================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20594
--------------------
FORM 10-K/A
(AMENDMENT NO. 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December 31, 1998 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 Purchase Rights 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 10K or any amendment of this
Form 10-K.|_|
As of February 26, 1999, approximately 56,045,000 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 of $50-13/16) held by
nonaffiliates was approximately $2,794,608,000. As of May 3, 1999, approximately
62,415,000 shares of common stock were outstanding, and the aggregate market
value of the Common Stock (based on its closing price per share on such date of
$49-3/8) held by nonaffiliates was approximately $3,028,523,707. The increase in
outstandings is primarily due to the Common Stock issued with the Sirrom and
Preferred Business Credit acquisitions.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part Where Incorporated
- -------- -----------------------
1. Proxy Statement relating to 1999 Annual Meeting
of Shareowners of The FINOVA Group Inc.
(but excluding information contained therein
furnished pursuant to items 402(k) and (l) of
SEC Regulation S-K). III
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Name of Item
Item # Page
- ----------------------------------------------------------------------------------------------------------------------------
Part I
<S> <C> <C>
Item 1 Business:
Introduction 1
General 1
Business Groups 1
Portfolio Composition 3
Investment in Financing Transactions 3
Cost and Use of Borrowed Funds 12
Matched Funding Policy 12
Credit Ratings 13
Residual Realization Experience 13
Business Development and Competition 14
Credit Quality 15
Risk Management 15
Portfolio Management 16
Delinquencies and Workouts 16
Governmental Regulation 16
Employees 16
Special Note Regarding Forward-Looking Statements 17
Item 2 Properties 17
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Optional Executive Officers of Registrant 19
Part II
Item 5 Market Price of and Dividends on the Registrant's Common
Equity & Related Shareowner Matters 20
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A Quantitative and Qualitative Disclosures About Market Risk 22
Item 8 Financial Statements & Supplementary Data 22
Item 9 Changes in and Disagreements with Accountants
on Accounting & Financial Disclosure 22
Part III
Item 10 Directors & Executive Officers of the Registrant 22
Item 11 Executive Compensation 23
Item 12 Security Ownership of Certain Beneficial Owners & Management 23
Item 13 Certain Relationships & Related Transactions 23
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
The following discussion relates to The FINOVA Group Inc. and its
subsidiaries (collectively "FINOVA" or the "Company"), including FINOVA Capital
Corporation and its subsidiaries ("FINOVA Capital").
GENERAL
The FINOVA Group Inc. is a financial services holding company. Through
its principal subsidiary, FINOVA Capital, the Company provides a broad range of
financing and capital market products. FINOVA concentrates on lending to
mid-size businesses. FINOVA Capital has been in operation since 1954.
FINOVA extends revolving credit facilities, term loans and equipment
and real estate financing primarily to "middle-market" businesses with financing
needs falling generally between $100,000 and $35 million.
FINOVA operates in 18 specific industry or market niches under three
market groups. FINOVA selected these niches because its expertise in evaluating
the creditworthiness of prospective customers and its ability to provide
value-added services enables the Company to differentiate itself from its
competitors. That expertise and ability also enable FINOVA to command pricing
that provides a satisfactory spread over its borrowing costs.
FINOVA seeks to maintain a high quality portfolio and to minimize
non-earning assets and write-offs. FINOVA uses clearly defined underwriting
criteria and stringent portfolio management techniques. The Company diversifies
its lending activities geographically and among a range of industries, customers
and loan products.
Due to the diversity of FINOVA's portfolio, the Company believes it is
better able to manage competitive changes in its markets and to withstand the
impact of deteriorating economic conditions on a regional or national basis.
There can be no assurance, however, that competitive changes, borrowers'
performance, economic conditions or other factors will not result in an adverse
impact on FINOVA's results of operations or financial condition.
FINOVA generates interest, leasing, fees and other income through
charges assessed on outstanding loans, loan servicing, leasing, brokerage and
other activities. FINOVA's primary expenses are the costs of funding the loan
and lease business, including interest paid on debt, provisions for credit
losses, marketing expenses, salaries and employee benefits, servicing and other
operating expenses and income taxes.
FINOVA's principal executive offices are located at 1850 North Central
Avenue, P.O. Box 2209, Phoenix, Arizona 85002-2209, telephone (602) 207-4900.
FINOVA also has business development offices throughout the U.S. and in London,
U.K. and Toronto, Canada.
BUSINESS GROUPS
FINOVA operates the following principal lines of business under three
market groups:
Commercial Finance
o Business Credit offers collateral-oriented revolving
credit facilities and term loans for manufacturers,
distributors, wholesalers and service companies. Typical
transaction sizes range from $500,000 to $3 million.
o Commercial Services (formerly Factoring Services) offers
full service factoring and accounts receivable
management services for entrepreneurial and larger
firms, primarily in the textile and apparel industries.
The annual factored volume of these companies is
generally between $5 million and $25 million. This line
provides accounts receivable financing and loans secured
by equipment and real estate.
1
<PAGE>
o Corporate Finance provides a full range of cash
flow-oriented and asset-based term and revolving loan
products for manufacturers, wholesalers, distributors,
specialty retailers and commercial and consumer service
businesses. Typical transaction sizes range from $2
million to $35 million.
o Distribution & Channel Finance (formerly Inventory
Finance) provides inbound and outbound inventory
financing, combined inventory/accounts receivable lines
of credit and purchase order financing for equipment
distributors, value-added resellers and dealers
nationwide. Transaction sizes generally range from
$500,000 to $30 million.
o Growth Finance provides collateral based working capital
financing primarily secured by accounts receivable.
Typical transaction sizes range from $100,000 to $1
million and are made to small and midsize businesses
with annual sales under $10 million.
o Rediscount Finance offers revolving credit facilities to
the independent consumer finance industry including
sales, automobile, mortgage and premium finance
companies. Typical transaction sizes range from $1
million to $35 million.
Specialty Finance
o Commercial Equipment Finance offers equipment leases,
loans and "turnkey" financing to a broad range of
midsize companies. Specialty markets include the
corporate aircraft and emerging growth technology
industries, primarily biotechnology and electronics.
Typical transaction sizes range from $500,000 to $15
million.
o Communications Finance specializes in term financing to
advertising and subscriber-supported businesses,
including radio and television stations, cable
operators, outdoor advertising firms and publishers.
Typical transaction sizes range from $1 million to $40
million.
o Franchise Finance offers equipment, real estate and
acquisition financing for operators of established
franchise concepts. Transaction sizes generally range
from $500,000 to $15 million.
o Healthcare Finance offers a full range of working
capital, equipment and real estate financing products
for the U.S. healthcare industry. Transaction sizes
typically range from $500,000 to $25 million.
o Portfolio Services provides customized receivable
servicing and collections for timeshare developers and
other generators of consumer receivables.
o Public Finance provides tax-exempt term financing to
state and local governments, non-profit corporations and
entities using industrial revenue or development bonds.
Typical transaction sizes range from $100,000 to $5
million.
o Resort Finance focuses on construction, acquisition and
receivables financing of timeshare resorts worldwide,
second home communities and fractional interest resorts.
Typical transaction sizes range from $5 million to $35
million.
o Specialty Real Estate Finance provides term financing
for hotel, anchored retail office and owner-occupied
properties. Typical transaction sizes range from $5
million to $30 million.
o Transportation Finance structures equipment loans,
leases, acquisition financing and leveraged lease equity
investments for commercial and cargo airlines worldwide,
railroads and operators of other transportation related
equipment. Typical transaction sizes range from $5
million to $30 million. Through FINOVA Aircraft
Investors, LLC, FINOVA also seeks to use its market
expertise and industry presence to purchase, upgrade and
resell used commercial aircraft.
Capital Markets
o Realty Capital specializes in providing capital
markets-funded commercial real estate financing products
and commercial mortgage banking services. Typical
transaction sizes range from $1 million to $5 million.
o Investment Alliance provides equity and debt financing
for midsize businesses in partnership with institutional
investors and selected fund sponsors. Typical
transaction sizes range from $2 million to $15 million.
o Loan Administration provides in-house servicing for
FINOVA's commercial loan products as well as servicing
and sub-servicing of other mortgage and consumer loans,
including residential real estate, mobile homes,
automobiles and other consumer products.
2
<PAGE>
FINOVA is a Delaware corporation. The Company was incorporated in 1991
to serve as the successor to The Dial Corp's financial services businesses. In
March 1992, Dial transferred those businesses to FINOVA in a spin-off. Since
that time, FINOVA has increased its total assets from $2.6 billion at December
31, 1992 to $10.4 billion at December 31, 1998. Income from continuing
operations increased from $36.8 million in 1992 to $160.3 million in 1998.
Management believes FINOVA ranks among the largest independent commercial
finance companies in the U.S., based on total assets. FINOVA's common stock is
traded on the New York Stock Exchange under the symbol "FNV."
PORTFOLIO COMPOSITION
The total assets under management consist of FINOVA's net investment in
financing transactions plus certain assets that are owned by others but managed
by the Company and are not reported on the Company's balance sheet (securitized
assets and participations sold). The Company's investment in financing
transactions is primarily settled in U.S. dollars.
INVESTMENT IN FINANCING TRANSACTIONS
The following tables detail FINOVA's investment in financing
transactions (before reserve for credit losses) at December 31, 1998, 1997,
1996, 1995 and 1994.
3
<PAGE>
<TABLE>
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(Dollars in Thousands)
December 31,
<CAPTION>
- -------------------------------------- ------------ -------- ------------ ------- ----------- -------
1998 % 1997 % 1996 %
- -------------------------------------- ------------ -------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans and other financing contracts:
Commercial (2) $ 5,705,801 56.9 $4,329,210 51.4 $3,614,877 49.4
Real estate 1,648,935 16.4 1,656,075 19.7 1,713,485 23.4
Leveraged leases (2) 773,942 7.7 611,262 7.2 512,049 7.0
Operating leases 648,185 6.5 712,927 8.5 517,690 7.1
Fee-based receivables 626,499 6.3 750,399 8.9 564,430 7.7
Direct financing leases 396,759 4.0 360,589 4.3 396,388 5.4
Financing contracts held for sale (2) 220,100 2.2
------------ -------- ----------- ------- ----------- -------
Investment in financing transactions 10,020,221 100.0 8,420,462 100.0 7,318,919 100.0
======== ======= =======
Securitized assets 436,064 336,607 300,000
Participations sold 101,532 121,360 64,546
------------ ----------- -----------
Total managed assets (1)(2) $10,557,817 $8,878,429 $7,683,465
============ =========== ===========
- -------------------------------------- ----------- ------- ----------- --------
1995 % 1994 %
- -------------------------------------- ----------- ------- ----------- --------
Loans and other financing contracts:
Commercial (2) $3,405,775 53.5 $2,744,381 51.3
Real estate 1,534,177 24.1 1,237,488 23.1
Leveraged leases (2) 366,196 5.8 287,518 5.4
Operating leases 460,496 7.2 412,782 7.7
Fee-based receivables 189,486 3.0 157,862 2.9
Direct financing leases 408,059 6.4 514,595 9.6
Financing contracts held for sale (2)
----------- ------- ----------- --------
Investment in financing transactions 6,364,189 100.0 5,354,626 100.0
======= ========
Securitized assets 200,000
Participations sold
----------- -----------
Total managed assets (1)(2) $6,564,189 $5,354,626
=========== ===========
<FN>
--------------------
NOTES:
(1) Excludes managed assets serviced under the mini-CMBS structure due to the expected short-term
nature of the servicing rights. For further discussion see Annex A, Note C.
(2) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
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4
<PAGE>
<TABLE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1998
(Dollars in Thousands)
<CAPTION>
Revenue Accruing Nonaccruing
-------------------------------------- -----------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
-------------------------------------- ----------------------------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) $ 2,140,541 $ 61,895 $ $ $ $ $ 2,202,436 22.0
Resort Finance 1,209,062 16,415 24,800 1,250,277 12.5
Corporate Finance 729,461 16,183 41,007 1,115 787,766 7.9
Rediscount Finance 766,250 999 3,762 771,011 7.7
Commercial Equipment Finance 712,854 1,526 4,858 10,884 17,855 4,135 752,112 7.5
Communications Finance 694,863 7,169 24,264 726,296 7.2
Specialty Real Estate Finance 635,952 16,966 34,230 9,799 7,620 194 704,761 7.0
Healthcare Finance 597,201 7,018 5,902 1,102 611,223 6.1
Franchise Finance 597,916 1,619 1,741 1,763 2,120 274 605,433 6.0
Distribution & Channel Finance 561,734 6,029 567,763 5.7
Business Credit 292,696 7,416 300,112 3.0
Realty Capital (6) 243,278 243,278 2.4
Public Finance 183,099 183,099 1.8
Commercial Services 160,012 648 8,912 936 170,508 1.7
Other (5)(6) 60,604 25,344 85,948 0.9
Growth Finance 45,901 45,901 0.5
Investment Alliance 12,297 12,297 0.1
------------- ---------- ---------- --------- --------- --------- ------------- -------
TOTAL (4)(6) $ 9,643,721 $ 106,006 $ 65,261 $ 119,738 $ 54,446 $ 31,049 $ 10,020,221 100.0
============= ========== ========== ========= ========= ========= ============= =======
<FN>
--------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired transactions.
(2) The Company earned income totaling $4.7 million on repossessed assets during 1998, including $2.4 million in Specialty Real
Estate Finance, $1.0 million in Resort Finance, $0.9 million in Healthcare Finance, $0.2 million in Rediscount Finance and
$0.2 million in Commercial Equipment Finance.
(3) Transportation Finance includes $419.7 million of aircraft financing business booked through the London office.
(4) Excludes $537.6 million of assets securitized and participations sold which the Company manages, including securitizations
of $300.0 million in Corporate Finance and $136.1 million in Franchise Finance and participations of $49.3 million in
Corporate Finance, $21.4 million in Communications Finance, $5.4 million in Resort Finance, $6.9 million in Rediscount
Finance, $3.8 million in Business Credit, $12.6 million in Transportation Finance and $2.1 million in Distribution & Channel
Finance.
(5) Primarily includes other assets retained from disposed or discontinued operations.
(6) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
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5
<PAGE>
<TABLE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1997
(Dollars in Thousands)
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------------- --------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
------------- ---------- ----------- --------- ---------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) $ 1,631,685 $ $ $ $ $ $ 1,631,685 19.4
Resort Finance 1,166,199 14,450 3,974 26,240 1,210,863 14.4
Corporate Finance 791,733 981 26,888 819,602 9.7
Specialty Real Estate Finance 610,711 24,120 38,055 7,648 10,853 196 691,583 8.2
Communications Finance 628,947 8,724 24,452 662,123 7.9
Commercial Equipment Finance 614,712 1,816 11,802 4,030 632,360 7.5
Rediscount Finance 609,641 993 610,634 7.2
Distribution & Channel Finance 544,108 4,333 548,441 6.5
Healthcare Finance 525,846 1,515 666 528,027 6.3
Franchise Finance 430,651 808 2,171 305 433,935 5.2
Commercial Services 196,843 30,205 227,048 2.7
Business Credit 195,897 7,559 203,456 2.4
Public Finance 135,826 135,826 1.6
Other (5)(6) 61,353 23,526 84,879 1.0
------------- -------- -------- -------- -------- -------- ------------ ----
TOTAL (4)(6) $ 8,144,152 $ 36,449 $ 52,505 $121,540 $ 37,093 $ 28,723 $ 8,420,462 100.0
============= ======== ======== ======== ======== ======== ============ =====
<FN>
--------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired transactions.
(2) The Company earned income totaling $4.1 million on repossessed assets during 1997, including $3.1 million in Specialty Real
Estate Finance and $1.0 million in Resort Finance.
(3) Transportation Finance includes $302.9 million of aircraft financing business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company manages, including securitizations of $300.0 million
in Corporate Finance and $36.6 million in Franchise Finance and participations of $40.2 million in Corporate Finance, $61.0
million in Communications Finance, $8.5 million in Transportation Finance, $4.6 million in Rediscount Finance, $5.1 million
in Resort Finance and $1.9 million in Distribution & Channel Finance.
(5) Primarily includes other assets retained from disposed or discontinued operations.
(6) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
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6
<PAGE>
<TABLE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1996
(Dollars in Thousands)
<CAPTION>
Revenue Accruing Nonaccruing
-------------------------------------- ----------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
-------------------------------------- ---------------------------------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) $ 1,330,578 $ $ $ $ $ $ 1,330,578 18.2
Resort Finance 1,124,462 2,963 13,878 77 25,136 1,166,516 15.9
Corporate Finance 630,399 3,211 14,695 335 648,640 8.9
Specialty Real Estate Finance 700,932 30,245 46,068 6,748 9,853 940 794,786 10.8
Communications Finance 535,701 8,796 14,129 3,095 561,721 7.7
Commercial Equipment Finance 570,574 7,900 6,564 585,038 8.0
Rediscount Finance 421,232 245 421,477 5.8
Distribution & Channel Finance 314,446 1,273 315,719 4.3
Healthcare Finance 497,540 1,304 1,194 500,038 6.8
Franchise Finance 366,202 1,104 1,985 996 370,287 5.0
Commercial Services 220,701 3,419 224,120 3.0
Business Credit 160,006 11,963 171,969 2.4
Public Finance 150,361 13 150,374 2.1
Other (6) 73,158 4,498 77,656 1.1
------------- ---------- ---------- --------- --------- --------- ------------ -----
Total Continuing Operations (4)(6) $ 7,096,292 $ 46,319 $ 59,946 $ 63,751 $ 38,419 $ 14,192 $ 7,318,919 100.0
============= ========== ========== ========= ========= ============ =====
Discontinued Operations (5) 39,143
---------
TOTAL $ 53,335
=========
<FN>
--------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired transactions.
(2) The Company earned income totaling $5.1 million on repossessed assets during 1996, including $4.4 million in Specialty Real
Estate Finance and $0.7 million in Resort Finance.
(3) Transportation Finance includes $160.8 million of aircraft financing business booked through the London office.
(4) Excludes assets securitized and participations sold which the Company manages, including securitizations of $300.0 million
in Corporate Finance and participations of $24.6 million in Corporate Finance, $27.5 million in Communications Finance, $4.8
million in Rediscount Finance, $4.4 million in Resort Finance and $3.2 million in Distribution & Channel Finance.
(5) Reflects assets retained by FINOVA subsequent to the sale of the Manufacturer and Dealer Services line of business
(6) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
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7
<PAGE>
<TABLE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(Dollars in Thousands)
<CAPTION>
Revenue Accruing Nonaccruing
------------------------------------- --------------------------------
Repos- Repos- Total
Market sessed sessed Lease & Carrying
Rate (1) Impaired Assets (2) Impaired Assets Other Amount %
------------------------------------- -------------------------------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (3) $ 929,043 $ $ $ $ $ $ 929,043 14.6
Resort Finance 943,661 2,849 12,064 2,583 26,559 987,716 15.6
Corporate Finance (4) 631,295 5,274 19,592 335 656,496 10.3
Specialty Real Estate Finance 703,018 3,898 42,304 15,264 18,231 988 783,703 12.3
Communications Finance 662,191 2,502 2,217 16,817 4,863 688,590 10.8
Commercial Equipment Finance 345,039 69 6,079 351,187 5.5
Rediscount Finance 345,264 345,264 5.4
Distribution & Channel Finance 202,879 430 203,309 3.2
Healthcare Finance 451,503 81 1,231 452,815 7.1
Franchise Finance 327,356 1,462 6,408 1,850 337,076 5.3
Commercial Services 188,892 594 189,486 3.0
Business Credit 200,365 12,685 213,050 3.3
Public Finance 121,956 47 122,003 1.9
Other (5) 94,755 1,275 2,360 6,061 104,451 1.7
------------- ---------- ---------- --------- --------- --------- ------------ -------
Total Continuing Operations (4)(5) $ 6,147,217 $ 17,260 $ 56,585 $ 76,883 $ 49,988 $ 16,256 $ 6,364,189 100.0
============= ========== ========== ========= ========= ========= ============ =======
<FN>
--------------------
NOTES:
(1) Represents original or renegotiated market rate terms, excluding impaired transactions.
(2) The Company earned income totaling $4.2 million on repossessed assets during 1995, including $3.2 million in Specialty Real
Estate Finance, $0.6 million in Resort Finance and $0.4 million in Communications Finance.
(3) Transportation Finance includes $144 million of aircraft financing business booked through the London office.
(4) Excludes $200 million of securitized assets which are managed by the Company.
(5) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
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8
<PAGE>
<TABLE>
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1994
(Dollars in Thousands)
<CAPTION>
Revenue Accruing Nonaccruing
---------------------------------------- -----------------------------------
Repos- Delin- Repos- Leases Total
Original Rewritten sessed quent sessed & Carrying
Rate Contracts Assets (1) Loans Assets Other Amount %
---------------------------------------- ----------------------------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation Finance (2) $ 706,242 $ 14,620 $ $ $ $ $ 720,862 13.5
Resort Finance 634,735 4,506 7,314 2,582 30,393 679,530 12.7
Corporate Finance 746,671 21,275 6,952 2,674 777,572 14.5
Specialty Real Estate Finance 672,522 7,237 40,510 7,622 21,519 749,410 14.0
Communications Finance 551,218 6,288 7,282 17,377 5,863 671 588,699 11.0
Commercial Equipment Finance 293,609 769 7,589 301,967 5.6
Rediscount Finance 99,353 99,353 1.9
Distribution & Channel Finance 58,595 642 59,237 1.1
Healthcare Finance 467,131 1,719 468,850 8.8
Franchise Finance 281,890 7,632 12,242 301,764 5.6
Commercial Services 157,090 772 157,862 2.9
Business Credit 181,741 12,003 193,744 3.6
Public Finance 93,491 144 93,635 1.8
FINOVA Capital Limited (3) 93,700 1,561 4,265 2 4,800 104,328 1.9
Other (4) 48,598 8,918 297 57,813 1.1
-------------- ----------- ---------- ----------------------- ---------- ------------- -----
Total Continuing Operations (4) $ 5,086,586 $ 63,888 $ 55,106 $ 73,519 $ 60,451 $ 15,076 $ 5,354,626 100.0
============== =========== ========== ======================= ========== ============= =====
<FN>
- --------------------
NOTES:
(1) The Company earned income totaling $3.3 million on repossessed assets during 1994, including $2.0 million in Specialty Real
Estate Finance, $0.8 million in Communications Finance and $0.5 million in Resort Finance.
(2) Transportation Finance includes $66.9 million of aircraft finance business booked through the London office.
(3) Includes transactions in Europe and elsewhere (including the U.S.) originated from the Company's London office. Also,
includes $39.2 million of Consumer Finance assets, of which $4.8 million were nonaccruing. Consumer Finance accounts were
generally considered nonaccruing after being 180 days delinquent.
(4) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
--------------------
9
<PAGE>
The Company's geographic portfolio diversification at December 31,
1998, as restated, was as follows:
State Total Percent
----------------------------------------------------------
(Dollars in
Thousands)
California $ 1,541,692 14.6%
Florida 1,065,801 10.1
Texas 827,422 7.8
New York 726,834 6.9
Illinois 467,083 4.4
Arizona 442,734 4.2
Georgia 370,541 3.5
New Jersey 330,958 3.1
Virginia 285,969 2.7
Nevada 283,520 2.7
Pennsylvania 274,323 2.6
Missouri 233,053 2.2
Other (1)(2) 3,707,887 35.2
------------------ ------------
Total managed assets (2) $ 10,557,817 100.0%
------------------------ ================== ============
- --------------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents
approximately 6% of the total.
(2) As restated. See Note T of Notes to Consolidated Financial Statements.
--------------------
<TABLE>
The following is an analysis of the reserve for credit losses for the
years ended December 31:
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 177,088 $ 148,693 $ 129,077 $ 110,903 $ 64,280
Provision for credit losses (1) 82,200 69,200 41,751 39,568 10,439
Write-offs (1) (59,037) (45,487) (32,017) (27,631) (28,109)
Recoveries 2,279 2,287 3,296 2,104 1,780
Acquisitions and other 5,088 2,395 6,586 4,133 62,513
--------- --------- --------- --------- ---------
Balance, end of year $ 207,618 $ 177,088 $ 148,693 $ 129,077 $ 110,903
========= ========= ========= ========= =========
<FN>
- ---------
NOTE:
(1) As restated. See Note T of Notes of Consolidated Financial Statements.
</FN>
</TABLE>
Included above is a specific impairment reserve of $37.1 million at
December 31, 1998, which applies to $98.7 million of the $225.7 million of
impaired loans. The remaining $170.5 million of the reserve for credit losses is
designated for general purposes and represents management's best estimate of
potential losses in the portfolio considering delinquencies, loss experience and
collateral. At December 31, 1997, the specific impairment reserve was $20.2
million, which applied to $52.3 million of the $158.0 million of impaired loans.
Additions to general and specific reserves are reflected in current operations.
Management may transfer reserves between the general and specific reserves as
appropriate.
10
<PAGE>
<TABLE>
Write-offs and recoveries by line of business, during the years ended
December 31, were as follows:
<CAPTION>
---------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------
WRITE-OFFS (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial Services $36,286 $24,382 $ 5,098 $ 3,728 $ 1,148
Corporate Finance 6,728 6,577 9,470 4,660 4,233
Commercial Equipment Finance 3,845 3,722 3,207 2,271 1,257
Franchise Finance 3,035 696 3,267 3,448 2,247
Distribution & Channel Finance 2,609 1,777 201 442
Specialty Real Estate Finance 1,785 2,106 1,793 2,275 1,461
Rediscount Finance 1,500
Healthcare Finance 1,502 1,798 1,018 314 377
Business Credit 1,253 452 774
Communications Finance 494 750 2,994 4,037 8,300
Resort Finance 2,700 4,275 2,000 2,730
Other (1)(3) 979 895 4,245 5,140
---------------------------------------------------
Total write-offs (3) 59,037 45,487 32,017 27,631 28,109
---------------------------------------------------
RECOVERIES
Commercial Services 623 1,127 1,488 482 376
Corporate Finance 48 99 10 247 86
Commercial Equipment Finance 200 514 829 116 428
Franchise Finance 255 263 422 115 66
Distribution & Channel Finance 33 20
Specialty Real Estate Finance 177 80
Healthcare Finance 542 94 8 52 63
Business Credit 434
Communications Finance 250
Resort Finance 26 22 10
Other (1) 177 190 303 720 751
---------------------------------------------------
Total recoveries 2,279 2,287 3,296 2,104 1,780
---------------------------------------------------
Total net write-offs (3) $56,758 $43,200 $28,721 $25,527 $26,329
===================================================
Net write-offs as a percentage
of average managed assets (2)(3) 0.60% 0.53% 0.41% 0.44% 0.62%
===================================================
<FN>
- --------------------
NOTES:
(1) Includes FINOVA Capital Ltd. (UK).
(2) Excludes average participations sold in which FINOVA has transferred credit
risk.
(3) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
--------------------
A further breakdown of the portfolio by line of business can be found
in Annex A, Notes C and D.
11
<PAGE>
COST AND USE OF BORROWED FUNDS
FINOVA Capital relies on borrowed funds as well as internal cash flow
to finance its operations. It also has raised funds through the sale or
securitization of assets, but does not rely on those methods as a primary source
of capital.
