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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20594
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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, 1997 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 New York Stock Exchange
of 9 - 1/8% Note 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 10K or any amendment of this
Form 10-K. [X]
As of March 13, 1998, 25,000 shares of Common Stock ($1.00 par value) were
outstanding and held by an affiliate.
Registrant meets the conditions set forth in General instruction I (1) (a) and
(b) of form 10-K and is therefore filing 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
Business Groups 1
Portfolio Composition 3
Investment in Financing Transactions 3
Cost and Use of Borrowed Funds 11
Matched Funding Policy 12
Credit Ratings 13
Residual Realization Experience 13
Business Development and Competition 14
Credit Quality 15
Risk Management 15
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 18
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Shareowner Matters 19
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 8 Financial Statements & Supplementary Data 21
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 21
Part III
Item 10 Directors & Executive Officers of the Registrant 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners & Management 22
Item 13 Certain Relationships & Related Transactions 22
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22
<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
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").
GENERAL
FINOVA Capital Corporation is a financial services company engaged in
providing capital and collateralized financing products to commercial
enterprises focusing on midsize businesses in various market niches, principally
in the United States.
FINOVA extends revolving credit facilities, term loans and equipment
and real estate financing primarily to "middle-market" businesses with financing
needs falling generally between $500,000 and $35 million. FINOVA operates in 16
specific industry or market niches under three market groups. FINOVA selected
these groups because its expertise in evaluating the credit-worthiness of
prospective customers and its ability to provide value-added services enable the
Company to differentiate itself from its competitors. That expertise and ability
also enables FINOVA to command pricing that provides a satisfactory spread over
its borrowing costs.
FINOVA seeks to maintain a high quality portfolio and to minimize
non-earning assets and write-offs. FINOVA uses clearly defined underwriting
criteria and stringent portfolio management techniques. The Company diversifies
its lending activities geographically and among a range of industries, customers
and financing products.
Due to the diversity of FINOVA'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.
There can be no assurance, however, that competitive changes, borrowers'
performance, economic conditions or other factors will not result in an adverse
impact on FINOVA's results of operations or financial condition.
FINOVA generates interest income, leasing income, fees and other income
through charges assessed on outstanding loans, loan servicing, leasing,
brokerage and other activities. FINOVA's primary expenses are the costs of
funding the loan and lease business, including interest paid on debt, provisions
for credit losses, marketing expenses, salaries and employee benefits, servicing
and other operating expenses and income taxes.
FINOVA is headquartered in Phoenix, Arizona with business development
offices throughout the U.S. and in London, U.K. and Toronto, Canada.
Business Groups
FINOVA operates the following principal lines of business under three
market groups:
Commercial Finance
o Business Credit 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 Corporate Finance provides a full range of cash
flow-oriented and asset-based term and revolving loan
products for manufacturers, wholesalers, distributors,
specialty retailers and commercial and consumer service
businesses. Typical transaction sizes range from $2
million to $35 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. Transaction sizes generally range from
$500,000 to $30 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. The annual factored volume of
these companies is generally between $5 million and $25
million.
1
<PAGE>
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.
Specialty Finance
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 Specialty Real Estate Finance focuses on first mortgage
loans for hotel and resort properties and equity
investments in real estate sale-leasebacks. Typical
transaction sizes range from $5 million to $30 million.
o Communications Finance specializes in term financing to
advertising and subscriber-supported businesses, including
radio and television stations, cable operators, outdoor
advertising firms and publishers. Typical transaction
sizes range from $1 million to $40 million.
o Franchise Finance offers equipment, real estate and
acquisition financing for operators of established
franchise concepts. Transaction sizes generally range from
$500,000 to $15 million.
o Healthcare Finance offers a full range of working capital,
equipment and real estate financing products for the U.S.
healthcare industry. Transaction sizes typically range
from $500,000 to $25 million.
o Public Finance provides tax-exempt term financing to state
and local governments, non-profit corporations and
entities using Industrial Revenue and Industrial
Development Bonds. Typical transaction sizes range from
$100,000 to $5 million.
o Portfolio Services provides customized receivable
servicing and collections for timeshare developers and
other generators of consumer receivables.
o Resort Finance focuses on construction, acquisition and
receivables financing of timeshare resorts worldwide as
well as term financing for established golf resort hotels
and receivables funding for developers of second home
communities. Typical transaction sizes range from $5
million to $35 million.
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. Through FINOVA Aircraft Investors, LLC,
FINOVA also seeks to use its market expertise and industry
presence to purchase, upgrade and resell used commercial
aircraft.
Capital Markets
o FINOVA Realty Capital specializes in providing capital
markets-funded commercial real estate financing products
and commercial mortgage banking services. Typical
transaction sizes range from $1 million to $5 million.
o FINOVA Investment Alliance provides equity and debt
financing for midsize businesses in partnership with
institutional investors and selected fund sponsors.
Typical transaction sizes range from $2 million to $15
million.
FINOVA is a Delaware corporation. The Company was incorporated in 1965
and is the successor to a California corporation that was formed in 1954. In
March 1992, The Dial Corp transferred those businesses to FINOVA Group in a
spin-off. Since that time, FINOVA has increased its total assets from about $2.5
billion at December 31, 1992 to $8.8 billion at December 31, 1997. Income from
continuing operations increased from $36.8 million in 1992 to $143.1 million in
1997. Management believes FINOVA ranks among the largest independent commercial
finance companies in the U.S., based on total assets.
2
<PAGE>
Portfolio Composition
The total assets under management of the Company consist of FINOVA'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 and participations sold). 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 credit losses) at December 31, 1997, 1996, 1995, 1994, and
1993.
3
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993 %
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, conditional sale and
other financing contracts:
Commercial $ 4,299,909 51.2 $ 3,592,193 49.2 $ 3,389,363 53.4 $2,732,734 51.1 $ 1,397,863 49.1
Real estate 1,656,075 19.7 1,713,485 23.5 1,534,177 24.1 1,237,488 23.2 945,892 33.2
Factored receivables 750,399 8.9 564,430 7.7 189,486 3.0 157,862 3.0
Operating leases 712,927 8.5 517,690 7.1 460,798 7.3 412,782 7.7 147,222 5.2
Leveraged leases 619,557 7.4 514,573 7.1 366,196 5.8 287,518 5.4 283,782 10.0
Direct financing leases 360,589 4.3 396,388 5.4 408,059 6.4 514,595 9.6 71,812 2.5
----------- ----- ----------- ----- ----------- ----- ---------- ----- ----------- -----
Total investment in
financing transactions 8,399,456 100.0 7,298,759 100.0 6,348,079 100.0 5,342,979 100.0 2,846,571 100.0
===== ===== ===== ===== =====
Securitized assets 336,607 300,000 200,000 -- --
Participations sold 121,360 64,546 -- -- --
----------- ----------- ----------- ---------- -----------
Total managed assets $ 8,857,423 $ 7,663,305 $ 6,548,079 $5,342,979 $ 2,846,571
=========== =========== =========== ========== ===========
</TABLE>
4
<PAGE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1997
(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) (4) $ 1,631,685 $ $ $ $ $ $ 1,631,685 19.4%
Resort Finance (4) 1,166,199 14,450 3,974 26,240 1,210,863 14.4%
Corporate Finance (4) 791,733 981 26,888 819,602 9.8%
Specialty Real Estate Finance 610,711 24,120 38,055 7,648 10,853 196 691,583 8.2%
Communications Finance (4) 628,947 8,724 24,452 662,123 7.9%
Commercial Equipment Finance 614,712 1,816 11,802 4,030 632,360 7.5%
Rediscount Finance (4) 609,641 993 610,634 7.3%
Inventory Finance(4) 544,108 4,333 548,441 6.5%
Healthcare Finance 525,846 1,515 666 528,027 6.3%
Franchise Finance(4) 430,651 808 2,171 305 433,935 5.2%
Factoring Services 196,843 30,205 227,048 2.7%
Business Credit 195,897 7,559 203,456 2.4%
Public Finance 135,826 135,826 1.6%
Other (5) 40,347 23,526 63,873 0.8%
------------ ---------- ---------- --------- -------- -------- ----------- ------
TOTAL(4) $ 8,123,146 $ 36,449 $ 52,505 $ 121,540 $ 37,093 $ 28,723 $ 8,399,456 100.0%
============ ========== ========== ========= ======== ======== =========== ======
</TABLE>
- --------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired
transactions.
(2) The Company earned income totaling $4.1 million on repossessed assets
during 1997, including $3.1 million in Specialty Real Estate Finance and
$1.0 million in Resort Finance.
(3) Transportation Finance includes $302.9 million of aircraft financing
business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company
manages, including securitizations of $300.0 million in Corporate Finance
and $36.6 million in Franchise Finance and participations of $40.2 million
in Corporate Finance, $61.0 million in Communications Finance, $8.5 in
Transportation Finance, $4.6 million in Rediscount Finance, $5.1 million in
Resort Finance, and $1.9 million in Inventory Finance.
(5) Primarily includes London-based FINOVA Capital Limited and assets retained
subsequent to the sale of the Manufacturer and Dealer Services line of
business which occurred in November 1996.
--------------------
5
<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 (4) 1,124,462 2,963 13,878 77 25,136 1,166,516 16.0
Corporate Finance (4) 630,399 3,211 14,695 335 648,640 8.9
Specialty Real Estate Finance 700,932 30,245 46,068 6,748 9,853 940 794,786 10.9
Communications Finance (4) 535,701 8,796 14,129 3,095 561,721 7.7
Commercial Equipment Finance 570,574 7,900 6,564 585,038 8.0
Rediscount Finance (4) 421,232 245 421,477 5.8
Inventory Finance (4) 314,446 1,273 315,719 4.3
Healthcare Finance 497,540 1,304 1,194 500,038 6.9
Franchise Finance 366,202 1,104 1,985 996 370,287 5.0
Factoring Services 220,701 3,419 224,120 3.1
Business Credit 160,006 11,963 171,969 2.3
Public 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
============= ========== ========== ======== ========= 39,143 =========== =====
Discontinued Operations (5) ---------
$ 53,335
TOTAL =========
</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 Specialty 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 assets securitized and participations sold which the Company
manages, including securitizations of $300.0 million in Corporate Finance
and participations of $24.6 million in Corporate Finance, $27.5 million in
Communications Finance, $4.8 million in Rediscount Finance, $4.4 million in
Resort Finance and $3.2 million in Inventory Finance.
(5) Reflects assets retained by FINOVA subsequent to the sale of the
Manufacturer and Dealer Services' line of business.
--------------------
6
<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
Corporate Finance (4) 631,295 5,274 19,592 335 656,496 10.3
Specialty Real Estate Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 12.3
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.8
Commercial Equipment Finance 345,039 69 6,079 351,187 5.5
Rediscount Finance 345,264 345,264 5.4
Inventory Finance 202,879 430 203,309 3.2
Healthcare Finance 451,503 81 1,231 452,815 7.2
Franchise Finance 327,356 1,462 6,408 1,850 337,076 5.3
Factoring Services 188,892 594 189,486 3.0
Business Credit 200,365 12,685 213,050 3.4
Public 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 Specialty 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.
