<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20594
------------------------
FORM 10-K/A
(AMENDMENT NO. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
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)
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<S> <C>
DELAWARE 86-0695381
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1850 NORTH CENTRAL AVE., P.O. BOX 2209 PHOENIX, AZ 85002-2209
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 602-207-4900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
</TABLE>
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
[ ] 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.
DOCUMENTS INCORPORATED BY REFERENCE
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<CAPTION>
PART WHERE
DOCUMENT INCORPORATED
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<S> <C> <C>
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
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM # NAME OF ITEM PAGE
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Part I
Item 1 Business:
Introduction.............................................. 1
General................................................... 1
Business Groups........................................ 1
Portfolio Composition.................................. 3
Investment in Financing Transactions................... 3
Cost and Use of Borrowed Funds......................... 11
Matched Funding Policy................................. 12
Credit Ratings......................................... 13
Residual Realization Experience........................ 13
Business Development and Competition................... 14
Credit Quality......................................... 15
Risk Management........................................ 15
Portfolio Management................................... 16
Delinquencies and Workouts............................. 16
Governmental Regulation................................ 16
Employees................................................. 17
Special Note Regarding Forward-Looking Statements......... 17
Item 2 Properties.................................................. 18
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...................................... 22
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
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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 $500,000 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
- 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.
1
<PAGE> 4
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
- 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.
- Portfolio Services provides customized receivable servicing and
collections for timeshare developers and other generators of consumer
receivables.
- 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.
- Resort Finance focuses on construction, acquisition and receivables
financing of timeshare resorts worldwide as well as term financing for
established golf resort hotels and receivables funding for developers of
second home communities. Typical transaction sizes range from $5 million
to $35 million.
- 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.
2
<PAGE> 5
- 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
- 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.
- 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.
- 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.
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 $10.5 billion at December 31, 1998. Income from continuing
operations increased from $36.8 million in 1992 to $169.7 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> 6
INVESTMENT IN FINANCING TRANSACTIONS
BY TYPES OF FINANCING
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------
1998 % 1997 % 1996 % 1995 %
----------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and other financing
contracts:
Commercial.................. $ 5,668,375 56.6 $4,299,909 51.2 $3,592,193 49.2 $3,389,363 53.4
Real estate................. 1,648,935 16.5 1,656,075 19.7 1,713,485 23.5 1,534,177 24.1
Leveraged leases.............. 780,836 7.8 619,557 7.4 514,573 7.1 366,196 5.8
Operating leases.............. 648,185 6.5 712,927 8.5 517,690 7.1 460,798 7.3
Fee-based receivables......... 626,499 6.2 750,399 8.9 564,430 7.7 189,486 3.0
Direct financing leases....... 396,759 4.0 360,589 4.3 396,388 5.4 408,059 6.4
Financing contracts held for
sale........................ 241,947 2.4
----------- ----- ---------- ----- ---------- ----- ---------- -----
Investment in financing
transactions.............. 10,011,536 100.0 8,399,456 100.0 7,298,759 100.0 6,348,079 100.0
===== ===== ===== =====
Securitized assets............ 436,064 336,607 300,000 200,000
Participations sold........... 101,532 121,360 64,546
----------- ---------- ---------- ----------
Total managed assets(1)....... $10,549,132 $8,857,423 $7,663,305 $6,548,079
=========== ========== ========== ==========
<CAPTION>
DECEMBER 31,
------------------
1994 %
---------- -----
<S> <C> <C>
Loans and other financing
contracts:
Commercial.................. $2,732,734 51.1
Real estate................. 1,237,488 23.2
Leveraged leases.............. 287,518 5.4
Operating leases.............. 412,782 7.7
Fee-based receivables......... 157,862 3.0
Direct financing leases....... 514,595 9.6
Financing contracts held for
sale........................
---------- -----
Investment in financing
transactions.............. 5,342,979 100.0
=====
Securitized assets............
Participations sold...........
----------
Total managed assets(1)....... $5,342,979
==========
</TABLE>
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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.
4
<PAGE> 7
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE ACCRUING NONACCRUING
----------------------------------- -------------------------------- TOTAL
MARKET REPOSSESSED REPOSSESSED 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 7.3
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............ 265,125 265,125 2.6
Public Finance............ 183,099 183,099 1.8
Commercial Services....... 160,012 648 8,912 936 170,508 1.7
Other(5).................. 30,072 25,344 55,416 0.6
Growth Finance............ 45,901 45,901 0.5
Investment Alliance....... 12,297 12,297 0.1
---------- -------- ------- -------- ------- ------- ----------- -----
TOTAL(4).................. $9,635,036 $106,006 $65,261 $119,738 $54,446 $31,049 $10,011,536 100.0
========== ======== ======= ======== ======= ======= =========== =====
</TABLE>
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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.
5
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE ACCRUING NONACCRUING
----------------------------------- -------------------------------- TOTAL
MARKET REPOSSESSED REPOSSESSED 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 9.8
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 7.3
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)................. 40,347 23,526 63,873 0.8
---------- ------- ------- -------- ------- ------- ---------- -----
TOTAL(4)................. $8,123,146 $36,449 $52,505 $121,540 $37,093 $28,723 $8,399,456 100.0
========== ======= ======= ======== ======= ======= ========== =====
</TABLE>
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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
1998, 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
<PAGE> 9
INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE ACCRUING NONACCRUING
----------------------------------- -------------------------------- TOTAL
MARKET REPOSSESSED REPOSSESSED LEASE & CARRYING
RATE(1) IMPAIRED ASSETS(2) IMPAIRED ASSETS OTHER AMOUNT %
---------- -------- ----------- -------- ----------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation
Finance(3).......... $1,330,578 $ $ $ $ $ $1,330,578 18.2
Resort Finance........ 1,124,462 2,963 13,878 77 25,136 1,166,516 16.0
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 10.9
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 6.9
Franchise Finance..... 366,202 1,104 1,985 996 370,287 5.0
Commercial Services... 220,701 3,419 224,120 3.1
Business Credit....... 160,006 11,963 171,969 2.3
Public Finance........ 150,361 13 150,374 2.1
Other................. 52,998 4,498 57,496 0.8
---------- ------- ------- ------- ------- ------- ---------- -----
Total Continuing
Operations(4)....... $7,076,132 $46,319 $59,946 $63,751 $38,419 $14,192 $7,298,759 100.0
========== ======= ======= ======= ======= ======= ========== =====
Discontinued
Operations(5)....... 39,143
-------
TOTAL................. $53,335
=======
</TABLE>
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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.
7
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE ACCRUING NONACCRUING
----------------------------------- -------------------------------- TOTAL
MARKET REPOSSESSED REPOSSESSED 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 7.2
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 3.4
Public Finance............ 121,956 47 122,003 1.9
Other..................... 78,645 1,275 2,360 6,061 88,341 1.5
---------- ------- ------- ------- ------- ------- ---------- -----
Total Continuing
Operations(4)........... $6,131,107 $17,260 $56,585 $76,883 $49,988 $16,256 $6,348,079 100.0
========== ======= ======= ======= ======= ======= ========== =====
</TABLE>
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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.