<TABLE>
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:
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term and variable rate long-term debt (1) 6.1% 6.4% 6.5% 7.2% 5.5%
Fixed-rate long-term debt (1) 7.0% 7.1% 7.2% 7.3% 8.1%
Aggregate borrowed funds (1) 6.4% 6.6% 6.8% 7.2% 6.3%
Rate earned on average earning assets (2) (3)(5) 11.9% 11.5% 11.4% 11.7% 11.2%
Operating margin percentage (4)(5) 6.3% 5.9% 5.7% 5.6% 5.7%
<FN>
- ---------------------
NOTES:
(1) Includes the effects of interest rate swap and hedge agreements.
(2) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(3) Earned amounts are net of depreciation.
(4) Represents operating margin as a percentage of average earning assets.
(5) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
--------------------
The effective costs presented above include costs of commitment fees
and related borrowing costs. They do not necessarily predict future costs of
funds. For further information on FINOVA Capital's cost of funds, refer to Annex
A, Notes E and F.
Following are the ratios of income to combined fixed charges and
preferred stock dividends ("ratio") for each of the past five years:
Year Ended December 31, (1)
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------- ----------- ----------- ----------- -----------
1.53 1.51 1.51 1.45 1.59
========== =========== =========== =========== ===========
- ---------------------
NOTES:
(1) As restated. See Note T of Notes to Consolidated Financial Statements.
--------------------
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 for combined fixed charges, for purposes of the computation of
the above ratio, consists of income from continuing operations before income
taxes and fixed charges. Combined fixed charges include interest and related
debt expense, a portion of rental expense representative of interest, and
preferred stock dividends grossed up to a pre-tax basis.
MATCHED FUNDING POLICY
FINOVA Capital follows a "matched funding" policy. Under that policy,
it funds its floating-rate assets (loans and leases to FINOVA's borrowers) with
floating-rate liabilities (FINOVA's debt) and fixed-rate assets with fixed-rate
liabilities, to the extent feasible. This policy helps protect FINOVA from
changes in interest rates. For further discussion on FINOVA Capital's debt and
matched funding policy, see Annex A, Notes E and F.
12
<PAGE>
CREDIT RATINGS
FINOVA Capital currently has investment-grade credit ratings from the
following rating agencies:
Commercial Senior
Paper Debt
--------------- -----------
Duff & Phelps Credit Rating Co. D1 A
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 A-
In addition, FINOVA Finance Trust, a subsidiary trust of the Company,
issued mandatory redeemable convertible preferred securities ("TOPrS") in
December 1996 having investment-grade ratings as follows:
Duff & Phelps Credit Rating Co. BBB+
Fitch Investors Services, Inc. A-
Moody's Investors Services, Inc. Baa2
Standard & Poor's Ratings Group BBB
For further information relating to the TOPrS, refer to Annex A, Note
G.
Standard & Poor's Ratings Group changed on February 26, 1999 its rating
of the TOPrS from BBB+ to BBB. The rating change was not a downgrade, but
resulted from the new rating scale under which Standard & Poor's Ratings Group
rates preferred stock two notches below the corporate or counter party credit
rating of an investment-grade issuer such as FINOVA.
There can be no assurance that these ratings will be maintained. The
ratings can be modified at any time. A credit rating is not a recommendation to
buy, sell or hold securities. Each rating should be evaluated independently of
any other rating. None of FINOVA Capital's subsidiaries have applied for credit
ratings.
RESIDUAL REALIZATION EXPERIENCE
Each year since its inception, FINOVA Capital and its predecessors have
earned total proceeds from the sale of assets upon lease termination (other than
foreclosures) in excess of carrying amounts. There can be no assurance, however,
that those results can be achieved in future years. Actual proceeds will depend
on current market values for those assets at the time of sale. While market
values are generally beyond the control of FINOVA, the Company has some
discretion in the timing of sales of the assets. Sales proceeds on lease
terminations in excess of carrying amounts are reported as gains on disposal of
assets when the assets are sold.
13
<PAGE>
<TABLE>
Income from leasing transactions is affected by gains from asset sales
on lease termination and, hence, can be somewhat less predictable than income
from non-leasing activities. During the five years ended December 31, 1998, the
proceeds to FINOVA Capital from sales of assets on early termination of leases
and at the expiration of leases have exceeded the carrying amounts and estimated
residual values as follows:
<CAPTION>
Early Terminations (1) Terminations at End of Lease Term (2)
- --------------------------------------------------------------- -----------------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C>
1998 $ 82,671 $ 67,650 122% $ 40,571 $ 35,647 114%
1997 114,680 96,656 119% 78,419 71,914 109%
1996 87,311 75,910 115% 16,334 13,872 118%
1995 1,402 905 155% 32,509 25,566 127%
1994 6,477 5,865 110% 15,287 14,164 108%
<FN>
- --------------------
NOTE:
(1) Excludes foreclosures for credit reasons, which are immaterial.
(2) As restated. See Note T of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
--------------------
The estimated residual value of direct finance and leveraged lease
assets in the accounts of FINOVA Capital at December 31, 1998 was 37.2% of the
original cost of those assets (30.0% 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, 1998 for financing contracts excluding leveraged
leases were 7.5 and 5.4 years, respectively, and for leveraged leases were
approximately 18.7 and 11.2 years, respectively. The comparable average initial
term and remaining term at December 31, 1997 for financing contracts excluding
leveraged leases were 7.6 and 5.1 years, respectively, and for leveraged leases
were approximately 17.3 and 11.7 years, respectively. FINOVA Capital uses either
employed or outside appraisers to determine the collateral value of assets to be
leased or financed and the estimated residual or collateral value thereof at the
expiration of each lease. Actual proceeds could differ from those appraised
values.
For a discussion of accounting for lease transactions, refer to Annex
A, Notes A and C.
BUSINESS DEVELOPMENT AND COMPETITION
FINOVA 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 and other sources.
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, structure and innovation in transactions,
the interest rate charged for money and concentration in focused market niches.
The interest rate FINOVA Capital 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. FINOVA's ability to manage costs is, in part, dependent on
factors beyond the Company's control, such as the cost of funds, outside
litigation expenses and competitive salaries.
14
<PAGE>
CREDIT QUALITY
FINOVA Capital has maintained a high-quality asset base through the use
of clearly defined underwriting standards, portfolio management techniques,
monitoring of covenant compliance and active collections and workout efforts.
RISK MANAGEMENT
FINOVA Capital generally investigates its prospective customers through
a review of historical financial statements, published credit reports, credit
references, discussions with management, analysis of location feasibility,
personal visits and collateral appraisals and inspections. In many cases,
depending upon the results of its credit investigations and the nature of the
financing being provided, FINOVA Capital obtains additional collateral or
guarantees from others. As part of its underwriting process, FINOVA Capital
considers the management, industry, financial position and collateral being
provided by a proposed borrower or lessee. The purpose, term, amortization and
amount of any proposed transaction generally must be clearly defined and within
established corporate guidelines. In addition, FINOVA attempts to avoid undue
concentrations in any one customer, industry or geographic region.
o Management. FINOVA 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.
o 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 liabilities.
o Financial. FINOVA Capital's review of a prospective borrower
normally includes a thorough analysis of the borrower's
financial performance. Items considered include net worth;
composition of assets and liabilities; debt service coverage;
liquidity; sales growth and earning power; and cash flow
generation and reliability.
o Collateral. FINOVA Capital regards collateral as an important
factor in a credit evaluation and, for collateral dependent
transactions, has established maximum loan to value ratios,
normally ranging from 60% - 90%, for each of its lines of
business.
The underwriting process includes, in addition to the analysis of the
factors noted above, the design and implementation of transaction structures and
strategies to mitigate identified risks; a review of transaction pricing
relative to product-specific return requirements and acknowledged risk elements;
a multi-step, interdepartmental review and approval process with varying levels
of authority based on the size of the transaction; and periodic
interdepartmental reviews and revision of underwriting guidelines.
FINOVA Capital also monitors portfolio concentrations in the areas of
total exposure to a single borrower and related entities, within a given
geographical area and with respect to an industry and/or product type within an
industry. FINOVA Capital has established concentration guidelines for each line
of business. Geographic concentrations are reviewed periodically and evaluated
based on historic loan experience and prevailing market and economic conditions.
FINOVA 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.
15
<PAGE>
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
to determine loan exposure and residual values; sales of residuals and warrants
to generate supplemental income; and review and management of covenant
compliance. The Portfolio Management department or dedicated personnel within
the business units regularly review financial statements to assess customer cash
flow performance and trends; periodically confirm operations of the customer;
conduct periodic reappraisals of the underlying collateral; seek to identify
issues concerning the vulnerabilities of the customer; seek to resolve
outstanding issues with the borrower; periodically review and address covenant
compliance issues; and prepare periodic summaries of the aggregate portfolio
quality and concentrations for management review.
Evaluation for loan impairment is performed as a part of the portfolio
management review process. When a loan is determined to be impaired, a
write-down is taken or an impairment reserve is established based on the
difference between the recorded balance of the loan ("carrying amount") and the
fair value of the asset.
DELINQUENCIES AND WORKOUTS
FINOVA Capital monitors the timing of payments on its accounts. For
term loans and leases, when an invoice is 10 days past due, the customer is
generally contacted, and a determination is made as to the extent of the
problem, if any. A commitment for immediate payment is pursued and the account
is observed closely. If satisfactory results are not obtained in communication
with the customer, the guarantor(s) are usually contacted to advise them of the
situation and the potential obligation under the guarantee agreement. If an
invoice becomes 31 days past due, it is reported as delinquent. A notice of
default is generally sent prior to an invoice becoming 45 days past due and,
between 60 and 90 days past the due date, if satisfactory negotiations are not
underway, outside counsel generally is 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 the assets generate sufficient cash to result in a
reasonable rate of return. Those accounts are continually reviewed, and
write-downs are taken as deemed necessary. While pursuing collateral and
obligors, FINOVA 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 credit losses is adequate. For additional
information regarding the reserve for credit losses, see Annex A, Note D.
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 and mortgage
broker activities are subject to additional government regulation. For example,
aircraft leasing is regulated by the Federal Aviation Administration, and
Communications Finance is regulated by the Federal Communication Commission.
FINOVA Capital's international activities are also subject to a variety of laws
and regulations of the countries in which the business is conducted.
EMPLOYEES
At December 31, 1998, the Company had 1,262 employees compared to 958
at December 31, 1997. The increase primarily included employees from FINOVA
Realty Capital ("FRC"), which was not consolidated until 1998, and employees
from companies acquired in 1998. None of the employees were covered by
collective bargaining agreements. FINOVA believes its employee relations are
satisfactory.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are "forward-looking," in that they
do not discuss historical fact but instead note future expectations,
projections, intentions or other items. These forward-looking statements include
matters in the sections of this report captioned "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Quantitative and Qualitative Disclosures About Market Risk". They are also made
in documents incorporated in this report by reference, or in which this report
may be incorporated, such as a prospectus.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause FINOVA's actual results or
performance to differ materially from those contemplated by the forward-looking
statements. Many of those factors are noted in conjunction with the
forward-looking statements in the text. Other important factors that could cause
actual results to differ include:
o The results of FINOVA's efforts to implement its business strategy.
Failure to fully implement its business strategy might result in
decreased market penetration, adverse effects on results of operations
and other adverse results.
o The effect of economic conditions and the performance of FINOVA's
borrowers. Economic conditions in general or in particular market
segments could impact the ability of FINOVA's borrowers to operate or
expand their businesses, which might result in decreased performance
for repayment of their obligations or reduce demand for additional
financing needs. The rate of borrower defaults or bankruptcies may
increase.
o Actions of FINOVA's competitors and FINOVA's ability to respond to
those actions. As noted in "Business Development and Competition,"
FINOVA seeks to remain competitive without sacrificing prudent lending
standards. Doing business under those standards becomes more difficult,
however, when competitors offer financing with lower pricing or less
stringent criteria. FINOVA may not be successful in maintaining and
continuing asset growth at historic levels.
o The cost of FINOVA's capital. That cost depends on many factors, some
of which are beyond FINOVA's control, such as its portfolio quality,
ratings, prospects and outlook. Changes in the interest rate
environment may reduce or eliminate profit margins.
o Changes in government regulations, tax rates and similar matters. For
example, government regulations could significantly increase the cost
of doing business or could eliminate certain tax advantages of some of
FINOVA's financing products.
o Necessary technological changes (including those addressing "Year 2000"
data systems issues) may be more difficult, expensive or time consuming
than anticipated.
o Costs or difficulties related to integration of acquisitions.
o Other risks detailed in FINOVA's other SEC reports or filings.
FINOVA does not intend to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements. FINOVA cannot predict the risk from reliance on
forward-looking statements in light of the many factors that could affect their
accuracy.
ITEM 2. PROPERTIES.
FINOVA's principal executive offices are located in premises leased
from FP Arizona, Inc. in Phoenix, Arizona. FINOVA Capital operates various
additional offices in the United States, one in Canada and one in Europe. All
these properties are leased. Alternative office space could be obtained without
difficulties in the event leases are not renewed. FINOVA has entered into a
lease agreement for new executive offices which are presently under
construction. Those facilities are expected to be completed in the fourth
quarter of 1999.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
FINOVA is a party either as plaintiff or defendant to various actions,
proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts.
Litigation often results from FINOVA's attempts to enforce its lending
agreements against borrowers and other parties to those transactions. Litigation
is subject to many uncertainties. It is possible that some of the legal actions,
proceedings or claims could be decided against FINOVA. Although the ultimate
amount for which FINOVA may be held liable, if any, is not ascertainable, FINOVA
believes that any resulting liability would not materially affect its financial
position or results of operations.
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 1998.
18
<PAGE>
OPTIONAL EXECUTIVE OFFICERS OF REGISTRANT.
<TABLE>
Set forth below is information with respect to those individuals who
serve as executive officers of FINOVA, including those officers of FINOVA
Capital who are responsible for its principal business units.
<CAPTION>
Name Age Position and Background
- --------------------------------- ------ -----------------------------------------------------------------
<S> <C> <C>
Samuel L. Eichenfield 62 Chairman, President and Chief Executive Officer of FINOVA and
FINOVA Capital for more than five years.
Matthew M. Breyne 41 Executive Vice President of FINOVA since 1998. Before that he
was Group Vice President - Communications Finance and Franchise
Finance or similar positions of FINOVA Capital for more than
five years.
Derek C. Bruns 39 Senior Vice President - Internal Audit or similar positions of
FINOVA for more than five years.
William J. Hallinan 56 Senior Vice President - General Counsel and Secretary or
similar positions of FINOVA and FINOVA Capital for more than
five years.
Bruno A. Marszowski 57 Senior Vice President - Controller and Chief Financial Officer
of FINOVA and FINOVA Capital since 1994. Before that he was
Vice President - Controller of FINOVA and FINOVA Capital for
more than five years.
William C. Roche 45 Senior Vice President - Human Resources & Facilities Planning
of FINOVA and FINOVA Capital for more than five years.
Meilee Smythe 43 Senior Vice President - Treasurer of FINOVA and FINOVA Capital
since 1998. Before that she was Vice President - Assistant
Treasurer for FINOVA and FINOVA Capital for more than five
years.
John J. Bonano 56 Executive Vice President or similar positions of FINOVA Capital
for more than five years.
Jack Fields, III 44 Executive Vice President or similar positions of FINOVA Capital
for more than five years.
Robert M. Korte 43 Executive Vice President of FINOVA Capital since 1998. Before
that he was Senior Vice President - Strategy and Technology of
FINOVA since 1994 and Vice President - Human and Corporate
Development of FINOVA and FINOVA Capital since 1991.
Gregory C. Smalis 46 Executive Vice President - Portfolio Management or similar
positions for more than five years and a Director of FINOVA
Capital since 1993.
</TABLE>
19
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY & RELATED SHAREOWNER MATTERS.
The FINOVA Group Inc.'s common stock trades on 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, 1997 through December 31, 1998. Amounts have been
restated to give effect to a stock split effective October 1, 1997.
Sales Price Range of Common Stock
----------------------------------------------------
1998 1997
-------------------------- -------------------------
Quarters: High Low High Low
----------- ----------- ----------- -----------
First $ 60-1/4 $ 45-1/2 $ 39-1/2 $ 31-7/8
Second 63-1/2 53-5/16 38-7/8 32-1/16
Third 65-1/8 41-1/16 48-1/4 37-7/8
Fourth 56-3/8 35-9/16 50 40-1/4
Dividends Declared on Common
Stock
-----------------------------
1998 1997
--------- --------
Februay $ 0.14 $ 0.12
May 0.14 0.12
August 0.16 0.14
November 0.16 0.14
-------- --------
$ 0.60 $ 0.52
======== ========
Quarterly dividends have been paid on the first business day of each
calendar quarter. FINOVA anticipates it will continue to pay regular quarterly
dividends on the first business day of January, April, July and October. In
February 1999, the Board of Directors declared a dividend of $0.16 per share,
payable April 1, 1999, for shareowners of record on February 26, 1999. The
declaration of dividends and their amounts are 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 The
FINOVA Group Inc. The agreements pertaining to long-term debt include various
restrictive covenants and require the maintenance of certain defined financial
ratios with which FINOVA and FINOVA Capital have complied. Under one of these
covenants, dividend payments from FINOVA Capital to FINOVA Group are limited to
50 percent of accumulated earnings after December 31, 1991.
As of February 26, 1999, there were approximately 22,200 holders of
record of The FINOVA Group Inc.'s common stock. The closing price of the common
stock on that date was $50-13/16. As of May 3, 1999, there were approximately
22,100 holders of record of The FINOVA Group, Inc.'s common stock. The closing
price of the common stock on that date was $49-3/8.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
The following table summarizes selected financial data of FINOVA, which
have been derived from the audited Consolidated Financial Statements of FINOVA
for each of the years ended December 31, 1998, 1997, 1996, 1995 and 1994. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements of FINOVA and the Notes included in Annex A,
as well as the remainder of this report. As discussed in Annex A, Note T, the
financial statements and the following selected financial data have been
restated for accounting matters relating to the amount of the CMBS gains
reported in 1998, to defer and amortize costs incurred in connection with the
origination of new business in each year in accordance with SFAS No. 91, as well
as several other adjustments. Prior year amounts have also been reclassified to
conform to 1998 presentation and restated to exclude operations which were
discontinued in 1996 and to reflect a two-for-one stock split in 1997. For
further detail, see Annex A, Note H.
<CAPTION>
Year Ended December 31, (6)
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
OPERATIONS: (Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income earned from financing
transactions $ 1,007,773 $ 879,763 $ 759,996 $ 673,194 $ 458,411
Interest margins earned 459,515 392,124 329,107 280,788 211,419
Volume-based fees 77,723 39,378 28,588 21,204 10,796
Provision for credit losses 82,200 69,200 41,751 39,568 10,439
Gains on disposal of assets 27,912 30,333 12,562 10,490 3,877
Income from continuing
operations 160,341 137,910 117,968 95,621 75,470
Net income 160,341 137,910 118,475 97,060 76,013
Basic earnings from continuing
operations per share 2.87 2.53 2.16 1.75 1.52
Basic earnings per share 2.87 2.53 2.17 1.78 1.53
Basic adjusted weighted average
outstanding shares 55,946,000 54,405,000 54,508,000 54,633,000 49,765,000
Diluted earnings from continuing
operations per share $ 2.70 $ 2.40 $ 2.10 $ 1.72 $ 1.50
Diluted earnings per share 2.70 2.40 2.11 1.75 1.51
Diluted adjusted weighted average
shares 60,705,000 59,161,000 56,051,000 55,469,000 50,436,000
Dividends declared per common share $ 0.60 $ 0.52 $ 0.46 $ 0.42 $ 0.37
Dividend payout ratio 21.0% 20.1% 21.3% 23.4% 25.5%
FINANCIAL POSITION:
Investment in financing transactions $10,020,221 $ 8,420,462 $ 7,318,919 $ 6,364,189 $ 5,354,626
Nonaccruing assets 205,233 187,356 155,505 143,127 149,046
Reserve for credit losses 207,618 177,088 148,693 129,077 110,903
Total assets 10,441,236 8,724,626 7,538,456 7,045,547 5,831,327
Deferred income taxes 342,268 275,972 246,218 210,530 190,288
Total debt 8,394,578 6,764,581 5,850,223 5,649,368 4,573,354
Company-obligated mandatory
redeemable convertible preferred
securities of subsidiary trust solely
holding convertible debentures of
FINOVA ("TOPrS") 111,550 111,550 111,550
Shareowners' equity 1,167,231 1,092,254 936,085 829,040 773,547
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
December 31, (6)
------------ ----------- ---------- ---------- ------------
1998 1997 1996 1995 1994
------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
RATIOS:
Reserve for credit losses/managed assets (1) (2) 2.0% 2.0% 2.0% 2.0% 2.1%
Nonaccruing assets/managed assets (1) 2.0% 2.1% 2.0% 2.2% 2.8%
Total debt to equity (3) 6.6x 5.6x 5.6x 6.8x 5.9x
Return on average common equity (4) 14.1% 14.1% 13.5% 12.0% 11.3%
Return on average funds employed (4) (5) 1.8% 1.8% 1.8% 1.7% 1.9%
Equity to assets (3) 12.2% 13.8% 13.9% 11.8% 13.3%
<FN>
- --------------------
NOTES:
(1) Managed assets exclude participations.
(2) Managed assets exclude financing contracts held for sale.
(3) Equity in 1998, 1997 and 1996 includes the TOPrS noted above.
(4) Return represents income from continuing operations.
(5) Average funds employed excludes deferred taxes applicable to leveraged
leases.
(6) As restated. See Note T of Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
--------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See pages 3 - 15 of Annex A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See page 16 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 FINOVA's directors is incorporated by
reference from FINOVA's Proxy Statement issued in connection with its 1999
Annual Meeting of Shareowners (the "Proxy Statement").
For information regarding FINOVA's executive officers, see the Optional
Item in Part I, following Item 4.
22
<PAGE>
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:
Annex A
Page
---------
Financial Highlights 1-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 3-15
Quantitative and Qualitative Disclosures about Market Risk 16
Report of Management and Independent Auditors' Report 17-18
Consolidated Balance Sheets (restated) 19
Statements of Consolidated Income (restated) 20
Statements of Consolidated Shareowners' Equity (restated) 21
Statements of Consolidated Cash Flows (restated) 22
Notes to Consolidated Financial Statements 23-47
Supplemental Selected Financial Data 48-49
2. All Schedules have been omitted because they are not applicable
or the required information is shown in the financial statements
or related notes.
3. Exhibits.
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
FINOVA's report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K"), Exhibit 3.A).
(3.B) Proposed amendment to the Certificate of
Incorporation to increase the number of authorized
shares, which is subject to shareowner approval
(incorporated by reference from the 1999 Proxy
Statement).
23
<PAGE>
Exhibit No.
-----------
(3.C) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on
Form 10-K for the year ended December 31, 1995 (the
"1995 10-K") Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate
(incorporated by reference from the 1994 10-K,
Exhibit 4.B).
(4.B) Relevant portions of FINOVA's Certificate of
Incorporation and Bylaws included in Exhibits 3.A,
3.B and 3.C above are incorporated by reference.
(4.C) Rights Agreement dated as of February 15, 1992
between FINOVA and the Rights Agent named therein, as
amended (incorporated by reference from FINOVA's
report on Form 8-K dated September 21, 1995, Exhibit
4.1).
(4.C.1) Acceptance of Successor Trustee to Appointment under
Rights Agreement noted in 4.C above (incorporated by
reference from FINOVA's report on Form 8-K, dated
November 30, 1995, Exhibit 4).
(4.D) Long-term debt instruments with principal amounts not
exceeding 10% of FINOVA's total consolidated assets
are not filed as exhibits to this report. FINOVA will
furnish a copy of those agreements to the SEC upon
its request.
(4.E) 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.F) 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.G) Indenture, dated as of December 11, 1996, between
FINOVA and Fleet National Bank as trustee
(incorporated by reference from FINOVA's report on
Form 8-K dated December 20, 1996, (the "December 1996
8-K"), Exhibit 4.1).
(4.G.1) Amended and Restated Declaration of Trust, dated as
of December 11, 1996, among Bruno A. Marszowski and
Robert J. Fitzsimmons, as Regular Trustees, First
Union Bank of Delaware, as Delaware Trustee, Fleet
National Bank, as Property Trustee, and FINOVA
(incorporated by reference from the December 1996
8-K, Exhibit 4.2).
(4.G.2) Preferred Security Guarantee, dated as of December
11, 1996, between FINOVA and Fleet National Bank, as
trustee (incorporated by reference from the December
1996 8-K, Exhibit 4.3).
(4.G.3) Form of 5 1/2% Convertible Subordinated Debenture
(incorporated by reference from the December 1996
8-K, Exhibit 4.4).
(4.G.4) Form of Preferred Security (TOPrS) (incorporated by
reference from the December 1996 8-K, Exhibit 4.5).
(4.H) Form of Indenture, dated as of March 20, 1998,
between FINOVA, FINOVA Capital and The First National
Bank of Chicago as Trustee (incorporated by reference
from FINOVA and FINOVA Capital's registration
statement on Form S-3, Registration No. 333-38171,
Exhibit 4.8).
24
<PAGE>
Exhibit No.
-----------
(4.I) Announcement of 2-for-1 Stock Split (incorporated by
reference from FINOVA's August 14, 1998 8-K, Exhibit
28).
(4.I.1) Letter to shareowners regarding FINOVA's 2-for-1
Stock Split (incorporated by reference from FINOVA's
October 1, 1998 8-K, Exhibit 28.A).
(4.I.2) Letter to holders of Preferred Securities regarding
the 2-for-1 common stock split and resulting
adjustment in conversion price applicable to the
Convertible Trust Originated Preferred Securities of
FINOVA Finance Trust (incorporated by reference from
FINOVA's October 1, 1998 8-K, Exhibit 28.B).
(4.J) 1992 Stock Incentive Plan, as amended through the
date of this filing (incorporated by reference from
the 1997 10-K, Exhibit 4.J).+
(4.K) Sirrom Capital Corporation Amended and Restated 1994
Stock Option Plan.*
(4.L) Sirrom Capital Corporation Amended and Restated 1995
Stock Option Plan for Non-employee Directors.*
(4.M) Sirrom Capital Corporation Amended and Restated 1996
Incentive Stock Option Plan.*
(4.N) Director resolutions dated February 11, 1999,
regarding adoption of the Sirrom stock option plans.*
(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 Westminister Bank USA, as
agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to
the Sixth Amendment and Restatement, noted in 10.A
above (incorporated by reference from the 1994 10-K,
Exhibit 10.A.1).
(10.A.2) Second Amendment dated as of May 11, 1995 to the
Sixth Amendment and Restatement noted in 10.A above
(incorporated by reference from FINOVA's Quarterly
Report on Form 10-Q for the period ending September
30, 1995 ( the "3Q95 10-Q"), Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 3Q95 10-Q, Exhibit 10.B).
(10.A.4) Fourth Amendment dated as of May 15, 1996, to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 1996 10-K, Exhibit 10.A.4).
(10.A.5) Fifth Amendment dated as of May 20, 1998 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 1997 10-K, Exhibit 10.A.5).
(10.B) Credit Agreement (Short-Term Facility) dated as of
May 16, 1994 among FINOVA Capital, the Lender parties
thereto, the Agents and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.2).
