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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
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For the Fiscal Year Ended December 31, 1996 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. |X|
As of March 10, 1997, 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 filling this Form with the reduced disclosure
format.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part Where
- -------- Incorporated
None ------------
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<PAGE>
TABLE OF CONTENTS
Name of Item
------------
Item # Page
- --------------------------------------------------------------------------------
Part I
Item 1 Business:
Introduction 1
General 1
Lines of Business 2
Portfolio Composition 3
Investment in Financing Transactions 3
Cost and Use of Borrowed Funds 11
Credit Ratings 12
Residual Realization Experience 13
Business Development and Competition 14
Credit Quality 14
Risk Management 14
Portfolio Management 15
Delinquencies and Workouts 16
Governmental Regulation 16
Employees 16
Special Note Regarding Forward-Looking Statements 16
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
<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to FINOVA Capital Corporation and its
subsidiaries (collectively "FINOVA" or the "Company"). During 1996, the Company
sold its Manufacturer and Dealer Services line of business and closed FINOVA
Medical Systems. Amounts for 1995 and 1994 have been restated to reflect these
operations as discontinued.
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.
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 historic
businesses of London-based FCL; in early 1996, this phase out was substantially
completed. FCL continues to originate and service transactions on behalf of
FINOVA's Transportation Finance line of business.
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 currently operates
primarily in 15 specific industry or market niches in which its expertise in
evaluating the creditworthiness of prospective customers and its ability to
provide value-added services enables 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
nonaccruing 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 income, other income and gains through
charges assessed on outstanding loans, loan servicing, leasing and other fees
and disposition of equipment upon termination of leases or in other
circumstances. 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.
<PAGE>
Lines of Business
FINOVA's activities currently include the following principal lines of
business:
o Commercial Equipment Finance offers equipment leases, loans
and turnkey financing to a broad range of midsize companies.
Specialty markets include the corporate aircraft and emerging
growth technology industries, primarily biotechnology and
electronics. Typical transaction sizes range from $500,000 to
$15 million.
o 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.
o Commercial Real Estate Finance provides term financing for
hotel, anchored retail, office and owner-occupied properties.
Typical transaction sizes range from $5 million to $25
million.
o Communications Finance specializes in term financing to
advertising and subscriber-supported businesses including
radio and television stations, cable TV operators, outdoor
advertising firms and publishers. Typical transaction sizes
range from $1 million to $40 million.
o Corporate Finance provides a full range of cash flow-oriented
and asset-based term and revolving loan products for
manufacturers, wholesalers, distributors, specialty retailers,
commercial and consumer service businesses. Typical
transaction sizes range from $2 million to $40 million.
o Factoring Services offers full service factoring and accounts
receivable management services for entrepreneurial and larger
firms, primarily in the textile and apparel industries, with
annual factored volume of $5 million to $25 million. This line
provides accounts receivable and inventory financing and loans
secured by equipment and real estate.
o Franchise Finance offers equipment, real estate and
acquisition financing for operators of established franchise
concepts. Typical transaction sizes range from $500,000 to $15
million.
o Government Finance provides tax-exempt term financing for
state and local governments and non-profit corporations.
Typical transaction sizes range from $100,000 to $5 million.
o Healthcare Finance offers a full range of working capital,
equipment and real-estate financing products for the U.S.
healthcare industry. Typical transaction sizes range from
$500,000 to $25 million.
o Inventory Finance provides inbound and outbound inventory
financing, combined inventory/accounts receivable lines of
credit and purchase order financing for equipment
distributors, value-added resellers and dealers nationwide.
Typical transaction sizes range from $500,000 to $30 million.
o Rediscount Finance offers revolving credit facilities to the
independent consumer finance industry including sales,
automobile, mortgage and premium finance companies. Typical
transaction sizes range from $1 million to $35 million.
o Portfolio Services provides customized receivables servicing
and collections for time share developers and other generators
of consumer receivables.
o Resort Finance focuses on construction, acquisition and
receivables financing for developers of timeshare resorts
worldwide, as well as term financing for established golf
resorts and resort hotels and receivables funding for
developers of second home communities. Typical transaction
sizes range from $5 million to $35 million.
<PAGE>
o Transportation Finance structures equipment loans, leases,
acquisition financing and leveraged lease equity investments
for commercial and cargo airlines worldwide, railroads and
operators of other transportation related equipment. Typical
transaction sizes range from $5 million to $30 million.
o FINOVA Investment Alliance provides equity and mezzanine debt
financing for midsize business in partnership with
institutional investors and selected fund sponsors. Typical
transaction sizes range from $2 million to $15 million.
Portfolio Composition
The total assets under the management of the Company consist
of the Company's net investment in financing transactions 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.
Investment in Financing Transactions
The following tables detail FINOVA's investment in financing
transactions (before reserve for possible credit losses) at December
31, 1996, 1995, 1994, 1993, and 1992.
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1996 % 1995 % 1994 % 1993 % 1992 %
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, conditional sale and other
financing contracts:
Commercial $ 3,592,193 49.2 $3,389,363 53.4 $ 2,732,734 51.1 $ 1,397,863 49.1 $ 1,028,181 42.3
Real estate 1,713,485 23.5 1,534,177 24.1 1,237,488 23.2 945,892 33.2 891,190 36.7
Factored receivables 564,430 7.7 189,486 3.0 157,862 3.0
Operating leases 517,690 7.1 460,798 7.3 412,782 7.7 147,222 5.2 100,911 4.2
Leveraged leases 514,573 7.1 366,196 5.8 287,518 5.4 283,782 10.0 269,370 11.1
Direct financing leases 396,388 5.4 408,059 6.4 514,595 9.6 71,812 2.5 138,871 5.7
----------- ----- ---------- ----- ----------- ----- ----------- ----- ------------ -----
Total investment in financing 7,298,759 100.0 6,348,079 100.0 $ 5,342,979 100.0 $ 2,846,571 100.0 $ 2,428,523 100.0
===== ===== =========== ===== =========== ===== ============ =====
transactions
Securitized assets 300,000 200,000
----------- ----------
Total managed assets $ 7,598,759 $6,548,079
=========== ==========
</TABLE>
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
---------------------------------------- ----------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
---------------------------------------- ---------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) $ 1,330,578 $ $ $ $ $ $ 1,330,578 18.2
Resort Finance 1,124,462 2,963 13,878 77 25,136 1,166,516 16.0
Commercial Real Estate Finance 700,932 30,245 46,068 6,748 9,853 940 794,786 10.9
Corporate Finance (4) 630,399 3,211 14,695 335 648,640 8.9
Commercial Equipment Finance 570,574 7,900 6,564 585,038 8.0
Communications Finance 535,701 8,796 14,129 3,095 561,721 7.7
Healthcare Finance 497,540 1,304 1,194 500,038 6.9
Rediscount Finance 421,232 245 421,477 5.8
Franchise Finance 366,202 1,104 1,985 996 370,287 5.0
Inventory Finance 314,446 1,273 315,719 4.3
Factoring Services 220,701 3,419 224,120 3.1
Commercial Finance 160,006 11,963 171,969 2.3
Government Finance 150,361 13 150,374 2.1
Other 52,998 4,498 57,496 0.8
------------ --------- --------- --------- --------- --------- ------------ -----
Total Continuing Operations (4) $ 7,076,132 $ 46,319 $ 59,946 $ 63,751 $ 38,419 $ 14,192 $ 7,298,759 100.0
============ ========= ========= ========= ========= ============ =====
Discontinued Operations (5) 39,143
---------
TOTAL $ 53,335
=========
</TABLE>
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $5.1 million on repossessed assets
during 1996, including $4.4 million in Commercial Real Estate Finance and
$0.7 million in Resort Finance.
(3) Transportation Finance includes $160.8 million of aircraft financing
business booked through the London office.
(4) Excludes $300 million of securitized assets which are managed by the
Company.
(5) Reflects assets retained by FINOVA subsequent to the sale of the
Manufacturer and Dealer Services' line of business.
--------------------
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------------- -----------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
------------------------------------- ----------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) $ 929,043 $ $ $ $ $ $ 929,043 14.6
Resort Finance 943,661 2,849 12,064 2,583 26,559 987,716 15.6
Commercial Real Estate Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 12.3
Corporate Finance (4) 631,295 5,274 19,592 335 656,496 10.3
Commercial Equipment Finance 345,039 69 6,079 351,187 5.5
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.8
Healthcare Finance 451,503 81 1,231 452,815 7.2
Rediscount Finance 345,264 345,264 5.4
Franchise Finance 327,356 1,462 6,408 1,850 337,076 5.3
Inventory Finance 202,879 430 203,309 3.2
Factoring Services 188,892 594 189,486 3.0
Commercial Finance 200,365 12,685 213,050 3.4
Government Finance 121,956 47 122,003 1.9
Other 78,645 1,275 2,360 6,061 88,341 1.5
------------ --------- --------- --------- --------- --------- ------------ -------
Total Continuing Operations (4) $ 6,131,107 $ 17,260 $ 56,585 $ 76,883 $ 49,988 $ 16,256 $ 6,348,079 100.0
============ ========= ========= ========= ========= ========= ============ =======
</TABLE>
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(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 included $144 million of aircraft financing business
booked through the London office.
(4) Excludes $200 million of securitized assets which are managed by the
Company.
--------------------
<PAGE>
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>
Transportation Finance (2) $ 706,242 $ 14,620 $ $ $ $ $ 720,862 13.5
Resort Finance 634,735 4,506 7,314 2,582 30,393 679,530 12.7
Commercial Real Estate Finance 672,522 7,237 40,510 7,622 21,519 749,410 14.0
Corporate Finance 746,671 21,275 6,952 2,674 777,572 14.5
Commercial Equipment Finance 293,609 769 7,589 301,967 5.6
Communications Finance 551,218 6,288 7,282 17,377 5,863 671 588,699 11.0
Healthcare Finance 467,131 1,719 468,850 8.8
Rediscount Finance 99,353 99,353 1.9
Franchise Finance 281,890 7,632 12,242 301,764 5.6
Inventory Finance 58,595 642 59,237 1.1
Factoring Services 157,090 772 157,862 3.0
Commercial Finance 181,741 12,003 193,744 3.6
Government Finance 93,491 144 93,635 1.8
FINOVA Capital Limited (3) 93,700 1,561 4,265 2 4,800 104,328 2.0
Other 36,951 8,918 297 46,166 0.9
------------ ---------- --------- --------- ---------- -------- ------------ -----
Total Continuing Operations $ 5,074,939 $ 63,888 $ 55,106 $ 73,519 $ 60,451 $ 15,076 $ 5,342,979 100.0
============ ========== ========= ========= ========== ======== ============ =====
</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) The FINOVA Capital Limited balance included transactions in Europe and
elsewhere (including the U.S.) originated from the Company's London office.
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.
--------------------
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(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>
Transportation Finance (2) (3) $ 604,416 $ $ $ 841 $ $ $ 605,257 21.2
Resort Finance 530,617 4,869 12,163 11,597 7,404 440 567,090 19.9
Commercial Real Estate Finance (2) 500,598 1,574 27,844 5,759 20,838 556,613 19.6
Corporate Finance (2) 397,779 27,921 4,243 5,462 386 435,791 15.3
Communications Finance 487,890 7,989 8,949 21,730 11,564 538,122 18.9
Rediscount Finance 19,439 19,439 0.7
FINOVA Capital Limited (4) 107,486 4,430 2,720 23 9,600 124,259 4.4
----------- --------- --------- --------- --------- --------- ------------- ------
$ 2,648,225 $ 46,783 $ 48,956 $ 46,890 $ 45,291 $ 10,426 $ 2,846,571 100.0
=========== ========= ========= ========= ========= ========= ============= ======
</TABLE>
- --------------------
NOTES:
(1) 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.
(2) 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.
(3) Transportation Finance included $31.9 million of aircraft finance business
booked through the London office.
(4) The FINOVA Capital Limited balance included transactions in Europe and
elsewhere (including the U.S.) originated from the Company's London office.
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.
--------------------
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1992
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------------ --------------------------------
Repos- Delin- Repos- Leases Total
Original Rewritten sessed quent sessed & Carrying
Rate Contract Assets (1) Loans Assets Other Amount %
------------------------------------ -------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance $ 328,962 $ $ $ $ $ $ 328,962 13.5
Resort Finance 488,224 1,356 6,524 7,365 635 504,104 20.8
Commercial Real Estate Finance 463,571 12,482 21,509 6,302 15,052 518,916 21.4
Corporate Finance (2) 420,006 16,081 14,436 5,111 611 456,245 18.8
Communications Finance 382,914 32,548 8,744 13,182 437,388 18.0
FINOVA Capital Limited (3) 154,609 5,839 6,000 60 16,400 182,908 7.5
------------ --------- --------- --------- --------- ---------- ------------- ------
$ 2,238,286 $ 68,306 $ 21,509 $ 42,006 $ 40,770 $ 17,646 $ 2,428,523 100.0
============ ========= ========= ========= ========= ========== ============= ======
</TABLE>
- --------------------
NOTES:
(1) The Company earned income of $1.9 million on repossessed accruing assets in
Commercial Real Estate Finance during 1992.
(2) 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.
(3) The FINOVA Capital Limited balance included transactions in Europe and
elsewhere (including the U.S.) originated from the Company's London office.
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.
---------------------
<PAGE>
The Company's geographic portfolio diversification at December 31, 1996
was as follows (Dollars in Thousands):
State Total Percent
---------------------------- ------------- ----------
California $ 1,143,936 15.1
Florida 763,109 10.0
Texas 569,841 7.5
New York 485,909 6.4
Arizona 294,603 3.9
New Jersey 289,004 3.8
Virginia 288,431 3.8
Pennsylvania 249,176 3.3
Illinois 241,706 3.2
Nevada 207,897 2.7
Michigan 199,367 2.6
Massachusetts 150,109 2.0
Other (1) 2,715,671 35.7
------------- ----------
$ 7,598,759 100.0%
============= ==========
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents approximately
8% of the total.
