 1994 as reported on the New York Stock
Exchange.
(2) Paid by wire transfer to the Commission's account at Mellon Bank.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains a prospectus relating to an offering
in the United States and Canada of an aggregate of 5,600,000 shares (the "U.S.
Offering") of Common Stock, $.01 par value (the "Common Stock"), of GFC
Financial Corporation (the "Company"), together with separate prospectus pages
relating to a concurrent offering outside the United States and Canada of an
aggregate of 1,400,000 shares (the "International Offering") of Common Stock.
The complete prospectus for the U.S. Offering follows immediately. Following
such prospectus are the following alternate pages for the International
Offering: a front cover page, an inside front cover page, an "Underwriting"
section and a back cover page. All other pages of the prospectus for the U.S.
Offering are to be used for both the U.S. Offering and the International
Offering.
Copies of each complete Prospectus in the exact forms in which they are to
be used after effectiveness will be filed with the Securities and Exchange
Commission pursuant to Rule 424(b)of the Securities Act of 1933, as amended.
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 1, 1994
PROSPECTUS
7,000,000 SHARES
G F C
G F C Financial Corporation
COMMON STOCK
------------------------
Of the 7,000,000 shares of Common Stock offered hereby, 5,600,000 shares
are being offered in the United States and Canada by the U.S. Underwriters (the
"U.S. Offering") and 1,400,000 shares are being offered in a concurrent
international offering outside the United States and Canada by the International
Managers (the "International Offering"). The price to the public and the
underwriting discount per share are identical for both offerings. See
"Underwriting."
The Company's Common Stock is listed on the New York Stock Exchange. On
March 31, 1994, the last reported sale price of the Common Stock on the New York
Stock Exchange was $31.75 per share.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share................................ $ $ $
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Total(3)................................. $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the U.S. Underwriters and the International Managers
options exercisable within 30 days of the date hereof, to purchase up to
840,000 and 210,000 additional shares of Common Stock, respectively, solely
to cover over-allotments, if any. If all such additional shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1994.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is April , 1994.
<PAGE> 4
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at Room 1024 at the public reference facilities maintained
by the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as
the Regional Offices of the Commission at Northwestern Atrium Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661-2511 and 7 World Trade
Center, New York, New York 10048, and copies can be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at the prescribed rates. Reports and other information
concerning the Company can also be inspected at the office of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered by this Prospectus. This Prospectus does not
contain all the information set forth in the Registration Statement and exhibits
thereto. In addition, certain documents filed by the Company with the Commission
have been incorporated in this Prospectus by reference. See "Incorporation of
Certain Documents by Reference." For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, and the documents incorporated herein
by reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated herein by reference are the Company's Annual Report on Form
10-K and 10-K/A for the fiscal year ended December 31, 1993 and Current Reports
on Form 8-K, 8-K/A and 8-K/A-1 dated February 14, 1994 filed pursuant to Section
13 of the Exchange Act with the Commission.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of the Common Stock offered hereby shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge upon written or oral request by any
person to whom this Prospectus is delivered a copy of any or all of the
documents described above which have been incorporated by reference in this
Prospectus, other than exhibits to such documents. Such request should be
directed to the Company at its principal executive offices, to the attention of
Robert J. Fitzsimmons, Vice President-Treasurer, GFC Financial Corporation, Dial
Tower, 1850 N. Central Avenue, Phoenix, Arizona 85004, telephone number (602)
207-4900.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information appearing elsewhere in, or incorporated by reference into,
this Prospectus. See "Incorporation of Certain Documents by Reference." Unless
the context otherwise requires, references in this Prospectus to the "Offerings"
means the concurrent offerings of the Common Stock by the U.S. Underwriters in
the United States and Canada and by the International Managers outside of the
United States and Canada. Unless indicated otherwise, the information contained
in this Prospectus assumes no exercise of the Underwriters' over-allotment
options and that the acquisition of TriCon Capital Corporation ("TriCon") has
been consummated. Historical financial results of the Company do not include
results for TriCon or Ambassador Factors Corporation (formerly known as Fleet
Factors Corp.) ("Ambassador"), unless expressly stated otherwise.
THE COMPANY
GFC Financial Corporation (the "Company"), through its wholly owned
subsidiaries, provides collateralized financing in focused market niches
primarily in the United States. The Company extends revolving credit facilities,
term loans, and equipment and real estate financing to "middle-market"
businesses with financing needs falling generally between $500,000 and $35
million. The Company also offers financing programs to manufacturers,
distributors, vendors and franchisors which facilitate the sale in the United
States of their products to end-users. The Company currently operates in 15
specific industry or market niches in which its expertise in evaluating the
creditworthiness of prospective customers and its ability to provide value-added
services enables the Company to differentiate itself from its competitors and to
command loan pricing which provides a satisfactory spread over the Company's
borrowing costs.
The Company seeks to maintain a high quality portfolio and to minimize
nonearning assets and write-offs by using clearly defined underwriting criteria
and stringent portfolio management techniques and by diversifying its lending
activities geographically and among a range of industries, customers, and loan
products. Because of the diversity of the Company's portfolio, the Company
believes it is better able to manage competitive changes in its markets and to
withstand the impact of deteriorating economic conditions on a regional or
national basis. The Company practices a matched funding strategy designed to
minimize the Company's earnings' sensitivity to interest rate fluctuations.
The Company is the successor to the former financial services businesses of
The Dial Corp ("Dial"). On March 3, 1992, the shareholders of Dial approved the
spin-off (the "Spin-Off") of the Company into a newly-formed Delaware
corporation. Prior to the Spin-Off, Dial contributed to the Company (i) all of
the common stock of Greyhound Financial Corporation ("GFC"), the business of
which represents the Company's core operations, (ii) Greyhound European
Financial Group ("GEFG"), Dial's European commercial and consumer finance
businesses not previously managed by GFC, (iii) Greyhound BID Holding Corp., a
portfolio of public sector loans to Latin American countries and (iv) Verex
Corporation and subsidiaries ("Verex"), Dial's discontinued mortgage insurance
operations, which had been operated in a run-off mode by Dial since 1988.
Following the Spin-Off in March 1992, the Company decided to focus its
resources and capital on its core domestic commercial finance activities. The
Company has embarked on a program of selling or winding down those businesses
included in the Spin-Off and not associated with the Company's core domestic
commercial finance activities. The Company has concentrated on redeploying the
capital previously invested in such businesses to support internal portfolio
growth and to make selected acquisitions which complement the Company's core
operations. This strategy has been implemented as follows:
- Liquidation of GEFG -- The Company ceased writing new business in Europe
and subsequently began a managed liquidation of GEFG's commercial and
consumer loan portfolios. Since 1992, the Company has reduced GEFG's
portfolio from approximately $314 million to $124 million at December
31, 1993. Over the same period, personnel at GEFG's London offices were
reduced from 94 to 31. Capital previously invested in GEFG has been
redeployed in GFC's domestic operations.
3
<PAGE> 6
- Disposition of Latin American Portfolio -- Between 1992 and the first
quarter of 1994, the Company sold substantially all of its public sector
Latin American loan portfolio held by Greyhound BID Holding Corp.
through a series of transactions which exceeded the book value of such
assets.
- Acquisition of U.S. Bancorp Financial -- On January 14, 1993, the
Company signed an agreement to acquire the Asset Based Finance group of
U.S. Bancorp Financial, Inc., a wholly-owned subsidiary of U.S. Bancorp,
for approximately $70 million. The primary focus of the Asset Based
Finance group (the "ABF group") is to offer revolving lines of credit
secured by accounts receivable and inventories on a national basis.
Prior to the acquisition, the Company did not offer revolving financing
services to its customers. Since the acquisition, which was consummated
on February 1, 1993, the ABF group's portfolio has grown from
approximately $63 million to $176 million at December 31, 1993.
- Sale of Verex Corporation -- On July 16, 1993, the Company sold Verex to
GE Capital Mortgage Corporation for approximately $215 million in cash,
resulting in a loss of $1.3 million. Approximately $170 million of the
Company's equity capital previously invested in Verex has since been
reinvested in GFC's domestic operations and for selected acquisitions.
- Acquisition of Ambassador Factors -- On November 29, 1993, the Company
and GFC signed an agreement in principle to acquire, Ambassador, Fleet
Financial Group, Inc.'s ("Fleet") factoring and asset based lending
subsidiary. At November 30, 1993, Ambassador had a $336 million loan
portfolio and generated $731 million of factoring volume during the
eleven month period ended November 30, 1993. Its customer base primarily
consists of small to medium-size textile and apparel manufacturers in
the factoring operations and similar sized manufacturers, distributors
and wholesalers in its asset-based lending business. The acquisition of
Ambassador, which was consummated by GFC on February 14, 1994, further
diversifies the Company's commercial lending activities to include both
factoring services and asset-based loan products offered to a segment of
the commercial finance market not previously served by GFC.
- Acquisition of TriCon Capital Corporation -- On March 4, 1994, the
Company signed a definitive agreement to acquire all of the stock of
TriCon, a wholly owned subsidiary of Bell Atlantic Corporation ("Bell
Atlantic") for $344.3 million, plus the assumption of approximately
$1.45 billion in debt and other liabilities. At December 31, 1993,
TriCon had total assets of approximately $1.8 billion and managed
approximately $1.3 billion of commercial finance assets for third
parties, including a $975 million leveraged lease portfolio owned by
Bell Atlantic. TriCon is a niche oriented provider of commercial lending
and equipment financing products to a segmented group of customers
throughout the United States. Management believes that TriCon's
marketing orientation fits well with the Company's emphasis on value
added products and services in focused niches of the commercial finance
business and further diversifies the Company's revenue sources and loan
portfolio. Management believes the acquisition of TriCon gives the
Company significant critical mass, important economies of scale and
allows the Company to compete over a greater range of services.
- Internally Generated Portfolio Growth -- Excluding the liquidating GEFG
portfolio and the acquisition of the ABF group's portfolio, the
Company's total investment in financing transactions grew (through new
business fundings) from $2.0 billion at December 31, 1991, to $2.7
billion at December 31, 1993, representing an annual compound growth
rate of approximately 17%. The total volume of new business funded by
the Company during 1993 exceeded $1 billion, a 59% improvement over 1992
new business volume, reflecting strong loan demand in the markets served
by the Company and an expansion of the Company's marketing staff in
Phoenix, Los Angeles, Chicago and the metropolitan New York area.
The Company's strategy of focusing its efforts on its domestic core lending
activities through internal growth and acquisitions has resulted in increasing
the Company's total assets on a pro forma basis, giving effect to the
acquisitions of Ambassador and TriCon, to approximately $5 billion at December
31, 1993, with pro forma 1993 income from continuing operations on a combined
basis of approximately $72 million, before a $4.9 million adjustment for
deferred taxes applicable to leveraged leases. Management believes the Company
now ranks among the largest independent commercial finance companies in the
United States based on total assets.
4
<PAGE> 7
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock Offered
U.S. Offering.................................. 5,600,000 shares
International Offering......................... 1,400,000 shares
Total.................................. 7,000,000 shares
Common Stock Outstanding after the Offerings..... 27,087,703* shares
Proceeds of Offerings............................ The net proceeds from the sale of the
shares
of Common Stock offered hereby will be
contributed to the Company's principal
subsidiary, GFC, and used by GFC to repay
debt.
NYSE Symbol...................................... GFC
</TABLE>
- ---------------
* Excluding shares of Common Stock issuable by the Company pursuant to its
employee benefit plans.
5
<PAGE> 8
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following summary selected consolidated financial data of the Company
has been derived from the audited Consolidated Financial Statements of the
Company for the five years ended December 31, 1993. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus. Per
share data for income and dividends has not been presented in 1991 and prior
years, as the Company was not a publicly held company prior to the Spin-Off from
Dial in 1992.
<TABLE>
<CAPTION>
PRO FORMA(1) YEAR ENDED DECEMBER 31,
------------ ------------------------------------------------------------------
1993 1993 1992 1991 1990 1989
------------ ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Interest earned from financing
transactions.......................... $ 523,068 $ 248,700 $ 240,806 $ 251,472 $ 256,962 $ 237,816
Interest margins earned................. 303,980 124,847 104,699 93,912 85,310 70,566
Provision for possible credit losses
(2)................................... 34,517 5,706 6,740 77,687 10,529 7,951
Gains on sale of assets................. 5,439 5,439 3,362 6,684 12,678 17,572
Core income (3)......................... 69,901 40,463 34,289 31,629 21,697 19,583
Income (loss) from continuing operations
(2)(4)................................ 67,284 37,846 36,750 (38,742) 29,558 28,464
Income from continuing operations per
common and equivalent share (4)....... $ 2.41 $ 1.80 $ 1.71
Dividends declared per common share..... $ 0.68 $ 0.68 $ 0.42
Average outstanding common and
equivalent shares..................... 27,332,000 20,332,000 20,464,000
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(1) DECEMBER 31,
------------ ------------------------------------------------------------------
1993 1993 1992 1991 1990 1989
------------ ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Investment in financing transactions.... $4,927,843 $2,846,571 $2,428,523 $2,281,872 $2,198,441 $1,950,372
Nonaccruing contracts and repossessed
assets(5)............................. 180,743 102,607 100,422 111,296 163,519 142,038
Reserve for possible credit losses
(2)................................... 116,678 64,280 69,291 87,600 77,098 72,636
Total assets............................ 5,008,135 2,834,322 2,641,668 2,414,484 2,393,309 2,138,413
Deferred income taxes................... 174,380 178,972 172,727 198,366 214,825 208,043
Total long-term debt.................... 3,835,780 2,078,776 1,882,349 1,706,470 1,510,675 1,337,596
Redeemable preferred stock.............. 25,000
Stockholders' equity.................... 719,740 503,300 488,396 371,576 442,747 423,323
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(1) YEAR ENDED DECEMBER 31,
------------ ------------------------------------------------------------------
1993 1993 1992 1991 1990 1989
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
RATIOS:
Reserve and accrued liabilities for
possible credit losses/investments in
financing transactions and
securitizations....................... 2.5%(6) 2.3% 2.9% 3.8% 3.5% 3.7%
Nonearning accounts and repossessed
assets/investment in financing
transactions and securitizations...... 3.4% 3.6% 4.1% 4.9% 7.4% 7.3%
Total debt/stockholders' equity......... 5.3x 4.1x 3.9x 4.8x 3.8x 3.5x
</TABLE>
- ---------------
(1) Gives effect to (i) the acquisitions of Ambassador and TriCon as if they
occurred on January 1, 1993, for purposes of operations data and on December
31, 1993 for purposes of financial position data, and (ii) the Offerings and
the application of the estimated net proceeds therefrom. See "Pro Forma
Financial Data."
(2) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65,000,000 and recorded write-offs of $15,000,000
related to nonearning assets in the GEFG portfolio and a $47,759,000
write-down to reduce Latin American assets to then-current market value.
(3) Core income is defined as domestic income from continuing operations
excluding the charges made to deferred taxes applicable to leveraged leases
in 1993 and the restructuring and other charges recorded in 1991 in
connection with the Spin-Off.
(4) Income from continuing operations for 1993, before the adjustment of
$4,857,000 to deferred taxes applicable to leveraged leases, was $42,703,000
or $2.04 per common and equivalent share.
(5) Pro Forma includes $14,935,000 and $63,201,000 of nonaccruing assets from
Ambassador and TriCon, respectively.
(6) Accrued liabilities for certain limited recourse obligations for credit
losses relating to securitizations were $14,146,000 and assets sold under
securitization arrangements and managed by TriCon were $343,839,000.
6
<PAGE> 9
USE OF PROCEEDS
The net proceeds from the sale of the 7,000,000 shares of Common Stock
offered hereby are estimated to be $ ($ if the
over-allotment options are exercised in full). All of such proceeds will be
contributed to the equity of the Company's principal subsidiary, GFC. GFC will
use such proceeds to repay outstanding commercial paper.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The principal market on which the Common Stock is traded is the New York
Stock Exchange. The following tables summarize the high and low market prices as
reported on the New York Stock Exchange Composite Tape and the cash dividends
declared from the Spin-Off through March 31, 1994:
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------------------------------------------------------------- ---- ----
<S> <C> <C>
1992:
First Quarter.............................................. $ 23 $21 3/8
Second Quarter............................................. 23 1/2 17 7/8
Third Quarter.............................................. 21 1/4 18 1/4
Fourth Quarter............................................. 25 3/8 20 7/8
1993
First Quarter.............................................. $29 5/8 $23 5/8
Second Quarter............................................. 30 1/8 25 1/2
Third Quarter.............................................. 31 7/8 28 1/4
Fourth Quarter............................................. 32 26 1/2
1994
First Quarter.............................................. $33 3/4 28 1/4
</TABLE>
As of March 31, 1994, there were approximately 33,000 holders of record of
the Common Stock. The last reported closing sales price of the Common Stock on
the New York Stock Exchange Composite Tape on March 31, 1994 was $31.75.
<TABLE>
<CAPTION>
DIVIDENDS DECLARED
PER SHARE OF
COMMON STOCK
--------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
February........................................................ $0.18 $0.16
April........................................................... 0.16
May............................................................. $0.14
August.......................................................... 0.18 0.14
November........................................................ 0.18 0.14
---- ----
Total................................................. $0.68 $0.42
---- ----
---- ----
</TABLE>
Following the Spin-Off, the Company has paid quarterly dividends since
August 1992 on the first business day of each calendar quarter. It is
anticipated that the Company will continue to pay regular quarterly dividends on
the first business day of January, April, July and October. The declaration of
dividends and their amounts will be at the discretion of the Board of Directors
of the Company and there can be no assurance that additional dividends will be
declared.
7
<PAGE> 10
GFC is restricted in its ability to pay dividends to its sole stockholder,
the Company. The agreements pertaining to long-term debt of GFC include various
restrictive covenants and require the maintenance of certain defined financial
ratios with which GFC has complied. Under one of these covenants, dividend
payments are limited to 50 percent of the sum of accumulated earnings and
proceeds from equity issued after December 31, 1991. On a pro forma basis,
including the equity represented by the Offerings, under the most restrictive
covenant, a leverage covenant, dividend payments would have been limited to
approximately $87,000,000 at December 31, 1993.
8
<PAGE> 11
CAPITALIZATION
The following table sets forth the unaudited capitalization, including
deferred income taxes, of the Company and its consolidated subsidiaries at
December 31, 1993, and as adjusted for (i) the acquisitions of Ambassador and
TriCon and (ii) such acquisitions and the sale of the 7,000,000 shares of Common
Stock offered hereby at an estimated price of $32.00 per share, based upon the
approximate sales price on the New York Stock Exchange of the Common Stock on
March 31, 1994, and the application of the net proceeds therefrom to make a
capital contribution to GFC, which in turn will use the net proceeds to reduce
debt.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993
-------------------------------------------
AS AS
ACTUAL ADJUSTED(I) ADJUSTED(II)
---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Senior debt:
Notes payable to Bell Atlantic....................... -- $ 1,377,899 $ 1,377,899
Other................................................ $1,991,986 2,587,021 2,370,581
Subordinated debt, net of unamortized discount......... 86,790 86,790 86,790
---------- ----------- ------------
Total debt................................... 2,078,776(1) 4,051,710(2) 3,835,270(2)
---------- ----------- ------------
Deferred income taxes.................................. 178,972 174,380 174,380
---------- ----------- ------------
Stockholders' equity:
Preferred Stock -- $0.01 par value; authorized,
5,000,000 shares; none outstanding................ -- -- --
Common Stock -- $0.01 par value; authorized
100,000,000 shares; 20,371,703 shares issued,
actual and as adjusted (i); 27,371,703 shares, as
adjusted (ii)(3).................................. 204 204 274(4)
Additional capital................................... 464,487 464,487 680,857
Retained income...................................... 54,901 54,901 54,901
Cumulative translation adjustments................... (7,773) (7,773) (7,773)
Common Stock in treasury (292,217 shares)............ (8,519) (8,519) (8,519)
---------- ----------- ------------
Total stockholders' equity................... 503,300 503,300 719,740
---------- ----------- ------------
Total capitalization.................... $2,761,048 $ 4,729,390 $ 4,729,390
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
- ---------------
(1) Includes current maturities of $179,392,000.
(2) Includes current maturities of $1,119,870,000. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Acquisition
of Ambassador and TriCon -- Impact on the Company."
(3) Does not include 5,611,000 shares of Common Stock reserved for issuance
under the Company's 1992 Stock Incentive Plan.
(4) Assumes the issuance of 7,000,000 shares of Common Stock, net of
underwriting discount and estimated expenses.
9
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company has been
derived from the audited Consolidated Financial Statements of the Company for
the five years ended December 31, 1993. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus. Per share data for
income and dividends has not been presented for 1991 and prior years, as the
Company was not a publicly held company prior to the Spin-Off from Dial in 1992.
<TABLE>
<CAPTION>
PRO FORMA(1) YEAR ENDED DECEMBER 31,
------------ -----------------------------------------------------------------
1993 1993 1992 1991(2) 1990 1989
------------ ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Interest earned from financing
transactions........................... $ 523,068 $ 248,700 $ 240,806 $ 251,472 $ 256,962 $ 237,816
Interest expense......................... 219,088 123,853 136,107 157,560 171,652 167,250
------------ ---------- ---------- ---------- ---------- ----------
Interest margins earned.................. 303,980 124,847 104,699 93,912 85,310 70,566
Provision for possible credit losses..... 34,517 5,706 6,740 77,687 10,529 7,951
------------ ---------- ---------- ---------- ---------- ----------
Net interest margins earned.............. 269,463 119,141 97,959 16,225 74,781 62,615
Gain on sale of assets................... 5,439 5,439 3,362 6,684 12,678 17,572
------------ ---------- ---------- ---------- ---------- ----------
274,902 124,580 101,321 22,909 87,459 80,187
Selling and administrative expenses...... 122,131 58,158 50,728 59,923 47,243 42,938
Depreciation............................. 41,582
------------ ---------- ---------- ---------- ---------- ----------
111,189 66,422 50,593 (37,014) 40,216 37,249
Income taxes:
Current and deferred................... 39,048 23,719 13,843 1,728 10,658 8,785
Adjustment to deferred taxes........... 4,857 4,857
------------ ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations(4).......................... 67,284 37,846 36,750 (38,742) 29,558 28,464
------------ ---------- ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ---------- ----------
Core income(3)........................... 69,901 40,463 34,289 31,629 21,697 19,583
------------ ---------- ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ---------- ----------
Income per common and equivalent share:
Income from continuing operations
before preferred dividends........... $ 2.46 $ 1.86 $ 1.80
Preferred dividends.................... 0.05 0.06 0.09
------------ ---------- ----------
Income from continuing operations(4)... 2.41 1.80 1.71
------------ ---------- ----------
------------ ---------- ----------
Dividends declared per common share.... $ 0.68 $ 0.68 $ 0.42
------------ ---------- ----------
------------ ---------- ----------
Average outstanding common and
equivalent shares.................... 27,332,000 20,332,000 20,464,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(footnotes to follow on next page)
10
<PAGE> 13
<TABLE>
<CAPTION>
PRO FORMA(1) DECEMBER 31,
------------ -----------------------------------------------------------------
1993 1993 1992 1991 1990 1989
------------ ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
ASSETS
Cash and cash equivalents................ $ 12,619 $ 929 $ 18,203 $ 37,903 $ 25,379 $ 29,138
Investment in financing transactions:
Loans and other financing contracts.... 3,591,375 2,343,755 1,919,371 1,739,978 1,665,747 1,389,933
Direct finance leases.................. 718,867 71,812 138,871 201,327 246,756 291,546
Operating leases....................... 333,819 147,222 100,911 75,204 10,303 2,324
Leveraged leases....................... 283,782 283,782 269,370 265,363 275,635 266,569
------------ ---------- ---------- ---------- ---------- ----------
4,927,843 2,846,571 2,428,523 2,281,872 2,198,441 1,950,372
Less reserve for possible credit
losses(2).............................. (116,678) (64,280) (69,291) (87,600) (77,098) (72,636)
------------ ---------- ---------- ---------- ---------- ----------
4,811,165 2,782,291 2,359,232 2,194,272 2,121,343 1,877,736
Investment in and advances to Verex
Corporation............................ 221,312 152,171 152,795 152,795
Other assets and deferred charges........ 184,351 51,102 42,921 30,138 70,269 55,305
------------ ---------- ---------- ---------- ---------- ----------
Total Assets............................. $5,008,135 $2,834,322 $2,641,668 $2,414,484 $2,369,786 $2,114,974
------------ ---------- ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accruals............ $ 166,709 $ 72,764 $ 71,836 $ 83,637 $ 201,277 $ 146,017
Due to factored clients.................. 111,526
Due to The Dial Corp..................... 10,727 (23,523) (23,439)
Debt..................................... 3,835,780 2,079,286 1,883,709 1,750,178 1,534,460 1,361,030
Deferred taxes........................... 174,380 178,972 172,727 198,366 214,825 208,043
------------ ---------- ---------- ---------- ---------- ----------
4,288,395 2,331,022 2,128,272 2,042,908 1,927,039 1,691,651
Redeemable preferred stock............... 25,000
Stockholders' equity..................... 719,740 503,300 488,396 371,576 442,747 423,323
------------ ---------- ---------- ---------- ---------- ----------
Total Liabilities And Stockholders'
Equity................................. $5,008,135 $2,834,322 $2,641,668 $2,414,484 $2,369,786 $2,114,974
------------ ---------- ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ---------- ----------
</TABLE>
- ---------------
(1) Gives effect to (i) the acquisitions of Ambassador and TriCon as if they
occurred on January 1, 1993, for purposes of operations data and on December
31, 1993 for purposes of financial position data, and (ii) the Offerings and
the application of the estimated net proceeds therefrom. See "Pro Forma
Financial Data."
