<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20594
--------------------
AMENDMENT NO. 1
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------
For the Fiscal Year Ended December 31, 1995 Commission File Number 1-11011
THE FINOVA GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0695381
(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
------------------- -------------------
Common Stock, $0.01 par value New York Stock Exchange
Junior Participating Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10-K. / /
As of March 6, 1996, approximately 27,329,000 shares of Common Stock ($0.01 par
value) were outstanding, and the aggregate market value of the Common Stock
(based on its closing price per share on such date) held by nonaffiliates was
approximately $1,479,182,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part Where
Document Incorporated
- -------- ------------
1. Proxy Statement relating to 1996 Annual Meeting of Stockholders
of The FINOVA Group Inc. (but excluding information contained
therein furnished pursuant to items 402(k) and (l) of SEC
Regulation S-K.) III
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<PAGE> 2
TABLE OF CONTENTS
Name of Item
<TABLE>
<CAPTION>
Item # Page
------ ----
<S> <C>
Part I
Item 1 Business:
Introduction 1
General 1
Lines of Business 2
Portfolio Composition 4
Investment in Financing Transactions 4
Cost and Utilization of Borrowed Funds 10
Credit Ratings 12
Residual Realization Experience 12
Business Development and Competition 13
Credit Quality 13
Risk Management 13
Portfolio Management 14
Delinquencies and Workouts 15
Governmental Regulation 15
Former Mortgage Insurance Operations 15
Employees 16
Item 2 Properties 16
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Optional Executive Officers of Registrant 16
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Stockholder Matters 18
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8 Financial Statements & Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 20
Part III
Item 10 Directors & Executive Officers of the Registrant 20
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial Owners & Management 20
Item 13 Certain Relationships & Related Transactions 20
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to The FINOVA Group Inc. (formerly
known as GFC Financial Corporation) and its subsidiaries (collectively "FINOVA"
or the "Company"), including FINOVA Capital Corporation (formerly known as
Greyhound Financial Corporation) and its subsidiaries (collectively "FINOVA
Capital"), including Ambassador Factors ("Ambassador") acquired on February 14,
1994 and TriCon Capital ("TriCon") acquired on April 30, 1994. Both Ambassador
and TriCon were merged into FINOVA Capital in 1994.
The Company is the successor to the former financial services businesses
of The Dial Corp ("Dial"). On March 18, 1992, Dial consummated the spin-off (the
"Spin-Off") of the Company by distributing one share of the Company's common
stock (the "shares") for every two shares of Dial common stock held by each
stockholder. Prior to the Spin-Off, Dial contributed to the Company (i) all of
the common stock of FINOVA Capital representing the Company's core operations,
(ii) FINOVA Capital Limited ("FCL") (formerly known as Greyhound European
Financial Group), Dial's European commercial and consumer finance businesses not
previously managed by the Company, (iii) Greyhound BID Holding Corp. ("Greyhound
BID") and (iv) Verex Corporation and subsidiaries ("Verex"), Dial's discontinued
mortgage insurance operations which had been operated in a run-off mode by Dial
since 1988. The Company sold Verex in July 1993.
The historical consolidated financial statements of FINOVA have been
retroactively restated to include the accounts and results of operations of
FINOVA Capital, FCL and Greyhound BID Holding and the investment in Verex for
all periods presented as if a pooling of interests of companies under common
control occurred. All intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
GENERAL
FINOVA is a financial services company primarily engaged in providing
collateralized financing and leasing products to commercial enterprises in
focused market niches, principally in the United States. The FINOVA Group Inc.
is a holding company which operates through its direct and indirect subsidiaries
and was incorporated in Delaware in December 1991.
FINOVA's lending activities to businesses are conducted through FINOVA
Capital and its subsidiaries. FINOVA Capital was incorporated in 1965 in
Delaware and is the successor to a California corporation that commenced
operations in 1954. FINOVA Capital has conducted business continuously since
that time. Foreign financial services are provided primarily in the United
Kingdom, where FCL has provided such services since 1964. Domestic and foreign
financial operations prior to the Spin-Off had been conducted independently of
each other for many years. Following the Spin-Off, they have been conducted as a
consolidated enterprise; however, subsequent to the Spin-Off, FINOVA announced
its intention to phase out the London based financing operations of FCL. In
early 1996, this phase out was substantially completed.
FINOVA Capital extends revolving credit facilities, term loans and
equipment and real estate financing to "middle-market" businesses with financing
needs falling generally between $500,000 to $35 million. FINOVA Capital also
offers sales financing programs to manufacturers, distributors, vendors and
franchisors which facilitate sales of their products to customers. FINOVA
Capital currently operates primarily in 14 specific industry or market niches in
which its expertise in evaluating the creditworthiness
1
<PAGE> 4
of prospective customers and its ability to provide value-added services enables
it to differentiate itself from its competitors and to command product pricing
which provides a satisfactory spread over the Company's borrowing costs.
The Company seeks to maintain a high quality portfolio and to minimize
nonearning assets and write-offs by using clearly defined underwriting criteria,
stringent portfolio management techniques and by diversifying its lending
activities geographically and among a range of industries, customers and loan
products. Because of the diversity of the Company's portfolio, the Company
believes it is better able to manage competitive changes in its markets and to
withstand the impact of deteriorating economic conditions on a regional or
national basis, although there can be no assurance that competitive changes,
borrowers' performance or economic conditions will not result in an adverse
impact on the Company's results of operations or financial condition.
FINOVA Capital generates interest and other income through charges
assessed on outstanding loans, loan servicing, leasing and other fees. FINOVA
Capital's primary expenses are the costs of funding its loan and lease business
(including interest paid on debt), provisions for possible credit losses,
marketing expenses, salaries and employee benefits, servicing and other
operating expenses and income taxes.
LINES OF BUSINESS
FINOVA Capital's activities currently include the following principal
lines of business:
- Commercial Equipment Finance offers equipment leases, loans and
"turnkey" financing to the supermarket, manufacturing, packaging
and general aviation industries. Typical transaction sizes are
$500,000 to $15 million.
- Commercial Finance offers collateral-oriented revolving credit
facilities and term loans for manufacturers, distributors,
wholesalers and service companies. Typical transaction sizes range
from $500,000 to $3 million.
- Commercial Real Estate Finance provides cash-flow-based financing
primarily for acquisitions and refinancings to experienced real
estate developers and owner/occupants of income-producing
properties in the United States. FINOVA Capital concentrates on
secured financing opportunities, generally between $5 million and
$25 million, involving senior mortgage term loans on
owner-occupied commercial real estate. FINOVA Capital's portfolio
of real estate leveraged leases is also managed as part of the
commercial real estate portfolio.
- Communications Finance specializes in radio and television
financing. Other markets include cable television, print and
outdoor media services in the United States. FINOVA Capital
extends secured loans to communications businesses requiring funds
for recapitalizations, refinancings or acquisitions. Loan sizes
generally are from $1 million to $40 million.
- Corporate Finance provides financing, generally in the range of $2
million to $40 million, focusing on middle market businesses
nationally, including distribution, wholesale, specialty retail,
manufacturing and services industries. The group's lending is
primarily in the form of revolving credit facilities and term
loans secured by the assets of the borrower, with significant
emphasis on the borrower's cash flow as the source of repayment of
the secured loan.
- Factoring Services provides full service factoring and accounts
receivable management services for entrepreneurial and larger
firms, operating primarily in the textile and apparel industries.
The annual factored volume of these companies is generally between
$5 million and $25 million.
2
<PAGE> 5
- Franchise Finance offers equipment, real estate and acquisition
financing programs for operators of established franchise
concepts. The equipment leased to the ultimate end-user is
typically purchased by FINOVA Capital from the equipment
manufacturer, vendor or dealer selected by the end-user.
Transaction sizes generally range from $500,000 to $15 million.
- Government Finance provides primarily tax-exempt financing to
state and local governments and non-profit corporations. Typical
transaction sizes range from $100,000 to $5 million.
- Inventory Finance provides inventory financing, combined
inventory/accounts receivable lines of credit and purchase order
financing for equipment distributors, value-added resellers and
dealers. Transaction sizes generally range from $500 thousand to
$30 million.
- Manufacturer and Dealer Services provides point-of-sale financing
programs and support services for regional and national
manufacturers, distributors and vendors of equipment classified as
"small ticket" in transaction size (generally transactions with an
equipment cost of less than $100,000). The equipment which FINOVA
Capital leases to the ultimate end-user is typically sold to
FINOVA Capital by the vendor participating in the financing
program.
- Medical Finance offers a full range of equipment and real estate
financing and asset management services for the U.S. health care
industry, targeting middle market health care providers in the
United States. Transaction sizes typically range from $500,000 to
$25 million.
- Rediscount Finance offers $1 million to $35 million revolving
credit lines to regional consumer finance companies, which in turn
extend credit to consumers. FINOVA Capital's customers provide
credit to consumers to finance home improvements, automobile
purchases, insurance premiums and a variety of other financial
needs.
- Resort Finance focuses on successful, experienced resort
developers, primarily of timeshare resorts, second home resort
communities, golf resorts and resort hotels. Extending funds
through a variety of lending options, Resort Finance provides
loans and lines of credit ranging from $5 million to $30 million
for construction, acquisitions, receivables financing and
purchases and other uses. Through FINOVA Portfolio Services, Inc.,
Resort Finance offers expanded convenience and service to its
customers. Professional receivables collections and cash
management give developers the ability of having loan-related
administrative functions performed for them by FINOVA Capital.
- Transportation Finance/Capital Services structures secured
financings for specialized areas of the transportation industry,
principally involving domestic and foreign used aircraft, some new
aircraft, as well as domestic short-line railroads including new
and used rail equipment. Typical transactions range from $5
million to $30 million and involve financing up to 80% of the fair
market value of used equipment and as equity participants in
leveraged lease transactions. Traditionally focused on the
domestic marketplace, FINOVA Transportation Finance has been
active in international aircraft lending and leasing since 1992
through an office in London, England. Through its Capital Services
activity, FINOVA Capital also provides leveraged lease financing
on transportation equipment.
3
<PAGE> 6
PORTFOLIO COMPOSITION
The total assets under the management of the Company consist of the
Company's net investment in financing contracts plus certain assets that are
owned by others but managed by the Company and are not reported on the
Company's balance sheet ("securitized assets").
The Company's investment in financing transactions is primarily settled
in U.S. dollars, except for approximately $36 million, $87 million and $100
million at December 31, 1995, 1994 and 1993, respectively, which is primarily
due in British pounds. The exchange rate of British pounds to dollars at
December 31, 1995, 1994 and 1993 was 1.55:1, 1.57:1 and 1.48:1, respectively.
INVESTMENT IN FINANCING TRANSACTIONS
The following tables detail FINOVA's investment in financing
transactions (before reserve for possible credit losses) at December 31, 1995,
1994, 1993, 1992 and 1991. Under Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"),
in-substance foreclosed assets are accounted for as loans, rather than
repossessed assets. The Company adopted SFAS 114, effective January 1, 1995,
resulting in the reclassification of nonaccruing in-substance foreclosed assets
to nonaccruing loans. The tables for years prior to 1995 have been restated to
reflect this change in classification; accordingly, in-substance foreclosed
assets of $25.3 million, $31.7 million, $13.2 million and $0 have been
reclassified from repossessed assets to loans at December 31, 1994, 1993, 1992
and 1991, respectively.
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------
1995 % 1994 % 1993 % 1992 % 1991 %
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, conditional sale and
other financing contracts:
Commercial $3,439,687 50.4 $2,797,160 49.4 $1,397,863 49.1 $1,028,181 42.3 $967,693 42.4
Real estate 1,534,177 22.5 1,237,488 21.8 945,892 33.2 891,190 36.7 772,285 33.9
Direct financing leases 828,713 12.1 774,834 13.6 71,812 2.5 138,871 5.7 201,327 8.8
Operating leases 460,798 6.8 412,782 7.3 147,222 5.2 100,911 4.2 75,204 3.3
Leveraged leases 366,196 5.4 287,518 5.1 283,782 10.0 269,370 11.1 265,363 11.6
Factored receivables 189,486 2.8 157,862 2.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total investment in financing 6,819,057 100.0 5,667,644 100.0 $2,846,571 100.0 $2,428,523 100.0 $2,281,872 100.0
transactions ===== ===== ========== ===== ========== ===== ========== =====
Securitized assets 303,304 253,386
---------- ----------
Total managed assets $7,122,361 $5,921,030
========== ==========
</TABLE>
4
<PAGE> 7
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
---------------------------- --------------------------
Repos- Repos- Lease Total
Original Impaired sessed sessed & Carrying
Rate (1) Assets Impaired Assets Other Amount %
(2)
---------------------------- -------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort Finance $ 943,661 $ 2,849 $12,064 $ 2,583 $26,559 $ $ 987,716 14.5
Transportation Finance (3) 929,043 929,043 13.6
Commercial Real Estate Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 11.5
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.1
Corporate Finance (4) 631,295 5,274 19,592 335 656,496 9.6
Manufacturer & Dealer Services (4) 443,474 108 24,637 468,219 6.9
Medical Finance 454,262 81 1,231 455,574 6.7
Commercial Equipment Finance 345,039 69 6,079 351,187 5.2
Rediscount Finance 345,264 345,264 5.1
Franchise Finance 327,356 1,462 6,408 1,850 337,076 4.9
Commercial Finance 200,365 12,685 213,050 3.1
Inventory Finance 202,879 430 203,309 3.0
Factoring Services 188,892 594 189,486 2.8
Government Finance 121,956 47 122,003 1.8
Other 78,645 1,275 2,360 6,061 88,341 1.2
---------- ------- ------- ------- ------- ------- ---------- -----
TOTAL (4) $6,577,340 $17,260 $56,585 $76,991 $49,988 $40,893 $6,819,057 100.0
========== ======= ======= ======= ======= ======= ========== =====
</TABLE>
- --------------------
NOTES:
(1) Consists of troubled debt restructurings.
(2) The Company earned income totaling $4.2 million on repossessed assets
during 1995, including $3.2 million in Commercial Real Estate Finance, $0.6
million in Resort Finance and $0.4 million in Communications Finance.
(3) Transportation Finance includes $144 million of aircraft financing business
booked through the London office.
(4) Excludes $303 million of assets securitized which the Company manages,
including $200 million in Corporate Finance and $103 million in
Manufacturer and Dealer Services.
5
<PAGE> 8
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------ -------------------------
Repos-
sessed Delin- Repos- Leases Total
Original Rewritten Assets quent sessed & Carrying
Rate Contracts (1) Loans Assets Other Amount %
------------------------------ ------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort Finance $ 634,735 $ 4,506 $ 7,314 $ 2,582 $30,393 $ $ 679,530 12.0
Transportation Finance (2) 706,242 14,620 720,862 12.7
Commercial Real Estate Finance 672,522 7,237 40,510 7,622 21,519 749,410 13.2
Communications Finance 551,218 6,288 7,282 17,377 5,863 671 588,699 10.4
Corporate Finance 746,671 21,275 6,952 2,674 777,572 13.8
Manufacturer and Dealer
Services (3) (4) 301,251 113 19,715 321,079 5.7
Medical Finance 470,717 1,719 472,436 8.3
Commercial Equipment Finance 293,609 769 7,589 301,967 5.3
Rediscount Finance 99,353 99,353 1.8
Franchise Finance 281,890 7,632 12,242 301,764 5.3
Commercial Finance 181,741 12,003 193,744 3.4
Inventory Finance 58,595 642 59,237 1.0
Factoring Services 157,090 772 157,862 2.8
Government Finance 93,491 144 93,635 1.7
FINOVA Capital Limited (5) 93,700 1,561 4,265 2 4,800 104,328 1.8
Other 36,951 8,918 297 46,166 0.8
---------- ------- ------- ------- ------- ------- ---------- -----
TOTAL (4) $5,379,776 $64,001 $55,106 $73,519 $60,451 $34,791 $5,667,644 100.0
========== ======= ======= ======= ======= ======= ========== =====
</TABLE>
- --------------------
NOTES:
(1) The Company earned income totaling $3.3 million on repossessed assets
during 1994, including $2.0 million in Commercial Real Estate Finance, $0.8
million in Communications Finance and $0.5 million in Resort Finance.
(2) Transportation Finance included $66.9 million of aircraft finance business
booked through the London office.
(3) Manufacturer and Dealer Services accounts were generally considered
nonaccruing after being 120 days delinquent.
(4) Excluded $253.4 million of assets securitized which the Company managed.
(5) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. Also, FINOVA Capital Limited included $39.2 million of Consumer
Finance assets, of which $4.8 million were nonaccruing. Consumer Finance
accounts were generally considered nonaccruing after being 180 days
delinquent.
6
<PAGE> 9
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
----------------------------- -------------------------
Delin- Repos- Leases Total
Original Repos- quent sessed & Carrying
Rate Rewritten sessed Loans Assets Other Amount %
Contracts Assets
(4)
----------------------------- ------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort Finance $ 530,617 $ 4,869 $12,163 $11,597 $ 7,404 $ 440 $ 567,090 19.9
Transportation Finance (1) (2) 604,416 841 605,257 21.2
Commercial Real Estate Finance 500,598 1,574 27,844 5,759 20,838 556,613 19.6
(1)
Communications Finance 487,890 7,989 8,949 21,730 11,564 538,122 18.9
Corporate Finance (1) 397,779 27,921 4,243 5,462 386 435,791 15.3
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
---------- ------- ------- ------- ------- ------- ---------- -----
$2,648,225 $46,783 $48,956 $46,890 $45,291 $10,426 $2,846,571 100.0
========== ======= ======= ======= ======= ======= ========== =====
</TABLE>
- --------------------
NOTES:
(1) Reclassifications (effective January 1, 1993): Approximately $169 million
of accruing assets were reclassified from Corporate Finance with $163
million going to Transportation Finance because they primarily represented
aircraft financing and $6 million to Commercial Real Estate Finance.
Additionally, $6.5 million of nonaccruing assets ($5.1 million classified
as repossessed assets and $1.4 million classified as 90 days delinquent)
were reclassified from Corporate Finance to Commercial Real Estate Finance.