--------------------
The following is an analysis of the reserve for possible credit losses
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 129,077 $ 110,903 $ 64,280 $ 69,291 $ 87,600
Provision for possible credit losses 41,751 37,568 10,439 5,706 6,740
Write-offs (32,017) (25,631) (28,109) (12,575) (23,661)
Recoveries 3,296 2,104 1,780 717 749
Other (including reserves related to
acquisitions) 6,586 4,133 62,513 1,141 (2,137)
----------- ----------- ---------- ---------- -----------
Balance, end of year $ 148,693 $ 129,077 $ 110,903 $ 64,280 $ 69,291
=========== =========== ========== ========== ===========
</TABLE>
--------------------
Included in the above is a specific impairment reserve of $6.2 million
at December 31, 1996, which applies to $14.1 million of the $110.1 million of
impaired loans. The remaining $142.5 million of the reserve for possible credit
losses is designated for general purposes and represents management's best
estimate of potential losses in the portfolio considering delinquencies, loss
experience and collateral. At December 31, 1995, the specific impairment reserve
was $16 million which applied to $35 million of the $94.1 million of impaired
loans. Additions to general and specific reserves are reflected in current
operations. Management may transfer reserves between the general and specific
reserves as appropriate.
<PAGE>
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>
1996 1995 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporate Finance $ 9,470 $ 4,660 $ 4,233 $ 3,741 $ 1,000
Factoring Services (2) 5,098 3,728 1,148
Resort Finance 4,275 2,000 2,730
Franchise Finance (1) 3,267 3,448 2,247
Commercial Equipment Finance (1) 3,207 2,271 1,257
Communications Finance 2,994 4,037 8,300 1,488 1,500
Commercial Real Estate Finance 1,793 2,275 1,461 2,320 4,417
Healthcare Finance (1) 1,018 314 377
FINOVA Capital Limited 895 1,523 5,140 5,026 15,838
Commercial Finance (1) 452 774
Inventory Finance (1) 201 442
Other 722 906
----------- ----------- ----------- ----------- -----------
$ 32,017 $ 25,631 $ 28,109 $ 12,575 $ 23,661
=========== =========== =========== =========== ===========
Write-offs as a percentage
of managed assets 0.42% 0.39% 0.53% 0.44% 0.97%
=========== =========== =========== =========== ===========
</TABLE>
- --------------------
NOTES:
(1) Acquired April, 1994.
(2) Acquired February, 1994.
--------------------
A further breakdown of the portfolio by line of business can be found in
Notes C and D of Notes to Consolidated Financial Statements in Annex A.
Cost and Use of Borrowed Funds
FINOVA relies on borrowed funds as well as internal cash flow to
finance its operations. FINOVA follows a policy of relating terms under its
loans and leases to the terms on which it obtains funds so, 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.
<PAGE>
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,
-------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term and variable rate long-term debt (1) 6.5% 7.2% 5.5% 4.7% 5.3%
Fixed-rate long-term debt (1) 7.2% 7.3% 8.1% 11.4% 10.6%
Aggregate borrowed funds (1) 6.8% 7.2% 6.3% 6.3% 7.2%
Rate earned on average earning assets (2) (3) 11.8% 12.1% 11.3% 10.9% 11.9%
Spread percentage (4) 5.8% 5.7% 5.9% 5.4% 5.1%
</TABLE>
- ---------------------
NOTES:
(1) Includes the effects of interest rate swap and hedge 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,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- ----------- ----------- ----------- ---------
1.50 1.44 1.58 1.46 1.34
========= =========== =========== =========== =========
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 from continuing operations 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.
Credit Ratings
FINOVA currently has investment-grade credit ratings from the following
rating agencies:
Commercial Senior
Paper Debt
----------- --------
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 A-
<PAGE>
There can be no assurance that these 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. None of FINOVA's subsidiaries have applied for credit ratings.
Residual Realization Experience
Over the last 42 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, 1996, 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:
Early Terminations (Note 1) Terminations at End of Lease Term
- ------------------------------------------- -----------------------------------
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)
- ------------------------------------------- -----------------------------------
1996 $ 87,311 $ 75,910 115% $ 15,634 $ 13,872 113%
1995 1,402 905 155% 44,395 37,053 120%
1994 6,477 5,865 110% 15,287 14,164 108%
1993 --- --- --- 486 248 196%
1992 20,493 17,527 117% 2,164 1,768 122%
- --------------------
Notes:
(1) Excludes foreclosures for credit reasons which are immaterial.
--------------------
<PAGE>
The estimated residual value of direct finance and leveraged lease
assets in the accounts of FINOVA at December 31, 1996 aggregated 30.5% of the
original cost of such assets (23.8% 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, 1996 for financing contracts excluding leveraged
leases were 7.2 and 4.6 years, respectively, and for leveraged leases were
approximately 18.6 and 11.9 years, respectively. The comparable average initial
term and remaining term 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. 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 and other sources.
At December 31, 1996, FINOVA's continuing operations consisted of 6,923
financing contracts with 4,119 customers (including 799 contracts with consumer
finance customers), compared to 6,705 contracts with 4,207 customers (including
881 contracts with consumer finance customers) at December 31, 1995.
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, structure and innovation in transactions, 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.
<PAGE>
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 guidelines. In
addition, underwriters attempt to avoid undue concentrations in any one
customer, industry or regional location.
o 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.
o 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.
o Financial. FINOVA's review of a prospective borrower normally includes
a thorough analysis of the borrower's financial performance. 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.
o Collateral. FINOVA regards collateral as an important factor in a
credit evaluation and has established maximum loan to value ratios,
normally ranging from 60% - 90%, 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
historic 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; and review and management of covenant compliance.
The Portfolio Management department or 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.
<PAGE>
Delinquencies and Workouts
FINOVA monitors the timing of payments on all of its accounts. For term
loans, when an invoice is 10 days past due, the customer is generally 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 satisfactory results are not obtained in communication with the customer, the
guarantor(s) are contacted to advise them of the situation and the potential
obligation under the guarantee agreement. 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 finance, 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.
EMPLOYEES
At December 31, 1996, the Company had 864 employees compared to 950 at
December 31, 1995. None of the employees were covered by collective bargaining
agreements. The Company believes its employee relations are satisfactory.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in documents incorporated herein by
reference and under the captions "Business," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Form that are not historical facts, including, without limitation, statements of
future expectations, projections of results of operations and financial
condition, statements of future economic performance and other forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, are subject to known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to differ materially from those contemplated in such forward-looking statements.
In addition to the specific matters referred to herein, important factors which
may cause actual results to differ from those contemplated in such
forward-looking statements include: (1) the results of the Company's efforts to
implement its business strategy; (2) the effect of economic conditions and the
performance of borrowers; (3) actions of the Company's competitors and the
Company's ability to respond to such actions; (4) the cost of the Company's
capital, which depends in part on the Company's portfolio quality, ratings,
prospects and outlook; (5) changes in governmental regulation, tax rates and
similar matters; and (6) other risks detailed in the Company's other filings
with the Commission.
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in premises
leased from Viad Corp. (formerly The Dial Corp) in Phoenix, Arizona. FINOVA
operates various additional offices in the United States and one office in
Europe. All these 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, some 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 those
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 would 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 as the Company is
wholly owned by FINOVA Group. The preferred stock was redeemed through a
contribution from FINOVA Group in March 1994 and none has been outstanding since
that time. Dividends paid on common stock for the first through fourth quarters
of 1996 were $6,012,000, $6,020,000, $6,596,000 and $6,602,000, respectively.
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.
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, 1996, FINOVA
had $83,400,000 of excess accumulated earnings available for distribution.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
See pages 1 - 5 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.
<PAGE>
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:
Annex
Page
-------
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 - 31
Supplemental Selected Financial Data 32 - 33
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).
<PAGE>
(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 the issue 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 incorporated by
reference.
(4.D) Indenture dated as of November 1, 1990 between
the Company 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.E) Fourth Supplemental Indenture dated as of April
17, 1992 between FINOVA and the Trustee named
therein, supplementing the Indenture referenced
in Exhibit 4.D 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.F) 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.G) Form of Indenture dated as of October 1, 1995
between FINOVA Capital and the Trustee named
therein (incorporated by reference from FINOVA's
Report on Form 8-K dated October 25, 1995,
Exhibit 4.1).
(4.H) 1992 Stock Incentive Plan of FINOVA Group as
amended through the date of this filing,
including proposed amendments being considered at
the 1997 Annual Meeting of Shareholders.*+
(10.A) Sixth Amendment and Restatement dated as of May
16, 1994 of the Credit Agreement dated as of May
31, 1976 among FINOVA 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 Company'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 the
Company's Quarterly Report on Form 10-Q for the
period ending September 30, 1995 (the "3Q95
10-Q"), Exhibit 10.A).
<PAGE>
Exhibit No
----------
(10.A.3) Third Amendment dated as of November 1, 1995 to
Sixth Amendment noted in 10.A above (incorporated
by reference from the 3Q95 10-Q, Exhibit 10.B).
(10.A.4) Fourth Amendment dated as of May 15, 1996, to
Sixth Amendment noted in 10.A above (incorporated
by reference from FINOVA Group's Report on Form
10-K for the year ended December 31, 1996 (the
"1996 FINOVA Group 10-K"), Exhibit 10.A.4).
(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
3Q95 10-Q, Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in
10.B above (incorporated by reference from the
3Q95 10-Q, Exhibit 10.D).
(10.B.4) Fourth Amendment to Short-Term Facility noted in
10.B above (incorporated by reference from the
1996 FINOVA Group 10-K, Exhibit 10.B.4).
(10.C.1) The Company's Executive Severance Plan for Tier 1
Employees (incorporated by reference from the
Company's 1995 10-K, Exhibit 10.C.1).+
(10.C.2) The Company's Executive Severance Plan for Tier 2
Employees (incorporated by reference from the
Company's 1995 10-K, Exhibit 10.C.2).+
(10.D) The Company's 1996 Management Incentive Plan
(incorporated by reference from the 1996 FINOVA
Group 10-K, Exhibit 10.D).+
(10.E.1) The Company's 1995 - 1997 Performance Share
Incentive Plan (incorporated by reference from
the 3Q95 10-Q, Exhibit 10.H).+
(10.E.2) The Company's 1994 - 1996 Performance Share
Incentive Plan (incorporated by reference from
the 3Q95 10-Q, Exhibit 10.I).+
(10.E.3) The Company's 1996-1998 Performance Share
Incentive Plan (incorporated by reference from
the 1996 FINOVA Group 10-K, Exhibit 10.E.3).+
(10.F.1) Employment Agreement with Samuel L. Eichenfield
dated March 16, 1996, (incorporated by reference
from the Company's 1995 10-K, Exhibit 10.F.3).+
(10.F.2) Amendment to Employee Agreement referenced in
10.F.1 above (incorporated by reference from the
1996 FINOVA Group 10-K, Exhibit 10.F.2).+
(10.G) Employment Agreement with William J. Hallinan,
dated February 25, 1992 (incorporated by
reference from the 1992 10-K, Exhibit 10.I).+
(10.H) Employment Agreement with Thomas C. Parrinello,
dated February 14, 1994 (incorporated by
reference from the 1994 10-K, Exhibit 10.H).+
(10.I) The Company's Amended and Restated Supplemental
Pension Plan (incorporated by reference from the
1996 FINOVA Group 10-K, Exhibit 10.I).+
<PAGE>
Exhibit No.
-----------
(10.J) FINOVA Group's Value Sharing Plan for Executive
Officers and Key Employees (incorporated by
reference from the 3Q95 10-Q, Exhibit 10.K).+
(10.K) FINOVA Group's Value Sharing Plan for the Chief
Executive Officer (incorporated by reference from
the 3Q95 10-Q, Exhibit 10.L).+
(10.L) [Omitted]
(10.M) [Omitted]
(10.N) The Company's Deferred Compensation Plan
(incorporated by reference from the Company's
1995 10-K, Exhibit 10.N).+
(10.O) Form of FINOVA Group's Stock Incentive Plan
Nonqualified Stock Option Agreement (for exempt
employees) (for grants between August 25, 1992
and August 10, 1994) (various prices)
(incorporated by reference from the 1992 10-K,
Exhibit 10.FF).+
(10.P) [Omitted]
(10.Q) [Omitted]
(10.R) Interim Services Agreement dated January 28, 1992
among the Company, The Dial Corp and others
(incorporated by reference from the 1992 10-K,
Exhibit 10.JJ).
(10.S) 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.T) 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.NN).
(10.U) FINOVA Group's Executive Officer Loan Program
Policies and Procedures (incorporated by
reference from the 1996 FINOVA Group 10-K,
Exhibit 10.U).+
(10.V.1) Form of Non-qualified Stock Option Agreements for
grants between August 10, 1994 and August 7,
1996, (for exempt employees) (various prices)
(incorporated by reference from the 1994 10-K,
Exhibit 10.DD).+
(10.V.2) Form of Non-Qualified Stock Option Agreement for
exempt employees subsequent to August 8, 1996 to
present (incorporated by reference from the 1996
FINOVA Group 10-K, Exhibit 10.V.5).+
(10.V.3) Form of Non-Qualified Stock Option Agreement
(multi-year grants) (incorporated by reference
from the 1996 FINOVA Group 10-K, Exhibit
10.V.6).+
(10.W.1) Form of Restricted Stock Agreements in effect
through July 1996 (incorporated by reference from
the 1994 10-K, Exhibit 10.GG).+
(10.W.2) Form of Restricted Stock Agreement in effect
subsequent to July 1996 (incorporated by
reference from the 1996 FINOVA Group 10-K,
Exhibit 10.W.3).+
<PAGE>
Exhibit No.
-----------
(10.X.1) PBRS/Restricted Stock Retention Incentive Program
Policies and Procedures (incorporated by
reference from the 1996 FINOVA Group 10-K,
Exhibit 10.X.1).+
(10.X.2) Form of Restricted Stock Agreement for use in
Stock Retention Incentive Program noted in 10.X.1
above (incorporated by reference from the 1996
FINOVA Group 10-K, Exhibit 10.X.2).+
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends.*
(23) Independent Auditor's Consent.*
(27) Financial Data Schedule.*
* Filed herewith.
+ Relating to Management Compensation.
(b) Reports on Form 8-K
A report on Form 8-K, dated December 20, 1996, was filed by Registrant
which reported under Item 7 the issuance, by FINOVA Finance Trust, of 2,300,000
5-1/2% Convertible Trust Originated Preferred Securities, guaranteed by FINOVA
Group to the extent provided in the Registration Statement filed on Form S-3.
A report on Form 8-K, dated January 23, 1997, was filed by Registrant
which reported under Items 5 and 7 the revenues, net income and selected
financial data and ratios for the fourth quarter ended December 31, 1996
(unaudited).