--------------------
7
<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
Corporate Finance 746,671 21,275 6,952 2,674 777,572 14.5
Specialty Real Estate Finance 672,522 7,237 40,510 7,622 21,519 749,410 14.0
Communications Finance 551,218 6,288 7,282 17,377 5,863 671 588,699 11.0
Commercial Equipment Finance 293,609 769 7,589 301,967 5.6
Rediscount Finance 99,353 99,353 1.9
Inventory Finance 58,595 642 59,237 1.1
Healthcare Finance 467,131 1,719 468,850 8.8
Franchise Finance 281,890 7,632 12,242 301,764 5.6
Factoring Services 157,090 772 157,862 3.0
Business Credit 181,741 12,003 193,744 3.6
Public 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 Specialty 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) Includes transactions in Europe and elsewhere (including the U.S.)
originated from the Company's London office. Also includes $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.
--------------------
8
<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) $ 604,416 $ $ $ 841 $ $ $ 605,257 21.2
Resort Finance 530,617 4,869 12,163 11,597 7,404 440 567,090 19.9
Corporate Finance 397,779 27,921 4,243 5,462 386 435,791 15.3
Specialty Real Estate Finance 500,598 1,574 27,844 5,759 20,838 556,613 19.6
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 (3) 107,486 4,430 2,720 23 9,600 124,259 4.4
---------- ---------- -------- -------- -------- -------- ------------ -------
TOTAL $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 Specialty Real Estate
Finance, $0.6 million in Communications Finance and $0.6 million in Resort
Finance.
(2) Transportation Finance included $31.9 million of aircraft finance business
booked through the London office.
(3) Includes transactions in Europe and elsewhere (including the U.S.)
originated from the Company's London office. Also includes $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.
--------------------
9
<PAGE>
The Company's geographic portfolio diversification at December 31, 1997
was as follows:
GEOGRAPHIC PORTFOLIO DIVERSIFICATION
December 31, 1997
(Dollars in thousands)
State Total Percent
-------------------------- ---------------- ----------
California $ 1,386,337 15.7%
Florida 928,459 10.5
Texas 713,368 8.1
New York 617,428 7.0
Arizona 304,706 4.6
New Jersey 320,502 3.6
Illinois 308,994 3.5
Virginia 286,399 3.2
Pennsylvania 253,255 2.9
Nevada 245,830 2.8
Massachusetts 214,617 2.4
Georgia 174,778 2.0
Other (1) 3,102,750 33.7
------------ --------
$ 8,857,423 100.0%
============ ========
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents approximately
6% of the total.
--------------------
The following is an analysis of the reserve for credit losses for the
years ended December 31:
RESERVE FOR CREDIT LOSSES
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 148,693 $ 129,077 $ 110,903 $ 64,280 $ 69,291
Provision for credit losses 69,200 41,751 37,568 10,439 5,706
Write-offs (45,487) (32,017) (25,631) (28,109) (12,575)
Recoveries 2,287 3,296 2,104 1,780 717
Other (including reserves related to
acquisitions) 2,395 6,586 4,133 62,513 1,141
---------- ---------- ---------- ---------- ---------
Balance, end of year $ 177,088 $ 148,693 $ 129,077 $ 110,903 $ 64,280
========== ========== ========== ========== =========
</TABLE>
--------------------
Included above is a specific impairment reserve of $24.5 million at
December 31, 1997, which applies to $158.0 million of impaired loans. The
remaining $152.6 million of the reserve for 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, 1996, the specific impairment reserve was $6.2 million, which
applied to $110.1 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.
10
<PAGE>
Write-offs by line of business during the years ended December 31, were
as follows:
WRITE-OFFS BY LINE OF BUSINESS
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Factoring Services (1) $ 24,382 $ 5,098 $ 3,728 $ 1,148 $
Corporate Finance 6,577 9,470 4,660 4,233 3,741
Commercial Equipment Finance (1) 3,722 3,207 2,271 1,257
Resort Finance 2,700 4,275 2,000 2,730
Specialty Real Estate Finance 2,106 1,793 2,275 1,461 2,320
Healthcare Finance (1) 1,798 1,018 314 377
Inventory Finance (1) 1,777 201 442
Communications Finance 750 2,994 4,037 8,300 1,488
Franchise Finance (1) 696 3,267 3,448 2,247
FINOVA Capital Limited (UK) 47 895 1,523 5,140 5,026
Business Credit (1) 452 774
Other 932 722
--------- --------- --------- --------- ---------
$ 45,487 $ 32,017 $ 25,631 $ 28,109 $ 12,575
========= ========= ========= ========= =========
Write-offs as a percentage
of average managed assets (2) 0.56% 0.46% 0.44% 0.66% 0.48%
========= ========= ========= ========= =========
</TABLE>
- --------------------
NOTES:
(1) Acquired in 1994.
(2) Excludes participations sold in which FINOVA has transferred credit risk.
--------------------
A further breakdown of the portfolio by line of business can be found in
Annex A, Notes C and D.
Cost and Use of Borrowed Funds
FINOVA relies on borrowed funds as well as internal cash flow to
finance its operations. It has also raised funds through the sale or
securitization of assets, but does not rely on those methods as a primary source
of capital.
11
<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,
----------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term and variable rate long-term debt (1) 6.4% 6.5% 7.2% 5.5% 4.7%
Fixed-rate long-term debt (1) 7.1% 7.2% 7.3% 8.1% 11.4%
Aggregate borrowed funds (1) 6.6% 6.8% 7.2% 6.3% 6.3%
Rate earned on average earning assets (2) (3) 12.3% 11.8% 12.1% 11.3% 10.9%
Spread percentage (4) 6.2% 5.8% 5.7% 5.9% 5.4%
</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. They do not necessarily predict future costs of
funds. For further information on FINOVA `s cost of funds, refer to Annex A,
Notes E and F.
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,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
1.54 1.50 1.44 1.58 1.46
========== ========== ========== ========== ==========
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 above ratio, consists 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 representing interest and preferred
stock dividends grossed up to a pre-tax basis.
Matched Funding Policy
FINOVA follows a "matched funding" policy. Under that policy, it funds
its floating-rate assets (loans and leases to FINOVA's borrowers) with floating
rate liabilities (FINOVA's debt) and fixed-rate assets with fixed rate
liabilities, to the extent feasible. This policy helps protect FINOVA from
changes in interest rates. For further discussion on FINOVA's debt and matched
funding policy, see Annex A, Notes E and F.
12
<PAGE>
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-
There can be no assurance that these ratings will be maintained. The
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
Each year since its inception, FINOVA and its predecessors have earned
total proceeds from the sale of assets upon lease terminations (other than
foreclosures) in excess of carrying amounts. There can be no assurance, however,
that those results can be achieved in future years. Actual proceeds will depend
on current market values for those assets at the time of sale. While market
values are generally beyond the control of FINOVA, the Company has some
discretion in the timing of sales of the assets. Sales proceeds on lease
terminations in excess of carrying amounts are reported as gains on sale of
assets when the assets are sold.
13
<PAGE>
Income from leasing transactions is affected by gains from asset sales
on lease termination and, hence, can be somewhat less predictable than income
from non-leasing activities. During the five years ended December 31, 1997, the
proceeds to FINOVA from sales of assets on early termination of leases and at
the expiration of leases have exceeded the carrying amounts and estimated
residual values as follows:
PROCEEDS FROM SALES OF LEASED ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Early Terminations (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
- -------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 114,680 $ 96,656 119% $ 63,733 $ 58,127 110%
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%
</TABLE>
- --------------------
NOTE:
(1) Excludes foreclosures for credit reasons, which are immaterial.
--------------------
The estimated residual value of direct finance and leveraged lease
assets in the accounts of FINOVA at December 31, 1997 was 31.2% of the original
cost of those assets (27.1% 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, 1997 for financing contracts excluding leveraged
leases were 7.6 and 5.1 years, respectively, and for leveraged leases were
approximately 17.5 and 11.9 years, respectively. The comparable average initial
term and remaining term 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. FINOVA uses 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 those appraised
values.
For a discussion of accounting for lease transactions, refer to Annex
A, Notes A and C.
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.
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 FINOVA 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. FINOVA'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.
14
<PAGE>
Credit Quality
FINOVA has maintained a high-quality asset base through the use of
clearly defined underwriting standards, portfolio management techniques,
monitoring of covenant compliance and active collections and workout efforts.
Risk Management
FINOVA generally investigates 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. As part of its underwriting process, FINOVA considers the
management, industry, financial position and collateral being provided by a
proposed borrower or lessee. The purpose, term, amortization and amount of any
proposed transaction generally must be clearly defined and within established
corporate guidelines. In addition, FINOVA attempts to avoid undue concentrations
in any one customer, industry or geographic region.
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
liabilities.
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, for collateral dependent transactions, 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 noted 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 total
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,
credit-worthiness 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
15
<PAGE>
collateral; seek to identify issues concerning the vulnerabilities of the
customer; seek to resolve outstanding issues with the borrower; and prepare
periodic 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
fair value of the asset.
Delinquencies and Workouts
FINOVA monitors the timing of payments on its accounts. For term loans
and leases, 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 the assets generate sufficient cash to result in a reasonable rate
of return. Those 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 credit losses is adequate. For additional
information regarding the reserve for credit losses, see Annex A, Note D.
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 s financing transactions and mortgage broker
activities are subject to additional government regulation. For example,
aircraft leasing is regulated by the Federal Aviation Authority, and
communications finance is regulated by the Federal Communication Commission.
FINOVA's international activities are also subject to a variety of laws and
regulations of the countries in which the business is conducted.
EMPLOYEES
At December 31, 1997, the Company had 923 employees compared to 864 at
December 31, 1996. None of the employees were covered by collective bargaining
agreements. FINOVA believes its employee relations are satisfactory.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are "forward-looking," in that they
do not discuss historical fact but instead note future expectations,
projections, intentions or other items relating to the future. These
forward-looking statements include matters in the sections of this report
captioned "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." They are also made in documents
incorporated in this report by reference, or in which this report may be
incorporated, such as a prospectus.
Forward-looking statements are subject to known and unknown risks, uncertainties
and other factors that may cause FINOVA's actual results or performance to
differ materially from those contemplated by the forward-looking statements.
