<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20594
--------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------
For the Fiscal Year Ended December 31, 1995 Commission File Number 1-7543
FINOVA CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-1278569
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1850 North Central Ave., P. O. Box 2209
Phoenix, AZ 85002-2209
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code - 602-207-4900
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
$175,000,000 Principal Amount of New York Stock Exchange
9-1/8% Notes Due February 27, 2002
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S- K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. / /
As of March 13, 1996, 25,000 shares of Common Stock ($0.01 par value) were
outstanding and held by an affiliate.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE
Part Where
Document Incorporated
NONE
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<PAGE> 2
TABLE OF CONTENTS
Name of Item
<TABLE>
<CAPTION>
Item #
- ----------------- ----------
<S> <C>
Part I
Item 1 Business:
Introduction 1
General 1
Lines of Business 2
Portfolio Composition 3
Investment in Financing Transactions 3
Cost and Utilization of Borrowed Funds 11
Credit Ratings 13
Residual Realization Experience 13
Business Development and Competition 14
Credit Quality 14
Risk Management 14
Portfolio Management 16
Delinquencies and Workouts 16
Governmental Regulation 16
Employees 17
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Stockholder Matters 17
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8 Financial Statements & Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 18
Part III
Item 10 Directors & Executive Officers of the Registrant 18
Item 11 Executive Compensation 18
Item 12 Security Ownership of Certain Beneficial Owners & Management 18
Item 13 Certain Relationships & Related Transactions 18
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to FINOVA Capital Corporation
(formerly known as Greyhound Financial Corporation) and its subsidiaries
(collectively "FINOVA" or the "Company"), including Ambassador Factors
("Ambassador") acquired on February 14, 1994 and TriCon Capital ("TriCon")
acquired on April 30, 1994. Both Ambassador and TriCon were merged into FINOVA
in 1994.
FINOVA is a wholly owned subsidiary of the FINOVA Group Inc. ("FINOVA
Group"). FINOVA Group is the successor to the former financial services
businesses of The Dial Corp ("Dial"). On March 18, 1992, Dial consummated the
spin-off (the "Spin-Off") of FINOVA Group by distributing one share of FINOVA
Group's common stock (the "shares") for every two shares of Dial common stock
held by each stockholder. Prior to the Spin-Off, Dial contributed to the Company
its 100% interest in FINOVA Capital Limited ("FCL") (formerly known as Greyhound
European Financial Group), Dial's European commercial and consumer finance
businesses not previously managed by the Company, and Greyhound BID Holding
Corp. ("Greyhound BID") and contributed all of the common stock of the Company
to FINOVA Group.
The historical consolidated financial statements of FINOVA have been
retroactively restated to include the accounts and results of operations of FCL
and Greyhound BID 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.
GENERAL
FINOVA is a financial services company primarily engaged in providing
collateralized financing and leasing products to commercial enterprises in
focused market niches, principally in the United States.
FINOVA was incorporated in 1965 in Delaware and is the successor to a
California corporation that commenced operations in 1954. FINOVA has conducted
business continuously since that time. Foreign financial services are provided
primarily in the United Kingdom, where FCL has provided such services since
1964. Domestic and foreign financial operations prior to the Spin-Off had been
conducted independently of each other for many years. Following the Spin-Off,
they have been conducted as a consolidated enterprise; however, subsequent to
the Spin-Off, FINOVA announced its intention to phase out the London based
financing operations of FCL. In early 1996, this phase out was substantially
completed.
FINOVA extends revolving credit facilities, term loans and equipment
and real estate financing to "middle-market" businesses with financing needs
falling generally between $500,000 to $35 million. FINOVA also offers sales
financing programs to manufacturers, distributors, vendors and franchisors which
facilitate sales of their products to customers. FINOVA currently operates
primarily in 14 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 it to differentiate itself from its
competitors and to command product 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, although there can be no assurance that competitive changes,
borrowers' performance or economic conditions will not result in an adverse
impact on the Company's results of operations or financial condition.
FINOVA generates interest and other income through charges assessed on
outstanding loans, loan servicing, leasing and other fees. FINOVA's primary
expenses are the costs of funding its loan and lease business (including
interest paid on debt), provisions for possible credit losses, marketing
expenses, salaries and employee benefits, servicing and other operating expenses
and income taxes.
1
<PAGE> 4
LINES OF BUSINESS
FINOVA's activities currently include the following principal lines of business:
* Commercial Equipment Finance offers equipment leases, loans
and "turnkey" financing to the supermarket, manufacturing,
packaging and general aviation industries. Typical transaction
sizes are $500,000 to $15 million.
* Commercial Finance offers collateral-oriented revolving credit
facilities and term loans for manufacturers, distributors,
wholesalers and service companies. Typical transaction sizes
range from $500,000 to $3 million.
* Commercial Real Estate Finance provides cash-flow-based
financing primarily for acquisitions and refinancings to
experienced real estate developers and owner/occupants of
income-producing properties in the United States. FINOVA
concentrates on secured financing opportunities, generally
between $5 million and $25 million, involving senior mortgage
term loans on owner-occupied commercial real estate. FINOVA's
portfolio of real estate leveraged leases is also managed as
part of the commercial real estate portfolio.
* Communications Finance specializes in radio and television
financing. Other markets include cable television, print and
outdoor media services in the United States. FINOVA extends
secured loans to communications businesses requiring funds for
recapitalizations, refinancings or acquisitions. Loan sizes
generally are from $1 million to $40 million.
* Corporate Finance provides financing, generally in the range
of $2 million to $40 million, focusing on middle market
businesses nationally, including distribution, wholesale,
specialty retail, manufacturing and services industries. The
group's lending is primarily in the form of revolving credit
facilities and term loans secured by the assets of the
borrower, with significant emphasis on the borrower's cash
flow as the source of repayment of the secured loan.
* Factoring Services provides full service factoring and
accounts receivable management services for entrepreneurial
and larger firms, operating primarily in the textile and
apparel industries. The annual factored volume of these
companies is generally between $5 million and $25 million.
* Franchise Finance offers equipment, real estate and
acquisition financing programs for operators of established
franchise concepts. The equipment leased to the ultimate
end-user is typically purchased by FINOVA from the equipment
manufacturer, vendor or dealer selected by the end-user.
Transaction sizes generally range from $500,000 to $15
million.
* Government Finance provides primarily tax-exempt financing to
state and local governments and non-profit corporations.
Typical transaction sizes range from $100,000 to $5 million.
* Inventory Finance provides inventory financing, combined
inventory/accounts receivable lines of credit and purchase
order financing for equipment distributors, value-added
resellers and dealers. Transaction sizes generally range from
$500,000 to $30 million.
* Manufacturer and Dealer Services provides 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 $100,000).
The equipment which FINOVA leases to the ultimate end-user is
typically sold to FINOVA by the vendor participating in the
financing program.
* Medical Finance offers a full range of equipment and real
estate financing and asset management services for the U.S.
health care industry, targeting middle market health care
providers in the United States. Transaction sizes typically
range from $500,000 to $25 million.
2
<PAGE> 5
* Rediscount Finance offers $1 million to $35 million revolving
credit lines to regional consumer finance companies, which in
turn extend credit to consumers. FINOVA's customers provide
credit to consumers to finance home improvements, automobile
purchases, insurance premiums and a variety of other financial
needs.
* Resort Finance 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, Resort Finance provides
loans and lines of credit ranging from $5 million to $30
million for construction, acquisitions, receivables financing
and purchases and other uses. Through FINOVA Portfolio
Services, Inc., Resort Finance offers expanded convenience and
service to its customers. Professional receivables collections
and cash management give developers the ability of having
loan-related administrative functions performed for them by
FINOVA.
* Transportation Finance/Capital Services structures secured
financings for specialized areas of the transportation
industry, principally involving domestic and foreign used
aircraft, some new aircraft, as well as domestic short-line
railroads including new and used rail equipment. Typical
transactions range from $5 million to $30 million and involve
financing up to 80% of the fair market value of used equipment
and as equity participants in leveraged lease transactions.
Traditionally focused on the domestic marketplace, FINOVA
Transportation Finance has been active in international
aircraft lending and leasing since 1992 through an office in
London, England. Through its Capital Services activity, FINOVA
also provides leveraged lease financing on transportation
equipment.
PORTFOLIO COMPOSITION
The total assets under the management of the Company consist of the
Company's net investment in financing contracts plus certain assets that are
owned by others but managed by the Company and are not reported on the
Company's balance sheet ("securitized assets").
The Company's investment in financing transactions is primarily settled
in U.S. dollars, except for approximately $36 million, $87 million and $100
million at December 31, 1995, 1994 and 1993, respectively, which is primarily
due in British pounds. The exchange rate of British pounds to dollars at
December 31, 1995, 1994 and 1993 was 1.55:1, 1.57:1 and 1.48:1, respectively.
INVESTMENT IN FINANCING TRANSACTIONS
The following tables detail FINOVA's investment in financing
transactions (before reserve for possible credit losses) at December 31, 1995,
1994, 1993, 1992 and 1991. Under Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"),
in-substance foreclosed assets are accounted for as loans, rather than
repossessed assets. The Company adopted SFAS 114, effective January 1, 1995,
resulting in the reclassification of nonaccruing in-substance foreclosed assets
to nonaccruing loans. The tables for years prior to 1995 have been restated to
reflect this change in classification; accordingly, in-substance foreclosed
assets of $25.3 million, $31.7 million, $13.2 million and $0 have been
reclassified from repossessed assets to loans at December 31, 1994, 1993, 1992
and 1991, respectively.
3
<PAGE> 6
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1995 % 1994 % 1993 %
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, conditional sale and other
financing contracts:
Commercial $ 3,439,687 50.4 $ 2,797,160 49.4 $ 1,397,863 49.1
Real estate 1,534,177 22.5 1,237,488 21.8 945,892 33.2
Direct financing leases 828,713 12.1 774,834 13.6 71,812 2.5
Operating leases 460,798 6.8 412,782 7.3 147,222 5.2
Leveraged leases 366,196 5.4 287,518 5.1 283,782 10.0
Factored receivables 189,486 2.8 157,862 2.8
------------ ------- ------------- ------- ----------- -------
Total investment in financing transactions 6,819,057 100.0 5,667,644 100.0 $ 2,846,571 100.0
======= ======= =========== =======
Securitized assets 303,304 253,386
------------ -------------
Total managed assets $ 7,122,361 $ 5,921,030
============ =============
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1992 % 1991 %
----------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, conditional sales and other
financing contracts:
Commercial $ 1,085,502 43.7 $ 967,693 42.4
Real estate 891,190 35.8 772,285 33.9
Direct financing leases 138,871 5.6 201,327 8.8
Operating leases 100,911 4.1 75,204 3.3
Leveraged leases 269,370 10.8 265,363 11.6
Factored receivables
------------ ---------- -------------- ----------
Total investment in financing transactions $ 2,485,844 100.0 $ 2,281,872 100.0
============ ========== ============== ==========
Securitized assets
Total managed assets
</TABLE>
4
<PAGE> 7
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
-------------------------------- -------------------------------
Repos- Repos- Total
Original Impaired sessed sessed Lease & Carrying
Rate (1) Assets Impaired Assets Other Amount %
(2)
-------------------------------- ------------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort Finance $ 943,661 $ 2,849 $12,064 $ 2,583 $26,559 $ $ 987,716 14.5
Transportation Finance (3) 929,043 929,043 13.6
Commercial Real Estate Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 11.5
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.1
Corporate Finance (4) 631,295 5,274 19,592 335 656,496 9.6
Manufacturer & Dealer Services (4) 443,474 108 24,637 468,219 6.9
Medical Finance 454,262 81 1,231 455,574 6.7
Commercial Equipment Finance 345,039 69 6,079 351,187 5.2
Rediscount Finance 345,264 345,264 5.1
Franchise Finance 327,356 1,462 6,408 1,850 337,076 4.9
Commercial Finance 200,365 12,685 213,050 3.1
Inventory Finance 202,879 430 203,309 3.0
Factoring Services 188,892 594 189,486 2.8
Government Finance 121,956 47 122,003 1.8
Other 78,645 1,275 2,360 6,061 88,341 1.2
---------- ------- ------- ------- ------- ------- ---------- -----
TOTAL (4) $6,577,340 $17,260 $56,585 $76,991 $49,988 $40,893 $6,819,057 100.0
========== ======= ======= ======= ======= ======= ========== =====
</TABLE>
- --------------------
NOTES:
(1) Consists of troubled debt restructurings.
(2) The Company earned income totaling $4.2 million on repossessed assets
during 1995, including $3.2 million in Commercial Real Estate Finance,
$0.6 million in Resort Finance and $0.4 million in Communications
Finance.
(3) Transportation Finance includes $144 million of aircraft financing
business booked through the London office.
(4) Excludes $303 million of assets securitized which the Company manages,
including $200 million in Corporate Finance and $103 million in
Manufacturer and Dealer Services.
--------------------
5
<PAGE> 8
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
-------------------------------- -----------------------------
Repos-
sessed Delin- Repos- Leases Total
Original Rewritten Assets quent sessed & Carrying
Rate Contracts (1) Loans Assets Other Amount %
------------------------------- ----------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort Finance $ 634,735 $ 4,506 $ 7,314 $ 2,582 $30,393 $ $ 679,530 12.0
Transportation Finance (2) 706,242 14,620 720,862 12.7
Commercial Real Estate 672,522 7,237 40,510 7,622 21,519 749,410 13.2
Finance
Communications Finance 551,218 6,288 7,282 17,377 5,863 671 588,699 10.4
Corporate Finance 746,671 21,275 6,952 2,674 777,572 13.8
Manufacturer and Dealer
Services (3) (4) 301,251 113 19,715 321,079 5.7
Medical Finance 470,717 1,719 472,436 8.3
Commercial Equipment 293,609 769 7,589 301,967 5.3
Finance
Rediscount Finance 99,353 99,353 1.8
Franchise Finance 281,890 7,632 12,242 301,764 5.3
Commercial Finance 181,741 12,003 193,744 3.4
Inventory Finance 58,595 642 59,237 1.0
Factoring Services 157,090 772 157,862 2.8
Government Finance 93,491 144 93,635 1.7
FINOVA Capital Limited (5) 93,700 1,561 4,265 2 4,800 104,328 1.8
Other 36,951 8,918 297 46,166 0.8
---------- ------- -------- ------- ------- ------- ---------- -----
TOTAL (4) $5,379,776 $64,001 $ 55,106 $73,519 $60,451 $34,791 $5,667,644 100.0
========== ======= ======== ======= ======= ======= ========== =====
</TABLE>
- --------------------
NOTES:
(1) The Company earned income totaling $3.3 million on repossessed assets
during 1994, including $2.0 million in Commercial Real Estate Finance,
$0.8 million in Communications Finance and $0.5 million in Resort
Finance.