<PAGE>
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 25 day of March, 1997.
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)
<PAGE>
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 25, 1997 March 25, 1997
/s/ Robert J. Fitzsimmons /s/ Gregory C. Smalis
Robert J. Fitzsimmons (Director) Gregory C. Smalis (Director)
March 25, 1997 March 25, 1997
<PAGE>
ANNEX A
<PAGE>
FINOVA CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
--------
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, 1996 and 1995 8 - 9
Statement of Consolidated Income for the Years Ended
December 31, 1996, 1995 and 1994 10
Statement of Consolidated Stockholder's Equity for the Years
Ended December 31, 1996, 1995 and 1994 11
Statement of Consolidated Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 12
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1996, 1995 and 1994 13 - 31
Supplemental Selected Financial Data 32 - 33
ii
<PAGE>
FINOVA CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to FINOVA Capital Corporation and its
subsidiaries (collectively, "FINOVA" or the "Company"). FINOVA is a wholly owned
subsidiary of The FINOVA Group Inc. ("FINOVA Group"). Amounts for 1995 and 1994
have been restated to reflect discontinued operations. The 1994 results include
income from Ambassador Factors, acquired on February 14, 1994, and TriCon
Capital, acquired on April 30, 1994, from their acquisition dates.
Results of Operations
1996 Compared to 1995
Income from continuing operations for 1996 increased 24% to $116.5
million from $93.8 million in 1995. Continuing operations exclude the operating
results and a $6 million gain, after taxes and allocation of related costs and
expenses, resulting from the sale of the Company's Manufacturer & Dealer
Services line of business, and the operating results of FINOVA Medical Systems,
which was liquidated in 1996. See Note B of Notes to Consolidated Financial
Statements for further discussion. Net income for 1996 increased to $117.0
million from $97.6 million in 1995.
Interest Margins Earned. Interest margins earned, which represent the
difference between (a) interest and income earned from financing transactions
and operating lease income and (b) interest expense and depreciation, were
$369.1 million for 1996, compared with $309.1 million in 1995, an increase of
19%. The increase was primarily due to a 16% increase in managed assets
(investment in financing transactions plus securitizations), composed primarily
of $2.7 billion in funded new business, compared to $2.3 billion in 1995, and
$2.9 billion in fee-based volume, compared to $2.0 billion in 1995. In addition,
the Company added funds employed of approximately $318 million through
acquisitions in 1996. These increases were partially offset by the normal
amortization of the portfolio as well as significantly higher prepayments in
1996, partially due to consolidation in the communications industry resulting
from changes in regulation at the federal level.
Interest margins earned as a percentage of average earning assets (defined
as average funds employed excluding deferred taxes on leveraged leases and
nonaccruing assets) increased to 5.8% for 1996 compared to 5.7% for 1995. This
increase was the result of the Company's ability to maintain rates and fees
charged on its financing transactions while benefiting from reduced interest
expense due to generally declining interest rates, improved credit ratings and
the maturity of certain interest rate hedges.
Non-Interest Expense. The provision for possible credit losses, which
increases the reserve for possible credit losses ("reserves") increased to $41.8
million in 1996 from $37.6 million in 1995, primarily due to the increase in
managed assets. The Company's reserves remained at 2.0% of ending managed
assets, while the credit quality of the Company's portfolio continued to
improve. Reserves as a percentage of nonaccruing assets increased to 95.6% at
December 31, 1996 from 90.2% a year earlier. Nonaccruing assets as a percentage
of ending managed assets declined to 2.0% at December 31, 1996 from 2.2% at the
end of 1995. 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 were 17% higher in
1996 than in 1995, due primarily to the growth in managed assets and incentives
related to the Company's improved results and stock performance. However, as a
percentage of interest margins earned, these expenses decreased to 41.9% in 1996
from 42.6% during 1995. See Note L of Notes to Consolidated Financial Statements
for additional detail.
Gains on Sale of Assets. Gains on sale of assets were higher in 1996 than
1995, primarily due to the amount and type of assets coming off lease during the
respective years. While the Company has consistently recognized gains on the
sale of assets it holds, the amount and timing of such gains is sporadic in
nature. There can be no assurance the Company will recognize such gains in the
future, depending, in part, on market conditions at the time of the sale.
Income Taxes. Income taxes increased during the year ended December 31,
1996, primarily due to the increase in pre-tax income, partially offset by a
lower effective tax rate. The lower tax rate, which decreased to 37.3% in 1996
from
1
<PAGE>
FINOVA CAPITAL CORPORATION
37.8% in 1995, was primarily related to lower foreign tax effects and increased
tax exempt municipal and ESOP income. See Note H of Notes to Consolidated
Financial Statements for further discussion.
1995 Compared to 1994
Amounts for 1995 and 1994 have been restated to reflect discontinued
operations.
Net income increased 31% during 1995 to $97.6 million from $74.3 million
in 1994; income from continuing operations increased 27% to $93.8 million from
$73.8 million in 1994. The 1994 results include income from Ambassador and
TriCon from the acquisition dates.
Interest Margins Earned. Interest margins earned increased by 36% in 1995
to $309.1 million from $226.7 million in 1994. This increase was driven by a 23%
growth in managed assets. The primary source of the growth in managed assets was
new business, which totaled $2.3 billion for 1995 compared to $1.6 billion for
1994, an increase of 42%. Also contributing to the improved margins were the
fees associated with the Factoring Services 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
5.7% in 1995, compared to 5.9% 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 1995.
Non-interest Expense. Loss provisions were greater by $27.1 million during
1995 compared to 1994 primarily due to the growth in managed assets. Management
believes that the 1995 reserve coverage was adequate at 90.2% of nonaccruing
assets (nonaccruing contracts and repossessed assets) and 2.0% of managed
assets. Details of write-offs and other changes in the reserves can be found in
Note D of Notes to Consolidated Financial Statements.
Selling, administrative and other operating expenses increased by $34.2
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 42.6% in 1995
from 42.9% in the previous year. See Note L of Notes to Consolidated Financial
Statements.
Gains on Sale of Assets. Gains on sale of assets were $7.0 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.
Income Taxes. Income taxes for 1995 increased to $57.0 million from $49.1
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 37.8% 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.
2
<PAGE>
FINOVA CAPITAL CORPORATION
Financial Condition, Liquidity and Capital Resources
Managed assets increased by $1.1 billion to $7.6 billion at December 31,
1996 from $6.5 billion at December 31, 1995. This increase was primarily
attributable to the $2.7 billion of new business generated and $318 million of
portfolios acquired in 1996, less portfolio amortization.
The reserves increased by $19.6 million in 1996 to $148.7 million
primarily due to loss provisions of $41.8 million provided for portfolio growth,
partially offset by charges for write-offs of $32.0 million. Nonaccruing assets
increased to $155.5 million at December 31, 1996 from $143.1 million at December
31, 1995. When measured as a percent of managed assets, nonaccruing assets
declined to 2.0% at December 31, 1996 from 2.2% at December 31, 1995. For more
information on the reserves, write-offs and nonaccruing assets see Note D of
Notes to Consolidated Financial Statements.
The Company had total debt of approximately $5.9 billion or 5.5 times its
equity of $1,069.0 million at December 31, 1996. The Company also had deferred
income taxes of $264.4 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 1996, FINOVA issued or acquired
$796.5 million 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 $681 million of debt. In addition, FINOVA Group
issued $115.0 million in company-obligated mandatory redeemable convertible
preferred securities ("TOPrS") through FINOVA Finance Trust. The proceeds from
the issuance of the TOPrS were contributed by FINOVA Group to the Company. See
Note G of Notes to Consolidated Financial Statements for additional detail.
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 1996, FINOVA issued $19.8 billion of commercial
paper (with an average of $2.6 billion outstanding during the year) and raised
$796.5 million, as noted above, through new long-term financing of one to 10
year durations. At December 31, 1996 and 1995, commercial paper and short-term
bank borrowings totaling $2.5 billion and $2.4 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 1995, FINOVA filed a shelf registration statement with the SEC allowing
for the issuance of $1.5 billion of senior debt securities, $815 million of
which remained available as of December 31, 1996. Also in 1996, the Company,
under a securitization agreement, sold an additional $100 million of assets for
a total $300 million undivided proportionate interest in a loan portfolio
totaling $626.7 million at December 31, 1996. See Note C of Notes to
Consolidated Financial Statements for further discussion of the securitization
transaction.
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 two five-year facilities with
numerous lenders for $700 million each. These $3.4 billion of credit 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 if it encounters
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
1997, while the two $700 million and the other $1.0 billion credit facilities
are subject to renewal in 2001.
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>
FINOVA CAPITAL CORPORATION
FINOVA's aggregate cost of funds decreased to 6.8% for 1996 from 7.2% for
1995 as a result of declining interest rates, higher credit ratings, and the
elimination of costs associated with $750 million of maturing interest rate
hedges. The Company's cost of and access to capital is dependent, in 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 Duff & Phelps Credit Rating Co. in 1996. FINOVA currently has
investment-grade ratings from the following agencies:
Commercial Senior
Paper Debt
---------- ------
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 A-
None of FINOVA's subsidiaries have applied for credit ratings.
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 used are straightforward
and involve little complexity. The Company continually monitors its position
relative to derivatives and uses derivative instruments for non-trading purposes
only.
At December 31, 1996, FINOVA had outstanding interest rate conversion
agreements with notional principal amounts totaling $3.1 billion. Agreements
with notional principal amounts of $825 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 6.07% to 9.10% (remaining terms of one to four years) in
return for receipts calculated on the same notional amounts at floating interest
rates. In addition, agreements with notional principal amounts of $1,350 million
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 nine years) in return for receipts
calculated on the same notional amounts at fixed interest rates of 5.51% to
7.71%. FINOVA has also entered into basis swap agreements with notional
principal amounts of $878 million and remaining terms of one to two years.
For the benefit of its customers, the Company enters into interest rate
cap agreements. The total notional amount of these agreements at December 31,
1996 was $124 million, none of which was in a pay or receive position.
At December 31, 1996, the Company was a party to a short-term foreign
currency forward exchange agreement with a notional amount of approximately $73
million to help mitigate its foreign currency risk. For further discussion of
debt and derivative financial instruments see Notes E and F of the Notes to
Consolidated Financial Statements.
Recent Developments and Business Outlook
The Company continues to seek new business by emphasizing customer
service, providing competitive interest rates and focusing on selected market
niches. Additionally, the Company continues to evaluate potential acquisition
opportunities that it believes are consistent with its business strategies.
During 1996, the Company acquired LINC Financial Services, Inc. and Financing
for Science International, Inc. to supplement existing lines of business. In
total, these acquisitions added approximately $318 million in investment in
financing transactions.
In November 1996, the Company sold its Manufacturer & Dealer Services
business ("MDS") to Green Tree Financial Corporation for $616.4 million. MDS is
a provider of vendor-oriented sales finance programs involving small-ticket
leasing and financing products for commercial end-user customers.
In December 1996, FINOVA Finance Trust, a subsidiary trust of FINOVA
Group, issued $115.0 million of mandatory redeemable convertible preferred
securities. The subsidiary trust solely holds convertible
4
<PAGE>
FINOVA CAPITAL CORPORATION
debentures of FINOVA Group. At that time, FINOVA Group contributed the $115
million gross proceeds to the equity of FINOVA Capital.
New Accounting Standards
See Note M of Notes to Consolidated Financial Statements.
5
<PAGE>
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 of The FINOVA Group Inc. ("FINOVA Group"), through
its Audit Committee, also oversees the financial reporting and adherence to
established procedures and controls of FINOVA Group and all of its subsidiaries,
including the Company. Periodically, FINOVA Group's Audit Committee meets,
jointly and separately, with the Company's 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
Chairman, President and Chief Executive Officer
/s/
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
/s/
Derek C. Bruns
Senior Vice President - Internal Audit
6
<PAGE>
FINOVA CAPITAL CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of FINOVA Capital Corporation.