Many of those factors are noted in conjunction with the forward-looking
statements in the text. Other important factors that could cause actual results
to differ include:
16
<PAGE>
o The results of FINOVA's efforts to implement its business
strategy. Failure to fully implement its business strategy might
result in decreased market penetration, adverse effects on results
of operations and other adverse results.
o The effect of economic conditions and the performance of FINOVA's
borrowers. Economic conditions in general or in particular market
segments could impact the ability of FINOVA's borrowers to operate
or expand their businesses, which might result in decreased
performance for repayment of their obligations or reduce demand
for additional financing needs.
o Actions of FINOVA's competitors and FINOVA's ability to respond
to those actions. As noted in "Business Development and
Competition," FINOVA seeks to remain competitive without
sacrificing prudent lending standards. Doing business under those
standards becomes more difficult, however, when competitors offer
financing with less stringent criteria. FINOVA seeks to maintain
credit quality at the risk of growth in assets, if necessary.
o The cost of FINOVA's capital. That cost depends on many factors,
some of which are beyond FINOVA's control, such as its portfolio
quality, ratings, prospects and outlook.
o Changes in government regulations, tax rates and similar matters.
For example, government regulations could significantly increase
the cost of doing business or could eliminate certain tax
advantages of some of FINOVA's financing products.
o Other risks detailed in FINOVA's other SEC reports or filings.
ITEM 2. PROPERTIES.
FINOVA'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, one in Canada and one in
Europe. All these properties are leased. Alternative office space could be
obtained without difficulties in the event leases are not renewed. FINOVA has
entered into a lease agreement for new executive offices which are presently
under construction. Those facilities are expected to be completed in 1999.
ITEM 3. LEGAL PROCEEDINGS.
FINOVA 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.
Litigation often results from the FINOVA'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 could be decided against FINOVA. Although the
ultimate amount for which FINOVA may be held liable, if any, is not
ascertainable, FINOVA believes that any resulting liability would not materially
affect its financial position or results of operations.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted
OPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT.
Omitted
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY & RELATED SHAREOWNER 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 1997 were $6,588,000, $6,506,000, $7,619,000 and $7,871,000, respectively.
Dividends paid on the 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.
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 from FINOVA to FINOVA Group are
limited to 50 percent of accumulated earnings after December 31, 1991. As of
December 31, 1997, FINOVA had $126,400,000 of excess accumulated earnings
available for distribution.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
See pages 1 - 6 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
1. Financial Statements - See Item 14 hereof and Annex A.
2. Supplementary Data - See Condensed Quarterly Results included
in Supplemental Selected Financial Data of Notes to
Consolidated Financial Statements included in Annex A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING &
FINANCIAL DISCLOSURE.
NONE.
PART III
18
<PAGE>
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.
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 1-6
Report of Management and Independent Auditors' Report 7-8
Consolidated Balance Sheet 9-10
Statement of Consolidated Income 11
Statement of Consolidated Shareowner's Equity 12
Statement of Consolidated Cash Flows 13
Notes to Consolidated Financial Statements 14-28
Supplemental Selected Financial Data 29-30
2. All Schedules have been omitted because they are not applicable
or the required information is shown in the financial statements
or related notes.
3. Exhibits.
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
FINOVA's report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K"), Exhibit 3.A).
(3.B) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on
Form 10-K for the year ended December 31, 1995 (the
"1995 10-K") Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate
(incorporated by reference from the 1994 10-K,
Exhibit 4.B).
19
<PAGE>
Exhibit No.
-----------
(4.B) Relevant portions of FINOVA's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and
3.B above are incorporated by reference.
(4.C) Long-term debt instruments with principal amounts not
exceeding 10% of FINOVA's total consolidated assets
are not filed as exhibits to this report. FINOVA will
furnish a copy of those agreements to the SEC upon
its request.
(4.D) Form of Indenture dated as of September 1, 1992
between FINOVA and the Trustee named therein
(incorporated by reference from the Greyhound
Financial Corporation Registration Statement on Form
S-3, Registration No. 33-51216, Exhibit 4).
(4.E) Form of Indenture dated as of October 1, 1995 between
FINOVA and the Trustee named therein (incorporated by
reference from FINOVA's report on Form 8-K dated
October 25, 1995, Exhibit 4.1).
(4.F) Form of Indenture between FINOVA, FINOVA Group and
The First National Bank of Chicago as Trustee
(incorporated by reference from FINOVA and FINOVA
Group's registration statement on Form S-3,
Registration No. 333-38171, Exhibit 4.8).
20
<PAGE>
Exhibit No.
-----------
(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 Westminister Bank USA, as agents (the
"Agents") and Citibank, N.A., as Administrative Agent
(incorporated by reference from FINOVA's report on
Form 8-K dated May 23, 1994, Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to
the Sixth Amendment and Restatement, noted in 10.A
above (incorporated by reference from the 1994 10-K,
Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the
Sixth Amendment and Restatement noted in 10.A above
(incorporated by reference from FINOVA's Quarterly
Report on Form 10-Q for the period ending September
30, 1995 ( the "3Q95 10-Q"), Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 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 the 1996 10-K, Exhibit 10.A.4).
(10.A.5) Fifth Amendment dated as of May 20, 1997 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, 1997 (the "FINOVA Group
1997 10-K"), Exhibit 10.A.5).
(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
FINOVA'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 1996 10-K,
Exhibit B.4).
(10.B.5) Fifth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the FINOVA
Group 1997 10-K, Exhibit 10.B.5).
(10.C) Exhibits relating to management compensation are
omitted due to the reduced disclosure format, but can
be found as exhibits to the FINOVA Group 1997 10-K.
21
<PAGE>
(10.D) Tax Sharing Agreement dated February 19, 1992 among
FINOVA, The Dial Corp and others (incorporated by
reference from the 1992 10-K, Exhibit 10.KK).
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends.*
(23) Independent Auditors' Consent.*
(24) Powers of Attorney.*
(27) Financial Data Schedule.*
*Filed with this report.
+Relating to management compensation
(b) Reports on Form 8-K
A report on Form 8-K, dated January 20, 1998, was filed by FINOVA
which reported under Item 5 and 7 the revenues, net income and selected
financial data and ratios for the fourth quarter and year ended December 31,
1997 (unaudited).
22
<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 17th day of March, 1998.
THE FINOVA GROUP INC.
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)
23
<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/ Samuel L. Eichenfield
- -------------------------------------- ------------------------------------
W. Carroll Bumpers (Director) Samuel L. Eichenfield (Chairman)
March 17, 1998 March 17, 1998
* *
- -------------------------------------- --------------------------------
Robert J. Fitzsimmons (Director) Gregory C. Smalis (Director)
March 17, 1998 March 17, 1998
* Signed pursuant to Powers of Attorney dated February 17, 1998 or
February 26, 1998 as appropriate.
/s/ Bruno A. Marszowski
----------------------------------
Bruno A. Marszowski
Attorney-in-Fact
March 17, 1998
24
<PAGE>
ANNEX A
<PAGE>
FINOVA CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations..................1
Management's Report on Responsibility for Financial Reporting..........................................7
Independent Auditors' Report...........................................................................8
Consolidated Balance Sheet.............................................................................9
Statement of Consolidated Income......................................................................11
Statement of Consolidated Shareowner's Equity.........................................................12
Statement of Consolidated Cash Flows..................................................................13
Notes to Consolidated Financial Statements............................................................14
Supplemental Selected Financial Data..................................................................29
</TABLE>
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").
Results of Operations
The following table summarizes FINOVA's operating results for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
For the Year Ended December 31, For the Year Ended December 31,
------------------------------- -------------------------------
Percent Percent
(Dollars in millions) 1997 1996 Change 1996 1995 Change
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest margins earned $ 455.6 $ 369.1 23% $ 369.1 $ 309.1 19%
Provision for credit losses (69.2) (41.8) 66% (41.8) (37.6) 11%
Gains on sale of assets 30.3 12.9 134% 12.9 10.9 19%
Selling, administrative and
other operating expenses (190.5) (154.5) 23% (154.5) (131.6) 17%
Income taxes (83.1) (69.3) 20% (69.3) (57.0) 22%
Income from continuing 23%
operations 143.1 116.5 116.5 93.8 24%
Income and gain from
discontinued operations -- 0.5 n/a 0.5 3.8 n/a
-------- -------- -------- --------
Net Income $ 143.1 $ 117.0 22% $ 117.0 $ 97.6 20%
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------
</TABLE>
1997 Compared to 1996
Net income for 1997 increased 22% to $143.1 million from $117.0 million
in 1996. The increase reflected growth in managed assets, increased fee-related
business, higher gains on sale of assets and a lower effective income tax rate,
partially offset by higher provisions for credit losses and increased operating
expenses. Income from continuing operations for 1997 increased to $143.1 million
from $116.5 million in 1996. Continuing operations in 1996 excluded the
operating results of FINOVA's discontinued Manufacturer & Dealer Services line
of business ("MDS") and FINOVA Medical Systems and a $6 million gain resulting
from the sale of MDS. See Note B of Notes to Consolidated Financial Statements
for further discussion.
Interest Margins Earned. Interest margins earned, which represent the
difference between (a) interest, fee and other income earned from financing
transactions and operating lease income and (b) interest expense and operating
lease depreciation, increased 23% to $455.6 million in 1997 from $369.1 million
in 1996 due primarily to a higher level of average earning assets and the
expansion of the fee-based businesses.
Average earning assets, which represent FINOVA's investment in
financing transactions less nonaccruing assets and deferred taxes related to
leveraged leases, increased 16% to $7.36 billion in 1997 from $6.32 billion a
year earlier. This increase primarily resulted from a 21% increase in funded new
business of $3.31 billion compared to $2.74 billion in 1996, and, to a lesser
extent, from portfolios purchased during 1997 (totaling $122 million). These
increases were partially offset by the normal amortization of the portfolio and
prepayments during the year.
The Company's interest margins earned as a percentage of average
earning assets ("spread") also increased during 1997, to 6.2% from 5.8%. A
portion of the increase in spread was due to a 54% growth in fee-based business
(to $4.53 billion from $2.94 billion in 1996), which provides interest, fee and
other income while requiring less investment in
1
<PAGE>
FINOVA CAPITAL CORPORATION
earning assets than term loans and leases. Contributing to the increase in
fee-based business was FINOVA Realty Capital ("FRC," formerly Belgravia Capital
Corporation), a commercial mortgage banking organization which was acquired in
October 1997 (and which has historically had its highest volume in the fourth
quarter). Excluding the impact of the FRC acquisition, FINOVA's spread improved
to 6.1% in 1997. The increase in interest margins earned was also partially
attributable to lower aggregate borrowing costs and lower debt leverage during
1997 compared to 1996.
Provision for Credit Losses. The provision for credit losses increased
66% to $69.2 million in 1997 compared to $41.8 million in 1996. In addition to
growth in FINOVA's managed assets, the increase in the provision for credit
losses primarily resulted from an increase in write-offs to $45.5 million in
1997 from $32.0 million in 1996. The higher write-offs in 1997 were primarily
attributable to FINOVA's Factoring Services line of business, due to credit
problems experienced among the line of business' wholesale textile customers.
Currently, Factoring Services is refocusing its portfolio toward retail
businesses and new industries. Total write-offs for FINOVA's other lines of
business were lower in 1997 than in 1996.
FINOVA's total write-offs during 1997 represented 0.56% of average
managed assets (excluding participations) compared to 0.46% in 1996. Details of
write-offs and other changes in the reserve for credit losses can be found in
Note D of Notes to Consolidated Financial Statements.