(2) Transportation Finance included $31.9 million of aircraft finance business
booked through the London office.
(3) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. Also, FINOVA Capital Limited included $45.3 million of Consumer
Finance assets, of which $9.6 million were nonaccruing. Consumer Finance
accounts were generally considered nonaccruing after being 180 days
delinquent.
(4) The Company earned income totaling $2.7 million on repossessed accruing
assets during 1993, including $1.5 million in Commercial Real Estate
Finance, $0.6 million in Communications Finance and $0.6 million in Resort
Finance.
7
<PAGE> 10
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1992
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------ ---------------------------
Repos- Delin- Repos-
Original Rewritten sessed quent sessed Leases Carrying
Rate Contracts Assets Loans Assets & Amount %
(3) Other
------------------------------ --------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort Finance $ 488,224 $ 1,356 $ $ 6,524 $ 7,365 $ 635 $ 504,104 20.8
Transportation Finance 328,962 328,962 13.5
Commercial Real Estate Finance 463,571 12,482 21,509 6,302 15,052 518,916 21.4
Communications Finance 382,914 32,548 8,744 13,182 437,388 18.0
Corporate Finance (1) 420,006 16,081 14,436 5,111 611 456,245 18.8
FINOVA Capital Limited (2) 154,609 5,839 6,000 60 16,400 182,908 7.5
---------- ------- ------- ------- ------- ------- ----------- -----
$2,238,286 $68,306 $21,509 $42,006 $40,770 $17,646 $ 2,428,523 100.0
========== ======= ======= ======= ======= ======= =========== =====
</TABLE>
- --------------------
NOTES:
(1) Included $5.1 million of public sector Latin American loans that were
written-down to estimated market value. During 1992, FINOVA successfully
liquidated 72% of the face value of public sector Latin American loans at
favorable market prices, which were approximately $3.1 million in excess of
the carrying amount.
(2) The FINOVA Capital Limited balance included transactions in Europe and
other countries (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. FINOVA Capital Limited included $57.8 million of Consumer Finance
assets, of which $16.4 million were nonaccruing. Consumer Finance accounts
were generally considered nonaccruing after being 180 days delinquent.
(3) The Company earned income of $1.9 million on repossessed accruing assets in
Commercial Real Estate Finance during 1992.
INVESTMENT IN FINANCING TRANSACTIONS
BY LINES OF BUSINESS
DECEMBER 31, 1991
(Dollars in Thousands)
<TABLE>
<CAPTION>
Revenue Accruing Nonaccruing
--------------------- ---------------------------------- Total
Original Rewritten Delinquent Repossessed Leases & Carrying
Terms Contracts Loans Assets Other Amount %
--------------------- ---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Resort Finance $ 430,113 $ 1,511 $ $ 7,317 $ 1,056 $ 439,997 19.3
Transportation Finance 223,803 223,803 9.8
Commercial Real Estate 431,097 15,734 10,504 20,002 477,337 20.9
Finance
Communications Finance 321,918 12,340 16,636 350,894 15.4
Corporate Finance 429,053 14,594 7,386 3,694 454,727 19.9
FINOVA Capital Limited (1) 263,995 5,095 11,975 826 31,900 313,791 13.8
Latin America (2) 21,323 21,323 0.9
---------- ------- ------- ------- ------- ---------- -----
$2,121,302 $49,274 $46,501 $28,145 $36,650 $2,281,872 100.0
========== ======= ======= ======= ======= ========== =====
</TABLE>
- --------------------
NOTES:
(1) The FINOVA Capital Limited balance included transactions in Europe and
other continents (including the U.S.) originated from the Company's London
office, including Transportation Finance transactions prior to July 1,
1993. Also, FINOVA Capital Limited included $94.3 million of Consumer
Finance assets of which $31.9 million were nonaccruing. Consumer Finance
accounts were generally considered nonaccruing after being 180 days
delinquent.
(2) Included $15.5 million of Latin American loans written-down to market
value.
8
<PAGE> 11
The Company's geographic portfolio diversification at December 31, 1995
was as follows:
<TABLE>
<CAPTION>
State Total Percent
----------------- ---------- -------
<S> <C> <C>
California $ 961,301 14.1%
Texas 597,285 8.8%
Florida 501,169 7.4%
New York 398,784 5.8%
Pennsylvania 297,039 4.4%
New Jersey 241,404 3.5%
Michigan 236,177 3.5%
Arizona 233,193 3.4%
Illinois 229,773 3.4%
Nevada 206,671 3.0%
Virginia 183,102 2.7%
Other (1) 2,733,159 40.0%
---------- -----
$6,819,057 100.0%
========== =====
</TABLE>
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents approximately
4% of the total.
The following is an analysis of the reserve for possible credit losses
for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $122,233 $ 64,280 $ 69,291 $ 87,600 $ 77,098
Provision for possible credit
losses (1) 47,300 16,670 5,706 6,740 77,687
Write-offs (1) (35,533) (35,127) (12,575) (23,661) (68,346)
Recoveries 2,216 1,898 717 749 663
Other (including addition of TriCon
and Ambassador reserves in 1994) 4,117 74,512 1,141 (2,137) 498
-------- -------- -------- -------- --------
Balance, end of year $140,333 $122,233 $ 64,280 $ 69,291 $ 87,600
======== ======== ======== ======== ========
</TABLE>
- --------------------
NOTE:
(1) In 1991, the Company recorded a special provision for possible credit
losses of $65 million and recorded a $47.8 million write-down of Latin
American assets and recorded write-offs of $15 million in the foreign
operations (FCL) portfolio.
The reserve for possible credit losses includes $16 million and $13 million
at December 31, 1995 and 1994, respectively, of reserves applicable to
securitizations previously classified as accrued liabilities.
9
<PAGE> 12
Included in the above is a specific impairment reserve of $15.7 million at
December 31, 1995, which applies to $35.2 million of the $94.3 million of
impaired loans. The remaining $124.6 million of the reserve for possible credit
losses is designated for general purposes and represents management's estimate
of the amount to cover potential losses in the portfolio considering
delinquencies, loss experience and collateral. Additions to general and specific
reserves are reflected in current operations. Management may transfer reserves
between the general and specific reserves as considered necessary.
Write-offs by line of business, experienced by the Company during the years
ended December 31, were as follows:
<TABLE>
<CAPTION>
WRITE-OFFS BY LINE OF BUSINESS
(Dollars in Thousands)
1995 1994 1993 1992 1991
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Manufacturer and Dealer Services $ 9,902 $ 7,018 $ $ $
(1)
Corporate Finance 4,660 4,233 3,741 1,000 668
Communications Finance 4,037 8,300 1,488 1,500 1,200
Factoring Services (2) 3,728 1,148
Franchise Finance (1) 3,448 2,247
Commercial Real Estate Finance 2,275 1,461 2,320 4,417 2,204
Commercial Equipment Finance (1) 2,271 1,257
Resort Finance 2,000 2,730 330
FINOVA Capital Limited (3) 1,523 5,140 5,026 15,838 15,593
Commercial Finance (1) 452 774
Medical Finance (1) 314 377
Inventory Finance (1) 201 442
Latin America (3) 47,759
Other 722 906 592
------- ------- ------- ------- -------
$35,533 $35,127 $12,575 $23,661 $68,346
======= ======= ======= ======= =======
Write-offs as a percentage
of managed assets 0.50% 0.59% 0.44% 0.97% 3.00%
======= ======= ======= ======= =======
</TABLE>
- --------------------
NOTES:
(1) These Lines of Business were not part of the Company's portfolio prior to
May, 1994.
(2) This Line of Business was not part of the Company's portfolio prior to
February, 1994.
(3) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65.0 million and recorded write-offs of
$15.0 million related to nonearning assets in the FCL (foreign) portfolio
and a $47.8 million write-down to reduce Latin American assets to current
market value.
A further breakdown of the portfolio by line of business can be found in
Note C of Notes to Consolidated Financial Statements in Annex A.
COST AND UTILIZATION OF BORROWED FUNDS
FINOVA Capital relies on borrowed funds as well as internal cash flow to
finance its operations. FINOVA Capital follows a policy of relating provisions
under its loans and leases to the terms on which it obtains funds so that, to
the extent feasible, floating-rate assets are funded with floating-rate
borrowings and fixed-rate assets are funded with fixed-rate borrowings. For
further discussion on FINOVA Capital's debt and matched funding policy, see
Notes E and F of Notes to Consolidated Financial Statements included in Annex A.
10
<PAGE> 13
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 Capital for each of the periods listed:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term and variable rate long-term debt (1) 7.2% 5.5% 4.7% 5.3% 8.1%
Fixed-rate long-term debt (1) 7.3% 8.1% 11.4% 10.6% 10.9%
Aggregate borrowed funds (1) 7.2% 6.3% 6.3% 7.2% 9.3%
Rate earned on average earning assets (2) (3) 12.5% 11.6% 10.9% 11.9% 13.6%
Spread percentage (4) 5.8% 6.0% 5.4% 5.1% 4.9%
</TABLE>
- ---------------------
NOTES:
(1) Includes the effect of interest rate swap agreements.
(2) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(3) Earned amounts are net of depreciation and include gains on sale of assets.
(4) Spread percentages represent interest margins earned as a percentage of
average earning assets.
The effective costs presented above include costs of commitment fees
and related borrowing costs and do not purport to predict the costs of funds in
the future.
For further information on FINOVA Capital's cost of funds, refer to
Notes E and F of the Notes to Consolidated Financial Statements included in
Annex A.
Following are the ratios of income to combined fixed charges and
preferred stock dividends ("ratio") for each of the past five years:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
1.43 1.55 1.50 1.34 --
==== ==== ==== ==== ====
</TABLE>
Variations in interest rates generally do not have a substantial impact
on the ratio because fixed-rate and floating-rate assets are generally matched
with liabilities of similar rate and term.
Income available for fixed charges, for purposes of the computation of
the ratio of income to combined fixed charges and preferred stock dividends,
consists of the sum of income before income taxes and fixed charges. Combined
fixed charges include interest and related debt expense and a portion of rental
expense determined to be representative of interest and preferred stock
dividends grossed up to a pre-tax basis.
For the year ended December 31, 1991, earnings were inadequate to cover
combined fixed charges by $37.0 million. The decline in the ratio in 1991 was
due to restructuring and other charges and transaction costs recorded in the
fourth quarter of 1991. Those charges and costs were recorded in connection with
the Spin-Off.
11
<PAGE> 14
CREDIT RATINGS
FINOVA Capital currently has investment-grade credit ratings from the
following rating agencies:
<TABLE>
<CAPTION>
Commercial Senior
Paper Debt
---------- ------
<S> <C> <C>
Duff & Phelps Credit Rating Co. D1- A-
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 BBB+
</TABLE>
There can be no assurance that FINOVA Capital's ratings will be
maintained. Such ratings can be modified at any time. A credit rating is not a
recommendation to buy, sell or hold securities. Each rating should be evaluated
independently of any other rating. Neither The FINOVA Group Inc. nor any of
FINOVA Capital's subsidiaries have applied for credit ratings.
RESIDUAL REALIZATION EXPERIENCE
In the last 41 years, FINOVA Capital has realized, in the aggregate,
proceeds from the sale of assets upon lease terminations (other than
foreclosures) in excess of carrying amounts; however, there can be no assurance
that such results will be realized in future years. Proceeds actually realized
will depend on current market values for those assets at the time of sale which
are generally beyond the control of the Company, although the Company has some
discretion in the timing of subsequent dispositions of such assets. Sales
proceeds upon lease terminations in excess of carrying amounts are reported as
gains when the assets are sold.
Income from leasing activities is affected by gains from asset sales
upon lease termination and, hence, can be somewhat less predictable than income
from non-leasing activities. During the five years ended December 31, 1995, the
proceeds to FINOVA Capital from sales of assets upon early termination of leases
and at the expiration of leases have exceeded the respective carrying amounts
and estimated residual values as follows:
<TABLE>
<CAPTION>
Early Terminations (Notes 1, 2 and 4) Terminations at End of Lease Term
(Note 3)
- -------------------------------------------- ---------------------------------
Proceeds
Proceeds Estimated as a % of
Carrying as a % of Residual Estimated
Sales Amount Carrying Sales Value of Residual
Year Proceeds of Assets Amount Proceeds Assets Value
- -------------------------------------------- ---------------------------------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
1995 $ 2,664 $ 2,018 132% $84,447 $67,186 126%
1994 6,477 5,865 110% 30,161 25,682 117%
1993 -- -- -- 486 248 196%
1992 20,493 17,527 117% 2,164 1,768 122%
1991 25,027 21,904 114% 10,114 6,553 154%
</TABLE>
- ----------
Notes:
(1) Excludes foreclosures for credit reasons which are immaterial to the above
amounts.
(2) Excludes proceeds of $3.2 million in 1993 on assets held for sale.
(3) Excludes proceeds of $2.0 million in 1993 received on guarantees.
12
<PAGE> 15
(4) Excludes gain on securitizations of $4.0 million in 1994.
The estimated residual value of direct finance and leveraged lease
assets in the accounts of FINOVA Capital at December 31, 1995 aggregated 19.0%
of the original cost of such assets (10.2% excluding the original costs of the
assets and residuals applicable to real estate leveraged leases, which typically
have higher residuals than other leases). The financing contracts and leases
outstanding at that date had initial terms ranging generally from one to 25
years. The average initial term weighted by carrying amount at inception and the
average remaining term weighted by remaining carrying amount of financing
contracts at December 31, 1995 for financing contracts excluding leveraged
leases were 6.4 and 4.6 years, respectively, and for leveraged leases were
approximately 20 and 13 years, respectively. The comparable average initial term
and remaining term at December 31, 1994 for financing contracts excluding
leveraged leases were 6.5 and 3.7 years, respectively, and for leveraged leases
were approximately 20 and 11 years, respectively. FINOVA Capital utilizes either
employed or outside appraisers to determine the collateral value of assets to be
leased or financed and the estimated residual or collateral value thereof at the
expiration of each lease. Actual proceeds could differ from such appraised
values.
For a discussion of accounting for lease transactions, refer to Notes A
and C of Notes to Consolidated Financial Statements included in Annex A.
BUSINESS DEVELOPMENT AND COMPETITION
FINOVA Capital develops business primarily through direct solicitation
by its own sales force. Customers are also introduced by independent brokers and
referred by other financial institutions.
At December 31, 1995, FINOVA Capital had 81,821 financing contracts with
65,554 customers (including 881 contracts with consumer finance customers and
75,116 small ticket contracts with 61,347 customers in Manufacturer and Dealer
Services), compared with 88,034 financing contracts with 70,892 customers
(including 2,313 contracts with consumer finance customers and 79,027 small
ticket contracts with 64,886 customers in Manufacturer and Dealer Services) at
December 31, 1994.
FINOVA Capital 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 Capital. FINOVA Capital's principal means of competition
is through a combination of service, the interest rate charged for money and
concentration in focused market niches. The interest rate it charges for money
is a function of its borrowing costs, its operating costs and other factors.
While many of FINOVA Capital's larger competitors are able to offer lower
interest rates based upon their lower borrowing costs, FINOVA Capital seeks to
maintain the competitiveness of the interest rates it offers by emphasizing
strict control of its operating costs. The Company's ability to manage costs is,
in part, dependent on factors beyond the Company's control, such as the cost of
funds, outside litigation expenses and competitive salaries.
CREDIT QUALITY
As a result of the use of clearly defined underwriting standards,
portfolio management techniques, monitoring of covenant compliance and active
collections and workout efforts, FINOVA Capital seeks to maintain a high-quality
asset base.
RISK MANAGEMENT
FINOVA Capital generally conducts investigations of its prospective
customers through a review of historical financial statements, published credit
reports, credit references, discussions with management, analysis of location
feasibility, personal visits and collateral appraisals and inspections. In many
cases, depending upon the results of its credit investigations and the nature of
the financing being provided, FINOVA Capital obtains additional collateral or
guarantees from others.
13
<PAGE> 16
As part of its underwriting process, FINOVA Capital considers the
management, industry, financial position and level of collateral of a proposed
obligor. The purpose, term, amortization and amount of any proposed transaction
generally must be clearly defined and within established corporate policy. In
addition, underwriters attempt to avoid undue concentrations in any one
customer, industry or regional location.
- Management. FINOVA Capital considers the reputation, experience
and depth of management; quality of product or service;
adaptability to changing markets and demand; and prior banking,
finance and trade relationships.
- Industry. FINOVA Capital evaluates critical aspects of each
industry to which it lends, including general trend,
seasonality and cyclicality; governmental regulation; the
effects of taxes; the economic value of goods or services
provided; and potential environmental or other liability.
- Financial. FINOVA Capital's review of a prospective borrower
normally includes a thorough analysis of the borrower's
financial trends. Items considered include net worth;
composition of assets and liabilities; debt service coverage;
liquidity; sales growth and earning power; and cash flow
generation and reliability.
- Collateral. FINOVA Capital regards collateral as an important
factor in a credit evaluation and has established maximum loan
to value ratios, normally ranging from 60% - 95%, for each of
its lines of business.
The underwriting process includes, in addition to the analysis of the
factors set forth above, the design and implementation of transaction structures
and strategies to mitigate identified risks; a review of transaction pricing
relative to product-specific return requirements and acknowledged risk elements;
a multi-step, interdepartmental review and approval process, with varying levels
of authority based on the size of the transaction; and periodic
interdepartmental reviews and revision of underwriting guidelines.
FINOVA Capital also monitors portfolio concentrations in the areas of
aggregate exposure to a single borrower and related entities, within a given
geographical area and with respect to an industry and/or product type within an
industry. FINOVA Capital has established concentration guidelines for each line
of business. Geographic concentrations are reviewed periodically and evaluated
based on historical loan experience and prevailing market and economic
conditions.