25
<PAGE>
Exhibit No.
-----------
(10.B.1) First Amendment dated as of September 30, 1994 to the
Credit Agreement noted in 10.B above (incorporated by
reference from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.D).
(10.B.4) Fourth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from 1996 10-K,
Exhibit B.4).
(10.B.5) Fifth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 1997 10-K,
Exhibit 10.B.5).+
(10.C) 1998 Management Incentive Plan (incorporated by
reference from the 1997 10-K, Exhibit 10.C.)+
(10.D) 1999 Management Incentive Plan.*+
(10.E.1) 1996 - 1998 Performance Share Incentive Plan
(incorporated by reference from 1996 10-K, Exhibit
10.E.3).+
(10.E.2) 1997 - 1999 Performance Share Incentive Plan
(incorporated by reference from the 1997 10-K,
Exhibit 10.E.3).+
(10.E.3) 1998 - 2000 Performance Share Incentive Plan
(incorporated by reference from the 1997 10-K,
Exhibit 10.E.4).+
(10.E.4) 1999 - 2001 Performance Share Incentive Plan.*+
(10.F) Employment Agreement with Samuel L. Eichenfield dated
March 16, 1996 (incorporated by reference from the
1995 10-K, Exhibit 10.F.3).+
(10.F.1) Amendment to Employment Agreement referenced in 10.F
above (incorporated by reference from the 1996 10-K,
Exhibit 10.F.2).+
(10.F.2) Second Amendment to Employment Agreement referenced
in 10.F above (incorporated by reference from the
2Q97 10-Q, Exhibit 10).+
(10.G) Employment Agreement with William J. Hallinan, dated
February 25, 1992 (incorporated by reference from the
1992 10-K, Exhibit 10.1).+
(10.H) Amended and Restated Supplemental Pension Plan,
(incorporated by reference from the 1996 10-K,
Exhibit 10.1).+
(10.I) A description of FINOVA's policies regarding
compensation of directors is incorporated by
reference from the 1999 Proxy Statement.+
(10.J) Directors Deferred Compensation Plan (incorporated by
reference from the 1992 10-K, Exhibit 10.O).+
26
<PAGE>
Exhibit No.
-----------
(10.K) Directors' Retirement Benefit Plan (incorporated by
reference from FINOVA's report on Form 10-K for the
year ended December 31, 1993 (the "1993 10-K"),
Exhibit 10.OO).+
(10.L) Directors' Charitable Awards Program (incorporated by
reference from the 1994 10-K, Exhibit 10.CC).+
(10.M) Deferred Compensation Plan (incorporated by reference
from the 1995 10-K, Exhibit 10.N).+
(10.N) Bonus KEYSOP Plan (incorporated by reference from the
1997 10-K, Exhibit 10.N).+
(10.N.1) Bonus KEYSOP Trust Agreement (incorporated by
reference from the 1997 10-K, Exhibit 10.N.1).+
(10.O) FINOVA's Executive Officer Loan Program Policies and
Procedures, (incorporated by reference from the 1996
10-K, Exhibit 10.U).+
(10.P.1) FINOVA's Executive Severance Plan for Tier 1
Employees (incorporated by reference from the 1995
10-K, Exhibit 10.C.1).+
(10.P.2) FINOVA's Executive Severance Plan for Tier 2
Employees (incorporated by reference from the 1995
10-K, Exhibit 10.C.2).+
(10.Q.1) Value Sharing Plan for the Chief Executive Officer
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.L).+
(10.Q.2) Value Sharing Plan for Executive Officers and Key
Employees (incorporated by reference from the 3Q95
10-Q, Exhibit 10.K).+
(10.R) Tax Sharing Agreement dated February 19, 1992 among
FINOVA, The Dial Corp and others (incorporated by
reference from the 1992 10-K, Exhibit 10.KK).
(10.S) 1992 Stock Incentive Plan (incorporated by reference
from the 1997 10-K, Exhibit 4.J).+
(10.T) Documents relating to the mini-CMBS Program: FINOVA
Commercial Mortgage Loan Owner Trust 1998-1.
Commercial Mortgage Loan Asset Backed Certificates
1998 -1.*
(10.T.1) Certificate Purchase Agreement dated as of September
29, 1998.*
(10.T.2) Trust and Servicing Agreement dated as of September
1, 1998.*
(10.T.3) Loan Purchase Agreement dated as of September 1,
1998.*
(10.T.4) Amendment No. 1 to the Trust and Servicing Agreement
dated as of December 8, 1998.*
(10.T.5) Amendment No. 2 to the Trust and Servicing Agreement
dated as of December 29, 1998.*
(10.T.6) Custodial Agreement dated as of September 1, 1998.*
(10.T.7) Administration Agreement dated as of September 1,
1998.*
(10.T.8) Amendment No. 3 to the Trust and Servicing Agreement
dated as of April 21, 1999.**
27
<PAGE>
Exhibit No.
-----------
(10.T.9) Amendment No. 4 to the Trust and Servicing Agreement
dated as of April 26, 1999.**
(12) Computation of Ratio of Restated Income to Combined
Fixed Charges and Preferred Stock Dividends, as
restated.**
(21) Subsidiaries.**
(23) Independent Auditors' Consent.**
(24) Powers of Attorney.**
(27) Financial Data Schedule for the year ended December
31, 1998, as restated.**
- ------------------------------------------
* Previously filed.
** Filed with this report.
+ Relating to management compensation.
(b) Reports on Form 8-K.
A report on Form 8-K, dated April 16, 1999, was filed by FINOVA, which
reported under Items 5 and 7 postponement of the release of earnings for the
first quarter of 1999.
A report on Form 8-K, dated March 31, 1999 was filed by FINOVA which
reported under Items 5 and 7 the summation of the acquisition of Sirrom Capital
Corporation.
A report on Form 8-K, dated January 14, 1999, was filed by FINOVA which
reported under Items 5 and 7 the revenues, net income and selected financial
data and ratios for the fourth quarter and year ended December 31, 1998
(unaudited).
A report on Form 13-D, dated January 6, 1999, was filed by FINOVA which
reported under Item 4 the Agreement and Plan of Merger between FINOVA and Sirrom
Capital Corporation.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the capacities
indicated, in Phoenix, Arizona on May 5, 1999.
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)
29
<PAGE>
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
* *
-------------------------------- --------------------------------
Robert H. Clark, Jr. (Director) G. Robert Durham (Director)
May 5, 1999 May 5, 1999
/s/ Samuel L. Eichenfield *
-------------------------------- --------------------------------
Samuel L. Eichenfield (Chairman) James L. Johnson (Director)
May 5, 1999 May 5, 1999
* *
-------------------------------- --------------------------------
Kenneth R. Smith (Director) Shoshana B. Tancer (Director)
May 5, 1999 May 5, 1999
* *
-------------------------------- --------------------------------
John W. Teets (Director) Constance R. Curran (Director)
May 5, 1999 May 5, 1999
* Signed pursuant to Powers of Attorney dated February 11, 1999.
/s/ Bruno A. Marszowski
----------------------------------
Bruno A. Marszowski
Attorney-in-Fact
May 5, 1999
30
<PAGE>
ANNEX A
THE FINOVA GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AS RESTATED
Page
----
Financial Highlights A-1
Management's Discussion and Analysis of Financial Condition
and Results of Operations A-3
Quantitative and Qualitative Disclosure about Market Risk A-16
Management's Report on Responsibility for Financial Reporting A-17
Independent Auditors' Report A-18
Consolidated Balance Sheet A-19
Statements of Consolidated Income A-20
Statements of Consolidated Shareowners' Equity A-21
Statements of Consolidated Cash Flows A-22
Notes to Consolidated Financial Statements A-23
Supplemental Selected Financial Data A-48
A-i
<PAGE>
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 (10) 1997 (10) 1996 (10)
- ------------------------ --------- --------- ---------
<S> <C> <C> <C>
OPERATIONS:
Interest margins earned $ 459,515 $ 392,124 $ 329,107
Volume-based fees 77,723 39,378 28,588
Operating expenses 216,653 168,444 140,218
Income from continuing operations 160,341 137,910 117,968
Net income 160,341 137,910 118,475
FINANCIAL POSITION:
Ending funds employed 10,020,221 8,420,462 7,318,919
Ending managed assets (1) 10,557,817 8,878,429 7,683,465
Average managed assets (2) 9,502,823 8,156,242 7,047,160
Average earning assets (3) 8,546,715 7,360,012 6,329,998
Reserve for credit losses 207,618 177,088 148,693
Nonaccruing assets (4) 205,233 187,356 155,505
Funded new business 3,979,265 3,311,105 2,740,353
Fee-based volume 7,257,003 4,532,494 2,937,311
Net write-offs 56,758 43,200 28,721
CAPITALIZATION:
Total debt 8,394,578 6,764,581 5,850,223
Company-obligated mandatory redeemable
convertible preferred Securities of a
subsidiary trust solely holding convertible
debentures of FINOVA ("TOPrS") 111,550 111,550 111,550
Shareowners' equity 1,167,231 1,092,254 936,085
PORTFOLIO QUALITY:
Net write-offs as a % of average managed assets (5) 0.60% 0.53% 0.41%
Nonaccruing assets as a % of ending managed assets (5) 2.0% 2.1% 2.0%
Reserve for credit losses as a % of:
Ending managed assets (5) (6) 2.0% 2.0% 2.0%
Nonaccruing assets 101.2% 94.5% 95.6%
As a multiple of net write-offs 3.7x 4.1x 5.2x
- --------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
FINANCIAL HIGHLIGHTS Continued
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 (10) 1997 (10) 1996 (10)
- ------------------------ --------- --------- ---------
<S> <C> <C> <C>
PERFORMANCE HIGHLIGHTS:
Return from continuing operations as a % of average
funds employed (7) 1.8% 1.8% 1.8%
Operating margin earned as a % of average earning
assets (3) 6.3% 5.9% 5.7%
Interest margins earned as a % of average earning
assets (3) 5.4% 5.3% 5.2%
Operating expenses as a % of operating margin 40.3% 39.0% 39.2%
Operating expenses as a % of operating margin
plus gains 38.3% 36.5% 37.9%
Aggregate cost of funds 6.4% 6.6% 6.8%
Ratio of income to combined fixed charges and
preferred stock dividends 1.53x 1.51x 1.51x
Return from continuing operations on average equity 14.1% 14.1% 13.5%
Basic earnings per common share:
Continuing operations $ 2.87 $ 2.53 $ 2.16
Net income $ 2.87 $ 2.53 $ 2.17
Adjusted weighted average shares (8) 55,946,000 54,405,000 54,508,000
Diluted earnings per share (9):
Continuing operations $ 2.70 $ 2.40 $ 2.10
Net income $ 2.70 $ 2.40 $ 2.11
Adjusted weighted average shares (8) 60,705,000 59,161,000 56,051,000
Book value per share outstanding $ 20.95 $ 19.41 $ 17.00
Shares outstanding (8) 55,721,000 56,282,000 55,058,000
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes assets sold under securitization and participation agreements that
are managed by the Company; however, excludes managed assets serviced under
the mini-CMBS structure due to the expected short-term nature of the
servicing rights.
(2) Includes average securitizations and participations of $484.5 million,
$388.9 million and $327.4 million for 1998, 1997 and 1996, respectively.
(3) Represents average funds employed excluding average deferred taxes on
leveraged leases of $275.9 million, $234.4 million and $237.8 million for
1998, 1997 and 1996, respectively and average nonaccruing assets.
(4) Includes nonaccruing assets classified as discontinued operations at
December 31, 1996.
(5) Excludes participations sold of $101.5 million, $121.4 million and $64.5
million for 1998, 1997 and 1996, respectively, in which the Company has
transferred credit risk.
(6) Excludes financing contracts held for sale of $220.1 million for 1998.
(7) Average funds employed excludes average deferred taxes on leveraged leases.
(8) Shares for 1997 and 1996 have been adjusted to reflect a two-for-one stock
split on October 1, 1997.
(9) Diluted earnings per share include the dilutive potential of options,
restricted stock and convertible preferred stock.
(10) As restated. See Note T of Notes to the Consolidated Financial Statements.
A-2
<PAGE>
THE FINOVA GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion relates to the restated financial statements of
The FINOVA Group Inc. and its subsidiaries (collectively, "FINOVA" or the
"Company"), including FINOVA Capital Corporation and its subsidiaries
(collectively, "FINOVA Capital"). The financial statements are being restated
primarily as a result of two accounting issues, as well as several other
adjustments.
The first issue relates to the amount of the gains on sale of certain
commercial mortgage-backed securities (CMBS), reported in 1998. In the latter
part of 1998, the Company used for the first time a private CMBS structure
("mini-CMBS") to sell loans originated by FINOVA Realty Capital ("FRC"). Under
this structure, the Company sold loans originated by FRC to a trust with limited
recourse. The trust held those loans with plans to resell them into the
permanent CMBS market. The trust paid cash to the Company upon acquisition of
the assets, issued a senior security interest to an investment banking firm and
a subordinated residual interest to the Company. The Company retained the
servicing rights and obligations related to the assets transferred to the Trust.
The Company was required to recognize gains on the transfer of the loans to
the mini-CMBS trust in accordance with SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liability," and initially
reported gains in the gross amount of $46.1 million. Subsequent to the issuance
of the Company's 1998 financial statements, the Company determined that the
original estimate of the fair value of the Company's retained interest was
overstated and accordingly revalued its retained interest in the mini-CMBS
transaction. This revaluation resulted in a reduction of the value of the
retained portion of the loans from the $91.7 million previously reported, to
$65.0 million, as now restated. This reduction in the value reduced FINOVA's
previously reported 1998 gross gains on mini-CMBS sales of $46.1 million to
$19.5 million, as restated. After recognition for hedge losses, commissions,
expenses and other obligations, the Company reported a net mini-CMBS loss of
$10.0 million. No gains were recognized on the subordinated interest retained by
the Company.
In determining the fair value of assets sold and interests retained, the
Company employed a variety of financial assumptions. To establish discount
rates, the Company referred to the subsequent April 1999 sale of approximately
70% of the mini-CMBS loans into a permanent CMBS structure. The permanent
transaction was compared to the mini-CMBS transaction and similar portions of
the interest retained were discounted using rates present in the permanent
structure, after adjusting for general movements in interest rates between the
date of the mini-CMBS transaction and the permanent transaction. Specifically,
servicing rights were discounted at approximately 6% and the remaining residual
cash flows were discounted at rates between 9% and 18%. The Company assumed
minimal defaults and prepayments due to the nature and structure of the
commercial mortgages. The recourse obligation was recorded at fair value based
on prices obtained from the subsequent April 1999 sale.
Once the trust sells the remainder of the loans into the permanent CMBS
market, there will be no further recourse or assumption risk.
Further discussion of the mini-CMBS transaction can be found under "Gains
on Disposal of Assets" in this discussion and under the "Securitizations"
Section of Note C and in Note T of the Notes to Consolidated Financial
Statements included in Annex A.
The second subject of the restatement relates to accounting for expenses
incurred in connection with the origination of new loans under SFAS No. 91,
"Accounting for Non-Refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Historically, the Company
has deferred loan origination fees received and amortized that income over the
lives of loans, while electing to expense loan origination costs as incurred
rather than deferring and amortizing them. As now restated, the Company has
A-3
<PAGE>
THE FINOVA GROUP INC.
deferred and amortized loan origination costs in accordance with SFAS No. 91.
The restated financial statements include several other adjustments.
A summary of the significant effects of the restatements for 1998 is as
follows:
<TABLE>
<CAPTION>
1998
Adjustments
-------------------------------
As Previously Origination As
Reported CMBS Gain Costs Other Restated
-------- --------- ----- ----- --------
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31,
Investment in financing transactions $10,011,536 $(21,847) $ 37,426 $ (6,894) $10,020,221
Goodwill and other assets 596,878 (1,140) (16,623) 579,115
Total liabilities 9,161,419 (4,910) 15,045 (9,099) 9,162,455
Shareowners' equity 1,177,345 (18,077) 22,381 (14,418) 1,167,231
FOR THE YEAR ENDED DECEMBER 31,
Interest margins earned 472,536 (15,605) 2,584 459,515
Gains on disposal of assets 55,024 (26,018) (1,094) 27,912
Operating expenses 241,074 (23,731) (690) 216,653
Net income 169,737 (15,559) 4,859 1,304 160,341
Basic earnings per share $ 3.03 $ (0.27) $ 0.09 $ 0.02 $ 2.87
Diluted earnings per share $ 2.86 $ (0.26) $ 0.08 $ 0.02 $ 2.70
- -------------------------------------------------------------------------------------------------------
</TABLE>
The restatement to reduce the mini-CMBS gain did not affect years prior to
1998.
A-4
<PAGE>
A summary of the significant effects of the restatement to defer loan
origination costs, as well as several other adjustments in 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
As Previously As As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AT DECEMBER 31,
Investment in financing transactions $8,399,456 $8,420,462 $7,298,759 $7,318,919
Goodwill and other assets 464,282 448,062 345,408 336,970
Total liabilities 7,517,836 7,520,822 6,485,593 6,490,821
Shareowners' equity 1,090,454 1,092,254 929,591 936,085
FOR THE YEAR ENDED DECEMBER 31,
Interest margins earned 408,914 392,124 340,517 329,107
Gain on disposal of assets 30,261 30,333 12,949 12,562
Operating expenses 190,525 168,444 154,481 140,218
Net Income 139,098 137,910 117,000 118,475
Basic earnings per share $ 2.56 $ 2.53 $ 2.15 $ 2.17
Diluted earnings per share $ 2.42 $ 2.40 $ 2.09 $ 2.11
</TABLE>
A prior period adjustment of $3.9 million has been reflected in
shareowners' equity at January 1, 1996. The effects of restatement have been
reflected herein.
RESULTS OF OPERATIONS
The following table summarizes FINOVA's operating results for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Percent Percent
(Dollars in Millions) 1998 1997 Change 1997 1996 Change
- --------------------- ---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest margins earned $ 459.5 $ 392.1 17.2% $ 392.1 $ 329.1 19.1%
Volume-based fees 77.7 39.4 97.4% 39.4 28.6 37.7%
------- ------- ------- --------
Operating margin 537.2 431.5 24.5% 431.5 357.7 20.6%
Provision for credit losses (82.2) (69.2) 18.8% (69.2) (41.8) 65.7%
Gains on disposal of assets 27.9 30.3 (8.0)% 30.3 12.6 141.5%
Operating expenses (216.7) (168.4) 28.6% (168.4) (140.2) 20.1%
Income taxes (102.2) (82.3) 24.2% (82.3) (70.3) 17.0%
Preferred dividends, net (3.8) (4.0) (5.3%) (4.0) n/a
------- ------- ------- --------
Income from continuing
operations 160.3 137.9 16.3% 137.9 118.0 16.9%
Income and gain from
discontinued operations n/a 0.5 n/a
------- ------- ------- --------
Net Income $ 160.3 $ 137.9 16.3% $ 137.9 $ 118.5 16.4%
======= ======= ======= ========
</TABLE>
A-5
<PAGE>
1998 COMPARED TO 1997
Net income for 1998 increased 16.3% to $160.3 million from $137.9 million
in 1997. The increase was due to the growth in average earning assets and the
expansion of the fee-related businesses, partially offset by a $10.0 million
loss on the sale of commercial mortgage-backed securities (CMBS) through
mini-CMBS transactions more fully described elsewhere in this discussion and in
Note C of Notes to Consolidated Financial Statements. Other offsetting items
included a higher provision for credit losses, increased operating expenses and
a higher effective tax rate. Net income in 1998 included a full year of FINOVA
Realty Capital ("FRC") and AT&T Capital's Inventory Finance unit, both of which
were acquired in the fourth quarter of 1997. See Note B of Notes to Consolidated
Financial Statements for further discussion.
INTEREST MARGINS EARNED. The net spread from the portfolio is represented
by interest margins earned, which is the difference between (a) income earned
from financing transactions and (b) interest expense and depreciation on
operating leases and other owned assets. Interest margins earned increased 17.2%
to $459.5 million in 1998 from $392.1 million in 1997, due primarily to a 16.1%
increase in average earning assets in 1998.
Average earning assets, which represents the average of FINOVA's investment
in financing transactions less nonaccruing assets and deferred taxes related to
leveraged leases, increased to $8.55 billion in 1998 from $7.36 billion in 1997.
The increase was primarily due to a 20.2% increase in funded new business of
$3.98 billion compared to $3.31 billion in 1997, partially offset by normal
amortization of the portfolio and prepayments during the year.
VOLUME-BASED FEES. Volume-based fees are generated by FINOVA's Distribution
& Channel Finance (formerly Inventory Finance), Commercial Services (formerly
Factoring Services) and FRC lines of business. These fees are predominantly
based on volume-originated business rather than the balance of outstanding
financing transactions during the year. Fees are generated on the volume of
purchased accounts receivables and mortgage loan originations. A majority of
FRC's mortgage loan originations are funded by other lenders and, therefore, are
not recorded on FINOVA's balance sheet. FINOVA's commercial mortgage operation
originates and sells loans and typically would only retain assets on the balance
sheet for a short period of time. Due to the short-term nature of
volume-originated business, these fees are recognized as income in the period of
origination.
The 97.4% increase in volume-based fees to $77.7 million in 1998 from $39.4
million in 1997 was primarily due to fee-based volume increasing by 60.1% to
$7.26 billion in 1998 compared to $4.53 billion in 1997. The increased volume
was attributable to the addition of FRC and AT&T Capital's Inventory Finance
unit.
The increase in volume-based fees in 1998 was the major reason for the
growth of FINOVA's operating margin as a percentage of average earning assets to
6.3% in 1998 from 5.9% in 1997. The interest rate spread portion of this margin
increased slightly to at 5.4% in 1998 from 5.3% in 1997.
PROVISION FOR CREDIT LOSSES. The provision for credit losses increased
18.8% to $82.2 million in 1998 compared to $69.2 million in 1997. The increase
in the provision reflected the growth in managed assets of 18.9% to $10.56
billion in 1998 from $8.88 billion in 1997 and an increase in net write-offs in
1998 to $56.8 million compared to $43.2 million in 1997. The higher level of
write-offs in 1998 was primarily due to prior credit problems experienced in
FINOVA's Commercial Services line of business which had net write-offs of $35.7
million in 1998 principally related to the business' wholesale textile
customers. The 1998 Commercial Services write-offs represent problems identified
in 1997 that the Company believed could be worked out. Unfortunately, the
results of those efforts were unsuccessful, resulting in increased write-offs
for 1998. Commercial Services is refocusing its portfolio to include more retail
customers and other industries. Net write-offs by line of business and other
changes in the reserve for credit losses can be found in Note D of Notes to
Consolidated Financial Statements.
GAINS ON DISPOSAL OF ASSETS. Gains on disposal of assets were $27.9 million
in 1998 compared to $30.3 million in 1997. Gains on disposal of assets include
the sale of loans via the commercial mortgage backed securities ("CMBS") market,
A-6
<PAGE>
THE FINOVA GROUP INC.
the sale of assets coming off lease and the sale of other assets. Sales of CMBS
transactions (permanent and mini-CMBS structures) resulted in a net loss of $7.2
million in 1998 and consisted of gross gains of $25.0 million offset by hedge
losses, commissions, expenses and recourse obligations of $32.2 million. The
total net loss on CMBS transactions of $7.2 million includes a net mini-CMBS
loss of $10.0 million from the utilization of the mini-CMBS structure to sell
loans warehoused by FINOVA Realty Capital and gains of $2.8 million from other
CMBS securitizations. In April 1999, approximately 70% of the assets within the
mini-CMBS structure were sold into a permanent CMBS structure. Refer to the
Recent Developments section of Management's Discussion and Analysis and Notes C
and T of Notes to the Consolidated Financial Statements for a further discussion
of the mini-CMBS transactions.
The other $35.1 million of net gains in 1998 resulted from the sale of
assets coming off lease, Franchise Finance loans and other assets. While, in the
aggregate, FINOVA has historically recognized gains on the disposal of assets it
holds, the timing and amount of these gains are sporadic in nature. There can be
no assurance FINOVA will recognize such gains in the future, depending, in part,
on market conditions at the time of disposal.
OPERATING EXPENSES. Operating expenses, which include selling,
administrative and other expenses, were generally higher in all major categories
and increased to $216.7 million in 1998 compared to $168.4 million in 1997. This
increase was partially attributable to the growth in managed assets during the
year and to incentives paid to employees based on performance criteria such as
profitability and the increased value of FINOVA's stock. Also contributing to
the increase was the addition of FRC, which has a higher operating cost
structure than other FINOVA lines of business, including over 80 business
development officers and support staff. Operating expenses were 40.3% of
operating margin for 1998 compared to 39.0% in 1997. Due to FINOVA's expansion
into activities that use gains from the disposal of assets to cover operating
expenses, a more appropriate ratio to measure efficiency is operating expenses
as a percentage of operating margin plus gains. Using this measurement,
operating expenses were 38.3% of operating margin plus gains for 1998 compared
to 36.5% in 1997. See Note O of Notes to Consolidated Financial Statements for
additional detail.
INCOME TAXES. Income taxes were $102.2 million in 1998 compared to $82.3
million in 1997. The increase was primarily due to higher pre-tax income and a
higher effective tax rate in 1998 due to the realization of certain tax credits
in 1997. See Note J of Notes to Consolidated Financial Statements for further
discussion of income taxes.
PREFERRED DIVIDENDS. Dividends, net of tax, paid on $111.6 million of
outstanding Company-obligated mandatory redeemable convertible preferred
securities ("TOPrS") was $3.8 million in 1998 compared to $4.0 million in 1997.
1997 COMPARED TO 1996
Net income for 1997 increased 16.4% to $137.9 million from $118.5
million in 1996. The increase reflected growth in managed assets, increased
fee-related business, higher gains on disposal of assets and a lower effective
income tax rate, partially offset by higher provisions for credit losses and
increased operating expenses. Income from continuing operations for 1997
increased to $137.9 million from $118.0 million in 1996. Continuing operations
in 1996 excluded the operating results of FINOVA's discontinued Manufacturer &
Dealer Services line of business ("MDS") and FINOVA Medical Systems and a $6
million gain resulting from the sale of MDS.
INTEREST MARGINS EARNED. Interest margins earned increased 19.1% to $392.1
million in 1997 from $329.1 million in 1996 due primarily to a higher level of
average earning assets.
Average earning assets increased 16.3% to $7.36 billion in 1997 from $6.33
billion a year earlier. This increase primarily resulted from a 20.8% increase
in funded new business of $3.31 billion compared to $2.74 billion in 1996, and
to a lesser extent, from portfolios purchased during 1997 (totaling $122
million). These increases were partially offset by the normal amortization of
the portfolio and prepayments during the year.
A-7
<PAGE>
THE FINOVA GROUP INC.
VOLUME-BASED FEES. Volume-based fees increased 37.7% to $39.4 million in
1997 compared to $28.6 million in 1996. The increase was primarily due to
fee-based volume of $4.53 billion in 1997 that was 54.3% higher than the
fee-based volume of $2.94 billion in 1996. Contributing to the increase in
fee-based business were the acquisitions of FRC (formerly Belgravia Capital
Corporation) and AT&T Capital's Inventory Finance unit in the fourth quarter of
1997.