We have audited the accompanying consolidated balance sheet of FINOVA
Capital Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Phoenix, Arizona
February 12, 1997
7
<PAGE>
FINOVA CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
- ------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 31,285 $ 90,329
Investment in financing transactions:
Loans and other financing contracts, less unearned
income of $396,247 and $338,267, respectively 5,305,678 4,923,540
Factored receivables 564,430 189,486
Operating leases 517,690 460,798
Leveraged leases 514,573 366,196
Direct financing leases 396,388 408,059
- ------------------------------------------------------------------------------------------------------
7,298,759 6,348,079
Less reserve for possible credit losses (148,693) (129,077)
- ------------------------------------------------------------------------------------------------------
Investment in financing transactions - net 7,150,066 6,219,002
Other assets and deferred charges 353,249 278,865
Investment in discontinued operations 17,326 475,639
- ------------------------------------------------------------------------------------------------------
$ 7,551,926 $ 7,063,835
======================================================================================================
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
FINOVA CAPITAL CORPORATION
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses $ 97,080 $ 103,990
Due to clients 218,494 181,548
Interest payable 52,677 45,553
Senior debt 5,850,223 5,649,368
Deferred income taxes 264,409 227,797
- ------------------------------------------------------------------------------------------------------
6,482,883 6,208,256
- ------------------------------------------------------------------------------------------------------
Stockholder's equity:
Common stock, $1.00 par value, 100,000 shares
authorized, 25,000 shares issued 25 25
Additional capital 792,948 677,948
Retained income 275,062 183,292
Cumulative translation adjustments 1,008 (5,686)
- ------------------------------------------------------------------------------------------------------
1,069,043 855,579
- ------------------------------------------------------------------------------------------------------
$ 7,551,926 $ 7,063,835
======================================================================================================
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other income $ 640,132 $ 568,115 $ 376,845
Financing lease income 61,985 49,310 43,560
Operating lease income 95,817 84,691 53,795
- --------------------------------------------------------------------------------------------------------------------
Interest earned from financing transactions 797,934 702,116 474,200
Interest expense 366,543 337,814 210,730
Depreciation 62,286 55,218 36,736
- --------------------------------------------------------------------------------------------------------------------
Interest margins earned 369,105 309,084 226,734
Provision for possible credit losses 41,751 37,568 10,439
- --------------------------------------------------------------------------------------------------------------------
Net interest margins earned 327,354 271,516 216,295
Gains on sale of assets 12,949 10,889 3,877
- --------------------------------------------------------------------------------------------------------------------
340,303 282,405 220,172
Selling, administrative and other operating
expenses 154,481 131,571 97,325
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 185,822 150,834 122,847
Income taxes 69,329 57,036 49,077
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations 116,493 93,798 73,770
Income and gain from sale of discontinued operations, net of tax 507 3,831 543
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 117,000 $ 97,629 $ 74,313
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDER'S EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance $ 25 $ 25 $ 25
- ------------------------------------------------------------------------------------------------------------------
ADDITIONAL CAPITAL:
Balance, beginning of year 677,948 677,947 298,665
Contributions from The FINOVA Group 115,000 1 379,282
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 792,948 677,948 677,947
- ------------------------------------------------------------------------------------------------------------------
RETAINED INCOME:
Balance, beginning of year 183,292 108,740 54,374
Net income 117,000 97,629 74,313
Dividends (25,230) (23,077) (19,947)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 275,062 183,292 108,740
- ------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance, beginning of year (5,686) (4,726) (7,773)
Unrealized translation gain (loss) 6,694 (960) 3,047
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,008 (5,686) (4,726)
- ------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY $ 1,069,043 $ 855,579 $ 781,986
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 117,000 $ 97,629 $ 74,313
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible credit losses 41,751 37,568 10,439
Depreciation and amortization 76,471 70,017 46,470
Gains on sale of assets (12,949) (10,889) (3,877)
Gains on dispositions of discontinued operations, net (3,521)
Deferred income taxes 31,272 17,617 17,001
Change in assets and liabilities, net of effects from subsidiaries purchased:
Increase in other assets and deferred charges (64,280) (55,204) (20,198)
Decrease in accounts payable and accrued expenses (17,563) (11,583) (85,716)
Increase in interest payable 5,853 7,843 14,077
Other 7,971 361 (3,923)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 182,005 153,359 48,586
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of assets 102,945 50,028 15,048
Proceeds from sales of securitized assets 100,000 200,000
Principal collections on financing transactions 1,781,985 1,088,420 860,066
Expenditures for financing transactions (2,221,363) (1,853,330) (1,323,703)
Net change in short-term financing transactions (624,952) (442,405) (294,123)
Acquisitions, net of cash acquired (7,455) (261,868) (590,497)
Sale of discontinued operation 616,434
Other 3,296 2,104 1,898
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (249,110) (1,217,051) (1,331,311)
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Long-term borrowings 564,988 1,272,450 827,550
Net borrowings under commercial paper 62,156 373,566 1,508,564
Repayment of long-term borrowings (681,401) (570,002) (1,186,191)
Net advances and contributions from parent 119,691 (16,578) 211,941
Dividends (25,230) (23,077) (19,947)
Net change in due to clients (32,143) 64,909 (9,298)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,061 1,101,268 1,332,619
- --------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (59,044) 37,576 49,894
Cash and cash equivalents, beginning of year 90,329 52,753 2,859
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 31,285 $ 90,329 $ 52,753
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
FINOVA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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 and its subsidiaries
(collectively, "FINOVA" or the "Company"). FINOVA is a wholly owned subsidiary
of The FINOVA Group Inc. ("FINOVA Group").
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.
Cash Equivalents -- The Company classifies highly liquid investments
with original maturities of three months or less from date of purchase as cash
equivalents.
At December 31, 1996, $19.4 million of cash and cash equivalents held
by a subsidiary of the Company are restricted as to use, pursuant to a secured
financing agreement.
Marketable Securities -- As more fully described in Note I, the Company
owns certain marketable securities which are considered trading securities.
Trading securities are stated at fair value with gains or losses recorded in
income in the period they occur.
Financing Transactions -- For loans and other financing contracts,
earned income is recognized over the life of the contract, 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.
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.
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
13
<PAGE>
FINOVA CAPITAL CORPORATION
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.
Reserve for Possible Credit Losses -- 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.
Repossessed Assets -- Repossessed assets are carried at the lower of
cost or fair value less estimated selling expenses.
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. Actual residual values realized
could differ from these estimates. Residual values are periodically reviewed to
determine that recorded amounts are appropriate.
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 at December 31, 1996 is $179.5 million, net of
amortization, and is included in other assets. Amortization totaled $9.6 million
($5.7 million after-tax) and $8.2 million ($4.9 million after-tax) for the years
ended December 31, 1996 and 1995, 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. At December 31, 1996, approximately $167.8 million of
goodwill is deductible for federal income tax purposes over 15 years under
Section 197 of the Internal Revenue Code.
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 15% 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 FINOVA Group stock through the Employee Stock
Ownership Plan, discussed below.
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 12 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.
14
<PAGE>
FINOVA CAPITAL CORPORATION
Expenses under the Savings Plan and Employee Stock Ownership Plan were
$2.1 million, $1.7 million, and $0.9 million in 1996, 1995 and 1994,
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.
Derivative Financial Instruments - As more fully described in Note F,
the Company uses derivative financial instruments as part of its interest rate
risk management policy of match funding its assets and liabilities. The
derivative instruments used include interest rate swaps and a foreign currency
exchange agreement, all of which are accounted for using settlement or matched
swap accounting. In addition, the Company enters into a limited amount of
interest rate caps for the benefit of customers.
Each derivative used as a hedge is matched with an asset or liability
with which it has a high correlation. The swap agreements are generally held to
maturity and the Company does not use derivative financial instruments for
trading purposes. Upon early termination of the designated matched asset or
liability, the related derivative is matched to another appropriate item or
marked to fair market value.
The foreign currency exchange agreement was entered into as a hedge for
the Company's limited exposure to fluctuations from investments in financing
transactions denominated in foreign currencies.
Discontinued Operations -- As more fully described in Note B, the
Company's Manufacturer & Dealer Services line of business and FINOVA Medical
Systems are presented as discontinued operations and, accordingly, prior year
amounts have been restated.
Reclassifications -- Certain reclassifications have been made to the
1995 and 1994 financial statements to conform to the 1996 presentation.
Recent Accounting Developments -- 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 adopted this accounting standard effective January 1,
1996, as required. The effect on the Company's financial position and the
results of operations was not material.
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
15
<PAGE>
FINOVA CAPITAL CORPORATION
Company continues to account for its participation in FINOVA Group's stock-based
employee compensation plans using the method of accounting prescribed by APB No.
25. Had compensation cost for the Company's participation in FINOVA Group's
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of FASB Statement 123, the effect
on net income would not have been material.
NOTE B ACQUISITIONS AND DISPOSITIONS
During 1996 and 1995, FINOVA, in transactions accounted for as
purchases, acquired various businesses and portfolios having initial funds
employed totaling $318 million and $262 million, respectively. In 1996, the
Company purchased LINC Financial Services, Inc. for $3.2 million in cash,
comprised of $139.9 million of assets and $136.7 million of liabilities and
acquisition costs. The Company also purchased Financing for Science
International, Inc. for $36.0 million, consisting of $226.6 million of assets
and $190.6 million in liabilities and acquisition costs.
During 1996, the company sold its Manufacturer & Dealer Services
operations for $616.4 million, recognizing a gain on sale, net of taxes, of $6.0
million after allocation of related costs and expenses. In connection with the
sale, the Company retained a small portfolio of leases relating to one vendor
program.
Also in 1996, the Company closed FINOVA Medical Systems, a
remanufacturer of medical equipment, recognizing a loss on disposal of
approximately $2.5 million, net of tax.
Income (losses) from these operations, net of tax, for the three years
ended December 31, 1996 were ($3.0 million), $3.8 million and $0.5 million,
respectively. Assumptions used to calculate these results were similar to those
used by the Company to evaluate its other lines of business and included the
allocation of interest expense based on certain leverage ratios and the
allocation of indirect operating expenses.
The consolidated financial statements and related notes have been
restated to classify these operations as discontinued.
16
<PAGE>
FINOVA CAPITAL CORPORATION
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, 1996 and 1995, the carrying amount of
the investment in financing transactions, including the estimated residual value
of leased assets upon lease termination, was $7.3 billion and $6.3 billion
(before reserve for possible credit losses), respectively, and consisted of the
following percentage of carrying amount by line of business:
- --------------------------------------------------------------------------------
Percent of Total
Carrying Amount
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Transportation Finance 18.2% 14.6%
Resort Finance 16.0% 15.6%
Commercial Real Estate Finance 10.9% 12.3%
Corporate Finance (1) 8.9% 10.3%
Commercial Equipment Finance 8.0% 5.5%
Communications Finance 7.7% 10.8%
Healthcare Finance 6.9% 7.2%
Rediscount Finance 5.8% 5.4%
Franchise Finance 5.0% 5.3%
Inventory Finance 4.3% 3.2%
Factoring Services 3.1% 3.0%
Commercial Finance 2.3% 3.4%
Government Finance 2.1% 1.9%
Other 0.8% 1.5%
- --------------------------------------------------------------------------------
100.0% 100.0%
================================================================================
(1) Excludes assets sold under securitization agreements of $300 million in
1996 and $200 million in 1995.
17
<PAGE>
FINOVA CAPITAL CORPORATION
Aggregate installments on loans and other financing contracts, direct
financing leases, operating leases, leveraged leases and factored receivables at
December 31, 1996 (excluding repossessed assets of $38.4 million and estimated
residual values) are due during each of the years ending December 31, 1997 to
2001 and thereafter as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
There-
1997 1998 1999 2000 2001 after
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and other financing
contracts:
Commercial:
Fixed interest rate $ 382,481 $ 324,871 $ 282,111 $ 281,515 $ 212,165 $ 507,594
Floating interest rate 346,152 365,149 343,933 363,891 368,243 171,207
Real Estate:
Fixed interest rate 100,518 85,895 99,664 42,683 31,826 136,590
Floating interest rate 388,468 375,637 226,982 95,623 105,240 25,068
Factored receivables 564,430
Leases, primarily at
fixed interest rates:
Operating leases 102,148 85,628 77,000 71,457 61,666 112,232
Leveraged leases 33,085 21,814 19,166 16,006 13,683 308,993
Direct financing leases 109,770 90,868 60,781 44,775 40,168 52,566
- --------------------------------------------------------------------------------------------------------------------
$2,027,052 $ 1,349,862 $ 1,109,637 $ 915,950 $ 832,991 $ 1,314,250
====================================================================================================================
</TABLE>
The investment in operating leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost of assets $ 646,918 $ 586,860
Accumulated depreciation (129,228) (126,062)
====================================================================================================================
Investment in operating leases $ 517,690 $ 460,798
====================================================================================================================
</TABLE>
The net investment in leveraged leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable $ 1,898,996 $ 1,454,754
Less principal and interest payable on nonrecourse debt (1,486,249) (1,157,789)
- --------------------------------------------------------------------------------------------------------------------
Net rentals receivable 412,747 296,965
Estimated residual values 479,850 344,766
Less unearned income (378,024) (275,535)
- --------------------------------------------------------------------------------------------------------------------
Investment in leveraged leases 514,573 366,196
Less deferred taxes arising from leveraged leases (246,075) (230,120)
- --------------------------------------------------------------------------------------------------------------------
Net investment in leveraged leases $ 268,498 $ 136,076
====================================================================================================================
</TABLE>
18
<PAGE>
FINOVA CAPITAL CORPORATION
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>
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lease and other income $ 30,230 $ 12,080 $ 9,240
Income tax expense 11,321 4,201 3,143
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment in direct financing leases at December 31 consisted of
the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable $ 398,928 $ 443,139
Estimated residual values 100,039 73,121
Unearned income (102,579) (108,201)
- --------------------------------------------------------------------------------------------------------------------
Investment in direct financing leases $ 396,388 $ 408,059
====================================================================================================================
</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>
- --------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Receivables due on financing transactions $ 3,749,575 $ 3,390,139
Less unearned income (53,075) (78,333)
====================================================================================================================
Investment in floating-rate loans and leases $ 3,696,500 $ 3,311,806
====================================================================================================================
</TABLE>
Interest earned from financing transactions with floating interest
rates was approximately $436.0 million in 1996, $402.0 million in 1995, and
$269.0 million in 1994. 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, 1996, the Company had a committed backlog of new
business of approximately $1.5 billion compared to $1.1 billion at December 31,
1995. The committed backlog includes lines of credit totaling $702.0 million and
$629.0 million for December 31, 1996 and 1995, 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.
19
<PAGE>
FINOVA CAPITAL CORPORATION
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. In 1996,
the Company sold an additional $100 million interest, resulting in a total $300
million undivided proportionate interest in a loan portfolio totaling $626.7
million at December 31, 1996.
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>
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 129,077 $ 110,903 $ 64,280
Provision for possible credit losses 41,751 37,568 10,439
Write-offs (32,017) (25,631) (28,109)
Recoveries 3,296 2,104 1,780
Other (including reserves related to acquisitions) 6,586 4,133 62,513
=====================================================================================================================
Balance, end of year $ 148,693 $ 129,077 $ 110,903
=====================================================================================================================
</TABLE>
20
<PAGE>
FINOVA CAPITAL CORPORATION
Write-offs by lines of business experienced by the Company during the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Finance $ 9,470 $ 4,660 $ 4,233
Factoring Services 5,098 3,728 1,148
Resort Finance 4,275 2,000 2,730
Franchise Finance 3,267 3,448 2,247
Commercial Equipment Finance 3,207 2,271 1,257
Communications Finance 2,994 4,037 8,300
Commercial Real Estate Finance 1,793 2,275 1,461
Healthcare Finance 1,018 314 377
FINOVA Capital Limited (UK) 895 1,523 5,140
Commercial Finance 452 774
Inventory Finance 201 442
Other 722
=================================================================================================================
$ 32,017 $ 25,631 $ 28,109
=================================================================================================================
Write-offs as a percentage of investment in
managed assets 0.42% 0.39% 0.53%
=================================================================================================================
</TABLE>
An analysis of nonaccruing assets included in the investment in
financing transactions at December 31 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Contracts $ 117,086 $ 93,139
Repossessed assets 38,419 49,988
- -----------------------------------------------------------------------------------------------------------------
Total nonaccruing assets $ 155,505 $ 143,127
=================================================================================================================
Nonaccruing assets as a percentage of managed assets 2.0% 2.2%
=================================================================================================================
</TABLE>
In addition to the repossessed assets included in the above table, the
Company had repossessed assets with a total carrying amount of $60.0 million and
$56.6 million at December 31, 1996 and 1995, respectively, which earned income
of $5.1 million and $4.2 million during 1996 and 1995, respectively.