(2) Transportation Finance included $66.9 million of aircraft finance
business booked through the London office. (3) Manufacturer and Dealer
Services accounts were generally considered nonaccruing after being 120
days delinquent.
(4) Excluded $253.4 million of assets securitized which the Company
managed.
(5) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's
London office, including Transportation Finance transactions prior to
July 1, 1993. Also, FINOVA Capital Limited included $39.2 million of
Consumer Finance assets, of which $4.8 million were nonaccruing.
Consumer Finance accounts were generally considered nonaccruing after
being 180 days delinquent.
--------------------
6
<PAGE> 9
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing
-------------------------------------------------
Repos-
sessed
Original Rewritten Assets
Rate Contracts (4)
-------------------------------------------------
<S> <C> <C> <C>
Resort Finance $ 530,617 $ 4,869 $ 12,163
Transportation Finance (1) (2) 604,416
Commercial Real Estate Finance (1) 500,598 1,574 27,844
Communications Finance 487,890 7,989 8,949
Corporate Finance (1) 397,779 27,921
Rediscount Finance 19,439
FINOVA Capital Limited (3) 107,486 4,430
--------------- -------------- ----------
$ 2,648,225 $ 46,783 $ 48,956
=============== ============== ==========
</TABLE>
<TABLE>
<CAPTION>
Nonaccruing
---------------------------------------------------
Delin- Repos- Leases Total
quent sessed & Carrying
Loans Assets Other Amount %
--------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Resort Finance $ 11,597 $ 7,404 $ 440 $ 567,090 19.9
Transportation Finance (1) (2) 841 605,257 21.2
Commercial Real Estate Finance (1) 5,759 20,838 556,613 19.6
Communications Finance 21,730 11,564 538,122 18.9
Corporate Finance (1) 4,243 5,462 386 435,791 15.3
Rediscount Finance 19,439 0.7
FINOVA Capital Limited (3) 2,720 23 9,600 124,259 4.4
-------------- --------------- ------------ ---------------- -----------
$ 46,890 $ 45,291 $ 10,426 $ 2,846,571 100.0
============== =============== ============ ================ ===========
</TABLE>
- --------------------
NOTES:
(1) Reclassifications (effective January 1, 1993): Approximately $169
million of accruing assets were reclassified from Corporate Finance
with $163 million going to Transportation Finance because they
primarily represented aircraft financing and $6 million to Commercial
Real Estate Finance. Additionally, $6.5 million of nonaccruing assets
($5.1 million classified as repossessed assets and $1.4 million
classified as 90 days delinquent) were reclassified from Corporate
Finance to Commercial Real Estate Finance.
(2) Transportation Finance included $31.9 million of aircraft finance
business booked through the London office.
(3) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's
London office, including Transportation Finance transactions prior to
July 1, 1993. Also, FINOVA Capital Limited included $45.3 million of
Consumer Finance assets, of which $9.6 million were nonaccruing.
Consumer Finance accounts were generally considered nonaccruing after
being 180 days delinquent.
(4) The Company earned income totaling $2.7 million on repossessed accruing
assets during 1993, including $1.5 million in Commercial Real Estate
Finance, $0.6 million in Communications Finance and $0.6 million in
Resort Finance.
--------------------
7
<PAGE> 10
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1992
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing
----------------------------------------------------
Repos-
Original Rewritten sessed
Rate Contracts Assets
(3)
----------------------------------------------------
<S> <C> <C> <C>
Resort Finance $ 488,224 $ 1,356 $
Transportation Finance 328,962
Commercial Real Estate Finance 463,571 12,482 21,509
Communications Finance 382,914 32,548
Corporate Finance (1) 477,327 16,081
FINOVA Capital Limited (2) 154,609 5,839
-------------- --------------- -------------
$ 2,295,607 $ 68,306 $ 21,509
============== =============== =============
</TABLE>
<TABLE>
<CAPTION>
Nonaccruing
----------------------------------------------
Delin- Repos- Leases
quent sessed & Carrying
Loans Assets Other Amount %
---------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Resort Finance $ 6,524 $ 7,365 $ 635 $ 504,104 20.3
Transportation Finance 328,962 13.2
Commercial Real Estate Finance 6,302 15,052 518,916 20.9
Communications Finance 8,744 13,182 437,388 17.6
Corporate Finance (1) 14,436 5,111 611 513,566 20.7
FINOVA Capital Limited (2) 6,000 60 16,400 182,908 7.3
------------- ------------ ----------- ----------------- ------
$ 42,006 $ 40,770 $ 17,646 $ 2,485,844 100.0
============= ============ =========== ================= ======
</TABLE>
- --------------------
NOTES:
(1) Included $5.1 million of public sector Latin American loans that were
written-down to estimated market value. During 1992, FINOVA
successfully liquidated 72% of the face value of public sector Latin
American loans at favorable market prices, which were approximately
$3.1 million in excess of the carrying amount.
(2) The FINOVA Capital Limited balance included transactions in Europe and
other countries (including the U.S.) originated from the Company's
London office, including Transportation Finance transactions prior to
July 1, 1993. FINOVA Capital Limited included $57.8 million of Consumer
Finance assets, of which $16.4 million were nonaccruing. Consumer
Finance accounts were generally considered nonaccruing after being 180
days delinquent.
(3) The Company earned income of $1.9 million on repossessed accruing
assets in Commercial Real Estate Finance during 1992.
---------------------
8
<PAGE> 11
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1991
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing
-----------------------------------------
Original Rewritten
Terms Contracts
-----------------------------------------
<S> <C> <C>
Resort Finance $ 430,113 $ 1,511
Transportation Finance 223,803
Commercial Real Estate 431,097 15,734
Finance
Communications Finance 321,918 12,340
Corporate Finance 429,053 14,594
FINOVA Capital Limited (1) 263,995 5,095
Latin America (2) 21,323
------------------ ----------------
$ 2,121,302 $ 49,274
================== ================
</TABLE>
<TABLE>
<CAPTION>
Nonaccruing Total
--------------------------------------------------------
Delinquent Repossessed Leases Carrying
&
Loans Assets Other Amount %
-------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
Resort Finance $ $ 7,317 $ 1,056 $ 439,997 19.3
Transportation Finance 223,803 9.8
Commercial Real Estate 10,504 20,002 477,337 20.9
Finance
Communications Finance 16,636 350,894 15.4
Corporate Finance 7,386 3,694 454,727 19.9
FINOVA Capital Limited (1) 11,975 826 31,900 313,791 13.8
Latin America (2) 21,323 0.9
---------------- ------------------ ------------ ------------------ ------------
$ 46,501 $ 28,145 $ 36,650 $ 2,281,872 100.0
================ ================== ============ ================== ============
</TABLE>
- --------------------
NOTES:
(1) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's
London office, including Transportation Finance transactions prior to
July 1, 1993. Also, FINOVA Capital Limited included $94.3 million of
Consumer Finance assets of which $31.9 million were nonaccruing.
Consumer Finance accounts were generally considered nonaccruing after
being 180 days delinquent.
(2) Included $15.5 million of Latin American loans written-down to market
value.
--------------------
9
<PAGE> 12
The Company's geographic portfolio diversification at December 31, 1995
was as follows:
<TABLE>
<CAPTION>
State Total Percent
- ----------------------------------- --------------------- ---------------
<S> <C> <C>
California $ 961,301 14.1%
Texas 597,285 8.8%
Florida 501,169 7.4%
New York 398,784 5.8%
Pennsylvania 297,039 4.4%
New Jersey 241,404 3.5%
Michigan 236,177 3.5%
Arizona 233,193 3.4%
Illinois 229,773 3.4%
Nevada 206,671 3.0%
Virginia 183,102 2.7%
Other (1) 2,733,159 40.0%
----------------- -----------
$ 6,819,057 100.0%
================= ==========
</TABLE>
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis,
represent less than 2% of the total and international, which represents
approximately 4% of the total.
--------------------
The following is an analysis of the reserve for possible credit losses
for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 122,233 $ 64,280 $ 69,291 $ 87,600 $ 77,098
Provision for possible credit
losses (1) 47,300 16,670 5,706 6,740 77,687
Write-offs (1) (35,533) (35,127) (12,575) (23,661) (68,346)
Recoveries 2,216 1,898 717 749 663
Other (including addition of TriCon
and Ambassador reserves in 1994) 4,117 74,512 1,141 (2,137) 498
--------------- -------------- -------------- ------------- --------------
Balance, end of year $ 140,333 $ 122,233 $ 64,280 $ 69,291 $ 87,600
=============== ============== ============== ============= ==============
</TABLE>
- --------------------
NOTE:
(1) In 1991, the Company recorded a special provision for possible credit
losses of $65 million and recorded a $47.8 million write-down of Latin
American assets and recorded write-offs of $15 million in the foreign
operations (FCL) portfolio.
--------------------
The reserve for possible credit losses includes $16 million and $13
million at December 31, 1995 and 1994, respectively, of reserves applicable to
securitizations previously classified as accrued liabilities.
Included in the above is a specific impairment reserve of $15.7 million
at December 31, 1995, which applies to $35.2 million of the $94.3 million of
impaired loans. The remaining $124.6 million of the reserve for possible credit
losses is designated for general purposes and represents management's estimate
of the amount to cover potential losses in the portfolio considering
delinquencies, loss
10
<PAGE> 13
experience and collateral. Additions to general and specific reserves are
reflected in current operations. Management may transfer reserves between the
general and specific reserves as considered necessary.
Write-offs by line of business, experienced by the Company during the years
ended December 31, were as follows:
WRITE-OFFS BY LINE OF BUSINESS
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Manufacturer and Dealer Services (1) $ 9,902 $ 7,018 $ $ $
Corporate Finance 4,660 4,233 3,741 1,000 668
Communications Finance 4,037 8,300 1,488 1,500 1,200
Factoring Services (2) 3,728 1,148
Franchise Finance (1) 3,448 2,247
Commercial Real Estate Finance 2,275 1,461 2,320 4,417 2,204
Commercial Equipment Finance (1) 2,271 1,257
Resort Finance 2,000 2,730 330
FINOVA Capital Limited (3) 1,523 5,140 5,026 15,838 15,593
Commercial Finance (1) 452 774
Medical Finance (1) 314 377
Inventory Finance (1) 201 442
Latin America (3) 47,759
Other 722 906 592
--------------- -------------- -------------- -------------- -------------
$ 35,533 $ 35,127 $ 12,575 $ 23,661 $ 68,346
=============== ============== ============== ============== =============
Write-offs as a percentage
of managed assets 0.50% 0.59% 0.44% 0.95% 3.00%
=============== ============== ============== ============== =============
</TABLE>
- --------------------
NOTES:
(1) These Lines of Business were not part of the Company's portfolio prior
to May, 1994.
(2) This Line of Business was not part of the Company's portfolio prior to
February, 1994.
(3) In the fourth quarter of 1991, the Company recorded a special provision
for possible credit losses of $65.0 million and recorded write-offs of
$15.0 million related to nonearning assets in the FCL (foreign)
portfolio and a $47.8 million write-down to reduce Latin American
assets to current market value.
--------------------
A further breakdown of the portfolio by line of business can be found
in Note C of Notes to Consolidated Financial Statements in Annex A.
COST AND UTILIZATION OF BORROWED FUNDS
FINOVA relies on borrowed funds as well as internal cash flow to
finance its operations. FINOVA follows a policy of relating provisions under its
loans and leases to the terms on which it obtains funds so that, to the extent
feasible, floating-rate assets are funded with floating-rate borrowings and
fixed-rate assets are funded with fixed-rate borrowings. For further discussion
on FINOVA's debt and matched funding policy, see Notes E and F of Notes to
Consolidated Financial Statements included in Annex A.
11
<PAGE> 14
The following table reflects the approximate average pre-tax effective
cost of borrowed funds and pre-tax equivalent rate earned on accruing assets for
FINOVA for each of the periods listed:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term and variable rate long-term debt (1) 7.2% 5.5% 4.7% 5.3% 8.1%
Fixed-rate long-term debt (1) 7.3% 8.1% 11.4% 10.6% 10.9%
Aggregate borrowed funds (1) 7.2% 6.3% 6.3% 7.2% 9.3%
Rate earned on average earning assets (2) (3) 12.5% 11.6% 10.8% 11.9% 13.6%
Spread percentage (4) 5.8% 6.0% 5.4% 5.1% 4.9%
</TABLE>
- ---------------------
NOTES:
(1) Includes the effect of interest rate swap agreements.
(2) Earning assets are net of average nonaccruing assets and average
deferred taxes applicable to leveraged leases.
(3) Earned amounts are net of depreciation and include gains on sale of
assets.
(4) Spread percentages represent interest margins earned as a percentage of
average earning assets.
--------------------
The effective costs presented above include costs of commitment fees
and related borrowing costs and do not purport to predict the costs of funds in
the future.
For further information on FINOVA's cost of funds, refer to Notes E and
F of the Notes to Consolidated Financial Statements included in Annex A.
Following are the ratios of income to combined fixed charges and
preferred stock dividends ("ratio") for each of the past five years:
Year Ended December 31,
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1.43 1.54 1.46 1.34 ---
============= ================ ================ ================ ================
</TABLE>
Variations in interest rates generally do not have a substantial impact
on the ratio because fixed-rate and floating-rate assets are generally matched
with liabilities of similar rate and term.
Income available for fixed charges, for purposes of the computation of
the ratio of income to combined fixed charges and preferred stock dividends,
consists of the sum of income before income taxes and fixed charges. Combined
fixed charges include interest and related debt expense and a portion of rental
expense determined to be representative of interest and preferred stock
dividends grossed up to a pre-tax basis.
For the year ended December 31, 1991, earnings were inadequate to cover
combined fixed charges by $37.0 million. The decline in the ratio in 1991 was
due to restructuring and other charges and transaction costs recorded in the
fourth quarter of 1991. Those charges and costs were recorded in connection with
the Spin-Off.
12
<PAGE> 15
CREDIT RATINGS
FINOVA currently has investment-grade credit ratings from the following
rating agencies:
<TABLE>
<CAPTION>
Commercial Senior
Paper Debt
------------------ ----------------
<S> <C> <C>
Duff & Phelps Credit Rating Co. D1- A-
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 BBB+
</TABLE>
There can be no assurance that FINOVA's ratings will be maintained.
Such ratings can be modified at any time. A credit rating is not a
recommendation to buy, sell or hold securities. Each rating should be evaluated
independently of any other rating. Neither The FINOVA Group Inc. nor any of
FINOVA's subsidiaries have applied for credit ratings.