Gains on Sale of Assets. Gains on sale of assets totaled $30.3 million
in 1997, higher than the $12.9 million in 1996. In addition to the sale of
assets coming off lease, FINOVA recognized a significant gain from the early
termination of a real estate leveraged lease transaction in 1997. While FINOVA
has consistently recognized gains on the sale of assets it holds, the gains are
sporadic in their timing and amount. There can be no assurance FINOVA will
recognize such gains in the future, depending, in part, on market conditions at
the time of sale.
Selling, Administrative and Other Operating Expenses. Selling,
administrative and other operating expenses ("operating expenses") were higher
in 1997 than in 1996, primarily as a result of increased costs necessary to
manage FINOVA's larger portfolio. Also contributing to the increase in operating
expenses were incentives paid to employees based on performance criteria such as
new business, profitability and the increased value of FINOVA Group's stock
(which increased by 54.7% to $49.69 per share at year-end). The Company also
incurred additional costs in administering problem loan accounts in 1997,
including an increase with respect to the Factoring Services line of business.
As a percentage of interest margins earned, operating expenses declined
slightly to 41.8% in 1997 from 41.9% in 1996. FINOVA's acquisition of FRC in the
fourth quarter of 1997 is expected to increase operating expenses as a
percentage of interest margins earned in future periods. See Note M of Notes to
Consolidated Financial Statements for further detail of operating expenses.
Income Taxes. Income taxes were higher in 1997 than in 1996 due to the
increase in pre-tax income. Partially offsetting the increase was a lower
effective tax rate in 1997 of 36.7% compared to 37.3% in 1996, principally
caused by FINOVA's ability to use certain capital loss carryforwards in 1997.
See Note I of Notes to Consolidated Financial Statements for further discussion
of income taxes.
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 FINOVA's Manufacturer & Dealer Services line of
business, and the operating results of FINOVA Medical Systems, which was
liquidated in 1996. Net income for 1996 increased to $117.0 million from $97.6
million in 1995.
Interest Margins Earned. Interest margins earned were $369.1 million for
1996, compared with $309.1 million in 1995, an increase of 19%. The increase was
primarily due to a 17% increase in managed assets (investment in financing
transactions plus securitizations and participations sold), resulting primarily
from $2.7 billion in funded new business in 1996, up from $2.3 billion in 1995,
and $2.9 billion in fee-based volume in 1996, compared to $2.0 billion in 1995.
In
2
<PAGE>
FINOVA CAPITAL CORPORATION
addition, FINOVA 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
increased to 5.8% for 1996 compared to 5.7% for 1995. This increase was the
result of FINOVA'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.
Provision for Credit Losses. The provision for credit losses increased to
$41.8 million in 1996 from $37.6 million in 1995, primarily due to the increase
in managed assets. FINOVA's reserves remained at 2.0% of ending managed assets
(excluding participations), while the credit quality of the 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 (excluding participations) 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 credit losses can be found in Note D of Notes to Consolidated
Financial Statements.
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.
Selling, Administrative and Other Operating Expenses. 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
FINOVA'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 M of Notes to Consolidated Financial Statements for
additional detail.
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 37.8% in 1995, was primarily related to lower foreign tax effects and
increased tax exempt municipal and ESOP income. See Note I of Notes to
Consolidated Financial Statements for further discussion of income taxes.
Financial Condition, Liquidity and Capital Resources
Managed assets at December 31, 1997 increased 16% to $8.86 billion from
$7.66 billion at December 31, 1996. The increase was the result of a 21%
increase in funded new business of $3.31 billion in 1997 compared to $2.74
billion in 1996, partially offset by normal loan and lease amortization and
approximately $0.7 billion in prepayments during 1997. In addition, an early
termination of a leveraged lease occurred in the Specialty Real Estate line of
business, which experienced a reduction in managed assets of approximately $103
million. The major causes of this reduction were the sale of this leveraged
lease combined with the business decision not to aggressively pursue new deals
at the cost of compromising rate and/or underwriting standards.
FINOVA recorded $4.53 billion in fee-based volume during 1997 compared
to $2.94 billion in 1996. The 54% increase in fee-based volume was due to growth
in FINOVA's on-going fee-based lines of business and the addition of FRC in the
fourth quarter of 1997.
FINOVA's reserve for credit losses increased to $177.1 million at
December 31, 1997 compared to $148.7 million at year-end 1996 primarily due to a
provision for credit losses of $69.2 million during the year, partially offset
by write-offs totaling $45.5 million. At December 31, 1997 the reserve
represents 2.0% of managed assets (excluding participations sold), the same
level as one year ago. Nonaccruing assets have increased to $187.4 million at
December 31, 1997 which represents 2.1% of ending managed assets compared to
$155.5 million in nonaccruing assets as of December 31, 1996 which constituted
2.0% of ending managed assets. At December 31, 1997, the reserve represents
94.5% of nonaccruing
3
<PAGE>
FINOVA CAPITAL CORPORATION
assets compared to 95.6% at December 31, 1996. The increase in nonaccruing
assets is primarily in the Factoring Services line of business. See Note D of
Notes to Consolidated Financial Statements for more information on the reserves,
write-offs and nonaccruing assets.
The Company had total debt outstanding of $6.76 billion at December 31,
1997 or 5.37 times its equity of $1.26 billion. At December 31, 1996, the
Company had debt leverage of 5.47 ($5.85 billion debt outstanding and $1.07
billion of equity). The Company also had $277.6 million in deferred taxes at
year-end 1997 compared to $264.4 million at year-end 1996.
Growth in managed assets is generally financed by internally generated
cash flow and borrowings. During 1997, FINOVA issued $1.1 billion in new senior
debt and increased its commercial paper and other short-term borrowings by $650
million. These funds were used to finance new business, redeem or retire $818
million of debt and acquire a $122 million inventory finance portfolio. During
1997, FINOVA Group also issued approximately 1.7 million shares of its common
stock as the primary consideration for the acquisition of FRC (see Note B of
Notes to Consolidated Financial Statements for further detail). In December
1996, FINOVA Group issued $111.6 million (net of transaction costs) in
company-obligated mandatory redeemable convertible preferred securities
("TOPrS") through FINOVA Finance Trust. The FRC assets and 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 discussion.
FINOVA satisfies a significant portion of its cash requirements from a
diversified group of worldwide funding sources and is not dependent on any one
lender. FINOVA also relies on the issuance of commercial paper as a major
funding source. During 1997, FINOVA issued $15.1 billion of commercial paper
(with an average of $2.9 billion outstanding during the year) and raised $1.1
billion, as noted above, through new long-term financing of one to 10 year
durations. At December 31, 1997 and 1996, commercial paper and short-term bank
borrowings totaled $3.1 billion and $2.5 billion, respectively, and were
supported by available unused revolving credit lines which, if not renewed, are
convertible to long-term debt at FINOVA's option.
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, two five-year facilities with
numerous lenders for $700 million each and one 364-day facility with one lender
for $200 million. These $3.6 billion of credit facilities support FINOVA's
outstanding commercial paper and short-term borrowings. FINOVA 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. FINOVA rarely
borrows under these facilities. The 364 day $1.0 billion and $200 million
revolving credit agreements will be subject to renewal in 1998, while the two
$700 million and the other $1.0 billion credit facilities are subject to renewal
in 2002.
FINOVA, through one of its subsidiaries, maintains a five-year
multi-currency facility with a group of lenders for $100 million. Through
another subsidiary, FINOVA maintains two five-year revolving credit facilities
with two separate lenders in Canada for $25 million Canadian each. FINOVA is the
guarantor of these credit facilities, which are subject to renewal in 2002.
FINOVA also maintains one $10 million Canadian 364-day revolving credit facility
with a lender. That agreement will be subject to renewal in 1998.
In 1997, FINOVA and FINOVA Group jointly filed a universal shelf
registration statement with the SEC allowing for the issuance of $2 billion of
senior debt securities, common stock, preferred stock, depositary shares and
warrants to purchase common stock or debt securities, all of which remained
available as of December 31, 1997.
The agreements pertaining to long-term debt include various restrictive
covenants and require the maintenance of certain defined financial ratios with
which FINOVA and FINOVA Group have complied. Under one such covenant, dividend
payments by FINOVA to FINOVA Group are limited to 50 percent of accumulated
earnings after December 31, 1991.
4
<PAGE>
FINOVA CAPITAL CORPORATION
FINOVA's aggregate cost of funds decreased to 6.6% for 1997 from 6.8%
for 1996 as a result of declining interest rates, higher credit ratings and the
elimination of costs associated with $250 million of maturing interest rate
hedges. FINOVA's cost of and access to capital is dependent, in large part, on
its credit ratings. FINOVA has maintained investment-grade ratings since 1976.
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.
Derivative Financial Instruments
FINOVA enters into interest rate and basis swap agreements as part of its
interest rate risk management policy of match funding its assets and
liabilities. The derivative instruments used are straightforward. FINOVA
continually monitors its derivative position and uses derivative instruments for
non-trading and non-speculative purposes only.
At December 31, 1997, FINOVA had outstanding interest rate conversion
agreements with notional principal amounts totaling $2.6 billion. Agreements
with notional principal amounts of $550 million were arranged to effectively
convert certain floating interest rate obligations into fixed interest rate
obligations. These agreements require interest payments on the stated principal
amount at rates ranging from 6.21% 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 $1.4 billion were arranged to effectively convert certain fixed interest rate
obligations into floating interest rate obligations. They 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 $628 million and remaining terms of one year. See
Note F of Notes to Consolidated Financial Statements for further discussion of
FINOVA's derivatives.
Year 2000 Date Conversion
FINOVA continues to implement changes necessary to assure accurate date
recognition and data processing with respect to the year 2000. Primary internal
activities related to this issue are modifications to existing computer programs
and conversions to new programs. The Company is also communicating with software
vendors, financial institutions, clients and others with whom it conducts
business to determine the nature of any impact on FINOVA. If needed
modifications and conversions are not accomplished in a timely manner, this
issue could have a material effect on the operations of FINOVA. As of this time,
however, management believes that necessary corrections will be achieved on
time. Costs related to this issue, which have been immaterial to date, are being
expensed as incurred and are not expected to have a material impact on FINOVA's
financial position.
Recent Developments and Business Outlook
FINOVA continues to seek new business by emphasizing customer service,
providing competitive interest rates and focusing on selected market niches.
Additionally, FINOVA continues to evaluate potential acquisition opportunities
that it believes are consistent with its business strategies.
In October 1997, FINOVA acquired Belgravia Capital Corporation, a
commercial mortgage banking organization headquartered in Irvine, California.
Consideration for the acquisition included approximately 1.7 million shares of
FINOVA Group's
5
<PAGE>
FINOVA CAPITAL CORPORATION
common stock, $10 million in cash and the agreement to pay additional amounts up
to approximately $30 million per year for the next three years, based on future
results of the operations. Historically, Belgravia originated mid-size
commercial mortgage loans which were funded by third parties who typically sold
or securitized the loans.