21
<PAGE>
FINOVA CAPITAL CORPORATION
At December 31, 1996, the total carrying amount of impaired loans was
$110.1 million, of which $46.3 million were revenue accruing. A reserve for
possible credit losses of $6.2 million has been established for $14.1 million of
nonaccruing impaired loans. At December 31, 1995, the total carrying amount of
impaired loans was $94.1 million, of which $17.3 million were revenue accruing.
At December 31, 1995, the reserve for possible credit losses was $16 million for
$35 million of nonaccruing impaired loans. For the years ended December 31, 1996
and 1995, the average carrying amount of impaired loans was $85.1 million and
$93.2 million, respectively. Income earned on accruing impaired loans was $4.0
million in both 1996 and 1995. Income earned on impaired loans is recognized in
the same manner as it is on other accruing loans. Cash collected on all
nonaccruing loans is applied to the carrying amount.
Had all nonaccruing assets outstanding at December 31, 1996, 1995 and
1994 remained accruing, income earned would have been increased by approximately
$19 million, $17 million, and $13 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 $3.4 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, amended in 1996, and has two five-year
facilities with numerous lenders for $700 million each. 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 1997 while the two five-year $700
million facilities and the other $1.0 billion credit facility are subject to
renewal in 2001.
The following information pertains to all short-term financing,
primarily commercial paper, issued by FINOVA for the years ended December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount of short-term debt outstanding
during year $ 3,087,876 $ 2,518,733 $ 2,024,441
Average short-term debt outstanding during year 2,551,316 2,210,329 1,050,358
Weighted average short-term interest rates
at end of year:
Short-term borrowings 5.4% 5.9% 6.2%
Commercial paper* 5.6% 6.0% 6.0%
Weighted average interest rate on short-term debt
outstanding during year* 5.6% 6.1% 4.8%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Exclusive of the cost of maintaining bank lines in support of outstanding
commercial paper and the effects of interest rate conversion agreements.
22
<PAGE>
FINOVA CAPITAL CORPORATION
Senior debt at December 31 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper and short-term bank loans supported by unused long-term
bank revolving credit agreements, less unamortized discount $ 2,482,496 $ 2,398,007
Medium-term notes due to 2005, 5.4% to 10.3% 1,414,500 1,224,546
Term loans payable to banks due to 1999, 5.6% to 6.1% 180,000 180,000
Senior notes due to 2006, 6.5% to 16.0%, less unamortized discount 1,758,176 1,830,009
Nonrecourse installment notes due to 2002, 10.6% (assets of
$24,656 and $25,349, respectively, pledged as collateral) 15,051 16,806
====================================================================================================================
Total senior debt $ 5,850,223 $ 5,649,368
====================================================================================================================
</TABLE>
Annual maturities of senior debt outstanding at December 31, 1996 due
through May 2006 (excluding the amount supported by the revolving credit
agreements expected to be renewed) approximate $742.3 million (1997), $557.0
million (1998), $532.1 million (1999), $563.7 million (2000), $457.5 million
(2001) and $515.1 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% of accumulated
earnings after December 31, 1991. As of December 31, 1996, FINOVA had $83.4
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 used are straightforward
and involve little complexity. The Company continually monitors its position
relative to derivatives and uses derivative instruments for non-trading purposes
only.
The Company uses 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 also 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
counter party, 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.
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 and are used primarily to
protect the Company's margins on floating-rate transactions by locking in the
spread between the Company's lending and borrowing rates.
23
<PAGE>
FINOVA CAPITAL CORPORATION
The Company's off-balance sheet derivative instruments involve credit
and interest rate risks. The credit risk would be the nonperformance by the
counter parties 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 counter party, 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 $3.0 million in
1996, an increase in the aggregate cost of funds of 0.05%, and $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%. 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. There were no deferred gains or
losses associated with derivatives.
24
<PAGE>
FINOVA CAPITAL CORPORATION
The following table provides annual maturities and weighted-average
interest rates for each significant derivative product type in place at December
31, 1996. The rates presented are as of December 31, 1996. To the extent that
rates change, variable interest information will change.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
December 31, Maturities of Derivative Products
------------------------------------------------------------------
(Dollars in Millions) 1996 1997 1998 1999 2000 2001 Thereafter
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed-rate swaps:
Notional value $ 1,350 $ 275 $ 325 $ 250 $ 150 $ 150 $ 200
Weighted average receive
rate 6.84% 6.77% 6.82% 6.62% 7.24% 6.66% 7.05%
Weighted average pay rate 5.58% 5.54% 5.54% 5.57% 5.50% 5.67% 5.68%
Pay fixed-rate swaps:
Notional value $ 825 $ 275 $ 200 $ 150 $ 100 $ 100
Weighted average receive
rate 5.56% 5.55% 5.54% 5.55% 5.60% 5.57%
Weighted average pay rate 7.14% 7.15% 7.30% 7.06% 7.38% 6.70%
Basis swaps:
Notional value $ 878 $ 250 $ 628
Weighted average receive
rate 5.52% 5.51% 5.53%
Weighted average pay rate 5.86% 5.83% 5.87%
TOTAL NOTIONAL VALUE $ 3,053 $ 800 $ 1,153 $ 400 $ 250 $ 250 $ 200
================================================================================================================
Total weighted average rates
on swaps:
Receive rate 6.12% 5.96% 5.89% 6.22% 6.59% 6.22% 7.05%
================================================================================================================
Pay rate 6.08% 6.18% 6.02% 6.13% 6.25% 6.08% 5.68%
================================================================================================================
</TABLE>
For the benefit of its customers, the Company enters into interest rate
cap agreements. The total notional amount of these agreements at December 31,
1996 was $124 million, none of which was in a pay or receive position. These
agreements will mature as follows: $90 million in 1997 and $34 million in 1998.
At December 31, 1996, the Company was a party to a short-term foreign
currency forward exchange agreement with a notional amount of approximately $73
million to mitigate its foreign currency risk.
25
<PAGE>
FINOVA CAPITAL CORPORATION
Derivative product activity for the three years ended December 31, 1996
is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Pay Interest
Receive Pay Fixed-Rate Rate
Fixed-Rate Fixed-Rate Amortizing Basis Hedge
(Dollars in Millions) Swaps Swaps Swaps Swaps Agreements TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Expired (100) (325) (95) (750) (1,270)
Additions 150 350 500
- ---------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 $ 1,350 $ 825 $ -- $ 878 $ -- $ 3,053
======================================================================================================================
</TABLE>
NOTE G REDEEMABLE PREFERRED STOCK
In December 1996, FINOVA Finance Trust, a trust sponsored and
wholly-owned by FINOVA Group, issued (a) 2,300,000 shares of convertible trust
originated preferred securities to the public for gross proceeds of $115 million
(before transaction costs of $3.5 million) and (b) 71,135 shares of common
securities to FINOVA Group. The gross proceeds from these transactions were
invested by the trust in $118.6 million aggregate principal amount of 5 1/2%
convertible subordinated debentures due 2016 (the "Debentures") newly issued by
FINOVA Group. The Debentures represent all of the assets of the trust. The
proceeds from the issuance of the Debentures were contributed by FINOVA Group to
the Company, which used the proceeds to repay commercial paper and other
indebtedness.
In connection with the 1992 Spin-Off of the Company from The Dial Corp,
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.
26
<PAGE>
FINOVA CAPITAL CORPORATION
NOTE H INCOME TAXES
The consolidated provision for income taxes consists of the following
for the years ended December 31:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Current:
United States:
Federal $ 28,658 $ 32,225 $ 25,686
State 7,654 7,194 6,390
Foreign 1,745
- --------------------------------------------------------------------------------
38,057 39,419 32,076
- --------------------------------------------------------------------------------
Deferred:
United States:
Federal 26,210 12,278 13,787
State 5,062 4,535 3,214
Foreign 804
- --------------------------------------------------------------------------------
31,272 17,617 17,001
- --------------------------------------------------------------------------------
Provision for income taxes $ 69,329 $ 57,036 $ 49,077
================================================================================
27
<PAGE>
FINOVA CAPITAL CORPORATION
Income taxes paid in 1996, 1995 and 1994 amounted to approximately
$31.3 million, $47.9 million, and $41.2 million, respectively.
The significant components of deferred tax liabilities and deferred tax
assets at December 31, 1996 and 1995 consisted of the following including
discontinued operations:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred income from leveraged leases $ 274,224 $ 230,120
Deferred income from lease financing 72,300 62,681
Other 22,486 6,408
- ---------------------------------------------------------------------------------------------------------------
Gross deferred tax liability 369,010 299,209
- ---------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Reserve for possible credit losses 55,883 39,094
Investment in foreign subsidiary carrying value difference 23,193 23,193
Alternative minimum tax credit carryforward 7,352
Sale of discontinued operations 16,400
Other 9,125 1,773
- ---------------------------------------------------------------------------------------------------------------
Gross deferred tax asset 104,601 71,412
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 264,409 $ 227,797
===============================================================================================================
</TABLE>
The federal statutory income tax rate is reconciled to the effective
income tax rate as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes 4.4% 5.1% 5.1%
Foreign tax effects (0.9%) (0.5%) 1.2%
Municipal and ESOP income (2.2%) (1.7%) (1.2%)
Other 1.0% (0.1%) (0.1%)
====================================================================================================================
Provision for income taxes 37.3% 37.8% 40.0%
====================================================================================================================
</TABLE>
28
<PAGE>
FINOVA CAPITAL CORPORATION
NOTE I PENSION AND OTHER BENEFITS
Net periodic pension costs were $1.7 million, $1.3 million, and $1.5
million for the years ended December 31, 1996, 1995 and 1994, respectively. The
Company's pension costs were prepaid by $0.6 million at December 31, 1996 and
$2.3 million at December 31, 1995.
Net periodic postretirement benefit costs were $0.7 million, $0.6
million, and $0.5 million for each of the years ended December 31, 1996, 1995
and 1994, respectively. The Company's accrued postretirement benefit costs were
$2.2 million at December 31, 1996 and $1.5 million at December 31, 1995.
The Company's investment of $28 million in a trust for a nonqualified
compensation plan consists of securities held for trading and is recorded at
market.
NOTE J LITIGATION AND CLAIMS
The Company is party either as plaintiff or defendant to various
actions, proceedings and pending claims, including legal actions, some 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 those
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 has been determined by the Company using market information obtained
by the Company and the 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.
29
<PAGE>
FINOVA CAPITAL CORPORATION
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows for the years ended December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
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 $ 5,143,562 $ 5,417,865 $ 4,740,085 $ 4,726,465
Liabilities:
Senior debt 5,850,223 5,952,108 5,649,368 5,729,950
Off-Balance Sheet -
Financial Instruments:
Interest rate swaps --- 1,462 --- 9,970
Interest rate hedge agreements --- --- --- (2,878)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying values of cash and cash equivalents, factored receivables,
accounts payable and accrued expenses, due to clients and interest payable
(including accrued amounts related to interest rate swaps and interest rate
hedge agreements) approximate fair values due to the short-term maturity of
these items.
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, 1996 and 1995. Management believes
that the risk factor embedded in the entry value interest rates
applicable to performing loans for which there are no known credit
concerns results in a fair valuation of such loans on an entry value
basis. As of December 31, 1996 and 1995, the fair value of nonaccruing
impaired contracts with a carrying amount of $63.8 million and $76.9
million, respectively, was not estimated because it is not practical to
reasonably assess the credit adjustment that would be applied in the
marketplace for such loans. As of December 31, 1996 and 1995, the
carrying amount of loans and other financing contracts excludes
repossessed assets with a total carrying amount of $98.4 million and
$106.6 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 are based on quoted
market prices obtained from participating banks and dealers for
transactions of similar remaining duration.
30
<PAGE>
FINOVA CAPITAL CORPORATION
Interest rate hedge agreements:
The fair values of interest rate hedge agreements in place at
December 31, 1995 are 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
obtained by the Company as of December 31, 1996 and 1995. 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, 1996 and 1995;
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:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Salaries and employee benefits $ 94,272 $ 74,884 $ 54,875
Depreciation and amortization 14,185 14,799 9,733
Travel and entertainment 8,953 8,030 5,833
Problem account costs 7,753 7,941 11,927
Occupancy expenses 7,104 6,253 5,312
Professional services 5,738 6,121 6,813
- --------------------------------------------------------------------------------
NOTE M NEW ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," effective
for transactions entered into after December 31, 1996. Among other things, this
statement changes the accounting treatment of transactions subsequent to
December 31, 1996, that transfer financial assets but retain the servicing
rights, such as securitizations. The future effect on the Company's financial
position and the results of operations is not expected to be material.
31
<PAGE>
FINOVA CAPITAL CORPORATION
SUPPLEMENTAL SELECTED FINANCIAL DATA
CONDENSED QUARTERLY RESULTS (UNAUDITED)
(Dollars in Thousands)
The following represents the condensed quarterly results for the three
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest earned from financing transactions:
1996 $ 190,652 $ 192,635 $ 204,972 $ 209,675
1995 161,369 170,475 176,802 193,470
1994 73,961 114,798 137,473 147,968
- -------------------------------------------------------------------------------------------------------------
Interest expense:
1996 88,224 89,718 91,629 96,972
1995 78,275 83,248 85,544 90,747
1994 33,862 50,431 61,735 64,702
- -------------------------------------------------------------------------------------------------------------
Gains on sale of assets:
1996 6,730 1,315 397 4,507
1995 1,710 728 2,557 5,894
1994 3 390 894 2,590
- -------------------------------------------------------------------------------------------------------------
Non-interest expenses:
1996 66,489 56,989 65,480 69,560
1995 47,581 52,832 54,605 69,339
1994 21,448 36,840 38,089 48,123
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations:
1996 26,756 28,852 30,489 30,396
1995 22,205 22,279 24,417 24,897
1994 11,596 15,933 23,107 23,134
- -------------------------------------------------------------------------------------------------------------
Income (loss) and gain from sale of discontinued
operations:
1996 365 (731) (726) 1,599
1995 163 1,350 733 1,585
1994 1,584 (1,051) 10
- -------------------------------------------------------------------------------------------------------------
Net income:
1996 27,121 28,121 29,763 31,995
1995 22,368 23,629 25,150 26,482
1994 11,596 17,517 22,056 23,144
=============================================================================================================
</TABLE>
32
<PAGE>
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, 1996
and 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 38,853 $ $ 45,917 $
Investment in financing transactions 6,716,996 735,648 (3) 11.6% (1) 5,815,019 646,898 (3) 11.9% (1)
Less reserve for possible credit losses (138,896) (117,337)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in financing transactions - net 6,578,100 5,697,682
Other assets and deferred charges 340,056 259,856
Investment in discontinued operations 487,915 403,034
- ------------------------------------------------------------------------------------------------------------------------------------
$ 7,444,924 $ 6,406,489
====================================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Other liabilities $ 341,370 $ 285,483
Senior debt 5,944,599 366,543 6.2% 5,084,145 337,814 6.6%
Deferred income taxes 249,164 218,727
- ------------------------------------------------------------------------------------------------------------------------------------
6,535,133 5,588,355
Stockholder's equity 909,791 818,134
- ------------------------------------------------------------------------------------------------------------------------------------
$ 7,444,924 $ 6,406,489
====================================================================================================================================
Interest income/average earning assets (1) $ 735,648 11.6% $ 646,898 11.9%
Interest expense/average earning assets (1)(2) 366,543 5.8% 337,814 6.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest margins earned (2) $ 369,105 5.8% $ 309,084 5.7%
====================================================================================================================================
</TABLE>
(1) The average rate is calculated based on average earning assets ($6,324,545
and $5,442,119 for 1996 and 1995, respectively) which are net of average
deferred taxes on leveraged leases and average nonaccruing assets.