The 54.3% increase in fee-based volume in 1997 was a primary factor in the
improvement of FINOVA's operating margin as a percentage of average earning
assets to 5.9% in 1997 from 5.7% in 1996. Lower aggregate borrowing costs and
lower leverage in 1997 also contributed to the improvement in the operating
margin.
PROVISION FOR CREDIT LOSSES. The provision for credit losses increased
65.7% to $69.2 million in 1997 compared to $41.8 million in 1996. In addition to
growth in FINOVA's managed assets, the increase in the provision for credit
losses primarily resulted from an increase in net write-offs to $43.2 million in
1997 from $28.7 million in 1996. The higher net write-offs in 1997 were
primarily attributable to FINOVA's Commercial Services line of business, due to
credit problems experienced among the line's wholesale textile customers. Total
net write-offs for FINOVA's other lines of business were lower in 1997 than in
1996.
FINOVA's net write-offs during 1997 represented 0.53% of average managed
assets (excluding average participations) compared to 0.41% in 1996. Details of
net write-offs and other changes in the reserve for credit losses can be found
in Note D of Notes to Consolidated Financial Statements.
GAINS ON DISPOSAL OF ASSETS. Gains on disposal of assets totaled $30.3
million in 1997, higher than the $12.6 million in 1996. In addition to the sale
of assets coming off lease, FINOVA recognized a significant gain from the early
termination of a real estate leveraged lease transaction in 1997.
OPERATING EXPENSES. Operating expenses, as restated, were higher in 1997
than in 1996, primarily as a result of increased costs necessary to manage
FINOVA's larger portfolio. Also contributing to the increase in operating
expenses were incentives paid to employees based on performance criteria such as
profitability and the increased value of FINOVA's stock (which increased by
54.7% to $49 11/16 per share at year-end). The Company also incurred additional
costs in administering problem loan accounts in 1997, including an increase with
respect to the Commercial Services line of business.
As a percentage of operating margin, operating expenses declined slightly
to 39.0% in 1997 from 39.2% in 1996. See Note O of Notes to Consolidated
Financial Statements for further detail of operating expenses.
INCOME TAXES. Income taxes were higher in 1997 than in 1996 due to the
increase in pre-tax income. Partially offsetting the increase was a lower
effective tax rate in 1997 of 36.7% compared to 37.3% in 1996, principally
caused by FINOVA's ability to use certain capital loss carryforwards in 1997.
See Note J of Notes to Consolidated Financial Statements for further discussion
of income taxes.
PREFERRED DIVIDENDS. During 1997, a subsidiary trust sponsored and wholly
owned by FINOVA had $111.6 million (net of transaction costs) outstanding of
TOPrS. FINOVA paid dividends of $4.0 million, after tax, on these securities
during 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Managed assets at December 31, 1998 increased 18.9% to $10.56 billion from
$8.88 billion at December 31, 1997. The increase was the result of a 20.2%
increase in funded new business of $3.98 billion in 1998 compared to $3.31
billion in 1997, partially offset by normal loan and lease amortization and
prepayments.
A-8
<PAGE>
THE FINOVA GROUP INC.
FINOVA's reserve for credit losses increased to $207.6 million at December
31, 1998 from $177.1 million at year-end 1997 that primarily consisted of
provisions of $82.2 million partially offset by net write-offs totaling $56.8
million. At December 31, 1998 the reserve represented 2.0% of managed assets
(excluding participations sold and financing contracts held for sale) the same
level as one year ago. Nonaccruing assets increased to $205.2 million at
December 31, 1998 representing 2.0% of ending managed assets (excluding
participations sold) compared to $187.4 million in nonaccruing assets as of
December 31, 1997, which constituted 2.1% of ending managed assets. The single
most significant increase in nonaccruing assets was the addition of a
paper-manufacturing customer in the Commercial Equipment Finance line of
business. At December 31, 1998, the reserve represented 101.2% of nonaccruing
assets compared to 94.5% at December 31, 1997. See Note D of Notes to
Consolidated Financial Statements for more information on the reserves, net
write-offs and nonaccruing assets.
The Company had total debt outstanding of $8.39 billion at December 31,
1998 or 6.6 times its equity base (shareowners' equity plus convertible
preferred securities) of $1.28 billion (FINOVA Capital's leverage as of December
31, 1998 was 6.3 to 1). At December 31, 1997, the Company had debt leverage of
5.6 times its equity base ($6.76 billion debt outstanding to $1.20 billion of
equity). Deferred income taxes, which are used to finance a portion of FINOVA's
assets, grew 24.0% during 1998 to $342.3 million from $276.0 million at year-end
1997.
Growth in managed assets is generally financed by internally generated cash
flows and borrowings. During 1998, FINOVA Capital issued $1.6 billion in new
senior debt and increased its commercial paper and other short-term borrowings
by $739.5 million. These funds were used to finance new business and to redeem
or retire $689 million of debt. During 1997, the Company also issued
approximately 1.7 million shares of its common stock as the primary
consideration for the acquisition of FRC. See Note B of Notes to Consolidated
Financial Statements for further detail.
FINOVA satisfies a significant portion of its cash requirements from a
diversified group of worldwide funding sources and is not dependent on any one
lender. FINOVA also relies on the issuance of commercial paper as a major
funding source. During 1998, FINOVA Capital issued $18.4 billion of commercial
paper, at a weighted average cost of 5.67% (with an average of $3.5 billion
outstanding during the year) and raised $1.6 billion, as noted above, through
new long-term financings of one to twelve year durations. At December 31, 1998
and 1997, commercial paper and short-term bank borrowings totaled $3.9 billion
and $3.1 billion, respectively, and were supported by available unused revolving
credit lines which, if not renewed, are convertible to long-term debt at
FINOVA's option.
At December 31, 1998, FINOVA Capital maintained a five-year revolving
credit facility and a 364-day facility with numerous lenders, in the aggregate
principal amount of $2.0 billion. Separately, FINOVA Capital also had two
five-year facilities with numerous lenders for $700 million each, one 364-day
facility with numerous lenders for $600 million and three 364-day facilities
with three separate lenders for an aggregate principal amount of $400 million.
These $4.4 billion of credit facilities support FINOVA's outstanding commercial
paper and short-term borrowings. The Company intends to borrow under the
domestic revolving credit agreements to refinance commercial paper and
short-term bank loans if it encounters significant difficulties in rolling over
its outstanding commercial paper and short-term bank loans. The Company rarely
borrows under these facilities. The 364-day $1.0 billion and $600 million
revolving credit agreements are subject to renewal in 1999, while the two $700
million and the other $1.0 billion credit facilities are subject to renewal in
2002. The 364-day facilities totaling $400 million are subject to renewal in
1999; however, the Company does not anticipate extending these facilities. In
addition to the above, The FINOVA Group Inc. has a revolving credit facility
with one lender for $25 million, which is subject to renewal in 1999.
The Company, through one subsidiary, uses a five-year multi-currency
facility with a small group of lenders for $100 million. Through another
subsidiary, the Company maintains a 364-day revolving credit facility with three
lenders in Canada for 100 million Canadian dollars. FINOVA Capital is the
guarantor of these credit facilities, which are subject to renewal in 1999.
A-9
<PAGE>
THE FINOVA GROUP INC.
In 1998, FINOVA Capital commenced a Euro Medium-Term Note Program allowing
for the issuance of up to $1.0 billion of debt securities. As of December 31,
1998 there was $750 million available under the program.
In 1997, FINOVA and FINOVA Capital jointly filed a universal shelf
registration statement with the SEC allowing for the issuance of $2.0 billion of
senior debt securities, common stock, preferred stock, depositary shares and
warrants to purchase common stock or debt securities, $830 million of which
remained available as of December 31, 1998, of which $105 million had been
designated for the issuance of medium term notes.
The agreements pertaining to long-term debt include various restrictive
covenants and require the maintenance of certain defined financial ratios with
which FINOVA and FINOVA Capital have complied. Under one covenant, dividend
payments by FINOVA Capital to FINOVA are limited to 50 percent of accumulated
earnings after December 31, 1991.
FINOVA Capital's aggregate cost of funds decreased to 6.4% for 1998 from
6.6% for 1997 as a result of declining interest rates and the elimination of
costs associated with $1.15 billion of maturing interest rate hedges. FINOVA's
cost of and access to capital is dependent, in large part, on its credit
ratings. FINOVA Capital has maintained investment-grade ratings since 1976.
FINOVA Capital currently has investment-grade ratings from the following
agencies:
Commercial Senior
Paper Debt
---------- ------
Duff & Phelps Credit Rating Co. D1 A
Fitch Investors Services, Inc. F1 A
Moody's Investors Service, Inc. P2 Baa1
Standard & Poor's Ratings Group A2 A-
In addition, FINOVA Finance Trust, a subsidiary trust of FINOVA, has issued
TOPrS with investment-grade ratings as follows:
TOPrS
-----
Duff & Phelps Credit Rating Co. BBB+
Fitch Investors Services, Inc. A-
Moody's Investors Service, Inc. Baa2
Standard & Poor's Ratings Group BBB
None of FINOVA Capital's subsidiaries have applied for credit ratings.
Standard & Poor's Ratings Group changed on February 26, 1999, its rating of
the TOPrS from BBB+ to BBB. The rating change was not a downgrade, but resulted
from the new rating scale under which Standard & Poor's Ratings Group rates
preferred stock two notches below the corporate or counter party credit rating
of an investment-grade issuer such as FINOVA.
FINOVA periodically repurchases its securities on the open market to fund
its obligations pursuant to employee stock options, benefit plans and similar
obligations. During the years 1998 and 1997, FINOVA repurchased 1,299,200 and
1,035,800 shares, respectively. This program may be discontinued at any time.
A-10
<PAGE>
THE FINOVA GROUP INC.
DERIVATIVE FINANCIAL INSTRUMENTS
FINOVA enters into interest rate and basis swap agreements as part of its
interest rate risk management policy of match funding its assets and
liabilities. The derivative instruments used are straightforward. FINOVA
continually monitors its derivative position and uses derivative instruments for
non-trading and non-speculative purposes only.
At December 31, 1998, FINOVA Capital had outstanding interest rate
conversion agreements with notional principal amounts totaling $1.80 billion.
Agreements with notional principal amounts of $700 million were arranged to
effectively convert certain floating interest rate obligations into fixed
interest rate obligations. These agreements require interest payments on the
stated principal amount at rates ranging from 5.84% to 8.09% (remaining terms of
one to ten years) in return for receipts calculated on the same notional amounts
at floating interest rates. In addition, agreements with notional principal
amounts of $1.10 billion were arranged to effectively convert certain fixed
interest rate obligations into floating interest rate obligations. They require
interest payments on the stated principal amount at the three month or six month
London interbank offered rates ("LIBOR") (remaining terms of one to eight years)
in return for receipts calculated on the same notional amounts at fixed interest
rates of 5.77% to 7.71%.
FINOVA also enters into short-term treasury rate locks, options,
swaptions and other derivative instruments to hedge interest rate risks
associated with the warehousing of loans primarily for FINOVA Realty Capital.
See Note F of Notes to Consolidated Financial Statements for further discussion
of FINOVA's derivatives.
A-11
<PAGE>
THE FINOVA GROUP INC.
SEGMENT REPORTING
Information for FINOVA's reportable segments reconciles to FINOVA's
consolidated totals as follows:
Dollars in Thousands 1998 1997
- -------------------- ---- ----
TOTAL NET REVENUE:
Commercial Finance $ 187,461 $ 154,981
Specialty Finance 344,541 313,841
Capital Markets 24,170 2,099
Corporate and other 8,978 (9,086)
------------ -----------
Consolidated total $ 565,150 $ 461,835
============ ===========
INCOME (LOSS) BEFORE ALLOCATIONS:
Commercial Finance $ 67,013 $ 72,454
Specialty Finance 273,674 248,793
Capital Markets (2,775) 2,099
Corporate and other, overhead and unallocated
provision for credit losses (71,615) (99,155)
------------ -----------
Income from continuing operations before
income taxes and preferred dividends $ 266,297 $ 224,191
============ ===========
MANAGED ASSETS:
Commercial Finance $ 3,005,130 $ 2,755,826
Specialty Finance 7,211,164 6,037,725
Capital Markets 255,575
Corporate and other 85,948 84,878
------------ -----------
Consolidated total $ 10,557,817 $ 8,878,429
Less securitizations and participations sold (537,596) (457,967)
------------ -----------
Investment in financing transactions $ 10,020,221 $ 8,420,462
============ ===========
FINOVA's business is organized into three market groups, which are also its
reportable segments: Commercial Finance, Specialty Finance and Capital Markets.
Management relies on total net revenue, income before allocations and managed
assets in evaluating the business performance of each reportable segment. See
Note Q of Notes to Consolidated Financial Statements for additional detail.
Total net revenue is the total of operating margin and gains on disposal of
assets. Income before allocations is income before income taxes, preferred
dividends, corporate overhead expenses and the unallocated portion of the
provision for credit losses. Managed assets include each segment's investment in
financing transactions plus securitizations and participations sold.
COMMERCIAL FINANCE. Commercial Finance includes traditional asset-based
businesses that lend against collateral such as cash flows, inventory,
receivables and leased assets. This segment includes the following lines of
business: Business Credit, Commercial Services, Corporate Finance, Distribution
& Channel Finance, Growth Finance and Rediscount Finance.
Total net revenue was $187.5 million in 1998 compared to $155.0 million in
1997, an increase of 21.0%. The increase in 1998 was primarily due to 16.9%
growth in fee-based volume, which rose to $4.45 billion from $3.80 billion and
24.0% growth in average earnings assets for the group in 1998. The 1998 results
include a full year of activity from AT&T Capital's Inventory Finance unit,
which became part of Distribution & Channel Finance's line of business in the
fourth quarter of 1997.
A-12
<PAGE>
THE FINOVA GROUP INC.
Income before allocations was $67.0 million in 1998 compared to $72.5
million in 1997. The decrease in 1998 was primarily due to previously reported
problems experienced in the Commercial Services line of business related to its
wholesale textile customers, which resulted in net write-offs of $35.7 million
in 1998 compared to $23.3 million in 1997. As a result of the Commercial
Services portfolio problems, the unit experienced higher operating expenses and
a decline in fee-based volume. Commercial Services is currently refocusing its
portfolio towards more retail customers and other industries. Excluding the net
effects of Commercial Services, income before allocations of the Commercial
Finance group would have increased 20.2% in 1998.
Managed assets grew to $3.01 billion in 1998 from $2.76 billion in 1997, an
increase of 9.0%. The growth in managed assets was slowed due to compression in
the Commercial Services unit, partially offset by strong growth in the
Rediscount Finance operation. Fee-based businesses, which make up a portion of
Commercial Finance, rely more on volume growth to increase income than asset
growth. A significant portion of the income growth (20.2% excluding Commercial
Services) was due to increased fee-based volume.
SPECIALTY FINANCE. Specialty Finance includes businesses that lend to a
variety of highly focused industry-specific niches. This segment includes the
following lines of business: Commercial Equipment Finance, Communications
Finance, Franchise Finance, Healthcare Finance, Portfolio Services, Public
Finance, Resort Finance, Specialty Real Estate Finance and Transportation
Finance.
Total net revenue increased 9.8% to $344.5 million in 1998 compared to
$313.8 million in 1997, while income before allocations grew 10.0% to $273.7
million in 1998 compared to $248.8 million in 1997. Both increases were
primarily due to 10.7% growth in average earning assets. The unit was able to
keep net write-offs and operating expenses at a relatively constant rate.
Managed assets grew to $7.21 billion in 1998 from $6.04 billion in 1997, an
increase of 19.4%. The growth in managed assets was driven by new business
growth of $3.08 billion in 1998 compared to $2.40 billion in 1997. Much of the
growth in new business occurred in the second half of 1998. The growth was
spread across all business units with Transportation Finance and Franchise
Finance contributing the most to the growth in managed assets.
CAPITAL MARKETS. Capital Markets, in conjunction with institutional
investors, provides commercial mortgage banking services and debt and equity
capital funding. This segment includes Realty Capital, Investment Alliance and
Loan Administration.
FINOVA Realty Capital was acquired in the fourth quarter of 1997. Total net
revenue was $24.2 million in 1998 compared to $2.1 million in 1997. Loss before
allocations was $2.8 million in 1998 compared to income of $2.1 million in 1997.
The decrease in income before allocations was primarily attributable to a loss
of $10.0 million on mini-CMBS transactions, partially offset by a higher level
of volume-based fees due to increased volume in 1998. See Note C and Note T of
Notes to Consolidated Financial Statements for further discussion of the
mini-CMBS structure.
Capital Markets was able to grow its managed asset base to $255.6 million,
of which $220.1 million represents financing contracts held for sale.
YEAR 2000 COMPLIANCE
FINOVA continues to implement changes necessary to help assure accurate
date recognition and data processing with respect to the year 2000. To be year
2000 compliant means (1) significant information technology ("IT") systems in
use by FINOVA demonstrate performance and functionality that is not materially
affected by processing dates on or after January 1, 2000, (2) customers and
collateral included in FINOVA's portfolio of business are year 2000 compliant
and (3) vendors of services critical to FINOVA's business processes are year
2000 compliant.
A-13
<PAGE>
THE FINOVA GROUP INC.
FINOVA's non-IT systems used to conduct business at its facilities consist
primarily of office equipment (other than computer and communications equipment)
and other equipment at leased office facilities. FINOVA has inventoried its
non-IT systems and has sent year 2000 questionnaires to office equipment vendors
and landlords to determine the status of their year 2000 readiness.
Primary internal activities related to this issue are modifications to
existing computer programs and conversions to new programs. FINOVA has a
five-phase plan for assuring year 2000 compliance of its internal systems:
1) Identifying each area, function and application that could be affected by
the change in date.
2) Determining the extent to which each area, function or application will be
affected by the change in date and identifying the proper course of action
to eliminate adverse effects.
3) Making the changes necessary to bring the system into year 2000 compliance.
4) Testing the integrated system.
5) Switching to year 2000 compliant applications.
At December 31, 1998, FINOVA estimated that 95% of the changes necessary to
make mission critical systems year 2000 compliant were complete. All remaining
changes are expected to be made and the systems should be tested and implemented
by the end of the first quarter of 1999. Acquisitions made during 1998 are being
reviewed using the same five-phase plan. The necessary modifications to make
those new businesses year 2000 compliant are expected to be complete by the end
of the second quarter of 1999. Similarly, acquisitions made or proposed to be
made in 1999 are being reviewed with year 2000 compliance issues to be addressed
in a prompt manner.
Costs incurred to bring FINOVA's internal systems into year 2000 compliance
are not expected to have a material impact on FINOVA's results of operations.
Maintenance and modification costs are expensed as incurred, while the costs of
new hardware and software are capitalized and amortized over their estimated
useful lives. FINOVA estimates it will incur approximately $300,000 in expenses
and $1.8 million in capital costs related to year 2000 compliance. Estimates are
reviewed and revised as necessary on a quarterly basis. Through December 31,
1998, FINOVA has incurred expenses of $158,000 and capital costs of $1.4
million.
FINOVA's aggregate cost estimate does not include time and costs that may
be incurred as a result of the failure of any third parties to become year 2000
compliant. FINOVA is communicating with customers, software vendors and others
to determine if their applications or services are year 2000 compliant and to
assess the potential impact on FINOVA related to this issue.
Risks to FINOVA include that third parties may not have accurately assessed
their state of readiness. Similarly, FINOVA cannot assure that the systems of
other companies and government agencies on which FINOVA relies will be converted
in a timely manner. While FINOVA believes all necessary work on internal systems
will be completed in a timely fashion, there can be no guarantee that all
systems will be compliant by the year 2000 and within the estimated cost. Any of
these occurrences could cause a material adverse effect on FINOVA's results of
operations.
FINOVA routinely assess the year 2000 compliance status of its borrowers
and generally requires that they provide representations and warranties
regarding the status. FINOVA also attempts to monitor their progress with
questionnaires and other means.
FINOVA believes under its reasonably possible worst case year 2000
scenario, a number of its borrowers and service providers would not be capable
of performing their contractual obligations to FINOVA. The financial impact of
this scenario and the Company's responses are currently under assessment.
FINOVA is assessing the need for contingency plans related to year 2000
compliance in the first half of 1999. It plans to develop additional contingency
plans as necessary throughout 1999. FINOVA maintains and deploys contingency
A-14
<PAGE>
THE FINOVA GROUP INC.
plans designed to address various other potential business interruptions. In
some respects, these plans may address interruptions resulting from FINOVA or a
third party's failure to be year 2000 compliant, but the plans have not been
updated to specifically address the year 2000 issue as of December 31, 1998.
RECENT DEVELOPMENTS AND BUSINESS OUTLOOK
In April 1999, approximately 70% of the mini-CMBS loans were sold into a
permanent CMBS structure.
In March 1999, FINOVA acquired Sirrom Capital Corporation ("Sirrom"), a
specialty finance company headquartered in Nashville, Tennessee, for
approximately $343 million in FINOVA common stock, excluding converted stock
options. Sirrom provides secured loans to small, fast growing companies in the
U.S. and Canada with revenues between $5 million and $50 million, for
expansions, acquisitions, buyouts and other strategic ventures. Completion of
the Sirrom acquisition resulted in an increase in the outstanding equity of
FINOVA and lowered the debt to equity ratio to 5.5x at March 31, 1999 compared
to FINOVA's leverage of 6.6x at December 31, 1998.
In February 1999, FINOVA acquired Preferred Business Credit Inc. ("PBC"), a
west coast provider of commercial financing to small and mid-size businesses.
PBC was added to Growth Finance to help expand its nationwide capabilities.
At the 1999 annual shareowners meeting, FINOVA's shareowners will consider
approval of an amendment to its certificate of incorporation to increase the
number of authorized shares of capital stock. If approved, the proposal will
increase the number of common shares from 100 million to 400 million, and the
number of preferred shares from 5 million to 20 million. The Board of Directors
recommends approval of that proposal for the reasons noted in the 1999 Proxy
Statement. Those reasons include:
o permitting future stock splits
o assisting in capital raising activities
o providing appropriate incentive compensation to its employees
o fulfilling its obligations to issue stock under existing contractual
arrangements
o facilitating FINOVA's growth strategy.
Shareowners are urged to approve that proposal for the reasons noted above.
In October 1998, FINOVA acquired United Credit Corporation, a New
York-based provider of commercial financing to small and midsize businesses, and
its Patriot Funding Division. The addition formed a new division named FINOVA
Growth Finance, which provides collateral-based working capital financing,
primarily secured by accounts receivable. The new division provides financing
ranging from $100,000 to $1 million to small and midsize businesses with annual
sales under $10 million. FINOVA anticipates that this new division will serve a
market segment of smaller, growth-oriented customers earlier in their maturation
cycle.
In October 1998, FINOVA acquired Electronic Payment Systems, Inc. a
commercial receivables servicing business headquartered in Salt Lake City, Utah,
to support the activities of its FINOVA Realty Capital business ("FRC").
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133") which is effective for
fiscal years beginning after June 15, 1999. This statement standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by recognition of those items as assets or
liabilities in the statement of financial position and measurement at fair
value. FINOVA will adopt this standard effective January 1, 2000, as required.
The impact of SFAS No. 133 on the Company's financial position and results of
operations has not yet been determined.
A-15
<PAGE>
THE FINOVA GROUP INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FINOVA's primary market risk exposure is the volatility of interest rates.
FINOVA seeks to manage interest rate risk and preserve income through a
diversified borrowing base and a matched-funding policy. A diversified borrowing
base consists of short and long-term debt with a fixed or variable rate.
FINOVA's matched-funding policy, set by the Board of Directors or Audit
Committee and administered by the Finance Committee, requires that floating-rate
assets be financed with similar floating-rate liabilities and fixed-rate assets
be financed with similar fixed-rate liabilities. Under the matched-funding
policy, the difference between floating-rate assets and floating-rate
liabilities should not exceed 3% of total assets for any extended period.
FINOVA engages in hedging transactions using primarily interest rate swaps,
and to a lesser extent, other derivative instruments to lower its interest costs
and to manage its interest rate risk. Derivative instruments are used for
non-trading and non-speculative purposes only. A hedge consists of a position
that is substantially equal and opposite of the asset or liability being hedged.
It is structured to provide a high degree of correlation at the inception of the
hedge and throughout the hedge period so that hedging results will substantially
offset the effects of interest rate changes on the exposed item.
Hedge transactions are authorized to be entered into with financial
institutions rated "A" or better by Standard & Poors Rating Group or Moody's
Investors Service, Inc., who must also be lenders or credit support providers to
FINOVA or its subsidiaries. Without approval from the Finance Committee, the
notional principal amount of aggregate hedges on a net basis with a given
counter party cannot exceed 10% of FINOVA's total debt outstanding as of the
time of entering into the derivative transaction.
FINOVA uses a sensitivity analysis model to measure the exposure of net
income to increases or decreases in interest rates. The model measures the
change in annual net income if interest rates on floating-rate assets,
liabilities and derivative instruments increased or decreased by 100 basis
points (1%), assuming no prepayments. Based on the model used, a 100 basis point
shift in interest rates would affect net income by less than 6.5%.
Certain limitations are inherent in the model used in the above interest
rate risk measurements. Modeling changes require certain assumptions that may
oversimplify the manner in which actual yields and costs respond to changes in
the market interest rates. For example, the model assumes a more static
composition of FINOVA's interest sensitive assets, liabilities and derivative
instruments than would actually exist over the period being measured. The model
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Although the sensitivity analysis model
provides an indication of FINOVA's interest rate risk exposure at a particular
point in time, the model is not intended to and does not provide a precise
forecast of the effects of changes in market interest rates on FINOVA's net
income and will likely differ from actual results.
A-16
<PAGE>
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.
FINOVA's management has established and maintains a system of internal
controls to reasonably assure the fair presentation of the financial statements,
the safeguarding of FINOVA's assets and the prevention or detection of
fraudulent financial reporting. The internal control structure is supported by
careful selection and training of personnel, policies and procedures and regular
review by both internal auditors and the independent auditors.
The Board of Directors, through its Audit Committee, also oversees the
financial reporting of FINOVA and its adherence to established procedures and
controls. Periodically, the Audit Committee meets, jointly and separately, with
management, the internal auditors and the independent auditors to review
auditing, accounting and financial reporting matters.
FINOVA's financial statements, including those that have been restated,
have been audited by Deloitte & Touche LLP, independent auditors. Management has
made available to Deloitte & Touche LLP all of FINOVA's financial records and
related data and has made valid and complete written and oral representations
and disclosures in connection with the audit.
Management believes it is essential to conduct its business in accordance
with the highest ethical standards, which are characterized and set forth in
FINOVA's written Code of Conduct. These standards are communicated to and
acknowledged by all of FINOVA's employees.
/s/ Samuel L. Eichenfield
- -------------------------------------
Samuel L. Eichenfield
Chairman, President and Chief Executive Officer
/s/ Bruno A. Marszowski
- -------------------------------------
Bruno A. Marszowski
Senior Vice President - Controller and Chief Financial Officer
/s/ Derek C. Bruns
- -------------------------------------
Derek C. Bruns
Senior Vice President - Internal Audit
A-17
<PAGE>
THE FINOVA GROUP INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowners of The FINOVA Group Inc.