In October 1997, FINOVA also announced the reorganization of its
businesses into three operating groups. The Commercial Finance Group comprises
FINOVA's asset-based lending businesses such as Business Credit, Corporate
Finance, Factoring Services, Inventory Finance and Rediscount Finance. The
Specialty Finance Group contains FINOVA's Commercial Equipment Finance,
Specialty Real Estate Finance, Communications Finance, Franchise Finance,
Healthcare Finance, Portfolio Services, Public Finance, Resort Finance and
Transportation Finance businesses. The new Capital Markets Group consists of
FINOVA Realty Capital and the bridge financing, mezzanine debt and equity funds
formed under the FINOVA Investment Alliance program.
In February 1998, FINOVA announced the formation of a $125 million
investment alliance with Credit Suisse First Boston PTG known as FINOVA Aircraft
Investors, LLC. The alliance will use FINOVA's market expertise and industry
presence to purchase, upgrade and resell used commercial aircraft.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997. The statement changes the reporting of certain items
currently reported in the shareowner's equity section of the balance sheet and
establishes standards for reporting of comprehensive income and its components
in a full set of general purpose financial statements. Adoption of this standard
will require additional disclosure only. FINOVA will adopt this standard
effective January 1, 1998, as required.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This standard requires certain
information regarding segments of a business enterprise to be reported based on
the way management organizes and evaluates segments within the company. The
standard also requires disclosures regarding products and services, geographical
areas and major customers. Adoption of this standard will require FINOVA to
include additional detail in its disclosures, including certain disaggregated
operating information. FINOVA will adopt this standard in 1998, as required, but
is not currently planning to elect early adoption for interim financial periods
during the year. At this time, management anticipates that FINOVA's reported
segments will be composed of its three operating groups:
Specialty Finance, Commercial Finance and Capital Markets.
6
<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.
FINOVA's management has established and maintains a system of internal
controls to reasonably assure the fair presentation of the financial statements,
the safeguarding of FINOVA'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 FINOVA Group, through its Audit Committee, also
oversees the financial reporting of FINOVA and its adherence to established
procedures and controls. Periodically, the Audit Committee meets, jointly and
separately, with management, the internal auditors and the independent auditors
to review auditing, accounting and financial reporting matters.
FINOVA's financial statements have been audited by Deloitte & Touche LLP,
independent auditors. Management has made available to Deloitte & Touche LLP all
of FINOVA'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
FINOVA's written Code of Conduct. These standards are communicated to and
acknowledged by all of FINOVA's employees.
/s/ Samuel L. Eichenfield
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
/s/ Bruno A. Marszowski
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
/s/ Derek C. Bruns
Derek C. Bruns
Senior Vice President - Internal Audit
7
<PAGE>
FINOVA CAPITAL CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowner of FINOVA Capital Corporation
We have audited the accompanying consolidated balance sheet of FINOVA
Capital Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareowner's equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of FINOVA'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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Phoenix, Arizona
February 11, 1998
8
<PAGE>
FINOVA CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
- --------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 33,193 $ 31,285
Investment in financing transactions:
Loans and other financing contracts 5,955,984 5,305,678
Factored receivables 750,399 564,430
Operating leases 712,927 517,690
Leveraged leases 619,557 514,573
Direct financing leases 360,589 396,388
- --------------------------------------------------------------------------------------------------------
8,399,456 7,298,759
Less reserve for credit losses (177,088) (148,693)
- --------------------------------------------------------------------------------------------------------
Investment in financing transactions - net 8,222,368 7,150,066
Goodwill and other assets 502,362 370,575
- --------------------------------------------------------------------------------------------------------
$ 8,757,923 $ 7,551,926
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
FINOVA CAPITAL CORPORATION
<TABLE>
<CAPTION>
LIABILITIES AND SHAREOWNER'S EQUITY
- --------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses $ 124,491 $ 97,080
Due to clients 278,571 218,494
Interest payable 52,643 52,677
Senior debt 6,764,581 5,850,223
Deferred income taxes 277,569 264,409
- --------------------------------------------------------------------------------------------------------
7,497,855 6,482,883
- --------------------------------------------------------------------------------------------------------
Shareowner's equity:
Common stock $1.00 par value, 100,000 shares authorized, 25,000 shares issued 25 25
Additional capital 870,485 792,948
Retained income 389,568 275,062
Cumulative translation adjustments (10) 1,008
- --------------------------------------------------------------------------------------------------------
1,260,068 1,069,043
- --------------------------------------------------------------------------------------------------------
$ 8,757,923 $ 7,551,926
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest, fees and other income $ 750,755 $ 640,132 $ 568,115
Financing lease income 77,049 61,985 49,310
Operating lease income 116,920 95,817 84,691
- --------------------------------------------------------------------------------------------------------
Income earned from financing transactions 944,724 797,934 702,116
Interest expense 416,093 366,543 337,814
Operating lease depreciation 72,989 62,286 55,218
- --------------------------------------------------------------------------------------------------------
Interest margins earned 455,642 369,105 309,084
Provision for credit losses 69,200 41,751 37,568
- --------------------------------------------------------------------------------------------------------
Net interest margins earned 386,442 327,354 271,516
Gains on sale of assets 30,261 12,949 10,889
- --------------------------------------------------------------------------------------------------------
416,703 340,303 282,405
Selling, administrative and other operating
expenses 190,525 154,481 131,571
- --------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 226,178 185,822 150,834
Income taxes 83,088 69,329 57,036
- --------------------------------------------------------------------------------------------------------
Income from continuing operations 143,090 116,493 93,798
Income and gain from sale of discontinued operations, net of tax 507 3,831
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 143,090 $ 117,000 $ 97,629
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED SHAREOWNER'S EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance $ 25 $ 25 $ 25
- --------------------------------------------------------------------------------------------------------
ADDITIONAL CAPITAL:
Balance, beginning of year 792,948 677,948 677,947
Contributions from The FINOVA Group, Inc. 77,537 115,000 1
- --------------------------------------------------------------------------------------------------------
Balance, end of year 870,485 792,948 677,948
- --------------------------------------------------------------------------------------------------------
RETAINED INCOME:
Balance, beginning of period 275,062 183,292 108,740
Net income 143,090 117,000 97,629
Dividends (28,584) (25,230) (23,077)
- --------------------------------------------------------------------------------------------------------
Balance, end of period 389,568 275,062 183,292
- --------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance, beginning of period 1,008 (5,686) (4,726)
Unrealized translation (loss) gain (1,018) 6,694 (960)
- --------------------------------------------------------------------------------------------------------
Balance, end of year (10) 1,008 (5,686)
- --------------------------------------------------------------------------------------------------------
SHAREOWNER'S EQUITY $ 1,260,068 $ 1,069,043 $ 855,579
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
FINOVA CAPITAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 143,090 $ 117,000 $ 97,629
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 69,200 41,751 37,568
Depreciation and amortization 90,396 76,471 70,017
Gains on sale of assets (30,261) (12,949) (10,889)
Gains on dispositions of discontinued operations, net (3,521)
Deferred income taxes 13,160 31,272 17,617
Change in assets and liabilities, net of effects from subsidiaries purchased:
Increase in other assets (81,611) (64,280) (55,204)
Increase (decrease) in accounts payable and accrued expenses 20,922 (17,563) (11,583)
(Decrease) increase in interest payable (34) 5,853 7,843
Other 954 7,971 361
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 225,816 182,005 153,359
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of assets 178,413 102,945 50,028
Proceeds from sales of securitized assets 36,565 100,000 200,000
Principal collections on financing transactions 2,087,619 1,781,985 1,088,420
Expenditures for financing transactions (2,507,822) (2,221,363) (1,853,330)
Net change in short-term financing transactions (844,584) (624,952) (442,405)
Acquisitions, net of cash acquired (120,883) (7,455) (261,868)
Sale of discontinued operation 616,434
Other 2,399 3,296 2,104
- -------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,168,293) (249,110) (1,217,051)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings under commercial paper and short-term loans 649,653 62,156 373,566
Long-term borrowings 1,080,625 564,988 1,272,450
Repayment of long-term borrowings (817,892) (681,401) (570,002)
Net advances and contributions from parent 20,088 119,691 (16,578)
Dividends (28,584) (25,230) (23,077)
Net change in due to clients 40,495 (32,143) 64,909
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 944,385 8,061 1,101,268
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,908 (59,044) 37,576
Cash and cash equivalents, beginning of year 31,285 90,329 52,753
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 33,193 $ 31,285 $ 90,329
===================================================================================================================
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
FINOVA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(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 capital and collateralized financing products to commercial
enterprises focusing on mid-size businesses 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.
Revenue Recognition -- 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
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.
Cash Equivalents -- FINOVA classifies highly liquid investments with
original maturities of three months or less from date of purchase as cash
equivalents.
Marketable Securities -- As discussed in Note J, FINOVA 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.
14
<PAGE>
FINOVA CAPITAL CORPORATION
Reserve for Credit Losses -- The reserve for credit losses is available
to absorb credit losses. The provision for credit losses is the charge to income
to increase the reserve for 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 credit losses. Recoveries
of amounts previously written-off as uncollectible are credited to the reserve
for credit losses.
Repossessed Assets -- Repossessed assets are carried at the lower of
cost or fair value less estimated selling expenses.
Residual Values -- FINOVA 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 -- FINOVA amortizes the excess of cost over the fair value of
net assets acquired ("goodwill") on a straight-line basis primarily over 20 to
25 years. Goodwill at December 31, 1997 and 1996 was $288.2 million and $179.5
million (net of amortization), respectively. Amortization totaled $10.1 million
($6.3 million after-tax), $9.6 million ($5.7 million after-tax) and $8.2 million
($4.9 million after-tax) for the years ended December 31, 1997, 1996 and 1995,
respectively. FINOVA 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,
1997, approximately $272.0 million of goodwill was 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 FINOVA. FINOVA funds its postretirement benefit
obligation as benefits are paid.
FINOVA records postemployment benefit costs at the time employees leave
active service. Postemployment benefits are any benefits other than retirement
benefits.
Savings Plan -- FINOVA 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 0% 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 FINOVA 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 FINOVA. 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.
15
<PAGE>
FINOVA CAPITAL CORPORATION
Expenses under the Savings Plan and Employee Stock Ownership Plan were
$2.5 million, $2.1 million and $1.7 million in 1997, 1996 and 1995,
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,
FINOVA 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 which are accounted for using
settlement or matched swap accounting.
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 FINOVA does not use derivative financial instruments for trading or
speculative 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.
Securitizations -- Effective January 1, 1997, FINOVA adopted the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" which requires receivable transfers
occurring after December 31, 1996 to be accounted for as sales when legal and
effective control over the transferred receivables is surrendered.
Reclassifications -- Certain reclassifications have been made to the
1996 and 1995 financial statements to conform to the 1997 presentation.