(2) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65,000,000 and recorded write-offs of $15,000,000
related to nonearning assets in the GEFG portfolio and a $47,759,000
write-down to reduce Latin American assets to then-current market value.
(3) Core income is defined as domestic income from continuing operations
excluding the charges made to deferred taxes applicable to leveraged leases
in 1993 and the restructuring and other charges recorded in 1991 in
connection with the Spin-Off.
(4) Income from continuing operations for 1993, before the adjustment of
$4,857,000 to deferred taxes applicable to leveraged leases, was $42,703,000
or $2.04 per common and equivalent share.
11
<PAGE> 14
PRO FORMA FINANCIAL DATA
AT AND FOR THE YEAR ENDED DECEMBER 31, 1993
The following Pro Forma Consolidated Balance Sheet (unaudited) of the
Company as of December 31, 1993 and Pro Forma Statement of Consolidated Income
From Continuing Operations (unaudited) for the year ended December 31, 1993 have
been prepared to reflect the Company's historical financial position and income
from continuing operations as adjusted to reflect the acquisitions of Ambassador
and TriCon and the Offerings by the Company. The Pro Forma Consolidated Balance
Sheet has been prepared as if such acquisitions occurred on December 31, 1993
and the Pro Forma Statement of Consolidated Income From Continuing Operations
has been prepared as if such acquisitions occurred on January 1, 1993 and give
effect to the Offerings. The pro forma financial information is unaudited and
should be read in conjunction with the accompanying notes thereto and with the
historical consolidated financial statements of the Company and TriCon, included
elsewhere herein, and Ambassador, incorporated by reference herein. The pro
forma financial information is not necessarily indicative of either the
financial position or the results of operations that would have been achieved
had the acquisitions and the Offerings been consummated as of the dates referred
to above, nor is it necessarily indicative of the results of future operations.
GFC FINANCIAL CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
----------------------------------------- ------------------------- PRO
COMPANY AMBASSADOR(1) TRICON AMBASSADOR TRICON FORMA
---------- ------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........... $ 929 $ 7,072 $ 4,483 $ $ 135(9) $ 12,619
---------- ------------- ---------- ---------- --------- ----------
Investment in financing
transactions:
Loans and other financing
contracts....................... 2,343,755 334,656 912,964 3,591,375
Direct finance leases............. 71,812 647,055 718,867
Operating leases.................. 147,222 240,057 (53,460)(10) 333,819
Leveraged leases.................. 283,782 283,782
---------- ------------- ---------- ---------- --------- ----------
2,846,571 334,656 1,800,076 (53,460) 4,927,843
Less reserve for possible credit
losses............................ (64,280) (9,207) (43,191) (116,678)
---------- ------------- ---------- ---------- --------- ----------
2,782,291 325,449 1,756,885 (53,460) 4,811,165
Other assets and deferred charges... 51,102 5,941 27,091 30,400(2) 69,817(13) 184,351
---------- ------------- ---------- ---------- --------- ----------
$2,834,322 $ 338,462 $1,788,459 $ 30,400 $ 16,492 $5,008,135
---------- ------------- ---------- ---------- --------- ----------
---------- ------------- ---------- ---------- --------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accruals....... $ 72,764 $ 4,843 $ 75,302 $ 8,800(2) $ 5,000(13) $ 166,709
Due to factored clients............. 111,526 111,526
Due to Fleet........................ 172,000 (172,000)(3)
Due to Bell Atlantic................ 611,194 83,900(11)
(695,094)(12)
Debt................................ 2,079,286 709,508 76,285(2) (53,460)(10) 3,835,780
172,000(3) 721,851(12)
130,310(13)
Deferred income taxes............... 178,972 (4,592) 81,100 (83,900)(11) 174,380
2,800(13)
---------- ------------- ---------- ---------- --------- ----------
2,331,022 283,777 1,477,104 85,085 111,407 4,288,395
Stockholders' equity................ 503,300 54,685 311,355 (54,685)(2) 135(9) 719,740
(26,757)(12)
216,440(13)
(284,733)(13)
---------- ------------- ---------- ---------- --------- ----------
$2,834,322 $ 338,462 $1,788,459 $ 30,400 $ 16,492 $5,008,135
---------- ------------- ---------- ---------- --------- ----------
---------- ------------- ---------- ---------- --------- ----------
</TABLE>
12
<PAGE> 15
GFC FINANCIAL CORPORATION
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
FROM CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS
----------------------------------- -------------------------- PRO
COMPANY AMBASSADOR(1) TRICON AMBASSADOR TRICON FORMA
---------- ------------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned from
financing transactions.... $ 248,700 $35,235 $245,300 $ $ (7,667)(10) $ 523,068
1,500(14)
Interest expense............ 123,853 5,780 80,211 4,226(4) 5,018(15) 219,088
---------- ------------- -------- ---------- -------- -----------
Interest margins earned..... 124,847 29,455 165,089 (4,226) (11,185) 303,980
Provision for possible
credit losses............. 5,706 7,177 21,634 34,517
---------- ------------- -------- ---------- -------- -----------
Net interest margins
earned.................... 119,141 22,278 143,455 (4,226) (11,185) 269,463
Gains on sale of assets..... 5,439 5,439
---------- ------------- -------- ---------- -------- -----------
124,580 22,278 143,455 (4,226) (11,185) 274,902
Selling and administrative
expenses.................. 58,158 8,125 48,128 2,470(5) 3,491(16) 122,131
1,000(6) 759(14)
Depreciation................ 41,582 41,582
---------- ------------- -------- ---------- -------- -----------
66,422 14,153 53,745 (7,696) (15,435) 111,189
Income taxes:
Current and deferred...... 23,719 6,481 22,164 (3,078)(7) (6,174)(18) 39,048
(820)(8) (3,244)(17)
Adjustment to deferred
taxes................... 4,857 4,857
---------- ------------- -------- ---------- -------- -----------
Income from continuing
operations................ $ 37,846 $ 7,672 $ 31,581 $ (3,798) $ (6,017) $ 67,284
---------- ------------- -------- ---------- -------- -----------
---------- ------------- -------- ---------- -------- -----------
Income from continuing
operations per common and
equivalent share(20)...... $ 1.80 $ 2.41
---------- -----------
---------- -----------
Average outstanding common
and equivalent
shares(20)................ 20,332,000 27,332,000
---------- -----------
---------- -----------
</TABLE>
13
<PAGE> 16
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The Pro Forma Consolidated Balance Sheet, as of December 31, 1993
includes the historical balance sheet of Ambassador as of November 30, 1993 and
the Pro Forma Statement of Consolidated Income From Continuing Operations for
the year ended December 31, 1993 includes the historical statement of income of
Ambassador for the eleven months ended November 30, 1993.
ACQUISITION OF AMBASSADOR
(2) To record the accrual of various liabilities ($8,800,000) and the
resulting goodwill arising from the Ambassador acquisition ($30,400,000), the
payment for Ambassador's equity plus a premium ($76,285,000) using a portion of
the proceeds from the sale of Verex and cash generated from operations which
previously had been used to repay debt and the elimination of historical equity
($54,685,000).
(3) To record repayment of Ambassador's intercompany payable to Fleet
($172,000,000), using the proceeds from the sale of Verex and cash generated
from operations which previously had been used to repay debt.
(4) To record the estimated interest expense ($4,226,000) arising from the
debt incurred to fund the acquisition and the repayment of the intercompany
payable due to Fleet.
(5) To record amortization of goodwill ($2,470,000) based on an
amortization period of twenty years and amortization of the covenant not to
compete over one year (see Note (19)).
(6) To record administrative expenses for additional employees and general
overhead ($1,000,000).
(7) To record the income tax effect ($3,078,000) of Notes (4), (5) and (6)
at the Company's effective incremental income tax rate of 40%.
(8) To adjust income taxes for the lower state income tax rate applicable
to the Company ($820,000).
ACQUISITION OF TRICON
(9) To record the original capital contribution by Bell Atlantic as part of
the incorporation of TriCon ($135,000).
(10) To transfer assets and the related debt of TriCon ($53,460,000), not
purchased by the Company, to Bell Atlantic and reduce interest earned from
financing transactions for the income recorded on such assets in 1993
($7,667,000).
(11) To record issuance of notes payable ($83,900,000) to Bell Atlantic by
TriCon to repay TriCon's deferred tax liability.
(12) To record a dividend from TriCon to Bell Atlantic ($26,757,000) and
the conversion of the remaining short-term borrowings from affiliates of TriCon
($695,094,000) to a Note payable to Bell Atlantic ($721,851,000).
(13) To record the goodwill created in the acquisition of TriCon
($69,817,000), elimination of the remaining TriCon equity ($284,733,000), the
elimination of deferred tax assets ($2,800,000), the debt incurred to finance
the acquisition ($130,310,000), the issuance of equity net of anticipated
expenses ($216,440,000) and the accrual of various liabilities ($5,000,000). The
interest expense related to debt initially issued to consummate the acquisition
of TriCon which will subsequently be replaced with a portion of the net proceeds
from the Offerings and, therefore, nonrecurring and excluded from the Pro Forma
Statement of Consolidated Income From Continuing Operations is approximately
$2,000,000.
(14) To reflect base fees ($1,500,000) and incremental costs ($759,000)
related to an agreement to manage leveraged leases for Bell Atlantic by TriCon.
(15) To record interest expense ($5,018,000) resulting from the additional
debt issued to purchase TriCon and certain debt to Bell Atlantic incurred to
fund the deferred tax payment and dividend referred to in
14
<PAGE> 17
Notes (11) and (12), reduced by the interest savings applicable to the debt not
transferred in the TriCon acquisition referred to in Note (10).
(16) To record amortization of goodwill ($3,491,000) based on an
amortization period of twenty years (see Note (19)).
(17) 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).
(18) To record the income tax effect ($6,174,000) of Notes (10) and (14)
through (16) at the Company's effective incremental income tax rate of 40%.
(19) Goodwill may be adjusted as the final allocation of the values of the
purchased assets and liabilities is established.
(20) Pro forma income from continuing operations per common and equivalent
share is calculated assuming the 7,000,000 common shares are issued at $32.00
per share which represents the Company's approximate stock sales price on March
31, 1994.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GFC FINANCIAL CORPORATION
On March 3, 1992, The Dial Corp's ("Dial") shareholders approved the
spin-off (the "Spin-Off") to its shareholders of the Company, a newly-formed
Delaware corporation, which comprised Dial's former commercial lending and
mortgage insurance subsidiaries. In connection with the Spin-Off, the holders of
common stock of Dial received a distribution of one share of common stock of the
Company for every two shares of Dial common stock.
Prior to the Spin-Off, Dial contributed its 100% ownership interest in
companies constituting the Greyhound European Financial Group ("GEFG") and
Greyhound BID Holding Corp. to GFC and contributed (i) all of the common stock
of GFC and (ii) its discontinued mortgage insurance operations, Verex
Corporation and subsidiaries ("Verex") to the Company. On July 16, 1993, the
Company reported the sale of Verex.
RESULTS OF OPERATIONS
1993 Compared to 1992
Income from continuing operations for 1993, excluding a $4.9 million
adjustment for deferred taxes applicable to leveraged leases ($0.24 per common
and equivalent share), rose to $42.7 million ($2.04 per common and equivalent
share) from $36.8 million ($1.71 per common and equivalent share) in 1992, a 16%
increase in earnings from continuing operations and a 19% increase in earnings
per common and equivalent share. The $4.9 million adjustment in 1993 represented
the effects of the recent increases in federal and state income tax rates as
they applied to deferred income taxes generated by the Company's leveraged lease
portfolio. Income from continuing operations for 1993, including the adjustment
for deferred taxes, was $37.8 million ($1.80 per common and equivalent share).
Net income for 1993 was $37.3 million ($1.77 per common and equivalent
share). Excluding the $4.9 million deferred tax adjustment, net income for 1993
was $42.2 million ($2.01 per common and equivalent share) compared to $49.0
million ($2.31 per common and equivalent share) in 1992. The primary reason for
the lower earnings in 1993 is the loss of $0.5 million ($0.03 per common and
equivalent share) reported from discontinued operations in 1993 compared to
income of $12.2 million ($0.60 per common and equivalent share) in 1992. The
$0.5 million loss for the year consists of $0.8 million of income from Verex's
operations and a loss of $1.3 million on the sale of Verex.
Interest Margins Earned. Interest margins earned, which represent the
difference between interest earned from financing transactions and interest
expense, increased by 19% in 1993 compared to 1992. These margins were improved
significantly by more favorable debt costs in 1993 when compared to 1992
(approximately a 1% reduction in the aggregate cost of debt). Also contributing
to the improved margins was the growth of the domestic portfolio and higher
prepayment fees, partially offset by the effects of larger foreign exchange
gains reported by GEFG in 1992 and the continued winding down of the GEFG
portfolio.
The $12.3 million reduction in interest expense is attributable to more
favorable debt costs and the interest savings from the repayment of commercial
paper with the proceeds from the Verex sale. The more favorable debt costs, in
comparison to 1992, primarily relate to the Company's ability to consistently
maintain a matched position throughout 1993 relative to financing its
floating-rate assets with floating-rate debt. During the second and third
quarters of 1992, the Company, because of the significant refinancing done in
connection with the Spin-Off, had to finance a major portion of its
floating-rate assets with fixed-rate debt. That fixed-rate debt was subsequently
converted to floating-rate debt through interest rate conversion agreements.
However, the timing between the issuance of fixed-rate debt and the execution of
the interest rate conversion agreements, caused interest margins to shrink by
approximately $2.8 million in 1992.
Non-Interest Expense. Although the provision for possible credit losses
was lower in 1993, in the opinion of management, such provision was adequate to
cover the growth and risk in the portfolio. The reserve
16
<PAGE> 19
for possible credit losses, which is increased by the loss provisions and
reduced by write-offs, was 2.3% of funds employed at December 31, 1993. Details
of the write-offs by collateral type can be found in Note D of Notes to
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
Selling, administrative and other operating expenses increased during 1993
due to the addition of the Asset Based Finance ("ABF") operations acquired from
U.S. Bancorp Financial, Inc., expenses that are no longer allocated to
discontinued operations and legal expenses incurred in connection with certain
problem accounts. See Note N of Notes to Consolidated Financial Statements of
the Company included elsewhere in this Prospectus.
Gains on Sale of Assets. Gains on sale of assets were higher in 1993 than
in 1992 due to the amount and type of assets sold. Gains in 1993 primarily were
derived from the sale of aircraft and assets held for sale.
Income Taxes. Income taxes, excluding the $4.9 million adjustment
applicable to deferred taxes, were higher in 1993 and more in the range of an
ongoing effective tax rate (approximately 36% of income before income taxes) for
the Company. The higher income taxes were attributable to the effects of a 1%
increase in both federal and state income tax rates, which increased the
provision for taxes by approximately $1 million, and to higher income before
income taxes. Additionally, in 1992, income taxes were reduced by $3.1 million,
representing tax adjustments related to the refinancing of the Company's debt.
See Note I of Notes to Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
Mortgage Insurance Operations. The Company sold all of the issued and
outstanding common stock of Verex in July 1993. The Stock Purchase Agreement
("Agreement") was executed on May 26, 1993, and the sale was consummated on July
16, 1993. The initial cash sale price was approximately $215 million, before
transaction costs. The sale price was generally determined by the book value of
the Verex assets plus a premium of $6 million and an adjustment for the
difference between market value and book value of Verex's investment portfolio,
calculated as prescribed more fully by the Agreement. Adjustments to the sale
were made in the fourth quarter of 1993 to reflect estimated transaction costs
and additional liabilities resulting in a $1.3 million loss on the sale of
Verex.
The loss from discontinued operations for 1993 was $0.5 million compared to
income of $12.2 million in 1992. The $0.5 million loss for the year consists of
$0.8 million of income from operations and the loss of $1.3 million on the sale
of Verex. The $0.8 million in income from Verex's operations represents income
through the sale date and the accrual of expenses necessary to complete the
disposition of the remaining assets and liabilities of Verex which were retained
by the Company.
1992 Compared to 1991
Income from continuing operations, after taxes, for 1992 was $36.8 million
compared to a loss of $38.7 million in 1991. The 1991 results from continuing
operations included $69 million (after-tax) of restructuring and other charges
as part of the Spin-Off. Excluding the effects of the restructuring and other
charges recorded in 1991, income from continuing operations in 1992 increased by
21% over 1991 ($36.8 million compared to $30.3 million).
Net income for 1992 rose to $49 million from a net loss of $52.5 million in
1991. The results for 1991 (both continuing and discontinued operations)
included restructuring and other charges of $83 million (after-tax).
The following discussion of results of operations excludes the $69 million
(after-tax) of restructuring and other charges recorded in 1991.
Interest Margins Earned. Interest margins earned increased by 11% in 1992
compared to 1991. This increase primarily was attributable to higher margins in
the domestic portfolio ($83.4 million in 1992 compared to $73.6 million in 1991)
which grew by $277.5 million in 1992. GEFG's interest margins earned increased
by $1.0 million in 1992 as a result of $47.2 million of additional capital
infused by Dial in December 1991 as part of the Spin-Off. The effect of this
capital infusion helped to offset the reduction in margins caused by the
continued liquidation of the GEFG portfolio.
17
<PAGE> 20
During the second and third quarters of 1992, GFC, because of the
significant refinancing done in connection with the Spin-Off, had to finance a
major portion of its floating-rate assets with fixed-rate debt. That fixed-rate
debt was subsequently converted to floating-rate debt through interest rate
conversion agreements. The timing between the issuance of fixed-rate debt and
the execution of interest rate conversion agreements resulted in a decrease in
margins of approximately $2.8 million. GFC was able to liquidate a substantial
portion of its Latin American assets for gains of $3.1 million, which offset the
adverse effect of the temporary imbalance of rate-sensitive assets and
liabilities.
Also contributing to the improved interest margins were the effects of
lower nonaccruals, which averaged $114 million in 1992 compared to $185 million
in 1991, high prepayment fees and interest expense reductions related to the
refinancing of high cost fixed-rate debt during 1991 and 1992. These increases
were partially offset by the effect of recognizing $6.3 million of additional
income in 1991, related to the leveraged lease portfolio, with no comparable
amount being recognized in 1992.
Non-interest Expense. Provisions for possible credit losses were lower in
1992 but, nevertheless, were adequate to cover the growth and risk in the
portfolio. A breakdown of the write-offs by collateral type can be found in Note
D of Notes to Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
Selling, administrative and other operating expenses increased during 1992
due to additional costs associated with being a public company, the ongoing
downsizing of GEFG (which included $1.3 million of after-tax employee
termination costs) and normal cost increases. See Note N of Notes to
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
Gains on Sale of Assets. Gains on sale of assets were lower in 1992 than
in 1991 due to reduced quantities and values of assets coming off lease. This
reduction was the result of the gradual runoff of the Company's lease portfolio
and is in line with the Company's strategy of improving core income (i.e., net
income excluding after-tax gains on sale of assets).
Income Taxes. The effective income tax rate for 1992 was lower than the
statutory rate primarily because of a $3.1 million reduction in taxes for tax
benefits related to the expenses of refinancing the Company's debt. See Note I
of Notes to Consolidated Financial Statements of the Company.
Mortgage Insurance Operations. Income from the discontinued mortgage
insurance operations (before federal income tax settlements) was $3.1 million in
1992 compared to $16.8 million in 1991. The 1992 results included a special
charge of $11.4 million ($7.5 million after-tax) to strengthen loss reserves and
were adversely affected by a decline in investment yields and a decrease in
premium volume resulting from high levels of mortgage loan refinancing. After
income tax credits of $9.1 million in 1992 and charges of $15.4 million in 1991,
income from discontinued operations improved to $12.2 million in 1992 from $1.4
million in 1991.
ACQUISITION OF AMBASSADOR AND TRICON -- IMPACT ON THE COMPANY
The acquisition of Ambassador and TriCon have significantly increased the
Company's assets and pro forma earnings. On a pro forma basis, at December 31,
1993, the Company's total assets would have been approximately $5 billion, with
income from continuing operations for the twelve months ended December 31, 1993
of approximately $72 million, before a one-time $4.9 million adjustment for
deferred taxes applicable to leveraged leases.
Prior to the acquisitions of Ambassador and TriCon, the Company analyzed
the impact of the acquisitions on its core commercial finance business in
several key areas, as described below.
Consistent Business Strategy
TriCon and Ambassador each pursued a niche-oriented business strategy
similar to that followed by the Company.
18
<PAGE> 21
Ambassador serves factoring clients and asset based borrowers, primarily in
the northeast, which are not actively pursued by larger factoring companies or
other asset based lenders due to (i) the size of the customer, (ii) the
complexity or type of assets serving as loan collateral or (iii) the clients'
need for a level of service which Ambassador's competitors are unwilling or
unable to provide because of their higher operating costs.
TriCon is a niche-oriented provider of commercial lending and equipment
financing products and services to a segmented group of customers throughout the
United States. TriCon emphasizes market or industry niches in which its ability
to offer products and services tailored to the individual needs and objectives
of each customer enables it to differentiate itself from its competitors and to
command pricing which provides a satisfactory spread over TriCon's cost of
funds.
As a result of the existing business strategies of Ambassador and TriCon,
management believes the acquisitions of Ambassador and TriCon strengthen the
Company's ability to execute its fundamental business strategy (see
"Business -- Business Strategy").
Management
Prior to being acquired by the Company, Ambassador and TriCon each operated
on an essentially autonomous basis with little reliance on Fleet or Bell
Atlantic, respectively, except in areas such as external financing and employee
welfare and retirement benefits. Prior to entering into the transaction with the
Company, Bell Atlantic intended to sell 100% of the stock of TriCon in an
initial public offering, reflecting Bell Atlantic's belief in TriCon
management's ability to operate independently. In connection with its proposed
initial public offering of stock, TriCon received investment grade ratings from
Standard & Poor's Corporation, Moody's Investor Service, Inc. and Duff & Phelps,
providing further evidence of TriCon management's ability to operate the company
on a stand-alone basis. Upon the acquisition of both Ambassador and TriCon, the
Company entered into employment agreements having initial terms of three years
with certain key management employees of Ambassador and TriCon. As a result,
while there can be no assurance that Ambassador's or TriCon's management will
remain with the Company, the Company believes it will be able to preserve
management continuity at both companies for the foreseeable future.
Asset Quality
In 1990, TriCon initiated a comprehensive plan for achieving independent
investment grade debt ratings. TriCon's plan, among other things, furthered the
development of its focus on niche market sectors in the commercial and equipment
finance industries. In addition, consistent with a heightened focus on portfolio
credit quality, related strategies were initiated to strengthen TriCon's
operations, underwriting standards and internal controls for the administration
of credit risk. As part of this process, procedures for the early identification
of potential problem accounts, more active management of nonearning accounts and
aggressive recognition of credit losses were adopted.
TriCon operates in business segments which historically have generated a
higher amount of write-offs than those experienced by GFC. This higher level of
write-offs is generally taken into account by the management of TriCon in
pricing its financing products. During the last three years, TriCon's average
interest margins earned (interest from financing transactions less interest
expense) on financing assets were approximately 150 basis points higher than
GFC's average interest margins for the same period. This in part reflects the
additional yield TriCon is able to generate on its financing products, which
offsets the expected higher levels of write-offs.
19
<PAGE> 22
The table below sets forth certain information regarding TriCon's credit
quality statistics:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,(1)
----------------------------------
TRICON 1993 1992 1991
- ----------------------------------------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonearning assets(2)....................................... $ 63,201 $ 78,655 $ 76,645
Reserve and accrued liabilities for possible credit
losses................................................... 57,337 65,639 57,991
Write-offs................................................. 38,884 32,771 24,391
Write-offs as a percentage of average funds employed and
securitizations(3)(4).................................... 1.9% 1.7% 1.3%
Nonearning assets as a percentage of funds employed and
securitizations(3)(4).................................... 3.0% 3.8% 4.0%
Reserve and accrued liabilities for possible credit losses
as a percentage of funds employed and
securitizations(3)(4).................................... 2.7% 3.2% 3.0%
Reserve and accrued liabilities for possible credit losses
as a
multiple of write-offs................................... 1.5x 2.0x 2.4x
Reserve and accrued liabilities for possible credit losses
as a percentage of nonearning assets..................... 90.7% 83.5% 75.7%
</TABLE>
- ---------------
(1) TriCon accounts are considered nonearning when delinquent over 120 days.
(2) The table excludes assets not purchased by the Company.
(3) Funds employed represent investments in financing transactions before the
reserve for possible credit losses.
(4) Securitizations are assets sold under securitization agreements and managed
by the Company.
Ambassador also operates in business segments in which it experiences
higher amounts of nonearning assets and write-offs than those historically
experienced by GFC. At November 30, 1993, approximately 4.5% of Ambassador's
$336 million loan portfolio was nonearning and write-offs for the eleven months
ended November 30, 1993 were approximately $7.3 million. These higher levels of
nonearning assets and write-offs have historically been offset by the interest
margins Ambassador generates on its financing assets. In 1993, Ambassador's net
interest margins including factoring fees were 500 basis points higher than
GFC's interest margins.