FINOVA Capital's financing contracts and leases generally require the
customer to pay taxes, license fees and insurance premiums and to perform
maintenance and repairs at the customer's expense. Contract payment rates are
based on several factors, including the cost of borrowed funds, term of
contract, creditworthiness of the prospective customer, type and nature of
collateral and other security and, in leasing transactions, the timing of tax
effects and estimated residual values. In direct finance lease transactions,
lessees generally are granted an option to purchase the equipment at the end of
the lease term at its then fair market value or, in some cases, are granted an
option to renew the lease at its then fair rental value. The extent to which
lessees exercise their options to purchase leased equipment varies from year to
year, depending on, among other factors, the state of the economy, the financial
condition of the lessee, interest rates and technological developments.
PORTFOLIO MANAGEMENT
In addition to the review at the time of original underwriting, FINOVA
Capital 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
14
<PAGE> 17
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 and dedicated personnel within
the business units regularly review financial statements to assess customer cash
flow performance and trends; periodically confirm operations of the customer;
conduct periodic reappraisals of the underlying collateral; seek to identify
issues concerning the vulnerabilities of the customer; seek to resolve
outstanding issues with the borrower; and prepare quarterly summaries of the
aggregate portfolio quality and concentrations for management review.
Evaluation for loan impairment is performed as a part of the portfolio
management review process. When a loan is determined to be impaired, a
write-down is taken or an impairment reserve is established based on the
difference between the recorded balance of the loan ("carrying amount") and the
relevant measured value.
DELINQUENCIES AND WORKOUTS
FINOVA Capital monitors timely payment of all accounts. Generally, when
an invoice is 10 days past due, the customer is contacted, and a determination
is made as to the extent of the problem, if any. A commitment for immediate
payment is pursued and the account is observed closely. If payment is not
received after this contact, guarantors of the account are to be contacted
within the next 20 days. If an invoice becomes 31 days past due, it is reported
as delinquent. A notice of default is generally sent prior to an invoice
becoming 45 days past due and, between 60 and 90 days past the due date, if
satisfactory negotiations are not underway, outside counsel is generally
retained to help protect FINOVA Capital's rights and to pursue its remedies.
When accounts become more than 90 days past due income recognition is
usually suspended, and FINOVA Capital vigorously pursues its legal remedies.
Foreclosed or repossessed assets are considered to be nonperforming, and are
reported as such unless such assets generate sufficient cash to result in a
reasonable rate of return. Such accounts are continually reviewed, and
write-downs are taken as deemed necessary. While pursuing collateral and
obligors, FINOVA Capital generally continues to negotiate the restructuring or
other settlement of the debt, as appropriate.
Management believes that collateral values significantly reduce loss
exposure and that the reserve for possible credit losses is adequate. For
additional information regarding the reserve for possible credit losses, see
Note D of Notes to Consolidated Financial Statements included in Annex A.
GOVERNMENTAL REGULATION
FINOVA Capital'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 Capital's financing transactions are subject to
additional government regulation, such as aircraft leasing, which is regulated
by the Federal Aviation Authority, and communications, which is regulated by the
Federal Communication Commission. FINOVA Capital's international activities are
also subject to a variety of laws and regulations promulgated by the governments
and various agencies of the countries in which the business is conducted.
FORMER MORTGAGE INSURANCE OPERATIONS
Verex, which conducted FINOVA's mortgage insurance operations, ceased
writing new business as of January 1, 1988 but continued to write renewals and
settle valid claims in accordance with insurance contracts in force.
Accordingly, Verex was treated as a discontinued operation. On July 16, 1993,
FINOVA consummated the sale of Verex. Proceeds from the sale of Verex were
approximately $215 million. The sale price was generally determined by the book
value of the Verex assets plus a premium of $6 million and an adjustment for the
difference between the market value and book value of Verex's investment
portfolio.
15
<PAGE> 18
EMPLOYEES
At December 31, 1995, the Company had 978 employees. None of such
employees were covered by collective bargaining agreements. The Company believes
its employee relations are satisfactory.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in premises leased
from Dial in Phoenix, Arizona. FINOVA Capital operates 46 additional offices in
the United States and one office in Europe. All such properties are leased.
Alternative office space could be obtained without difficulty in the event
leases are not renewed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party either as plaintiff or defendant to various
actions, proceedings and pending claims, including legal actions, certain of
which involve claims for compensatory, punitive or other damages in significant
amounts. Such litigation often results from the Company's attempts to enforce
its lending agreements against borrowers and other parties to such transactions.
Litigation is subject to many uncertainties and it is possible that some of the
legal actions, proceedings or claims referred to above could be decided against
the Company. Although the ultimate amount for which the Company may be held
liable, if any, is not ascertainable, the Company believes that any resulting
liability should not materially affect the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1995.
OPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT.
Set forth below is information with respect to those individuals who
serve as executive officers of FINOVA.
<TABLE>
<CAPTION>
Name Age Position and Background
- --------------------- --- ----------------------------------------------------
<S> <C> <C>
Samuel L. Eichenfield 59 Chairman, President and Chief Executive Officer
since 1993 and Chairman and Chief Executive Officer
of The FINOVA Group Inc. since 1992; also Chairman,
President and Chief Executive Officer of FINOVA
Capital for more than five years.
Robert J. Fitzsimmons 55 Senior Vice President - Treasurer of The FINOVA
Group Inc. or similar positions since 1992; also
Senior Vice President - Treasurer or similar
positions of FINOVA Capital for more than five years
and a Director of FINOVA Capital since 1992.
William J. Hallinan 53 Senior Vice President - General Counsel and
Secretary or similar positions of The FINOVA Group
Inc. and FINOVA Capital since 1992; prior thereto
for more than five years served as Vice President -
Taxes and Associate General Counsel or a similar
position of Dial.
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Name Age Position and Background
- --------------------- --- ----------------------------------------------------
<S> <C> <C>
Robert M. Korte 40 Senior Vice President - Strategy and Technology
since 1994 and prior thereto was Vice
President-Human and Corporate Development of The
FINOVA Group Inc. since 1992; also Vice President -
Human and Corporate Development or in similar
positions of FINOVA Capital since 1991, and prior
thereto was Assistant Vice President -
Administration.
Bruno A. Marszowski 54 Senior Vice President - Controller and Chief
Financial Officer of The FINOVA Group Inc. and
FINOVA Capital since 1994 and prior thereto was Vice
President - Controller of The FINOVA Group Inc.
since 1992; also, Vice President - Controller of
FINOVA Capital for more than five years and a
Director thereof during 1992.
Robert E. Radway 35 Senior Vice President - Corporate Development and
Communications or similar positions of The FINOVA
Group Inc. since 1993; prior thereto was Manager,
Corporate Finance Division of CMS Companies, an
investment management/merchant banking firm since
1990 and prior thereto was Vice President,
Investment Banking Division of First Fidelity
Bancorporation (a bank holding company) since 1988.
Derek C. Bruns 36 Vice President - Internal Audit or similar positions
of The FINOVA Group Inc. since 1992; prior thereto
was Senior Manager - Audit Services or in a similar
position at Deloitte & Touche LLP for more than five
years.
John J. Bonano 53 Group Vice President or similar positions of FINOVA
Capital since 1993; prior thereto was Senior Vice
President, Asset Based Finance Division of U.S.
Bancorp Financial, Inc. since 1988.
J. Parker Lapp 42 Group Vice President of FINOVA Capital since 1995;
prior thereto was President, Current Asset
Management Group of Heller Financial, Inc. for five
years.
Matthew M. Breyne 38 Group Vice President or similar positions of FINOVA
Capital for more than five years.
Jack Fields, III 41 Group Vice President or similar positions of FINOVA
Capital for more than five years.
Thomas C. Parrinello 54 Group Vice President of FINOVA Capital since 1994;
prior thereto was Executive Vice President of Heller
Financial for more than five years.
John Jackson 56 Senior Vice President or similar positions of FINOVA
Capital since 1994; prior thereto was in similar
positions with Bell Atlantic TriCon Leasing, Inc.
for more than five years.
Martin G. Roth 58 Group Vice President or similar positions of FINOVA
Capital for more than five years.
Gregory C. Smalis 43 Group Vice President - Portfolio Management or
similar positions and a Director of FINOVA Capital
since 1993; prior thereto served as Managing
Director of FCL from 1992 and as Vice President -
Credit of FINOVA Capital from 1987.
</TABLE>
17
<PAGE> 20
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY &
RELATED STOCKHOLDER MATTERS.
The principal market on which the common stock of The FINOVA Group Inc.
is traded is the New York Stock Exchange. The following tables summarize the
high and low market prices as reported on the New York Stock Exchange Composite
Tape and the cash dividends declared from January 1, 1994 through December 31,
1995:
<TABLE>
<CAPTION>
Sales Price Range of Common Stock
-----------------------------------------------------
1995 1994
-----------------------------------------------------
Quarters: High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
First $ 34 $30-5/8 $33-3/4 $28-1/4
Second 38-1/2 31-3/4 34-3/8 29-1/8
Third 45-3/4 34-7/8 39 33-1/8
Fourth 49-1/2 44-5/8 35-7/8 29-1/8
</TABLE>
<TABLE>
<CAPTION>
Dividends Declared on
Common Stock
1995 1994
----- -----
<S> <C> <C>
February $0.20 $0.18
May 0.20 0.18
August 0.22 0.18
November 0.22 0.20
----- -----
$0.84 $0.74
===== =====
</TABLE>
Following the Spin-Off, quarterly dividends have been paid on the first
business day of each calendar quarter. It is anticipated that FINOVA will
continue to pay regular quarterly dividends on the first business day of
January, April, July and October. In February 1996, the Board of Directors
declared a dividend of $0.22 per share, payable April 1, 1996, for shareholders
of record on March 1, 1996. The declaration of dividends and their amounts will
be at the discretion of the Board of Directors of FINOVA, and there can be no
assurance that additional dividends will be declared.
FINOVA Capital is restricted in its ability to pay dividends to its
shareholder. The agreements pertaining to long-term debt of FINOVA Capital
include various restrictive covenants and require the maintenance of certain
defined financial ratios with which FINOVA Capital has complied. Under one of
18
<PAGE> 21
these covenants, dividend payments are limited to 50 percent of accumulated
earnings after December 31, 1991.
As of March 6, 1996, there were approximately 26,544 holders of record
of The FINOVA Group Inc.'s common stock. The closing price of the common stock
on that date was $54-1/8.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data of FINOVA which
have been derived from the audited Consolidated Financial Statements of FINOVA
for the five years ended December 31, 1995. The information set forth below
should be read in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the Consolidated Financial
Statements of FINOVA and the Notes thereto included in Annex A, as well as the
remainder of this Report. Per share data for income and dividends have not been
presented for 1991 and prior years as The FINOVA Group Inc. was not a publicly
held company prior to the Spin-Off.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------------------
OPERATIONS: (Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest earned from financing
transactions $ 761,855 $ 503,351 $ 255,216 $ 243,337 $ 251,472
Interest margins earned 339,815 244,414 124,847 104,699 93,912
Provision for possible credit losses (1) 47,300 16,670 5,706 6,740 77,687
Gains on sale of assets 19,726 9,045 5,439 3,362 6,684
Core income (2) 97,994 80,834 40,463 34,289 31,629
Income (loss) from continuing
operations 97,629 74,313 37,846 36,750 (38,742)
Net income (loss) 97,629 74,313 37,347 48,957 (52,471)
Earnings per common and equivalent
share $ 3.51 $ 2.94 $ 1.77 $ 2.31
Dividends declared per common share $ 0.84 $ 0.74 $ 0.68 $ 0.42
Dividend payout ratio 23.9% 25.2% 38.4% 18.2%
Average outstanding common and
equivalent shares 27,832,000 25,307,000 20,332,000 20,464,000
FINANCIAL POSITION:
Investment in financing transactions $ 6,819,057 $ 5,667,644 $ 2,846,571 $ 2,428,523 $ 2,281,872
Nonaccruing assets 167,872 168,761 102,607 100,422 111,296
Reserve for possible credit losses (1) 140,333 122,233 64,280 69,291 87,600
Total assets 7,036,514 5,821,343 2,834,322 2,641,668 2,414,484
Deferred income taxes 209,512 188,887 178,972 172,727 198,366
Total debt 5,649,368 4,573,354 2,079,286 1,898,773 1,769,545
Redeemable preferred stock 25,000
Stockholders' equity 825,184 770,252 503,300 488,396 371,576
RATIOS:
Reserve for possible credit losses/managed
assets 2.0% 2.1% 2.3% 2.9% 3.8%
Nonaccruing assets/managed assets 2.4% 2.9% 3.6% 4.1% 4.9%
Total debt to stockholders' equity 6.8x 5.9x 4.1x 3.9x 4.8x
Return on average equity 12.2% 11.1% 7.5% 11.4% (12.9%)
Return on average total assets 1.5% 1.6% 1.4% 1.9% (2.2%)
Equity to assets 11.7% 13.2% 17.8% 18.5% 15.4%
</TABLE>
- --------------------
NOTES:
(1) In the fourth quarter of 1991, the Company recorded a special provision for
possible credit losses of $65 million and recorded write-offs of $15
million related to nonearning assets in the FCL portfolio and a $47.8
million write-down to reduce Latin American assets to current market value.
(2) Core income is defined as domestic income from continuing operations plus
the charges made to deferred taxes applicable to leveraged leases in 1993
and the restructuring and other charges recorded in 1991 in connection with
the Spin-Off.
19
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See pages 2 - 7 of Annex A.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
1. Financial Statements - See Item 14 hereof and Annex A.
2. Supplementary Data - See Condensed Quarterly Results included in
Supplemental Selected Financial Data of Notes to Consolidated
Financial Statements included in Annex A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING &
FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this Item
is incorporated by reference from the Company's Proxy Statement issued in
connection with its 1996 Annual Meeting of Stockholders (the "Proxy Statement").
The information regarding the Company's executive officers required by
this item is found as an Optional Item in Part I, following Item 4 hereof.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item is incorporated by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed.
1. Financial Statements.
(i) The following financial statements of FINOVA are included in
Annex A:
<TABLE>
<CAPTION>
Annex
Page
-------
<S> <C>
Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations 2 - 7
Report of Management and Independent Auditors' Report 8 - 9
Consolidated Balance Sheet 10
Statement of Consolidated Income 11
Statement of Consolidated Stockholders' Equity 12
Statement of Consolidated Cash Flows 13
Notes to Consolidated Financial Statements 14 - 32
Supplemental Selected Financial Data 33 - 34
</TABLE>
2. All Schedules have been omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
20
<PAGE> 23
3. Exhibits.
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
the Company's Report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K")).
(3.B) By-Laws, as amended through the date of this filing.*
(4.A) Instruments with respect to issues of long-term debt
have not been filed as exhibits to this Annual Report
on Form 10-K if the authorized principal amount of any
one of such issues does not exceed 10% of total assets
of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of each
such instrument to the Securities and Exchange
Commission upon request.
(4.B) Form of Common Stock Certificate of the Company
(incorporated by reference from the 1994 10-K, Exhibit
4.B).
(4.C) Relevant portions of the Company's Certificate of
Incorporation and Bylaws included in Exhibits 3.A and
3.B above, respectively, are hereby incorporated by
reference.
(4.D.1) Rights Agreement dated as of February 15, 1992 between
the Company and the Rights Agent named therein, as
amended (incorporated by reference from the Company's
Current Report on Form 8-K dated September 21, 1995,
Exhibit 4.1).
(4.D.2) Acceptance of Successor Trustee to Appointment under
Rights Agreement noted in 4.D.1 above (incorporated by
reference from the Company's Current Report on Form
8-K, dated November 30, 1995, Exhibit 4).
(4.E) Indenture dated as of November 1, 1990 between FINOVA
Capital and the Trustee named therein (incorporated by
reference from Greyhound Financial Corporation's
Registration Statement on Form S-3, Registration No.
33-37743, Exhibit 4).
(4.F) Fourth Supplemental Indenture dated as of April 17,
1992 between FINOVA Capital and the Trustee named
therein, supplementing the Indenture referenced in
Exhibit 4.E above (incorporated by reference from GFC
Financial Corporation's Annual Report on Form 10-K for
the year 1992 (the "1992 10-K"), Exhibit 4.F).
(4.G) Form of Indenture dated as of September 1, 1992
between FINOVA Capital and the Trustee named therein
(incorporated by reference from the Greyhound
Financial Corporation Registration Statement on Form
S-3, Registration No. 33-51216, Exhibit 4).
(4.H) Form of Indenture dated as of October 1, 1995 between
FINOVA Capital and the Trustee named therein
(incorporated by reference from FINOVA Capital's
Report on Form 8-K dated October 25, 1995, Exhibit
4.1).
(4.I) 1992 Stock Incentive Plan of the Company as amended
through the date hereof, with a proposed amendment
thereto as discussed more fully in the Proxy
Statement.*+
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
(10.A) Sixth Amendment and Restatement dated as of May 16,
1994 of the Credit Agreement dated as of May 31, 1976
among FINOVA Capital and the lender parties thereto,
and Bank of America National Trust and Savings
Association, Bank of Montreal, Chemical Bank,
Citibank, N.A. and National Westminster Bank USA, as
agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from
the Corporation's Current Report on Form 8-K dated May
23, 1994, Exhibit 10.I).
(10.A.1) First Amendment dated as of September 30, 1994, to the
Sixth Amendment and Restatement, noted in 10.A above
(incorporated by reference from the 1994 10-K, Exhibit
10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the Sixth
Amendment and Restatement noted in 10.A above
(incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the period ending
September 30, 1995 (the "Third Quarter 10-Q"), Exhibit
10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the Third Quarter 10-Q, Exhibit 10.B).
(10.B) Credit Agreement (Short-Term Facility) dated as of May
16, 1994 among FINOVA Capital, the Lender parties
thereto, the Agents and Citibank, N.A., as
Administrative Agent (incorporated by reference from
the Company's Report on Form 8-K dated May 23, 1994,
Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the
Credit Agreement noted in 10.B above (incorporated by
reference from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the Third
Quarter 10-Q, Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the Third
Quarter 10-Q, Exhibit 10.D).