NOTE B ACQUISITIONS AND DISPOSITIONS
During 1997 and 1996, FINOVA, in transactions accounted for as
purchases, acquired various businesses and portfolios having initial funds
employed totaling $122 million and $318 million, respectively. In October 1997,
FINOVA Group also purchased Belgravia Capital Corporation, a commercial mortgage
banking organization, for $77.5 million of FINOVA Group's common stock (1.7
million shares), $10.0 million in cash and an agreement to pay additional
amounts up to approximately $30 million per year for the next three years,
contingent upon future results of the operations. The acquisition was comprised
of $91.5 million in assets, including $88.0 million in goodwill and $4.0 million
in liabilities and acquisition costs. The results of these operations have been
included in FINOVA's results since the date of acquisition. Goodwill related to
this transaction is being amortized over 25 years.
In 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 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 two years ended
December 31, 1996 and 1995 were ($3.0 million) and $3.8 million, respectively.
Assumptions used to calculate these results were similar to those used by FINOVA
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. Results for 1995 have been restated to classify these
operations as discontinued.
16
<PAGE>
FINOVA CAPITAL CORPORATION
NOTE C INVESTMENT IN FINANCING TRANSACTIONS
FINOVA 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, 1997 and 1996, the carrying amount of
the investment in financing transactions, including the estimated residual value
of leased assets upon lease termination, was $8.4 billion and $7.3 billion
(before reserve for credit losses), respectively, and consisted of the following
percentage of carrying amount by line of business:
- --------------------------------------------------------------------------------
Percent of Total
Carrying Amount
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Transportation Finance 19.4% 18.2%
Resort Finance 14.4 16.0
Corporate Finance 9.8 8.9
Specialty Real Estate Finance 8.2 10.9
Communications Finance 7.9 7.7
Commercial Equipment Finance 7.5 8.0
Rediscount Finance 7.3 5.8
Inventory Finance 6.5 4.3
Healthcare Finance 6.3 6.9
Franchise Finance 5.2 5.0
Factoring Services 2.7 3.1
Business Credit 2.4 2.3
Public Finance 1.6 2.1
Other 0.8 0.8
- --------------------------------------------------------------------------------
100.0% 100.0%
================================================================================
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, 1997 (excluding repossessed assets of $37.1 million and estimated
residual values) are contractually due during each of the years ending December
31, 1998 to 2002 and thereafter as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
There-
1998 1999 2000 2001 2002 after
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and other financing
contracts:
Commercial:
Fixed interest rate 332,773 $ 376,445 $ 270,568 $ 306,517 $ 150,631 $ 405,615
Floating interest rate 640,324 538,160 545,215 417,486 220,807 95,437
Real estate:
Fixed interest rate 90,091 93,535 40,530 50,152 31,311 130,954
Floating interest rate 447,377 349,907 132,069 144,931 37,301 70,755
Factored receivables 750,399
Leases, primarily at
fixed interest rates:
Operating leases 127,053 143,946 103,196 71,510 39,513 112,453
Leveraged leases 31,582 25,456 15,859 13,010 8,073 402,266
Direct financing leases 100,174 74,040 48,073 33,378 23,401 88,714
- --------------------------------------------------------------------------------------------------------
2,519,773 $ 1,601,489 $ 1,155,510 $1,036,984 $ 511,037 $ 1,306,194
========================================================================================================
</TABLE>
The investment in operating leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost of assets $ 855,670 $ 646,918
Accumulated depreciation (142,743) (129,228)
- --------------------------------------------------------------------------------------------------------
Investment in operating leases $ 712,927 $ 517,690
========================================================================================================
</TABLE>
The net investment in leveraged leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable $ 2,287,233 $ 1,898,996
Less principal and interest payable on nonrecourse debt (1,790,987) (1,486,249)
- --------------------------------------------------------------------------------------------------------
Net rentals receivable 496,246 412,747
Estimated residual values 575,234 479,850
Less unearned income (451,923) (378,024)
- --------------------------------------------------------------------------------------------------------
Investment in leveraged leases 619,557 514,573
Less deferred taxes arising from leveraged leases (249,710) (246,075)
- --------------------------------------------------------------------------------------------------------
Net investment in leveraged leases $ 369,847 $ 268,498
========================================================================================================
</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>
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lease and other income, net $ 41,605 $ 30,230 $ 12,080
Income tax expense 19,476 11,321 4,201
- --------------------------------------------------------------------------------------------------------
</TABLE>
The investment in direct financing leases at December 31 consisted of
the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable $ 367,780 $ 398,928
Estimated residual values 120,020 100,039
Unearned income (127,211) (102,579)
- --------------------------------------------------------------------------------------------------------
Investment in direct financing leases $ 360,589 $ 396,388
========================================================================================================
</TABLE>
FINOVA 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) was $4.34 billion and $3.70 billion at December 31, 1997 and 1996,
respectively.
Interest earned from financing transactions with floating interest
rates was approximately $491 million in 1997, $436 million in 1996 and $402
million in 1995. 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. FINOVA's matched funding policy is more fully described in Note
F.
At December 31, 1997, FINOVA had a committed backlog of new business of
approximately $1.6 billion compared to $1.5 billion at December 31, 1996. The
committed backlog includes lines of credit totaling $666 million and $702
million at December 31, 1997 and 1996, respectively. Historically, FINOVA has
booked a substantial portion of its backlog, although there can be no assurance
that the 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.
Securitizations - On a limited basis, FINOVA 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.
In 1996 and 1995, FINOVA, under a securitization agreement, sold a
total of $300 million in undivided proportionate interests in a revolving loan
portfolio totaling approximately $736.2 million as of December 31, 1997. Under
this agreement, there is recourse to FINOVA based on the outstanding balance of
the proportionate interest sold. In 1997, under a separate securitization
agreement, FINOVA sold $36.6 million of loan receivables with limited recourse.
FINOVA will service these loan contracts for the transferee and has deferred a
portion of the proceeds to be recognized as service fee income over the term of
the agreements.
19
<PAGE>
FINOVA CAPITAL CORPORATION
NOTE D RESERVE FOR CREDIT LOSSES
The following is an analysis of the reserve for credit losses for the
years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 148,693 $ 129,077 $ 110,903
Provision for credit losses 69,200 41,751 37,568
Write-offs (45,487) (32,017) (25,631)
Recoveries 2,287 3,296 2,104
Other (including reserves related to acquisitions) 2,395 6,586 4,133
- --------------------------------------------------------------------------------------------------------
Balance, end of year $ 177,088 $ 148,693 $ 129,077
========================================================================================================
</TABLE>
Write-offs by lines of business during the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Factoring Services $ 24,382 $ 5,098 $ 3,728
Corporate Finance 6,577 9,470 4,660
Commercial Equipment Finance 3,722 3,207 2,271
Resort Finance 2,700 4,275 2,000
Specialty Real Estate Finance 2,106 1,793 2,275
Healthcare Finance 1,798 1,018 314
Inventory Finance 1,777 201
Communications Finance 750 2,994 4,037
Franchise Finance 696 3,267 3,448
FINOVA Capital Limited (UK) 47 895 1,523
Business Credit 452
Other 932 722
- --------------------------------------------------------------------------------------------------------
$ 45,487 $ 32,017 $ 25,631
========================================================================================================
Write-offs as a percentage of average managed assets (excluding
participations) 0.56% 0.46% 0.44%
========================================================================================================
</TABLE>
An analysis of nonaccruing assets included in the investment in
financing transactions at December 31 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Contracts $ 150,263 $ 117,086
Repossessed assets 37,093 38,419
- --------------------------------------------------------------------------------------------------------
Total nonaccruing assets $ 187,356 $ 155,505
========================================================================================================
Nonaccruing assets as a percentage of managed assets (excluding participations) 2.1% 2.0%
========================================================================================================
</TABLE>
In addition to the repossessed assets included in the above table,
FINOVA had repossessed assets with a total carrying amount of $52.5 million and
$60.0 million at December 31, 1997 and 1996, respectively, which earned income
of $4.1 million and $5.1 million during 1997 and 1996, respectively.
20
<PAGE>
FINOVA CAPITAL CORPORATION
At December 31, 1997, the total carrying amount of impaired loans was
$158.0 million, of which $36.4 million were revenue accruing. A reserve for
credit losses of $24.5 million has been established for $39.0 million of
nonaccruing impaired loans. At December 31, 1996, the total carrying amount of
impaired loans was $110.1 million, of which $46.3 million were revenue accruing.
At December 31, 1996, a reserve for credit losses of $6.2 million was
established for $14.1 million of nonaccruing impaired loans. For the three years
ended December 31, 1997, 1996 and 1995, the average carrying amount of impaired
loans was $130.3 million, $85.1 million and $93.2 million, respectively. Income
earned on accruing impaired loans was approximately $4.0 million in all three
years. 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, 1997, 1996 and
1995 remained accruing, income earned would have increased by approximately $22
million, $19 million and $17 million, respectively.
NOTE E DEBT
FINOVA satisfies its short-term financing requirements from the
issuance of commercial paper supported by bank lines of credit, other bank loans
and public notes. FINOVA's commercial paper borrowings are supported by unused
long-term revolving bank credit agreements totaling $3.6 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, two five-year facilities with numerous lenders
for $700 million each and one 364-day facility with one lender for $200 million.
FINOVA 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. FINOVA rarely borrows under these facilities. Under the
terms of these agreements, FINOVA 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 and $200 million
revolving credit agreements will be subject to renewal in 1998, while the two
$700 million and the other $1.0 billion credit facilities are subject to renewal
in 2002.
FINOVA, through one of its subsidiaries, maintains a five-year
multi-currency facility with a small group of lenders for $100 million. Under
the terms of this agreement, the subsidiary has the option to periodically
select multiple currencies as the basis of borrowings. Interest is based on the
Eurocurrency rate per annum for deposits in the relevant designated currency.
Through another subsidiary, FINOVA maintains two five-year revolving credit
facilities with two separate lenders in Canada for $25 million Canadian each.
Under the terms of these agreements, the subsidiary has the option to borrow
Canadian dollars through either bankers' acceptances or prime rate advances.
Interest is based on the lenders' bankers' acceptance rates or prime rate for
prime advances. FINOVA is the guarantor of these credit facilities, which are
subject to renewal in 2002. FINOVA also maintains one $10 million Canadian
364-day revolving credit facility with one lender. That credit agreement will be
subject to renewal in 1998.
21
<PAGE>
FINOVA CAPITAL CORPORATION
The following information pertains to all short-term financing,
primarily commercial paper, issued by FINOVA for the years ended December 31:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount of short-term debt outstanding
during year $ 3,284,118 $ 3,087,876 $ 2,518,733
Average short-term debt outstanding during year 2,886,668 2,551,316 2,210,329
Weighted average short-term interest rates
at end of year:
Short-term borrowings 5.6% 5.4% 5.9%
Commercial paper* 5.7% 5.6% 6.0%
Weighted average interest rate on short-term debt
outstanding during year* 5.7% 5.6% 6.1%
-------------------------------------------------------------------------------------------------------
</TABLE>
* Exclusive of the cost of maintaining bank lines in support of outstanding
commercial paper and the effects of interest rate conversion agreements.