20
<PAGE> 23
The tables below set forth certain information regarding Ambassador's
credit quality statistics and the Company's credit quality statistics on a pro
forma basis, including Ambassador and TriCon:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
AMBASSADOR 1993(1) 1992 1991
- ----------------------------------------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonearning assets.......................................... $ 14,935 $ 15,833 $ 10,312
Reserve for possible credit losses......................... 9,207 7,993 8,768
Write-offs................................................. 7,349 13,929 5,252
Write-offs as a percentage of average funds employed....... 2.2% 4.4% 1.8%
Nonearning assets as a percentage of ending funds
employed................................................. 4.5% 4.9% 3.4%
Reserve for possible credit losses as a percentage of
ending funds employed.................................... 2.8% 2.5% 2.9%
Reserve for possible credit losses as a multiple of
write-offs............................................... 1.3x 0.6x 1.7x
Reserve for possible credit losses as a percentage of
nonearning assets........................................ 61.6% 50.5% 85.0%
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31, (2)
----------------------------------
THE COMPANY, PRO FORMA 1993(1) 1992 1991
- ----------------------------------------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonearning assets (3)...................................... $180,743 $194,910 $198,253
Reserve and accrued liabilities for possible credit
losses................................................... 130,824 142,923 154,359
Write-offs (4)............................................. 58,808 70,361 97,989
Write-offs as a percentage of average funds employed and
securitizations (3)...................................... 1.2% 1.5% 2.2%
Nonearning assets as a percentage of funds employed and
securitizations (3)...................................... 3.4% 4.1% 4.4%
Reserve and accrued liabilities for possible credit losses
as a percentage of funds employed and securitizations
(3)...................................................... 2.5% 3.0% 3.4%
Reserve and accrued liabilities for possible credit losses
as a multiple of write-offs.............................. 2.2x 2.0x 1.6x
Reserve and accrued liabilities for possible credit losses
as a percentage of nonearning assets..................... 72.4% 73.3% 77.9%
</TABLE>
- ---------------
(1) The Ambassador historical and the pro forma combined information for 1993
includes information for Ambassador at or for the eleven months ended
November 30, 1993.
(2) Accounts are generally considered delinquent after 90 days except for TriCon
accounts, which are considered delinquent after 120 days.
(3) Excludes assets not purchased by the Company.
(4) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65,000,000 and recorded write-offs of $15,000,000
related to nonearning assets in the GEFG portfolio and a $47,759,000
write-down to reduce Latin American assets to current market value.
For more information on the Company's credit quality statistics on a
stand-alone basis see "Selected Consolidated Financial Data" and Note D of Notes
to Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
21
<PAGE> 24
PRO FORMA PORTFOLIO DIVERSIFICATION
At December 31, 1993, the pro forma carrying amount of the investment in
financing transactions and securitizations, including the estimated residual
value of leased assets upon lease termination (before reserve for possible
credit losses) consisted of the following types of loans and collateral:
PRO FORMA PORTFOLIO DIVERSIFICATION
BY TYPE OF LOAN AND COLLATERAL
AT DECEMBER 31, 1993
<TABLE>
<CAPTION>
PRO FORMA
GFC FINANCIAL CORPORATION PRO FORMA PERCENT OF TOTAL
AND AMBASSADOR TRICON(1) COMPANY(1) CARRYING AMOUNT(1)
------------------------- ---------- ---------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Asset Based Finance....... $ 373,528 $ 203,400 $ 576,928 11.0%
Aircraft & Related
Equipment............... 556,856 14,300 571,156 10.8
Timeshare Resort
Receivables............. 563,214 563,214 10.7
Communications Finance.... 507,723 507,723 9.6
Commercial Real Estate.... 354,318 141,040 495,358 9.4
Production & Processing
Equipment............... 134,816 307,100 441,916 8.4
Diversified Commercial
Equipment............... 306,515 306,515 5.8
Data Processing
Equipment............... 295,400 295,400 5.6
Health Care Equipment..... 278,800 278,800 5.3
Real Estate Leveraged
Leases.................. 196,915 196,915 3.7
Health Care Real Estate... 195,300 195,300 3.7
Telecommunications........ 179,700 179,700 3.4
Diversified Commercial
Real Estate............. 168,900 168,900 3.2
Factoring Finance......... 137,196 137,196 2.6
Land Receivables.......... 74,053 74,053 1.4
Railroad Equipment........ 73,762 73,762 1.4
Consumer Finance.......... 45,264 45,264 0.9
Commercial Vehicles &
Buses................... 9,795 9,795 0.2
Other..................... 153,787 153,787 2.9
------------- ---------- ---------- ------
Total Funds Employed...... $ 3,181,227 $2,090,455 $5,271,682 100.0%
------------- ---------- ---------- ------
------------- ---------- ---------- ------
</TABLE>
- ---------------
(1) Excludes assets not purchased by the Company.
22
<PAGE> 25
A breakdown of the pro forma portfolio of assets and securitizations by
state at December 31, 1993 is as follows:
PRO FORMA PORTFOLIO DIVERSIFICATION
BY STATE
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PERCENT OF
GFC FINANCIAL COMPANY TOTAL
STATE CORPORATION AMBASSADOR TRICON TOTAL CARRYING AMOUNT
- ------------------------- ------------- ---------- ---------- ---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
California............... $ 402,052 $ 17,835 $ 338,840 $ 758,727 14.4%
New York................. 143,450 248,581 108,178 500,209 9.5
Texas.................... 196,481 25,670 224,706 446,857 8.5
Florida.................. 159,185 117,960 277,145 5.3
New Jersey............... 63,693 42,570 121,321 227,584 4.3
Pennsylvania............. 79,021 112,773 191,794 3.6
Michigan................. 104,712 63,967 168,679 3.2
Arizona.................. 119,218 30,916 150,134 2.8
Illinois................. 87,076 59,506 146,582 2.8
Maryland................. 53,886 71,633 125,519 2.4
Nevada................... 111,242 7,989 119,231 2.3
Washington............... 70,127 42,743 112,870 2.1
Georgia.................. 54,995 53,872 108,867 2.1
Other(1)................. 1,201,433 736,051 1,937,484 36.7
------------- ---------- ---------- ---------- ------
$ 2,846,571 $334,656 $2,090,455 $5,271,682 100.0%
------------- ---------- ---------- ---------- ------
------------- ---------- ---------- ---------- ------
</TABLE>
- ---------------
(1): Other includes all other states which, on an individual basis, represent
less than 2% of the total, and international, which represents approximately 5%
of the total.
Capital Structure and Leverage
After giving effect to the Offerings, contribution of all of the estimated
net proceeds therefrom to GFC, and application of such funds by GFC to the
repayment of indebtedness, GFC will have a leverage ratio as measured by total
debt to shareholders' equity (which on a pro forma basis amounted to $3.8
billion and $720 million, respectively, at December 31, 1993) equal to
approximately 5.3 to 1. The Company's revolving credit agreements currently
permit the Company to operate at leverage ratio of up to 7.0 to 1. Management
believes the Company will continue to be able to fund expected future asset
growth through the issuance of additional indebtedness and retention of future
earnings while operating within GFC's leverage constraints.
Growth Rate
In 1990, Bell Atlantic imposed capital constraints on TriCon as a result of
a strategic redirection of Bell Atlantic's business, which curtailed TriCon's
capacity for asset growth. The Company intends to remove such constraints and
believes that TriCon, as part of the Company, is capable of producing growth in
quality assets at a rate in excess of that experienced by it while under those
restrictions. The Company seeks to capitalize on the complementary nature of the
financial products and services offered by GFC, TriCon and Ambassador and to
build on the strengths of each of its lines of business. Management believes
that TriCon's marketing orientation fits well with the Company's emphasis on
value added products and services in focused niches of the commercial finance
business and further diversifies the Company's revenue sources and loan
portfolio. In addition, management believes the acquisition of TriCon gives the
Company significant critical mass, important economies of scale and allows the
Company to compete over a greater range of services.
23
<PAGE> 26
Certain of TriCon's business segments are cyclical and tend to experience a
greater demand for their financing products and services at a time when the U.S.
economy is expanding and lower demand during recessionary periods. In addition,
certain of TriCon's equipment financing products are dependent on TriCon's or
its affiliated group's ability to utilize on a current basis the federal and
state tax benefits associated with those products. On a combined basis,
management believes that the Company will have a federal and state income tax
position which will permit TriCon to market its tax-oriented equipment financing
products. As a result of these factors, management believes that the acquisition
of TriCon will not limit the Company's ability to achieve internal portfolio
growth at a rate consistent with the Company's historical experience.
Securitizations
TriCon has diversified its funding sources over the past several years to
include securitizations. This practice allowed TriCon to reduce its dependency
on medium-term debt supported by Bell Atlantic while operating under capital
constraints imposed by Bell Atlantic. Securitizations are used as an alternative
to medium-term financing to obtain funds for redeployment in the business. These
transactions also provide for near perfect match funding as the repayment of
proceeds raised by the securitization are matched with the future expected cash
flow of the assets being securitized. At December 31, 1993 total assets
securitized by TriCon were approximately $344 million and the accrued liability
for estimated losses under TriCon's securitization programs was approximately
$14.1 million. Securitization transactions reduce TriCon's investment in finance
leases, except to the extent that the proceeds are reinvested in new finance
leases. The future revenue stream of the securitized assets, in excess of the
income allocated to the purchasers, is recharacterized into two components, (i)
servicing fee income which is recognized as received over time, and (ii) gain on
sale. During 1994, the Company expects to utilize securitizations of selected
TriCon assets consistent with TriCon's historical experience. However, in the
future the Company may reduce the utilization of asset securitizations. Reduced
utilization of securitizations would have the result of reducing net income in
the near term since no gain on the sale of assets would be recorded. However,
earnings from assets retained and not securitized would continue to be
recognized over the life of the assets. The Company estimates that if TriCon had
not engaged in any securitizations, but had instead retained the earning assets,
income before cumulative effect of changes in accounting principles from TriCon
would have changed in 1991 from $23.4 million to $20.5 million, in 1992 from
$27.4 million to $27.7 million, and in 1993 from $31.6 million to $35.0 million.
TriCon did not engage in any securitizations prior to 1990.
Seasonality of TriCon Income
TriCon usually experiences increases in its volume of new lease
originations during the fourth quarter of each year for various reasons,
including the tax attributes of the assets being financed. TriCon has the option
to securitize its assets at any time during the year, but it has historically
used securitizations to fund the increased volume of lease transactions or to
reduce the debt incurred to fund such additions during the fourth quarter.
Liquidity and Capital Resources
The Company's sources of liquidity are funds from operations, proceeds from
the Offerings, external debt or equity financings and securitizations. GFC
recently filed a shelf-registration statement with the Securities and Exchange
Commission that would provide for the issuance of up to $1.0 billion of senior
debt securities. Additionally, GFC currently maintains a three-year revolving
credit facility with numerous lenders, in the aggregate principal amount of $700
million. Separately, GFC also has a 364-day revolving credit facility in the
aggregate principal amount of $200 million. GFC is currently in negotiation with
its banks to expand the aggregate principal amount of the three-year revolving
credit facility from $700 million up to approximately $1.2 to $1.5 billion
through a bank syndicate acceptable to GFC. The new revolving credit agreement
would be subject to the completion of the Offerings and the investment by the
Company of a substantial portion of the net proceeds from the Offerings in GFC,
as well as negotiation and execution of definitive documentation and other terms
and conditions usual and customary for transactions of that nature. While the
Company believes it will be successful in obtaining an expansion of such
facilities, there can be no assurance of that result. If an expansion of the
revolving facility is not successfully negotiated, the Company and GFC believe
24
<PAGE> 27
they have other alternatives available to them, including the sale of additional
debt or equity securities, although the ability to do so will depend on various
factors including then-current market conditions and the Company's financial
condition.
Debt repayments due in 1994 will be approximately $1.12 billion, consisting
of approximately $722 million payable to Bell Atlantic, approximately $219
million payable to other third party creditors of TriCon and approximately $179
million payable to creditors of GFC. The Company believes that its current
financial resources and anticipated future cash flows, together with the
proceeds of the Offerings and sale of commercial paper, supported by the
anticipated debt facilities referred to above, will be adequate to fund the
Company's 1994 debt repayments and operating requirements.
25
<PAGE> 28
BUSINESS
GENERAL
The Company, through its wholly owned subsidiaries, is in the business of
providing collateralized financing in focused market niches primarily in the
United States. The Company extends revolving credit facilities, term loans, and
equipment and real estate financing to "middle-market" businesses with financing
needs falling generally between $500,000 and $35 million. The Company also
offers financing programs to manufacturers, distributors, vendors and
franchisers which facilitate the sale in the United States of their products to
end-users. The Company currently operates in 15 specific industry or market
niches in which its expertise in evaluating the creditworthiness of prospective
customers and its ability to provide value-added services enables the Company to
differentiate itself from its competitors and to command loan pricing which
provides a satisfactory spread over the Company's borrowing costs.
The Company seeks to maintain a high quality portfolio and to minimize
nonearning assets and write-offs by using clearly defined underwriting criteria,
stringent portfolio management techniques and by diversifying its lending
activities geographically and among a range of industries, customers, and loan
products. Because of the diversity of the Company's portfolio, the Company
believes it is better able to manage competitive changes in its markets and to
withstand the impact of deteriorating economic conditions on a regional or
national basis.
The Company's activities include:
GFC BUSINESS SEGMENTS
- Corporate Finance. The Corporate Finance group provides financing,
generally in the range of $2 million to $25 million, focusing on
middle-market businesses nationally, including distribution, wholesale,
retail, manufacturing and service industries. The group's lending is
primarily in the form of term loans secured by the assets of the
borrower, with significant emphasis on cash flow as the source of
repayment of the secured loan.
- Transportation Finance. The Transportation Finance group structures
secured financings for specialized areas of the transportation industry,
principally involving domestic and foreign used aircraft, as well as
domestic short-line railroads and used rail equipment. Typical
transactions involve financing up to 80% of the fair market value of used
equipment in the $3 million to $30 million range. Traditionally focused
on the domestic marketplace, Transportation Finance established a London,
England office in 1992, broadening its product line to include
international aircraft loans.
- Communications Finance. The Communications Finance group specializes in
radio and television. Other markets include cable television, print and
outdoor media services in the United States. The Company extends secured
loans to communications businesses requiring funds for recapitalization,
refinancing or acquisition. Loan sizes generally are from $3 million to
$35 million.
- Commercial Real Estate Finance. The Commercial Real Estate group
provides cash-flow-based financing primarily for acquisitions and
refinancings to experienced real estate developers and owner tenants of
income-producing properties in the United States. The Company
concentrates on secured financing opportunities, generally between $3
million and $30 million, involving senior mortgage term loans on
owner-occupied commercial real estate. The Company's portfolio of real
estate leveraged leases is also managed as part of the commercial real
estate portfolio.
- Resort Finance. The Resort Finance group focuses on successful,
experienced resort developers, primarily of timeshare resorts, second
home resort communities, golf resorts and resort hotels. Extending funds
through a variety of lending options, the Resort Finance group provides
loans and lines of credit ranging from $3 million to $30 million for
construction, acquisitions, receivables financing and purchases and other
uses. Through the Company's subsidiary, GFC Portfolio Services, Inc., the
Resort Finance group offers expanded convenience and service to its
customers. Professional receivables collections and cash management gives
developers the ability of having loan-related administrative functions
performed for them by the Company.
26
<PAGE> 29
- Asset Based Finance. Acquired in early 1993, the ABF group offers a full
range of nationwide collateral-oriented lending programs to middle-market
businesses including manufacturers, wholesalers and distributors. The
Company's ABF group mainly provides revolving lines of credit ranging
between $2 million and $25 million, often partnering with the Corporate
Finance group to offer convenient "one-stop" financing to businesses.
- Consumer Rediscount Finance. The Consumer Rediscount Group provides $2
million to $25 million revolving credit lines to regional consumer
finance companies which in turn extend credit to consumers. The Company's
customers provide credit to consumers to finance home improvements,
automobile purchases, insurance premiums and for a variety of other
financial needs.
- Ambassador Factors. Ambassador provides accounts receivable factoring
and asset-based lending in amounts generally ranging from $500,000 to $3
million principally to small and medium-sized textile and apparel
manufacturers and importers.
In conjunction with the liquidation of the GEFG portfolio, GEFG surrendered
the banking license of its United Kingdom bank, Greyhound Bank PLC. GEFG
operates a finance group that was primarily involved in lending to individuals
in the United Kingdom secured by second mortgages on residential real estate.
GEFG ceased writing new consumer finance business in the first quarter of 1991,
but continues to administer and collect loans previously made.
TRICON BUSINESS SEGMENTS
TriCon is a niche oriented provider of commercial finance and equipment
leasing services to a segmented group of borrowers and lessees throughout the
United States. TriCon conducts its operations through seven specialized business
groups which provide financial products and services to three specific market
sectors of the commercial finance industry: the End-User Sector, the Program
Finance Sector and the Capital Services Sector.
END-USER SECTOR. The customers in the End-User Sector use the assets which
TriCon finances or leases for the ongoing operation of their businesses. The
equipment which TriCon leases to its customers is typically purchased from an
equipment manufacturer, vendor or dealer selected by the customer. The three
specialized business groups associated with this market sector and the services
provided by TriCon to customers of each business group include:
- Medical Finance Group. Equipment and real estate financing and asset
management services targeting the top 2,400 health care providers in the
United States.
- Commercial Equipment Finance Group. Direct finance leasing of, and
lending for, general business equipment to quality commercial business
enterprises which lack ready access to the public finance markets.
- Government Finance Group. Primarily tax-exempt financing to state and
local governments.
PROGRAM FINANCE SECTOR. TriCon's business groups in the Program Finance
Sector provide financing programs to help manufacturers, distributors, vendors
and franchisors facilitate the sale of their products or
27
<PAGE> 30
services. The three specialized business groups associated with this market
sector and the services provided by TriCon to customers of each business group
include:
- Vendor Service Group. Point-of-sale financing programs and support
services for regional and national manufacturers, distributors and
vendors of equipment classified as "small ticket" in transaction size
(generally transactions with an equipment cost of less than $250,000).
The equipment which TriCon leases to the ultimate end-user is typically
sold to TriCon by the vendor participating in the financing program.
- Franchise Finance Group. Equipment and total facility financing programs
for the franchise-based food service industry. The equipment which TriCon
leases to the ultimate end-user is typically purchased by TriCon from an
equipment manufacturer, vendor or dealer selected by the end-user.
- Commercial Credit Services Group. Accounts receivable and inventory
lending for manufacturers and major distributors, manufacturer-sponsored
inventory financing for office equipment dealers, and telecommunications
receivables financing for regional providers of long distance operator
services.
CAPITAL SERVICES SECTOR. The Capital Services Sector has one business
group which focuses on the management and origination of highly structured
financing of "large ticket" commercial equipment (generally transactions
involving the sale or lease of equipment with a cost in excess of $15 million),
primarily leveraged leases for major corporations. The equipment which TriCon
leases to its customers is typically purchased from an equipment manufacturer,
vendor or dealer selected by the customer.
TriCon Portfolio Composition.
The total assets under the management of TriCon consist of TriCon's
portfolio of owned lease and loan assets (the "Portfolio Assets") plus certain
assets that are owned by others but managed by TriCon and are not reflected on
TriCon's balance sheet. At December 31, 1993, the Portfolio Assets were
approximately $1.8 billion. At that date, the assets of others managed by TriCon
were approximately $1.3 billion, consisting of approximately $343.8 million of
assets originated by TriCon but sold to others in securitizations (the
"Securitizations") and approximately $975.7 million of net lease receivables
relating to the leveraged lease and project finance portfolio retained by Bell
Atlantic.
TriCon's primary financing products are finance leases, operating leases,
collateralized loans and inventory and receivable financing. The Portfolio
Assets are diversified across types of financed equipment with the largest
equipment concentrations being personal computers and individual workstation
data processing equipment, health care equipment, communications equipment,
furniture and fixtures, office machines and diversified commercial use
equipment. The Portfolio Assets also include real estate-related assets,
consisting primarily of real estate held as collateral in conjunction with its
health care and franchise-based food service equipment financings, and, to a
lesser extent, a portfolio of general commercial real estate mortgages currently
being managed for liquidation.
TriCon's current customer base includes approximately 70,000 customer
accounts; its largest exposure to any single customer is approximately $33.0
million, or constitutes approximately 2% of the Portfolio Assets and
Securitizations.
BUSINESS STRATEGY
Following the Spin-Off in March 1992, the Company decided to focus its
resources and capital on its core domestic commercial finance activities. The
Company has embarked on a program of selling or winding down those businesses
included in the Spin-Off not associated with the Company's core domestic
commercial finance activities. The Company has concentrated on redeploying the
capital previously invested in such businesses to support internal portfolio
growth and to make selected acquisitions which complement the Company's core
operations. This strategy has resulted in (i) the managed liquidation and sale
of the GEFG and Latin American loan portfolios, (ii) an increase (excluding
acquisitions) in GFC's domestic loan portfolio from the December 31, 1991 to
December 31, 1993 of $700 million or 36%, (iii) the acquisition of the ABF group
from U.S. Bancorp, (iv) the sale of Verex, (v) the acquisition of Ambassador,
and (vi) the acquisition
28
<PAGE> 31
of TriCon. As a result of management's execution of its business strategy,
management believes that the Company now ranks among the largest independent
commercial finance companies, based on assets, in the United States, and can
direct its energies primarily on its core business operations in the United
States, rather than on terminating discontinued operations.
Through GFC, the Company has been engaged in collateralized lending and
equipment leasing and financing for over 40 years. Since 1987, GFC's focus has
been on niche-oriented "middle-market" lending involving the extension of
revolving credit facilities, term loans and equipment financing to businesses
with financing needs generally falling between $500,000 and $35 million.
The Company seeks to achieve superior financial performance on a consistent
basis by adhering to certain fundamental principles in managing its commercial
finance business:
- Niche Focus. The Company seeks to compete in industry or market niches
in which its expertise in evaluating the creditworthiness of prospective
customers and its ability to provide value-added services enables the
Company to differentiate itself from its competitors and command loan
pricing which provides a satisfactory spread over the Company's
borrowing costs. The Company currently operates in 15 specific market or
industry niches (see "GFC Business Segments" and "TriCon Business
Segments"). The Company generally avoids competing solely on the basis
of the interest rate or fees charged to the customer for the Company's
loan products and services. The Company makes a determination of return
on equity for each new financing transaction which it funds. The
determination of the expected return on equity on any one transaction
takes into account loan origination and administration costs, historical
write-off experience in each of the Company's business segments,
overhead allocations and the size and expected term of the financing.
- Maintenance of Asset Quality. The Company seeks to maintain a high
quality loan portfolio and to minimize nonearning assets and write-offs
by using clearly defined underwriting criteria for each of the Company's
15 business segments, a stringent underwriting process and limited
delegation of credit authority. In addition, the Company actively
manages its portfolio by diversifying its financing activities
geographically and among a range of industries, customers and loan
products. Because of the diversity of the Company's portfolio, the
Company believes it is better able to manage competitive changes in its
markets and to withstand the impact of deteriorating economic conditions
on a regional or national basis.
- Asset/Liability Management. The Company seeks to maintain a
match-funded position in its financing transactions and borrowings so as
to minimize exposure to changing interest rates. The Company generally
follows a policy of funding floating rate assets with floating rate
borrowings and funding fixed rate assets with fixed rate debt, deferred
tax liabilities or with its equity capital. Substantially all of the
Company's floating rate assets are priced using the prime rate, which is
set by major U.S. banks, while its floating rate debt is generally
priced using LIBOR, which is dictated by market conditions. From time to
time, the Company hedges against a contraction in favorable spreads
between prime and LIBOR. At December 31, 1993, the Company had entered
into interest rate hedge agreements to fix the spread between the prime
rate and LIBOR at 2.3% on a notional principal amount of $750 million.
Management believes that the Company's results of operations should not
be materially affected by changing interest rates because of its
asset/liability management policies.
- Cost Controls. The Company actively attempts to maximize employee
productivity and to manage selling, administrative and other operating
expenses actively so as to optimize earnings and to enhance its
competitive position. Management believes its operating costs are lower
than many of its competitors when viewed either as a percentage of total
assets or as a percentage of net interest margins earned. As a result,
while certain of the Company's larger competitors may enjoy a lower cost
of funds, management believes that advantage is often offset, at least
in part, by the Company's lower operating costs.
- Acquisitions. Management considers selective acquisitions which
compliment the Company's core commercial finance business to be an
element in its overall business strategy. Acquisitions permit the
29
<PAGE> 32
Company to secure a presence in a particular industry or market niche
quickly while simultaneously giving the Company a seasoned loan
portfolio, experienced management and an existing loan origination,
underwriting and administrative infrastructure. The Company is neither
currently evaluating any prospective acquisition opportunities nor is
management contemplating making any significant acquisitions during the
balance of 1994. However, management will consider appropriate
opportunities as they arise, and acquisitions are expected to continue
to represent one component of the Company's longer-term growth strategy.
EMPLOYEES
At December 31, 1993, after giving effect to the Ambassador and TriCon
acquisitions, the Company had 872 employees, consisting of 14 (the Company), 230
(GFC), 31 (GEFG), 525 (TriCon) and 72 (Ambassador). None of such employees is
covered by collective bargaining agreements. The Company believes its employee
relations are satisfactory.
PROPERTIES
The principal executive offices of the Company and GFC are located in
premises leased from Dial in Phoenix, Arizona. GFC operates six additional
offices in the United States, and GEFG operates one office in Europe. All such
properties are leased.
TriCon's principal office and headquarters is located in Paramus, New
Jersey. TriCon also operates 14 additional offices in the United States and has
a marketing or administrative force in 16 additional locations. All such
properties are leased.
The Company believes alternative office space could be obtained without
difficulty in the event leases are not renewed.