8
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INVESTMENT IN FINANCING TRANSACTIONS
BY LINE OF BUSINESS
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE ACCRUING NONACCRUING
------------------------------------ ----------------------------------- TOTAL
ORIGINAL REWRITTEN REPOSSESSED DELINQUENT REPOSSESSED LEASES & 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 3.0
Business Credit.......... 181,741 12,003 193,744 3.6
Public Finance........... 93,491 144 93,635 1.8
FINOVA Capital
Limited(3)............. 93,700 1,561 4,265 2 4,800 104,328 2.0
Other.................... 36,951 8,918 297 46,166 0.9
---------- ------- ------- ------- ------- ------- ---------- -----
Total Continuing
Operations............. $5,074,939 $63,888 $55,106 $73,519 $60,451 $15,076 $5,342,979 100.0
========== ======= ======= ======= ======= ======= ========== =====
</TABLE>
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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.
9
<PAGE> 12
The Company's geographic portfolio diversification at December 31, 1998 was
as follows:
<TABLE>
<CAPTION>
STATE TOTAL PERCENT
- ----- ---------------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
California.................................... $ 1,541,692 14.6%
Florida....................................... 1,065,801 10.1
Texas......................................... 827,422 7.9
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)...................................... 3,699,202 35.1
----------- -----
$10,549,132 100.0%
=========== =====
</TABLE>
- ---------------
NOTE:
(1) Other includes all other states which, on an individual basis, represent
less than 2% of the total and international, which represents approximately
6% of the total.
The following is an analysis of the reserve for credit losses for the years
ended December 31:
<TABLE>
<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................ 82,200 69,200 41,751 37,568 10,439
Write-offs.............. (59,037) (45,487) (32,017) (25,631) (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
======== ======== ======== ======== ========
</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> 13
Write-offs and recoveries by line of business, during the years ended
December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
WRITE-OFFS
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)............................. 979 895 2,245 5,140
------- ------- ------- ------- -------
Total write-offs..................... 59,037 45,487 32,017 25,631 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................. $56,758 $43,200 $28,721 $23,527 $26,329
======= ======= ======= ======= =======
Net write-offs as a percentage of
average managed assets(2).......... 0.60% 0.54% 0.41% 0.40% 0.62%
======= ======= ======= ======= =======
</TABLE>
- ---------------
NOTES:
(1) Includes FINOVA Capital Ltd. (UK).
(2) Excludes average participations sold in which FINOVA has transferred credit
risk.
------------------------
A further breakdown of the portfolio by line of business can be found in
Annex A, Notes C and D.
COST AND USE OF BORROWED FUNDS
FINOVA 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.
11
<PAGE> 14
The following table reflects the approximate average pre-tax effective cost
of borrowed funds and pre-tax equivalent rate earned on accruing assets for
FINOVA Capital for each of the periods listed:
<TABLE>
<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)... 12.1% 11.9% 11.6% 11.9% 11.3%
Operating margin percentage(4)................ 6.4% 6.2% 5.8% 5.7% 5.9%
</TABLE>
- ---------------
NOTES:
(1) Includes the effects of interest rate swap and hedge agreements.
(2) Earning assets are net of average nonaccruing assets and average deferred
taxes applicable to leveraged leases.
(3) Earned amounts are net of depreciation.
(4) Represents operating margin as a percentage of average earning assets.
------------------------
The effective costs presented above include costs of commitment fees and
related borrowing costs. They do not necessarily predict future costs of funds.
For further information on FINOVA 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
1.56.. 1.52 1.50 1.44 1.58
==== ==== ==== ==== ====
</TABLE>
Variations in interest rates generally do not have a substantial impact on
the ratio because fixed-rate and floating-rate assets are generally matched with
liabilities of similar rate and term.
Income 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> 15
CREDIT RATINGS
FINOVA Capital currently has investment-grade credit ratings from the
following rating agencies:
<TABLE>
<CAPTION>
COMMERCIAL SENIOR
PAPER DEBT
---------- ------
<S> <C> <C>
Duff & Phelps Credit Rating Co. ........................ D1 A
Fitch Investors Services, Inc. ......................... F1 A
Moody's Investors Service, Inc. ........................ P2 Baa1
Standard & Poor's Ratings Group......................... A2 A-
</TABLE>
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:
<TABLE>
<S> <C>
Duff & Phelps Credit Rating Co. ............................ BBB+
Fitch Investors Services, Inc. ............................. A-
Moody's Investors Services, Inc. ........................... Baa2
Standard & Poor's Ratings Group............................. BBB
</TABLE>
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.
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
13
<PAGE> 16
termination of leases and at the expiration of leases have exceeded the carrying
amounts and estimated residual values as follows:
<TABLE>
<CAPTION>
EARLY TERMINATIONS (1) TERMINATIONS AT END OF LEASE TERM
---------------------------------- ----------------------------------
PROCEEDS
PROCEEDS ESTIMATED AS A % OF
CARRYING AS A % OF RESIDUAL ESTIMATED
SALES AMOUNT CARRYING SALES VALUE OF RESIDUAL
YEAR PROCEEDS OF ASSETS AMOUNT PROCEEDS ASSETS VALUE
- ---- -------- --------- --------- -------- --------- ---------
(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% 63,733 58,127 110%
1996................. 87,311 75,910 115% 15,634 13,872 113%
1995................. 1,402 905 155% 44,395 37,053 120%
1994................. 6,477 5,865 110% 15,287 14,164 108%
</TABLE>
- ---------------
NOTE:
(1) Excludes foreclosures for credit reasons, which are immaterial.
The estimated residual value of direct finance and leveraged lease assets
in the accounts of FINOVA Capital at December 31, 1998 was 37.3% of the original
cost of those assets (30.1% excluding the original costs of the assets and
residuals applicable to real estate leveraged leases, which typically have
higher residuals than other leases). The financing contracts and leases
outstanding at that date had initial terms ranging generally from one to 25
years. The average initial term weighted by carrying amount at inception and the
average remaining term weighted by remaining carrying amount of financing
contracts at December 31, 1998 for financing contracts excluding leveraged
leases were 7.5 and 5.4 years, respectively, and for leveraged leases were
approximately 18.9 and 11.4 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 17.5 and 11.9 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> 17
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.
- Management. FINOVA Capital considers the reputation, experience and
depth of management; quality of product or service; adaptability to
changing markets and demand; and prior banking, finance and trade
relationships.
- Industry. FINOVA Capital evaluates critical aspects of each industry to
which it lends, including general trend, seasonality and cyclicality;
governmental regulation; the effects of taxes; the economic value of
goods or services provided; and potential environmental or other
liabilities.
- 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.
- 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
15
<PAGE> 18
option to renew the lease at its then fair rental value. The extent to which
lessees exercise their options to purchase leased equipment varies from year to
year, depending on, among other factors, the state of the economy, the financial
condition of the lessee, interest rates and technological developments.
PORTFOLIO MANAGEMENT
In addition to the review at the time of original underwriting, FINOVA
Capital attempts to preserve and enhance the earnings quality of its portfolio
through proactive management of its financing relationships with its clients.
This process includes the periodic appraisal or verification of the collateral
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
16
<PAGE> 19
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- Necessary technological changes (including those addressing "Year 2000"
data systems issues) may be more difficult, expensive or time consuming
than anticipated.
- Costs or difficulties related to integration of acquisitions.
- Other risks detailed in FINOVA's other SEC reports or filings.
17
<PAGE> 20
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.
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> 21
OPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT.
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.
<TABLE>
<CAPTION>
NAME AGE POSITION AND BACKGROUND
---- --- ------------------------------------------------------
<S> <C> <C>
Samuel L. Eichenfield............. 61 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> 22
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.