(10.C.1) The Company's Executive Severance Plan for Tier 1
Employees.*+
(10.C.2) The Company's Executive Severance Plan for Tier 2
Employees.*+
(10.D) The Company's 1995 Management Incentive Plan
(incorporated by reference from the Third Quarter
10-Q, Exhibit 10-G).+
(10.E.1) The Company's 1995 - 1997 Performance Share Incentive
Plan (incorporated by reference from the Third Quarter
10-Q, Exhibit 10.H).+
(10.E.2) The Company's 1994 - 1996 Performance Share Incentive
Plan (incorporated by reference from the Third Quarter
10-Q, Exhibit 10-I).+
(10.E.3) The Company's 1993 - 1995 Performance Share Incentive
Plan (incorporated by reference from the Third Quarter
10-Q, Exhibit 10.H).+
(10.F.1) Employment Agreement with Samuel L. Eichenfield, dated
March 16, 1992 (incorporated by reference from the
1992 10-K, Exhibit 10.F).+
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
(10.F.2) Amendment to Employment Agreement referenced in 10.F.1
above (incorporated by reference from the Third
Quarter 10.Q, Exhibit 10.M).+
(10.F.3) Employment Agreement with Samuel L. Eichenfield dated
March 15, 1996.*+
(10.G) Employment Agreement with William J. Hallinan, dated
February 25, 1992 (incorporated by reference from the
1992 10-K, Exhibit 10.I).+
(10.H) Employment Agreement with Thomas C. Parrinello, dated
February 14, 1994 (incorporated by reference from the
1994 10-K, Exhibit 10.H).+
(10.I) The Company's Supplemental Pension Plan (incorporated
by reference from the 1994 10-K, Exhibit 10.K).
(10.I.1) Resolutions of the Board of Directors dated December
5, 1994, amending Exhibit 10.I above.*+
(10.I.2) Resolutions of the Board of Directors dated August 22,
1995, amending Exhibit 10.I and 10.I.1 above.*+
(10.J) The Company's Value Sharing Plan for Executive
Officers and Key Employees (incorporated by reference
from the Third Quarter 10-Q, Exhibit 10.K).+
(10.K) The Company's Value Sharing Plan for the Chief
Executive Officer (incorporated by reference from the
Third Quarter 10-Q, Exhibit 10.L).+
(10.L) The Company's Directors Deferred Compensation Plan
(incorporated by reference from the 1992 10-K, Exhibit
10.O).+
(10.M) The Company's Deferred Compensation Plan.*+
(10.N) Directors' Retirement Benefit Plan (incorporated by
reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1993 (the "1993
10-K"), Exhibit 10.OO).+
(10.O) Form of the Company's 1992 Stock Incentive Plan
Nonqualified Stock Option Agreement (for exempt
employees) (for August 25, 1992 and subsequent grants
through August 10, 1994) (various prices)
(incorporated by reference from the 1992 10-K, Exhibit
10.FF).+
(10.P) A description of the Company's policies regarding
compensation of directors is incorporated by reference
from the Proxy Statement.+
(10.Q) Directors' Charitable Awards Program (incorporated by
reference from the 1994 10-K, Exhibit 10.CC).+
(10.R) Interim Services Agreement dated January 28, 1992
among the Company, The Dial Corp and others
(incorporated by reference from the 1992 10-K, Exhibit
10.JJ).
(10.S) Tax Sharing Agreement dated February 19, 1992 among
the Company, The Dial Corp and others (incorporated by
reference from the 1992 10-K, Exhibit 10.KK).
(10.T) Sublease dated as of April 1, 1991, among the Company,
The Dial Corp and others, relating to the Company's
principal office space (incorporated by reference from
the 1992 10-K, Exhibit 10.NN).
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
(10.U) Stock Purchase Agreement between Bell Atlantic TriCon
Leasing Corporation and Greyhound Financial
Corporation dated as of March 4, 1994 (incorporated by
reference from the 1993 10-K, Exhibit 10.QQ).
(10.V) Form of Assets Purchase Agreement between Bell
Atlantic TriCon Leasing Corporation and TriCon Capital
Corporation (incorporated by reference from the 1993
10-K, Exhibit 10.RR).
(10.W) Form of Distribution Agreement among the Company,
Greyhound Financial Corporation, The Dial Corp and
certain other parties named therein, dated as of
January 28, 1992 (incorporated by reference from the
Company's Registration Statement on Form S-1, SEC File
No. 33-45452, Annex II to the Prospectus and Exhibit
2.1).
(10.X) Stock Purchase Agreement among The FINOVA Group Inc.,
FINOVA Capital and GE Capital Mortgage Corporation
dated May 26, 1993 (incorporated by reference from the
Company's Report on Form 8-K dated July 15, 1993,
Exhibit 2).
(10.Y) Form of the Company's 1992 Stock Incentive Plan Stock
Option Agreements for grants subsequent to August 10,
1994 (for exempt employees) (various prices)
(incorporated by reference from the 1994 10-K, Exhibit
10.DD).+
(10.Z) Form of the Company's 1992 Stock Incentive Plan Stock
Option Agreements for grants subsequent to August 10,
1994 (for non-employee directors) (various prices)
(incorporated by reference from the 1994 10-K, Exhibit
10.FF).+
(10.AA) Form of the Company's 1992 Stock Incentive Plan
Restricted Stock Agreements (incorporated by reference
from the 1994 10-K, Exhibit 10.GG).+
(11) Computation of Per Share Earnings.*
(12) Computation of Ratio of Income to Combined Fixed
Charges and Preferred Stock Dividends.*
(21) Subsidiaries of the Registrant.*
(25) Powers of Attorney.*
(27) Financial Data Schedule.*
* Filed with the Company's Report on Form 10-K for
the year ended December 31, 1995.
+ Relating to Management Compensation.
</TABLE>
(b) Reports on Form 8-K:
A Report on Form 8-K dated November 30, 1995, was filed by
Registrant, which reported under Items 5 and 7 the resignation of Bank
One, Arizona, NA (formerly The Valley National Bank of Arizona, NA) and
the appointment of Harris Trust and Savings Bank, N.A. as its Rights
Agent pursuant to the Rights Agreement between the Company and Bank One
Arizona, NA, dated as of February 15, 1992. The transition to the new
Rights Agent was effective November 30, 1995.
A Report on Form 8-K dated January 23, 1996 was filed by
Registrant, which reported under Items 5 and 7 the revenues, net income
and selected financial data and ratios for the twelve months ended
December 31, 1995.
24
<PAGE> 27
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 8th day of March, 1996.
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)
---------------
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
- ------------------------------ ----------------------------------
G. Robert Durham (Director) Samuel L. Eichenfield (Chairman)
March 8, 1996 March 8, 1996
* *
- ------------------------------ ----------------------------------
James L. Johnson (Director) L. Gene Lemon (Director)
March 8, 1996 March 8, 1996
* *
- ------------------------------ ----------------------------------
Kenneth R. Smith (Director) Robert P. Straetz (Director)
March 8, 1996 March 8, 1996
* *
- ------------------------------ ----------------------------------
Shoshana B. Tancer (Director) John W. Teets (Director)
March 8, 1996 March 8, 1996
* Signed pursuant to Powers of Attorney dated February 8, 1996.
/s/ Bruno A. Marszowski
---------------------------
Bruno A. Marszowski
Attorney-in-Fact
March 8, 1996
25
<PAGE> 28
ANNEX A
<PAGE> 29
THE FINOVA GROUP INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Highlights 1
Management's Discussion and Analysis of Financial Condition and
Results of Operations 2 - 7
Management's Report on Responsibility for
Financial Reporting 8
Independent Auditors' Report 9
Consolidated Balance Sheet at December 31, 1995 and 1994 10
Statement of Consolidated Income for the Years Ended
December 31, 1995, 1994 and 1993 11
Statement of Consolidated Stockholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993 12
Statement of Consolidated Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 13
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1995, 1994 and 1993 14 - 32
Supplemental Selected Financial Data 33 - 34
</TABLE>
<PAGE> 30
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 (1) 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Interest margins earned $ 339,815 $ 244,414 $ 124,847
Selling, administrative and other operating expenses 155,001 113,018 58,158
Net income 97,629 74,313 37,347
FINANCIAL POSITION:
Average funds employed (AFE) 6,213,571 4,446,745 2,637,547
Ending funds employed (EFE) 6,819,057 5,667,644 2,846,571
Ending managed assets (2) 7,122,361 5,921,030 2,846,571
Average earning assets (3) 5,815,455 4,064,971 2,321,359
Reserve for possible credit losses 140,333 122,233 64,280
Nonaccruing assets 167,872 168,761 102,607
New business 2,570,993 1,799,331 1,007,794
Factoring/floor planning volume 1,951,310 1,129,936
Write-offs 35,533 35,127 12,575
CAPITALIZATION:
Total debt 5,649,368 4,573,354 2,079,286
Stockholders' equity 825,184 770,252 503,300
PORTFOLIO QUALITY:
Write-offs as a % of average managed assets (4) 0.6% 0.8% 0.5%
Nonaccruing assets as a % of ending managed assets (2) 2.4% 2.9% 3.6%
Reserve for possible credit losses as a % of:
Ending managed assets (2) 2.0% 2.1% 2.3%
Nonaccruing assets 83.6% 72.4% 62.6%
As a multiple of write-offs 3.9x 3.5x 5.1x
PERFORMANCE HIGHLIGHTS:
Return from continuing operations as a % of AFE (5) 1.6% 1.8% 1.6%
Interest margins earned as a % of average earning assets (3) 5.8% 6.0% 5.4%
Selling, administrative and other operating expenses as a % of
interest margins earned 45.6% 46.2% 46.6%
Aggregate cost of funds 7.2% 6.3% 6.3%
Ratio of income to combined fixed charges and preferred stock
dividends 1.4 1.6 1.5
Return on average equity 12.2% 11.1% 7.5%
Income per share (continuing operations) $ 3.51 $ 2.94 $ 1.80
Book value per share outstanding $ 30.25 $ 27.83 $ 25.06
Average outstanding common and equivalent shares 27,832,000 25,307,000 20,332,000
Shares outstanding 27,279,000 27,677,000 20,080,000
===========================================================================================================================
</TABLE>
(1) Includes financial results from the date of acquisition for Ambassador
(February 14, 1994) and TriCon (April 30, 1994).
(2) Ending managed assets include assets sold under securitization agreements
and managed by the Company of $303,304 and $253,386 at December 31, 1995
and 1994, respectively.
(3) Average earning assets represents AFE excluding average deferred taxes on
leveraged leases and average nonaccruing assets.
(4) Includes average securitizations of $188 million and $183 million for
1995 and 1994, respectively.
(5) AFE in this item excludes average deferred taxes on leveraged leases of
$227 million, $225 million and $215 million for 1995, 1994 and 1993,
respectively.
1
<PAGE> 31
THE FINOVA GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to The FINOVA Group Inc. (formerly known
as GFC Financial Corporation) and its subsidiaries (collectively, "FINOVA" or
the "Company"), including FINOVA Capital Corporation (formerly known as
Greyhound Financial Corporation) and its subsidiaries (collectively, "FINOVA
Capital"), including Ambassador Factors ("Ambassador") acquired on February 14,
1994 and TriCon Capital ("TriCon") acquired on April 30, 1994. Both Ambassador
and TriCon were merged into FINOVA Capital in 1994.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Net income increased 31% during 1995 to $97.6 million from $74.3 million
in 1994. The 1994 results include income from Ambassador and TriCon from the
acquisition dates.
INTEREST MARGINS EARNED. Interest margins earned, which represent the
difference between (a) interest and income earned from financing transactions
and (b) interest expense and depreciation, increased by 39% in 1995 to $339.8
million from $244.4 million in 1994. This increase was driven by a 20% growth
in managed assets (investment in financing transactions plus securitizations).
The primary source of the growth in managed assets was new business, which
totaled $2.6 billion for 1995 compared to $1.8 billion for 1994, an increase of
43%. Also contributing to the improved margins were the fees associated with
the factoring business, which recorded factoring volume of $1.1 billion in 1995
compared to $847 million in 1994 and the inventory finance business, which
recorded floor planning volume of $898 million in 1995 compared to $283 million
in 1994.
Interest margins earned as a percentage of average earning assets were
5.8% in 1995, compared to 6.0% in 1994. This reduction in the interest margin
percentage was expected in 1995 primarily due to the cost of hedges that the
Company entered into to lock in the spread between its lending and borrowing
rates on $1.5 billion of its floating-rate debt. Growth in interest margins
earned more than offset the higher provisions for possible credit losses and
the higher selling, administrative and other operating expenses in the 1995
period.
NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for
possible credit losses ("reserves"), were greater by $30.6 million during 1995
compared to 1994 primarily due to the growth in managed assets. Management
believes that reserve coverage remains adequate at 83.6% of nonaccruing assets
(nonaccruing contracts and respossessed assets) and 2.0% of managed assets.
Details of write-offs and other changes in the reserve for possible credit
losses can be found in Note D of Notes to Consolidated Financial Statements.
Selling, administrative and other operating expenses increased by $42
million in 1995 due to the growth of the Company, the large volume of new
business added and the inclusion of TriCon and Ambassador for the full year. As
a percentage of interest margins earned, these costs decreased to 45.6% in 1995
from 46.2% in the previous year. See Note M of Notes to Consolidated Financial
Statements.
GAINS ON SALE OF ASSETS. Gains on sale of assets were $10.7 million higher
in 1995 compared to 1994 primarily due to the inclusion of TriCon for the full
year and the amount and type of assets coming
2
<PAGE> 32
THE FINOVA GROUP INC.
off lease. The 1994 gains of $9.0 million included $4.0 million (pre-tax) from
the securitization of assets in June 1994.
INCOME TAXES. Income taxes for 1995 increased to $59.6 million from $49.5
million in 1994. This increase was caused by the increase in pre-tax income,
partially offset by certain tax credits recognized during 1995. The 1995 overall
effective income tax rate for the Company approximated 37.9% compared to 40.0%
in 1994. The decrease in the effective rate is primarily related to lower
foreign tax effects and an increase in tax exempt municipal income. Details can
be found in Note I of Notes to Consolidated Financial Statements.
1994 COMPARED TO 1993
Income from continuing operations increased 96% during 1994 to $74.3
million from $37.8 million in 1993. The 1994 results included income for
Ambassador and TriCon from the acquisition dates. Net income for the 1994 period
rose to $74.3 million from $37.3 million in 1993, an increase of 99%. Income
from continuing operations and net income in 1993 included a $4.9 million
adjustment for tax rate increases applicable to deferred income taxes generated
by the Company's leveraged lease portfolio. Net income in 1993 included a $0.5
million loss from the Company's discontinued mortgage insurance subsidiary sold
in July 1993.
INTEREST MARGINS EARNED. Interest margins earned increased to $244.4
million in 1994 from $124.8 million in 1993, an increase of 96%. This increase
was driven by portfolio growth, together with the addition of TriCon and
Ambassador in 1994. The primary source of the portfolio growth was new business,
which totaled $1.8 billion for 1994 compared to $1.0 billion for 1993, an
increase of 80%.
Interest margins earned, measured as a percent of average earning assets,
were 6.0%. This measurement compares to 5.4% for the 1993 period and reflects
the contributions of the acquisitions made in 1994, the continuing healthy
returns of the charter financial operations and the Company's access to lower
cost capital. Growth in interest margins more than offset the higher provisions
for possible credit losses and the higher selling, administrative and other
operating expenses.
NON-INTEREST EXPENSE. Loss provisions, which increase the reserve for
possible credit losses ("reserve"), were greater by $11.0 million during 1994
compared to 1993. The greater loss provisions were consistent with the
requirements of a larger portfolio and the loss experience of the businesses
acquired. Higher interest margins generated by Ambassador and certain TriCon
businesses are used to cover the risk profiles associated with those businesses.
Management believes that reserve coverage was adequate at 72.4% of nonaccruing
assets and at 2.1% of managed assets. Details of the write-offs by line of
business, as well as changes in the reserve for possible credit losses, can be
found in Note D of Notes to Consolidated Financial Statements.
Selling, administrative and other operating expenses increased by $54.9
million in 1994, which was consistent with the growth in assets. As a percent
of interest margins earned, these expenses were 46.2% (for the combined
entities) in 1994, an improvement over 46.6% in 1993 (which excluded TriCon
and Ambassador). See Note M of Notes to Consolidated Financial Statements.
GAINS ON SALE OF ASSETS. Gains on sale of assets were $3.6 million higher
in 1994 compared to 1993. The increase principally was the result of a $4.0
million ($2.4 million after-tax) gain from the securitization of assets recorded
in 1994, which was consistent with TriCon's historical experience related to
asset securitizations.
INCOME TAXES. Income taxes for 1994 increased to $49.5 million from $28.6
million in 1993. This increase is attributable to: (a) higher income before
income taxes, (b) higher state income tax rates in 1994 because of the
apportionment of the Company's assets to states with higher income tax rates and
(c) increased foreign income taxes due to an increase in foreign income. The
overall effective income tax rate for the Company, including both federal and
state income taxes, approximates 40.0% for 1994 and 35.7% for 1993, excluding
the $4.9 million tax adjustment for the Company's leveraged lease portfolio. See
Note I of Notes to Consolidated Financial Statements.
3
<PAGE> 33
THE FINOVA GROUP INC.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Managed assets increased by $1.2 billion to $7.1 billion at December 31,
1995 from $5.9 billion at December 31, 1994. This increase primarily is
attributable to the $2.6 billion of new business generated in 1995 and portfolio
acquisitions of $262 million, less portfolio amortization.
The reserve for possible credit losses increased by $18.1 million in 1995
to $140.3 million. The increase in the reserve consisted primarily of increases
due to loss provisions of $47.3 million which were applicable to portfolio
growth, partially offset by decreases due to write-offs of $35.5 million. See
Note D of Notes to Consolidated Financial Statements.
Nonaccruing assets decreased to $167.9 million at December 31, 1995 from
$168.8 million at December 31, 1994. When measured as a percent of managed
assets, nonaccruing assets declined to 2.4% at December 31, 1995 from 2.9% at
December 31, 1994. For more information on write-offs and nonaccruing assets see
Note D of Notes to Consolidated Financial Statements.