30
<PAGE> 33
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following discussion summarizes certain Federal income tax consequences
generally applicable to the ownership and disposition of the Common Stock by a
holder who is not a United States Person ("Non-U.S. Holder"). The term "United
States Person" means a citizen or resident of the Untied States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any state thereof or an estate or trust, the income of which is
subject to Federal income taxation regardless of its source. This discussion is
based on the Internal Revenue Code of 1986, as amended (the "Code"), and
judicial and administrative interpretations now in effect, all of which are
subject to change. The discussion, which is for general information only and
does not constitute tax advice, does not purport to deal with all aspects of
United States Federal income taxation that may be relevant to a Non-U.S. Holder
and does not describe any tax consequences arising out of the laws of any state,
locality or foreign jurisdiction. NON-U.S. HOLDERS ARE ADVISED TO CONSULT THEIR
TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THEIR PARTICIPATION IN THIS OFFERING.
Dividends. A dividend paid by the Company to a Non-U.S. Holder generally
will be subject to withholding of United States Federal income tax at the rate
of 30% unless the dividend is effectively connected with the conduct of a trade
or business within the Untied States by the Non-U.S. Holder, in which case the
dividend will be subject to the United States Federal income tax on net income
that applies to United States persons generally (and, with respect to corporate
holders and under certain circumstances, the branch profits tax). Non-U.S.
Holders should consult any applicable income tax treaties, which may provide for
a lower rate of withholding or other rules different from those described above.
A Non-U.S. Holder may be required to satisfy certain certification requirements
to claim treaty benefits or otherwise claim a reduction of or exemption from
withholding under the foregoing rules.
Gain on Disposition. A Non-U.S. Holder generally will not be subject to
United States Federal income tax (subject to the discussion of FIRPTA and backup
withholding below) on gain recognized on a sale or other disposition (including
a redemption) of Common Stock unless (i) the gain is effectively connected with
the conduct of a trade or business within the United States by the Non-U.S.
Holder, or (ii) in the case of a Non-U.S. Holder who is a nonresident alien
individual and holds the Common Stock as a capital asset, such holder is present
in the U.S. for 183 or more days in the taxable year of the sale or disposition
and either has a "tax home" (as defined for United States Federal income tax
purposes) in the United States or an office or other fixed place of business in
the United States to which the sale or disposition is attributable.
FIRPTA. A Non-U.S. Holder of Common Stock may be subject to Federal income
tax under certain rules added to the Code by the Foreign Investment in Real
Property Tax Act ("FIRPTA tax") on a sale or other disposition of such Common
Stock if, in accordance with certain rules, the Company is or has been a United
States real property holding corporation ("USRPHC") within the preceding five
years or the period of such holder's ownership of such Common Stock, if shorter
(the "FIRPTA period"). A required withholding in respect of FIRPTA tax ("FIRPTA
withholding") is imposed at a rate of 10% of the amount realized on certain
sales or other dispositions of stock in USRPHCs.
FIRPTA does not apply to persons who beneficially own less than 5 percent
of the total fair market value of stock in a company at all times during the
five-year period ending on the date of disposition if such stock is regularly
traded on an established securities market located in the United States. The
Company's Common Stock qualifies for this exception and therefore Non-U.S.
Holders meeting the less than 5% test will not be subject to FIRPTA tax even if
the company otherwise is a USRPHC.
A Non-U.S. Holder of Common Stock also could generally avoid FIRPTA tax and
withholding if he obtains a statement from the Company to the effect that the
Company is not and has not been a USRPHC within the FIRPTA period and the
Company provides certain information to the IRS, including the name, address and
identification number (if any) of the Non-U.S. Holder requesting the statement.
Treasury Regulations require that the Company provide upon request of any person
a statement as to whether or not it
31
<PAGE> 34
is or has been a USRPHC within the FIRPTA period. Management believes that the
Company is not currently a USRPHC.
Federal Estate Taxes. Common Stock owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States Federal estate tax purposes) of the United States at the date of death
will be included in such individual's estate for United States Federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS the total amount of Federal income taxes withheld from
dividends paid to Non-U.S. Holders. In addition, the Company must report
annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to
and the tax withheld with respect to such holder. These information reporting
requirements apply regardless of whether withholding was reduced by an
applicable treaty.
The 31% backup withholding tax will not generally apply to dividends paid
to Non-U.S. Holder outside the United States that are subject to the 30%
withholding discussed above or that are not so subject because a tax treaty
applies that reduces or eliminates such withholding. In that regard, under
temporary regulations, dividends payable at an address located outside of the
United States to a Non-U.S. Holder are not subject to the backup withholding
rules.
Under temporary Treasury regulations, information reporting and backup
withholding requirements will apply to the gross proceeds paid to a foreign
person upon the disposition of Common Stock by or through a United States office
of a United States or foreign broker, unless the holder certifies to the broker
under penalties of perjury as to its name, address, and status as a foreign
person or the holder otherwise establishes an exemption. Information reporting
requirements (but not backup withholding) will also apply to a payment of the
proceeds of a disposition of the Debentures by or through a foreign office of
(i) a United States broker, (ii) a foreign broker 50% or more of whose gross
income for certain periods is effectively connected with the conduct of a trade
or business in the United States, or (iii) a foreign broker that is a
"controlled foreign corporation," unless the broker has documentary evidence in
its records that the holder is a non-United States holder and certain other
conditions are met, or the holder otherwise establishes an exemption. Neither
information reporting nor backup withholding will generally apply to a payment
of the proceeds of a disposition of Common Stock by or through a foreign office
of a foreign broker not subject to the preceding sentence.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such holder's
Federal income tax, provided that the required information is furnished to the
IRS.
32
<PAGE> 35
DESCRIPTION OF CAPITAL STOCK
The following summary description is qualified in its entirety by reference
to the Company's Certificate of Incorporation and the Rights Agreement between
the Company and The Valley National Bank of Arizona (now Bank One of Arizona),
as Rights Agent, dated as of February 15, 1992 (the "Rights Agreement"), which
are incorporated herein by reference as Exhibits to the Registration Statement
of which this Prospectus is a part. The Company is authorized by its Certificate
of Incorporation to issue an aggregate of 105,000,000 shares of stock,
consisting of 5,000,000 shares of Preferred Stock, par value $.01 per share, and
100,000,000 shares of Common Stock, par value $.01 per share.
As of March 31, 1994, there were 20,087,702 shares of Common Stock
outstanding. The Company's Board of Directors authorized and reserved for
issuance 600,000 shares of Junior Participating Preferred Stock in connection
with the Rights which were issued by the Company in connection with the
Spin-Off.
The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including elections of directors, and, except
as otherwise required by law or provided in any resolution adopted by the
Company's Board of Directors with respect to any series of Preferred Stock, the
holders of such shares exclusively possess all voting power. The Certificate of
Incorporation does not provide for cumulative voting in the election of
directors. Subject to any preferential rights of any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to such dividends as
may be declared from time to time by the Company's Board of Directors from funds
available therefor, and upon liquidation are entitled to receive pro rata all
assets of the Company available for distribution to such holders. The holders of
shares of Common Stock do not have preemptive rights.
The Company's Board of Directors is authorized to provide for the issuance
of shares of Preferred Stock, in one or more series, to establish the number of
shares in each series and to fix the designation, powers, preferences and rights
of each such series and the qualifications, limitations or restrictions thereof.
Except in connection with the Rights, the Board of Directors has not authorized
the issuance of any shares of Preferred Stock.
Immediately following the Spin-Off, a dividend of one preferred share
purchase right (a "Right") was paid in respect of each share of Common Stock to
the holder of record thereof as of the Spin-Off. Each Right entitles the
registered holder to purchase from the Company one-one-hundredth of a share of
junior participating preferred stock, par value $.01 per share (the "Junior
Participating Preferred Stock"), of the Company at a price of $45 per
one-one-hundredth of a share (the "Purchase Price"), subject to adjustment. The
terms of the Rights are set forth in a Rights Agreement.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 20% or more of the then
outstanding shares of the Common Stock or (ii) 10 business days (or such later
date as may be determined by action of the Company's Board of Directors prior to
such time as any person or group becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding shares of the
Common Stock (the earlier of such dates being called the "Rights Spin-Off
Date"), the Rights will be evidenced by the certificates representing shares of
Common Stock. The Rights Agreement provides that until the Rights Spin-Off Date
(or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the shares of Common Stock.
The Rights will not be exercisable until the Rights Spin-Off Date. The
Rights will expire on the tenth anniversary of the Spin-Off (the "Final
Expiration Date"), unless the Final Expiration Date is extended or unless the
Rights are earlier redeemed or exchanged by the Company, in each case, as
described below.
Because of the nature of the dividend, liquidation and voting rights of
Junior Preferred Stock, the value of the one one-hundredth interest in a share
of Junior Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of Common Stock.
33
<PAGE> 36
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision will be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise thereof at the then current exercise price that number of shares of
Common Stock having a market value of two times the exercise price of the Right
(such right being referred to as a "Flip-in Right"). In the event that, at any
time on or after the date that any person has become an Acquiring Person, the
Company is acquired in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power are sold, proper provision
will be made so that each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a market value of two times the exercise
price of the Right.
At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person and prior to the acquisition by such person or group
of 50% or more of the outstanding shares of Common Stock, the Board of Directors
of the Company may exchange the Rights (other than Rights owned by such person
or group which will have become void), in whole or in part, at an exchange ratio
of one share of Common Stock, or one one-hundredth of a share of Junior
Preferred Stock, per Right (subject to adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
shares of Common Stock, the Board of Directors may redeem the Rights in whole,
but not in part, at a price of $.01 per Right (the "Redemption Price"). The
redemption of the Rights may be made effective at such time, on such basis and
with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
and thereby effect a change in the composition of the Company's Board of
Directors on terms not approved by the Company's Board of Directors, including
by means of a tender offer at a premium to the market price, other than an offer
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or the business combination approved by the
Company's Board of Directors since the Rights may be redeemed by the Company at
the Redemption Price prior to the time that a person or group has become an
Acquiring Person.
In the event that the Rights become exercisable, the Company intends to
register the shares of Junior Preferred Stock for which the Rights may be
exercised, in accordance with applicable law.
34
<PAGE> 37
UNDERWRITING
Subject to the terms and conditions set forth in the U.S. purchase
agreement (the "U.S. Purchase Agreement"), the Company has agreed to sell to
each of the underwriters named below (the "U.S. Underwriters"), and each of the
U.S. Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
is acting as representative (the "U.S. Representative"), severally has agreed to
purchase, the number of shares of Common Stock set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
---------
Total........................................................ 5,600,000
---------
---------
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement" and, together with the U.S. Purchase Agreement, the
"Purchase Agreements") with Merrill Lynch International Limited acting as lead
manager (the "Lead Manager") and certain other underwriters outside the United
States and Canada (collectively, the "International Managers" and, together with
the U.S. Underwriters, the "Underwriters"). Subject to the terms and conditions
set forth in the International Purchase Agreement, the Company has agreed to
sell to the International Managers, and the International Managers severally
have agreed to purchase, an aggregate of 1,400,000 shares of Common Stock.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Common Stock being sold pursuant to such Purchase
Agreement if any of the shares of Common Stock being sold pursuant to such
Purchase Agreement are purchased. Under certain circumstances, under the
Purchase Agreements, the commitments of non-defaulting Underwriters may be
increased. Each Purchase Agreement provides that the Company is not obligated to
sell, and the Underwriters named therein are not obligated to purchase, the
shares of Common Stock under the terms of the Purchase Agreement unless all of
the shares of Common Stock to be sold pursuant to the Purchase Agreements are
contemporaneously sold.
The U.S. Representative has advised the Company that the U.S. Underwriters
propose to offer the shares of Common Stock offered hereby to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock, and that the U.S. Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per
share of Common Stock on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The initial public offering price per share of Common Stock and the
underwriting discount per share of Common Stock will be identical for both
Offerings.
The Company has granted to the U.S. Underwriters and the International
Managers options to purchase up to an aggregate of 840,000 and 210,000 shares of
Common Stock, respectively, at the initial public offering price, less the
underwriting discount. Such options, which will expire 30 days after the date of
this Prospectus, may be exercised solely to cover over-allotments. To the extent
that the Underwriters exercise such options, each of the Underwriters will have
a firm commitment, subject to certain conditions, to purchase approxi-
35
<PAGE> 38
mately the same percentage of the option shares that the number of shares to be
purchased initially by that Underwriter is of the 7,000,000 shares of Common
Stock initially purchased by the Underwriters.
The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the U.S.
Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other.
The Company and Samuel L. Eichenfield, Chairman, President, Chief Executive
Officer and a director of the Company, have agreed not to sell or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable into or exercisable for Common Stock, without the prior written
consent of the U.S. Representative and the Lead Manager, for a period of 90 days
after the date of this Prospectus except pursuant to awards under employee
benefit plans.
The Company has been informed that, under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or resell shares of Common Stock to persons
who are non-U.S. or non-Canadian persons or to persons they believe intend to
resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any bank, broker or dealer to whom they sell shares
of Common Stock will not offer to sell or resell shares of Common Stock to U.S.
persons or to Canadian persons or to persons they believe intend to resell to
U.S. persons or to Canadian persons, except in the case of transactions pursuant
to the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and offer for resale such number of
shares of Common Stock as the selling Underwriter or Underwriters and the
purchasing Underwriter or Underwriters may agree.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the Common Stock being offered hereby will be passed upon
for the Company by Gibson, Dunn & Crutcher. Brown & Wood will act as counsel for
the Underwriters.
EXPERTS
The financial statements of the Company included in this Prospectus and
incorporated in this Prospectus by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 have been audited by Deloitte &
Touche, independent auditors, as stated in their reports appearing herein and
incorporated herein by reference, and are included herein and incorporated
herein in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The consolidated balance sheets as of December 31, 1993 and 1992 and the
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1993 of TriCon Capital Corporation-Predecessor
Business included in and incorporated by reference in this Prospectus, have been
included and incorporated herein in reliance on the report, which includes an
explanatory paragraph for certain accounting changes, of Coopers & Lybrand,
independent certified public accountants given on the authority of that firm as
experts in accounting and auditing.
The financial statements of Fleet Factors Corporation (a wholly-owned
subsidiary of Fleet Financial Group, Inc. at the time of the report referred to
herein) appearing in the Company's Current Report on Form 8-K dated February 14,
1994 have been audited by KPMG Peat Marwick, independent auditors, as of the
dates and for the periods indicated in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein in reliance on such report of KPMG Peat Marwick, independent auditors,
given upon the authority of said firm as experts in accounting and auditing.
36
<PAGE> 39
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GFC FINANCIAL CORPORATION
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheet at December 31, 1993 and 1992.............................. F-3
Statement of Consolidated Operations for the Years Ended
December 31, 1993, 1992 and 1991.................................................... F-5
Statement of Consolidated Stockholders' Equity for the Years Ended
December 31, 1993, 1992 and 1991.................................................... F-6
Statement of Consolidated Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991.................................................... F-7
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1993, 1992 and 1991.................................................... F-8
Pro Forma Consolidated Balance Sheet at December 31, 1993............................. F-29
Pro Forma Consolidated Statement of Income from Continuing Operations for the Year
Ended December 31, 1993............................................................. F-30
Notes to Pro Forma Consolidated Financial Statements.................................. F-31
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
Independent Auditors' Report.......................................................... F-34
Consolidated Balance Sheets at December 31, 1993 and 1992............................. F-35
Consolidated Statements of Income for the Years Ended December 31, 1993, 1992 and
1991................................................................................ F-36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991.................................................... F-37
Notes to Consolidated Financial Statements............................................ F-38
</TABLE>
F-1
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
GFC Financial Corporation
We have audited the accompanying consolidated balance sheet of GFC
Financial Corporation and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of GFC Financial Corporation and
subsidiaries at December 31, 1993 and 1992, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Phoenix, Arizona
March 4, 1994
F-2
<PAGE> 41
GFC FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1992
---------- ----------
<S> <C> <C>
Cash and cash equivalents......................................... $ 929 $ 18,203
Investment in financing transactions:
Loans and other financing contracts, less unearned
income of $72,747 and $122,381, respectively................. 2,343,755 1,919,371
Leveraged leases................................................ 283,782 269,370
Operating and direct financing leases........................... 219,034 239,782
---------- ----------
2,846,571 2,428,523
Less reserve for possible credit losses......................... (64,280) (69,291)
---------- ----------
Investment in financing transactions -- net.................. 2,782,291 2,359,232
Investment in and advances to Verex Corporation................... 221,312
Other assets and deferred charges................................. 51,102 42,921
---------- ----------
$2,834,322 $2,641,668
---------- ----------
---------- ----------
</TABLE>
(continued)
See notes to consolidated financial statements.
F-3
<PAGE> 42
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1992
---------- ----------
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses........................... $ 46,067 $ 27,710
Customer deposits............................................... 3,064 15,064
Interest payable................................................ 23,633 29,062
Short-term debt................................................. 510 1,360
Senior debt..................................................... 1,991,986 1,806,433
Subordinated debt............................................... 86,790 75,916
Deferred income taxes........................................... 178,972 172,727
---------- ----------
2,331,022 2,128,272
---------- ----------
Redeemable preferred stock........................................ 25,000
----------
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares authorized,
20,372,000 shares issued..................................... 204 204
Additional capital.............................................. 464,487 465,955
Net unrealized investment losses................................ (387)
Retained income................................................. 54,901 32,524
Cumulative translation adjustments.............................. (7,773) (6,685)
Common stock in treasury, 292,000 and 136,000 shares,
respectively................................................. (8,519) (3,215)
---------- ----------
503,300 488,396
---------- ----------
$2,834,322 $2,641,668
---------- ----------
---------- ----------
</TABLE>
(concluded)
See notes to consolidated financial statements.
F-4
<PAGE> 43
GFC FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1992 1991
----------- ----------- --------
<S> <C> <C> <C>
Interest and other income....................... $ 218,171 $ 210,873 $212,706
Lease income.................................... 30,529 29,933 38,766
----------- ----------- --------
Interest earned from financing transactions..... 248,700 240,806 251,472
Interest expense................................ 123,853 136,107 157,560
----------- ----------- --------
Interest margins earned......................... 124,847 104,699 93,912
----------- ----------- --------
Provision for possible credit losses............ 5,706 6,740 12,687
Restructuring and other charges................. 65,000
----------- ----------- --------
5,706 6,740 77,687
----------- ----------- --------
Net interest margins earned..................... 119,141 97,959 16,225
Gains on sale of assets......................... 5,439 3,362 6,684
----------- ----------- --------
124,580 101,321 22,909
----------- ----------- --------
Selling, administrative and other operating
expenses...................................... 58,158 50,728 46,923
Transaction costs of the Spin-Off............... 13,000
----------- ----------- --------
58,158 50,728 59,923
----------- ----------- --------
Income (loss) before income taxes............... 66,422 50,593 (37,014)
Income taxes:
Current and deferred.......................... 23,719 13,843 1,728
Adjustment to deferred taxes.................. 4,857
----------- ----------- --------
28,576 13,843 1,728
----------- ----------- --------
Income (loss) from continuing operations........ 37,846 36,750 (38,742)
(Loss) income from discontinued operations...... (499) 12,207 (13,729)
----------- ----------- --------
NET INCOME (LOSS)............................... $ 37,347 $ 48,957 $(52,471)
----------- ----------- --------
----------- ----------- --------
Income per common and equivalent share:
Income from continuing operations before
preferred dividends........................ $ 1.86 $ 1.80
Preferred dividends........................... 0.06 0.09
----------- -----------
Income from continuing operations............... 1.80 1.71
Discontinued operations......................... (0.03) 0.60
----------- -----------
Net income...................................... $ 1.77 $ 2.31
----------- -----------
----------- -----------
Dividends declared per common share............. $ 0.68 $ 0.42
----------- -----------
----------- -----------
Average outstanding common and equivalent
shares........................................ 20,332,000 20,464,000
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 44
GFC FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
COMMON STOCK:
Balance, beginning of year............................... $ 204 $ 203 $ 203
Issuance of common stock................................. 1
-------- -------- --------
Balance, end of year..................................... 204 204 203
-------- -------- --------
ADDITIONAL CAPITAL:
Balance, beginning of year............................... 465,955 376,136 377,811
Contributions from (distributions to) The Dial Corp...... 89,195 (1,675)
Net change in unamortized amount of restricted stock..... (223) (1,506)
Issuance of common stock................................. 2,148
Common stock in treasury issued in connection with
employee benefit plans................................ (1,245) (18)
-------- -------- --------
Balance, end of year..................................... 464,487 465,955 376,136
-------- -------- --------
NET UNREALIZED INVESTMENT LOSSES:
Balance, beginning of year............................... (387) --
Change in net unrealized investment losses............... 387 (387)
-------- -------- --------
Balance, end of year..................................... -- (387) --
-------- -------- --------
RETAINED INCOME (DEFICIT):
Balance, beginning of year............................... 32,524 (3,124) 64,382
Net income (loss)........................................ 37,347 48,957 (52,471)
Dividends................................................ (14,970) (13,309) (15,035)
-------- -------- --------
Balance, end of year..................................... 54,901 32,524 (3,124)
-------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance, beginning of year............................... (6,685) (1,639) 351
Unrealized translation loss.............................. (1,088) (5,046) (1,990)
-------- -------- --------
Balance, end of year..................................... (7,773) (6,685) (1,639)
-------- -------- --------
COMMON STOCK IN TREASURY:
Balance, beginning of year............................... (3,215) --
Purchase of shares....................................... (10,162) (3,249)
Shares used in connection with employee benefit plans.... 4,858 34
-------- -------- --------
Balance, end of year..................................... (8,519) (3,215) --
-------- -------- --------
STOCKHOLDERS' EQUITY....................................... $503,300 $488,396 $371,576
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 45
GFC FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1993 1992 1991
----------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................... $ 37,347 $ 48,957 $ (52,471)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Provision for possible credit losses.............. 5,706 6,740 77,687
Loss (income) from discontinued operations........ 499 (12,207) 13,729
Gains on sale of assets........................... (5,439) (3,362) (6,684)
Deferred income taxes............................. 17,947 (4,837) (17,760)
(Decrease) increase in accounts payable and
accrued expenses................................ (1,959) 4,515 19,275
Decrease in customer deposits..................... (12,287) (577) (126,979)
(Decrease) increase in interest payable........... (5,429) 3,576 (4,906)
Other............................................. (4,799) (9,553) 29,035
----------- --------- ---------
Net cash provided (used) by operating
activities................................. 31,586 33,252 (69,074)
----------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of assets......................... 5,681 22,657 35,141
Principal collections on financing transactions...... 644,939 454,390 338,451
Expenditures for financing transactions.............. (1,007,794) (682,369) (525,659)
Purchase of subsidiary............................... (69,808)
Sale of Verex Corporation............................ 171,500
Decrease (increase) in advances to discontinued
insurance subsidiary.............................. 57,321 (57,321)
Other................................................ 221 392 (5,213)
----------- --------- ---------
Net cash used by investing activities........ (197,940) (262,251) (157,280)
----------- --------- ---------
FINANCING ACTIVITIES:
Borrowings........................................... 646,701 974,232 760,947
Repayment of borrowings.............................. (451,102) (829,212) (539,609)
(Redemption)issuance of preferred stock.............. (25,000) 25,000
Proceeds from exercise of stock options.............. 3,613 562
Common stock purchased for treasury.................. (10,162) (3,249)
Advances and contributions from The Dial Corp........ 55,275 32,575
Dividends............................................ (14,970) (13,309) (15,035)
----------- --------- ---------
Net cash provided by financing activities.... 149,080 209,299 238,878
----------- --------- ---------
(Decrease) increase in cash and cash equivalents..... (17,274) (19,700) 12,524
Cash and cash equivalents, beginning of year......... 18,203 37,903 25,379
----------- --------- ---------
Cash and cash equivalents, end of year............... $ 929 $ 18,203 $ 37,903
----------- --------- ---------
----------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 46
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS IN TABLES)
NOTE A SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION -- On March 3, 1992,
The Dial Corp's ("Dial") shareholders approved the spin-off to its shareholders
of GFC Financial Corporation ("GFC Financial", "GFCFC" or the "Company"), a
newly-formed Delaware corporation, which comprised Dial's former commercial
lending and mortgage insurance subsidiaries. In connection with the spin-off,
the holders of common stock of Dial received a distribution of one share of
common stock of GFC Financial for every two shares of Dial common stock (the
"Spin-Off").
Prior to the Spin-Off, Dial contributed its 100% ownership interest in
companies constituting the Greyhound European Financial Group ("GEFG") and
Greyhound BID Holding Corp. ("BID") to Greyhound Financial Corporation ("GFC")
and contributed all of the common stock of GFC to GFC Financial (the
"Contribution"). In addition, Dial contributed its 100% ownership interest in
Verex Corporation and subsidiaries ("Verex"), a discontinued insurance
subsidiary, to GFC Financial.
The historical consolidated financial statements of GFC Financial and
subsidiaries have been retroactively restated to include the accounts and
results of operations of GFC, GEFG and BID and the investment in Verex for all
periods presented as if a pooling of interests of companies under common control
occurred. All intercompany accounts and transactions have been eliminated from
the consolidated financial statements.
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles. Described below are those accounting
policies particularly significant to GFC Financial, including those selected
from acceptable alternatives.
FINANCING TRANSACTIONS -- For loans and other financing contracts earned
income is recognized over the life of the contract, using the interest method.