<TABLE>
<CAPTION>
SALES PRICE RANGE OF COMMON STOCK
---------------------------------
1998 1997
-------------- --------------
QUARTERS: HIGH LOW HIGH LOW
- --------- ----- ---- ----- ----
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED ON
COMMON STOCK
--------------
1998 1997
----- -----
<S> <C> <C>
February.................................................... $0.14 $0.12
May......................................................... 0.14 0.12
August...................................................... 0.16 0.14
November.................................................... 0.16 0.14
----- -----
$0.60 $0.52
===== =====
</TABLE>
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.
20
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data of FINOVA, which
have been derived from the audited Consolidated Financial Statements of FINOVA
for 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. Prior years have 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Income earned from
financing
transactions............ $ 1,021,977 $ 897,996 $ 769,346 $ 680,912 $ 463,404
Interest margins earned... 472,536 408,914 340,517 287,880 216,667
Volume-based fees......... 77,723 46,728 28,588 21,204 10,796
Provision for credit
losses.................. 82,200 69,200 41,751 37,568 10,439
Gains on disposal of
assets.................. 55,024 30,261 12,949 10,889 3,877
Income from continuing
operations.............. 169,737 139,098 116,493 93,798 73,770
Net income................ 169,737 139,098 117,000 97,629 74,313
Basic earnings from
continuing operations
per share............... 3.03 2.56 2.14 1.72 1.48
Basic earnings per share.. 3.03 2.56 2.15 1.79 1.49
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............... $ 2.86 $ 2.42 $ 2.08 $ 1.69 $ 1.46
Diluted earnings per
share................... 2.86 2.42 2.09 1.76 1.47
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..... 19.9% 20.5% 21.7% 24.6% 26.3%
FINANCIAL POSITION:
Investment in financing
transactions............ $10,011,536 $ 8,399,456 $ 7,298,759 $ 6,348,079 $ 5,342,979
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.............. 10,450,314 8,719,840 7,526,734 7,036,514 5,821,343
Deferred income taxes..... 347,373 274,761 244,208 209,512 188,887
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....... 1,177,345 1,090,454 929,591 825,184 770,252
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
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)..................................... 6.5x 5.6x 5.6x 6.8x 5.9x
Return on average common equity(4).......................... 14.9% 14.3% 13.3% 11.8% 11.1%
Return on average funds employed(4)(5)...................... 1.9% 1.8% 1.8% 1.7% 1.8%
Equity to assets(3)......................................... 12.3% 13.8% 13.8% 11.7% 13.2%
</TABLE>
- ---------------
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.
------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See pages 3 -- 12 of Annex A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See pages 12 -- 13 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.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
Proxy Statement.
22
<PAGE> 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed.
1. Financial Statements.
(i) The following financial statements of FINOVA are included in
Annex A:
<TABLE>
<CAPTION>
ANNEX A
PAGE
-------
<S> <C>
Financial Highlights............................... 1-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 3-12
Quantitative and Qualitative Disclosures about
Market Risk...................................... 12-13
Report of Management and Independent Auditors'
Report........................................... 14-15
Consolidated Balance Sheets........................ 16
Statements of Consolidated Income.................. 17
Statements of Consolidated Shareowners' Equity..... 18
Statements of Consolidated Cash Flows.............. 19
Notes to Consolidated Financial Statements......... 20-43
Supplemental Selected Financial Data............... 44-45
</TABLE>
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.
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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.
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).
(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.*
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).
(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.*+
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).+
(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.*
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(12) Computation of Ratio of Income to Combined Fixed Charges and
Preferred Stock Dividends.*
(21) Subsidiaries.*
(23) Independent Auditors' Consent.*
(24) Powers of Attorney.*
(27) Financial Data Schedule for the year ended December 31,
1998.*
</TABLE>
- ---------------
* Previously filed.
+ Relating to management compensation.
(b) Reports on Form 8-K.
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.
27
<PAGE> 30
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 March 1, 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)
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:
<TABLE>
<S> <C>
* *
--------------------------------------------------- -----------------------------------------------------
Robert H. Clark, Jr. (Director) G. Robert Durham (Director)
March 1, 1999 March 1, 1999
/s/ SAMUEL L. EICHENFIELD *
- ----------------------------------------------------- -----------------------------------------------------
Samuel L. Eichenfield (Chairman) James L. Johnson (Director)
March 1, 1999 March 1, 1999
* *
- ----------------------------------------------------- -----------------------------------------------------
Kenneth R. Smith (Director) Shoshana B. Tancer (Director)
March 1, 1999 March 1, 1999
* *
- ----------------------------------------------------- -----------------------------------------------------
John W. Teets (Director) Constance R. Curran (Director)
March 1, 1999 March 1, 1999
</TABLE>
- ---------------
* Signed pursuant to Powers of Attorney dated February 11, 1999.
<TABLE>
<S> <C>
/s/ BRUNO A. MARSZOWSKI
- -----------------------------------------------------
Bruno A. Marszowski
Attorney-in-Fact
March 1, 1999
</TABLE>
28
<PAGE> 31
ANNEX A
<PAGE> 32
THE FINOVA GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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-12
Management's Report on Responsibility for Financial
Reporting................................................. A-14
Independent Auditors' Report................................ A-15
Consolidated Balance Sheets................................. A-16
Statements of Consolidated Income........................... A-17
Statements of Consolidated Shareowners' Equity.............. A-18
Statements of Consolidated Cash Flows....................... A-19
Notes to Consolidated Financial Statements.................. A-20
Supplemental Selected Financial Data........................ A-44
</TABLE>
A-ii
<PAGE> 33
THE FINOVA GROUP INC.
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATIONS:
Interest margins earned.................................. $ 472,536 $ 408,914 $ 340,517
Volume-based fees........................................ 77,723 46,728 28,588
Operating expenses....................................... 241,074 190,525 154,481
Income from continuing operations........................ 169,737 139,098 116,493
Net income............................................... 169,737 139,098 117,000
FINANCIAL POSITION:
Ending funds employed.................................... 10,011,536 8,399,456 7,298,759
Ending managed assets(1)................................. 10,549,132 8,857,423 7,663,305
Average managed assets(2)................................ 9,500,539 8,153,076 7,041,708
Average earning assets(3)................................ 8,544,431 7,356,845 6,324,545
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 subsidiary trust solely holding
convertible debentures of FINOVA ("TOPrS")............. 111,550 111,550 111,550
Shareowners' equity...................................... 1,177,345 1,090,454 929,591
PORTFOLIO QUALITY:
Net write-offs as a % of average managed assets(5)....... 0.60% 0.54% 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
PERFORMANCE HIGHLIGHTS:
Return from continuing operations as a % of average funds
employed(7)............................................ 1.9% 1.8% 1.8%
Operating margin earned as a % of average earning
assets(3).............................................. 6.4% 6.2% 5.8%
Interest margins earned as a % of average earning
assets(3).............................................. 5.5% 5.6% 5.4%
Operating expenses as a % of operating margin............ 43.8% 41.8% 41.9%
Operating expenses as a % of operating margin plus
gains.................................................. 39.8% 39.2% 40.4%
Aggregate cost of funds.................................. 6.4% 6.6% 6.8%
Ratio of income to combined fixed charges and preferred
stock dividends........................................ 1.56x 1.52x 1.50x
Return from continuing operations on average equity...... 14.9% 14.3% 13.3%
Basic earnings per common share:
Continuing operations.................................. $3.03 $2.56 $2.14
Net income............................................. $3.03 $2.56 $2.15
Adjusted weighted average shares(8).................... 55,946,000 54,405,000 54,508,000
Diluted earnings per share(9):
Continuing operations.................................. $2.86 $2.42 $2.08
Net income............................................. $2.86 $2.42 $2.09
Adjusted weighted average shares(8).................... 60,705,000 59,161,000 56,051,000
Cash earnings per share(10).............................. $4.40 $3.68 $3.06
Book value per share outstanding......................... $21.13 $19.37 $16.88
Shares outstanding(8).................................... 55,721,000 56,282,000 55,058,000
---------------------------------------
</TABLE>
A-1
<PAGE> 34
- ---------------
(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 $241.9 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) Represents net income before preferred dividends plus non-cash taxes, loss
provision and goodwill amortization. Excluding non-cash mini-CMBS
transactions, cash earnings per share were $4.24 for 1998. See Note C of
Notes to Consolidated Financial Statements for a further discussion of the
mini-CMBS transactions.