We have audited the accompanying consolidated balance sheets of The FINOVA Group
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareowners' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of The FINOVA Group Inc.'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 as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note T, the 1998, 1997, and 1996 financial statements have been
restated to properly defer and amortize loan origination costs over the life of
the loan as well as to make several other adjustments and the 1998 financial
statements have been restated to correct the amount of gain recognized on the
sale of commercial mortgage-backed securities.
/s/Deloitte & Touche LLP
- ---------------------------------
Deloitte & Touche LLP
Phoenix, Arizona
February 10, 1999
(April 23, 1999 as to Note T)
A-18
<PAGE>
THE FINOVA GROUP INC.
CONSOLIDATED BALANCE SHEETS
As Restated, See Note T
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------ ---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 49,518 $ 33,190
Investment in financing transactions:
Loans and other financing contracts 7,354,736 5,985,285
Leveraged leases 773,942 611,262
Operating leases 648,185 712,927
Fee-based receivables 626,499 750,399
Direct financing leases 396,759 360,589
Financing contracts held for sale 220,100
------------ -----------
10,020,221 8,420,462
Less reserve for credit losses (207,618) (177,088)
------------ -----------
Net investment in financing transactions 9,812,603 8,243,374
Goodwill and other assets 579,115 448,062
------------ -----------
$ 10,441,236 $ 8,724,626
============ ===========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 154,137 $ 147,280
Due to clients 205,655 278,571
Interest payable 65,817 54,418
Senior debt 8,394,578 6,764,581
Deferred income taxes 342,268 275,972
------------ -----------
9,162,455 7,520,822
------------ -----------
Commitments and contingencies (Note M)
Company-obligated mandatory redeemable convertible
preferred securities of subsidiary trust solely
holding convertible debentures of FINOVA, net of
expenses ("TOPrS") 111,550 111,550
Shareowners' equity:
Common stock, $0.01 par value, 100,000,000 shares
authorized, 58,555,000 shares issued 585 585
Additional capital 765,050 764,525
Retained income 515,057 388,465
Accumulated other comprehensive income (deficit) 686 (10)
Common stock in treasury, 2,834,000 and 2,273,000
shares, respectively (114,147) (61,311)
------------ -----------
1,167,231 1,092,254
------------ -----------
$ 10,441,236 $ 8,724,626
============ ===========
</TABLE>
See notes to consolidated financial statements.
A-19
<PAGE>
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED INCOME
As Restated, See Note T
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Interest, fees and other income $ 795,790 $ 691,565 $ 601,416
Financing lease income 95,781 71,278 59,461
Operating lease income 116,202 116,920 96,119
----------- ----------- -----------
Income earned from financing transactions 1,007,773 879,763 756,996
Interest expense 478,177 414,650 365,603
Operating lease depreciation 70,081 72,989 62,286
----------- ----------- -----------
Interest margins earned 459,515 392,124 329,107
Volume-based fees 77,723 39,378 28,588
----------- ----------- -----------
Operating margin 537,238 431,502 357,695
Provision for credit losses 82,200 69,200 41,751
----------- ----------- -----------
Net interest margins earned 455,038 362,302 315,944
Gains on disposal of assets 27,912 30,333 12,562
----------- ----------- -----------
482,950 392,635 328,506
Operating expenses 216,653 168,444 140,218
----------- ----------- -----------
Income from continuing operations before
income taxes and preferred dividends 266,297 224,191 188,288
Income taxes 102,174 82,289 70,320
----------- ----------- -----------
Income from continuing operations before
preferred dividends 164,123 141,902 117,968
Preferred dividends, net of tax 3,782 3,992
----------- ----------- -----------
Income from continuing operations 160,341 137,910 117,968
Income and gain from sale of discontinued
operations, net of tax 507
----------- ----------- -----------
NET INCOME $ 160,341 $ 137,910 $ 118,475
=========== =========== ===========
Basic earnings per share:
Income from continuing operations $ 2.87 $ 2.53 $ 2.16
Income and gain from discontinued operations .01
----------- ----------- -----------
Net income $ 2.87 $ 2.53 $ 2.17
=========== =========== ===========
Adjusted weighted average shares outstanding 55,946,000 54,405,000 54,508,000
=========== =========== ===========
Diluted earnings per share:
Income from continuing operations before
preferred dividends $ 2.70 $ 2.40 $ 2.10
Income and gain from discontinued operations .01
----------- ----------- -----------
Net income $ 2.70 $ 2.40 $ 2.11
=========== =========== ===========
Adjusted weighted average shares outstanding 60,705,000 59,161,000 56,051,000
=========== =========== ===========
Dividends per common share $ 0.60 $ 0.52 $ 0.46
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
A-20
<PAGE>
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED SHAREOWNERS' EQUITY
As Restated, See Note T
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Other Common
Common Additional Retained Comprehensive Stock in Shareowners' Comprehensive
Stock Capital Income (Deficit)/Income Treasury Equity Income
----- ------- ------ ---------------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
(AS PREVIOUSLY REPORTED) $568 $686,098 $184,381 $(5,686) $(40,177) $ 825,184
---- -------- -------- ------- -------- -----------
Prior period adjustment 2,343 1,513 3,856
---- -------- -------- ------- -------- -----------
BALANCE, JANUARY 1, 1996
(AS RESTATED) 568 688,441 185,894 (5,686) (40,177) 829,040
---- -------- -------- ------- -------- -----------
Comprehensive income:
Net income 118,475 118,475 $118,475
--------
Foreign currency translation 6,694
--------
Other comprehensive income 6,694 6,694 6,694
--------
Comprehensive income $125,169
========
Net change in unamortized amount
of restricted stock (653) (653)
Dividends (25,230) (25,230)
Shares issued in connection with
employee benefit plans (21) 7,780 7,759
---- -------- -------- ----- --------- -----------
BALANCE, DECEMBER 31, 1996 568 687,767 279,139 1,008 (32,397) 936,085
---- -------- -------- ----- --------- -----------
Comprehensive income:
Net income 137,910 137,910 $137,910
--------
Foreign currency translation (1,018)
--------
Other comprehensive income (1,018) (1,018) (1,018)
--------
Comprehensive income $136,892
========
Issuance of common stock 17 77,521 77,538
Net change in unamortized
amount of restricted stock (5,064) (5,064)
Dividends (28,584) (28,584)
Purchase of shares (37,296) (37,296)
Shares issued in connection with
employee benefit plans 4,301 8,382 12,683
---- -------- -------- ----- --------- -----------
BALANCE, DECEMBER 31, 1997 585 764,525 388,465 (10) (61,311) 1,092,254
---- -------- -------- ----- --------- -----------
Comprehensive income:
Net income 160,341 160,341 $160,341
--------
Unrealized holding gains 904
Foreign currency translation (208)
--------
Other comprehensive income 696 696 696
--------
Comprehensive income $161,037
========
Net change in unamortized
amount of restricted stock (1,053) (1,053)
Dividends (33,749) (33,749)
Purchase of shares (63,271) (63,271)
Shares issued in connection with
employee benefit plans 1,578 10,435 12,013
---- -------- -------- ----- --------- -----------
BALANCE, DECEMBER 31, 1998 $585 $765,050 $515,057 $ 686 $(114,147) $ 1,167,231
==== ======== ======== ===== -======== ===========
</TABLE>
See notes to consolidated financial statements.
A-21
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
As Restated, See Note T
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 160,341 $ 137,910 $ 118,475
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 82,200 69,200 41,751
Depreciation and amortization 93,150 90,010 76,085
Gains on disposal of assets (27,912) (30,333) (12,562)
Deferred income taxes 66,296 29,754 30,347
Gains on dispositions of discontinued operations, net (3,521)
Net deferred acquisition costs (8,126) (5,718) (5,572)
Change in assets and liabilities, net of effects from acquisitions:
Increase in other assets (117,476) (32,776) (53,642)
Increase (decrease) in accounts payable and accrued expenses 4,369 20,800 (16,009)
Increase (decrease) in interest payable 11,399 (1,477) 6,184
Other 1,819 (603) 6,153
----------- ----------- -----------
Net cash provided by operating activities 266,060 276,767 187,689
----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of assets 128,542 178,485 102,558
Proceeds from sales of securitized assets 99,967 36,565 100,000
Proceeds from sales of commercial mortgage backed
securities ("CMBS") 869,296
Principal collections on financing transactions 2,158,103 2,081,319 1,777,094
Expenditures for financing transactions (3,282,348) (2,507,822) (2,221,363)
Expenditures for CMBS transactions (1,005,373)
Net change in short-term financing transactions (631,478) (844,584) (624,952)
Acquisitions, net of cash acquired (61,164) (120,883) (7,455)
Sales of discontinued operations 616,434
Other 2,307 2,399 3,296
----------- ----------- -----------
Net cash used for investing activities (1,722,148) (1,174,521) (254,388)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net borrowings under commercial paper and short-term loans 739,515 649,653 62,156
Long-term borrowings 1,580,000 1,080,625 564,988
Repayment of long-term borrowings (689,176) (817,892) (681,401)
Proceeds from exercise of stock options 12,013 12,683 7,759
Net proceeds from sale of company-obligated mandatory
redeemable convertible preferred securities of
subsidiary trust solely holding convertible
debentures of FINOVA ("TOPrS") 111,550
Common stock purchased for treasury (63,271) (37,296)
Dividends (33,749) (28,584) (25,230)
Net change in due to clients (72,916) 40,495 (32,143)
----------- ----------- -----------
Net cash provided by financing activities 1,472,416 899,684 7,679
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 16,328 1,930 (59,020)
Cash and cash equivalents, beginning of year 33,190 31,260 90,280
----------- ----------- -----------
Cash and cash equivalents, end of year $ 49,518 $ 33,190 $ 31,260
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
A-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, AS RESTATED
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
(Dollars in Thousands in Tables, except per share data)
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. and its subsidiaries (collectively, "FINOVA"
or the "Company"), including FINOVA Capital Corporation and its subsidiaries
(collectively, "FINOVA Capital").
The FINOVA Group Inc. is a financial services company engaged in providing
capital and collateralized financing products to commercial enterprises focusing
on mid-size businesses in various market niches, principally in the United
States.
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles. All significant intercompany balances
have been eliminated in consolidation. Described below are those accounting
policies particularly significant to FINOVA, including those selected from
acceptable alternatives:
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION -- For loans and other financing contracts, earned
income is recognized over the life of the contract, using the interest method.
Leases that are financed by nonrecourse borrowings and meet certain other
criteria are classified as leveraged leases. For leveraged leases, aggregate
rental receivables are reduced by the related nonrecourse debt service
obligation including interest ("net rental receivables"). The difference between
(a) the net rental receivables and (b) the cost of the asset less estimated
residual value at the end of the lease term is recorded as unearned income.
Earned income is recognized over the life of the lease at a constant rate of
return on the positive net investment, which includes the effects of deferred
income taxes.
For operating leases, earned income is recognized on a straight-line basis
over the lease term and depreciation is taken on a straight-line basis over the
estimated useful lives of the leased assets.
Origination fees net of direct origination costs are deferred and amortized
over the life of the originated asset as an adjustment to yield.
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 to the yield. Fees on commitments
that expire unused are recognized at expiration.
Fees are also generated on the volume of purchased accounts receivable and
mortgage loan originations. A majority of FRC's mortgage loan originations are
funded by other lenders and, therefore, are not recorded on FINOVA's balance
sheet. Fees on the volume of purchased accounts receivable represent discounts
or commissions to FINOVA in return for handling the accounts receivable
collection process. These fees are recognized as income in the period the
receivables are purchased due to the short-term nature of the accounts
receivable, which are generally collected from one to three months after
purchase. FINOVA's commercial mortgage operation originates and sells loans and
typically would only retain assets on the balance sheet for a short period of
A-23
<PAGE>
time. Fees on mortgage loan originations represent broker commissions on the
loan originations and are recognized as income in the period of origination.
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, lease
or other financing contract becomes contractually current and performance is
demonstrated to be resumed or when foreclosed or repossessed assets generate a
reasonable rate of return.
CASH EQUIVALENTS -- FINOVA classifies highly liquid investments with
original maturities of three months or less from date of purchase as cash
equivalents.
MARKETABLE SECURITIES -- As discussed in Note K, FINOVA owns certain
marketable securities, which are considered trading securities. Trading
securities are stated at fair value with gains or losses recorded in income in
the period they occur.
FINANCING CONTRACTS HELD FOR SALE -- Financing contracts held for sale are
composed of assets held for sale and retained interest from sales to a private
CMBS ("mini-CMBS") structure that are available for sale. Assets held for sale
are carried at lower of cost or market with adjustment, if any, recorded in
operations. Assets available for sale are carried at fair value using the
specific identification method with unrealized gains and losses being recorded
as a component of accumulated other comprehensive income within the equity
section of the balance sheet. See Notes C and P.
RESERVE FOR CREDIT LOSSES -- The reserve for credit losses is available to
absorb credit losses and is not provided for financing contracts held for sale
and other owned assets, including assets on operating lease. The provision for
credit losses is the charge to income to increase the reserve for credit losses
to the level that management estimates to be adequate considering delinquencies,
loss experience and collateral. Other factors considered include changes in
geographic and product diversification, size of the portfolio and current
economic conditions. Accounts are either written-off or written-down when the
loss is considered probable and determinable, after giving consideration to the
customer's financial condition and the value of the underlying collateral,
including any guarantees. Any deficiency between the carrying amount of an asset
and the net sales price of repossessed collateral is charged to the reserve for
credit losses. Recoveries of amounts previously written-off as uncollectible are
credited to the reserve for credit losses.
REPOSSESSED ASSETS -- Repossessed assets are carried at the lower of cost
or fair value less estimated selling expenses.
RESIDUAL VALUES -- FINOVA has a significant investment in residual values
in its leasing portfolios. These residual values represent estimates of the
value of leased assets at the end of the contract terms and are initially
recorded based upon appraisals and estimates. Residual values are periodically
reviewed to determine that recorded amounts are appropriate. Actual residual
values realized could differ from these estimates and updates.
GOODWILL -- FINOVA amortizes the excess of cost over the fair value of net
assets acquired ("goodwill") on a straight-line basis primarily over 20 to 25
years. Goodwill at December 31, 1998 and 1997 was $286.0 million and $274.5
million (net of amortization), respectively. Amortization totaled $14.5 million
($10.6 million after-tax), $9.7 million ($6.1 million after-tax) and $9.2
million ($5.5 million after-tax) for the years ended December 31, 1998, 1997 and
1996, respectively. FINOVA periodically evaluates the carrying value of its
intangible assets for impairment. This evaluation is based on projected,
undiscounted cash flows generated by the underlying assets. At December 31,
1998, approximately $197.6 million of goodwill (net of amortization) was
deductible for federal income tax purposes over 15 years under Section 197 of
the Internal Revenue Code.
A-24
<PAGE>
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 post-retirement benefit costs are recorded during the period the
employees provide service to FINOVA. Post-retirement benefit obligations are
funded as benefits are paid.
Post-employment benefits are any benefits other than retirement benefits.
FINOVA records post-employment benefit costs at the time employees leave active
service.
SAVINGS PLAN -- FINOVA maintains The FINOVA Group Inc. Savings Plan (the
"Savings Plan"), a qualified 401(k) program. The Savings Plan is available to
substantially all employees. The employee may elect voluntary wage reductions
ranging from 0% to 15% of taxable compensation. The Company's matching
contributions are based on employee pre-tax salary reductions, up to a maximum
of 100% of the first 6% of salary contributions, the first 3% of which are
matched in FINOVA stock through the Employee Stock Ownership Plan, discussed
below.
EMPLOYEE STOCK OWNERSHIP PLAN -- Employees of FINOVA are eligible to
participate in the Employee Stock Ownership Plan in the month following the
first 12 consecutive month period during which they have at least 1,000 hours of
service with FINOVA. Company contributions are made in the form of matching
stock contributions of 100% of the first 3% of salary reduction contributions
made by participants of the Savings Plan.
Expenses under the Savings Plan and Employee Stock Ownership Plan were $3.1
million, $2.5 million and $2.1 million in 1998, 1997 and 1996, 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.
EARNINGS PER SHARE -- Basic earnings per share exclude the effects of
dilution and are computed by dividing income available to common shareowners by
the weighted average amount of common stock outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if options,
convertible preferred stock or other contracts to issue stock were exercised or
converted into common stock. These calculations are presented for the
years-ended December 31, 1998, 1997 and 1996 on the Statements of Consolidated
Income and are more fully discussed in Note L.
DERIVATIVE FINANCIAL INSTRUMENTS -- As more fully described in Note F,
FINOVA uses derivative financial instruments as part of its interest rate risk
management policy of match funding its assets and liabilities. The derivative
instruments used include interest rate swaps, which are accounted for using
settlement or matched swap accounting, and to a lesser extent treasury locks,
options and swaptions which are subject to hedge accounting determination.
Each derivative used as a hedge is matched with an asset or liability with
which it has a high correlation. The swap agreements are generally held to
maturity and FINOVA does not use derivative financial instruments for trading or
speculative purposes. Upon early termination of the designated matched asset or
liability, the related derivative is matched to another appropriate item or
marked to fair market value.
SECURITIZATIONS -- In accordance with SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
receivable transfers are accounted for as sales when legal and effective control
over the transferred receivables is surrendered.
RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
years financial statements to conform to the 1998 presentation.
A-25
<PAGE>
NOTE B ACQUISITIONS
During 1998 and 1997, FINOVA Capital, in transactions accounted for as
purchases, acquired various businesses and portfolios having initial funds
employed totaling $44 million and $122 million, respectively.
In October 1998, FINOVA acquired United Credit Corporation, a New York
based provider of commercial financing to small and mid-size businesses, and its
Patriot Funding Division. The addition formed a new division named FINOVA Growth
Finance which provides collateral-based working capital financing, primarily
secured by accounts receivable. The new division provides financing ranging from
$100,000 to $1 million to small and mid-size businesses with annual sales under
$10 million. This new division is serving a market segment of smaller,
growth-oriented customers earlier in their maturation cycle. Certain estimates
used in the allocation of the purchase price are preliminary, pending receipt of
acquiree's final audited financial statements.
In October 1998, FINOVA acquired Electronic Payment Systems, Inc., a
commercial receivables servicing business headquartered in Salt Lake City, Utah,
to support the activities of FINOVA Realty Capital ("FRC").
In October 1997, FINOVA purchased Belgravia Capital Corporation, a
commercial mortgage banking organization, for $77.5 million of the Company's
common stock (1.7 million shares), $10.0 million in cash and an agreement to pay
additional amounts up to approximately $30 million per year for the next three
years, contingent upon future results of the operations. To date, no additional
amounts have been paid under the contingency agreement. The acquisition was
composed of $91.5 million in assets, including $88.0 million in goodwill and
$4.0 million in liabilities and acquisition costs. The results of these
operations have been included in FINOVA's results since the date of acquisition.
Goodwill related to this transaction is being amortized over 25 years.
In December 1997, FINOVA acquired the Inventory Finance unit of AT&T
Capital Corporation. The acquisition, which joined FINOVA's Distribution &
Channel Finance line of business, provided an opportunity for FINOVA to expand
into the fast-growing telecommunications market.
A-26
<PAGE>
THE FINOVA GROUP INC.
NOTE C INVESTMENT IN FINANCING TRANSACTIONS
FINOVA provides secured financing to commercial and real estate
enterprises principally under financing contracts (such as loans and other
financing contracts, direct financing leases, operating leases, leveraged
leases, fee-based receivables and financing contracts held for sale). At
December 31, 1998 and 1997, the carrying amount of the investment in financing
transactions, including the estimated residual value of leased assets upon lease
termination, was $10.0 billion and $8.4 billion (before reserve for credit
losses), respectively, and consisted of the following percentage of carrying
amount by line of business:
<TABLE>
<CAPTION>
- ------------------------------------------------- -----------------------------
Percent of Total
Carrying Amount
- ------------------------------------------------- -------------- --------------
1998 1997
- ------------------------------------------------- -------------- --------------
<S> <C> <C>
Transportation Finance 22.0% 19.4%
Resort Finance 12.5 14.4
Corporate Finance 7.9 9.7
Rediscount Finance 7.7 7.2
Commercial Equipment Finance 7.5 7.5
Communications Finance 7.2 7.9
Specialty Real Estate Finance 7.0 8.2
Healthcare Finance 6.1 6.3
Franchise Finance 6.0 5.2
Distribution & Channel Finance 5.7 6.5
Business Credit 3.0 2.4
Realty Capital 2.4
Public Finance 1.8 1.6
Commercial Services 1.7 2.7
Other 0.9 1.0
Growth Finance 0.5
Investment Alliance 0.1
- ------------------------------------------------- -------------- --------------
100.0% 100.0%
================================================= ============== ==============
</TABLE>
A-27
<PAGE>
THE FINOVA GROUP INC.
<TABLE>
Aggregate installments on investments in financing transactions at
December 31, 1998 (excluding nonaccruing repossessed assets of $54.4 million and
estimated residual values of $920.2 million) are contractually due or
anticipated during each of the years ending December 31, 1999 to 2003 and
thereafter as follows:
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
There-
1999 2000 2001 2002 2003 after
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and other financing contracts:
Commercial:
Fixed interest rate $ 423,111 $ 453,207 $ 454,860 $ 286,238 $ 233,499 $ 767,796
Floating interest rate 1,063,606 934,396 220,715 347,006 291,059 204,595
Real estate:
Fixed interest rate 99,368 100,513 72,716 37,213 41,192 168,911
Floating interest rate 303,790 283,831 228,791 76,935 103,239 123,132
Leases, primarily at fixed interest rates:
Operating leases 102,182 86,339 61,330 39,908 28,636 33,891
Leveraged leases 45,860 41,943 10,491 3,153 18,790 361,492
Direct financing leases 93,212 73,397 59,183 46,434 33,475 92,602
Fee-based receivables 626,499
Financing contracts held
for sale 220,100
===================================================================================================================================
$ 2,977,728 $ 1,973,626 $ 1,108,086 $ 836,887 $ 749,890 $ 1,752,419
===================================================================================================================================
</TABLE>
<TABLE>
The investment in operating leases at December 31 consisted of the following:
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost of assets $ 757,921 $ 855,670
Accumulated depreciation (109,736) (142,743)
===================================================================================================================================
Investment in operating leases $ 648,185 $ 712,927
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The net investment in leveraged leases at December 31 consisted of the following:
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rental receivables $ 2,885,352 $ 2,262,656
- -----------------------------------------------------------------------------------------------------------------------------------
Less principal and interest payable on nonrecourse debt (2,403,623) (1,790,987)
- -----------------------------------------------------------------------------------------------------------------------------------
Net rental receivables 481,729 471,669
Estimated residual values 794,112 572,880
Less unearned income (501,899) (433,287)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in leveraged leases 773,942 611,262
Less deferred taxes from leveraged leases (314,243) (246,375)
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment in leveraged leases $ 459,699 $ 364,887
===================================================================================================================================
</TABLE>
A-28
<PAGE>
THE FINOVA GROUP INC.
<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:
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lease and other income, net $ 60,484 $ 35,834 $ 27,706
Income tax expense 24,063 17,156 10,306
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The investment in direct financing leases at December 31 consisted of the following:
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rental receivables $ 398,303 $ 367,780
Estimated residual values 126,095 120,020
Unearned income (127,639) (127,211)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in direct financing leases $ 396,759 $ 360,589
===================================================================================================================================
</TABLE>
FINOVA has a substantial number of loans and leases with payments that
fluctuate with changes in index rates, primarily prime interest rates and the
London interbank offered rates ("LIBOR"). The investment in loans and leases
with floating interest rates (excluding nonaccruing contracts and repossessed
assets) was $4.75 billion and $4.34 billion at December 31, 1998 and 1997,
respectively.
Income earned from financing transactions with floating interest rates
was approximately $562 million in 1998, $491 million in 1997 and $436 million in
1996. The adjustments which arise from changes in index rates can have a
significant effect on income earned from financing transactions; however, the
effects on interest margins earned and net income are substantially offset by
related interest expense changes on debt obligations with floating interest
rates. FINOVA's matched funding policy is more fully described in Note F.
At December 31, 1998, FINOVA had a committed backlog of new business of
approximately $1.9 billion compared to $1.6 billion at December 31, 1997. The
committed backlog includes unused lines of credit totaling $549 million and $666
million at December 31, 1998 and 1997, respectively. Historically, FINOVA has
booked a substantial portion of its backlog, although there can be no assurance
that the trend will continue. Loan commitments and lines of credit have
generally the same credit risk as extending loans to borrowers. These
commitments are generally subject to the same credit quality and collateral
requirements involved in lending transactions. Commitments generally have a
fixed expiration and usually require payment of a fee.
Securitizations - In 1998 and 1997, under a separate securitization
agreement, FINOVA sold loan receivables totaling $103.2 million and $36.8
million, respectively with limited recourse. Outstanding securitized assets
under this agreement were $136.1 million at December 31, 1998. FINOVA will
service these loan contracts for the transferee and has deferred a portion of
the proceeds to be recognized as service fee income over the term of the
agreements.
In the latter part of 1998, the Company used for the first time a
private CMBS structure ("mini-CMBS") to sell loans originated by FINOVA Realty
Capital ("FRC"). Under this structure, the Company sold loans originated by FRC
to a trust with limited recourse. The trust held those loans with plans to
resell them to the permanent CMBS market. The trust paid cash to the Company
upon acquisition of the assets, issued a senior security interest to an
investment banking firm and a subordinated residual interest to the Company. The
Company retained the servicing rights and obligations related to the asset
transferred to the Trust.
In determining the fair value of assets sold and interests retained,
the Company employed a variety of financial assumptions. To establish discount
rates, the Company referred to the subsequent April 1999 sale of approximately
70% of the mini-CMBS loans into a permanent CMBS structure. The permanent
transaction was compared to the mini-CMBS transaction and similar portions of
the interest retained were discounted using rates present in the permanent
structure, after adjusting for general movements in interest rates between the
date of the mini-CMBS transaction and the permanent transaction. Specifically,
servicing rights were discounted at approximately 6% and the remaining residual
cash flows were discounted at rates between 9% and 18%. The Company assumed
minimal defaults and prepayments due to the nature and structure of the
commercial mortgages. The recourse obligation was recorded at fair value based
on prices obtained from the subsequent April 1999 sale.
The Company was required to recognize gains on the transfer of the
loans to the mini-CMBS trust in accordance with SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liability,"
and initially reported gains in the gross amount of $46.1 million. Subsequent to
the issuance of the Company's 1998 financial statements, the Company determined
that the original estimate of the fair value of the Company's retained interest
was overstated and accordingly revalued its retained interest in the mini-CMBS
transaction. This revaluation resulted in a reduction of the value of
A-29
<PAGE>
THE FINOVA GROUP INC.
the retained portion of the loans from the $91.7 million previously reported, to
$65.0 million, as now restated. This reduction in the value reduced FINOVA's
previously reported 1998 gross gains on mini-CMBS sales of $46.1 million to
$19.5 million, as restated. After recognition for hedge losses, commissions,
expenses and other obligations, the Company reported a net loss of $10.0
million. No gains were reported on the subordinated interest retained by the
Company.
Activity for the retained subordinated interest is as follows:
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Beginning retained interest $
Retained interest added 65,033
Principal payments applied (55)
Advances made 386
- --------------------------------------------------------------------------------
Ending retained interest $ 65,364
================================================================================
Cash received on the retained interest totaled $0.9 million, which was
applied against principal and interest. Principle advances are made to the trust
for delinquencies in the underlying loans, which are recovered when the
delinquent payments are collected.