Leases that are financed by nonrecourse borrowings and meet certain other
criteria are classified as leveraged leases. For leveraged leases, aggregate
rentals receivable are reduced by the related nonrecourse debt service
obligation including interest ("net rentals receivable"). The difference between
(a) the net rentals receivable and (b) the cost of the asset less estimated
residual value at the end of the lease term is recorded as unearned income.
Earned income is recognized over the life of the lease at a constant rate of
return on the positive net investment, which includes the effects of deferred
income taxes.
For operating leases, earned income is recognized on a straight-line basis
over the lease term and depreciation is taken on a straight-line basis over the
estimated useful life. Operating lease income is net of depreciation and related
expenses.
For leases classified as direct financing leases, the difference between
(a) aggregate lease rentals and (b) the cost of the related assets less
estimated residual value at the end of the lease term is recorded as unearned
income. Earned income is recognized over the life of the contracts using the
interest method.
Income recognition is generally suspended for leases, loans and other
financing contracts at the earlier of the date at which payments become 90 days
past due (other than consumer finance accounts of GEFG, which are considered
nonaccruing when 180 days past due) or when, in the opinion of management, a
full recovery of income and principal becomes doubtful. Income recognition is
resumed when the loan becomes contractually current and performance is
demonstrated to be resumed.
The reserve for possible credit losses is available to absorb credit
losses. The provision for possible credit losses is the charge to income to
increase the reserve for possible credit losses to the level that management
estimates to be adequate considering delinquencies, loss experience and
collateral. Other factors include changes in geographic and product
diversification, size of the portfolio and current economic conditions.
F-8
<PAGE> 47
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts are either written-off or written-down when the probability of loss has
been established in amounts determined to cover such losses after giving
consideration to the customer's financial condition, the value of the underlying
collateral and any guarantees. Any deficiency between the carrying amount of an
asset and the ultimate sales price of repossessed collateral is charged to the
reserve for possible credit losses. Recoveries of amounts previously written-off
as uncollectible are credited to the reserve for possible credit losses.
Repossessed assets are carried at the lower of cost or fair value. Loans
classified as in-substance foreclosures are included in repossessed assets.
Loans are classified as in-substance foreclosed assets, even though legal
foreclosure has not occurred, when (i) the borrower has little or no equity in
the collateral at its current fair value, (ii) proceeds for repayment are
expected to come only from the operation or sale of the collateral and (iii) it
is doubtful that the borrower will rebuild equity in the collateral or otherwise
repay the loan in the foreseeable future.
The FASB has issued a new accounting standard, SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"). This standard requires that
impaired loans that are within the scope of this statement generally be measured
based on the present value of expected cash flows discounted at the loan's
effective interest rate or the fair value of the collateral, if the loan is
collateral dependent. Under SFAS 114, a loan is considered impaired when, based
on current information and events, it is probable that a creditor will be unable
to collect all amounts due. Presently, the reserve for possible credit losses
represents management's estimate of the amount necessary to cover potential
losses in the portfolio considering delinquencies, loss experience and
collateral. The impact of the new standard, which is effective for fiscal years
beginning after December 15, 1994, has not yet been determined.
PENSION AND OTHER BENEFITS -- Trusteed, noncontributory pension plans cover
substantially all employees. Benefits are based primarily on final average
salary and years of service. Net periodic pension cost for GFC Financial is
based on the provisions of SFAS No. 87, "Employers' Accounting for Pensions".
Funding policies provide that payments to pension trusts shall be at least equal
to the minimum funding required by applicable regulations.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", which requires
accrual of such benefits during the years the employees provide services. Prior
to 1993, the costs of such benefits were expensed as incurred. See Note J of
Notes to Consolidated Financial Statements for further information.
In November 1992, the FASB issued 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. This standard must be adopted for fiscal years
beginning after December 15, 1993, which for the Company would be 1994. Based on
management's review, the adoption of the new standard will not have a material
impact on the Company's financial position or results of operations.
INCOME TAXES -- Income taxes are provided based upon the provisions of SFAS
No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred
tax assets and liabilities are recognized for the estimated future tax effects
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax law.
CASH EQUIVALENTS -- For purposes of the Statement of Consolidated Cash
Flows, the Company has classified highly liquid investments with original
maturities of three months or less from date of purchase as cash equivalents.
F-9
<PAGE> 48
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME PER COMMON AND EQUIVALENT SHARE -- Income per common and equivalent
share is based on net income after preferred stock dividend requirements and the
weighted average number of common shares outstanding during the year giving
effect to stock options considered to be dilutive common stock equivalents.
Fully diluted income per share is not materially different from primary income
per share. Income per common and equivalent share is not presented for 1991
because the Company operated as a wholly owned subsidiary of Dial.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1992
financial statements to conform to the 1993 presentation.
NOTE B DISCONTINUED OPERATIONS
Verex, which conducted GFC Financial's mortgage insurance operations,
ceased writing new business as of January 1, 1988 but continued to write
renewals and settle valid claims in accordance with insurance contracts in
force. Accordingly, Verex was treated as a discontinued operation. On July 16,
1993, GFC Financial consummated the sale of Verex. Proceeds from the sale of
Verex were approximately $215 million. The sale price was generally determined
by the book value of the Verex assets plus a premium of $6 million and an
adjustment for the difference between the market value and book value of Verex's
investment portfolio, calculated as prescribed more fully by the Agreement. The
loss from discontinued operations for the year ended December 31, 1993 includes
all transaction costs and the costs anticipated to complete the disposition of
the remaining assets and liabilities of Verex retained by GFC Financial. The net
liabilities of Verex retained by the Company totaled $0.7 million at December
31, 1993.
The revenues and (loss) income of Verex for the years ended December 31,
was as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- --------
<S> <C> <C> <C>
Revenues................................................. $31,336 $70,097 $ 88,334
------- ------- --------
------- ------- --------
(Loss) income before income tax benefit (provision)...... $(3,393) $(2,216) $ 18,308
Income tax benefit (provision)........................... 4,243 5,323 (1,469)
------- ------- --------
Income from operations before income tax settlement...... 850 3,107 16,839
Reversal of (provision for) federal income tax
settlement............................................. 9,100 (15,425)
------- ------- --------
Income from operations................................... 850 12,207 1,414
Loss on disposal......................................... (1,349)
Addition to previously provided reserve for loss......... (2,043)
Write-off of nonrecoverable deferred tax asset........... (13,100)
------- ------- --------
(Loss) income from discontinued operations............... $ (499) $12,207 $(13,729)
------- ------- --------
------- ------- --------
</TABLE>
NOTE C INVESTMENT IN FINANCING TRANSACTIONS
The Company provides secured financing to commercial and real estate
enterprises principally under financing contracts (such as loans and other
financing contracts, leveraged leases, operating leases and direct financing
leases). At December 31, 1993 and 1992, the carrying amount of the investment in
financing transactions, including the estimated residual value of leased assets
upon lease termination, was
F-10
<PAGE> 49
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,846,571,000 and $2,428,523,000 (before reserve for possible credit losses),
respectively, and consisted of the following types of loans and collateral:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
CARRYING AMOUNT
---------------
1993 1992
----- -----
<S> <C> <C>
Resort receivables................................................... 19.8% 18.8%
Aircraft and related equipment....................................... 19.6 19.5
Communications finance............................................... 17.8 16.6
Commercial real estate............................................... 12.4 18.5
Real estate leveraged leases......................................... 6.9 7.5
Asset based finance.................................................. 6.2
Production and processing equipment.................................. 4.7 5.9
Land receivables..................................................... 2.6 3.8
Railroad equipment................................................... 2.6 2.6
Consumer finance (GEFG).............................................. 1.6 2.4
Commercial vehicles.................................................. 0.4 1.4
Other(1)............................................................. 5.4 3.0
----- -----
100.0% 100.0%
----- -----
----- -----
</TABLE>
- ---------------
(1) The category "Other" includes different classes of commercial and industrial
contract receivables, none of which accounted for more than 1% of the
aggregate carrying amount of the net investment in financing transactions.
The Company's investment in financing transactions outside of the United
States at December 31 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Europe, primarily United Kingdom............................... $ 196,499 $ 206,893
Mexico......................................................... 30,952 33,827
Other countries................................................ 17,740 38,168
--------- ---------
$ 245,191 $ 278,888
--------- ---------
--------- ---------
</TABLE>
The Company's investment in financing transactions is primarily settled in
U.S. dollars, except for approximately $100,000,000 and $128,000,000 at December
31, 1993 and 1992, respectively, which is primarily due in British pounds. The
exchange rate of British pounds to dollars at December 31, 1993 and 1992 was
1.48:1 and 1.52:1, respectively.
F-11
<PAGE> 50
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate installments on loans and other financing contracts, leveraged
leases, operating leases and direct financing leases at December 31, 1993
(excluding repossessed assets of $77,024,000 and estimated residual values) are
due during each of the years ending December 31, 1994 to 1998 and thereafter as
follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 THEREAFTER
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Loans and other
financing contracts:
Commercial:
Fixed interest
rate........... $ 80,796 $ 77,294 $ 72,707 $ 45,984 $ 31,600 $ 81,838
Floating interest
rate........... 179,164 211,921 218,987 141,294 126,221 75,418
Real Estate:
Fixed interest
rate........... 61,416 43,634 39,777 27,935 18,702 46,941
Floating interest
rate........... 147,101 167,375 147,507 92,831 53,461 39,204
Leveraged leases....... 4,834 5,385 7,282 13,862 8,395 171,883
Operating and direct
financing leases,
primarily at fixed
interest rates...... 21,120 20,389 29,295 17,907 16,873 115,737
-------- -------- -------- -------- -------- ----------
494,431 525,998 515,555 339,813 255,252 531,021
-------- -------- -------- -------- -------- ----------
Foreign, primarily at
floating interest
rates:
Loans and other
financing
contracts........... 10,078 6,429 8,915 16,007 23,700
Consumer Finance....... 14,122 7,858 7,212 9,617 5,255 1,200
Operating and direct
financing leases.... 4,284 3,038 4,343 2,496 2,870
-------- -------- -------- -------- -------- ----------
28,484 17,325 20,470 28,120 31,825 1,200
-------- -------- -------- -------- -------- ----------
$522,915 $543,323 $536,025 $367,933 $287,077 $ 532,221
-------- -------- -------- -------- -------- ----------
-------- -------- -------- -------- -------- ----------
</TABLE>
The net investment in leveraged leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Rentals receivable................................................ $ 1,377,107 $ 1,451,925
Less principal and interest payable on nonrecourse debt........... (1,165,466) (1,237,776)
----------- -----------
Net rentals receivable............................................ 211,641 214,149
Estimated residual values......................................... 306,894 306,691
Less unearned income.............................................. (234,753) (251,470)
----------- -----------
Investment in leveraged leases.................................... 283,782 269,370
Less deferred taxes arising from leveraged leases................. (223,006) (206,342)
----------- -----------
Net investment in leveraged leases................................ $ 60,776 $ 63,028
----------- -----------
----------- -----------
</TABLE>
F-12
<PAGE> 51
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of income from leveraged leases, before the effects of
interest on nonrecourse debt and other related expenses, for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Lease and other income............................................ $11,376 $ 9,172 $16,421
Income tax expense................................................ 8,363 2,757 4,903
</TABLE>
The investment in operating and direct financing leases at December 31
consisted of the following:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Operating leases....................................................... $147,222 $100,911
Direct financing leases:
Rentals receivable................................................... 91,153 154,463
Estimated residual values............................................ 23,121 42,158
Unearned income...................................................... (42,462) (57,750)
-------- --------
71,812 138,871
-------- --------
Investment in operating and direct financing leases.................... $219,034 $239,782
-------- --------
-------- --------
</TABLE>
The investment in operating leases is net of accumulated depreciation of
$10,601,000 and $4,110,000 as of December 31, 1993 and 1992, respectively.
Depreciation expense relating to equipment held under operating leases was
$6,491,000, $2,531,000 and $1,685,000 in 1993, 1992 and 1991, respectively.
The Company has a substantial number of loans and leases with payments that
fluctuate with changes in index rates, primarily Prime interest rates and the
London Interbank Offered Rate ("LIBOR"). The investment in loans and leases with
floating interest rates (excluding nonaccruing contracts and repossessed assets)
at December 31 was as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Receivables due on financing transactions........................... $1,661,602 $1,368,412
Estimated residual values........................................... 8,162
Less unearned income................................................ (25,928) (34,899)
---------- ----------
Investment in loans and leases...................................... $1,635,674 $1,341,675
---------- ----------
---------- ----------
</TABLE>
Interest earned from financing transactions with floating interest rates
was approximately $154,000,000 in 1993, $127,000,000 in 1992 and $128,000,000 in
1991. The adjustments, which arise from changes in index rates, can have a
significant effect on interest earned from financing transactions; however, the
effects on interest margins earned and net income are substantially offset by
related interest expense changes on debt obligations with floating interest
rates.
At December 31, 1993, the Company had a committed backlog of new business
of approximately $420,000,000 compared to $317,000,000 at December 31, 1992.
F-13
<PAGE> 52
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D RESERVE FOR POSSIBLE CREDIT LOSSES
The following is an analysis of the reserve for possible credit losses for
the years ended December 31:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year................................. $ 69,291 $ 87,600 $ 77,098
Provision for possible credit losses(1).................... 5,706 6,740 77,687
Write-offs(1).............................................. (12,575) (23,661) (68,346)
Recoveries................................................. 717 749 663
Other...................................................... 1,141 (2,137) 498
-------- -------- --------
Balance, end of year....................................... $ 64,280 $ 69,291 $ 87,600
-------- -------- --------
-------- -------- --------
</TABLE>
- ---------------
(1) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65,000,000 and recorded write-offs of $15,000,000
related to nonearning assets in the GEFG portfolio and a $47,759,000
write-down to reduce Latin American assets to current market value.
Write-offs by major loan and collateral types experienced by the Company
during the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Consumer finance (GEFG).................................... $ 4,071 $ 10,176 $ 13,687
Commercial real estate..................................... 3,082 8,904 2,894
Manufacturing and processing equipment..................... 2,242 1,908 604
Commercial vehicles........................................ 1,579 67
Communications finance..................................... 1,488 1,500 1,200
Maritime................................................... 906
Latin America.............................................. 47,759
Other...................................................... 113 267 2,135
-------- -------- --------
$ 12,575 $ 23,661 $ 68,346
-------- -------- --------
-------- -------- --------
Write-offs as a percentage of investment in financing
transactions............................................. 0.44% 0.97% 3.00%
-------- -------- --------
-------- -------- --------
</TABLE>
An analysis of nonaccruing contracts and repossessed assets at December 31
is as follows:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Nonaccruing contracts:
Domestic............................................................. $ 13,263 $ 24,031
Foreign.............................................................. 12,320 22,400
-------- --------
Total nonaccruing contracts............................................ 25,583 46,431
-------- --------
Repossessed assets:
Domestic............................................................. 77,001 53,931
Foreign.............................................................. 23 60
-------- --------
Total repossessed assets............................................... 77,024 53,991
-------- --------
Total nonaccruing contracts and repossessed assets..................... $102,607 $100,422
-------- --------
-------- --------
Nonaccruing contracts and repossessed assets as a
percentage of investment in financing transactions................... 3.6% 4.1%
-------- --------
-------- --------
</TABLE>
F-14
<PAGE> 53
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the repossessed assets included in the above table, the
Company had repossessed assets, with a total carrying amount of $48,956,000 and
$21,509,000 at December 31, 1993 and 1992 which earned income of $2,700,000 and
$1,900,000 during 1993 and 1992, respectively.
In the normal course of business, the Company has renegotiated and modified
certain contracts with respect to rates and other terms. At December 31, 1993
and 1992, the Company had approximately $47,000,000 and $68,000,000,
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 yielding, on a weighted average basis,
a return of approximately 9.3%.
Had all contracts placed in a nonaccrual status outstanding at December 31,
1993, 1992 and 1991, respectively, remained accruing, interest earned would have
been increased by approximately $6,000,000, $7,500,000 and $11,300,000,
respectively, for domestic contracts and $5,000,000, $5,100,000 and $9,100,000,
respectively, for foreign contracts. Income recognized on these accounts was
approximately $1,732,000, $589,000 and $1,100,000 for domestic contracts during
the years 1993, 1992 and 1991, respectively.
NOTE E DEBT
The Company satisfies its short-term financing requirements from bank lines
of credit, other bank loans, public medium-term notes and the issuance of
commercial paper. In conjunction with the winding down of the GEFG portfolio,
GEFG, in December 1993, surrendered the banking license of the United Kingdom
bank and, therefore, will not be taking in any more customer deposits. At
December 31, 1993, short-term bank loans and commercial paper of $515,876,000
(net of unamortized discount) are considered to be long-term debt because they
are supported by an unused long-term revolving bank credit agreement of
$700,000,000.
The following information pertains to all short-term financing, including
bank loans and commercial paper (considered to be long-term debt), for the years
ended December 31:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Maximum amount of short-term debt outstanding during
year..................................................... $516,386 $504,829 $533,446
Average short-term debt outstanding during year............ 336,672 322,176 448,174
Weighted average short-term interest rates at end of year:
Short-term borrowings.................................... 3.5% 4.1% 8.1%
Commercial paper*........................................ 3.6% 4.2% 5.6%
Weighted average interest rate on short-term debt
outstanding
during year*............................................. 3.5% 4.3% 6.9%
</TABLE>
- ---------------
* Exclusive of the cost of maintaining bank lines in support of outstanding
commercial paper and the effects of interest rate conversion agreements.
Senior and subordinated debt at December 31 was as follows:
F-15
<PAGE> 54
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Senior debt:
Commercial paper and short-term bank loans supported by unused
long-term bank revolving credit agreements, less unamortized
discount....................................................... $ 515,876 $ 330,141
Medium-term notes due to 2003, 4.6% to 12.5%...................... 751,500 591,433
Term loans payable to banks due to 1996, 4.2%..................... 150,000 310,000
Senior notes due to 2002, 8.3% to 16.0%, less unamortized
discount....................................................... 555,666 555,147
Nonrecourse installment notes due to 2002, 10.6% (assets of
$25,613 and $25,579, respectively, pledged as collateral)...... 18,944 19,712
---------- ----------
Total senior debt................................................... 1,991,986 1,806,433
---------- ----------
Subordinated debt:
Senior subordinated loans, due 1994, 14.1%........................ 92,270 92,270
Less unamortized discount......................................... (5,480) (16,354)
---------- ----------
Total subordinated debt............................................. 86,790 75,916
---------- ----------
TOTAL............................................................... $2,078,776 $1,882,349
---------- ----------
---------- ----------
</TABLE>
Aggregate commitments under the Company's domestic revolving credit
agreement availability was $700,000,000 at December 31, 1993. Under the terms of
this agreement, the Company has the option to periodically select either
domestic dollars or Eurodollars as the basis of borrowings. Interest is based on
the banks' Prime rate for domestic dollar advances or LIBOR for Eurodollar
advances. The agreements also provide for a commitment fee on the unused credit.
The Company, in the event it becomes advisable, intends to exercise its right
under this agreement to borrow for the purpose of refinancing commercial paper
and short-term bank loans.
The credit agreement for $700,000,000, described in the preceding
paragraph, will be subject to renewal in May 1996. If the credit facility with
any or all of the participating banks is not renewed, the Company may, at its
option, repay the non-renewing banks' outstanding participation, if any,
immediately or in equal quarterly installments over a four year period.
As of December 31, 1993, the Company had outstanding 31 interest rate
conversion agreements with notional principal amounts totaling $1,320,000,000.
Six agreements with notional principal amounts of $180,000,000 were arranged to
effectively convert certain floating interest rate obligations into fixed
interest rate obligations and require interest payments on the stated principal
amount at rates ranging from 8.3% to 9.8% (remaining terms of three months to
five years) in return for receipts calculated on the same notional amounts at
floating interest rates. In addition, 25 agreements with notional principal
amounts of $1,140,000,000 were arranged to effectively convert certain fixed
interest rate obligations into floating interest rate obligations and require
interest payments on the stated principal amount at the three month or six month
LIBOR (remaining terms of five months to nine years) in return for receipts
calculated on the same notional amounts at fixed interest rates of 4.9% to 7.6%.
In the third quarter of 1993, GFC entered into four three-year interest rate
hedge agreements on $750 million of floating-rate borrowings to effectively
guarantee a spread of approximately 2.3% between its borrowing rate (LIBOR) and
the Prime interest rate. The agreements have been entered into with major
financial institutions, which are expected to fully perform under the terms of
the agreements, thereby mitigating the credit risk from the transactions.
Annual maturities of long-term debt outstanding at December 31, 1993 due
through June 2003 (excluding the amount supported by the revolving credit
agreements expected to be renewed) will approximate $179,392,000 (1994),
$192,135,000 (1995), $163,030,000 (1996), $198,747,000 (1997), $204,072,000
(1998) and $625,524,000 (thereafter).
F-16
<PAGE> 55
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The agreements pertaining to long-term debt of GFC include various
restrictive covenants and require the maintenance of certain defined financial
ratios with which GFC has complied. Under one of these covenants, dividend
payments are limited to 50 percent of accumulated earnings after December 31,
1991.
Total interest paid is not significantly different from interest expense.
NOTE F REDEEMABLE PREFERRED STOCK
On July 30, 1993, GFC Financial acquired 2,500 shares of GFC's Series A
Redeemable Preferred Stock ("GFC Preferred Stock") from a subsidiary of Dial.
The GFC Preferred Stock was issued in connection with the Spin-Off and entitled
the holder to receive cash dividends at an annual rate of 9%.
NOTE G STOCKHOLDERS' EQUITY
At December 31, 1993 and 1992, there were 20,371,703 shares of common stock
issued with 20,079,486 and 20,235,791 shares of common stock outstanding,
respectively. Approximately 5,611,000 common shares were reserved for issuance
under the 1992 Stock Incentive Plan at December 31, 1993.
GFC Financial has 5,000,000 shares of preferred stock authorized, none of
which was issued at December 31, 1993. The Board of Directors is authorized to
provide for the issuance of shares of preferred stock in series, to establish
the number of shares to be included in each series and to fix the designation,
powers, preferences and rights of the shares of each series. In connection with
the Company's stock incentive plan, 250,000 shares of preferred stock are
reserved for issuance of stock options.
NOTE H STOCK OPTIONS
During 1992, the Board of Directors of the Company adopted the GFC
Financial Corporation 1992 Stock Incentive Plan (the "Plan") for the grant of
options and restricted stock to officers, directors and certain key employees.
In connection with the Spin-Off, shares of common stock were made available to
provide new options and restricted shares of common stock to employees of the
Company or its subsidiaries in exchange for awards outstanding under certain
stock option and incentive plans of Dial. Each option was adjusted so that the
aggregate exercise price and the aggregate spread before the Spin-Off was
preserved at the time of the Spin-Off. For each share of Dial restricted stock
held by an employee, such employee received replacement shares of GFC Financial
restricted stock with a market value intended to compensate for the Spin-Off.
The Plan provides for the following types of awards: (a) stock options
(both incentive stock options and non-qualified stock options); (b) Stock
Appreciation Rights; and (c) restricted stock. The Plan authorizes the issuance
of awards for up to 2 1/2 percent of the total number of shares of common stock
outstanding as of the first day of each year. In addition, 250,000 shares of
preferred stock are reserved for awards under the Plan.
The stock options outstanding at December 31, 1993 are granted for terms of
ten years and generally become exercisable over two to three years from the date
of grant. Stock options are exercisable based on the market value at the date of
grant.
F-17
<PAGE> 56
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information with respect to options granted and exercised from the date of
Spin-Off to December 31, 1993 is as follows:
<TABLE>
<CAPTION>
AVERAGE OPTION
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Granted(1).............................................. 892,908 $ 17.01
Exercised............................................... (41,235) 14.00
Canceled................................................ (23,590) 18.34
--------- -------
Options outstanding at December 31, 1992................ 828,083 17.12
Granted................................................. 454,450 31.17
Exercised............................................... (166,839) 16.10
Canceled................................................ (103,580) 22.61
--------- -------
Options outstanding at December 31, 1993................ 1,012,114 $ 23.04
--------- -------
--------- -------
</TABLE>
- ---------------
(1) Includes 526,658 shares granted in exchange for awards outstanding under
certain stock option and incentive plans of Dial at an average exercise
price of $14.35.
At December 31, 1993, stock options with respect to 1,012,114 common shares
are outstanding at exercise prices ranging from $10.06 to $41.65 per share, of
which options to 422,667 common shares are exercisable at an average price of
$15.75 per share.
Restricted stock awards (38,629 shares in 1993 and 146,136 in 1992,
including 64,586 shares converted in the Spin-Off) vest generally over periods
not exceeding five years from the date of grant. The holder of the restricted
stock has the right to receive dividends and vote the shares but may not sell,
assign, transfer, pledge or otherwise encumber the restricted stock. All
restricted stock grants since the Spin-Off are based on Company share
performance and may result in greater or lesser numbers of shares being finally
delivered to holder, depending on such performance.
NOTE I INCOME TAXES
Prior to the Spin-Off, Dial credited or charged the Company an amount equal
to the tax reductions realized or tax payments made by Dial as a result of
including the Company's tax results and credits in Dial's consolidated federal
and other applicable income tax returns. In all other respects, the Company's
tax provisions have been computed on a separate return basis.