(2) For the year ended December 31, 1996, excluding the impact of derivatives,
interest expense would have been $363,526 or 5.7% of average earning assets
and interest margins earned would have been $372,122 or 5.9% of average
earning assets. For the year ended December 31, 1995, excluding the impact
of derivatives, interest expense would have been $328,009 or 6.0% of
average earning assets and interest margins earned would have been $318,889
or 5.9% of average earning assets.
(3) Interest income is shown net of depreciation.
33
<PAGE>
FINOVA CAPITAL CORPORATION
COMMISSION FILE NUMBER 1-11011
EXHIBIT INDEX
DECEMBER 31, 1996 FORM 10-K
Page in
Sequentially
Numbered
Exhibit No. Description Report
- ---------------- ---------------------------------------------- ------------
(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
Company's Report on Form 10-K for the year
ended December 31, 1995 (the "1995 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 the issue 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
incorporated by reference.
(4.D) Indenture dated as of November 1, 1990 between
the Company 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.E) Fourth Supplemental Indenture dated as of
April 17, 1992 between FINOVA and the Trustee
named therein, supplementing the Indenture
referenced in Exhibit 4.D 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).
<PAGE>
Page in
Sequentially
Numbered
Exhibit No. Description Report
- ---------------- ---------------------------------------------- ------------
(4.F) 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.G) Form of Indenture dated as of October 1, 1995
between FINOVA Capital and the Trustee named
therein (incorporated by reference from
FINOVA's Report on Form 8-K dated October 25,
1995, Exhibit 4.1).
(4.H) 1992 Stock Incentive Plan of FINOVA Group as
amended through the date of this filing,
including proposed amendments being considered
at the 1997 Annual Meeting of Sharefholders.*+
(10.A) Sixth Amendment and Restatement dated as of
May 16, 1994 of the Credit Agreement dated as
of May 31, 1976 among FINOVA 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 Company'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 the
Company's Quarterly Report on Form 10-Q for
the period ending September 30, 1995 (the
"3Q95 10-Q"), Exhibit 10.A).
<PAGE>
Page in
Sequentially
Numbered
Exhibit No. Description Report
- ---------------- ---------------------------------------------- ------------
(10.A.3) Third Amendment dated as of November 1, 1995
to Sixth Amendment noted in 10.A above
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.B).
(10.A.4) Fourth Amendment dated as of May 15, 1996, to
Sixth Amendment noted in 10.A above
(incorporated by reference from FINOVA Group's
Report on Form 10-K for the year ended
December 31, 1996 (the "1996 FINOVA Group
10-K"), Exhibit 10.A.4).
(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 3Q95 10-Q, Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted
in 10.B above (incorporated by reference from
the 3Q95 10-Q, Exhibit 10.D).
(10.B.4) Fourth Amendment to Short-Term Facility noted
in 10.B above (incorporated by reference from
the 1996 FINOVA Group 10-K, Exhibit 10.B.4).
(10.C.1) The Company's Executive Severance Plan for
Tier 1 Employees (incorporated by reference
from the Company's 1995 10-K, Exhibit
10.C.1).+
(10.C.2) The Company's Executive Severance Plan for
Tier 2 Employees (incorporated by reference
from the Company's 1995 10-K, Exhibit
10.C.2).+
(10.D) The Company's 1996 Management Incentive Plan
(incorporated by reference from the 1996
FINOVA Group 10-K, Exhibit 10.d).+
(10.E.1) The Company's 1995 - 1997 Performance Share
Incentive Plan (incorporated by reference from
the 3Q95 10-Q, Exhibit 10.H).+
(10.E.2) The Company's 1994 - 1996 Performance Share
Incentive Plan (incorporated by reference from
the 3Q95 10-Q, Exhibit 10.I).+
(10.E.3) The Company's 1996-1998 Performance Share
Incentive Plan (incorporated by reference from
the 1996 FINOVA Group 10-K, Exhibit 10.E.3).+
(10.F.1) Employment Agreement with Samuel L.
Eichenfield dated March 16, 1996,
(incorporated by reference from the Company's
1995 10-K, Exhibit 10.F.3).+
(10.F.2) Amendment to Employee Agreement referenced in
10.F.1 above (incorporated by reference from
the 1996 FINOVA Group 10-K, Exhibit 10.F.2).+
10.G Employment Agreement with William J. Hallinan,
dated February 25, 1992 (incorporated by
reference from the 1992 10-K, Exhibit 10.I)+
<PAGE>
Page in
Sequentially
Numbered
Exhibit No. Description Report
- ---------------- ---------------------------------------------- ------------
(10.H) Employment Agreement with Thomas C.
Parrinello, dated February 14, 1994
(incorporated by reference from the 1994 10-K,
Exhibit 10.H).+
(10.I) The Company's Amended and Restated
Supplemental Pension Plan (incorporated by
reference from the 1996 FINOVA Group 10-K,
Exhibit 10.I).+
(10.J) FINOVA Group's Value Sharing Plan for
Executive Officers and Key Employees
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.K).+
(10.K) FINOVA Group's Value Sharing Plan for the
Chief Executive Officer (incorporated by
reference from the 3Q95 10-Q, Exhibit 10.L).+
(10.L) [Omitted]
(10.M) [Omitted]
(10.N) The Company's Deferred Compensation Plan
(incorporated by reference from the Company's
1995 10-K, Exhibit 10.N).+
(10.O) Form of FINOVA Group's 1992 Stock Incentive
Plan Nonqualified Stock Option Agreement (for
exempt employees) (for grants between August
25, 1992 and August 10, 1994) (various prices)
(incorporated by reference from the 1992 10-K,
Exhibit 10.FF).+
(10.P) [Omitted]
(10.Q) [Omitted]
(10.R) Interim Services Agreement dated January 28,
1992 among the Company, The Dial Corp and
others (incorporated by reference from the
1992 10-K, Exhibit 10.JJ).
(10.S) 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.T) 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.NN).
(10.U) FINOVA Group's Executive Officer Loan Program
Policies and Procedures (incorporated by
reference from the 1996 FINOVA Group 10-K,
Exhibit 10.U).+
<PAGE>
Page in
Sequentially
Numbered
Exhibit No. Description Report
- ---------------- ---------------------------------------------- ------------
(10.V.1) Form of the Company's 1992 Stock incentive
Plan Stock Option Agreements for grants
between August 10, 1994 and August 7, 1996,
(for exempt employees) (various prices)
(incorporated by reference from the 1994 10-K,
Exhibit 10.DD).+
(10.V.2) Form of Non-Qualified Stock Option Agreement
for exempt employees subsequent to August 8,
1996 to present (incorporated by reference
from the 1996 FINOVA Group 10-K, Exhibit
10.V.5).+
(10.V.3) Form of Non-Qualified Stock Option Agreement
(multi-year grants)(incorporated by reference
from the 1996 FINOVA Group 10-K, Exhibit
10.V.6).+
(10.W.1) Form of the Company's Restricted Stock
Agreements in effect through July 1996
(incorporated by reference from the 1994 10-K,
Exhibit 10.GG).+
(10.W.2) Form of Restricted Stock Agreement in effect
subsequent to July 1996 (incorporated by
reference from the 1996 FINOVA Group 10-K,
Exhibit 10.W.3).+
(10.X.1) PBRS/Restricted Stock Retention Incentive
Program Policies and Procedures (incorporated
by reference from the 1996 FINOVA Group 10-K,
Exhibit 10.X.1).+
(10.X.2) Form of Restricted Stock Agreement for use in
Stock Retention Incentive Program noted in
10.X.1 above (incorporated by reference from
the 1996 FINOVA Group 10-K, Exhibit 10.X.2)+
(12) Computation of Ratio of Income to Combined
Fixed Charges and Preferred Stock Dividends.*
(23) Independent Auditor's Consent.*
(27) Financial Data Schedule.*
* Filed herewith.
+ Relating to Management Compensation.
The FINOVA Group Inc.
1992 STOCK INCENTIVE PLAN
(INCLUDING 1997 AMENDMENTS)
Section 1. Purpose.
A. Purpose. Through this Plan, FINOVA seeks to
The Plan helps attract, retain and motivate officers,
align the interest employees and directors. The Plan's incentives
of our helps align their efforts with the
executives and profitability of the Company and increases in
shareholders. shareholder value.
B. Defined Terms. Section 11 contains a Glossary
of many defined terms used in this Plan. The
Plan defines other terms in the text as they
appear.
Section 2. Administration of the Plan.
A. Committee. The Human Resources Committee of
the Board or any other committee designated by
the Board (the "Committee") will administer
the Plan, unless otherwise determined by the
Board. The Committee must contain at least two
Outside Directors. Unless the Committee
contains only Outside Directors, it will
appoint a subcommittee to act on all Awards to
Section 16 Officers, except as otherwise
permitted by Section 162(m). Each Committee
member serves at the pleasure of the Board. If
no Committee is appointed to administer the
Plan, the Board will act in its place.
The Committee B. Powers. The Committee may grant Awards under
has broad the Plan to officers, employees and directors
powers to of the Company and its Affiliates. Among other
administer the things, and subject to the terms of the Plan,
plan. the Committee may determine in its sole
discretion:
1. The officers, employees and directors to
receive Awards, except Awards to
Non-Employee Directors can only be made as
permitted by Section 7;
2. The timing and form of each Award,
including Options (ISOs or NQs),
Restricted Stock (including PBRS), Stock
Appreciation Rights, or any combination
thereof;
3. The number of Shares underlying an Award;
4. The terms of any Award, including any
exercise price, vesting restriction
(including vesting or lapse of
restrictions in installments), forfeiture,
expiration date, or conditions for
exercise;
5. Any performance goals or conditions to be
satisfied in connection with an Award,
including goals based on the performance
of the individual, Company or any
Affiliate, division or department;
6. Whether and how to adjust the terms of any
Award at any time, in whole or in part,
including accelerating the vesting or
exercisability, changing the number of
Shares subject to the Award, changing the
performance goals or measurements for
<PAGE>
performance-based Awards, or waiving or
relaxing any term;
7. Whether and how to defer Shares and other
amounts payable on an Award;
8. Whether and how amounts due for any Award
may be settled in cash, Shares or
otherwise;
9. Whether and how an Award may be
transferred to other persons or entities,
before or after vesting; the Committee may
permit transfer of outstanding as well as
future Awards; and
10. Whether and how to cash out all or part of
an Award or its underlying Shares by
paying the holder the difference, in cash
or Stock, between the Fair Market Value
over the exercise price times the number
of Shares to be cashed out.
B. Agreements/Notice of Awards. Awards will be
evidenced by written agreements, the terms and
provisions of which may differ. The Company
will deliver a copy of the agreement promptly
following the grant. The Company may sign the
agreements by facsimile signature.
C. Administration of the Plan. The Committee will
supervise the administration of the Plan. It
may adopt, alter and repeal administrative
rules, guidelines and practices for the Plan.
It may interpret the Plan and the terms of any
Award and related agreement.
D. Committee Action/Delegation. The Committee may
act only by a majority of its then-current
The Committee members, except it may: (1) delegate to one or
may delegate more officers of the Company or its Affiliates
certain matters. the authority to make decisions permitted
under the Plan and by law, (2) authorize a
subcommittee to act in its place if consistent
with the Plan and law, and (3) authorize one
or more of its members or officers of the
Company or any Affiliate to execute and
deliver documents on behalf of the Committee
or any subcommittee. The Committee, however,
can not delegate to any officer under (1)
above decisions under the Plan with respect to
Section 16 Officers. Any other reference in
this Plan to the Committee will not preclude
any delegated authority permitted by this
section.
E. Discretion to Act. The Committee and persons
with delegated authority may act in their sole
discretion when granting an Award or, if
permitted by the Plan, after the grant. All
decisions made by the Committee or under
delegated authority will be binding on all
persons, including the Company and Plan
participants.
Section 3. Stock Subject to Plan.
A. General Authorization. For Plan years
The number of beginning on or after January 1, 1997, the
initial authorized Committee may continue to grant Awards for
shares in a year Shares in each calendar year (including
generally partial years) totaling two and one-half
remains the percent (2.5%) of the Common Stock of the
same as the Company outstanding as of the first day of
former plan. that year, subject to adjustment as provided
in the Plan. Any available Shares not granted
in a year will be available for grant in a
future
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year, but only if those Shares are Awarded to
new officers, employees or directors in
connection with the merger with or the
acquisition of all or substantially all the
stock or assets of another corporation or
other entity by the Company or its Affiliates.
The Committee may award up to 250,000 shares
of Preferred Stock under the Plan. The
Committee may issue Shares authorized and
unissued Shares or "treasury Shares" to
satisfy any Award.
B. Limitations. Subject to adjustment as provided
in the Plan, the Committee may award a maximum
of 2,500,000 shares of Common Stock as
Incentive Stock Options over the life of the
Plan, and it may grant Awards for a maximum of
500,000 Shares to any one participant in any
calendar year. Canceled and replacement Awards
for a participant will count against that
individual award limitation.