The Company had total debt of approximately $5.6 billion or 6.8 times
its equity base of $825.2 million at December 31, 1995 (FINOVA Capital's
leverage as of December 31, 1995 was 6.6 to 1). The Company also had deferred
income taxes of $209.5 million, generally used to reduce debt and, therefore,
help finance lending activities.
Growth in funds employed is generally financed by internally generated
cash flow and additional borrowings. During 1995, FINOVA Capital issued $1.3
billion in new senior debt, which, together with general corporate funds and net
commercial paper borrowings, was used to finance new business, acquire
portfolios and redeem or retire $570 million of debt. An equity offering was
completed in May 1994 for 8,050,000 shares of the Company's common stock.
FINOVA satisfies a significant portion of its cash requirements from a
diversified group of worldwide funding sources and is not dependent upon any one
lender. Additionally, FINOVA relies on the issuance of commercial paper as a
major funding source. During 1995, FINOVA Capital issued $16.1 billion of
commercial paper (with an average of $2.2 billion outstanding during the year)
and raised $1.3 billion, as noted above, through new long-term financings of one
to 10 year durations. At December 31, 1995 and 1994, commercial paper and
short-term bank borrowings totaling $2.4 billion and $2.0 billion, respectively,
were supported by available unused revolving credit lines which, if not renewed,
are convertible to long-term debt at FINOVA's option.
In 1994, FINOVA Capital filed a shelf-registration statement with the
Securities and Exchange Commission ("SEC") that allowed for the issuance of $1.0
billion of senior debt securities, all of which was used as of December 31,
1995. In 1995, FINOVA Capital filed an additional shelf registration statement
with the SEC allowing for the issuance of $1.5 billion of senior debt
securities, $1.2 billion of which remained available as of December 31, 1995.
Also in 1995, the Company, under a securitization agreement, sold a $200 million
undivided proportionate interest in a loan portfolio totaling $610.5 million.
See Note C of Notes to Consolidated Financial Statements for further discussion.
FINOVA Capital currently maintains a five-year revolving credit facility
with numerous lenders, in the aggregate principal amount of $1.0 billion.
Separately, FINOVA Capital also has a 364 day revolving credit facility with the
same lenders in the aggregate principal amount of $1.0 billion and has another
four-year facility with numerous lenders for $700 million. All of these
facilities support FINOVA's outstanding commercial paper and short-term
borrowings. The Company intends to borrow under the domestic revolving credit
agreements to refinance commercial paper and short-term bank loans
4
<PAGE> 34
THE FINOVA GROUP INC.
to the extent that it experiences significant difficulties in rolling over
its outstanding commercial paper and short-term bank loans. The Company rarely
borrows under these facilities. The 364 day $1.0 billion revolving credit
agreements will be subject to renewal in 1996, while the four and five year $700
million and $1.0 billion credit facilities are subject to renewal in 1999 and
2000, respectively.
The agreements pertaining to long-term debt of FINOVA Capital include
various restrictive covenants and require the maintenance of certain defined
financial ratios with which FINOVA Capital has complied. Under one such
covenant, dividend payments are limited to 50 percent of accumulated earnings
after December 31, 1991.
FINOVA Capital's aggregate cost of funds increased to 7.2% for 1995 from
6.3% for 1994 as a result of rising interest rates and the Company's hedging
activities, as further discussed below. The Company's cost of and access to
capital is dependent, in a large part, on its credit ratings. FINOVA Capital has
maintained investment grade ratings since 1976, and received an upgrade in those
ratings from Standard & Poor's Ratings Group and Moody's Investor Service, Inc.
in 1995. Neither The FINOVA Group Inc. nor any of FINOVA Capital's subsidiaries
have applied for credit ratings. FINOVA Capital currently has investment-grade
ratings from the following agencies:
<TABLE>
<CAPTION>
Commercial Senior
Paper Debt
--------------- -------------
<S> <C> <C>
Duff & Phelps Credit Rating Co. D1- A-
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 BBB+
</TABLE>
At December 31, 1995, FINOVA Capital had outstanding 59 interest rate
conversion agreements with notional principal amounts totaling $3.1 billion.
Twenty-four agreements with notional principal amounts of $895 million were
arranged to effectively convert certain floating interest rate obligations into
fixed interest rate obligations and require interest payments on the stated
principal amount at rates ranging from 4.1% to 9.1% (remaining terms of one to
five years) in return for receipts calculated on the same notional amounts at
floating interest rates. In addition, 28 agreements with notional principal
amounts of $1.3 billion were arranged to effectively convert certain fixed
interest rate obligations into floating interest rate obligations and require
interest payments on the stated principal amount at the three month or six month
London interbank offered rates ("LIBOR") (remaining terms of one to seven years)
in return for receipts calculated on the same notional amounts at fixed interest
rates of 4.9% to 7.7%. FINOVA Capital has also entered into seven basis swap
agreements with notional principal amounts of $878 million and remaining terms
of two to three years.
In 1993, FINOVA Capital entered into four three-year interest rate hedge
agreements on $750 million of floating-rate borrowings. In 1995, FINOVA Capital
hedged an additional $750 million of floating-rate debt through five basis swap
agreements expiring through 1998, to lock in a spread between its lending and
borrowing rates. FINOVA's assets are primarily prime based while a significant
portion of its liabilities are either LIBOR based or tied to the 30-day
commercial paper composite rate. The agreements enable FINOVA to hedge against a
narrowing of the spread between the prime rate (lending rate) and its borrowing
rates (LIBOR and commercial paper). For more information on derivative financial
instruments, see Note F of Notes to Consolidated Financial Statements.
5
<PAGE> 35
THE FINOVA GROUP INC.
The Company announced in 1992 that it intended to repurchase its
securities on the open market, from time to time, to fund its obligations
pursuant to employee stock options, benefit plans and similar obligations. Under
this program, 611,600, 602,800 and 349,909 shares were acquired during the years
ending December 31, 1995, 1994 and 1993, respectively. The program may be
discontinued at any time.
RECENT DEVELOPMENTS AND BUSINESS OUTLOOK
Following its spin-off from The Dial Corporation in 1992 (the "Spin-Off"),
the Company decided to focus its resources and capital on its domestic
commercial finance activities. The Company embarked on a program of selling or
winding down those activities included in the Spin-Off that were not associated
with the Company's core businesses. The Company concentrated on redeploying the
capital previously invested in such businesses and raised additional capital to
support internal portfolio growth and to make complementary acquisitions. This
strategy has resulted in (i) the managed liquidation and sale of FINOVA Capital
Limited ("FCL"), Dial's former European financial business, and the Latin
American loan portfolios, (ii) an increase (excluding acquisitions) in FINOVA's
domestic loan portfolio each year, (iii) the acquisition of the asset based
lending activity of U.S. Bancorp, (iv) the sale of the discontinued mortgage
insurance subsidiary, (v) the acquisition of Ambassador, (vi) the acquisition of
TriCon and (vii) portfolio acquisitions of $262 million in 1995.
[/R]
In 1994, the Company raised an additional $226 million of equity through
the sale of 8,050,000 shares in a stock offering and expanded its debt sources
through a $1.0 billion shelf registration with the SEC. In 1995, the Company
further added to its debt sources through a $1.5 billion shelf registration with
the SEC and increased its revolving credit lines to $2.7 billion. Also in 1995,
the Company, under a securitization agreement, sold a $200 million undivided
proportionate interest in a loan portfolio totaling $610.5 million. See Note C
of Notes to Consolidated Financial Statements for further discussion.
As a result of the execution of its business strategy, management believes
that the Company now ranks among the largest independent commercial finance
companies, based on assets, in the United States, and can direct its energies
primarily to its principal business operations, including those businesses
acquired since the Spin-Off.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
effective for fiscal years beginning after December 15, 1995. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, the statement
requires that certain long-lived assets and intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company does not expect the adoption of this accounting standard to materially
impact its results of operations or financial position. The Company will adopt
this accounting standard effective January 1, 1996, as required.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", effective for transactions entered into in fiscal years that
begin after December 15, 1995. This statement establishes financial accounting
and reporting for stock-based employee compensation plans, including
6
<PAGE> 36
THE FINOVA GROUP INC
stock purchase plans, stock option plans, restricted stock and stock
appreciation rights. The Statement allows for a fair value based method of
accounting for employee stock options or similar instruments and encourages a
similar method for all employee stock compensation plans. This method measures
compensation cost at the grant date based on the value of an award and
recognizes it over the service period, usually the vesting period. However, the
Statement also allows an entity to continue measuring compensation cost for such
plans using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), providing pro forma disclosures are made. The Company expects to
continue to account for its stock-based employee compensation plans using the
method of accounting prescribed by APB No. 25 and does not expect that this
accounting standard will materially impact its results of operations or
financial position.
The Company adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"), as of January 1, 1995. These statements require that
impaired loans be measured based on the present value of the expected cash flows
discounted at the loan's effective interest rate or the fair value of the
collateral, if the loan is collateral dependent. Under SFAS 114, a loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. For the impact and disclosures of
these new standards, see Note D of Notes to Consolidated Financial Statements.
During 1994, FINOVA adopted SFAS No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments." The disclosures
required by SFAS No. 119 are included in Notes F and L of Notes to Consolidated
Financial Statements.
7
<PAGE> 37
THE FINOVA GROUP INC.
MANAGEMENT'S REPORT ON
RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The FINOVA Group Inc. is responsible for the
preparation, integrity and objectivity of the financial statements and other
financial information included in this Annual Report. The financial statements
are presented in accordance with generally accepted accounting principles
reflecting, where applicable, management's best estimates and judgments.
Management of the Company has established and maintains a system of
internal controls to reasonably assure the fair presentation of the financial
statements, the safeguarding of the Company's assets and the prevention or
detection of fraudulent financial reporting. The internal control structure is
supported by careful selection and training of personnel, policies and
procedures and regular review by both internal auditors and the independent
auditors.
The Board of Directors, through its Audit Committee, also oversees the
financial reporting of the Company and its adherence to established procedures
and controls. Periodically, the Audit Committee meets, jointly and separately,
with management, the internal auditors and the independent auditors to review
auditing, accounting and financial reporting matters.
The Company's financial statements have been audited by Deloitte & Touche
LLP, independent auditors. Management has made available to Deloitte & Touche
LLP all of the Company's financial records and related data and has made valid
and complete written and oral representations and disclosures in connection with
the audit.
Management believes it is essential to conduct its business in accordance
with the highest ethical standards, which are characterized and set forth in the
Company's written Code of Conduct. These standards are communicated to and
acknowledged by all of the Company's employees.
/s/ Samuel L. Eichenfield
______________________________
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
/s/ Bruno A. Marszowski
______________________________
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
/s/ Derek C. Burns
_______________________________
Derek C. Bruns
Vice President - Internal Audit
8
<PAGE> 38
THE FINOVA GROUP INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of The FINOVA Group Inc.
We have audited the accompanying consolidated balance sheet of The FINOVA
Group Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The FINOVA Group Inc. and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
_____________________________
Deloitte & Touche LLP
Phoenix, Arizona
February 16, 1996
9
<PAGE> 39
THE FINOVA GROUP INC.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
December 31, 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 90,280 $ 49,875
Investment in financing transactions:
Loans and other financing contracts, less unearned
income of $354,961 and $249,550, respectively 4,973,864 4,034,648
Direct financing leases 828,713 774,834
Operating leases 460,798 412,782
Leveraged leases 366,196 287,518
Factored receivables 189,486 157,862
- ---------------------------------------------------------------------------------------
6,819,057 5,667,644
Less reserve for possible credit losses (140,333) (122,233)
- ---------------------------------------------------------------------------------------
Investment in financing transactions - net 6,678,724 5,545,411
Other assets and deferred charges 267,510 226,057
- ---------------------------------------------------------------------------------------
$7,036,514 $5,821,343
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
December 31, 1995 1994
- ---------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 125,349 $ 134,501
Due to clients 181,548 116,639
Interest payable 45,553 37,710
Senior debt 5,649,368 4,573,354
Deferred income taxes 209,512 188,887
- ---------------------------------------------------------------------------------------
6,211,330 5,051,091
- ---------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares
authorized, 28,422,000 shares issued 284 284
Additional capital 686,382 688,042
Retained income 184,381 109,830
Cumulative translation adjustments (5,686) (4,726)
Common stock in treasury, 1,143,000 and 745,000 shares,
respectively (40,177) (23,178)
- ---------------------------------------------------------------------------------------
825,184 770,252
- ---------------------------------------------------------------------------------------
$7,036,514 $5,821,343
=======================================================================================
</TABLE>
See notes to consolidated financial statements.
10
<PAGE> 40
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED INCOME
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other income $ 580,309 $ 386,566 $ 218,171
Financing lease income 96,855 62,990 20,838
Operating lease income 84,691 53,795 16,207
- -----------------------------------------------------------------------------------------
Interest earned from financing transactions 761,855 503,351 255,216
Interest expense 366,822 222,200 123,853
Depreciation 55,218 36,737 6,516
- -----------------------------------------------------------------------------------------
Interest margins earned 339,815 244,414 124,847
Provision for possible credit losses 47,300 16,670 5,706
- -----------------------------------------------------------------------------------------
Net interest margins earned 292,515 227,744 119,141
Gains on sale of assets 19,726 9,045 5,439
- -----------------------------------------------------------------------------------------
312,241 236,789 124,580
Selling, administrative and other operating
expenses 155,001 113,018 58,158
- -----------------------------------------------------------------------------------------
Income before income taxes 157,240 123,771 66,422
Income taxes 59,611 49,458 28,576
- -----------------------------------------------------------------------------------------
Income from continuing operations 97,629 74,313 37,846
Loss from discontinued operations (499)
- -----------------------------------------------------------------------------------------
NET INCOME $ 97,629 $ 74,313 $ 37,347
=========================================================================================
Earnings per common and equivalent share:
Income from continuing operations $ 3.51 $ 2.94 $ 1.86
Preferred dividends 0.06
- -----------------------------------------------------------------------------------------
Income from continuing operations after
preferred dividends 3.51 2.94 1.80
Loss from discontinued operations (0.03)
- -----------------------------------------------------------------------------------------
EARNINGS PER COMMON AND EQUIVALENT SHARE $ 3.51 $ 2.94 $ 1.77
=========================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.84 $ 0.74 $ 0.68
=========================================================================================
Average outstanding common and equivalent
shares 27,832,000 25,307,000 20,332,000
=========================================================================================
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 41
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance, beginning of year $ 284 $ 204 $ 204
Issuance of common stock 80
- ----------------------------------------------------------------------------------------
Balance, end of year 284 284 204
- ----------------------------------------------------------------------------------------
ADDITIONAL CAPITAL:
Balance, beginning of year 688,042 464,487 465,955
Issuance of common stock 225,911
Net change in unamortized amount of restricted
stock (613) (2,113) (223)
Common stock in treasury issued in connection
with employee benefit plans (1,047) (243) (1,245)
- ----------------------------------------------------------------------------------------
Balance, end of year 686,382 688,042 464,487
- ----------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT LOSSES:
Balance, beginning of year (387)
Change in net unrealized investment losses 387
- ----------------------------------------------------------------------------------------
Balance, end of year --- --- ---
- ----------------------------------------------------------------------------------------
RETAINED INCOME:
Balance, beginning of year 109,830 54,901 32,524
Net income 97,629 74,313 37,347
Dividends (23,078) (19,384) (14,970)
- ----------------------------------------------------------------------------------------
Balance, end of year 184,381 109,830 54,901
- ----------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS:
Balance, beginning of year (4,726) (7,773) (6,685)
Unrealized translation (loss) gain (960) 3,047 (1,088)
- ----------------------------------------------------------------------------------------
Balance, end of year (5,686) (4,726) (7,773)
- ----------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY:
Balance, beginning of year (23,178) (8,519) (3,215)
Purchase of shares (23,588) (18,954) (10,162)
Shares used in connection with employee
benefit plans 6,589 4,295 4,858
- ----------------------------------------------------------------------------------------
Balance, end of year (40,177) (23,178) (8,519)
- ----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY $ 825,184 $ 770,252 $ 503,300
========================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 42
THE FINOVA GROUP INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 97,629 $ 74,313 $ 37,347
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible credit losses 47,300 16,670 5,706
Depreciation and amortization 71,583 46,470 9,318
Gains on sale of assets (19,726) (9,045) (5,439)
Loss from discontinued operations 499
Deferred income taxes 20,625 9,915 17,947
Change in assets and liabilities, net of effects from
subsidiaries purchased:
Increase in other assets (37,338) (20,087) (6,290)
Decrease in accounts payable and accrued expenses (9,152) (82,694) (14,246)
Increase (decrease) in interest payable 7,843 14,077 (5,429)
Other (1,573) (4,548) (1,311)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 177,191 45,071 38,102
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of assets 86,280 35,106 5,681
Proceeds from sales of securitized assets 200,000 115,507
Principal collections on financing transactions 1,308,747 908,862 638,423
Expenditures for financing transactions (2,128,588) (1,505,208) (1,007,794)
Net change in short-term financing transactions (442,405) (294,123)
Acquisitions (261,868) (590,497) (69,808)
Sale of discontinued operation 171,500
Net repayment of advances to discontinued operation 57,321
Other 1,249 1,898 221
- ---------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,236,585) (1,328,455) (204,456)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Long-term borrowings 1,272,450 827,550 200,000
Net borrowings under commercial paper 373,566 1,508,564 185,735
Repayment of long-term borrowings (570,002) (1,186,191) (190,136)
Issuance of common stock 225,991
Redemption of preferred stock (25,000)
Proceeds from exercise of stock options 5,542 4,052 3,613
Common stock purchased for treasury (23,588) (18,954) (10,162)
Dividends (23,078) (19,384) (14,970)
Net change in due to clients 64,909 (9,298)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,099,799 1,332,330 149,080
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 40,405 48,946 (17,274)
Cash and cash equivalents, beginning of year 49,875 929 18,203
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 90,280 $ 49,875 $ 929
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 43
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands in Tables)
NOTE A SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION -- The
consolidated financial statements present the financial position, results of
operations and cash flows of The FINOVA Group Inc. (formerly known as GFC
Financial Corporation) and its subsidiaries (collectively, "FINOVA" or the
"Company"), including FINOVA Capital Corporation, (formerly known as Greyhound
Financial Corporation), and its subsidiaries (collectively, "FINOVA Capital"),
including Ambassador Factors ("Ambassador") acquired on February 14, 1994 and
TriCon Capital ("TriCon") acquired on April 30, 1994. Both Ambassador and TriCon
were merged into FINOVA Capital in 1994.