Senior debt at December 31 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper and short-term bank loans supported by unused long-term
bank revolving credit agreements, less unamortized discount $ 3,132,109 $ 2,482,496
Medium-term notes due to 2005, 6.1% to 10.3% 1,343,148 1,414,500
Term loans payable to banks due to 1999, 6.0% 190,000 180,000
Senior notes due to 2007, 6.1% to 16.0%, less unamortized discount 2,083,761 1,758,176
Nonrecourse installment notes due to 2002, 10.6% (assets of
$58,064 and $24,656, respectively, pledged as collateral) 15,563 15,051
- --------------------------------------------------------------------------------------------------------
Total senior debt $ 6,764,581 $ 5,850,223
========================================================================================================
</TABLE>
Annual maturities of senior debt outstanding at December 31, 1997 due
through June 2007 (excluding the amount supported by the revolving credit
agreements expected to be renewed) approximate $687.3 million (1998), $707.8
million (1999), $721.8 million (2000), $476.2 million (2001), $539.7 million
(2002) and $499.7 million (thereafter).
The agreements pertaining to senior debt and revolving credit
agreements include various restrictive covenants and require the maintenance of
certain defined financial ratios with which FINOVA has complied. Under one such
covenant, dividend payments by FINOVA are limited to 50% of accumulated earnings
after December 31, 1991. As of December 31, 1997, FINOVA had $126.4 million of
excess accumulated earnings available for distribution.
Total interest paid is not significantly different from interest
expense.
NOTE F DERIVATIVE FINANCIAL INSTRUMENTS
FINOVA enters into interest rate and basis swap agreements as part of
its interest rate risk management policy of match funding its assets and
liabilities. The derivative instruments used are straightforward. The Company
continually monitors its derivative position and uses derivative instruments for
non-trading and non-speculative purposes only.
FINOVA uses derivative instruments to minimize its exposure to
fluctuations in interest rates. FINOVA 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, FINOVA diversifies its
borrowing sources (short- and long-term debt with a fixed or a variable rate)
and seeks to maintain
22
<PAGE>
FINOVA CAPITAL CORPORATION
a portfolio that is matched funded. FINOVA'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. FINOVA's matched
funding policy also requires that the difference between floating-rate
liabilities and floating-rate assets, 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, FINOVA agrees to exchange with the other
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. 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
FINOVA's margins on floating-rate transactions by locking in the spread between
FINOVA's lending and borrowing rates.
FINOVA's off-balance sheet derivative instruments involve credit and
interest rate risks. The credit risk would be the nonperformance by the other
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. FINOVA'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 FINOVA's outstanding
debt at the time of that transaction. Interest rate risks relate to changes in
interest rates and the impact on earnings. FINOVA mitigates interest rate risks
through its matched funding policy.
The use of derivatives decreased interest expense by $1.0 million in
1997, a decrease in the aggregate cost of funds of 0.03%, whereas 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%. 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.
23
<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, 1997. The rates presented are as of December 31, 1997. To the extent that
rates change, variable interest information will change:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Maturities of Derivative Products
December 31, ---------------------------------------------------------
(Dollars in Millions) 1997 1998 1999 2000 2001 2002 Thereafter
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed-rate swaps:
Notional value $ 1,402 $ 325 $ 377 $ 150 $ 150 $ 200 $ 200
Weighted average receive rate 6.77% 6.82% 6.45% 7.24% 6.66% 6.51% 7.26%
Weighted average pay rate 5.82% 5.78% 5.79% 5.78% 5.83% 5.80% 5.98%
Pay fixed-rate swaps:
Notional value $ 550 $ 200 $ 150 $ 100 $ 100
Weighted average receive rate 5.81% 5.86% 5.80% 5.74% 5.77%
Weighted average pay rate 7.14% 7.30% 7.06% 7.38% 6.70%
Basis swaps:
Notional value $ 628 $ 628
Weighted average receive rate 5.75% 5.75%
Weighted average pay rate 6.04% 6.04%
-------------------------------------------------------------------------------------------------------
TOTAL NOTIONAL VALUE $ 2,580 $ 1,153 $ 527 $ 250 $ 250 $ 200 $ 200
=======================================================================================================
Total weighted average rates
on swaps:
Receive rate 6.32% 6.07% 6.26% 6.64% 6.30% 6.51% 7.26%
=======================================================================================================
Pay rate 6.15% 6.19% 6.15% 6.42% 6.18% 5.80% 5.98%
=======================================================================================================
</TABLE>
For the benefit of its customers, FINOVA enters into interest rate cap
agreements. The total notional amount of these agreements at December 31, 1997
was $41.9 million, none of which was in a pay or receive position. These
agreements will mature as follows: $16.9 million in 1998, $15.9 million in 1999,
$1.5 million in 2000 and $7.6 million in 2001.
At December 31, 1996, FINOVA 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. The exchange agreement expired in
1997.
24
<PAGE>
FINOVA CAPITAL CORPORATION
Derivative product activity for the three years ended December 31, 1997
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, January 1, 1995 $ 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
Expired (275) (275) (250) (800)
Additions 327 327
- --------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 1,402 $ 550 $ -- $ 628 $ -- $ 2,580
========================================================================================================
</TABLE>
NOTE G REDEEMABLE PREFERRED STOCK
In December 1996, FINOVA Finance Trust, a subsidiary 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 FINOVA, which used the proceeds to repay commercial paper and other
indebtedness.
NOTE H STOCK OPTIONS
FINOVA Group sponsors the 1992 Stock Incentive Plan in which FINOVA
participates. Consequently, any compensation related to that plan is reflected
in FINOVA's operating results. The plan provides for the grant of options,
restricted stock and stock appreciation rights relating to FINOVA Group common
stock. Those awards are granted to directors, officers and employees.
FINOVA applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. The compensation cost that has been charged against
income for its performance-based plan was $7.9 million, $2.9 million and $1.6
million for 1997, 1996 and 1995, respectively. Had compensation cost for the
Company's stock based compensation 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, FINOVA's net income would have been $139.6 million, $115.0
million and $97.0 million for 1997, 1996 and 1995, respectively.
The fair value of the options was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995: dividend yield of 1.92%,
expected volatility of 43%, risk-free interest rates of 6.2% and expected lives
of five to seven years.
NOTE I INCOME TAXES
The consolidated provision for income taxes consists of the following
for the years ended December 31:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Current:
United States:
Federal $ 34,936 $ 28,658 $ 32,225
State 13,973 7,654 7,194
Foreign 3,626 1,745
- --------------------------------------------------------------------------------
52,535 38,057 39,419
- --------------------------------------------------------------------------------
Deferred:
United States:
Federal 31,051 26,210 12,278
State (498) 5,062 4,535
Foreign 804
- --------------------------------------------------------------------------------
30,553 31,272 17,617
- --------------------------------------------------------------------------------
Provision for income taxes $ 83,088 $ 69,329 $ 57,036
================================================================================
25
<PAGE>
FINOVA CAPITAL CORPORATION
Income taxes paid in 1997, 1996 and 1995 amounted to approximately
$30.3 million, $31.3 million and $47.9 million, respectively.
The significant components of deferred tax liabilities and deferred tax
assets at December 31, 1997 and 1996 consisted of the following:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred income from leveraged leases $ 308,764 $ 274,224
Deferred income from lease financing 89,196 68,542
Goodwill 24,343 10,776
Other 1,207 15,468
- --------------------------------------------------------------------------------
Gross deferred tax liability 423,510 369,010
- --------------------------------------------------------------------------------
Deferred tax assets:
Reserve for credit losses 75,670 61,083
Foreign 16,802 24,159
Alternative minimum tax 26,153
Accrued expenses 9,739 14,230
Net operating loss carryforward 4,875
Other 12,702 5,129
- --------------------------------------------------------------------------------
Gross deferred tax asset 145,941 104,601
- --------------------------------------------------------------------------------
Net deferred tax liability $ 277,569 $ 264,409
================================================================================
The federal statutory income tax rate is reconciled to the effective
income tax rate as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes 2.6 4.4 5.1
Foreign tax effects (0.1) (0.9) (0.5)
Municipal and ESOP income (2.0) (2.2) (1.7)
Other 1.2 1.0 (0.1)
- --------------------------------------------------------------------------------
Provision for income taxes 36.7% 37.3% 37.8%
================================================================================
NOTE J PENSION AND OTHER BENEFITS
Net periodic pension costs were $1.9 million, $1.7 million and $1.3
million for the years ended December 31, 1997, 1996 and 1995, respectively.
FINOVA's pension costs were accrued at $2.8 million at December 31, 1997 and
prepaid by $0.6 million at December 31, 1996.
Net periodic postretirement benefit costs were $0.5 million, $0.7
million and $0.6 million for each of the years ended December 31, 1997, 1996 and
1995, respectively. FINOVA's accrued postretirement benefit costs were $2.8
million at December 31, 1997 and $2.2 million at December 31, 1996.
FINOVA's investment of $47 million in trust for nonqualified
compensation plans consists of securities held for trading and is recorded at
market.
26
<PAGE>
FINOVA CAPITAL CORPORATION
NOTE K LITIGATION AND CLAIMS
FINOVA 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 FINOVA'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
FINOVA. Although the ultimate amount for which FINOVA may be held liable, if
any, is not ascertainable, FINOVA believes that any resulting liability should
not materially affect FINOVA's financial position or results of operations.
NOTE L FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined by FINOVA using market information obtained by
FINOVA 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 FINOVA could realize in a current market exchange. The use of
different market assumptions or valuation methodologies may have a material
effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of FINOVA's financial
instruments are as follows for the years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
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 $ 5,744,846 $ 5,872,082 $ 5,143,562 $ 5,417,865
Liabilities:
Senior debt 6,764,581 6,832,327 5,850,223 5,952,108
Off-Balance Sheet -
Financial Instruments:
Interest rate swaps --- 15,893 --- 1,462
- --------------------------------------------------------------------------------------------------------
</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, 1997 and 1996. 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, 1997 and 1996, the fair value of nonaccruing
impaired contracts with a carrying amount of $121.5 million and $63.8
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, 1997 and 1996, the
carrying amount of loans and other financing contracts excludes
repossessed assets with a total carrying amount of $89.6 million and
$98.4 million, respectively.
27
<PAGE>
FINOVA CAPITAL CORPORATION
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.
The fair value estimates presented herein were based on information
obtained by FINOVA as of December 31, 1997 and 1996. 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, 1997 and 1996. Therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
NOTE M 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:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Salaries and employee benefits $ 112,980 $ 94,272 $ 74,884
Depreciation and amortization 17,407 14,185 14,799
Travel and entertainment 11,917 8,953 8,030
Problem account costs 11,586 7,753 7,941
Occupancy expenses 8,368 7,104 6,253
Professional services 7,654 5,738 6,121
- --------------------------------------------------------------------------------
NOTE N NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported in the shareowner's equity section of the
balance sheet and establishes standards for reporting of comprehensive income
and its components in a full set of general purpose financial statements.