C. Adjustment in Amount. The Shares available
under the Plan will be increased by the number
of Shares (1) of Restricted Stock that are
forfeited, (2) underlying an Option (and
related SAR, if any) that terminates for any
reason without being exercised, or (3)
underlying a Stock Appreciation Right that is
exercised for cash.
D. Change in Corporate Structure. The Committee
or Board may adjust or substitute in its
discretion the Shares reserved for issuance
under the Plan, the number and exercise price
of any outstanding Options and SARs, and the
number of Shares subject to other Awards in
the event of any change in corporate structure
of the Company. Those changes include any
merger, reorganization, consolidation,
recapitalization, stock dividend, stock split,
or extraordinary distribution regarding the
Stock. The number of Shares subject to an
Award, however, must always be a whole number.
Section 4. Options.
A. Date of Grant. The grant of an Option occurs
on the day the Committee selects the person to
participate in the grant, determines the
number of Shares subject to the Option, and
specifies the terms of the Option.
Options are B. ISOs and NQs. The Committee may award
NQ's unless Incentive Stock Options only to employees of
designated as the Company and its subsidiaries (as permitted
ISO's. by Section 422). The Option agreement must
note whether the Option is an ISO or NQ. If an
Option is not designated as an ISO, or even if
so captioned it does not qualify as an ISO, it
will be a Non-Qualified Stock Option. No term
of the Plan relating to an Incentive Stock
Option can be interpreted, amended or altered,
nor can any discretion or authority granted
under the Plan be exercised so as to
disqualify the Plan under Section 422 or,
without the written consent of the option
holder, to disqualify his or her ISOs under
that section.
C. Terms. Options are subject to the following
terms, and such additional terms selected by
the Committee:
1. Price. The Committee will state in the
Option agreement the Option price (or
formula for determining the price) per
Share
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<PAGE>
purchasable under that Option. The Option
price must be no less than the Fair Market
No Options are Value of the Stock on the date of grant.
awarded at less
than fair market 2. Term. All Options expire no later than 10
value or for years after the grant date.
terms over 10
years. 3. Method of Exercise. The Plan and Option
agreement determine when holders may
exercise all or part of their options. The
holder must give the Company written
notice stating the number of Shares to be
purchased under the Option. The holder
must pay the full purchase price for the
Shares purchased at the time of exercise.
The Company may determine the permitted
forms of notice and payment. The Company
will not issue any Shares until full
payment has been made.
Full payment is
due on Option 4. Use of Stock for Payment. If approved by
exercise. the Committee, holders may pay for Options
with payment in full or unrestricted Stock
already owned by the holder of the same
class as the Stock subject to the Option.
The Committee may permit payment for an NQ
with Restricted Stock of the same class,
based on the Fair Market Value of the
Stock on the exercise date. In that case,
Shares issued under the Option equal to
the number of Restricted Shares used will
become Restricted Shares with the same
terms as the surrendered Restricted
Shares, unless the Committee determines
otherwise.
The Committee
may permit 5. Transferability/Restrictions on Transfer.
transfer of Holders may not transfer options except as
Awards. permitted by the Committee or this Plan. A
holder may transfer Options by will, the
laws of descent and distribution, or under
a domestic relations order (as defined by
the Code or by ERISA) (collectively, by
"Will"). Except as noted above, all Stock
Options are exercisable during the
optionee's lifetime only by the optionee
or his or her guardian or legal
representative. In those events, the term
"holder," "optionee," and "participant"
include the guardian and legal
representative of the optionee and any
person or entity receiving an option by
Will or permitted transfer. The Committee
cannot permit transfer of ISOs other than
by Will, unless the transfer would not
terminate ISO status.
Employees may
generally 6. Termination of Employment. After
exercise options Termination of Employment, participants
after they leave may exercise Options, to the extent then
FINOVA within exercisable or as accelerated by the
the following Committee, during the periods noted below,
periods: unless otherwise permitted by the
Committee or the Option Agreement. In no
event, however, will the Option be
exercisable after expiration of the
original Option term. An ISO exercised
Death - 1 year after the exercise periods permitted by
Disability - 3 the Code will be treated as an NQ.
years
Retirement - 3 (a) Death. One year from the date of
years death. If the optionee dies after
Termination Termination of Employment during the
for Cause- periods referenced in Section
Options expire 4.C.6(b), that period will be
Other reasons - extended to the extent necessary to
3 months permit exercise within one year from
the date of death.
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<PAGE>
(b) Disability or Retirement. Three years
from the Termination of Employment due
to Disability or Retirement.
(c) Terminations for Cause. The Option
will terminate and will not be
exercisable. "Cause" means (i)
conviction of a felony, (ii)
dishonesty in fulfilling one's
employment duties or (iii) willful and
deliberate failure to perform those
duties in any material respect.
(d) Terminations Not for Cause, Death,
Disability or Retirement. Three months
from the Termination of Employment.
7. Cash Out for Change in Control. During
the first 60 days after a Change in
Control (the "Exercise Period"), an
optionee may elect, by written notice to
the Company, to be paid in cash the
Spread for each Share underlying his or
her outstanding Options, even if not then
exercisable, in lieu of payment of the
exercise price for the Options. The
payment will be made within 30 days of
that notice. The rights under this
Section 4.C.7 supersede all other
provisions of the Plan, but will not
exist if the Committee states that at the
time of the grant. The "Spread" is the
amount the Change in Control Price per
Share on the date of election exceeds the
exercise price per Share. Section 16
Officers may not make the election
provided for by this paragraph for
Options granted within 6 months of a
Change in Control. In that case, the
Options will automatically be canceled in
exchange for a cash payment equal to the
Spread multiplied by the number of Shares
underlying the Options. That payment will
be made on the day that is 6 months and 1
day after the grant of the Options.
8. Rights as a Shareholder. The holder of an
Option will have all the rights of a
shareholder of the Company for that class
or series of Stock (including, if
applicable, the right to vote the
securities and the right to receive
dividends) when the holder gives written
notice of exercise, pays for the Shares
and, if requested, gives the
representation described in Section 10.A.
Section 5. Stock Appreciation Rights.
A. Grant and Exercise. The Committee may grant
Stock Appreciation Rights with all or part of
any Option Award, either at or after the grant
(at the time of grant only for ISOs). A Stock
Appreciation Right will terminate and not be
exercisable on the termination or exercise of
the related Option, and vice versa. To
exercise an SAR, the holder must surrender the
applicable part of the related Option and
comply with procedures established by the
Committee.
B. Terms. Stock Appreciation Rights are subject
to the following terms, and
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<PAGE>
any additional terms selected by the
Committee:
Exercise of an
SAR cancels 1. Same as Options. SARs are exercisable
the underlying only at the times and to the extent the
Option and vice related Options are exercisable.
versa.
2. Payment for SARs. Upon exercise of an
SAR, an optionee the Company will pay
cash, Shares or both equal to the amount
the Fair Market Value of each Share
exceeds the Option price of the related
Option, multiplied by the number of
Shares for which the SAR is exercised.
The Committee will determine the form of
payment.
3. Transferability of SARs. Holders may
transfer SARs only to the extent
permitted for the underlying Option.
4. Cash Out for Change in Control. The
provisions of Section 4.C.7 also apply to
SARs.
Section 6. Restricted Stock.
PBRS Awards
can base A. Section 16 Officers. Unless otherwise provided
performance on by the Committee, awards of Restricted Stock
various factors. to Section 16 Officers will only be PBRS
Awards which comply with the performance-based
compensation requirements of Section 162(m).
Unless otherwise determined by the Committee,
the performance goals for the PBRS Awards will
be based on the following factors: total
shareholder return (alone or in comparison
with one or more indices), revenues (gross or
net), earnings per share, expenses, margin
(gross or net), changes in stock price, funds
or asset turnover, market share, net income
(before or after taxes), return on assets,
equity, capital, investment or sales (actual
or pro forma), operating margin, net revenue
growth, or cash flow. The Committee may
decline to use any or all of those performance
goals and it may apply these performance
measures singly or in any combination. It may
also link them to performance of the Company,
its Affiliates or any division, department or
individual. The Committee may not forgive
satisfaction of any performance condition
specified for officers subject to Section
162(m), nor may it increase an Award to those
officers over amounts provided for by the
initial grant, unless permitted by Section
162(m). The Committee must certify attainment
of the performance results if required by
Section 162(m).
B. Awards and Certificates. The Committee may
determine the form Restricted Stock may take,
including book-entry registration or issuance
of one or more stock certificates. Restricted
Stock will be registered in the name of the
participant. Restricted Stock certificates
will bear an appropriate legend referring to
the restrictions on that Award. The legend
will read essentially:
The transferability of this certificate
and the shares of stock represented
hereby are subject to the terms
(including forfeiture) of the 1992
Stock Incentive Plan and a Restricted
Stock Agreement. Copies of the Plan and
Agreement are on file at the offices of
The FINOVA Group Inc.
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<PAGE>
The Company's most recent principal address
will also be included in the legend, but the
failure to update the address in the event of
a change will have no effect on the
restrictions on those Shares. The Company will
hold any certificates evidencing Restricted
Stock until the restrictions lapse, unless
otherwise determined by the Committee. The
Committee may also require, as a condition to
an Award, that the participant deliver one or
more stock powers and, if appropriate, SEC
Forms 144 or other applicable forms, executed
in blank, relating to the Restricted Stock.
C. Terms. Restricted Stock is subject to the
following terms and any other terms selected
by the Committee:
1. No Transfer. Except as permitted by the
Plan, Committee or Restricted Stock
agreement, the participant may not
transfer, sell, assign, pledge or
otherwise encumber the Restricted Stock
during the period set by the Committee
beginning on the date of the Award (the
"Restriction Period").
2. Rights as a Shareholder. Except as
provided by the Plan, Committee or
Restricted Stock agreement, the
participant will have all the rights of a
shareholder for the same class or series
of Stock as the Restricted Stock,
including, if applicable, the right to
vote the Shares and to receive any cash
dividends. If the Committee requires in
the Restricted Stock agreement, and
subject to Section 10.F, (a) cash
dividends on the Restricted Stock will be
automatically deferred and reinvested in
additional Restricted Stock, and (b)
Stock dividends will be paid in the form
of Restricted Stock of the same class as
the dividend.
3. Forfeiture of Restricted Stock. Except as
provided by this Plan, the Committee or
the Restricted Stock agreement, a
participant will forfeit all Shares of
Restricted Stock still subject to
restriction upon his or her Termination
of Employment.
4. Certificates Upon Vesting. Upon
expiration of the Restriction Period
without a prior forfeiture, the Company
will deliver unlegended certificates for
those Shares to the participant.
Section 7. Non-Employee Director Awards.
A. Automatic Grants. Each Non-Employee Director
who has served on the Board continuously since
the commencement of his or her term will
receive an annual (including partial years)
grant of Non-Qualified Options to purchase
1,500 Shares of Common Stock. The grant will
occur automatically on the third Thursday of
August during that director's term. Each
Non-Employee Director will also be awarded NQs
to purchase
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<PAGE>
2,000 shares of Common Stock on joining the
Board. The exercise price for those grants
will equal the Fair Market Value on the date
of grant.
B. Election for Retainer Payments. In addition to
the Awards authorized by Section 7.A, each
Non-Employee Director may from time to time
elect to receive, in lieu of all or part of
the cash retainer otherwise payable to that
director, (1) Restricted Stock ("Directors
Retainer Shares") with a Fair Market Value
equal to the amount of the retainer payment to
be paid on that date, (2) Non-Qualified
Options to purchase Common Stock with a Fair
Market Value as of that payment date equal to
two and one-half times the amount of the
retainer payment ("Directors Retainer
Options"), or (3) a combination of the above.
The Committee may establish minimum thresholds
for election of any alternative other than
cash.
C. Directors Retainer Shares. Directors Retainer
Shares are non-transferable by the director
until the day before the next annual meeting
of the Company's shareholders. Those Shares
will be forfeited to the Company if the
director ceases to be a Board member prior to
that date except as otherwise provided by this
Plan.
D. Directors Retainer Options. Except as provided
below, Directors Retainer Options may be
exercised in whole or in part commencing on
the day before the next annual meeting of
shareholders and ending ten years after the
date of grant. If the director ceases to be a
Board member before the Directors Retainer
Option becomes exercisable, the Option becomes
void, except as provided by this Plan. The
exercise price will be the Fair Market Value
of the Shares on the date of grant.
E. Death, Disability or Retirement of a Director.
If a participant ceases to be a Board member
due to death, Disability or Retirement as a
director at the end of a term or upon a Change
in Control, then any Directors Retainer Shares
and Directors Retainer Options will
immediately vest and become exercisable, as
the case may be. Any restriction on transfer
imposed by this Plan and any risk of
forfeiture will cease on any of those events.
F. Expiration of Directors Retainer Options.
Directors Retainer Options that are
exercisable but have not been exercised expire
six months after the date the director ceases
to be a Board member, except as noted below.
If the Board membership ceases due to death,
Disability or Retirement as a director at the
end of a term or upon a Change in Control,
those Options may be exercised for two years
after termination of Board membership, and if
the director dies within the six month or two
year periods noted above, the Options may be
exercised at any time within two years after
the death. Nothing in this paragraph permits
exercise of any Options beyond the original
ten year term.
G. Allocation of Shares. If the number of Shares
available for future grants under the Plan is
not sufficient to make all automatic grants
required to be made on that date, then all
Non-Employee Directors entitled to a grant on
that date will share proportionately in the
available Options. In addition, no elections
under Section 7.B can be made until all
automatic grants for that date have been made,
and the directors who have elected to receive
all or
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<PAGE>
any portion of their retainer under that
subsection will share ratably in the number of
remaining available Shares.
H. Other Terms. Except as expressly provided in
this Section 7, any Award granted under this
Section will be subject to the terms of the
Plan, including those contained in Sections 4
and 6, respectively.
Section 8. Change in Control Provisions.
A. Impact of Event. Notwithstanding any other
provision in this Plan to the contrary, if a
Change of Control occurs:
1. Options and SARs. Any unvested or
unexercisable Options and SARs
outstanding as of the date of the Change
in Control become fully vested and
exercisable to the full extent of the
original grant, without regard to the
three month limit on exercisability
imposed by Section 4.C.6(c) of the Plan.
2. Restricted Stock. The restrictions on
Restricted Stock lapse, and it will
become free of all restrictions (other
than those imposed by the securities
laws). The Restricted Stock will fully
vest immediately, including full vesting
of the maximum number of Shares or
payouts as if maximum performance
conditions or goals were achieved, as
applicable.