The FINOVA Group Inc. is a financial services company engaged in
providing collateralized financing products to commercial enterprises in various
market niches, principally in the United States.
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles. Described below are those accounting
policies particularly significant to FINOVA, including those selected from
acceptable alternatives.
USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FINANCING TRANSACTIONS -- For loans and other financing contracts,
earned income is recognized over the life of the contract, using the interest
method.
For leases classified as direct financing leases, the difference
between (a) aggregate lease rentals and (b) the cost of the related assets less
estimated residual value at the end of the lease term is recorded as unearned
income. Earned income is recognized over the life of the contracts using the
interest method.
For operating leases, earned income is recognized on a straight-line
basis over the lease term and depreciation is taken on a straight-line basis
over the estimated useful lives of the leased assets.
Leases that are financed by nonrecourse borrowings and meet certain
other criteria are classified as leveraged leases. For leveraged leases,
aggregate rentals receivable are reduced by the related nonrecourse debt service
obligation including interest ("net rentals receivable"). The difference between
(a) the net rentals receivable and (b) the cost of the asset less estimated
residual value at the end of the lease term is recorded as unearned income.
Earned income is recognized over the life of the lease at a constant rate of
return on the positive net investment, which includes the effects of deferred
income taxes.
Fees received in connection with loan commitments are deferred in
accounts payable and accrued expenses until the loan is advanced and are then
recognized over the term of the loan as an adjustment of the yield. Fees on
commitments that expire unused are recognized at expiration.
14
<PAGE> 44
THE FINOVA GROUP INC.
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.
The reserve for possible credit losses is available to absorb credit
losses. The provision for possible credit losses is the charge to income to
increase the reserve for possible credit losses to the level that management
estimates to be adequate considering delinquencies, loss experience and
collateral. Other factors considered include changes in geographic and product
diversification, size of the portfolio and current economic conditions. Accounts
are either written-off or written-down when the loss is considered probable and
determinable, after giving consideration to the customer's financial condition
and the value of the underlying collateral, including any guarantees. Any
deficiency between the carrying amount of an asset and the net sales price of
repossessed collateral is charged to the reserve for possible credit losses.
Recoveries of amounts previously written-off as uncollectible are credited to
the reserve for possible credit losses.
Under certain limited recourse provisions of receivable transfer
agreements (securitizations), the Company repurchases defaulted direct financing
leases and subsequently classifies these leases as nonaccruing. If the accounts
require a write-down, they are charged to the reserve for possible credit
losses.
Repossessed assets are carried at the lower of cost or fair value.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118"), as of
January 1, 1995. These statements require that impaired loans be measured based
on the present value of the expected cash flows discounted at the loan's
effective interest rate or the fair value of the collateral, if the loan is
collateral dependent. Under SFAS 114, a loan is considered impaired when, based
on current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. These standards do not apply to leasing transactions or to large
groups of smaller balance homogeneous loans. Evaluation for loan impairment is
performed as a part of the portfolio management review process. When a loan is
determined to be impaired, a write-down is taken or an impairment reserve is
established based on the difference between the recorded balance of the loan
("carrying amount") and the relevant measured value. For the impact and
disclosures of these new standards, see Note D of Notes to Consolidated
Financial Statements.
PENSION AND OTHER BENEFITS -- Trusteed, noncontributory pension plans
cover substantially all employees. Benefits are based primarily on final average
salary and years of service. Funding policies provide that payments to pension
trusts shall be at least equal to the minimum funding required by applicable
regulations.
Other postretirement benefit costs are recorded during the period the
employees provide service to the Company. The Company funds its postretirement
benefit obligation as benefits are paid.
The Company records postemployment benefit costs at the time
employees leave active service. Postemployment benefits are any benefits other
than retirement benefits.
15
<PAGE> 45
THE FINOVA GROUP INC.
SAVINGS PLAN -- The Company maintains The FINOVA Group Inc. Savings
Plan (the "Savings Plan"), a qualified 401(k) program. The Savings Plan is
available to substantially all employees. Voluntary wage reductions may be
elected by the employee ranging from 1% to 22% of taxable compensation. The
Company's matching contributions are based on employee pre-tax salary
reductions, up to a maximum of 100% of the first 6% of salary contributions,
the first 3% of which are matched in Company stock through the Employee Stock
Ownership Plan, discussed below.
EMPLOYEE STOCK OWNERSHIP PLAN -- Employees of the Company are eligible
to participate in the Employee Stock Ownership Plan in the month following the
first twelve consecutive month period during which they have at least 1,000
hours of service with the Company. Company contributions are made in the form
of matching stock contributions of 100% of the first 3% of salary reduction
contributions made by participants of the Savings Plan.
Expenses under the Savings Plan and Employee Stock Ownership Plan were
$1.1 million, $0.9 million and $0.4 million in 1995, 1994 and 1993,
respectively.
INCOME TAXES -- Deferred tax assets and liabilities are recognized for
the estimated future tax effects attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax law.
CASH EQUIVALENTS -- The Company classifies highly liquid investments
with original maturities of three months or less from date of purchase as cash
equivalents.
EARNINGS PER COMMON AND EQUIVALENT SHARE -- Earnings per common and
equivalent share is based on net income after preferred stock dividend
requirements (in 1993) and the weighted average number of common shares
outstanding during the year giving effect to stock options considered to be
dilutive common stock equivalents. Fully diluted earnings per share is not
materially different from primary earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into derivative
financial instruments as part of its interest rate risk management. The Company
uses interest rate swaps and interest rate hedge agreements. These interest rate
derivatives are accounted for using settlement or matched swap accounting.
Periodic net cash settlements are recognized when they occur.
GOODWILL -- The Company amortizes the excess of cost over the fair
value of net assets acquired ("goodwill") on a straight line basis primarily
over 20 years. Goodwill is included in other assets and is reported net of
accumulated amortization. Amortization totaled $8.2 million and $5.8 million
for the years ended December 31, 1995 and 1994, respectively. The Company
periodically evaluates the carrying value of its intangible assets for
impairment. This evaluation is based principally on projected, undiscounted
cash flows generated by the underlying assets.
Substantially all of the amortization of goodwill resulting from
acquisitions is tax deductible under Section 197 of the Internal Revenue Code.
RESIDUAL VALUES -- The Company has a significant investment in residual
values in its leasing portfolios. These residual values represent estimates of
the value of leased assets at the end of the contract terms and are initially
recorded based upon appraisals and estimates. Residual values are periodically
reviewed to determine that recorded amounts are appropriate.
RECLASSIFICATIONS -- Certain reclassifications have been made to the
1994 and 1993 financial statements to conform to the 1995 presentation.
16
<PAGE> 46
THE FINOVA GROUP INC.
NOTE B ACQUISITIONS
During 1995, 1994 and 1993, FINOVA Capital, in transactions accounted
for as purchases, acquired various businesses and portfolios. During 1995, the
Company acquired portfolios having a total purchase price of $262 million. In
1994, the Company acquired TriCon for $344 million in cash, comprised of $1,886
million of assets and $1,542 million of liabilities and acquisition costs. The
cash purchase price for Ambassador was $246 million, consisting of $364 million
of assets and $118 million of liabilities and acquisition costs.
The following unaudited summarized proforma financial information is
presented for the years ended December 31, 1994 and 1993 as if the purchases of
TriCon and Ambassador had occurred on January 1, 1993.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C>
Interest earned on financing transactions $577,528 $529,584
Income before income taxes 129,802 109,465
Net income 78,636 71,761
Earnings per common share (in dollars) $ 2.76 $ 2.48
- ----------------------------------------------------------------------------
</TABLE>
NOTE C INVESTMENT IN FINANCING TRANSACTIONS
The Company provides secured financing to commercial and real estate
enterprises principally under financing contracts (such as loans and other
financing contracts, direct financing leases, operating leases, leveraged leases
and factored receivables). At December 31, 1995 and 1994, the carrying amount of
the investment in financing transactions, including the estimated residual value
of leased assets upon lease termination, was $6.8 billion and $5.7 billion
(before reserve for possible credit losses), respectively, and consisted of the
following percentage of carrying amount by line of business:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Percent of Total
Carrying Amount
- --------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Resort Finance 14.5% 12.0%
Transportation Finance 13.6% 12.7%
Commercial Real Estate Finance 11.5% 13.2%
Communications Finance 10.1% 10.4%
Corporate Finance (1) 9.6% 13.8%
Manufacturer and Dealer Services (1) 6.9% 5.7%
Medical Finance 6.7% 8.3%
Commercial Equipment Finance 5.2% 5.3%
Rediscount Finance 5.1% 1.8%
Franchise Finance 4.9% 5.3%
Commercial Finance 3.1% 3.4%
Inventory Finance 3.0% 1.0%
Factoring Services 2.8% 2.8%
Government Finance 1.8% 1.7%
FINOVA Capital Limited 0.9% 1.8%
Other 0.3% 0.8%
- --------------------------------------------------------------------------
100.0% 100.0%
==========================================================================
</TABLE>
(1) Excludes assets sold under securitization agreements of $200 million for
Corporate Finance in 1995 and $103 million and $253 million, respectively
in 1995 and 1994, for Manufacturer and Dealer Services that are managed by
the Company.
17
<PAGE> 47
THE FINOVA GROUP INC.
Aggregate installments on loans and other financing contracts, direct
financing leases, operating leases, leveraged leases and factored receivables at
December 31, 1995 (excluding repossessed assets of $50.0 million and estimated
residual values) are due during each of the years ending December 31, 1996 to
2000 and thereafter as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
There-
1996 1997 1998 1999 2000 after
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and other financing contracts:
Commercial:
Fixed interest rate $ 275,003 $ 257,712 $ 211,309 $ 194,823 $175,583 $ 362,185
Floating interest rate 466,343 475,718 357,347 378,198 401,310 158,855
Real Estate:
Fixed interest rate 79,162 55,820 53,899 113,212 44,999 182,306
Floating interest rate 236,768 238,512 242,917 193,532 84,725 38,599
Leases, primarily at fixed interest rates:
Direct financing leases 341,518 252,739 166,126 94,638 43,385 46,016
Operating leases 89,624 72,852 58,012 48,414 43,697 29,191
Leveraged leases 14,905 25,408 22,696 17,611 15,145 201,200
Factored receivables 189,486
- -----------------------------------------------------------------------------------------------------------------
$1,692,809 $1,378,761 $1,112,306 $1,040,428 $808,844 $1,018,352
=================================================================================================================
</TABLE>
The net investment in leveraged leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable $ 1,454,754 $ 1,268,843
Less principal and interest payable on nonrecourse debt (1,157,789) (1,062,218)
- -------------------------------------------------------------------------------------------------------------
Net rentals receivable 296,965 206,625
Estimated residual values 344,766 306,204
Less unearned income (275,535) (225,311)
- -------------------------------------------------------------------------------------------------------------
Investment in leveraged leases 366,196 287,518
Less deferred taxes arising from leveraged leases (230,120) (226,115)
- -------------------------------------------------------------------------------------------------------------
Net investment in leveraged leases $ 136,076 $ 61,403
=============================================================================================================
</TABLE>
The components of income from leveraged leases, after the effects of
interest on nonrecourse debt and other related expenses, for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lease and other income $12,080 $9,240 $11,376
Income tax expense 4,201 3,143 8,363
- ---------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 48
THE FINOVA GROUP INC.
The investment in direct financing leases at December 31 consisted of
the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable $ 944,422 $ 885,148
Estimated residual values 109,431 86,191
Unearned income (225,140) (196,505)
- ---------------------------------------------------------------------------------------------------------------
Investment in direct financing leases $ 828,713 $ 774,834
===============================================================================================================
</TABLE>
The investment in operating leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost of assets $ 586,860 $ 526,191
Accumulated depreciation (126,062) (113,409)
- ---------------------------------------------------------------------------------------------------------------
Investment in operating leases $ 460,798 $ 412,782
===============================================================================================================
</TABLE>
The Company has a substantial number of loans and leases with payments
that fluctuate with changes in index rates, primarily prime interest rates and
the London interbank offered rates ("LIBOR"). The investment in loans and leases
with floating interest rates (excluding nonaccruing contracts and repossessed
assets) at December 31 was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Receivables due on financing transactions $3,403,084 $2,928,287
Less unearned income (78,333) (65,327)
- ---------------------------------------------------------------------------------------------------------------
Investment in floating-rate loans and leases $3,324,751 $2,862,960
===============================================================================================================
</TABLE>
Interest earned from financing transactions with floating interest
rates was approximately $402.0 million in 1995, $269.0 million in 1994 and
$154.0 million in 1993. The adjustments, which arise from changes in index
rates, can have a significant effect on interest earned from financing
transactions; however, the effects on interest margins earned and net income are
substantially offset by related interest expense changes on debt obligations
with floating interest rates. The Company's matched funding policy is more fully
described in Note F.
At December 31, 1995, the Company had a committed backlog of new
business of approximately $1.1 billion compared to $764.0 million at December
31, 1994. The committed backlog includes lines of credit totaling $629.0 million
and $540.0 million for December 31, 1995 and 1994, respectively. Historically,
the Company has booked a substantial portion of its backlog, although there can
be no assurance that such trend will continue. Loan commitments and lines of
credit have generally the same credit risk as extending loans to borrowers.
These commitments are generally subject to the same credit quality and
collateral requirements involved in lending transactions. Commitments generally
have a fixed expiration and usually require payment of a fee.
RECEIVABLE TRANSFER AGREEMENTS ("SECURITIZATIONS") -- The Company sells
receivables in transactions subject to limited recourse provisions and remains a
servicer for which it is paid a fee. Normal servicing fees are earned on a level
yield basis over the remaining terms of the related receivables sold.
19
<PAGE> 49
THE FINOVA GROUP INC.
During 1995, the Company, under a securitization agreement, sold a $200
million undivided proportionate interest in a loan portfolio totaling $610.5
million. Under this securitization agreement, there is recourse to the Company
based on the outstanding balance of the proportionate interest sold. Under
certain other securitizations, $38.7 million and $58.5 million, as of December
31, 1995 and 1994, respectively, of finance lease receivables are the sole
collateral for limited recourse provisions. In addition to such finance lease
receivables, the Company has recourse exposure, at December 31, 1995 and 1994,
limited to $44.7 million and $78.8 million, respectively.
At December 31, 1995 and 1994, the reserve for possible credit losses
includes approximately $16.0 million and $13.0 million, respectively, of
reserves applicable to securitizations. Previously, these reserves had been
classified as accrued liabilities.
NOTE D RESERVE FOR POSSIBLE CREDIT LOSSES
The following is an analysis of the reserve for possible credit losses
for the years ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 122,233 $ 64,280 $ 69,291
Provision for possible credit losses 47,300 16,670 5,706
Write-offs (35,533) (35,127) (12,575)
Recoveries 2,216 1,898 717
Other (including addition of TriCon and Ambassador
reserves in 1994) 4,117 74,512 1,141
- ---------------------------------------------------------------------------------------------
Balance, end of year $ 140,333 $ 122,233 $ 64,280
=============================================================================================
</TABLE>
20
<PAGE> 50
THE FINOVA GROUP INC.
Write-offs by lines of business experienced by the Company during the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Manufacturer and Dealer Services $ 9,902 $ 7,018 $
Corporate Finance 4,660 4,233 3,741
Communications Finance 4,037 8,300 1,488
Factoring Services 3,728 1,148
Franchise Finance 3,448 2,247
Commercial Real Estate Finance 2,275 1,461 2,320
Commercial Equipment Finance 2,271 1,257
Resort Finance 2,000 2,730
FINOVA Capital Limited 1,523 5,140 5,026
Commercial Finance 452 774
Medical Finance 314 377
Inventory Finance 201 442
Other 722
- ---------------------------------------------------------------------------------
$35,533 $35,127 $12,575
=================================================================================
Write-offs as a percentage of investment in
managed assets 0.50% 0.59% 0.44%
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
An analysis of nonaccruing contracts and repossessed assets included in
the investment in financing transactions at December 31 is as follows:
- -----------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C>
Nonaccruing contracts $117,884 $ 83,003
Repossessed assets 49,988 85,758
- -----------------------------------------------------------------------------------
Total nonaccruing assets $167,872 $168,761
===================================================================================
Nonaccruing assets as a percentage of managed assets 2.4% 2.9%
===================================================================================
</TABLE>
In addition to the repossessed assets included in the above table, the
Company had repossessed assets with a total carrying amount of $56.6 million and
$55.1 million at December 31, 1995 and 1994, respectively, which earned income
of $4.2 million and $3.3 million during 1995 and 1994, respectively.
21
<PAGE> 51
THE FINOVA GROUP INC.
The total carrying amount of impaired loans was $94.3 million at
December 31, 1995, $17.3 million of which were performing and $77.0 million of
which were nonaccruing. A reserve for possible credit losses of $16 million has
been established for $35 million of nonaccruing impaired loans. The average
carrying amount of impaired loans was $93.2 million for the year ended December
31, 1995. Income earned on accruing impaired loans was $4.0 million in 1995 and
is recognized in the same manner as it is on normal accruing loans. Cash
collected on all nonaccruing assets is applied to the carrying amount.
Under SFAS 114, in-substance foreclosed assets are accounted for as
loans. Accordingly, effective January 1, 1995, $25.3 million of nonaccruing
in-substance foreclosed assets were reclassified from repossessed assets to
nonaccruing contracts. At December 31, 1995, troubled debt restructurings are
included in impaired loans. At December 31, 1994, there were $64.0 million of
troubled debt restructurings classified as rewritten contracts.