RESIDUAL REALIZATION EXPERIENCE
In the last 41 years, FINOVA has realized, in the aggregate, proceeds
from the sale of assets upon lease terminations (other than foreclosures) in
excess of carrying amounts; however, there can be no assurance that such results
will be realized in future years. Proceeds actually realized will depend on
current market values for those assets at the time of sale which are generally
beyond the control of the Company, although the Company has some discretion in
the timing of subsequent dispositions of such assets. Sales proceeds upon lease
terminations in excess of carrying amounts are reported as gains when the assets
are sold.
Income from leasing activities is affected by gains from asset sales
upon lease termination and, hence, can be somewhat less predictable than income
from non-leasing activities. During the five years ended December 31, 1995, the
proceeds to FINOVA from sales of assets upon early termination of leases and at
the expiration of leases have exceeded the respective carrying amounts and
estimated residual values as follows:
<TABLE>
<CAPTION>
Early Terminations (Notes 1, 2 and 4) Terminations at End of Lease Term (Note 3)
- ------------------------------------------------------------------------- ----------------------------------------------------
Proceeds
Proceeds Estimated as a % of
Carrying as a % of Residual Estimated
Sales Amount Carrying Sales Value of Residual
Year Proceeds of Assets Amount Proceeds Assets Value
- ------------------------------------------------------------------------- ----------------------------------------------------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
1995 $ 2,664 $ 2,018 132% $ 84,447 $ 67,186 126%
1994 6,477 5,865 110% 30,161 25,682 117%
1993 --- --- --- 486 248 196%
1992 20,493 17,527 117% 2,164 1,768 122%
1991 25,027 21,904 114% 10,114 6,553 154%
</TABLE>
Notes:
(1) Excludes foreclosures for credit reasons which are immaterial to the
above amounts.
(2) Excludes proceeds of $3.2 million in 1993 on assets held for sale.
(3) Excludes proceeds of $2.0 million in 1993 received on guarantees.
(4) Excludes gain on securitizations of $4.0 million in 1994.
--------------------
13
<PAGE> 16
The estimated residual value of direct finance and leveraged lease
assets in the accounts of FINOVA at December 31, 1995 aggregated 19.0% of the
original cost of such assets (10.2% excluding the original costs of the assets
and residuals applicable to real estate leveraged leases, which typically have
higher residuals than other leases). The financing contracts and leases
outstanding at that date had initial terms ranging generally from one to 25
years. The average initial term weighted by carrying amount at inception and the
average remaining term weighted by remaining carrying amount of financing
contracts at December 31, 1995 for financing contracts excluding leveraged
leases were 6.4 and 4.6 years, respectively, and for leveraged leases were
approximately 20 and 13 years, respectively. The comparable average initial term
and remaining term at December 31, 1994 for financing contracts excluding
leveraged leases were 6.5 and 3.7 years, respectively, and for leveraged leases
were approximately 20 and 11 years, respectively. FINOVA utilizes either
employed or outside appraisers to determine the collateral value of assets to be
leased or financed and the estimated residual or collateral value thereof at the
expiration of each lease. Actual proceeds could differ from such appraised
values.
For a discussion of accounting for lease transactions, refer to Notes A
and C of Notes to Consolidated Financial Statements included in Annex A.
BUSINESS DEVELOPMENT AND COMPETITION
FINOVA develops business primarily through direct solicitation by its
own sales force. Customers are also introduced by independent brokers and
referred by other financial institutions.
At December 31, 1995, FINOVA had 81,821 financing contracts with 65,554
customers (including 881 contracts with consumer finance customers and 75,116
small ticket contracts with 61,347 customers in Manufacturer and Dealer
Services), compared with 88,034 financing contracts with 70,892 customers
(including 2,313 contracts with consumer finance customers and 79,027 small
ticket contracts with 64,886 customers in Manufacturer and Dealer Services) at
December 31, 1994.
FINOVA is engaged in an extremely competitive activity. It competes
with banks, insurance companies, leasing companies, the credit units of
equipment manufacturers and other finance companies. Some of these competitors
have substantially greater financial resources and are able to borrow at costs
below those of FINOVA. FINOVA's principal means of competition is through a
combination of service, the interest rate charged for money and concentration in
focused market niches. The interest rate it charges for money is a function of
its borrowing costs, its operating costs and other factors. While many of
FINOVA's larger competitors are able to offer lower interest rates based upon
their lower borrowing costs, FINOVA seeks to maintain the competitiveness of the
interest rates it offers by emphasizing strict control of its operating costs.
The Company's ability to manage costs is, in part, dependent on factors beyond
the Company's control, such as the cost of funds, outside litigation expenses
and competitive salaries.
CREDIT QUALITY
As a result of the use of clearly defined underwriting standards,
portfolio management techniques, monitoring of covenant compliance and active
collections and workout efforts, FINOVA seeks to maintain a high-quality asset
base.
RISK MANAGEMENT
FINOVA generally conducts investigations of its prospective customers
through a review of historical financial statements, published credit reports,
credit references, discussions with management, analysis of location
feasibility, personal visits and collateral appraisals and inspections. In many
cases, depending upon the results of its credit investigations and the nature of
the financing being provided, FINOVA obtains additional collateral or guarantees
from others.
14
<PAGE> 17
As part of its underwriting process, FINOVA considers the management,
industry, financial position and level of collateral of a proposed obligor. The
purpose, term, amortization and amount of any proposed transaction generally
must be clearly defined and within established corporate policy. In addition,
underwriters attempt to avoid undue concentrations in any one customer, industry
or regional location.
- Management. FINOVA considers the reputation, experience and
depth of management; quality of product or service;
adaptability to changing markets and demand; and prior
banking, finance and trade relationships.
- Industry. FINOVA evaluates critical aspects of each industry
to which it lends, including general trend, seasonality and
cyclicality; governmental regulation; the effects of taxes;
the economic value of goods or services provided; and
potential environmental or other liability.
- Financial. FINOVA's review of a prospective borrower normally
includes a thorough analysis of the borrower's financial
trends. Items considered include net worth; composition of
assets and liabilities; debt service coverage; liquidity;
sales growth and earning power; and cash flow generation and
reliability.
- Collateral. FINOVA regards collateral as an important factor
in a credit evaluation and has established maximum loan to
value ratios, normally ranging from 60% - 95%, for each of its
lines of business.
The underwriting process includes, in addition to the analysis of the
factors set forth above, the design and implementation of transaction structures
and strategies to mitigate identified risks; a review of transaction pricing
relative to product-specific return requirements and acknowledged risk elements;
a multi-step, interdepartmental review and approval process, with varying levels
of authority based on the size of the transaction; and periodic
interdepartmental reviews and revision of underwriting guidelines.
FINOVA also monitors portfolio concentrations in the areas of aggregate
exposure to a single borrower and related entities, within a given geographical
area and with respect to an industry and/or product type within an industry.
FINOVA has established concentration guidelines for each line of business.
Geographic concentrations are reviewed periodically and evaluated based on
historical loan experience and prevailing market and economic conditions.
FINOVA's financing contracts and leases generally require the customer
to pay taxes, license fees and insurance premiums and to perform maintenance and
repairs at the customer's expense. Contract payment rates are based on several
factors, including the cost of borrowed funds, term of contract,
creditworthiness of the prospective customer, type and nature of collateral and
other security and, in leasing transactions, the timing of tax effects and
estimated residual values. In direct finance lease transactions, lessees
generally are granted an option to purchase the equipment at the end of the
lease term at its then fair market value or, in some cases, are granted an
option to renew the lease at its then fair rental value. The extent to which
lessees exercise their options to purchase leased equipment varies from year to
year, depending on, among other factors, the state of the economy, the financial
condition of the lessee, interest rates and technological developments.
PORTFOLIO MANAGEMENT
In addition to the review at the time of original underwriting, FINOVA
attempts to preserve and enhance the earnings quality of its portfolio through
proactive management of its financing relationships with its clients. This
process includes the periodic appraisal or verification of the collateral to
determine loan exposure and residual values; sales of residuals and warrants to
generate supplemental income;
15
<PAGE> 18
and review and management of covenant compliance. The Portfolio Management
department and dedicated personnel within the business units regularly review
financial statements to assess customer cash flow performance and trends;
periodically confirm operations of the customer; conduct periodic reappraisals
of the underlying collateral; seek to identify issues concerning the
vulnerabilities of the customer; seek to resolve outstanding issues with the
borrower; and prepare quarterly summaries of the aggregate portfolio quality and
concentrations for management review.
Evaluation for loan impairment is performed as a part of the portfolio
management review process. When a loan is determined to be impaired, a
write-down is taken or an impairment reserve is established based on the
difference between the recorded balance of the loan ("carrying amount") and the
relevant measured value.
DELINQUENCIES AND WORKOUTS
FINOVA monitors timely payment of all accounts. Generally, when an
invoice is 10 days past due, the customer is contacted, and a determination is
made as to the extent of the problem, if any. A commitment for immediate payment
is pursued and the account is observed closely. If payment is not received after
this contact, guarantors of the account are to be contacted within the next 20
days. If an invoice becomes 31 days past due, it is reported as delinquent. A
notice of default is generally sent prior to an invoice becoming 45 days past
due and, between 60 and 90 days past the due date, if satisfactory negotiations
are not underway, outside counsel is generally retained to help protect FINOVA's
rights and to pursue its remedies.
When accounts become more than 90 days past due income recognition is
usually suspended, and FINOVA vigorously pursues its legal remedies. Foreclosed
or repossessed assets are considered to be nonperforming, and are reported as
such unless such assets generate sufficient cash to result in a reasonable rate
of return. Such accounts are continually reviewed, and write-downs are taken as
deemed necessary. While pursuing collateral and obligors, FINOVA generally
continues to negotiate the restructuring or other settlement of the debt, as
appropriate.
Management believes that collateral values significantly reduce loss
exposure and that the reserve for possible credit losses is adequate. For
additional information regarding the reserve for possible credit losses, see
Note D of Notes to Consolidated Financial Statements included in Annex A.
GOVERNMENTAL REGULATION
FINOVA's domestic activities, including the financing of its
operations, are subject to a variety of federal and state regulations such as
those imposed by the Federal Trade Commission, the Securities and Exchange
Commission, the Consumer Credit Protection Act, the Equal Credit Opportunity Act
and the Interstate Land Sales Full Disclosure Act. Additionally, a majority of
states have ceilings on interest rates chargeable to customers in financing
transactions. Some of FINOVA's financing transactions are subject to additional
government regulation, such as aircraft leasing, which is regulated by the
Federal Aviation Authority, and communications, which is regulated by the
Federal Communication Commission. FINOVA's international activities are also
subject to a variety of laws and regulations promulgated by the governments and
various agencies of the countries in which the business is conducted.
16
<PAGE> 19
EMPLOYEES
At December 31, 1995, the Company had 950 employees. None of such
employees were covered by collective bargaining agreements. The Company believes
its employee relations are satisfactory.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in premises
leased from Dial in Phoenix, Arizona. FINOVA operates 46 additional offices in
the United States and one office in Europe. All such properties are leased.
Alternative office space could be obtained without difficulty in the event
leases are not renewed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party either as plaintiff or defendant to various
actions, proceedings and pending claims, including legal actions, certain of
which involve claims for compensatory, punitive or other damages in significant
amounts. Such litigation often results from the Company's attempts to enforce
its lending agreements against borrowers and other parties to such transactions.
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 may be held
liable, if any, is not ascertainable, the Company believes that any resulting
liability should not materially affect the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY &
RELATED STOCKHOLDER MATTERS.
There is no market for the Company's common stock or redeemable
preferred stock as the Company is wholly owned by FINOVA Group. The preferred
stock was redeemed through contribution from FINOVA Group in March 1994.
Dividends paid on the common stock for the first through fourth quarters of 1995
were $5,518,000, $5,520,000, $6,044,000 and $5,995,000, respectively. Dividends
paid on the common stock for the first through fourth quarters of 1994 were
$3,600,000, $5,050,000, $5,130,000 and $5,604,000, respectively.
The agreements pertaining to senior debt and revolving credit
agreements of FINOVA include various restrictive covenants and require the
maintenance of certain defined financial ratios with which FINOVA has complied.
Under one such covenant, dividend payments are limited to 50 percent of
accumulated earnings after December 31, 1991. As of December 31, 1995, FINOVA
had $50,121,000 of excess accumulated earnings available for distribution.
17
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See pages 1 - 6 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
1. Financial Statements - See Item 14 hereof and Annex A.
2. Supplementary Data - See Condensed Quarterly Results included
in Supplemental Selected Financial Data of Notes to
Consolidated Financial Statements included in Annex A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING & FINANCIAL
DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
Omitted.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
Omitted.
18
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed.
1. Financial Statements.
(i) The following financial statements of FINOVA are
included in Annex A:
<TABLE>
<CAPTION>
Annex
Page
----------------
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operations 1 - 5
Report of Management and Independent Auditors' Report 6 - 7
Consolidated Balance Sheet 8 - 9
Statement of Consolidated Income 10
Statement of Consolidated Stockholder's Equity 11
Statement of Consolidated Cash Flows 12
Notes to Consolidated Financial Statements 13 - 28
Supplemental Selected Financial Data 29 - 30
</TABLE>
2. All Schedules have been omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
3. Exhibits.
Exhibit No.
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
the Company's Report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K", Exhibit 3.A).
(3.B) By-Laws, as amended through the date of this filing
(incorporated by reference from the 1994 10-K,
Exhibit 3.B).
(4.A) Instruments with respect to issues of long-term debt
have not been filed as exhibits to this Annual Report
on Form 10-K if the authorized principal amount of
any one of such issues does not exceed 10% of total
assets of the Company and its subsidiaries on a
consolidated basis. The Company agrees to furnish a
copy of each such instrument to the Securities and
Exchange Commission upon request.
(4.B) Form of Common Stock Certificate of the Company
(incorporated by reference from the 1994 10-K,
Exhibit 4.B).
(4.C) Relevant portions of the Company's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and
3.B above, respectively, are hereby incorporated by
reference.
(4.D.1) Rights Agreement dated as of February 15, 1992
between the Company and the Rights Agent named
therein, as amended (incorporated by reference from
the Company's Current Report on Form 8-K dated
September 21, 1995, Exhibit 4.1).
19
<PAGE> 22
Exhibit No.
(4.D.2) Acceptance of Successor Trustee to Appointment under
Rights Agreement noted in 4.D.1 above (incorporated
by reference from the Company's Current Report on
Form 8-K, dated November 30, 1995, Exhibit 4).
(4.E) Indenture dated as of November 1, 1990 between FINOVA
Capital and the Trustee named therein (incorporated
by reference from Greyhound Financial Corporation's
Registration Statement on Form S-3, Registration No.