A-2
<PAGE> 35
THE FINOVA GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to The FINOVA Group Inc. and its
subsidiaries (collectively, "FINOVA" or the "Company"), including FINOVA Capital
Corporation and its subsidiaries (collectively, "FINOVA Capital").
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
1998 1997 CHANGE 1997 1996 CHANGE
------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest margins earned... $ 472.5 $ 408.9 15.6% $ 408.9 $ 340.5 20.1%
Volume-based fees......... 77.7 46.7 66.3% 46.7 28.6 63.5%
------- ------- ------- -------
Operating margin.......... 550.3 455.6 20.8% 455.6 369.1 23.4%
Provision for credit
losses.................. (82.2) (69.2) 18.8% (69.2) (41.8) 65.7%
Gains on disposal of
assets.................. 55.0 30.3 81.8% 30.3 12.9 133.7%
Operating expenses........ (241.1) (190.5) 26.5% (190.5) (154.5) 23.3%
Income taxes.............. (108.5) (83.1) 30.6% (83.1) (69.3) 19.8%
Preferred dividends,
net..................... (3.8) (4.0) (5.3%) (4.0) n/a
------- ------- ------- -------
Income from continuing
operations.............. 169.7 139.1 22.0% 139.1 116.5 19.4%
Income and gain from
discontinued
operations.............. n/a 0.5 n/a
------- ------- ------- -------
Net Income................ $ 169.7 $ 139.1 22.0% $ 139.1 $ 117.0 18.9%
======= ======= ======= =======
</TABLE>
1998 COMPARED TO 1997
Net income for 1998 increased 22.0% to $169.7 million from $139.1 million
in 1997. The increase was due to the growth in average earning assets, the
expansion of the fee-related businesses and higher gains on disposal of assets.
Partially offsetting these increases were 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 15.6%
to $472.5 million in 1998 from $408.9 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 $8.54 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.
A-3
<PAGE> 36
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. The 66.3% increase in
volume-based fees to $77.7 million in 1998 from $46.7 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
6.4% in 1998 from 6.2% in 1997. The interest rate spread portion of this margin
declined slightly to 5.5% from 5.6% principally due to the increase in the
Company's debt leverage during 1998.
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 19.1% to $10.55
billion in 1998 from $8.86 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 $55.0
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, the sale of assets coming off lease and the sale of other assets. Net
gains from the CMBS market totaled $18.9 million in 1998 and included gross
gains of $51.7 million partially offset by hedge losses, commissions and
expenses of $24.3 million and $8.5 million of reserves. The other $36.1 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. See Note C of Notes to Consolidated
Financial Statements for further discussion of gains on disposal of assets.
OPERATING EXPENSES. Operating expenses, which include selling,
administrative and other expenses, were generally higher in all major categories
and increased to $241.1 million in 1998 compared to $190.5 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
new business, 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 43.8%
of operating margin for 1998 compared to 41.8% in 1997. Due to FINOVA's
expansion into activities that use gains from the sale 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 39.8% of operating margin plus gains for 1998 compared
to 39.2% in 1997. See Note O of Notes to Consolidated Financial Statements for
additional detail.
INCOME TAXES. Income taxes were $108.5 million in 1998 compared to $83.1
million in 1997. The increase was primarily due to higher pre-tax income and a
higher effective tax rate in 1998 due
A-4
<PAGE> 37
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 18.9% to $139.1 million from $117.0 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
$139.1 million from $116.5 million in 1996. Continuing operations in 1996
excluded the operating results of FINOVA's discontinued Manufacturer & Dealer
Services line of business ("MDS") and FINOVA Medical Systems and a $6 million
gain resulting from the sale of MDS.
INTEREST MARGINS EARNED. Interest margins earned increased 20.1% to $408.9
million in 1997 from $340.5 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 $6.32
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.
VOLUME-BASED FEES. Volume-based fees increased 63.5% to $46.7 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 6.2% in 1997 from 5.8% 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 0.54% 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 $12.9 million in 1996. In addition to the sale
of assets coming off lease, FINOVA recognized a significant gain from the early
termination of a real estate leveraged lease transaction in 1997.
OPERATING EXPENSES. Operating expenses were higher in 1997 than in 1996,
primarily as a result of increased costs necessary to manage FINOVA's larger
portfolio. Also contributing to the increase in operating expenses were
incentives paid to employees based on performance criteria such as new business,
profitability and the increased value of FINOVA's stock (which increased by
54.7% to $49 11/16 per share at year-end). The Company also incurred additional
costs in administer-
A-5
<PAGE> 38
ing 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 41.8% in 1997 from 41.9% 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 19.1% to $10.55 billion from
$8.86 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.
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 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 6.5 times its equity base (shareowners' equity plus convertible
preferred securities) of $1.29 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 26.4% during 1998 to $347.4 million from $274.8 million at year-end
1997.
Growth in managed assets is generally financed by internally generated cash
flow 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
A-6
<PAGE> 39
available unused revolving credit lines which, if not renewed, are convertible
to long-term debt at FINOVA's option.
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, 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. 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.
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.
In 1997, FINOVA and FINOVA Capital jointly filed a universal shelf
registration statement with the SEC allowing for the issuance of $2 billion of
senior debt securities, common stock, preferred stock, depositary shares and
warrants to purchase common stock or debt securities, $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:
<TABLE>
<CAPTION>
COMMERCIAL SENIOR
PAPER DEBT
---------- ------
<S> <C> <C>
Duff & Phelps Credit Rating Co. ....................... D1 A
Fitch Investors Services, Inc.......................... F1 A
Moody's Investors Service, Inc......................... P2 Baa1
Standard & Poor's Ratings Group........................ A2 A-
</TABLE>
In addition, FINOVA Finance Trust, a subsidiary trust of FINOVA, has issued
TOPrS with investment-grade ratings as follows:
<TABLE>
<CAPTION>
TOPRS
-----
<S> <C>
Duff & Phelps Credit Rating Co.............................. BBB+
Fitch Investors Services, Inc. ............................. A-
Moody's Investors Service, Inc. ............................ Baa2
Standard & Poor's Ratings Group............................. BBB
</TABLE>
None of FINOVA Capital's subsidiaries have applied for credit ratings.
A-7
<PAGE> 40
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.