Had all nonaccruing assets outstanding at December 31, 1995, 1994 and
1993 remained accruing, income earned would have been increased by approximately
$19 million, $14 million and $11 million, respectively.
NOTE E DEBT
The Company satisfies its short-term financing requirements from the
issuance of commercial paper supported by bank lines of credit, other bank loans
and public notes. The Company's commercial paper borrowings are supported by
unused long-term revolving bank credit agreements totaling $2.7 billion. FINOVA
Capital currently maintains a five-year revolving credit facility with numerous
lenders, in the aggregate principal amount of $1.0 billion. Separately, FINOVA
Capital also has a 364 day revolving credit facility with the same lenders in
the aggregate principal amount of $1.0 billion and has another four-year
facility with numerous lenders for $700.0 million. Under the terms of these
agreements, the Company has the option to periodically select either domestic
dollars or Eurodollars as the basis of borrowings. Interest is based on the
lenders' prime rate for domestic dollar advances or London interbank offered
rates ("LIBOR") for Eurodollar advances. The agreements also provide for a
commitment fee on the unused credit. The 364 day $1.0 billion revolving credit
agreement will be subject to renewal in 1996 while the four and five year $700.0
million and $1.0 billion credit facilities are subject to renewal in 1999 and
2000, respectively.
The following information pertains to all short-term financing
primarily commercial paper issued by FINOVA Capital for the years ended
December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount of short-term debt outstanding
during year $2,518,733 $2,024,441 $516,386
Average short-term debt outstanding during year 2,210,329 1,050,358 336,672
Weighted average short-term interest rates
at end of year:
Short-term borrowings 5.9% 6.2% 3.5%
Commercial paper* 6.0% 6.0% 3.6%
Weighted average interest rate on short-term debt
outstanding during year* 6.1% 4.8% 3.5%
- -------------------------------------------------------------------------------------------
</TABLE>
* Exclusive of the cost of maintaining bank lines in support of outstanding
commercial paper and the effects of interest rate conversion agreements.
22
<PAGE> 52
THE FINOVA GROUP INC.
Senior debt at December 31 was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper and short-term bank loans supported by unused long-term
bank revolving credit agreements, less unamortized discount $2,398,007 $2,024,441
Medium-term notes due to 2005, 4.5% to 10.3% 1,224,546 1,167,811
Term loans payable to banks due in 1996, 5.9% to 6.8% 180,000 130,000
Senior notes due to 2002, 6.1% to 16.0%, less unamortized discount 1,830,009 1,233,013
Nonrecourse installment notes due to 2002, 10.6% (assets of
$25,349 and $25,648, respectively, pledged as collateral) 16,806 18,089
- ----------------------------------------------------------------------------------------------------------
Total senior debt $5,649,368 $4,573,354
==========================================================================================================
</TABLE>
Annual maturities of senior debt outstanding at December 31, 1995 due
through November 2005 (excluding the amount supported by the revolving credit
agreements expected to be renewed) approximate $568.8 million (1996), $522.9
million (1997), $522.4 million (1998), $374.1 million (1999), $553.1 million
(2000) and $710.1 million (thereafter).
The agreements pertaining to senior debt and revolving credit
agreements of FINOVA Capital include various restrictive covenants and require
the maintenance of certain defined financial ratios with which FINOVA Capital
has complied. Under one such covenant, dividend payments are limited to 50
percent of accumulated earnings after December 31, 1991. As of December 31,
1995, FINOVA Capital had $50.1 million of excess accumulated earnings available
for distribution.
Total interest paid is not significantly different from interest
expense.
NOTE F DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into interest rate swaps and interest rate hedge
agreements as part of its interest rate risk management policy of match funding
its assets and liabilities. The derivative instruments utilized are
straightforward and involve little complexity. The Company continually monitors
its position relative to derivatives and utilizes derivative instruments for
non-trading purposes only.
The Company utilizes derivative instruments to minimize its exposure to
fluctuations in interest rates. The Company strives to minimize its overall debt
costs while limiting the short-term variability of interest expense and funds
required for debt service. To achieve this objective, the Company diversifies
its borrowing sources (short- and long-term debt with a fixed or a variable
rate) and seeks to maintain a portfolio that is matched funded. The Company's
matched funding policy generally requires that floating-rate assets be financed
with floating-rate liabilities and fixed-rate assets be financed with fixed-rate
liabilities. The Company's matched funding policy requires that the difference
between floating-rate liabilities and floating-rate assets, as measured as a
percent of total assets, should not vary by more than 3% for any extended
period. The amount of derivatives used is a function of this 3% gap policy with
the maturities of the derivatives being correlated to the maturities of the
assets being financed.
23
<PAGE> 53
THE FINOVA GROUP INC.
The notional amounts of derivatives do not represent amounts exchanged
by the parties and, thus, are not a measure of FINOVA's exposure through its
use of derivatives. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the derivatives.
Under interest rate swaps, the Company agrees to exchange with the
counterparty, at specified intervals, the payment streams calculated on a
specified notional amount, with at least one stream based on a floating interest
rate. Generic swap notional amounts do not change for the life of the contract.
Amortizing swap notional amounts amortize over the life of the transaction.
Basis swaps involve the exchange of floating-rate indices, such as the prime
rate, the commercial paper composite rate and LIBOR.
The Company purchased interest rate hedge agreements to reduce the
impact of increases in interest rates on its floating-rate debt. These
agreements effectively lock in a spread of approximately 2.3% between the
Company's borrowing rate, LIBOR, and its lending rate (Prime based). In 1995,
the Company further protected its margins on floating-rate transactions by
entering into basis swaps with a notional amount of $750 million to lock in the
spread between the Company's lending and borrowing rates. With these agreements,
the Company protected its margins on $1.5 billion of floating-rate transactions.
The Company's off-balance sheet derivative instruments involve credit
and interest rate risks. The credit risk would be the nonperformance by the
counterparties to the financial instruments. All financial instruments have been
entered into with major financial institutions, which are expected to fully
perform under the terms of the agreements, thereby mitigating the credit risk
from the transactions, although there can be no assurance that any such
institution will perform under its agreement. The Company's derivative policy
stipulates that the maximum exposure to any one counterparty, relative to the
derivative products, is limited on a net basis to 10% of the Company's
outstanding debt at the time of that transaction. Interest rate risks relate to
changes in interest rates and the impact on earnings. The Company mitigates
interest rate risks through its matched funding policy.
The use of derivatives increased interest expense by $9.8 million in
1995, an increase in the aggregate cost of funds of 0.2%; whereas, the use of
derivatives decreased interest expense by $13.7 million in 1994, a reduction in
the aggregate cost of funds of 0.4% and $25.9 million in 1993, a decrease in the
aggregate cost of funds of 1.3%. These changes in interest expense from
off-balance sheet derivatives effectively alter on-balance sheet costs and must
be viewed as total interest rate management. At December 31, 1995 and 1994,
unamortized premiums amounted to $0.6 million and $1.9 million, respectively.
There were no deferred gains or losses associated with derivatives.
24
<PAGE> 54
THE FINOVA GROUP INC.
The following table provides annual maturities and weighted-average
interest rates for each significant derivative product type. The rates presented
are as of December 31, 1995. To the extent that rates change, variable interest
information will change.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
December Maturities of Derivative Products
31, -----------------------------------------------------------------
(Dollars in Millions) 1995 1996 1997 1998 1999 2000 Thereafter
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RECEIVE FIXED-RATE SWAPS:
Notional value $1,300 $ 100 $ 275 $ 325 $ 250 $ 150 $ 200
Weighted average receive rate 6.70% 5.34% 6.70% 6.83% 6.82% 7.24% 6.65%
Weighted average pay rate 5.89% 5.72% 5.76% 5.73% 5.64% 5.88% 5.78%
PAY FIXED-RATE GENERIC SWAPS:
Notional value $ 800 $ 325 $ 275 $ 100 $ 50 $ 50
Weighted average receive rate 5.86% 5.79% 5.75% 5.70% 5.81% 5.68%
Weighted average pay rate 7.18% 6.88% 7.18% 8.37% 7.98% 8.09%
PAY FIXED-RATE AMORTIZING SWAPS:
Notional value $ 95 $ 76 $ 19
Weighted average receive rate 5.76% 5.78% 5.58%
Weighted average pay rate 5.33% 5.13% 6.06%
BASIS SWAPS:
Notional value $ 878 $ 250 $ 628
Weighted average receive rate 5.85% 5.84% 6.02%
Weighted average pay rate 6.12% 6.08% 6.24%
INTEREST RATE HEDGE AGREEMENTS:
Notional value $ 750 $ 750
Weighted average receive rate 2.08% 2.08%
Weighted average pay rate 2.50% 2.50%
TOTAL NOTIONAL VALUE $3,823 $1,251 $ 819 $1,053 $ 300 $ 200 $ 200
================================================================================================================
Total weighted average rates:
Receive rate 5.40% 3.53% 6.09% 6.24% 6.65% 6.85% 6.65%
================================================================================================================
Pay rate 5.53% 4.05% 6.34% 6.29% 6.03% 6.43% 5.78%
================================================================================================================
</TABLE>
25
<PAGE> 55
THE FINOVA GROUP INC.
Derivative product activity for the three years ended December 31, 1995
is as follows:
<TABLE>
<CAPTION>
Pay
Receive Fixed- Pay Fixed- Interest
Fixed- Rate Rate Rate
Rate Generic Amortizing Basis Hedge
(Dollars in Millions) Swaps Swaps Swaps Swaps Agreements TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1992 $ 890 $205 $ $ $ $1,095
Expired (50) (25) (75)
Additions 300 750 1,050
- -------------------------------------------------------------------------------------------------
Balance,
December 31, 1993 1,140 180 750 2,070
Expired (50) (50) (148) (248)
Additions 100 650 390 254 1,394
- -------------------------------------------------------------------------------------------------
Balance,
December 31, 1994 1,190 780 242 254 750 3,216
Expired (40) (30) (152) (126) (348)
Additions 150 50 5 750 955
- -------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 $1,300 $800 $ 95 $ 878 $750 $3,823
=================================================================================================
</TABLE>
NOTE G STOCKHOLDERS' EQUITY
At December 31, 1995 and 1994, The FINOVA Group Inc. had 28,421,703
shares of common stock issued, with 27,278,932 and 27,676,526 shares of common
stock outstanding, respectively. Approximately 4,746,000 and 5,011,000 common
shares were reserved for issuance under the 1992 Stock Incentive Plan at
December 31, 1995 and 1994, respectively.
FINOVA has 5,000,000 shares of preferred stock authorized, none of
which was issued at December 31, 1995. The Board of Directors is authorized to
provide for the issuance of shares of preferred stock in series, to establish
the number of shares to be included in each series and to fix the designation,
powers, preferences and rights of the shares of each series. In connection with
the Company's stock incentive plan, 250,000 shares of preferred stock are
reserved for issuance of stock options.
The Company announced in 1992 that it intended to repurchase its
securities on the open market, from time to time, to fund its obligations
pursuant to employee stock options, benefit plans and similar obligations. Under
this program, 611,600, 602,800 and 349,909 shares were acquired during the years
ending December 31, 1995, 1994 and 1993, respectively. The program may be
discontinued at any time.
26
<PAGE> 56
THE FINOVA GROUP INC.
NOTE H STOCK OPTIONS
During 1992, the Board of Directors of the Company adopted The FINOVA
Group Inc. 1992 Stock Incentive Plan (the "Plan") for the grant of options,
restricted stock and stock appreciation rights to officers, directors and
certain key employees. In connection with the 1992 spin-off of the Company (the
"Spin-Off") from The Dial Corp ("Dial"), shares of common stock were made
available to provide new options, restricted shares of common stock and stock
appreciation rights to employees of the Company or its subsidiaries in exchange
for awards outstanding under certain stock option and incentive plans of Dial.
Each option was adjusted so that the aggregate exercise price and the aggregate
spread before the Spin-Off was preserved at the time of the Spin-Off. For each
share of Dial restricted stock held by an employee, such employee received
replacement shares of FINOVA restricted stock with a market value intended to
compensate for the Spin-Off.
The Plan provides for the following types of awards: (a) stock options
(both incentive stock options and non-qualified stock options), (b) stock
appreciation rights, and (c) restricted stock. The Plan generally authorizes the
issuance of awards for up to 2-1/2 percent of the total number of shares of
common stock outstanding as of the first day of each year, with some
modifications. In addition, 250,000 shares of preferred stock are reserved for
awards under the Plan.
The stock options outstanding at December 31, 1995 were granted for
terms of ten years and generally become exercisable over two to three years from
the date of grant. Stock options are exercisable based on the market value at
the date of grant, unless a higher exercise price was established, which has
been the case for multi-year grants.
Information with respect to options granted and exercised for the three
years ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Option
Shares Price Per Share
- --------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at January 1, 1993 828,083 $17.12
Granted 454,450 31.17
Exercised (166,839) 16.10
Canceled (103,580) 22.61
- --------------------------------------------------------------------------------
Options outstanding at January 1, 1994 1,012,114 23.04
Granted 635,766 36.18
Exercised (66,418) 17.29
Canceled (119,857) 33.54
- --------------------------------------------------------------------------------
Options outstanding at January 1, 1995 1,461,605 28.12
Granted 313,300 38.80
Exercised (168,388) 22.39
Canceled (83,008) 34.17
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1995 1,523,509 $30.62
================================================================================
</TABLE>
At December 31, 1995, stock options with respect to 1,523,509 common
shares were outstanding at exercise prices ranging from $12.70 to $49.10 per
share.
27
<PAGE> 57
THE FINOVA GROUP INC.
Since 1992, the Board of Directors has granted only performance based
restricted stock. Performance based restricted stock awards (54,550 shares in
1995, 104,820 shares in 1994 and 38,629 in 1993), vest generally over periods
not exceeding five years from the date of grant. The holder of the performance
based restricted stock, like restricted stock, has the right to receive
dividends and vote the target number of shares but may not sell, assign,
transfer, pledge or otherwise encumber the performance based restricted stock.
All performance based restricted stock grants since the Spin-Off were based on
Company share performance and may result in greater or lesser numbers of shares
ultimately being delivered to the holder, depending on that performance. The
target number of shares are deemed received on the grant date. Additional
vestings over the target are reported as new grants as of the vesting dates.
Vestings below target would be reported as a forfeiture of amounts below the
target number of shares.
NOTE I INCOME TAXES
The consolidated provision (benefit) for income taxes consist of the
following for the years ended December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Current:
United States:
Federal $31,792 $33,107 $ 9,783
State 7,194 6,436 1,002
Foreign (156)
- ------------------------------------------------------------
38,986 39,543 10,629
- ------------------------------------------------------------
Deferred:
United States:
Federal 14,774 5,514 15,680
State 5,047 4,489 2,267
Foreign 804 (88)
- ------------------------------------------------------------
20,625 9,915 17,947
- ------------------------------------------------------------
Provision for income taxes $59,611 $49,458 $28,576
============================================================
</TABLE>
Income taxes paid in 1995, 1994 and 1993 amounted to approximately
$47.9 million, $41.2 million and $10.5 million , respectively.
28
<PAGE> 58
THE FINOVA GROUP INC.
The significant components of deferred tax liabilities and deferred tax
assets at December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred income from leveraged leases $230,120 $226,115
Deferred income from lease financing 62,681 32,833
Other 6,408 8,353
- ----------------------------------------------------------------------------------------
Gross deferred tax liability 299,209 267,301
- ----------------------------------------------------------------------------------------
Deferred tax assets:
Reserve for possible credit losses 39,094 29,363
Investment in foreign subsidiary carrying value difference 23,193 23,193
Accrued expenses 5,005 11,400
Alternative minimum tax credit carryforward 15,405 6,183
Other 7,000 8,275
- ----------------------------------------------------------------------------------------
Gross deferred tax asset 89,697 78,414
- ----------------------------------------------------------------------------------------
Net deferred tax liability $209,512 $188,887
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
The federal statutory income tax rate is reconciled to the effective
income tax rate as follows:
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes 5.1% 5.1% 3.4%
Foreign tax effects (0.5%) 1.2% (2.0%)
Municipal income (1.7%) (1.2%)
Other (0.1%) (0.7%)
- -----------------------------------------------------------------------------
Current provision for income taxes 37.9% 40.0% 35.7%
Adjustments to deferred taxes 7.3%
- -----------------------------------------------------------------------------
Provision for income taxes 37.9% 40.0% 43.0%
=============================================================================
</TABLE>
NOTE J PENSION AND OTHER BENEFITS
Net periodic pension costs were $1.3 million, $1.5 million and $0 for
each of the years ended December 31, 1995, 1994 and 1993, respectively. The
Company's pension costs were prepaid by $2.3 million at December 31, 1995 and
$3.6 million at December 1994.
Net periodic postretirement benefit costs were $0.6 million, $0.5
million and $0.3 million for each of the years ended December 31, 1995, 1994 and
1993, respectively. The Company's accrued postretirement benefit costs were $1.5
million at December 31, 1995 and $0.8 million at December 31, 1994.
29
<PAGE> 59
THE FINOVA GROUP INC.
NOTE K LITIGATION AND CLAIMS
The Company is party either as plaintiff or defendant to various
actions, proceedings and pending claims, including legal actions, certain of
which involve claims for compensatory, punitive or other damages in significant
amounts. Such litigation often results from the Company's attempts to enforce
its lending agreements against borrowers and other parties to such transactions.
Litigation is subject to many uncertainties and it is possible that some of the
legal actions, proceedings or claims referred to above could be decided against
the Company. Although the ultimate amount for which the Company may be held
liable, if any, is not ascertainable, the Company believes that any resulting
liability should not materially affect the Company's financial position or
results of operations.