F-18
<PAGE> 57
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated provision (benefit) for income taxes consist of the
following for the years ended December 31:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- --------
<S> <C> <C> <C>
Current:
United States:
Federal......................................... $ 9,783 $16,265 $ 20,087
State........................................... 1,002 2,069 1,364
Foreign............................................ (156) 346 (1,963)
------- ------- --------
10,629 18,680 19,488
------- ------- --------
Deferred:
United States...................................... 17,947 (2,377) (17,760)
Foreign............................................ (2,460)
------- ------- --------
17,947 (4,837) (17,760)
------- ------- --------
Provision for income taxes........................... $28,576 $13,843 $ 1,728
------- ------- --------
------- ------- --------
</TABLE>
Deferred income taxes relate to the following principal temporary
differences:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- --------
<S> <C> <C> <C>
Lease and other contract income and related
depreciation....................................... $14,973 $ 3,882 $ 6,244
Gains on sale of assets.............................. (1,377) 1,726 (16,732)
Provision for possible credit losses................. (277) 1,551 (8,175)
Recognition of deferred intercompany gain............ (7,531)
Adjustment to deferred taxes related to the increase
in the
U.S. federal statutory income tax rate............. 4,857
Operating expense deferrals.......................... 3,834
Recognition of tax benefit on refinancing charges
accrued in 1991.................................... (3,153)
Minimum tax credit carryforward...................... (4,799)
Other................................................ 736 1,148 903
------- ------- --------
Provision (benefit) for deferred income taxes........ $17,947 $(2,377) $(17,760)
------- ------- --------
------- ------- --------
</TABLE>
The benefit for foreign deferred income taxes for the year ended December
31, 1992 relates to operating losses of GEFG. Income taxes paid in 1993, 1992
and 1991 amounted to $10,511,000, $19,096,000 and $16,769,000, respectively.
F-19
<PAGE> 58
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The federal statutory income tax rate is reconciled to the effective income
tax rate as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate......................... 35.0% 34.0% (34.0%)
State income tax.......................................... 3.4% 2.7% 2.3%
Foreign tax effects....................................... (2.0%) (2.4%) 11.7%
Tax provision on intercompany gains resulting from the
Spin-Off................................................ 21.6%
Recognition of tax benefit on refinancing charges accrued
in 1991................................................. (6.2%)
Permanent differences on transaction costs................ 12.0%
Other..................................................... (0.7%) (0.7%) (8.9%)
------ ------ ------
Current provision for income tax.......................... 35.7% 27.4% 4.7%
Adjustments to deferred taxes............................. 7.3%
------ ------ ------
Provision for income taxes................................ 43.0% 27.4% 4.7%
------ ------ ------
------ ------ ------
</TABLE>
NOTE J PENSION AND OTHER BENEFITS
PENSION BENEFITS
Net periodic pension (income) cost for the years ended December 31,
included the following components:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN
------------------- ---------------
1993 1992 1993 1992
------- ------- ----- -----
<S> <C> <C> <C> <C>
Service cost benefits earned during period..... $ 813 $ 738 $ 215 $ 341
Interest cost on projected benefit
obligation................................... 1,063 878 293 345
Actual return on plan assets................... (2,306) (1,781) (736) (382)
Net amortization and deferral.................. 967 553 459 79
------- ------- ----- -----
Periodic pension cost.......................... 537 388 231 383
Curtailment gain............................... (777)
------- ------- ----- -----
Net periodic pension (income) cost............. $ (240) $ 388 $ 231 $ 383
------- ------- ----- -----
------- ------- ----- -----
</TABLE>
Assumptions regarding the determination of net periodic pension (income)
costs were:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN
------------- -------------
1993 1992 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate for obligation.......................... 8.5% 9.0% 9.0% 9.0%
Rate of increase in compensation levels............... 5.5% 6.0% 8.0% 8.0%
Long-term rate of return on assets.................... 9.5% 9.5% 9.0% 9.0%
</TABLE>
GFC Financial participated in a Dial pension plan and was allocated pension
credits of $128,700 for 1991.
F-20
<PAGE> 59
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table indicates the plans' funded status and amounts
recognized in the Company's consolidated balance sheet at December 31, 1993 and
1992:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN
------------------- -----------------
1993 1992 1993 1992
------- ------- ------ ------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations.......................... $12,000 $ 7,587 $3,440 $3,088
------- ------- ------ ------
------- ------- ------ ------
Accumulated benefit obligations..................... $12,600 $ 8,489 $3,440 $3,088
------- ------- ------ ------
------- ------- ------ ------
Projected benefit obligation.......................... $14,400 $12,676 $3,755 $3,548
Market value of plan assets, primarily equity and
fixed income securities............................. 17,606 15,500 3,781 3,319
------- ------- ------ ------
Plan assets over (under) projected benefit
obligation.......................................... 3,206 2,824 26 (229)
Unrecognized transition asset......................... (451) (513) (109) (123)
Unrecognized prior service cost reduction............. 404 1,429 72 96
Unrecognized net loss................................. 1,804 983 101 254
Additional liability.................................. (150)
------- ------- ------ ------
Prepaid (accrued) pension costs....................... $ 4,963 $ 4,573 $ 90 $ (2)
------- ------- ------ ------
------- ------- ------ ------
</TABLE>
Assumptions regarding the funded status of pension plans are:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN
--------------- ---------------
1993 1992 1993 1992
----- ----- ----- -----
<S> <C> <C> <C> <C>
Discount rate for obligation.............................. 7.75% 8.50% 8.00% 9.00%
Rate of increase in compensation levels................... 4.25% 5.50% 6.00% 8.00%
Long-term rate of return on assets........................ 9.50% 9.50% 9.00% 9.00%
</TABLE>
There are restrictions on the use of excess pension plan assets in the
event of a defined change in control of the Company.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
("OPEB"), which requires the accrual of retiree benefits during the years the
employees provide services. OPEB requires the recognition of a transition
obligation that represents the aggregate amount that would have accrued in the
years prior to adoption of OPEB had the standard been in effect for those years.
The Company elected to accrue the transition obligation over 20 years. The
adoption of SFAS No. 106 has no cash impact because the plans are not funded and
the pattern of benefit payments did not change.
Net periodic postretirement benefit cost for the year ended December 31,
1993 included the following components:
<TABLE>
<S> <C>
Service cost benefits earned during period............................ $ 55
Interest cost on accumulated postretirement benefit obligation........ 143
Net amortization and deferral......................................... 85
----
Net periodic postretirement benefit cost.............................. $283
----
----
</TABLE>
F-21
<PAGE> 60
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumptions regarding the determination of net periodic postretirement
benefit costs were:
<TABLE>
<S> <C>
Discount rate for obligation......................................... 8.5%
Rate of increase in compensation levels.............................. 5.5%
Rate of increase in health care costs(1)............................. 14.0%
</TABLE>
- ---------------
(1) Rate of increase in health care costs was 14.0% in 1993, graded to 7.0% in
2000 and thereafter.
OPEB benefit costs for 1993 are $223,000 higher than postretirement
benefits paid and expensed in 1992 due to the adoption of SFAS No. 106. Amounts
paid for postretirement benefits in 1992 and 1991 were approximately $60,000 and
$38,000, respectively.
The following table indicates the amounts recognized in the Company's
consolidated balance sheet at December 31, 1993:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................................... $1,680
Actives eligible for full benefits................................ 230
Other actives..................................................... 370
------
Total accumulated postretirement benefit obligation................. 2,280
Unrecognized transition obligation.................................. 1,607
Unrecognized net loss............................................... 437
------
Accrued postretirement benefit cost................................. $ 236
------
------
</TABLE>
Assumptions regarding the accrued postretirement benefit cost at December
31, 1993 were:
<TABLE>
<S> <C>
Discount rate for obligation........................................ 7.75%
Rate of increase in compensation levels............................. 4.25%
Rate of increase in health care costs(1)............................ 13.25%
</TABLE>
- ---------------
(1) Rate of increase in health care costs was 13.25% in 1993, graded to 6.25% in
2000 and thereafter.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1993 by approximately 7% and the ongoing annual expense by
approximately 5%.
NOTE K TRANSACTIONS WITH DIAL
Pursuant to the Spin-Off, the Company and Dial entered into several
agreements, including the Spin-Off Agreement, Tax Sharing Agreement, Sublease
Agreement, Interim Services Agreement and Trademark Assignment and Agreement.
These agreements do not result in significant additional expenses.
The Company leases its corporate office facilities from Dial under an
agreement which expires March 31, 2001. Annual rentals under the lease are
approximately $1,616,000 to 1996 and $1,806,000 thereafter.
NOTE L LITIGATION AND CLAIMS
The Company and certain of its subsidiaries are parties either as
plaintiffs or defendants to various actions, proceedings and pending claims,
including legal actions, certain of which involve claims for compensatory,
punitive or other damages in material amounts. Litigation is subject to many
uncertainties and it is possible that some of the legal actions, proceedings or
claims referred to above could be decided against the Company. Although the
ultimate amount for which the Company or its subsidiaries may be held liable is
F-22
<PAGE> 61
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not ascertainable, the Company believes that any resulting liability should not
materially affect the Company's financial position or results of operations.
NOTE M SFAS NO. 107 -- "DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS"
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company using available market
information and valuation methodologies described below. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein may not be indicative of
the amounts that the Company could realize in a current market exchange. The use
of different market assumptions or valuation methodologies may have a material
effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1993 1992
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance Sheet -- Financial Instruments:
Assets:
Loans and other financing contracts..... $2,192,192 $2,172,154 $1,797,440 $1,755,543
Investment in and advances to Verex
Corporation.......................... -- -- 221,312 222,331
Liabilities:
Senior debt............................. 1,991,986 2,149,387 1,806,433 1,847,875
Subordinated debt....................... 86,790 88,390 75,916 83,915
Off-Balance Sheet -- Financial
Instruments:
Interest rate conversion agreements..... -- 36,361 -- 4,536
</TABLE>
The carrying values of cash and cash equivalents, accounts payable and
accrued expenses, customer deposits, interest payable and short-term debt
approximate fair values due to the short-term maturities of these instruments.
The methods and assumptions used to estimate the fair values of other
financial instruments are summarized as follows:
LOANS AND OTHER FINANCING CONTRACTS:
The fair value of loans and other financing contracts was estimated by
discounting expected cash flows using the current rates at which loans of
similar credit quality, size and remaining maturity would be made as of
December 31, 1993 and 1992. Management believes that the risk factor
embedded in the entry-value interest rates applicable to performing loans
for which there are no known credit concerns results in a fair valuation of
such loans on an entry value basis. As of December 31, 1993 and 1992, the
fair value of nonaccruing contracts with a carrying amount of $25,583,000
and $46,431,000, respectively, was not estimated because it is not
practicable to reasonably assess the credit adjustment that would be
applied in the market place for such loans. As of December 31, 1993 and
1992, the carrying amount of loans and other financing contracts excludes
repossessed assets with a total carrying amount of $125,980,000 and
$75,500,000, respectively.
F-23
<PAGE> 62
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT IN AND ADVANCES TO DISCONTINUED INSURANCE SUBSIDIARY:
The fair value of the investment in and advances to Verex for December
31, 1992 was based on the fair value of the net assets of Verex. These net
assets were primarily represented by cash and investments which were valued
using quoted market prices.
SENIOR AND SUBORDINATED DEBT:
The fair value of senior and subordinated debt was estimated by
discounting future cash flows using rates currently available for debt of
similar terms and remaining maturities. The carrying values of commercial
paper and borrowings under revolving credit facilities were assumed to
approximate fair values due to their short maturities.
INTEREST RATE CONVERSION AGREEMENTS:
The fair values of interest conversion agreements is based on quoted
market prices obtained from participating banks and dealers.
The fair value estimates presented herein were based on information
available as of December 31, 1993 and 1992. Although management is not
aware of any factors that would significantly affect the estimated fair
values, such values have not been updated since December 31, 1993 and 1992;
therefore, current estimates of fair value may differ significantly from
the amounts presented herein.
NOTE N SELLING, ADMINISTRATIVE AND OTHER OPERATING EXPENSES
The following represents a summary of the major components of selling,
administrative and other operating expenses for the three years ended December
31:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Salaries and employee benefits................................ $ 29,502 $ 27,247 $ 24,362
Problem account costs......................................... 11,822 7,642 5,790
Occupancy expense............................................. 4,160 4,494 3,444
Depreciation and amortization................................. 2,803 1,970 1,502
Other......................................................... 9,871 9,375 11,825
-------- -------- --------
$ 58,158 $ 50,728 $ 46,923
-------- -------- --------
-------- -------- --------
</TABLE>
F-24
<PAGE> 63
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O GEOGRAPHIC INFORMATION
The Company operates primarily in the United States and Europe. Geographic
information for the three years ended December 31, 1993 is shown below:
<TABLE>
<CAPTION>
DOMESTIC EUROPE CONSOLIDATED
---------- ---------- ----------
<S> <C> <C> <C>
Assets at year end:
1993..................................................... $2,698,455 $ 135,867 $2,834,322
1992..................................................... 2,433,378 208,290 2,641,668
1991..................................................... 2,072,612 341,872 2,414,484
Interest earned from financing transactions:
1993..................................................... 225,688 23,012 248,700
1992..................................................... 202,472 38,334 240,806
1991..................................................... 197,080 54,392 251,472
Interest margins earned:
1993..................................................... 108,950 15,897 124,847
1992..................................................... 83,390 21,309 104,699
1991..................................................... 73,647 20,265 93,912
Income (loss) before income taxes:
1993..................................................... 65,121 1,301 66,422
1992..................................................... 54,937 (4,344) 50,593
1991..................................................... (19,076) (17,938) (37,014)
</TABLE>
F-25
<PAGE> 64
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE P CONDENSED QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest earned from financing transactions:
1993................................................. $58,262 $62,356 $63,450 $64,632
1992................................................. 57,842 60,219 63,100 59,645
Interest expense:
1993................................................. 30,568 31,423 30,788 31,074
1992................................................. 35,263 33,896 34,580 32,368
Gains on sale of assets:
1993................................................. 2,061 179 -- 3,199
1992................................................. -- 1,617 196 1,549
Non-interest expenses (includes provision for possible
credit losses):
1993................................................. 16,339 15,022 14,389 18,114
1992................................................. 11,860 14,934 12,760 17,914
Income from continuing operations:
1993................................................. 8,545 10,323 6,750 (1) 12,228
1992................................................. 7,185 8,969 10,087 10,509
Income (loss) from discontinued operations:
1993................................................. 1,338 2,870 -- (4,707 )
1992................................................. 613 4,176 3,311 4,107
Net income:
1993................................................. 9,883 13,193 6,750 (1) 7,521
1992................................................. 7,798 13,145 13,398 14,616
</TABLE>
- ---------------
(1) Income from continuing operations and net income for the third quarter of
1993 include an adjustment of $4,857,000 representing the effect of recent
federal and state income tax increases applicable to deferred income taxes
generated by the Company's leveraged lease portfolio.
NOTE Q SUBSEQUENT EVENT (UNAUDITED) -- PURCHASE OF AMBASSADOR FACTORS AND
TRICON CAPITAL CORPORATION
On February 14, 1994, GFC acquired Fleet Financial Group, Inc.'s ("Fleet")
factoring and asset based lending subsidiary, Fleet Factors Corporation, which
operates under the trade name Ambassador Factors ("Ambassador"). The cash
purchase price of the acquisition was $248,285,000 and represented Ambassador's
stockholder's equity, including a premium ($76,285,000), and repayment of the
intercompany balance due from Ambassador to Fleet ($172,000,000). In addition,
GFC assumed $111,526,000 due to factored clients, $4,843,000 of accrued
liabilities and $8,800,000 of additional liabilities and transaction costs. The
acquisition will be accounted for as a purchase and will create 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.
F-26
<PAGE> 65
GFC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 4, 1994, GFC signed a definitive purchase agreement under which it
will acquire all of the stock of TriCon Capital Corporation ("TriCon") from Bell
Atlantic Corporation ("Bell Atlantic"), in an all-cash transaction. This
transaction is subject to regulatory approvals and certain other conditions.
Accordingly, there can be no assurance that the acquisition will be consummated.
The cash purchase price of the acquisition is $344,250,000. In addition, GFC
will assume outstanding indebtedness and liabilities of TriCon totaling
$1,453,201,000 and incur additional liabilities and acquisition costs of
$7,500,000. The acquisition is expected to be accounted for as a purchase and
will create approximately $69,817,000 of goodwill, which will be amortized on a
straight line basis over 20 years.
The cash purchase price is expected to be financed initially with the
proceeds from the issuance of $300 million of debt securities of GFC and the
remainder with internally generated funds. A portion of the interim debt is
expected to be replaced with additional equity to be raised in the near future
by GFC Financial in public or private offerings which, together with the
remaining intercompany loans from GFC Financial to GFC and other assets, will be
contributed as additional paid in capital of GFC. It is not expected that such
equity securities of GFC Financial will be issued prior to the consummation of
the acquisition of TriCon by GFC. There can be no assurance that such an
offering will occur.
GFC's obligation to consummate the acquisition of TriCon is conditioned
upon its receipt of waivers or consents from lenders under certain of its credit
and loan agreements with respect to certain financial covenants contained
therein. GFC has obtained such consents and waivers, which are conditioned upon
the receipt by GFC, not later than 120 days following the consummation of the
acquisition of TriCon, of the equity investment from GFC Financial referred to
above. The failure of GFC Financial to complete the equity offering or offerings
and invest the required proceeds in GFC by such date would constitute a default
under such credit and loan agreements, unless GFC could obtain additional
waivers, consents or amendments to such credit and loan agreements. GFC's
inability to obtain additional waivers, consents or amendments to such credit
and loan agreements would allow GFC's lenders to declare an event of default and
could result in the acceleration of the indebtedness due thereunder. Such
default and/or acceleration would constitute a default under other borrowing
arrangements and could result in the acceleration of substantially all of GFC's
outstanding indebtedness, which would have a material adverse effect on GFC's
business, financial condition and results of operations. There can be no
assurance that GFC Financial will complete such equity offering or offerings and
make the required investment in GFC by the required date or at any other date.
The following Pro Forma Consolidated Balance Sheet (unaudited) of GFC
Financial as of December 31, 1993 and Pro Forma Statement of Consolidated Income
From Continuing Operations (unaudited) for the year ended December 31, 1993 have
been prepared to reflect the historical financial position and income from
continuing operations as adjusted to reflect the acquisition of Ambassador and
the pending acquisition of TriCon by GFC. The Pro Forma Consolidated Balance
Sheet has been prepared as if such acquisitions occurred on December 31, 1993
and the Pro Forma Statement of Consolidated Income From Continuing Operations
have been prepared as if such acquisitions occurred on January 1, 1993. The pro
forma consolidated financial information is unaudited and is not necessarily
indicative of the results that would have occurred if the acquisitions had been
consummated as of December 31, 1993 or January 1, 1993.
Total assets on a pro forma basis increased to $5,008,135,000 at December
31, 1993. Pro forma income from continuing operations would have been
$67,284,000 ($2.41 per common and equivalent share) after a $4,857,000 ($0.18
per common and equivalent share) adjustment for deferred taxes applicable to
leveraged leases. Excluding the $4,857,000 charge, pro forma income from
continuing operations would be approximately $72 million ($2.59 per common and
equivalent share). Pro forma income per share assumes a 7,000,000 increase in
the number of common shares outstanding.
F-27
<PAGE> 66
GFC FINANCIAL CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
--------------------------------------- -----------------------
GFCFC AMBASSADOR(1) TRICON AMBASSADOR TRICON PRO FORMA
---------- ------------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 929 $ 7,072 $ 4,483 $ $ 135(9) $ 12,619
Investment in financing
transactions:
Loans and other
financing contracts... 2,343,755 334,656 912,964 3,591,375
Direct finance leases... 71,812 647,055 718,867
Operating leases........ 147,222 240,057 (53,460)(10) 333,819
Leveraged leases........ 283,782 283,782
---------- ------------- ---------- ---------- -------- ----------
2,846,571 334,656 1,800,076 (53,460) 4,927,843
Less reserve for possible
credit losses........... (64,280) (9,207) (43,191) (116,678)
---------- ------------- ---------- ---------- -------- ----------
2,782,291 325,449 1,756,885 (53,460) 4,811,165
Other assets and deferred
charges................. 51,102 5,941 27,091 30,400(2) 69,817(13) 184,351
---------- ------------- ---------- ---------- -------- ----------
$2,834,322 $ 338,462 $1,788,459 $ 30,400 $ 16,492 $5,008,135
---------- ------------- ---------- ---------- -------- ----------
---------- ------------- ---------- ---------- -------- ----------
</TABLE>
F-28
<PAGE> 67
GFC FINANCIAL CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
--------------------------------------- ------------------------
GFCFC AMBASSADOR(1) TRICON AMBASSADOR TRICON PRO FORMA
---------- ------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Accounts payable and
accruals............... $ 72,764 $ 4,843 $ 75,302 $ 8,800 (2) $ 5,000(13) $ 166,709
Due to factored
clients................ 111,526 111,526
Due to Fleet............. 172,000 (172,000 )(3)
Due to Bell Atlantic..... 611,194 83,900(11)
(695,094)(12)
Debt..................... 2,079,286 709,508 76,285 (2) (53,460)(10) 3,835,780
172,000 (3) 721,851(12)
130,310(13)
Deferred income taxes.... 178,972 (4,592) 81,100 (83,900)(11) 174,380
2,800(13)
---------- ------------- ---------- ---------- --------- ----------
2,331,022 283,777 1,477,104 85,085 111,407 4,288,395
Stockholders' equity..... 503,300 54,685 311,355 (54,685 )(2) 135(9) 719,740
(26,757)(12)
216,440(13)
(284,733)(13)
---------- ------------- ---------- ---------- --------- ----------
$2,834,322 $ 338,462 $1,788,459 $ 30,400 $ 16,492 $5,008,135
---------- ------------- ---------- ---------- --------- ----------
---------- ------------- ---------- ---------- --------- ----------
</TABLE>
F-29
<PAGE> 68
GFC FINANCIAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME FROM CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------------------ ------------------------
GFCFC AMBASSADOR(1) TRICON AMBASSADOR TRICON PRO FORMA
----------- ------------- -------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned from
financing
transactions............ $ 248,700 $35,235 $245,300 $ $ (7,667)(10) $ 523,068
1,500(14)
Interest expense.......... 123,853 5,780 80,211 4,226(4) 5,018(15) 219,088
----------- ------------- -------- ------------- -------- -----------
Interest margins earned... 124,847 29,455 165,089 (4,226) (11,185) 303,980
Provision for possible
credit
losses.................. 5,706 7,177 21,634 34,517
----------- ------------- -------- ------------- -------- -----------
Net interest margins
earned.................. 119,141 22,278 143,455 (4,226) (11,185) 269,463
Gains on sale of assets... 5,439 5,439
----------- ------------- -------- ------------- -------- -----------
124,580 22,278 143,455 (4,226) (11,185) 274,902
Selling and administrative
expenses................ 58,158 8,125 48,128 2,470(5) 3,491(16) 122,131
1,000(6) 759(14)
Depreciation.............. 41,582 41,582
----------- ------------- -------- ------------- -------- -----------
66,422 14,153 53,745 (7,696) (15,435) 111,189
Income taxes:
Current and deferred.... 23,719 6,481 22,164 (3,078)(7) (6,174)(18) 39,048
(820)(8) (3,244)(17)
Adjustment to deferred
taxes................. 4,857 4,857
----------- ------------- -------- ------------- -------- -----------
Income from continuing
operations.............. $ 37,846 $ 7,672 $ 31,581 $(3,798) $ (6,017) $ 67,284
----------- ------------- -------- ------------- -------- -----------
----------- ------------- -------- ------------- -------- -----------
Income from continuing
operations per common
and equivalent
share(20)............... $ 1.80 $ 2.41
----------- -----------
----------- -----------
Average outstanding common
and equivalent
shares(20).............. 20,332,000 27,332,000
----------- -----------
----------- -----------
</TABLE>
F-30
<PAGE> 69
GFC FINANCIAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The Pro Forma Consolidated Balance Sheet, as of December 31, 1993 and the
Pro Forma Statement of Consolidated Income From Continuing Operations for
the year ended December 31, 1993 include the historical balance sheet of
Ambassador, incorporated herein by reference from the Company's Current
Report on Form 8-K, dated February 14, 1994, as amended, as of November 30,
1993 and the historical statement of income of Ambassador for the eleven
months ended November 30, 1993.
ACQUISITION OF AMBASSADOR
(2) To record the purchase of Ambassador, including the accrual of various
liabilities and the resulting goodwill, using the proceeds advanced to GFC
upon the sale of GFCFC's discontinued mortgage insurance subsidiary and
cash generated from operations.
(3) To record repayment of Ambassador's intercompany payable to Fleet using the
proceeds advanced to GFC upon the sale of GFCFC's discontinued mortgage
insurance subsidiary and cash generated from operations.
(4) Adjustments to reflect interest expense of debt repaid in 1993 with
proceeds received from the sale of GFCFC's discontinued mortgage insurance
operations and cash generated from operations. Such debt is assumed to be
outstanding for the entire pro forma period.
(5) To record amortization of goodwill based on an amortization period of
twenty years and amortization of the covenant not to compete over one year
(see item (19)).
(6) To record additional administrative expenses for additional employees and
general overhead.
(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
GFC.
ACQUISITION OF TRICON
(9) To record the original capital contribution by Bell Atlantic as part of the
incorporation of TriCon.
(10) To transfer assets and the related debt of TriCon, not purchased by GFC, to
Bell Atlantic and reduce interest earned from financing transactions for
the income recorded on such assets in 1993.
(11) To record issuance of notes payable to fund the deferred tax payment to
Bell Atlantic for an amount equal to the deferred taxes of TriCon,
exclusive of deferred tax assets.