To provide further liquidity, the Company utilized a private CMBS structure
("mini-CMBS") to sell loans warehoused by FRC. Under the structure, the Company
sold loans to a trust with limited recourse. The Trust issued a senior security
interest to an investment banking company and a subordinated security interest
was retained by the Company. The Company also retained the servicing rights and
obligations on the assets transferred to the trust. The intent of the trust is
to sell the loans into the permanent CMBS market. Until the loans are sold,
interest rate risk is hedged using various instruments including Treasury rate
locks. The Company recognized gains on the transfer of the loans in accordance
with SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". No gains were recorded on the subordinated
interest retained by the Company.
This structure differs from many transfer and securitization vehicles in
that the intent is to sell the loans in the trust within a short period of time
rather than holding the loans throughout the amortization period. Once the sale
of the loans by the trust is completed, there will be no further recourse or
assumption risks.
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.
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-8
<PAGE> 41
SEGMENT REPORTING
Information for FINOVA's reportable segments reconciles to FINOVA's
consolidated totals as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
TOTAL NET REVENUE:
Commercial Finance.............................. $ 187,461 $ 154,981
Specialty Finance............................... 344,541 313,841
Capital Markets................................. 50,188 9,449
Corporate and other............................. 23,093 7,632
----------- ----------
Consolidated total.............................. $ 605,283 $ 485,903
=========== ==========
INCOME BEFORE ALLOCATIONS:
Commercial Finance.............................. $ 67,013 $ 72,454
Specialty Finance............................... 273,674 248,793
Capital Markets................................. 23,243 9,449
Corporate and other, overhead and unallocated
provision for credit losses................... (81,921) (104,518)
----------- ----------
Income from continuing operations before income
taxes......................................... $ 282,009 $ 226,178
=========== ==========
MANAGED ASSETS:
Commercial Finance.............................. $ 3,005,130 $2,755,826
Specialty Finance............................... 7,211,164 6,037,725
Capital Markets................................. 277,422
Corporate and other............................. 55,416 63,872
----------- ----------
Consolidated total.............................. $10,549,132 $8,857,423
=========== ==========
</TABLE>
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.
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
A-9
<PAGE> 42
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. Therefore, 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, but per
the acquisition agreement would not be consolidated into FINOVA until 1998.
Therefore in 1997, FINOVA received a management fee equal to the net results of
the unit from the time of the acquisition. This fee ($9.4 million) was reported
in volume-based fees in 1997 and represented all revenues net of expenses.
Total net revenue was $50.2 million in 1998 compared to the net management
fee of $9.4 million in 1997. Income before allocations was $23.2 million in 1998
compared to $9.4 million in 1997. The growth in income before allocations was
primarily attributable to a higher level of originations ($2.8 billion in 1998
compared to $731 million in 1997) and an increased level of sales into the CMBS
market, resulting in higher gains. See Note C 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 $277.4 million,
of which $241.9 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 computer 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
A-10
<PAGE> 43
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.
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 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
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 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
A-11
<PAGE> 44
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 Realty Capital business.
In January 1999, FINOVA reached a definitive agreement to acquire Sirrom
Capital Corporation ("Sirrom"), a specialty finance company headquartered in
Nashville, Tennessee, for approximately $343 million in FINOVA common stock.
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. The completion of the Sirrom
acquisition is expected to result in an increase in the outstanding equity of
FINOVA which is expected to lower the debt to equity ratio to approximately 5.2x
at the time the acquisition is consummated as compared to FINOVA's leverage of
6.5x 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.
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:
- permitting future stock splits
- assisting in capital raising activities
- providing appropriate incentive compensation to its employees
- fulfilling its obligations to issue stock under existing contractual
arrangements
- facilitating FINOVA's growth strategy.
Shareowners are urged to approve that proposal for the reasons noted above.
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.
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.
A-12
<PAGE> 45
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
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 effect of changes in market interest rates on FINOVA's net income and will
likely differ from actual results.
A-13
<PAGE> 46
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 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-14
<PAGE> 47
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.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------------------------------
Deloitte & Touche LLP
Phoenix, Arizona
February 10, 1999
A-15
<PAGE> 48
THE FINOVA GROUP INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 49,518 $ 33,190
Investment in financing transactions:
Loans and other financing contracts....................... 7,317,310 5,955,984
Leveraged leases.......................................... 780,836 619,557
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......................... 241,947
----------- ----------
10,011,536 8,399,456
Less reserve for credit losses............................ (207,618) (177,088)
----------- ----------
Net investment in financing transactions.................... 9,803,918 8,222,368
Goodwill and other assets................................... 596,878 464,282
----------- ----------
$10,450,314 $8,719,840
=========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses..................... $ 148,588 $ 147,280
Due to clients............................................ 205,655 278,571
Interest payable.......................................... 65,225 52,643
Senior debt............................................... 8,394,578 6,764,581
Deferred income taxes..................................... 347,373 274,761
----------- ----------
9,161,419 7,517,836
----------- ----------
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........................................... 522,653 386,665
Accumulated other comprehensive income (deficit).......... 3,204 (10)
Common stock in treasury, 2,834,000 and 2,273,000 shares,
respectively........................................... (114,147) (61,311)
----------- ----------
1,177,345 1,090,454
----------- ----------
$10,450,314 $8,719,840
=========== ==========
</TABLE>
See notes to consolidated financial statements.
A-16
<PAGE> 49
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED INCOME
(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............... $ 811,395 $ 704,027 $ 611,544
Financing lease income........................ 94,380 77,049 61,985
Operating lease income........................ 116,202 116,920 95,817
----------- ----------- -----------
Income earned from financing transactions..... 1,021,977 897,996 769,346
Interest expense.............................. 479,360 416,093 366,543
Operating lease depreciation.................. 70,081 72,989 62,286
----------- ----------- -----------
Interest margins earned....................... 472,536 408,914 340,517
Volume-based fees............................. 77,723 46,728 28,588
----------- ----------- -----------
Operating margin.............................. 550,259 455,642 369,105
Provision for credit losses................... 82,200 69,200 41,751
----------- ----------- -----------
Net interest margins earned................... 468,059 386,442 327,354
Gains on disposal of assets................... 55,024 30,261 12,949
----------- ----------- -----------
523,083 416,703 340,303
Operating expenses............................ 241,074 190,525 154,481
----------- ----------- -----------
Income from continuing operations before
income taxes................................ 282,009 226,178 185,822
Income taxes.................................. 108,490 83,088 69,329
----------- ----------- -----------
Income from continuing operations before
preferred dividends......................... 173,519 143,090 116,493
Preferred dividends, net of tax............... 3,782 3,992
----------- ----------- -----------
Income from continuing operations............. 169,737 139,098 116,493
Income and gain from sale of discontinued
operations, net of tax...................... 507
----------- ----------- -----------
NET INCOME.................................... $ 169,737 $ 139,098 $ 117,000
=========== =========== ===========
Basic earnings per share:
Income from continuing operations........... $3.03 $2.56 $2.14
Income and gain from discontinued
operations............................... .01
----------- ----------- -----------
Net income.................................... $3.03 $2.56 $2.15
=========== =========== ===========
Adjusted weighted average shares
outstanding................................. 55,946,000 54,405,000 54,508,000
=========== =========== ===========
Diluted earnings per share:
Income from continuing operations........... $2.86 $2.42 $2.08
Income and gain from discontinued
operations............................... .01
----------- ----------- -----------
Net income.................................... $2.86 $2.42 $2.09
=========== =========== ===========
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-17
<PAGE> 50
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED SHAREOWNERS' EQUITY
(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...... $568 $686,098 $184,381 $(5,686) $ (40,177) $ 825,184
---- -------- -------- ------- --------- ----------
Comprehensive income:
Net income.................. 117,000 117,000 $117,000
--------
Foreign currency
translation............... 6,694
--------
Other comprehensive
income.................... 6,694 6,694 6,694
--------
Comprehensive income.......... $123,694
========
Net change in unamortized
amount of restricted
stock....................... (1,816) (1,816)
Dividends..................... (25,230) (25,230)
Shares issued in connection
with employee benefit
plans....................... (21) 7,780 7,759
---- -------- -------- ------- --------- ----------
BALANCE, DECEMBER 31, 1996.... 568 684,261 276,151 1,008 (32,397) 929,591
---- -------- -------- ------- --------- ----------
Comprehensive income:
Net income.................. 139,098 139,098 $139,098
--------
Foreign currency
translation............... (1,018)
--------
Other comprehensive
income.................... (1,018) (1,018) (1,018)
--------
Comprehensive income.......... $138,080
========
Issuance of common stock...... 17 77,521 77,538
Net change in unamortized
amount of restricted
stock....................... (1,558) (1,558)
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.... 585 764,525 386,665 (10) (61,311) 1,090,454
---- -------- -------- ------- --------- ----------
Comprehensive income:
Net income.................. 169,737 169,737 $169,737
--------
Unrealized holding gains.... 3,422
Foreign currency
translation............... (208)
--------
Other comprehensive
income.................... 3,214 3,214 3,214
--------
Comprehensive income.......... $172,951
========
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 $522,653 $ 3,204 $(114,147) $1,177,345
==== ======== ======== ======= ========= ==========
</TABLE>
See notes to consolidated financial statements.