Adoption of this standard will require additional disclosure only. FINOVA will
adopt this standard effective January 1, 1998, as required.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This standard requires certain
information regarding segments of a business enterprise to be reported based on
the way management organizes and evaluates segments within FINOVA. The standard
also requires disclosures regarding products and services, geographical areas
and major customers. Adoption of this standard will require FINOVA to include
additional detail in its disclosures, including certain disaggregated operating
information. FINOVA will adopt this standard in 1998, as required, but is not
currently planning to elect early adoption for interim financial periods during
the year. At this time, management anticipates that FINOVA's reported segments
will be composed of its three operating groups: Specialty Finance, Commercial
Finance and Capital Markets.
28
<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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest earned from financing transactions:
1997 $ 217,077 $ 228,487 $ 237,356 $ 261,804
1996 190,652 192,635 204,972 209,675
1995 161,369 170,475 176,802 193,470
- --------------------------------------------------------------------------------------------------------
Interest expense:
1997 97,172 101,883 105,592 111,446
1996 88,224 89,718 91,629 96,972
1995 78,275 83,248 85,544 90,747
- --------------------------------------------------------------------------------------------------------
Gains on sale of assets:
1997 3,233 10,468 8,706 7,854
1996 6,730 1,315 397 4,507
1995 1,710 728 2,557 5,894
- --------------------------------------------------------------------------------------------------------
Non-interest expenses:
1997 70,327 82,522 84,500 95,365
1996 66,489 56,989 65,480 69,560
1995 47,581 52,832 54,605 69,339
- --------------------------------------------------------------------------------------------------------
Income from continuing operations:
1997 32,813 34,697 35,867 39,713
1996 26,756 28,852 30,489 30,396
1995 22,205 22,279 24,417 24,897
- --------------------------------------------------------------------------------------------------------
Net income:
1997 32,813 34,697 35,867 39,713
1996 27,121 28,121 29,763 31,995
1995 22,368 23,629 25,150 26,482
- --------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
FINOVA CAPITAL CORPORATION
AVERAGE BALANCES/INTEREST MARGINS/AVERAGE ANNUAL RATES (UNAUDITED) (1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
The following represents the breakdown of FINOVA's average balance sheet, interest margins and average annual rates for the years
ended December 31, 1997 and 1996:
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 36,899 $ $ 38,853 $
Investment in financing transactions 7,764,224 871,735 (4) 11.85% (2) 6,716,996 735,648 (4) 11.63% (2)
Less reserve for credit losses (160,241) (138,896)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in financing transactions - net 7,603,983 6,578,100
Goodwill and other assets 415,573 340,056
Investment in discontinued operations 2,704 487,915
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,059,159 $ 7,444,924
====================================================================================================================================
LIABILITIES AND SHAREOWNER'S EQUITY
Liabilities:
Other liabilities $ 389,998 $ $ 341,370 $
Senior debt 6,253,588 416,093 6.65% 5,944,599 366,543 (5) 6.17% (5)
Deferred income taxes 274,811 249,164
- ------------------------------------------------------------------------------------------------------------------------------------
$ 6,918,397 $ 6,535,133
Shareowner's equity 1,140,762 909,791
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,059,159 $ 7,444,924
====================================================================================================================================
Interest income/average earning assets (2) $ 871,735 11.85% $ 735,648 11.63%
Interest expense/average earning assets (2) (3) 416,093 5.66% 366,543 5.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest margins earned (3) $ 455,642 6.19% $ 369,105 5.83%
====================================================================================================================================
</TABLE>
1) Averages are calculated based on monthly balances.
2) The average rate is calculated based on average earning assets ($7,356,845
and $6,324,545 for 1997 and 1996, respectively) which are net of average
deferred taxes on leveraged leases and average nonaccruing assets.
3) For the year ended December 31, 1997, excluding the impact of derivatives,
interest expense would have been $417,140 or 5.67% of average earning
assets and interest margins earned would have been $454,595 or 6.18% of
average earning assets. For the year ended December 31, 1996, excluding the
impact of derivatives, interest expense would have been $363,526 or 5.75%
of average earning assets and interest margins earned would have been
$372,122 or 5.88% of average earning assets.
(4) Interest income is shown net of operating lease depreciation.
(5) Interest expense for 1996 excludes expense related to MDS which was
classified as discontinued operations. The average rate would have been
6.77% if the expense had not been reclassified.
30
<PAGE>
FINOVA CAPITAL CORPORATION
COMMISSION FILE NUMBER 1-7543
EXHIBIT INDEX
DECEMBER 31, 1997 FORM 10-K
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
FINOVA's report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K"), Exhibit 3.A).
(3.B) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on
Form 10-K for the year ended December 31, 1995 (the
"1995 10-K") Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate
(incorporated by reference from the 1994 10-K,
Exhibit 4.B).
(4.B) Relevant portions of FINOVA's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and
3.B above are incorporated by reference.
(4.C) Long-term debt instruments with principal amounts not
exceeding 10% of FINOVA's total consolidated assets
are not filed as exhibits to this report. FINOVA will
furnish a copy of those agreements to the SEC upon
its request.
(4.D) Form of Indenture dated as of September 1, 1992
between FINOVA and the Trustee named therein
(incorporated by reference from the Greyhound
Financial Corporation Registration Statement on Form
S-3, Registration No. 33-51216, Exhibit 4).
(4.E) Form of Indenture dated as of October 1, 1995 between
FINOVA and the Trustee named therein (incorporated by
reference from FINOVA's report on Form 8-K dated
October 25, 1995, Exhibit 4.1).
31
<PAGE>
Exhibit No.
-----------
(4.F) Form of Indenture between FINOVA, FINOVA Group and
The First National Bank of Chicago as Trustee
(incorporated by reference from FINOVA and FINOVA
Group's registration statement on Form S-3,
Registration No. 333-38171, Exhibit 4.8).
(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 Westminister Bank USA, as agents (the
"Agents") and Citibank, N.A., as Administrative Agent
(incorporated by reference from FINOVA's report on
Form 8-K dated May 23, 1994, Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to
the Sixth Amendment and Restatement, noted in 10.A
above (incorporated by reference from the 1994 10-K,
Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the
Sixth Amendment and Restatement noted in 10.A above
(incorporated by reference from FINOVA's Quarterly
Report on Form 10-Q for the period ending September
30, 1995 ( the "3Q95 10-Q"), Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 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 the 1996 10-K, Exhibit 10.A.4).
(10.A.5) Fifth Amendment dated as of May 20, 1997 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, 1997 (the "FINOVA Group
1997 10-K"), Exhibit 10.A.5).
32
<PAGE>
Exhibit No.
-----------
(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
FINOVA'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 1996 10-K,
Exhibit B.4).
(10.B.5) Fifth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the FINOVA
Group 1997 10-K, Exhibit 10.B.5).
(10.C) Exhibits relating to management compensation are
omitted due to the reduced disclosure format, but can
be found as exhibits to the FINOVA Group 1997 10-K.
33
<PAGE>
Exhibit No.
-----------
(10.D) Tax Sharing Agreement dated February 19, 1992 among
FINOVA, The Dial Corp and others (incorporated by
reference from the 1992 10-K, Exhibit 10.KK).
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends.*
(23) Independent Auditors' Consent.*
(24) Powers of Attorney.*
(27) Financial Data Schedule.*
*Filed with this report.
+Relating to management compensation
34
EXHIBIT 12
FINOVA CAPITAL CORPORATION
COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes $ 226,178 $ 185,822 $ 150,834 $ 122,847 $ 64,123
Add fixed charges:
Interest expense 416,093 366,543 337,814 210,730 126,152
One-third of rent expense 2,789 2,368 2,084 2,053 1,387
- -------------------------------------------------------------------------------------------------------
Total fixed charges 418,882 368,911 339,898 212,783 127,539
- -------------------------------------------------------------------------------------------------------
Income as adjusted $ 645,060 $ 554,733 $ 490,732 $ 335,630 $ 191,662
- -------------------------------------------------------------------------------------------------------
Ratio of income to fixed charges 1.54 1.50 1.44 1.58 1.50
=======================================================================================================
Preferred stock dividends on a pre-tax
basis $ $ $ $ $ 3,682
Total combined fixed charges and
preferred stock dividends $ 418,882 $ 368,911 $ 339,898 $ 212,783 $ 131,221
- -------------------------------------------------------------------------------------------------------
Ratio of income to combined fixed charges
and preferred stock dividends 1.54 1.50 1.44 1.58 1.46
=======================================================================================================
</TABLE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-38171 of FINOVA Capital Corporation (a subsidiary of The FINOVA Group Inc)
on Form S-3 of our report dated February 11, 1998, appearing in this Annual
Report on Form 10-K of FINOVA Capital Corporation for the year ended December
31, 1997.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 17, 1998
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and
appoints Samuel L. Eichenfield and Bruno A. Marszowski, and each of them
severally, as his attorneys-in-fact, with full power of substitution and
resubstitution, to sign and file on his behalf individually and in each such
capacity stated below, FINOVA Capital Corporation's Annual Report on Form 10-K,
and any amendments thereto, to be filed with the Securities and Exchange
Commission, the New York Stock Exchange, and otherwise, as fully as such person
could do in person, hereby verifying and confirming all that said
attorneys-in-fact, or their or his substitutes or substitute, may lawfully do or
cause to be done by virtue hereof.
Signatures Title Date
- ---------- ----- ----
Principal Executive
Officer
/s/Samuel L. Eichenfield Chairman, President and February 17,1998
- ---------------------------- Chief Executive Officer
Samuel L. Eichenfield
Principal Financial and
Accounting Officer
/s/Bruno A. Marszowski Senior Vice President- February 17,1998
- ---------------------------- Controller and Chief
Bruno A. Marszowski Financial Officer
Directors
/s/W. Carroll Bumpers February 26,1998
- ----------------------------
W. Carroll Bumpers
/s/Robert J. Fitzsimmons February 17,1998
- ----------------------------
Robert J. Fitzsimmons
/s/Gregory C. Smalis February 17,1998
- ----------------------------
Gregory C. Smalis
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 33,193
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 8,399,456
<ALLOWANCE> (177,088)
<TOTAL-ASSETS> 8,757,923
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 733,274
<LONG-TERM> 6,764,581
0
0
<COMMON> 25
<OTHER-SE> 1,260,043
<TOTAL-LIABILITIES-AND-EQUITY> 8,757,923
<INTEREST-LOAN> 944,724
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 416,093
<INTEREST-INCOME-NET> 455,642
<LOAN-LOSSES> 69,200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 190,525
<INCOME-PRETAX> 226,178
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,090
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 6.2
<LOANS-NON> 187,356
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 148,693
<CHARGE-OFFS> (45,487)
<RECOVERIES> 2,287
<ALLOWANCE-CLOSE> 177,088
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