(12) To record a dividend from TriCon to Bell Atlantic and the issuance of a
note payable to Bell Atlantic for the remaining principal amount of the
short-term borrowings from affiliates of TriCon.
(13) To record the purchase of TriCon. The acquisition of TriCon is expected to
be financed initially with interim debt, the assumption of outstanding
indebtedness of TriCon to Bell Atlantic, the assumption of TriCon's third
party debt and liabilities and internally generated funds. A portion of the
interim debt is assumed to be replaced with proceeds from the issuance of
7,000,000 shares of GFCFC's common stock which issuance is assumed in the
accompanying pro forma consolidated balance sheet. The interest expense
related to the debt that is being replaced with equity and, therefore,
nonrecurring and excluded from the pro forma consolidated statement of
income from continuing operations, is approximately $2,000,000.
Including new debt, the debt assumed, the accrual of various additional
liabilities and acquisition costs, the total purchase price of the
acquisition is estimated to be $1,804,951,000 resulting in $69,817,000 of
goodwill. The purchase will result in a new tax basis for TriCon's assets,
eliminating the remaining deferred tax asset.
F-31
<PAGE> 70
(14) To reflect base fees and incremental costs related to an agreement to
manage leveraged leases for Bell Atlantic.
(15) To record additional interest expense resulting from additional debt to
Bell Atlantic and interim debt not replaced with the proceeds from the
common stock issuance in item (13). The adjustment is partially offset by
interest saved on the debt transferred to Bell Atlantic.
(16) To record amortization of goodwill based on an amortization period of
twenty years (see item (19)).
(17) 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 new tax basis in assets at the beginning of
the pro forma period.
(18) To record the income tax effect of adjustments (10) and (14) through (16)
at GFCFC's effective incremental income tax rate of 40%.
(19) Goodwill may be adjusted as the final allocation of the values of the
purchased assets and liabilities is established.
(20) Pro forma income from continuing operations per common and equivalent share
is calculated assuming the 7,000,000 common shares are issued at $32.00 per
share which represents GFCFC's approximate stock price on March 31, 1994.
F-32
<PAGE> 71
The following financial statements contain references to a proposed public
offering of stock of TriCon and certain restructuring of the business. The
acquisition by GFC supersedes that public offering and the purchase agreement
makes certain changes to the proposed restructuring.
F-33
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors of
Bell Atlantic TriCon Leasing Corporation:
We have audited the consolidated balance sheets of TriCon Capital
Corporation -- Predecessor Business (see Note 1 to the Consolidated Financial
Statements) at December 31, 1993 and 1992, and the related consolidated
statements of income and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TriCon Capital
Corporation -- Predecessor Business at December 31, 1993 and 1992, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Notes 2 and 9 to the Consolidated Financial Statements, in
1993 the Company adopted the method of accounting for income taxes prescribed by
Statement of Financial Accounting Standards No. 109 and the method of accounting
for postemployment benefits prescribed by Statement of Financial Accounting
Standards No. 112, and in 1991 adopted the method of accounting for
postretirement benefits other than pensions prescribed by Statement of Financial
Accounting Standards No. 106.
COOPERS & LYBRAND
New York, New York
February 7, 1994
F-34
<PAGE> 73
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1992
---------- ----------
<S> <C> <C>
ASSETS
Cash................................................................ $ 4,483 $ 4,503
Notes receivable and finance leases:
Investment in notes receivable...................................... 912,964 833,487
Investment in finance leases........................................ 647,055 639,592
---------- ----------
Total notes receivable and finance leases................. 1,560,019 1,473,079
Less:
Allowance for credit losses......................................... 43,191 48,279
---------- ----------
Net investment in notes receivable and finance leases............... 1,516,828 1,424,800
Investment in operating leases, net of accumulated depreciation..... 240,057 230,721
Other assets........................................................ 27,091 32,222
---------- ----------
Total Assets.............................................. $1,788,459 $1,692,246
---------- ----------
---------- ----------
LIABILITIES AND EQUITY
Liabilities:
Notes payable....................................................... $ 709,508 $ 919,642
Accounts payable and accrued expenses............................... 75,302 71,951
Due to affiliates................................................... 611,194 349,842
Deferred income taxes............................................... 81,100 93,908
---------- ----------
Total Liabilities................................................... 1,477,104 1,435,343
---------- ----------
Total Equity........................................................ 311,355 256,903
---------- ----------
Total Liabilities and Equity.............................. $1,788,459 $1,692,246
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-35
<PAGE> 74
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Interest income............................................ $ 80,477 $ 77,170 $ 90,788
Finance lease revenue...................................... 65,835 77,009 94,503
Operating lease revenue.................................... 63,806 46,337 34,679
Other...................................................... 35,182 41,751 33,879
-------- -------- --------
Total Revenue.................................... 245,300 242,267 253,849
-------- -------- --------
EXPENSES
Interest................................................... 80,211 90,298 115,190
Selling, general and administrative........................ 48,128 49,638 46,533
Provision for credit losses................................ 21,634 28,057 29,876
Depreciation............................................... 41,582 31,496 23,881
-------- -------- --------
Total Expenses................................... 191,555 199,489 215,480
-------- -------- --------
Income before provision for income taxes and cumulative
effect of changes in accounting principles............... 53,745 42,778 38,369
Provision for income taxes................................. 22,164 15,414 15,014
-------- -------- --------
Income before cumulative effect of changes in accounting
principles............................................. 31,581 27,364 23,355
Cumulative effect of changes in accounting principles...... 5,530 -- (1,471)
-------- -------- --------
NET INCOME....................................... $ 37,111 $ 27,364 $ 21,884
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-36
<PAGE> 75
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 37,111 $ 27,364 $ 21,884
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 43,538 33,436 25,329
Provision for credit losses.................... 21,634 28,057 29,876
Amortization of initial direct costs........... 8,946 10,417 12,081
Foreign currency transaction gain.............. -- -- (2,857)
Valuation adjustment........................... -- (6,000) --
Cumulative effect of changes in accounting
principles................................... (5,530) -- 1,471
Gain on sale of equipment and real estate held
under operating leases....................... (2,548) (72) (29)
Gain on transfer of receivables................ (11,290) (13,065) (11,745)
Deferred income taxes.......................... (6,893) 593 (41)
Changes in certain assets and liabilities:
(Increase) decrease in other assets............ (628) 2,491 28,404
Increase (decrease) in accounts payable and
accrued expenses............................. 7,461 (8,320) (4,171)
----------- ----------- -----------
Net cash provided by operating activities........... 91,801 74,901 100,202
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to notes receivable and finance
leases....................................... (1,844,466) (1,355,261) (1,198,591)
Principal payments received on notes receivable
and finance leases........................... 1,553,092 1,053,913 969,786
Additions to equipment and real estate held
under operating leases....................... (60,270) (57,686) (63,420)
Proceeds from sale of equipment and real estate
under operating leases....................... 8,236 4,166 461
Proceeds from transfer of receivables.......... 183,242 275,049 291,053
----------- ----------- -----------
Net cash used in investing activities............... (160,166) (79,819) (711)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings....................... 128,529 204,223 283,067
Principal repayments of borrowings............. (338,663) (254,155) (458,595)
Increase in amounts due to affiliates.......... 261,352 32,703 73,579
Capital contributions.......................... 21,438 40,416 6,073
Capital distributions.......................... (3,932) (17,932) (3,677)
Other.......................................... (395) -- (42)
----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................ 68,329 5,255 (99,595)
----------- ----------- -----------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH............ 16 (31) (164)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH......................... (20) 306 (268)
CASH, BEGINNING OF YEAR............................. 4,503 4,197 4,465
----------- ----------- -----------
CASH, END OF YEAR................................... $ 4,483 $ 4,503 $ 4,197
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-37
<PAGE> 76
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
TriCon Capital Corporation, a wholly-owned subsidiary of Bell Atlantic
Investments, Inc. and, ultimately, Bell Atlantic Corporation ("Bell Atlantic"),
was incorporated on December 3, 1993 and will be the successor entity to certain
businesses of Bell Atlantic TriCon Leasing Corporation ("Old TriCon") which is
wholly owned by Bell Atlantic Capital Corporation.
Prior to a planned restructuring (the "Restructuring") in contemplation of
a public offering of the Company's common stock, the Company will be capitalized
with amounts sufficient to acquire from Old TriCon certain assets which comprise
the Predecessor Business (described below).
Pursuant to the Restructuring, the Company will acquire substantially all
of the assets and assume certain liabilities of Old TriCon, other than its
leveraged lease portfolio, project finance portfolio and certain other assets to
be retained by Old TriCon (the "Transferred Assets" and "Excluded Assets,"
respectively). The purchase price will be equivalent to the net book value of
the Transferred Assets, subject to certain adjustments, and will be paid in part
by the issuance of notes payable to Old TriCon.
Pursuant to the Restructuring, the Company will also, among other things,
assume the rights and obligations of Old TriCon under its securitization
agreements and enter into a five-year agreement to manage, for a fee, the
leveraged lease and project finance portfolios retained by Old TriCon.
BASIS OF PRESENTATION
The consolidated financial statements reflect the financial position,
results of operations and cash flows of TriCon Capital
Corporation -- Predecessor Business, which consists of the assets and
liabilities to be acquired or assumed by the Company in the contemplated
Restructuring described above. Use of "the Company" in these financial
statements refers to the Predecessor Business, unless the context indicates
reference to TriCon Capital Corporation. The consolidated financial statements
include the accounts of a Canadian division and all wholly owned subsidiaries
which are included in the Predecessor Business. All significant intercompany
balances are eliminated.
The consolidated financial statements include allocations of certain
liabilities and expenses relating to the Predecessor Business to be transferred
to the Company in the Restructuring. Debt and related interest expense were
allocated between the Transferred Assets and the Excluded Assets based upon the
internal "match funding" and debt-to-equity ratio policies of Old TriCon in
place during such periods. Common expenses were allocated on a proportional
basis between the Transferred Assets and the Excluded Assets. Management
believes that these allocation methods are reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT IN FINANCE LEASES
Investment in finance leases consists of the minimum lease payments
receivable, estimated residual value of the equipment and initial direct costs
less unearned income and security deposits. The unearned income represents the
excess of the gross lease payments receivable plus the estimated residual value
over the cost of the equipment leased. Unearned income is amortized to income so
as to provide an approximate level rate of return on the net outstanding
investment. The original lease terms of the direct finance leases are generally
from 36 to 84 months.
F-38
<PAGE> 77
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT IN OPERATING LEASES
Investment in operating leases consist predominantly of medical equipment
and health care facilities. The Company recognizes operating lease revenue on a
straight-line basis over the term of the lease. The cost of equipment and
facilities held under operating leases is depreciated to the estimated residual
value, on a straight-line basis, over the shorter of the estimated economic life
or the period specified under the lease term. Initial direct costs are deferred
and amortized over the lease term on a straight-line basis.
RESIDUAL VALUES
Residual values are reviewed by the Company at least annually. Declines in
residual values for finance leases are recognized as charges to income. Declines
in residual values for operating leases are recognized as adjustments to
depreciation on operating leases over the shorter of the useful life of the
asset or the remaining term of the lease.
ALLOWANCE FOR CREDIT LOSSES
In connection with the financing of leases and other receivables, the
Company records an allowance for credit losses to provide for estimated losses
in the portfolio. The allowance for credit losses is based on a detailed
analysis of delinquencies, an assessment of overall risks, management's review
of historical loss experience and evaluation of probable losses in the portfolio
as a whole given its diversification. An account is fully reserved for or
written off when analysis indicates that the probability of collection of the
account is remote.
INCOME TAXES
For federal income tax purposes, the results of the Company's operations
are included in Bell Atlantic's consolidated tax return. In accordance with the
Bell Atlantic Consolidated Federal Income Tax Allocation Policy, the Company is
allocated federal income tax, or benefit, to the extent it contributes taxable
income or loss, and credits, which are utilized in consolidation. The Company
and each of its subsidiaries file separate state tax returns in the
jurisdictions in which they conduct business.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
the Company adopted effective January 1, 1993. SFAS 109 requires the
determination of deferred taxes using the liability method. Under the liability
method, deferred taxes must be provided on all book and tax basis differences
and deferred tax balances must be adjusted to reflect enacted changes in income
tax rates. The cumulative impact of adopting SFAS 109 on the earnings of the
Company is a tax benefit of $5,763.
Prior to January 1, 1993, deferred taxes were provided for differences in
the measurement of revenue and expenses for financial accounting and income tax
purposes using the deferral method under Accounting Principles Board Opinion No.
11 (APB 11), "Accounting for Income Taxes."
INTEREST RATE SWAPS
Interest rate swaps are contracts between two parties to exchange interest
payments without the exchange of the underlying notional principal amounts. The
Company enters into interest rate swap agreements primarily to hedge interest
rate risks. The Company records a net receivable or payable related to the
interest to be paid or received as an adjustment to interest expense. In the
event of an early termination of an interest rate swap contract, the gain or
loss would be amortized over the remaining life of the swap.
F-39
<PAGE> 78
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
The financial statements of foreign operations are translated in accordance
with the provisions of Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." Under the provisions of the statement, assets
and liabilities are translated at year-end exchange rates, and revenues and
expenses are translated at average exchange rates prevailing during the year.
The related translation adjustments are recorded as a separate component of
Total Equity. Transactions denominated in foreign currencies are translated at
rates in effect at the time of the transaction. Gains or losses resulting from
foreign currency transactions are included in results of operations.
3. INVESTMENT IN NOTES RECEIVABLE AND FINANCE LEASES
Investment in notes receivable consists primarily of amounts due the
Company relating to commercial inventory and accounts receivable financing and
first mortgage notes which are collateralized by the underlying commercial real
estate. The notes bear interest at rates ranging from 5.1% to 15.4% and mature
between the years 1994 and 2015. The components of investment in notes
receivable as of December 31 are as follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Notes receivable............................................... $ 883,122 $ 803,009
Initial direct costs........................................... 5,002 4,272
Non-accrual accounts........................................... 24,840 26,206
--------- ---------
Investment in notes receivable................................. $ 912,964 $ 833,487
--------- ---------
--------- ---------
</TABLE>
Investment in finance leases consists of various types of equipment
including diversified commercial use equipment, health care equipment and data
processing equipment. The original lease terms are generally from 36 to 84
months. The components of investment in finance leases as of December 31 are as
follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Minimum lease payments......................................... $ 685,578 $ 659,097
Estimated residual value....................................... 64,004 75,834
Less:
Unearned income................................................ 133,991 134,364
Security deposits.............................................. 20,737 20,171
Plus:
Initial direct costs........................................... 15,259 13,426
Net investment in non-accrual accounts......................... 36,942 45,770
--------- ---------
Investment in finance leases................................... $ 647,055 $ 639,592
--------- ---------
--------- ---------
</TABLE>
F-40
<PAGE> 79
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1993, estimated minimum annual receipts from notes
receivable and finance leases based upon contractual terms are as follows:
<TABLE>
<CAPTION>
NOTES FINANCE
YEAR ENDING DECEMBER 31 RECEIVABLE LEASES
- --------------------------------------------------------------------- ---------- --------
<S> <C> <C>
1994................................................................. $338,390 $223,413
1995................................................................. 113,977 177,670
1996................................................................. 95,010 130,487
1997................................................................. 81,733 82,128
1998................................................................. 51,897 38,629
Thereafter........................................................... 202,115 33,251
---------- --------
$883,122 $685,578
---------- --------
---------- --------
</TABLE>
4. INVESTMENT IN OPERATING LEASES
Operating leases have original terms from 12 to 120 months. Investment in
operating leases consists of the following at December 31:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Medical equipment, at cost............................................... $215,951 $193,828
Commercial real estate, at cost.......................................... 99,943 95,926
Other, at cost........................................................... 6,466 6,466
-------- --------
Total cost............................................................... 322,360 296,220
Less accumulated depreciation............................................ (82,303) (65,499)
-------- --------
Net investment in operating leases....................................... $240,057 $230,721
-------- --------
-------- --------
</TABLE>
Depreciation expense relating to equipment and real estate held under
operating leases was $39,012, $28,645 and $21,191 in 1993, 1992 and 1991,
respectively.
Estimated minimum annual lease receipts from noncancelable operating leases
as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
--------------------------------------------------------------------------
<S> <C>
1994...................................................................... $ 58,934
1995...................................................................... 50,000
1996...................................................................... 36,454
1997...................................................................... 27,273
1998...................................................................... 15,989
Thereafter................................................................ 61,893
--------
$250,543
--------
--------
</TABLE>
F-41
<PAGE> 80
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
Notes payable at December 31 consist of the following:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Recourse notes payable with interest rates from 3.31% to 11.0%
and
maturity dates through 2005.................................. $709,508 $918,617
Nonrecourse notes payable with fixed interest rates from 8.5%
to 9.3%
and retired in 1993.......................................... -- 1,025
-------- --------
Total notes payable.................................. $709,508 $919,642
-------- --------
-------- --------
</TABLE>
At December 31, 1992, all nonrecourse notes were collateralized by specific
lease receivables and the underlying equipment. During 1993, 1992 and 1991, the
Company paid $82,656, $91,434 and $113,925, respectively, in interest.
The above recourse note amounts are allocated from aggregate recourse notes
of Old TriCon of $847,917 and $1,066,193 at December 31, 1993 and 1992,
respectively (see Note 1).
Under the terms of various recourse notes and receivable transfer
agreements, Old TriCon was subject to certain restrictive covenants. The most
restrictive of these covenants require Old TriCon to maintain a minimum net
worth of $150,000; an interest coverage ratio of at least 1.2:1; and a ratio of
indebtedness (as defined in the various agreements) to net worth not to exceed
8:1. Old TriCon was in compliance with all covenants as of the balance sheet
dates. In addition, certain affiliates have agreed to maintain Old TriCon's
compliance with certain financial covenants pursuant to agreements covering the
majority of recourse borrowings at December 31, 1993. During 1993 and 1992, Old
TriCon participated with an affiliate in the issuance of medium-term notes. Old
TriCon's share of the issuance was $184,567 and $60,750 in 1993 and 1992,
respectively, which is included in recourse notes payable above. The notes bear
interest at varying rates from 4.33% to 6.625% and have maturity dates through
December 1999. The Company recognized interest expense on these medium-term
notes of $8,054 and $217 in 1993 and 1992, respectively.
Maturities of notes payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------------------
<S> <C>
1994.............................................. $218,627
1995.............................................. 220,072
1996.............................................. 135,824
1997.............................................. 60,011
1998.............................................. 18,045
Thereafter........................................ 56,929
--------
$709,508
--------
--------
</TABLE>
F-42
<PAGE> 81
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. TOTAL EQUITY
The following are transactions affecting total equity:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year....................... $256,903 $206,674 $185,069
Capital contributions.............................. 21,438 40,416 6,073
Net income......................................... 37,111 27,364 21,884
Capital distributions.............................. (3,932) (17,932) (3,677)
Foreign currency translation adjustments........... 230 381 (2,633)
Other.............................................. (395) -- (42)
-------- -------- --------
Total Equity at end of year.............. $311,355 $256,903 $206,674
-------- -------- --------
-------- -------- --------
</TABLE>
7. INCOME TAXES
In 1990, Bell Atlantic was subject to the alternative minimum tax (AMT)
provisions of the 1986 Tax Reform Act on a tax return basis. The Company has
provided for its share of Bell Atlantic's consolidated current AMT liability and
for the deferred benefit relating to the corresponding AMT credit carryforward.
Bell Atlantic was able to utilize all AMT carryforwards in 1991 and 1992. The
Company's income tax expense for the years 1993, 1992 and 1991 would not have
differed materially from that reported had the Company filed tax returns on a
stand alone basis.
The provision for income taxes (exclusive of the tax effect of the
cumulative effect of changes in accounting principles in 1993 and 1991) for the
years ended December 31 consists of the following:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $28,912 $14,065 $15,045
State and local..................................... 145 756 10
------- ------- -------
29,057 14,821 15,055
------- ------- -------
Deferred:
Federal............................................. (11,365) (3,071) (4,012)
State and local..................................... 4,472 3,664 3,971
------- ------- -------
(6,893) 593 (41)
------- ------- -------
Provision for income taxes.................. $22,164 $15,414 $15,014
------- ------- -------
------- ------- -------
</TABLE>
F-43
<PAGE> 82
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
1993
--------
<S> <C>
Gross deferred tax liabilities:
Lease related differences.............................................. $ 75,263
Other.................................................................. 57,704
--------
Gross deferred tax liabilities........................................... 132,967
--------
Gross deferred tax assets:
Allowance for credit losses and accrued liabilities for
securitizations..................................................... (23,031)
Other.................................................................. (28,836)
--------
Gross deferred tax assets................................................ (51,867)
--------
Net deferred taxes............................................. $ 81,100
--------
--------
</TABLE>
Under APB 11, deferred taxes resulted from timing differences in the
recognition of revenue and expenses for federal and state tax and for financial
statement purposes. The tax effects of the timing differences that resulted in
the provision for deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
1992 1991
-------- --------
<S> <C> <C>
Accelerated depreciation..................................... $ (407) $ 3,151
Direct finance and operating leases.......................... (23,681) (10,653)
State taxes.................................................. 2,418 2,621
Deferred AMT credits......................................... 7,937 6,597
Asset backed securitizations................................. 7,834 103
Provision for credit losses.................................. 3,227 (9,195)
Other, net................................................... 3,265 7,335
-------- --------
Total.............................................. $ 593 $ (41)
-------- --------
-------- --------
</TABLE>
During 1993, 1992 and 1991 the Company paid $24,989, $23,415 and $8,322,
respectively, in income taxes.
The provision for income taxes recorded for financial reporting purposes
differs from the expense computed at the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision at the statutory rate............. 35.0% 34.0% 34.0%
State income tax provision, net of federal tax benefit......... 5.6 6.8 6.8
Adjust prior years' tax provision.............................. (.1) (1.1) --
Income tax expense related to acquisition of business.......... .5 1.4 2.1
Income tax benefit related to tax exempt income................ (4.3) (3.8) (3.9)
Impact of 1% rate change....................................... 4.4 -- --
Other.......................................................... .1 (1.3) .1
---- ---- ----
Provision for income taxes..................................... 41.2% 36.0% 39.1%
---- ---- ----
---- ---- ----
</TABLE>
8. TRANSACTIONS WITH AFFILIATES
The Company purchased equipment from affiliates of Bell Atlantic totaling
$4,574, $7,793 and $10,923 in 1993, 1992 and 1991, respectively, which is being
leased to third parties under financing lease arrangements.
F-44
<PAGE> 83
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1990, the Company purchased $11,800 of equipment from an affiliate in return
for a non-interest bearing note payable due in 1991. During 1991, the Company
returned such equipment to the affiliate in full payment of the note. During
1993, 1992 and 1991, the Company leased various equipment to affiliates under
direct finance and operating leases and recognized earned income of $1,540,
$1,143 and $1,481, respectively.
During 1993, 1992 and 1991, the Company earned $100, $1,174 and $234,
respectively, of management fees from an affiliate. The Company has entered into
a short-term borrowing arrangement with an affiliate that bears interest at a
rate which approximates the affiliate's average daily cost of funds (weighted
average effective rates of 3.28%, 3.83% and 6.04% for the years ended December
31, 1993, 1992 and 1991, respectively). The Company recognized interest expense
of $13,844, $13,910 and $19,727 in 1993, 1992 and 1991, respectively, under
these arrangements.
Due to Affiliates consists of the following at December 31:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Advances under short-term borrowing arrangements... $603,501 $347,260 $311,029
Payables to affiliates............................. 4,437 3,855 4,723
Receivables from affiliates........................ (2,148) (2,825) (2,846)
Income tax payable................................. 5,404 1,552 4,235
-------- -------- --------
$611,194 $349,842 $317,141
-------- -------- --------
-------- -------- --------
</TABLE>
9. EMPLOYEE BENEFITS
Pension Plans
Substantially all of the Company's employees are covered under a
noncontributory defined benefit pension plan sponsored by Bell Atlantic Capital
Corporation and its subsidiaries. The pension benefit formula used is based on a
stated percentage of adjusted career average income. The funding objective of
the plan is to accumulate funds at a relatively stable rate over participants'
working lives so that benefits are fully funded at retirement. Amounts
contributed to the plan are determined actuarially, principally under the
aggregate cost method, and are subject to applicable federal income tax
regulations. Plan assets consist principally of investments in domestic and
foreign corporate equity securities, U.S. Government and corporate debt
securities, and real estate. In addition, the Company participates in the
Executive Management Retirement Plan, a non-qualified pension plan, sponsored by
Bell Atlantic and its subsidiaries.
Aggregate pension costs are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Current year cost........................................ $1,306 $1,417 $1,464
Percentage of salaries and wages......................... 3.7% 4.0% 4.6%
</TABLE>
The decrease in pension cost from 1991 to 1993 is the net result of changes
in plan provisions and other actuarial assumptions, and amortization of
actuarial gains and losses relating to demographic and investment experience.
Statement of Financial Accounting Standards No. 87, "Employers Accounting
for Pensions" requires a comparison of the actuarial present value of projected
benefit obligations with the fair value of plan assets, the disclosure of the
components of net periodic pension costs, and a reconciliation of the funded
status of the plan with amounts recorded on the balance sheets. Such disclosures
are not presented for the Company because the structure of the plan does not
allow for the determination of this information on an individual company basis.