A-18
<PAGE> 51
THE FINOVA GROUP INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................... $ 169,737 $ 139,098 $ 117,000
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................. 93,830 90,396 76,471
Gains on disposal of assets................... (55,024) (30,261) (12,949)
Deferred income taxes......................... 72,612 30,553 29,356
Gains on dispositions of discontinued
operations, net............................ (3,521)
Change in assets and liabilities, net of effects
from acquisitions:
Increase in other assets...................... (134,559) (48,610) (61,694)
(Decrease) increase in accounts payable and
accrued expenses........................... (1,180) 20,800 (16,009)
Increase (decrease) in interest payable....... 12,582 (34) 5,853
Other........................................... 1,819 (603) 6,153
----------- ----------- -----------
Net cash provided by operating
activities............................... 242,017 270,539 182,411
----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of assets................... 129,324 178,413 102,945
Proceeds from sales of securitized assets....... 99,967 36,565 100,000
Proceeds from sales of commercial mortgage
backed securities ("CMBS") assets............. 869,296
Principal collections on financing
transactions.................................. 2,181,364 2,087,619 1,781,985
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..... (1,698,105) (1,168,293) (249,110)
----------- ----------- -----------
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-19
<PAGE> 52
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
For direct financing leases, unearned income is the difference between (a)
aggregate lease rentals and (b) the cost of the related assets less estimated
residual value at the end of the lease term. Earned income is recognized over
the life of the contracts using the interest method.
Fees received in connection with loan commitments are deferred in accounts
payable and accrued expenses until the loan is advanced and are then recognized
over the term of the loan as an adjustment 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. 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. Fees on mortgage loan originations represent broker commissions on the
loan originations and are recognized as income in the period of origination.
A-20
<PAGE> 53
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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 $299.0 million and $288.2
million (net of amortization), respectively. Amortization totaled $15.2 million
($11.1 million after-tax), $10.1 million ($6.3 million after-tax) and $9.6
million ($5.7 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
A-21
<PAGE> 54
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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.
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
A-22
<PAGE> 55
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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.
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.
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. Once assets currently
held under the mini-CMBS structure, including the retained interest, have been
sold into the permanent CMBS market, the Company will evaluate the contingency
agreement and make payments due thereunder as appropriate. The acquisition was
comprised of $91.5 million in assets, including $88.0 million in goodwill and
$4.0 million in liabilities and acquisition costs. The results of these
operations have been included in FINOVA's results since the date of acquisition.
Goodwill related to this transaction is being amortized over 25 years.
In 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-23
<PAGE> 56
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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 9.8
Rediscount Finance.......................................... 7.7 7.3
Commercial Equipment Finance................................ 7.5 7.5
Communications Finance...................................... 7.3 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.............................................. 2.6
Public Finance.............................................. 1.8 1.6
Commercial Services......................................... 1.7 2.7
Other....................................................... 0.6 0.8
Growth Finance.............................................. 0.5
Investment Alliance......................................... 0.1
----- -----
100.0% 100.0%
===== =====
</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 $922.6
A-24
<PAGE> 57
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
million) are contractually due or anticipated during each of the years ending
December 31, 1999 to 2003 and thereafter as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER
---------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans and other financing
contracts:
Commercial:
Fixed interest
rate.............. $ 408,821 $ 442,892 $ 448,212 $282,927 $231,971 $ 766,461
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 8,069 23,706 376,237
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....... 241,947
---------- ---------- ---------- -------- -------- ----------
$2,985,285 $1,963,311 $1,101,438 $838,492 $753,278 $1,765,829
========== ========== ========== ======== ======== ==========
</TABLE>
The investment in operating leases at December 31 consisted of the
following:
<TABLE>
<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>
The net investment in leveraged leases at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Rental receivables............................. $ 2,909,929 $ 2,287,233
Less principal and interest payable on
nonrecourse debt............................. (2,403,623) (1,790,987)
----------- -----------
Net rental receivables......................... 506,306 496,246
Estimated residual values...................... 796,466 575,234
Less unearned income........................... (521,936) (451,923)
----------- -----------
Investment in leveraged leases................. 780,836 619,557
Less deferred taxes from leveraged leases...... (317,015) (249,710)
----------- -----------
Net investment in leveraged leases............. $ 463,821 $ 369,847
=========== ===========
</TABLE>
A-25
<PAGE> 58
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
The components of income from leveraged leases, after the effects of
interest on nonrecourse debt and other related expenses, for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Lease and other income, net................. $59,083 $41,605 $30,230
Income tax expense.......................... 23,500 19,476 11,321
</TABLE>
The investment in direct financing leases at December 31 consisted of the
following:
<TABLE>
<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.
During 1998, the Company utilized the mini-CMBS structure to sell loans
warehoused by FRC. Under the structure, the Company sold loans to a trust with
limited recourse. The trust issued a senior security interest to an investment
banking company and a subordinated security interest was retained by the
Company. The Company also retained the servicing rights and obligations on the
assets transferred to the trust. The intent of the trust is to sell the loans
into the permanent CMBS market. Until the loans are sold, interest rate risk is
hedged using various instruments including Treasury rate locks. The Company
recognized gains on the transfer of the loans in
A-26
<PAGE> 59
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
accordance with SFAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". No gains were recorded on the
subordinated interest retained by the Company.
In determining the fair value of assets sold and interests retained, the
Company inherently employs a variety of financial assumptions, including
defaults, prepayments and discount rates. The Company assumed minimal defaults
and prepayments due to the nature of the commercial mortgages and the
anticipated period before sale into the permanent CMBS market. FINOVA also used
discount rates ranging from approximately 6.0% to 7.0%
This structure differs from many transfer and securitization vehicles in
that the intent is to sell the loans in the trust within a short period of time
rather than holding the loans throughout the amortization period. Once the sale
of the loans by the trust is completed, there will be no further recourse or
assumption risks.