In 1996 and 1995, FINOVA, under a securitization agreement, sold a
total of $300 million in undivided proportionate interests in a revolving loan
portfolio totaling approximately $694.5 million as of December 31, 1998. Under
this agreement, there is recourse to FINOVA based on the outstanding balance of
the proportionate interest sold.
In general, the servicing fees earned on securitizations are
approximately equal to the cost of servicing; therefore, no material servicing
assets or liabilities have been recognized.
NOTE D RESERVE FOR CREDIT LOSSES
<TABLE>
The following is an analysis of the reserve for credit losses for the
years ended December 31:
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 177,088 $ 148,693 $ 129,077
Provision for credit losses 82,200 69,200 41,751
Write-offs (59,037) (45,487) (32,017)
Recoveries 2,279 2,287 3,296
Acquisitions and other 5,088 2,395 6,586
- -----------------------------------------------------------------------------------------------
Balance, end of year $ 207,618 $ 177,088 $ 148,693
===============================================================================================
</TABLE>
A-30
<PAGE>
THE FINOVA GROUP INC.
<TABLE>
Net write-offs by line of business for the years ended December 31 are as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial Services $ 35,663 $ 23,255 $ 3,610
Corporate Finance 6,680 6,478 9,460
Commercial Equipment Finance 3,645 3,208 2,378
Franchise Finance 2,780 433 2,845
Distribution & Channel Finance 2,609 1,777 (33)
Specialty Real Estate Finance 1,785 2,106 1,616
Rediscount Finance 1,500
Healthcare Finance 960 1,704 1,010
Business Credit 819
Communications Finance 494 750 2,994
Resort Finance 2,700 4,249
Other (177) 789 592
- ----------------------------------------------------------------------------------------------------------------------
Total net write-offs by line of business $ 56,758 $ 43,200 $ 28,721
======================================================================================================================
Net write-offs as a percentage of average managed
assets (excluding average participations) 0.60% 0.53% 0.41%
======================================================================================================================
</TABLE>
<TABLE>
An analysis of nonaccruing assets included in the investment in financing transactions at December 31 is
as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Contracts $ 150,787 $ 150,263
Repossessed assets 54,446 37,093
- ----------------------------------------------------------------------------------------------------------------------
Total nonaccruing assets $ 205,233 $ 187,356
======================================================================================================================
Nonaccruing assets as a percentage of managed assets (excluding participations) 2.0% 2.1%
======================================================================================================================
</TABLE>
In addition to the repossessed assets included in the above table,
FINOVA had repossessed assets with a total carrying amount of $65.3 million and
$52.5 million at December 31, 1998 and 1997, respectively, which earned income
of $4.7 million and $4.1 million during 1998 and 1997, respectively.
At December 31, 1998, the total carrying amount of impaired loans was
$225.7 million, of which $106.0 million were revenue accruing. A reserve for
credit losses of $30.9 million has been established for $74.3 million of
nonaccruing impaired loans and $6.2 million has been established for $24.4
million of accruing impaired loans. At December 31, 1997, the total carrying
amount of impaired loans was $158.0 million, of which $36.4 million were revenue
accruing. At December 31, 1997, a reserve for credit losses of $17.8 million was
established for $39.0 million of nonaccruing impaired loans and $2.4 million was
established for $13.3 million of accruing impaired loans. For the three years
ended December 31, 1998, 1997 and 1996, the average carrying amount of impaired
loans was $172.0 million, $130.3 million and $85.1 million, respectively. Income
earned on accruing impaired loans was approximately $4.0 million in all three
years. Income earned on impaired loans is recognized in the same manner as it is
on other accruing loans. Cash collected on all nonaccruing loans is applied to
the carrying amount.
Had all nonaccruing assets outstanding at December 31, 1998, 1997 and
1996 remained accruing, pre-tax income earned would have increased by
approximately $19 million, $22 million and $19 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 revolving bank credit agreements totaling $4.4 billion. FINOVA Capital
currently maintains a five-year revolving credit facility and a 364-day facility
with numerous lenders, in the aggregate principal amount of $2.0 billion.
Separately,
A-31
<PAGE>
THE FINOVA GROUP INC.
FINOVA Capital also has two five-year facilities with numerous lenders for $700
million each, one 364-day facility with numerous lenders for $600 million and
three 364-day facilities with three separate lenders for an aggregate principal
amount of $400 million. The Company intends to borrow under the domestic
revolving credit agreements to refinance commercial paper and short-term bank
loans if it encounters significant difficulties in rolling over its outstanding
commercial paper and short-term bank loans. The Company rarely borrows under
these facilities. 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, approximately 10
basis points, on the unused credit. The 364-day $1.0 billion and $600 million
revolving credit agreements are subject to renewal in 1999, while the two $700
million and the other $1.0 billion credit facilities are subject to renewal in
2002. The 364-day facilities totaling $400 million are subject to renewal in
1999; however, the Company does not anticipate extending these facilities. In
addition to the above, the FINOVA Group Inc. has a 364-day revolving credit
facility with one lender for $25 million, which is subject to renewal in 1999.
The Company, through one subsidiary, utilizes a five-year
multi-currency facility with a small group of lenders for $100 million. Under
the terms of this agreement, the subsidiary has the option to periodically
select multiple currencies as the basis of borrowings. Interest is based on the
Eurocurrency rate per annum for deposits in the relevant designated currency.
Through another subsidiary, the Company maintains one 364-day revolving credit
facility with three lenders in Canada for $100 million Canadian, supporting the
issuance of Canadian commercial paper. Under the terms of this agreement, the
subsidiary has the option to borrow Canadian dollars through either bankers'
acceptances or a prime rate advance. Interest is based on the lenders' prime
rate for prime advances or bankers' acceptance rates. FINOVA Capital is the
guarantor of this credit facility, which is subject to renewal in 1999.
In 1998, FINOVA Capital commenced a Euro Medium-Term Note Program
allowing for the issuance of up to $1 billion of debt securities. As of December
31, 1998 there was $750 million available under the program.
<TABLE>
The following information pertains to all short-term financing,
primarily commercial paper, issued by FINOVA Capital for the years ended
December 31:
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount of short-term debt outstanding during year 4,006,576 $ 3,284,118 $ 3,087,876
Average short-term debt outstanding during year 3,529,528 2,886,668 2,551,316
Weighted average short-term interest rates at end of year:
Short-term borrowings 5.6% 5.6% 5.4%
Commercial paper* 5.7% 5.7% 5.6%
Weighted average interest rate on short-term debt
outstanding during year* 5.7% 5.7% 5.6%
- -----------------------------------------------------------------------------------------------------------------
<FN>
* Exclusive of the cost of maintaining bank lines in support of outstanding commercial paper and the
effects of interest rate conversion agreements. The Company uses various mechanisms to manage interest
rate risks. See Note F for further discussions.
</FN>
</TABLE>
A-32
<PAGE>
THE FINOVA GROUP INC.
<TABLE>
Senior debt at December 31 was as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper and short-term bank loans supported by unused long-term
bank revolving credit agreements, less unamortized discount $ 3,871,350 $ 3,132,109
Medium-term notes due to 2010, 5.9% to 10.3% 1,717,544 1,343,148
Term loans payable to banks due to 1999, 5.3% to 5.8% 190,000 190,000
Senior notes due to 2007, 5.9% to 16.0%, less unamortized discount 2,604,762 2,083,761
Nonrecourse installment notes due to 2002, 10.6% (assets of $22,838 and
$58,064, respectively, pledged as collateral) 10,922 15,563
- ----------------------------------------------------------------------------------------------------------------------
Total senior debt $ 8,394,578 $ 6,764,581
======================================================================================================================
</TABLE>
Annual maturities of senior debt outstanding at December 31, 1998 due
through June 2007 (excluding the amount supported by the revolving credit
agreements expected to be renewed) approximate $775.2 million (1999), $821.3
million (2000), $951.0 million (2001), $839.4 million (2002), $504.9 million
(2003) and $631.4 million (thereafter).
The agreements pertaining to senior debt and revolving credit
agreements include various restrictive covenants and require the maintenance of
certain defined financial ratios with which FINOVA and FINOVA Capital have
complied. Under one covenant, dividend payments by FINOVA Capital are limited to
50% of accumulated earnings after December 31, 1991. As of December 31, 1998,
FINOVA Capital had $114.9 million of excess accumulated earnings available for
distribution.
Total interest paid is not significantly different from interest
expense.
NOTE F DERIVATIVE FINANCIAL INSTRUMENTS
FINOVA enters into interest rate and basis swap agreements as part of
its interest rate risk management policy of match funding its assets and
liabilities. The derivative instruments used are straightforward. The Company
continually monitors its derivative position and uses derivative instruments for
non-trading and non-speculative purposes only.
FINOVA uses derivative instruments to minimize its exposure to
fluctuations in interest rates. FINOVA strives to minimize its overall debt
costs while limiting the short-term variability of interest expense and funds
required for debt service. To achieve this objective, FINOVA diversifies its
borrowing sources (short and long-term debt with a fixed or a variable rate) and
seeks to maintain a portfolio that is matched funded. FINOVA's matched funding
policy generally requires that floating-rate assets be financed with
floating-rate liabilities and fixed-rate assets be financed with fixed-rate
liabilities. FINOVA's matched funding policy also requires that the difference
between floating-rate liabilities and floating-rate assets, measured as a
percent of total assets, should not vary by more than 3% for any extended
period. The amount of derivatives used is a function of this 3% gap policy with
the maturities of the derivatives being correlated to the maturities of the
assets being financed.
The notional amounts of derivatives do not represent amounts exchanged
by the parties and, thus, are not a measure of FINOVA's exposure through its use
of derivatives. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the derivatives.
Under interest rate swaps, FINOVA agrees to exchange with the other
party, at specified intervals, the payment streams calculated on a specified
notional amount, with at least one stream based on a floating interest rate.
Generic swap notional amounts do not change for the life of the contract. Basis
swaps involve the exchange of floating-rate indices, such as the prime rate, the
commercial paper composite rate and LIBOR and are used primarily to protect
FINOVA's margins on floating-rate transactions by locking in the spread between
FINOVA's lending and borrowing rates.
FINOVA's off-balance sheet derivative instruments involve credit and
interest rate risks. The credit risk would be the nonperformance by the other
parties to the financial instruments. All financial instruments have been
entered into with major financial institutions, which are expected to fully
perform under the terms of the agreements, thereby mitigating the
A-33
<PAGE>
THE FINOVA GROUP INC.
credit risk from the transactions, although there can be no assurance that any
such institution will perform under its agreement. FINOVA's derivative policy
stipulates that the maximum exposure to any one counter-party, relative to the
derivative products, is limited on a net basis to 10% of FINOVA's outstanding
debt at the time of that transaction. Interest rate risks relate to changes in
interest rates and the impact on earnings. FINOVA mitigates interest rate risks
through its matched funding policy.
The use of derivatives decreased interest expense by $5.3 million in
1998, a decrease in the aggregate cost of funds of 0.07%. The use of derivatives
in 1997 decreased interest expense by $1.0 million, a decrease in the aggregate
cost of funds of 0.03%, whereas the use of derivatives increased interest
expense $3.0 million in 1996, an increase in the aggregate cost of funds of
0.05%. These changes in interest expense from off-balance sheet derivatives
effectively alter on-balance sheet costs and must be viewed as total interest
rate management. There were no deferred gains or losses associated with
derivatives.
FINOVA also enters into short-term treasury rate locks, options,
swaptions and other derivative investments to hedge interest rate risks
associated with the warehousing of loans, primarily for FRC.
In a treasury rate lock, FINOVA agrees to lock in an interest rate on a
U.S. Treasury security until a specified date in the future. Prior to the
expiration date, if treasury rates decrease, there is an associated loss on the
hedge. If treasury rates increase, FINOVA will immediately benefit from an
increase in the hedge value.
In a treasury put option, FINOVA pays an up-front fee (premium) to have
the right, but not the obligation to sell a pre-determined treasury security at
an agreed-upon strike rate. Prior to the expiration date of the option, if
treasury rates decrease, the option expires worthless and there is no additional
hedge loss. If treasury rates increase and surpass the strike rate, the value of
the option will increase. In addition to the level of interest rates, the option
value also depends on other variables including volatility and the time to
maturity.
A swaption gives FINOVA the right, but not the obligation, to enter
into a swap on the exercise date. An up-front premium is the only cost incurred
by FINOVA. If swap rates rise above the strike rate, the option value will
increase. If swap rates decrease, the option will not be exercised and will
expire worthless. In addition to the level of swap rates, the option value also
depends on other variables including volatility and time to maturity.
A-34
<PAGE>
THE FINOVA GROUP INC.
<TABLE>
The following table provides annual maturities and weighted-average
interest rates for each significant derivative product type in place at December
31, 1998. The rates presented are as of December 31, 1998. To the extent that
rates change, variable interest information will change:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at
December 31,
Maturities of Derivative Products
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) 1998 1999 2000 2001 2002 2003 Thereafter
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed-rate swaps:
Notional value $ 1,077 $ 377 $ 150 $ 150 $ 200 $ 200
Weighted average receive rate 6.75% 6.45% 7.24% 6.66% 6.51% 7.26%
Weighted average pay rate 5.35% 5.32% 5.39% 5.29% 5.30% 5.47%
Pay fixed-rate swaps:
Notional value $ 700 $ 150 $ 100 $ 100 $ 150 $ 200
Weighted average receive rate 5.37% 5.30% 5.42% 5.34% 5.42% 5.37%
Weighted average pay rate 6.49% 7.06% 7.38% 6.70% 5.98% 5.90%
Treasury rate locks:
Notional value $ 153 $ 153
Weighted average rate 4.71% 4.71%
Options and swaptions:
Notional value $ 64 $ 64
Weighted average strike rate 5.72% 5.72%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL NOTIONAL VALUE $ 1,994 $ 744 $ 250 $ 250 $ 200 $ 150 $ 400
========================================================================================================================
Total weighted average rates on :
swaps Receive rate 6.21% 6.12% 6.51% 6.13% 6.51% 5.42% 6.32%
========================================================================================================================
Pay rate 5.80% 5.82% 6.19% 5.85% 5.30% 5.98% 5.69%
========================================================================================================================
</TABLE>
For the benefit of its customers, FINOVA enters into interest rate cap
agreements. The total notional amount of these agreements at December 31, 1998
was $25.0 million, none of which was in a pay or receive position. These
agreements will mature as follows: $15.9 million in 1999, $1.5 million in 2000
and $7.6 million in 2001.
<TABLE>
Derivative product activity for the three years ended December 31, 1998 is as follows:
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Pay Interest
Receive Pay Fixed-Rate Rate
Fixed-Rate Fixed-Rate Amortizing Basis Hedge
(Dollars in Millions) Swaps Swaps Swaps Swaps Agreements TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 1,300 $ 800 $ 95 $ 878 $ 750 $ 3,823
Expired (100) (325) (95) (750) (1,270)
Additions 150 350 500
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,350 825 878 3,053
Expired (275) (275) (250) (800)
Additions 327 327
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,402 550 628 2,580
Expired (325) (200) (628) (1,153)
Additions 350 217 567
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 1,077 $ 700 $ -- $ -- $ 217 $ 1,994
===========================================================================================================================
</TABLE>
A-35
<PAGE>
THE FINOVA GROUP INC.
NOTE G COMPANY-OBLIGATED MANDATORY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST SOLELY HOLDING CONVERTIBLE DEBENTURES
OF FINOVA
In December 1996, FINOVA Finance Trust, a subsidiary trust sponsored
and wholly-owned by FINOVA, issued (a) 2,300,000 shares of convertible trust
originated preferred securities (the "Preferred Securities" or "TOPrS") to the
public for gross proceeds of $115 million (before transaction costs of $3.5
million) and (b) 71,135 shares of common securities to FINOVA. The gross
proceeds from these transactions were invested by the trust in $118.6 million
aggregate principal amount of 5 1/2% convertible subordinated debentures due
2016 (the "Debentures") newly issued by FINOVA. The Debentures represent all of
the assets of the trust. The proceeds from the issuance of the Debentures were
contributed by FINOVA to FINOVA Capital, which used the proceeds to repay
commercial paper and other indebtedness.
The Preferred Securities accrue and pay cash distributions quarterly
when declared by FINOVA at a rate of 5 1/2% per annum of the stated liquidation
amount of $50 per preferred security. FINOVA has guaranteed, on a subordinated
basis, distributions and other payments due on the Preferred Securities (the
"Guarantee"). The Guarantee, when taken together with FINOVA's obligations under
the Debentures, the indenture under which the Debentures were issued and
FINOVA's obligations under the Amended and Restated Declaration of Trust
governing the trust, provides a full and unconditional guarantee on a
subordinated basis of amounts due on the Preferred Securities. FINOVA can defer
making distributions on the Debentures for up to 20 consecutive quarters, but
does not anticipate doing so. The Preferred Securities are mandatory redeemable
upon the maturity of the Debentures on December 31, 2016, or earlier to the
extent of any redemption by FINOVA of any Debentures. The redemption price in
either case will be $50 per share plus accrued and unpaid distributions to the
date fixed for redemption.
Prior to their maturity, the Preferred Securities are convertible into
FINOVA's common stock at the election of the holders of the Preferred Securities
individually. Each debenture is convertible into 1.2774 shares of FINOVA's
common stock (equivalent to a conversion price of $39.14 per share), subject to
adjustment in specified circumstances. FINOVA can terminate the conversion
rights noted above on 30 days notice on or after December 31, 1999 if it is
current on its payments for the Debentures and the closing prices of its common
stock trade at or above 120% of the conversion price of the Preferred Securities
($46.97, assuming no adjustments).
NOTE H SHAREOWNERS' EQUITY
On August 14, 1997, the Board of Directors declared a two-for-one stock
split of FINOVA's common stock effected as a stock distribution on October 1,
1997 to shareowners of record as of September 1, 1997. All share and per share
data have been restated to reflect the split.
At December 31, 1998, 1997 and 1996, The FINOVA Group Inc. had
58,555,000, 58,555,000 and 56,844,000 shares of common stock issued, with
55,721,000, 56,282,000 and 55,058,000 shares of common stock outstanding,
respectively. Approximately 6,917,000, 7,972,000 and 8,632,000 common shares
were reserved for issuance under the 1992 Stock Incentive Plan at December 31,
1998, 1997 and 1996, respectively.
In addition to the convertible preferred securities issued by FINOVA
Finance Trust in 1996, FINOVA has 5,000,000 shares of preferred stock
authorized, none of which was issued at December 31, 1998. 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 FINOVA's stock incentive plan, 250,000 shares of
preferred stock are reserved for issuance of awards under that plan.
Each outstanding share of FINOVA's common stock has a tandem junior
participating preferred stock purchase right ("Right") attached to it. The
Rights contain provisions to protect shareowners in the event of an unsolicited
acquisition or attempted acquisition of 20% or more of FINOVA's common stock,
which is not believed by the Board of Directors to be in the best interest of
shareowners. The Rights are represented by the common share certificates and are
not exercisable or transferable apart from the common stock until such a
situation arises. The Rights may be redeemable by FINOVA at $0.01 per right
prior to the time any person or group has acquired 20% or more of FINOVA's
shares. FINOVA has reserved 600,000 shares of Junior Participating Preferred
Stock for issuance in connection with the Rights.
A-36
<PAGE>
THE FINOVA GROUP INC.
FINOVA periodically repurchases its securities on the open market to
fund its obligations pursuant to employee stock options, benefit plans and
similar obligations. During the years ended December 31, 1998 and 1997, FINOVA
repurchased 1,299,200 and 1,035,800 shares, respectively. No shares were
repurchased in 1996. The program may be discontinued at any time.
In 1999, the Board of Directors approved and recommended to the
shareowners that they approve an amendment to FINOVA's certificate of
incorporation. That amendment would increase the authorized common stock from
100 million to 400 million shares and the preferred stock from 5 million to 20
million shares. The shareowners are expected to vote on the measure at the 1999
annual meeting. The Board recommends approval of the proposal.
NOTE I STOCK OPTIONS
During 1992, the Board of Directors of FINOVA 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 employees. The
Plan provides for the following types of awards: (a) stock options (both
incentive 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% 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, 1998 were granted for
terms of 10 years and generally become exercisable between one month to five
years from the date of grant. Stock options are issued at market value at the
date of grant, unless a higher exercise price is established. Since 1993, the
Board has issued multi-year, multi-priced stock options to senior executives.
The exercise price of those option grants range in price from the fair market
value on the grant date to prices up to 58.7% in excess of the grant date value.
Those option grants are intended to cover anticipated grants during the years
the grants are scheduled to vest, although the Board may issue additional grants
at its discretion. In 1998, premium-priced options were granted with exercise
prices ranging from $54.47 to $83.21.
<TABLE>
Information with respect to options granted and exercised for the three
years ended December 31, 1998 is as follows:
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Average Option
Shares Price Per Share
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at January 1, 1996 3,047,018 $ 15.31
Granted 1,011,740 29.05
Exercised (359,408) 13.37
Canceled (262,172) 20.45
- ------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1996 3,437,178 19.17
Granted 781,108 43.57
Exercised (442,049) 15.57
Canceled (191,094) 28.05
- ------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 3,585,143 24.45
Granted 1,197,032 58.22
Exercised (626,853) 18.13
Canceled (197,680) 42.00
- ------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 3,957,642 $ 34.79
======================================================================================================
</TABLE>
A-37
<PAGE>
THE FINOVA GROUP INC.
At December 31, 1998, stock options with respect to 3,957,642 common
shares were outstanding at exercise prices ranging from $6.35 to $83.21 per
share.
<TABLE>
The following table summarizes information about stock options outstanding at December 31, 1998:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Weighted
Average
Range of Number Remaining Weighted Number Weighted
Exercise Outstanding Contractual Average Exercisable Average
Prices at 12/31/98 Life Exercise Price at 12/31/98 Exercise Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$6.35 - $16.45 844,033 3.76 $ 12.22 844,033 $ 12.22
16.56 - 26.38 1,011,726 6.22 21.53 879,208 20.90
27.25 - 46.86 816,505 8.20 37.90 476,869 35.92
48.06 - 54.47 835,906 9.29 53.30 37,947 53.73
54.97 - 83.21 449,472 9.57 66.36
- -----------------------------------------------------------------------------------------------------------------
$6.35 - $83.21 3,957,642 7.13 $ 34.79 2,238,057 $ 21.39
=================================================================================================================
</TABLE>
Since April 1992, the Board of Directors has only granted performance
based restricted stock to employees. Performance based restricted stock awards
(78,985 shares in 1998, 90,100 shares in 1997 and 138,160 shares in 1996), vest
generally over 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 1992 were based on FINOVA
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
vesting 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. The balance of unamortized restricted stock was $9.5
million at December 31, 1998.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. No compensation cost has been recognized for its fixed
stock option plans because FINOVA grants options at market price on the date of
grant. The compensation cost that has been charged against income for its
performance-based plan was $5.5 million, $7.9 million and $2.9 million for 1998,
1997 and 1996, respectively. Had compensation cost for the Company's stock based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the fair market value method,
FINOVA's net income would have been $153.4 million, $134.4 million and $116.5
million for 1998, 1997 and 1996, respectively. Basic earnings per share would
have been $2.74, $2.47 and $2.14 and diluted earnings per share would have been
$2.59, $2.34 and $2.08 for 1998, 1997 and 1996, respectively.
The fair value of the options was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 1.75%, 1.92% and 1.50%, expected volatility of 26%, 43% and 23%, risk-free
interest rates on options with expected lives of five years of 5.7%, 6.2% and
6.2% and risk-free interest rates on options with expected lives of seven years
of 5.8%, 6.3% and 6.4%. The weighted average grant date fair value of options
issued for 1998, 1997 and 1996 were $17.45, $17.51 and $12.68, respectively.
A-38
<PAGE>
THE FINOVA GROUP INC.
NOTE J INCOME TAXES
The consolidated provision for income taxes consists of the following
for the years ended December 31:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Current:
United States:
Federal $ 25,308 $ 34,936 $ 30,574
State 8,700 13,973 7,654
Foreign 1,870 3,626 1,745
- --------------------------------------------------------------------------------
35,878 52,535 39,973
- --------------------------------------------------------------------------------
Deferred:
United States:
Federal 51,491 30,869 25,088
State 6,855 (1,115) 5,259
Foreign 7,950
- --------------------------------------------------------------------------------
66,296 29,754 30,347
- --------------------------------------------------------------------------------
Provision for income taxes $ 102,174 $ 82,289 $ 70,320
================================================================================
Income taxes paid in 1998, 1997 and 1996 were approximately $26.0
million, $30.3 million and $31.3 million, respectively.
The significant components of deferred tax liabilities and deferred tax
assets at December 31, 1998 and 1997 consisted of the following:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred income from leveraged leases $ 396,572 $ 305,130
Deferred income from lease financing 108,883 89,196
Goodwill 23,726 21,266
Deferred acquisition costs 15,045 11,779
Other 16,229 1,754
- --------------------------------------------------------------------------------
Gross deferred tax liability 560,455 429,125
- --------------------------------------------------------------------------------
Deferred tax assets:
Reserve for credit losses 92,784 78,082
Foreign 10,792 16,802
Alternative minimum tax 52,442 26,153
Accrued expenses 9,051 14,478
Net operating loss carryforward/carryback 20,625 4,875
Other 32,493 12,763
- --------------------------------------------------------------------------------
Gross deferred tax asset 218,187 153,153
- --------------------------------------------------------------------------------
Net deferred tax liability $ 342,268 $ 275,972
================================================================================
A-39
<PAGE>
THE FINOVA GROUP INC.
The federal statutory income tax rate is reconciled to the effective
income tax rate as follows:
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes 3.8 2.6 4.5
Foreign tax effects 0.1 (0.1) (0.8)
Municipal and ESOP income (1.6) (2.0) (2.2)
Other 1.1 1.2 0.8
- -------------------------------------------------------------------------------
Provision for income taxes 38.4% 36.7% 37.3%
===============================================================================
NOTE K PENSION AND OTHER BENEFITS
Net periodic pension costs were $3.0 million, $1.9 million and $1.7
million for the years ended December 31, 1998, 1997 and 1996, respectively.
FINOVA's pension costs were accrued at $5.5 million at December 31, 1998 and
$2.8 million at December 31, 1997.
Net periodic other postretirement benefit costs were $0.7 million, $0.5
million and $0.7 million for each of the years ended December 31, 1998, 1997 and
1996, respectively. FINOVA's accrued postretirement benefit costs were $3.5
million at December 31, 1998 and $2.8 million at December 31, 1997.
FINOVA's investment of $49 million in trust for nonqualified
compensation plans consists of securities held for trading and is recorded at
market.