33-37743, Exhibit 4).
(4.F) Fourth Supplemental Indenture dated as of April 17,
1992 between FINOVA Capital and the Trustee named
therein, supplementing the Indenture referenced in
Exhibit 4.E above (incorporated by reference from GFC
Financial Corporation's Annual Report on Form 10-K
for the year 1992 (the "1992 10-K"), Exhibit 4.F).
(4.G) Form of Indenture dated as of September 1, 1992
between FINOVA Capital and the Trustee named therein
(incorporated by reference from the Greyhound
Financial Corporation Registration Statement on Form
S- 3, Registration No. 33-51216, Exhibit 4).
(4.H) Form of Indenture dated as of October 1, 1995 between
FINOVA Capital and the Trustee named therein
(incorporated by reference from FINOVA Capital's
Report on Form 8-K dated October 25, 1995, Exhibit
4.1).
(10.A) Sixth Amendment and Restatement dated as of May 16,
1994 of the Credit Agreement dated as of May 31, 1976
among FINOVA Capital and the lender parties thereto,
and Bank of America National Trust and Savings
Association, Bank of Montreal, Chemical Bank,
Citibank, N.A. and National Westminster Bank USA, as
agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from
the Corporation's Current Report on Form 8-K dated
May 23, 1994, Exhibit 10.I).
(10.A.1) First Amendment dated as of September 30, 1994, to
the Sixth Amendment and Restatement, noted in 10.A
above (incorporated by reference from the 1994 10-K,
Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the
Sixth Amendment and Restatement noted in 10.A above
(incorporated by reference from FINOVA Group's
Quarterly Report on Form 10-Q for the period ending
September 30, 1995 (the "Third Quarter 10-Q"),
Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the Third Quarter 10-Q, Exhibit 10.B).
(10.B) Credit Agreement (Short-Term Facility) dated as of
May 16, 1994 among FINOVA Capital, the Lender parties
thereto, the Agents and Citibank, N.A., as
Administrative Agent (incorporated by reference from
the Company's Report on Form 8-K dated May 23, 1994,
Exhibit 10.2).
20
<PAGE> 23
Exhibit No.
(10.B.1) First Amendment dated as of September 30, 1994 to the
Credit Agreement noted in 10.B above (incorporated by
reference from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the Third
Quarter 10-Q, Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the Third
Quarter 10-Q, Exhibit 10.D).
(10.C) Interim Services Agreement dated January 28, 1993
among the Company, The Dial Corp and others,
(incorporated by reference from the 1992 10-K,
Exhibit 10.JJ).
(10.D) Tax Sharing Agreement dated February 19, 1992 among
the Company, The Dial Corp and others, (incorporated
by reference from the 1992 10-K, Exhibit 10.KK).
(10.E) Certificate of Designations of Series A Redeemable
Preferred Stock of FINOVA, dated March 17, 1992,
(incorporated by reference from the 1992 10-K,
Exhibit 10.MM).
(10.F) Sublease dated as of April 1, 1991, among the
Company, The Dial Corp and others, relating to the
Company's principal office space, (incorporated by
reference from the 1992 10-K, Exhibit 10.F).
(10.G) Stock Purchase Agreement between Bell Atlantic TriCon
Leasing Corporation and Greyhound Financial
Corporation dated as of March 4, 1994 (incorporated
by reference from the 1993 10-K, Exhibit 10.F).
(10.H) Form of Assets Purchase Agreement between Bell
Atlantic TriCon Leasing Corporation and TriCon
Capital Corporation (incorporated by reference from
the 1993 10-K, Exhibit 10.G).
(10.I) Form of Distribution Agreement among the Company,
Greyhound Financial Corporation, The Dial Corp and
certain other parties named therein, dated as of
January 28, 1992 (incorporated by reference from the
Registration Statement, Annex II to the Prospectus
and Exhibit 2.1).
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends.*
(23) Independent Auditors' Consent.*
(27) Financial Data Schedule.*
* Filed herewith.
21
<PAGE> 24
(b) Reports on Form 8-K:
A Report on Form 8-K dated October 27, 1995, was filed by
Registrant, which reported under Rule 424 (b)(3) of Regulation C,
Pricing Supplements No. 1 through 8 of FINOVA Capital for its
Medium-Term Notes, Series C and under Items 4.1 and 4.2, the Indenture,
dated as of October 1, 1995 between the Registrant and First Interstate
Bank of Arizona, N.A. and the Distribution Agreement dated as of
October 25, 1995 among the Registrant, CS First Boston Corporation,
Citicorp Securities, Inc., Goldman Sachs & Co., Lehman Brothers Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley &
Co. Incorporated, with respect to the Registrant's Medium-Term Notes,
Series C (the "Notes").
A Report on Form 8-K dated January 24, 1996 was filed by
Registrant, which reported under Items 5 and 7 the revenues, net income
and selected financial data and ratios for the twelve months ended
December 31, 1995.
A Report on Form 8-K dated November 30, 1995 was filed by
Registrant, which reported under items 5 and 7 the substitution of a
new rights agent under FINOVA Group's Rights Agreement.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the capacities
indicated, in Phoenix, Arizona on the 13th day of March, 1996.
FINOVA CAPITAL CORPORATION
By: /s/ Samuel L. Eichenfield
-----------------------------------------------------
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
(Chief Executive Officer)
By: /s/ Bruno A. Marszowski
-----------------------------------------------------
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
(Chief Accounting and Financial Officer)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ W. Carroll Bumpers /s/ Samuel L. Eichenfield
- ----------------------------------- --------------------------------------
W. Carroll Bumpers (Director) Samuel L. Eichenfield (Chairman)
March 13, 1996 March 13, 1996
/s/ Robert J. Fitzsimmons /s/ Gregory C. Smalis
- ----------------------------------- --------------------------------------
Robert J. Fitzsimmons (Director) Gregory C. Smalis (Director)
March 13, 1996 March 13, 1996
23
<PAGE> 26
ANNEX A
<PAGE> 27
FINOVA CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Management's Discussion and Analysis of Financial Condition and
Results of Operations 1 - 5
Management's Report on Responsibility for
Financial Reporting 6
Independent Auditors' Report 7
Consolidated Balance Sheet at December 31, 1995 and 1994 8 - 9
Statement of Consolidated Income for the Years Ended
December 31, 1995, 1994 and 1993 10
Statement of Consolidated Stockholder's Equity for the Years
Ended December 31, 1995, 1994 and 1993 11
Statement of Consolidated Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 12
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1995, 1994 and 1993 13 - 28
Supplemental Selected Financial Data 29 - 30
</TABLE>
<PAGE> 28
FINOVA CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to FINOVA Capital Corporation
(formerly known as Greyhound Financial Corporation) and its subsidiaries
(collectively, "FINOVA" or the "Company"), including Ambassador Factors
("Ambassador") acquired on February 14, 1994 and TriCon Capital ("TriCon")
acquired on April 30, 1994. Both Ambassador and TriCon were merged into FINOVA
in 1994.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Net income increased 31% during 1995 to $97.6 million from $74.3
million in 1994. The 1994 results include income from Ambassador and TriCon from
the acquisition dates.
INTEREST MARGINS EARNED. Interest margins earned, which represent the
difference between (a) interest and income earned from financing transactions
and (b) interest expense and depreciation, increased by 39% in 1995 to $339.8
million from $243.7 million in 1994. This increase was driven by a 20% growth in
managed assets (investment in financing transactions plus securitizations).
The primary source of the growth in managed assets was new business, which
totaled $2.6 billion for 1995 compared to $1.8 billion for 1994, an increase of
43%. Also contributing to the improved margins were the fees associated with
the factoring business, which recorded factoring volume of $1.1 billion in 1995
compared to $847 million in 1994 and the inventory finance business, which
recorded floor planning volume of $898 million in 1995 compared to $283
million in 1994.
Interest margins earned as a percentage of average earning assets were
5.8% in 1995, compared to 6.0% in 1994. This reduction in the interest margin
percentage was expected in 1995 primarily due to the cost of hedges that the
Company entered into to lock in the spread between its lending and borrowing
rates on $1.5 billion of its floating-rate debt. Growth in interest margins
earned more than offset the higher provisions for possible credit losses
and the higher selling, administrative and other operating expenses in the 1995
period.
NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for
possible credit losses ("reserves"), were greater by $30.6 million during 1995
compared to 1994 primarily due to the growth in managed assets. Management
believes that reserve coverage remains adequate at 83.6% of nonaccruing assets
(nonaccruing contracts and repossessed assets) and 2.0% of managed assets.
Details of write-offs and other changes in the reserve for possible credit
losses can be found in Note D of Notes to Consolidated Financial Statements.
Selling, administrative and other operating expenses increased by $43
million in 1995 due to the growth of the Company, the large volume of new
business added and the inclusion of TriCon and Ambassador for the full year. As
a percentage of interest margins earned, these costs decreased to 45.6% in 1995
from 46.1% in the previous year. See Note L of Notes to Consolidated Financial
Statements.
GAINS ON SALE OF ASSETS. Gains on sale of assets were $10.7 million
higher in 1995 compared to 1994 primarily due to the inclusion of TriCon for the
full year and the amount and type of assets coming off lease. The 1994 gains of
$9.0 million included $4.0 million (pre-tax) from the securitization of assets
in June 1994.
INCOME TAXES. Income taxes for 1995 increased to $59.6 million from
$49.4 million in 1994. This increase was caused by the increase in pre-tax
income, partially offset by certain tax credits recognized during 1995. The 1995
overall effective income tax rate for the Company approximated
1
<PAGE> 29
FINOVA CAPITAL CORPORATION
37.9% compared to 40.0% in 1994. The decrease in the effective rate is primarily
related to lower foreign tax effects and an increase in tax exempt municipal
income. Details can be found in Note H of Notes to Consolidated Financial
Statements.
1994 COMPARED TO 1993
Net income increased 104% during 1994 to $74.3 million from $36.4
million in 1993. The 1994 results included income for Ambassador and TriCon from
the acquisition dates. Net income in 1993 included a $4.9 million adjustment for
tax rate increases applicable to deferred income taxes generated by the
Company's leveraged lease portfolio.
INTEREST MARGINS EARNED. Interest margins earned increased to $243.7
million in 1994 from $122.5 million in 1993, an increase of 99%. This increase
was driven by portfolio growth, together with the addition of TriCon and
Ambassador in 1994. The primary source of the portfolio growth was new business,
which totaled $1.8 billion for 1994 compared to $1.0 billion for 1993, an
increase of 80%.
Interest margins earned, measured as a percent of average earning
assets, were 6.0%. This measurement compares to 5.2% for the 1993 period and
reflects the contributions of the acquisitions made in 1994, the continuing
healthy returns of the charter financial operations and the Company's access to
lower cost capital. Growth in interest margins more than offset the higher
provisions for possible credit losses and the higher selling, administrative and
other operating expenses.
NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for
possible credit losses ("reserve"), were greater by $11.0 million during 1994
compared to 1993. The greater loss provisions were consistent with the
requirements of a larger portfolio and the loss experience of the businesses
acquired. Higher interest margins generated by Ambassador and certain TriCon
businesses are used to cover the risk profiles associated with those businesses.
Management believes that reserve coverage was adequate at 72.4% of nonaccruing
assets and at 2.1% of managed assets. Details of the write-offs by line of
business, as well as changes in the reserve for possible credit losses, can be
found in Note D of Notes to Consolidated Financial Statements.
Selling, administrative and other operating expenses increased by $54.1
million in 1994, which was consistent with the growth in assets. As a percent of
interest margins earned, these expenses were 46.1% (for the combined entities)
in 1994, an improvement over 47.5% in 1993 (which excluded TriCon and
Ambassador). See Note L of Notes to Consolidated Financial Statements.
GAINS ON SALE OF ASSETS. Gains on sale of assets were $3.6 million
higher in 1994 compared to 1993. The increase principally was the result of a
$4.0 million ($2.4 million after-tax) gain from the securitization of assets
recorded in 1994, which was consistent with TriCon's historical experience
related to asset securitizations.
INCOME TAXES. Income taxes for 1994 increased to $49.4 million from
$27.7 million in 1993. This increase is attributable to: (a) higher income
before income taxes; (b) higher state income tax rates in 1994 because of the
apportionment of the Company's assets to states with higher income tax rates and
(c) increased foreign income taxes due to an increase in foreign income. The
overall effective income tax rate for the Company, including both federal and
state income taxes, approximates 40.0% for 1994 and 35.6% for 1993, excluding
the $4.9 million tax adjustment for the Company's leveraged lease portfolio. See
Note H of Notes to Consolidated Financial Statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Managed assets increased by $1.2 billion to $7.1 billion at December
31, 1995 from $5.9 billion at December 31, 1994. This increase primarily is
attributable to the $2.6 billion of new business generated in 1995 and portfolio
acquisitions of $262 million, less portfolio amortization.
2
<PAGE> 30
FINOVA CAPITAL CORPORATION
The reserve for possible credit losses increased by $18.1 million in
1995 to $140.3 million. The increase in the reserve consisted primarily of
increases due to loss provisions of $47.3 million which were applicable to
portfolio growth, partially offset by decreases due to write-offs of $35.5
million. See Note D of Notes to Consolidated Financial Statements.
Nonaccruing assets decreased to $167.9 million at December 31, 1995
from $168.8 million at December 31, 1994. When measured as a percent of managed
assets, nonaccruing assets declined to 2.4% at December 31, 1995 from 2.9% at
December 31, 1994. For more information on write-offs and nonaccruing assets see
Note D of Notes to Consolidated Financial Statements.
The Company had total debt of approximately $5.6 billion or 6.6 times
its equity base of $855.6 million at December 31, 1995. The Company also had
deferred income taxes of $227.8 million, generally used to reduce debt and,
therefore, help finance lending activities.
Growth in funds employed is generally financed by internally generated
cash flow and additional borrowings. During 1995, FINOVA issued $1.3 billion in
new senior debt, which, together with general corporate funds and net commercial
paper borrowings, was used to finance new business, acquire portfolios and
redeem or retire $570 million of debt.
FINOVA satisfies a significant portion of its cash requirements from a
diversified group of worldwide funding sources and is not dependent upon any one
lender. Additionally, FINOVA relies on the issuance of commercial paper as a
major funding source. During 1995, FINOVA issued $16.1 billion of commercial
paper (with an average of $2.2 billion outstanding during the year) and raised
$1.3 billion, as noted above, through new long-term financings of one to 10 year
durations. At December 31, 1995 and 1994, commercial paper and short-term bank
borrowings totaling $2.4 billion and $2.0 billion, respectively, were supported
by available unused revolving credit lines which, if not renewed, are
convertible to long-term debt at FINOVA's option.