In 1998, the Company sold $724.3 million of loans into the private CMBS
structure. The Company received $678.7 million in cash proceeds and retained a
subordinated interest valued at $91.7 million. The Company recognized gross
gains of $46.1 million. The gains were reduced by hedge losses, commissions and
expenses of $21.6 million and an $8.5 million reserve resulting in net non-cash
gains of $16.0 million.
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
The following is an analysis of the reserve for credit losses for the years
ended December 31:
<TABLE>
<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-27
<PAGE> 60
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
Net write-offs by line of business for the years ended December 31 are as
follows:
<TABLE>
<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% 0.54% 0.41%
======== ======== ========
</TABLE>
An analysis of nonaccruing assets included in the investment in financing
transactions at December 31 is as follows:
<TABLE>
<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
A-28
<PAGE> 61
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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, 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 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.
A-29
<PAGE> 62
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
The following information pertains to all short-term financing, primarily
commercial paper, issued by FINOVA Capital for the years ended December 31:
<TABLE>
<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%
</TABLE>
- ---------------
* Exclusive of the cost of maintaining bank lines in support of outstanding
commercial paper and the effects of interest rate conversion agreements.
Senior debt at December 31 was as follows:
<TABLE>
<CAPTION>
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 $118.1 million of excess accumulated earnings available for
distribution.
Total interest paid is not significantly different from interest expense.
A-30
<PAGE> 63
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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 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.
A-31
<PAGE> 64
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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.
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:
<TABLE>
<CAPTION>
OUTSTANDING AT
DECEMBER 31, MATURITIES OF DERIVATIVE PRODUCTS
-------------- ---------------------------------------------------
1998 1999 2000 2001 2002 2003 THEREAFTER
-------------- ------ ----- ----- ----- ----- ----------
(DOLLARS IN MILLIONS)
<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-32
<PAGE> 65
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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.
Derivative product activity for the three years ended December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
PAY INTEREST
RECEIVE PAY FIXED-RATE RATE
FIXED-RATE FIXED-RATE AMORTIZING BASIS HEDGE
SWAPS SWAPS SWAPS SWAPS AGREEMENTS TOTAL
---------- ---------- ---------- ----- ---------- -------
(DOLLARS IN MILLIONS)
<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>
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.
A-33
<PAGE> 66
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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.
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.
A-34
<PAGE> 67
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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.
Information with respect to options granted and exercised for the three
years ended December 31, 1998 is as follows:
<TABLE>
<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>
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.
A-35
<PAGE> 68
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER
NUMBER REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE PRICES AT 12/31/98 LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <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 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 $162.7 million, $135.6 million and $115.0
million for 1998, 1997 and 1996, respectively. Basic earnings per share would
have been $2.91, $2.49 and $2.11 and diluted earnings per share would have been
$2.74, $2.36 and $2.05 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: dividend yield of 1.75%, expected
volatility of 26%, risk-free interest rates of 5.7% and 5.8% and expected lives
of five to seven years.
A-36
<PAGE> 69
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
NOTE J INCOME TAXES
The consolidated provision for income taxes consists of the following for
the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
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............................... 56,550 31,051 24,294
State................................. 8,112 (498) 5,062
Foreign.................................. 7,950
-------- ------- -------
72,612 30,553 29,356
-------- ------- -------
Provision for income taxes................. $108,490 $83,088 $69,329
======== ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Deferred income from leveraged leases.............. $399,343 $308,465
Deferred income from lease financing............... 108,883 89,196
Goodwill........................................... 26,530 24,343
Other.............................................. 17,933 3,498
-------- --------
Gross deferred tax liability......................... 552,689 425,502
-------- --------
Deferred tax assets:
Reserve for credit losses.......................... 90,372 75,670
Foreign............................................ 10,792 16,802
Alternative minimum tax............................ 52,442 26,153
Accrued expenses................................... 400 9,739
Net operating loss carryforward/carryback.......... 20,625 4,875
Other.............................................. 30,685 17,502
-------- --------
Gross deferred tax asset............................. 205,316 150,741
-------- --------
Net deferred tax liability........................... $347,373 $274,761
======== ========
</TABLE>
A-37
<PAGE> 70
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
The federal statutory income tax rate is reconciled to the effective income
tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate..................... 35.0% 35.0% 35.0%
State income taxes.................................... 3.9 2.6 4.4
Foreign tax effects................................... 0.1 (0.1) (0.9)
Municipal and ESOP income............................. (1.5) (2.0) (2.2)
Other................................................. 1.0 1.2 1.0
---- ---- ----
Provision for income taxes............................ 38.5% 36.7% 37.3%
==== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE COMPUTATION:
Income from continuing operations....... $ 169,737 $ 139,098 $ 116,493
=========== =========== ===========
Net income.............................. $ 169,737 $ 139,098 $ 117,000
=========== =========== ===========
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................................. $3.03 $2.56 $2.14
=========== =========== ===========
Net income per share.................... $3.03 $2.56 $2.15
=========== =========== ===========
</TABLE>
A-38
<PAGE> 71
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
DILUTED EARNINGS PER SHARE COMPUTATION:
Income from continuing operations....... $ 169,737 $ 139,098 $ 116,493
Preferred dividends, net of tax......... 3,782 3,992
----------- ----------- -----------
Income from continuing operations
available to common shareowners....... $ 173,519 $ 143,090 $ 116,493
=========== =========== ===========
Net income.............................. $ 169,737 $ 139,098 $ 117,000
Preferred dividends, net of tax......... 3,782 3,992
----------- ----------- -----------
Net income available to common
shareowners........................... $ 173,519 $ 143,090 $ 117,000
=========== =========== ===========
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................................. $2.86 $2.42 $2.08
=========== =========== ===========
Earnings per share...................... $2.86 $2.42 $2.09
=========== =========== ===========
</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.
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.
A-39
<PAGE> 72
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
The carrying amounts and estimated fair values of FINOVA's financial
instruments are as follows for the years ended December 31:
<TABLE>
<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..................... $7,077,865 $7,151,296 $5,744,846 $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-40
<PAGE> 73
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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
The following represents a summary of the major components of operating
expenses for the three years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Salaries and employee benefits............ $140,939 $112,980 $94,272
Depreciation and amortization............. 23,749 17,407 14,185
Travel and entertainment.................. 16,045 11,917 8,953
Occupancy expenses........................ 11,562 8,368 7,104
Problem account costs..................... 10,343 11,586 7,753
Professional services..................... 9,982 7,654 5,738
</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.
Accumulated other comprehensive income activity for the three years ended
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN UNREALIZED OTHER
CURRENCY HOLDING GAINS ON COMPREHENSIVE
TRANSLATION 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) 3,422 3,214
------- ------ -------
Balance, December 31, 1998...... $ (218) $3,422 $ 3,204
======= ====== =======
</TABLE>
A-41
<PAGE> 74
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
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. Specialty Finance includes
businesses which lend to a variety of highly focused, industry-specific niches.
Capital Markets, in conjunction with institutional investors, provides
commercial mortgage banking services and debt and equity capital funding.
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 disposals 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.