F-45
<PAGE> 84
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumed discount rate used to measure the projected benefit obligation
was 7.25% at December 31, 1993 and 7.75% at December 31, 1992 and 1991. The
assumed rate of future increases in compensation levels was 5.25% at December
31, 1993, 1992 and 1991. The expected long-term rate of return on plan assets
was 8.25% for December 31, 1993 and 1992 and, 7.5% for December 31, 1991.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1991, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" (SFAS 106) which requires accrual accounting for all
postretirement benefits other than pensions. Under the prescribed accrual
method, the Company's obligation for these postretirement benefits is to be
fully accrued by the date employees attain full eligibility for such benefits.
Prior to this adoption, the Company charged costs relating to such benefits to
expense as paid.
In conjunction with the 1991 adoption of SFAS 106, the Company elected to
immediately recognize the accumulated postretirement benefit obligation for
current and future retirees, net of the fair value of any plan assets, and
recognized accrued postretirement benefit cost (transition obligation) in the
amount of $1,471, net of a deferred income tax benefit of $758.
Substantially all of the Company's employees are covered under
postretirement health benefit plans sponsored by Bell Atlantic Capital
Corporation and its subsidiaries. The determination of benefit cost for the
postretirement health benefit plan is based on comprehensive hospital, medical
and surgical benefit provisions.
Aggregate postretirement benefit cost for the year ended December 31, 1993,
1992 and 1991 was $571, $394 and $332, respectively. There were no amounts paid
for postretirement health benefits in 1990.
SFAS 106 requires a comparison of the actuarial present value of the
accumulated postretirement benefit obligation with the fair value of the plan
assets, the disclosure of the components of net periodic postretirement benefit
cost, and a reconciliation of the funded status of the plan with the amount
recorded on the balance sheet. Such disclosures are not presented for the
Company because the structure of the Bell Atlantic plan does not allow for the
determination of this information on an individual company basis.
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 7.25% at December 31, 1993 and 7.75% at December 31, 1992
and 1991. The assumed rate of future increases in compensation levels was 5.25%
at December 31, 1993 and 1992. The expected long-term rate of return on plan
assets was 8.25% for 1993 and 1992 and 7.50% for 1991. The medical cost trend
rate in 1993 was approximately 13.0%, grading down to an ultimate rate in year
2003 of approximately 5.0%.
EMPLOYEE STOCK OWNERSHIP PLANS
The Company maintains savings plans which cover substantially all of its
employees. Under these plans, the Company matches a certain percentage of
eligible contributions made by the employees. In 1989, Bell Atlantic established
two leveraged employee stock ownership plans (ESOPs) within two existing
employee savings plans. Under the ESOP provisions, which began January 1, 1990,
a substantial portion of Company matching contributions are allocated to the
employees in the form of Bell Atlantic stock from the ESOP trusts. Bell Atlantic
stock allocated by the ESOP trusts to the participating employees is based on
the proportion that principal and interest paid in a year bears to remaining
principal and interest due over the life of the notes.
Leveraged ESOP expense for the years ended December 31, 1993, 1992 and 1991
is $786, $912 and $803, respectively.
F-46
<PAGE> 85
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standard No. 112 "Employers' Accounting for Postemployment Benefits"
(SFAS 112) which requires employers who provide benefits to former or inactive
employees to recognize the obligation relative to such future benefits on an
accrual basis. This change principally affects the Company's accounting for
long-term disability benefits which were previously charged to expenses as
benefits were paid. The cumulative impact at January 1, 1993 of adopting SFAS
112 was a reduction of net income of $232, net of a deferred income tax benefit
of $151.
10. COMMITMENTS
At December 31, 1993, the Company's commitments under noncancelable
operating leases having remaining terms in excess of one year, primarily for
office space are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------------------
<S> <C>
1994............................................... $ 2,803
1995............................................... 2,543
1996............................................... 2,488
1997............................................... 2,251
1998............................................... 1,741
Thereafter......................................... 3,739
-------
$15,565
-------
-------
</TABLE>
Such leases generally include escalation and renewal clauses and require
that the Company pay for utilities, taxes, insurance and maintenance. Rent
expense under operating lease agreements was $2,972, $2,985 and $2,952 in 1993,
1992 and 1991, respectively.
At December 31, 1993, the Company has outstanding commitments to finance
notes receivable of $171,985. The anticipated expirations of such commitments
are $167,487 in 1994, $0 in 1995, $0 in 1996, and $4,498 in 1997.
11. FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk exist when changes in economic, industry or
geographic factors similarly affect groups of customers whose aggregate credit
exposure is material in relation to the Company's total credit exposure.
Although the Company's portfolio is broadly diversified along industry,
customer, equipment and geographic lines, there does exist a concentration of
transactions within the health care industry (approximately 22% of total assets
plus transferred receivables at December 31, 1993 and 1992). The Company's
exposure to credit risk in these and other industries is mitigated by the
diversity of customers in the customer base and in many cases by the quality of
the underlying collateral.
RECEIVABLE TRANSFER AGREEMENTS (SECURITIZATIONS)
During 1993, 1992 and 1991, the Company transferred its interests in
approximately $179,206, $248,048 and $246,721, respectively, of its direct
finance lease portfolio for $200,447, $275,049 and $270,621, respectively. These
transfers provide limited recourse for credit losses to the Company and certain
of its assets. As of December 31, 1993, $60,153 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 at December 31,
1993 limited to $106,429. At December 31, 1993 and 1992, an outstanding
allowance for estimated losses under these recourse provisions of $14,146 and
$17,360, respectively, is included in Accounts
F-47
<PAGE> 86
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Payable and Accrued Expenses. The outstanding gross receivable balance of
transferred receivables was $495,906 and $541,834 at December 31, 1993 and 1992,
respectively. The Company will service these lease contracts for the transferee,
and a portion of the proceeds on the transfer has been deferred representing
service fees to be earned over the term of the agreements.
INTEREST RATE SWAPS
The Company has entered into a number of interest rate swap agreements
which have effectively fixed interest rates on $424,432 of floating rate
instruments including debt and receivable transfer agreements. Under these
interest rate swap agreements, the Company will pay the counterparties interest
at a fixed rate and the counterparties will pay the Company interest at a
variable rate based on the London Interbank Offered Rate (LIBOR), the A1/P1
commercial paper rate or a money market yield. The fixed rates payable under
these agreements range from 4.08% to 7.96% with terms expiring at various dates
from February 1994 to August 1996. Cash flows resulting from the above are
classified with the transactions being hedged. The Company would be exposed to
increased interest costs in the event of non-performance by the counterparties
for the fixed to floating interest rate swap agreements. However, because of the
stature of the counterparties, the Company does not anticipate non-performance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of the
fair value of financial instruments, both recognized and unrecognized on the
consolidated balance sheet, for which it is practicable to estimate fair value.
Leases are not considered financial instruments under SFAS 107 and are
accordingly excluded from the fair value disclosures. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market exchange
nor can they be substantiated by comparison to independent markets.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, Accounts Payable, Accrued Expenses, Other Amounts Due to Affiliates
and
Recourse Provisions under Receivable Transfer Agreements
The carrying amount approximates fair value.
Notes Receivable
Fair values of notes receivable are based principally on the net present
value of the future expected cash flows using current interest rates.
Notes Payable and Advances under Short-term Borrowing Arrangements with
Affiliates
The fair values of notes payable and advances under short-term borrowing
arrangements with affiliates is estimated based on the quoted market prices for
the same or similar issues, where available or is based on the net present value
of the future expected cash flows using current interest rates.
F-48
<PAGE> 87
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Swap Agreements
The fair value of interest rate swap agreements is the estimated amount
that the Company would have to pay to terminate the swap agreements at December
31, 1993, taking into account current interest rates and the creditworthiness of
the swap counterparties.
Loan Commitments
The fair value of loan commitments is estimated using the fees currently
charged to enter into similar commitments.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS ON THE BALANCE
SHEETS
Notes Receivable net of Allowance
for Credit Losses................. $ 894,486 $ 896,051 $ 818,216 $ 827,264
Notes Payable....................... (709,508) (740,970) (919,642) (973,021)
Advances under Short-term Borrowing
Arrangements with Affiliates...... (603,501) (603,793) (347,260) (348,897)
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
Interest Rate Swap Agreements....... -- $ (1,160) -- $ 1,321
Loan Commitments.................... -- 6,516 -- 4,383
</TABLE>
12. SUPPLEMENTAL CASH FLOW ACTIVITIES
During 1992 and 1991 the Company transferred $5,859 and $57,050,
respectively, of investment in notes receivable to other assets. In addition,
during 1992 the Company transferred $41,585 of property foreclosed in 1991 and
included in other assets to investment in operating leases, following the
determination to hold such property for operating purposes. The resultant
valuation adjustment of $6,000 is reflected in other revenues in 1992.
F-49
<PAGE> 88
TRICON CAPITAL CORPORATION -- PREDECESSOR BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1993
Total revenue........................... $57,258 $58,629 $62,253 $67,160 $245,300
Interest expense........................ 20,795 20,956 19,564 18,896 80,211
Provision for credit losses............. 7,384 7,606 2,966 3,678 21,634
Depreciation............................ 10,416 9,902 10,138 11,126 41,582
Cumulative effect of changes in
accounting principles................. 5,763 -- -- (233) 5,530
Net income.............................. 9,815 5,368 8,111 13,817 37,111
1992
Total revenue........................... $53,980 $54,217 $59,137 $74,933 $242,267
Interest expense........................ 23,736 22,804 22,012 21,746 90,298
Provision for credit losses............. 5,606 6,671 9,355 6,425 28,057
Depreciation............................ 6,960 7,193 8,049 9,294 31,496
Net income.............................. 2,706 4,892 4,859 14,907 27,364
</TABLE>
Net income in the fourth quarter of 1993 and 1992 was increased by certain
securitization transactions (see Note 11).
F-50
<PAGE> 89
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Use of Proceeds....................... 7
Price Range of Common Stock and
Dividends........................... 7
Capitalization........................ 9
Selected Consolidated Financial
Data................................ 10
Pro Forma Financial Data.............. 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 26
Certain United States Tax Consequences
to Non-United States Holders........ 31
Description of Capital Stock.......... 33
Underwriting.......................... 35
Legal Matters......................... 36
Experts............................... 36
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
7,000,000 SHARES
G F C
G F C
Financial
Corporation
COMMON STOCK
------------------------
P R O S P E C T U S
------------------------
MERRILL LYNCH & CO.
, 1994
------------------------------------------------------
------------------------------------------------------
<PAGE> 90
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
(ALTERNATE FRONT COVER PAGE FOR INTERNATIONAL PROSPECTUS)
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 1, 1994
PROSPECTUS
7,000,000 SHARES
G F C
Greyhound Financial Corporation
COMMON STOCK
------------------------
Of the 7,000,000 shares of Common Stock offered hereby, 1,400,000 shares
are being offered outside the United States and Canada by the International
Managers (the "International Offering") and 5,600,000 shares are being offered
in a concurrent offering inside the United States and Canada by the U.S.
Underwriters (the "U.S. Offering"). The price to the public and the underwriting
discount per share are identical for both offerings. See "Underwriting."
The Company's Common Stock is listed on the New York Stock Exchange. On
March 31, 1994, the last reported sale price of the Common Stock on the New York
Stock Exchange was $31.75 per share.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
Per Share................................ $ $ $
- -----------------------------------------------------------------------------------------------
Total(3)................................. $ $ $
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the International Managers and the U.S. Underwriters
options exercisable within 30 days of the date hereof to purchase up to
210,000 and 840,000 additional shares of Common Stock, respectively, solely
to cover over-allotments, if any. If all such additional shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1994.
------------------------
MERRILL LYNCH INTERNATIONAL LIMITED
------------------------
The date of this Prospectus is April , 1994.
<PAGE> 91
[ALTERNATE INSIDE FRONT COVER PAGE FOR INTERNATIONAL PROSPECTUS]
IN CONNECTION WITH THE OFFERINGS, MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at Room 1024 at the public reference facilities maintained
by the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as
the Regional Offices of the Commission at Northwestern Atrium Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661-2511 and 7 World Trade
Center, New York, New York 10048, and copies can be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at the prescribed rates. Reports and other information
concerning the Company can also be inspected at the office of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered by this Prospectus. This Prospectus does not
contain all the information set forth in the Registration Statement and exhibits
thereto. In addition, certain documents filed by the Company with the Commission
have been incorporated in this Prospectus by reference. See "Incorporation of
Certain Documents by Reference." For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, and the documents incorporated herein
by reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated herein by reference are the Company's Annual Report on Form
10-K and 10-K/A for the fiscal year ended December 31, 1993 and Current Reports
on Form 8-K, 8-K/A and 8-K/A-1 dated February 14, 1994 filed pursuant to Section
13 of the Exchange Act with the Commission.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of the Securities shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge upon written or oral request by any
person to whom this Prospectus is delivered a copy of any or all of the
documents described above which have been incorporated by reference in this
Prospectus, other than exhibits to such documents. Such request should be
directed to the Company at its principal executive offices, to the attention of
Robert J. Fitzsimmons, Vice President-Treasurer, GFC Financial Corporation, Dial
Tower, 1850 N. Central Avenue, Phoenix, Arizona 85004, telephone number (602)
207-4900.
<PAGE> 92
[ALTERNATE SECTION FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions set forth in the International purchase
agreement (the "International Purchase Agreement"), the Company has agreed to
sell to each of the international underwriters named below (the "International
Managers"), and each of the International Managers, for whom Merrill Lynch
International Limited is acting as lead manager (the "Lead Manager"), severally
has agreed to purchase, the number of shares of Common Stock set forth opposite
its name below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch International Limited.......................................
---------
Total........................................................... 1,400,000
---------
---------
</TABLE>
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with Merrill Lynch, Pierce, Fenner & Smith Incorporated
as a representative (the "U.S. Representative") and certain other underwriters
within the United States and Canada (collectively, the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters"). Subject to the
terms and conditions set forth in the U.S. Purchase Agreement, the Company has
agreed to sell to the U.S. Underwriters, and the U.S. Underwriters severally
have agreed to purchase, an aggregate of shares of Common Stock.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Common Stock being sold pursuant to such Purchase
Agreement if any of the shares of Common Stock being sold pursuant to such
Purchase Agreement are purchased. Under certain circumstances, under the
Purchase Agreements, the commitments of non-defaulting Underwriters may be
increased. Each Purchase Agreement provides that the Company is not obligated to
sell, and the Underwriters named therein are not obligated to purchase, the
shares of Common Stock under the terms of the Purchase Agreement unless all of
the shares of Common Stock to be sold pursuant to the Purchase Agreements are
contemporaneously sold.
The Lead Manager has advised the Company that the International Managers
propose to offer the shares of Common Stock offered hereby to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock, and that the International Managers may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The initial public offering price per share of Common Stock and the
underwriting discount per share of Common Stock will be identical for both
Offerings.
The Company has granted to the International Managers and the U.S.
Underwriters options to purchase up to an aggregate of 210,000 and 840,000
shares of Common Stock, respectively, at the initial public offering price, less
the underwriting discount. Such options, which will expire 30 days after the
date of this Prospectus, may be exercised solely to cover over-allotments. To
the extent that the Underwriters exercise
<PAGE> 93
[ALTERNATE SECTION FOR INTERNATIONAL PROSPECTUS]
such options, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of the option
shares that the number of shares to be purchased initially by that Underwriter
is of the 7,000,000 shares of Common Stock initially purchased by the
Underwriters.
The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the International
Managers and the U.S. Underwriters are permitted to sell shares of Common Stock
to each other.
The Company and Samuel L. Eichenfield, President, Chairman, Chief Executive
Officer and Director of the Company, agreed not to sell or otherwise dispose of
any shares of Common Stock or securities convertible into or exchangeable into
or exercisable for Common Stock, without the prior written consent of the U.S.
Representative and the Lead Manager, for a period of 90 days after the date of
this Prospectus.
The Company has been informed that, under the terms of the Intersyndicate
Agreement, the International Managers and any bank, broker or dealer to whom
they sell shares of Common Stock will not offer to sell or resell shares of
Common Stock to persons who are U.S. or Canadian persons or to persons they
believe intend to resell to persons who are U.S. or Canadian persons, and the
U.S. Underwriters and any dealer to whom they sell shares of Common Stock will
not offer to sell or resell shares of Common Stock to non-U.S. persons or to
non-Canadian persons or to persons they believe intend to resell to non-U.S.
persons or to non-Canadian persons, except in the case of transactions pursuant
to the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and offer for resale such number of
shares of Common Stock as the selling Underwriter or Underwriters and the
purchasing Underwriter or Underwriters may agree.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Each International Manager has agreed that it has not offered or sold and
will not offer or sell in the United Kingdom by means of any document any shares
of Common Stock offered hereby, other than to persons whose ordinary business it
is to buy or sell shares or debentures, whether as principal or agent or in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act 1985.
Each International Manager has agreed to comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom.
Each International Manager has agreed that it will only issue or pass on to
any person in the United Kingdom any document received by it in connection with
the issue of the shares of Common Stock if that person is of a kind described in
Article 9(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1988 or is a person to whom the document may otherwise
lawfully be issued or passed on.
<PAGE> 94
[ALTERNATE BACK COVER PAGE FOR INTERNATIONAL PROSPECTUS]
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Use of Proceeds....................... 7
Price Range of Common Stock and
Dividends........................... 7
Capitalization........................ 9
Selected Consolidated Financial
Data................................ 10
Pro Forma Financial Data.............. 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 26
Certain United States Tax Consequences
to Non-United States Holders........ 31
Description of Capital Stock.......... 33
Underwriting.......................... 35
Legal Matters......................... 36
Experts............................... 36
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
7,000,000 SHARES
G F C
G F C
Financial
Corporation
COMMON STOCK
------------------------
P R O S P E C T U S
------------------------
MERRILL LYNCH INTERNATIONAL LIMITED
, 1994
------------------------------------------------------
------------------------------------------------------
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated amounts of the expenses of and related to the offering are as
follows:
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission............ $ 88,308
NASD filing fees.................................................. 26,109
Printing and engraving expenses................................... 120,000*
Auditing and accounting fees and expenses......................... 100,000*
Legal fees and expenses........................................... 100,000*
Blue Sky fees and expenses........................................ 20,000*
New York Stock Exchange listing fees and expenses................. 56,795
Transfer agent fees and expenses.................................. **
Miscellaneous..................................................... **
--------
Total................................................... $
--------
--------
</TABLE>
- ---------------
* Estimated
** To be filed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the State of Delaware, the state of
incorporation of the Company, the Certificate of Incorporation and the Bylaws of
the Company provide for indemnification of directors and officers. Section 145
of the Delaware General Corporation Law provides generally that a person sued as
a director, officer, employee or agent of a corporation may be indemnified by
the corporation for reasonable expenses, including attorneys' fees, if, in cases
other than actions brought by or in the right of the corporation, he or she has
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation (and in the case of a
criminal proceeding, had no reasonable cause to believe that his or her conduct
was unlawful). Section 145 provides that no indemnification for any claim or
matter may be made, in the case of an action brought by or in the right of the
corporation, if the person has been adjudged to be liable, unless the Court of
Chancery or other court determines that indemnity is fair and reasonable despite
the adjudication of liability. Indemnification is mandatory in the case of a
director, officer, employee or agent who has been successful on the merits, or
otherwise, in defense of a suit against him or her. The determination of whether
a director, officer, employee or agent should be indemnified is made by
independent legal counsel selected by the director, officer, employee or agent,
approved by the Company's Board of Directors and retained by the Board of
Directors on behalf of the Company.
Directors and officers of the Company are covered under policies of
directors' and officers' liability insurance with coverage aggregating
$100,000,000. The directors serving the Company are parties to Indemnification
Agreements with the Company (the "Indemnification Agreements"). The
Indemnification Agreements provide substantially the same scope of coverage
afforded by provisions in the Certificate of Incorporation and the Bylaws and
are designed to provide greater assurance to the directors that indemnification
will be available because as contracts, the Indemnification Agreements may not
be unilaterally modified by the Company's Board of Directors or stockholders.
The Indemnification Agreements are generally intended to provide indemnification
for any amounts a director is legally obligated to pay because of claims arising
out of the director's service to the Company or any other subsidiary of the
Company.
II-1
<PAGE> 96
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<S> <C>
1.1 Form of U.S. Purchase Agreement*
1.2 Form of International Purchase Agreement*
4.1 Certificate of Incorporation of the Company (incorporated by reference from the
Company's Registration Statement on Form S-1, SEC File No. 33-45452, Exhibit 3.2
(the "Company Registration Statement"))
4.2 Bylaws of the Company (incorporated by reference from the Company's Form 10-K for
the fiscal year ending December 31, 1993, Exhibit 3.B)
4.3 Rights Agreement dated as of February 15, 1992 between the Company and The Valley
National Bank of Arizona (now Bank One of Arizona), as Rights Agent (incorporated
by reference from the Company Registration Statement, Annex V to Prospectus and
Exhibit 4.1)
5.1 Opinion of Gibson, Dunn & Crutcher*
23.1 Consent of Deloitte and Touche
23.2 Consent of KPMG Peat Marwick
23.3 Consent of Coopers & Lybrand
23.2 Consent of Gibson, Dunn & Crutcher (included in its opinion filed as Exhibit 5.1)*
24.1 Power of Attorney (included on page II-3)
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended (the "Act"), each filing
of the Company's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The Company hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-2
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on April 1, 1994.
GFC Financial Corporation
By: /s/ SAMUEL L. EICHENFIELD
Samuel L. Eichenfield
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Samuel L.
Eichenfield, Robert J. Fitzsimmons and William J. Hallinan, or any one or more
of them, as such person's true and lawful attorney-in-fact and agent with full
power of substitution for such person and in such person's names, place and
stead, in any and all capacities, to sign and to file with the Securities and
Exchange Commission, any and all amendments and post-effective amendments to
this Registration Statement, with exhibits thereto and other documents in
connection therewith, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or any substitute therefor,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES CAPACITY DATE
- --------------------------------------------- --------------------------------- --------------
<C> <S> <C>
/s/ G. ROBERT DURHAM Director April 1, 1994
G. Robert Durham
/s/ SAMUEL L. EICHENFIELD Director, Chairman, President and April 1, 1994
Samuel L. Eichenfield Chief Executive Officer
/s/ JAMES L. JOHNSON Director April 1, 1994
James L. Johnson
/s/ L. GENE LEMON Director April 1, 1994
L. Gene Lemon
/s/ KENNETH R. SMITH Director April 1, 1994
Kenneth R. Smith
</TABLE>
II-3
<PAGE> 98
<TABLE>
<CAPTION>
SIGNATURES CAPACITY DATE
- --------------------------------------------- --------------------------------- --------------
<C> <S> <C>
/s/ ROBERT P. STRAETZ Director April 1, 1994
Robert P. Straetz
/s/ SHOSHANA B. TANCER Director April 1, 1994
Shoshana B. Tancer
/s/ JOHN W. TEETS Director April 1, 1994
John W. Teets
/s/ ROBERT J. FITZSIMMONS Vice-President-Treasurer April 1, 1994
Robert J. Fitzsimmons (Principal Financial
Officer)
/s/ BRUNO A. MARSZOWSKI Vice President-Controller April 1, 1994
Bruno A. Marszowski (Principal Accounting Officer)
</TABLE>
II-4
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- ------------
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1.1 Form of U.S. Purchase Agreement*
1.2 Form of International Purchase Agreement*
4.1 Certificate of Incorporation of the Company (incorporated by
reference from the Company's Registration Statement on Form S-1, SEC
File No. 33-45452, Exhibit 3.2 (the "Company Registration
Statement"))
4.2 Bylaws of the Company (incorporated by reference from the Company's
Form 10-K for the fiscal year ending December 31, 1993, Exhibit 3.B)
4.3 Rights Agreement dated as of February 15, 1992 between the Company
and The Valley National Bank of Arizona (now Bank One of Arizona), as
Rights Agent (incorporated by reference from the Company Registration
Statement, Annex V to Prospectus and Exhibit 4.1)
5.1 Opinion of Gibson, Dunn & Crutcher*
23.1 Consent of Deloitte and Touche
23.2 Consent of KPMG Peat Marwick
23.3 Consent of Coopers & Lybrand
23.2 Consent of Gibson, Dunn & Crutcher (included in its opinion filed as
Exhibit 5.1)*
24.1 Power of Attorney (included on page II-3)
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* To be filed by amendment.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference and to the use in this
Registration Statement of GFC Financial Corporation on Form S-3 of our reports
dated March 4, 1994, appearing in the Annual Report on Form 10-K of GFC
Financial Corporation for the year ended December 31, 1993 and appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE
Phoenix, Arizona
April 1, 1994
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the registration statement (No.
33- ) on Form S-3 of GFC Financial Corporation of our report on Fleet
Factors Corporation (a wholly-owned subsidiary of Fleet Financial Group, Inc.)
dated January 28, 1994, relating to the balance sheets 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, which report appears in the February
14, 1994 Form 8-K of GFC Financial Corporation and to the reference to our Firm
under the heading "Experts" in the prospectus, which is part of the registration
statement.
KPMG PEAT MARWICK
PROVIDENCE, RHODE ISLAND
APRIL 1, 1994
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EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and incorporation by reference in the
registration statement of GFC Financial Corporation on Form S-3 (File No.
33- ) of our report dated February 7, 1994 on our audits of the
consolidated financial statements of TriCon Capital Corporation -- Predecessor
Business, which report is included in this registration statement and the Annual
Report on Form 10-K of GFC Financial Corporation and includes an explanatory
paragraph for certain accounting changes. We also consent to the reference to
our firm under the caption "Experts."
COOPERS & LYBRAND
NEW YORK, NEW YORK
APRIL 1, 1994