In 1994, FINOVA filed a shelf-registration statement with the
Securities and Exchange Commission ("SEC") that allowed for the issuance of $1.0
billion of senior debt securities, all of which was used as of December 31,
1995. In 1995, FINOVA filed an additional shelf registration statement with the
SEC allowing for the issuance of $1.5 billion of senior debt securities, $1.2
billion of which remained available as of December 31, 1995. Also in 1995, the
Company, under a securitization agreement, sold a $200 million undivided
proportionate interest in a loan portfolio totaling $610.5 million. See Note C
of Notes to Consolidated Financial Statements for further discussion.
FINOVA currently maintains a five-year revolving credit facility with
numerous lenders, in the aggregate principal amount of $1.0 billion.
Separately, FINOVA also has a 364 day revolving credit facility with the same
lenders in the aggregate principal amount of $1.0 billion and has another
four-year facility with numerous lenders for $700 million. All of these
facilities support FINOVA's outstanding commercial paper and short-term
borrowings. The Company intends to borrow under the domestic revolving credit
agreements to refinance commercial paper and short-term bank loans to the
extent that it experiences significant difficulties in rolling over its
outstanding commercial paper and short-term bank loans. The Company rarely
borrows under these facilities. The 364 day $1.0 billion revolving credit
agreements will be subject to renewal in 1996, while the four and five year
$700 million and $1.0 billion credit facilities are subject to renewal in 1999
and 2000, respectively.
The agreements pertaining to long-term debt of FINOVA include various
restrictive covenants and require the maintenance of certain defined financial
ratios with which FINOVA has complied. Under one such covenant, dividend
payments are limited to 50 percent of accumulated earnings after December 31,
1991.
3
<PAGE> 31
FINOVA CAPITAL CORPORATION
FINOVA's aggregate cost of funds increased to 7.2% for 1995 from 6.3%
for 1994 as a result of rising interest rates and the Company's hedging
activities, as further discussed below. The Company's cost of and access to
capital is dependent, in a large part, on its credit ratings. FINOVA has
maintained investment grade ratings since 1976, and received an upgrade in those
ratings from Standard & Poor's Ratings Group and Moody's Investor Service, Inc.
in 1995. Neither The FINOVA Group Inc. nor any of FINOVA's subsidiaries have
applied for credit ratings. FINOVA currently has investment- grade ratings from
the following agencies:
<TABLE>
<CAPTION>
Commercial Senior
Paper Debt
------------------- -----------------
<S> <C> <C>
Duff & Phelps Credit Rating Co. D1- A-
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 BBB+
</TABLE>
At December 31, 1995, FINOVA had outstanding 59 interest rate
conversion agreements with notional principal amounts totaling $3.1 billion.
Twenty-four agreements with notional principal amounts of $895 million were
arranged to effectively convert certain floating interest rate obligations into
fixed interest rate obligations and require interest payments on the stated
principal amount at rates ranging from 4.1% to 9.1% (remaining terms of one to
five years) in return for receipts calculated on the same notional amounts at
floating interest rates. In addition, 28 agreements with notional principal
amounts of $1.3 billion were arranged to effectively convert certain fixed
interest rate obligations into floating interest rate obligations and require
interest payments on the stated principal amount at the three month or six month
London interbank offered rates ("LIBOR") (remaining terms of one to seven years)
in return for receipts calculated on the same notional amounts at fixed interest
rates of 4.9% to 7.7%. FINOVA has also entered into seven basis swap agreements
with notional principal amounts of $878 million and remaining terms of two to
three years.
In 1993, FINOVA entered into four three-year interest rate hedge
agreements on $750 million of floating-rate borrowings. In 1995, FINOVA hedged
an additional $750 million of floating-rate debt through five basis swap
agreements expiring through 1998, to lock in a spread between its lending and
borrowing rates. FINOVA's assets are primarily prime based while a significant
portion of its liabilities are either LIBOR based or tied to the 30-day
commercial paper composite rate. The agreements enable FINOVA to hedge against a
narrowing of the spread between the prime rate (lending rate) and its borrowing
rates (LIBOR and commercial paper). For more information on derivative financial
instruments, see Note F of Notes to Consolidated Financial Statements.
RECENT DEVELOPMENTS AND BUSINESS OUTLOOK
Following its spin-off from The Dial Corporation in 1992 (the
"Spin-Off"), the Company decided to focus its resources and capital on its
domestic commercial finance activities. The Company embarked on a program of
selling or winding down those activities included in the Spin-Off that were not
associated with the Company's core businesses. The Company concentrated on
redeploying the capital previously invested in such businesses and raised
additional capital to support internal portfolio growth and to make
complementary acquisitions. This strategy has resulted in (i) the managed
liquidation and sale of FINOVA Capital Limited ("FCL"), Dial's former European
financial business, and the Latin American loan portfolios, (ii) an increase
(excluding acquisitions) in FINOVA's domestic loan portfolio each year, (iii)
the acquisition of the asset based lending activity of U.S. Bancorp, (iv) the
acquisition of Ambassador, (v) the acquisition of TriCon and (vi) portfolio
acquisitions of $262 million in 1995.
4
<PAGE> 32
FINOVA CAPITAL CORPORATION
In 1994, the Company expanded its debt sources through a $1.0 billion
shelf registration with the SEC. In 1995, the Company further added to its debt
sources through a $1.5 billion shelf registration with the SEC and increased its
revolving credit lines to $2.7 billion. Also in 1995, the Company, under a
securitization agreement, sold a $200 million undivided proportionate interest
in a loan portfolio totaling $610.5 million. See Note C of Notes to Consolidated
Financial Statements for further discussion.
As a result of the execution of its business strategy, management
believes that the Company now ranks among the largest independent commercial
finance companies, based on assets, in the United States, and can direct its
energies primarily to its principal business operations, including those
businesses acquired since the Spin-Off.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for fiscal years beginning after December 15, 1995. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, the statement
requires that certain long-lived assets and intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company does not expect the adoption of this accounting standard to materially
impact its results of operations or financial position. The Company will adopt
this accounting standard effective January 1, 1996, as required.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," effective for transactions entered into in fiscal
years that begin after December 15, 1995. This statement establishes financial
accounting and reporting for stock-based employee compensation plans, including
stock purchase plans, stock option plans, restricted stock and stock
appreciation rights. The Statement allows for a fair value based method of
accounting for employee stock options or similar instruments and encourages a
similar method for all employee stock compensation plans. This method measures
compensation cost at the grant date based on the value of an award and
recognizes it over the service period, usually the vesting period. However, the
Statement also allows an entity to continue measuring compensation cost for such
plans using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), providing pro forma disclosures are made. The Company expects to
continue to account for its stock- based employee compensation plans using the
method of accounting prescribed by APB No. 25 and does not expect that this
accounting standard will materially impact its results of operations or
financial position.
The Company adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"), as of January 1, 1995. These statements require that
impaired loans be measured based on the present value of the 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 according to
the contractual terms of the loan agreement. For the impact and disclosures of
these new standards, see Note D of Notes to Consolidated Financial Statements.
During 1994, FINOVA adopted SFAS No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments." The disclosures
required by SFAS No. 119 are included in Notes F and K of Notes to Consolidated
Financial Statements.
5
<PAGE> 33
FINOVA CAPITAL CORPORATION
MANAGEMENT'S REPORT ON
RESPONSIBILITY FOR FINANCIAL REPORTING
The management of FINOVA Capital Corporation is responsible for the
preparation, integrity and objectivity of the financial statements and other
financial information included in this Annual Report. The financial statements
are presented in accordance with generally accepted accounting principles
reflecting, where applicable, management's best estimates and judgments.
Management of the Company has established and maintains a system of
internal controls to reasonably assure the fair presentation of the financial
statements, the safeguarding of the Company's assets and the prevention or
detection of fraudulent financial reporting. The internal control structure is
supported by careful selection and training of personnel, policies and
procedures and regular review by both internal auditors and the independent
auditors.
The Board of Directors, through its Audit Committee, also oversees the
financial reporting of the Company and its adherence to established procedures
and controls. Periodically, the Audit Committee meets, jointly and separately,
with management, the internal auditors and the independent auditors to review
auditing, accounting and financial reporting matters.
The Company's financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available to Deloitte &
Touche LLP all of the Company's financial records and related data and has made
valid and complete written and oral representations and disclosures in
connection with the audit.
Management believes it is essential to conduct its business in
accordance with the highest ethical standards, which are characterized and set
forth in the Company's written Code of Conduct. These standards are communicated
to and acknowledged by all of the Company's employees.
/s/ Samuel L. Eichenfield
_______________________________
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
/s/ Bruno A. Marszowski
_______________________________
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
/s/ Derek C. Bruns
_______________________________
Derek C. Bruns
Vice President - Internal Audit
6
<PAGE> 34
FINOVA CAPITAL CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of FINOVA Capital Corporation
We have audited the accompanying consolidated balance sheet of FINOVA
Capital Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. 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 FINOVA Capital Corporation
and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
______________________________
Deloitte & Touche LLP
Phoenix, Arizona
February 16, 1996
7
<PAGE> 35
FINOVA CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
ASSETS
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 90,329 $ 52,753
Investment in financing transactions:
Loans and other financing contracts, less unearned
income of $354,961 and $249,550, respectively 4,973,864 4,034,648
Direct financing leases 828,713 774,834
Operating leases 460,798 412,782
Leveraged leases 366,196 287,518
Factored receivables 189,486 157,862
- -----------------------------------------------------------------------------------------------
6,819,057 5,667,644
Less reserve for possible credit losses (140,333) (122,233)
- -----------------------------------------------------------------------------------------------
Investment in financing transactions - net 6,678,724 5,545,411
Other assets and deferred charges 294,782 236,397
- -----------------------------------------------------------------------------------------------
$ 7,063,835 $ 5,834,561
===============================================================================================
</TABLE>
See notes to consolidated financial statements.
8
<PAGE> 36
FINOVA CAPITAL CORPORATION
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses $ 103,990 $ 115,573
Due to clients 181,548 116,639
Interest payable 45,553 37,710
Senior debt 5,649,368 4,573,354
Deferred income taxes 227,797 209,299
- -------------------------------------------------------------------------------------------------
6,208,256 5,052,575
- -------------------------------------------------------------------------------------------------
Stockholder's equity:
Common stock, $1.00 par value, 100,000 shares
authorized, 25,000 shares issued and outstanding 25 25
Additional capital 677,948 677,947
Retained income 183,292 108,740
Cumulative translation adjustments (5,686) (4,726)
- -------------------------------------------------------------------------------------------------
855,579 781,986
- -------------------------------------------------------------------------------------------------
$ 7,063,835 $ 5,834,561
=================================================================================================
</TABLE>
See notes to consolidated financial statements.
9
<PAGE> 37
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED INCOME
(Dollars in Thousands)
<TABLE>
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other income $ 580,309 $ 386,566 $ 218,171
Financing lease income 96,855 62,990 20,838
Operating lease income 84,691 53,795 16,207
- --------------------------------------------------------------------------------------------------------------
Interest earned from financing transactions 761,855 503,351 255,216
Interest expense 366,822 222,929 126,152
Depreciation 55,218 36,737 6,516
- --------------------------------------------------------------------------------------------------------------
Interest margins earned 339,815 243,685 122,548
Provision for possible credit losses 47,300 16,670 5,706
- --------------------------------------------------------------------------------------------------------------
Net interest margins earned 292,515 227,015 116,842
Gains on sale of assets 19,726 9,045 5,439
- --------------------------------------------------------------------------------------------------------------
312,241 236,060 122,281
Selling, administrative and other operating
expenses 155,001 112,305 58,158
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 157,240 123,755 64,123
Income taxes 59,611 49,442 27,682
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 97,629 $ 74,313 $ 36,441
==============================================================================================================
</TABLE>
See notes to consolidated financial statements.
10
<PAGE> 38
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDER'S EQUITY
(Dollars in Thousands)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance, beginning and end of year $ 25 $ 25 $ 25
- ------------------------------------------------------------------------------------------------------------------
ADDITIONAL CAPITAL:
Balance, beginning of year 677,947 298,665 298,665
Contributions from The FINOVA Group 1 379,282
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 677,948 677,947 298,665
- ------------------------------------------------------------------------------------------------------------------
RETAINED INCOME:
Balance, beginning of year 108,740 54,374 33,783
Net income 97,629 74,313 36,441
Dividends (23,077) (19,947) (15,850)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 183,292 108,740 54,374
- ------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance, beginning of year (4,726) (7,773) (6,685)
Unrealized translation (loss) gain (960) 3,047 (1,088)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year (5,686) (4,726) (7,773)
- ------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY $ 855,579 $ 781,986 $ 345,291
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 39
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 97,629 $ 74,313 $ 36,441
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible credit losses 47,300 16,670 5,706
Depreciation and amortization 71,583 46,470 9,318
Gains on sale of assets (19,726) (9,045) (5,439)
Deferred income taxes 18,498 11,594 21,608
Change in assets and liabilities, net of effects from subsidiaries purchased:
Increase in other assets (37,692) (20,198) (2,189)
Decrease in accounts payable and accrued expenses (11,583) (85,716) (9,742)
Increase (decrease) in interest payable 7,843 14,077 (5,429)
Other (959) (2,435) (1,088)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 172,893 45,730 49,186
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of assets 86,280 35,106 5,681
Proceeds from sales of securitized assets 200,000 115,507
Principal collections on financing transactions 1,308,747 908,862 638,423
Expenditures for financing transactions (2,128,588) (1,505,208) (1,007,794)
Net change in short-term financing transactions (442,405) (294,123)
Acquisitions (261,868) (590,497) (69,808)
Net related party advances 57,321
Other 1,249 1,898 221
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,236,585) (1,328,455) (375,956)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Long-term borrowings 1,272,450 827,550 200,000
Net borrowings under commercial paper 373,566 1,508,564 185,735
Repayment of long-term borrowings (570,002) (1,186,191) (190,136)
Net advances and contributions from Parent (16,578) 211,941 130,760
Dividends (23,077) (19,947) (15,850)
Net change in due to clients 64,909 (9,298)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,101,268 1,332,619 310,509
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 37,576 49,894 (16,261)
Cash and cash equivalents, beginning of year 52,753 2,859 19,120
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 90,329 $ 52,753 $ 2,859
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 40
FINOVA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands in Tables)
NOTE A SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION -- The
consolidated financial statements present the financial position, results of
operations and cash flows of FINOVA Capital Corporation (formerly known as
Greyhound Financial Corporation) and its subsidiaries (collectively, "FINOVA" or
the "Company"), including Ambassador Factors ("Ambassador") acquired on February
14, 1994 and TriCon Capital ("TriCon") acquired on April 30, 1994. Both
Ambassador and TriCon were merged into FINOVA in 1994.