NOTE L FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and valuation methodologies described below. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein may not be indicative of
the amounts that the Company could realize in a current market exchange. The use
of different market assumptions or valuation methodologies may have a material
effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows for the years ended December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance Sheet -
Financial Instruments:
Assets:
Loans and other financing contracts $4,749,407 $4,755,908 $3,810,781 $3,829,881
Liabilities:
Senior debt 5,649,368 5,729,950 4,573,354 4,510,043
Off-Balance Sheet -
Financial Instruments:
Interest rate swaps -- 9,970 -- (47,937)
Interest rate hedge agreements -- (2,878) -- (4,049)
- ----------------------------------------------------------------------------------------------------
</TABLE>
The carrying values of cash and cash equivalents, factored receivables,
accounts payable and accrued expenses, due to clients and interest payable
approximate fair values due to the short-term maturities of these instruments.
30
<PAGE> 60
THE FINOVA GROUP INC.
The methods and assumptions used to estimate the fair values of other
financial instruments are summarized as follows:
LOANS AND OTHER FINANCING CONTRACTS:
The fair value of loans and other financing contracts was
estimated by discounting expected cash flows using the current rates at
which loans of similar credit quality, size and remaining maturity
would be made as of December 31, 1995 and 1994. Management believes
that the risk factor embedded in the entry-value interest rates
applicable to performing loans for which there are no known credit
concerns results in a fair valuation of such loans on an entry value
basis. As of December 31, 1995 and 1994, the fair value of nonaccruing
contracts with a carrying amount of $117.9 million and $83.0 million,
respectively, was not estimated because it is not practicable to
reasonably assess the credit adjustment that would be applied in the
marketplace for such loans. As of December 31, 1995 and 1994, the
carrying amount of loans and other financing contracts excludes
repossessed assets with a total carrying amount of $106.6 million and
$140.9 million, respectively.
SENIOR DEBT:
The fair value of senior debt was estimated by discounting
future cash flows using rates currently available for debt of similar
terms and remaining maturities. The carrying values of commercial paper
and borrowings under revolving credit facilities, if any, were assumed
to approximate fair values due to their short maturities.
INTEREST RATE SWAPS:
The fair values of interest rate swaps is based on quoted
market prices obtained from participating banks and dealers for
transactions of similar remaining duration.
INTEREST RATE HEDGE AGREEMENTS:
The fair values of interest rate hedge agreements is based on
quoted market prices obtained from participating banks and dealers for
transactions of similar remaining duration.
The fair value estimates presented herein were based on information
available as of December 31, 1995 and 1994. Although management is not aware of
any factors that would significantly affect the estimated fair values, such
values have not been updated since December 31, 1995 and 1994; therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
NOTE 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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $88,102 $63,891 $29,502
Depreciation and amortization 16,365 9,733 2,802
Problem account costs 9,316 13,505 11,822
Travel and entertainment 8,818 6,099 2,182
Professional services 8,741 7,357 2,201
Occupancy expense 7,433 6,124 4,160
- -----------------------------------------------------------------------
</TABLE>
31
<PAGE> 61
THE FINOVA GROUP INC.
NOTE N NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
effective for fiscal years beginning after December 15, 1995. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, the statement
requires that certain long-lived assets and intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company does not expect the adoption of this accounting standard to materially
impact its results of operations or financial position. The Company will adopt
this accounting standard effective January 1, 1996, as required.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation", effective for transactions entered into in fiscal
years that begin after December 15, 1995. This statement establishes financial
accounting and reporting for stock-based employee compensation plans, including
stock purchase plans, stock option plans, restricted stock and stock
appreciation rights. The Statement requires a fair value based method of
accounting for employee stock options or similar instruments and encourages a
similar method for all employee stock compensation plans. This method measures
compensation cost at the grant date based on the value of an award and
recognizes it over the service period, usually the vesting period. However, the
Statement also allows an entity to continue measuring compensation cost for such
plans using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
provided pro forma disclosures are made. The Company expects to continue to
account for its stock-based employee compensation plans using the method of
accounting prescribed by APB No. 25 and does not expect this accounting standard
will materially impact its results of operations or financial position.
32
<PAGE> 62
THE FINOVA GROUP INC.
SUPPLEMENTAL SELECTED FINANCIAL DATA
CONDENSED QUARTERLY RESULTS (UNAUDITED)
(Dollars in Thousands)
The following represents the condensed quarterly results for the two
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest earned from financing transactions:
1995 $174,757 $184,693 $192,287 $210,118
1994 73,961 121,891 147,649 159,850
- -------------------------------------------------------------------------------------
Interest expense:
1995 84,524 90,197 93,136 98,965
1994 33,133 53,648 65,881 69,538
- -------------------------------------------------------------------------------------
Gains on sale of assets:
1995 2,980 4,073 4,646 8,027
1994 3 4,500 1,169 3,373
- -------------------------------------------------------------------------------------
Non-interest expenses:
1995 55,718 61,188 63,363 77,250
1994 22,510 42,526 45,813 55,576
- -------------------------------------------------------------------------------------
Income from continuing operations:
1995 22,368 23,629 25,150 26,482
1994 11,389 17,305 22,257 23,362
- -------------------------------------------------------------------------------------
Net income:
1995 22,368 23,629 25,150 26,482
1994 11,389 17,305 22,257 23,362
=====================================================================================
</TABLE>
33
<PAGE> 63
THE FINOVA GROUP INC.
AVERAGE BALANCES/INTEREST MARGINS/AVERAGE ANNUAL RATES (UNAUDITED)
(Dollars in Thousands)
The following represents the breakdown of the Company's average balance
sheet, interest margins and average annual rates for the years ended December
31, 1995 and 1994:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 (1)
- --------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 44,412 $ $ 28,886 $
Investment in financing transactions 6,213,571 706,637 (4) 12.1% (2) 4,446,745 466,614 (4) 11.5% (2)
Less reserve for possible credit losses (128,590) (106,277)
- --------------------------------------------------------------------------------------------------------------------------
Investment in financing transactions - net 6,084,981 4,340,468
Other assets and deferred charges 252,194 183,069
- --------------------------------------------------------------------------------------------------------------------------
$6,381,587 $4,552,423
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities $ 301,242 $ 226,648
Senior debt 5,084,145 366,822 7.2% 3,468,498 222,200 6.4%
Deferred income taxes 199,141 190,710
- --------------------------------------------------------------------------------------------------------------------------
5,584,528 3,885,856
Stockholders' equity 797,059 666,567
- --------------------------------------------------------------------------------------------------------------------------
$6,381,587 $4,552,423
==========================================================================================================================
Interest income/average earning assets (2) $706,637 12.1% 466,614 11.5%
Interest expense/average earning assets (2) (3) 366,822 6.3% 222,200 5.5%
- --------------------------------------------------------------------------------------------------------------------------
Interest margins earned (3) $339,815 5.8% $244,414 6.0%
==========================================================================================================================
</TABLE>
(1) Includes financial results from the acquisitions of Ambassador (February
14, 1994) and TriCon (April 30, 1994).
(2) The average rate is calculated based on average earning assets ($5,815,455
and $4,064,971 for 1995 and 1994, respectively) which are net of average
deferred taxes on leveraged leases and average nonaccruing assets.
(3) For the year ended December 31, 1995, excluding the impact of derivatives,
interest expense would have been $357,017 or 6.1% of average earning assets
and interest margins earned would have been $349,620 or 6.0% of average
earning assets. For the year ended December 31, 1994, excluding the impact
of derivatives, interest expense would have been $235,855 or 5.8% of
average earning assets and interest margins earned would have been $230,759
or 5.7% of average earning assets.
(4) Interest income is shown net of depreciation.
34
<PAGE> 64
EXHIBIT 11
THE FINOVA GROUP INC.
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Primary and Fully Diluted:
Net income $ 97,629 $ 74,313 $ 37,347
Preferred dividends 1,306
----------- ----------- -----------
Net income available to common shareholders $ 97,629 $ 74,313 $ 36,041
=========== =========== ===========
Average common shares outstanding before common equivalents 27,452,000 24,998,000 20,090,000
Common equivalent stock options 380,000 309,000 242,000
----------- ----------- -----------
Average outstanding common and equivalent shares 27,832,000 25,307,000 20,332,000
=========== =========== ===========
Net income per common and equivalent share $ 3.51 $ 2.94 $ 1.77
=========== =========== ===========
</TABLE>
<PAGE> 65
THE FINOVA GROUP INC.
COMMISSION FILE NUMBER 1-11011
EXHIBIT INDEX
DECEMBER 31, 1995 FORM 10-K
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ---------------------------------------------------------------
<S> <C>
(3.A) Certificate of Incorporation, as amended through the date of
this filing (incorporated by reference from the Company's
Report on Form 10-K for the year ended December 31, 1994 (the
"1994 10-K")).
(3.B) By-Laws, as amended through the date of this filing.*
(4.A) Instruments with respect to issues of long-term debt have not
been filed as exhibits to this Annual Report on Form 10-K if
the authorized principal amount of any one of such issues does
not exceed 10% of total assets of the Company and its
subsidiaries on a consolidated basis. The Company agrees to
furnish a copy of each such instrument to the Securities and
Exchange Commission upon request.
(4.B) Form of Common Stock Certificate of the Company (incorporated
by reference from the 1994 10-K, Exhibit 4.B).
(4.C) Relevant portions of the Company's Certificate of Incorporation
and Bylaws included in Exhibits 3.A and 3.B above,
respectively, are hereby incorporated by reference.
(4.D.1) Rights Agreement dated as of February 15, 1992 between the
Company and the Rights Agent named therein, as amended
(incorporated by reference from the Company's Current Report on
Form 8-K dated September 21, 1995, Exhibit 4.1).
(4.D.2) Acceptance of Successor Trustee to Appointment under Rights
Agreement noted in 4.D.1 above (incorporated by reference from
the Company's Current Report on Form 8-K, dated November 30,
1995, Exhibit 4).
(4.E) Indenture dated as of November 1, 1990 between FINOVA Capital
and the Trustee named therein (incorporated by reference from
Greyhound Financial Corporation's Registration Statement on
Form S-3, Registration No. 33-37743, Exhibit 4).
(4.F) Fourth Supplemental Indenture dated as of April 17, 1992
between FINOVA Capital and the Trustee named therein,
supplementing the Indenture referenced in Exhibit 4.E above
(incorporated by reference from GFC Financial Corporation's
Annual Report on Form 10-K for the year 1992 (the "1992 10-K"),
Exhibit 4.F).
(4.G) Form of Indenture dated as of September 1, 1992 between FINOVA
Capital and the Trustee named therein (incorporated by
reference from the Greyhound Financial Corporation Registration
Statement on Form S-3, Registration No. 33-51216, Exhibit 4).
(4.H) Form of Indenture dated as of October 1, 1995 between FINOVA
Capital and the Trustee named therein (incorporated by
reference from FINOVA Capital's Report on Form 8-K dated
October 25, 1995, Exhibit 4.1).
(4.I) 1992 Stock Incentive Plan of the Company as amended through the
date hereof, with a proposed amendment thereto as discussed
more fully in the Proxy Statement.*+
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ---------------------------------------------------------------
<S> <C>
(10.A) Sixth Amendment and Restatement dated as of May 16, 1994 of the
Credit Agreement dated as of May 31, 1976 among FINOVA Capital
and the lender parties thereto, and Bank of America National
Trust and Savings Association, Bank of Montreal, Chemical Bank,
Citibank, N.A. and National Westminster Bank USA, as agents
(the "Agents") and Citibank, N.A., as Administrative Agent
(incorporated by reference from the Corporation's Current
Report on Form 8-K dated May 23, 1994, Exhibit 10.I).
(10.A.1) First Amendment dated as of September 30, 1994, to the Sixth
Amendment and Restatement, noted in 10.A above (incorporated by
reference from the 1994 10-K, Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the Sixth
Amendment and Restatement noted in 10.A above (incorporated by
reference from the Company's Quarterly Report on Form 10-Q for
the period ending September 30, 1995 (the "Third Quarter
10-Q"), Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth Amendment
noted in 10.A above (incorporated by reference from the Third
Quarter 10-Q, Exhibit 10.B).
(10.B) Credit Agreement (Short-Term Facility) dated as of May 16, 1994
among FINOVA Capital, the Lender parties thereto, the Agents
and Citibank, N.A., as Administrative Agent (incorporated by
reference from the Company's Report on Form 8-K dated May 23,
1994, Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the Credit
Agreement noted in 10.B above (incorporated by reference from
the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B above
(incorporated by reference from the Third Quarter 10-Q, Exhibit
10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B above
(incorporated by reference from the Third Quarter 10-Q, Exhibit
10.D).
(10.C.1) The Company's Executive Severance Plan for Tier 1 Employees.*+
(10.C.2) The Company's Executive Severance Plan for Tier 2 Employees.*+
(10.D) The Company's 1995 Management Incentive Plan (incorporated by
reference from the Third Quarter 10-Q, Exhibit 10-G).+
(10.E.1) The Company's 1995 - 1997 Performance Share Incentive Plan
(incorporated by reference from the Third Quarter 10-Q, Exhibit
10.H).+
(10.E.2) The Company's 1994 - 1996 Performance Share Incentive Plan
(incorporated by reference from the Third Quarter 10-Q, Exhibit
10-I).+
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ---------------------------------------------------------------
<S> <C>
(10.E.3) The Company's 1993 - 1995 Performance Share Incentive Plan
(incorporated by reference from the Third Quarter 10-Q, Exhibit
10.H).+
(10.F.1) Employment Agreement with Samuel L. Eichenfield, dated March
16, 1992 (incorporated by reference from the 1992 10-K,
Exhibit 10.F).+
(10.F.2) Amendment to Employment Agreement referenced in 10.F.1 above
(incorporated by reference from the Third Quarter 10-Q,
Exhibit 10.M).+
(10.F.3) Employment Agreement with Samuel L. Eichenfield dated March 15,
1996.*+
(10.G) Employment Agreement with William J. Hallinan, dated February
25, 1992 (incorporated by reference from the 1992 10-K,
Exhibit 10.I).+
(10.H) Employment Agreement with Thomas C. Parrinello, dated February
14, 1994 (incorporated by reference from the 1994 10-K, Exhibit
10.H).+
(10.I) The Company's Supplemental Pension Plan (incorporated by
reference from the 1994 10-K, Exhibit 10.K)
(10.I.1) Resolutions of the Board of Directors dated December 5, 1994,
amending Exhibit 10.I above.*+
(10.I.2) Resolutions of the Board of Directors dated August 22, 1995,
amending Exhibit 10.I and 10.I.1 above.*+
(10.J) The Company's Value Sharing Plan for Executive Officers and Key
Employees (incorporated by reference from the Third Quarter
10-Q, Exhibit 10.K).+
(10.K) The Company's Value Sharing Plan for the Chief Executive
Officer (incorporated by reference from the Third Quarter 10-Q,
Exhibit 10.L).+
(10.L) The Company's Directors Deferred Compensation Plan
(incorporated by reference from the 1992 10-K, Exhibit 10.O).+
(10.M) The Company's Deferred Compensation Plan.*+
(10.N) Directors' Retirement Benefit Plan (incorporated by reference
from the Company's Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 10-K"), Exhibit 10.OO).+
(10.O) Form of the Company's 1992 Stock Incentive Plan Nonqualified
Stock Option Agreement (for exempt employees) (for August 25,
1992 and subsequent grants through August 10, 1994) (various
prices) (incorporated by reference from the 1992 10-K, Exhibit
10.FF).+
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ---------------------------------------------------------------
<S> <C>
(10.P) A description of the Company's policies regarding compensation
of directors is incorporated by reference from the Proxy
Statement.+
(10.Q) Directors' Charitable Awards Program (incorporated by reference
from the 1994 10-K, Exhibit 10.CC).+
(10.R) Interim Services Agreement dated January 28, 1992 among the
Company, The Dial Corp and others (incorporated by reference
from the 1992 10-K, Exhibit 10.JJ).
(10.S) Tax Sharing Agreement dated February 19, 1992 among the
Company, The Dial Corp and others (incorporated by reference
from the 1992 10-K, Exhibit 10.KK).
(10.T) Sublease dated as of April 1, 1991, among the Company, The Dial
Corp and others, relating to the Company's principal office
space (incorporated by reference from the 1992 10-K, Exhibit
10.NN).
(10.U) Stock Purchase Agreement between Bell Atlantic TriCon Leasing
Corporation and Greyhound Financial Corporation dated as of
March 4, 1994 (incorporated by reference from the 1993 10-K,
Exhibit 10.QQ).
(10.V) Form of Assets Purchase Agreement between Bell Atlantic TriCon
Leasing Corporation and TriCon Capital Corporation
(incorporated by reference from the 1993 10-K, Exhibit 10.RR).
(10.W) Form of Distribution Agreement among the Company, Greyhound
Financial Corporation, The Dial Corp and certain other parties
named therein, dated as of January 28, 1992 (incorporated by
reference from the Company's Registration Statement on Form
S-1, SEC File No. 33-45452, Annex II to the Prospectus and
Exhibit 2.1).
(10.X) Stock Purchase Agreement among The FINOVA Group Inc., FINOVA
Capital and GE Capital Mortgage Corporation dated May 26, 1993
(incorporated by reference from the Company's Report on Form
8-K dated July 15, 1993, Exhibit 2).
(10.Y) Form of the Company's 1992 Stock Incentive Plan Stock Option
Agreements for grants subsequent to August 10, 1994 (for exempt
employees) (various prices) (incorporated by reference from the
1994 10-K, Exhibit 10.DD).+
(10.Z) Form of the Company's 1992 Stock Incentive Plan Stock Option
Agreements for grants subsequent to August 10, 1994 (for
non-employee directors) (various prices) (incorporated by
reference from the 1994 10-K, Exhibit 10.FF).+
(10.AA) Form of the Company's 1992 Stock Incentive Plan Restricted
Stock Agreements (incorporated by reference from the 1994 10-K,
Exhibit 10.GG).+
(11) Computation of Per Share Earnings.*
(12) Computation of Ratio of Income to Combined Fixed Charges and
Preferred Stock Dividends.*
(21) Subsidiaries of the Registrant.*
(25) Powers of Attorney.*
(27) Financial Data Schedule.*
_______________
* Filed with the Company's report on Form 10-K for the year ended
December 31, 1995.
+ Relating to Management Compensation.
</TABLE>