NOTE L EARNINGS PER SHARE
Basic earnings per share exclude the effects of dilution and are
computed by dividing income available to common shareowners by the weighted
average amount of common stock outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if options, convertible
preferred stock or other contracts to issue stock were exercised or converted
into common stock. These per share calculations are presented for the years
ended December 31, 1998, 1997 and 1996 on the Statements of Consolidated Income
and are detailed below:
A-40
<PAGE>
THE FINOVA GROUP INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE COMPUTATION:
Income from continuing operations $ 160,341 $ 137,910 $ 117,968
=================================================================================================================
Net income $ 160,341 $ 137,910 $ 118,475
=================================================================================================================
Weighted average shares outstanding 56,232,000 54,748,000 54,816,000
Contingently issued shares (286,000) (343,000) (308,000)
- -----------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares 55,946,000 54,405,000 54,508,000
=================================================================================================================
Earnings from continuing operations per share $ 2.87 $ 2.53 $ 2.16
=================================================================================================================
Net income per share $ 2.87 $ 2.53 $ 2.17
=================================================================================================================
DILUTED EARNINGS PER SHARE COMPUTATION:
Income from continuing operations $ 160,341 $ 137,910 $ 117,968
Preferred dividends, net of tax 3,782 3,992
- -----------------------------------------------------------------------------------------------------------------
income from continuing operations available to
common shareowners $ 164,123 $ 141,902 $ 117,968
=================================================================================================================
Net income $ 160,341 $ 137,910 $ 118,475
Preferred dividends, net of tax 3,782 3,992
- -----------------------------------------------------------------------------------------------------------------
Net income available to common shareowners $ 164,123 $ 141,902 $ 118,475
=================================================================================================================
Weighted average shares outstanding 56,232,000 54,748,000 54,816,000
Contingently issued shares (171,000) (184,000) (183,000)
Incremental shares from assumed conversions:
Stock options 1,706,000 1,659,000 1,257,000
Convertible preferred securities 2,938,000 2,938,000 161,000
- -----------------------------------------------------------------------------------------------------------------
Total potential dilutive common shares 4,644,000 4,597,000 1,418,000
- -----------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares 60,705,000 59,161,000 56,051,000
=================================================================================================================
Earnings from continuing operations per share $ 2.70 $ 2.40 $ 2.10
=================================================================================================================
Earnings per share $ 2.70 $ 2.40 $ 2.11
=================================================================================================================
</TABLE>
NOTE M LITIGATION AND CLAIMS
FINOVA is party either as plaintiff or defendant to various actions,
proceedings and pending claims, including legal actions, some of which involve
claims for compensatory, punitive or other damages in significant amounts. That
litigation often results from FINOVA's attempts to enforce its lending
agreements against borrowers and other parties to those transactions. Litigation
is subject to many uncertainties and it is possible that some of the legal
actions, proceedings or claims referred to above could be decided against
FINOVA. Although the ultimate amount for which FINOVA may be held liable, if
any, is not ascertainable, FINOVA believes that any resulting liability should
not materially affect FINOVA's financial position, results of operations or cash
flows.
A-41
<PAGE>
THE FINOVA GROUP INC.
NOTE N FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments has been determined by FINOVA using market information obtained by
FINOVA and the valuation methodologies described below. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein may not be indicative of
the amounts that FINOVA could realize in a current market exchange. The use of
different market assumptions or valuation methodologies may have a material
effect on the estimated fair value amounts.
<TABLE>
The carrying amounts and estimated fair values of FINOVA's financial
instruments are as follows for the years ended December 31:
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
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 $ 7,115,291 $ 7,151,296 $ 5,774,147 $ 5,872,082
Liabilities:
Senior debt 8,394,578 8,472,603 6,764,581 6,832,327
Off-Balance Sheet -
Financial Instruments:
Interest rate swaps -- 17,558 -- 15,893
Interest rate hedge agreements -- (459) -- --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying values of cash and cash equivalents, fee-based
receivables, financing contracts held for sale, accounts payable and accrued
expenses, due to clients and interest payable (including accrued amounts related
to interest rate swaps and interest rate hedge agreements) approximate fair
values due to the short-term maturity of these items.
The methods and assumptions used to estimate the fair values of other
financial instruments are summarized as follows:
LOANS AND OTHER FINANCING CONTRACTS:
The fair value of loans and other financing contracts was estimated by
discounting expected cash flows using the current rates at which loans of
similar credit quality, size and remaining maturity would be made as of December
31, 1998 and 1997. Management believes that the risk factor embedded in the
current interest rates on performing loans results in a fair valuation of
performing loans. As of December 31, 1998 and 1997, the fair value of
nonaccruing impaired contracts with a carrying amount of $119.7 million and
$121.5 million, respectively, was not estimated because it is not practical to
reasonably assess the credit adjustment that would be applied in the marketplace
for such loans. As of December 31, 1998 and 1997, the carrying amount of loans
and other financing contracts excludes repossessed assets with a total carrying
amount of $119.7 million and $89.6 million, respectively.
SENIOR DEBT:
The fair value of senior debt was estimated by discounting future cash
flows using rates currently available for debt of similar terms and remaining
maturities. The carrying values of commercial paper and borrowings under
revolving credit facilities, if any, were assumed to approximate fair values due
to their short maturities.
A-42
<PAGE>
THE FINOVA GROUP INC.
INTEREST RATE SWAPS:
The fair values of interest rate swaps are based on quoted market
prices obtained from participating banks and dealers.
INTEREST RATE HEDGE AGREEMENTS:
The fair value of interest rate hedge agreements in place at December
31, 1998 are based on quoted market prices obtained from participating loans and
dealers for transactions of similar remaining durations.
The fair value estimates presented herein were based on information
obtained by FINOVA as of December 31, 1998 and 1997. 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, 1998 and 1997. Therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
NOTE O OPERATING EXPENSES
<TABLE>
The following represents a summary of the major components of operating
expenses for the three years ended December 31:
<CAPTION>
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 140,939 $ 109,514 $ 95,314
Depreciation and amortization 23,069 17,021 13,799
Travel and entertainment 16,045 11,917 8,953
Occupancy expenses 11,562 8,368 7,104
Problem account costs 10,332 11,577 8,294
Professional services 9,982 7,654 5,738
Deferred acquisition cost (22,409) (16,847) (15,899)
- --------------------------------------------------------------------------------------------
</TABLE>
NOTE P COMPREHENSIVE INCOME
Effective for the year ended December 31, 1998, FINOVA adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements.
<TABLE>
Accumulated other comprehensive income activity for the three years ended
December 31, 1998 is as follows:
<CAPTION>
- -----------------------------------------------------------------------------------------------
Accumulated
Foreign Unrealized Other
Currency Holding Gains Comprehensive
Translation On Securities Income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1996 $ (5,686) $ $ (5,686)
Change during 1996 6,694 6,694
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,008 1,008
Change during 1997 (1,018) (1,018)
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1997 (10) (10)
Change during 1998 (208) 904 696
===============================================================================================
Balance, December 31, 1998 $ (218) $ 904 $ 686
===============================================================================================
</TABLE>
For 1998, the changes in foreign currency translation and unrealized
holding gains on securities are net of an income tax benefit of $140,000 and an
income tax expense of $608,000 respectively.
A-43
<PAGE>
THE FINOVA GROUP INC.
For comparative purposes, financial statements presented for prior
years have been reclassified to conform to the requirements of SFAS No. 130. The
adoption of SFAS No. 130 had no impact on FINOVA's consolidated results of
operations, financial position, or cash flows.
NOTE Q SEGMENT REPORTING
MANAGEMENT'S POLICY FOR IDENTIFYING REPORTABLE SEGMENTS
FINOVA's reportable business segments are strategic business units that
offer distinctive products and services that are marketed through different
channels.
TYPES OF PRODUCTS AND SERVICES
FINOVA has three market groups that are also its reportable segments:
Commercial Finance, Specialty Finance and Capital Markets. Commercial Finance
includes traditional asset-based businesses that lend against collateral such as
cash flows, inventory, receivables and leased assets. This segment includes the
following lines of businesses: Business Credit, Commercial Services, Corporate
Finance, Distribution & Channel Finance, Growth Finance and Rediscount Finance.
Specialty Finance includes businesses which lend to a variety of highly focused,
industry-specific niches. This segment includes the following lines of
businesses: Commercial Equipment Finance, Communications Financing, Franchise
Finance, Healthcare Finance, Portfolio Services, Public Finance, Resort Finance,
Specialty Real Estate Finance and Transportation Finance. Capital Markets, in
conjunction with institutional investors, provides commercial mortgage banking
services and debt and equity capital funding. This segment includes:
Realty Capital, Investment Alliance and Loan Administration.
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS
Management evaluates the business performance of each group based on
total net revenue, income before allocations and managed assets. Total net
revenue is operating margin plus gains on disposal of assets. Income before
allocations is income before income taxes and preferred dividends, excluding
allocation of corporate overhead expenses and the unallocated portion of
provision for credit losses. Managed assets includes each segment's investment
in financing transactions plus securitizations and participations sold.
<TABLE>
Information for FINOVA's reportable segments reconciles to FINOVA's consolidated totals as follows:
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL NET REVENUE:
Commercial Finance $ 187,461 $ 154,981
Specialty Finance 344,541 313,841
Capital Markets 24,170 2,099
Corporate and other 8,978 (9,086)
- -------------------------------------------------------------------------------------------
Consolidated total $ 565,150 $ 461,835
===========================================================================================
INCOME (LOSS) BEFORE ALLOCATIONS:
Commercial Finance $ 67,013 $ 72,454
Specialty Finance 273,674 248,793
Capital Markets (2,775) 2,099
Corporate and other, overhead and unallocated
provision for credit losses (71,615) (99,155)
- -------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and preferred dividends $ 266,297 $ 224,191
===========================================================================================
MANAGED ASSETS:
Commercial Finance $ 3,005,130 $ 2,755,826
Specialty Finance 7,211,164 6,037,725
Capital Markets 255,575
Corporate and other 85,948 84,878
- -------------------------------------------------------------------------------------------
Consolidated total $ 10,557,817 $ 8,878,429
Less securitizations and participations sold (537,596) (457,967)
- -------------------------------------------------------------------------------------------
Investment in financing transactions $ 10,020,221 $ 8,420,462
===========================================================================================
</TABLE>
A-44
<PAGE>
THE FINOVA GROUP INC.
Segment information was not presented for 1996 due to restructuring
within the Company which made such presentation impracticable.
GEOGRAPHIC INFORMATION
FINOVA attributes income earned from financing transactions and managed
assets to geographic areas based on the location of the customer. Income earned
from financing transactions and managed assets at December 31, 1998 by
geographic area are as follows:
-------------------------------------------------------------------------------
Income Earned from
Financing
Transactions Managed Assets
-------------------------------------------------------------------------------
United States $ 942,275 $ 10,030,078
Canada 2,646 94,035
United Kingdom 62,852 433,704
-------------------------------------------------------------------------------
$ 1,007,773 $ 10,557,817
===============================================================================
MAJOR CUSTOMER INFORMATION
FINOVA has no single customer that accounts for 10% or more of revenue.
NOTE R NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS No. 133) which is effective for
fiscal years beginning after June 15, 1999. This statement standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by recognition of those items as assets or
liabilities in the statement of financial position and measurement at fair
value. FINOVA will adopt this standard effective January 1, 2000, as required.
The impact of SFAS No. 133 on the Company's financial position and results of
operations has not yet been determined.
NOTE S SUBSEQUENT EVENT - ACQUISITION OF SIRROM CAPITAL CORPORATION
In March 1999, FINOVA acquired Sirrom Capital Corporation ("Sirrom"), a
specialty finance company headquartered in Nashville, Tennessee. Under the terms
of the agreement, Sirrom shareholders received 0.1634 shares of FINOVA common
stock for each share of Sirrom common stock they owned. The aggregate purchase
price of the Sirrom common stock was approximately $343 million (excluding
options).
NOTE T RESTATEMENT
Subsequent to the issuance of the Company's 1998 financial statements,
the Company's management determined that it should revalue its retained interest
in the mini-commercial mortgage-backed securities ("mini-CMBS") transaction (see
Note C). These revaluations resulted in a reduction of the value of the retained
portion of the loans from $91.7 million to $65.0 million and reduced FINOVA's
previously reported gross gains on the transactions from $46.1 million to $19.5
million. As a result, the Company has restated its 1998 financial statements
from amounts previously reported to reflect the reduction of the retained
interest and resulting gain.
In determining the fair value of assets sold and interests retained,
the Company employed a variety of financial assumptions. To establish discount
rates, the Company referred to the subsequent April 1999 sale of approximately
70% of the mini-CMBS loans into a permanent CMBS structure. The permanent
transaction was compared to the mini-CMBS transaction and similar portions of
the interest retained were discounted using rates present in the permanent
structure, after adjusting for general movements in interest rates between the
date of the mini-CMBS transaction and the permanent transaction. Specifically,
servicing rights were discounted at approximately 6% and the remaining residual
cash flows were discounted at rates between 9% and 18%. The Company assumed
minimal defaults and prepayments due to the nature and structure of the
commercial mortgages. The recourse obligation was recorded at fair value based
on prices obtained from the subsequent April 1999 sale.
A-45
<PAGE>
THE FINOVA GROUP INC.
<TABLE>
A summary of the revaluation of the retained interest in the mini-CMBS structure is as follows:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Mini-CMBS Structure - 1998
- ------------------------------------------------------------------------------------------------------------
As Previously As
Reported Restated
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans sold $ 724,257 $ 724,257
Principal A (Senior security interest) 678,686 678,686
Principal B (Subordinated retained interest) 91,708 65,033
- ------------------------------------------------------------------------------------------------------------
Basis 770,394 743,719
Gross gains 46,137 19,462
Commissions & expenses (3,862) (3,156)
Recourse obligations (278) (5,827)
Hedge loss (20,443) (20,443)
Valuation adjustment (5,500)
- ------------------------------------------------------------------------------------------------------------
Net gain/(loss) $ 16,054 $ (9,964)
- ------------------------------------------------------------------------------------------------------------
Activity for the subordinated retained interest is as follows:
- ------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------
Beginning retained interest $
Retained interest added 65,033
Principal payments applied (55)
Advances made 386
- ------------------------------------------------------------------------------------------------------------
Ending retained interest $ 65,364
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Cash received on the retained interest totaled $0.9 million, which was
applied against principal and interest. Advances are made to the trust for
delinquencies in the underlying loans, which are recovered when the delinquent
payments are collected.
Additionally, the Company's management has determined that expenses
incurred in connection with the origination of new loans under SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" (SFAS No. 91), should have
been deferred and amortized over the estimated loan life. Previously, the
Company was deferring loan origination fees received and amortizing them over
the lives of the loans in accordance with SFAS No. 91, but elected to expense
loan origination costs as incurred. The Company has restated its financial
statements to now defer and amortize loan costs over the estimated loan life, in
accordance with SFAS No. 91 as well as to make several other adjustments.
A-46
<PAGE>
THE FINOVA GROUP INC.
<TABLE>
A summary of the significant effects of the restatements for 1998 is as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998
Adjustments
- ----------------------------------------------------------------------------------------------------------------------
As Previously Origination As
Reported CMBS Gain Costs Other Restated
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At December 31,
Investment in financing transactions $ 10,011,536 $ (21,847) $ 37,426 $ (6,894) $ 10,020,221
Goodwill and other assets 596,878 (1,140) (16,623) 579,115
Total liabilities 9,161,419 (4,910) 15,045 (9,099) 9,162,455
Shareowners' equity 1,177,345 (18,077) 22,381 (14,418) 1,167,231
For the year ended December 31,
Interest margins earned 472,536 (15,605) 2,584 459,515
Gains on disposal of assets 55,024 (26,018) (1,094) 27,912
Operating expenses 241,074 (23,731) (690) 216,653
Net income 169,737 (15,559) 4,859 1,304 160,341
Basic earnings per share $ 3.03 $ (0.27) $ 0.09 $ 0.02 $ 2.87
Diluted earnings per share $ 2.86 (0.26) $ 0.08 $ 0.02 $ 2.70
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The restatement to reduce the mini-CMBS gain did not affect years prior
to 1998.
<TABLE>
A summary of the significant effects of the restatement to defer loan origination costs as well as to make
several other adjustments in 1997 and 1996 are as follows:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
As Previously As As Previously As
Reported Restated Reported Restated
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31,
Investment in financing transactions $ 8,399,456 $ 8,420,462 $ 7,298,759 $ 7,318,919
Goodwill and other assets 464,282 448,062 345,408 336,970
Total liabilities 7,517,836 7,520,822 6,485,593 6,490,821
Shareowners' equity 1,090,454 1,092,254 929,591 936,085
For the year ended December 31,
Interest margins earned 408,914 392,124 340,517 329,107
Gain on disposal of assets 30,261 30,333 12,949 12,562
Operating expenses 190,525 168,444 154,481 140,218
Net Income 139,098 137,910 117,000 118,475
Basic earnings per share $ 2.56 $ 2.53 $ 2.15 $ 2.17
Diluted earnings per share $ 2.42 $ 2.40 $ 2.09 $ 2.11
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A prior period adjustment of $3.9 million has been reflected in
shareowners' equity at January 1, 1996.
A-47
<PAGE>
THE FINOVA GROUP INC.
<TABLE>
SUPPLEMENTAL SELECTED FINANCIAL DATA
CONDENSED QUARTERLY RESULTS (UNAUDITED)
As restated
(Dollars in Thousands, except per share data)
The following represents the condensed quarterly results for the three years ended December 31, 1998,
1997 and 1996:
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income earned from financing transactions:
1998 $ 232,833 $ 246,069 $ 253,309 $ 275,562
1997 206,226 216,836 219,012 237,689
1996 181,389 183,723 192,297 199,587
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
1998 110,280 114,692 121,937 131,268
1997 96,793 101,501 105,208 111,148
1996 88,138 89,631 91,247 96,587
- ---------------------------------------------------------------------------------------------------------------
Volume-based fees:
1998 22,156 19,103 16,687 19,777
1997 7,784 8,583 9,546 13,465
1996 6,731 6,380 7,570 7,907
- ---------------------------------------------------------------------------------------------------------------
Gains on disposal of assets:
1998 1,525 7,433 6,471 12,483
1997 3,233 9,768 10,305 7,027
1996 6,730 1,315 397 4,120
- ---------------------------------------------------------------------------------------------------------------
Non-interest expenses:
1998 79,548 89,702 85,922 113,762
1997 66,769 77,599 80,334 85,931
1996 62,927 53,992 62,135 65,201
- ---------------------------------------------------------------------------------------------------------------
Income from continuing operations:
1998 39,741 40,535 41,838 38,227
1997 32,178 34,670 33,337 37,725
1996 27,423 29,182 29,665 31,698
- ---------------------------------------------------------------------------------------------------------------
Net income:
1998 39,741 40,535 41,838 38,227
1997 32,178 34,670 33,337 37,725
1996 27,788 28,451 28,939 33,297
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share:
1998 0.71 0.72 0.75 0.69
1997 0.60 0.64 0.62 0.68
1996 0.51 0.52 0.53 0.61
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
1998 0.67 0.68 0.71 0.65
1997 0.57 0.61 0.58 0.64
1996 0.50 0.51 0.52 0.59
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
A-48
<PAGE>
<TABLE>
AVERAGE BALANCES/OPERATING MARGIN/AVERAGE ANNUAL RATES (UNAUDITED) (1)
AS RESTATED
(Dollars in Thousands)
The following represents the breakdown of FINOVA's average balance sheet, operating margin and average annual rates for the
years ended December 31, 1998 and 1997:
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
Interest & Interest &
Average Volume-Based Average Average Volume-Based Average
Balance Fees Rate Balance Fees Rate
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 38,304 $ $ 36,873 $
Investment in financing transactions 9,018,351 1,015,415(4) 11.88%(2) 7,767,391 846,152(4) 11.50%(2)
Less reserve for credit losses (184,162) (160,241)
-----------------------------------------------------------------------------------------------------------------------------------
Net investment in financing transactions 8,834,189 7,607,150
Goodwill and other assets 519,742 363,988
Investment in discontinued operations 2,703
-----------------------------------------------------------------------------------------------------------------------------------
$9,392,235 $ 8,010,714
====================================================================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities:
Other liabilities $ 386,714 $ $ 409,024 $
Senior debt 7,452,245 478,177 6.42% 6,253,588 414,650 6.63%
Deferred income taxes 304,571 260,275
-----------------------------------------------------------------------------------------------------------------------------------
8,143,530 6,922,887
Company-obligated mandatory redeemable
convertible preferred securities of
subsidiary trust solely holding
convertible debentures of FINOVA 111,550 111,550
Shareowners' equity 1,137,155 976,277
-----------------------------------------------------------------------------------------------------------------------------------
$ 9,392,235 $ 8,010,714
====================================================================================================================================
Interest income/average earning assets (2) $ 1,015,415 11.88% $ 846,152 11.50%
Interest expense/average earning assets (2) (3) 478,177 5.59% 414,650 5.63%
-----------------------------------------------------------------------------------------------------------------------------------
Operating margin (3) $ 537,238 6.29% $ 431,502 5.87%
====================================================================================================================================
<FN>
(1) Averages are calculated based on monthly balances.
(2) The average rate is calculated based on average earning assets ($8,546,715 and $7,360,012 for 1998 and 1997, respectively)
which are net of average deferred taxes on leveraged leases and average nonaccruing assets.
(3) For the year ended December 31, 1998, excluding the impact of derivatives, interest expense would have been $472,893 or 5.53%
of average earning assets and operating margin would have been $542,522 or 6.35% of average earning assets. For the year ended
December 31, 1997, excluding the impact of derivatives, interest expense would have been $415,697 or 5.65% of average earning
assets and operating margin would have been $430,455 or 5.85% of average earning assets.
(4) For the years ended December 31, 1998 and 1997 interest income is shown net of operating lease depreciation.
</FN>
</TABLE>
A-49
<PAGE>
THE FINOVA GROUP INC.
COMMISSION FILE NUMBER 1-11011
EXHIBIT INDEX
DECEMBER 31, 1998 FORM 10-K
Exhibit No.
-----------
(3.A) Certificate of Incorporation, as amended through the
date of this filing (incorporated by reference from
FINOVA's report on Form 10-K for the year ended
December 31, 1994 (the "1994 10-K"), Exhibit 3.A).
(3.B) Proposed amendment to the Certificate of
Incorporation to increase the number of authorized
shares, which is subject to shareowner approval
(incorporated by reference from the 1999 Proxy
Statement).
(3.C) Bylaws, as amended through the date of this filing
(incorporated by reference from FINOVA's report on
Form 10-K for the year ended December 31, 1995 (the
"1995 10-K") Exhibit 3.B).
(4.A) Form of FINOVA's Common Stock Certificate
(incorporated by reference from the 1994 10-K,
Exhibit 4.B).
(4.B) Relevant portions of FINOVA's Certificate of
Incorporation and Bylaws included in Exhibits 3.A,
3.B and 3.C above are incorporated by reference.
(4.C) Rights Agreement dated as of February 15, 1992
between FINOVA and the Rights Agent named therein, as
amended (incorporated by reference from FINOVA's
report on Form 8-K dated September 21, 1995, Exhibit
4.1).
(4.C.1) Acceptance of Successor Trustee to Appointment under
Rights Agreement noted in 4.C above (incorporated by
reference from FINOVA's report on Form 8-K, dated
November 30, 1995, Exhibit 4).
(4.D) Long-term debt instruments with principal amounts not
exceeding 10% of FINOVA's total consolidated assets
are not filed as exhibits to this report. FINOVA will
furnish a copy of those agreements to the SEC upon
its request.
(4.E) 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.F) 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.G) Indenture, dated as of December 11, 1996, between
FINOVA and Fleet National Bank as trustee
(incorporated by reference from FINOVA's report on
Form 8-K dated December 20, 1996, (the "December 1996
8-K"), Exhibit 4.1).
(4.G.1) Amended and Restated Declaration of Trust, dated as
of December 11, 1996, among Bruno A. Marszowski and
Robert J. Fitzsimmons, as Regular Trustees, First
Union Bank of Delaware, as Delaware Trustee, Fleet
National Bank, as Property Trustee, and FINOVA
(incorporated by reference from the December 1996
8-K, Exhibit 4.2).
A-50
<PAGE>
Exhibit No.
-----------
(4.G.2) Preferred Security Guarantee, dated as of December
11, 1996, between FINOVA and Fleet National Bank, as
trustee (incorporated by reference from the December
1996 8-K, Exhibit 4.3).
(4.G.3) Form of 5 1/2% Convertible Subordinated Debenture
(incorporated by reference from the December 1996
8-K, Exhibit 4.4).
(4.G.4) Form of Preferred Security (TOPrS) (incorporated by
reference from the December 1996 8-K, Exhibit 4.5).
(4.H) Form of Indenture, dated as of March 20, 1998,
between FINOVA, FINOVA Capital and The First National
Bank of Chicago as Trustee (incorporated by reference
from FINOVA and FINOVA Capital's registration
statement on Form S-3, Registration No. 333-38171,
Exhibit 4.8).
(4.I) Announcement of 2-for-1 Stock Split (incorporated by
reference from FINOVA's August 14, 1998 8-K, Exhibit
28).
(4.I.1) Letter to shareowners regarding FINOVA's 2-for-1
Stock Split (incorporated by reference from FINOVA's
October 1, 1998 8-K, Exhibit 28.A).
(4.I.2) Letter to holders of Preferred Securities regarding
the 2-for-1 common stock split and resulting
adjustment in conversion price applicable to the
Convertible Trust Originated Preferred Securities of
FINOVA Finance Trust (incorporated by reference from
FINOVA's October 1, 1998 8-K, Exhibit 28.B).
(4.J) 1992 Stock Incentive Plan, as amended through the
date of this filing (incorporated by reference from
the 1997 10-K, Exhibit 4.J).+
(4.K) Sirrom Capital Corporation Amended and Restated 1994
Stock Option Plan.*
(4.L) Sirrom Capital Corporation Amended and Restated 1995
Stock Option Plan for Non-employee Directors.*
(4.M) Sirrom Capital Corporation Amended and Restated 1996
Incentive Stock Option Plan.*
(4.N) Director resolutions dated February 11, 1999,
regarding adoption of the Sirrom stock option plans.*
(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 Westminister Bank USA, as
agents (the "Agents") and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.1).
(10.A.1) First Amendment dated as of September 30, 1994, to
the Sixth Amendment and Restatement, noted in 10.A
above (incorporated by reference from the 1994 10-K,
Exhibit 10.A.1).
A-51
<PAGE>
Exhibit No.
-----------
(10.A.2) Second Amendment dated as of May 11, 1995 to the
Sixth Amendment and Restatement noted in 10.A above
(incorporated by reference from FINOVA's Quarterly
Report on Form 10-Q for the period ending September
30, 1995 ( the "3Q95 10-Q"), Exhibit 10.A).
(10.A.3) Third Amendment dated as of November 1, 1995 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 3Q95 10-Q, Exhibit 10.B).
(10.A.4) Fourth Amendment dated as of May 15, 1996, to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 1996 10-K, Exhibit 10.A.4).
(10.A.5) Fifth Amendment dated as of May 20, 1998 to Sixth
Amendment noted in 10.A above (incorporated by
reference from the 1997 10-K, Exhibit 10.A.5).
(10.B) Credit Agreement (Short-Term Facility) dated as of
May 16, 1994 among FINOVA Capital, the Lender parties
thereto, the Agents and Citibank, N.A., as
Administrative Agent (incorporated by reference from
FINOVA's report on Form 8-K dated May 23, 1994,
Exhibit 10.2).
(10.B.1) First Amendment dated as of September 30, 1994 to the
Credit Agreement noted in 10.B above (incorporated by
reference from the 1994 10-K, Exhibit 10.B.1).
(10.B.2) Second Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.C).