Information for FINOVA's reportable segments reconciles to FINOVA's
consolidated totals as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
TOTAL NET REVENUE:
Commercial Finance.............................. $ 187,461 $ 154,981
Specialty Finance............................... 344,541 313,841
Capital Markets................................. 50,188 9,449
Corporate and other............................. 23,093 7,632
----------- ----------
Consolidated total.............................. $ 605,283 $ 485,903
=========== ==========
INCOME BEFORE ALLOCATIONS:
Commercial Finance.............................. $ 67,013 $ 72,454
Specialty Finance............................... 273,674 248,793
Capital Markets................................. 23,243 9,449
Corporate and other, overhead and unallocated
provision for credit losses................... (81,921) (104,518)
----------- ----------
Income from continuing operations before income
taxes......................................... $ 282,009 $ 226,178
=========== ==========
</TABLE>
A-42
<PAGE> 75
THE FINOVA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS IN TABLES, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
MANAGED ASSETS:
Commercial Finance.............................. $ 3,005,130 $2,755,826
Specialty Finance............................... 7,211,164 6,037,725
Capital Markets................................. 277,422
Corporate and other............................. 55,416 63,872
----------- ----------
Consolidated total.............................. $10,549,132 $8,857,423
=========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
INCOME
EARNED
FROM FINANCING
TRANSACTIONS MANAGED ASSETS
-------------- --------------
<S> <C> <C>
United States................................ $ 956,479 $10,021,393
Canada....................................... 2,646 94,035
United Kingdom............................... 62,852 433,704
---------- -----------
$1,021,977 $10,549,132
========== ===========
</TABLE>
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 -- DEFINITIVE AGREEMENT TO ACQUIRE SIRROM
CAPITAL CORPORATION
On January 7, 1999, The FINOVA Group Inc. announced that it had reached a
definitive agreement to acquire Sirrom Capital Corporation ("Sirrom"), a
specialty finance company headquartered in Nashville, Tenn.
Under the terms of the agreement, Sirrom shareholders will receive 0.1634
shares of FINOVA common stock for each share of Sirrom common stock they own,
subject to possible increases. Based on the conversion rate and FINOVA's share
value when the agreement was signed, the aggregated purchase price of the Sirrom
common stock will be approximately $343 million.
A-43
<PAGE> 76
THE FINOVA GROUP INC.
SUPPLEMENTAL SELECTED FINANCIAL DATA
CONDENSED QUARTERLY RESULTS
(UNAUDITED)
(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:
<TABLE>
<CAPTION>
FOURTH
FIRST SECOND THIRD QUARTER
QUARTER QUARTER QUARTER --------
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income earned from financing transactions:
1998...................................... $236,399 $249,624 $256,854 $279,100
1997...................................... 209,293 219,904 227,810 240,989
1996...................................... 183,921 186,255 197,402 201,768
- ------------------------------------------------------------------------------------------
Interest expense:
1998...................................... 110,572 114,987 122,235 131,566
1997...................................... 97,172 101,883 105,592 111,446
1996...................................... 88,224 89,718 91,629 96,972
- ------------------------------------------------------------------------------------------
Volume-based fees:
1998...................................... 22,156 19,103 16,687 19,777
1997...................................... 7,784 8,583 9,546 20,815
1996...................................... 6,731 6,380 7,570 7,907
- ------------------------------------------------------------------------------------------
Gains on disposal of assets:
1998...................................... 1,223 9,582 13,438 30,781
1997...................................... 3,233 10,468 8,706 7,854
1996...................................... 6,730 1,315 397 4,507
- ------------------------------------------------------------------------------------------
Non-interest expenses:
1998...................................... 83,628 94,274 93,972 121,482
1997...................................... 70,327 82,522 84,500 95,365
1996 66,489 56,989 65,480 69,560
- ------------------------------------------------------------------------------------------
Income from continuing operations:
1998...................................... 39,077 41,035 43,132 46,492
1997...................................... 31,658 33,751 34,921 38,768
1996...................................... 26,756 28,852 30,489 30,396
- ------------------------------------------------------------------------------------------
Net income:
1998...................................... 39,077 41,035 43,132 46,492
1997...................................... 31,658 33,751 34,921 38,768
1996...................................... 27,121 28,121 29,763 31,995
- ------------------------------------------------------------------------------------------
Basic earnings per share:
1998...................................... 0.70 0.73 0.77 0.84
1997...................................... 0.59 0.62 0.65 0.70
1996...................................... 0.50 0.52 0.54 0.59
- ------------------------------------------------------------------------------------------
Diluted earnings per share:
1998...................................... 0.66 0.69 0.73 0.79
1997...................................... 0.56 0.59 0.61 0.66
1996...................................... 0.49 0.51 0.53 0.56
- ------------------------------------------------------------------------------------------
</TABLE>
A-44
<PAGE> 77
THE FINOVA GROUP INC.
AVERAGE BALANCES/OPERATING MARGIN/AVERAGE ANNUAL RATES
(UNAUDITED)(1)
(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:
<TABLE>
<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.............. 9,016,067 $1,029,619(4) 12.05% 7,764,224 $871,735(4) 11.85%(2)
Less reserve for credit
losses.................... (184,162) (160,241)
---------- ---------- ----- ---------- -------- -----
Net investment in financing
transactions.............. 8,831,905 7,603,983
Goodwill and other assets... 522,356 365,885
Investment in discontinued
operations................ 2,703
---------- ---------- ----- ---------- -------- -----
$9,392,565 $8,009,444
========== ========== ===== ========== ======== =====
LIABILITIES AND SHAREOWNERS'
EQUITY
Liabilities:
Other liabilities......... $ 386,105 $ 408,640
Senior debt............... 7,452,245 $ 479,360 5.71% 6,253,588 $416,093 6.65%
Deferred income taxes..... 304,870 260,027
---------- ---------- ----- ---------- -------- -----
8,143,220 6,922,255
Company-obligated mandatory
redeemable convertible
preferred securities of
subsidiary trust solely
holding convertible
debentures of FINOVA...... 111,550 111,550
Shareowners' equity......... 1,137,795 975,639
---------- ---------- ----- ---------- -------- -----
$9,392,565 $8,009,444
========== ========== ===== ========== ======== =====
Interest income/average
earning assets (2)........ $1,029,619 12.05% $871,735 11.85%
Interest expense/average
earning assets(2)(3)...... 479,360 5.61% 416,093 5.66%
---------- ---------- ----- ---------- -------- -----
Operating margin(3)......... $ 550,259 6.44% $455,642 6.19%
========== ========== ===== ========== ======== =====
</TABLE>
- ---------------
(1) Averages are calculated based on monthly balances.
(2) The average rate is calculated based on average earning assets ($8,544,431
and $7,356,845 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 $474,076 or 5.55% of average earning assets
and operating margin would have been $554,543 or 6.50% of average earning
assets. For the year ended December 31, 1997, excluding the impact of
derivatives, interest expense would have been $417,140 or 5.67% of average
earning assets and operating margin would have been $454,595 or 6.18% of
average earning assets.
(4) For the years ended December 31, 1998 and 1997 interest income is shown net
of operating lease depreciation.
A-45
<PAGE> 78
THE FINOVA GROUP INC.
COMMISSION FILE NUMBER 1-11011
EXHIBIT INDEX
DECEMBER 31, 1998 FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).
(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).
</TABLE>
A-46
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).
(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).
</TABLE>
A-47
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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).+
(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).+
</TABLE>
A-48
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(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.K).
(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.*
(12) Computation of Ratio of Income to Combined Fixed Charges and
Preferred Stock Dividends.*
(21) Subsidiaries.*
(23) Independent Auditors' Consent.*
(24) Powers of Attorney.*
(27) Financial Data Schedule for the year ended December 31,
1998.*
</TABLE>
- ---------------
* Previously filed.
+ Relating to management compensation.
A-49