B. Definition of Change in Control. For purposes
of the Plan, a "Change in Control" means the
happening of any of the following events:
1. Acquisition. An acquisition by any
person, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2)
of the Exchange Act (a "Person") of
beneficial ownership (within the meaning
of SEC Rule 13d-3) of 20% or more of
either (a) the then outstanding common
stock (the "Outstanding Common Stock") or
(b) the combined voting power of the then
outstanding voting securities entitled to
vote generally in the election of
directors (the "Outstanding Voting
Securities") of the Company.
Exception. No Change of Control will have
occurred for any acquisition (i) directly
from the Company or any Affiliate, other
than one by exercise of a conversion
privilege unless the security being so
converted was itself acquired directly
from the Company or Affiliate, (ii) by
the Company or any Affiliate, (iii) by
any employee benefit plan or related
trust sponsored or maintained by the
Company or any Affiliate, or (iv) by any
corporation pursuant to a transaction
that complies with clauses (a), (b) and
(c) of the Exception contained in
subsection 3 of this Section 8.B; or
2. Change in the Board. A change in the
composition of the Board so that the
members who as of January 1, 1997
constitute the Board (the "Incumbent
Board") cease for any reason to be at
least a majority of the Board. Any person
who becomes a Board member after January
1, 1997 whose election or nomination for
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<PAGE>
election was approved by at least a
majority of the Incumbent Board will also
be a member of the Incumbent Board,
unless his or her initial assumption of
office occurs due to either an actual or
threatened election contest (as those
terms are used in SEC Rule 14a-11 or SEC
Regulation 14A) or other actual or
threatened solicitation of proxies or
consents by or on behalf of a Person
other than the Board; or
3. Corporate Transaction. The Company's
shareholders approve a reorganization,
merger, consolidation or sale or other
disposition of all or substantially all
the assets of the Company (a "Corporate
Transaction").
Exception. If all of the following apply,
the instance will not be a Corporate
Transaction: (a) all or substantially all
of the beneficial owners of the Company's
Outstanding Common Stock or Outstanding
Voting Securities, respectively,
immediately prior to the Corporate
Transaction will beneficially own,
directly or indirectly, more than 60% of,
respectively, the Outstanding Common
Stock and the Outstanding Voting
Securities of the corporation resulting
from the Corporate Transaction (including
any corporation that owns the Company or
all or substantially all of the Company's
assets directly or indirectly) in
substantially the same proportions as
their ownership immediately prior to the
Corporate Transaction, (b) no Person
(other than the Company, any employee
benefit plan -- or related trust -- of
the Company or the corporation resulting
from the Corporate Transaction) will
beneficially own, directly or indirectly,
20% or more of the Outstanding Common
Stock or Outstanding Voting Securities,
except to the extent that ownership
existed prior to the Corporate
Transaction, and (c) members of the
Incumbent Board constitute at least a
majority of the board of directors
resulting from the Corporate Transaction,
or
4. Liquidation/Dissolution of the Company.
The shareholders of the Company approve a
complete liquidation or dissolution of
the Company.
C. Change in Control Price. For purposes of this
Plan, "Change in Control Price" means the
higher of (1) the highest reported sales
price, regular way, of a Share in any
transaction reported on the NYSE Composite
Tape, on any other national exchange listing
the Shares or on NASDAQ or (2) if the Change
in Control results from a tender or exchange
offer or a Corporate Transaction, the highest
price per Share paid in that tender or
exchange offer or Corporate Transaction. For
Incentive Stock Options and Stock Appreciation
Rights relating to ISOs, the Change in Control
Price will be in all cases the Fair Market
Value of the Stock on the date the ISO or SAR
is cashed out. To the extent the consideration
paid in any Change in Control transaction
consists of all or in part securities or other
non-cash consideration, the Board will
determine the value of the securities or
non-cash consideration in its discretion.
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<PAGE>
Section 9. Effective Date/Term/Amendment/Termination.
A. Effective Date. This amended Plan is effective
upon approval by the Board. Those changes
necessary for qualification under Section
162(m) or Section 422 will not be effective
until those changes are ratified and approved
by a majority of the Company's shareholders
who vote on the matter at a meeting with a
quorum present. All Awards outstanding on the
effective date of these amendments to this
Plan will remain outstanding and will become
subject to the terms of this Plan as amended.
B. Termination. The Plan terminates on December
31, 2002. Awards outstanding as of the date
the Plan terminates will not be affected or
impaired by that termination.
C. Changes to the Plan/Restrictions. The Board
may amend, alter or discontinue the Plan,
including to incorporate changes in law, tax
and accounting rules, or other developments,
and to grant Awards that qualify for
beneficial treatment under those changes. No
change can be made, however, that would (1)
impair the rights of a participant granted
before that date without the participant's
consent, except for a change made to cause the
Plan to qualify for exemptions provided by
then-current law, including exemptions
relating to securities and taxation, or (2)
disqualify the Plan from the exemptions
provided by SEC Rule 16b-3 or for favorable
tax treatment under Sections 162(m) or 422. No
amendment can be made without approval of the
Company's shareholders if their approval is
required by law or is necessary to maintain
the exemptions under Rule 16b-3 or Sections
162(m) or 422. No term of the Plan can be
interpreted, amended or altered, nor can any
discretion or authority to act under the Plan
be exercised so as to disqualify the Plan
under Sections 162(m) or 422 or Rule 16b-3.
D. Changes to Prior Awards/Restrictions. The
Committee may amend the terms of any Award
granted before that date, prospectively or
retroactively, but no amendment can impair the
rights of any holder without the holder's
consent, except as noted in this Section 9.
The Committee may also substitute new Options
for previously granted Options, including
previously granted Options having higher
exercise prices.
Section 10. General Provisions.
A. No Intent to Transfer. The Committee may
require each person acquiring an Award or the
underlying Shares to represent to and agree
with the Company in writing that the person is
acquiring the Award or Shares without a view
to the distribution thereof. All Shares or
other securities issued under the Plan will be
subject to stop transfer orders and other
restrictions imposed by the Committee,
including restrictions imposed by law, SEC or
stock exchange rules or other restrictions.
The certificates for Shares or other Awards
may contain any legend the Committee deems
appropriate regarding any restrictions on
transfer or otherwise.
B. Other Compensation Permitted. Nothing in this
Plan will prevent the Company or any Affiliate
from adopting other or additional compensation
arrangements for their employees.
C. No Employment Rights. Nothing in this Plan or
any Award will confer on any employee any
right to continued employment, nor will either
interfere
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<PAGE>
with the right of the Company or any Affiliate
to terminate the employment of any employee at
any time.
D. Taxes. The participant must pay to the Company
or make arrangements satisfactory to the
Company regarding the payment of any Federal,
state, local and foreign taxes of any kind
required by law to be withheld regarding any
Award. The participant must satisfy that tax
obligation no later than when the amount
becomes includible in the person's gross
income for Federal income tax purposes. Unless
otherwise determined by the Company,
withholding obligations may be settled with
Stock, including Stock that is part of the
Award giving rise to the tax obligation. The
obligations of the Company under the Plan are
conditional on satisfaction of these taxes.
The Company and its Affiliates may deduct any
taxes due from any payment otherwise due the
participant if permitted by law.
E. Right of First Refusal. At the time of grant,
the Committee may require that the participant
offer to the Company the right to purchase
Shares resulting from an Award (or if the
Committee permits transfer, of the Award
itself) that the participant wishes to sell,
transfer, assign, pledge or otherwise
encumber. The Company will have the right to
purchase the Shares (or Award) at the then
Fair Market Value of the Shares, subject to
terms the Committee specifies at the time of
grant.
F. Reinvestment of Dividends Subject to
Availability. The reinvestment of dividends in
additional Restricted Stock can only occur if
sufficient Shares are available under Section
3 for that reinvestment (taking into account
then outstanding Awards).
G. Beneficiary Designation. The Committee will
establish procedures for a participant to
designate a beneficiary to whom any amounts
payable in the event of the participant's
death are to be paid.
H. Governing Law. The Plan and all Awards made
and actions taken under the Plan will be
governed by and construed in accordance with
the laws of the State of Delaware, without
regard to its conflicts of law principles.
I. Unfunded Status of Plan. The Board intends
that the Plan constitute an "unfunded" plan
for incentive and deferred compensation. The
Committee may create trusts or other
arrangements to meet the obligations created
under the Plan to deliver Stock or make
payments. Unless the Committee otherwise
determines, however, the existence of those
trusts or arrangements shall be consistent
with the unfunded status of the Plan.
Section 11. Definitions.
As used in this Plan:
"Affiliate" means a corporation or other entity
controlled by the Company and designated by the
Committee as eligible to participate in this Plan.
"Award" means an Option, Stock Appreciation Right or
Restricted Stock grant issued under the Plan.
"Board" means the Board of Directors of the Company.
-12-
<PAGE>
"Code" means the Internal Revenue Code of 1986, as
amended, and any successor provisions. The Code
includes its related rules.
"Committee" is defined in Section 2.A.
"Common Stock" means the common stock, par value $.01
per share, of the Company.
"Company" or "FINOVA" means The FINOVA Group Inc., a
Delaware corporation.
"Disability" means permanent and total disability under
the Company's policies as they then exist. The
Committee may amend or interpret, for purposes of the
Plan, the Company's disability policies in its
discretion.
"Exchange Act" means the Securities Exchange Act of
1934, as amended, and any successor provisions. The
Exchange Act includes its related rules, as they may be
amended.
"Fair Market Value" as of any given date depends on
whether the Stock is immediately resold. The resale
price is the fair market value if the participant
resells that Stock in an arms-length transaction on the
open market on the same date the Fair Market Value is
to be determined. In all other cases, the Fair Market
Value is the average of the high and low reported sales
prices of the Stock on the given date. The reported
sales price will be determined in the following order,
as applicable: the NYSE Composite Tape, any other
national stock exchange listing the stock, NASDAQ, or
if the Stock's sales are not regularly reported by any
of the above, by the Committee in its good faith
discretion. For any day that is not a trading day on
the national securities markets, the previous trading
day will determine Fair Market Value.
"Incentive Stock Option" or "ISO" means any Option
intended to be and designated as an "incentive stock
option" within the meaning of Section 422 of the Code.
"Including" even if not capitalized, means including
without limitation.
"Non-Employee Director" means a director who is not
otherwise an employee of the Company or any Affiliate
and has not been so employed for any part of the
preceding fiscal year.
"Non-Qualified Option" or "NQ" means any Option that is
not an ISO.
"Option" means an option granted under Section 4 or 7.
"Outside Director" means a director who satisfies the
requirements of an "outside director" as defined in
Section 162(m) and who otherwise satisfies the
requirements of a "non-employee director" under Rule
16b-3.
"Plan" means this 1992 Stock Incentive Plan, as it may
be amended.
"Performance Based Restricted Stock" or "PBRS" means
Restricted Stock with performance conditions other than
the mere passage of time or continued employment or
service which satisfy the requirements as
performance-based
-13-
<PAGE>
compensation under Section 162(m).
"Preferred Stock" means preferred stock, par value
$.01, of the Company.
"Restricted Stock" means an Award granted under Section
6 or 7.C.
"Retirement" means (A) retirement from active
employment under a pension plan of the Company or an
Affiliate, (B) retirement under an employment contract
with the Company or an Affiliate, or (C) termination of
employment (or service as a non-employee director) at
or after age 55 under circumstances that the Committee
in its sole discretion deems to be retirement.
"SEC" means the Securities and Exchange Commission or
any successor.
"Section 16 Officer" means any officer (including any
employee director) subject to the insider trading and
reporting requirements of Section 16 of the Exchange
Act. Non-Employee Directors are not Section 16 Officers
for purposes of this Plan.
"Section 162(m)" means Section 162(m) of the Code.
"Section 422" means Section 422 of the Code.
"Shares" or "Stock" means the Common Stock or Preferred
Stock, as the case may be.
"Stock Appreciation Right" or "SAR" means a right
granted under Section 5.
"Termination of Employment" means the termination of
the participant's employment with the Company or an
Affiliate. It also occurs if the participant is
employed by a division, department or Affiliate that
ceases its affiliation with the Company. In any case,
the participant will not incur a Termination of
Employment if he or she immediately becomes an employee
of the Company or another Affiliate following that
event.
-14-
FINOVA CAPITAL CORPORATION
EXHIBIT 12
COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes $ 185,822 $ 150,834 $ 122,847 $ 64,123 $ 50,593
Add fixed charges:
Interest expense 366,543 337,814 210,730 126,152 136,107
One-third of rent expense 2,368 2,084 2,053 1,387 1,498
--------- ----------- ---------- --------- ----------
Total fixed charges 368,911 339,898 212,783 127,539 137,605
--------- ----------- ---------- --------- ----------
Income as adjusted $ 554,733 $ 490,732 $ 335,630 $ 191,662 $ 188,198
--------- ----------- ---------- --------- ----------
Ratio of income to fixed charges 1.50 1.44 1.58 1.50 1.37
========= =========== ========== ========= ===========
Preferred stock dividends on a pre-tax $ $ $ $ 3,682 $ 2,826
basis
Total combined fixed charges and
preferred stock dividends $ 368,911 $ 339,898 $ 212,783 $ 131,221 $ 140,431
--------- ----------- ---------- --------- ----------
Ratio of income to combined fixed charges
and preferred stock dividends 1.50 1.44 1.58 1.46 1.34
========= =========== ========== ========= ===========
</TABLE>
39
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
12, 1997, appearing in the Annual Report on Form 10-K of FINOVA Capital
Corporation for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 31,285
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 7,298,759
<ALLOWANCE> (148,696)
<TOTAL-ASSETS> 7,551,926
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 632,660
<LONG-TERM> 5,850,223
0
0
<COMMON> 25
<OTHER-SE> 1,069,018
<TOTAL-LIABILITIES-AND-EQUITY> 7,551,926
<INTEREST-LOAN> 797,934
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 366,543
<INTEREST-INCOME-NET> 369,105
<LOAN-LOSSES> 41,751
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 154,481
<INCOME-PRETAX> 185,822
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.8
<LOANS-NON> 155,505
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 129,077
<CHARGE-OFFS> (32,017)
<RECOVERIES> 3,296
<ALLOWANCE-CLOSE> 148,693
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