FINOVA Capital Corporation is a financial services company engaged in
providing collateralized financing products to commercial enterprises in various
market niches, principally in the United States.
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles. Described below are those accounting
policies particularly significant to FINOVA, including those selected from
acceptable alternatives.
USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FINANCING TRANSACTIONS -- For loans and other financing contracts,
earned income is recognized over the life of the contract, using the interest
method.
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.
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 lives of the leased assets.
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.
Fees received in connection with loan commitments are deferred in
accounts payable and accrued expenses until the loan is advanced and are then
recognized over the term of the loan as an adjustment of the yield. Fees on
commitments that expire unused are recognized at expiration.
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 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 or when
foreclosed or repossessed assets generate a reasonable rate of return.
13
<PAGE> 41
FINOVA CAPITAL CORPORATION
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 considered include changes in geographic and product
diversification, size of the portfolio and current economic conditions. Accounts
are either written-off or written-down when the loss is considered probable and
determinable, after giving consideration to the customer's financial condition
and the value of the underlying collateral, including any guarantees. Any
deficiency between the carrying amount of an asset and the net 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.
Under certain limited recourse provisions of receivable transfer
agreements (securitizations), the Company repurchases defaulted direct financing
leases and subsequently classifies these leases as nonaccruing. If the accounts
require a write-down, they are charged to the reserve for possible credit
losses.
Repossessed assets are carried at the lower of cost or fair value.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118"), as of
January 1, 1995. These statements require that impaired loans be measured based
on the present value of the 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 according to the contractual terms of the loan
agreement. These standards do not apply to leasing transactions or to large
groups of smaller balance homogeneous loans. Evaluation for loan impairment is
performed as a part of the portfolio management review process. When a loan is
determined to be impaired, a write-down is taken or an impairment reserve is
established based on the difference between the recorded balance of the loan
("carrying amount") and the relevant measured value. For the impact and
disclosures of these new standards, see Note D of Notes to Consolidated
Financial Statements.
PENSION AND OTHER BENEFITS -- Trusteed, noncontributory pension plans
cover substantially all employees. Benefits are based primarily on final average
salary and years of service. Funding policies provide that payments to pension
trusts shall be at least equal to the minimum funding required by applicable
regulations.
Other postretirement benefit costs are recorded during the period the
employees provide service to the Company. The Company funds its postretirement
benefit obligation as benefits are paid.
The Company records postemployment benefit costs at the time employees
leave active service. Postemployment benefits are any benefits other than
retirement benefits.
SAVINGS PLAN -- The Company participates in the FINOVA Group Inc.
Savings Plan (the "Savings Plan"), a qualified 401(k) program. The Savings Plan
is available to substantially all employees. Voluntary wage reductions may be
elected by the employee ranging from 1% to 22% of taxable compensation. The
Company's matching contributions are based on employee pre-tax salary
reductions, up to a maximum of 100% of the first 6% of salary contributions,
the first 3% of which are matched in Company stock through the Employee Stock
Ownership Plan, discussed below.
14
<PAGE> 42
FINOVA CAPITAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN -- Employees of the Company are eligible
to participate in FINOVA Group's Employee Stock Ownership Plan in the month
following the first twelve consecutive month period during which they have at
least 1,000 hours of service with the Company. Company contributions are made
in the form of matching stock contributions of 100% of the first 3% of salary
reduction contributions made by participants of the Savings Plan.
Expenses under the Savings Plan and Employee Stock Ownership Plan were
$1.1 million, $0.9 million and $0.4 million in 1995, 1994 and 1993,
respectively.
INCOME TAXES -- 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 -- The Company classifies highly liquid investments
with original maturities of three months or less from date of purchase as cash
equivalents.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into derivative
financial instruments as part of its interest rate risk management. The Company
uses interest rate swaps and interest rate hedge agreements. These interest rate
derivatives are accounted for using settlement or matched swap accounting.
Periodic net cash settlements are recognized when they occur.
GOODWILL -- The Company amortizes the excess of cost over the fair
value of net assets acquired ("goodwill") on a straight line basis primarily
over 20 years. Goodwill is included in other assets and is reported net of
accumulated amortization. Amortization totaled $8.2 million and $5.8 million for
the years ended December 31, 1995 and 1994, respectively. The Company
periodically evaluates the carrying value of its intangible assets for
impairment. This evaluation is based principally on projected, undiscounted cash
flows generated by the underlying assets.
Substantially all of the amortization of goodwill resulting from
acquisitions is tax deductible under Section 197 of the Internal Revenue Code.
RESIDUAL VALUES -- The Company has a significant investment in residual
values in its leasing portfolios. These residual values represent estimates of
the value of leased assets at the end of the contract terms and are initially
recorded based upon appraisals and estimates. Residual values are periodically
reviewed to determine that recorded amounts are appropriate.
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES -- During
1994, FINOVA Group contributed $127.7 million of intercompany loans and other
assets and $25 million of preferred stock to FINOVA as additional paid in
capital.
RECLASSIFICATIONS -- Certain reclassifications have been made to the
1994 and 1993 financial statements to conform to the 1995 presentation.
NOTE B ACQUISITIONS
During 1995, 1994 and 1993, FINOVA, in transactions accounted for as
purchases, acquired various businesses and portfolios. During 1995, the Company
acquired portfolios having a total purchase price of $262 million. In 1994, the
Company acquired TriCon for $344 million in cash, comprised of $1,886 million of
assets and $1,542 million of liabilities and acquisition costs. The cash
purchase price for Ambassador was $246 million, consisting of $364 million of
assets and $118 million of liabilities and acquisition costs.
15
<PAGE> 43
FINOVA CAPITAL CORPORATION
The following unaudited summarized proforma financial information is
presented for the years ended December 31, 1994 and 1993 as if the purchases of
TriCon and Ambassador had occurred on January 1, 1993.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C>
Interest earned on financing transactions $ 577,528 $ 529,584
Income before income taxes 130,515 109,465
Net income 79,073 72,260
- --------------------------------------------------------------------------------------
</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, direct financing leases, operating leases, leveraged leases
and factored receivables). At December 31, 1995 and 1994, the carrying amount of
the investment in financing transactions, including the estimated residual value
of leased assets upon lease termination, was $6.8 billion and $5.7 billion
(before reserve for possible credit losses), respectively, and consisted of the
following percentage of carrying amount by line of business:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percent of Total
Carrying Amount
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Resort Finance 14.5% 12.0%
Transportation Finance 13.6% 12.7%
Commercial Real Estate Finance 11.5% 13.2%
Communications Finance 10.1% 10.4%
Corporate Finance (1) 9.6% 13.8%
Manufacturer and Dealer Services (1) 6.9% 5.7%
Medical Finance 6.7% 8.3%
Commercial Equipment Finance 5.2% 5.3%
Rediscount Finance 5.1% 1.8%
Franchise Finance 4.9% 5.3%
Commercial Finance 3.1% 3.4%
Inventory Finance 3.0% 1.0%
Factoring Services 2.8% 2.8%
Government Finance 1.8% 1.7%
FINOVA Capital Limited 0.9% 1.8%
Other 0.3% 0.8%
- --------------------------------------------------------------------------------
100.0% 100.0%
================================================================================
</TABLE>
(1) Excludes assets sold under securitization agreements of $200 million for
Corporate Finance in 1995 and $103 million and $253 million, respectively
in 1995 and 1994, for Manufacturer and Dealer Services, that are managed
by the Company.
16
<PAGE> 44
FINOVA CAPITAL CORPORATION
Aggregate installments on loans and other financing contracts, direct
financing leases, operating leases, leveraged leases and factored receivables at
December 31, 1995 (excluding repossessed assets of $50.0 million and estimated
residual values) are due during each of the years ending December 31, 1996 to
2000 and thereafter as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
There-
1996 1997 1998 1999 2000 after
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and other financing contracts:
Commercial:
Fixed interest rate $ 275,003 $ 257,712 $ 211,309 $ 194,823 $ 175,583 $ 362,185
Floating interest rate 466,343 475,718 357,347 378,198 401,310 158,855
Real Estate:
Fixed interest rate 79,162 55,820 53,899 113,212 44,999 182,306
Floating interest rate 236,768 238,512 242,917 193,532 84,725 38,599
Leases, primarily at fixed interest rates:
Direct financing leases 341,518 252,739 166,126 94,638 43,385 46,016
Operating leases 89,624 72,852 58,012 48,414 43,697 29,191
Leveraged leases 14,905 25,408 22,696 17,611 15,145 201,200
Factored receivables 189,486
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,692,809 $ 1,378,761 $ 1,112,306 $ 1,040,428 $ 808,844 $ 1,018,352
===================================================================================================================================
</TABLE>
The net investment in leveraged leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable $ 1,454,754 $ 1,268,843
Less principal and interest payable on nonrecourse debt (1,157,789) (1,062,218)
- --------------------------------------------------------------------------------------------------------------------------
Net rentals receivable 296,965 206,625
Estimated residual values 344,766 306,204
Less unearned income (275,535) (225,311)
- --------------------------------------------------------------------------------------------------------------------------
Investment in leveraged leases 366,196 287,518
Less deferred taxes arising from leveraged leases (230,120) (226,115)
- --------------------------------------------------------------------------------------------------------------------------
Net investment in leveraged leases $ 136,076 $ 61,403
==========================================================================================================================
</TABLE>
The components of income from leveraged leases, after the effects of
interest on nonrecourse debt and other related expenses, for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lease and other income $ 12,080 $ 9,240 $ 11,376
Income tax expense 4,201 3,143 8,363
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment in direct financing leases at December 31 consisted of
the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable $ 944,422 $ 885,148
Estimated residual values 109,431 86,191
Unearned income (225,140) (196,505)
- --------------------------------------------------------------------------------------------------------------------------
Investment in direct financing leases $ 828,713 $ 774,834
==========================================================================================================================
</TABLE>
17
<PAGE> 45
FINOVA CAPITAL CORPORATION
The investment in operating leases at December 31 consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost of assets $ 586,860 $ 526,191
Accumulated depreciation (126,062) (113,409)
- ----------------------------------------------------------------------------------------------------------------------------
Investment in operating leases $ 460,798 $ 412,782
============================================================================================================================
</TABLE>
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 rates ("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>
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Receivables due on financing transactions $ 3,403,084 $ 2,928,287
Less unearned income (78,333) (65,327)
- ----------------------------------------------------------------------------------------------------------------------------
Investment in floating-rate loans and leases $ 3,324,751 $ 2,862,960
============================================================================================================================
</TABLE>
Interest earned from financing transactions with floating interest
rates was approximately $402.0 million in 1995, $269.0 million in 1994 and
$154.0 million in 1993. 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. The Company's matched funding policy is more fully
described in Note F.
At December 31, 1995, the Company had a committed backlog of new
business of approximately $1.1 billion compared to $764.0 million at December
31, 1994. The committed backlog includes lines of credit totaling $629.0 million
and $540.0 million for December 31, 1995 and 1994, respectively. Historically,
the Company has booked a substantial portion of its backlog, although there can
be no assurance that such trend will continue. Loan commitments and lines of
credit have generally the same credit risk as extending loans to borrowers.
These commitments are generally subject to the same credit quality and
collateral requirements involved in lending transactions. Commitments generally
have a fixed expiration and usually require payment of a fee.
RECEIVABLE TRANSFER AGREEMENTS ("SECURITIZATIONS") -- The Company sells
receivables in transactions subject to limited recourse provisions and remains a
servicer for which it is paid a fee. Normal servicing fees are earned on a level
yield basis over the remaining terms of the related receivables sold.
During 1995, the Company, under a securitization agreement, sold a $200
million undivided proportionate interest in a loan portfolio totaling $610.5
million. Under this securitization agreement, there is recourse to the Company
based on the outstanding balance of the proportionate interest sold. Under
certain other securitizations, $38.7 million and $58.5 million, as of December
31, 1995 and 1994, respectively, of finance lease receivables are the sole
collateral for limited recourse provisions. In addition to such finance lease
receivables, the Company has recourse exposure, at December 31, 1995 and 1994,
limited to $44.7 million and $78.8 million, respectively.
At December 31, 1995 and 1994, the reserve for possible credit losses
includes approximately $16.0 million and $13.0 million, respectively, of
reserves applicable to securitizations. Previously, these reserves had been
classified as accrued liabilities.
18
<PAGE> 46
FINOVA CAPITAL CORPORATION
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>
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 122,233 $ 64,280 $ 69,291
Provision for possible credit losses 47,300 16,670 5,706
Write-offs (35,533) (35,127) (12,575)
Recoveries 2,216 1,898 717
Other (including addition of TriCon and Ambassador
reserves in 1994) 4,117 74,512 1,141
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 140,333 $ 122,233 $ 64,280
=================================================================================================================================
</TABLE>
Write-offs by lines of business experienced by the Company during the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Manufacturer and Dealer Services $ 9,902 $ 7,018 $
Corporate Finance 4,660 4,233 3,741
Communications Finance 4,037 8,300 1,488
Factoring Services 3,728 1,148
Franchise Finance 3,448 2,247
Commercial Real Estate Finance 2,275 1,461 2,320
Commercial Equipment Finance 2,271 1,257
Resort Finance 2,000 2,730
FINOVA Capital Limited 1,523 5,140 5,026
Commercial Finance 452 774
Medical Finance 314 377
Inventory Finance 201 442
Other 722
- ---------------------------------------------------------------------------------------------------------------------------
$ 35,533 $ 35,127 $ 12,575
===========================================================================================================================
Write-offs as a percentage of investment in
managed assets 0.50% 0.59% 0.44%
===========================================================================================================================
</TABLE>
An analysis of nonaccruing contracts and repossessed assets included in
the investment in financing transactions at December 31 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccruing contracts $ 117,884 $ 83,003
Repossessed assets 49,988 85,758
- --------------------------------------------------------------------------------------------------------------------------
Total nonaccruing assets $ 167,872 $ 168,761
==========================================================================================================================
Nonaccruing assets as a percentage of managed assets 2.4% 2.9%
==========================================================================================================================
</TABLE>
In addition to the repossessed assets included in the above table, the
Company had repossessed assets with a total carrying amount of $56.6 million and
$55.1 million at December 31, 1995 and 1994, respectively, which earned income
of $4.2 million and $3.3 million during 1995 and 1994, respectively.