(10.B.3) Third Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 3Q95 10-Q,
Exhibit 10.D).
(10.B.4) Fourth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from 1996 10-K,
Exhibit B.4).
(10.B.5) Fifth Amendment to Short-Term Facility noted in 10.B
above (incorporated by reference from the 1997 10-K,
Exhibit 10.B.5).+
(10.C) 1998 Management Incentive Plan (incorporated by
reference from the 1997 10-K, Exhibit 10.C.)+
(10.D) 1999 Management Incentive Plan.*+
(10.E.1) 1996 - 1998 Performance Share Incentive Plan
(incorporated by reference from 1996 10-K, Exhibit
10.E.3).+
(10.E.2) 1997 - 1999 Performance Share Incentive Plan
(incorporated by reference from the 1997 10-K,
Exhibit 10.E.3).+
(10.E.3) 1998 - 2000 Performance Share Incentive Plan
(incorporated by reference from the 1997 10-K,
Exhibit 10.E.4).+
(10.E.4) 1999 - 2001 Performance Share Incentive Plan.*+
(10.F) Employment Agreement with Samuel L. Eichenfield dated
March 16, 1996 (incorporated by reference from the
1995 10-K, Exhibit 10.F.3).+
A-52
<PAGE>
Exhibit No.
-----------
(10.F.1) Amendment to Employment Agreement referenced in 10.F
above (incorporated by reference from the 1996 10-K,
Exhibit 10.F.2).+
(10.F.2) Second Amendment to Employment Agreement referenced
in 10.F above (incorporated by reference from the
2Q97 10-Q, Exhibit 10).+
(10.G) Employment Agreement with William J. Hallinan, dated
February 25, 1992 (incorporated by reference from the
1992 10-K, Exhibit 10.1).+
(10.H) Amended and Restated Supplemental Pension Plan,
(incorporated by reference from the 1996 10-K,
Exhibit 10.1).+
(10.I) A description of FINOVA's policies regarding
compensation of directors is incorporated by
reference from the 1999 Proxy Statement.+
(10.J) Directors Deferred Compensation Plan (incorporated by
reference from the 1992 10-K, Exhibit 10.O).+
(10.K) Directors' Retirement Benefit Plan (incorporated by
reference from FINOVA's report on Form 10-K for the
year ended December 31, 1993 (the "1993 10-K"),
Exhibit 10.OO).+
(10.L) Directors' Charitable Awards Program (incorporated by
reference from the 1994 10-K, Exhibit 10.CC).+
(10.M) Deferred Compensation Plan (incorporated by reference
from the 1995 10-K, Exhibit 10.N).+
(10.N) Bonus KEYSOP Plan (incorporated by reference from the
1997 10-K, Exhibit 10.N).+
(10.N.1) Bonus KEYSOP Trust Agreement (incorporated by
reference from the 1997 10-K, Exhibit 10.N.1).+
(10.O) FINOVA's Executive Officer Loan Program Policies and
Procedures, (incorporated by reference from the 1996
10-K, Exhibit 10.U).+
(10.P.1) FINOVA's Executive Severance Plan for Tier 1
Employees (incorporated by reference from the 1995
10-K, Exhibit 10.C.1).+
(10.P.2) FINOVA's Executive Severance Plan for Tier 2
Employees (incorporated by reference from the 1995
10-K, Exhibit 10.C.2).+
(10.Q.1) Value Sharing Plan for the Chief Executive Officer
(incorporated by reference from the 3Q95 10-Q,
Exhibit 10.L).+
(10.Q.2) Value Sharing Plan for Executive Officers and Key
Employees (incorporated by reference from the 3Q95
10-Q, Exhibit 10.K).+
(10.R) Tax Sharing Agreement dated February 19, 1992 among
FINOVA, The Dial Corp and others (incorporated by
reference from the 1992 10-K, Exhibit 10.KK).
A-53
<PAGE>
Exhibit No.
-----------
(10.S) 1992 Stock Incentive Plan (incorporated by reference
from the 1997 10-K, Exhibit 4.J).+
(10.T) Documents relating to the mini-CMBS Program: FINOVA
Commercial Mortgage Loan Owner Trust 1998-1.
Commercial Mortgage Loan Asset Backed Certificates
1998 -1.*
(10.T.1) Certificate Purchase Agreement dated as of September
29, 1998.*
(10.T.2) Trust and Servicing Agreement dated as of September
1, 1998.*
(10.T.3) Loan Purchase Agreement dated as of September 1,
1998.*
(10.T.4) Amendment No. 1 to the Trust and Servicing Agreement
dated as of December 8, 1998.*
(10.T.5) Amendment No. 2 to the Trust and Servicing Agreement
dated as of December 29, 1998.*
(10.T.6) Custodial Agreement dated as of September 1, 1998.*
(10.T.7) Administration Agreement dated as of September 1,
1998.*
(10.T.8) Amendment No. 3 to the Trust and Servicing Agreement
dated as of April 21, 1999.**
(10.T.9) Amendment No. 4 to the Trust and Servicing Agreement
dated as of April 26, 1999.**
(12) Computation of Ratio of Restated Income to Combined
Fixed Charges and Preferred Stock Dividends, as
restated.**
(21) Subsidiaries.**
(23) Independent Auditors' Consent.**
(24) Powers of Attorney.**
(27) Financial Data Schedule for the year ended December
31, 1998, as restated.**
- ----------
* Previously filed.
** Filed with this report.
+ Relating to management compensation.
A report on Form 8-K, dated April 16, 1999, was filed by FINOVA, which
reported under Items 5 and 7 postponement of the release of earnings for the
first quarter of 1999.
A-54
AMENDMENT NO. 3
dated as of April 21, 1999
to the
TRUST AND SERVICING AGREEMENT
among
FINOVA COMMERCIAL MORTGAGE LOAN OWNER TRUST 1998-1
(Trust)
FINOVA REALTY CAPITAL WAREHOUSE FUNDING, L.P.
(Depositor)
FINOVA CAPITAL CORPORATION
(Loan Originator)
FINOVA CAPITAL CORPORATION
(Servicer)
FINOVA CAPITAL CORPORATION
(Transfer Obligor)
and
WILMINGTON TRUST COMPANY
(Owner Trustee)
FINOVA COMMERCIAL MORTGAGE LOAN OWNER TRUST 1998-1
COMMERCIAL MORTGAGE LOAN ASSET-BACKED CERTIFICATES
Dated as of September 1, 1998
---------------------------------------------------------------------------
<PAGE>
AMENDMENT NO. 3
TO THE
TRUST AND SERVICING AGREEMENT
dated as of April 21, 1999
AMENDMENT NO. 3 TO THE TRUST AND SERVICING AGREEMENT, dated as of April 21,
1999 ("AMENDMENT NO. 3") to that certain Trust and Servicing Agreement, dated as
of September 1, 1998 (the "TRUST AND SERVICING AGREEMENT") among FINOVA
COMMERCIAL MORTGAGE LOAN OWNER TRUST 1998-1, a Delaware business trust (the
"TRUST"), FINOVA REALTY CAPITAL WAREHOUSE FUNDING, L.P., a Delaware limited
partnership, as Depositor (the "DEPOSITOR"), FINOVA CAPITAL CORPORATION, a
Delaware corporation, as Loan Originator (the "LOAN ORIGINATOR"), FINOVA CAPITAL
CORPORATION, a Delaware corporation, as Transfer Obligor (the "TRANSFER
OBLIGOR"), FINOVA CAPITAL CORPORATION, as Servicer (the "SERVICER") and
WILMINGTON TRUST COMPANY, a Delaware banking corporation, as Owner Trustee on
behalf of the Certificateholders (in such capacity, the "OWNER TRUSTEE").
PRELIMINARY STATEMENTS
WHEREAS, the parties hereto have entered into the Trust and Servicing
Agreement, whereby the Owner Trust Estate was conveyed to the Trustee;
WHEREAS, Section 17.02 provides the Trust and Servicing Agreement may be
amended in writing by the parties thereto; and
WHEREAS the parties hereto wish to make certain amendments to the Trust and
Servicing Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms
shall have the meaning set forth in the Trust and Servicing Agreement.
<PAGE>
2. AMENDMENT TO TRUST AND SERVICING AGREEMENT.
(a) Section 1.01 is hereby amended by:
(i) deleting the definition of "EXPECTED FINAL DISTRIBUTION DATE" and
replacing such definition with the following:
EXPECTED FINAL DISTRIBUTION DATE: The Expected Final Distribution Date with
respect to the Class A Certificates shall be October 1, 2019, or, if such day is
not a Business Day, then the next Business Day, or such later date as may be
agreed in writing by the Majority Certificateholders, provided that if the
Majority Certificateholders shall exercise the Put Option or a Disposition shall
occur, the Expected Final Distribution Date shall be the earlier of the Put Date
and the date of the second Disposition (or such later date as the Majority
Certificateholders may agree in writing in their sole discretion).
(b) Section 2.03(a)(vi) is hereby amended by deleting the word "and" after
";".
(c) Section 2.03(a)(vii) is hereby amended by deleting "." and inserting ";
and".
(d) Section 2.03(a) is hereby amended by adding Section 2.03(a)(viii) as
follows:
(viii) notwithstanding Section 10.01 or any other provision of this
Agreement, to enter into and perform its obligations under that certain Mortgage
Loan Purchase Agreement, dated as of April 21, 1999 (the "MORTGAGE LOAN PURCHASE
AGREEMENT") among the Trust, as seller, FINOVA Realty Capital Inc. and Morgan
Stanley Capital I Inc., as depositor, and to execute and deliver all other
certificates and documents required to be executed and delivered thereunder,
and, pursuant to Section 1(a)(i)(O) of the Administration Agreement, the
Administrator shall perform all administrative duties on behalf of the Trust
with respect to the Mortgage Loan Purchase Agreement.
(e) Section 4.06(a)(iii)(A) is hereby amended by deleting the entire
section and replacing such section with the following:
(A) There shall occur two Dispositions (or two sets of simultaneous
Dispositions) either as a result of the exercise of the Put Option or the
Disposition Agent's decision to effect a Disposition. To the extent that the
Issuer, Loan Originator and Majority Certificateholders so agree in writing,
there may occur additional Dispositions.
(f) Section 4.06(b)(iii) is hereby amended by deleting the word "and" after
";".
(g) Section 4.06(b)(iv) is hereby amended by deleting "." and inserting ";
and".
(h) Section 4.06(b) is hereby amended by adding Section 4.06(b)(v) as
follows:
<PAGE>
(v) make such representations and warranties concerning the Loans as of the
"cutoff date" of the related Disposition to the Disposition Participants as may
be necessary to effect the Disposition and such additional representations and
warranties as may be necessary, in the reasonable opinion of any of the
Disposition Participants, to effect such Disposition; provided, that the Trust
shall not be required to make any representation or warranty beyond the scope or
substance of the representations and warranties delineated herein; provided
further that pursuant to Section 4.06(a)(i)(A) of this Agreement, the Loan
Originator shall guaranty such representations and warranties; provided further
that any obligations that result from any breach of the representations and
warranties made by the Trust are paid for from amounts otherwise payable
pursuant to 7.01(c)(3)(viii).
2. ATTORNEYS FEES. The Servicer agrees to pay as and when billed by the
Initial Class A Certificateholder and the Owner Trustee, respectively, the
reasonable fees, disbursements and expenses of counsel to the Initial Class A
Certificateholder and the Owner Trustee, respectively, in connection with the
amendments to the Basic Documents effected on the date hereof.
3. FULL FORCE AND EFFECT. Except as modified by this Amendment No. 3, the
Trust and Servicing Agreement shall otherwise remain in full force and effect
against any and all of the parties thereunder.
4. GOVERNING LAW. This Amendment No. 3 shall be governed by, and construed
in accordance with, the laws of the State of Delaware, without reference to its
conflicts of laws provisions, and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance therewith.
5. COUNTERPARTS. This Amendment No. 3 may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF the parties have executed this Amendment No. 3 as of the
date first above written.
FINOVA COMMERCIAL MORTGAGE LOAN
OWNER TRUST 1998-1,
By: FINOVA Capital Corporation, as
Administrator on behalf of the Issuer
By: /s/ Meilee Smythe
Name: Meilee Smythe
Title: Sr. Vice President/Treasurer
FINOVA REALTY CAPITAL WAREHOUSE FUNDING, L.P.,
as Depositor
By: FINOVA Warehouse Funding Inc.,
as General Partner
By: /s/ Melissa C. Huckins
Name: Melissa C. Huckins
Title: Vice President-Assistant Treasurer
FINOVA CAPITAL CORPORATION,
as Loan Originator
By: /s/ Meilee Smythe
Name: Meilee Smythe
Title: Sr. Vice President/Treasurer
FINOVA CAPITAL CORPORATION,
as Transfer Obligor
By: /s/ Meilee Smythe
Name: Meilee Smythe
Title: Sr. Vice President/Treasurer
FINOVA CAPITAL CORPORATION,
as Servicer
By: /s/ Meilee Smythe
Name: Meilee Smythe
Title: Sr. Vice President/Treasurer
WILMINGTON TRUST COMPANY,
as Owner Trustee
<PAGE>
By: /s/ Rosemary Pantano
Name: Rosemary Pantano
Title: Financial Services Officer
AGREED AND ACCEPTED:
FINOVA REALTY CAPITAL
WAREHOUSE FUNDING, L.P.,
as holder of 100% of the
Percentage Interests of the Class B Certificates
By: FINOVA WAREHOUSE FUNDING INC.,
as General Partner
By: /s/ Melissa C. Huckins
Name: Melissa C. Huckins
Title: Vice President-Assistant Treasurer
<PAGE>
FINOVA COMMERCIAL MORTGAGE LOAN OWNER TRUST 1998-1
COMMERCIAL MORTGAGE LOAN ASSET-BACKED CERTIFICATES
INSTRUCTION TO OWNER TRUSTEE
Reference is hereby made to the Trust and Servicing Agreement (the "TRUST
AGREEMENT"), dated as of September 1, 1998 among FINOVA COMMERCIAL MORTGAGE LOAN
OWNER TRUST 1998-1, a Delaware business trust (the "TRUST"), FINOVA REALTY
CAPITAL WAREHOUSE FUNDING, L.P., a Delaware limited partnership, as Depositor
(the "DEPOSITOR"), FINOVA CAPITAL CORPORATION, a Delaware corporation, as Loan
Originator, FINOVA CAPITAL CORPORATION, a Delaware corporation, as Transfer
Obligor, FINOVA CAPITAL CORPORATION, as Servicer and WILMINGTON TRUST COMPANY, a
Delaware banking corporation, as Owner Trustee on behalf of the
Certificateholders (in such capacity, the "OWNER TRUSTEE"). Capitalized terms
not defined herein shall have the meanings ascribed to such terms in the Trust
Agreement.
1. Morgan Stanley Securitization Funding Inc. hereby certifies that it is
the Initial Class A Certificateholder and is the Holder of 100% of the
Percentage Interests of the Class A Certificates and is the Majority
Certificateholder.
2. The Depositor certifies that it is holder of 100% of the Percentage
Interests of the Class B Certificates.
3. Section 17.02 of the Trust Agreement provides, among other things, that
the Trust Agreement may be amended from time to time by the parties thereto with
the prior written consent of the Majority Certificateholders, such consent is
hereby given.
4. Section 11.03 of the Trust Agreement provides that the Majority
Certificateholders, may with written instruction, direct the Owner Trustee in
the management of the Trust consistent with the purpose of the Trust.
5. Section 7.01(c)(4) of the Trust Agreement provides that the Majority
Certificateholders and the Trust may agree, upon written notice to the Owner
Trustee, on additional Distribution Dates, and shall specify within such notice
each amount to be withdrawn from the Collection Account and Distribution Account
on such day.
6. Morgan Stanley Securitization Funding Inc., as the holder of 100% of the
Percentage Interests of the Class A Certificates and the Depositor, as the
holder of 100% of the Percentage Interests of the Class B Certificates, hereby
waive the written notice to the Certificateholders and the Intitial Class A
Certificateholder of Amendment No. 3, dated as of April 21, 1999 to the Trust
and Servicing Agreement (the "AMENDMENT NO. 3"), among the Trust, the Depositor,
the Loan Originator, the Transfer Obligor, the Servicer and the Owner Trustee.
7. Morgan Stanley Securitization Funding Inc., as the holder of 100% of the
Percentage Interests of the Class A Certificates and the Depositor, as the
holder of 100% of the Percentage Interests of the Class B Certificates hereby
direct the Owner Trustee to execute the Amendment No. 3.
8. Morgan Stanley Securitization Funding Inc. as the holder of 100% of the
Percentage Interests of the Class A Certificates and the Trust hereby notify and
<PAGE>
direct the Owner Trustee to designate April 21, 1999 as an additional
Distribution Date (the "NEW DISTRIBUTION DATE").
9. Morgan Stanley Securitization Funding Inc. as the holder of 100% of the
Percentage Interests of the Class A Certificates and the Trust direct the Owner
Trustee to distribute all amounts on deposit in the Collection Account and
Distribution Account on the date hereof in accordance with Schedule A.
10. Morgan Stanley Securitization Funding Inc. as the holder of 100% of the
Percentage Interests of the Class A Certificates and the Trust direct the
Disposition Agent to remit the Disposition Proceeds to the Distribution Account
for distribution in accordance with the prior paragraph.
11. Morgan Stanley Securitization Funding Inc., as the holder of 100% of
the Percentage Interests of the Class A Certificates and the Depositor, as the
holder of 100% of the Percentage Interests of the Class B Certificates hereby
direct the Owner Trustee to execute the Certificate, dated as of April 21, 1999,
attached to the opinion of counsel to FINOVA Realty Capital Inc.
[SIGNATURE PAGE FOLLOWS]
2
<PAGE>
As of April 21, 1999
MORGAN STANLEY SECURITIZATION
FUNDING INC.,
as Majority Certificateholder of 100%
of the Percentage Interests of the
Class A Certificates
By: /s/ Marc Flamino
Name: Marc Flamino
Title: Vice President
FINOVA COMMERCIAL MORTGAGE LOAN OWNER
TRUST 1998-1,
By: Wilmington Trust Company,
not in its individual capacity
but solely as Owner Trustee
By: /s/ Emmett R. Harmon
Name: Emmett R. Harmon
Title: Vice President
FINOVA REALTY CAPITAL WAREHOUSE
FUNDING, L.P.,
as holder of 100% of the Percentage
Interests of the Class B Certificates
By: FINOVA WAREHOUSE FUNDING INC.,
as General Partner
By: /s/ Melissa C. Huckins
Name: Melissa C. Huckins
Title: Vice President-Assistant
Treasurer
[INSTRUCTION TO OWNER TRUSTEE]
3
<PAGE>
SCHEDULE A
Owner Trustee Fee: $0
Custodian Fee: $0
Nonrecoverable Servicing Advances: $0
Hedge Funding Requirement: $0
Sum of Interest Distribution Amount and Interest
Carry-Forward Amount (paid to the Class A
Certificateholders): $1,029,545.12
Sum of Overcollateralization Shortfall and Principal
Carry-Forward Amount (paid to the Class A
Certificateholders): $480,511,114.81
Trust/Depositor Indemnities and Due Diligence Fees: $0
Servicing Compensation: $0
All Remaining Amounts to the Class B Certificateholder: $47,825,435.88
AMENDMENT NO. 4
dated as of April 26, 1999
to the
TRUST AND SERVICING AGREEMENT
among
FINOVA COMMERCIAL MORTGAGE LOAN OWNER TRUST 1998-1
(Trust)
FINOVA REALTY CAPITAL WAREHOUSE FUNDING, L.P.
(Depositor)
FINOVA CAPITAL CORPORATION
(Loan Originator)
FINOVA CAPITAL CORPORATION
(Servicer)
FINOVA CAPITAL CORPORATION
(Transfer Obligor)
and
WILMINGTON TRUST COMPANY
(Owner Trustee)
FINOVA COMMERCIAL MORTGAGE LOAN OWNER TRUST 1998-1
COMMERCIAL MORTGAGE LOAN ASSET-BACKED CERTIFICATES
Dated as of September 1, 1998
---------------------------------------------------------------------------
<PAGE>
AMENDMENT NO. 4
TO THE
TRUST AND SERVICING AGREEMENT
dated as of April 26, 1999
AMENDMENT NO. 4 TO THE TRUST AND SERVICING AGREEMENT, dated as
of April 26, 1999 ("Amendment No. 4") to that certain Trust and Servicing
Agreement, dated as of September 1, 1998 (the "Trust and Servicing Agreement")
among FINOVA COMMERCIAL MORTGAGE LOAN OWNER TRUST 1998-1, a Delaware business
trust (the "Trust"), FINOVA REALTY CAPITAL WAREHOUSE FUNDING, L.P., a Delaware
limited partnership, as Depositor (the "Depositor"), FINOVA CAPITAL CORPORATION,
a Delaware corporation, as Loan Originator (the "Loan Originator"), FINOVA
CAPITAL CORPORATION, a Delaware corporation, as Transfer Obligor (the "Transfer
Obligor"), FINOVA CAPITAL CORPORATION, as Servicer (the "Servicer") and
WILMINGTON TRUST COMPANY, a Delaware banking corporation, as Owner Trustee on
behalf of the Certificateholders (in such capacity, the "Owner Trustee").
PRELIMINARY STATEMENTS
WHEREAS, the parties hereto have entered into the Trust and
Servicing Agreement, whereby the Owner Trust Estate was conveyed to the Trustee;
WHEREAS, Section 17.02 provides the Trust and Servicing
Agreement may be amended in writing by the parties thereto; and
WHEREAS the parties hereto wish to make certain amendments to
the Trust and Servicing Agreement;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, all
capitalized terms shall have the meaning set forth in the Trust and Servicing
Agreement.
2. AMENDMENT TO TRUST AND SERVICING AGREEMENT.
Section 9.01(a) is hereby amended by deleting the section in
its entirety and replacing such section with the following:
(a) In connection with the sale of Loans on the related
Transfer Date, the Trust, with the approval of the Market Value Agent on behalf
of the Majority Certificateholders, shall assume, but only concurrently with the
sale, such Hedging Instruments as it deems necessary in order to hedge the
interest rate with respect to the fixed rate or hybrid Loans relative to the
expected Disposition Proceeds therefrom. Such Hedging Instruments shall be
2
<PAGE>
transferred by the Loan Originator to the Depositor and by the Depositor to the
Trust. In deciding to approve any Hedging Instrument hereunder, the Market Value
Agent shall determine, in its sole discretion, whether any Hedging Instrument
conforms to the requirements of Section 9.01(b), (c) and (d).
3. Attorneys Fees. The Servicer agrees to pay as and when
billed by the Initial Class A Certificateholder and the Owner Trustee,
respectively, the reasonable fees, disbursements and expenses of counsel to the
Initial Class A Certificateholder and the Owner Trustee, respectively, in
connection with the amendments to the Basic Documents effected on the date
hereof.
4. Full Force and Effect. Except as modified by this Amendment
No. 4, the Trust and Servicing Agreement shall otherwise remain in full force
and effect against any and all of the parties thereunder.
5. Governing Law. This Amendment No. 4 shall be governed by,
and construed in accordance with, the laws of the State of Delaware, without
reference to its conflicts of laws provisions, and the obligations, rights and
remedies of the parties hereunder shall be determined in accordance therewith.
6. Counterparts. This Amendment No. 4 may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF the parties have executed this Amendment No. 4 as of the date
first above written.
FINOVA COMMERCIAL MORTGAGE LOAN OWNER
TRUST 1998-1,
By: FINOVA Capital Corporation, as Administrator on
behalf of the Issuer
By: /s/ Meilee Smythe
Name: Meilee Smythe
Title: Senior Vice President-Treasurer
FINOVA REALTY CAPITAL WAREHOUSE FUNDING,
L.P.,
as Depositor
By: FINOVA Warehouse Funding Inc.,
as General Partner
By: /s/ Melissa C. Huckins
Name: Melissa C. Huckins
Title: Vice President-Assistant Treasurer
FINOVA CAPITAL CORPORATION,
as Loan Originator
By: /s/ Meilee Smythe
Name: Meilee Smythe
Title: Senior Vice President-Treaurer
FINOVA CAPITAL CORPORATION,
as Transfer Obligor
By: /s/ Meilee Smythe
Name: Meilee Smythe
Title: Senior Vice President-Treaurer
4
<PAGE>
FINOVA CAPITAL CORPORATION,
as Servicer
By: /s/ Meilee Smythe
Name: Meilee Smythe
Title: Senior Vice President
WILMINGTON TRUST COMPANY,
as Owner Trustee
By: /s/ Rosemary Pentano
Name: Rosemary Pentano
Title: Financial Services Officer
AGREED AND ACCEPTED:
FINOVA REALTY CAPITAL
WAREHOUSE FUNDING, L.P.,
as holder of 100% of the
Percentage Interests of the Class B Certificates
By: FINOVA WAREHOUSE FUNDING INC.,
as General Partner
By: /s/ Melissa C. Huckins
Name: Melissa C. Huckins
Title: Vice President-Assistant Treasurer
5
<TABLE>
EXHIBIT 12
THE FINOVA GROUP INC.
COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
As Restated
(Dollars in Thousands)
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes $266,297 $224,191 $188,288 $153,883 $125,706
Add fixed charges:
Interest expense 478,177 414,650 365,603 337,188 210,256
One-third of rent expense 3,854 2,789 2,368 2,084 2,053
- ------------------------------------------------------------------------------------------------------
Total fixed charges 482,031 417,439 367,971 339,272 212,309
- ------------------------------------------------------------------------------------------------------
Income as adjusted $748,328 $641,630 $556,259 $493,155 $338,015
- ------------------------------------------------------------------------------------------------------
Ratio of income to fixed charges 1.55 1.54 1.51 1.45 1.59
=====================================================================================================
Preferred stock dividends on a pre-tax basis $ 6,325 $ 6,676 $ $ $
Total combined fixed charges and
preferred stock dividends $488,356 $424,115 $367,971 $339,272 $212,309
- ------------------------------------------------------------------------------------------------------
Ratio of income to combined fixed charges
and preferred stock dividends 1.53 1.51 1.51 1.45 1.59
=====================================================================================================
</TABLE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-38171 and 333-39383 of The FINOVA Group Inc. on Form S-3 of our report dated
February 10, 1999, April 23, 1999, as to Note T, (which expresses an unqualified
opinion and includes an explanatory paragraph relating to the restatement
described in Note T) appearing in this Annual Report on Form 10-K/A of The
FINOVA Group Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
May 5, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 49,518
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,020,221
<ALLOWANCE> 207,618
<TOTAL-ASSETS> 10,441,236
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 767,877
<LONG-TERM> 8,394,578
111,550
0
<COMMON> 585
<OTHER-SE> 1,166,646
<TOTAL-LIABILITIES-AND-EQUITY> 10,441,236
<INTEREST-LOAN> 1,007,773
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 478,177
<INTEREST-INCOME-NET> 459,515
<LOAN-LOSSES> 82,200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 216,653
<INCOME-PRETAX> 266,297
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 160,341
<EPS-PRIMARY> 2.87
<EPS-DILUTED> 2.70
<YIELD-ACTUAL> 6.3
<LOANS-NON> 205,233
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 177,088
<CHARGE-OFFS> 59,037
<RECOVERIES> 2,279
<ALLOWANCE-CLOSE> 207,618
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