The total carrying amount of impaired loans was $94.3 million at
December 31, 1995, $17.3 million of which were performing and $77.0 million of
which were nonaccruing. A reserve for possible
19
<PAGE> 47
FINOVA CAPITAL CORPORATION
credit losses of $16 million has been established for $35 million of nonaccruing
impaired loans. The average carrying amount of impaired loans was $93.2 million
for the year ended December 31, 1995. Income earned on accruing impaired loans
was $4.0 million in 1995 and is recognized in the same manner as it is on normal
accruing loans. Cash collected on all nonaccruing assets is applied to the
carrying amount.
Under SFAS 114, in-substance foreclosed assets are accounted for as
loans. Accordingly, effective January 1, 1995, $25.3 million of nonaccruing
in-substance foreclosed assets were reclassified from repossessed assets to
nonaccruing contracts. At December 31, 1995, troubled debt restructurings are
included in impaired loans. At December 31, 1994, there were $64.0 million of
troubled debt restructurings classified as rewritten contracts.
Had all nonaccruing assets outstanding at December 31, 1995, 1994 and
1993 remained accruing, income earned would have been increased by approximately
$19 million, $14 million and $11 million, respectively.
NOTE E DEBT
The Company satisfies its short-term financing requirements from the
issuance of commercial paper supported by bank lines of credit, other bank
loans and public notes. The Company's commercial paper borrowings are supported
by unused long-term revolving bank credit agreements totaling $2.7 billion.
FINOVA currently maintains a five-year revolving credit facility with numerous
lenders, in the aggregate principal amount of $1.0 billion. Separately, FINOVA
also has a 364 day revolving credit facility with the same lenders in the
aggregate principal amount of $1.0 billion and has another four-year facility
with numerous lenders for $700.0 million. Under the terms of these agreements,
the Company has the option to periodically select either domestic dollars or
Eurodollars as the basis of borrowings. Interest is based on the lenders' prime
rate for domestic dollar advances or London interbank offered rates ("LIBOR")
for Eurodollar advances. The agreements also provide for a commitment fee on
the unused credit. The 364 day $1.0 billion revolving credit agreement will be
subject to renewal in 1996 while the four and five year $700.0 million and $1.0
billion credit facilities are subject to renewal in 1999 and 2000,
respectively.
The following information pertains to all short-term financing
primarily commercial paper issued by FINOVA for the years ended December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount of short-term debt outstanding
during year $ 2,518,733 $ 2,024,441 $ 516,386
Average short-term debt outstanding during year 2,210,329 1,050,358 336,672
Weighted average short-term interest rates
at end of year:
Short-term borrowings 5.9% 6.2% 3.5%
Commercial paper* 6.0% 6.0% 3.6%
Weighted average interest rate on short-term debt
outstanding during year* 6.1% 4.8% 3.5%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Exclusive of the cost of maintaining bank lines in support of outstanding
commercial paper and the effects of interest rate conversion agreements.
20
<PAGE> 48
FINOVA CAPITAL CORPORATION
Senior debt at December 31 was as follows:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper and short-term bank loans supported by unused long-
term $ 2,398,007 $ 2,024,441
bank revolving credit agreements, less unamortized discount
Medium-term notes due to 2005, 4.5% to 10.3% 1,224,546 1,167,811
Term loans payable to banks due in 1996, 5.9% to 6.8% 180,000 130,000
Senior notes due to 2002, 6.1% to 16.0%, less unamortized discount 1,830,009 1,233,013
Nonrecourse installment notes due to 2002, 10.6% (assets of
$25,349 and $25,648, respectively, pledged as collateral) 16,806 18,089
- ---------------------------------------------------------------------------------------------------------------------
Total senior debt $ 5,649,368 $ 4,573,354
=====================================================================================================================
</TABLE>
Annual maturities of senior debt outstanding at December 31, 1995 due
through November 2005 (excluding the amount supported by the revolving credit
agreements expected to be renewed) approximate $568.8 million (1996), $522.9
million (1997), $522.4 million (1998), $374.1 million (1999), $553.1 million
(2000) and $710.1 million (thereafter).
The agreements pertaining to senior debt and revolving credit
agreements of FINOVA include various restrictive covenants and require the
maintenance of certain defined financial ratios with which FINOVA has complied.
Under one such covenant, dividend payments are limited to 50 percent of
accumulated earnings after December 31, 1991. As of December 31, 1995, FINOVA
had $50.1 million of excess accumulated earnings available for distribution.
Total interest paid is not significantly different from interest
expense.
NOTE F DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into interest rate swaps and interest rate hedge
agreements as part of its interest rate risk management policy of match funding
its assets and liabilities. The derivative instruments utilized are
straightforward and involve little complexity. The Company continually monitors
its position relative to derivatives and utilizes derivative instruments for
non-trading purposes only.
The Company utilizes derivative instruments to minimize its exposure to
fluctuations in interest rates. The Company strives to minimize its overall debt
costs while limiting the short-term variability of interest expense and funds
required for debt service. To achieve this objective, the Company diversifies
its borrowing sources (short- and long-term debt with a fixed or a variable
rate) and seeks to maintain a portfolio that is matched funded. The Company's
matched funding policy generally requires that floating-rate assets be financed
with floating-rate liabilities and fixed-rate assets be financed with fixed-rate
liabilities. The Company's matched funding policy requires that the difference
between floating-rate liabilities and floating-rate assets, as measured as a
percent of total assets, should not vary by more than 3% for any extended
period. The amount of derivatives used is a function of this 3% gap policy with
the maturities of the derivatives being correlated to the maturities of the
assets being financed.
The notional amounts of derivatives do not represent amounts exchanged
by the parties and, thus, are not a measure of FINOVA's exposure through its use
of derivatives. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the derivatives.
Under interest rate swaps, the Company agrees to exchange with the
counterparty, at specified intervals, the payment streams calculated on a
specified notional amount, with at least one stream based on a floating interest
rate. Generic swap notional amounts do not change for the life of the contract.
21
<PAGE> 49
FINOVA CAPITAL CORPORATION
Amortizing swap notional amounts amortize over the life of the transaction.
Basis swaps involve the exchange of floating-rate indices, such as the prime
rate, the commercial paper composite rate and LIBOR.
The Company purchased interest rate hedge agreements to reduce the
impact of increases in interest rates on its floating-rate debt. These
agreements effectively lock in a spread of approximately 2.3% between the
Company's borrowing rate, LIBOR, and its lending rate (Prime based). In 1995,
the Company further protected its margins on floating-rate transactions by
entering into basis swaps with a notional amount of $750 million to lock in the
spread between the Company's lending and borrowing rates. With these agreements,
the Company protected its margins on $1.5 billion of floating-rate transactions.
The Company's off-balance sheet derivative instruments involve credit
and interest rate risks. The credit risk would be the nonperformance by the
counterparties to the financial instruments. All financial instruments have been
entered into with major financial institutions, which are expected to fully
perform under the terms of the agreements, thereby mitigating the credit risk
from the transactions, although there can be no assurance that any such
institution will perform under its agreement. The Company's derivative policy
stipulates that the maximum exposure to any one counterparty, relative to the
derivative products, is limited on a net basis to 10% of the Company's
outstanding debt at the time of that transaction. Interest rate risks relate to
changes in interest rates and the impact on earnings. The Company mitigates
interest rate risks through its matched funding policy.
The use of derivatives increased interest expense by $9.8 million in
1995, an increase in the aggregate cost of funds of 0.2%; whereas, the use of
derivatives decreased interest expense by $13.7 million in 1994, a reduction in
the aggregate cost of funds of 0.4%, and $25.9 million in 1993, a decrease in
the aggregate cost of funds of 1.3%. These changes in interest expense from
off-balance sheet derivatives effectively alter on-balance sheet costs and must
be viewed as total interest rate management. At December 31, 1995 and 1994,
unamortized premiums amounted to $0.6 million and $1.9 million, respectively.
There were no deferred gains or losses associated with derivatives.
22
<PAGE> 50
FINOVA CAPITAL CORPORATION
The following table provides annual maturities and weighted-average
interest rates for each significant derivative product type. The rates presented
are as of December 31, 1995. To the extent that rates change, variable interest
information will change.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, Maturities of Derivative Products
---------------------------------------------------------------------------------
(Dollars in Millions) 1995 1996 1997 1998 1999 2000 Thereafter
- ------------------------------------------------------------------------------------------------------------------------------------
RECEIVE FIXED-RATE SWAPS:
<S> <C> <C> <C> <C> <C> <C> <C>
Notional value $ 1,300 $ 100 $ 275 $ 325 $ 250 $ 150 $ 200
Weighted average receive
rate 6.70% 5.34% 6.70% 6.83% 6.82% 7.24% 6.65%
Weighted average pay rate 5.89% 5.72% 5.76% 5.73% 5.64% 5.88% 5.78%
PAY FIXED-RATE GENERIC
SWAPS:
Notional value $ 800 $ 325 $ 275 $ 100 $ 50 $ 50
Weighted average receive
rate 5.86% 5.79% 5.75% 5.70% 5.81% 5.68%
Weighted average pay rate 7.18% 6.88% 7.18% 8.37% 7.98% 8.09%
PAY FIXED-RATE AMORTIZING SWAPS:
Notional value $ 95 $ 76 $ 19
Weighted average receive
rate 5.76% 5.78% 5.58%
Weighted average pay rate 5.33% 5.13% 6.06%
BASIS SWAPS:
Notional value $ 878 $ 250 $ 628
Weighted average receive
rate 5.85% 5.84% 6.02%
Weighted average pay rate 6.12% 6.08% 6.24%
INTEREST RATE HEDGE AGREEMENTS:
Notional value $ 750 $ 750
Weighted average receive
rate 2.08% 2.08%
Weighted average pay rate 2.50% 2.50%
TOTAL NOTIONAL VALUE $ 3,823 $ 1,251 $ 819 $ 1,053 $ 300 $ 200 $ 200
===================================================================================================================================
Total weighted average
rates:
Receive rate 5.40% 3.53% 6.09% 6.24% 6.65% 6.85% 6.65%
===================================================================================================================================
Pay rate 5.53% 4.05% 6.34% 6.29% 6.03% 6.43% 5.78%
===================================================================================================================================
</TABLE>
23
<PAGE> 51
FINOVA CAPITAL CORPORATION
Derivative product activity for the three years ended December 31, 1995
is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Pay Fixed- Pay Fixed- Interest
Receive Rate Rate Rate
Fixed-Rate Generic Amortizing Basis Hedge
(Dollars in Millions) Swaps Swaps Swaps Swaps Agreements TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1992 $ 890 $ 205 $ $ $ $ 1,095
Expired (50) (25) (75)
Additions 300 750 1,050
- -----------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1993 1,140 180 750 2,070
Expired (50) (50) (148) (248)
Additions 100 650 390 254 1,394
- -----------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1994 1,190 780 242 254 750 3,216
Expired (40) (30) (152) (126) (348)
Additions 150 50 5 750 955
- -----------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 $ 1,300 $ 800 $ 95 $ 878 $ 750 $ 3,823
=======================================================================================================================
</TABLE>
NOTE G REDEEMABLE PREFERRED STOCK
In connection with the Spin-Off, the Company issued 2,500 shares of its
Series A Redeemable Preferred Stock (the "preferred stock") to a subsidiary of
Dial for $25 million. In July 1993, FINOVA Group acquired all 2,500 shares of
the preferred stock. In March 1994, FINOVA Group contributed all 2,500 shares of
the preferred stock to FINOVA as additional paid in capital.
NOTE H INCOME TAXES
The consolidated provision (benefit) for income taxes consist of the
following for the years ended December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
United States:
Federal $ 33,919 $ 31,412 $ 4,976
State 7,194 6,436 1,254
Foreign (156)
- -----------------------------------------------------------------------------------
41,113 37,848 6,074
- -----------------------------------------------------------------------------------
Deferred:
United States:
Federal 12,647 7,193 19,341
State 5,047 4,489 2,267
Foreign 804 (88)
- -----------------------------------------------------------------------------------
18,498 11,594 21,608
- -----------------------------------------------------------------------------------
Provision for income taxes $ 59,611 $ 49,442 $ 27,682
===================================================================================
</TABLE>
24
<PAGE> 52
FINOVA CAPITAL CORPORATION
Income taxes paid in 1995, 1994 and 1993 amounted to approximately
$48.0 million, $39.1 million and $10.5 million, respectively.
The significant components of deferred tax liabilities and deferred tax
assets at December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred income from leveraged leases $ 230,120 $ 226,115
Deferred income from lease financing 62,681 32,833
Other 6,408 8,353
- ----------------------------------------------------------------------------------------------------------------------
Gross deferred tax liability 299,209 267,301
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Reserve for possible credit losses 39,094 29,363
Investment in foreign subsidiary carrying value difference 23,193 23,193
Accrued expenses 0 1,462
Alternative minimum tax credit carryforward 7,352 0
Other 1,773 3,984
- ----------------------------------------------------------------------------------------------------------------------
Gross deferred tax asset 71,412 58,002
- ----------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 227,797 $ 209,299
======================================================================================================================
</TABLE>
The federal statutory income tax rate is reconciled to the effective
income tax rate as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes 5.1% 5.1% 3.4%
Foreign tax effects (0.5%) 1.2% (2.1%)
Municipal income (1.7%) (1.2%)
Other (0.1%) (0.7%)
- ----------------------------------------------------------------------------------------------------------------------
Current provision for income taxes 37.9% 40.0% 35.6%
Adjustments to deferred taxes 7.6%
- ----------------------------------------------------------------------------------------------------------------------
Provision for income taxes 37.9% 40.0% 43.2%
======================================================================================================================
</TABLE>
NOTE I PENSION AND OTHER BENEFITS
Net periodic pension costs were $1.3 million, $1.5 million and $0 for
each of the years ended December 31, 1995, 1994 and 1993, respectively. The
Company's pension costs were prepaid by $2.3 million at December 31, 1995 and
$3.6 million at December 1994.
Net periodic postretirement benefit costs were $0.6 million, $0.5
million and $0.3 million for each of the years ended December 31, 1995, 1994 and
1993, respectively. The Company's accrued postretirement benefit costs were $1.5
million at December 31, 1995 and $0.8 million at December 31, 1994.
25
<PAGE> 53
FINOVA CAPITAL CORPORATION
NOTE J LITIGATION AND CLAIMS
The Company is party either as plaintiff or defendant to various
actions, proceedings and pending claims, including legal actions, certain of
which involve claims for compensatory, punitive or other damages in significant
amounts. Such litigation often results from the Company's attempts to enforce
its lending agreements against borrowers and other parties to such transactions.
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 may be held
liable, if any, is not ascertainable, the Company believes that any resulting
liability should not materially affect the Company's financial position or
results of operations.
NOTE K 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>
- -------------------------------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
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 $ 4,749,407 $ 4,755,908 $ 3,810,781 $ 3,829,881
Liabilities:
Senior debt 5,649,368 5,729,950 4,573,354 4,510,043
Off-Balance Sheet -
Financial Instruments:
Interest rate swaps -- 9,970 -- (47,937)
Interest rate hedge agreements -- (2,878) -- (4,049)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying values of cash and cash equivalents, factored receivables,
accounts payable and accrued expenses, due to clients and interest payable
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, 1995 and 1994. Management believes
that the risk factor embedded in the entry-value interest rates
applicable to performing loans for
26
<PAGE> 54
FINOVA CAPITAL CORPORATION
which there are no known credit concerns results in a fair valuation of
such loans on an entry value basis. As of December 31, 1995 and 1994,
the fair value of nonaccruing contracts with a carrying amount of
$117.9 million and $83.0 million, respectively, was not estimated
because it is not practicable to reasonably assess the credit
adjustment that would be applied in the marketplace for such loans. As
of December 31, 1995 and 1994, the carrying amount of loans and other
financing contracts excludes repossessed assets with a total carrying
amount of $106.6 million and $140.9 million, respectively.
SENIOR DEBT:
The fair value of senior 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, if any, were assumed
to approximate fair values due to their short maturities.
INTEREST RATE SWAPS:
The fair values of interest rate swaps is based on quoted
market prices obtained from participating banks and dealers for
transactions of similar remaining duration.
INTEREST RATE HEDGE AGREEMENTS:
The fair values of interest rate hedge agreements is based on
quoted market prices obtained from participating banks and dealers for
transactions of similar remaining duration.
The fair value estimates presented herein were based on information
available as of December 31, 1995 and 1994. 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, 1995 and 1994; therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
NOTE L 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>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 88,102 $ 63,891 $ 29,502
Depreciation and amortization 16,365 9,733 2,802
Problem account costs 9,316 13,505 11,822
Travel and entertainment 8,818 6,099 2,182
Professional services 8,741 7,357 2,201
Occupancy expense 7,433 6,124 4,160
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE M NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of,"
effective for fiscal years beginning after December 15, 1995. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or
27
<PAGE> 55
FINOVA CAPITAL CORPORATION
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In addition, the statement requires that certain long-lived
assets and intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The Company does not expect the adoption
of this accounting standard to materially impact its results of operations or
financial position. The Company will adopt this accounting standard effective
January 1, 1996, as required.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," effective for transactions entered into in fiscal
years that begin after December 15, 1995. This statement establishes financial
accounting and reporting for stock-based employee compensation plans, including
stock purchase plans, stock option plans, restricted stock and stock
appreciation rights. The Statement requires a fair value based method of
accounting for employee stock options or similar instruments and encourages a
similar method for all employee stock compensation plans. This method measures
compensation cost at the grant date based on the value of an award and
recognizes it over the service period, usually the vesting period. However, the
Statement also allows an entity to continue measuring compensation cost for such
plans using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
provided pro forma disclosures are made. The Company expects to continue to
account for its stock-based employee compensation plans using the method of
accounting proscribed by APB No. 25 and does not expect this accounting standard
will materially impact its results of operations or financial position.
28
<PAGE> 56
FINOVA CAPITAL CORPORATION
SUPPLEMENTAL SELECTED FINANCIAL DATA
CONDENSED QUARTERLY RESULTS (UNAUDITED)
(Dollars in Thousands)
The following represents the condensed quarterly results for the two
years ended December 31, 1995 and 1994:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest earned from financing transactions:
1995 $ 174,757 $ 184,693 $ 192,287 $ 210,118
1994 73,961 121,891 147,649 159,850
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
1995 84,524 90,197 93,136 98,965
1994 33,862 53,648 65,881 69,538
- ----------------------------------------------------------------------------------------------------------------------------
Gains on sale of assets:
1995 2,980 4,073 4,646 8,027
1994 3 4,500 1,169 3,373
- ----------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
1995 55,718 61,188 63,363 77,250
1994 21,448 42,176 46,151 55,937
- ----------------------------------------------------------------------------------------------------------------------------
Net income:
1995 22,368 23,629 25,150 26,482
1994 11,596 17,517 22,056 23,144
============================================================================================================================
</TABLE>
29
<PAGE> 57
FINOVA CAPITAL CORPORATION
AVERAGE BALANCES/INTEREST MARGINS/AVERAGE ANNUAL RATES (UNAUDITED)
(Dollars in Thousands)
The following represents the breakdown of the Company's average balance
sheet, interest margins and average annual rates for the years ended December
31, 1995 and 1994:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate
- --------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 45,917 $
Investment in financing transactions 6,213,571 706,637 (4) 12.1% (2)
Less reserve for possible credit losses (128,590)
- --------------------------------------------------------------------------------------------------
Investment in financing transactions - net 6,084,981
Other assets and deferred charges 275,592
- --------------------------------------------------------------------------------------------------
$ 6,406,490
==================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Other liabilities $ 285,484
Senior debt 5,084,145 366,822 7.2%
Deferred income taxes 218,727
- --------------------------------------------------------------------------------------------------
5,588,356
Redeemable preferred stock
Stockholder's equity 818,134
- --------------------------------------------------------------------------------------------------
$ 6,406,490
==================================================================================================
Interest income/average earning assets (2) $ 706,637 12.1%
Interest expense/average earning assets (2) (3) 366,822 6.3%
- --------------------------------------------------------------------------------------------------
Interest margins earned (3) $ 339,815 5.8%
==================================================================================================
- --------------------------------------------------------------------------------------------------
December 31, 1994 (1)
- --------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate
- --------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 25,038 $
Investment in financing transactions 4,446,745 466,614 (4) 11.5% (2)
Less reserve for possible credit losses (106,277)
- --------------------------------------------------------------------------------------------------
Investment in financing transactions - net 4,340,468
Other assets and deferred charges 182,412
- --------------------------------------------------------------------------------------------------
$ 4,547,918
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities $ 240,890
Senior debt 3,468,498 222,929 6.4%
Deferred income taxes 209,088
- --------------------------------------------------------------------------------------------------
3,918,476
Redeemable preferred stock 7,692
Stockholders' equity 621,750
- --------------------------------------------------------------------------------------------------
$ 4,547,918
==================================================================================================
Interest income/average earning assets (2) 466,614 11.5%
Interest expense/average earning assets (2) (3) 222,929 5.5%
- --------------------------------------------------------------------------------------------------
Interest margins earned (3) $ 243,685 6.0%
==================================================================================================
</TABLE>
(1) Includes financial results from the acquisitions of Ambassador (February
14, 1994) and TriCon (April 30, 1994).
(2) The average rate is calculated based on average earning assets ($5,815,455
and $4,064,971 for 1995 and 1994, respectively) which are net of average
deferred taxes on leveraged leases and average nonaccruing assets.
(3) For the year ended December 31, 1995, excluding the impact of derivatives,
interest expense would have been $357,017 or 6.1% of average earning assets
and interest margins earned would have been $349,620 or 6.0% of average
earning assets. For the year ended December 31, 1994, excluding the impact
of derivatives, interest expense would have been $235,855 or 5.8% of
average earning assets and interest margins earned would have been $230,759
or 5.7% of average earning assets.
(4) Interest income is shown net of depreciation.
30
<PAGE> 58
FINOVA CAPITAL CORPORATION
COMMISSION FILE NUMBER 1-7543
EXHIBIT INDEX
DECEMBER 31, 1995 FORM 10-K
Exhibit No. Description
----------- -----------
(3.A) Certificate of Incorporation, as amended through the date of
this filing (incorporated by reference from the Company's
Report on Form 10-K for the year ended December 31, 1994 (the
"1994 10-K", Exhibit 3.A).
(3.B) By-Laws, as amended through the date of this filing,
(incorporated by reference from the 1994 10-K, Exhibit 3.B)
(4.A) Instruments with respect to issues of long-term debt have not
been filed as exhibits to this Annual Report on Form 10-K if
the authorized principal amount of any one of such issues does
not exceed 10% of total assets of the Company and its
subsidiaries on a consolidated basis. The Company agrees to
furnish a copy of each such instrument to the Securities and
Exchange Commission upon request.
(4.B) Form of Common Stock Certificate of the Company (incorporated
by reference from the 1994 10-K, Exhibit 4.B).
(4.C) Relevant portions of the Company's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and 3.B
above, respectively, are hereby incorporated by reference.
(4.D.1) Rights Agreement dated as of February 15, 1992 between the
Company and the Rights Agent named therein, as amended
(incorporated by reference from the Company's Current Report
on Form 8-K dated September 21, 1995, Exhibit 4.1).
(4.D.2) Acceptance of Successor Trustee to Appointment under Rights
Agreement noted in 4.D.1 above (incorporated by reference from
the Company's Current Report on Form 8-K, dated November 30,
1995, Exhibit 4).
(4.E) Indenture dated as of November 1, 1990 between FINOVA and the
Trustee named therein (incorporated by reference from
Greyhound Financial Corporation's Registration Statement on
Form S-3, Registration No. 33-37743, Exhibit 4).
(4.F) Fourth Supplemental Indenture dated as of April 17, 1992
between FINOVA Capital and the Trustee named therein,
supplementing the Indenture referenced in Exhibit 4.E above
(incorporated by reference from GFC Financial Corporation's
Annual Report on Form 10-K for the year 1992 (the "1992
10-K"), Exhibit 4.F).
(4.G) Form of Indenture dated as of September 1, 1992 between FINOVA
and the Trustee named therein (incorporated by reference from
the Greyhound Financial Corporation Registration Statement on
Form S-3, Registration No. 33-51216, Exhibit 4).
<PAGE> 59
Exhibit No. Description
----------- -----------
(4.H) Form of Indenture dated as of October 1, 1995 between FINOVA
and the Trustee named therein (incorporated by reference from
FINOVA's Report on Form 8-K dated October 25, 1995, Exhibit
4.1).
(10.A) Sixth Amendment and Restatement dated as of May 16, 1994 of
the Credit Agreement dated as of May 31, 1976 among FINOVA
Capital and the lender parties thereto, and Bank of America
National Trust and Savings Association, Bank of Montreal,
Chemical Bank, Citibank, N.A. and National Westminster Bank
USA, as agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from the
Corporation's Current Report on Form 8-K dated May 23, 1994,
Exhibit 10.I).
(10.A.1) First Amendment dated as of September 30, 1994, to the Sixth
Amendment and Restatement, noted in 10.A above (incorporated
by reference from the 1994 10-K, Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the Sixth
Amendment and Restatement noted in 10.A above (incorporated by
reference from FINOVA Group's Quarterly Report on Form 10-Q
for the period ending September 30, 1995 (the "Third Quarter
10- Q", Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by reference from
the Third Quarter 10-Q, Exhibit 10.B).
(10.B) Credit Agreement (Short-Term Facility) dated as of May 16,
1994 among FINOVA Capital, the Lender parties thereto, the
Agents and Citibank, N.A., as Administrative Agent
(incorporated by reference from the Company's Report on Form
8-K dated May 23, 1994, Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the Credit
Agreement noted in 10.B above (incorporated by reference from
the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B above
(incorporated by reference from the Third Quarter 10-Q,
Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B above
(incorporated by reference from the Third Quarter 10-Q,
Exhibit 10.D).
(10.C) Interim Services Agreement dated January 28, 1993 among the
Company, The Dial Corp and others, (incorporated by reference
from the 1992 10-K, Exhibit 10.JJ).
(10.D) Tax Sharing Agreement dated February 19, 1992 among the
Company, The Dial Corp and others, (incorporated by reference
from the 1992 10-K, Exhibit 10.KK).
<PAGE> 60
Exhibit No. Description
----------- -----------
(10.E) Certificate of Designations of Series A Redeemable Preferred
Stock of FINOVA, dated March 17, 1992, (incorporated by
reference from the 1992 10-K, Exhibit 10.MM).
(10.F) Sublease dated as of April 1, 1991, among the Company, The
Dial Corp and others, relating to the Company's principal
office space, (incorporated by reference from the 1992 10-K,
Exhibit 10.F).
(10.G) Stock Purchase Agreement between Bell Atlantic TriCon Leasing
Corporation and Greyhound Financial Corporation dated as of
March 4, 1994 (incorporated by reference from the 1993 10-K,
Exhibit 10.F).
(10-H) Form of Assets Purchase Agreement between Bell Atlantic TriCon
Leasing Corporation and TriCon Capital Corporation
(incorporated by reference from the 1993 10-K, Exhibit 10.G).
(10.I) Form of Distribution Agreement among the Company, Greyhound
Financial Corporation, The Dial Corp and certain other parties
named therein, dated as of January 28, 1992 (incorporated by
reference from the Registration Statement, Annex II to the
Prospectus and Exhibit 2.1).
(12) Computation of Ratio of Income to Combined Fixed Charges and
Preferred Stock Dividends.*
(23) Independent Auditors' Consent.*
(27) Financial Data Schedule.*
* Filed herewith.
<PAGE> 1
EXHIBIT 12
FINOVA CAPITAL CORPORATION
Computation of Ratio of Income to Combined Fixed Charges
and Preferred Stock Dividends
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 157,240 $ 123,755 $ 64,123 $ 50,593 $ (37,014)
Add fixed charges:
Interest expense 366,822 222,929 126,152 136,107 157,560
One-third of rent expense 2,478 2,041 1,387 1,498 1,148
--------- --------- --------- --------- ---------
Total fixed charges 369,300 224,970 127,539 137,605 158,708
--------- --------- --------- --------- ---------
Net income as adjusted $ 526,540 $ 348,725 $ 191,662 $ 188,198 $ 121,694
--------- --------- --------- --------- ---------
Ratio of income to fixed charges 1.43 1.55 1.50 1.37 --
========= ========= ========= ========= =========
Preferred stock dividends on a pre-tax basis $ $ 930 $ 3,682 $ 2,826
Total combined fixed charges and
preferred stock dividends $ 369,300 $ 225,900 $ 131,221 $ 140,431 $ 158,708
--------- --------- --------- --------- ---------
Ratio of income to combined fixed charges and
preferred stock dividends 1.43 1.54 1.46 1.34 --
========= ========= ========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-63343 of FINOVA Capital Corporation on Form S-3 of our report dated February
16, 1996, appearing in this Annual Report on Form 10-K of FINOVA Capital
Corporation for the year ended December 31, 1995.
Deloitte & Touche
March 19, 1996
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 90,329
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<ALLOWANCE> (140,333)
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<COMMON> 25
0
0
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<INTEREST-LOAN> 761,855
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<INTEREST-TOTAL> 366,822
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<INTEREST-INCOME-NET> 339,815
<LOAN-LOSSES> 47,300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 155,001
<INCOME-PRETAX> 157,240
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<NET-INCOME> 97,629
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<CHARGE-OFFS> (35,533)
<RECOVERIES> 2,216
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